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Webzen 20-F 2008 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
(Mark
One)
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, 8th
Floor,
467-6
Dogok-dong, Kangnam-ku,
Seoul,
Korea 135-971
(Address
of principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
* 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.
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
PRESENTATION
OF FINANCIAL INFORMATION
Unless the
context otherwise requires, references in this annual report to:
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.
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.
Not
applicable.
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.
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 W935.8 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.
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:
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 W2.0 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.
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:
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.
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:
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:
The
following table presents the royalty revenue generated from the Soul of the
Ultimate Nation (SUN) distributors in overseas market since 2007:
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:
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 W8,176 million,
W8,898
million, and W2,271 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.
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
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:
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.
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.
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.
There are
no unresolved outstanding comments.
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 W24,058
million and W29,097 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 W3,287 million
(US$3.5 million), W2,003 million
(US$2.1 million), W417 million
(US$0.4 million), W279 million
(US$0.3 million) and W199 million
(US$0.2 million), respectively, in 2007.
Our cost
of revenues increased in 2007 to W17,505 million
from W15,722
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 W46,012 million
from W56,761
million in 2006 as we implemented a series of cost-cutting measures. Our net
loss decreased in 2007 to W25,594 million
from W47,065
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:
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 W388
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:
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.
The
following table summarizes our results of operations as a percentage of our
total net revenues for the periods indicated.
Revenues. Our net revenues
for 2007 increased 20.9% from W24,058 million in
2006 to W29,097 million in
2007 due to:
Cost of revenues. Our cost of
revenues for 2007 increased 11.3% from W15,722 million in
2006 to W17,505 million in
2007, primarily due to:
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 W32,699 million in
2006 to W22,848 million in
2007 and, as a percentage of net revenues, decreased from 135.9% to 78.5% in
2007, primarily due to:
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 W24,062 in 2006 to
W23,164
million in 2007. Of this amount, W5,960 million was
attributable to the wages and salaries paid in 2007 to personnel in research and
development departments, W8,188 million was
attributable to advance royalties paid to Red5 Studios for the development of
T-project, and W5,706 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 W3,991 million in
2006 to W3,503 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 W78,138 million as
of December 31, 2006 to W66,857 million as
of December 31, 2007.
Foreign currency gains and
losses. We realized net foreign currency losses of W501 million in
2006 and a net foreign currency gain of W92 million in
2007.
Gain on disposal of property and
equipment. Gain on disposal of property and equipment increased
significantly from W115 million in
2006 to W3,931 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 W3,892
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 W2,320
million.
Income
taxes. Income tax expenses decreased 49.5% from W5,102 million in
2006 to W2,579 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 W47,065 million in
2006 to W25,594 million in
2007.
2006
compared to 2005
The
following table summarizes our results of operations for the periods
indicated.
The
following table summarizes our results of operations as a percentage of our
total net revenues for the periods indicated.
Revenues. Our net revenues
for 2006 decreased 24.0% from W31,646 million in
2005 to W24,058 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 W12,815 million in
2005 to W15,722 million in
2006, and as a percentage of total revenues increased from 40.5% in 2005 to
65.4% in 2006 primarily due to:
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 W26,763 million in
2005 to W32,699 million in
2006 and, as a percentage of net revenues, increased from 84.6% to 135.9%,
primarily due to:
These
increases were partly offset by the decrease in sales commission that declined
from W1,339
million in 2005 to W809 million in
2006 and by a slight decrease in consulting and other fees from W3,536 million in
2005 to W3,154 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 W20,282 million in
2005 to W24,062 in 2006,
as we increased our spending for the development of the games. Of this amount,
W8,194
million was attributable to the wages and salaries paid in 2006 to personnel in
research and development departments, W6,793 million was
attributable to advance royalties paid to Red5 Studios for the development of
T-project, W4,363 million was
attributable to advance royalties paid to RTW for the development of APB and
W2,368
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 W4,747 million in
2005 to W3,991 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 W121,739 million
as of December 31, 2005 to W78,138 million as
of December 31, 2006, respectively.
Foreign currency gains and
losses. Net foreign currency losses increased 32.9% from W377 million in
2005 to W501
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 W2,237
million.
Income taxes. In 2005, an
income tax benefit of W5,507 million was
recognized. In 2006, W5,102 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 W16,548 million
from W1,621
million as of December 31, 2005 to W18,169 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 W664 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 W47,065 million in
2006 from W18,804 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
In 2007,
our primary sources of liquidity were existing cash on hand and cash generated
from investing and financing activities. We used W22,026 million in
operating activities in 2007, as our net loss amounted to W25,594 million
during that period.
Net cash
provided by investing activities in 2007 was W4,995 million,
primarily due to the proceeds from disposal of available-for-sale securities
amounting to W17,651 million
and the proceeds from disposal of property, equipment and intangible assets
amounting to W7,625 million
(W7,465
million of which was attributable to the sales of office space at the Daelim
Acrotel Building in Dogok-dong, Seoul), partially offset by W11,656 million
used in the acquisition of available-for-sale securities and an increase of
W5,105
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 W5,756 million for
2007, primarily due to the proceeds of the sales of treasury stock worth W14,166 million to
Woori Investment Security Co., Ltd., partially offset by W9,443 million
used for share purchase of 755,616 common shares in the market.
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 W4.2 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 W1,704 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
W1,100
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.
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:
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 W1.1 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 W0.8 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:
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 W1,704 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 W1,291 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:
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 W24,100 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 W24,100
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 W24,100 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 W16,000 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 W14,000 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
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