Financial Statements
Index Page(s) Report of Independent Auditors... 1 Financial Statements Balance Sheets... 2 Statements of Income... 3 Statements of Appropriations of Retained Earnings... 4 Statements of Cash Flows... 5-6... 7-32 Report on the Review of Internal Accounting Control System... 33-34
Refer to original Korean Language Report for a Copy of Auditor s Report issued by Samil PricewaterhouseCoopers Report of Independent Auditors To the Board of Directors and Shareholder of We have audited the accompanying balance sheets of (the Company) as of, and the related statements of income, appropriations of retained earnings and cash flows for the years then ended, expressed in Korean won. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of as of, and the results of its operations, the changes in its retained earnings and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea. [Sealed by Samil PricewaterhouseCoopers in the Korean language report] February 15, 2006 This report is effective as of February 15, 2006, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any. 1
MEGASTUDY Co. Ltd. Balance Sheets (in Korean won) 2005 2004 Assets Current assets Cash and cash equivalents (Note 3) 14,988,671,941 24,560,818,776 Short-term financial instruments (Note 3) 150,000,000 5,803,097,969 Short-term available-for-sale securities (Note 4) 35,455,269,578 22,373,761,356 Trade accounts receivable, net (Note 6) 2,031,646,619 1,479,390,151 Other accounts receivable, net 690,194 35,330 Short-term loan receivables 563,037,247 185,714,600 Accrued income 92,653,533 112,267,075 Advance payments (Notes 7 and 24) 3,645,939,455 1,280,626,037 Prepaid expenses 139,342,752 265,307,703 Inventories - - Total current assets 57,067,251,319 56,061,018,997 Long-term financial instruments (Note 3) 20,000,000 20,000,000 Long-term available-for-sale securities (Note 5) 7,723,767,367 339,930,000 Loan receivables to shareholders, directors and employees 484,855,394 640,874,000 Long-term loan receivables 349,999,800 314,285,400 Guarantee deposits (Notes 8 and 24) 13,500,361,141 5,578,124,925 Long-term advance payments (Notes 7 and 24) 1,835,500,000 1,299,000,000 Property, plant and equipment, net (Notes 9 and 10) 23,724,960,806 8,691,888,785 Intangible assets, net (Note 11) 539,794,643 633,896,110 Total assets 105,246,490,470 73,579,018,217 Liabilities and Shareholder's Equity Current liabilities Trade accounts payable (Note 24) 1,111,874,795 624,135,317 Other accounts payable (Note 24) 1,053,046,904 734,315,972 Advance received 1,436,394,613 1,053,721,112 Withholdings 105,967,993 83,050,930 Income taxes payable 5,299,590,512 3,376,064,819 Unearned income 3,114,485,700 2,015,820,136 Deferred income tax liabilities (Note 21) 207,852,632 - Total current liabilities 12,329,213,149 7,887,108,286 Rental guarantee deposits received 24,582,000 5,000,000 Long-term other accounts payable 334,076,976 - Accrued severance benefits, net (Note 12) - - Deferred income tax liabilities (Note 21) 2,023,690,516 574,267,008 Total liabilities 14,711,562,641 8,466,375,294 Commitments and contingencies (Note 13) Shareholders' equity Common stock (Note 14) 3,030,000,000 3,030,000,000 Paid-in-capital in excess of par value 24,076,278,656 24,076,278,656 Retained earnings (Note 15) 58,657,265,758 37,666,989,000 Capital adjustments (Note 16) 4,771,383,415 339,375,267 Total shareholders' equity 90,534,927,829 65,112,642,923 Total liabilities and shareholders' equity 105,246,490,470 73,579,018,217 The accompanying notes are an integral part of these financial statements. 2
MEGASTUDY Co. Ltd. Statements of Income Years Ended (in Korean won) 2005 2004 Revenue (Note 18) 71,042,650,391 50,259,002,678 Cost of revenue (Notes 19 and 24) 27,096,385,353 18,161,142,350 Gross profit 43,946,265,038 32,097,860,328 Selling and administrative expenses (Notes 17 and 20) 19,250,545,431 12,334,955,109 Operating income 24,695,719,607 19,762,905,219 Non-operating income Interest income 1,066,923,012 988,507,328 Rental income 24,416,908 26,864,080 Gain on disposal of short-term available-for-sale securities 3,042,556,470 219,798,220 Gain on disposal of property, plant and equipment 5,674,315 - Others 42,487,567 8,091,496 4,182,058,272 1,243,261,124 Non-operating expenses Interest expense 1,026,038 - Loss on disposal of property, plant and equipment 837,722 2,605,849 Loss on scrap of property, plant and equipment 9,125,594 - Donations - 31,317,000 Bad debt expense - 11,623,820 Others 2,884,780 1,115,898 13,874,134 46,662,567 Income before income tax expenses 28,863,903,745 20,959,503,776 Income tax expenses (Note 21) 7,873,626,987 6,116,012,733 Net income 20,990,276,758 14,843,491,043 Per share data (Note 22) Ordinary income per share 3,464 3,115 Earnings per share 3,464 3,115 The accompanying notes are an integral part of these financial statements. 3
MEGASTUDY Co. Ltd. Statements of Appropriations of Retained Earnings Years Ended (Dates of Appropriations : March 24, 2006 and March 25, 2005 for the years ended, respectively) (in Korean won) 2005 2004 Retained earnings before appropriations Unappropriated retained earnings carried over from prior years 35,677,466,338 20,833,975,295 Net income 20,990,276,758 14,843,491,043 56,667,743,096 35,677,466,338 Appropriations of retained earnings Legal reserve 454,500,000 - Cash dividends (Note 23) 4,545,000,000-4,999,500,000 - Unappropriated retained earnings carried forward to the subsequent year 51,668,243,096 35,677,466,338 The accompanying notes are an integral part of these financial statements. 4
MEGASTUDY Co. Ltd. Statements of Cash Flows Years Ended (in Korean won) 2005 2004 Cash flows from operating activities Net income 20,990,276,758 14,843,491,043 Adjustments to reconcile net income to net cash provided by (used in) operating activities Provision for severance benefits 579,757,167 283,767,888 Depreciation 1,072,721,027 603,154,299 Bad debt expenses (selling and administrative expenses) 5,663,920 6,124,980 Loss on disposal of property, plant and equipment 837,722 2,605,849 Loss on scrap of property, plant and equipment 9,125,594 - Amortization 214,141,127 139,997,627 Bad debt expenses (non-operating expenses) - 11,623,820 Gain on disposal of short-term available-for-sale securities (3,042,556,470) (219,798,220) Gain on disposal of property, plant and equipment (5,674,315) - (1,165,984,228) 827,476,243 Changes in operating assets and liabilities Increase in trade accounts receivable (557,913,778) (620,503,360) (Increase) decrease in other accounts receivable (661,474) 188,710 Decrease (increase) in accrued income 19,613,542 (22,414,779) Increase in advance payments (2,365,313,418) (1,176,750,226) Increase in long-term advance payments (536,500,000) (1,299,000,000) Decrease (increase) in prepaid expenses 125,964,951 (260,426,089) Increase in severance insurance deposits (430,066,827) (496,080,950) Increase in trade accounts payable 487,739,478 86,419,306 Increase (decrease) in other accounts payable 318,730,932 (375,402,813) Increase in long-term other accounts payable 334,076,976 - Increase in advance received 382,673,501 462,022,383 Payment of severance benefits (149,690,340) (97,419,238) Increase in withholdings 22,917,063 31,551,860 Increase in unearned income 1,098,665,564 716,400,936 Increase (decrease) in income taxes payable 1,923,525,693 (1,036,779,796) Increase in deferred income tax liabilities (current) 207,852,632 54,384,771 Decrease in deferred income tax liabilities (non-current) (360,410,022) - 521,204,473 (4,033,809,285) Net cash provided by operating activities 20,345,497,003 11,637,158,001 5
MEGASTUDY Co. Ltd. Statements of Cash Flows Years Ended (in Korean won) 2005 2004 Cash flows from investing activities Disposal of short-term available-for-sale securities 75,092,019,487 12,026,586,693 Decrease of short-term financial instruments 10,753,097,969 2,466,902,040 Collection of short-term loan receivables 208,391,153 - Disposal of long-term available-for-sale securities 5,271,317,900 - Decrease of loan receivables to shareholders, directors and employees 231,449,160 9,100,000 Collection of long-term loan receivables 57,143,200 - Collection of guarantee deposits 873,980,000 - Increase of rental guarantee deposits received 31,582,000 40,000,000 Disposal of property, plant and equipment 25,353,871 1,000,000 Increase of short-term financial instruments (5,100,000,000) (8,250,000,009) Acquisition of short-term available-for-sale securities (82,418,258,131) (30,740,580,962) Increase of short-term loan receivables (585,713,800) (100,000,000) Increase of long-term financial instruments - (20,000,000) Acquisition of long-term available-for-sale securities (9,126,026,697) (5,148,600) Increase of loan receivables to shareholders, directors and employees (75,430,554) (551,274,000) Increase of long-term loan receivables (92,857,600) (400,000,000) Payment of guarantee deposits (8,796,216,216) (2,708,269,185) Acquisition of property, plant and equipment (16,135,435,920) (1,107,503,899) Acquisition of intangible assets (120,039,660) (318,869,066) Repayment of rental guarantee deposits received (12,000,000) (10,000,000) Net cash used in investing activities (29,917,643,838) (29,668,056,988) Cash flows from financing activities Proceeds from capital increase - 25,046,040,000 Payment of stock issuance cost - (1,067,192,104) Net cash provided by financing activities - 23,978,847,896 Net increase (decrease) in cash and cash equivalents (9,572,146,835) 5,947,948,909 Cash and cash equivalents Beginning of year 24,560,818,776 18,612,869,867 End of year (Note 26) 14,988,671,941 24,560,818,776 The accompanying notes are an integral part of these financial statements. 6
1. The Company (the Company) was incorporated on July 12, 2000 to operate the business for providing on-line educational information and the business for educational institute. The Company operates its business with 6 affiliates including Mok-dong Megastudy Institute. The shares of the Company were approved to be listed on the Kosdaq Market by Korea Securities Dealers Association on December 17, 2004. The shares of the Company were traded on the Kosdaq Market from December 21, 2004. The Company was established with an initial paid-in capital of 300 million and its paid-in capital amounted to 3,030 million as of December 31, 2005 through several capital increases. As of December 31, 2005, the number of authorized shares are 24,000,000 shares and the outstanding shares are 6,060,000 shares, with par value of 500. As of December 31, 2005, the shareholders of the Company are as follows. Number of Shares Ownership(%) Son Joo Eun Son Sung Eun Employees Others 1,881,020 31.04 289,900 4.78 60,049 0.99 3,829,031 63.19 6,060,000 100.00 7
2. Summary of Significant Accounting Policies The significant accounting policies followed by the Company in the preparation of its financial statements are summarized below. Application of the Statements of Korean Financial Accounting Standards The Korean Accounting Standards Board has published a series of Statements of Korean Financial Accounting Standards (SKFAS), which will gradually replace the existing financial accounting standards established by the Korean Financial Supervisory Commission. As SKFAS No. 10, 12 and 13 became applicable to the Company on January 1, 2004, the Company adopted these Standards in its financial statements covering periods beginning January 1, 2004. And as SKFAS No. 15 through 17 became effective for the Company on January 1, 2005, the Company adopted these Standards in its financial statements for the year ended December 31, 2005. Revenue Recognition Revenue from on-line lecture is recognized when providing contents is settled and revenue from educational institute is recognized using the percentage-of-completion method. As of December 31, 2005 and 2004, unearned income are 3,114 million and 2,015 million, respectively. Revenue from publication is recognized upon delivery. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts and notes receivable based on the aggregate estimated collectibility of the amounts receivable. Securities The Company accounts for equity and debt securities under the provision of Statement of Korean Accounting Standards No. 8, Investments in Securities. This statement requires investments in equity and debt securities to be classified into three categories. trading, available-for-sale and held-to-maturity. Marketable securities and investments in equity and debt securities are initially carried at cost, with cost determined using the moving average method. In the case of debt securities, cost includes the premium paid or discount received at the time of purchase. The following paragraphs describe the subsequent accounting for securities by type of security. Marketable securities held for short-term cash management purposes are stated at fair market value, and valuation gains or losses are reported in current operations. 8
Investments in debt securities held for investment purposes and marketable equity securities of non-controlled investees are reported at fair market value with unrealized gains or losses reported as a capital adjustment under shareholders equity until these are realized. Declines in the fair value which are deemed to be permanent are recorded as valuation losses in current operations after eliminating any previously recorded capital adjustment for temporary changes. Non-marketable debt securities are carried at a value using the present value of future cash flows, discounted at a reasonable interest rate determined considering the credit ratings provided by independent credit rating agencies. Debt securities, which the Company has the intent and ability to hold to maturity, are generally carried at cost, adjusted for the amortization of discounts or premiums. Premiums and discounts on debt securities are amortized over the term of the debt using the effective interest method. Investments in debt securities which the Company has the intent and ability to hold to maturity are generally carried at cost, adjusted for the amortization of discounts or premiums. Declines in the fair value of debt securities which are deemed to be permanent are recorded as valuation losses in current operations. Subsequent recoveries are also recorded in current operations but not to exceed the amortized cost of the investment. Investments in equity securities of companies over which the Company exercises significant control or influence (equity method investees) are recorded using the equity method of accounting. Differences between the initial purchase price and the Company s initial proportionate ownership in the net book value of the investee are amortized over five years using the straight-line method. Under the equity method, the Company records changes in its proportionate ownership in the book value of the investees in current operations, capital adjustments, or retained earnings, depending on the nature of the underlying change in book value of the investees. Unrealized profit arising from sales by the Company to equity method investees is fully eliminated. Unrealized profit arising from sales by the equity method investees to the Company or sales between equity method investees is also eliminated considering the percentage of ownership. Foreign currency financial statements of equity method investees are translated into Korean won using the basic exchange rates in effect as of the balance sheet date for assets and liabilities, and annual average exchange rates for income and expenses. Any resulting translation gain or loss is included under the capital adjustment account, a component of shareholders' equity. 9
The Company discontinues the equity method of accounting for investments in equity method investees when the Company s share of accumulated losses equals the costs of the investments and until the subsequent changes in its proportionate net income of the investees equals its proportionate net losses not recognized during the period the equity method was suspended. However, the estimated contingent losses arising from the collectibility of the Company s receivables and guaranteed obligations of the investees or commitments to provide further financial support for the investees are recorded as an allowance for doubtful accounts or as an allowance for contingent liabilities. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is computed using the following depreciation method and estimated useful lives of the assets. Description Estimated Useful Lives Depreciation Method Buildings 40 years Straight-line method Machinery 5 years Declining-balance method Vehicles 5 years Declining-balance method Furniture and fixtures 5 years Declining-balance method Facilities 5 years Declining-balance method Routine maintenance and repairs are charged to expense as incurred. Expenditures, which enhance the value or extend the useful life of the related assets, are capitalized. The Company assesses the potential impairment of property, plant and equipment when there is evidence that events or changes in circumstances have made the recovery of an asset's carrying value unlikely. The carrying value of the asset is reduced to its estimated realizable value by recording an impairment loss charged to current operations and presenting it as a reduction from the said carrying value. Recovery of the impaired asset is recorded in current operations only to the extent that it does not increase the carrying amount of an asset above the carrying amount that would have been determined for the asset had no impairment loss been recognized in prior years. 10
Intangible Assets Intangible assets, consisting of property right, development costs and other intangible assets, are stated at cost, net of accumulated amortization. Amortization is computed using the straight-line method over the following estimated useful life of the assets. Description Estimated Useful Lives Property right Development costs Other intangible assets 5 years 3 years 5 years Ordinary research and development costs are expensed as incurred. Development costs directly relating to a new technology or new products with probable future benefits are capitalized as intangible assets. Amortization of Development costs is computed using the straight-line method within three years from the commencement of the commercial production of the related products or use of the related technology. Such costs are subject to periodic review of their recoverability. In the event that such amounts are determined to be not recoverable, they are written down or written off from the accounts. For the year ended December 31, 2005, ordinary research and development costs amounted to 774 million (2004 : 518 million). The Company assesses the potential impairment of intangible assets when there is evidence that events or changes in circumstances have made the recovery of an asset's carrying value unlikely. The carrying value of the asset is reduced to its recoverable value by recording an impairment loss charged to current operations and presenting it as a reduction from the said carrying value. Recovery of the impaired asset is recorded in current operations only to the extent that it does not increase the carrying amount of an asset above the carrying amount that would have been determined for the asset had no impairment loss been recognized in prior years. 11
Deferred Income Tax Assets (Liabilities) The Company recognizes deferred income taxes for anticipated future tax consequences resulting from temporary differences between amounts reported for financial reporting and income tax purposes. Deferred tax assets and liabilities are computed on such temporary differences by applying enacted statutory tax rates applicable to the years when such differences are expected to reverse. Deferred tax assets are recognized when it is probable that such deferred tax assets will be realized. The total income tax provision includes the current tax expense under applicable tax regulations and the change in the balance of deferred tax assets and liabilities during the year. The balance sheet distinguishes the current and non-current portions of the deferred tax assets and liabilities, whose balances are offset against each other. Accrued Severance Benefits Employees and directors, except for expatriates, with at least a year of service are entitled to receive a lump-sum payment upon termination of their employment, based on their length of service and rate of pay at the time of termination. Accrued severance benefits represent the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the balance sheet date. For the year ended December 31, 2005, severance benefits paid amounted to 150 million (2004 : 97 million). Accrued severance benefits are funded at 100% as of December 31, 2005, through a severance insurance plan and are presented as a deduction from accrued severance benefits. The beneficiaries of the severance insurance deposits are the Company s employees. Stock Compensation Plans The Company has granted stock options to certain qualified employees and executives and the Company compensates for the difference between market prices at the exercise date and exercise prices of the Company s stocks. Compensation costs for stock options granted to employees and executives are recognized using the intrinsic value-based method. Under the intrinsic value-based method, compensation costs for stock option are determined by the difference between the exercise price and market price at each balance sheet date (if the stock options are exercised before the balance sheet date, it should be the difference between the exercise price and market price at exercise date). The compensation costs for stock options are measured at each balance sheet date and allocated over service period and are recognized as expense and liability in the financial statements. 12
Reclassification of Prior Year Financial Statement Presentation Certain amounts in the 2004 financial statements have been reclassified to conform to the 2005 presentation. These reclassifications had no effect on the previously reported net income or shareholder s equity. 3. Cash and Cash Equivalents and Financial Instruments Cash and cash equivalents and financial instruments as of are as follows. Description Annual interest rates(%) 2005 2004 Cash and cash equivalents Cash Ordinary deposits - - 84,484 392,493 22,245 546,881 Time deposits MMDA MMF 3.7 0.1 2.8 ~ 3.2 2,000,000 2,181,329 10,330,364-1,504,406 22,487,287 Cash and cash equivalents - total 14,988,671 24,560,819 Short-term financial instruments Time deposit (*) 3.45 ~ 4.50 150,000 5,803,098 Long-term financial instruments Time deposit (*) 4.00 20,000 20,000 As of, financial instruments amounting to 170 million and 70 million respectively, are subject to withdrawal restrictions relative to joining installment contract. 13
4. Short-Term Available-for-Sale Securities Short-term available-for-sale securities as of are as follows. 2005 2004 Acquisition Cost Book Value Fair Value Acquisition Cost Book Value Fair Value Corporate bonds - - - 100,000 100,423 100,423 Beneficiary certificates 22,200,000 26,826,192 26,826,192 13,000,000 13,250,481 13,250,481 Investment entrustment 7,500,000 8,629,078 8,629,078 8,934,386 9,022,857 9,022,857 contracts 29,700,000 35,455,270 35,455,270 22,034,386 22,373,761 22,373,761 5. Long-Term Available-for-Sale Securities Long-term available-for-sale securities as of are as follows. 2005 2004 Equity securities Government and municipal bonds Beneficiary certificates 4,270,500 200,000 227,125 3,226,142 139,930-7,723,767 339,930 14
Equity securities as of are as follows. Acquisition Cost Book Value Fair Value Investee Percentage of Ownership 2005 2004 2005 2004 2005 2004 MEGA P&P 25.00% 80,000 80,000 80,000 80,000 362,580 323,095 Mbest Education 35.00 1,790,500 120,000 1,790,500 120,000 1,737,761 414,750 Heeso Megastudy 60.00 2,400,000-2,400,000-2,361,216 - Institute 4,270,500 200,000 4,270,500 200,000 4,461,557 737,845 6. Trade Accounts Receivable Trade accounts receivables as of are as follows. 2005 2004 Trade accounts receivable 2,052,168 1,494,333 Less : Allowance for doubtful accounts (20,522) (14,943) 2,031,646 1,479,390 15
7. Advance Payments and Long-Term Advance Payments Advance payments and long-term advance payments as of are as follows. Description 2005 2004 Advance payments Lecture fee (*) Others 3,609,747 36,192 1,231,150 49,476 Advance payments total 3,645,939 1,280,626 Long-term Advance payments Lecture fee (*) 1,835,500 1,299,000 (*) Advance payments for lecture fees are prepaid for the purpose of headhunting famous lecturers. Changes in advance payments and long-term advance payments for the years ended December 31, 2005 and 2004 are as follows. 2005 Beginning Increase Decrease Ending Advance payments 1,231,150 4,150,942 1,772,345 3,609,747 Long-term Advance payments 1,299,000 979,500 443,000 1,835,500 2,530,150 5,130,442 2,215,345 5,445,247 2004 Beginning Increase Decrease Ending Advance payments 99,300 1,566,000 424,150 1,231,150 Long-term Advance payments - 1,299,000-1,299,000 99,300 2,855,000 424,150 2,530,150 16
8. Guarantee Deposits Guarantee deposits as of are as follows. Description 2005 2004 Guarantee Deposits Lease for office(*) 13,266,435 5,501,054 Telephone deposit, etc 233,926 77,071 13,500,361 5,578,125 (*) The Company leases its offices from Son Joo Eun, related party with related guarantee deposits of 1,499 million and 1,469 million as of, respectively (Note 24). 9. Assets Covered by Insurance Policies Assets covered by insurance policies as of are as follows. Type Insured assets Insured by Insured amount 2005 2004 Fire Insurance, etc Property, plant and equipment AIG Inc. 700,000 700,000 The Company also maintains automobile insurance for the Company s vehicles. 17
10. Property, Plant and Equipment Changes in property, plant and equipment for the years ended are as follows. 2005 Beginning Acquisition Disposal Depreciation Endings Accumulated Depreciation Land 5,080,846 6,950,726 - - 12,031,572 - Buildings 2,037,312 4,911,514 - (63,150) 6,885,676 142,525 Machinery 237,806 212,646 (3,081) (149,755) 297,616 471,963 Vehicle 24,947 - - (11,251) 13,696 52,256 Furniture and fixtures 443,534 893,028 (17,437) (309,348) 1,009,777 776,452 Facilities 380,858 1,333,351 (9,126) (539,217) 1,165,866 769,391 Constructionin-progress 486,586 14,523,998 (12,689,826) - 2,320,758-8,691,889 28,825,263 (12,719,470) (1,072,721) 23,724,961 2,212,587 2004 Beginning Acquisition Disposal Depreciation Endings Accumulated Depreciation Land 5,080,846 - - - 5,080,846 - Buildings 2,090,229 - - (52,917) 2,037,312 79,376 Machinery 306,921 111,687 (3,607) (177,195) 237,806 334,116 Vehicle 16,939 26,676 - (18,668) 24,947 41,005 Furniture and fixtures 340,850 287,427 - (184,743) 443,534 513,932 Facilities 355,360 195,129 - (169,631) 380,858 274,897 Constructionin-progress - 486,586 - - 486,586-8,191,145 1,107,505 (3,607) (603,154) 8,691,889 1,243,326 The value of the Company s land, as determined by the local government for property tax assessment purposes for the year ended December 31, 2005 is 6,122 million (2004 : 2,712 million). 18
11. Intangible Assets Changes in intangible assets for the years ended are as follows. 2005 Beginning Acquisition Amortization Ending Property right 9,724 4,400 2,391 11,733 Development costs 197,287-76,519 120,768 Others 426,884 115,640 135,231 407,293 633,895 120,040 214,141 539,794 2004 Beginning Acquisition Amortization Ending Property right 560 10,154 990 9,724 Development costs - 229,557 32,270 197,287 Others 454,464 79,158 106,738 426,884 455,024 318,869 139,998 633,895 19
12. Accrued Severance Benefits Changes in accrued severance benefits and severance insurance deposits for the years ended are as follows. 2005 Beginning Increase Decrease Ending Accrued severance benefits 496,081 579,757 149,691 926,147 Severance insurance deposits (496,081) (463,896) (33,830 (926,147) - 115,861 115,861-2004 Beginning Increase Decrease Ending Accrued severance benefits 309,732 283,768 97,419 496,081 Severance insurance deposits - (593,500) (97,419 (496,081) 309,732 (309,732) - - 13. Commitments and Contingencies Guarantees Obtained As of December 31, 2005, the Company is provided with payment guarantees by Hanabank amounting to 170 million relative to joining installment contract.. Uncertainties of a Venture Company On January 16, 2004, the Company was appointed as venture company by Small and Medium Business Administration. The operations of venture companies such as are sensitive and volatile to changes in the economic environment and technology. Such companies may be significantly affected by operational and technological changes. The ultimate effect of these significant uncertainties on the financial position of the Company as of the balance sheet date, cannot be presently determined and, accordingly, no adjustments related to such uncertainties have been recorded in the accompanying financial statements. 20
14. Common Stock Paid-in capital as of, is summarized as follows. (in Korean won) Type Number of issued shares Par value Paid-in capital per share 2005 2004 Common stock 6,060,000 shares 500 3,030,000,000 3,030,000,000 The shares of the Company were listed on the Kosdaq Market on December 17, 2004. The Company increase its capital by 677 million (number of issued common stock : 1,353,840 share, issue cost per share : 18,500) on December 16, 2004. Due to capital increase, paid-in capital in excess of par value was increased by 23,302 million in 2004. As of December 31, 2005, the number of authorized shares of the Company is 24,000,000 shares. 15. Retained Earnings Retained earnings as of are as follows. 2005 2004 Reserve for research and development 1,989,523 1,989,523 Retained earnings before appropriations 56,667,743 35,677,466 58,657,266 37,666,989 Reserve for research and development Pursuant to the Special Tax Treatment Control Law, the Company appropriates retained earnings as a reserve for research and development. This reserve is not available for dividends, but may be transferred to capital stock, or used to reduce accumulated deficit, if any, with the ratification of the Company s majority shareholders. 21
16. Capital Adjustments Capital adjustments of the Company are gain on valuation of available-for-sales securities and loss on valuation of available-for-sales securities. Changes in capital adjustments for the years ended are as follows. 2005 Beginning Increase Decrease Ending (*) Short-term available-for-sale securities Corporate bonds 423-423 - Beneficiary certificates 250,481 4,626,192 250,481 4,626,192 Investment entrustment contracts 88,470 1,129,078 88,470 1,129,078 Long-term available-for-sale securities Beneficiary certificates - 825,947-825,947 Gain on valuation of available-for-sales securities 339,375 6,581,217 339,375 6,581,217 Loss on valuation of available-for-sales securities - - - - 2004 Beginning Increase Decrease Ending Short-term available-for-sale securities Corporate bonds (171) 594-423 Beneficiary certificates 85,427 250,481 85,427 250,481 Investment entrustment contracts - 88,470-88,470 Long-term available-for-sale securities Beneficiary certificates - - - - Gain on valuation of available-for-sales securities 85,427 339,375 85,427 339,375 Loss on valuation of available-for-sales securities (171) 171 - - (*) Above gain on valuation of available-for-sales securities as of December 31, 2005 is recorded as 4,771 million at the balance sheet due to tax effect (Note 21). 22
17. Stock Compensation Plans As of December 31, 2005, the Company has maintained stock compensation plans for its executives and employees. The details of the plans are as follows. Number of Shares to be Issued Exercise Price Grant Date upon Exercise Exercise Period in Korean Won June 15, 2005 100,000 shares From June 15, 2008 to June 14, 2010 40,100 per share Stock compensation expense for stock options amounted to 333 million for the year ended December 31, 2005. 18. Revenue Revenue for the years ended are as follows. 2005 2004 Revenue from on-line lecture 43,908,264 35,586,526 Revenue from publication 8,035,416 6,369,819 Revenue from educational institute 18,549,384 7,813,203 Others 549,586 489,455 71,042,650 50,259,003 19. Cost of Revenue Cost of revenue for the years ended are as follows. 2005 2004 Cost of revenue from on-line lecture 10,044,348 11,002,540 Cost of revenue from publication 3,999,928 3,144,728 Cost of revenue from educational institute 9,052,109 4,013,874 27,096,385 18,161,142 23
20. Selling and Administrative Expenses Selling and administrative expenses for the years ended are as follows. 2005 2004 Salaries 4,711,680 2,724,710 Miscellaneous salaries 432,174 272,585 Provision for severance benefits 450,468 217,119 Employee benefits 554,518 380,516 Travel 95,140 40,633 Entertainment 129,830 157,468 Communication 186,226 143,270 Utilities 263,199 147,757 Taxes and dues 234,964 150,459 Depreciation 920,404 420,830 Rent 2,603,638 1,316,426 Repairs and maintenance 140,544 34,061 Insurance 16,644 15,624 Vehicle maintenance 64,070 26,195 Ordinary research and development expense 774,101 517,959 Delivery 969,159 926,847 Training 3,931 8,511 Books and printing 98,716 46,909 Supplies 388,190 247,656 Commissions 2,321,275 1,301,071 Electronic data processing expenses 425,145 301,262 Advertisement 2,534,904 2,378,793 Revenue promotion - 3,934 Amortization 214,141 139,998 Outside service fees 377,673 406,980 Bad debt expense 5,664 6,125 Stock compensation expense 332,500 - Others 1,648 1,258 19,250,545 12,334,955 24
21. Income Taxes Income tax expenses for the years ended are as follows. 2005 2004 Current income taxes 8,026,185 6,061,628 Changes in deferred income taxes 1,657,276 54,385 Gain on valuation of available-for-sales securities (1,809,834) - Income tax expenses 7,873,627 6,116,013 25
Details of tax reconciliation are as follows. 2005 2004 Temporary differences Non-temporary differences Temporary differences Non-temporary differences Income before income tax expenses 28,863,904 20,959,504 Addition Accrued severance benefits 400,530-111,80 - Accrued income 112,267-89,85 - Loss on valuation of available-for-sales securities 199 - - Allowance for doubtful accounts - - 11,62 - Stock compensation expense 332,500 - Reserve for research and development 203,508 - - Entertainment - 51,597 86,390 Capital Adjustments - 6,242,036 640 Others - 2,009 - Deemed interest - 1,861-1,049,004 6,297,503 213,28 87,030 Deduction Accrued income 92,654-112,26 - Gain on valuation of available-for-sales securities 6,242,037-1,57 - Organization costs - - 1,09 - Accrued severance benefits 400,530-297,64 - Allowance for doubtful accounts - - 5,02 - Depreciation 866 - - Available-for-sales securities - 199-6,736,087 199 417,62 - Taxable Income 29,474,125 20,842,199 26
Changes in accumulated temporary differences for the years ended are as follows. Beginning Adjustment Decrease Increase Ending Tax effect (current) Tax effect (non-current) Depreciation 1,923-868 - 1,055-290 Loss on scrap 1 - - - 1 - - Allowance for doubtful accounts 11,623 - - - 11,623-3,196 Accrued income (112,267) - (112,267) (92,654) (92,654) (25,480) - Reserve for research and development (1,989,523) - (203,508) - (1,786,015) (182,373) (308,781) Gain on valuation of available-for-sales securities - (339,375 (199) (6,242,037) (6,581,213) - (1,809,834) Stock compensation expense - - - 332,500 332,500-91,438 Total FY 2005 (2,088,243) (339,375 (315,10 (6,002,191) 8,114,703 (207,853) (2,023,691) Total FY 2004 (1,883,908) - 215,50 11,165 (2,088,243) (574,267) - Details of deferred income tax assets (liabilities) directly added or offset to capital accounts are as follows. Temporary differences Deferred income tax assets (liabilities) Gain on valuation of available-for-sales securities 6,581,213 (1,809,834) The statutory income tax rate, including resident tax surcharges, applicable to the Company was approximately 27.5%. As a result of tax adjustment, effective tax rate of the Company for the year ended December 31, 2005 is approximately 27.3% (2004 : 29.2%). 27
22. Per Share Data Earnings per share is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the year. Ordinary income per share is computed by dividing ordinary income, net of corresponding income taxes, allocated to common stock by the weighted average number of common shares outstanding during the year. Ordinary income per share and earnings per share are calculated as follows. (in Korean won) 2005 2004 Ordinary income(*) Weighted average number of shares 20,990,276,758 6,060,000 shares 14,843,491,043 4,765,344 shares Ordinary income per share 3,464 3,115 (in Korean won) 2005 2004 Net income(*) Weighted average number of shares 20,990,276,758 6,060,000 shares 14,843,491,043 4,765,344 shares Earnings per share 3,464 3,115 (*)Since there were no extraordinary gain or loss items, ordinary income equals net income in 2005 and 2004. There was no change in the weighted average number of outstanding shares in 2005. The weighted average number of outstanding shares for the year ended December 31, 2004 is as follows. Number of Outstanding Shares Number of Days Outstanding Weighted Number of Shares January 1, 2004 4,706,160 350 1,647,156,000 Capital increase 6,060,000 16 96,960,000 1,744,116,000 The weighted average number of outstanding shares = 1,744,116,000 / 366 = 4,765,344 shares 28
23. Dividends Details of dividend yield ratio, dividend payout ratio and dividends amount for the year ended December 31, 2005 are calculated as follows. (in Korean won) 2005 Dividend yield ratio Dividend per share (A) 750 Stock price as of year-ends (B) 57,200 Dividend yield ratio (A/B) 1.31% Dividend payout ratio Dividends amount (C) 4,545,000,000 Net income (D) 20,990,276,758 Dividend payout ratio (C/D) 21.65% Dividend amount Number of shares (E) 6,060,000 shares Dividend ratio per share (F) 150% Dividend amount (E*F* 500) 4,545,000,000 29
24. Transactions with Related Parties Significant transactions, which occurred in the ordinary course of business with related companies for the years ended, are as follows. Accounts 2005 2004 MEGA P&P Purchase, etc 1,939,387 1,800,821 Son Joo Eun Purchase, etc 1,536,572 1,636,496 Other shareholders Purchase, etc 4,743,261 2,808,448 Total 8,219,220 6,245,765 Related account balances with related companies as of are as follows. Accounts 2005 2004 MEGA P&P Son Joo Eun Other shareholders Receivable - - Payable 166,063 171,601 Receivable 1,498,669 1,743,682 Payable 3,591 27,339 Receivable 3,899,263 2,008,566 Payable 99,037 121,786 Receivable - Total 5,397,932 3,752,248 Payable Total 268,691 320,726 As of, the Company recorded advance payments amounting to 1,965 million and 1,345 million respectively to the shareholders including Son Joo Eun in connection with lecture fee. 30
25. Value Added Information Details of accounts included in the computation of value added for the year ended December 31, 2005 and 2004 are as follows. 2005 Cost of revenue S & A Expenses Ordinary R & D expense Total Salaries 679,837 4,711,680 679,101 6,070,618 Provision for severance benefits 34,290 450,468 95,000 579,758 Employee benefits 95,114 554,518-649,632 Taxes and dues 30,564 234,964-265,528 Rent 77,848 2,603,638-2,681,486 Depreciation 152,317 920,404-1,072,721 Amortization - 214,141-214,141 1,069,970 9,689,813 774,101 11,533,884 2004 Cost of revenue S & A Expenses Ordinary R & D expense Total Salaries 528,963 2,724,710 439,845 3,693,517 Provision for severance benefits 26,819 217,119 39,829 283,768 Employee benefits 85,674 380,516-466,190 Taxes and dues 24,013 150,459-174,472 Rent 56,624 1,316,426-1,373,050 Depreciation 182,324 420,830-603,154 Amortization - 139,998-139,998 904,417 5,350,058 479,674 6,734,149 31
26. Supplemental Cash Flow Information The Company considers cash on hand, bank deposits and highly liquid marketable securities with original maturities of three months or less to be cash and cash equivalents. Significant non-cash transactions for the years ended are as follows. 2005 2004 Gain on valuation of available-for-sales securities 6,581,213 339,375 Transfer of construction-in-progress 12,689,826 - Stock compensation expense 332,500 - Transfer of long-term available-for-sale securities to short-term available-for-sale securities - 100,423 32
Refer to original Korean Language Report for a Copy of Auditor s Report issued by Samil PricewaterhouseCoopers Report on the Review of Internal Accounting Control System To the President of We have reviewed the management s report on the operations of the internal accounting control system ( IACS ) of (the Company ) as of December 31, 2005. In accordance with Article 2-2 of the Act on External Audit for Stock Companies (the External Audit Law ) of the Republic of Korea, the Company s management is responsible for reporting on the design and operations of its IACS ( IACS report ). Our responsibility is to review the management s IACS report and issue a report based on our review. We conducted our review in accordance with Article 2-3 of the External Audit Law. Our review included inquiries of management and employees, inspection of related documents and checking of the operations of the Company s IACS. We did not perform an audit of the Company s IACS and accordingly, we do not express an audit opinion. Based on our review, no material weakness in the design or operations of the Company s IACS under Article 2-2 of the External Audit Law as of December 31, 2005, has come to our attention. This report applies to the Company s IACS in existence as of December 31, 2005. We did not review the Company s IACS after December 31, 2005. This report has been prepared for Korean regulatory purposes pursuant to the External Audit Law, and may not be appropriate for other purposes or for other users. 33
Refer to original Korean Language Report for a Copy of Auditor s Report issued by Samil PricewaterhouseCoopers As this report is based on Interim Guidelines on Auditors Review and Report on Management s IACS Report issued by the Korean Audit Standards Committee on March 29, 2005, they apply only from that date until the date the Final Standards for Management s IACS Report, and the Final Standards for Auditors Review and Report on Management s IACS Report become effective. A review based on the final standards may have different results and accordingly, the content of any updated report may be different. February 15, 2006 Notice to Readers This report is annexed in relation to the audit of the financial statements as of and for the year ended December 31, 2005, and the review of internal accounting control system pursuant to Article 2-3 of the Act on External Audit for Stock Companies of the Republic of Korea. 34