UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
(Mark
One)
o
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
|
OR
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the fiscal year ended December 31, 2007
|
|
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 our charter)
Webzen
Inc.
(Translation
of Registrant’s name into English)
The
Republic of Korea
(Jurisdiction
of incorporation or organization)
Daelim
Acrotel Building, 8
th
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 (“Shares”)*
|
The
Nasdaq Global Market
|
(2)
American Depository 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
(Title
of Class)
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
None
(Title
of Class)
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, 2007, 12,492,689 Shares and 9,415,170 ADSs are
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.
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.
Item
17
o
Item
18
x
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
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Page
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58
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F-1
|
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, 2007 which was 935.8 to
US$1.00.
FORWARD-LOOKING STATEMENTS
This
annual report contains statements that constitute “forward-looking statements”
within the meaning of Section 21(E) of the Securities Exchange Act of 1934. When
included in this annual report, the words, “will,” “should,” “expects,”
“intends,” “anticipates,” “estimates” and similar expressions, among others,
identify forward-looking statements. Such statements, which include, but are not
limited to, statements contained in “Item 3. Key Information — 3.D. Risk
Factors,” “Item 5. Operating and Financial Review and Prospects” and “Item 11.
Quantitative and Qualitative Disclosure about Market Risk,” inherently are
subject to a variety of risks and uncertainties that could cause actual results
to differ materially from those set forth in such statements. These
forward-looking statements are made only as of the date of this annual report.
We expressly disclaim any obligation or undertaking to release any update or
revision to any forward-looking statement contained herein to reflect any change
in our expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.
PART I
Item 1.
|
Identity
of Directors, Senior Management and
Advisers
|
Not
applicable.
Item 2.
|
Offer
Statistics and Expected Timetable
|
Not
applicable.
3.A. Selected
Financial Data
The
following selected consolidated financial information has been derived from our
consolidated financial statements as of each of the dates and for each of the
periods indicated below. This information should be read in conjunction with and
is qualified in its entirety by reference to our consolidated financial
statements, including the notes thereto, included in this annual report. Our
consolidated financial statements are prepared in accordance with U.S.
GAAP.
|
|
As
of and for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won and thousands of US$, except per share
data)
|
|
|
|
|
Statement
of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
game subscriptions
|
|
W
|
48,667
|
|
|
W
|
46,041
|
|
|
W
|
26,830
|
|
|
W
|
21,247
|
|
|
W
|
22,884
|
|
|
$
|
24,454
|
|
Royalties
and license fees
|
|
|
8,270
|
|
|
|
8,204
|
|
|
|
4,816
|
|
|
|
2,811
|
|
|
|
6,213
|
|
|
|
6,639
|
|
Total
net revenues
|
|
|
56,937
|
|
|
|
54,245
|
|
|
|
31,646
|
|
|
|
24,058
|
|
|
|
29,097
|
|
|
|
31,093
|
|
Cost
of revenues
|
|
|
5,890
|
|
|
|
10,723
|
|
|
|
12,815
|
|
|
|
15,722
|
|
|
|
17,505
|
|
|
|
18,706
|
|
Gross
profit
|
|
|
51,047
|
|
|
|
43,522
|
|
|
|
18,831
|
|
|
|
8,336
|
|
|
|
11,592
|
|
|
|
12,387
|
|
Selling,
general and administrative expenses
|
|
|
16,762
|
|
|
|
21,699
|
|
|
|
26,763
|
|
|
|
32,699
|
|
|
|
22,848
|
|
|
|
24,415
|
|
Research
and development expenses
|
|
|
—
|
|
|
|
10,262
|
|
|
|
20,282
|
|
|
|
24,062
|
|
|
|
23,164
|
|
|
|
24,753
|
|
Operating
income (loss)
|
|
|
34,285
|
|
|
|
11,561
|
|
|
|
(28,214
|
)
|
|
|
(48,425
|
)
|
|
|
(34,420
|
)
|
|
|
(36,781
|
)
|
Interest
income
|
|
|
1,186
|
|
|
|
3,849
|
|
|
|
4,747
|
|
|
|
3,991
|
|
|
|
3,503
|
|
|
|
3,743
|
|
Other
income (expense)
|
|
|
753
|
|
|
|
(1,122
|
)
|
|
|
(213
|
)
|
|
|
1,946
|
|
|
|
7,660
|
|
|
|
8,186
|
|
Income
(loss) before income tax expenses (benefit), equity in earnings (loss) of
related equity investment and minority interest
|
|
|
36,224
|
|
|
|
14,288
|
|
|
|
(23,680
|
)
|
|
|
(42,488
|
)
|
|
|
(23,257
|
)
|
|
|
(24,852
|
)
|
Income
tax expenses (benefit)
|
|
|
5,501
|
|
|
|
1,846
|
|
|
|
(5,507
|
)
|
|
|
5,102
|
|
|
|
2,579
|
|
|
|
2,756
|
|
Income
(loss) before equity in earnings (loss) of related equity investment and
minority interest
|
|
|
30,723
|
|
|
|
12,442
|
|
|
|
(18,173
|
)
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
|
(27,608
|
)
|
Equity
in earnings (loss) of related equity investment, net of
taxes
|
|
|
5,179
|
|
|
|
2,461
|
|
|
|
(664
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income
(loss) before minority interest
|
|
|
35,902
|
|
|
|
14,903
|
|
|
|
(18,837
|
)
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
|
(27,608
|
)
|
Minority
interest
|
|
|
110
|
|
|
|
206
|
|
|
|
33
|
|
|
|
525
|
|
|
|
242
|
|
|
|
259
|
|
Net
income (loss)
|
|
|
36,012
|
|
|
|
15,109
|
|
|
|
(18,804
|
)
|
|
|
(47,065
|
)
|
|
|
(25,594
|
)
|
|
|
(27,349
|
)
|
Earnings
(loss) per share:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,798
|
|
|
|
1,169
|
|
|
|
(1,497
|
)
|
|
|
(3,847
|
)
|
|
|
(2,078
|
)
|
|
|
(2.22
|
)
|
Diluted(3)
|
|
|
3,796
|
|
|
|
1,169
|
|
|
|
(1,497
|
)
|
|
|
(3,847
|
)
|
|
|
(2,078
|
)
|
|
|
(2.22
|
)
|
Earnings
(loss) per ADS(2)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,139
|
|
|
|
351
|
|
|
|
(449
|
)
|
|
|
(1,154
|
)
|
|
|
(623
|
)
|
|
|
(0.67
|
)
|
Diluted(3)
|
|
|
1,139
|
|
|
|
351
|
|
|
|
(449
|
)
|
|
|
(1,154
|
)
|
|
|
(623
|
)
|
|
|
(0.67
|
)
|
Dividends
declared per share
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted
average number of shares outstanding: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,481,151
|
|
|
|
12,924,119
|
|
|
|
12,563,892
|
|
|
|
12,233,204
|
|
|
|
12,319,347
|
|
|
|
12,319,347
|
|
Diluted(3)
|
|
|
9,486,556
|
|
|
|
12,927,206
|
|
|
|
12,563,892
|
|
|
|
12,233,204
|
|
|
|
12,319,347
|
|
|
|
12,319,347
|
|
|
|
As
of and for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won and thousands of US$, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
173,198
|
|
|
|
161,882
|
|
|
|
121,739
|
|
|
|
78,138
|
|
|
|
66,857
|
|
|
|
71,444
|
|
Short-term
financial instruments
|
|
|
2,304
|
|
|
|
4,925
|
|
|
|
2,935
|
|
|
|
5,211
|
|
|
|
8,047
|
|
|
|
8,599
|
|
Total
assets
|
|
|
206,552
|
|
|
|
212,682
|
|
|
|
185,685
|
|
|
|
142,385
|
|
|
|
121,414
|
|
|
|
129,744
|
|
Total
liabilities
|
|
|
17,515
|
|
|
|
13,706
|
|
|
|
17,406
|
|
|
|
16,691
|
|
|
|
22,475
|
|
|
|
24,017
|
|
Common
stock
|
|
|
2,185
|
|
|
|
6,485
|
|
|
|
6,485
|
|
|
|
6,486
|
|
|
|
6,487
|
|
|
|
6,932
|
|
Total
stockholders’ equity
|
|
|
188,831
|
|
|
|
198,976
|
|
|
|
167,412
|
|
|
|
125,396
|
|
|
|
98,869
|
|
|
|
105,652
|
|
(1)
|
For
convenience, the Won amounts are expressed in U.S. dollars at the rate of
W
935.8
to US$1.00, the noon buying rate in effect on December 31, 2007 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 Depository
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, 2006 and
2007.
|
(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
935.8 to US$1.00,
which was the noon buying rate announced by the Federal Reserve Bank of New York
on December 31, 2007. 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 noon buying rate for Won, expressed in Won per one U.S. dollar.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Won
per US$1.00)
|
|
2003
|
|
|
1,192.0
|
|
|
|
1,193.0
|
|
|
|
1,262.0
|
|
|
|
1,146.0
|
|
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
(through May 31)
|
|
|
1,028.5
|
|
|
|
981.7
|
|
|
|
1,047.0
|
|
|
|
935.2
|
|
January
|
|
|
943.4
|
|
|
|
942.1
|
|
|
|
953.2
|
|
|
|
935.2
|
|
February
|
|
|
942.8
|
|
|
|
943.9
|
|
|
|
948.2
|
|
|
|
937.2
|
|
March
|
|
|
988.6
|
|
|
|
981.7
|
|
|
|
1,021.5
|
|
|
|
947.1
|
|
April
|
|
|
1,005.0
|
|
|
|
986.9
|
|
|
|
1,005.0
|
|
|
|
973.5
|
|
May
31
|
|
|
1,028.5
|
|
|
|
1,034.1
|
|
|
|
1,047.0
|
|
|
|
1,004.0
|
|
(1)
|
The
average of the noon buying rates on the last date of each month (or a
portion thereof) during the period.
|
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 tested other games such as Huxley and Parfait Station. 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.
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 third quarter of 2008.
Huxley is scheduled for commercial launch in September 2008, and T-Project is
planned to have an open beta testing in 2010. 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
2007 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 massively-multiplayer
online games (“MMOGs”) or discontinue playing MMOGs. 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, and MU revenue continues to
decline, 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 MMOG 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
have identified certain deficiencies with respect to our internal control over
financial reporting and, if we fail to remedy these deficiencies, investor
confidence and the market price of our ADSs may be adversely
affected.
We have
been and are continuing to evaluate our internal control systems to allow our
management to report on, and our auditors to attest to, our internal control
over financial reporting. As of December 31, 2007, we identified deficiencies in
our internal control over financial reporting. If we cannot remedy these
deficiencies or if subsequent assessments of our internal control over financial
reporting otherwise identify material weaknesses that must be disclosed in
future annual reports on Form 20-F, we may receive an attestation with an
adverse opinion from our independent auditors as to the adequacy of our internal
control over financial reporting. Such an opinion could reduce confidence in our
financial statements and negatively affect the price of our
securities.
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.
We
have recently experienced departures of a key executive officer and key game
development personnel. If we fail to attract highly skilled online game
developers who can assume the tasks of those that have departed, our future game
release schedule could be further delayed and our business could be materially
and adversely affected.
Our
success depends to a large extent upon the services of a limited number of
executive officers and other key employees in our online game development
department. The unanticipated loss of the services of several of our key
employees, including Ki Yong Cho, our co-founder and former executive officer,
and key game developers, may have a material and adverse effect upon the
development schedule of the games that these employees were in charge of. The
number of our employees in game development, web development and system
engineering decreased from 548 as of December 31, 2006 to 319 as of December 31,
2007. We are in the process of seeking skilled online game developers who can
assume the tasks of those who have departed. However, as competition for such
personnel is
intense
and as we continue to experience employee departures at a rate greater than that
historically experienced, we may not be able to find the qualified replacement
personnel that we are seeking or may need to offer higher compensation and other
benefits. Even if such key personnel can be recruited, the time it takes for
them to integrate into our current operations may challenge our ability to meet
our development schedules, which could materially and adversely affect our
results of operations and have a negative effect on the price of our common
shares and ADSs.
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 recent incidents of
private information leaks in Korea that raised serious concerns among internet
and online service users. Internet Auction Co., the South Korean unit of U.S.
online auction house eBay Inc., recently announced that its website had been
hacked in February 2008, leading to the theft of 10.8 million users’
confidential information. Certain users of Auction service are gathering members
to launch a class-action lawsuit against Auction. LG Telecom Co., 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 may have been a passive foreign investment company (“PFIC”) for
2007, 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 2007 taxable
year and the amount of passive assets, including cash and cash
equivalents,
held by us throughout that year, we believe we may have been a PFIC for our 2007
taxable year. Further, there is a significant risk that we will be a PFIC for
our 2008 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.
Risks
Specific to Our Overseas Operations
Foreign
operations are subject to different business, political and economic
risks.
For the
year ended December 31, 2007, our license and royalty revenues from operations
outside of Korea, including China, Taiwan, Thailand, Japan, the Philippines,
Vietnam and the U.S. comprised 21.4% 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.
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 over most of Korea’s modern
history. The level of tension between Korea and North Korea has fluctuated and
may increase or change abruptly as a result of current and future events,
including ongoing contacts at the highest levels of the governments of Korea and
North Korea. The level of tension between Korea and North Korea, as well as
between North Korea and the United States, has increased as a result of the
missile testing conducted in the East Sea, as well as recent public
announcements that nuclear tests had been conducted in North Korea. On October
9, 2006, North Korea announced that it had successfully conducted a nuclear
test, which increased tensions in the region and raised strong objections from
Korea, the United States, Japan, China and other nations worldwide. In response,
the United Nations Security Council passed a resolution which prohibits any
United Nations member state from conducting transactions with North Korea in
connection with any large-scale arms and material or technology related to
missile development or weapons of mass destruction, and providing luxury goods
to North Korea. The resolution also imposes an asset freeze and an international
travel ban on persons associated with North Korea’s weapons programs and calls
upon all United Nations member states to take cooperative actions, including
inspections of cargo to or from North Korea.
North
Korea agreed in late October 2006 to return to the six-party talks to hold
further discussions on its nuclear programme and other related topics. In
February 2007, Korea, China, Japan, Russia, the United States and North Korea
reached agreement during six-party talks in Beijing for South Korea to provide
up to 1 million tons of heavy fuel oil and other economic support to North Korea
in exchange for North Korea’s agreement to shut down its nuclear facilities in
Yongbyun and allow the International Atomic Energy Agency (“IAEA”) inspectors to
be admitted for conducting the necessary monitoring. North Korea also agreed not
to produce any plutonium for use in producing nuclear weapons. In addition, the
United States and Korea have recently begun to restructure and reorganize the
nature of their military alliance in Korea. In October 2004, the United States
and Korea agreed to a three-phase withdrawal of approximately one-third of the
37,500 U.S. troops then stationed in Korea by the end of 2008. By the end of
2006, 10,000 U.S. troops had departed Korea, with an additional 2,500 U.S.
troops to be withdrawn by the end of 2008. Further, in February 2007, the United
States and Korea agreed to dissolve their joint command structure by 2012, which
would allow Korea to assume the command of its own armed forces in the event of
war on the Korean peninsula.
Escalated
tensions between the Korea and North Korea due to any reason, including if
high-level contacts break down or military hostilities increase, 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 substantial portion of our operations and assets are
located in Korea. As a result, we are subject to political, economic, legal and
regulatory risks specific to Korea. The economic indicators in the past few
years have shown mixed signs of recovery and uncertainty, and future recovery
and growth of the economy is subject to many factors beyond our control. Any
future deterioration of the Korean and global economy could adversely affect our
business, financial condition and results of operations.
Developments
that could hurt Korea’s economy in the future include:
|
·
|
financial
problems relating to
chaebols
(Korean
conglomerates), or their suppliers, and their potential adverse impact on
the Korean economy;
|
|
·
|
loss
of investor confidence arising from corporate accounting irregularities
and corporate governance issues at certain
chaebols
;
|
|
·
|
political
instability that may arise in connection with the recent presidential
election;
|
|
·
|
a
slowdown in consumer spending and the overall economy, including the real
estate market;
|
|
·
|
adverse
changes or volatility in foreign currency reserve levels, commodity prices
(including an increase in oil prices), exchange rates (including
depreciation of the U.S. dollar or Japanese yen or revaluation of the
Chinese Renminbi), interest rates and stock
markets;
|
|
·
|
deterioration
of economic or market conditions in other markets, including the sub-prime
market in the United States and
elsewhere;
|
|
·
|
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 that could result in a loss
of confidence in the Korean
economy;
|
|
·
|
political,
social and labor unrest;
|
|
·
|
geo-political
uncertainty and risk of further attacks by terrorist groups around the
world;
|
|
·
|
the
recurrence of SARS or avian flu in Asia and other parts of the world;
and
|
|
·
|
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 hostilities.
|
Securities
class action litigation may be brought against us in Korea following periods of
volatility in the market price of our securities.
The
Securities-Related Class Action Act of Korea, which became effective on January
1, 2005, permits class action suits to be instituted by one or more
representative plaintiffs on behalf of 50 or more persons who collectively hold
0.01% or more of the shares of the company and who claim to have been damaged in
a capital markets transaction involving securities issued by a company listed on
the KRX Stock Market or KOSDAQ. Applicable causes of action with respect to such
suits include, among others, claims for damages caused by misleading information
contained in a securities registration statement, the filing of a misleading
business report, insider trading or market manipulation and claims instituted
against auditors for damages caused by accounting irregularities. In cases of
false and inaccurate statements provided in registration statements,
prospectuses, business reports and accounting irregularities of companies whose
total assets are less than
W
2.0 trillion on a
non-consolidated basis as at the end of the fiscal year immediately preceding
January 1, 2005 (such as us), the new law started to apply from January 1, 2007.
Following periods of significant volatility in the market price of a company’s
securities, it is possible that securities class action litigation can be
brought against that company under the new law. If similar litigation were
instituted against us, it could result in substantial costs and divert
management’s attention and resources from our core business.
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.
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 “
주식회사웹젠
” (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 2006
are set forth below:
|
·
|
In
February 2006, we entered into a worldwide publishing rights contract for
the online game tentatively named T-Project with Red 5 Studios, Inc. (“Red
5”), a company based in the United
States.
|
|
·
|
In
June 2006, we entered into an agreement with Massive Inc. for placing
advertisements in certain video
games.
|
|
·
|
In
November 2006, we commercially launched Soul of the Ultimate Nation (SUN)
in Korea.
|
|
·
|
In
December 2006, we were awarded the Ministry of Information and
Communication Prize in the first Korea Internet Award hosted by the Korean
government.
|
|
·
|
In
February 2007, we entered into a US$35 million three-year exclusive
license agreement with 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.
for the distribution of Huxley in North America and
Europe.
|
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 MMOG space, such as FPS, 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 new three-dimensional MMOG provided in Korea, Taiwan, China
and Japan. MU is a MMOG initially launched in 2001 and currently provided in
Korea, China, Japan, Taiwan, Thailand, the Philippines, Vietnam, and the U.S. We
are also planning to release new online games beginning in the third quarter of
2008.
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 September 2008, and T-Project is planned to have an open
beta testing in 2010.
Current
Products
Soul of the Ultimate Nation
(SUN)
is a massively-multiplayer online role-playing game 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 with high
polygon counts. 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 MMOG 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 first, second and third closed beta
testing in Korea in September 2007, December 2007 and March 2008, respectively,
and is set for commercial launch in September 2008.
T-Project
is being developed by Red 5 and is planned to have an open beta testing in 2010.
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.
During
2007 and early 2008, our management reassessed our financial position, business
prospects and product lineup and made a strategic decision to focus on the
development of a smaller number of products and manage our company in a more
cost-efficient manner. As a result, we concentrated our development resources on
Soul of the Ultimate Nation (SUN), which was being commercially launched in
several overseas markets, and Huxley and decided to put on hold the development
of Kingdom of Warriors (Il Ki Dang Chun) and Parfait Station until the
development of the first two games was completed. In addition, we terminated the
publishing rights contract for the online game All Points Bulletin (“APB”) with
Real Time Worlds, Ltd. (“RTW”). RTW agreed to reimburse part of the development
cost we have invested by paying us certain fixed amounts and a percentage of the
net receipt it will collect after the commercial launch of APB.
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.
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 38,461 individual account subscribers at the end of first
quarter of 2008 compared to 49,838 at the end of the first quarter of
2007.
The
following table sets forth information on MU users and accounts in Korea since
2006.
|
|
|
|
|
|
|
|
|
|
|
|
1Q
|
|
|
2Q
|
|
|
3Q
|
|
|
4Q
|
|
|
1Q
|
|
|
2Q
|
|
|
3Q
|
|
|
4Q
|
|
|
1Q
|
|
No.
of Internet cafe accounts(1)
|
|
|
18,203
|
|
|
|
19,449
|
|
|
|
19,482
|
|
|
|
17,849
|
|
|
|
19,143
|
|
|
|
15,550
|
|
|
|
15,401
|
|
|
|
15,004
|
|
|
|
14,972
|
|
No.
of paying individual PC account subscribers(2)
|
|
|
48,175
|
|
|
|
46,500
|
|
|
|
44,089
|
|
|
|
47,724
|
|
|
|
49,838
|
|
|
|
41,735
|
|
|
|
42,391
|
|
|
|
42,345
|
|
|
|
38,461
|
|
(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. The performance of Soul of the Ultimate Nation (SUN) in Korea
has not met our initial expectations.
The
following table sets forth information on Soul of the Ultimate Nation (SUN)
users and accounts in Korea since the fourth quarter of 2006, when it was
commercially launched:
|
|
|
|
|
|
|
|
|
|
|
|
|
4Q
|
|
|
|
1Q
|
|
|
|
2Q
|
|
|
|
3Q
|
|
|
|
4Q
|
|
|
|
1Q
|
|
No.
of Internet cafe accounts(1)
|
|
|
17,849
|
|
|
|
19,143
|
|
|
|
12,433
|
|
|
|
11,665
|
|
|
|
9,887
|
|
|
|
8,944
|
|
No.
of paying individual PC account subscribers(2)
|
|
|
6,305
|
|
|
|
9,050
|
|
|
|
7,743
|
|
|
|
8,471
|
|
|
|
6,937
|
|
|
|
6,180
|
|
|
|
|
(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) 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 Soul of the Ultimate Nation (SUN) online game
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,
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 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. 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 New Era Online, we received a one-time licensing fee when we
entered into the licensing agreement, and 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.
The
following table presents the royalty revenue generated from MU distributors in
overseas market since 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q
|
|
|
2Q
|
|
|
3Q
|
|
|
|
|
|
1Q
|
|
|
2Q
|
|
|
3Q
|
|
|
4Q
|
|
|
1Q
|
|
|
|
(in
millions of Won)
|
|
Japan
|
|
|
508
|
|
|
487
|
|
|
467
|
|
|
|
390
|
|
|
347
|
|
|
675
|
|
|
482
|
|
|
498
|
|
|
508
|
|
Thailand
|
|
|
57
|
|
|
123
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Philippines
|
|
|
75
|
|
|
126
|
|
|
69
|
|
|
|
58
|
|
|
61
|
|
|
55
|
|
|
40
|
|
|
43
|
|
|
43
|
|
Vietnam
|
|
|
—
|
|
|
76
|
|
|
50
|
|
|
|
32
|
|
|
147
|
|
|
58
|
|
|
38
|
|
|
35
|
|
|
36
|
|
U.S.
|
|
|
—
|
|
|
46
|
|
|
60
|
|
|
|
58
|
|
|
109
|
|
|
103
|
|
|
96
|
|
|
109
|
|
|
105
|
|
(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 2007:
|
|
2007
|
|
2008
|
|
Revenue
from Soul of the
Ultimate
Nation (SUN)(1)
|
|
|
2Q
|
|
|
3Q
|
|
|
4Q
|
|
|
1Q
|
|
|
|
(in
millions of Won)
|
|
China
|
|
|
419
|
|
|
1,711
|
|
|
1,157
|
|
|
1,158
|
|
(1)
|
Includes
royalty revenue for the licensing and installation
fee.
|
Seasonality
Although
we have only limited historical data, 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. In 2007, however, we decided not to participate in E3 after
reassessing the marketing impact and as part of our cost-cutting measures. Our
advertising and promotion expenses were
W
8,176 million,
W
8,898
million, and
W
2,271 million in
2005, 2006 and 2007, respectively.
Our
marketing activities in China are managed through The9 Computer, and marketing
activities in Taiwan are conducted by Webzen Taiwan. Marketing activities in
Japan, Thailand, 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, Thailand, 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.
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 2007, there were several launches of online games including CJ
Internet’s
Oriental
Fantasy
, Neowiz’s
FIFA
Online 2
and
Warload
, MGame’s
Punglim
and Gravity’s
Ragnarok
2
and
Requiem
. In 2008, the
industry has launched or is expecting the launch of several additional online
game titles in the Korean market, such as NCSoft’s
Point Blank
, Hanbitsoft’s
Popoming
, Neowiz’s
Warload
and
Tenvi
and Nexon’s
Counter Strike Onlin
e and
Elsword
. The new
releases of high-quality game will increase competition in our industry.
Recently, there were two major M&A deals in the game industry in Korea. In
March 2008, GungHo Online Entertainment, Inc. purchased 52.4% of Gravity Co.,
Ltd’s common shares, and, in May 2008, T3 Entertainment acquired 26.29% of Habit
Soft Inc.’s shares as well as the management right of the company.
China
. Our
primary online game competitors in China are The9, Ltd. (which distributes
WoW
), Shanda Networking
(which distributes Actoz Soft’s “
Legend of Mir
” series),
Netease (which distributes “
Mong Hwan Seo Yu
,
Dae Hwa Seo Yu
”), Zheng Tu
(which distributes “
Zheng Tu
Online
”).
Japan
. Our
primary online game competitors in Japan are GungHo’s “
Ragnarok
,” NCsoft Japan’s
“
Lineage I
I,” Square
Enix’s “
Final Fantasy
Onlin
e” , YNK Japan’s “
ROHAN
,” and Nexon Japan’s
“
Mabinogi
.” 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.
Other
markets
. We consider our main competitors to be: Wowtaiwan’s
WoW
, Gamania’s “
Lineage I
” and Softworld’s
“
Ragnarok
” in Taiwan;
Asia Soft’s “
Ragnarok
”
and NCTrue’s “
Lineage
”
in Thailand; and Level Up’s “
Ragnarok
” and “
RFOnline
” and IPVG’s “
RAN Online
” in the
Philippines.
In all of
these markets, we also compete against PC-based game developers such as
Electronic Arts, Take Two Interactive Software, Activision, THQ and Midway
Games, Inc., which produce popular PC-packaged games, 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 new consoles, Xbox 360,
Playstation 3 and Nintendo Wii, respectively. Xbox 360 was launched in November
2005, and Playstation 3 and Nintendo Wii were released in November
2006.
Intellectual
Property
Members of
our senior management team have been and continue to be instrumental in planning
and developing core programming technology for our online games. 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 MU, Soul of the Ultimate
Nation (SUN) and Kingdom of Warriors (Il Ki Dang Chun) and own the service marks
for MU, Soul of the Ultimate Nation (SUN), Kingdom of Warriors (Il Ki Dang
Chun), Huxley and Parfait Station. 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
. For the years
through 2007, we were entitled to a fifty-percent reduced tax rate by virtue of
the Special Tax Treatment Control Law. Under the same law, we may claim a tax
credit that can be carried forward for five years. However, the reduced tax rate
and tax credit cannot be claimed in the same year. In 2004, we realized a net
profit and elected to be taxed by the reduced tax rate. In 2006 and 2007,
however, we realized net losses and, accordingly, chose the standard statutory
tax rate of 27.5% to claim for tax credit. Our deferred income taxes as of
December 31, 2007 were calculated based on the assumption that the statutory tax
rate of 27.5% would apply to our operational results in 2008 and
thereafter.
China
. The
online games industry in China operates under a legal regime that consists of
the State Council, 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 Information
Industry; the Ministry of Culture; the State Press and Publications
Administration; the State Copyright Bureau; the Ministry of Public Security; and
the Bureau of State Secrecy. 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 Specific to Our Operations in
China.”
4.C.
Organization
As of
December 31, 2007, we had three significant wholly-owned subsidiaries: Webzen
Taiwan, Webzen China and Webzen America. 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 105,341 square feet. The latest of our leases
expires in December 2009.
China.
The
offices of 9Webzen (Shanghai) and Webzen China are located at 15th floor, Double
Dove Tower, No. 438, Pu Dian Road, Shanghai, China 200122. 9Webzen (Shanghai)
and Webzen China occupy 23,304 square feet of office space.
Taiwan.
The offices of Webzen Taiwan are located at 7F-3, No.176, Jian 1
st
Rd.,
Jhonghe City, Taipei County, Taiwan 23553, Republic of China.
United
States
. The offices of Webzen America are located at 6601 Center Drive
West, 7th Floor, Los Angeles, CA 90045.
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
24,058
million and
W
29,097 million in
2006 and 2007, 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. Unless we start generating significant
revenues from Soul of the Ultimate Nation (SUN), or from other new games
expected to be launched in 2008, we expect to incur losses in 2008.
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
3,287 million
(US$3.5 million),
W
2,003 million
(US$2.1 million),
W
417 million
(US$0.4 million),
W
279 million
(US$0.3 million) and
W
199 million
(US$0.2 million), respectively, in 2007.
Our cost
of revenues increased in 2007 to
W
17,505 million
from
W
15,722
million in 2006, as costs related to Soul of the Ultimate Nation (SUN) were
recognized as cost of revenue for the full year in 2007 after the commercial
launch of the game in Korea in November 2006. Our operating expenses, which
includes selling, general and administrative expenses and research and
development expenses, significantly decreased in 2007 to
W
46,012 million
from
W
56,761
million in 2006 as we implemented a series of cost-cutting measures. Our net
loss decreased in 2007 to
W
25,594 million
from
W
47,065
million in 2006.
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
14,774 million
and
W
4,824
million, respectively, in 2007. Online subscription fees earned by our
consolidated subsidiaries, which recorded
W
1,299 million
from 9Webzen and
W
1,932 million
from Webzen Taiwan in 2007, 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.
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 17.4% of our total
net revenues in 2007. 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
|
|
Japan
|
|
|
489
|
|
|
467
|
|
|
447
|
|
|
371
|
|
|
328
|
|
|
656
|
|
|
463
|
|
|
478
|
|
Thailand
|
|
|
43
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Philippines
|
|
|
75
|
|
|
126
|
|
|
69
|
|
|
58
|
|
|
61
|
|
|
55
|
|
|
40
|
|
|
43
|
|
Vietnam
|
|
|
—
|
|
|
60
|
|
|
26
|
|
|
8
|
|
|
124
|
|
|
35
|
|
|
14
|
|
|
11
|
|
U.S.
|
|
|
—
|
|
|
19
|
|
|
19
|
|
|
17
|
|
|
51
|
|
|
62
|
|
|
54
|
|
|
68
|
|
(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 The9, 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.
As of
December 31, 2006, we recognized a valuation allowance for all of the deferred
tax assets, as we determined that we would not be able to realize these assets
based on our historical and projected net and taxable income. All deferred tax
assets are recognized. We then assess if the realization of the related tax
benefit is more likely than not to occur.
For the
years through 2006, we were entitled to a fifty-percent reduced tax rate by
virtue of the Special Tax Treatment Control Law. Under the same law, we may
claim a tax credit that can be carried forward for five years. However, the
reduced tax rate and tax credit cannot be claimed in the same year. In 2004, we
realized a net profit and elected to be taxed by the reduced tax rate. In 2005,
2006 and 2007, however, we realized net losses and, accordingly, chose the
standard statutory tax rate of 27.5% to claim the higher tax credit. Our
deferred income taxes as of December 31, 2007 were calculated based on the
assumption that the statutory tax rate of 27.5% would apply to our operational
results in 2008 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.
Acquisitions
On
December 14, 2005, we acquired 21% of the common stock of 9Webzen from GameNow
for US$2.75 million in cash, increasing our stake from 49.0% to 70.0%. The
acquisition was accounted for using the purchase method of accounting in
accordance with SFAS No. 141,
Business Combination
. We are
required to allocate the purchase price of acquired companies to tangible and
intangible assets acquired and liabilities assumed, based on their estimated
fair values. In connection with the 9Webzen acquisition, we engaged an
independent third-party appraisal firm to assist us in determining the fair
values of assets acquired and liabilities assumed. Such valuations require
management to make significant estimates and assumptions, especially with
respect to intangible assets.
The excess
purchase price over those fair values is recorded as goodwill. In accordance
with SFAS No. 142
Goodwill and
other Intangible Assets
, goodwill is not amortized but is reviewed
annually and the value is adjusted downward whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. As of December 31, 2006, we recognized a goodwill impairment loss
of
W
388
million since the carrying amount of the reporting unit goodwill exceeded the
implied fair value of that goodwill. The fair value of that reporting unit was
estimated using the expected present value of future cash flows.
Recent
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159
The Fair Value Option for Financial
Assets and Financial Liabilities
, which provides companies with an option
to report selected financial assets and liabilities at fair value in an attempt
to reduce both complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and liabilities
differently. This Statement is effective as of the beginning of an entity’s
first fiscal year beginning after November 15, 2007. We are currently evaluating
the impact that the adoption may have on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141R
Business Combinations
. This
standard establishes principles and requirements for how the acquirer recognizes
and measures the acquired identifiable assets, assumed liabilities,
noncontrolling interest in the acquiree, and acquired goodwill or gain from a
bargain purchase. SFAS No. 141R also determines what information the acquirer
must disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or
after January 1, 2009. We are assessing the potential impact of this standard on
our financial condition and results of operations.
In
December 2007, the FASB issued SFAS No. 160
Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51
. This
standard establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No.
160 clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS No. 160 is effective for us as of
January 1, 2009 with early adoption prohibited. SFAS No. 160 shall be applied
prospectively as of the beginning of the fiscal year in which this standard is
initially applied. The presentation and disclosure requirements of this standard
shall be applied retrospectively for all periods presented and will impact how
we present and disclose noncontrolling interests and income from noncontrolling
interests in our financial statements.
In March
2008, the FASB issued SFAS No. 161
Disclosures about Derivative
Instruments and Hedging Activities
(“FAS 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, for example:
|
·
|
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.
|
FAS 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 of adopting this
standard.
Results
of Operations
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 and thousands of US$)
|
|
|
|
|
|
|
(unaudited)
|
|
Online
game subscriptions
|
|
W
|
21,247
|
|
|
W
|
22,884
|
|
|
$
|
24,454
|
|
Royalties
and license fees
|
|
|
2,811
|
|
|
|
6,213
|
|
|
|
6,639
|
|
Total
net revenues
|
|
|
24,058
|
|
|
|
29,097
|
|
|
|
31,093
|
|
Cost
of revenues
|
|
|
15,722
|
|
|
|
17,505
|
|
|
|
18,706
|
|
Gross
profit
|
|
|
8,336
|
|
|
|
11,592
|
|
|
|
12,387
|
|
Selling,
general and administrative expenses
|
|
|
32,699
|
|
|
|
22,848
|
|
|
|
24,415
|
|
Research
and development expenses
|
|
|
24,062
|
|
|
|
23,164
|
|
|
|
24,753
|
|
Operating
income (loss)
|
|
|
(48,425
|
)
|
|
|
(34,420
|
)
|
|
|
(36,781
|
)
|
Interest
income
|
|
|
3,991
|
|
|
|
3,503
|
|
|
|
3,743
|
|
Foreign
currency gains (losses), net
|
|
|
(501
|
)
|
|
|
92
|
|
|
|
98
|
|
Gain
on disposal of available-for-sale securities
|
|
|
2,535
|
|
|
|
3,755
|
|
|
|
4,013
|
|
Gain
on disposal of property and equipment
|
|
|
115
|
|
|
|
3,931
|
|
|
|
4,200
|
|
Others,
net
|
|
|
(203
|
)
|
|
|
(118
|
)
|
|
|
(125
|
)
|
Income
(loss) before income tax expenses, equity in earnings of related equity
investment and minority interest
|
|
|
(42,488
|
)
|
|
|
(23,257
|
)
|
|
|
(24,852
|
)
|
Income
tax expenses
|
|
|
5,102
|
|
|
|
2,579
|
|
|
|
2,756
|
|
Income
(loss) before equity in earnings related equity investment and minority
interest
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
|
(27,608
|
)
|
Income
(loss) before minority interest
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
|
(27,608
|
)
|
Minority
interest
|
|
|
525
|
|
|
|
242
|
|
|
|
259
|
|
Net
income (loss)
|
|
|
(47,065
|
)
|
|
|
(25,594
|
)
|
|
|
(27,349
|
)
|
(1)
|
For
convenience, the Won amounts are expressed in U.S. dollars at the rate of
W935.8 to US$1.00, the noon buying rate in effect on December 31, 2007, 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
|
|
|
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;
|
|
·
|
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;
|
|
·
|
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
settlement providers, 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%), 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 costs incurred prior to the
establishment of technological feasibility are included in this item. Research
and development costs 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 Red5 Studios for the development of
T-project, and
W
5,706 million was
attributable to advance royalties paid to RTW for the development of 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 gains and
losses.
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. For description of income
tax expenses in 2006, see “— 2006 compared to 2005.”
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.
2006
compared to 2005
The
following table summarizes our results of operations for the periods
indicated.
|
|
For
the year ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
millions of Won)
|
|
Online
game subscriptions
|
|
W
|
26,830
|
|
|
W
|
21,247
|
|
Royalties
and license fees
|
|
|
4,816
|
|
|
|
2,811
|
|
Total
net revenues
|
|
|
31,646
|
|
|
|
24,058
|
|
Cost
of revenues
|
|
|
12,815
|
|
|
|
15,722
|
|
Gross
profit
|
|
|
18,831
|
|
|
|
8,336
|
|
Selling,
general and administrative expenses
|
|
|
26,763
|
|
|
|
32,699
|
|
Research
and development expenses
|
|
|
20,282
|
|
|
|
24,062
|
|
Operating
income (loss)
|
|
|
(28,214
|
)
|
|
|
(48,425
|
)
|
Interest
income
|
|
|
4,747
|
|
|
|
3,991
|
|
Foreign
currency gains (losses), net
|
|
|
(377
|
)
|
|
|
(501
|
)
|
Gain
on disposal of available-for-sale securities
|
|
|
173
|
|
|
|
2,535
|
|
Others,
net
|
|
|
(9
|
)
|
|
|
(88
|
)
|
Income
(loss) before income tax expenses, equity in earnings of related equity
investment and minority interest
|
|
|
(23,680
|
)
|
|
|
(42,488
|
)
|
Income
tax expenses (benefit)
|
|
|
(5,507
|
)
|
|
|
5,102
|
|
Income
(loss) before equity in earnings of related equity investment and minority
interest
|
|
|
(18,173
|
)
|
|
|
(47,590
|
)
|
Equity
in earnings of related equity investment, net of taxes
|
|
|
(664
|
)
|
|
|
—
|
|
Income
(loss) before minority interest
|
|
|
(18,837
|
)
|
|
|
(47,590
|
)
|
Minority
interest
|
|
|
33
|
|
|
|
525
|
|
Net
income (loss)
|
|
|
(18,804
|
)
|
|
|
(47,065
|
)
|
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
|
|
|
84.8
|
%
|
|
|
88.3
|
%
|
Royalties
and license fees
|
|
|
15.2
|
%
|
|
|
11.7
|
%
|
Total
net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost
of revenues
|
|
|
40.5
|
%
|
|
|
65.4
|
%
|
Gross
profit
|
|
|
59.5
|
%
|
|
|
34.6
|
%
|
Selling,
general and administrative expenses
|
|
|
84.6
|
%
|
|
|
135.9
|
%
|
Research
and development expenses
|
|
|
64.1
|
%
|
|
|
100.0
|
%
|
Operating
income (loss)
|
|
|
(89.2
|
%)
|
|
|
(201.3
|
%)
|
Interest
income
|
|
|
15.0
|
%
|
|
|
16.6
|
%
|
Foreign
currency gains (losses), net
|
|
|
(1.2
|
%)
|
|
|
(2.1
|
%)
|
Gain
on disposal of available-for-sale securities
|
|
|
0.5
|
%
|
|
|
10.5
|
%
|
Income
(loss) before income tax expenses, equity in earnings of related equity
investment and minority interest
|
|
|
(74.8
|
%)
|
|
|
(176.6
|
%)
|
Income
tax expenses (benefit)
|
|
|
(17.4
|
%)
|
|
|
21.2
|
%
|
Income
(loss) before equity in earnings of related equity investment and minority
interest
|
|
|
(57.4
|
%)
|
|
|
(197.8
|
%)
|
Equity
in earnings of related equity investment, net of taxes
|
|
|
(2.1
|
%)
|
|
|
-
|
|
Income
(loss) before minority interest
|
|
|
(59.5
|
%)
|
|
|
(197.8
|
%)
|
Minority
interest
|
|
|
0.1
|
%
|
|
|
2.2
|
%
|
Net
income (loss)
|
|
|
(59.4
|
%)
|
|
|
(195.6
|
%)
|
Revenues.
Our net revenues
for 2006 decreased 24.0% from
W
31,646 million in
2005 to
W
24,058 million in
2006, reflecting a decline in the number of MU subscribers in most of our major
markets. This decline is primarily attributable to the success of new games
introduced by our competitors, which has caused a significant number of our MU
subscribers to switch to such games, and to our inability to timely introduce
new games to capture new subscribers. Our MU pricing plan in Korea has not
changed since our initial commercialization of the game.
Cost of revenues
. Our cost of
revenues for 2006 increased 22.7% from
W
12,815 million in
2005 to
W
15,722 million in
2006, and as a percentage of total revenues increased from 40.5% in 2005 to
65.4% in 2006 primarily due to:
|
·
|
a
22.3% increase in wages and salaries, including severance benefits, from
W
6,352
million in 2005 to
W
7,769
million in 2006, as we increased salaries for our existing employees and
hired additional game monitoring and hardware maintenance personnel;
and
|
|
·
|
a
47.4% increase in depreciation expense, from
W
2,573
million in 2005 to
W
3,793
million in 2006, as we increased property and equipment such as servers,
software and intangible assets.
|
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 settlement providers, 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 22.2% from
W
26,763 million in
2005 to
W
32,699 million in
2006 and, as a percentage of net revenues, increased from 84.6% to 135.9%,
primarily due to:
|
·
|
payroll
costs (excluding payroll costs of 9Webzen) that increased by 33.7% from
W
7,688
million in 2005 to
W
10,276
million, as the average number of general and administrative personnel
increased by 17% and the average salaries increased by 6% compared to the
prior year.
|
|
·
|
selling,
general and administrative expenses of 9Webzen, which were consolidated
into our consolidated income statement since December 14, 2005 and
amounted to
W
1,559
million in 2006; and
|
|
·
|
marketing
expenses (excluding marketing expenses of 9Webzen) that increased by 9.4%
from
W
8,129
million in 2005 to
W
8,891
million in 2006 (as a percentage of total revenues, our
marketing expenses increased from 25.7% to 37.0%), as we participated in
the 2006 Electronic Entertainment Expo and increased the advertising
campaign for Soul of the Ultimate Nation (SUN) and other new
games.
|
These
increases were partly offset by the decrease in sales commission that declined
from
W
1,339
million in 2005 to
W
809 million in
2006 and by a slight decrease in consulting and other fees from
W
3,536 million in
2005 to
W
3,154 million in
2006.
Research and development
expenses
. Research and development costs incurred prior to the
establishment of technological feasibility are included in this item. Research
and development costs in 2006 increased 18.6% from
W
20,282 million in
2005 to
W
24,062 in 2006,
as we increased our spending for the development of the games. Of this amount,
W
8,194
million was attributable to the wages and salaries paid in 2006 to personnel in
research and development departments,
W
6,793 million was
attributable to advance royalties paid to Red5 Studios for the development of
T-project,
W
4,363 million was
attributable to advance royalties paid to RTW for the development of APB and
W
2,368
million was attributable to services outsourced to third-party developers. We
expect the level of research and development expenses in 2007 to be similar to
2006, 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
15.9% from
W
4,747 million in
2005 to
W
3,991 million in
2006, 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
121,739 million
as of December 31, 2005 to
W
78,138 million as
of December 31, 2006, respectively.
Foreign currency gains and
losses.
Net foreign currency losses increased 32.9% from
W
377 million in
2005 to
W
501
million in 2006, primarily due to an appreciation of the Korean Won against the
U.S. dollar during this period.
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. As GameOn Co., Ltd. listed its common shares on the Tokyo Stock
Exchange in 2006, we reclassified those securities to available-for-sale
securities from other non current assets. In 2006, we sold 640 shares out of
3,200 shares and recognized gain on disposal of available-for-sales securities
of
W
2,237
million.
Income taxes.
In 2005, an
income tax benefit of
W
5,507 million was
recognized. In 2006,
W
5,102 million was
recorded for income tax expenses mainly due to an increase of valuation
allowance relating to operating loss carry-
forwards
and research and development expenses. Valuation allowance increased by
W
16,548 million
from
W
1,621
million as of December 31, 2005 to
W
18,169 million as
of December 31, 2006, as we determined that we would not be able to realize our
deferred tax assets based on our projected taxable income.
Equity in loss of related equity
investment, net of taxes
. In 2005, we incurred a loss of
W
664 million in
equity in earnings of related equity investments, net of tax, which reflected
the loss of 9Webzen, our only equity-method investee in 2005. In
2006, however, we did not recognize any loss in equity in earnings of related
equity investments, net of tax, as 9Webzen was re-characterized as a
consolidated subsidiary.
Net income.
As a result of
the factors discussed above, our net loss increased to
W
47,065 million in
2006 from
W
18,804 million in
2005.
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 2.7% in 2005, 2.2% in 2006 and 2.5% in 2007.
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,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007(1)
|
|
|
|
(in
millions of Won and thousands of US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Net
cash used in operating activities
|
|
W
|
(14,007
|
)
|
|
W
|
(38,660
|
)
|
|
W
|
(22,026
|
)
|
|
$
|
(23,538
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
(10,713
|
)
|
|
|
(3,574
|
)
|
|
|
4,995
|
|
|
|
5,339
|
|
Net
cash provided by (used in) financing activities
|
|
|
(15,423
|
)
|
|
|
(1,367
|
)
|
|
|
5,756
|
|
|
|
6,151
|
|
Effect
of exchange rate changes on
cash
and cash equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(40,143
|
)
|
|
|
(43,601
|
)
|
|
|
(11,281
|
)
|
|
|
(12,054
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
161,882
|
|
|
|
121,739
|
|
|
|
78,138
|
|
|
|
83,498
|
|
Cash
and cash equivalents at end of period
|
|
|
121,739
|
|
|
|
78,138
|
|
|
|
66,857
|
|
|
|
71,444
|
|
(1)
|
For
convenience, the Won amounts are expressed in U.S. dollars at the rate of
W
935.8
to US$1.00, the noon buying rate in effect on December 31, 2007, as
announced by the Federal Reserve Bank of New
York.
|
In 2007,
our primary sources of liquidity were existing cash on hand and cash generated
from investing and financing activities. We used
W
22,026 million in
operating activities in 2007, as our net loss amounted to
W
25,594 million
during that period.
Net cash
provided by investing activities in 2007 was
W
4,995 million,
primarily due to the proceeds from disposal of available-for-sale securities
amounting to
W
17,651 million
and the proceeds from disposal of property, equipment and intangible assets
amounting to
W
7,625 million
(
W
7,465
million of which was attributable to the sales of office space at the Daelim
Acrotel Building in Dogok-dong, Seoul), partially offset by
W
11,656 million
used in the acquisition of available-for-sale securities and an increase of
W
5,105
million in short-term financial instruments and restricted cash.
Our cash
investment policy emphasizes liquidity and the preservation of principal over
other portfolio considerations. We satisfy a portion of our liquidity
requirements by investing excess cash in short-term financial instruments, which
primarily consist of time deposits with a maturity of one year or less, and
demand deposits, money market demand deposits, and money market funds with a
rolling maturity of 90 days or less. In addition, to avoid being an investment
company under the Investment Company Act of 1940 (Investment Company Act), we
hold a substantial portion of our net cash provided by operating activities in
lower-yielding bank deposits and money market instruments, which due to their
liquidity and certain other characteristics are not considered to be investment
securities under the Investment Company Act.
Net cash
provided by financing activities was
W
5,756 million for
2007, primarily due to the proceeds of the sales of treasury stock worth
W
14,166 million to
Woori Investment Security Co., Ltd., partially offset by
W
9,443 million
used for share purchase of 755,616 common shares in the market.
Capital resources.
As of
December 31, 2007, our primary source of liquidity was
W
66,857 million
(US$71.4 million) of cash and cash equivalents and
W
8,047 million
(US$8.6 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, 2007, 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
4.2 billion in
capital expenditures in 2008. 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
During
2005 and 2006, we expected that the online game industry would continue its
pattern of developing increasingly sophisticated games and offering improved
graphics resolution, sound quality and other improvements to the gaming
experience. In order to remain competitive, we expanded our game development and
operation teams and invested in other outside game development opportunities.
For example, in January 2006, we entered into a worldwide publishing rights
contract for the online PC game T-project with Red5 Studios, Inc., a company
based in the U.S. The contracts were for five years after the games are
commercialized, and we agreed to fund part of the development costs and pay
royalties for the exclusive world-wide distribution rights to the
games.
During
2007 and early 2008, our management reassessed our financial position, business
prospects and product lineup and made a strategic decision to focus on the
development of a smaller number of products and manage our company in a more
cost-efficient manner. As a result, we concentrated our development resources on
Soul of the Ultimate Nation (SUN), which was being commercially launched in
several overseas markets, and Huxley and decided to put on hold the development
of Kingdom of Warriors (Il Ki Dang Chun) and Parfait Station until the
development of the first two games were completed. In addition, we terminated
the publishing rights contract for the online game APB with RTW.
5.D. Trend
Information
See “—5.A.
Operating Results—Overview.”
5.E. Off-balance
Sheet Arrangements
We have
provided guarantees of
W
1,704 million as
of December 31, 2007 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 February 28, 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 pledged
W
1,100
million in a restricted account as of December 31, 2007 to guarantee Webzen
China’s payment of its short-term borrowings from Korea Exchange Bank Shanghai
Branch.
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, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of Won)
|
|
Contractual
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
|
3,168
|
|
|
|
1,291
|
|
|
|
1,133
|
|
|
|
744
|
|
|
|
—
|
|
Capital
lease obligations
|
|
|
127
|
|
|
|
51
|
|
|
|
76
|
|
|
|
—
|
|
|
|
—
|
|
Purchase
obligations
(1)
|
|
|
13,195
|
|
|
|
10,294
|
|
|
|
2,901
|
|
|
|
—
|
|
|
|
—
|
|
|
The Company entered
into a game development contract with Red5 requiring payments of
W
10,294
million within one year and
W
2,901
million after one year but within three years from December 31,
2007.
|
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,
2008:
|
|
|
|
|
Nam-Ju
Kim
|
|
36
|
|
President,
Chief Executive Officer and Director (Representative
Director)
|
Hyung-Cheol
Kim
|
|
34
|
|
Chief
Financial Officer and Director
|
Kil-Saup
Song
|
|
32
|
|
Technology
Advisor and Director
|
Seong-Hoon
Joo
|
|
33
|
|
Legal
Counsel and Director
|
Yong-Seo
Choi
|
|
39
|
|
Chief
Operating Officer and Director
|
Young-Bong
Yoon
|
|
40
|
|
Outside
Director and a member of the Audit Committee
|
Beom-Soo
Seo
|
|
40
|
|
Outside
Director and a member of the Audit Committee
|
Young-Hwan
Choi
|
|
28
|
|
Outside
Director and a member of the Audit
Committee
|
Nam-Ju Kim
is a founder of Webzen and has served as a Director since April 2000 and as the
Representative Director, President and Chief Executive Officer since September
2002. From 1995 to 2000, he freelanced as a game developer. Mr. Kim graduated
from Seoul Yerim Art High School.
Kil-Saup
Song
is a founder of Webzen and has served as a Director since April 2000
and as a part-time Technology Advisor since May 2007. From April 2000 to May
2007, he served as the Chief Technology Officer of our company. He has been a
registered director of 9Webzen, our Hong Kong joint venture, since January 2003.
He served as a game developer for Pantech Co., Ltd., a wireless
telecommunication company, from 1998 to 2000. Mr. Song graduated from Euijungboo
Technology High School.
Hyung-Cheol Kim
is the newly elected Director and 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, he worked at Saebit
Accounting Firm as a manager. Mr. Kim received a bachelor’s degree in business
administration from Korea University in 1996.
Yong-Seo
Choi
is the newly elected Director and Chief Operating Officer serving
March 2008. From 2006 to 2007, he served as a senior manager at Samil PWC. From
2005 to 2006, he worked at Visphor as a software architect. From 1999 to 2004,
he served as a senior consultant for Microsoft Korea. Mr. Choi received a
bachelor’s degree in industrial engineering from the Busan University and a
master’s degree from The Graduate School of Information System, Sogang
University.
Seong-Hoon
Joo
has served as a Director since March 2008. He has worked as an
in-house legal counsel at Woori Investment Security Co., Ltd. since 2007. From
2005 to 2007, he worked at KCL law firm as a lawyer. He completed Judicial
training from the Judicial Research Training Institute on 2005. Mr. Joo received
a bachelor’s degree in law from the Hanyang University.
Young-Bong
Yoon
has served as an Outside Director and a member of the Audit
Committee since March 2008. He has been working as a certified public accountant
at Samduk Accounting Corporation since 2007. From 2001 to 2007, he worked at
Woori Accounting Firm as a CPA. From 1999 to 2001, he worked at LG Investment
& Security Co., Ltd. at its corporate finance department. Mr. Yoon received
a bachelor’s degree in economics from Sungkyunkwan University in
1994.
Beom-Soo
Seo
has served as an Outside Director and a member of the Audit Committee
since March 2008. He is an attorney-at-law and has worked at Najeunhapdong Law
Office since 2006. From 2005 to 2006, he worked at Onnuri law firm. He completed
judicial training at the Judicial Research Training Institute on 2005. Mr. Seo
received a bachelor’s degree in law from Korea University.
Young-Hwan
Choi
was newly elected as a Outside Director and a member of the Audit
Committee since March 2008. He served as a business consultant at Monitor Group.
Mr. Kim received a bachelor’s degree in business administration from Yonsei
University.
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, 2007, the aggregate amount of compensation paid by
us to all Directors and executive officers was
W
1.1 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 28, 2008, our shareholders approved an aggregate amount of up to
W
0.8 billion as
compensation for our executive officers for the year 2008.
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 Nam Ju Kim and Kil Saup Song expire on March 27, 2009.
The term of office for our newly elected Directors is two or 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 Hyung-Cheol Kim, Yong Seo
Choi and Seong Hoon Joo expire on March 27, 2011, and those of Young-Bong Yoon,
Beom-Soo Seo and Young-Hwan Choi expire on March 27, 2010.
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 4350(c), 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 4350(c)(1).
Audit
Committee
The
Sarbanes-Oxley Act of 2002 directs the Securities and Exchange Commission
(“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 4350(d), 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: Young-Bong Yoon, Beom-Soo Seo and Young-Hwan Choi. All of our
independent Directors are financially literate and our board of Directors
designated Young-Bong Yoon 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 Korean Securities and Exchange Act and, to
the extent they are listed on KOSDAQ, the listing rules of KOSDAQ. 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 latest amendment to the NASD Marketplace Rule 4350(a)(1), foreign private
issuers are permitted to follow certain home country corporate governance
practices in lieu of the requirements of Rule 4350. Under the amendment, foreign
private issuers must disclose alternative home country practices they follow.
The following are the requirements of Rule 4350 we do not follow and the
descriptions of home country practices.
Under Rule
4350(b)(1)(A), issuers are required to distribute to shareholders copies of
annual reports containing audited financial statements prior to the companies’
annual meetings and to file with Nasdaq at the time they are distributed to
shareholders. 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 Korean
Securities and Exchange Act.
Under Rule
4350(c)(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
4350(c)(3) 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
4350(c)(4), 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 33-1/3% of the outstanding
common shares as required by Nasdaq Rule 4350(f), 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.
Rule
4350(g) 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 4350(g) should contain the information
required by Section 14 of the United States Securities Exchange Act of 1934 (the
“Exchange Act”) and rules thereunder. The Korean Securities and Exchange 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 Korean Securities
rules.
Under Rule
4350(h), issuers should conduct a review of all related party transactions on an
ongoing basis and all such transactions should be approved by the audit
committee. 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
4350(i) requires issuers to obtain shareholder approval prior to the issuance of
certain securities, including when an issuance will result in a change of
control, or in connection with the acquisition of the stock or assets of another
corporation. We do not obtain shareholder approval for all of the cases provided
in Rule 4350(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, 2007, we had 672 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
|
|
|
585
|
|
|
|
548
|
|
|
|
450
|
|
Game
operations team
|
|
|
73
|
|
|
|
99
|
|
|
|
84
|
|
International
business, strategy and planning, management support and game marketing
team
|
|
|
275
|
|
|
|
224
|
|
|
|
138
|
|
Total
|
|
|
933
|
|
|
|
871
|
|
|
|
672
|
|
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, 2007, our wholly-owned subsidiaries, Webzen Taiwan, Webzen China,
and Webzen America, had 56, 72 and 4 full-time employees,
respectively.
As of
December 31, 2007, 9Webzen and its subsidiary employed 65 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, 2007, we have pledged short-term
financial instruments in the amount of
W
1,704 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
1,291 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 Securities and Exchange Act,
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.
As of
April 25, 2008, options to purchase an aggregate of 242,300 common shares were
outstanding, and 109,700 of the 242,300 outstanding options were granted to our
Directors or executive officers.
Employee
Stock Ownership Association
An
employee stock ownership association under the Korean Securities and Exchange
Act is an association formed by the employees of a company for the purpose of
acquiring and managing shares issued by such company. Only full-time workers of
a company may join the employee stock ownership association. Officers elected at
a shareholders’ meeting, shareholders (excluding certain minority shareholders)
and part-time workers are not qualified to become members of the
association.
We
established our employee stock ownership association in November 2002. As of
December 31, 2007, 78 of our employees were members of the employee stock
ownership association.
Item 7.
|
Major
Shareholders and Related Party
Transactions
|
7.A. Major
Shareholders
The
following table sets forth information as of June 15, 2008 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 20, 2008, 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:
|
|
|
|
|
|
|
|
|
|
Nam-Ju
Kim(1)
|
|
|
813,279
|
|
|
|
6.27
|
%
|
|
|
6.86
|
%
|
Hyung-Cheol
Kim
|
|
|
3,400
|
|
|
|
0.03
|
%
|
|
|
0.03
|
%
|
Kil-Saup
Song(1)
|
|
|
622,491
|
|
|
|
4.80
|
%
|
|
|
5.5
|
%
|
Seong-Hoon
Joo
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Yong-Seo
Choi
|
|
|
4,224
|
|
|
|
0.03
|
%
|
|
|
0.04
|
%
|
Young-Bong
Yoon
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Beom-Soo
Seo
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Young-Hwan
Choi
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
All
executive officers and Directors as a group
|
|
|
1,443,394
|
|
|
|
11.13
|
%
|
|
|
12.43
|
%
|
Other
major shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ki-Yong
Cho(1)
|
|
|
600,000
|
|
|
|
4.62
|
%
|
|
|
5.06
|
%
|
Woori
Investment Security Co., Ltd.(1)
|
|
|
797,649
|
|
|
|
6.15
|
%
|
|
|
6.73
|
%
|
NHN
Games Corporation
|
|
|
1,364,592
|
|
|
|
10.52
|
%
|
|
|
11.51
|
%
|
(1)
|
Kil-Saup
Song , Ki-Yong Cho, Hyung-Cheol Kim, Yong-Seo Choi, Woori Investment
Security Co., Ltd. and NHN Games Corporation reported to the Financial
Supervisory Service of Korea (“FSS”) that the shares held by each of them
are deemed to be co-held by Nam-Ju Kim under Article 10-4-3 of the
Presidential Decree to the Securities and Exchange Act of Korea. Kil-Saup
Song , Ki-Yong Cho, Hyung-Cheol Kim, Yong-Seo Choi, Woori Investment
Security Co., Ltd. and NHN Games Corporation each executed and delivered a
power of attorney appointing Nam-Ju Kim as the attorney-in-fact with full
power and authority to act with respect to all matters related to Section
200-2 of the Securities and Exchange 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. This was
to increase friendly shares and stabilize the management of our company so
that the management could focus on the maximization of mid- to long-term
shareholder value. The total number of shares held by these shareholders
as of June 20, 2008 was 4,205,635 shares or 32.4% of the issued shares (or
35.5% of the issued and outstanding
shares).
|
According
to JPMorgan Chase Bank, depositary for our ADSs, as of December 31, 2007,
2,824,551 shares of our common shares were held in the form of ADSs,
representing 22% of total outstanding common shares as of such
date.
7.B. Related
Party Transactions
Contribution
to Webzen Taiwan
On
November 20, 2007, we contributed US$1.2 million to Webzen Taiwan, our
wholly-owned subsidiary, in exchange for 4,000,000 newly issued common shares of
the company. In addition, we opened a stand-by letter of credit at Hana Bank
until February 28, 2009 for our business in Taiwan and, in turn, Hana Bank
provided a payment guarantee of U$660,000 for Webzen Taiwan’s loan from a local
bank in Taiwan.
Loan
to Webzen America
We
extended a US$2.0 million aggregate amount loan to Webzen America on February
16, 2007 and June 26, 2007. 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.
Guarantee
for Webzen China
We pledged
W
1,100
million in a restricted account as of December 31, 2007 to guarantee Webzen
China’s payment of its short-term borrowings from Korea Exchange Bank, Shanghai
Branch.
Service
Contracts with Woori Investment Security Co., Ltd.
In
December, 2007, we entered into a consulting service contract with Woori
Investment Security Co., Ltd. for advisory service regarding our corporate
governance and recorded
W
67 million as
service fees during 2007.
In July
2007, we entered into a consulting service contract with Woori Investment
Security Co., Ltd. for advisory service regarding the operation of our share
repurchase program and recorded
W
446 million as
service fees during 2007.
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
Prior to
our general meeting of shareholders, held on March 28, 2008, Neowave Inc. and
Liveplex Co., Ltd., which nominated their own slate of Director candidates for
election, filed eight law suits with the Central Seoul District Court requesting
the court’s injunction to hold a special shareholders’ meeting, open our
registered and beneficial shareholder list to them, open our books and records
to them, block the voting of Woori Investment Security Co., Ltd. at the general
shareholders’ meeting, block the shareholders’ voting on certain items proposed
by our management and prohibit us from impeding the two entities’ voting. All of
the abovementioned law suits were dismissed by the court, or the plaintiffs
withdrew the complaint.
In April
2008, Liveplex Co., Ltd. filed a law suit with the Central Seoul District Court
requesting the court to nullify the election of the management slate of
Directors and Audit Committee members. In June 2008, Liveplex Co., Ltd. withdrew
its complaint.
None of
the law suits described herein had significant effects on our financial position
or profitability.
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.
Stock
split
On June
10, 2004, we announced a 3-to-1 stock split to our shareholders of record as of
June 28, 2004. In connection with such stock split, the ratio of our common
shares to ADR changed from 1:10 to 3:10, effective July 20, 2004.
8.B. Significant
Changes
In
February 2008, we acquired 10.78% of the common stock of NeoWave, Inc. in the
market for
W
4,548
million.
Gameon
launched open beta testing and commercial service of Soul of the Ultimate Nation
(SUN) in Japan in March and April 2008, respectively.
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 certain fixed amounts and a percentage of the net receipt it will
collect after the commercial launch of APB.
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. for the
distribution of Huxley in North America and Europe.
In June
2008, NHN Games Corporation acquired approximately 10.52% of our issued common
shares. See “Item 7. Major Shareholders and Related Party
Transactions.”
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 volume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
quarter
|
|
|
125,000
|
|
|
|
71,600
|
|
|
|
144,721
|
|
|
|
508.60
|
|
|
|
382.50
|
|
|
|
690.49
|
|
|
|
538.46
|
|
Third
quarter
|
|
|
151,500
|
|
|
|
114,800
|
|
|
|
185,487
|
|
|
|
535.00
|
|
|
|
448.50
|
|
|
|
767.46
|
|
|
|
674.75
|
|
Fourth
quarter
|
|
|
158,500
|
|
|
|
112,000
|
|
|
|
124,814
|
|
|
|
481.70
|
|
|
|
430.90
|
|
|
|
822.16
|
|
|
|
704.29
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
12,800
|
|
|
|
9,850
|
|
|
|
81,695
|
|
|
|
719.25
|
|
|
|
603.11
|
|
|
|
1,863.90
|
|
|
|
1,589.06
|
|
February
|
|
|
11,550
|
|
|
|
9,880
|
|
|
|
69,740
|
|
|
|
660.75
|
|
|
|
612.57
|
|
|
|
1,736.17
|
|
|
|
1,631.78
|
|
March
|
|
|
11,400
|
|
|
|
9,810
|
|
|
|
61,155
|
|
|
|
652.55
|
|
|
|
600.10
|
|
|
|
1,703.99
|
|
|
|
1,574.44
|
|
April
|
|
|
10,150
|
|
|
|
8,990
|
|
|
|
38,896
|
|
|
|
654.70
|
|
|
|
641.03
|
|
|
|
1,825.47
|
|
|
|
1,702.25
|
|
May
|
|
|
12,800
|
|
|
|
8,980
|
|
|
|
189,674
|
|
|
|
655.80
|
|
|
|
640.96
|
|
|
|
1,888.88
|
|
|
|
1,800.58
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
December
|
|
|
11.20
|
|
|
|
9.68
|
|
|
|
524,100
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
4.06
|
|
|
|
3.25
|
|
|
|
53,161
|
|
February
|
|
|
3.71
|
|
|
|
2.90
|
|
|
|
39,885
|
|
March
|
|
|
3.42
|
|
|
|
2.74
|
|
|
|
46,785
|
|
April
|
|
|
3.15
|
|
|
|
2.68
|
|
|
|
16,236
|
|
May
|
|
|
3.64
|
|
|
|
2.50
|
|
|
|
64,285
|
|
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 May
31, 2008, 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 Depository may act as agents and provide
related services for foreign shareholders. Certain foreign exchange controls and
securities regulations apply to the transfer of shares 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
February 2006, we entered into a worldwide publishing rights contract for
the online game tentatively named T-Project with Red 5, a company based in
the United States.
|
|
·
|
In
June 2006, we entered into an agreement with Massive Inc. for placing
advertisements in certain video
games.
|
|
·
|
In
February 2007, The9 and we entered into a US$35 million three-year
exclusive license agreement with The9 to publish the PC version of Huxley
in China.
|
|
·
|
In
October 2007, we entered into three-year licensing agreement with Gameon
for the distribution of Soul of the Ultimate Nation (SUN) in Japan for
royalty fees with a minimum
guarantee.
|
|
·
|
In
December 2007, Webzen Taiwan entered into a publishing rights contract for
the online game Mini Fighter service in Taiwan with CJ
Internet.
|
|
·
|
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 certain fixed amounts and a percentage
of the net receipt it will collect after the commercial launch of
APB.
|
|
·
|
In
May 2008, we entered into a three-year license agreement with NHN USA Inc.
for the distribution of Huxley in North America and
Europe.
|
The above
contracts are online game publishing rights or 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 and certain
equity related debt securities, such as convertible bonds and bonds with
warrants (collectively, the “Equity Securities”), together with the Equity
Securities beneficially owned by certain related persons or by any person acting
in concert with such person that account for 5% or more of the total outstanding
Equity Securities, is required to report the status and purpose (in terms of
whether the purpose of shareholding is to affect control over management of the
issuer) of such holding to the FSC and the KSX or the Korea Securities Dealers
Association 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, or (2) in the shareholding purpose, is required to be reported to
the FSC and the KSX within five business days from the date of such change.
However, the reporting deadline of such reporting requirement is extended for
institutional investors who hold shares for purposes other than management
control to the tenth day of the month immediately following the month in which
the shares were acquired or the shareholdings were otherwise changed. Under the
recently amended Korean Securities and Exchange Act, 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 for five days subsequent to the report.
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,
unless prohibited by specific laws. Foreign investors may trade shares listed on
KRX Stock Market or KOSDAQ only through KRX Stock Market or the KOSDAQ, 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
involving shares with respect to which the limit on aggregate foreign ownership
has been reached or exceeded, a securities company licensed in Korea must act as
an intermediary. Odd lot trading of shares outside KRX Stock Market or KOSDAQ
must involve a licensed securities company 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 (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 financial institutions or similar international organizations,
corporations incorporated under foreign laws and any person in any additional
category designated by decree of the MOFE. 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, 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, 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 trust
companies, internationally recognized foreign custodians, the entity licensed to
be engaged in futures transaction business under Korean Futures Transaction Law,
and securities companies (including domestic branches of foreign securities
companies) which have obtained a license 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 itsself. However, a foreign investor may be exempted
from complying with these standing proxy rules with the approval of the Governor
in cases deemed inevitable by reason of conflict between laws of Korea and 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), securities companies (including domestic branches of foreign
securities companies), investment trust companies, entities licensed to be
engaged in futures transaction business under Korean Futures Transaction Law,
internationally recognized foreign custodians 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 Ministry of Commerce, Industry and Energy, 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 MIC 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:
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are
an individual U.S. resident, a U.S. corporation or a partnership or trust
to the extent your income is subject to taxation in the United States as
the income of a U.S. resident;
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are
not also a resident of Korea for purposes of the tax treaty between the
United States and Korea;
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are
not subject to any anti-treaty shopping article that applies in limited
circumstances; and
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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.
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In order
to obtain the benefits of a reduced withholding tax rate under a tax treaty, you
must submit to us, prior to the dividend payment date, 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 depository), 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:
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certain
financial institutions;
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dealers
and traders in securities or foreign
currencies;
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persons
holding common shares or ADSs as part of a hedge, straddle, integrated
transaction or conversion
transaction;
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persons
whose functional currency for U.S. federal income tax purposes is not the
U.S. dollar;
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partnerships
or other entities classified as partnerships for U.S. federal income tax
purposes;
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persons
liable for the alternative minimum
tax;
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tax-exempt
organizations;
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persons
holding common shares or ADSs that own or are deemed to own more than ten
percent of any class of our stock;
or
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persons
who acquired our common shares or ADSs pursuant to the exercise of an
employee stock option or otherwise as
compensation.
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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 and are, for U.S.
federal tax purposes:
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a
citizen or resident of the United
States;
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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
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an
estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source.
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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
receipts are released before delivery of shares to the depositary
(“pre-release”) 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 2007 taxable year and the
amount of passive assets, including cash and cash equivalents, held by us
throughout that year, we believe that we may have been a passive foreign
investment company (“PFIC”) for our 2007 taxable year. Further, there is a
significant risk that we will be a PFIC for our 2008 taxable year and 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.
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 that are also
PFICs (“subsidiary PFICs”), and will generally be subject to U.S. federal income
tax as if such holders directly held the shares of such subsidiary
PFICs.
To avoid
the foregoing rules 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
subsidiary 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 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.
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 subsidiary 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 for any year in which we are treated as a PFIC and the
next succeeding 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.
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Quantitative
and Qualitative Disclosures about Market
Risk
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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 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, Taiwan dollars or Renminbi. For
example, our revenues may be impacted by exchange rate fluctuations in the
Renminbi, U.S. 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, 2007, we had
W
66,857 million of
cash or cash equivalents, approximately
W
1,448 million or
US$1.5 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.
Interest rate
risk.
Our exposure to risk from changes in interest rates relates
primarily to our investments in short-term financial instruments and other
inves
tments. 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.
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Description
of Securities Other than Equity
Securities
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Not
applicable.
PART II
Item 13.
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Defaults,
Dividend Arrearages and
Delinquencies
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None.
Item 14.
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Material
Modifications to the Rights of Security Holders and Use of
Proceeds
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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, 2007, we have used a total of approximately
W
42,017 million,
or approximately US$45.1 million, of our IPO proceeds.
W
37,031 million
was used for the development of new games,
W
2,271 million was
used for advertisement and marketing,
W
1,420 million was
used for equipment and computer software and
W
1,296 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, 2007. 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 Securities Exchange Act of 1934 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 Securities Exchange
Act of 1934 as a process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer, as the Company’s 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 the assets of the
Company;
|
|
·
|
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
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use of 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. 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, 2007 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, 2007, our internal control over
financial reporting was effective.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007 has been audited by Samil PricewaterhouseCoopers LLP, 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, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Item 16A.
|
Audit
Committee Financial Expert
|
The Audit
Committee is comprised of the following three independent Directors: Young-Bong
Yoon, Beom-Soo Seo and Young-Hwan Choi. All of our independent Directors are
financially literate and our board of Directors designated Yong-Bong Yoon 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.
We have
adopted a code of ethics that applies to all employees as well as each member of
our board of Directors. 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,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Audit
fees(2)
|
|
|
504,300
|
|
|
|
438,487
|
|
|
|
469
|
|
Audit-related
fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Tax
fees
|
|
|
10,073
|
|
|
|
6,153
|
|
|
|
7
|
|
All
other fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
For
convenience, the Won amounts are expressed in U.S. dollars at the rate of
W
935.8
to US$1.00, the noon buying rate in effect on December 31, 2007 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.
|
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, 2008 until April 30, 2008:
|
|
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
|
|
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
|
|
|
|
30,389
|
|
January
23-24, 2008 (2)
|
|
|
30,389
|
|
|
|
10,369
|
|
|
|
250,000
|
|
|
|
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.
|
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, 2006 and 2007 (page F-4)
(b) Consolidated
Statements of Operations for the Years Ended December 31, 2005, 2006 and 2007
(page F-5)
(c) Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended December 31,
2005, 2006 and 2007 (page F-6)
(d) Consolidated
Statements of Cash Flows for the Years Ended December 31, 2005, 2006 and 2007
(page F-8)
(e) Notes
to Consolidated Financial Statements (page F-10 to F-28)
1.1*
|
Articles
of Incorporation Amended on March 28, 2006 (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**
|
Joint
Venture Agreement, dated September 10, 2002, between the registrant and
GameNow.net (Hong Kong) Ltd.
|
|
|
4.2††
|
Share
Purchase Agreement, dated December 24, 2004, between the registrant and
Gameon Co., Ltd. (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 (See “Item 4. Information on the Company — 4.C.
Organizational Structure” of this Form 20-F)
|
|
|
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 30, 2006
|
|
|
**
|
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.
|
Webzen Inc.
and
subsidiaries
Index
December
31, 2006 and 2007
|
Page(s)
|
|
|
|
F-2
- F-3
|
|
|
Consolidated
Financial Statements
|
|
|
|
|
F-4
|
|
F-5
|
|
|
|
F-6
- F-7
|
|
|
|
F-8
- F-9
|
|
F-10
- F-28
|
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 2006, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2007 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, 2007, 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). 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 16,
2008
Webzen Inc.
and
subsidiaries
Consolidated Balance Sheets
December
31, 2006 and 2007
(In
millions of Korean Won and in thousands of U.S. dollars, except per share
data)
|
|
|
|
|
|
|
|
(Note 3)
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
₩
|
78,138
|
|
|
₩
|
66,857
|
|
|
$
|
71,444
|
|
Short-term
financial instruments
|
|
|
5,211
|
|
|
|
8,047
|
|
|
|
8,599
|
|
Available-for-sale
securities
|
|
|
11,748
|
|
|
|
-
|
|
|
|
-
|
|
Accounts
receivable, net of allowance
|
|
|
4,229
|
|
|
|
4,566
|
|
|
|
4,880
|
|
Other
current assets
|
|
|
2,882
|
|
|
|
5,188
|
|
|
|
5,543
|
|
Total
current assets
|
|
|
102,208
|
|
|
|
84,658
|
|
|
|
90,466
|
|
Property
and equipment, net
|
|
|
17,772
|
|
|
|
11,147
|
|
|
|
11,912
|
|
Leasehold
and other deposits
|
|
|
18,803
|
|
|
|
21,499
|
|
|
|
22,974
|
|
Other
non-current assets
|
|
|
3,602
|
|
|
|
4,110
|
|
|
|
4,392
|
|
Total
assets
|
|
₩
|
142,385
|
|
|
₩
|
121,414
|
|
|
$
|
129,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
₩
|
2,996
|
|
|
₩
|
3,897
|
|
|
$
|
4,165
|
|
Deferred
income
|
|
|
4,971
|
|
|
|
7,200
|
|
|
|
7,694
|
|
Other
current liabilities
|
|
|
680
|
|
|
|
1,880
|
|
|
|
2,010
|
|
Total
current liabilities
|
|
|
8,647
|
|
|
|
12,977
|
|
|
|
13,869
|
|
Long-term
deferred income
|
|
|
1,388
|
|
|
|
3,987
|
|
|
|
4,260
|
|
Accrued
severance benefits
|
|
|
5,774
|
|
|
|
4,458
|
|
|
|
4,763
|
|
Guarantee
deposits
|
|
|
872
|
|
|
|
972
|
|
|
|
1,039
|
|
Other
non-current liabilities
|
|
|
10
|
|
|
|
81
|
|
|
|
86
|
|
Total
liabilities
|
|
|
16,691
|
|
|
|
22,475
|
|
|
|
24,017
|
|
Minority
interest
|
|
|
298
|
|
|
|
70
|
|
|
|
75
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock,
₩
500 par
value,
|
|
|
|
|
|
|
|
|
|
|
|
|
6,485,000
shares authorized at
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006 and 2007, no shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
and
outstanding at December 31, 2006 and 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
stock,
₩
500 par
value, 6,485,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
authorized
at December 31, 2006 and 2007,
|
|
|
|
|
|
|
|
|
|
|
|
|
no
shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
at
December 31, 2006 and 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock,
₩
500 par
value 27,030,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
authorized
at December 31, 2006 and 2007,
|
|
|
|
|
|
|
|
|
|
|
|
|
12,972,000
shares issued and 12,212,651 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at December 31, 2006 and
|
|
|
|
|
|
|
|
|
|
|
|
|
12,974,000
shares issued and 12,492,689 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
at December 31, 2007
|
|
|
6,486
|
|
|
|
6,487
|
|
|
|
6,932
|
|
Additional
paid-in capital
|
|
|
136,207
|
|
|
|
133,647
|
|
|
|
142,816
|
|
Accumulated
deficit
|
|
|
(8,359
|
)
|
|
|
(33,953
|
)
|
|
|
(36,282
|
)
|
Loans
to employees related to employee stock purchase plan
|
|
|
(58
|
)
|
|
|
-
|
|
|
|
-
|
|
Treasury
stock, 759,349 shares and 481,311 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
at
December 31, 2006 and 2007, respectively
|
|
|
(14,237
|
)
|
|
|
(6,789
|
)
|
|
|
(7,255
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
5,357
|
|
|
|
(523
|
)
|
|
|
(559
|
)
|
Total
stockholders’ equity
|
|
|
125,396
|
|
|
|
98,869
|
|
|
|
105,652
|
|
Total
liabilities and stockholders’ equity
|
|
₩
|
142,385
|
|
|
₩
|
121,414
|
|
|
$
|
129,744
|
|
The
accompanying notes are integral part of these financial statements
.
Webzen Inc.
and
subsidiaries
Consolidated Statements of
Operations
Years
ended December 31, 2005, 2006 and 2007
(In
millions of Korean Won and in thousands of U.S. dollars, except earnings per
share data)
|
|
|
|
|
|
|
|
|
|
|
(Note
3)
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
game subscriptions
|
|
₩
|
26,830
|
|
|
₩
|
21,247
|
|
|
₩
|
22,884
|
|
|
$
|
24,454
|
|
Royalties
and license fees
|
|
|
4,816
|
|
|
|
2,811
|
|
|
|
6,213
|
|
|
|
6,639
|
|
Total
net revenues
|
|
|
31,646
|
|
|
|
24,058
|
|
|
|
29,097
|
|
|
|
31,093
|
|
Cost
of revenues
|
|
|
12,815
|
|
|
|
15,722
|
|
|
|
17,505
|
|
|
|
18,706
|
|
Gross
profit
|
|
|
18,831
|
|
|
|
8,336
|
|
|
|
11,592
|
|
|
|
12,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
26,763
|
|
|
|
32,699
|
|
|
|
22,848
|
|
|
|
24,415
|
|
Research
and development expenses
|
|
|
20,282
|
|
|
|
24,062
|
|
|
|
23,164
|
|
|
|
24,753
|
|
Operating
loss
|
|
|
(28,214
|
)
|
|
|
(48,425
|
)
|
|
|
(34,420
|
)
|
|
|
(36,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,747
|
|
|
|
3,991
|
|
|
|
3,503
|
|
|
|
3,743
|
|
Foreign
currency gains
|
|
|
59
|
|
|
|
29
|
|
|
|
239
|
|
|
|
255
|
|
Foreign
currency losses
|
|
|
(436
|
)
|
|
|
(530
|
)
|
|
|
(147
|
)
|
|
|
(157
|
)
|
Gain
(loss) on disposal of property and equipment
|
|
|
(40
|
)
|
|
|
115
|
|
|
|
3,931
|
|
|
|
4,200
|
|
Gain
on disposal of available-for-sale securities
|
|
|
173
|
|
|
|
2,535
|
|
|
|
3,755
|
|
|
|
4,013
|
|
Others,
net
|
|
|
31
|
|
|
|
(203
|
)
|
|
|
(118
|
)
|
|
|
(125
|
)
|
Loss
before income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses,
equity in losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
equity investment and minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
|
(23,680
|
)
|
|
|
(42,488
|
)
|
|
|
(23,257
|
)
|
|
|
(24,852
|
)
|
Income
tax expenses (benefits)
|
|
|
(5,507
|
)
|
|
|
5,102
|
|
|
|
2,579
|
|
|
|
2,756
|
|
Loss
before equity in losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
related equity investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
minority interest
|
|
|
(18,173
|
)
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
|
(27,608
|
)
|
Equity
in losses of related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
investment, net of taxes
|
|
|
(664
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
before minority interest
|
|
|
(18,837
|
)
|
|
|
(47,590
|
)
|
|
|
(25,836
|
)
|
|
|
(27,608
|
)
|
Minority
interest
|
|
|
33
|
|
|
|
525
|
|
|
|
242
|
|
|
|
259
|
|
Net
loss
|
|
₩
|
(18,804
|
)
|
|
₩
|
(47,065
|
)
|
|
₩
|
(25,594
|
)
|
|
$
|
(27,349
|
)
|
Loss
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
₩
|
(1,497
|
)
|
|
₩
|
(3,847
|
)
|
|
₩
|
(2,078
|
)
|
|
$
|
(2.22
|
)
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
12,563,892
|
|
|
|
12,233,204
|
|
|
|
12,319,347
|
|
|
|
12,319,347
|
|
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, 2005, 2006 and 2007
(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, 2005
|
|
|
12,900,000
|
|
|
₩
|
6,485
|
|
|
₩
|
135,513
|
|
|
₩
|
60,735
|
|
|
₩
|
(908
|
)
|
|
₩
|
(2,061
|
)
|
|
₩
|
(788
|
)
|
|
₩
|
198,976
|
|
Treasury
stock purchase
|
|
|
(610,698
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,684
|
)
|
|
|
-
|
|
|
|
(10,684
|
)
|
Loans
to employees related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
stock purchase plan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
571
|
|
|
|
-
|
|
|
|
-
|
|
|
|
571
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
378
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
378
|
|
Dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,225
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,225
|
)
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,804
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,804
|
)
|
Unrealized
gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
securities, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
287
|
|
|
|
287
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments,
net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(87
|
)
|
|
|
(87
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
277
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
277
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(47,065
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(47,065
|
)
|
Unrealized
gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
securities, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,484
|
|
|
|
6,484
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments,
net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
163
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,594
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,594
|
)
|
Unrealized
gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
securities, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,824
|
)
|
|
|
(5,824
|
)
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments,
net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(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
|
|
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, 2005, 2006 and 2007
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note
3) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
12,212,651
|
|
|
$
|
6,931
|
|
|
$
|
145,552
|
|
|
$
|
(8,933
|
)
|
|
$
|
(61
|
)
|
|
$
|
(15,214
|
)
|
|
$
|
5,724
|
|
|
$
|
133,999
|
|
Exercise
of stock options
|
|
|
2,000
|
|
|
|
1
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
Treasury
stock purchase
|
|
|
(755,616
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,091
|
)
|
|
|
-
|
|
|
|
(10,091
|
)
|
Disposition
of treasury stock
|
|
|
1,033,654
|
|
|
|
-
|
|
|
|
(2,912
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
18,050
|
|
|
|
-
|
|
|
|
15,138
|
|
Loans
to employees related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employees
stock purchase plan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
174
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
174
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,349
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,349
|
)
|
Unrealized
gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
securities, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,223
|
)
|
|
|
(6,223
|
)
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments,
net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
(60
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,632
|
)
|
Balance
at December 31, 2007
|
|
|
12,492,689
|
|
|
$
|
6,932
|
|
|
$
|
142,816
|
|
|
$
|
(36,282
|
)
|
|
$
|
-
|
|
|
$
|
(7,255
|
)
|
|
$
|
(559
|
)
|
|
$
|
105,652
|
|
The
accompanying notes are integral part of these financial statements
.
Webzen Inc.
and
subsidiaries
Consolidated Statements of Cash
Flows
Years
ended December 31, 2005, 2006 and 2007
(In
millions of Korean Won and in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
(Note
3)
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
₩
|
(18,804
|
)
|
|
₩
|
(47,065
|
)
|
|
₩
|
(25,594
|
)
|
|
$
|
(27,349
|
)
|
Adjustments
to reconcile net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,126
|
|
|
|
5,871
|
|
|
|
5,441
|
|
|
|
5,814
|
|
Provision
for accrued severance benefits
|
|
|
2,092
|
|
|
|
2,483
|
|
|
|
1,287
|
|
|
|
1,375
|
|
Equity
in losses of related equity investment
|
|
|
862
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
income taxes
|
|
|
(6,132
|
)
|
|
|
4,777
|
|
|
|
2,209
|
|
|
|
2,361
|
|
Gain
on disposal of available-for-sale securities
|
|
|
(173
|
)
|
|
|
(2,535
|
)
|
|
|
(3,755
|
)
|
|
|
(4,013
|
)
|
Loss
(gain) on disposal of property and equipment
|
|
|
40
|
|
|
|
(115
|
)
|
|
|
(3,931
|
)
|
|
|
(4,200
|
)
|
Other
|
|
|
332
|
|
|
|
325
|
|
|
|
(218
|
)
|
|
|
(232
|
)
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,353
|
|
|
|
8
|
|
|
|
(262
|
)
|
|
|
(280
|
)
|
Dividends
from related equity investment
|
|
|
1,482
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accounts
payable and accrued expenses
|
|
|
1,119
|
|
|
|
(1,572
|
)
|
|
|
806
|
|
|
|
861
|
|
Deferred
income
|
|
|
(110
|
)
|
|
|
(797
|
)
|
|
|
4,716
|
|
|
|
5,039
|
|
Income
taxes payable
|
|
|
(1,363
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
current liabilities
|
|
|
163
|
|
|
|
85
|
|
|
|
117
|
|
|
|
125
|
|
Payment
of severance benefits
|
|
|
(233
|
)
|
|
|
(988
|
)
|
|
|
(2,603
|
)
|
|
|
(2,782
|
)
|
Others
|
|
|
239
|
|
|
|
863
|
|
|
|
(239
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(14,007
|
)
|
|
|
(38,660
|
)
|
|
|
(22,026
|
)
|
|
|
(23,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in short-term financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments
|
|
|
(602
|
)
|
|
|
(2,321
|
)
|
|
|
(2,715
|
)
|
|
|
(2,902
|
)
|
Decrease
(increase) in restricted cash
|
|
|
3,219
|
|
|
|
166
|
|
|
|
(2,390
|
)
|
|
|
(2,554
|
)
|
Acquisition
of available-for-sale securities
|
|
|
(36,239
|
)
|
|
|
(16,280
|
)
|
|
|
(11,656
|
)
|
|
|
(12,456
|
)
|
Proceeds
from sale of available-for-sale securities
|
|
|
31,995
|
|
|
|
21,360
|
|
|
|
17,651
|
|
|
|
18,862
|
|
Increase
in loans to employees
|
|
|
(1,588
|
)
|
|
|
(1,405
|
)
|
|
|
(861
|
)
|
|
|
(919
|
)
|
Decrease
in loans to employees
|
|
|
190
|
|
|
|
1,288
|
|
|
|
1,533
|
|
|
|
1,639
|
|
Purchase
of property, equipment and intangible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
(5,505
|
)
|
|
|
(3,366
|
)
|
|
|
(1,502
|
)
|
|
|
(1,605
|
)
|
Proceeds
from sale of property, equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
intangible assets
|
|
|
2
|
|
|
|
1
|
|
|
|
7,625
|
|
|
|
8,148
|
|
Cash
paid for acquisition, net of cash acquired
|
|
|
5,438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Increase
in leasehold and other deposits
|
|
|
(7,413
|
)
|
|
|
(1,479
|
)
|
|
|
(7,420
|
)
|
|
|
(7,929
|
)
|
Decrease
in leasehold and other deposits
|
|
|
4
|
|
|
|
192
|
|
|
|
4,730
|
|
|
|
5,055
|
|
Increase
in capitalized software development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cost
|
|
|
-
|
|
|
|
(1,851
|
)
|
|
|
-
|
|
|
|
-
|
|
Others,
net
|
|
|
(214
|
)
|
|
|
121
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investing
activities
|
|
|
(10,713
|
)
|
|
|
(3,574
|
)
|
|
|
4,995
|
|
|
|
5,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock, net
|
|
|
-
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
Increase
in short-term borrowings, net
|
|
|
-
|
|
|
|
-
|
|
|
|
916
|
|
|
|
979
|
|
Acquisition
of treasury stock
|
|
|
(10,684
|
)
|
|
|
(1,648
|
)
|
|
|
(9,443
|
)
|
|
|
(10,091
|
)
|
Proceeds
from sale of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
14,166
|
|
|
|
15,138
|
|
Increase
in leasehold deposits received
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
107
|
|
Repayment
of leasehold deposits received
|
|
|
(253
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Repayment
of capital lease liability
|
|
|
-
|
|
|
|
-
|
|
|
|
(44
|
)
|
|
|
(47
|
)
|
Loan
to employees related to employee stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purchase
plan
|
|
|
572
|
|
|
|
279
|
|
|
|
58
|
|
|
|
62
|
|
Dividends
|
|
|
(5,058
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financing
activities
|
|
|
(15,423
|
)
|
|
|
(1,367
|
)
|
|
|
5,756
|
|
|
|
6,151
|
|
Webzen Inc.
and
subsidiaries
Consolidated
Statements of Cash Flows
Years
ended December 31, 2005, 2006 and 2007
(In
millions of Korean Won and in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
(Note
3)
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
and
cash equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
equivalents
|
|
|
(40,143
|
)
|
|
|
(43,601
|
)
|
|
|
(11,281
|
)
|
|
|
(12,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
161,882
|
|
|
|
121,739
|
|
|
|
78,138
|
|
|
|
83,498
|
|
End
of year
|
|
₩
|
121,739
|
|
|
₩
|
78,138
|
|
|
₩
|
66,857
|
|
|
$
|
71,444
|
|
The
accompanying notes are integral part of these financial statements.
Webzen Inc.
and
subsidiaries
Notes to Consolidated Financial
Statements
December
31, 2006 and 2007
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
massively 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 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"). The equity method of accounting is used
for unconsolidated investments in which the Company exercises significant
influence. All other investments are accounted for using the cost method. 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.
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
Revenue
recognition
Revenue
recognition for games subscriptions
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.
For the
year ended December 31, 2007, 89%, 7% and 4% 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.
Restricted
cash
As of
December 31, 2006 and 2007, time deposits amounting to
₩
414 million and
₩
304 million
have been pledged to guarantee loans made to certain employees in connection
with the stock ownership plan, respectively. In addition, as of December 31,
2007, time deposits amounting to
₩
1,400 million have
been pledged to guarantee loans made to certain employees for the acquisition of
stocks. As of December 31, 2006 and 2007, in connection with development of
game, the current deposits of ₩30 million resulting from government grants is
restricted for use only for the development of “Huxley”. As of December 31,
2007,
₩
1,100
million have been pledged to guarantee for subsidiary’s short-term borrowings
from Korea Exchange Bank in China. Those amounts are included within other
current assets in the accompanying consolidated balance sheets.
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
Investments
All of the
Company's investments in debt securities and equity securities are classified as
available-for-sale. Available-for-sale securities with maturities greater than
twelve months are classified as short term when they are intended for use in
current operations. Investments in available-for-sale securities are reported at
fair value with unrealized gains, net of tax, as a component of accumulated
other comprehensive income. The Company monitored its investments for impairment
periodically and recorded appropriate reductions in carrying values when the
declines were determined to be other-than-temporary.
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.
Significant
renewals and additions are capitalized at cost. Maintenance and repairs are
charged to income as incurred.
As of
December 31, 2007, 85%, 5%, 5% and 5% of the Company's property and equipment
are located in Korea, China, Taiwan and the United States of America,
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.
Investment
in related equity investment
The
Company acquired a 49% interest in 9Webzen Limited Hong Kong ("9Webzen") in
2002. The business markets and distributes the Company’s online game “MU” in
China. On December 14, 2005, the Company acquired additional 21% interest in
9Webzen from Gamenow.net (Hong Kong) Limited ("Gamenow"). Prior to the
additional acquisition, the investment was accounted for using the equity
method. Subsequent to the additional acquisition, the accounts of the investment
are included in the accompanying consolidated financial statements.
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
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
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 recorded as a
component of cost of revenues.
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.
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 assets purchased for research and development
purpose, until technological feasibility is reached.
In
February 2005, the Company entered into a worldwide publishing rights contract
for the online PC game APB with Real Time Worlds Ltd., 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.
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
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 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, 2005, 2006 and 2007, the Company paid
₩
7,205 million,
₩
11,156
million and
₩
13,894 million,
respectively, in accordance with the terms of the contract. This payment was
expensed and recorded as a research and development expense in the consolidated
statements of operations for the years ended December 31, 2005, 2006 and
2007.
In April
2008, the Company subsequently 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 or before December 31, 2008 and 15% of cash receipt following commercial
release of the game APB for the first three years from commercial
launch.
Research
and development costs included in the cost of revenues for the years ended
December 31, 2005, 2006 and 2007 amounted to
₩
2,149 million,
₩
4,147
million and
₩
7,369 million,
respectively.
Advertising
The
Company expenses advertising costs as incurred. Advertising expense was
approximately
₩
8,176 million,
₩
8,898
million and
₩
2,271 million for
the years ended December 31, 2005, 2006 and 2007, 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 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 2005 and 2006 and
20% for 2007 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. Accrued
severance benefits are estimated assuming all eligible employees were to
terminate their employment at the balance sheet date. The annual severance
benefits expense charged to operations is calculated based upon the net change
in the accrued severance benefits payable at the balance sheet
date.
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
Lease
Transactions
The
Company accounts for lease transactions as either operating leases or capital
leases, depending on the terms of the underlying lease agreement. Equipments
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 accrued interest. Accrued interest is
amortized over the lease period using the effective interest rate
method.
Vehicles,
housing and offices 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.
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 the portion vesting in the period
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).
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
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, 2006 and 2007 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 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 2005 and 2006 consolidated financial statements have been
reclassified to conform to 2007 presentation.
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
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
February 2007, the FASB issued SFAS No. 159
The Fair Value Option for Financial
Assets and Financial Liabilities
(“FAS 159”), which provides companies
with an option to report selected financial assets and liabilities at fair value
in an attempt to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. This Statement is effective as of the beginning of an
entity’s first fiscal year beginning after November 15, 2007. The Company is
currently evaluating the impact that the adoption may have on the
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(revised 2007)
Business Combinations
(“FAS
141(R)”). This standard establishes principles and requirements for how the
acquirer recognizes and measures the acquired identifiable assets, assumed
liabilities, noncontrolling interest in the acquiree, and acquired goodwill or
gain from a bargain purchase. FAS 141(R) also determines what information the
acquirer must disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. FAS
141(R) applies prospectively to business combinations for which the
acquisition date is on or after January 1, 2009. The
Company is assessing the potential impact of this standard on the
financial condition and results of operations.
In
December 2007, the FASB issued SFAS No. 160
Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51
(“FAS
160”). This standard establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. FAS 160 clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. FAS 160 is
effective for the Company as of January 1, 2009 with early
adoption prohibited. FAS 160 shall be applied prospectively as of the
beginning of the fiscal year in which this standard is initially
applied. The presentation and disclosure requirements of this
standard shall be applied retrospectively for all periods presented and will
impact how the Company presents and discloses noncontrolling interests
and income from noncontrolling interests in our financial
statements.
In March
2008, the FASB issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities
(“FAS 161”). The new standard is
intended to help investors better understand how derivative instruments and
hedging activities affect an entity’s financial position, financial
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
performance
and cash flows through enhanced disclosure requirements. The enhanced
disclosures include, for example:
|
●
|
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.
|
FAS 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 of
adopting this standard.
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 935.8 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, 2007. 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.
Property and equipment, net
Property
and equipment as of December 31, 2006 and 2007 are as follows:
(in
millions of Korean Won)
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
Land
|
|
₩
|
2,612
|
|
|
₩
|
1,514
|
|
Building
|
|
|
6,144
|
|
|
|
3,363
|
|
Computer
and equipment
|
|
|
20,081
|
|
|
|
18,487
|
|
Furniture
and fixtures
|
|
|
3,306
|
|
|
|
3,314
|
|
Vehicles
|
|
|
45
|
|
|
|
72
|
|
Software-externally
purchased
|
|
|
5,710
|
|
|
|
6,505
|
|
|
|
|
37,898
|
|
|
|
33,255
|
|
Less:
accumulated depreciation and amortization
|
|
|
(20,126
|
)
|
|
|
(22,108
|
)
|
|
|
₩
|
17,772
|
|
|
₩
|
11,147
|
|
Depreciation
and amortization expense for the years ended December 31, 2005, 2006 and 2007,
were
₩
4,125
million,
₩
5,687 million and
₩
4,670
million, respectively. The amortization expense of externally purchased software
for 2008, 2009, 2010, 2011 and 2012 is
₩
1,046 million,
₩
592 million,
₩
311 million,
₩
154 million
and
₩
88
million, respectively.
5.
Acquisition
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
On
December 14, 2005, the Company acquired 21% of the common stock of 9Webzen from
Gamenow for $2,750 thousand (
₩
2,831 million
equivalent) in cash.
At the
date of the acquisition, the Company obtained an independent valuation of the
assets acquired and liabilities assumed, resulting in goodwill amounted to
₩
388
million.
Goodwill
was reviewed for impairment in accordance with SFAS No. 142
Goodwill and other Intangible Assets
on each balance sheet date. As of December 31, 2006, a goodwill
impairment loss of
₩
388 million was
recognized in the reporting unit since the carrying amount of the reporting unit
goodwill exceeded the implied fair value of that goodwill. The fair value of
that reporting unit was estimated using the expected present value of future
cash flows.
6.
Investments
Investments
in related equity investment
The
Company acquired additional 21% of the common stock of 9Webzen on December 14,
2005 and there is no equity method investee as of December 31, 2006 and 2007.
Summarized financial information of the Company’s equity method investee, which
is 9Webzen Ltd., for 2005 is as follows :
(in
millions of Korean Won)
|
|
As
of December 31,
2005
and for the
period
from
January
1, 2005
through
December
14, 2005
|
|
|
|
|
|
Financial
position information of the equity investment
|
|
|
|
Current
assets
|
|
₩
|
10,021
|
|
Non-current
assets
|
|
|
1,632
|
|
Current
liabilities
|
|
|
2,353
|
|
Retained
earnings
|
|
|
7,458
|
|
Total
equity
|
|
|
9,300
|
|
|
|
|
|
|
Income
statement information of the equity investment
|
|
|
|
|
Revenue
|
|
₩
|
5,978
|
|
Gross
loss
|
|
|
(260
|
)
|
Operating
loss
|
|
|
(1,402
|
)
|
Net
loss
|
|
|
(1,564
|
)
|
The
Company recorded
₩
664 million of the
equity in loss of related equity investment, net of income taxes in
2005.
Available-for-sale
securities
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
The cost,
gross unrealized gains and fair value of available-for-sale securities as of
December 31, 2006 and 2007 are as follows:
(in
millions of Korean Won)
|
|
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Fair
value
|
|
As
of December 31, 2006
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
Beneficiary
certificates
|
|
₩
|
1,978
|
|
|
₩
|
363
|
|
|
₩
|
2,341
|
|
Equity
securities
|
|
|
429
|
|
|
|
8,978
|
|
|
|
9,407
|
|
|
|
₩
|
2,407
|
|
|
₩
|
9,341
|
|
|
₩
|
11,748
|
|
As
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
₩
|
167
|
|
|
₩
|
1,308
|
|
|
₩
|
1,475
|
|
The
investment in equity securities are comprised of 2,560 shares and 1,000 shares
of GameOn Co., Ltd. as of December 31, 2006 and 2007, respectively, and the
Company owns 3.36% and 1.01% of shares of GameOn Co., Ltd.,
respectively.
Unrealized
gains on available-for-sale securities, net of tax, included in accumulated
other comprehensive income are
₩
6,771 million and
₩
948 million
as of December 31, 2006 and 2007, respectively.
Proceeds
from the sales of available-for-sale securities were
₩
21,360 million and
₩
17,651
million in 2006 and 2007, respectively. Gain on disposal of available-for-sale
securities included in other income in 2006 and 2007 were
₩
2,535 million and
₩
3,755
million, respectively, on the basis of average cost method.
The fair
value of equity securities amounting
₩
1,475 million as
of December 31, 2007 is included in other non-current assets.
7.
Accrued severance benefits
Accrued
severance benefits as of December 31, 2006 and 2007 are as follows:
(in
millions of Korean Won)
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
₩
|
4,325
|
|
|
₩
|
5,774
|
|
Provisions
for severance benefits
|
|
|
2,437
|
|
|
|
1,287
|
|
Severance
payments
|
|
|
(988
|
)
|
|
|
(2,603
|
)
|
Balance
at end of year
|
|
₩
|
5,774
|
|
|
₩
|
4,458
|
|
It is
estimated that no benefits will be paid over the next ten years upon employees
normal retirement ages.
8.
Guarantee deposits
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
In May
2003, the Company entered into an agreement to purchase building space located
in Seoul, Korea. Concurrent with the purchase, the Company agreed to allow the
existing tenant to continue to lease a portion of the purchased space until
2005. The former owner had received a leasehold guarantee deposit in the amount
of
₩
1,937
million from the tenant in lieu of rental payments. When the Company agreed to
purchase the building space from the former owner, it deducted the leasehold
guarantee deposit amount from the purchase price and agreed to refund the
deposit amount to the tenant upon the termination of the lease. The Company
repaid guarantee deposit of
₩
812 million and
₩
253 million
in 2004 and 2005 to the tenant, respectively.
On May 5,
2005, the Company extended the lease contract until 2007. On May 5, 2007, the
Company extended the lease contract until 2009 and increased the guarantee
deposits by
₩
100 million. In
the Korean real estate market, guarantee deposits are often received in lieu of
rental payments and are free of interest, typically utilized by the landlord for
the duration of the lease, and returned to the tenant upon the termination of
the lease.
9.
Commitments and contingencies
The
Company rents vehicles, housing and offices under operating leases, which expire
at various times through 2012.
Future
minimum lease payments for all operating leases at December 31, 2007, are as
follows:
(in
millions of Korean Won)
2008
|
₩
|
1,291
|
|
2009
|
|
702
|
|
2010
|
|
431
|
|
2011
|
|
425
|
|
2012
|
|
319
|
|
|
₩
|
3,168
|
|
Rent
expense incurred was approximately
₩
1,153 million,
₩
1,527
million and
₩
1,502 million for
the years ended December 31, 2005, 2006 and 2007, respectively.
As of
December 31, 2007, the Company acquired equipments under capital lease
agreements, with acquisition cost amounting to
₩
171 million. The
assets and liabilities under the capital leases are recognized at the present
value of the minimum lease payments over the lease terms. The Company’s
depreciation expense, with respect to the above lease agreements, for
December 31, 2007, amounted to
₩
39
million.
Future
minimum lease payments under capital lease agreements are as
follows:
(In
millions of Korean won)
|
|
Minimum
lease payments
|
|
|
Interest
|
|
|
Lease
liabilities
(Present
value)
|
|
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
₩
|
58
|
|
|
₩
|
7
|
|
|
₩
|
51
|
|
From
one year to three years
|
|
|
63
|
|
|
|
4
|
|
|
|
59
|
|
Purchase
or renewal option
required
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
₩
|
121
|
|
|
₩
|
11
|
|
|
₩
|
127
|
|
The
Company opened a Stand-by Letter of Credit account at Hana Bank until February
28, 2009 for its business in Taiwan. Hana Bank provided a guarantee of amounts
up to $660 thousand for a subsidiary for its borrowings.
The
Company has entered into a consulting service agreement regarding the defense of
management rights with Woori Investment & Securities Co., Ltd., one of the
Company’s shareholders. In accordance with the agreement, the Company provides
service fee of
₩
500 million and
additional payment of
₩
100 million per
month as a base fee if litigation or settlement is occurred due to an attempt of
hostile merger and acquisition. There is a contingent compensation clause
requiring the payment after the deduction of the prepaid base fees ranging from
₩
1,000
million to
₩
2,000 million,
where certain criteria are met.
As of
December 31, 2007, 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, 2007.
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, 2007, the Company provided
₩
1,704 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.
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
Dividends
Dividends
are generally proposed based on each year’s earnings and are declared, recorded
and paid in the subsequent year. During 2005, the Company declared and paid a
dividend of 21.3% of net income totaling
₩
3,225 million for
the year 2004. In 2006 and 2007, the Company did not declared
dividends.
Accumulated
deficit
Accumulated
deficit consist of the following as of December 31, 2006 and 2007:
(in
millions of Korean Won)
|
2006
|
|
|
2007
|
|
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
|
|
(9,242
|
)
|
|
|
(34,866
|
)
|
|
₩
|
(8,359
|
)
|
|
₩
|
(33,983
|
)
|
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.
11.
Treasury stock
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. The
Company acquired 610,698 shares at an aggregate cost of
₩
10,684 million,
86,951 shares at an aggregate cost of
₩
1,648 million and
755,616 shares at an aggregate cost of
₩
9,443 million
during 2005, 2006 and 2007, respectively, on
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
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. The purpose of the stock repurchase program is to help stabilize the
price of the Company’s common stock in its markets.
12.
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, 2005
|
|
|
127,500
|
|
|
₩
|
23,388
|
|
|
₩
|
10,081
|
|
Options
granted
|
|
|
41,000
|
|
|
|
24,100
|
|
|
|
9,594
|
|
Options
exercised
|
|
|
(2,000
|
)
|
|
|
1,394
|
|
|
|
27,682
|
|
Options
canceled/forfeited
|
|
|
(38,200
|
)
|
|
|
24,100
|
|
|
|
9,220
|
|
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
|
|
As of
December 31, 2007, the weighted-average remaining contractual life of
outstanding options was 2.69 years.
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
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 exercis
able for
one
year from 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 Apri
l 13, 2009. In addition, options granted
in 2006 and 2007 become exercisable in periodic installments, with
50% of options 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 annive
rsary of the grant
date.
The total
compensation expenses relating to the remaining stock options of
₩
1,331 million, are
recognized over the remaining vesting period on a straight line basis. For the
years ended December 31, 2005, 2006 and 2007, the Company recognized a
compensation expense of
₩
378 million,
₩
277 million and
₩
163 million,
respectively, for the shares granted. There were no exercisable options at
December 31, 2007.
The fair
value for each option was estimated at the grant date, using a Black-Scholes
option pricing model, with the following assumptions:
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Risk-free
interest rate
|
|
|
3.74
|
%
|
|
|
4.85
|
%
|
|
|
5.43
|
%
|
Expected
volatility
|
|
|
55.56
|
%
|
|
|
55.56
|
%
|
|
|
56.21
|
%
|
Expected
life (in years from vesting)
|
|
3.47
years
|
|
|
2.5
years
|
|
|
2.5
years
|
|
Expected
forfeitures
|
|
|
-
|
%
|
|
|
41
|
%
|
|
|
42
|
%
|
Fair
value of stock
|
|
₩
|
22,870
|
|
|
₩
|
24,700
|
|
|
₩
|
14,868
|
|
Expected
volatilities are based on historical volatility of the Company’s
stock.
13.
Income taxes
Income tax
expense consists of the following:
(in
millions of Korean Won)
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Current
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
₩
|
-
|
|
|
₩
|
-
|
|
|
₩
|
-
|
|
Foreign
|
|
|
427
|
|
|
|
325
|
|
|
|
370
|
|
|
|
|
427
|
|
|
|
325
|
|
|
|
370
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
(5,934
|
)
|
|
|
4,777
|
|
|
|
2,209
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(5,934
|
)
|
|
|
4,777
|
|
|
|
2,209
|
|
Total
income tax expenses (benefits)
|
|
₩
|
(5,507
|
)
|
|
₩
|
5,102
|
|
|
₩
|
2,579
|
|
The tax effects
of temporary differences that give rise to
significant portions of the deferred
income
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
tax assets and deferred income tax
liabilities at December 31,
200
6
and 200
7
are as follows:
(in
millions of Korean Won)
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
Current
deferred income tax assets (liabilities)
|
|
|
|
|
|
|
Provision
for allowance
|
|
₩
|
795
|
|
|
₩
|
500
|
|
Deferred
income
|
|
|
94
|
|
|
|
249
|
|
Available-for-sale
securities
|
|
|
(2,569
|
)
|
|
|
(360
|
)
|
Tax
loss carryforward
|
|
|
2,479
|
|
|
|
673
|
|
Other
|
|
|
(113
|
)
|
|
|
49
|
|
Total
gross current deferred income tax assets
|
|
|
686
|
|
|
|
1,111
|
|
Less
valuation allowance
|
|
|
(686
|
)
|
|
|
(1,111
|
)
|
Net
current deferred income tax assets
|
|
₩
|
-
|
|
|
₩
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-current
deferred income tax assets (liabilities)
|
|
|
|
|
|
|
|
|
Deferred income
|
|
₩
|
95
|
|
|
₩
|
153
|
|
Provisions for severance benefits
|
|
|
972
|
|
|
|
941
|
|
Depreciation and amortization
|
|
|
(156
|
)
|
|
|
(128
|
)
|
Research and development costs
|
|
|
7,415
|
|
|
|
11,162
|
|
Tax loss carryforward
|
|
|
8,706
|
|
|
|
14,670
|
|
Other
|
|
|
451
|
|
|
|
483
|
|
Total
gross non-current deferred income tax assets
|
|
|
17,483
|
|
|
|
27,281
|
|
Less
valuation allowance
|
|
|
(17,483
|
)
|
|
|
(27,281
|
)
|
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, 2006 and 2007, 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, 2007, Webzen and its subsidiaries had available net operating loss
carryforwards of
₩
55,777 million to
offset future taxable income which expire in varying amounts from 2010 to 2012,
except
₩
6,314
million from subsidiary in the United States which expire in from 2025 to
2027.
The tax
effects of temporary differences which are directly related to shareholders'
equity amounted to
₩
2,569 million and
₩
2,209
million as of December 31, 2006 and 2007, respectively.
The
statutory income tax rate, including tax surcharges, applicable to the Company
was approximately 27.5%.
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
A
reconciliation of income tax expenses (benefits) at the Korean statutory income
tax rate to actual income tax expenses (benefits) are as follows:
(in
millions of Korean Won)
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
at Korean statutory tax rate
|
|
₩
|
(6,512
|
)
|
|
₩
|
(11,684
|
)
|
|
₩
|
(6,396
|
)
|
Income
tax exemption
|
|
|
(331
|
)
|
|
|
-
|
|
|
|
-
|
|
Nondeductible
items
|
|
|
180
|
|
|
|
(361
|
)
|
|
|
(1,744
|
)
|
Change
in valuation allowances
|
|
|
892
|
|
|
|
16,548
|
|
|
|
10,223
|
|
Foreign
tax credit
|
|
|
306
|
|
|
|
361
|
|
|
|
369
|
|
Others
|
|
|
(42
|
)
|
|
|
238
|
|
|
|
127
|
|
Total
income tax expenses (benefits)
|
|
₩
|
(5,507
|
)
|
|
₩
|
5,102
|
|
|
₩
|
2,579
|
|
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 the beginning of
the year and there has been no change during the year.
The
Company is subject to taxation in the Republic of Korea, its major tax
jurisdiction. The Company’s tax years for 2003, 2004, 2005, 2006, and 2007 are
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.
14.
Earnings per share
The
components of basic and diluted earnings per share were as follows:
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Net
loss available for common
|
|
|
|
|
|
|
|
|
|
stockholders
(A)
|
|
₩
|
(18,804
|
)
|
|
|
(47,065
|
)
|
|
|
(25,594
|
)
|
Weighted
average outstanding shares
|
|
|
|
|
|
|
|
|
|
|
|
|
of
common stock (B)
|
|
|
12,563,892
|
|
|
|
12,233,204
|
|
|
|
12,319,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
(C)
|
|
|
12,563,892
|
|
|
|
12,233,204
|
|
|
|
12,319,347
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(A/B)
|
|
₩
|
(1,497
|
)
|
|
₩
|
(3,847
|
)
|
|
₩
|
(2,078
|
)
|
Diluted
(A/C)
|
|
₩
|
(1,497
|
)
|
|
₩
|
(3,847
|
)
|
|
₩
|
(2,078
|
)
|
The
Company did not include stock options in computation of diluted earnings per
share in 2005, 2006 and 2007, because stock options are
antidilutive.
15.
Related party transactions
Webzen Inc.
and
subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006 and 2007
During the
normal course of business, the Company recognized
₩
1,663 million as
royalties and license revenue from related equity investment for the period from
January 1, 2005 through December 14, 2005. In 2006 and 2007, there was no
royalties and license revenue from related equity investment. Royalty revenues
from the Company's license are recognized on a monthly basis after the licensee
confirms its revenues based on the actual hours of services sold during the
prior month.
As of
December 31, 2006, the Company provided loans to employees for housing and
employee stock ownership plan amounting to
₩
1,762 million and
₩
58 million,
respectively. As of December 31, 2007, the Company provided loans to employees
for housing amounting to
₩
1,291 million.
Short-term financial instruments amounting to
₩
414 million and
₩
1,704
million are subject to withdrawal restrictions in relation to bank loans of
employees as of December 31, 2006 and 2007, respectively.
As of December 31, 2007, the Company has
entered into a consulting agreement with Woori Investment & Securities Co.,
Ltd., one of the Company
’
s shareholder
s, and recorded
₩
513 million as services fees based on
this agreement.
16.
Subsequent Event
According
to the approval of Board of Directors on February 14, 2008, the Company acquired
10.78% of the common stock of NeoWave, Inc. for
₩
4,548
million.
On May 19,
2008, the Company entered into
a
license and distribution agreement relating to the online PC game “
Huxley”
with NHN USA Inc. According to the
agreement, the Company is to develop the game and transfer the license and
distribution rights in
America
and
Western Europ
e
of the game to NHN USA Inc. in exchange
for advance cash payments and future running royalty based upon 35% or 38% of
the net revenue for the following three years started after the game is
commercialized.
17.
Supplemental cash flow information and non-cash activities
(in
millions of Korean Won)
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for income taxes
|
|
₩
|
2,496
|
|
|
₩
|
194
|
|
|
₩
|
398
|
|
Interest
paid
|
|
|
6
|
|
|
|
4
|
|
|
|
35
|
|
Supplemental
non-cash activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease
|
|
₩
|
-
|
|
|
₩
|
-
|
|
|
₩
|
171
|
|
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:
|
/s/
Hyung-Cheol Kim
|
|
|
Name:
|
Hyung-Cheol
Kim
|
|
|
Title:
|
Chief
Financial Officer
|
|
Date: June
26, 2008
Webzen (MM) (NASDAQ:WZEN)
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