UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________________
FORM
20-F/A
(Amendment No.
1)
|
(Mark
One)
|
|
|
o
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
|
|
OR
|
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For
the fiscal year ended December 31, 2008
|
|
|
OR
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
OR
|
|
o
|
SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
|
Commission
file number: 000-50476
|
(Exact
name of Registrant as specified in its charter)
Webzen
Inc.
(Translation
of Registrant’s name into English)
The
Republic of Korea
(Jurisdiction
of incorporation or organization)
Daelim
Acrotel Building, 8th Floor,
467-6
Dogok-dong, Kangnam-ku,
Seoul,
Korea 135-971
(Address
of principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
(1) Common
shares, par value Won 500 per share (“Common Shares”)*
|
The
Nasdaq Global Market
|
|
(2) American
Depositary Shares (“ADSs”), each of which represents three tenths of a
common share
|
The
Nasdaq Global Market
|
* Not for
trading, but only in connection with the registration of American Depositary
Shares.
Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
As of
December 31, 2008, 11,856,948 Common Shares and 6,572,570 ADSs were
outstanding.
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
o
Yes
x
No
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
o
Yes
x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
o
Large
accelerated filer
x
Accelerated
filer
o
Non-accelerated
filer
Indicate
by check mark which financial statement item the registrant has elected to
follow.
o
Item
17
x
Item
18
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
x
No
TABLE OF CONTENTS
Page
|
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
12
|
|
|
23
|
|
|
23
|
|
|
33
|
|
|
39
|
|
|
41
|
|
|
41
|
|
|
44
|
|
|
58
|
|
|
59
|
|
|
59
|
|
|
59
|
|
|
59
|
|
|
59
|
|
|
60
|
|
|
60
|
|
|
61
|
|
|
61
|
|
|
61
|
|
|
61
|
|
|
62
|
|
|
62
|
|
|
|
|
|
62
|
|
|
62
|
|
|
Ex-1
|
|
|
65
|
EXPLANATORY
NOTE
Webzen
Inc. is filing this amendment no. 1 to its annual report on Form 20-F/A (the
“Amendment No. 1”) for the fiscal year ended December 31, 2008 in order to
revise disclosures in certain items, including Items 3.D. Risk Factors, 6.A.
Directors and Senior Management, 7.A. Major Shareholders, 7.B. Related Party
Transactions, 10.C. Material Contracts, 16B. Code of Ethics and 16G. Corporate
Governance, contained in its annual report on Form 20-F filed on June 29, 2009
(the “Original Annual Report”) and to file additional exhibits to its annual
report. No changes have been made to the financial statements included in the
Original Annual Report. Except for the exhibits, which are incorporated by
reference hereto, this Amendment No. 1 replaces and supersedes in its entirety
the Original Annual Report.
This
Amendment No. 1 does not reflect events occurring after the filing of the
Original Annual Report and does not modify or update the disclosure therein in
any way other than as required to reflect the amendments described herein and
reflected below. The filing of this Amendment No. 1 should not be understood to
mean that any statements contained herein are true or complete as of any date
subsequent to the date of the original filing of the Original Annual
Report.
CERTAIN
DEFINED TERMS, CONVENTIONS AND
PRESENTATION
OF FINANCIAL INFORMATION
Unless
the context otherwise requires, references in this annual report
to:
|
|
·
|
“Korea”
or the “Republic” are to The Republic of
Korea;
|
|
|
·
|
“Government”
are to the government of the
Republic;
|
|
|
·
|
“China”
or the “PRC” are to the People’s Republic of
China;
|
|
|
·
|
“Taiwan”
are to Taiwan, the Republic of
China;
|
|
|
·
|
“U.S.”
or the “United States” are to the United States of
America;
|
|
|
·
|
“Webzen,”
“we,” “us,” “our,” “our company” or “Company” are to Webzen
Inc.;
|
|
|
·
|
“Won”
or “
W
”
are to the currency of the
Republic;
|
|
|
·
|
“U.S.
dollars,” “$” or “US$” are to the currency of the United
States;
|
|
|
·
|
“Renminbi”
or “RMB” are to the currency of
China;
|
|
|
·
|
“NT
dollars” are to the currency of Taiwan;
and
|
|
|
·
|
“Yen”
or “¥” are to the currency of
Japan.
|
The
consolidated financial statements of Webzen have been prepared in accordance
with accounting principles generally accepted in the United States (“U.S.
GAAP”). Unless otherwise stated or the context otherwise requires, all amounts
in such financial statements are expressed in Won.
For your
convenience, this annual report contains translations of certain Won amounts
into U.S. dollars at the noon buying rate of the Federal Reserve Bank of New
York for Won in effect on December 31, 2008 which was
W
1,262.0 to
US$1.00.
FORWARD-LOOKING STATEMENTS
This
annual report contains statements that constitute “forward-looking statements”
within the meaning of Section 21(E) of the Securities Exchange Act of 1934. When
included in this annual report, the words, “will,” “should,” “expects,”
“intends,” “anticipates,” “estimates” and similar expressions, among others,
identify forward-looking statements. Such statements, which include, but are not
limited to, statements contained in “Item 3. Key Information — 3.D. Risk
Factors,” “Item 5. Operating and Financial Review and Prospects” and “Item 11.
Quantitative and Qualitative Disclosure about Market Risk,” inherently are
subject to a variety of risks and uncertainties that could cause actual results
to differ materially from those set forth in such statements. These
forward-looking statements are made only as of the date of this annual report.
We expressly disclaim any obligation or undertaking to release any update or
revision to any forward-looking statement contained herein to reflect any change
in our expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.
PART I
Item 1. Identity of Directors, Senior Management and
Advisers
Not
applicable.
Item 2. Offer Statistics and Expected
Timetable
Not
applicable.
Item 3. Key Information
3.A. Selected
Financial Data
The
following selected consolidated financial information has been derived from our
consolidated financial statements as of each of the dates and for each of the
periods indicated below. This information should be read in conjunction with and
is qualified in its entirety by reference to our consolidated financial
statements, including the notes thereto, included in this annual report. Our
consolidated financial statements are prepared in accordance with U.S.
GAAP.
|
|
|
As
of and for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won and thousands of US$, except per share data and per ADS
data)
|
|
|
(unaudited)
|
|
|
Statement
of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
game subscriptions
|
|
W
|
46,041
|
|
|
W
|
26,830
|
|
|
W
|
21,247
|
|
|
W
|
22,884
|
|
|
W
|
22,478
|
|
|
$
|
17,812
|
|
|
Royalties
and license fees
|
|
|
8,204
|
|
|
|
4,816
|
|
|
|
2,811
|
|
|
|
6,213
|
|
|
|
10,298
|
|
|
|
8,160
|
|
|
Total
net revenues
|
|
|
54,245
|
|
|
|
31,646
|
|
|
|
24,058
|
|
|
|
29,097
|
|
|
|
32,776
|
|
|
|
25,972
|
|
|
Cost
of revenues
|
|
|
10,723
|
|
|
|
12,815
|
|
|
|
15,722
|
|
|
|
17,505
|
|
|
|
15,102
|
|
|
|
11,967
|
|
|
Gross
profit
|
|
|
43,522
|
|
|
|
18,831
|
|
|
|
8,336
|
|
|
|
11,592
|
|
|
|
17,674
|
|
|
|
14,005
|
|
|
Selling,
general and administrative expenses
|
|
|
21,699
|
|
|
|
26,763
|
|
|
|
32,699
|
|
|
|
22,848
|
|
|
|
24,590
|
|
|
|
19,485
|
|
|
Research
and development expenses
|
|
|
10,262
|
|
|
|
20,282
|
|
|
|
24,062
|
|
|
|
23,164
|
|
|
|
1,816
|
|
|
|
1,439
|
|
|
Impairment
charges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
505
|
|
|
|
400
|
|
|
Operating
income (loss)
|
|
|
11,561
|
|
|
|
(28,214
|
)
|
|
|
(48,425
|
)
|
|
|
(34,420
|
)
|
|
|
(9,237
|
)
|
|
|
(7,319
|
)
|
|
Interest
income
|
|
|
3,849
|
|
|
|
4,747
|
|
|
|
3,991
|
|
|
|
3,503
|
|
|
|
3,364
|
|
|
|
2,666
|
|
|
Other
income (expense)
|
|
|
(1,122
|
)
|
|
|
(213
|
)
|
|
|
1,946
|
|
|
|
7,660
|
|
|
|
(1,154
|
)
|
|
|
(914
|
)
|
|
Income
(loss) before income tax expenses (benefit), equity in earnings (loss) of
related equity investment and minority interest
|
|
|
14,288
|
|
|
|
(23,680
|
)
|
|
|
(42,488
|
)
|
|
|
(23,257
|
)
|
|
|
(7,027
|
)
|
|
|
(5,567
|
)
|
|
Income
tax expenses (benefit)
|
|
|
1,846
|
|
|
|
(5,507
|
)
|
|
|
5,102
|
|
|
|
2,579
|
|
|
|
802
|
|
|
|
636
|
|
|
Income
(loss) before equity in earnings (loss) of related equity investment and
minority interest
|
|
|
12,442
|
|
|
|
(18,173
|
)
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
|
(7,829
|
)
|
|
|
(6,203
|
)
|
|
Equity
in earnings (loss) of related equity investment, net of
taxes
|
|
|
2,461
|
|
|
|
(664
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Income
(loss) before minority interest
|
|
|
14,903
|
|
|
|
(18,837
|
)
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
|
(7,829
|
)
|
|
|
(6,203
|
)
|
|
Minority
interest
|
|
|
206
|
|
|
|
33
|
|
|
|
525
|
|
|
|
242
|
|
|
|
154
|
|
|
|
123
|
|
|
Net
income (loss)
|
|
|
15,109
|
|
|
|
(18,804
|
)
|
|
|
(47,065
|
)
|
|
|
(25,594
|
)
|
|
|
(7,675
|
)
|
|
|
(6,080
|
)
|
|
Earnings
(loss) per share:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
Basic
|
|
|
1,169
|
|
|
|
(1,497
|
)
|
|
|
(3,847
|
)
|
|
|
(2,078
|
)
|
|
|
(641
|
)
|
|
|
(0.51
|
)
|
|
Diluted(3)
|
|
|
1,169
|
|
|
|
(1,497
|
)
|
|
|
(3,847
|
)
|
|
|
(2,078
|
)
|
|
|
(641
|
)
|
|
|
(0.51
|
)
|
|
Earnings
(loss) per ADS(2)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
351
|
|
|
|
(449
|
)
|
|
|
(1,154
|
)
|
|
|
(623
|
)
|
|
|
(192
|
)
|
|
|
(0.15
|
)
|
|
|
|
As
of and for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won and thousands of US$, except per share
data)
|
|
|
(unaudited)
|
|
|
Diluted(3)
|
|
|
351
|
|
|
|
(449
|
)
|
|
|
(1,154
|
)
|
|
|
(623
|
)
|
|
|
(192
|
)
|
|
|
(0.15
|
)
|
|
Dividends
declared per share
|
|
|
—
|
|
|
|
250
|
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Weighted
average number of shares outstanding: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,924,119
|
|
|
|
12,563,892
|
|
|
|
12,233,204
|
|
|
|
12,319,347
|
|
|
|
11,982,216
|
|
|
|
11,982,216
|
|
|
Diluted(3)
|
|
|
12,927,206
|
|
|
|
12,563,892
|
|
|
|
12,233,204
|
|
|
|
12,319,347
|
|
|
|
11,982,216
|
|
|
|
11,982,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
161,882
|
|
|
|
121,739
|
|
|
|
78,138
|
|
|
|
66,857
|
|
|
|
41,823
|
|
|
|
33,140
|
|
|
Short-term
financial instruments
|
|
|
4,925
|
|
|
|
2,935
|
|
|
|
5,211
|
|
|
|
8,047
|
|
|
|
11,523
|
|
|
|
9,131
|
|
|
Total
assets
|
|
|
212,682
|
|
|
|
185,685
|
|
|
|
142,385
|
|
|
|
121,414
|
|
|
|
100,117
|
|
|
|
79,332
|
|
|
Total
liabilities
|
|
|
13,706
|
|
|
|
17,406
|
|
|
|
16,691
|
|
|
|
22,475
|
|
|
|
16,929
|
|
|
|
13,414
|
|
|
Common
stock
|
|
|
6,485
|
|
|
|
6,485
|
|
|
|
6,486
|
|
|
|
6,487
|
|
|
|
6,487
|
|
|
|
5,140
|
|
|
Total
stockholders’ equity
|
|
|
198,976
|
|
|
|
167,412
|
|
|
|
125,396
|
|
|
|
98,869
|
|
|
|
83,188
|
|
|
|
65,918
|
|
|
(1)
|
For
convenience, the Won amounts are expressed in U.S. dollars at the rate of
W
1,262.0 to
US$1.00, the noon buying rate in effect on December 31, 2008 as announced
by the Federal Reserve Bank of New York. The translation is not a
representation that the Won or U.S. dollar amounts referred to herein
could have been or could be converted into U.S. dollars or Won, as the
case may be, at any particular rate, or at
all.
|
|
(2)
|
All
share and per share data have been restated as if the 3-to-1 stock split
in June 2004 had occurred as of the earliest period presented. The stock
split did not affect the number and par value of our American Depositary
Shares (“ADS”), or the number of the stock
options.
|
|
(3)
|
For
further information on historical financial statement effects of stock
option issuances, see note 12 to the notes to our audited financial
statements as of and for the years ended December 31, 2007 and
2008.
|
|
(4)
|
Based
on earnings per share. Each ADS represents three-tenths of a common
share.
|
|
(5)
|
The
record date for the dividend payment was December 31,
2004.
|
Exchange
Rates
Fluctuations
in the exchange rate between Won and U.S. dollars will affect the U.S. dollar
equivalent of the Won price of our common shares on The Korea Exchange, Inc.
(“KRX”) KOSDAQ Market (“KOSDAQ”) and, as a result, will likely affect the market
price of our ADSs. These fluctuations will also affect the U.S. dollar
conversion by the depositary of cash dividends paid in Won and the Won proceeds
received by the depositary from any sale of our common shares represented by our
ADSs.
In
certain parts of this annual report, we have translated Won amounts into U.S.
dollars for the convenience of investors. Unless otherwise stated, the rate we
used for the translation was
W
1,262.0 to
US$1.00, which was the noon buying rate announced by the Federal Reserve Bank of
New York on December 31, 2008. The translation is not a representation that the
Won or U.S. dollar amounts referred to herein could have been or could be
converted into U.S. dollars or Won, as the case may be, at any particular rate,
or at all. The table below sets forth, for the periods indicated, information
concerning the exchange rate for Won, expressed in Won per one U.S.
dollar.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
(Won
per US$1.00)
|
|
|
2004
|
|
|
1,035.1
|
|
|
|
1,139.3
|
|
|
|
1,195.1
|
|
|
|
1,035.1
|
|
|
2005
|
|
|
1,010.0
|
|
|
|
1,023.2
|
|
|
|
1,059.8
|
|
|
|
997.0
|
|
|
2006
|
|
|
930.0
|
|
|
|
950.1
|
|
|
|
1,002.9
|
|
|
|
913.7
|
|
|
2007
|
|
|
935.8
|
|
|
|
928.0
|
|
|
|
950.2
|
|
|
|
903.2
|
|
|
2008
|
|
|
1,262.0
|
|
|
|
1,
105.8
|
|
|
|
1,507.9
|
|
|
|
935.2
|
|
|
December
|
|
|
1,262.0
|
|
|
|
1,361.6
|
|
|
|
1,479.0
|
|
|
|
1,257.4
|
|
|
2009
(through May 31)
|
|
|
1,249.0
|
|
|
|
1,362.2
|
|
|
|
1,570.1
|
|
|
|
1,232.9
|
|
|
January
|
|
|
1,380.0
|
|
|
|
1,354.4
|
|
|
|
1,391.5
|
|
|
|
1,292.3
|
|
|
February
|
|
|
1,532.8
|
|
|
|
1,439.6
|
|
|
|
1,532.8
|
|
|
|
1,368.7
|
|
|
March
|
|
|
1,372.3
|
|
|
|
1,449.6
|
|
|
|
1,570.1
|
|
|
|
1,334.8
|
|
|
April
|
|
|
1,277.0
|
|
|
|
1,332.1
|
|
|
|
1,378.3
|
|
|
|
1,277.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
(Won
per US$1.00)
|
|
|
May
|
|
|
1,249.0
|
|
|
|
1,254.3
|
|
|
|
1,277.0
|
|
|
|
1,232.9
|
|
|
(1)
|
Annual
average rate refers to the average of the exchange rates on the last date
of each month (or a portion thereof) during the period. Monthly average
rate refers to the average of daily exchange rates during the
period.
|
|
Source:
|
For
periods prior to and on December 31, 2008, the noon buying rates of the
Federal Reserve Bank of New York; for periods subsequent to December 31,
2008, Federal Reserve Statistical Release, Board of Governors of the
Federal Reserve System.
|
3.B. Capitalization
and Indebtedness
Not
applicable.
3.C. Reasons
for the Offer and Use of Proceeds
Not
applicable.
3.D. Risk
Factors
Risks
Related to the Company
Risks
Related to Our Business
Our
business is intensely “hit” driven. If we fail to deliver “hit” products or if
consumers prefer our competitors’ products over our own, our operating results
could suffer.
While
many new online game products are regularly introduced, only a relatively small
number of “hit” titles account for a significant portion of the total net
revenue in our industry. We commenced commercial service of Soul of the Ultimate
Nation (SUN) in Korea in the fourth quarter of 2006, in Taiwan and China in the
second quarter of 2007 and in Japan in the second quarter of 2008. The
performance in Korea, however, has not met our initial expectations. We have
also conducted multiple tests of Huxley from September 2007 to January 2009, and
we expect to commence commercial service of Huxley in the second half of 2009 in
Korea and the U.S.
We are
unable to predict if our new games and services will be successful. In addition,
even if any of our games are initially well-received, the introduction of more
popular games by our competitors may significantly shorten the life-cycle of our
game, which could cause our revenue to fall below our expectations. If our
competitors develop more successful products, offer competitive products at
lower prices, or if we do not continue to develop consistently high-quality and
well-received products, our revenue, margins and profitability will
decline.
Additionally,
our business is subject to risks that are generally associated with the
entertainment industry, many of which are beyond our control. These risks could
negatively impact our operating results and include: the popularity, price and
timing of our games and the platforms on which they are played; economic
conditions that adversely affect discretionary consumer spending; changes in
consumer demographics; the availability and popularity of other forms of
entertainment; and critical reviews and public tastes and preferences, which may
change rapidly and are difficult to predict.
Disruptions
in global credit and financial markets and the resulting governmental actions
around the world could have a material adverse impact on our business and the
ability to meet our funding needs, and could cause the market value of our
common shares and ADSs to decline.
Global
credit markets have been experiencing difficulties and volatility since the
second half of 2008. The market uncertainty that started from the U.S.
residential market further expanded to other markets such as those for leveraged
finance, collateralized debt obligations and other structured products. These
developments have resulted in significant contraction, de-leveraging and reduced
liquidity in the global credit markets, as well as bankruptcy or acquisition of,
and government assistance to, several major U.S. and European financial
institutions, beginning with the bankruptcy filing of Lehman Brothers in
September 2008. In response to such developments, legislators and
financial
regulators in the United States and other jurisdictions, including Korea, have
implemented a number of policy measures designed to add stability to financial
markets. However, the overall impact of these legislative and regulatory efforts
on the global financial markets is uncertain, and they may not have the intended
stabilizing effects. The United States Securities and Exchange Commission, other
regulators, self-regulatory organizations and exchanges are authorized to take
extraordinary actions in the event of market emergencies, and may effect changes
in law or interpretations of existing laws.
We are
exposed to risks related to changes in the global and Korean economic
environments, changes in interest rates and instability in the global financial
markets. As liquidity and credit concerns and volatility in the global financial
markets increased, the value of the Won relative to the Dollar has fluctuated
significantly. Furthermore, as a result of adverse global and Korean economic
conditions, there has been a significant decline and continuing volatility in
securities prices of Korean companies, including ours, which may result in
trading and valuation losses on our trading and investment securities portfolio.
The Korea Stock Price Index declined from 1,852.0 on May 30, 2008 to 1,412.42 on
June 15, 2009. In addition, recent increases in credit spreads, as well as
limitations on the availability of credit resulting from heightened concerns
about the stability of the markets generally and the strength of counterparties
specifically have led many lenders and institutional investors to reduce or
cease providing funding to borrowers, which may negatively impact our liquidity
and results of operation. Major market disruptions and the current adverse
changes in market conditions and regulatory climate may further impair our
ability to meet our desired funding needs. We cannot predict how long the
current market conditions will last. These recent and developing economic and
governmental factors may have a material adverse effect on our business and the
ability to meet our funding needs, as well as negatively affect the market
prices of our common shares and ADSs. In addition, if our game players reduce
their spending on playing massively-multiplayer role-playing online games,
or MMORPGs, due to such uncertain economic conditions, our business may be
adversely affected.
We
may have conflicts of interest with NHN Games. Because of NHN Games’ significant
ownership interest in and control over us, we may not be able to resolve such
conflicts on terms favorable to us.
Since May
2008, NHN Games Co., Ltd. (“NHN Games”), a developer of massively-multiplayer
online games (“MMOGs”) and one of our potential competitors based in Korea,
purchased common stock of our company (the “Common Shares”) from various
shareholders including our prior controlling shareholders. As a result, it has
gained control of our company and owned 3,469,784 Common Shares or 29.26% of the
outstanding Common Shares as of June 18, 2009. In addition, NHN Games entered
into an arrangement with Nam-Ju Kim, Ki-Yong Cho, Kil-Saup Song, Hyung-Cheol Kim
and Chang Keun Kim that they would have a good faith discussion with NHN Games
before exercising any voting rights of the Common Shares and that they shall
exercise voting rights together in the same direction in accordance with the
discussion for matters relating to changing or influencing control of our
company. Based on such arrangement, the individuals referred to above each
executed and delivered a power of attorney appointing NHN Games as the
attorney-in-fact with full power and authority to act with respect to all
matters related to Section 147 of the Capital Market and Financial Investment
Business Act of Korea, which sets forth the obligation to report beneficial
ownership of equity securities of more than 5% of a class of stock listed on
Korea Exchange or KOSDAQ. As a result, NHN Games effectively controlled 37.76%
of our outstanding Common Shares as of June 18, 2009. Such share holding gives
NHN Games the power to significantly affect the actions that require shareholder
approval under Korean law and our articles of incorporation, including the
election and removal of any member of our board of directors, mergers,
consolidations and other business combinations and changes to our articles of
incorporation. As a result of NHN Games’ share ownership, its voting power may
cause transactions to occur that might not be beneficial to you as a holder of
ADSs and may prevent transactions that would be beneficial to you. For example,
NHN Games’ voting power may prevent a transaction involving a change of control
of us, including transactions in which you as a holder of our ADSs might
otherwise receive a premium for your securities over the then-current market
price. Similarly, NHN Games may approve a merger or consolidation of our
company, which you may disapprove. In addition, NHN Games is not prohibited from
selling a controlling interest in us to a third party and may do so without your
approval. NHN Games’ voting power and control over us could also cause
transactions to occur that might not be beneficial to you as a holder of ADSs
and could prevent transactions that would be beneficial to you. NHN Games’
decisions with respect to us or our business may be resolved in ways that favor
NHN Games, which may not coincide with the interests of our other
shareholders.
If
we do not meet our product development schedules, our operating results will be
adversely affected.
We have
new games and services that we plan to launch from the second half of 2009.
Huxley is scheduled for commercial launch in the second half of 2009, and
T-Project is planned to have an open beta testing in 2011. Our ability to meet
product development schedules is affected by a number of factors, including the
creative processes involved, the coordination of development teams required by
the increasing complexity of our products and the need to fine-tune our products
prior to their release. We have in the past experienced development delays of
our products. Failure to meet anticipated production or commercialization
schedules may cause a shortfall in our revenue, adversely affect our
profitability and cause our operating results to be materially different from
expectations. In addition, the perceived or actual delay of our launch schedules
has in the past and will likely in the future have a negative affect on the
price of our common shares and ADSs.
We
currently depend on two games, MU and Soul of the Ultimate Nation (SUN), for
substantially all of our revenue.
Substantially
all of our revenues and profits are currently derived from two online games, MU
and Soul of the Ultimate Nation (SUN). Revenue generated from MU decreased in
2008 and may decrease in the future as the game has reached its declining stage
and as users may switch to newly introduced games or other MMORPGs or
discontinue playing MMORPGs. We have commenced commercial service of Soul of the
Ultimate Nation (SUN) in Korea in the fourth quarter of 2006, in Taiwan and
China in the second quarter of 2007 and in Japan in the second quarter of 2008,
but the game is still in its initial stages contributing less to our revenue
than MU. We expect that the revenue generated by Soul of the Ultimate Nation
(SUN) will grow as we upgrade the game and commercially launch it in other
markets. However, if revenue derived from Soul of the Ultimate Nation (SUN) does
not increase at the pace we expect, or at all, MU revenue continues to decline
and commercialization of new games such as Huxley is delayed for any reason, our
future results of operations and the prices of our common shares and ADSs will
be negatively affected.
Increased
competition in the online game industry may adversely affect our
business.
Competition
in our industry is intense and we expect new competitors to continue to emerge.
There are over 100 companies in Korea alone that are dedicated to developing
and/or operating online games. Our competitors in the MMORPG industry vary in
size from small companies to very large companies with dominant market shares
such as
Blizzard and NCsoft. Chinese game developers have also developed and
successfully launched new games, many of which are tailored to the needs and
tastes of Chinese game players. We also compete with online casual game and game
portal companies such as NHN, Neowiz, Nexon and CJ Internet. In addition, we may
face stronger competition from console game companies, such as Sony, Microsoft
and Nintendo, many of which have expanded their game services and offerings to
enable console games to be played over the Internet. Many of our competitors
have significantly greater financial, marketing and game development resources
than we have. As a result, we may not be able to devote resources to design and
develop new games, undertake extensive marketing campaigns, adopt aggressive
pricing policies, pay high compensation to game developers or compensate
independent game developers to the same degree as some of our competitors. In
markets outside Korea, we may not be able to provide games that are as
customized to the tastes and preferences of local customers. We believe the
decline in the number of MU subscribers in major overseas market such as China
is attributable to the success of new games introduced by our competitors. In
addition, increased competition in the online game industry may also reduce the
number or growth rate of our subscribers, the average number of hours played by
our subscribers, our license fee revenue or our subscription fees. All of these
competitive factors may adversely affect our cash flows, operating margins and
profitability.
We
may be unsuccessful in completing future mergers and acquisitions, and completed
mergers and acquisitions may expose us to certain risks.
If we are
presented with appropriate opportunities, we may merge with another company or
acquire additional complementary companies, products or technologies. Our
ability to grow by mergers and acquisitions is dependent upon, and may be
limited by, the availability of suitable merger and acquisition candidates, our
ability to negotiate acceptable merger and acquisition terms and our assessment
of the characteristics of potential merger and acquisition targets. In addition,
the completion of these mergers and acquisitions is subject to a number of
risks, including the ability to fund such mergers and acquisitions and the
uncertainty of the legal environment relating to mergers and
acquisitions.
Our
acquisitions expose us to potential difficulties that could prevent us from
achieving the strategic objectives for our mergers and acquisitions or harm our
ability to achieve anticipated levels of profitability from our mergers and
acquisitions. Specifically, these difficulties include:
|
|
·
|
diversion
of management’s attention from the normal operation of our
business;
|
|
|
·
|
potential
loss of key employees and customers of the merged or acquired
companies;
|
|
|
·
|
increases
in our expenses and working capital requirements, which reduce our return
on invested capital;
|
|
|
·
|
potential
increases in debt, which increase our operating costs as a result of
higher interest payments;
|
|
|
·
|
exposure
to unanticipated contingent liabilities of merged or acquired
companies;
|
|
|
·
|
difficulties
in integrating merged or acquired businesses into our existing operations,
technologies and personnel which may prevent us from achieving, or may
reduce, the anticipated synergies;
|
|
|
·
|
the
diversion of resources from our existing businesses and
technologies;
|
|
|
·
|
the
inability to generate sufficient revenue to offset the costs and expenses
of mergers or acquisitions; and
|
|
|
·
|
potential
loss of, or harm to, relationships with employees, customers and suppliers
as a result of challenges from the integration of new
businesses.
|
If we are
not able to successfully manage these potential difficulties, our mergers or
acquisitions might not result in any anticipated benefits, which could
materially and adversely affect our business, financial condition and results of
operations. In addition, if we fail to continue to make or execute advantages
acquisitions in the future due to the foregoing and other uncertainties and
difficulties, our overall long-term growth strategy could be impaired and our
operating results could be adversely affected.
Rapid
technological change may limit our ability to recover game development costs and
adversely affect our future revenues and profitability.
The
online game industry is subject to rapid technological change. We need to
anticipate the emergence of new technologies and games, assess their market
acceptance, and make substantial game development and related investments. In
addition, new technologies in online game programming or new platforms such as
the game consoles introduced to the market could render MU, Soul of the Ultimate
Nation (SUN) or other online games that we expect to develop in the future less
attractive to our subscribers, thereby limiting our ability to recover
development costs and potentially adversely affecting our future revenues and
profitability.
Undetected
programming errors or flaws in our games could harm our reputation or decrease
market acceptance of our games, which would materially and adversely affect our
results of operations.
Our games
may contain errors or flaws that become apparent only after their release,
particularly as we seek to develop and launch new games under tight time
constraints. We believe that if our customers have negative experiences with our
games, they may be less inclined to commence, continue or resume subscriptions
with us or recommend our games to other potential customers. Undetected
programming errors and game defects can harm our reputation, cause our customers
to terminate subscriptions with us, divert our resources and delay market
acceptance of our games, any of which could materially and adversely affect our
results of operations and have a negative effect on the price of our common
shares and ADSs.
Unexpected
network interruptions caused by system failures or any personal information leak
may lead to subscriber and revenue reductions and harm our
reputation.
Any
failure to maintain the satisfactory performance, reliability, security and
availability of our network infrastructure may cause significant harm to our
reputation and our ability to attract and maintain subscribers. Any server
interruptions, breakdowns or system failures, including failures attributable to
sustained power shutdowns, efforts to gain unauthorized access to our systems,
loss or corruption of data or malfunctions of software or hardware, or other
events outside our control that could result in a sustained shutdown of all or a
material portion of our services could adversely impact our ability to service
our subscribers. Our network systems are also vulnerable to damage from fire,
flood, power loss, telecommunications failures, hackings and similar
events.
In
addition, subscriber personal information leaks or any security breach may
adversely affect our business. For example, there were past incidents of private
information leaks in Korea that raised serious concerns among internet and
online service users. Internet Auction Co. (“Auction”), the South Korean unit of
U.S. online auction house eBay Inc., announced that its website had been hacked
in February 2008, leading to the theft of 10.8 million users’ confidential
information. LG Telecom Ltd., the country’s third largest mobile carrier, was
also found to have been attacked by a hacker who managed to access the private
information of its subscribers. Any failure to maintain reliable network
infrastructure or proper security measures can harm our reputation and our
business, expose us to litigation risks and have a negative effect on the price
of our common shares and ADS.
We
may not be able to adequately protect our intellectual property rights, which
could decrease our competitiveness.
We regard
our proprietary software, domain names, trade names, trademarks and similar
intellectual properties as critical to our success. We rely on a combination of
copyrights, service marks and patents to protect our intellectual property
rights. Policing unauthorized use of proprietary technology is difficult and
expensive. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our technology. We
cannot be certain of our ability to prevent misappropriations of our technology
in Korea, China and other countries where intellectual property protection laws
may not be as robust as in the United States. From time to time, we may have to
resort to litigation to enforce our intellectual property rights, which could
result in substantial costs and diversion of our resources.
We
believe that we would likely be considered a passive foreign investment company
(“PFIC”) for 2008, which has certain adverse U.S. federal income tax
consequences to holders of common shares and ADSs.
In
general, we will be considered a PFIC for U.S. federal income tax purposes for
any taxable year in which (i) 75% or more of our gross income consists of
passive income or (ii) 50% or more of the average quarterly value of our assets
consist of assets that produce, or are held for the production of, passive
income. Based on the price of our common shares and ADSs during our 2008 taxable
year and the amount of passive assets, including cash and cash equivalents, held
by us throughout that year, we believe we would likely be considered a
PFIC for our 2008 taxable year. Further, there is a significant risk that we
will be a PFIC for our 2009 taxable year, and we may be a PFIC for future
taxable years.
If we are
a PFIC for any year that you hold common shares or ADSs, certain adverse U.S.
federal income tax consequences could apply to you, including recharacterization
of gains realized on the disposition of, and certain dividends received on, the
common shares or ADSs as ordinary income earned pro rata over your holding
period for such common shares or ADSs, taxed at the maximum rates applicable
during the years in which such income is treated as earned, and subject to
interest charges for a deemed deferral benefit. You should consult your own tax
adviser with respect to our potential PFIC status and the consequences to you.
See “Item 10. Additional Information – 10.E. Taxation – U.S. Federal Income Tax
Considerations – Passive Foreign Investment Company
Considerations.”
Our
online games may be subject to government restrictions or ratings systems, which
could delay or prohibit the release of new games or reduce the existing and
potential range of our customer base.
Legislation
is periodically introduced in Korea by government agencies to establish a system
for protecting consumers from the influence of graphic violence and sexually
explicit material contained in various types of games. Korean law also requires
online game companies to obtain ratings classifications and implement procedures
to restrict the distribution of online games to certain age groups. See “Item 4.
Information on the Company — 4.B. Business Overview — Laws and Regulations.”
Similar mandatory ratings systems and other regulations affecting the content
and distribution of our games have also been adopted in China and other markets.
In the future we may be required to modify our game content or features or alter
our marketing strategies to comply with new government regulations or new
ratings assigned to our current or future games, which could delay or prohibit
the release of new games or upgrades and reduce the existing and potential range
of our customer base. Moreover, uncertainties regarding government restrictions
or ratings systems applicable to our business could give rise to market
confusion, thereby adversely affecting our business or the prevailing price of
our common shares or ADSs.
Foreign
operations are subject to different business, political and economic
risks.
For the
year ended December 31, 2008, our license and royalty revenues from operations
outside of Korea, including China, Taiwan, Japan, the Philippines, Vietnam and
the U.S. comprised 31.4% of our total net revenues. Foreign operations are
subject to inherent risks, including disputes with our licensees or joint
venture partners, uncertain legal environments, different consumer preferences,
unexpected regulatory requirements, tariffs and other barriers, difficulties in
training and retraining staff and managing foreign operations, difficulties in
obtaining or renewing required licenses and obtaining administrative approvals
and difficulties in collecting foreign receivables. We will also be exposed to
risks of foreign exchange fluctuations as we record our license and joint
venture income in Won in our financial statements.
As the
online game industry is at an early stage of development, notwithstanding
certain differences among countries, new laws and regulations may be adopted
from time to time to require additional licenses and permits and to address new
issues that arise. In addition, substantial uncertainties exist regarding the
interpretation and implementation of current and any such future laws and
regulations applicable to the online game industry. We cannot assure you that we
will be able to obtain timely, or at all, required licenses or any other new
license required in the future. We cannot assure you that we will not be found
in violation of any current laws or regulations should their interpretation
change, or that we will not be found in violation of any future laws or
regulations.
Risks
Related to The Republic of Korea
Increased
tension with North Korea could adversely affect us.
Relations
between Korea and North Korea have been tense throughout Korea’s modern history.
The level of tension between the two Koreas has fluctuated and may increase
abruptly as a result of current and future events. In recent years, there have
been heightened security concerns stemming from North Korea’s nuclear weapons
and long-range missile programs and uncertainty regarding North Korea’s actions
and possible responses from the international community. In April 2009, after
launching a long-range rocket over the Pacific Ocean, which led to protests from
the international community, North Korea announced that it would permanently
withdraw from the six-party talks that began in 2003 to discuss Pyongyang’s path
to denuclearization. On May 25, 2009, North Korea conducted its second
nuclear testing by launching several short-range missiles. After North Korea’s
second nuclear testing, the Republic joined the Proliferation Security
Initiative, a U.S.-led multinational initiative involving the interdiction of
third-country ships on the high seas on the basis of carrying nuclear materials,
over Pyongyang’s harsh rebuke and threat of war. After the United Nations
Security Council passed a resolution on June 12, 2009 to condemn North
Korea’s second nuclear test and impose tougher sanctions such as a mandatory ban
on arms exports, North Korea announced that it would produce nuclear weapons and
take “resolute military actions” against the international
community.
Recently,
there has been increased uncertainty about the future of North Korea’s political
leadership. In June 2009, there were reports citing American and South Korean
officials that Kim Jong-il, the North Korean ruler who reportedly suffered a
stroke in August 2008 designated his third son, in his twenties, to become his
successor. The succession plan, however, remains uncertain. In addition, North
Korea’s economy faces severe challenges.
There can
be no assurance that the level of tension and instability in the Korean
peninsula will not escalate in the future, or that the political regime in North
Korea may not suddenly collapse. Any further increase in tension or uncertainty
relating to the military or economic stability in the Korean peninsula,
including a breakdown of diplomatic negotiations over the North Korean nuclear
program, the occurrence of military hostilities or heightened concerns about the
stability of North Korea’s political leadership, could have a material adverse
effect on the credit rating of Korea, our operations and the price of our common
shares and ADSs.
If
economic conditions in Korea deteriorate, our current business and future growth
could be materially and adversely affected.
We are incorporated in
Korea
and a significant portion of our
operations and assets are based in
Korea
. As a result, we are subject to
political, economic, legal and regulatory risks speci
fic to
Korea
.
Recent difficulties affecting
the U.S. and global financial sectors, adverse conditions and volatility in the
U.S. and worldwide credit and financial markets, fluctuations in oil and
commodity prices and the general weakness of the U.S. and global economy have
increased the uncertainty of global economic prospects in general and have
adversely affected the global and Korean economies.
Any future deterioration of the Korean
and global economy could adversely affect our business, financial
condi
tion, results of
operations and cash flows.
Developments
that could hurt Korea’s economy in the future include:
|
|
·
|
adverse
changes or volatility in foreign currency reserve levels, commodity prices
(including oil prices), exchange rates (including fluctuation of the
U.S. dollar or Japanese yen exchange rates or revaluation of the
Chinese renminbi), interest rates and stock
markets;
|
|
|
·
|
substantial
decreases in the market prices of Korean real
estate;
|
|
|
·
|
increasing
delinquencies and credit defaults by consumer and small and medium sized
enterprise borrowers;
|
|
|
·
|
declines
in consumer confidence and a slowdown in consumer
spending;
|
|
|
·
|
adverse
developments in the economies of countries that are important export
markets for Korea, such as the United States, Japan and China, or in
emerging market economies in Asia or
elsewhere;
|
|
|
·
|
the
continued emergence of the Chinese economy, to the extent its benefits
(such as increased exports to China) are outweighed by its costs (such as
competition in export markets or for foreign investment and the relocation
of the manufacturing base from the Republic to
China);
|
|
|
·
|
political,
social and labor unrest;
|
|
|
·
|
a
decrease in tax revenues and a substantial increase in the Government’s
expenditures for fiscal stimulus measures, unemployment compensation and
other economic and social programs that, together, would lead to an
increased government budget
deficit;
|
|
|
·
|
financial
problems or lack of progress in the restructuring of Korean conglomerates,
other large troubled companies, their suppliers or the financial
sector;
|
|
|
·
|
loss
of investor confidence arising from corporate accounting irregularities
and corporate governance issues at certain Korean
conglomerates;
|
|
|
·
|
the
economic impact of any pending or future free trade agreements, including
the Free Trade Agreement recently negotiated with the United
States;
|
|
|
·
|
geo-political
uncertainty and risk of further attacks by terrorist groups around the
world;
|
|
|
·
|
outbreak
of the H1N1 flu or the recurrence of severe acute respiratory syndrome, or
SARS, or an outbreak of avian flu in Asia and other parts of the
world;
|
|
|
·
|
deterioration
in economic or diplomatic relations between the Republic and its trading
partners or allies, including deterioration resulting from trade disputes
or disagreements in foreign policy;
|
|
|
·
|
political
uncertainty or increasing strife among or within political parties in the
Republic;
|
|
|
·
|
hostilities
involving oil producing countries in the Middle East and any material
disruption in the supply of oil or increase in the price of oil resulting
from those; and
|
|
|
·
|
an
increase in the level of tension or an outbreak of hostilities between
North Korea and the Republic or the United
States.
|
Risks
Related to Our ADSs
KOSDAQ
volatility may adversely affect the price of our common shares and the
ADSs.
Certain
shares listed on the KOSDAQ have recently experienced significant price and
volume fluctuations, sometimes without regard to the underlying fundamentals of
such shares. Historically, the KOSDAQ itself has had substantially less trading
volume than the KRX Stock Market. As a result, our common shares may be less
liquid and the prevailing price of the common shares may be more volatile in the
future than other shares listed on the KOSDAQ or shares listed on the KRX Stock
Market. The volatility and limited liquidity of our common shares on the KOSDAQ
may adversely affect the market price of the ADSs.
We
currently follow home country practice in lieu of complying with certain
requirements of the Nasdaq Stock Market LLC. This may afford less protection to
holders of our ordinary shares and ADSs.
Rule 5605
of the Marketplace Rules of the Nasdaq Stock Market LLC, or the Nasdaq Rules,
requires listed companies to have, among others, a board of directors comprised
of a majority of independent directors, the holding of regularly scheduled
meetings at which only independent directors are present, an audit committee
comprised of a minimum of three independent directors, a compensation committee,
if any, comprised solely of independent directors, and a nominations committee,
if any, comprised solely of independent directors. As a foreign private issuer,
however, we are permitted to, and we do, follow home country practice in lieu of
the above requirements. See “Item 6.C. Directors, Senior Management and
Employees—Board Practices” and “Item 16G. Corporate Governance” for more
information on the significant differences between our corporate governance
practices and
those
followed by U.S. companies under the Nasdaq Rules. As a result, we have fewer
board members exercising independent judgment and the level of board oversight
on the management of our company may therefore decrease. The board members who
are not independent may also cause a merger, consolidation, change of control or
other transactions or actions without the consent of the independent directors,
which may lead to a conflict with the interest of holders of our ordinary shares
and ADSs. Holders of our ordinary shares and ADSs may therefore be afforded less
protection.
Any
dividends paid on our common shares will be in Won and fluctuations in the
exchange rate between the Won and the U.S. dollar may affect the amount received
by you.
When we
declare cash dividends, the dividends will be paid to the depositary for the
ADSs in Won and then converted by the depositary into U.S. dollars pursuant to
the deposit agreement. Fluctuations in the exchange rate between the Won and the
U.S. dollar will affect, among other things, the U.S. dollar amounts you will
receive from the depositary as dividends.
Your
ability to deposit common shares into the depositary facility may be
limited.
Neither
common shares acquired in the open market nor common shares withdrawn from the
ADS depositary facility may be deposited or redeposited, as the case may be,
under the deposit agreement governing the ADSs without our consent. It is our
policy to consent to any deposit unless such deposit is prohibited by Korean
law, violates our Articles of Incorporation or the total number of our common
shares on deposit with the depositary does not exceed 3,900,000. No assurance
can be given that deposits or redeposits of our common shares will always be
permitted. If an investor’s ability to deposit common shares is limited, the
prevailing market price of our ADSs may differ from the prevailing market price
of the equivalent number of our common shares traded on the KOSDAQ.
You
may not be able to exercise preemptive rights.
The
Korean Commercial Code and our Articles of Incorporation require us, with
certain exceptions, to offer shareholders the right to subscribe for new common
shares in proportion to their existing ownership percentages whenever new common
shares are issued. Under the deposit agreement governing the ADSs, if we offer
rights to subscribe for additional common shares, the depositary under the
deposit agreement, after consultation with us, may make such rights available to
you or dispose of such rights on your behalf and make the net proceeds available
to you or, if the depositary is unable to take such actions, it may allow the
rights to lapse with no consideration to be received by you. The depositary is
required to make available any rights to subscribe for any securities only when
a registration statement under the United States Securities Act of 1933, as
amended (“Securities Act”), is in effect with respect to the securities or if
the offering of the securities is exempt from the registration requirements
under the Securities Act. We are under no obligation to file a registration
statement under the Securities Act to enable you to exercise preemptive rights
for our common shares underlying the ADSs, and we cannot assure you that any
registration statement will be filed or that an exemption from the registration
requirement under the Securities Act will be available. Accordingly, you may not
be entitled to exercise preemptive rights and may thereby suffer dilution of
your interests in us.
You
will not have the same voting rights as a holder of common shares.
You may
exercise voting rights with respect to the common shares underlying your ADRs.
You may instruct the depositary as to how to exercise the voting rights for the
common shares which underlie your ADSs if the depositary asks you to provide it
with voting instructions. After receiving voting materials from us, the
depositary will notify the ADR holders of any shareholder meeting or
solicitation of consents or proxies. This notice will describe how you may
instruct the depositary to exercise the voting rights for the common shares that
underlie your ADSs, subject to Korean law and the provisions of our Articles of
Incorporation. For instructions to be valid, the depositary must receive them on
or before the date specified. The depositary will endeavor, insofar as
practicable and subject to Korean law and the provisions of our Articles of
Incorporation, to vote or to have its agents vote the common shares or other
deposited securities represented by your ADSs as you instruct. The depositary
will not itself exercise any voting discretion. ADSs for which no voting
instructions have been received will not be voted. You may only exercise the
voting rights in blocks of 10 ADSs. Neither the depositary nor its agents are
responsible for any failure to carry out any voting instructions (if acting in
good faith), for the manner in which any vote is cast or for the effect
of any
vote. There is no guarantee that you will receive voting materials in time to
instruct the depositary to vote and it is possible that you, or persons who hold
their ADSs through brokers, dealers or other third parties, will not have the
opportunity to exercise a right to vote.
You
may not be able to exercise dissent and appraisal rights.
In some
limited circumstances, including the transfer of the whole or any significant
part of our business, our acquisition of a part of the business of any other
company having a material effect on our business, and our merger or
consolidation with another company, dissenting shareholders have the right to
require us to purchase their shares under Korean law. See “Item 10. Additional
Information — 10.B. Articles of Incorporation — Rights of Dissenting
Shareholders.” However, if you hold our ADSs, you will not be able to exercise
such dissent and appraisal rights unless you have withdrawn the underlying
common shares and become a direct shareholder prior to the record date for the
shareholders’ meeting at which the relevant transaction is to be
approved.
You
may be subject to Korean withholding taxes.
Under
Korean tax law, if you are a U.S. investor, you may be subject to Korean
withholding taxes on capital gains and dividends on the ADSs unless an exemption
or a reduction under the income tax treaty between the United States and Korea
is available. Under the United States-Korea tax treaty, capital gains realized
by holders that are residents of the United States eligible for treaty benefits
will not be subject to Korean taxation upon the disposition of the ADSs, with
certain exceptions. See “Item 10. Additional Information — 10.E. Taxation —
Korean Taxation” for a more detailed discussion of the effects of Korean tax
laws on the holders of ADSs, including the possible imposition of a Korean
securities transaction tax.
You
may have difficulty enforcing any judgment obtained outside Korea against us or
our Directors and officers.
We are
organized under the laws of Korea, and all of our Directors and officers reside
in Korea. All or a significant portion of our assets and the assets of such
persons are located outside of the United States. As a result, it may not be
possible for you to effect service of process within the United States upon
these persons or to enforce against them or us court judgments obtained in the
United States that are predicated upon the civil liability provisions of the
federal securities laws of the United States or of the securities laws of any
state of the United States. We have, however, appointed an agent in New York to
receive service of process in any proceedings in the State of New York relating
to our common shares or ADSs. Notwithstanding the foregoing, it may be difficult
to enforce in Korea civil liabilities predicated on the federal securities laws
of the United States or the securities laws of any state of the United
States.
Item 4. Information on the Company
4.A. History
and Development of the Company
We were
incorporated as a company with limited liability under Korean law on April 28,
2000. Our legal and commercial name is “
”
(pronounced “Chushikhoesa Webzen”) in Korean, and “Webzen Inc.” in English. Our
registered office is located at Daelim Acrotel Building, 8th Floor, 467-6
Dogok-dong, Kangnam-ku, Seoul, Korea 135-971. Our telephone number is (822)
3498-1600. We maintain a website at http://www.webzen.com. The information on
our website is not incorporated by reference into this annual report. Our agent
for U.S. federal securities law purposes is National Registered Agents, Inc.,
located at 875 Avenue of the Americas, Suite 501, New York, New York,
10001.
We are a
leading developer and distributor of online games in Korea. Some of the
important events in the development of our business since the beginning of 2007
are set forth below:
|
|
·
|
In
February 2007, we entered into a US$35 million three-year exclusive
license agreement with Asian Development Limited, a wholly owned
subsidiary of The9 Limited (“The9”), to publish the PC version of
Huxley in China.
|
|
|
·
|
In
April 2007, we commercially launched Soul of the Ultimate Nation (SUN) in
Taiwan through our subsidiary Webzen Taiwan Inc. (“Webzen
Taiwan”).
|
|
|
·
|
The9
launched open beta testing and commercial service of Soul of the Ultimate
Nation (SUN) in China in April and May 2007,
respectively.
|
|
|
·
|
In
December 2007, Webzen Taiwan entered into a publishing rights contract for
the online game Mini Fighter service in Taiwan with CJ
Internet.
|
|
|
·
|
Gameon
launched open beta testing and commercial service of Soul of the Ultimate
Nation (SUN) in Japan in March and April 2008,
respectively.
|
|
|
·
|
In
May 2008, Webzen Taiwan launched open beta testing and commercial service
of Mini Fighter in Taiwan.
|
|
|
·
|
In
May 2008, we entered into a three-year license agreement with NHN USA Inc.
(“NHN USA”) for the distribution of Huxley in North America and
Europe.
|
|
|
·
|
In
June 2008, we initiated open best test in Korea for
Huxley.
|
|
|
·
|
In
September 2008, NHN Games became our largest
shareholder.
|
|
|
·
|
In
October 2008, we appointed new chief executive officer, Mr. Chang Keun
Kim.
|
|
|
·
|
In
November 2008, we won the second prize by the Chairman of Korea
Communications Commission in Korea Internet Award, sponsored by Korea
Communications Commission.
|
|
|
·
|
In
December 2008, Huxley won the Game Graphics Prize and Game Sound Prize in
2008 Korean Game Awards.
|
|
|
·
|
In
March 2009, we entered into a channeling agreement with NHN Corp. to
distribute Soul of the Ultimate Nation (SUN) in Korea through NHN Corp.’s
online game portal,
www.hangame.com.
|
|
|
·
|
In
April 2009, we entered into a service agreement with NHN Games to have it
develop and maintain our game Parfait
Station.
|
|
|
·
|
In
April 2009, we entered into a lease agreement with nPluto Co., Ltd., an
online game developer affiliated to NHN Corp., to lease our internet data
centers and servers for nPluto’s future
games.
|
|
|
·
|
In
May 2009, we entered into a three-year exclusive license with NHN USA Inc.
to distribute Soul of the Ultimate Nation (SUN) in the United States,
Canada, Mexico and the United Kingdom through
www.ijji.com.
|
Since May
2008, NHN Games purchased Common Shares from various shareholders including our
controlling shareholders. As a result, it has gained control of our company and
owned 3,080,565 Common Shares or 23.74% of the outstanding common shares as of
June 30, 2009.
From May
28, 2008 to June 11, 2008, NHN Games purchased 40,592 Common Shares, equivalent
to 0.3% of the then outstanding Common Shares, on the KOSDAQ market. The total
amount paid by NHN Games for 40,592 shares was
W
500,297,152, or
W
12,325 per
share.
On June
11, 2008, NHN Games purchased 821,000 Common Shares, equivalent to 6.3% of the
then outstanding Common Shares, from Neowave Co., Ltd. through a block trade
after the close of the KOSDAQ market. The total amount paid by NHN Games for the
821,000 shares was
W
10,262,500,000,
or
W
12,500
per share.
On June
11, 2008, NHN Games purchased 343,000 Common Shares from Liveplex Co., Ltd.
through a block trade after the close of the KOSDAQ market. The total
amount paid by NHN Games for the 343,000 shares was
W
4,527,600,000, or
W
13,200 per
share.
On June
11, 2008, NHN Games purchased 160,000 Common Shares from Hyunsuk Ko through a
block trade after the close of the KOSDAQ market. The total amount paid by NHN
Games for the 160,000 shares was
W
1,920,000,000, or
W
12,000 per
share.
On
September 3, 2008, NHN Games purchased 259,152 Common Shares from Nam-Ju Kim
through a block trade after the close of the KOSDAQ market. The total amount
paid by NHN Games for the 259,152 shares was
W
4,664,736,000, or
W
18,000 per
share.
On
September 3, 2008, NHN Games purchased 191,191 Common Shares from Ki-Yong Cho
through a block trade after the close of the KOSDAQ market. The total amount
paid by NHN Games for the 191,191 shares was
W
3,441,438,000, or
W
18,000 per
share.
On
September 3, 2008, NHN Games purchased 198,357 Common Shares from Kil-Saup Song
through a block trade after the close of the KOSDAQ market. The total amount
paid by NHN Games for the 198,357 shares was
W
3,570,426,000, or
W
18,000 per
share.
On
September 3, 2008, NHN Games purchased 797,649 Common Shares from Woori
Investment & Securities Co., Ltd. (“Woori I&S”) through a block trade
after the close of the KOSDAQ market. The total amount paid by NHN Games for the
797,649 shares was
W
14,357,682,000,
or
W
18,000
per share.
On
September 3, 2008, NHN Games purchased 240,000 Common Shares from Hyo Sik Cho
through a block trade after the close of the KOSDAQ market. The total amount
paid by NHN Games for the 240,000 shares was
W
4,272,000,000, or
W
17,800 per
share.
On
September 9, 2008, Nam-Ju Kim, Ki-Yong Cho, Kil-Saup Song, Hyung-Cheol Kim and
Chang Keun Kim each executed and delivered a power of attorney appointing NHN
Games as the attorney-in-fact with full power and authority to act with respect
to all matters related to Section 147 of the Capital Market and Financial
Investment Business Act of Korea, which sets forth the obligation to report
beneficial ownership of equity securities of more than 5% of a class of stock
listed on Korea Exchange or KOSDAQ. When NHN Games purchased the Common Stock
from Nam-Ju Kim, Ki-Yong Cho, Kil-Saup Song and Hyung-Cheol Kim (the
“Individuals”) as set forth above, it had an arrangement (the “Arrangement”)
with the Individuals that the Individuals would have a good faith discussion
with NHN Games before exercising any voting rights of the Common Stock and that
they shall exercise voting rights together in the same direction in accordance
with the discussion for matters relating to changing or influencing control of
our company, including:
|
|
·
|
elections
and dismissals of directors;
|
|
|
·
|
amendments
to the article of incorporation regarding our organization including any
change to the board of directors;
|
|
|
·
|
changes
to our capital;
|
|
|
·
|
approvals
of dividend plans;
|
|
|
·
|
general
share exchanges or stock transfers;
|
|
|
·
|
transfers
or acquisitions of significant business
operations;
|
|
|
·
|
disposals
of significant assets; and
|
|
|
·
|
dissolution
of our company.
|
On June
18, 2009, NHN Games purchased 155,491 Common Shares from Nam-Ju Kim through a
block trade after the close of the KOSDAQ market. The total amount
paid by NHN Games for the 155,491 shares was
W
2,721,092,500, or
W
17,500 per
share.
On June
18, 2009, NHN Games purchased 114,714 Common Shares from Ki-Yong Cho through a
block trade after the close of the KOSDAQ market. The total amount
paid by NHN Games for the 114,714 shares was
W
2,007,495,000, or
W
17,500 per
share.
On June
18, 2009, NHN Games purchased 119,014 Common Shares from Kil-Saup Song through a
block trade after the close of the KOSDAQ market. The total amount
paid by NHN Games for the 119,014 shares was
W
2,082,745,000, or
W
17,500 per
share.
NHN Games
has purchased the Common Shares for taking control of our management. At the
extraordinary shareholders’ meeting held on October 24, 2008, NHN Games replaced
all the members of our board of directors (the “Board”) with new members, except
Hyung-Cheol Kim. See Item 6. Directors, Senior Management and
Employees.
NHN Games
controls the Board and thereby overlooks our business, operations and future
plans. While maintaining its controlling stake in us, NHN Games intends to
review its holdings in our company on a continuing basis and, depending upon the
price and availability of our securities, subsequent developments affecting us,
our prospects, general stock market and economic conditions, tax considerations
and other factors deemed relevant, may consider increasing or decreasing its
investment in us.
Our key
strategic objective is to maintain our position as a leading developer of online
games in Korea and to emerge as a leading developer and publisher of online
games in other markets. We are currently developing several games to diversify
our game portfolio and to target various segments in the market. By developing
different game genres within the massively-multiplayer online game space, such
as first-person shooting games, we will seek to diversify and increase
our subscriber base. In addition to our internally developed games, we are also
publishing third-party games. We believe that our proven operational experience,
established distribution platform and existing subscriber base make us an
attractive partner for other online game companies interested in licensing their
games to us for distribution in our markets. In line with this objective, we
regularly review proposed online games, acquisitions, and investments to
supplement and broaden our own game development activities.
4.B. Business
Overview
We are a
leading developer and distributor of online games. Our game Soul of the Ultimate
Nation (SUN) is a three-dimensional MMORPG provided in Korea, Taiwan, China and
Japan. MU is a MMORPG initially launched in 2001 and currently provided in
Korea, China, Japan, Taiwan, the Philippines, Vietnam and the U.S. We are also
planning to release new online games beginning in the second half of
2009.
We
commercially launched our new game Soul of the Ultimate Nation (SUN) in Korea in
November 2006, in Taiwan in April 2007, in China in May 2007 and in Japan in
April 2008.
We have
new games and services that we plan to launch. Huxley is scheduled for
commercial launch in the second half of 2009, and T-Project is planned to have
an open beta testing in 2011.
Current
Products
Soul of
the Ultimate Nation (SUN) is a MMORPG in which the players experience an epic
medieval tale in a world of emperors, armies, magicians and monsters set to an
original soundtrack by Howard Shore, an Academy Award winner and composer of the
theatrical score for the “Lord of the Rings” films. Soul of the Ultimate Nation
(SUN) features a state-of-the-art game graphics environment, taking advantage of
normal map rendering and various graphical effects, offering players rich and
realistic graphics. Our programmers have developed game engines that enable
fluid movement and console-level control of the game characters. Soul of the
Ultimate Nation (SUN) can be accessed from any location with a high-bandwidth
Internet connection. Registered subscribers may enter our network with a
password and a user ID, after downloading our game client software. Players
choose a character from five distinct character classes with different fighting
skills and magical powers and control the development of that character by
allocating points and carrying out tasks to meet the prerequisites for learning
certain skills. Players can individually play the game, but they can also form a
group using various communication methods to wage a large-scale battle, known as
siege warfare.
We
commenced the commercial service of Soul of the Ultimate Nation (SUN) in Korea
in November 2006, in Taiwan in April 2007, in China in May 2007 and in Japan in
April 2008.
In the
markets in which we currently provide commercial service of Soul of Ultimate
Nation (SUN), we provide the basic service of the game for free. End-users pay
us when they buy at our in-game item shops various items for their characters,
such as armor, weapons and potions, and the right at our in- game item shops to
change the world or stage at our in-game item shops in which the end-user plays.
This new revenue generating business model is referred to in the online game
industry as “microtransaction.”
MU is an
MMORPG which was initially launched in 2001. MU players select a specific
character with which they develop experience and enhanced game capabilities that
can be carried over into sequential gaming sessions. Players are able to
communicate with each other during the game through instant messaging and may
coordinate their activities with other players to form groups, thereby
coordinating their game skills to achieve collective objectives.
Our MU
users pay hourly charges based upon the hour they use our service or,
alternatively, pay a flat fee – usually a fixed amount per month – for a longer
period of time. In 2007, we introduced microtransaction sales for MU service in
Japan, Taiwan and China, and the end-users in those markets pay us when they buy
at our in-game item shops various items for their characters, such as armor,
weapons and potions and the right to change the world or stage in which the
end-user plays.
Products
under Development
Huxley is
a massively-multiplayer online first person shooting game developed for both PCs
and the Xbox 360. Users will be able to play a “Doom”-style first person
shooting game with up to 5,000 other players simultaneously and battle against
opposing races. Huxley has finished its closed beta testings in Korea in
September 2007 and December 2007 and its open beta testing in Korea in November
2008. We expect to complete another open beta test in Korea in July 2009 and to
commence its commercial service in Korea in the second half of 2009. In the
U.S., we plan to conduct beta testing in the third quarter of 2009, and to
commence its commercial service in the second half of 2009.
T-Project
is being developed by Red 5 Studios Inc. (“Red 5 Studios”) and is planned to
have a closed best testing in 2010 and an open beta testing in 2011. For
T-Project, we signed a worldwide publishing rights contract with the developing
company. The contract is for five years after the game is commercialized, and we
have agreed to pay royalties for the exclusive world-wide distribution rights to
this games. On May 28, 2009, an amendment to the original publishing agreement
was made to waive our obligation to make any addition payments relating to
T-project partly in exchange for Red 5 Studios’ publishing rights in the United
States and Europe. Under the amendment, Red 5 Studios will pay us 10% of the
revenue from the United States and Europe for five years after commercialization
and an additional 5% of such revenue (with quarterly cap of US$2,083,333 with
respect to the 5% additional revenue) for the first three-year period after
commercialization. We will remain to be the exclusive publisher of the game in
all other markets throughout the world, but we are to pay Red 5 Studios 50% of
such revenue from other markets for five years after
commercialization.
Parfait
Station is a massively-multiplayer online shooting game targeting younger age
groups and female players. We finished its closed beta testing and open beta
testing in Korea in December 2007 and February 2008, respectively. In order to
concentrate our development resources on Soul of the Ultimate Nation (SUN) and
Huxley, we had put on hold the development of Parfait Station in 2008. In April
2009, we entered into a service agreement with NHN Games under which NHN Games
will be responsible for the development, operation and maintenance of Parfait
Station until five years after the commercial launch of the game.
Markets
In 2001
and 2002, substantially all of our revenue was generated from online game
subscriptions in Korea. In 2003, approximately 85.5% of our revenue was
generated from online game subscriptions in Korea and approximately 14.5% of our
revenue was generated from the payment of royalties and license fees by our
overseas licensee. In 2004, 2005 and 2006, approximately 84.9%, 84.8% and 88.3%
of our revenue was generated from
online
game subscriptions in Korea, Taiwan and China, and approximately 15.1%, 15.2%
and 11.7% of our revenue was generated from royalties and license fees paid by
our licensees in the overseas markets, respectively. In 2007, approximately
67.5%, 6.6% and 4.5% of our revenue was generated from online game subscriptions
and microtransaction sales in Korea, Taiwan and China, respectively, and
approximately 11.4%, 6.9%, 1.4%, 1.0% and 0.7% of our revenue were generated
from royalties and fees paid by our licensees in China, Japan, the U.S., Vietnam
and the Philippines, respectively. In 2008, approximately 52.1%, 10.3% and 6.2%
of our revenue was generated from online game subscriptions and microtransaction
sales in Korea, Taiwan and China, respectively, and approximately 16.0%, 12.8%,
1.4%, 0.8% and 0.4% of our revenue were generated from royalties and fees paid
by our licensees in China, Japan, the U.S., Vietnam and the Philippines,
respectively.
Korea.
We
commenced commercial service of MU in Korea in November 2001. We divide our MU
online game subscribers in Korea into individual PC account subscribers and
Internet cafe subscribers. Individual PC account subscribers are individuals who
log on to our game servers either from home or at work, whereas Internet cafe
subscribers are commercial businesses with multiple PCs that provide Internet
and online game access to their customers for hourly fees. After the
introduction of the game, the number of individual PC account subscribers grew
until the first quarter of 2004. Since then, the number of individual PC account
subscribers has declined, and we recorded 28,696 individual account subscribers
at the end of first quarter of 2009 compared to 38,461 at the end of the first
quarter of 2008.
The
following table sets forth information on MU users and accounts in Korea since
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
No.
of Internet cafe accounts(1)
|
|
|
19,143
|
|
|
|
15,550
|
|
|
|
15,401
|
|
|
|
15,004
|
|
|
|
14,972
|
|
|
|
14,136
|
|
|
|
12,701
|
|
|
|
12,149
|
|
|
|
11,171
|
|
|
No.
of paying individual PC account subscribers(2)
|
|
|
49,838
|
|
|
|
41,735
|
|
|
|
42,391
|
|
|
|
42,345
|
|
|
|
38,461
|
|
|
|
36,323
|
|
|
|
32,626
|
|
|
|
31,209
|
|
|
|
28,696
|
|
|
(1)
|
Until
the first quarter of 2007, the number of Internet cafe account refers to
the number of paid accounts held by Internet cafes that can access MU
online game, while, since the second quarter of 2007, the same number
refers to the number of accounts held by Internet cafes that actually
accessed MU online game during the period
indicated.
|
|
(2)
|
As
of the end of the period.
|
We
commenced commercial service of our new game Soul of the Ultimate Nation (SUN)
in Korea in November 2006. We divide our Soul of the Ultimate Nation (SUN)
online game subscribers into individual PC account subscribers and Internet cafe
subscribers, but unlike MU, do not collect hourly or monthly subscription fees
from them. Our Soul of the Ultimate Nation (SUN) users pay us when they buy – at
our in-game item shops – various items for their characters, such as armor,
weapons and potions, and the right to change the world or stage in which the
end-user plays. Since March 2009, we started to provide our Soul of the Ultimate
Nation (SUN) in Korea through NHN Corp’s game portal www.hangame.com. While the
gamers who subscribed for Soul of the Ultimate Nation (SUN) before March 26,
2009 can use our old Soul of the Ultimate Nation (SUN) portal, all new
subscribers since then are to use NHN Corp’s game portal.
The
following table sets forth information on Soul of the Ultimate Nation (SUN)
users and accounts in Korea since the first quarter of 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
No.
of Internet cafe accounts(1)
|
|
|
19,143
|
|
|
|
12,433
|
|
|
|
11,665
|
|
|
|
9,887
|
|
|
|
8,944
|
|
|
|
6,844
|
|
|
|
5,768
|
|
|
|
3,974
|
|
|
|
2,547
|
|
|
No.
of paying individual PC account subscribers(2)
|
|
|
9,050
|
|
|
|
7,743
|
|
|
|
8,471
|
|
|
|
6,937
|
|
|
|
6,180
|
|
|
|
4,674
|
|
|
|
3,939
|
|
|
|
2,714
|
|
|
|
1,740
|
|
|
(1)
|
Until
the first quarter of 2007, the number of Internet cafe account refers to
the number of paid accounts held by Internet cafes that can access Soul of
the Ultimate Nation (SUN), while, since the second quarter of 2007, the
same number refers to the number of accounts held by Internet cafes that
actually accessed Soul of the Ultimate Nation (SUN) during the period
indicated.
|
|
(2)
|
As
of the end of the period.
|
Overseas
markets.
In China, we license our game to GameNow or conduct our business
through 9Webzen, Ltd. (“9Webzen”), a Hong Kong company which we established with
GameNow. GameNow, a wholly-owned subsidiary of The9, is an operator of a leading
Chinese-language game website called The9.com and holds a 30% interest in
9Webzen. GameNow is a licensee of our game Soul of the Ultimate Nation (SUN) and
it offers and distributes the game in China. GameNow, through its website
The9.com, launched open beta testing of the Chinese version of Soul of the
Ultimate Nation (SUN) in April 2007 and launched commercial service in May 2007.
Our Soul of the Ultimate Nation (SUN) users in China pay GameNow.net, Ltd. when
they buy at our in-game item shops various items for their characters, such as
armors, weapons and potions, and the right to change the world or stage in which
the end-user plays. MU has been distributed in China through 9Webzen since 2002.
We have licensed our MU online game to 9Webzen, based on a five-year license
agreement we entered into in September 2002. The license agreement was extended
another two years in September 2007. The Chinese version of MU was
commercialized in February 2003 after a five-month beta testing period. MU game
users in China purchase online credits or prepaid cards to access the game. The
operational results and financial position of 9Webzen have been consolidated
with our financial statements since December 14, 2005, when we increased our
interest in the company from 49% to 70%.
In
Taiwan, Soul of the Ultimate Nation (SUN) was commercialized through our Taiwan
subsidiary in April 2007 after a four-month beta testing period. Our Soul of the
Ultimate Nation (SUN) users in Taiwan pay us when they buy at our in-game item
shops various items for their characters, such as armors, weapons and potions,
and the right to change the world or stage in which the end-user plays. We
introduced MU in August 2002 through a license agreement with IGC, a content
publishing company in Taiwan. In July 2004, our two-year agreement with IGC
expired, and we decided to provide our online game services in Taiwan through a
wholly-owned subsidiary, which we established in July 2004.
In 2007,
we introduced microtransaction sales for MU service in Taiwan and China, and the
end-users in those markets pay us for various items for their characters they
buy at our in-game item shops, in addition to the subscription fee.
In Japan,
we entered into a three-year term licensing agreement with Gameon Co., Ltd., or
Gameon, for Soul of the Ultimate Nation (SUN) in October 2007. Soul of the
Ultimate Nation (SUN) went through closed beta testing in February 2008 and open
beta testing in March 2008 and was commercialized in April 2008. MU has been
distributed in Japan by Gameon since February 2003. From Gameon, we received
one-time licensing fees when we entered into the license agreements. Gameon
receives microtransaction payments from MU and Soul of the Ultimate Nation (SUN)
users in Japan, and we receive a certain percentage of the revenue generated in
Japan as a royalty fee.
In other
overseas markets, we licensed MU to game developers and operators such as New
Era Online Co., Ltd. in Thailand (June 2003), Digital Media Exchange, Inc. in
the Philippines (May 2004) and FPT Communications in Vietnam (May 2005). In each
case, we agreed to receive a certain percentage of the revenue generated in each
market as a royalty fee for licensing MU. The terms are usually two years and
renewable. From Digital Media Exchange and FPT Communications, we received
installation fees for setting up the game servers. In Thailand, the licensing
agreement with New Era Online Co., Ltd. ended in June 2006, and we did not renew
the contract.
In
December 2005, we entered into a three-year licensing agreement with K2 for the
licensing of a MU global server. The global server provides MU service in
countries where we have no exclusive licensing agreements. We received an
initial installation fee for setting up the game servers and have received a
certain percentage of the revenue as a royalty fee. In January 2007, we extended
the global server licensing agreement for two more years. In April 2009, the
extended term of the global server licensing agreement expired, and we began
directly operating the MU global server starting from May 2009.
The
following table presents the royalty revenue generated from MU distributors in
overseas market since 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from MU(1)
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
|
|
(in
millions of Won)
|
|
|
Japan
|
|
|
347
|
|
|
|
675
|
|
|
|
482
|
|
|
|
498
|
|
|
|
508
|
|
|
|
461
|
|
|
|
523
|
|
|
|
751
|
|
|
|
750
|
|
|
Philippines
|
|
|
61
|
|
|
|
55
|
|
|
|
40
|
|
|
|
43
|
|
|
|
43
|
|
|
|
29
|
|
|
|
29
|
|
|
|
31
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from MU(1)
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
|
|
(in
millions of Won)
|
|
|
Vietnam
|
|
|
147
|
|
|
|
58
|
|
|
|
38
|
|
|
|
35
|
|
|
|
36
|
|
|
|
43
|
|
|
|
102
|
|
|
|
98
|
|
|
|
221
|
|
|
U.S.
|
|
|
109
|
|
|
|
103
|
|
|
|
96
|
|
|
|
109
|
|
|
|
104
|
|
|
|
93
|
|
|
|
113
|
|
|
|
133
|
|
|
|
142
|
|
|
(1)
|
Includes
royalty revenue for licensing and installation
fee.
|
The
following table presents the royalty revenue generated from the Soul of the
Ultimate Nation (SUN) distributors in overseas market since 2008:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from Soul of the Ultimate Nation (SUN)(1)
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
|
|
(in
millions of Won)
|
|
|
China
|
|
|
419
|
|
|
|
1,711
|
|
|
|
1,157
|
|
|
|
1,158
|
|
|
|
1,349
|
|
|
|
1,459
|
|
|
|
1,281
|
|
|
|
1,000
|
|
|
Japan
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
483
|
|
|
|
484
|
|
|
|
984
|
|
|
|
1,552
|
|
|
(1)
|
Includes
royalty revenue for the licensing and installation
fee.
|
Seasonality
Usage of
our online games has typically increased around the New Year and other Korean
holidays, in particular during winter and summer school holidays. See “Item 3.
Key Information — 3.D. Risk Factors” for a description of other factors that
affect the demand for our games.
Marketing
We have
engaged independent promotional agents to promote our online games to Internet
cafes in Korea. We grant each promotional agent exclusive rights to promote our
online games within a specified area and pay a monthly commission based on the
revenue generated from Internet cafes in the allocated area. We also conduct a
variety of marketing programs and online events to target potential subscribers
accessing the Internet from home. Our main marketing efforts
include:
|
|
·
|
advertising
on website portals and in online game
magazines;
|
|
|
·
|
conducting
online promotional events;
|
|
|
·
|
forming
alliances with Internet service
providers.
|
In 2005
and 2006, we participated in the Electronic Entertainment Expo, or E3, held in
Los Angeles. Since 2007, however, we decided not to participate in E3 after
reassessing the marketing impact and as part of our cost-cutting measures. In
2008, our marketing activities were primarily conducted in Korea. Our
advertising and promotion expenses were
W
8,898 million,
W
2,271
million, and
W
3,824 million in
2006, 2007 and 2008, respectively.
Our
marketing activities in China are managed through The9 Computer Technology
Consultation Co., Ltd., and marketing activities in Taiwan are conducted by
Webzen Taiwan. Marketing activities in Japan, the Philippines and Vietnam are
primarily conducted by our licensees and consist of advertising on website
portals and in online game magazines and conducting online promotional
events.
Information
Technology
In
connection with deploying our games in Korea, we have designed and assembled a
flexible and reliable game server and information systems network. Our
distributors in China, Japan, the Philippines and Vietnam have separate game
servers and information system networks modeled on our system architecture in
Korea.
In order
to provide MU online game service in foreign markets where we do not have a
distributor, we established in September 2003 a “global server” network in our
office in Korea. Through this server, users in
countries
in which we did not have a presence could download for free a reduced version of
MU. On December 1, 2005, we licensed the operation of this global server to K2.
In January 2007, we extended the global server licensing agreement for two more
years. In April 2009, the extended term of the global server licensing agreement
expired, and we are currently preparing to operate the MU global server through
a subsidiary by June 2009.
Competition
We
believe that the principal competitive factors in the online game industry are
the ability to consistently attract creative game developers and offer new
online games, maintain a high-quality network and implement innovative and
effective sales and marketing campaigns.
Korea
. Our
primary subscription-based online game competitors in the Korean market are
NCsoft, Neowiz, Nexon, NHN, CJ Internet, YNK, Gravity, Hanbit Soft and Blizzard
Entertainment. In 2008, there were several launches of online games including
NCSoft’s
Aion
,
Hanbitsoft’s
Popoming
,
Neowiz’s
Warload
and
Tenvi
and Nexon’s
Counter Strike Online
and
Elsword
. In 2009, the
industry has launched or is expecting the launch of several additional online
game titles in the Korean market, such as
YNK’s
Battlerohan
, Hanbit Soft’s
Camon Hero
, Blizzard
Entertainment’s
StarCraft
2
, NHN’s
C9
and
Kingdom under Fire
II
.
The new
releases of high-quality game will increase competition in our
industry.
China
. Our
primary online game competitors in China are
Shanda
’
s
Yong Heng Zhi
Ta
(
A
ion
developed by NCsoft),
Netease
’
World of
WarCraft
,
Tencent
’
s
Dungeon and
Fighter
and
Cross
Fire
, 9you
’
s
Audition
, Giant
’
s
Zheng Tu
and
Giant
Online
, and
Wanmei
’
s
Perfect
World
.
Japan
. Our
primary online game competitors in Japan are GungHo’s
Ragnarok
, NCsoft Japan’s
Lineage II
, Square
Enix’s
Final Fantasy
Online
, YNK Japan’s
ROHAN
and Game On’s
RED STONE
. To date, Japan’s
game market still has been primarily driven by console games, although online
games are gaining popularity among Japanese game users as broadband access
becomes more widely available.
North America and
Western Europe
.
Our primary
online game competitors in the North America and
Western Europe
are
: Blizzard Entertainment’s
WOW,
Mythic
Entertainment’s
Warhammer
Online, Dark Age of Camelot
and
Ultima Online,
Sony Online
Entertainment’
s
PlanetSide,
Turbine’s
Lord of the Rings Online
and
Eidos’
Age of Conan
. Webzen’s
massively-multiplayer online first person shooting game title,
Huxley: The Distopia
(published by NHN USA) targets to compete with not only MMORPGs but also first
person shooting games such as
Halo 3
.
In all of
these markets, we also compete against PC-based game developers producing
popular PC-packaged games, including Electronic Arts, Take Two Interactive
Software, Activision, THQ and Midway Games, Inc., and against game console
manufacturers such as Microsoft (which produces Xbox), Sony (which produces
Playstation) and Nintendo (which produces Wii). Microsoft, Sony and Nintendo are
providing Internet online game services with their consoles, Xbox 360,
Playstation 3 and Nintendo Wii, respectively.
Intellectual
Property
We
require all key personnel engaged in technological research and development
capacities to sign agreements that substantiate our exclusive right to those
works and to transfer any ownership claim that they may have in those works to
us.
In Korea,
we own two patents relating to data transmission over the Internet for online
games, obtained program registration for our games and own service marks. In
other countries, we registered some of our service marks and plan to apply for
the registration of our other intellectual properties. We will take legal action
in any jurisdiction where we believe our intellectual property rights have been
infringed.
Insurance
We
maintain medical and accident insurance for our employees to the extent required
under Korean law, and we are insured against fire with respect to our facilities
in Korea. In addition, we maintain directors’ and officers’ liability insurance
policies covering potential liabilities of our Directors and
officers.
Laws
and Regulations
Korea
. The
Korean game industry is subject to comprehensive regulation by the Ministry of
Culture, Sports and Tourism (“MCST”), which is responsible for establishing
policies for the industry under the Act on Promotion of Game Industry. As an
online game company operating in Korea, we are also subject to:
|
|
·
|
regulation
by the Ministry of Knowledge Economy (“MKE”), which is responsible for
setting industrial, trade, resource and energy
policies.
|
|
|
·
|
regulation
by the Korea Communications Commission (“KCC”), under the
Telecommunication Business Act and the Protection of Communication Secrets
Act
|
|
|
·
|
regulation
by the KCC and the Ministry of Public Administration and Security under
the Act on Promotion of Information and Communications Network Utilization
and Information Protection;
|
|
|
·
|
regulation
by the Fair Trade Commission under the Act on Consumer Protection for
Transactions through Electronic
Commerce;
|
|
|
·
|
regulation
by the MCST under the Copyright Act, the Computer Program Protection Act
and the Online Digital Contents Business Development
Act;
|
|
|
·
|
regulation
by the Game Rating Board under the Act on Promotion of Game Industry;
and
|
|
|
·
|
regulation
by the Ministry for Health, Welfare and Family Affairs under the Juvenile
Protection Act.
|
Ratings regulation
.
Businesses manufacturing or importing games for the purpose of distributing or
providing games in Korea must obtain game ratings in advance from the Game
Rating Board. Online games are generally divided into four ratings categories:
“suitable for users of all ages,” “suitable for users over 12 years of age,”
“suitable for users over 15 years of age” and “suitable for users over 18 years
of age.” Soul of the Ultimate Nation (SUN) has been rated “suitable for users
over 18 years of age.” Our standard player-versus-player (“PVP”) version of the
MU online game, which allows players to kill other players’ characters, has been
rated “suitable for users over 18 years of age.” We also offer a
non-player-versus-player (“non-PVP”) version of MU, which allows players to kill
only non-player characters, which has been rated “suitable for users over 15
years of age” in Korea. Our Huxley online game has recently been rated “suitable
for users over 15 years of age.”
Value-added communications business
regulation
. Under the Telecommunications Business Act we are classified
as a value-added service provider and are required to make periodic reports to
the MKE and report any transfer, takeover, suspension or closing of our business
activities. The MKE may cancel our registration or order us to suspend our
business for a period of up to one year if we fail to comply with its rules and
regulations.
Protection of interests of online
game users under 20 years of age
. Pursuant to Korea’s civil law,
contracts entered into with persons under 20 years of age without parental
consent may be invalidated. Under the Telecommunication Framework Act,
telecommunication service providers are also required to take certain steps to
protect the rights of telecommunication service users. As a result,
telecommunication service contracts and online game user agreements are required
to set forth specific procedures for rescinding service contracts, which may be
entered into by persons under 20 years of age without parental consent. Also,
under the Promotion of Information and Communications Network Utilization and
Information Protection Act, the operator of a website should monitor and delete
any content harmful to minors.
Protection of consumer information
for electronic settlement services
. Under the Act on Consumer Protection
for Transactions on Electronic Commerce, we are required to take measures to
maintain the security of consumer information related to our electronic
settlement services. We are also required to notify consumers when electronic
payments are made and to indemnify consumers for damages resulting from the
misappropriation of consumer information by third parties.
We
believe that we have instituted appropriate safety measures to protect against
data misappropriation. To date, we have not experienced material disputes or
claims in this area.
Protection of personal information
for users of information and communications services
. Under the Act on
Promotion of Information and Communications Network Utilization and Information
Protection, we are permitted to gather personal information relating to our
subscribers within the scope of their consents. We are, however, generally
prohibited from utilizing personal information or providing it to third parties
beyond the purposes disclosed in our subscriber agreements. Disclosure of
personal information without consent from a subscriber is permitted
if:
|
|
·
|
it
is necessary for the settlement of service
charges;
|
|
|
·
|
the
personal information is processed so that the specific individual is
unidentified and is provided for compiling statistics, academic research
or surveys; or
|
|
|
·
|
it
is otherwise permitted by laws and
regulations.
|
We are
required to indemnify users for damages occurring as a result of our violation
of the foregoing restrictions, unless we can prove an absence of willful
misconduct or negligence on our part. We believe that we have instituted
appropriate measures and are in compliance with all material restrictions
regarding internal mishandling of personal information.
Taxation
. Under the Special
Tax Treatment Control Law, we may claim a tax credit that can be carried forward
for five years. In 2006, 2007 and 2008, we realized net losses, which were
claimed for carried forward tax credit. The statutory tax rate applied to us was
27.5% in 2006, 2007 and 2008 and will be reduced to 24.2% in 2009 and 22.0% in
2010. Our deferred income taxes as of December 31, 2008 were
calculated based on the assumption that the statutory tax rate of 22.0% would
apply to our operational results in 2010 and thereafter.
China
. The
online games industry in China operates under a legal regime that consists of
the State Council (especially, the State Council Information Office), which is
the highest authority of the executive branch of the PRC central government, and
the various ministries and agencies under its leadership. These ministries and
agencies include the Ministry of Industry and Information Technology; the
Ministry of Culture; the Ministry of Public Security; the State Administration
of Industry and Commerce; and the General Administration of Press and
Publications. The State Council and these ministries and agencies have issued a
series of rules that regulate a number of different substantive areas of our
business, including, among others, foreign ownership restrictions, Internet
content provider licenses and regulation of Internet content. See “Item 3. Key
Information — 3.D. Risk Factors — Risks Related to Our Business — Foreign
operations are subject to different business, political and economic
risks.”
4.C. Organization
As of
December 31, 2008, Webzen Taiwan was our only significant wholly-owned
subsidiary. We ceased the operation of Webzen America and Webzen China in 2008.
We also own 55.4% of the common shares of Flux, Inc., a privately held wireless
game developer, and 70% of 9Webzen, a joint venture with GameNow.
4.D. Property,
Plant and Equipment
Because
our main business is to provide online game services to our clients, we do not
own any factories or facilities that manufacture products. There are no
factories currently under construction, and we have no plans to build any
factories in the future.
Korea
. Our
principal executive and administrative offices are located at the Daelim Acrotel
Building, 467-6, Dogok-dong, Kangnam-ku, Seoul, Korea 135-971. We currently own
26,582 square feet and lease 56,099 square feet. The latest of our leases
expires in December 2009.
Taiwan
.
The offices of Webzen Taiwan are located at 7F-3, No.176, Jian 1st Rd., Jhonghe
City, Taipei County, Taiwan 23553, Republic of China.
We
believe that our existing facilities are adequate for our current requirements
and that additional space can be obtained on commercially reasonable terms to
meet our future requirements.
Item 4A. Unresolved Staff Comments
There are
no unresolved outstanding comments.
Item 5. Operating and Financial Review and
Prospects
5.A. Operating
Results
The
following discussion and analysis provides information that management believes
to be relevant to understanding our consolidated financial condition and results
of operations. This discussion should be read in conjunction with the
consolidated financial statements of Webzen, including the notes thereto
included in this Annual Report. See “Item 18. Financial
Statements.”
Overview
We are a
developer and distributor of online games. Our total net revenues, which include
online game subscription, microtransaction sales, royalties and license fees,
were
W
29,097
million and
W
32,776 million in
2007 and 2008, respectively. Substantially all of our revenue come from our two
online games, MU and Soul of the Ultimate Nation (SUN). With MU approaching the
end of its life cycle in most of its markets and with intensifying competition
due to the introduction of new games by competitors, we expect a decline in
revenues generated from MU going forward.
In our
overseas market, where we have licensed MU and/or Soul of the Ultimate Nation
(SUN) to licensees, we recorded royalties from China, Japan, the U.S., Vietnam
and the Philippines in the amounts of
W
5,247 million
(US$4.8 million),
W
4,195 million
(US$3.8 million),
W
444 million
(US$0.4 million) and
W
279 million
(US$0.3 million) and
W
132 million
(US$0.1 million), respectively, in 2008.
Our cost
of revenues decreased in 2008 to
W
15,102 million
from
W
17,505
million in 2007. Our operating expenses, which includes selling, general and
administrative expenses and research and development expenses, significantly
decreased in 2008 to
W
26,406 million
from
W
46,012
million in 2007 as we implemented a series of cost-cutting measures. Our net
loss decreased in 2008 to
W
7,675 million
from
W
25,594
million in 2007.
Critical
Accounting Policies
Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, contingent assets and liabilities,
and revenue and expenses during the reporting period. The policies discussed
below are considered by management to be critical not only because they are
important to the portrayal of our financial condition and results of operations
but also because application and interpretation of these policies requires both
judgment and estimates of matters that are inherently uncertain. As a result,
actual results may differ materially from our estimates.
Revenue
recognition
We derive
and expect to continue to generate most of our revenues from online game
subscription fees paid by our MU subscribers, royalties and license fees paid by
our licensees and sales of game items to Soul of the Ultimate Nation (SUN)
subscribers. We recognize revenue in accordance with accounting principles
generally accepted in the United States, as set forth in the American Institute
of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2,
Software Revenue
Recognition
, and AICPA SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition with
respect to Certain Transactions
, Staff Accounting Bulletin No. 104,
Revenue Recognition and other related pronouncements. Our current revenues can
be classified into the following categories:
Online
subscription fees
. Subscription fees are fees we directly collect from
client terminal level end-users. Our revenues from our operations in Korea
consist mostly of prepaid subscription fees paid by individual PC accounts and
Internet cafe subscribers, accounting for
W
13,589 million
and
W
3,326
million, respectively, in 2008. Online subscription fees earned by our
consolidated subsidiaries, which recorded
W
2,032 million
from 9Webzen and
W
3,363 million
from Webzen Taiwan in 2008, are also included in this item.
Microtransaction
sales
. Microtransaction sales are fees we collect from in-game item sales
for the online game Soul of the Ultimate Nation (SUN), which was commercialized
in Korea in the fourth quarter of 2006, in Taiwan and China in the second
quarter of 2007 and in Japan in the second quarter of 2008. The microtransaction
sales model is also utilized in the MU online game in Japan, China and Taiwan.
Under this model, players purchase points for in-game premium features.
Microtransaction sales are typically paid by credit card or charged to the
users’ mobile phone bills. These payments are deferred when received and the
relevant revenues are recognized over the life of the premium features or as the
premium features are consumed.
Under our micro-transaction sales model, or
item-based revenue model, game players can access our games free of charge or
for a low membership fee, but may purchase consumable virtual items, including
those with a predetermined expiration time, such as three months, or perpetual
items, such as certain costumes that stay binded to a game player for the life
of the game. Revenues in relation to consumable virtual items are recognized as
they are consumed, as our services in connection with these items have been
fully rendered to our game players as of that time. Revenues in relation to
perpetual virtual items are recognized over their estimated lives. We will
provide continuous online game services in connection with these perpetual
virtual items until they are no longer used by our game players. We have
considered the average period that game players typically play our games and
other game player behavior patterns to arrive at our best estimates for the
lives of these perpetual virtual items.
One-time license
fee
. In certain cases, we receive a one-time license fee from licensees
after we enter into a licensing agreement. License fees are deferred and
recognized as revenue over the licensing period. When we receive a one-time
license fee, we generally provide our licensees with minimal post-contract
customer support on our software products, consisting of access to a support
hotline and occasional unspecified upgrades or game enhancements, which
typically occur within one year of the beginning of the licensing agreements.
The estimated costs of providing such support are insignificant and sufficient
vendor-specific evidence does not exist to allocate the revenue from software
and related integration projects to the separate elements of such projects. As a
result, all of our licensing revenue is recognized ratably over the life of the
agreement.
Installation
fee
. In connection with certain overseas licensing agreements, we receive
a one-time installation fee in lieu of a licensing fee as we install game
servers and information systems networks for our licensees. The system and
network we use for our licensees are modeled after our system in Korea. As there
are no sufficient vendor-specific information to allocate the revenue between
installation service and other services, we recognize installation fees as
revenue ratable over the life of the agreements.
Royalty
revenues
. We receive royalty revenues from our licensees based on agreed
percentage of the licensees’ revenue. Royalty revenues are recognized on a
monthly basis after the licensees confirm their revenues based on the actual
number of hours of services sold during the prior month. Royalty revenues
generated from our consolidated subsidiaries, such as 9Webzen or Webzen Taiwan,
are eliminated during the consolidation process and are not included in this
item. Royalty revenues from foreign licensees accounted for 25.9% of our total
net revenues in 2008. The following table sets forth our royalty revenues from
each of our overseas licensees for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
|
(in
millions of Won)
|
|
|
Royalty
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China(1)
|
|
|
–
|
|
|
|
287
|
|
|
|
1,391
|
|
|
|
836
|
|
|
|
840
|
|
|
|
1,031
|
|
|
|
1,138
|
|
|
|
959
|
|
|
Japan
|
|
|
328
|
|
|
|
656
|
|
|
|
463
|
|
|
|
478
|
|
|
|
497
|
|
|
|
870
|
|
|
|
911
|
|
|
|
1,640
|
|
|
Philippines
|
|
|
61
|
|
|
|
55
|
|
|
|
40
|
|
|
|
43
|
|
|
|
43
|
|
|
|
29
|
|
|
|
29
|
|
|
|
31
|
|
|
Vietnam
|
|
|
124
|
|
|
|
35
|
|
|
|
14
|
|
|
|
11
|
|
|
|
13
|
|
|
|
19
|
|
|
|
78
|
|
|
|
74
|
|
|
U.S.
|
|
|
51
|
|
|
|
62
|
|
|
|
54
|
|
|
|
68
|
|
|
|
64
|
|
|
|
52
|
|
|
|
71
|
|
|
|
92
|
|
|
(1)
|
Since
we increased our interest in 9Webzen from 49% to 70% and 9Webzen became a
consolidated subsidiary in December 14, 2005, revenues for MU in China are
no longer recognized as royalty revenues, but are recorded under online
subscriptions fees. Royalty revenues from China in this table refer only
to royalty fees we receive from GameNow.net Ltd., the operator of Soul of
the Ultimate Nation (SUN) in China.
|
Allowances
for doubtful accounts
We
maintain allowances for doubtful accounts receivable for estimated losses that
result from the inability of our customers to make required payments. We base
our allowances on the likelihood of recoverability of accounts receivable which
is based on past experience and current collection trends. Allowances for
accounts receivable generally arise when individual PC account subscribers who
elect to make their payments through their fixed- line or mobile phone service
provider fail to make such payments. We record allowances for doubtful accounts
based on the historical payment patterns of our overall subscribers and increase
our allowances as the length of time after which such receivables become past
due increases.
Capitalized
software development costs
We
account for capitalized software development costs in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 86,
Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed
. Software development
costs incurred prior to the establishment of technological feasibility are
expensed when incurred and treated as research and development expenses. Once a
software product, such as an online game, has reached technological feasibility,
then all subsequent software development costs for that product are capitalized
until that product is released for sale. Technological feasibility is evaluated
on a product-by-product basis but typically occurs once the online game has a
proven ability to operate on a massively-multiplayer level. After an online game
is released, the capitalized product development costs are amortized based on
the expected life of the game. This amortized expense is recorded as a component
of cost of revenues. We evaluate the recoverability of capitalized software
development costs on a product-by-product basis. Capitalized costs for those
products that are cancelled are expensed in the period of cancellation. In
addition, a charge to cost of revenues is recorded when management’s forecast
for a particular game indicates that unamortized capitalized costs exceed the
net realizable value of that asset.
Income
taxes
We
account for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes
.
Under SFAS No. 109, income taxes are accounted for under the asset and liability
method. Management judgment is required in determining our provision for income
taxes, deferred tax assets and liabilities and the extent to which deferred tax
assets can be recognized. Deferred taxes are determined based upon differences
between the financial reporting and tax bases of assets and liabilities and
carryforwards at currently applicable statutory tax rates for the years in which
the differences are expected to be reversed and carryforwards are expected to be
realized.
A
valuation allowance is provided on deferred tax assets to the extent that it is
more likely than not that such deferred tax assets will not be realized. The
total income tax provision includes current tax expenses under applicable tax
regulations and the change in the balance of deferred tax assets and
liabilities.
Deferred
income tax assets are recognized only to the extent that realization of the
related tax benefit is more likely than not to occur. Realization of the future
tax benefits related to the deferred tax assets is dependent on many factors,
including our ability to generate taxable income within the period during which
the temporary differences reverse, the outlook for the Korean economic
environment, and the overall future industry outlook.
Under the
Special Tax Treatment Control Law, we may claim a tax credit that can be carried
forward for five years. In 2006, 2007 and 2008, we realized net losses, which
were claimed for carried forward tax credit. The statutory tax rate applied to
us was 27.5% in 2006, 2007 and 2008 and will be reduced to 24.2% in 2009 and
22.0% in 2010. Our deferred income taxes as of December 31, 2008 were
calculated based on the assumption that the statutory tax rate of 22.0% would
apply to our operational results in 2010 and thereafter.
In
addition, beginning January 1, 2007, we account for uncertainties related to
income taxes in compliance with FIN No 48,
Accounting for Uncertainty in Income
Taxes – an interpretation of SFAS No. 109
. Under FIN No. 48, we evaluate
our tax positions taken or expected to be taken in a tax return for recognition
and measurement on our financial statements. Only those tax positions that meet
the more likely than not threshold are recognized on the financial statements at
the largest amount of benefit that is a greater than 50 percent likely of
ultimately being realized.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R established
principles and requirements for how an acquirer in a business combination should
recognize and measure identifiable assets acquired, the liabilities assumed and
any noncontrolling interest in the acquiree. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of their first annual reporting period beginning on or after December
15, 2008.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements –An amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 requires that ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled and presented in the consolidated
statement of financial position within equity, but separate from the parent’s
equity. It also requires companies to clearly identify and present on the face
of the consolidated statement of income, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 and will be applied prospectively to all
noncontrolling interests, including any that arose prior to the effective date.
We are assessing the impact by the initial adoption of SFAS 160 and believe that
the initial adoption of SFAS 160 will not have a material impact on our
financial position and results of operations.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities–An Amendment of FASB Statement No. 133” (“SFAS 161”). The
new standard is intended to help investors better understand how derivative
instruments and hedging activities affect an entity’s financial position,
financial performance and cash flows through enhanced disclosure requirements.
The enhanced disclosures include the following:
|
|
·
|
a
tabular summary of the fair values of derivative instruments and their
gains and losses;
|
|
|
·
|
disclosure
of derivative features that are credit-risk-related to provide more
information regarding an entity’s liquidity;
and
|
|
|
·
|
cross-referencing
within footnotes to make it easier for financial statement users to locate
important information about derivative
instruments.
|
SFAS 161
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. We
are currently in the process of evaluating the impact, if any, of adopting this
standard.
In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets.” FSP FAS 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142, “Goodwill and Other
Intangible Assets.” FSP FAS 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We are currently in the process of evaluating the impact, if
any, of adopting this FSP.
Results
of Operations
2008
compared to 2007
The
following table summarizes our results of operations for the periods
indicated.
|
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won and thousands of US$)
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Online
game subscriptions
|
|
W
|
22,884
|
|
|
W
|
22,478
|
|
|
$
|
17,812
|
|
|
Royalties
and license fees
|
|
|
6,213
|
|
|
|
10,298
|
|
|
|
8,160
|
|
|
Total
net revenues
|
|
|
29,097
|
|
|
|
32,776
|
|
|
|
25,972
|
|
|
Cost
of revenues
|
|
|
17,505
|
|
|
|
15,102
|
|
|
|
11,967
|
|
|
Gross
profit
|
|
|
11,592
|
|
|
|
17,674
|
|
|
|
14,005
|
|
|
Selling,
general and administrative expenses
|
|
|
22,848
|
|
|
|
24,590
|
|
|
|
19,485
|
|
|
Research
and development expenses
|
|
|
23,164
|
|
|
|
1,816
|
|
|
|
1,439
|
|
|
Impairment
charges
|
|
|
0
|
|
|
|
505
|
|
|
|
400
|
|
|
Operating
loss
|
|
|
(34,420
|
)
|
|
|
(9,237
|
)
|
|
|
(7,319
|
)
|
|
Interest
income
|
|
|
3,503
|
|
|
|
3,364
|
|
|
|
2,666
|
|
|
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won and thousands of US$)
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Foreign
currency gain (loss), net
|
|
|
92
|
|
|
|
3,210
|
|
|
|
2,543
|
|
|
Gain
(loss) on disposal of property and equipment
|
|
|
3,931
|
|
|
|
—
|
|
|
|
—
|
|
|
Gain
on disposal of available-for-sale securities
|
|
|
3,755
|
|
|
|
34
|
|
|
|
27
|
|
|
Loss
on impairment of available-for-sale securities
|
|
|
—
|
|
|
|
(3,883
|
)
|
|
|
(3,077
|
)
|
|
Others,
net
|
|
|
(118
|
)
|
|
|
(515
|
)
|
|
|
(407
|
)
|
|
Loss
before income tax expenses and minority interest
|
|
|
(23,257
|
)
|
|
|
(7,027
|
)
|
|
|
(5,567
|
)
|
|
Income
tax expenses
|
|
|
2,579
|
|
|
|
802
|
|
|
|
636
|
|
|
Loss
before minority interest
|
|
|
(25,836
|
)
|
|
|
(7,829
|
)
|
|
|
(6,203
|
)
|
|
Minority
interest
|
|
|
242
|
|
|
|
154
|
|
|
|
123
|
|
|
Net
income (loss)
|
|
|
(25,594
|
)
|
|
|
(7,675
|
)
|
|
|
(6,080
|
)
|
|
(1)
|
For
convenience, the Won amounts are expressed in U.S. dollars at the rate of
W
1,262.0 to
US$1.00, the noon buying rate in effect on December 31, 2008, as announced
by the Federal Reserve Bank of New
York.
|
The
following table summarizes our results of operations as a percentage of our
total net revenues for the periods indicated.
|
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(as
a percentage of total net revenues)
|
|
|
Online
game subscriptions
|
|
|
78.6
|
%
|
|
|
68.6
|
%
|
|
Royalties
and license fees
|
|
|
21.4
|
%
|
|
|
31.4
|
%
|
|
Total
net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost
of revenues
|
|
|
60.2
|
%
|
|
|
46.1
|
%
|
|
Gross
profit
|
|
|
39.8
|
%
|
|
|
53.9
|
%
|
|
Selling,
general and administrative expenses
|
|
|
78.5
|
%
|
|
|
75.0
|
%
|
|
Research
and development expenses
|
|
|
79.6
|
%
|
|
|
5.5
|
%
|
|
Impairment
charges
|
|
|
0.0
|
%
|
|
|
1.5
|
%
|
|
Operating
loss
|
|
|
(118.3
|
)%
|
|
|
(28.2
|
)%
|
|
Interest
income
|
|
|
12.0
|
%
|
|
|
10.3
|
%
|
|
Foreign
currency gain (loss), net
|
|
|
0.3
|
%
|
|
|
9.8
|
%
|
|
Gain
(loss) on disposal of property and equipment
|
|
|
13.5
|
%
|
|
|
0.0
|
%
|
|
Gain
on disposal of available-for-sale securities
|
|
|
12.9
|
%
|
|
|
0.1
|
%
|
|
Loss
on impairment of available-for-sale securities
|
|
|
0.0
|
%
|
|
|
(11.8
|
)%
|
|
Others,
net
|
|
|
0.4
|
%
|
|
|
(1.6
|
)%
|
|
Loss
before income tax expenses and minority interest
|
|
|
(79.9
|
)%
|
|
|
(21.4
|
)%
|
|
Income
tax expenses
|
|
|
8.9
|
%
|
|
|
2.4
|
%
|
|
Loss
before minority interest
|
|
|
(88.8
|
)%
|
|
|
(23.9
|
)%
|
|
Minority
interest
|
|
|
0.8
|
%
|
|
|
0.5
|
%
|
|
Net
income (loss)
|
|
|
(88.0
|
)%
|
|
|
(23.4
|
)%
|
Revenues
. Our net revenues
increased 12.7% from
W
29,097 million in
2007 to
W
32,776 million in
2008 due to a 65.7% increase in royalties and license fees from
W
6,213 million in
2007 to
W
10,298 million in
2008 as royalties and license fees from Soul of the Ultimate Nation (SUN)
increased from
W
3,287 million in
2007 to
W
7,197 million in
2008, mainly as a result of increased revenues from the PRC and
commercialization of the game in Japan. This increase in royalties
and license fees was partially offset by a 1.8% decrease in online game
subscriptions from
W
22,884 million in
2007 to
W
22,478 million in
2008 as online game subscription from Soul of the Ultimate Nation (SUN) and MU
decreased during the period.
Cost of revenues.
Our cost of
revenues for 2008 decreased 13.7% from
W
17,505 million in
2007 to
W
15,102 million in
2008, primarily due to:
|
|
·
|
a
14.3% decrease in wages and salaries, including severance benefits, from
W
8,231
million in 2007 to
W
7,055
million in 2008 as our workforce in the operation and maintenance division
of MU and Soul of the Ultimate Nation (SUN) decreased by 19.8% as a part
of our cost-cutting measures;
|
|
|
·
|
a
23.4% decrease in depreciation from
W
3,131
million in 2007 to
W
2,397
million in 2008 as we disposed of equipments and office fixtures when we
decreased our headquarters’ office space in 2008;
and
|
|
|
·
|
a
41.8% decrease in fees and service charges from
W
1,323
million in 2007 to
W
770 million
in 2008 mainly due to a decrease in outsourcing service fees, as we
decreased the number of outsourcing workforce that worked on customer
relations for Soul of the Ultimate Nation (SUN) and quality assurance
during the previous year.
|
As a
percentage of total net revenues, cost of revenues decreased from 60.2% in 2007
to 46.1% in 2008.
Selling, general and administrative
expenses.
Selling, general and administrative expenses consist of sales
commissions paid to independent promotional agents that target our Internet cafe
subscribers in Korea, commissions paid to providers of settlement services,
administrative expenses and related personnel expenses of executive and
administrative staff, and marketing and promotional expenses and related
personnel expenses. Selling, general and administrative expenses increased 7.6%
from
W
22,848
million in 2007 to
W
24,590 million in
2008 primarily due to:
|
|
·
|
a
63.4% increase in fees and commissions from
W
3,369
million in 2007 to
W
5,504
million in 2008 mainly due to an increase in professional fees related to
defending a hostile acquisition attempt in 2008;
and
|
|
|
·
|
a
68.4% increase in marketing expenses from
W
2,271
million in 2007 to
W
3,824
million in 2008 (as a percentage of total revenues, our marketing expenses
increased from 7.8% in 2007 to 11.7% in 2008) mainly due to the
advertisement costs related the launch of third closed beta test and open
beta test of our new product,
Huxley.
|
These
increases were partially offset by a 15.3% decrease in payroll costs and
retirement benefit costs from
W
10,462 million in
2007 to
W
8,859 million in
2008, as the number of general and administrative personnel decreased 30.1%
compared to the prior year.
As a
percentage of net revenues, selling, general and administrative expenses
decreased from 78.5% in 2007 to 75.0% in 2008.
Research and development
expenses.
Research and development expenses incurred prior to the
establishment of technological feasibility are included in this item. Research
and development expenses in 2008 decreased 92.2% from
W
23,164 in 2007 to
W
1,816
million in 2008, despite the advance payment of
W
979 million to
Red 5 Studios for T-Project, partly due to a
W
12,309 million
setoff to the research and development expenses, which reflects the amount
Realtime Worlds Inc. (“RTW”) reimbursed or agreed to reimburse us for our
earlier advance payments when we terminated a game development agreement with
it, and a decrease of
W
7,194 million
attributable various cost-cutting measures in research and development
departments including decrease in wages and salaries paid and outsourcing fees
paid. We expect the level of research and development expenses to decrease in
2009, as we expect to implement tight cost controls and make effective use of
our development resources.
Impairment
charges
. We realized an impairment charge of
W
505 million in
2008, while there were no such charges in previous periods. This impairment
charge in 2008 was mainly due to the impairment of
equipment,
capitalized leasehold improvements and certain other
assets
of Webzen
China and Webzen America as the two entities ceased to conduct activities
generating revenue and the relevant assets had not alternative use.
Interest income
. Our interest
income is mainly generated from cash equivalents and short-term financial
instruments. Interest income decreased 4.0% from
W
3,503 million in
2007 to
W
3,364 million in
2008, mainly due to a decrease of cash and cash equivalents and short-term
financial instruments. During the same period, the balance of our cash and cash
equivalents and short-term financial instruments decreased from
W
74,904 million as
of
December
31, 2007 to
W
53,346 million as
of December 31, 2008, while the average interest rate on these assets
increased.
Foreign currency gain and
loss
. Our net foreign currency gain increased significantly from
W
92 million in
2007 to
W
3,210 million in
2008. This was mainly due to an increase of valuation of foreign currency
denominated assets (including account receivables and long-term loans), as
Korean Won significantly depreciated against other major currencies including
U.S. dollar in 2008.
Gain on disposal of property and
equipment
. We realized net gain on disposal of property and equipment of
W
3,931
million in 2007, but no such gain in 2008. The gain on disposal of
property and equipment in 2007 was mainly due to the sale of office space at the
Daelim Acrotel Building in Dogok-dong, Seoul.
Gain on disposal of
available-for-sale securities
. Our gain on disposal of available-for-sale
securities decreased 99.1% from
W
3,755 million in
2007 to
W
34
million in 2008. The net gain in 2007 of
W
2,320 million was
from sale of common shares of GameOn Co., Ltd. and
W
1,435 million
from disposal of beneficial certificates and other available-for-sale
securities.
Loss on impairment of
available-for-sale securities
. We realized loss from impairment of
available-for-sale securities of
W
3,883 million in
2008 from an other-than-temporary decrease in value of investment in NeoWave
Inc. We did not incur any loss on impairment of available-for-sale securities in
2007.
Income taxes
. Income tax
expenses decreased 68.9% from
W
2,579 million in
2007 to
W
802
million in 2008, mainly due to a decrease of income tax expenses relating
to the valuation allowance for unrealized gain
on available-for-sale securities.
The
income tax expenses in 2007 were attributable to an increase in the valuation
allowance recorded in 2007, due to a decrease in the deferred tax liabilities
recorded in equity in 2006 related to available for sale
securities.
Net income
. As a result of
the factors discussed above, our net loss decreased from
W
25,594 million in
2007 to
W
7,675 million in
2008.
2007
compared to 2006
The
following table summarizes our results of operations for the periods
indicated.
|
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won)
|
|
|
|
|
|
|
|
|
|
|
Online
game subscriptions
|
|
W
|
21,247
|
|
|
W
|
22,884
|
|
|
Royalties
and license fees
|
|
|
2,811
|
|
|
|
6,213
|
|
|
Total
net
revenues
|
|
|
24,058
|
|
|
|
29,097
|
|
|
Cost
of revenues
|
|
|
15,722
|
|
|
|
17,505
|
|
|
Gross
profit
|
|
|
8,336
|
|
|
|
11,592
|
|
|
Selling,
general and administrative expenses
|
|
|
32,699
|
|
|
|
22,848
|
|
|
Research
and development expenses
|
|
|
24,062
|
|
|
|
23,164
|
|
|
Operating
income (loss)
|
|
|
(48,425
|
)
|
|
|
(34,420
|
)
|
|
Interest
income
|
|
|
3,991
|
|
|
|
3,503
|
|
|
Foreign
currency gains (losses), net
|
|
|
(501
|
)
|
|
|
92
|
|
|
Gain
on disposal of available-for-sale securities
|
|
|
2,535
|
|
|
|
3,755
|
|
|
Gain
on disposal of property and equipment
|
|
|
115
|
|
|
|
3,931
|
|
|
Others,
net
|
|
|
(203
|
)
|
|
|
(118
|
)
|
|
Income
(loss) before income tax expenses, equity in earnings of related equity
investment and minority interest
|
|
|
(42,488
|
)
|
|
|
(23,257
|
)
|
|
Income
tax expenses
|
|
|
5,102
|
|
|
|
2,579
|
|
|
Income
(loss) before equity in earnings related equity investment and minority
interest
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
Income
(loss) before minority interest
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won)
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
525
|
|
|
|
242
|
|
|
Net
income (loss)
|
|
|
(47,065
|
)
|
|
|
(25,594
|
)
|
The
following table summarizes our results of operations as a percentage of our
total net revenues for the periods indicated.
|
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(as
a percentage of total net revenues)
|
|
|
Online
game subscriptions
|
|
|
88.3
|
%
|
|
|
78.6
|
%
|
|
Royalties
and license fees
|
|
|
11.7
|
%
|
|
|
21.4
|
%
|
|
Total
net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost
of revenues
|
|
|
65.4
|
%
|
|
|
60.2
|
%
|
|
Gross
profit
|
|
|
34.6
|
%
|
|
|
39.8
|
%
|
|
Selling,
general and administrative expenses
|
|
|
135.9
|
%
|
|
|
78.5
|
%
|
|
Research
and development expenses
|
|
|
100.0
|
%
|
|
|
79.6
|
%
|
|
Operating
income (loss)
|
|
|
(201.3
|
%)
|
|
|
(118.3
|
%)
|
|
Interest
income
|
|
|
16.6
|
%
|
|
|
12.0
|
%
|
|
Foreign
currency gains (losses), net
|
|
|
(2.1
|
%)
|
|
|
0.3
|
%
|
|
Gain
on disposal of available-for-sale securities
|
|
|
10.5
|
%
|
|
|
12.9
|
%
|
|
Income
(loss) before income tax expenses, equity in earnings of related equity
investment and minority interest
|
|
|
(176.6
|
%)
|
|
|
(79.9
|
%)
|
|
Income
tax expenses
|
|
|
21.2
|
%
|
|
|
8.9
|
%
|
|
Income
(loss) before equity in earnings related equity investment and minority
interest
|
|
|
(197.8
|
%)
|
|
|
(88.8
|
%)
|
|
Equity
in earnings of related equity investment, net of taxes
|
|
|
–
|
|
|
|
|
|
|
Income
(loss) before minority interest
|
|
|
(197.8
|
%)
|
|
|
(88.8
|
%)
|
|
Minority
interest
|
|
|
2.2
|
%
|
|
|
0.8
|
%
|
|
Net
income (loss)
|
|
|
(195.6
|
%)
|
|
|
(88.0
|
%)
|
Revenues
. Our net revenues
for 2007 increased 20.9% from
W
24,058 million
in 2006 to
W
29,097 million in 2007 due to:
|
|
·
|
a
121.1% increase in royalties and license fees from
W
2,811
million in 2006 to
W
6,213
million in 2007 as royalties and license fees from Soul of the Ultimate
Nation (SUN) recorded
W
3,296
million in 2007 while there were no royalties and license fees generated
from Soul of the Ultimate Nation (SUN) in 2006;
and
|
|
|
·
|
a
7.7% increase in online game subscriptions from
W
21,247
million in 2006 to
W
22,884
million in 2007 as online game subscription from Soul of the Ultimate
Nation (SUN) increased by
W
3,606
million while online game subscription from MU decreased by
W
1,969
million during the period.
|
Cost of revenues.
Our cost of
revenues for 2007 increased 11.3% from
W
15,722 million in
2006 to
W
17,505 million in
2007, primarily due to:
|
|
·
|
a
159.9% increase in fees and service charges from
W
509 million
in 2006 to
W
1,323
million in 2007 as various service fees related to Soul of the Ultimate
Nation (SUN), such as costs for outsourcing of operations and animation
production of characters and background, were recognized for the full
year;
|
|
|
·
|
a
5.9% increase in wages and salaries, including severance benefits, from
W
7,769
million in 2006 to
W
8,231
million in 2007 as the labor costs related to Soul of the Ultimate Nation
(SUN) development teams were recognized as cost of revenues for the full
year in 2007; and
|
|
|
·
|
intangible
asset amortization in the amount of
W
699 million
in 2007, as the capitalized product development costs of Soul of the
Ultimate Nation (SUN) started to be amortized after the release of the
game in late 2006.
|
As a
percentage of total revenues, however, cost of revenues decreased from 65.4% in
2006 to 60.2% in 2007.
Selling, general and administrative
expenses.
Selling, general and administrative expenses consist of sales
commissions paid to independent promotional agents that target our Internet cafe
subscribers in Korea, commissions paid to providers of settlement services,
administrative expenses and related personnel expenses of executive and
administrative staff, and marketing and promotional expenses and related
personnel expenses. Selling, general and administrative expenses decreased 30.1%
from
W
32,699
million in 2006 to
W
22,848 million in
2007 and, as a percentage of net revenues, decreased from 135.9% to 78.5% in
2007, primarily due to:
|
|
·
|
marketing
expenses that decreased 74.4% from
W
8,898
million in 2006 to
W
2,271
million in 2007 (as a percentage of total revenues, our marketing expenses
decreased from 37.0% to 7.8%, respectively), as we decided not to
participate in 2007 E3 and focused on cost-effective advertising and
marketing activities; and
|
|
|
·
|
payroll
costs and retirement benefit costs that decreased 10.2% from
W
11,647
million in 2006 to
W
10,462
million in 2007, as the number of general and administrative personnel
decreased 38.3% compared to the prior
year.
|
Research and development
expenses.
Research and development expenses incurred prior to the
establishment of technological feasibility are included in this item. Research
and development expenses in 2007 decreased 3.7% from
W
24,062 in 2006 to
W
23,164
million in 2007. Of this amount,
W
5,960 million was
attributable to the wages and salaries paid in 2007 to personnel in research and
development departments,
W
8,188 million was
attributable to advance royalties paid to Red 5 Studios for the development of
T-project, and
W
5,706 million was
attributable to advance royalties paid to RTW for the development of a game
called APB. We expect the level of research and development expenses to decrease
in 2008, as we expect to implement tight cost controls and make effective use of
our development resources.
Interest income
. Our interest
income is mainly generated from cash equivalents and short-term financial
instruments. Interest income decreased 12.2% from
W
3,991 million in
2006 to
W
3,503 million in
2007, mainly due to a decrease of cash and cash equivalents. During the same
period, the balance of our cash and cash equivalents decreased from
W
78,138 million as
of December 31, 2006 to
W
66,857 million as
of December 31, 2007.
Foreign currency gain and
loss
. We realized net foreign currency losses of
W
501 million in
2006 and a net foreign currency gain of
W
92 million in
2007.
Gain on disposal of property and
equipment
. Gain on disposal of property and equipment increased
significantly from
W
115 million in
2006 to
W
3,931 million in
2007, mainly due to the sale of office space at the Daelim Acrotel Building in
Dogok-dong, Seoul, for which we realized a gain of
W
3,892
million.
Gain on disposal of
available-for-sale securities
. Gain on disposal of available-for-sale
securities increased mainly due to sale of common shares of GameOn Co., Ltd. In
2007, we sold 1,560 shares out of 2,560 shares and recognized gain on disposal
of available-for-sales securities of
W
2,320
million.
Income taxes
. Income tax
expenses decreased 49.5% from
W
5,102 million in
2006 to
W
2,579 million in
2007. The income tax expenses in 2007 were attributable to an increase in the
valuation allowance recorded in 2007, due to a decrease in the deferred tax
liabilities recorded in equity in 2006 related to available for sale securities.
In 2006, the valuation allowance recorded was equal to the net deferred tax
asset balance at December 31, 2006.
Net income
. As a result of
the factors discussed above, our net loss decreased from
W
47,065 million in
2006 to
W
25,594 million in
2007.
Impact
of inflation
In view
of our operating history, we believe that inflation in Korea and our other
principal markets has not had a material impact on our results of operations.
Inflation in Korea was 2.2% in 2006 and 2.5% in 2007 and 4.7% in
2008.
Impact
of Foreign Currency Fluctuations
See “Item
11. Quantitative and Qualitative Disclosures about Market Risk — Foreign
currency risk.”
Government,
Economic, Fiscal, Monetary or Political Factors
See “Item
3. Key Information — 3.D. Risk Factors — Risks Related to The Republic of
Korea,” “Item 4. Information on the Company — 4.B. Business Overview — Laws and
Regulations” and “Item 10. Additional Information — 10.E.
Taxation.”
5.B. Liquidity
and Capital Resources
Liquidity
.
The following table sets forth the summary of our cash flows for the periods
indicated:
|
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won and thousands of US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Net
cash used in operating activities
|
|
|
(38,660
|
)
|
|
|
(22,026
|
)
|
|
|
(13,916
|
)
|
|
|
(11,027
|
)
|
|
Net
cash provided by (used in) investing activities
|
|
|
(3,574
|
)
|
|
|
4,995
|
|
|
|
(2,868
|
)
|
|
|
(2,273
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
|
(1,367
|
)
|
|
|
5,756
|
|
|
|
(8,798
|
)
|
|
|
(6,971
|
)
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
–
|
|
|
|
(6
|
)
|
|
|
548
|
|
|
|
434
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(43,601
|
)
|
|
|
(11,281
|
)
|
|
|
(25,034
|
)
|
|
|
(19,837
|
)
|
|
Cash
and cash equivalents at beginning of period
|
|
|
121,739
|
|
|
|
78,138
|
|
|
|
66,857
|
|
|
|
52,977
|
|
|
Cash
and cash equivalents at end of period
|
|
|
78,138
|
|
|
|
66,857
|
|
|
|
41,823
|
|
|
|
33,140
|
|
|
(1)
|
For
convenience, the Won amounts are expressed in U.S. dollars at the rate of
W
1,262.0 to
US$1.00, the noon buying rate in effect on December 31, 2008, as announced
by the Federal Reserve Bank of New
York.
|
In 2008,
our primary sources of liquidity were existing cash on hand and short-term
financial instruments.
We used
W
13,916
million in operating activities in 2008, as our net loss amounted to
W
7,675 million in
2008 and other receivables increased
W
8,570 million
primarily due to the receivables recorded from our termination of agreement with
RTW, partially offset by non-cash items such as depreciation and
amortization.
Net cash
used in investing activities in 2008 was
W
2,868 million,
primarily due the
W
9,987 million
increase in investment in available-for-sale securities and the
W
2,897 million
increase in short-term financial instrument, partially offset by the
W
11,306 of
leasehold deposit we received when we decreased our office space.
Net cash
used in financing activities was
W
8,798 million in
2008, primarily due to the
W
6,617 million
used in the acquisition of treasury stock and the
W
1,192 million net
decrease in short-term borrowing, which was partly attributable to the repayment
of borrowing that had been incurred by Webzen China.
Capital resources
. As of
December 31, 2008, our primary source of liquidity was
W
41,823 million
(US$33 million) of cash and cash equivalents and
W
11,523 million
(US$9 million) of unrestricted short-term financial instruments. We believe that
our available cash, cash equivalents and short-term financial instruments will
be
sufficient
to meet our capital needs for at least the next 12 months. However, we cannot
assure you that our business or operations will not change in a manner that
would consume available capital resources more rapidly than anticipated. As of
December 31, 2008, Webzen Taiwan has a L/C credit line up to $660,000 from a
local bank in Taiwan.
We expect
to have capital expenditure requirements for the ongoing expansion into other
markets, including hardware expenditures for the continuous expansion and
upgrading of our existing server equipment, for which we expect to make
approximately
W
1 billion in
capital expenditures in 2009. The amount and timing of any investments have not
yet been determined and will depend on our ability to identify suitable
acquisition targets.
5.C. Research
and Development, Patents and Licenses
Since
2007, we implemented a series of cost-cutting measures. We significantly reduced
our workforce, including game developers, and as a result the number of
employees in game development, web development and system engineering teams
decreased from 548 as of December 31, 2006 to 229 as of December 31, 2008. In
2008, we had put on hold the development of certain games such as Parfait
Station in order to concentrate our development resources on Soul of the
Ultimate Nation (SUN). Later in April 2009, the development and maintenance of
Parfait Station was outsourced to NHN Games. In early 2009, we also negotiated
with Red 5 Studios to reduce the amount we invest in T-project development in
exchange for lower profit share in the U.S. and European market after
commercialization. On May 28, 2009, an amendment to the original publishing
agreement was made to waive our obligation to make any addition payments
relating to T-project in exchange for Red 5 Studios’ publishing rights in the
United States and Europe and lower profit share worldwide after
commercialization.
5.D. Trend
Information
See
“—5.A. Operating Results—Overview.”
5.E. Off-balance
Sheet Arrangements
We have
provided guarantees of
W
346 million as of
December 31, 2008 to lending institutions for certain loans extended to our
employees for their purchase of our common shares. The guarantees are secured by
a cash deposit with the lending institution.
We opened
a stand-by letter of credit account at Hana Bank until December 18, 2009 for our
business in Taiwan. In turn, Hana Bank provided a guarantee of up to $660,000
for Webzen Taiwan for its borrowings from a local bank in Taiwan.
We do not
have any outstanding hedging contracts. See “Item 11. Quantitative and
Qualitative Disclosures about Market Risk — Foreign currency risk.”
5.F. Contractual
Obligations
The
tables below set forth the maturities of contractual cash obligations as of
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won)
|
|
|
Contractual
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
|
1,199
|
|
|
|
752
|
|
|
|
447
|
|
|
|
—
|
|
|
|
—
|
|
|
Capital
lease obligations
|
|
|
77
|
|
|
|
55
|
|
|
|
22
|
|
|
|
—
|
|
|
|
—
|
|
|
Purchase
obligations
|
|
|
38
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38
|
|
|
|
—
|
|
Employees and executive
officers with one
year or more of service are entitled to
receive a lump-sum payment upon termination of their employment with
us
based on the length of service and their
rate of payment at the time of termination. W
e accrued
W
3,012 million as accrued severance
benefits
as of
December 31, 2008.
Item 6. Directors, Senior Management and
Employees
6.A. Directors
and Senior Management
The
following table sets forth the names, ages and positions at our company and
other positions held by our Directors and officers as of May 31,
2009:
|
|
|
|
|
|
|
Chang
Keun Kim
|
|
|
39
|
|
President,
Chief Executive Officer and Director (Representative
Director)
|
|
Byoung
Gwan Kim
|
|
|
37
|
|
Chief
Strategy Officer and Director
|
|
Hyung-Cheol
Kim
|
|
|
36
|
|
Chief
Financial Officer and Director
|
|
Chang
Won Rhee
|
|
|
47
|
|
Outside
Director and a member of the Audit Committee
|
|
Seung
Han Ha
|
|
|
43
|
|
Outside
Director and a member of the Audit Committee
|
|
Hyuk-Yun
Kim
|
|
|
39
|
|
Outside
Director and a member of the Audit
Committee
|
Chang Keun
Kim
is a newly elected Representative Director, President and the Chief
Executive Officer serving since October 2008. He served as Business Department
Manager of NHN Hangame Division and Group Manager of NHN Publishing Business
Group. Mr. Kim had received a bachelor’s degree in business administration from
Seoul National University and a master’s degree and doctoral degree in business
administration from Korea Advanced Institute of Science and
Technology.
Byoung Gwan
Kim
is a newly elected Director and the Chief Strategy Officer serving
since October 2008. He is also the chief executive officer of NHN Games. Mr. Kim
received a bachelor’s degree in business administration from Seoul National
University and a master’s degree in industrial business administration from
Korea Advanced Institute of Science and Technology.
Hyung-Cheol
Kim
is a Director and the Chief Financial Officer serving since March
2008. From 2004 to 2007, he served as head of the business planning team at Daum
Communication Co., Ltd. From 2001 to 2004, Mr. Kim worked at Saebit Accounting
Firm as a manager. Mr. Kim received a bachelor’s degree in business
administration from Korea University in 1996.
Chang Won
Rhee
is a newly elected Outside Director and a member of the Audit
Committee since October 2008. He is a partner attorney at Shin & Kim. Mr.
Lee had received a bachelor’s degree in law from Seoul National University and a
master of law degree from Boston University.
Seung Han
Ha
is a newly elected Outside Director and a member of the Audit
Committee since October 2008. He is a certified public accountant and is an
accountant at Shin & Kim. Mr. Ha received a bachelor’s degree in business
administration from Seoul National University and a master’s degree in business
administration from University of Illinois.
Hyuk-Yun
Kim
is a newly elected Outside Director and a member of the Audit
Committee since March 2009. He is a certified public accountant at Kim &
Chang since 2001. Mr. Kim worked at Sandong Accounting Firm from 1997 to 2000 as
a certified public accountant. Mr. Kim received a bachelor’s degree in business
administration from Seoul National University and a master’s degree in business
taxation from University of Southern California.
All of
our current Directors but Hyung-Cheol Kim and Hyuk-Yun Kim were elected as
Directors at the extraordinary general meeting of shareholders held on October
24, 2008 after NHN Games purchased Common Shares from our prior controlling
shareholders. Hyuk-Yun Kim was elected as an Outside Director at the annual
general meeting of shareholders held on March 27, 2009.
In 2008 and the first half
of 2009, the composition of our Board changed several times. Our prior Chief
Financial Officer and Director, Won Seon Kim, resigned on February 4, 2008.
Outside Directors Moon Kyu Kim, Sang Woo Park and Yong Gu Kim resigned soon
before the annual general meeting of shareholders held on March 28, 2008, and
Directors Yong-Seo Choi, Hyung-Cheol Kim and Seong-Hoon Joo and Outside
Directors Beom-Soo Seo, Young-Bong Yoon and Young-Hwan Choi were elected at that
annual general meeting of shareholders. At the same meeting, the three Outside
Directors were also selected as Audit Committee members. On July 10, 2008,
Director Yong-Seo Choi resigned. Our prior Representative Director and Chief
Executive Officer, Nam Ju Kim, Director Kil-Saup Song and Outside Directors
Beom-Soo Seo, Young-Bong Yoon and Young-Hwan Choi resigned soon before the
extraordinary general meeting of shareholders held on October 24, 2008, and
Directors Chang Keun Kim and Byoung Gwan Kim and Outside Directors Chang Won
Lee, Seoung Han Ha and Hwi Joon Shin were elected at that extraordinary general
meeting of shareholders. At the same meeting, the three Outside Directors were
also selected as Audit Committee members. Chang Keun Kim was selected as the
Representative Director at a subsequent Board meeting. Outside Director Hwi Joon
Shin resigned soon before the annual general meeting of shareholders held on
March 27, 2009, and Hyuk-Yun Kim was elected as an Outside Director and selected
as an Audit Committee member at that annual general meeting of
shareholders
.
6.B. Compensation
We have
not extended any loans or credit to any of our Directors or executive officers,
and we have not provided guarantees for borrowings by any of these persons. For
the year ended December 31, 2008, the aggregate amount of compensation paid by
us to all Directors and executive officers was
W
2.3 billion. We
have not granted any stock options to any of our Directors and executive
officers during this period. At our general meeting of shareholders, held on
March 27, 2009, our shareholders approved an aggregate amount of up to
W
1.2 billion as
compensation for our executive officers for the year 2009. In addition, our
shareholders approved the grant of stock options to purchase an aggregate of
213,000 common shares to two registered directors and one non-registered
director.
Under the
Korean Labor Standard Act, we are required to pay a severance amount to eligible
employees, including Directors and officers, who voluntarily or involuntarily
terminate their employment with us, including through retirement. The severance
amount for an officer or Director equals the monthly salary at the time of his
or her departure, multiplied by the number of continuous years of service, and
further multiplied by a discretionary number set forth in our Severance Payment
Regulation, which depending on the position of the officer or Director ranges
from two to four.
We
maintain a Directors’ and officers’ liability insurance policy covering
potential liabilities of our Directors and officers.
6.C. Board
Practices
Board
of Directors
Our board
of Directors has the ultimate responsibility for the administration of our
affairs. Our Articles of Incorporation, as currently in effect, provide for a
board of Directors comprised of not less than three Directors. The Directors are
elected at a general meeting of shareholders by a majority vote of the
shareholders present or represented, so long as the affirmative votes also
represent not less than 25% of all issued and outstanding shares with voting
rights. For the purpose of electing a statutory auditor or auditors, a
shareholder holding more than 3% of the issued and outstanding shares with
voting rights may not exercise voting rights with respect to such shares in
excess of 3%.
The term
of office for our Directors is three years but is extendible to the close of the
ordinary general meeting of shareholders convened in the last fiscal year of
each term. The terms of Chang Keun Kim and Byoung Gwan Kim expire on October 23,
2011, and that of Hyung-Cheol Kim expire on March 27, 2011
The term
of office for our Outside Directors is two years but is extendible to the close
of the ordinary general meeting of shareholders convened in the last fiscal year
of each term. The terms of Chang Won Lee and Seung Han Ha expire on October 23,
2010, and that of Hyuk-Yun Kim expire on March 26, 2011.
However,
Directors may serve any number of consecutive terms and may be removed from
office at any time by a resolution adopted at a general meeting of shareholders.
None of our Directors is party to a service contract with our company that
provides for benefits upon termination of employment.
The board
of Directors elects representative Directors from its members. Under the Korean
Commercial Code and our Articles of Incorporation, any Directors with a special
interest in an agenda of a board meeting may not exercise his voting rights at
that board meeting.
Independent
Directors
Our ADSs
are listed for quotation on the Nasdaq Market and we currently are subject to
the Nasdaq listing requirements applicable to listed foreign companies. Under
the Nasdaq listing requirements, Marketplace Rule 5605(b), a majority of the
board of Directors should be comprised of independent directors. The
independence standards under the Nasdaq rules exclude, among others, any person
who is a current or former employee of a company (for the current year or the
past three years) or of any of its affiliates, as well as any immediate family
member of an executive officer of a listed company or of any of its affiliates.
The Korea Securities and Exchange Act and regulations thereunder require
companies listed on the KOSDAQ or KRX Stock Market to have at least one fourth
of its board of Directors comprised of outside directors. Under Korean law, a
director or officer of the company, any person who served as a director or an
officer of the company during the past two years, certain family members of a
director of the company or certain other affiliates of the company, do not
qualify as an outside director. We elected three independent Outside Directors
in March 2008 to comply with Korean law, but we do not satisfy the majority
independent board requirement under Marketplace Rule 5605(b)(1).
Audit
Committee
The
Sarbanes-Oxley Act of 2002 directs the Securities and Exchange Commission (the
“SEC”) to require U.S. national securities exchanges and national securities
associations, such as the Nasdaq Global Market, to adopt rules
prohibiting
the listing of any security of an issuer that is not in compliance with the
relevant audit committee requirements set forth in the Sarbanes-Oxley Act. The
SEC adopted final rules relating to the audit committee requirements on April 9,
2003, and approved related proposed changes to the Nasdaq corporate governance
rules on November 4, 2003. Marketplace Rule 5605(c), which sets forth the
requirements for listing company’s audit committees, requires that at least
three independent directors who are able to read and understand fundamental
financial statements serve on the committee.
Under the
Korean Commercial Code, a company may elect between appointing a statutory
internal auditor or establishing an audit committee.
To comply
with the Sarbanes-Oxley Act and the SEC rules and regulations as well as the
Nasdaq listing requirements regarding the audit committee, our board of
Directors established an audit committee by amending our Articles of
Incorporation at the general meeting of shareholders held in March 2004. Our
Audit Committee is currently comprised of the following three independent
Directors: Chang Won Lee, Seung Han Ha and Hyuk-Yun Kim. All of our independent
Directors are financially literate and our board of Directors designated Seung
Han Ha as an audit committee financial expert. The Audit Committee is
responsible for examining internal transactions and potential conflicts of
interest and reviewing company accounting and other relevant matters. Under the
Korean Commercial Code, the Audit Committee has the right to request the board
of Directors to convene a shareholders’ meeting by providing a document that
sets forth the agenda and reasons.
Difference
between Nasdaq requirements and home country practices
In
general, corporate governance principles for Korean companies are set forth in
the Korean Commercial Code and the Capital Market and Financial Investment
Business Act and, to the extent they are listed on KOSDAQ Market, the listing
rules of KOSDAQ Market. Corporate governance principles under provisions of
Korean law may differ in significant ways from corporate governance standards
for U.S. Nasdaq-listed companies. Under the NASD Marketplace Rule 5615(a)(3),
foreign private issuers are permitted to follow certain home country corporate
governance practices in lieu of the requirements of the Rule 5600 Series. Under
the Rule, foreign private issuers must disclose alternative home country
practices they follow. The following are the requirements of the Rule 5600
Series we do not follow and the descriptions of home country
practices.
Under
Rule 5250(d)(1), issuers are required to distribute to shareholders copies of
annual reports containing audited financial statements within a reasonable
period of time following the filing of the annual report with the SEC. We do not
distribute our annual report to our shareholders. Instead, we make our annual
report and audited non-consolidated financial statements available for
inspection at our principal office and at all of our branch offices at least one
week before the annual general meeting of shareholders. We also file our annual
report on the Data Analysis Retrieval and Transfer System, or DART, an
electronic disclosure system operated by Financial Supervisory Service (“FSS”),
in accordance with the rules under the Capital Market and Financial Investment
Business Act.
Under
Rule 5605(b)(2), issuers are required to have regularly scheduled meetings
(executive sessions) at which only independent directors are present. We do not
hold executive sessions of independent Directors, as such meetings are not
required under Korean law. However, our three independent Directors serve on our
Audit Committee and meet regularly.
Rule
5605(d)(1) requires that compensation of the chief executive officer and other
executive officers must be determined, or recommended to the board, either by a
majority of the independent directors or an independent compensation committee.
We currently follow the home country practice, which allows the board of
Directors to determine executive officers’ compensations.
Under
Rule 5605(e)(1), director nominees must either be selected, or recommended for
the board’s selection, either by a majority of the independent directors or an
independent nominations committee. The Korean Commercial Code grants the power
of nomination to the board of Directors, and we conduct our nomination process
accordingly.
We, as a
foreign issuer, have been granted an exemption by Nasdaq from the requirement
that the minimum quorum for a shareholder meeting is 33⅓% of the outstanding
common shares as required by Nasdaq Rule 5620(c), on the basis that such
requirement was inconsistent with our home country practice. Pursuant to our
Articles of Incorporation, our shareholders may adopt resolutions at a general
meeting by an affirmative majority vote of the voting shares present or
represented at the meeting, where the affirmative votes also represent at least
one-fourth of our total voting shares then issued and outstanding. Our quorum
requirements comply with the requirements of the Korean Commercial Code and are
consistent with that of other companies with common shares listed on KOSDAQ
Market.
Rule
5620(b) requires issuers to solicit proxies and provide proxy statements for all
meetings of shareholders and provide them to Nasdaq. Nasdaq is of the view that
the proxy statements required under Rule 5620(b) should contain the information
required by Section 14 of the United States Securities Exchange Act of 1934 (the
“Exchange Act”) and rules thereunder. The Capital Market and Financial
Investment Business Act requires persons soliciting proxies to provide proxy
materials, with information set forth in the rules, to shareholders prior to or
at the same time as the solicitation and to file the proxy materials with the
FSS before they are sent to the shareholders. However, the information required
under the Korean rules is much less extensive than that required under the
Exchange Act rules. We do provide to shareholders proxy statements prior to
shareholder meetings, but the content of the materials is made in accordance
with the rules under the Capital Market and Financial Investment Business
Act.
Under
Rule 5630(a), issuers shall conduct an appropriate review and oversight of all
related party transactions on an ongoing basis by the audit committee or another
independent body of the board of directors. Korean law does not have a
comparable requirement, and our board of Directors reviews and approves related
party transactions. Under the Korean Commercial Code and our Articles of
Incorporation, however, any Director with a special interest in an agenda item
of a board meeting may not exercise his voting rights at that board
meeting.
Rule
5635(a) and (b) require issuers to obtain shareholder approval prior to the
issuance of securities when the issuance or potential issuance will result in a
change of control of the issuers, or prior to the issuance of securities in
connection with the stock or assets of another company if certain conditions are
met. We do not obtain shareholder approval for all of the cases provided in Rule
5605(i). However, under the Korean Commercial Code and our Articles of
Incorporation, we do require approval by the holders of at least two-thirds of
the voting shares present or represented at a meeting, where the affirmative
votes also represent at least one-third of our total voting shares then
outstanding, when we acquire all of the business of any other company or a part
of the business of any other company that has a material effect on our business,
issue new shares at a price below par value, transfer all or any significant
part of our business, or effect a capital reduction.
6.D. Employees
As of
December 31, 2008, we had 414 full-time employees. The following tables set
forth the number of permanent employees at Webzen and its subsidiaries, for the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
|
|
|
|
|
|
|
|
|
Game
development, web development and system engineering team
|
|
|
548
|
|
|
|
450
|
|
|
|
229
|
|
|
Game
supporting team
|
|
|
99
|
|
|
|
84
|
|
|
|
38
|
|
|
International
business, strategy and planning, management support and game marketing
team
|
|
|
224
|
|
|
|
138
|
|
|
|
147
|
|
|
Total
|
|
|
871
|
|
|
|
672
|
|
|
|
414
|
|
None of
our employees is represented by a labor union or covered by a collective
bargaining agreement. We consider our relations with our employees to be
good.
As of
December 31, 2008, our wholly-owned subsidiary, Webzen Taiwan had 45 full-time
employees.
As of
December 31, 2008, 9Webzen and its subsidiary employed 41 employees in China,
none of whom is represented by a labor union or covered by a collective
bargaining agreement.
Under the
Korean Labor Standard Act, employees with more than one year of service are
entitled to receive a lump sum payment upon voluntary or involuntary termination
of their employment. The amount of the benefit equals the employee’s monthly
salary, calculated by averaging the employee’s daily salary for the three months
prior to the date of the employee’s departure, multiplied by the number of
continuous years of employment.
Pursuant
to the Korean National Pension Law, we are required to prepay 4.5% of each
employee’s annual wages as part of our accrued severance payments to the
National Pension Corporation. Our employees are also required to pay 4.5% of
their annual wages to the National Pension Corporation. Our employees are
entitled to receive an annuity in the event they lose, in whole or in part,
their wage earning capability.
Hana Bank
and Korea Exchange Bank extended loans to members of our employee stock
ownership association. As of December 31, 2008, we have pledged short-term
financial instruments in the amount of
W
346 million to
guarantee these bank loans. On the same date, we also had outstanding housing
and other loans to our employees in the aggregate amount of
W
1,083 million. We
have not experienced any defaults under these loans to our employees. We provide
these loans as a benefit to our employees and not as a requirement under Korean
law. Our executive officers and Directors are not eligible for these
loans.
6.E. Share
Ownership
Some of
our Directors and officers own our common shares. See “Item 7. Major
Shareholders and Related Party Transactions—7.A. Major
Shareholders.”
Stock
Option Plan
Pursuant
to our Articles of Incorporation and the Korean Commercial Code, stock options
may be granted by either a special resolution of our shareholders or a
resolution of our board of Directors, with the aggregate number of shares
issuable in each case not to exceed 15% and 3%, respectively, of the total
number of our then issued and outstanding common shares. Stock options may be
granted to our executive officers and employees who have contributed or are
qualified to contribute to our establishment, management and technical
innovation. No stock options may be granted to any executive officer or employee
who owns, or upon exercise of an option to purchase our common shares would own,
directly or indirectly, 10% or more of our outstanding common
shares.
According
to our Articles of Incorporation, we may grant stock options that are
exercisable to purchase our common shares and preferred shares. Such stock
options can vest after two years from the stock option grant date and can be
exercisable up to seven years (four years for options granted in 2007) from the
date of the grant. The stock option may be cancelled by a resolution of our
board of Directors:
|
|
·
|
if
the officer or employee who holds the option resigns voluntarily or is
discharged from office prior to the vesting
date;
|
|
|
·
|
if
the officer or employee is discharged or submitted to a disciplinary
measure for causing damage to us by willful misconduct or by gross
negligence; or
|
|
|
·
|
in
the event of the occurrence of any cause for cancellation of stock options
specified in the stock option
agreement.
|
On
January 20, 2005, we granted stock options to our employees to purchase an
aggregate of 118,800 common shares. All of the options granted on this date can
be exercised between January 20, 2008 through January 19, 2010, at a purchase
price of
W
24,100 per share.
On April 14, 2005, we granted stock options to our employees to purchase an
aggregate of 24,500 common shares. All of the options granted on this date can
be exercised between April 14, 2008 through April 13, 2010 at a purchase price
of
W
24,100
per share. On April 12, 2006, we granted stock options to our employees to
purchase an aggregate of 41,000 common shares. All of the options granted on
this date can be exercised between April 12, 2008 through April 11, 2010 at a
purchase price of
W
24,100 per share.
Options for 18,000 shares of the total 41,000 shares were granted to two
executive officers. On July 18, 2007, we granted stock
options
to our employees to purchase an aggregate of 114,000 common shares. All of the
options granted on this date can be exercised between July 12, 2009 through July
11, 2011 at a purchase price of
W
16,000 per share.
On October 12, 2007, we granted stock options to our employees to purchase an
aggregate of 77,000 common shares. All of the options granted on this date can
be exercised between October 12, 2009 through October 11, 2011 at a purchase
price of
W
14,000 per share.
On February 12, 2009, we granted stock options to our employees to purchase an
aggregate of 131,400 common shares. All of the options granted on February 12,
2009 can be exercised from February 12, 2011 through February 11, 2013 at a
purchase price of
W
6,800 per share.
On March 27, 2009, we granted stock options to our directors and executive
officers to purchase an aggregate of 213,000 common shares. All of the options
granted on March 27, 2009 can be exercised from March 27, 2011 through March 26,
2013 at a purchase price of
W
8,300 per
share.
As of
June 18, 2009, options to purchase an aggregate of 577,700 common shares were
outstanding, and 213,000 of the 577,700 outstanding options were granted to our
Directors or executive officers. With respect to the current Directors and
executive officers, Mr. Chang Keun Kim was granted 200,000 options on March 27,
2009, exercisable from March 27, 2011, and Mr. Hyung-Cheol Kim was granted 5,000
and 10,000 options on July 18, 2007 and March 27, 2009, respectively,
exercisable from July 18, 2009 and March 27, 2011, respectively.
Item 7. Major Shareholders and Related Party
Transactions
7.A. Major
Shareholders
The
following table sets forth information as of June 18, 2009 known to us with
respect to the beneficial ownership of our common shares by:
|
|
·
|
each
person who is the beneficial owner of more than 5% of our common
shares;
|
|
|
·
|
each
of our named executive officers;
and
|
|
|
·
|
all
of our executive officers and Directors as a
group.
|
The
percentage in column (A) of the following table is based on 12,974,000 of our
common shares issued as of June 18, 2009, and the percentage in column (B) is
based on 11,856,948 of our common shares issued and outstanding as of the same
date. The numbers of shares in the table include shares that can be acquired
within 60 days through the exercise of any option, warrant or right or through
conversion of any securities, or otherwise. None of our common shares entitles
the holder to any preferential voting rights.
|
|
|
Number
of shares beneficially owned
|
|
|
Percentage
beneficially owned (A)
|
|
|
Percentage
beneficially owned (B)
|
|
|
Directors
and officers:
|
|
|
|
|
|
|
|
|
|
|
Chang
Keun Kim
|
|
|
10,000
|
|
|
|
0.08
|
%
|
|
|
0.08
|
%
|
|
Byoung
Gwan Kim
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Hyung-Cheol
Kim
|
|
|
5,000
|
(2)
|
|
|
0.04
|
%(2)
|
|
|
0.04
|
%(2)
|
|
Chang
Won Rhee
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Seung
Han Ha
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Hyuk-Yun
Kim
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
All
executive officers and Directors as a group
|
|
|
15,000
|
|
|
|
0.11
|
%
|
|
|
0.12
|
%
|
|
Other
major shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NHN
Games(1)
|
|
|
3,469,784
|
|
|
|
26.74
|
%
|
|
|
29.26
|
%
|
|
Nam-Ju
Kim(1)
|
|
|
398,636
|
|
|
|
3.07
|
%
|
|
|
3.36
|
%
|
|
Kil-Saup
Song(1)
|
|
|
305,120
|
|
|
|
2.35
|
%
|
|
|
2.57
|
%
|
|
Ki-Yong
Cho(1)
|
|
|
294,095
|
|
|
|
2.27
|
%
|
|
|
2.48
|
%
|
|
All
other major shareholders
|
|
|
4,467,635
|
|
|
|
34.43
|
%
|
|
|
37.67
|
%
|
|
(1)
|
Nam-Ju
Kim, Kil-Saup Song and Ki-Yong Cho reported to the Financial Supervisory
Service of Korea (“FSS”) that the shares held by each of them are deemed
to be co-held by NHN Games under Section 142 of the Capital Market and
Financial Investment Business Act of Korea. The total number of shares
held by these shareholders as of June 18, 2009 was 4,477,635 shares or
34.51% of the issued shares (or 34.51% of the issued and outstanding
shares).
|
|
(2)
|
5,000
shares held Hyung-Cheol Kim represent his right to acquire such number of
shares within 60 days by option. The option is exercisable from July 18,
2009 to July 17, 2011.
|
Since May
2008, NHN Games purchased Common Shares from various shareholders including our
prior controlling shareholders. See Item 4. Information on the Company – 4.A.
History and Development of the Company. As a result, the number of Common Shares
held by NHN Games increased from 0 shares as of April 30, 2008 to 3,469,784
shares or 29.26% of the outstanding Common Shares as of June 18, 2009. In
addition, NHN Games entered into an arrangement with Nam-Ju Kim, Ki-Yong Cho,
Kil-Saup Song, Hyung-Cheol Kim and Chang Keun Kim that they would have a good
faith discussion with NHN Games before exercising any voting rights of the
Common Shares and that they shall exercise voting rights together in the same
direction in accordance with the discussion for matters relating to changing or
influencing control of our company. Counting in the shares held by such
individuals, NHN Games effectively controlled 37.76% of our outstanding Common
Shares as of June 18, 2009. Such share holding gives NHN Games the power to
significantly affect the actions that require shareholder approval under Korean
law and our articles of incorporation, including the election and removal of any
member of our board of directors, mergers, consolidations and other business
combinations and changes to our articles of incorporation.
According
to JPMorgan Chase Bank, depositary for our ADSs, as of December 31, 2008,
1,971,771 Common Shares were held in the form of ADSs, representing 15% of total
outstanding Common Shares, and there were 2,052 record holders of ADSs in the
United States.
7.B. Related
Party Transactions
Contribution
to Webzen Taiwan
We opened
a stand-by letter of credit at Hana Bank until December 18, 2009 for our
business in Taiwan and, in turn, Hana Bank provided a payment guarantee of
US$660,000 for Webzen Taiwan’s loan from a local bank in Taiwan. During the
fiscal year ended December 31, 2008, the largest amount outstanding of the loan
to Webzen Taiwan from the Taiwan local bank was approximately
US$167,000.
Contribution
to Webzen China
On April
11, 2008 and December 5, 2008, we contributed
W
977 million and
W
476
million, respectively to Webzen China’s capital in order to provide working
capital.
Loan
to Webzen America
We
extended a US$450,000 aggregate amount loan to Webzen America on March 18, 2008
and August 19, 2008. The term was for three years and the interest rate was 5%.
Webzen America will use the proceeds of the loan for general corporate use.
During the fiscal year ended December 31, 2008, the largest amount outstanding
of the loan to Webzen America from us was approximately US$395,000.
Contracts
with NHN Games or its Affiliates
In March
2009, we entered into a channeling agreement with NHN Corp. Under the agreement,
we distribute our game Soul of the Ultimate Nation (SUN) in Korea through NHN
Corp.’s online game portal, www.hangame.com, and use NHN Corp.’s virtual cash
(Han Coin) settlement system in exchange for fees and 20% of profit sharing
amount generated through the portal.
In April
2009, we entered into a service agreement with NHN Games to have it develop and
maintain our game Parfait Station. Under the agreement, NHN Games undertook to
develop our discontinued online game Parfait Station, deliver by a certain date
a version that is ready to be commercialized and maintain the game after
commercialization in exchange for certain installment payments (
W
3.0 billion in
total) during the development stage and 20-50% of net revenue generated from the
game after commercialization.
In May
2009, we entered into a three-year exclusive license agreement with NHN USA Inc.
to distribute Soul of the Ultimate Nation (SUN) in the United States, Canada,
Mexico and the United Kingdom through www.ijji.com. Under the agreement, we are
to receive software development and installation fees in the amount of
US$300,000, 30% of net revenue generated in the licensed territory as running
royalty (with minimum guarantee amounts) and additional incentives when certain
milestone sales figures are achieved.
In June
2009, we entered into a outsourcing agreement with NHN Games where we are to
provide services relating to strategy, marketing, promotion and businesses
abroad. NHN Games is to pay
W
93,750,000 per
month for such services. The term of the agreement is to end on December 31,
2009, and will be automatically renewed for one year unless a party notifies
termination of the agreement 30 days prior to the end of each contract
period.
7.C. Interests
of Experts and Counsel
Not
applicable.
Item 8. Financial Information
8.A. Consolidated
Statements and Other Financial Information
All
relevant financial statements are included in “Item 18. Financial
Statements.”
Legal
proceedings
In June
2008, Aesderm Medics Co., Ltd. filed a law suit alleging our non-performance of
an agreement relating to its hostile acquisition of Neowave Inc., and claimed
for damages of approximately
W
2.5 billion. The
court dismissed the case, but we expect Aesderm Medics Co., Ltd. to appeal the
case to the higher court.
In
October 2008, Young Woo Roh filed a law suit alleging our non-performance of an
agreement relating to his hostile acquisition of Neowave Inc. and breach of
confidentiality, and claimed for damages of
W
4 billion. The
court dismissed the case, but we expect Young Woo Roh to appeal the case to the
higher court.
Dividend
policy
Since our
inception on April 28, 2000, we have declared or paid dividends on our common
shares once. On February 22, 2005, the board of Directors passed a resolution to
pay dividends, and the shareholders approved it at our annual general meeting of
shareholders on March 18, 2005. The record date was December 31, 2004, and the
amount was
W
250 per common
share. We plan to have a similar dividend policy in the future, but any decision
to pay dividends in the future will be subject to a number of factors, including
the interests of our shareholders, cash requirements for future capital
expenditures and investments, as well as relevant industry and market
practice.
Holders
of outstanding common shares on a dividend record date will be entitled to the
full dividend declared without regard to the date of issuance of the common
shares or any subsequent transfer of the common shares. Payment of dividends in
respect of a particular year, if any, will be made in the year following
approval by our shareholders at the annual general meeting of shareholders,
subject to certain provisions of the Korean Commercial Code.
Subject
to the terms of the deposit agreement for the ADSs, holders of ADSs will be
entitled to receive dividends on common shares represented by ADSs to the same
extent as the holders of common shares, less the fees and expenses payable under
the deposit agreement in respect of, and any Korean tax applicable to, such
dividends. The depositary will generally convert the Won it receives into U.S.
dollars and distribute the U.S. dollar amounts to holders of ADSs.
8.B. Significant
Changes
Please
see Item 4. Information on the Company — 4.A. History and
Development of the Company.
Item 9. The Offer and Listing
9.A. Market
Price Information
With the
enactment of the Korea Stock and Futures Exchange Act, which came into effect on
January 27, 2005, the three existing spot and futures exchanges (which were the
Korea Stock Exchange, Korean Futures Exchange, and KOSDAQ) and Kosdaq Committee,
a sub organization of Korea Stock Dealers Association, were merged and
integrated into a newly established joint stock company called KRX. KRX is
organized into five divisions: the Administrative Service Division, the Stock
Market Division, referred to as KRX Stock Market, the Kosdaq Market Division,
referred to as the KRX KOSDAQ Market, the Futures Market Division, referred to
as the KRX Futures Market, and the Market Surveillance Division. The KRX,
headquartered in Pusan, has one branch located in Seoul.
Our
common shares are traded on the KOSDAQ under the code 069080. Our common shares
were listed on the KOSDAQ on May 23, 2003. The KOSDAQ composite index is
computed by taking the aggregate market capitalization of all companies included
in the index as a percentage of the market capitalization as of the base date,
July 1, 1996, multiplied by 1,000.
The most
widely followed price index of stocks quoted on stock exchanges in Korea is the
Korea Composite Stock Price Index, or KOSPI, an index of all equities listed on
KRX Stock Market. The KOSPI is computed by aggregating the market capitalization
of all listed companies and (subject to certain adjustments) by expressing this
aggregate as a percentage of the aggregate market capitalization of all listed
companies as of the base date (January 4, 1980).
The
following table sets forth, for the periods indicated:
|
|
·
|
the
high and low closing sales price for our common shares as reported on the
KOSDAQ;
|
|
|
·
|
the
average daily trading volume of our common
shares;
|
|
|
·
|
the
high and low of the daily closing values of the KOSDAQ composite index;
and
|
|
|
·
|
the
high and low of the daily closing values of the
KOSPI.
|
|
|
|
|
|
|
Average
daily trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
150,900
|
|
|
|
100,000
|
|
|
|
91,376
|
|
|
|
458.40
|
|
|
|
420.28
|
|
|
|
907.43
|
|
|
|
821.26
|
|
|
Second
quarter(1)
|
|
|
110,000
|
|
|
|
27,950
|
|
|
|
107,430
|
|
|
|
491.53
|
|
|
|
361.17
|
|
|
|
936.06
|
|
|
|
728.98
|
|
|
Third
quarter
|
|
|
29,000
|
|
|
|
19,200
|
|
|
|
238,695
|
|
|
|
383.84
|
|
|
|
324.71
|
|
|
|
857.15
|
|
|
|
719.59
|
|
|
Fourth
quarter
|
|
|
27,400
|
|
|
|
20,100
|
|
|
|
226,939
|
|
|
|
382.71
|
|
|
|
350.70
|
|
|
|
895.92
|
|
|
|
808.14
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
24,600
|
|
|
|
18,000
|
|
|
|
263,224
|
|
|
|
515.04
|
|
|
|
390.40
|
|
|
|
1,022.79
|
|
|
|
870.84
|
|
|
Second
quarter
|
|
|
20,100
|
|
|
|
16,750
|
|
|
|
143,108
|
|
|
|
503.21
|
|
|
|
423.30
|
|
|
|
1,010.80
|
|
|
|
911.30
|
|
|
Third
quarter
|
|
|
19,700
|
|
|
|
14,350
|
|
|
|
170,236
|
|
|
|
571.95
|
|
|
|
492.66
|
|
|
|
1,231.22
|
|
|
|
1,018.02
|
|
|
Fourth
quarter
|
|
|
32,150
|
|
|
|
17,050
|
|
|
|
429,491
|
|
|
|
747.96
|
|
|
|
573.19
|
|
|
|
1,379.37
|
|
|
|
1,140.72
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
34,400
|
|
|
|
19,000
|
|
|
|
417,607
|
|
|
|
754.97
|
|
|
|
601.33
|
|
|
|
1,421.79
|
|
|
|
1,297.43
|
|
|
Second
quarter
|
|
|
25,400
|
|
|
|
15,000
|
|
|
|
232,418
|
|
|
|
704.57
|
|
|
|
559.37
|
|
|
|
1,464.70
|
|
|
|
1,203.86
|
|
|
Third
quarter
|
|
|
17,100
|
|
|
|
11,800
|
|
|
|
190,944
|
|
|
|
614.80
|
|
|
|
539.81
|
|
|
|
1,374.30
|
|
|
|
1,233.42
|
|
|
Fourth
quarter
|
|
|
13,600
|
|
|
|
11,200
|
|
|
|
131,734
|
|
|
|
622.17
|
|
|
|
539.10
|
|
|
|
1,442.28
|
|
|
|
1,319.40
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
13,200
|
|
|
|
11,500
|
|
|
|
151,901
|
|
|
|
648.99
|
|
|
|
571.04
|
|
|
|
1,470.03
|
|
|
|
1,355.79
|
|
|
Second
quarter
|
|
|
14,900
|
|
|
|
12,050
|
|
|
|
141,347
|
|
|
|
819.97
|
|
|
|
651.78
|
|
|
|
1,807.85
|
|
|
|
1,459.53
|
|
|
Third
quarter
|
|
|
17,500
|
|
|
|
12,600
|
|
|
|
157,562
|
|
|
|
828.22
|
|
|
|
673.48
|
|
|
|
2,004.22
|
|
|
|
1,638.07
|
|
|
Fourth
quarter
|
|
|
13,550
|
|
|
|
8,920
|
|
|
|
123,602
|
|
|
|
818.26
|
|
|
|
692.02
|
|
|
|
2,064.85
|
|
|
|
1,772.88
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
12,800
|
|
|
|
9,810
|
|
|
|
70,295
|
|
|
|
719.25
|
|
|
|
600.10
|
|
|
|
1,863.90
|
|
|
|
1,574.44
|
|
|
Second
quarter
|
|
|
15,700
|
|
|
|
8,980
|
|
|
|
174,586
|
|
|
|
655.80
|
|
|
|
590.19
|
|
|
|
1,888.88
|
|
|
|
1,674.92
|
|
|
Third
quarter
|
|
|
11,250
|
|
|
|
6,550
|
|
|
|
68,248
|
|
|
|
580.77
|
|
|
|
481.14
|
|
|
|
1,666.46
|
|
|
|
1,387.75
|
|
|
Fourth
quarter
|
|
|
6,230
|
|
|
|
3,965
|
|
|
|
60,131
|
|
|
|
440.95
|
|
|
|
261.19
|
|
|
|
1,439.67
|
|
|
|
938.75
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
7,570
|
|
|
|
4,425
|
|
|
|
190,908
|
|
|
|
364.90
|
|
|
|
339.76
|
|
|
|
1,228.17
|
|
|
|
1,093.40
|
|
|
February
|
|
|
8,030
|
|
|
|
6,440
|
|
|
|
146,062
|
|
|
|
402.87
|
|
|
|
358.65
|
|
|
|
1,210.26
|
|
|
|
1,054.79
|
|
|
March
|
|
|
9,450
|
|
|
|
5,750
|
|
|
|
138,223
|
|
|
|
427.27
|
|
|
|
347.76
|
|
|
|
1,243.80
|
|
|
|
1,018.81
|
|
|
April
|
|
|
14,850
|
|
|
|
8,890
|
|
|
|
417,763
|
|
|
|
514.09
|
|
|
|
430.97
|
|
|
|
1,369.36
|
|
|
|
1,233.36
|
|
|
May
|
|
|
19,950
|
|
|
|
11,800
|
|
|
|
943,526
|
|
|
|
562.57
|
|
|
|
507.01
|
|
|
|
1,435.70
|
|
|
|
1,362.02
|
|
|
(1)
|
Price
decreased significantly partly due to the 3-to-1 stock split, which took
place in June 2004.
|
Nasdaq
Market
The ADSs
are listed on the Nasdaq Market under the symbol “WZEN.”
As a
result of a 3-for-1 stock split in June 2004, the ADR ratio changed so that ten
ADSs represent three shares. According to JPMorgan Chase Bank, depositary for
our ADSs, as of December 31, 2006, 3,540,099 shares of our common shares were
held in the form of ADSs, representing 29% of total outstanding common
shares.
The
following table provides the high and low closing sale prices and the average
daily trading volume of our ADSs on the Nasdaq Market based on information
provided by
www.adr.com
.
|
|
|
|
|
|
|
|
|
Average
daily trading volume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
14.05
|
|
|
|
8.23
|
|
|
|
404,350
|
|
|
Second
quarter
|
|
|
9.49
|
|
|
|
5.75
|
|
|
|
216,080
|
|
|
Third
quarter
|
|
|
7.32
|
|
|
|
4.92
|
|
|
|
108,400
|
|
|
Fourth
quarter
|
|
|
7.95
|
|
|
|
5.02
|
|
|
|
102,370
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
6.99
|
|
|
|
5.30
|
|
|
|
108,220
|
|
|
Second
quarter
|
|
|
6.08
|
|
|
|
4.85
|
|
|
|
76,770
|
|
|
Third
quarter
|
|
|
5.74
|
|
|
|
4.28
|
|
|
|
84,870
|
|
|
Fourth
quarter
|
|
|
9.34
|
|
|
|
4.86
|
|
|
|
122,820
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
10.34
|
|
|
|
6.01
|
|
|
|
144,930
|
|
|
Second
quarter
|
|
|
8.20
|
|
|
|
4.82
|
|
|
|
129,770
|
|
|
Third
quarter
|
|
|
5.35
|
|
|
|
3.58
|
|
|
|
77,850
|
|
|
Fourth
quarter
|
|
|
4.22
|
|
|
|
3.59
|
|
|
|
101,180
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
4.45
|
|
|
|
3.68
|
|
|
|
86,388
|
|
|
Second
quarter
|
|
|
4.86
|
|
|
|
3.95
|
|
|
|
69,879
|
|
|
Third
quarter
|
|
|
5.30
|
|
|
|
4.01
|
|
|
|
110,738
|
|
|
Fourth
quarter
|
|
|
4.54
|
|
|
|
2.91
|
|
|
|
97,529
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
4.06
|
|
|
|
2.74
|
|
|
|
46,718
|
|
|
Second
quarter
|
|
|
4.40
|
|
|
|
2.50
|
|
|
|
48,714
|
|
|
Third
quarter
|
|
|
3.18
|
|
|
|
1.37
|
|
|
|
35,845
|
|
|
Fourth
quarter
|
|
|
1.30
|
|
|
|
0.64
|
|
|
|
28,588
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
1.56
|
|
|
|
0.86
|
|
|
|
15,985
|
|
|
February
|
|
|
1.50
|
|
|
|
1.04
|
|
|
|
9,221
|
|
|
March
|
|
|
1.96
|
|
|
|
0.89
|
|
|
|
17,145
|
|
|
April
|
|
|
3.35
|
|
|
|
1.93
|
|
|
|
37,119
|
|
|
May
|
|
|
4.67
|
|
|
|
2.71
|
|
|
|
37,455
|
|
9.B. Plan
of Distribution
Not
applicable.
9.C. Markets
See
“—9.A. Market Price Information.”
9.D. Selling
Shareholders
Not
applicable.
9.E. Dilution
Not
applicable.
9.F. Expenses
of the Issue
Not
applicable.
Item 10. Additional Information
10.A. Share
Capital
Not
applicable.
10.B. Articles
of Incorporation
The
section below provides summary information relating to the material terms of the
capital stock of our company and our Articles of Incorporation. It also includes
a brief summary of certain provisions of the Securities and Exchange Act, the
Commercial Code and related laws of Korea, all as currently in
effect.
Objectives
Article 2
of our Articles of Incorporation states our objectives, among other things, as
follows:
|
|
·
|
to
develop and distribute online games and software;
and
|
|
|
·
|
to
engage in the Internet business, software consulting, value-added
communication services, character business, and publishing
business.
|
General
Our total
authorized share capital is 40,000,000 shares, which consists of common shares
and preferred shares (together, referred to as “shares”) each with a par value
of
W
500 per
share. Under our Articles of Incorporation, holders of preferred shares are
entitled to dividends of 3% or more of the par value of such shares, the exact
rate to be determined by our board of Directors at the time of
issuance.
Under our
Articles of Incorporation, we are authorized to issue preferred shares numbering
up to one-half of our total shares issued.
As of
June 18, 2009, 12,974,000 common shares were issued, and 11,856,948 common
shares were outstanding. We have not issued any preferred shares. All of our
issued and outstanding shares are fully paid and non-assessable and are in
registered form. Pursuant to our Articles of Incorporation, we may issue
additional common shares without further shareholder approval.
Dividends
We may
pay dividends to our shareholders in proportion to the number of shares owned by
each shareholder. The common shares represented by the ADSs have the same
dividend rights as our other common shares, except for the fees and expenses
payable by the ADS holders under the deposit agreement with respect to such
dividends.
We may
declare annual dividends at our annual general meeting of shareholders, which is
held within three months after the end of each fiscal year or declare quarterly
dividends within 45 days of March 31, June 30 and September 30. We pay dividends
shortly after declaration. We may distribute the annual dividend in cash or in
shares and quarterly dividend only in cash. However, a dividend in shares must
be distributed at par value. If the market price of the dividended shares is
less than par value, dividends in shares may not exceed one-half of the annual
dividends. We have no obligation to pay any dividend unclaimed for five years
from the dividend payment date.
Under the
Korean Commercial Code, we may pay an annual dividend only out of the excess of
our net assets, on a non-consolidated basis, over the sum of:
|
|
·
|
the
total amount of our capital surplus reserve and legal reserve accumulated
up to the end of the relevant dividend period,
and
|
|
|
·
|
the
legal reserve to be set aside for the annual
dividend.
|
We may
not pay an annual dividend unless we have set aside as a legal reserve an amount
equal to at least 10% of the cash portion of the annual dividend, or unless we
have an accumulated legal reserve of not less than one-half of our stated
capital. In addition, as a company registered with the KOSDAQ, we are required
under the relevant Korean laws and regulations to set aside a certain amount
every fiscal year as a reserve until our capital ratio is at least 30%. We may
not use our legal reserve to pay cash dividends but may transfer amounts from
our legal reserve to capital stock or use our legal reserve to reduce an
accumulated deficit.
Distribution
of Bonus Shares
In
addition to paying dividends in shares out of our retained or current earnings,
we may also distribute to our shareholders an amount transferred from our
capital surplus or legal reserve to our stated capital in the form of bonus
shares. We must distribute such bonus shares to all our shareholders in
proportion to their existing shareholdings.
Preemptive
Rights and Issuance of Additional Shares
We may
issue authorized but unissued shares at the time and, unless otherwise provided
in the Korean Commercial Code, on such terms as our board of Directors may
determine. We must offer new shares on uniform terms to all shareholders who
have preemptive rights and are listed on our shareholders’ register as of the
relevant record date.
We may
issue new shares pursuant to a board resolution to persons other than existing
shareholders, who in these circumstances will not have preemptive rights if the
new shares are issued:
|
|
·
|
to
increase our capital through a general public offering pursuant to a
resolution of the board of Directors in accordance with the provisions of
Article 189-3 of the Korean Securities and Exchange
Act;
|
|
|
·
|
to
the members of the employee stock ownership association when less than 20%
of the offering is made to such
members;
|
|
|
·
|
to
induce foreign direct investment necessary for business in accordance with
the Foreign Investment Promotion Act or to domestic companies conducting
the business of technology credit guarantees or venture
investment;
|
|
|
·
|
to
domestic or overseas financial institutions for the purpose of raising
funds on an emergency basis;
|
|
|
·
|
to
an allied company as necessary for the development of
technology;
|
|
|
·
|
upon
exercise of a stock option in accordance with Article 189-4 of the Korean
Securities and Exchange Act or exercise of employee stock option pursuant
to Article 32, Clause 2 of the Employee Welfare Act;
and
|
|
|
·
|
in
the form of depositary receipts in accordance with Article 192 of the
Korean Securities and Exchange Act.
|
We must
give public notice of preemptive rights regarding new shares and their
transferability at least two weeks before the relevant record date. We will
notify the shareholders entitled to subscribe for newly issued shares of the
subscription deadline at least two weeks prior to such deadline. If a
shareholder fails to subscribe by the deadline, the shareholder’s preemptive
rights shall lapse. Our board of Directors may determine how to distribute
shares for which preemptive rights have not been exercised, as well as
fractional shares.
General
Meeting of Shareholders
We hold
the annual general meeting of shareholders within three months after the end of
each fiscal year. Subject to a board resolution or court approval, we may hold
an extraordinary general meeting of shareholders:
|
|
·
|
at
the request of shareholders holding an aggregate of 3% or more of our
outstanding shares for at least six months;
or
|
|
|
·
|
at
the request of our statutory
auditor.
|
We must
give shareholders written notice setting out the date, place and agenda of the
meeting at least two weeks prior to the general meeting of shareholders.
However, for holders of not more than 1% of the total number of issued and
outstanding voting shares, we may give notice by placing at least two public
notices in at least two daily newspapers at least two weeks in advance of the
meeting. Currently, we use The Korea Economic Daily News and Maeil Business
Newspaper for this purpose. Shareholders not on the shareholders’ register as of
the record date are not entitled to receive notice of the general meeting of
shareholders or attend or vote at the meeting. Holders of preferred shares,
unless enfranchised, are not entitled to receive notice of or vote at general
meetings of shareholders.
Our
shareholders meetings are held at our head office or other adjacent areas as
deemed necessary.
Voting
Rights
Holders
of our common shares are entitled to one vote for each common share. However,
common shares held by us (i.e., treasury shares) or by any corporate entity in
which we have, directly or indirectly, greater than a 10% interest, do not
exercise voting rights. The Korean Commercial Code permits cumulative voting
pursuant to which each common share entitles the holder thereof to multiple
voting rights equal to the number of Directors to be elected at such time. A
holder of common shares may exercise all voting rights with respect to his or
her shares cumulatively to elect one Director. However, our shareholders have
decided not to adopt cumulative voting.
Our
shareholders may adopt resolutions at a general meeting by an affirmative
majority vote of the voting shares present or represented at the meeting, where
the affirmative votes also represent at least one-fourth of our total voting
shares then issued and outstanding. However, under the Korean Commercial Code
and our Articles of Incorporation, the following matters require approval by the
holders of at least two-thirds of the voting shares present or represented at a
meeting, where the affirmative votes also represent at least one-third of our
total voting shares then issued and outstanding:
|
|
·
|
amending
our Articles of Incorporation;
|
|
|
·
|
effecting
a capital reduction;
|
|
|
·
|
effecting
any dissolution, merger or consolidation with respect to
Webzen;
|
|
|
·
|
transferring
all or any significant part of our assets and/or
business;
|
|
|
·
|
acquiring
all of the business of any other company or a part of the business of any
other company having a material effect on our business;
or
|
|
|
·
|
any
other matters for which such resolution is required under relevant laws
and regulations.
|
In
general, holders of preferred shares (other than enfranchised preferred shares)
are not entitled to vote on any resolution or receive notice of any general
meeting of shareholders. However, in the case of amendments to our Articles of
Incorporation, any merger or consolidation, any capital reductions or in some
other cases that affect the rights or interests of the preferred shares,
approval of the holders of such class of shares is required. We must obtain
the
approval, by a resolution, of holders of at least two-thirds of the preferred
shares present or represented at a class meeting of the holders of such class of
shares, where the affirmative votes also represent at least one-third of our
total issued and outstanding shares of such class. In addition, if we are unable
to pay dividends on preferred shares as provided in our Articles of
Incorporation, the holders of preferred shares will become enfranchised and will
be entitled to exercise voting rights until the dividends are paid. The holders
of enfranchised preferred shares have the same rights as holders of voting
shares to request, receive notice of, attend and vote at a general meeting of
shareholders.
Shareholders
may exercise their voting rights by proxy. Under our Articles of Incorporation,
the person exercising the proxy does not have to be a shareholder. A person with
a proxy must present a document evidencing a power of attorney in order to
exercise such voting rights.
Holders
of ADRs will exercise their voting rights through the ADR depositary. Subject to
the provisions of the deposit agreement, ADR holders will be entitled to
instruct the depositary on how to vote the common shares underlying their
ADSs.
Rights
of Dissenting Shareholders
In some
limited circumstances, including the transfer of all or any significant part of
our business and our merger or consolidation with another company, dissenting
shareholders have the right to require us to purchase their shares. To exercise
this right, shareholders must submit to us a written notice of their intention
to dissent before the applicable general meeting of shareholders. Within 20 days
after the relevant resolution is passed, the dissenting shareholders must
request us in writing to purchase their shares. We are obligated to purchase the
shares of dissenting shareholders within one month after the expiration of the
20-day period. The purchase price for the shares is required to be determined
through negotiations between us and the dissenting shareholders. If we cannot
agree on a price through negotiation, the purchase price will be the average of
(1) the weighted average of the daily share prices on the KOSDAQ for the
two-month period before the date of the adoption of the relevant board of
Directors resolution, (2) the weighted average of the daily share price on the
KOSDAQ for the one-month period before the date of the adoption of the relevant
board of Directors resolution and (3) the weighted average of the daily share
price on the KOSDAQ for the one- week period before such date of the adoption of
the relevant board of Directors resolution. However, the FSC may adjust this
price if we or at least 30% of the dissenting shareholders do not accept the
purchase price. Holders of ADSs will not be able to exercise dissenter’s rights
unless they withdraw the underlying common shares and become our direct
shareholders.
Register
of Shareholders and Record Dates
Our
transfer agent, Hana Bank, maintains the register of our shareholders at its
office located at 43-2 Yoido-dong, Youngdeungpo-ku, Seoul, Korea. It registers
transfers of shares on the register of shareholders on presentation of the share
certificates.
The
record date for annual dividends is December 31 of each year. For the purpose of
determining shareholders entitled to annual dividends, the register of
shareholders may be closed for the period from January 1 to January 31 of each
year. Further, for the purpose of determining the shareholders entitled to some
other rights pertaining to the shares, we may, on at least two weeks’ public
notice, set a record date and/or close the register of shareholders for not more
than three months. The trading of shares and the delivery of share certificates
may continue while the register of shareholders is closed.
Annual
Report
At least
one week before the annual general meeting of shareholders, we must make our
annual report and audited non-consolidated financial statements available for
inspection at our principal office and at all of our branch offices. In
addition, copies of annual reports, the audited financial statements and any
resolutions adopted at the general meeting of shareholders will be available to
our shareholders.
Under the
Korean Securities and Exchange Act, we must file with the FSC and the KRX, an
annual report within 90 days after the end of our fiscal year and interim
reports with respect to the three-month period, six-month
period
and nine-month period from the fiscal year within 45 days following the end of
each period. Copies of these reports are or will be available for public
inspection at the FSC and the KSDA.
Transfer
of Shares
Under the
Korean Commercial Code, the transfer of shares is effected by delivery of share
certificates. However, to assert shareholders’ rights against us, the transferee
must have his or her name and address registered on our register of
shareholders. For this purpose, a shareholder is required to file his or her
name, address and seal with our transfer agent. A non-Korean shareholder may
file a specimen signature in place of a seal, unless he is a citizen of a
country with a sealing system similar to that of Korea. In addition, a
non-resident shareholder must appoint an agent authorized to receive notices on
his or her behalf in Korea and file a mailing address in Korea. The above
requirement does not apply to the holders of ADSs.
Under
current Korean regulations, Korean securities companies and banks, including
licensed branches of non-Korean securities companies and banks, investment trust
companies, futures trading companies, and internationally recognized foreign
custodians and the Korea Securities Depositary may act as agents and provide
related services for foreign shareholders. Certain foreign exchange controls and
securities regulations apply to the transfer of shares by non-residents or
non-Koreans.
Acquisition
of Shares by Us
We may
not acquire our own common shares except in limited circumstances, such as
reduction in capital and acquisition of our own common shares for the purpose of
granting stock options to our officers and employees. Under the Korean
Commercial Code and the Korean Securities and Exchange Act, except in the case
of a reduction of capital (in which case we must retire the common shares
immediately), we must resell any common shares acquired by us to a third party
within a reasonable time. Notwithstanding the foregoing restrictions, under the
Korean Securities and Exchange Act, we may acquire our common shares through
purchases on the KOSDAQ market or through a tender offer. We may also acquire
interests in our common shares through agreements with trust companies,
securities investment trust companies and securities investment companies. The
aggregate purchase price for the common shares may not exceed the total amount
available for distribution of dividends at the end of the preceding fiscal year
less the amounts of dividends and legal reserve required to be set aside for
that fiscal year and treasury shares acquired year-to-date, subject to certain
procedural requirements. Corporate entities in which we own a 50% or greater
equity interest may not acquire our common shares. See “Item 16E. Purchase of
Equity Securities by the Issuer and Affiliated Purchasers” for information on
share repurchases by us.
Liquidation
Rights
In the
event of our liquidation, after payment of all debts, liquidation expenses and
taxes, our remaining assets will be distributed among shareholders in proportion
to their shareholdings.
10.C. Material
Contracts
|
|
·
|
In
April 2008, we terminated the publishing rights contract for the online
game APB with RTW, and RTW agreed to reimburse part of the development
cost we have invested by paying us US$10.4 million in total and 15% of the
net receipt (capped at US$12.0 million) it will collect for three years
after the commercial launch of APB.
|
|
|
·
|
In
May 2008, we entered into a three-year exclusive license agreement with
NHN USA Inc. for the distribution of Huxley in North America and most of
the western European countries through www.ijji.com. Under the agreement,
we are to receive software development and installation fees in the amount
of US$1.5 million, 35% of net revenue generated in the licensed territory
as running royalty (with minimum guarantee amounts) and additional
incentives when certain milestone sales figures are
achieved.
|
|
|
·
|
In
April 2009, we entered into a service agreement with NHN Games to have it
develop and maintain our game Parfait Station. Under the agreement, NHN
Games undertook to develop our discontinued online game Parfait Station,
deliver by a certain date a version that is ready to be commercialized and
maintain the game after commercialization in exchange for certain
installment payments (
W
3.0 billion
in total) during the development stage and 20-50% of net revenue generated
from the game after
commercialization.
|
|
|
·
|
In
May 2009, we entered into a three-year exclusive license agreement with
NHN USA Inc. to distribute Soul of the Ultimate Nation (SUN) in the United
States, Canada, Mexico and the United Kingdom through www.ijji.com. Under
the agreement, we are to receive software development and installation
fees in the amount of US$300,000, 30% of net revenue generated in the
licensed territory as running royalty (with minimum guarantee amounts) and
additional incentives when certain milestone sales figures are
achieved.
|
The above
agreements are online game publishing rights, game development and license
agreements that were entered into in the ordinary course of our
business.
10.D. Exchange
Controls
General
The
Korean Foreign Exchange Transaction Law and the Presidential Decree and
regulations under such Act and Decree (collectively, the “Foreign Exchange
Transaction Laws”) regulate investment in Korean securities by non residents and
issuance of securities outside Korea by Korean companies. Under the Foreign
Exchange Transaction Laws, non residents may invest in Korean securities only to
the extent specifically allowed by such laws or otherwise permitted by the MOFE.
The FSC has also adopted, pursuant to its authority under the Korean Securities
and Exchange Act, regulations that restrict investment by foreigners in Korean
securities.
Under the
Foreign Exchange Transaction Laws, if the government deems that certain
emergency circumstances, including, but not limited to, extreme difficulty in
stabilizing the balance of payments or substantial disturbance in the Korean
financial and capital markets, are likely to occur, it may impose any necessary
restrictions, such as requiring foreign investors to obtain prior approval from
the MOFE for the acquisition of Korean securities or for the repatriation of
dividends or sales proceeds arising from Korean securities or from disposition
of such securities.
Reporting
Requirements for Holders of Substantial Interests
Any
person whose direct or beneficial ownership of shares (whether in the form of
shares or ADSs), certificates representing the right to subscribe for shares,
certain equity related debt securities, such as convertible bonds, exchangeable
bonds and bonds with warrants, and certain derivatives-combined securities whose
underlying assets are the above-mentioned securities (collectively, the “Equity
Securities”), together with the Equity Securities beneficially owned by certain
related persons or by any person acting in concert with such person that account
for 5% or more of the total outstanding Equity Securities, is required to report
the status, purpose (in terms of whether the purpose of shareholding is to
affect control over management of the issuer), forms (direct ownership or
beneficial ownership) of such holding and major contracts with regard to the
Equity Securities held by the person to the FSC and the KRX within five business
days after reaching the 5% ownership interest threshold. In addition, any change
(1) in the ownership interest subsequent to such report which equals or exceeds
1% of the total outstanding Equity Securities, (2) in the shareholding purpose,
(3) in the major contracts with regard to the relevant Equity Securities, or (4)
in the shareholding form is required to be reported to the FSC and the KRX
within five business days from the date of such change. However, the reporting
deadline of such reporting requirement is extended for investors who hold shares
for purposes other than management control and for the Government, municipal
authorities, the Bank of Korea and certain public institutions to the tenth day
of the month immediately following the month in which the shares were acquired
or the shareholdings were otherwise changed. Those who report that the purpose
of their shareholding is to affect control over management of the issuer are
prohibited from exercising their voting rights and acquiring additional shares
during the period from the day any event subject to the above reporting
requirements occurs to five days subsequent to the report. Any investor who has
filed the above report is required to send a copy of the report to the issuer of
the Equity Securities immediately.
Violation
of these reporting requirements may subject a person to criminal sanctions, such
as fines or imprisonment, and may result in a loss of voting right with respect
to the ownership of Equity Securities exceeding 5%. Furthermore, the FSC may
issue an order to dispose of such non reported Equity Securities.
Restrictions
Applicable to ADSs
No Korean
governmental approval is necessary for the sale and purchase of ADSs in the
secondary market outside Korea or for the withdrawal of shares underlying ADSs
and the delivery inside Korea of shares in connection with such withdrawal,
provided that a foreigner who intends to acquire such shares must obtain an
Investment Registration Card from the Financial Supervisory Service as described
below. The acquisition of such shares by a foreigner must be reported
immediately by the foreigner or his standing proxy in Korea to the Governor of
the Financial Supervisory Service (the “Governor”).
Persons
who have acquired shares as a result of the withdrawal of shares underlying the
ADSs may exercise their preemptive rights for new shares, participate in free
distributions and receive dividends on shares without any further governmental
approval.
Restrictions
Applicable to Shares
As a
result of amendments to the Foreign Exchange Transaction Laws and FSC
regulations (together, the “Investment Rules”) adopted in connection with the
stock market opening from January 1992 and after that date, foreigners may
invest, with certain exceptions and subject to certain procedural requirements,
in all shares of Korean companies, whether listed on KRX Stock Market or KOSDAQ
Market, unless prohibited by specific laws. Foreign investors may trade shares
listed on KRX Stock Market or KOSDAQ Market only through KRX Stock Market or the
KOSDAQ Market, except in limited circumstances, including:
|
|
·
|
odd
lot trading of shares;
|
|
|
·
|
acquisition
of shares by exercise of warrant, conversion right under equity linked
securities or withdrawal right under depositary receipts issued outside of
Korea by a Korean company (“Converted
Shares”);
|
|
|
·
|
acquisition
of shares by foreign companies as a result of
merger;
|
|
|
·
|
acquisition
of shares as a result of inheritance, donation, bequest or exercise of
shareholders’ rights, including preemptive rights or rights to participate
in free distributions and receive
dividends;
|
|
|
·
|
acquisition
of shares offered and subscribed overseas for listing on foreign
securities exchanges;
|
|
|
·
|
over
the counter transactions between foreigners of a class of shares for which
the ceiling on aggregate acquisition by foreigners, as explained below,
has been reached or exceeded;
|
|
|
·
|
acquisition
of underlying shares by an overseas depositary in relation to the issuance
of depositary receipts;
|
|
|
·
|
disposition
of shares through the exercise of a dissenting shareholder’s appraisal
right;
|
|
|
·
|
acquisition
of shares by direct investment pursuant to the Foreign Investment
Promotion Act and disposition of shares so
acquired;
|
|
|
·
|
acquisition
or disposition of shares through a tender offer;
and
|
|
|
·
|
acquisition
or disposition of shares through the electronic over the counter market
brokerage companies.
|
For over
the counter transactions between foreigners outside KRX Stock Market or KOSDAQ
Market involving shares with respect to which the limit on aggregate foreign
ownership has been reached or exceeded, an investment broker such as a
securities company licensed in Korea must act as an intermediary. Odd lot
trading of shares outside KRX Stock Market or KOSDAQ Market must involve an
investment trader such as a securities company licensed in Korea as the other
party. Foreign investors are prohibited from engaging in margin transactions by
using securities borrowed from securities companies in Korea with respect to
shares that are subject to a foreign ownership limit.
The
Investment Rules require a foreign investor who wishes to invest in shares on
KRX Stock Market or KOSDAQ Market (including Converted Shares) to register its
identity with the FSS prior to making any such investment; however, such
registration requirement does not apply to foreign investors who acquire
Converted Shares with the intention of selling such Converted Shares within
three months from the date of acquisition thereof. Upon registration, the FSS
will issue to the foreign investor an Investment Registration Card, which must
be presented each time the foreign investor opens a brokerage account with a
securities company. Foreigners eligible to obtain an Investment Registration
Card include foreign nationals who are individuals residing abroad for more than
six months, foreign governments, foreign municipal authorities, foreign public
institutions, international organizations incorporated under international
covenants, corporations incorporated under foreign laws and certain foreign
funds and partnerships. All Korean offices of a foreign corporation as a group
are treated as a separate foreigner from the offices of the corporation outside
Korea. However, a foreign corporation or depositary issuing
depositary
receipts may obtain one or more Investment Registration Cards in its name in
certain circumstances as described in the relevant regulations.
Upon a
foreign investor’s purchase of shares through the KRX Stock Market or KOSDAQ
Market, no separate report by the investor is required, because the Investment
Registration Card system is designed to control and oversee foreign investment
through a computer system. However, a foreign investor’s acquisition or sale of
shares outside the KRX Stock Market (as discussed above) must be reported by the
foreign investor or its standing proxy to the Governor at the time of each such
acquisition or sale; provided that a foreign investor must ensure that any
acquisition or sale by it of shares outside KRX Stock Market or KOSDAQ Market,
in the case of trades in connection with a tender offer, odd lot trading of
shares or trades of a class of shares for which the aggregate foreign ownership
limit has been reached or exceeded, is reported to the Governor by the
securities company engaged to facilitate such transaction. A foreign investor
must appoint one or more standing proxies from among the Korea Securities
Depository, foreign exchange banks (including domestic branches of foreign
banks), investment traders (such as securities companies), investment brokers
(such as securities companies), collective investment business companies (such
as asset management companies), and foreign custodians meeting certain
requirements to act as a standing proxy to exercise shareholders’ rights, place
an order to sell or purchase shares or perform any matter related to the
foregoing activities if the foreign investor does not perform these activities
itself. However, a foreign investor may be exempted from complying with these
standing proxy rules with the approval of the Governor in circumstances where
such compliance is made impracticable, including cases where such compliance
would contravene the laws of the home country of such foreign
investor.
Certificates
evidencing shares of Korean companies must be kept in custody with an eligible
custodian in Korea. Only foreign exchange banks (including domestic branches of
foreign banks), investment traders (such as securities companies), investment
brokers (such as securities companies), collective investment business companies
(such as asset management companies), foreign custodians meeting certain
requirements and the Korea Securities Depository are eligible to act as a
custodian of shares for a nonresident or foreign investor. A foreign investor
must ensure that its custodian deposits such shares with the Korea Securities
Depository. However, a foreign investor may be exempted from complying with this
deposit requirement with the approval of the Governor in circumstances where
such compliance is made impracticable, including cases where such compliance
would contravene the laws of the home country of such foreign
investor.
Under the
Investment Rules, with certain exceptions, foreign investors may acquire shares
of a Korean company without being subject to any foreign investment ceiling. As
one such exception, designated public corporations are subject to a 40% ceiling
on the acquisition of shares by foreigners in the aggregate. Furthermore, an
investment by a foreign investor of not less than 10% of the outstanding shares
of a Korean company is defined as a direct foreign investment under the Foreign
Investment Promotion Law, which is, in general, subject to the report to, and
acceptance by, the MKE, which delegates its authority to the Korea Trade
Investment Promotion Agency, or foreign exchange banks (including domestic
branches of foreign banks) under the relevant regulations. The acquisition of
shares of a Korean company by a foreign investor may also be subject to certain
foreign shareholding restrictions in the event that such restrictions are
prescribed in each specific law which regulates the business of such Korean
company. For example, we are currently subject to a foreign shareholding ceiling
of 49%, pursuant to the Telecommunications Business Law. A foreigner who has
acquired shares in excess of this ceiling may not exercise its voting rights
with respect to the shares exceeding this limit, and the MKE may take corrective
action pursuant to the Telecommunications Business Law.
Under the
Foreign Exchange Transaction Laws, a foreign investor who intends to acquire
shares must designate a foreign exchange bank at which it must open a foreign
currency account and a Won account exclusively for stock investments. No
approval is required for remittance into Korea and deposit of foreign currency
funds in the foreign currency account. Foreign currency funds may be transferred
from the foreign currency account at the time required to place a deposit for,
or settle the purchase price of, a stock purchase transaction to a Won account
opened at a securities company. Funds in the foreign currency account may be
remitted abroad without any governmental approval.
Dividends
on shares are paid in Won. No governmental approval is required for foreign
investors to receive dividends on, or the Won proceeds of the sale of, any such
shares to be paid, received and retained in Korea. Dividends paid on, and the
Won proceeds of the sale of, any such shares held by a nonresident of Korea must
be
deposited
either in a Won account with the investor’s securities company or his Won
account. Funds in the investor’s Won account may be transferred to his foreign
currency account or withdrawn for local living expenses up to certain
limitations. Funds in the Won account may also be used for future investment in
shares or for payment of the subscription price of new shares obtained through
the exercise of preemptive rights.
Securities
companies (including domestic branches of foreign securities companies) in Korea
are allowed to open foreign currency accounts and Won accounts with foreign
exchange banks exclusively for accommodating foreign investors’ stock
investments in Korea. Through such accounts, these securities companies may
enter into foreign exchange transactions on a limited basis, such as conversion
of foreign currency funds and Won funds, either as a counterparty to or on
behalf of foreign investors, without such investors having to open their own
accounts with foreign exchange banks.
10.E. Taxation
Korean
Taxation
The
following is a summary of material Korean tax consequences to owners of our ADSs
and common shares that are non-resident individuals or non-Korean corporations
without a permanent establishment in Korea to which the relevant income is
attributable. Such non-resident individuals or non-Korean corporations will be
referred to as non-resident holders below. The statements regarding Korean tax
laws set forth below are based on the laws in force and as interpreted by the
Korean taxation authorities as of the date hereof. This discussion is not
exhaustive of all possible tax considerations which may apply to a particular
investor, and prospective investors are advised to satisfy themselves as to the
overall tax consequences of the acquisition, ownership and disposition of our
common shares, including specifically the tax consequences under Korean law, the
laws of the jurisdiction of which they are resident, and any tax treaty between
Korea and their country of residence, by consulting their own tax
advisers.
Dividends
on the Shares or ADSs
We will
deduct Korean withholding tax from dividends paid to you at a rate of 27.5%. If
you are a resident in a country that has entered into a tax treaty with Korea,
you may qualify for a reduced rate of Korean withholding tax.
For
example, if you are a qualified resident of the United States for purposes of
the tax treaty between the United States and Korea and you are the “beneficial
owner” of a dividend, a reduced withholding tax rate of 16.5%, including local
surtax, generally will apply. If you are a beneficial owner of ADSs, you will
generally be entitled to benefits under the tax treaty between the United States
and Korea if you:
|
|
·
|
are
an individual U.S. resident, a U.S. corporation (or other entity treated
as a United States corporation for United States tax purposes) or in the
case of a person acting as a partner or fiduciary, only to the extent your
income is subject to taxation in the United States as the income of a U.S.
resident;
|
|
|
·
|
are
not deemed to be a resident of Korea for purposes of the tax treaty
between the United States and
Korea;
|
|
|
·
|
are
not subject to any anti-treaty shopping article that applies in limited
circumstances; and
|
|
|
·
|
do
not hold ADSs in connection with the conduct of business in Korea through
a permanent establishment or the performance of independent personal
services in Korea through a fixed
base.
|
In order
to obtain the benefits of a reduced withholding tax rate under a tax treaty, you
must submit to us, prior to the dividend payment date, such evidence of tax
residence as may be required by the Korean tax authorities. Holders of ADSs may
submit evidence of tax residence to us through the depositary for the ADSs.
Holders of common shares may submit evidence of tax residence to us through the
Korea Securities Depository. Excess taxes withheld generally are not recoverable
even if you subsequently produce evidence that you were entitled to have tax
withheld at a lower rate.
If we
distribute to you bonus shares representing a transfer of certain capital
reserves or asset revaluation reserves into paid-in capital, that distribution
may be subject to Korean tax.
Taxation
of Capital Gains
You are
exempt from Korean taxation on capital gains realized upon sale of shares
through the KRX Stock Market or KOSDAQ if you have owned, together with certain
related parties, less than 25% of our total issued and outstanding shares at any
time during the year of sale and the five calendar years before the year of
sale, provided that you have no permanent establishment in Korea (whether or not
such capital gains are attributable to the permanent establishment). If you are
a resident of the United States for purposes of the tax treaty between the
United States and Korea, you will be exempt from Korean taxation on the capital
gains realized by the disposition of common shares or ADSs. Further, the Korean
taxation authorities have issued a tax ruling confirming that capital gains
earned by a non-Korean holder (whether or not it has a permanent establishment
in Korea) from the transfer of ADSs outside of Korea are exempt from Korean
taxation by virtue of the Special Tax Treatment Control Law of
Korea.
If you
are subject to tax on capital gains with respect to the sale of ADSs, or of
shares which you acquired as a result of a withdrawal, your gain will be
calculated based on your cost of acquiring the ADSs representing such shares,
although there are no specific Korean tax provisions or rulings on this issue.
In the absence of the application of a tax treaty which exempts or reduces the
rate of tax on capital gains, the amount of Korean tax imposed on your capital
gains will be the lesser of 11% (including resident surtax) of the gross
realization proceeds and, subject to the production of satisfactory evidence of
the acquisition cost and transfer expenses of the ADSs, 27.5% (including
resident surtax) of the net capital gains. The gain is calculated as the gross
realization proceeds less the acquisition cost and transfer
expenses.
If you
sell your common shares or ADSs, the purchaser or, in the case of the sale of
shares through a licensed securities company in Korea, the licensed securities
company is required to withhold Korean tax from the sales price in an amount
equal to 11% of the gross realization proceeds and to make payment thereof to
the Korean tax authority, unless you establish your entitlement to an exemption
from taxation under an applicable tax treaty or produce satisfactory evidence of
your acquisition and transfer costs for the ADSs. In order to obtain the benefit
of an exemption or reduced rate of tax pursuant to a tax treaty, you must submit
to the purchaser or the securities company (or through the depositary), as the
case may be, the application for tax exemption along with a certificate of your
tax residency issued by a competent authority of your tax residence country
prior to or at the time of payment. Excess taxes withheld are generally not
recoverable even if you subsequently produce evidence that you were entitled to
have taxes withheld at a lower rate.
Inheritance
Tax and Gift Tax
If you
die while holding an ADS or transfer an ADS as a gift, it is unclear whether,
for Korean inheritance and gift tax purposes, you will be treated as the owner
of the common shares underlying the ADSs. If you are treated as the owner of the
common shares, the heir or the donee (or you, if the donee fails to pay) will be
subject to Korean inheritance or gift tax presently at the rate of 10% to 50%,
provided that the value of such common shares or ADSs is greater than a
specified amount.
Securities
Transaction Tax
You will
not pay a securities transaction tax on your transfer of ADSs. If you transfer
shares, you will be subject to a securities transaction tax at the rate of 0.15%
and an agriculture and fishery special tax at the rate of 0.15% of the sale
price of the shares when traded on the Korea Stock Exchange. If you transfer
shares through KOSDAQ, you will be subject to a securities transaction tax at
the rate of 0.3% of the sales price of the shares and will not be subject to an
agriculture and fishery special tax. If your transfer of shares is not made on
the KRX Stock Market or KOSDAQ, subject to certain exceptions, you will be
subject to a securities transaction tax at the rate of 0.5% and will not be
subject to an agriculture and fishery special tax.
The
securities transaction tax and the agriculture and fishery special tax are not
applicable if (i) shares are listed on a designated foreign stock exchange
(e.g., New York Stock Exchange or Nasdaq Market) and (ii) the sale of shares
takes place on such exchange.
According
to a tax ruling issued by the Korean tax authorities, foreign shareholders are
not subject to a securities transaction tax upon the deposit of underlying
shares and receipt of depositary shares or upon the surrender of depositary
shares and withdrawal of originally deposited underlying shares. However,
questions have been raised as to whether this ruling is also applied to the
surrender of depositary shares. Although the tax authorities recently issued
another tax ruling indicating that securities transaction tax would be imposed
“when depositary shares which were issued upon deposit with an overseas
depositary of stock issued by a Korean company are later converted into the
underlying stock” except for the case mentioned in such ruling issued by the
Korean tax authorities, it is not clear as to whether, on whom, when and in what
amount the securities transaction tax will be imposed in the case of withdrawals
of underlying shares by holders of depositary shares other than initial holders.
Accordingly, there can be no assurance that the holders of ADSs other than
initial holders will not be subject to the securities transaction tax when they
withdraw the shares upon surrendering the ADSs.
U.S.
Federal Income Tax Considerations
The
following is a discussion of material U.S. federal income tax consequences to a
U.S. holder (as described below) of owning and disposing of common shares or
ADSs. It does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a particular person’s decision to hold
such securities. The discussion applies only if you hold common shares or ADSs
as capital assets for U.S. federal income tax purposes and it does not address
special classes of holders, such as:
|
|
·
|
certain
financial institutions;
|
|
|
·
|
dealers
and traders in securities or foreign
currencies;
|
|
|
·
|
persons
holding common shares or ADSs as part of a hedge, straddle, integrated
transaction or conversion
transaction;
|
|
|
·
|
persons
whose functional currency for U.S. federal income tax purposes is not the
U.S. dollar;
|
|
|
·
|
partnerships
or other entities classified as partnerships for U.S. federal income tax
purposes;
|
|
|
·
|
persons
liable for the alternative minimum
tax;
|
|
|
·
|
tax-exempt
organizations;
|
|
|
·
|
persons
holding common shares or ADSs that own or are deemed to own more than ten
percent of any class of our stock;
or
|
|
|
·
|
persons
who acquired our common shares or ADSs pursuant to the exercise of an
employee stock option or otherwise as
compensation.
|
This
discussion is based on the Internal Revenue Code of 1986, as amended (the
“Code”), administrative pronouncements, judicial decisions and final, temporary
and proposed Treasury regulations and the current income tax treaty in effect
between the United States and the Republic of Korea (the “Treaty”), all as of
the date hereof. These laws are subject to change, possibly on a retroactive
basis. It is also based in part on representations by the depositary and assumes
that each obligation under the deposit agreement and any related agreement will
be performed in accordance with its terms.
The
discussion below applies to you only if you are a U.S. holder. You are a U.S.
holder if you are a beneficial owner of common shares or ADSs who is eligible
for benefits under the Treaty and are, for U.S. federal tax
purposes:
|
|
·
|
a
citizen or resident of the United
States;
|
|
|
·
|
a
corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States or any political
subdivision thereof; or
|
|
|
·
|
an
estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source.
|
In
general, if you own ADSs, you will be treated as the owner of the underlying
shares represented by those ADSs for U.S. federal income tax purposes.
Accordingly, no gain or loss will be recognized if you exchange ADSs for the
underlying shares represented by those ADSs.
The U.S.
Treasury has expressed concerns that parties to whom American depositary shares
are released before delivery of shares to the depositary (“pre-release”), or
intermediaries in the chain of ownership between holders and the issuer of the
security underlying the American depositary shares, may be taking actions that
are inconsistent with the claiming of foreign tax credits for U.S. holders of
American depositary receipts. Such actions would also be inconsistent with the
claiming of the reduced rate of tax, described below, applicable to dividends
received by certain non-corporate holders. Accordingly, the analysis of the
creditability of Korean taxes and the availability of a lower rate of tax for
dividends received by certain non- corporate holders, each described below,
could be affected by actions taken by parties to whom ADSs are
pre-released.
Please
consult your own tax advisers concerning the U.S. federal, state, local and
foreign tax consequences of owning and disposing of common shares or ADSs in
your particular circumstances.
Passive
Foreign Investment Company Considerations
Based on
the price of our common shares and ADSs during our 2008 taxable year and the
amount of passive assets, including cash and cash equivalents, held by us
throughout that year, we believe that we would likely be considered a
passive foreign investment company (“PFIC”) for our 2008 taxable year. Further,
there is a significant risk that we may be a PFIC for future taxable
years.
In
general, a non-U.S. corporation will be considered a PFIC for any taxable year
in which (i) 75% or more of its gross income consists of passive income or (ii)
50% or more of the average quarterly value of its assets consists of assets that
produce, or are held for the production of, passive income. For purposes of the
above calculations, a non-U.S. corporation that directly or indirectly owns at
least 25% by value of the shares of another corporation is treated as if it held
its proportionate share of the assets of such other corporation and received
directly its proportionate share of the income of such other corporation.
Passive income generally includes dividends, interest, rents, royalties and
capital gains.
If we are
a PFIC for any taxable year during which a U.S. holder holds common shares or
ADSs, such U.S. holder is subject to adverse U.S. federal income tax rules. In
general, gain recognized upon a disposition (including, under certain
circumstances, a constructive disposition) of common shares or ADSs by such U.S.
holder is allocated ratably over the holder’s holding period for such common
shares or ADSs. The amounts allocated to the taxable year of disposition and to
years before we became a PFIC would be taxed as ordinary income. The amount
allocated to each other taxable year would be subject to tax at the highest rate
in effect for such taxable year for individuals or corporations, as appropriate,
and an interest charge would be imposed on the tax attributable to such
allocated amounts. Similar rules apply to any distribution received by such U.S.
holder on its common shares or ADSs in excess of 125% of the average of the
annual distributions on such common shares or ADSs received during the preceding
three years or the holder’s holding period, whichever is shorter.
If we are
a PFIC for any year during which a U.S. holder holds common shares or ADSs, we
generally will continue to be treated as a PFIC with respect to the holder for
all succeeding years during which the U.S. holder holds common shares or ADSs,
even if we cease to meet the threshold requirements for PFIC status. U.S.
holders should consult their tax advisers regarding the potential availability
of a “deemed sale” election that would allow them to eliminate this continuing
PFIC status under certain circumstances.
Under
certain attribution rules, if we are a PFIC, U.S. holders will be deemed to own
their proportionate share of any direct or indirect subsidiaries or other
entities in which we own an equity interest that are also PFICs (“lower-tier
PFICs”), and will generally be subject to U.S. federal income tax as if such
holders directly held the shares of such lower-tier PFICs.
Alternatively,
a U.S. holder may make a mark-to-market election with respect to the common
shares or ADSs (but not with respect to the shares of any lower-tier PFICs) if
the common shares or ADSs are “regularly traded” on a “qualified exchange.” The
common shares or ADSs will be treated as “regularly traded” in any calendar year
in
which
more than a
de minimis
quantity of common shares or ADSs are traded on a qualified exchange on at least
15 days during each calendar quarter. Our ADSs are traded on the NASDAQ Market,
which is a qualified exchange.
If a U.S.
holder makes the mark-to-market election, for each year in which we are a PFIC,
the holder will generally include as ordinary income the excess, if any, of the
fair market value of the common shares or ADSs at the end of the taxable year
over their adjusted tax basis, and will be permitted an ordinary loss in respect
of the excess, if any, of the adjusted tax basis of the common shares or ADSs
over their fair market value at the end of the taxable year (but only to the
extent of the net amount of previously included income as a result of the
mark-to-market election). If a U.S. holder makes the election, the holder’s tax
basis in the common shares or ADSs will be adjusted to reflect any such income
or loss amounts. Any gain or loss recognized on the sale or other disposition of
common shares or ADSs in a year when we are a PFIC will be treated as ordinary
income or loss (in which case only to the extent of the net amount of previously
included income as a result of the mark-to-market election). U.S. holders should
consult their own tax advisers regarding the availability and advisability of
making a mark-to-market election in their particular circumstances.
We will
not make available the information necessary for U.S. holders to make a
Qualified Electing Fund election.
If a U.S.
holder owns common shares or ADSs during any year in which we are a PFIC, the
holder must file IRS Form 8621 with respect to us and any lower-tier PFICs. In
addition, the preferential dividend rates discussed below with respect to
dividends paid to certain non-corporate U.S. holders does not apply if we are a
PFIC for a taxable year in which we pay a dividend or the prior taxable
year.
U.S.
holders should consult their own tax advisers concerning our PFIC status and the
tax considerations relevant to an investment in a PFIC.
Taxation
of Distributions
Subject
to the passive foreign investment company rules described above, distributions
paid on common shares or ADSs, other than certain pro rata distributions of
common shares, will be treated as dividends to the extent paid out of our
current or accumulated earnings and profits (as determined under U.S. federal
income tax principles). Because we do not maintain calculations of our earnings
and profits under U.S. federal income tax principles, we expect that
distributions will generally be reported to U.S. holders as dividends. Subject
to applicable limitations and the discussion above regarding concerns expressed
by the U.S. Treasury, under current law, certain dividends paid to certain
non-corporate U.S. holders in taxable years beginning before January 1, 2011
will be taxable at a maximum rate of 15%. However, such dividends will not be
eligible for the reduced rates of taxation if we are a PFIC for the taxable year
in which we pay the dividend or the prior taxable year. The amount of a dividend
will include any amounts withheld by us or our paying agent in respect of Korean
taxes. The dividend will be treated as foreign source dividend income to you and
will not be eligible for the dividends received deduction generally allowed to
U.S. corporations under the Code.
Dividends
paid in Won will be included in your income in a U.S. dollar amount calculated
by reference to the exchange rate in effect on the date of your (or in the case
of ADSs, the depositary’s) receipt of the dividend, regardless of whether the
payment is in fact converted into U.S. dollars. If the dividend is converted
into U.S. dollars on the date of receipt, you generally should not be required
to recognize foreign currency gain or loss in respect of the dividend income.
You may have foreign currency gain or loss if you do not convert the dividend
into U.S. dollars on the date of its receipt.
Korean
taxes withheld from cash dividends on common shares or ADSs at the rate provided
in the Treaty will be creditable against your U.S. federal income tax liability,
subject to applicable limitations that may vary depending upon your
circumstances and subject to the discussion above regarding concerns expressed
by the U.S. Treasury. Korean taxes withheld in excess of the rate provided in
the Treaty will not be eligible for credit against your U.S. federal income tax
liability until you exhaust all effective and practical remedies to recover such
excess withholding, including the seeking of competent authority assistance from
the U.S. Internal Revenue Service. See “— Korean Taxation — Dividends on the
Shares or ADSs” for a description of how you can secure the Treaty rate for
withholding on dividends paid by us. The limitation on foreign taxes eligible
for credit is calculated separately with
respect
to specific classes of income. The rules governing foreign tax credits are
complex and, therefore, you should consult your own tax adviser regarding the
availability of foreign tax credits in your particular circumstances. Instead of
claiming a credit, you may, at your election, deduct otherwise creditable Korean
taxes in computing your taxable income, subject to generally applicable
limitations under U.S. law.
Sale
and Other Disposition of Common Shares or ADSs
Subject
to the passive foreign investment company rules described above, for U.S.
federal income tax purposes, gain or loss you realize on the sale or other
disposition of common shares or ADSs will be capital gain or loss, and will be
long-term capital gain or loss if you held the common shares or ADSs for more
than one year. The amount of your gain or loss will be equal to the difference
between the amount realized on the sale or other disposition and your tax basis
in the common shares or ADSs disposed of. Such gain or loss will generally be
U.S. source gain or loss for foreign tax credit purposes.
Information
Reporting and Backup Withholding
Information
returns may be filed with the U.S. Internal Revenue Service in connection with
the payment of dividends and sales proceeds. You may be subject to backup
withholding tax on these payments if you fail to provide your taxpayer
identification number to the paying agent and comply with certain certification
procedures or otherwise establish an exemption from backup
withholding.
The
amount of any backup withholding from a payment to you will be allowed as a
credit against your U.S. federal income tax liability and may entitle you to a
refund, provided that the required information is timely furnished to the
Internal Revenue Service.
10.F. Dividends
and Paying Agents
Not
applicable.
10.G. Statements
by Experts
Not
applicable.
10.H. Documents
on Display
We are
subject to the information requirements of the Exchange Act, and, in accordance
therewith, we file with the SEC annual reports on Form 20-F within six months of
our fiscal year-end, and provide to the SEC other material information on Form
6-K. These reports and other information can be inspected at the public
reference room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. You can
also obtain copies of the material from the public reference room or by calling
at 1-800-732-0330 or writing the SEC upon payment of a prescribed fee. Our SEC
filings, including the annual reports on Form 20-F, are also available on the
SEC’s website at www.sec.gov. As a foreign private issuer, we are exempt from
the rules under the Exchange Act prescribing the furnishing and content of proxy
statements to shareholders and Webzen’s executive officers, Directors and
principal shareholders are exempt from the reporting and short-swing profit
recovery provisions contained in Section 16 of the Exchange Act.
We will
furnish to JPMorgan Chase Bank, as depositary for the ADSs, our annual reports,
which will include a review of operations and annual audited financial
statements prepared in accordance with U.S. GAAP and all notices of
shareholders’ meetings and other reports and communications that are made
generally available to our shareholders. The depositary will make these notices,
reports and communications available to holders of ADSs and will, upon our
request, arrange for the mailing of these documents to all holders of record of
ADSs.
10.I. Subsidiary
Information
Not
applicable.
Item 11. Quantitative and Qualitative Disclosures about
Market Risk
Market
risk is the risk of loss related to adverse changes in market prices, including
interest rates and foreign exchange rates, of financial instruments. In the
normal course of our business, we are subject to market risk associated with
interest rate movements, credit risk and currency movements on non-Won
denominated assets and liabilities and license and royalty
revenues.
Foreign currency
risk
. We have exposure to some foreign currency exchange-rate
fluctuations on cash flows from our subsidiaries and licensee partners
denominated in U.S. dollars, Japanese Yen, NT dollars or Chinese RMB. For
example, our revenues may be impacted by exchange rate fluctuations in the
Chinese RMB, U.S. dollars, NT dollars or Japanese Yen when revenues at overseas
subsidiary or royalty payments are translated into Korean Won. Foreign exchange
fluctuation could also affect the value of our assets. As of December 31, 2008,
we had
W
41,823 million of
cash or cash equivalents, approximately
W
2,060 million or
US$1.6 million of which were held in foreign currencies such as U.S. Dollar,
Chinese RMB and NT Dollar. We do not expect any material change with respect to
our net income as a result of a 10% hypothetical exchange rate
change.
As of
December 31, 2008, we had Japanese Yen denominated accounts receivables of
W
1,460 million,
which represented 27.63% of our total consolidated accounts receivables balance,
U.S. dollar denominated accounts receivables of
W
1,113 million,
which represented 21.06% of our total consolidated accounts receivables balance,
and NT dollars denominated accounts receivables of
W
364 million,
which represented 6.88% of our total consolidated accounts receivables balance .
We also had NT dollars denominated accounts payable of
W
335 million,
which represented 22.92% of our total consolidated accounts payable balance, and
Chinese RMB denominated accounts payable of
W
276 million,
which represented 18.89% of our total consolidated accounts payable balance. As
these balances all have short maturities, exposure to foreign currency
fluctuations on these balances is not significant. For example, a hypothetical
10% appreciation of the Won against the Chinese RMB, U.S. dollars, NT dollars
and Japanese Yen, in the aggregate, would reduce our cash flows by
W
233
million.
In 2008,
W
15,654
million of our revenue was derived from currencies other than the Won, primarily
from the U.S. dollar in the amount of
W
5,504 million,
the Japanese Yen in the amount of
W
4,755 million,
the NT dollar in the amount of
W
3,363 million and
the Chinese RMB in the amount of
W
2,032 million. A
hypothetical 10% depreciation in the exchange rates of these foreign currencies
against the Won in 2008 would have reduced our revenue by
W
1,565
million.
Credit
Risk.
As our cash and cash equivalents are placed with local financial
institutions, we face a potential credit risk that the financial institutions
may become insolvent and be unable to repay our principal and interest in a
timely manner. To manage our risk, we select a number of major financial
institutions which we believe to be of high credit quality and allocate our cash
holdings among such institutions. However, due to the current economic downturn
and the volatile financial markets, it is difficult for us to predict the
financial condition of the Korean banking sector and the financial institutions
that manage our cash holdings and we may be materially impacted by any
widespread failure in the Korean banking sector in the future.
Interest rate
risk
. Our exposure to risk from changes in interest rates relates
primarily to our investments in short-term financial instruments and other
investments. Investments in both fixed rate and floating rate interest earning
instruments carry some interest rate risk. The fair value of fixed rate
securities may fall due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Partly
as a result of this, our future interest income may fall short of expectations
due to changes in interest rates or we may suffer losses in principal if we are
forced to sell securities that have fallen in estimated fair value due to
changes in interest rates. However, as substantially all of our cash equivalents
consist of bank deposits and short-term money market instruments, we do not
expect any material change with respect to our net income as a result of a 10%
hypothetical interest rate change.
Substantially
all of our short-term financial instruments consist of time deposits and money
market deposit accounts. We do not believe that we are subject to any material
market risk exposure on our short-term financial instruments, as they are
readily convertible to cash and have short maturities. We do not have any
derivative financial instruments hedging interest rate risk.
Item 12. Description of Securities Other than Equity
Securities
Not
applicable.
PART II
Item 13. Defaults, Dividend Arrearages and
Delinquencies
None.
Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds
14.A.
to D. Material Modifications to the Rights of Security
Holders
On
February 3, 2004, JPMorgan Chase Bank, as depositary for the ADSs, and we
entered into the first amendment to the deposit agreement governing the ADSs,
under which we reduced the total number of our common shares on deposit at any
time with the depositary from 1,500,000 to 1,300,000. In connection with our
3-to-1 stock split on June 10, 2004, we entered into the second amendment to the
deposit agreement to change the ratio of our common shares to ADSs from 1:10 to
3:10 and adjust the maximum number of common shares that may be accepted for
deposit from 1,300,000 to 3,900,000. The second amendment went into effect on
July 10, 2004.
14.E. Use
of Proceeds
We
completed our initial public offering of 8,700,000 ADSs, representing 870,000
common shares (2,610,000 shares after the 3-to-1 stock split) on the Nasdaq
Market, in December 2003, pursuant to our registration statement on Form F-1
(File No. 333-110321), which the SEC declared effective on December 12, 2003. In
the offering, we sold the ADSs at a price of $11.17 per ADS, which resulted in
aggregate net proceeds to us of approximately US$92 million, after deducting
underwriting discounts and commissions and paying offering expenses of
approximately US$4.86 million. The managing underwriter in the offering was J.P.
Morgan Securities, Inc.
As of
December 31, 2008, we have used a total of approximately
W
19,838 million,
or approximately US$18 million, of our IPO proceeds.
W
12,120 million
was used for the development of new games,
W
3,824 million was
used for advertisement and marketing,
W
1,661 million was
used for equipment and computer software and
W
2,233 million was
used for office rent.
We have
invested the net proceeds in short-term, interest-bearing debt instruments. The
amounts we actually spend in the future will depend on a number of factors,
including the progress of our research and development efforts, the amount of
cash generated or used by our operations, competitive and technological
developments, marketing and sales activities and market acceptance of our
products, and the rate of growth, if any, of our business.
We intend
to use the remaining proceeds of our initial public offering of the ADSs for
other acquisitions or investments in businesses, products or technologies that
are complementary to our own, development of new online games and game features,
hiring additional employees, capital expenditures such as the upgrade and
addition of our servers and the expansion of our existing facilities, and
working capital and other general corporate purposes. None of the proceeds from
our initial public offering of ADSs were paid to our Directors or officers or
any other affiliates of us.
Item 15. Controls and Procedures
Disclosure
Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of December 31, 2008. Our disclosure controls and procedures are designed to
ensure that the information we are required to disclose in the reports that we
file or submit under the Exchange Act is (i) recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange
Commission’s rules and forms and (ii) accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer,
as the principal executive and financial officers, respectively, to allow timely
decisions regarding required disclosures. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a
process designed by, or under the supervision of, our Chief Executive Officer
and Chief Financial Officer, as our principal executive and principal financial
officers, and effected by our board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transaction and dispositions of our
assets;
|
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
Directors; and
|
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use of disposition of our assets that could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2008 using the criteria in “Internal Control –
Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO)
of the Treadway Commission.
Based on
our evaluation, management concluded that, as of December 31, 2008, our internal
control over financial reporting was effective. The effectiveness of our
internal control over financial reporting as of December 31, 2008 has been
audited by Samil PricewaterhouseCoopers, an independent registered public
accounting firm, as stated in their report which is included in Item 18 of this
Form 20-F.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the year ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Item 16. Reserved.
Item 16A. Audit Committee Financial
Expert
The Audit
Committee is comprised of the following three independent Directors: Chang Won
Lee, Seung Han Ha and Hyuk-Yun Kim. All of our independent Directors are
financially literate and our board of Directors designated Seung-Han Ha as an
audit committee financial expert, who is an independent Director, as defined in
Rule 10A-3 under the Exchange Act. The Audit Committee is responsible for
examining internal transactions and potential conflicts of interest and
reviewing accounting and other relevant matters.
Item 16B. Code of Ethics
We have
adopted a code of ethics that applies to each member of our board of Directors
and all employees, including our Chief Executive Officer and our Chief Financial
Officer. The code of ethics was filed as exhibit 11.1 to the annual report on
Form 20-F filed on June 25, 2004.
Item 16C. Principal Accountant Fees and
Services
Fees
Paid to Principal Accountant
The
following table sets forth the aggregate fees by category specified below in
connection with certain professional services rendered by our principal external
auditor for the periods indicated. We did not pay any other fees to our
principal external auditor during the periods indicated below.
|
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Audit
fees(2)
|
|
|
438,487
|
|
|
|
460,464
|
|
|
|
365
|
|
|
Audit-related
fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Tax
fees(3)
|
|
|
6,153
|
|
|
|
108,464
|
|
|
|
86
|
|
|
All
other fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
For
convenience, the Won amounts are expressed in U.S. dollars at the rate of
W
1,262.0 to
US$1.00, the noon buying rate in effect on December 31, 2008 as announced
by the Federal Reserve Bank of New
York.
|
|
(2)
|
Audit
fees in the table above are the aggregate fees in connection with the
audits of our annual financial statements, the review of our interim
financial statements and assistance with and review of registration
statements and periodic SEC
filings.
|
|
(3)
|
Tax
fees in the table above include the auditor’s advisory service fees with
respect to our tax return and for tax audit by the Korean tax
authority.
|
Audit
Committee’s Pre-Approval Policies and Procedures
Our Audit
Committee rules set forth that all auditing services and non-auditing services
provided to us by our independent auditors should be pre-approved by the Audit
Committee.
Item 16D. Exemptions from the Listing Standards for
Audit Committees
Not
applicable.
Item 16E. Purchase of Equity Securities by the Issuer
and Affiliated Purchasers
On April
12, 2007, our board of Directors approved a program to indirectly repurchase
W
9.0 billion
worth of common stock through trust accounts and, on November 29, 2007, approved
a program to directly repurchase 250,000 common shares. The purpose of the share
repurchase programs were to stabilize the stock price and to accumulate treasury
stock for future stock option grants. The table below presents information with
respect to purchases of our common stock made by us directly or indirectly
through trust accounts from January 1, 2009 until April 30, 2009:
|
|
|
Total
number of common shares purchased
|
|
|
Average
price paid per share (in Korean Won)
|
|
|
Total
number of shares purchased as part of publicly announced plans or
programs
|
|
|
The
number of shares or the approximate Korean Won value (3) of shares that
may yet be purchased under the plans or programs
|
|
|
August
22-30, 2007 (1)
|
|
|
102,453
|
|
|
|
14,479
|
|
|
|
102,453
|
|
|
W
|
6,489,266,146
|
|
|
September
4-28, 2007 (1)
|
|
|
176,123
|
|
|
|
14,130
|
|
|
|
176,123
|
|
|
W
|
4,033,429,864
|
|
|
|
|
Total
number of common shares purchased
|
|
|
Average
price paid per share (in Korean Won)
|
|
|
Total
number of shares purchased as part of publicly announced plans or
programs
|
|
|
The
number of shares or the approximate Korean Won value (3) of shares that
may yet be purchased under the plans or programs
|
|
|
October
8-31, 2007 (1)
|
|
|
212,348
|
|
|
|
12,027
|
|
|
|
212,348
|
|
|
W
|
508,428,577
|
|
|
November
1-8, 2007 (1)
|
|
|
45,081
|
|
|
|
11,097
|
|
|
|
45,081
|
|
|
W
|
12,583,795
|
|
|
December
3-14, 2007(2)
|
|
|
219,611
|
|
|
|
10,997
|
|
|
|
250,000
|
|
|
W
|
30,389
|
|
|
January
23-24, 2008 (2)
|
|
|
30,389
|
|
|
|
10,369
|
|
|
|
250,000
|
|
|
W
|
0
|
|
|
February
15-29, 2008 (1)
|
|
|
160,000
|
|
|
|
10,514
|
|
|
|
160,000
|
|
|
W
|
4,597,597,847
|
|
|
March
3-31, 2008 (1)
|
|
|
295,965
|
|
|
|
10,524
|
|
|
|
295,965
|
|
|
W
|
1,506,537,664
|
|
|
April
1-15, 2008 (1)
|
|
|
149,387
|
|
|
|
10,069
|
|
|
|
149,387
|
|
|
W
|
18,126,997
|
|
|
(1)
|
Purchased
through trust account.
|
|
(2)
|
Purchased
directly by our company in the
market.
|
|
(3)
|
Remaining
balance in Korean Won value in the trust
account.
|
Item 16F. Change in Registrant’s Certifying
Accountant
Not
applicable.
Item 16G. Corporate Governance
See “Item
6. Directors, Senior Management and Employees – 6.C. Board Practices –
Difference between Nasdaq requirements and home country
practices.”
PART III
Item 17. Financial Statements
Webzen
has elected to provide financial statements and related information pursuant to
Item 18.
Item 18. Financial Statements
The
consolidated financial statements of Webzen and the report thereon by its
independent auditor listed below are attached hereto as follows:
(a) Consolidated
Balance Sheets as of December 31, 2007 and 2008 (page F-4)
(b) Consolidated
Statements of Operations for the Years Ended December 31, 2006, 2007 and 2008
(page F-5)
(c) Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended December 31,
2006, 2007 and 2008 (page F-6)
(d) Consolidated
Statements of Cash Flows for the Years Ended December 31, 2006, 2007 and 2008
(page F-8)
(e) Notes
to Consolidated Financial Statements (page F-10 to F-28)
Webzen
Inc. and subsidiaries
Index
December
31, 2007 and 2008
|
|
Page(s)
|
|
|
|
|
|
F -
1 – F - 2
|
|
|
|
|
Consolidated
Financial
Statements
|
|
|
|
|
|
|
F -
3
|
|
|
|
|
|
F -
4
|
|
|
|
|
|
F -
5 – F - 6
|
|
|
|
|
|
F -
7 – F - 8
|
|
|
|
|
|
F -
9 – F - 30
|
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and the Shareholders of
Webzen
Inc.:
In our
opinion, the accompanying consolidated balance sheets and the related statements
of operations, changes in stockholders’ equity and cash flows present fairly, in
all material respects, the financial position of Webzen Inc. and its
subsidiaries (the "Company") at December 31, 2007 and 2008, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, based on our
audit, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in
Internal
Control - Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in “Management’s Report on
Internal Control over Financial Reporting” appearing under Item 15. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our audits (which
was an integrated audit in 2007 and 2008). We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ Samil
PricewaterhouseCoopers
Seoul,
Korea
June 29,
2009
Webzen Inc. and
subsidiaries
Consolidated Balance Sheets
December 31, 2007
and 2008
(In
millions of Korean Won and in thousands of U.S. dollars, except per share
data)
|
|
|
2007
|
|
|
2008
|
|
|
(Note
3)
2008
(unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
￦
|
66,857
|
|
|
￦
|
41,823
|
|
|
$
|
33,140
|
|
|
Short-term
financial instruments
|
|
|
8,047
|
|
|
|
11,523
|
|
|
|
9,130
|
|
|
Available-for-sale
securities (including
￦
4,449
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
at fair value at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
see Notes 1 and 4)
|
|
|
-
|
|
|
|
5,116
|
|
|
|
4,054
|
|
|
Accounts
receivables, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
￦
1,185
and
￦
683 at
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
2008, respectively
|
|
|
4,566
|
|
|
|
4,649
|
|
|
|
3,684
|
|
|
Other
receivables
|
|
|
843
|
|
|
|
9,413
|
|
|
|
7,459
|
|
|
Other
current assets
|
|
|
4,345
|
|
|
|
2,663
|
|
|
|
2,110
|
|
|
Total
current assets
|
|
|
84,658
|
|
|
|
75,187
|
|
|
|
59,577
|
|
|
Available-for-sale
securities
|
|
|
1,475
|
|
|
|
1,709
|
|
|
|
1,354
|
|
|
Property
and equipment, net
|
|
|
11,147
|
|
|
|
9,109
|
|
|
|
7,218
|
|
|
Leasehold
and other deposits
|
|
|
21,499
|
|
|
|
10,189
|
|
|
|
8,074
|
|
|
Other
non-current assets
|
|
|
2,635
|
|
|
|
3,923
|
|
|
|
3,109
|
|
|
Total
assets
|
|
￦
|
|
|
|
￦
|
|
|
|
$
|
79,332
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
￦
|
3,897
|
|
|
￦
|
2,196
|
|
|
$
|
1,740
|
|
|
Deferred
income
|
|
|
7,200
|
|
|
|
7,426
|
|
|
|
5,884
|
|
|
Other
current liabilities
|
|
|
1,880
|
|
|
|
846
|
|
|
|
670
|
|
|
Total
current liabilities
|
|
|
12,977
|
|
|
|
10,468
|
|
|
|
8,294
|
|
|
Long-term
deferred income
|
|
|
3,987
|
|
|
|
3,391
|
|
|
|
2,687
|
|
|
Accrued
severance benefits
|
|
|
4,458
|
|
|
|
3,012
|
|
|
|
2,387
|
|
|
Guarantee
deposits
|
|
|
972
|
|
|
|
38
|
|
|
|
30
|
|
|
Other
non-current liabilities
|
|
|
81
|
|
|
|
20
|
|
|
|
16
|
|
|
Total
liabilities
|
|
|
22,475
|
|
|
|
16,929
|
|
|
|
13,414
|
|
|
Minority
interest
|
|
|
70
|
|
|
|
-
|
|
|
|
-
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock,
￦
500 par
value, 6,485,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
authorized
at December 31, 2007 and 2008, no shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issued
and outstanding at December 31, 2007 and 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Convertible
stock,
￦
500 par
value, 6,485,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
authorized
at December 31, 2007 and 2008, no shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issued
and outstanding at December 31, 2007 and 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock,
￦
500 par
value 27,030,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
authorized
at December 31, 2007 and 2008,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,974,000
shares issued and 12,492,689 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at December 31, 2007 and 12,974,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
issued and 11,856,948 shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
December 31, 2008
|
|
|
6,487
|
|
|
|
6,487
|
|
|
|
5,140
|
|
|
Additional
paid-in capital
|
|
|
133,647
|
|
|
|
133,954
|
|
|
|
106,144
|
|
|
Accumulated
deficit
|
|
|
(33,953
|
)
|
|
|
(41,628
|
)
|
|
|
(32,985
|
)
|
|
Treasury
stock, 481,311 shares and 1,117,052 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
December 31, 2007 and 2008, respectively
|
|
|
(6,789
|
)
|
|
|
(13,406
|
)
|
|
|
(10,623
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(523
|
)
|
|
|
(2,219
|
)
|
|
|
(1,758
|
)
|
|
Total
stockholders’ equity
|
|
|
98,869
|
|
|
|
83,188
|
|
|
|
65,918
|
|
|
Total
liabilities and stockholders’ equity
|
|
￦
|
|
|
|
￦
|
|
|
|
$
|
79,332
|
|
The
accompanying notes are integral part of these financial statements
.
Webzen Inc. and
subsidiaries
Consolidated Statements of Operations
Years ended December
31, 2006, 2007 and 2008
(In
millions of Korean Won and in thousands of U.S. dollars, except earnings per
share data)
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
(Note
3)
2008
(unaudited)
|
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
game subscriptions
|
|
￦
|
21,247
|
|
|
￦
|
22,884
|
|
|
￦
|
22,478
|
|
|
$
|
17,812
|
|
|
Royalties
and license fees
|
|
|
2,811
|
|
|
|
6,213
|
|
|
|
10,298
|
|
|
|
8,160
|
|
|
Total
net revenues
|
|
|
24,058
|
|
|
|
29,097
|
|
|
|
32,776
|
|
|
|
25,972
|
|
|
Cost
of revenues
|
|
|
15,722
|
|
|
|
17,505
|
|
|
|
15,102
|
|
|
|
11,967
|
|
|
Gross
profit
|
|
|
8,336
|
|
|
|
11,592
|
|
|
|
17,674
|
|
|
|
14,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
32,699
|
|
|
|
22,848
|
|
|
|
24,590
|
|
|
|
19,485
|
|
|
Research
and development expenses
|
|
|
24,062
|
|
|
|
23,164
|
|
|
|
1,816
|
|
|
|
1,439
|
|
|
Impairment
charges
|
|
|
-
|
|
|
|
-
|
|
|
|
505
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(48,425
|
)
|
|
|
(34,420
|
)
|
|
|
(9,237
|
)
|
|
|
(7,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,991
|
|
|
|
3,503
|
|
|
|
3,364
|
|
|
|
2,666
|
|
|
Foreign
currency gains
|
|
|
29
|
|
|
|
239
|
|
|
|
3,632
|
|
|
|
2,878
|
|
|
Foreign
currency losses
|
|
|
(530
|
)
|
|
|
(147
|
)
|
|
|
(422
|
)
|
|
|
(335
|
)
|
|
Gain
(loss) on disposal of property and equipment
|
|
|
115
|
|
|
|
3,931
|
|
|
|
-
|
|
|
|
-
|
|
|
Gain
on disposal of available-for-sale securities
|
|
|
2,535
|
|
|
|
3,755
|
|
|
|
34
|
|
|
|
27
|
|
|
Loss
on impairment of available-for-sale securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,883
|
)
|
|
|
(3,077
|
)
|
|
Others,
net
|
|
|
(203
|
)
|
|
|
(118
|
)
|
|
|
(515
|
)
|
|
|
(407
|
)
|
|
Loss
before income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
and minority interest
|
|
|
(42,488
|
)
|
|
|
(23,257
|
)
|
|
|
(7,027
|
)
|
|
|
(5,567
|
)
|
|
Income
tax expense
|
|
|
5,102
|
|
|
|
2,579
|
|
|
|
802
|
|
|
|
636
|
|
|
Loss
before minority interest
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
|
(7,829
|
)
|
|
|
(6,203
|
)
|
|
Minority
interest
|
|
|
525
|
|
|
|
242
|
|
|
|
154
|
|
|
|
123
|
|
|
Net
loss
|
|
￦
|
(47,065
|
)
|
|
￦
|
(25,594
|
)
|
|
￦
|
(7,675
|
)
|
|
$
|
(6,080
|
)
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
￦
|
(3,847
|
)
|
|
￦
|
(2,078
|
)
|
|
￦
|
(641
|
)
|
|
$
|
(0.51
|
)
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
12,233,204
|
|
|
|
12,319,347
|
|
|
|
11,982,216
|
|
|
|
11,982,216
|
|
The
accompanying notes are integral part of these financial statements
.
Webzen Inc. and
subsidiaries
Consolidated Statements of Changes in Stockholders
’
Equity
Years ended December
31, 2006, 2007 and 2008
(In
millions of Korean Won and in thousands of U.S. dollars, except number of
shares)
|
|
|
Common
Shares
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
(accumulated
deficit)
|
|
|
Loans
to Employees Related to Employee Stock Purchase Plan
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other Comprehensive Income (loss)
|
|
|
Total
|
|
|
Balance
at January 1, 2006
|
|
|
12,289,302
|
|
|
|
6,485
|
|
|
|
135,891
|
|
|
|
38,706
|
|
|
|
(337
|
)
|
|
|
(12,745
|
)
|
|
|
(588
|
)
|
|
|
167,412
|
|
|
Exercise
of stock options
|
|
|
2,000
|
|
|
|
1
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
Treasury
stock purchase
|
|
|
(86,951
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,648
|
)
|
|
|
-
|
|
|
|
(1,648
|
)
|
|
Share-based
compensation to employees
|
|
|
8,300
|
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
156
|
|
|
|
-
|
|
|
|
193
|
|
Loans
to employees related to
employees stock
purchase plan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
279
|
|
|
|
-
|
|
|
|
-
|
|
|
|
279
|
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
277
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
277
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(47,065
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(47,065
|
)
|
Unrealized
gain on
available-for-sale
securities,
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,484
|
|
|
|
6,484
|
|
Foreign
currency translation
adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(539
|
)
|
|
|
(539
|
)
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
12,212,651
|
|
|
|
6,486
|
|
|
|
136,207
|
|
|
|
(8,359
|
)
|
|
|
(58
|
)
|
|
|
(14,237
|
)
|
|
|
5,357
|
|
|
|
125,396
|
|
|
Exercise
of stock options
|
|
|
2,000
|
|
|
|
1
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
Treasury
stock purchase
|
|
|
(755,616
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,443
|
)
|
|
|
-
|
|
|
|
(9,443
|
)
|
|
Disposition
of treasury stock
|
|
|
1,033,654
|
|
|
|
-
|
|
|
|
(2,725
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
16,891
|
|
|
|
-
|
|
|
|
14,166
|
|
Loans
to employees related to
employees stock
purchase plan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
163
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,594
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,594
|
)
|
Unrealized
gain on
available-for-
sale
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,824
|
)
|
|
|
(5,824
|
)
|
Foreign
currency translation
adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(56
|
)
|
|
|
(56
|
)
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
12,492,689
|
|
|
|
6,487
|
|
|
|
133,647
|
|
|
|
(33,953
|
)
|
|
|
-
|
|
|
|
(6,789
|
)
|
|
|
(523
|
)
|
|
|
98,869
|
|
|
Treasury
stock purchase
|
|
|
(635,741
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,617
|
)
|
|
|
-
|
|
|
|
(6,617
|
)
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
307
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
307
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,675
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,675
|
)
|
Unrealized
gain on
available-for-
sale
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(104
|
)
|
|
|
(104
|
)
|
Foreign
currency translation
adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,592
|
)
|
|
|
(1,592
|
)
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,371
|
)
|
|
Balance
at December 31, 2008
|
|
|
11,856,948
|
|
|
￦
|
6,487
|
|
|
￦
|
133,954
|
|
|
￦
|
(41,628
|
)
|
|
￦
|
-
|
|
|
￦
|
(13,406
|
)
|
|
￦
|
(2,219
|
)
|
|
￦
|
83,188
|
|
The
accompanying notes are integral part of these financial statements
.
Webzen Inc. and
subsidiaries
Consolidated
Statements of Changes in Stockholders
’
Equity
Years ended December
31, 2006, 2007 and 2008
(In
thousands of U.S. dollars, except number of shares)
|
(Note
3) (unaudited)
|
|
Common
Shares
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
(accumulated
deficit)
|
|
|
Loans
to
Employees
Related
to
Employee
Stock
Purchase
Plan
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
Income
(loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
12,492,689
|
|
|
$
|
5,140
|
|
|
$
|
105,901
|
|
|
$
|
(26,905
|
)
|
|
$
|
-
|
|
|
$
|
(5,380
|
)
|
|
$
|
(413
|
)
|
|
$
|
78,343
|
|
|
Treasury
stock purchase
|
|
|
(635,741
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,243
|
)
|
|
|
-
|
|
|
|
(5,243
|
)
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
243
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
243
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,080
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,080
|
)
|
|
Unrealized
gain on available-for-sale securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(84
|
)
|
|
|
(84
|
)
|
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,261
|
)
|
|
|
(1,261
|
)
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,425
|
)
|
|
Balance
at December 31, 2008
|
|
|
11,856,948
|
|
|
$
|
5,140
|
|
|
$
|
106,144
|
|
|
$
|
(32,985
|
)
|
|
$
|
-
|
|
|
$
|
(10,623
|
)
|
|
$
|
(1,758
|
)
|
|
$
|
65,918
|
|
The
accompanying notes are integral part of these financial statements
.
Webzen Inc. and
subsidiaries
Consolidated Statements of Cash
Flows
Years ended December
31, 2006, 2007 and 2008
(In
millions of Korean Won and in thousands of U.S.
dollars)
|
|
|
|
|
|
|
|
|
|
|
|
(Note
3)
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
(unaudited)
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
￦
|
(47,065
|
)
|
|
￦
|
(25,594
|
)
|
|
￦
|
(7,675
|
)
|
|
$
|
(6,080
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,871
|
|
|
|
5,441
|
|
|
|
4,899
|
|
|
|
3,882
|
|
|
Provision
for accrued severance benefits
|
|
|
2,483
|
|
|
|
1,287
|
|
|
|
1,592
|
|
|
|
1,261
|
|
|
Deferred
income taxes
|
|
|
4,777
|
|
|
|
2,209
|
|
|
|
12
|
|
|
|
9
|
|
|
Gain
on disposal of available-for-sale securities
|
|
|
(2,535
|
)
|
|
|
(3,755
|
)
|
|
|
(34
|
)
|
|
|
(27
|
)
|
|
Loss
on impairment of available-for-sale securities
|
|
|
-
|
|
|
|
-
|
|
|
|
3,883
|
|
|
|
3,077
|
|
|
Loss
(gain) on disposal of property and equipment
|
|
|
(115
|
)
|
|
|
(3,931
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Impairment
charges
|
|
|
-
|
|
|
|
-
|
|
|
|
505
|
|
|
|
400
|
|
|
Foreign
currency losses (gains)
|
|
|
111
|
|
|
|
(79
|
)
|
|
|
(2,216
|
)
|
|
|
(1,756
|
)
|
|
Loss
on valuation of available-for-sale securities
|
|
|
-
|
|
|
|
-
|
|
|
|
671
|
|
|
|
532
|
|
|
Gain
on valuation of derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
(145
|
)
|
|
|
(115
|
)
|
|
Others
|
|
|
214
|
|
|
|
(139
|
)
|
|
|
138
|
|
|
|
109
|
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
8
|
|
|
|
(262
|
)
|
|
|
1,041
|
|
|
|
825
|
|
|
Other
receivables
|
|
|
282
|
|
|
|
(208
|
)
|
|
|
(8,570
|
)
|
|
|
(6,791
|
)
|
|
Accounts
payable and accrued expenses
|
|
|
(1,572
|
)
|
|
|
806
|
|
|
|
(3,037
|
)
|
|
|
(2,407
|
)
|
|
Deferred
income
|
|
|
(797
|
)
|
|
|
4,716
|
|
|
|
(1,182
|
)
|
|
|
(937
|
)
|
|
Other
liabilities
|
|
|
85
|
|
|
|
117
|
|
|
|
68
|
|
|
|
54
|
|
|
Payment
of severance benefits
|
|
|
(988
|
)
|
|
|
(2,603
|
)
|
|
|
(3,112
|
)
|
|
|
(2,466
|
)
|
|
Others
|
|
|
581
|
|
|
|
(31
|
)
|
|
|
(754
|
)
|
|
|
(597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(38,660
|
)
|
|
|
(22,026
|
)
|
|
|
(13,916
|
)
|
|
|
(11,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in short-term financial instruments
|
|
|
(2,321
|
)
|
|
|
(2,715
|
)
|
|
|
(2,897
|
)
|
|
|
(2,296
|
)
|
|
Decrease
(increase) in restricted cash
|
|
|
166
|
|
|
|
(2,390
|
)
|
|
|
2,458
|
|
|
|
1,948
|
|
|
Acquisition
of available-for-sale securities
|
|
|
(16,280
|
)
|
|
|
(11,656
|
)
|
|
|
(19,181
|
)
|
|
|
(15,199
|
)
|
|
Proceeds
from sale of available-for-sale securities
|
|
|
21,360
|
|
|
|
17,651
|
|
|
|
9,194
|
|
|
|
7,286
|
|
|
Increase
in loans to employees
|
|
|
(1,405
|
)
|
|
|
(861
|
)
|
|
|
(714
|
)
|
|
|
(565
|
)
|
|
Decrease
in loans to employees
|
|
|
1,288
|
|
|
|
1,533
|
|
|
|
922
|
|
|
|
732
|
|
|
Purchase
of property, equipment and intangible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
(3,366
|
)
|
|
|
(1,502
|
)
|
|
|
(2,198
|
)
|
|
|
(1,742
|
)
|
|
Proceeds
from sale of property and equipment
|
|
|
1
|
|
|
|
7,625
|
|
|
|
194
|
|
|
|
154
|
|
|
Increase
in leasehold and other deposits
|
|
|
(1,479
|
)
|
|
|
(7,420
|
)
|
|
|
(52
|
)
|
|
|
(41
|
)
|
|
Decrease
in leasehold and other deposits
|
|
|
192
|
|
|
|
4,730
|
|
|
|
11,306
|
|
|
|
8,959
|
|
|
Increase
in capitalized software development cost
|
|
|
(1,851
|
)
|
|
|
-
|
|
|
|
(2,008
|
)
|
|
|
(1,593
|
)
|
|
Others,
net
|
|
|
121
|
|
|
|
-
|
|
|
|
108
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by investing activities
|
|
|
(3,574
|
)
|
|
|
4,995
|
|
|
|
(2,868
|
)
|
|
|
(2,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock, net
|
|
|
2
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
Increase
(decrease) in short-term borrowings, net
|
|
|
-
|
|
|
|
916
|
|
|
|
(1,192
|
)
|
|
|
(945
|
)
|
|
Acquisition
of treasury stock
|
|
|
(1,648
|
)
|
|
|
(9,443
|
)
|
|
|
(6,617
|
)
|
|
|
(5,243
|
)
|
|
Proceeds
from sale of treasury stock
|
|
|
-
|
|
|
|
14,166
|
|
|
|
-
|
|
|
|
-
|
|
|
Increase
in leasehold deposits received
|
|
|
-
|
|
|
|
100
|
|
|
|
34
|
|
|
|
27
|
|
|
Repayment
of leasehold deposits received
|
|
|
-
|
|
|
|
-
|
|
|
|
(972
|
)
|
|
|
(770
|
)
|
|
Repayment
of capital lease liability
|
|
|
-
|
|
|
|
(44
|
)
|
|
|
(51
|
)
|
|
|
(40
|
)
|
Webzen Inc. and
subsidiaries
Consolidated
Statements of Cash Flows
Years ended December
31, 2006, 2007 and 2008
(In
millions of Korean Won and in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
(Note
3)
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
(unaudited)
|
|
|
Loan
to employees related to employee stock purchase plan
|
|
|
279
|
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(1,367
|
)
|
|
|
5,756
|
|
|
|
(8,798
|
)
|
|
|
(6,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
548
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(43,601
|
)
|
|
|
(11,281
|
)
|
|
|
(25,034
|
)
|
|
|
(19,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
121,739
|
|
|
|
78,138
|
|
|
|
66,857
|
|
|
|
52,977
|
|
|
End
of year
|
|
￦
|
78,138
|
|
|
￦
|
66,857
|
|
|
￦
|
41,823
|
|
|
$
|
33,140
|
|
The
accompanying notes are integral part of these financial
statements.
Webzen Inc. and
subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007
and 2008
1.
Description of business
Webzen
Inc. is engaged in developing and distributing online games principally in the
Republic of Korea and in other countries within Asia. Webzen was incorporated on
April 28, 2000. Webzen' s principal game product "MU" is a three-dimensional
massive multi-player online role playing game (“MMORPG”) first introduced in May
2001. On November 14, 2006, Webzen released a three-dimensional MMORPG game
“SUN” in Korea.
Webzen
conducts its business within one industry segment – the business of developing
and distributing online game, software licensing and other related
services.
On May
21, 2003, the Company issued 2,880,000 shares of its common shares at
￦
10,667 per share
to the public through an initial public offering in the Republic of Korea, which
generated net proceeds of
￦
29,529 million.
The common stock of the Company was registered with the Korea Securities Dealers
Automated Quotations (“KOSDAQ”) on May 23, 2003.
On
December 16, 2003, the Company issued 8,700,000 American Depository Share
(“ADS”) representing 2,610,000 common shares at $11.17 per ADS to the public
through an initial public offering in the United States, which generated net
proceeds of
￦
109,799 million.
The ADS of the Company was registered with the National Association of
Securities Dealers Automated Quotation (“NASDAQ”) in the United States of
America on December 16, 2003.
2.
Significant accounting policies
Basis
of presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“US GAAP”). Significant accounting policies followed by the Company in the
preparation of the accompanying financial statements are summarized
below.
Principles
of consolidation
The
accompanying consolidated financial statements include the accounts of Webzen
and its subsidiaries (the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Use
of estimates
The
preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the accompanying consolidated financial statements and related
disclosures. Although these estimates are based on management’s best knowledge
of current events and actions that the Company may take in the future, actual
results could differ from these estimates.
Revenue
recognition
Revenue
recognition for games subscriptions
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
For the
online role playing game “MU”, online subscriptions typically involve prepaid
fees, which are deferred and recognized based upon their actual usage. These
subscriptions are typically short-term in nature, require no additional upgrades
and minor customer support.
For the
online role playing game “SUN” which was commercialized on November 14, 2006,
the Company started to apply a free-to-pay model. Under this model, players can
access the games free of charges but may purchase points for in-game premium
features. The distribution of points to the end users typically is paid by cell
phone or credit card. These payments are deferred when received and revenue is
recognized over the life of the premium features or as the premium features is
consumed.
Software
licensing
The
Company receives prepaid license fees in connection with its software licensing
business. These revenues are deferred and recognized over the license period,
including automatic renewal periods.
The
Company generally provides its licensees with minimal post-contract customer
support on its software products, consisting of access to a support hotline and
occasional unspecified upgrades, or enhancements, which typically occur within
one year of the beginning of the contract. The estimated costs of providing such
support are insignificant and sufficient vendor-specific evidence does not exist
to allocate the revenue from software and related integration projects to the
separate elements of such projects, therefore all license revenue is recognized
ratably over the life of the contract.
The
Company also receives royalty income from its licensees, based upon a percentage
of the licensees' revenue. The related royalty revenue is recognized on a
monthly basis, when the licensees confirm their sales activity for the prior
period.
The Company depends on two key products, “MU Online” and “Soul of
Ultimate Nation (SUN) Online”, for all of its revenues.
For the years ended December 31, 2006, 2007, and 2008, the Company
generated 100%, 74% and 66% of its total revenues from “MU Online”,
respectively. For the years ended December 31, 2006, 2007 and 2008, the Company
generated 0%, 26% and 34% of its total revenues from “Soul of Ultimate Nation
(SUN) Online”, respectively.
For the
year ended December 31, 2008, 84%, 10% and 6% of total revenues are from Korea,
Taiwan and China, respectively.
Cash
and cash equivalents
Cash
equivalents consist of highly liquid investments with an original maturity date
of three months or less.
Short-term
financial instruments
Short-term
financial instruments represent bank time deposits, with original maturities
greater than three months and less than one year. The carrying value of these
financial instruments approximates fair market value due to the current nature
of their maturities.
Restricted
cash
As of
December 31, 2007 and 2008, time deposits amounting to
￦
1,704 million and
￦
346 million,
respectively, have been pledged to guarantee loans made to certain employees for
the acquisition of stocks. The Company can not withdraw these bank time deposits
until the employees make full payment to the financial institutions of their
loans. As of December 31, 2007 and 2008, in connection with development of game,
bank time deposits of
￦
30 million
resulting from government grants is restricted for use only for the development
of “Huxley”. These amounts are included within financial instruments in the
accompanying consolidated balance sheets.
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
Available-for-sale
securities
On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 159,
The Fair Value Option
for Financial Assets and Financial Liabilities
(SFAS 159). The Company
has elected the fair value option for two of its investments in
available-for-sale securities that were acquired during the year ended December
31, 2008. Under the fair value option, unrealized gains and losses
related to this investment are reflected in the consolidated statements of
operations for the year ended December 31, 2008. The Company's
remaining investments in available-for-sale securities are accounted for as
available-for-sale securities pursuant to Statement of Financial Accounting
Standards No. 115,
Accounting
for Certain Investments in Debt and Equity Securities
(SFAS
115). The available-for-sale securities are reported on the
consolidated balance sheet at their estimated fair market values with any
changes in the estimated fair market values being recorded as a component of
accumulated other comprehensive income, net of tax. The adoption of
SFAS 159 did not impact retained earnings as of January 1,
2008. Investments in available-for-sale securities that were
previously classified as available-for-sale as of December 31, 2007 continue to
be classified as available-for-sale as of December 31, 2008.
Available-for-sale
securities with maturities less than twelve months are classified as current
assets on the consolidated balance sheet. Available-for-sale
securities with maturities greater than twelve months are classified as
non-current unless such securities are intended for use in current operations
and the Company has the ability to liquidate such securities prior to
maturity.
Accounting
for derivative instruments
The
Company applies the provisions of SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
(“SFAS 133”), as amended. This
Statement requires recognizing all derivative instruments as either assets or
liabilities measured at fair value.
Under the
provisions of SFAS 133, the Company may designate a derivative instruments as
hedging the exposure to variability in expected future cash flows that are
attributable to a particular risk (a “cash flow hedge”) or hedging the exposure
to changes in the fair value of an asset or a liability (a “fair value hedge”).
Special accounting for qualifying hedges allows the effective portion of a
derivative instrument’s gains and losses to offset related results on the hedged
item in the consolidated statements of operations and requires that a company
formally document, designate and assess the effectiveness of the transactions
that receive hedge accounting treatment. Both at the inception of a hedge and on
an ongoing basis, a hedge must be expected to be highly effective in achieving
offsetting changes in cash flows of fair value attributable to the underlying
risk being hedged. If the Company determines that a derivative instrument is no
longer highly effective as a hedge, it discontinues hedge accounting
prospectively and future changes in the fair value of the derivative are
recognized in current earnings. The Company assesses hedge effectiveness at the
end of year. The Company has not elected to designate any derivative instruments
as hedges for the years ended December 31, 2008.
In
accordance with SFAS 133, changes in the fair value of derivative instruments
that are cash flow hedges are recognized in accumulated other comprehensive
income (loss) and reclassified into earnings in the period in which the hedged
item affects earnings. Ineffective portions of a derivative instrument’s change
in fair value are immediately recognized in earnings. Derivative instruments
that
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
do not
qualify, or cease to qualify, as hedges must be adjusted to fair value and the
adjustments are recorded through net income.
Property
and equipment
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation
for building, equipment, furniture and fixtures, vehicles and purchased software
is computed using the straight-line method over the following estimated useful
lives.
|
Building
|
40
years
|
|
Computer
and equipment
|
3~5
years
|
|
Furniture
and fixtures
|
3~10
years
|
|
Vehicles
|
5
years
|
|
Software-externally
purchased
|
3~5
years
|
Leasehold
improvements are amortized on a straight-line basis over the shorter of the
estimated useful life of the assets, or the remaining lease term, whichever is
shorter.
Significant
renewals and additions are capitalized at cost. Maintenance and repairs are
charged to income as incurred.
As of
December 31, 2008, 85%, 13% and 2% of the Company's property and equipment are
located in Korea, Taiwan and China, respectively.
Accounting
for the impairment of long-lived assets
Long-lived
assets and intangible assets that do not have indefinite lives are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. When the aggregate future
cash flows (undiscounted and without interest changes) is less than the carrying
value of the asset, an impairment loss is recognized, based on the fair value of
the asset.
Capitalized
software development costs
The
Company capitalizes certain software development costs relating to online games
that will be distributed to consumers through subscriptions or licenses. The
Company accounts for software development in accordance with Statements of
Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed
. Software development
costs incurred prior to the establishment of technological feasibility are
expensed when incurred and are included in research and development expense.
Once a software product has reached technological feasibility, then all
subsequent software development costs for that product are capitalized until
that product is available for sale. Technological feasibility is evaluated on a
product-by-product basis, but typically occurs when the online game has a proven
ability to operate in a massively multi-player format.
After an
online game is released, the capitalized product development costs are amortized
to expense based on current and future revenue with an annual minimum equal to
the straight-line amortization over the remaining estimated economic life of the
game not exceeding three years. This expense is
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
recorded
as a component of cost of revenues. The amortization expense related to
capitalized software development costs was
￦
162 million,
￦
750 million and
￦750
million
during the years ended December 31, 2006, 2007 and 2008,
respectively.
For the
year ended December 31, 2006, SUN online game development cost amounting to
￦
2,098
million which was incurred during open beta test period was capitalized. SUN
online game was released on November 14, 2006 and, thereafter, amortized to
expense using the straight-line method over the estimated economic life of the
game.
For the
year ended December 31, 2008, HUXLEY online game development cost amounting to
￦
2,239
million which was incurred during open beta test period was capitalized. HUXLEY
online game is expected to be released in 2009.
The net
amount of capitalized software development costs was
￦
1,440 million and
￦
2,929
million at December 31, 2007 and 2008, respectively. These amounts
are included with other non-current assets on the consolidated balance
sheets.
The
Company evaluates the recoverability of capitalized software development costs
on a product-by-product basis. Capitalized costs for those products that are
cancelled are expensed in the period of cancellation. In addition, a charge to
cost of revenue is recorded when management's forecast for a particular game
indicates that unamortized capitalized costs exceed the net realizable value of
that asset.
Management
judgments and estimates are used in the assessment of when technological
feasibility is established, as well as in the ongoing assessment of the
recoverability of capitalized costs. Different estimates or assumptions could
result in different reported amounts of capitalized product development costs,
research and development expense, or cost of revenues. If a revised
game sales forecast is less than management's current game sales forecast, or if
actual game usage is less than management's forecast, the Company could record
charges to write-down software development costs previously
capitalized.
Research
and development expenses
Research
and development expenses consist primarily of payroll, depreciation expense,
other overhead expenses and the cost of equipment purchased for research and
development purpose.
In
February 2005, the Company entered into a worldwide publishing rights contract
for the online PC game APB with Real Time Worlds Ltd., (“RTW”) a company based
in Scotland. In June 2005, the Company entered into a worldwide publishing
rights contract for the console version (XBox 360) of the online game APB. In
addition, in January 2006, the Company entered into a worldwide publishing
rights contract for the online PC game T-project with Red5 Studios,
Inc.(“Red5”), a company based in United States of America. These contracts are
for five years after the games are commercialized, and the Company has agreed to
pay royalties for the exclusive world-wide distribution rights to the games.
According to the contracts, RTW and Red5 are to develop the game and transfer
the worldwide publishing rights to the Company in exchange for advance cash
payments to be made in quarterly
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
installments
and future royalty payments. If a marketable game is developed, the Company will
pay RTW and Red5 royalties based on certain percentage of revenues generated
from the games.
The
advance payments made by the Company will be used to offset against the future
royalty payments. For the years ended December 31, 2006, 2007 and 2008, the
Company paid
￦
11,156 million,
￦
13,894
million and
￦
9,166 million,
respectively, in accordance with the terms of the contract. These payments were
expensed and recorded as a research and development expense in the consolidated
statements of operations for the years ended December 31, 2006, 2007 and
2008.
In April
2008, the Company entered into a termination agreement with RTW to terminate the
aforementioned worldwide publishing rights contracts for the online PC game and
the console version (XBox 360) of the online game APB. According to this
agreement, the Company shall have no rights or licenses with respect to the game
APB and the Company shall be compensated with payment in cash on $10.4 million
before December 31, 2008 and 15% of cash receipt following commercial release of
the game APB for the first three years from commercial launch.
In June
and July 2008, according to this agreement the Company was compensated with
payment in cash on $2.9 million and $0.5 million, respectively. These amounts
were recorded as an offset to research and development expense in the
consolidated statement of operations. In addition, the Company
recorded the remaining amount owed to the Company under the agreement of $7.0
million as other receivables at December 31, 2008. This amount was
recorded as an offset of research and development expense in the consolidated
statement of operations. This receipt was collected on January 5, 2009
subsequently. The Company did not record any royalty income related to the 15%
of the revenue following commercial release as no such sales occurred as of
December 31, 2008.
In May
2009, the Company subsequently entered into an amendment of contract with Red5
to amend the aforementioned worldwide publishing rights contract for the online
PC game T-project. According to this contract, Red 5 will have rights
to publish the Game in the United States and Europe and pay 15% of the revenue
for 3 years and thereafter 10% of the revenue for 2 years to the Company. The
Company will have publishing rights in all of the countries throughout the world
other than those in the United States or Europe, paying 50% of revenue for 5
years to Red 5. The Company is not required to make any additional development
payment to Red 5.
Research
and development costs included in the cost of revenues for the years ended
December 31, 2006, 2007 and 2008 amounted to
￦
4,147 million,
￦
7,369
million and
￦
7,397 million,
respectively.
Advertising
The
Company expenses advertising costs as incurred. Advertising expense was
approximately
￦
8,898 million,
￦
2,271
million and
￦
3,824 million for
the years ended December 31, 2006, 2007 and 2008, respectively.
The
Company enters into marketing arrangements with independent distribution agents
to distribute its MU and SUN online game product to internet cafes in Korea.
Under the terms of these agreements, the Company remits monthly cash payments to
the agents based upon cash collections for the previous
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
month.
These agreements are typically 12 months in duration. The Company accounts for
the revenue from sales through its distribution agents at the gross sales price
and records a marketing expense, or sales commission, representing 23% for 2006
and 20% for 2007 and 2008 of the gross selling price in accordance with the
terms of the distribution agreement.
The
Company expenses advertising costs for participating in trade shows during the
period in which the show occurs. Expenses for advertising in online forums and
industry publications are expensed in the period when the advertising is
displayed. There were no significant advertising costs associated with online
promotions, website or magazine advertising, or alliances with internet service
providers.
Accrued
severance benefits
Employees
and directors with one year or more of service are entitled to receive a
lump-sum payment upon termination of their employment with the Company based on
the length of service and rate of pay at the time of termination. The annual
severance benefit expense charged to operations is calculated based upon the net
change in the accrued severance benefit payable at the balance sheet
date.
Lease
transactions
The
Company accounts for lease transactions as either operating leases or capital
leases, depending on the terms of the underlying lease agreement. Equipment
acquired under capital lease agreements, are recorded at cost as property and
equipment, and depreciated using the straight-line method over their estimated
useful lives. In addition, the aggregate lease payments are recorded as
obligations under capital leases, net of the portion interest which is
recognized over the lease period using the effective interest rate
method.
Vehicles,
housing and office space rented acquired under operating lease agreements are
not included in property and equipment. The related lease rentals are charged to
expense when incurred.
Foreign
currency translation
The
Company, including all of its subsidiaries, uses their local currencies as their
functional currencies. The financial statements of the subsidiaries are
translated into the Korean Won in accordance with Statements of Financial
Accounting Standards (“SFAS”) No.52,
Foreign Currency Translation
.
All the assets and liabilities are translated to the Korean Won at the
end-of-period exchange rates. Capital accounts are determined to be of a
permanent nature, are translated using historical exchange rates. Revenues and
expenses are translated using average exchange rates. Foreign currency
translation adjustments arising from differences in exchange rates from period
to period are included in the foreign currency translation adjustment account in
accumulated comprehensive income (loss) of shareholders’ equity.
Foreign
currency transactions
Gains and
losses resulting from foreign exchanges transactions are included in foreign
currency gains (losses) in other income (loss) in the accompanying consolidated
statement of operations.
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
Fair
values of financial instruments
The Company’s carrying amounts of
cash, cash equivalents, short-term financial instruments, receivables, accounts
payable and accrued liabilities approximate fair value because of the short
maturity of these instruments.
Stock-based
compensation
The
Company adopted SFAS No. 123(R),
Share-Based Payment
(“FAS
123(R)”) using the modified prospective method, which requires the application
of the accounting standard as of January 1, 2006. The Company’s
consolidated financial statements as of and for the year ended December 31,
2006 reflect the impact of adopting FAS 123(R). Under the modified
prospective method, compensation expense recognized includes the estimated
expense for stock options granted on and subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions
of FAS 123(R), and the estimated expense for options granted prior to, but not
vested as of January 1, 2006, based on the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123
Accounting for Stock-Based
Compensation
(“FAS 123”). In accordance with the modified prospective
method, the consolidated financial statements for prior periods have not been
restated to reflect, and do not include, the impact of FAS 123(R).
The
Company uses a Black-Scholes model to determine the fair value of equity-based
awards at the date of grant. Compensation cost for stock option grants are
measured at the grant date based on the fair value of the award and recognized
over the service period, which is usually the vesting period. As stock-based
compensation expense recognized in the consolidated statement of operations for
the years ended December 31, 2007 and 2008 are based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. The Company
estimates forfeitures at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. For the
periods prior to 2006, the Company accounted for forfeitures as they occurred
under FAS 123.
Income
taxes
The
Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes
(“FAS 109”). Under FAS 109, income taxes are accounted for under the
asset and liability method. Deferred taxes are determined based upon differences
between the financial reporting and tax bases of assets and liabilities at
currently enacted statutory tax rates for the years in which the differences are
expected to reverse. A valuation allowance is provided on deferred tax assets to
the extent that it is more likely than not that such deferred tax assets will
not be realized. The total income tax provision includes current tax expenses
under applicable tax regulations and the change in the balance of deferred tax
assets and liabilities.
On
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) issued interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income
Taxes
—
an interpretation
of FASB Statement No. 109
, which prescribes a recognition threshold
and measurement attribute for tax positions taken or expected to be taken in a
tax return. This interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The evaluation of a tax position in accordance with
this interpretation is a two-step process. In the first step, recognition, the
Company determines whether it is more-likely-than-not that a tax position will
be sustained upon examination, including resolution of any related appeals
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
or
litigation processes, based on the technical merits of the position. The second
step addresses measurement of a tax position that meets the more-likely-than-not
criteria.
The tax
position is measured at the largest amount of benefit that has a cumulative
likelihood of greater than 50 percent of being realized upon ultimate
settlement. Differences between tax positions taken in a tax return and amounts
recognized in the financial statements will generally result in (a) an
increase in a liability for income taxes payable or a reduction of an income tax
refund receivable, (b) a reduction in a deferred tax asset or an increase
in a deferred tax liability or (c) both (a) and (b). Tax positions
that previously failed to meet the more-likely-than-not recognition threshold
should be recognized in the first subsequent financial reporting period in which
that threshold is met. Previously recognized tax positions that no longer meet
the more-likely-than-not recognition threshold should be de-recognized in the
first subsequent financial reporting period in which that threshold is no longer
met. Use of a valuation allowance as described in FAS 109 is not an appropriate
substitute for the de-recognition of a tax position. The requirement to assess
the need for a valuation allowance for deferred tax assets based on sufficiency
of future taxable income is unchanged by this interpretation.
Reclassifications
Certain
amounts in the 2006 and 2007 consolidated financial statements have been
reclassified to conform to 2008 presentation.
Earnings
per share
Basic
earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for all
periods. Diluted earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding, increased by
common stock equivalents. Common stock equivalents are calculated using the
treasury stock method and represent incremental shares issuable upon exercise of
the Company’s outstanding stock options. However, potential common shares are
not included in the denominator of the diluted earnings per share calculation
when inclusion of such shares would be anti-dilutive, such as in a period in
which a net loss is recorded.
Recent
accounting pronouncements
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (revised 2007), “
Business
Combinations
”
(“SFAS 141R”). SFAS
141R establishes principles and requirements for how an acquirer in a business
combination should recognize and measure identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of their first annual reporting period beginning on or
after December 15, 2008.
In
December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in
Consolidated Financial Statements –An amendment of ARB No. 51”
(“SFAS
160”). SFAS 160 requires that ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled and presented in
the consolidated statement of financial position within equity, but separate
from the parent’s equity. It also requires companies to clearly identify and
present on the face of the consolidated statement of income, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest.
SFAS 160
is effective for fiscal years, and interim periods within those
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
fiscal
years, beginning on or after December 15, 2008 and will be applied prospectively
to all noncontrolling interests, including any that arose prior to the effective
date. The Company assesses the impact by the initial adoption of SFAS 160 and
believes that the initial adoption of SFAS 160 will not have a material impact
on the Company’s financial position and results of operations.
In March
2008, the FASB issued SFAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities–An Amendment of FASB Statement No.
133
” (“SFAS 161”). The new standard is intended to help investors better
understand how derivative instruments and hedging activities affect an entity’s
financial position, financial performance and cash flows through enhanced
disclosure requirements. The enhanced disclosures include the
following:
|
|
•
|
a
tabular summary of the fair values of derivative instruments and their
gains and losses;
|
|
|
•
|
disclosure
of derivative features that are credit-risk-related to provide more
information regarding an entity’s liquidity;
and
|
|
|
•
|
cross-referencing
within footnotes to make it easier for financial statement users to locate
important information about derivative
instruments.
|
SFAS 161
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged.
The Company is currently in the process of evaluating the impact, if any, of
adopting this standard.
In April
2008, the FASB issued FSP FAS 142-3, “
Determination of the Useful Life of
Intangible Assets
.” FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “
Goodwill and Other Intangible
Assets
.” FSP FAS 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. The Company is currently in the process of evaluating the impact,
if any, of adopting this FSP.
3.
Convenience Translation into United States Dollar Amounts
The
Company reports its consolidated financial statements in the Korean Won. The
United States dollar ("US dollar") amounts disclosed in the accompanying
financial statements are presented solely for the convenience of the reader, and
have been converted at the rate of 1,262.0 Korean Won to one US dollar, which is
the noon buying rate of the US Federal Reserve Bank of New York in effect on
December 31, 2008. Such translations should not be construed as representations
that the Korean Won amounts represent, have been, or could be, converted into,
United States dollars at that or any other rate. The US dollar amounts are
unaudited and are not presented in accordance with generally accepted accounting
principles either in Korea or the United States of America.
4.
Available-for-sale securities
The cost,
gross unrealized gains and fair value of available-for-sale securities as of
December 31, 2007 and 2008 are as follows:
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
|
(In
millions of Korean Won)
|
|
Cost
or
carrying
value
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
As
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
￦
|
167
|
|
|
￦
|
1,308
|
|
|
￦
|
-
|
|
|
￦
|
1,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficiary
certificates
|
|
￦
|
3,995
|
|
|
￦
|
35
|
|
|
￦
|
386
|
|
|
￦
|
3,644
|
|
|
Beneficiary
certificates (accounted for at fair value under
SFAS
159)
|
|
|
1,476
|
|
|
|
-
|
|
|
|
671
|
|
|
|
805
|
|
|
Equity
securities (fair market value)
|
|
|
667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
667
|
|
|
|
|
|
6,138
|
|
|
|
35
|
|
|
|
1,057
|
|
|
|
5,116
|
|
|
Non-current
portion of available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
167
|
|
|
|
1,542
|
|
|
|
-
|
|
|
|
1,709
|
|
|
|
|
￦
|
6,305
|
|
|
￦
|
1,577
|
|
|
￦
|
1,057
|
|
|
￦
|
6,825
|
|
The
current investment in equity securities are comprised of 2,300,000 shares of
NeoWave Inc. The Company owns 5.94% of shares of NeoWave Inc. as of December 31,
2008. The non-current investment in equity securities are comprised of 1,000
shares of GameOn Co., Ltd. The Company owns 1.01% and 1.00% of shares of GameOn
Co., Ltd. as of December 31, 2007 and 2008, respectively.
The
original cost of the investment in NeoWave Inc. securities was
￦
4,550
million when the Company acquired the securities in February 2008. During 2008,
the Company concluded that the fair market value of NeoWave Inc. securities was
significantly less than the original cost. In addition, the Company
concluded that it was unlikely to recover the original cost of the NeoWave Inc.
investment at any time in the foreseeable future. Accordingly, as of December
31, 2008, the Company recorded an other-than-temporary loss on the investment in
NeoWave Inc. securities of
￦
3,883
million, which represents the difference between cost and fair market value at
December 31, 2008.
The
current investment in beneficiary certificates represents equity interests in a
fund that is comprised of bonds, marketable equity securities and trust funds as
of December 31, 2008. The fair value of bonds is derived based on quoted prices
in active markets, the fair value of marketable securities is derived based on
quoted prices in active exchange markets and the fair value of trust funds is
derived based on quoted prices in markets that are not active or other inputs
that are observable.
The Company has invested
in multiple beneficiary certificates. Two of these beneficiary certificates
contain embedded derivatives.
The Company has determined that
it is not practical to bifurcate the embedded derivative and account for
separately. Pursuant to SFAS 159, the Company has elected the fair
value option to account for these two beneficiary
certificates. Accordingly, the entire change in estimated fair value
of the two beneficiary certificates
that
contain embedded derivatives is
included in other expense on the
consolidated statement of operations for the year ended December 31,
2008.
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
The
Company classified the investment in equity securities and beneficiary
certificates other than the investment of GameOn Co., Ltd as the current
investment as those securities are intended for use in current operations and
the Company has the ability to liquidate such securities within one year of the
balance sheet date. The Company has held the securities of GameOn
Co., Ltd for several years and does not have any intention to sell this
investment within a year from the balance sheet date.
Unrealized
gains on the available-for-sale securities, net of tax, included in accumulated
comprehensive income were
￦
948 million and
￦
1,229
million at December 31, 2007 and 2008, respectively. The deferred
income tax liability amounts related to these unrealized gains were
￦
360 million and
￦
348 million
at December 31, 2007 and 2008, respectively.
The
Company sold securities of NeoWave Inc. investment in 2008 and sold out certain
portions of beneficiary certificate in 2007 and 2008. Proceeds from the sales of
available-for-sale securities were
￦
21,360 million,
￦
17,651
million and
￦
9,194 million in
2006, 2007 and 2008, respectively. The gain on disposal of available-for-sale
securities in 2006, 2007 and 2008 were
￦
2,535 million,
￦
3,755
million and
￦
35 million,
respectively, and loss on disposal of available-for-sale securities in 2008 were
￦
1 million.
These gains and losses were determined based on the average cost
method.
5.
Property and equipment, net
Property
and equipment as of December 31, 2007 and 2008 are as follows:
|
(In
millions of Korean Won)
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
￦
|
1,514
|
|
|
￦
|
1,514
|
|
|
Building
|
|
|
3,363
|
|
|
|
3,363
|
|
|
Computer
and equipment
|
|
|
18,487
|
|
|
|
16,564
|
|
|
Furniture
and fixtures
|
|
|
3,314
|
|
|
|
3,185
|
|
|
Vehicles
|
|
|
72
|
|
|
|
103
|
|
|
Software-externally
purchased
|
|
|
6,505
|
|
|
|
8,478
|
|
|
|
|
|
33,255
|
|
|
|
33,207
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
(22,108
|
)
|
|
|
(24,098
|
)
|
|
|
|
￦
|
11,147
|
|
|
￦
|
9,109
|
|
Depreciation
and amortization expense for the years ended December 31, 2006, 2007 and 2008,
were
￦
5,687
million,
￦
4,670 million and
￦
4,085
million, respectively. The expected future amortization expense of externally
purchased software for 2009, 2010, 2011, 2012 and 2013 is
￦
1,099 million,
￦
507 million,
￦
251 million,
￦
194 million
and
￦
20
million, respectively.
6.
Impairment charges
During
the year ended December 31, 2008, the Company recorded an impairment charge of
￦
505 million
for the leasehold improvements, equipment and certain other assets at its
subsidiaries located
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
in China
and United States. The Company concluded that these assets were impaired as
there had been no revenue activities at these subsidiaries and that there
are no other alternative uses for these assets.
7.
Derivatives
During
2008, the Company entered into a trading-purpose option contract related to the
investment in NeoWave Inc. securities (see note 4) as of December 31, 2008.
According to the terms of this contract, the put option allows the Company to
sell NeoWave Inc. securities to a counterparty at
￦
2,000 per share
for 1,800,000 shares, and the call option allows for the same counterparty to
buy NeoWave Inc. securities from the Company at
￦
2,100 per share
for 1,800,000 shares. The estimated fair value of these derivatives
related to this contract is as follows:
|
(In
millions of Korean Won)
|
|
Fair
value
|
|
Put-option
|
|
￦
145
|
|
Call-option
|
|
-
|
|
Total
|
|
￦
145
|
In March
2009, the Company exercised this put option and according to the terms of this
contract, call option was expired upon this exercise.
8.
Fair value of financial instruments
The Company adopted
Statement of Financial Accounting
Standards No. 157,
Fair Value
Measurements
(
SFAS 157
)
effective January 1, 2008, for all
financial assets and liabilities as required.
The adoption of SFAS 157 was not
material
to the
Company
’
s financial position or results of
operations.
As discussed in Note 2, the Company
adopted SFAS 159, which
permits entities to choose to measure
financial instruments
and certain other items at fair value
and consequently report unrealized
gains and losses on these items in
earnings. SFAS 159 was
effective for the Company
’
s fiscal year beginning January 1, 2008.
The Company has elected the fair value option to measure
one of its investments in
available-for-sale securities
.
The estimated f
air value of financial
assets
is determined by the Company, using
available market information and
valuation
methodologies considered to be
appropriate. However, considerable judgment is required in interpreting market
data to develop the estimates of fair
value.
The following methods and assumptions
were used to estimate the fair value of each class of significant financial
assets and financial
liabilities
:
|
(i)
|
Cash and cash equivalents,
short-term financial instruments, accounts receivable and accounts
payable
|
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
The carrying amount approximates fair
value because of the short maturit
ies
of these
balances
.
|
(ii)
|
Available-for-sale
securities
|
The fair
value of market traded investments such as listed company’s stocks, public bonds
and other marketable securities are based on quoted market prices for those
investments.
|
(iii)
|
Available-for-sale securities
with an embedded derivative
feature
|
The
investment in beneficiary certificates represents equity interests in a fund
that is comprised of bonds and trust funds as of December 31, 2008. The fair
value of bonds is derived based on quoted prices in active markets, and the fair
value of trust funds is derived based on quoted prices in markets that are not
active or other inputs that are observable. The trust fund portion of this
investment contains an embedded derivative. The Company has
determined that it is not practical to bifurcate the embedded derivative and
account for separately. Pursuant to SFAS 159, the Company has elected
the fair value option to account for this investment. Accordingly,
the entire change in estimated fair value in the beneficiary certificates is
included in the consolidated statement of operations.
The fair value of derivatives is
estimated based on pricing models usin
g
current market rates
,
records
and
other inputs that are
observable.
The
Company’s financial assets and liabilities are valued utilizing the market
approach to measure fair value. The market approach uses prices and other
relevant information generated by market transactions involving identical or
comparable assets or liabilities. The standard describes a fair value hierarchy
based on three levels of inputs that may be used to measure fair value which are
the following:
|
-
Level 1—
|
Quoted
prices in active exchange markets involving identical assets or
liabilities.
|
|
-
Level 2—
|
Inputs
other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of
the assets or liabilities.
|
|
-
Level 3—
|
Unobservable
inputs for the asset or liability, either directly or indirectly, and
management assessments and inputs using a binomial lattice model as the
valuation technique.
|
The
following table summarizes the Company’s financial assets and liabilities
measured at fair value
on a
recurring basis in accordance with FAS 157 and FAS 159 as of
December 31, 2008:
|
(In
millions of Korean Won)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities, including current portion
|
|
|
2,376
|
|
|
|
4,449
|
|
|
|
-
|
|
|
|
6,825
|
|
|
Derivatives
|
|
|
-
|
|
|
|
145
|
|
|
|
-
|
|
|
|
145
|
|
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
9.
Accrued severance benefits
Accrued
severance benefits as of December 31, 2007 and 2008 are as follows:
|
(In
millions of Korean Won)
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
￦
|
5,774
|
|
|
￦
|
4,458
|
|
|
Provisions
for severance benefits
|
|
|
1,287
|
|
|
|
1,666
|
|
|
Severance
payments
|
|
|
(2,603
|
)
|
|
|
(3,112
|
)
|
|
Balance
at end of year
|
|
￦
|
4,458
|
|
|
￦
|
3,012
|
|
It is
estimated that no health and welfare benefits will be paid over the next ten
years upon employees normal retirement ages.
10.
Commitments and contingencies
The
Company rents vehicles, housing and office space under operating leases, which
expire at various dates through 2011.
Future
minimum lease payments for all operating leases at December 31, 2008, are as
follows:
(In
millions of Korean Won)
|
2009
|
|
￦
|
752
|
|
|
2010
|
|
|
433
|
|
|
2011
|
|
|
14
|
|
|
|
|
￦
|
1,199
|
|
Rent
expense incurred was approximately
￦
1,527 million,
￦
1,502
million and
￦
1,768 million for
the years ended December 31, 2006, 2007 and 2008, respectively.
During
2007, the Company entered into capital lease agreements related to equipment.
The assets and liabilities under the capital leases were
￦
171 million at the
inception of the leases which represented the present value of the minimum lease
payments over the lease term. The Company’s depreciation expense, with respect
to the above lease agreements, was
￦
39 million and
￦
47 million
for the years ended December 31, 2007 and 2008, respectively.
Future
minimum lease payments under capital lease agreements as of December 31, 2008
are as follows:
|
(In
millions of Korean won)
|
|
Minimum
lease payments
|
|
|
Interest
|
|
|
Lease
liabilities
(Present
value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
￦
|
58
|
|
|
￦
|
3
|
|
|
￦
|
55
|
|
|
From
one year to three years
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
|
|
|
￦
|
80
|
|
|
￦
|
3
|
|
|
￦
|
77
|
|
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
The
Company entered into a stand-by Letter of credit agreement with a financial
institution, which is effective until December 18, 2009. The
financial institution provided a guarantee on borrowings by the Company’s Taiwan
subsidiary of up to $660 thousand.
There are
no amounts outstanding under the letter of credit agreement as of December 31,
2008.
As of
December 31, 2007, the Company was a defendant in two lawsuits claiming damages
for breach of contract as a result of two contracts in which the Company had
been a party. On May 7, 2009, the court returned a verdict against the
plaintiffs. The aggregated claims amount to approximately
￦
6,500 million and
the Company expects the plaintiffs to appeal the cases to the higher court.
Although there can be no assurance as to the outcome, the Company’s management
does not expect that the outcome in the above legal proceedings and claims,
individually or collectively, will have a material adverse effect on the
Company’s financial condition, results of operations or cash flows.
As of
December 31, 2008, the Company is authorized to issue 40,000,000 shares, par
value
￦
500
per share, in registered form, which consists of common shares, non-voting
preferred shares and common shares convertible into non-voting preferred shares.
The Common shares are convertible at a rate of common share for preferred share.
Under the articles of incorporation, holders of non-voting preferred shares are
entitled to dividends of 3% or more of the par value, the actual dividend rate
to be determined by the Company's board of directors at the time of issuance. In
addition, the Company is authorized to issue the non-voting preferred shares up
to 50% of the issued common shares and to issue convertible shares up to 50% of
the issued common shares, less issued preferred shares.
All of
the outstanding shares are fully paid and are in registered form. No non-voting
preferred shares or convertible common shares were issued or outstanding as of
December 31, 2008.
On
February 2, 2006, September 4, 2006 and September 21, 2007, the Company issued
1,000 common shares, 1,000 common shares and 2,000 common shares at
￦
1,394 per share to
the Company’s employees who exercised stock options which were granted on July
10, 2002.
As of
December 31, 2008, the Company provided
￦
346 million of its
short-term financial instruments to banks as collateral for the employees'
borrowings. The guarantees were given pursuant to the Company's employee stock
purchase plan and the acquisition of stocks. The Company cannot withdraw the
collateralized financial instruments until the employees' make full payment of
their loans.
Dividends
Dividends
are generally proposed based on each year’s earnings and are declared, recorded
and paid in the subsequent year. In 2006, 2007 and 2008, the Company did not
declared dividends.
Accumulated
deficit
Accumulated
deficit consists of the following as of December 31, 2007 and 2008:
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
|
(In
millions of Korean Won)
|
|
2007
|
|
|
2008
|
|
|
Appropriated
retained earnings
|
|
|
|
|
|
|
|
Legal
reserve
|
|
￦
|
322
|
|
|
￦
|
322
|
|
|
Reserve
for business rationalization
|
|
|
118
|
|
|
|
118
|
|
|
Reserve
for small and medium size enterprise investment
|
|
|
443
|
|
|
|
443
|
|
|
Accumulated
deficit before disposition
|
|
|
(34,836
|
)
|
|
|
(42,511
|
)
|
|
|
|
￦
|
(33,953
|
)
|
|
￦
|
(41,628
|
)
|
The
Commercial Code of the Republic of Korea requires the Company to appropriate a
portion of retained earnings as a legal reserve in an amount equal to a minimum
of ten percent of its cash dividends until such reserve equals 50% of its
capital stock. The reserve is not available for dividends, but may be
transferred into capital stock through an appropriate resolution by the
Company’s Board of Directors or used to reduce accumulated deficit, if any,
through an appropriate resolution by the Company’s stockholders.
Pursuant
to the Special Tax Treatment Control Law of Korea, the Company was required to
appropriate, as a reserve for business rationalization, amounts equal to the tax
reductions arising from tax exemptions and tax credits. This reserve was not
available for payment of cash dividends, but may be transferred into capital
stock through an appropriate resolution by the Company’s Board of Directors or
used to reduce accumulated deficit, if any, through an appropriate resolution by
the Company’s stockholders. Effective for fiscal years beginning January 1,
2002, the Special Tax Treatment Control Law of Korea was amended and, subject to
an appropriate resolution by the Company's stockholders, this reserve became
available for payment of cash dividends.
Pursuant
to the Korean tax laws, when determining taxable income, small and medium sized
companies, such as the Company, are eligible to claim a tax deduction for the
amounts of retained earnings appropriated to reserves. These amounts are not
available for dividends until they are used for the specified purposes or
reversed.
During
2005, the Company established a treasury stock fund of
￦
9,000 million
according to the resolution of its board of directors on April 14, 2005. During
2008, the Company renewed the contract amounts of this fund up to
￦
6,319 million. The
Company acquired 86,951 shares at an aggregate cost of
￦
1,648 million,
755,616 shares at an aggregate cost of
￦
9,443 million and
635,741 shares at an aggregate cost of
￦
6,617 million
during 2006, 2007 and 2008, respectively, on the open market or through the
trust funds. The Company disposed of 1,033,654 shares of treasury stock at an
aggregate proceeds of
￦
14,166 million
during 2007, resulting in decrease in additional paid-in capital amounting to
￦
2,725
million. There was no disposal of treasury stock during 2008.
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
13.
Stock purchase option plan
On July
10, 2002, the Company’s shareholders approved the stock purchase option plan
(the “Plan”). The Plan provides for the grant of incentive stock options to
employees and directors. Additionally, the total number of options may not
exceed 15% of the total number of the Company's issued shares. On July 10, 2002,
January 20, 2005, April 14, 2005, April 12, 2006, July 18, 2007 and October 12,
2007, the Company granted certain employees options to purchase 14,000 shares of
the Company’s common stock at an exercise price of
￦
1,394 per share,
118,800 shares at an exercise price of
￦
24,100, 24,500
shares at an exercise price of
￦
24,100, 41,000
shares at an exercise price of
￦
24,100, 114,000
shares at an exercise price of
￦
16,000 and 77,000
shares at an exercise price of
￦
14,000,
respectively. During 2005, 2006 and 2007, options were granted with exercise
prices of not less than the fair market value of the common shares on the grant
date.
The fair
value of the options at the date of the grant is estimated using the
Black-Sholes option pricing model. In accordance with the Plan, options are
vested at the conclusion of three years (two years for options granted in 2006
and 2007) of continued employment. Upon vesting, options
are exercisable between
three to six years (two to four years for options granted in 2006 and 2007) from
the grant date.
The
following table summarizes the stock options activity under the
Plan:
|
|
|
Weighted-Average
Number of Stock Options
|
|
|
Weighted
Average Exercise Price Per Share
|
|
|
Weighted
Average Fair Value of Shares Granted
|
|
|
(in
Korean Won, except number of stock options data)
|
|
|
|
|
|
|
|
|
|
|
Stock
options outstanding as of December 31, 2006
|
|
|
128,300
|
|
|
￦
|
23,746
|
|
|
￦
|
9,907
|
|
|
Options
granted
|
|
|
191,000
|
|
|
|
15,194
|
|
|
|
5,690
|
|
|
Options
exercised
|
|
|
(2,000
|
)
|
|
|
1,394
|
|
|
|
27,682
|
|
|
Options
canceled/forfeited
|
|
|
(60,500
|
)
|
|
|
22,895
|
|
|
|
9,412
|
|
|
Stock
options outstanding as of December 31, 2007
|
|
|
256,800
|
|
|
￦
|
17,760
|
|
|
￦
|
6,749
|
|
|
Options
granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Options
canceled/forfeited
|
|
|
(24,000
|
)
|
|
|
16,338
|
|
|
|
6,927
|
|
|
Stock
options outstanding as of December 31, 2008
|
|
|
232,800
|
|
|
￦
|
17,906
|
|
|
￦
|
6,731
|
|
As of
December 31, 2008, the weighted-average remaining contractual life of
outstanding options was 1.65 years.
The
entire award vests at the end of three years (two years for options granted in
2006 and 2007) from the grant date. Generally, options
granted in 2005 become exercisable in
periodic installments, with
50% of options exercisable for
one
year fro
m the third anniversary of the grant
date a
nd the rest 50% of
options for
one
year from the fourth anniversary of the
grant date. Of the options granted on April 14, 2005, 7,500 options are fully
exercisable from April 14, 2008 to April 13, 2009. In additi
on, options granted in 2006 and 2007
become exercisable in periodic installments, with
50% of options
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
exercisable for
one
year from the second anniversary of the
grant date a
nd the rest 50%
of options for
one
year from the third anniversary of the
grant da
te.
The total
compensation expenses relating to the remaining stock options of
￦
1,303 million, are
recognized over the remaining vesting period on a straight line basis. For the
years ended December 31, 2006, 2007 and 2008, the Company recognized a
compensation expense of
￦
277 million,
￦
163 million and
￦
307 million,
respectively, for the shares granted. There were 40,650 exercisable options at
December 31, 2008.
The fair
value for each option was estimated at the grant date, using a Black-Scholes
option pricing model, with the following assumptions:
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
0%
|
|
|
0%
|
|
Risk-free
interest rate
|
|
|
4.85%
|
|
|
5.43%
|
|
Expected
volatility
|
|
|
55.56%
|
|
|
56.21%
|
|
Expected
life (in years from vesting)
|
|
2.5
years
|
|
2.5
years
|
|
Expected
forfeitures
|
|
|
41%
|
|
|
42%
|
|
Fair
value of stock
|
|
￦
|
24,700
|
|
￦
|
14,868
|
Expected
volatilities are based on historical volatility of the Company’s
stock.
14.
Income taxes
Income
tax expense consists of the following:
|
(In
millions of Korean Won)
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
￦
|
-
|
|
|
￦
|
-
|
|
|
￦
|
63
|
|
|
Foreign
|
|
|
325
|
|
|
|
370
|
|
|
|
727
|
|
|
|
|
|
325
|
|
|
|
370
|
|
|
|
790
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
4,777
|
|
|
|
2,209
|
|
|
|
12
|
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
4,777
|
|
|
|
2,209
|
|
|
|
12
|
|
|
Total
income tax expense
|
|
￦
|
5,102
|
|
|
￦
|
2,579
|
|
|
￦
|
802
|
|
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
The tax effects of temporary differences
that give rise to significant portions of the def
erred income tax assets and deferred
income tax
liabilities at
December 31, 200
7
and 200
8
are as follows:
|
(In
millions of Korean Won)
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Current
deferred income tax assets (liabilities)
|
|
|
|
|
|
|
|
Allowance
for accounts receivable
|
|
￦
|
500
|
|
|
￦
|
197
|
|
|
Deferred
income
|
|
|
249
|
|
|
|
194
|
|
|
Available-for-sale
securities
|
|
|
(360
|
)
|
|
|
1,024
|
|
|
Income
tax loss carryforward
|
|
|
673
|
|
|
|
2,686
|
|
|
Other
|
|
|
49
|
|
|
|
(227
|
)
|
|
Total
gross current deferred income tax assets
|
|
|
1,111
|
|
|
|
3,874
|
|
|
Less
valuation allowance
|
|
|
(1,111
|
)
|
|
|
(3,874
|
)
|
|
Net
current deferred income tax assets
|
|
￦
|
-
|
|
|
￦
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
deferred income tax assets (liabilities)
|
|
|
|
|
|
|
|
|
|
Deferred
income
|
|
￦
|
153
|
|
|
￦
|
137
|
|
|
Available-for-sale
securities
|
|
|
-
|
|
|
|
(339
|
)
|
|
Accrued
severance benefits
|
|
|
941
|
|
|
|
497
|
|
|
Property
and equipment
|
|
|
(128
|
)
|
|
|
19
|
|
|
Research
and development costs
|
|
|
11,162
|
|
|
|
8,997
|
|
|
Income
tax loss carryforward
|
|
|
14,670
|
|
|
|
14,695
|
|
|
Other
|
|
|
483
|
|
|
|
563
|
|
|
Total
gross non-current deferred income tax assets
|
|
|
27,281
|
|
|
|
24,569
|
|
|
Less
valuation allowance
|
|
|
(27,281
|
)
|
|
|
(24,569
|
)
|
|
Net
non-current deferred income tax assets
|
|
￦
|
-
|
|
|
￦
|
-
|
|
Deferred
income tax assets are recognized only to the extent that realization of the
related tax benefit is more likely than not. Realization of the future tax
benefits related to the deferred tax assets is dependent on many
factors
, including the Company’s
ability to generate taxable income within the period during which the temporary
differences reverse, the outlook for the Korean economic environment, and the
overall future industry outlook. Management periodically considers these factors
in reaching its conclusion.
As of
December 31, 2007 and 2008, the Company recognized full valuation allowances for
the net deferred tax assets as the management determined that it would not be
able to realize these assets based on Webzen
and
its subsidiaries’ historical
and projected net and taxable income.
As of
December
31, 2008, Webzen
and its subsidiaries had available net operating loss carryforwards of
￦
71,597 million to
offset future taxable income which expire in varying amounts from 2010 to 2013,
except
￦
10,221 million
from subsidiary in the United States which expire in from 2025 to
2028.
The tax
effects of temporary differences which are directly related to shareholders'
equity amounted to
￦
2,209 million and
￦
12 million
as of December 31, 2007 and 2008, respectively.
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
The
statutory income tax rate, including tax surcharges, applicable to the Company
was approximately 27.5%.
In 2008,
the corporate income tax rate was reduced. The Company is subject to corporate
tax rates of 24.20% in 2009 and 22.00% in 2010 and thereafter. Accordingly,
deferred income taxes as of December 31, 2008 were calculated based on the rates
of 24.20% and 22.00% for the amounts expected to be realized during the fiscal
year 2009 and thereafter, respectively.
A
reconciliation of income tax expenses at the Korean statutory income tax rate to
actual income tax expenses are as follows:
|
(In
millions of Korean Won)
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) at Korean statutory tax rate
|
|
￦
|
(11,684
|
)
|
|
￦
|
(6,396
|
)
|
|
￦
|
(1,932
|
)
|
|
Nondeductible
items
|
|
|
(361
|
)
|
|
|
(1,744
|
)
|
|
|
606
|
|
|
Change
in statutory tax rate
|
|
|
–
|
|
|
|
–
|
|
|
|
1,284
|
|
|
Change
in valuation allowances
|
|
|
16,548
|
|
|
|
10,223
|
|
|
|
51
|
|
|
Foreign
tax credit
|
|
|
361
|
|
|
|
369
|
|
|
|
726
|
|
|
Others
|
|
|
238
|
|
|
|
127
|
|
|
|
67
|
|
|
Total
income tax expense
|
|
￦
|
5,102
|
|
|
￦
|
2,579
|
|
|
￦
|
802
|
|
The
Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”)
Accounting for Uncertainty in
Income Taxes
—an interpretation of SFAS No. 109, on January 1,
2007. The Company did not have any unrecognized tax benefits at December 31,
2007 and there has been no changes during the year ended December 31,
2008.
The
Company is subject to taxation in the Republic of Korea, its major tax
jurisdiction. The Company’s tax year for 2008 is subject to examination by the
tax authorities.
The
Company’s policy is to record any penalties associated with uncertain tax
positions as income tax expense in the statement of income.
15.
Earnings per share
The
components of basic and diluted earnings per share were as follows:
(In
millions of Korean Won, except number of common shares and per share
amounts)
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Net
loss available for common
|
|
|
|
|
|
|
|
|
|
|
stockholders
(A)
|
|
￦
|
(47,065
|
)
|
|
|
(25,594
|
)
|
|
|
(7,675
|
)
|
|
Weighted
average outstanding shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
common stock (B)
|
|
|
12,233,204
|
|
|
|
12,319,347
|
|
|
|
11,982,216
|
|
|
Common
stock and common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
(C)
|
|
|
12,233,204
|
|
|
|
12,319,347
|
|
|
|
11,982,216
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(A/B)
|
|
￦
|
(3,847
|
)
|
|
￦
|
(2,078
|
)
|
|
￦
|
(641
|
)
|
|
Diluted
(A/C)
|
|
￦
|
(3,847
|
)
|
|
￦
|
(2,078
|
)
|
|
￦
|
(641
|
)
|
Webzen Inc. and
subsidiaries
Notes to
Consolidated Financial Statements
December 31, 2007
and 2008
The
Company did not include stock options in computation of diluted earnings per
share in 2006, 2007 and 2008, because stock options are
antidilutive.
16.
Related party transactions
As of
December 31, 2007 and 2008, the Company provided loans to employees for housing
amounting to
￦
1,291 million and
￦
1,083
million and recorded these loans as other current assets and other non-current
assets. Short-term financial instruments amounting to
￦
1,704 million and
￦
346 million
are subject to withdrawal restrictions in relation to bank loans of employees as
of December 31, 2007 and 2008, respectively.
In May 2008, before NHN Games became the Company's related party, the
Company entered into a three-year license agreement with NHN USA Inc., related
party of NHN Games, for the distribution of Huxley in North America and Europe.
For the year ended December 31, 2008, revenue and cost of revenue related to
this agreement has not been incurred.
17.
Subsequent events
In April
2009, the Company entered into a service agreement with NHN Games under which
NHN Games will be responsible for the development, operation and maintenance of
Parfait Station until five years after the commercial launch of the
game.
In May
2009, the Company entered into a three-year exclusive license with NHN USA Inc.
to distribute Soul of the Ultimate Nation (SUN) in the United States, Canada,
Mexico and the United Kingdom through www.ijji.com.
18.
Supplemental cash flow information and non-cash activities
|
(In
millions of Korean Won)
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for income taxes
|
|
￦
|
194
|
|
|
￦
|
398
|
|
|
￦
|
540
|
|
|
Interest
paid
|
|
|
4
|
|
|
|
35
|
|
|
|
76
|
|
|
Supplemental
non-cash activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
acquired under a capital lease
|
|
￦
|
-
|
|
|
￦
|
171
|
|
|
￦
|
-
|
|
Item 19. Exhibits
|
1.1*
|
Articles
of Incorporation Amended on March 27, 2009 (English
translation)
|
|
|
|
|
2.1**
|
Form
of Common Share Certificate (English translation)
|
|
|
|
|
2.2***
|
Form
of ADR
|
|
|
|
|
2.3**
|
Form of Deposit
Agreement among Webzen Inc., JPMorgan Chase Bank as depositary and holders
of American Depositary Receipts (including form of
American
Depositary Receipt)
|
|
|
|
|
2.4†
|
First Amendment to
the Deposit Agreement among Webzen Inc., JPMorgan Chase Bank as depositary
and holders of American Depositary Receipts
dated
February 3, 2004
|
|
|
|
|
2.5††
|
Second
Amendment to the Deposit Agreement among Webzen Inc., JPMorgan Chase Bank
as depositary and holders of American Depositary
Receipts
|
|
|
|
|
4.1
|
Channeling
Agreement dated March 1, 2009 between Webzen Inc. and NHN Co.,
Ltd.
|
|
|
|
|
4.2
|
Service
Agreement dated April 2009 between Webzen Inc. and NHN Games Co.,
Ltd.
|
|
|
|
|
4.3
|
License
and Distribution Agreement dated May 21, 2009 between Webzen Inc. and NHN
USA Inc.
|
|
|
|
|
4.4
|
Business
Agency Agreement dated June 8, 2009 between Webzen Inc. and NHN Games Co.,
Ltd.
|
|
|
|
|
4.5
|
License
and Distribution Agreement dated May 19, 2008 between Webzen Inc. and NHN
USA Inc.
|
|
|
|
|
4.6
|
Power
of Attorney dated September 9, 2008 executed by Nam-Ju
Kim
|
|
|
|
|
4.7
|
Power
of Attorney dated September 9, 2008 executed by Ki-Yong
Cho
|
|
|
|
|
4.8
|
Power
of Attorney dated September 9, 2008 executed by Kil-Saup
Song
|
|
|
|
|
4.9
|
Power
of Attorney dated September 9, 2008 executed by Hyung-Cheol
Kim
|
|
|
|
|
4.10
|
Power
of Attorney dated September 9, 2008 executed by Chang Keun
Kim
|
|
|
|
|
4.11
|
Lease
Agreement dated September 1, 2005 between Webzen Inc. as tenant and Kim,
Eun-ok as landlord (English translation)
|
|
|
|
|
4.12
|
Amendment
dated September 10, 2007 to the Lease Agreement between Webzen Inc. as
tenant and Kim, Eun-ok as landlord (English
translation)
|
|
|
|
|
4.13
|
Lease
Agreement dated May 28, 2008 between Webzen Inc. as tenant and Kim,
Seong-gyun as landlord (English translation)
|
|
|
|
|
4.14
|
Lease
Agreement dated May 25, 2009 between Webzen Inc. as tenant and Yu, Ji-hun
as landlord (English translation)
|
|
|
|
|
4.15
|
Lease
Agreement dated December 1, 2007 between Webzen Inc. as tenant and Han,
Jeong-hee as landlord (English translation)
|
|
|
|
|
4.16
|
Amendment
dated December 1, 2008 to the Lease Agreement between Webzen Inc. as
tenant and Han, Jeong-hee as landlord (English
translation)
|
|
|
|
|
6.1
|
Calculation
of Basic and Diluted Earnings Per Common Share and ADS (see “Note 14 to
the Consolidated Financial Statements” of this Form
20-F)
|
|
|
|
|
8.1
|
List
of Subsidiaries
|
|
|
|
|
11.1†††
|
Code
of Ethics (English
Translation)
|
|
12.1
|
Certifications
of Chief Executive Officer required by Rule 13a-14(a)
|
|
|
|
|
12.2
|
Certifications
of Chief Financial Officer required by Rule 13a-14(a)
|
|
|
|
|
13.1
|
Certifications
of Chief Executive Officer and Chief Financial Officers required by Rule
13a-14(b)
|
|
|
|
|
*
|
Incorporated
by reference to the exhibits to the annual report on Form 20-F, filed on
June 29, 2009.
|
|
|
|
|
**
|
Incorporated
by reference to the exhibits to the registration statement on Form F-1
(File No. 333-110321).
|
|
|
|
|
***
|
Incorporated
by reference to the exhibits to Form F-6, filed on June 20,
2005.
|
|
|
|
|
†
|
Incorporated
by reference to the exhibits to Form F-6, filed on February 3,
2004.
|
|
|
|
|
††
|
Incorporated
by reference to the exhibits to Form F-6, filed on July 16,
2004.
|
|
|
|
|
†††
|
Incorporated
by reference to the exhibits to the annual report on Form 20-F, filed on
June 25, 2004.
|
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
|
WEBZEN
INC
|
|
|
|
|
|
By:
|
|
|
|
Name:
|
|
|
|
Title:
|
Chief
Financial
Officer
|
Date: November
20, 2009
Webzen (MM) (NASDAQ:WZEN)
Historical Stock Chart
From Oct 2024 to Nov 2024
Webzen (MM) (NASDAQ:WZEN)
Historical Stock Chart
From Nov 2023 to Nov 2024
