POSCO
Table of Contents

As filed with the Securities and Exchange Commission on June 27, 2007
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 20-F
 
     
(Mark One)    
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2006
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o
  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    Date of event requiring this shell company report          
    For the transition period from          to          
 
Commission file number 1-13368
 
 
POSCO
(Exact name of Registrant as specified in its charter)
 
 
The Republic of Korea
(Jurisdiction of incorporation or organization)
 
Finance Division
POSCO Center
892 Daechi-4-dong, Gangnam-gu
Seoul, Korea
(Address of principal executive offices)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
American Depositary Shares, each representing   New York Stock Exchange, Inc.
one-fourth of one share of common stock   New York Stock Exchange, Inc.*
Common Stock, par value Won 5,000 per share    
 
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.
 
77,592,942 shares of common stock, par value Won 5,000 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
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.  Yes o     No þ
 
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.  Yes þ     No o
 
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):
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
 
Indicate by check mark which financial statement item the registrant has elected to follow.  Item 17 o     Item 18 þ
 
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).  Yes o     No þ
 
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes o     No o
 
* Not for trading, but only in connection with the registration of the American Depositary Shares.
 


 

 
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 EX-1.1 ARTICLES OF INCORPORATION OF POSCO
 EX-7.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
 EX-8.1 LIST OF SUBSIDIARIES OF POSCO
 EX-12.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 EX-12.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 EX-13.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 EX-15.1 CONSENT OF SAMIL PRICEWATERHOUSECOOPERS


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GLOSSARY
 
“ADR” American Depositary Receipt evidencing ADSs.
 
“ADR depositary” The Bank of New York.
 
“ADS” American Depositary Share representing one-fourth of one share of Common Stock.
 
“Australian Dollar” or “A$” The currency of the Commonwealth of Australia.
 
“common stock” Common stock, par value Won 5,000 per share, of POSCO.
 
“deposit agreement” Deposit Agreement, dated as of September 26, 1994, among POSCO, the ADR Depositary and all holders and beneficial owners from time to time of ADRs issued thereunder, as amended by amendment no. 1 thereto dated June 25, 1997.
 
“Dollars,” “$” or “US$‘ The currency of the United States of America.
 
“Government” The government of the Republic of Korea.
 
“Yen” or “JPY” The currency of Japan.
 
“Korean GAAP” Generally accepted accounting principles in the Republic of Korea.
 
“Gwangyang Works” Gwangyang Steel Works.
 
“We” POSCO and its consolidated subsidiaries.
 
“Pohang Works” Pohang Steel Works.
 
“Republic” The Republic of Korea.
 
“Securities Act” The United States Securities Act of 1933, as amended.
 
“Securities Exchange Act” The United States Securities Exchange Act of 1934, as amended.
 
“SEC” The United States Securities and Exchange Commission.
 
“tons” Metric tons (1,000 kilograms), equal to 2,204.6 pounds.
 
“U.S. GAAP” Generally accepted accounting principles in the United States of America.
 
“Won” or “W” The currency of the Republic of Korea.
 
Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.


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PART I
 
Item 1.   Identity of Directors, Senior Managers and Advisors
 
Item 1.A.   Directors and Senior Management
 
Not applicable
 
Item 1.B.   Advisers
 
Not applicable
 
Item 1.C.   Auditors
 
Not applicable
 
Item 2.   Offer Statistics and Expected Timetable
 
Not applicable
 
Item 3.   Key Information
 
Item 3.A.   Selected Financial Data
 
The selected financial data presented below should be read in conjunction with our Consolidated Financial Statements and related notes thereto and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected financial data as of December 31, 2005 and 2006 and for each of the three years in the period ended December 31, 2006 is derived from our Consolidated Financial Statements included elsewhere in this annual report. Our Consolidated Financial Statements are prepared in accordance with Korean GAAP, which differ in significant respects from U.S. GAAP.
 
INCOME STATEMENT DATA
 
                                                 
    For the Year Ended December 31,  
    2002     2003     2004     2005     2006     2006(11)  
    (In billions of Won and millions of Dollars, except per share data)  
 
Korean GAAP:
                                               
Sales(1)
  W 14,355     W 17,789     W 23,973     W 26,302     W 25,842     US$ 27,787  
Cost of goods sold(2)
    11,338       13,451       17,361       18,767       19,897       21,394  
Selling and administrative expenses
    967       1,075       1,293       1,451       1,556       1,674  
Operating income
    2,050       3,263       5,319       6,083       4,389       4,720  
Interest expense
    332       250       192       149       183       197  
Foreign currency transaction and translation gains (losses), net
    135       (105 )     179       159       99       106  
Donations(3)
    50       103       170       153       155       166  
Income tax expenses
    398       730       1,502       1,474       922       991  
Net income
    1,089       1,996       3,814       4,022       3,314       3,564  
Basic and diluted earnings per share of common stock(4)
    13,295       24,496       47,185       50,790       42,115       45.28  
Dividends per share of common stock
    3,500       6,000       8,000       8,000       8,000       8.60  
U.S. GAAP(5):
                                               
Operating income
  W 2,021     W 3,235     W 5,299     W 5,671     W 4,259     US$ 4,579  
Net income
    1,018       1,997       3,460       4,102       3,408       3,665  
Basic and diluted earnings per share of common stock
    12,430       24,508       42,806       51,789       43,304       46.56  


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BALANCE SHEET DATA
 
                                                 
    For the Year Ended December 31,  
    2002     2003     2004     2005     2006     2006(11)  
    (In billions of Won and millions of Dollars, except per share data)  
 
Korean GAAP:
                                               
Working capital(6)
  W 1,695     W 3,450     W 5,493     W 5,759     W 7,155     US$ 7,694  
Property, plant and equipment, net(7)
    10,325       9,846       10,440       12,272       14,643       15,745  
Total assets(7)
    19,077       20,769       24,129       27,507       31,149       33,494  
Long-term debt(8)(9)(10)
    3,194       2,952       2,051       1,131       2,726       2,931  
Total shareholders’ Equity(7)
    11,820       13,250       16,386       19,874       22,402       24,088  
U.S. GAAP(5):
                                               
Property, plant and equipment, net
  W 10,322     W 9,880     W 10,541     W 12,420     W 14,860     US$ 15,978  
Total assets
    19,000       20,838       24,279       27,525       31,208       33,557  
Total shareholders’ Equity
    11,464       13,018       16,208       19,498       21,972       23,626  
 
 
(1) Includes sales by our consolidated sales subsidiaries of steel products purchased by such subsidiaries from third parties, including trading companies to which we sell steel products.
 
(2) Includes purchases of steel products by our consolidated subsidiaries from third parties, including trading companies to which we sell steel products.
 
(3) Includes donations to educational foundations supporting basic science and technology research. See “Item 5. Operating and Financial Review and Prospects — Item 5.C. Research and Development, Patents and Licenses, Etc.” and Note 24 of Notes to Consolidated Financial Statements.
 
(4) See Note 26 of Notes to Consolidated Financial Statements for method of calculation.
 
(5) A description of the material differences between Korean GAAP and U.S. GAAP as well as the reconciliation to U.S. GAAP are discussed in detail in Note 32 of Notes to Consolidated Financial Statements.
 
(6) “Working capital” means current assets minus current liabilities.
 
(7) Reflects revaluations of assets permitted under Korean law.
 
(8) Net of current portion and discount on debentures issued.
 
(9) For information regarding swap transactions entered into by us, see “Item 5. Operating and Financial Review and Prospects — Item 5A. Operating Results — Exchange Rate Fluctuations” and Note 22 of Notes to Consolidated Financial Statements.
 
(10) Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at the basic rates in effect at the balance sheet date and resulting translation gains and losses are recognized in current operations. See Notes 2 and 27 of Notes to Consolidated Financial Statements.
 
(11) Translated into U.S. Dollars at the rate of Won 930.00 to US$1.00, the noon buying rate of the Federal Reserve Bank of New York for Won in effect on December 29, 2006. This translation should not be construed as a representation that the Korean Won amounts represent, have been, or could be converted to U.S. Dollars at that rate or any other rate.


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EXCHANGE RATE INFORMATION
 
The following table sets out information concerning the noon buying rate for the periods and dates indicated.
 
                                 
    At End
    Average
             
Period
  of Period     Rate(1)     High     Low  
    (Per US$1.00)  
 
2002
    1,186.3       1,242.0       1,332.0       1,160.6  
2003
    1,192.0       1,183.0       1,262.0       1,146.0  
2004
    1,035.1       1,139.3       1,195.1       1,035.1  
2005
    1,010.0       1,023.2       1,059.8       997.0  
2006
    930.0       954.3       1002.9       913.7  
2007 (through June 26)
    926.1       934.8       949.1       922.3  
January
    941.0       936.8       942.2       925.4  
February
    942.3       936.9       942.3       932.5  
March
    941.1       942.9       949.1       937.2  
April
    931.0       930.7       937.0       926.1  
May
    927.4       927.6       934.0       922.3  
June (through June 26)
    926.1       928.3       932.3       926.1  
 
 
Source: Federal Reserve Bank of New York.
 
(1) The average rate for each full year is calculated as the average of the noon buying rates on the last business day of each month during the relevant year. The average rate for a full month is calculated as the average of the noon buying rates on each business day during the relevant month (or portion thereof).
 
We have translated the Won amounts into Dollars in this prospectus solely for your convenience. We make no representation that the Won or Dollar amounts contained in this prospectus could have been or could be converted into Dollar or Won, as the case may be, at any particular rate or at all.
 
Item 3.B.   Capitalization and Indebtedness
 
Not applicable
 
Item 3.C.   Reasons for Offer and Use of Proceeds
 
Not applicable
 
Item 3.D.   Risk Factors
 
You should carefully consider the risks described below.
 
Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.
 
We are incorporated in Korea, and most of our operations and assets are located in Korea. In addition, Korea is our most important market, accounting for 67.7% of our total sales volume of steel products in 2006. Domestic demand for our products is affected by the condition of major steel consuming industries, such as construction, shipbuilding, automobile, electrical appliances and downstream steel processors, and the Korean economy in general. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea.
 
From early 1997 until 1999, Korea experienced a significant financial and economic downturn, from which it is widely believed the country has now recovered to a significant extent. However, the economic indicators in recent years have shown mixed signs of recovery and uncertainty, and future recovery or growth of the economy is subject to many factors beyond our control. Events related to the terrorist attacks in the United States on September 11, 2001, recent developments in the Middle East including the war in Iraq, higher oil prices, and the general weakness of the global economy have increased the uncertainty of global economic prospects and may continue to adversely


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affect the Korean economy. Any future deterioration of the Korean and global economy could adversely affect our financial condition and results of operations.
 
Developments that could have an adverse impact on Korea’s economy include:
 
  •  financial problems relating to chaebols, or Korean conglomerates, and their suppliers;
 
  •  failure or lack of progress in restructuring of chaebols and other large troubled companies or the financial sector, including credit card companies;
 
  •  loss of investor confidence arising from corporate accounting irregularities and corporate governance issues of certain chaebols;
 
  •  a slowdown in consumer spending;
 
  •  adverse changes or volatility in foreign currency reserve levels, commodity prices, exchange rates, interest rates or stock markets;
 
  •  adverse developments in the economies of countries that are important export markets for Korea, such as the United States, Japan and China, or in emerging market economies in Asia or elsewhere;
 
  •  the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of manufacturing base from Korea to China);
 
  •  social and labor unrest;
 
  •  a decrease in tax revenues and a substantial increase in the Korean government’s expenditures for unemployment compensation and other social programs that, together, would lead to an increased government budget deficit;
 
  •  geo-political uncertainty and risk of further attacks by terrorist groups around the world;
 
  •  implementation of free trade agreements between Korea and other countries, including the United States;
 
  •  deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;
 
  •  political uncertainty or increasing strife among or within political parties in Korea;
 
  •  hostilities involving oil producing countries in the Middle East and any material disruption in the supply of oil or increase in the price of oil; and
 
  •  an increase in the level of tension or an outbreak of hostilities between North Korea and Korea or the United States.
 
We rely on export sales for a significant portion of our total sales. Adverse economic and financial developments in Asia in the future may have an adverse effect on demand for our products in Asia and increase our foreign exchange risks.
 
Our export sales accounted for 32.3% of our total sales volume of steel products in 2006. Our export sales volume to Asia, including China, Japan, Indonesia, Thailand and Malaysia, accounted for 63.8% of our total export sales volume for steel products in 2006, and we expect our sales to these countries, especially to China, to remain important in the future. Accordingly, adverse economic and financial developments in these countries may have an adverse effect on demand for our products. Economic weakness in Asia may also adversely affect our sales to the Korean companies that export to the region, especially companies in the construction, shipbuilding, automobile, electrical appliances and downstream steel processing industries. Weaker demand in these countries, combined with addition of new steel production capacity, particularly in China, may also reduce export prices in Dollar terms of our principal products. We attempt to maintain and expand our export sales to generate foreign currency receipts to cover our foreign currency purchases and debt service requirements. Consequently, any decrease in our export sales could also increase our foreign exchange risks.


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Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the price of the ADSs.
 
Depreciation of the Won may materially affect the results of our operations because, among other things, it causes:
 
  •  an increase in the amount of Won required for us to make interest and principal payments on our foreign currency-denominated debt, which accounted for approximately 50.8% of our total long-term debt (excluding discounts on debentures issued and including current portion) as of December 31, 2006;
 
  •  an increase in Won terms in the costs of raw materials and equipment that we purchase from overseas sources and a substantial portion of our freight costs, which are denominated primarily in Dollars; and
 
  •  foreign exchange translation losses on liabilities, which lower our earnings for accounting purposes.
 
Appreciation of the Won, on the other hand, (i) causes our export products to be less competitive by raising our prices in Dollar terms and (ii) reduces net sales and accounts receivables in Won from export sales, which are primarily denominated in Dollars. However, because of the larger positive effects of the appreciation of the Won (i.e., the reverse of the negative effects caused by the depreciation of the Won, as discussed above), appreciation of the Won generally has a positive impact on our results of operations.
 
Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of the shares of our common stock on the Stock Market Division of the Korea Exchange (formerly the Korea Stock Exchange) and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the Dollar conversion by the depositary for the ADRs of cash dividends, if any, paid in Won on shares of common stock represented by the ADSs.
 
We are dependent on imported raw materials.
 
We purchase substantially all of the principal raw materials we use from sources outside Korea, including iron ore and coal. In 2006, we imported approximately 42.6 million tons of iron ore and 19.7 million tons of coal. Iron ore is imported primarily from Australia, Brazil and India. Coal is imported primarily from Australia, China, Canada and Russia. Although we have not experienced significant unanticipated supply disruptions in the past, supply disruptions or significant increases in market prices of essential raw materials, which could be caused by political or other events in the countries from which we import these materials, could adversely affect our operations.
 
We expect global steel production capacity to continue to expand in the near future, and over-capacity in the global steel industry may return.
 
In recent years, driven in part by strong growth in steel consumption in China, the global steel industry has experienced renewed interest in expansion of steel production capacity. The International Iron and Steel Institute estimated the global crude steel production capacity to increase from 1,129 million tons in 2005 to 1,221 million tons in 2006 and expects that the production capacity to continue to increase further in 2007, primarily as a result of additions of new capacity in China, India and other Asian countries. Over-capacity in the global steel industry may return if increase in demand from developing countries that have experienced significant growth in the past several years does not meet this growth in production capacity. Over-capacity will affect our ability to expand export sales and to increase steel production in general, as well as reduce export prices in Dollar terms of our principal products.
 
Consolidation in the global steel industry may increase competition.
 
In recent years, there has been a trend toward industry consolidation among our competitors. For example, consolidation of Mittal and Arcelor in 2006 has created a company with approximately 10% of global steel production capacity. Competition from global steel manufacturers with expanded production capacity such as Mittal-Arcelor and new market entrants, especially from China and India, could result in significant price competition, declining margins and reductions in revenue. Our larger competitors may use their resources, which


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may be greater than ours, against us in a variety of ways, including by making additional acquisitions, investing more aggressively in product development and capacity and displacing demand for our export products.
 
Expansion of our production operations abroad is important to our long-term success, and our limited experience in the operation of our business outside Korea increases the risk that our international expansion efforts will not be successful.
 
We conduct international trading and construction operations abroad, and our business relies on a global trading network comprised of overseas subsidiaries, branches and representative offices. Although many of our subsidiaries and overseas branches are located in developed countries, we also operate in numerous countries with developing economies. In addition, we intend to continue to expand our production operations internationally by carefully seeking out promising investment opportunities, particularly in China, India and Vietnam, in part to prepare for the eventual maturation of the Korean steel market. We may enter into joint ventures with foreign steel producers that would enable us to rely on these businesses to conduct our operations, establish local networks and coordinate our sales and marketing efforts abroad. To the extent that we enter into these arrangements, our success will depend in part on the willingness of our partner companies to dedicate sufficient resources to their partnership with us.
 
In other situations, we may decide to establish manufacturing facilities by ourselves instead of relying on partners. The demand and market acceptance for our products produced abroad are subject to a high level of uncertainty and are substantially dependent upon the market condition of the global steel industry. We cannot assure you that our international expansion plan will be profitable or that we can recoup the costs related to such investments.
 
Expansion of our trading, construction and production operations abroad requires management attention and resources. In addition, we face additional risks associated with our expansion outside Korea, including:
 
  •  challenges caused by distance, language and cultural differences;
 
  •  higher costs associated with doing business internationally;
 
  •  legal and regulatory restrictions, including foreign exchange controls that might prevent us from repatriating cash earned in countries outside Korea;
 
  •  longer payment cycles in some countries;
 
  •  credit risk and higher levels of payment fraud;
 
  •  currency exchange risks;
 
  •  potentially adverse tax consequences;
 
  •  political and economic instability; and
 
  •  seasonal reductions in business activity during the summer months in some countries.
 
Several of our products have been and may become subject to anti-dumping or countervailing proceedings, which may have an adverse effect on our export sales.
 
In recent years, several of our products have been subject to anti-dumping or countervailing proceedings, including in the United States and China. Further increases in or new imposition of anti-dumping duties, countervailing duties, quotas or tariffs on our sales in these markets may have a material adverse effect on our exports to these regions in the future. Exports to these regions accounted for 15.6% of our sales volume of steel products in 2006. See “Item 4. Information on the Company — Item 4B. Business Overview — Markets — Exports.”


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Cyclical fluctuations based on macroeconomic factors may adversely affect the business and performance of our engineering and construction segment.
 
In order to complement our steel operations, we engage in engineering and construction activities through POSCO Engineering & Construction Co., Ltd., a 90.9%-owned subsidiary. The engineering and construction segment, which accounted for approximately 8.2% of our consolidated sales in 2006, is cyclical and also tends to fluctuate based on macroeconomic factors. Although we believe that our strategy of focusing on high-value-added plant construction and architectural works has enabled us to be exposed to a lesser degree to general economic conditions in Korea in comparison to some of our domestic competitors, our construction revenues have fluctuated in the past depending on the level of domestic construction activity including new construction orders. Our construction operations could suffer in the future in the event of a general downturn in the construction market resulting in weaker demand and falling prices, which could adversely affect the business, financial condition and results of operations of our engineering and construction segment.
 
Fixed price construction contracts without price escalation provisions could result in losses for our engineering and construction segment in the event that unforeseen additional expenses arise with respect to the construction project.
 
Most domestic and international construction projects are carried out on a fixed price basis according to a predetermined timetable, pursuant to the terms of a fixed price contract. The pricing of fixed price contracts is crucial to the profitability of a contractor, as is the ability of the contractor to quantify risks to be borne by it and to provide for contingencies in the contract accordingly. If unforeseen additional expenses arise, for example due to increases in the cost of raw materials or supplies or because the property underlying a structure requires unforeseen remedial treatment in order for it to support the structure, such expenses are usually borne by the contractor, whose profit from the project will be correspondingly reduced or eliminated. If we experience significant unforeseen additional expenses with respect to our fixed price construction projects, we may incur losses on such projects, which could adversely affect the business, financial condition and results of operations of our engineering and construction segment.
 
The Korean housing construction market fluctuates based on the Government’s real estate policies.
 
The performance of the housing construction business of POSCO Engineering & Construction is affected by a variety of factors, many of which are beyond our control. In particular, the housing market in Korea is influenced by the Government’ s real estate policies. In recent years, the Government has introduced a variety of new measures to mitigate increases in housing prices in Korea, which include constraints on the amount of mortgage loans, imposition of higher real estate and capital gains taxes and disclosure of construction project costs. The Government has also discouraged redevelopment of apartment complexes in certain parts of Seoul. In part due to such policies, the real estate market for new housing in Korea has experienced a slowdown in recent months. Additional changes in the Government’ s real estate policies may further reduce demand for new housing in Korea, which would negatively affect the business, financial condition and results of operations of our engineering and construction segment.
 
Escalations in tension with North Korea could have an adverse effect on us and the market value of our securities.
 
Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In recent years, there have been heightened security concerns stemming from North Korea’s nuclear weapon and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the international community. In December 2002, North Korea removed the seals and surveillance equipment from its Yongbyon nuclear power plant and evicted inspectors from the United Nations International Atomic Energy Agency. In January 2003, North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty. Since the renouncement, Korea, the United States, North Korea, China, Japan and Russia have held numerous rounds of six party multi-lateral talks in an effort to resolve issues relating to North Korea’s nuclear weapons program.


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In addition to conducting test flights of long-range missiles, North Korea announced in October 2006 that it had successfully conducted a nuclear test, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council passed a resolution that 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 from providing luxury goods to North Korea, imposes an asset freeze and travel ban on persons associated with North Korea’s weapons program, and calls upon all United Nations member states to take cooperative action, including through inspection of cargo to or from North Korea. In response, North Korea agreed in February 2007 at the six-party talks to shut down and seal the Yongbyon nuclear facility, including the reprocessing facility, and readmit international inspectors to conduct all necessary monitoring and verifications. In return, the other five parties in the six-party talks agreed to provide emergency energy assistance to North Korea in the initial phase of 50,000 tons of heavy fuel oil.
 
There can be no assurance that the February 2007 accord will be implemented as agreed or the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tension, including a breakdown of high-level contacts between Korea and North Korea or occurrence of military hostilities, could have a material adverse effect on our operations.
 
If you surrender your ADRs to withdraw shares of our common stock, you may not be allowed to deposit the shares again to obtain ADRs.
 
Under the deposit agreement, holders of shares of our common stock may deposit those shares with the ADR depositary’s custodian in Korea and obtain ADRs, and holders of ADRs may surrender ADRs to the ADR depositary and receive shares of our common stock. However, under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit that exceeds the difference between (i) the aggregate number of shares deposited by us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (ii) the number of shares on deposit with the depositary bank at the time of such proposed deposit. It is possible that we may not give the consent. As a result, if you surrender ADRs and withdraw shares of common stock, you may not be able to deposit the shares again to obtain ADRs. See “Item 10. Additional Information — Item 10D. Exchange Controls.”
 
You may not be able to exercise preemptive rights for additional shares of common stock and may suffer dilution of your equity interest in us.
 
The Commercial Code of Korea and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the ADR depositary, after consultation with us, may make the rights available to you or use reasonable efforts to dispose of the rights on your behalf and make the net proceeds available to you. The ADR depositary, however, is not required to make available to you any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:
 
  •  a registration statement filed by us under the Securities Act is in effect with respect to those shares; or
 
  •  the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act.
 
We are under no obligation to file any registration statement. If a registration statement is required for you to exercise preemptive rights but is not filed by us, you will not be able to exercise your preemptive rights for additional shares and may suffer dilution of your equity interest in us.
 
This annual report contains “forward-looking statements” that are subject to various risks and uncertainties.
 
This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements


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are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.
 
Item 4.   Information on the Company
 
Item 4.A.   History and Development of the Company
 
We were established by the Government on April 1, 1968, under the Commercial Code of the Republic of Korea, to manufacture and distribute steel rolled products and plates in the domestic and overseas markets. The Government owned more than 70% of our equity until 1988, when the Government reduced its ownership of our common stock to 35% through a public offering and listing our shares on the Stock Market Division of the Korea Exchange. In July 1998, the Government announced its intention to sell all of our common stock owned directly by it or indirectly through The Korea Development Bank. In December 1998, the Government sold all of our common stock it owned directly, and The Korea Development Bank completed the sale of our shares that it owned in September 2000. The Government no longer holds any direct interest in us, and our outstanding common stock is currently held by individuals and institutions. See “Item 7. Major Shareholders and Related Party Transactions — Item 7A. Major Stockholders.”
 
Our legal and commercial name is POSCO. Our principal executive offices are located at POSCO Center, 892 Daechi-4-dong, Gangnam-gu, Seoul, Korea, and our telephone number is (822) 3457-0114.
 
Item 4.B.   Business Overview
 
The Company
 
We are the largest and the only fully integrated steel producer in Korea, and one of the largest steel producers in the world, based on annual crude steel production in 2006. We produced approximately 31.2 million tons of crude steel in 2006, a substantial portion of which was produced at Pohang Works and Gwangyang Works. Currently, Pohang Works has 13.3 million tons of annual crude steel and stainless steel production capacity, and Gwangyang Works has an annual crude steel production capacity of 16.7 million tons. We manufacture and sell a broad line of steel products, including hot rolled and cold rolled products, plates, wire rods, silicon steel sheets and stainless steel products.
 
We sell primarily to the Korean market, with domestic sales accounting for 67.7% of our total sales volume of steel products in 2006. We believe that we had an overall market share of approximately 42.3% of the total sales volume of steel products sold in Korea in 2006.
 
Our exports in 2005 and 2006 accounted for 26.5% and 32.3% of our total sales volume of steel products, respectively. Our major export market is Asia, with China accounting for 25.1%, Japan 19.4% and the rest of Asia 18.8% of our total steel export sales volume in 2006.
 
Business Strategy
 
Our goal is to maintain and strengthen our position as one of the leading steel producers in the world. In recent years, the global steel industry has undergone significant consolidation, resulting in the emergence of steel companies with expanded production capacity. We seek to achieve continued global excellence in this era of


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consolidation through a renewed emphasis on growth and innovation. We are currently pursuing the following business strategies.
 
Continue to Seek Investment Opportunities Abroad and Establish Global Production Base
 
We carefully seek out promising investment opportunities abroad, primarily in China, India and Vietnam, in part to prepare for the eventual maturation of the Korean steel market. We believe that China, India and Vietnam will continue to offer substantial growth opportunities, and we plan to selectively seek additional investment opportunities and expand our production base in these countries. In November 2003, we launched POSCO China Holding Corporation, a holding company for our investments in China. In June 2005, we entered into a memorandum of understanding with Orissa State Government of India for the construction of an integrated steel mill and the development of an iron ore mine in Orissa state. We estimate the aggregate costs of the initial round of construction and mine development to be approximately $3.7 billion and additional costs of approximately $8.3 billion in order to increase the annual production capacity to 12 million tons of slab and hot rolled products. We also obtained an approval from the Government of Vietnam in November 2006 to construct steel mills with annual production capacities of 1.2 million tons of cold rolled products and 3.0 million tons of hot rolled products, pursuant to which we plan to invest $196 million and finance the remainder to start construction of a $491 million cold rolling mill in November 2007 with target completion in December 2009. We also entered into a memorandum of understanding with Vina-shin Group in May 2007 to jointly study feasibility of construction and operation of an integrated steel mill in Vietnam. We will continue to seek investment opportunities abroad.
 
Develop Leading Technology to Increase Sales of Higher Margin, Higher Value-Added Products and Enhance Quality of Our Products
 
We plan to continue to invest in developing leading technology necessary to produce higher margin, higher value-added products and enhance the overall quality of our products. We will continue to refine FINEX, a low cost, environmentally friendly steel manufacturing process that we believe optimizes our production capacity by utilizing non-agglomerated iron ore fines and using non-coking coal as an energy source and a reducing agent. We believe that FINEX offers considerable environmental and economic advantages through elimination of major sources of pollution such as sinter and coke plants, as well as decreasing operating and raw material costs. We completed the construction of our first FINEX plant with an annual production capacity of 1.5 million tons in May 2007. We are also incorporating a new technology called strip casting, which eliminates most of the existing slab casting and hot rolling process and transforms molten steel directly into steel sheets with 1.6 mm to 3.0 mm in thickness. We completed construction of a testing plant with an annual production capacity of 600 thousand tons that utilizes strip casting technology, which we expect to start operating late this year.
 
We have also sought to enhance the quality of our products through continued modernization and rationalization of our facilities. Through our strategic alliance with Nippon Steel, we also participate in jointly sponsored research. Leveraging our leading technology, we plan to further increase the proportion of our sales of higher margin, higher value-added products such as cold-rolled products (including automotive steel sheets), silicon steel sheets and stainless steel products.
 
Enhance Efficiency of Operations and Cost-Effectiveness through Company-Wide Process Innovation
 
We continue to refine our Six Sigma programs as part of our company-wide process for innovation and enhancing efficiency of operations. We reoriented our business transaction processes, including purchase of raw materials and sale of goods, to focus on our customers and established a computerized resource management system. The company-wide inventory and product classification and data standardization system have substantially cut operational inefficiencies and enhanced our cost-effectiveness. In addition, by sharing inventory and cost information in real time, we have shortened the period required to prepare monthly financial accounting data. In recent years, we have also implemented aggressive cost savings programs, including implementation of the Mega Y project to reduce raw material costs and steel production costs related to sintering and coking processes. In addition to improving the efficiency of our production, we also strive to create an innovative corporate culture. Under the slogan of “improve and practice everyday,” the POSCO Six Sigma Model extends to business process management


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which enables us to monitor and control our performance. We will continue to seek new opportunities to implement our company-wide process innovation and increase our efficiency and cost-effectiveness.
 
Continue to Expand Our Export Customer Base
 
Although supplying the Korean domestic market is our priority, we intend to continue to supply a significant amount of our products to customers in overseas markets. Our export and overseas sales volume represented 32.3% of our total sales volume of steel products in 2006, with 63.8% of our export and overseas sales volume of steel products to customers in nearby Asian markets in 2006. We intend to further strengthen our global market position by cultivating relationships with our existing overseas customers and assertively seeking out prospective new customers in the emerging markets for high value steel products. Our export sales provide a foreign currency hedge by generating foreign currency that can be used to service our foreign currency debt and to purchase key raw materials, most of which we source from overseas. Maintaining strong relationships with major export customers also provides us with the flexibility to reallocate sales to foreign markets in periods when domestic demand is weak.
 
Secure Procurement of Raw Materials through Strategic Investments and Long-Term Contracts
 
We purchase substantially all of the principal raw materials we use, including iron ore and coal, from sources outside Korea. Import prices of these raw materials have increased in recent years. To secure adequate procurement of principal raw materials, we have invested and will continue to explore additional investment opportunities in various raw material development projects abroad, as well as enter into long-term contracts with leading suppliers of raw materials, principally in Australia, Brazil and Canada.
 
Selectively Seek Opportunities in Growth Industries
 
Our first priority is to maximize revenues and profits from our steel operations. We also selectively seek opportunities in growth industries, in part to prepare for the eventual maturation of the Korean steel market. When determining our diversification projects, we consider attractiveness of the industry and its future growth potential, as well as our capabilities to become competitive in such an industry. New businesses related to our steel operations include liquefied natural gas production, logistics and magnesium coil and sheet production. New businesses not related to our steel operations in which we intend to focus our efforts for diversification include power generation, advanced materials and alternative energy development. For example, we purchased a 50.0% interest in POSCO Power Corporation for Won 291 billion in July 2005 and the remaining 50.0% interest for Won 306 billion in March 2006. POSCO Power Corporation is the largest private power generation company in Korea that operates power plants with total power generation capacity of 1,800 megawatts. In order to meet the increasing demand for clean and renewable sources of energy, POSCO Power Corporation signed a strategic partnership agreement in February 2007 with FuelCell Energy, a global leader in molten carbonate fuel cell technology, pursuant to which POSCO Power Corporation will explore opportunities to expand into the stationary fuel cell market.
 
Major Products
 
We manufacture and sell a broad line of steel products, including the following:
 
  •  hot rolled products;
 
  •  plates;
 
  •  wire rods;
 
  •  cold rolled products;
 
  •  silicon steel sheets; and
 
  •  stainless steel products.


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The tables below set out our sales revenues and sales volume by major steel product categories for the periods indicated.
 
                                                                                 
    Year Ended December 31,  
    2002     2003     2004     2005     2006  
    Billions of
          Billions of
          Billions of
          Billions of
          Billions of
       
Steel Products
  Won     %     Won     %     Won     %     Won     %     Won     %  
 
Hot rolled products
    3,416       25.4       4,185       26.1       5,449       25.1       5,877       25.0       4,650       20.8  
Plates
    1,237       9.2       1,320       8.2       1,987       9.1       2,253       9.6       2,380       10.7  
Wire rods
    1,178       8.7       1,064       6.6       1,351       6.2       1,528       6.5       1,243       5.6  
Cold rolled products
    4,310       32.0       5,208       32.4       6,564       30.2       7,527       32.0       6,765       30.3  
Silicon steel sheets
    347       2.6       431       2.7       531       2.4       688       2.9       681       3.0  
Stainless steel products
    2,278       16.9       3,172       19.7       4,920       22.6       4,543       19.3       5,751       25.8  
Others
    700       5.2       687       4.3       952       4.4       1,132       4.7       859       3.8  
                                                                                 
Total
    13,465       100.0       16,067       100.0       21,753       100.0       23,547       100.0       22,329       100.0  
                                                                                 
 
                                                                                 
    Year Ended December 31,  
    2002     2003     2004     2005     2006  
    Thousands
          Thousands
          Thousands
          Thousands
          Thousands
       
Steel Products
  of Tons     %     of Tons     %     of Tons     %     of Tons     %     of Tons     %  
 
Hot rolled products
    11,461       37.8       11,514       37.6       10,966       34.5       10,330       33.2       9,604       31.0  
Plates
    3,060       10.1       3,047       9.9       3,385       10.6       3,193       10.3       3,615       11.7  
Wire rods
    2,808       9.3       2,777       9.1       2,503       7.9       2,366       7.6       2,153       6.9  
Cold rolled products
    9,503       31.3       9,770       31.9       10,242       32.2       10,468       33.6       10,864       35.1  
Silicon steel sheets
    589       1.9       671       2.2       705       2.2       737       2.4       686       2.2  
Stainless steel products
    1,394       4.6       1,778       5.8       2,069       6.5       1,919       6.2       2,260       7.3  
Others
    1,518       5.0       1,100       3.5       1,926       6.1       2,100       6.7       1,802       5.8  
                                                                                 
Total
    30,333       100.0       30,657       100.0       31,796       100.0       31,115       100.0       30,984       100.0  
                                                                                 
 
The sales revenues and sales volumes in the tables above represent the steel product sales of our consolidated entities which are steel-related companies but do not include the non-steel product sales of these entities. They include sales by our consolidated sales subsidiaries of steel products purchased by these subsidiaries from third parties, including trading companies to which we sell steel products. The sales of steel products purchased from third parties amounted to approximately 1.2 million tons in 2002, 1.4 million tons in 2003, 1.0 million tons in 2004, 1.0 million tons in 2005 and 0.8 million tons in 2006, accounting for Won 511 billion in 2002, Won 679 billion in 2003, Won 699 billion in 2004, Won 807 billion in 2005 and Won 470 billion in 2006, respectively.
 
Hot Rolled Products
 
Hot rolled coils and sheets have many different industrial applications. They are used to manufacture structural steel used in the construction of buildings, railway rolling stocks, industrial pipes and tanks, and automobile chassis. Hot rolled coil is also manufactured in a wide range of widths and thickness as the feedstock for higher value-added products such as cold rolled products and silicon steel sheets.
 
Our deliveries of hot rolled products amounted to 9.6 million tons in 2006, representing 31.0% of our total sales volume of steel products. The Korean market accounted for 7.1 million tons or 74.2% of our hot rolled product sales in 2006, representing a domestic market share of approximately 51.3%. The largest customers of our hot rolled products are downstream steelmakers in Korea who use the products to manufacture pipes and cold rolled products.
 
Hot rolled products constitute one of our two largest product categories in terms of sales volume. In 2006, our sales volume of hot rolled products decreased by 7.0% compared to 2005 primarily due to a decrease in demand from the construction industry and an increase in the quantity set aside for use in the production of cold rolled products.


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Plates
 
Plates are used in shipbuilding, structural steelwork, offshore oil and gas production, power generation, mining, and the manufacture of earth-moving and mechanical handling equipment, boiler and pressure vessels and other industrial machinery.
 
Our deliveries of plates amounted to 3.6 million tons in 2006, representing 11.7% of our total sales volume of steel products. The Korean market accounted for 3.4 million tons or 93.7% of our plate sales in 2006, representing a domestic market share of approximately 37.2%. The Korean shipbuilding industry, which uses plates to manufacture chemical tankers, rigs, bulk carriers and containers, and the construction industry are our largest customers of plates.
 
In 2006, our sales volume of plates increased by 13.2% compared to 2005 primarily due to an increase in demand from the shipbuilding and industrial machinery industries.
 
Wire Rods
 
Wire rods are used mainly by manufacturers of wire, nails, bolts, nuts and welding rods. Wire rods are also used in the manufacture of coil springs, tension bars and tire cords in the automobile industry.
 
Our deliveries of wire rods amounted to 2.2 million tons in 2006, representing 6.9% of our total sales volume of steel products. The Korean market accounted for 1.7 million tons or 76.9% of our wire rod sales in 2006, representing a domestic market share of approximately 52.7%. The largest customers for our wire rods are manufacturers of wire and nails.
 
In 2006, our sales volume of wire rods decreased by 9.0% compared to 2005 primarily due to a decrease in demand from the construction industry, which more than offset an increase in demand from the automobile industry.
 
Cold Rolled Products
 
Cold rolled coils and further refined galvanized cold rolled products are used mainly in the automobile industry to produce car body panels. Other users include the household goods, electrical appliances, engineering and metal goods industries.
 
Our deliveries of cold rolled products amounted to 10.9 million tons in 2006, representing 35.1% of our total sales volume of steel products. The Korean market accounted for 6.1 million tons or 56.1% of our cold rolled product sales in 2006, representing a domestic market share of approximately 52.3%.
 
Cold rolled products constitute one of our two largest product categories in terms of sales volume and revenue. Sales of cold rolled products in recent years have experienced growth due to the launching of a sixth continuous galvanizing line at Gwangyang Works and an increase in demand from the automobile industry. In 2006, our sales volume of cold rolled products increased by 3.8% compared to our sales volume in 2005.
 
Silicon Steel Sheets
 
Silicon steel sheets are used mainly in the manufacture of power transformers and generators and rotating machines.
 
Our deliveries of silicon steel sheets amounted to 686 thousand tons in 2006, representing 2.2% of our total sales volume of steel products. The Korean market accounted for 318 thousand tons or 46.3% of our silicon steel sheet sales in 2006, representing a domestic market share of approximately 85.0%.
 
In 2006, despite an increase in demand from manufacturers of power transformers and generators, our sales volume of silicon steel sheets decreased by 6.9% compared to 2005 due to a temporary suspension of a production plant for revamping from April to June in 2006.


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Stainless Steel Products
 
Stainless steel products are used to manufacture household goods and are also used by the chemical industry, paper mills, the aviation industry, the automobile industry, the construction industry and the food processing industry.
 
Our deliveries of stainless steel products amounted to 2.3 million tons in 2006, representing 7.3% of our total sales volume of steel products. The Korean market accounted for 1.0 million tons or 44.9% of our stainless steel product sales in 2006, representing a domestic market share of approximately 53.9%.
 
Stainless steel products constitute our second largest product category in terms of revenue. Although sales of stainless steel products accounted for only 7.3% of our total sales volume in 2006, they represented 25.8% of our total revenues from sales of steel products in 2006. Our sales volume of stainless steel products increased by 17.8% in 2006 compared to 2005 due to an increase in demand from the stainless steel products industry and stabilization of production from China.
 
Others
 
Other products include lower value-added semi-finished products such as pig iron, billets, blooms and slab.
 
Markets
 
Korea is our most important market. Domestic sales represented 67.7% of our total sales volume of steel products in 2006. Exports and overseas sales represented 32.3% of our total sales volume of steel products in 2006. Our sales strategy has been to devote our production primarily to satisfy domestic demand, while seeking export sales to utilize capacity to the fullest extent, to expand our international market presence and to earn foreign exchange.
 
Domestic Market
 
The total Korean market for steel products amounted to 49.6 million tons in 2006. We sold a total of 21.0 million tons of steel products in Korea in 2006, maintaining an overall domestic market share of 42.3% for such period.
 
The table below sets out sales of steel products in Korea for the periods indicated.
 
                                                                                 
    Year Ended December 31,  
    2002     2003     2004     2005     2006  
    Thousands
          Thousands
          Thousands
          Thousands
          Thousands
       
Region
  of Tons     %     of Tons     %     of Tons     %     of Tons     %     of Tons     %  
 
POSCO’s sales
    21,090       48.2       21,121       46.6       23,599       50.0       22,880       48.5       20,991       42.3  
Other Korean steel companies’ sales
    17,732       40.6       17,838       39.3       15,969       33.9       15,957       33.9       18,052       36.4  
Imports(1)
    4,898       11.2       6,411       14.1       7,595       16.1       8,287       17.6       10,591       21.3  
                                                                                 
Total domestic sales(1)
    43,720       100.0       45,370       100.0       47,163       100.0       47,124       100.0       49,634       100.0  
                                                                                 
 
 
(1) Source: 2006 Official Statistics, Korea Iron & Steel Association.
 
Total domestic sales increased by 3.8% in 2003, primarily resulting from an increase in demand from the construction industry which more than offset decreases in demand from the automobile industry and the consumer appliance industry. Imports from foreign competitors, primarily from Japan, China and Russia, showed strong growth as import sales volume increased by 30.9% in 2003 to 6.4 million tons. Growth in domestic sales volume of other Korean steel companies in 2003 slowed to 0.6% in 2003 while our domestic sales volume remained stable with a 0.1% increase in 2003 to 21.1 million tons. Accordingly, our market share dropped to 46.6% in 2003 from 48.2% in 2002.
 
In 2004, total domestic sales increased by 4.0%, primarily due to an increase in demand from the automobile, consumer appliance, and shipbuilding industries which more than offset a decrease in demand from the construction industry. Imports from foreign competitors, primarily from Japan, China, and Russia, showed strong growth as import sales volume increased by 18.5% in 2004 to 7.6 million tons. Growth in domestic sales volume of other Korean steel companies decreased by 10.5% in 2004 while our domestic sales volume increased by 11.7% in 2004 to 23.6 million tons. Accordingly, our market share increased to 50.0% in 2004 from 46.6% in 2003.


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In 2005, total domestic sales decreased by 0.1%, primarily due to a decrease in demand from the construction industry, which more than offset an increase in demand from the automobile and shipbuilding industries. Imports from foreign competitors, primarily from Japan, China, and Russia, showed strong growth as import sales volume increased by 9.1% in 2005 to 8.3 million tons. Growth in domestic sales volume of other Korean steel companies decreased by 0.1% in 2005 while our domestic sales volume decreased by 3.0% in 2005 to 22.9 million tons. Accordingly, our market share decreased to 48.5% in 2005 from 50.0% in 2004.
 
In 2006, total domestic sales increased by 5.3%, primarily due to an increase in demand from the shipbuilding and automobile industries, which more than offset a decrease in demand from the construction industry. Imports from foreign competitors, primarily from Japan, China, and Russia, showed strong growth as import sales volume increased by 27.8% in 2006 to 10.6 million tons. Growth in domestic sales volume of other Korean steel companies increased by 13.1% in 2006 while our domestic sales volume decreased by 8.3% in 2006 to 21.0 million tons. Accordingly, our market share decreased to 42.3% in 2006 from 48.5% in 2005.
 
We sell in Korea higher value-added and other finished products to end-users and semi-finished products to other steel manufacturers for further processing. Local distribution companies and sales affiliates sell finished steel products to low-volume customers. We provide service technicians for large customers and distributors in each important product area.
 
For a discussion of our domestic sales of steel products and factors that may affect domestic sales in the future, see “Item 5. Operating and Financial Review and Prospects — Item 5.A. Operating Results.”
 
Exports
 
Our exports and overseas sales volume represented 32.3% of our total sales volume of steel products in 2006, 63.8% of which was generated in exports and sales to Asian countries. Our exports in terms of sales volume increased by 21.4% to 10.0 million tons in 2006. The tables below set out our exports and sales of steel products in terms of sales volume by geographical market and by product for the periods indicated.
 
                                                                                 
    Year Ended December 31,  
    2002     2003     2004     2005     2006  
    Thousands
          Thousands
          Thousands
          Thousands
          Thousands
       
Region
  of Tons     %     of Tons     %     of Tons     %     of Tons     %     of Tons     %  
 
China
    2,828       30.6       3,510       36.8       3,138       38.3       2,640       32.1       2,524       25.3  
Japan
    1,780       19.3       1,719       18.0       1,661       20.3       1,843       22.4       1,959       19.6  
Asia (other than China and Japan)
    2,414       26.1       2,259       23.7       1,502       18.3       1,636       19.9       1,895       19.0  
North America
    978       10.6       715       7.5       737       9.0       761       9.2       963       9.6  
Europe
    294       3.2       236       2.5       116       1.4       34       0.4       318       3.2  
Others
    949       10.3       1,096       11.5       1,043       12.7       1,320       16.0       2,335       23.3  
                                                                                 
Total
    9,243       100.0       9,535       100.0       8,198       100.0       8,234       100.0       9,994       100.00  
                                                                                 
 
                                                                                 
    Year Ended December 31,  
    2002     2003     2004     2005     2006  
    Thousands
          Thousands
          Thousands
          Thousands
          Thousands
       
Steel Products
  of Tons     %     of Tons     %     of Tons     %     of Tons     %     of Tons     %  
 
Hot rolled products
    2,224       24.1       2,464       25.8       2,049       25.0       1,960       23.8       2,477       24.8  
Plates
    300       3.2       363       3.8       295       3.6       229       2.8       228       2.3  
Wire rods
    679       7.3       598       6.3       252       3.1       333       4.1       498       5.0  
Cold rolled products
    4,694       50.8       4,649       48.8       4,139       50.5       4,142       50.3       4,774       47.8  
Silicon steel sheets
    161       1.7       223       2.3       245       3.0       262       3.2       369       3.7  
Stainless steel products
    706       7.6       795       8.3       1,019       12.4       1,032       12.5       1,245       12.4  
Others
    478       5.2       443       4.7       199       2.4       276       3.3       403       4.0  
                                                                                 
Total
    9,243       100.0       9,535       100.0       8,198       100.0       8,234       100.0       9,994       100.0  
                                                                                 


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The table below sets out our total sales, including non-steel sales, by geographic region for the periods indicated.
 
                         
    Year Ended December 31,  
Region
  2004     2005     2006  
    (In billions)  
 
Korea
  W 16,738     W 18,566     W 17,250  
China
    3,316       3,118       3,070  
Asia (other than China and Japan)
    1,257       1,502       1,486  
Japan
    1,164       1,372       1,312  
North America
    529       550       610  
Other
    969       1,194       2,114  
                         
Total
    23,973       26,302       25,842  
                         
 
The above tables include sales by our consolidated sales subsidiaries of steel products purchased by these subsidiaries from third parties, including trading companies to which we sell steel products.
 
The table below sets out the world’s apparent crude steel use for the periods indicated.
 
                                         
    Year Ended December 31,  
    2002     2003     2004     2005     2006  
 
Apparent Crude Steel Use (million metric tons)
    917       984       1,091       1,113       1,178  
Percentage of annual increase (decrease)
    6.3 %     7.3 %     10.9 %     2.0 %     5.8 %
 
 
Source: International Iron and Steel Institute.
 
In recent years, driven in part by strong growth in steel consumption in China, the global steel industry has experienced renewed interest in expansion of steel production capacity. The International Iron and Steel Institute estimated the global crude steel production capacity to increase from 1,129 million tons in 2005 to 1,221 million tons in 2006 and expects the production capacity to increase further in 2007, primarily as a result of additions of new capacity in China, India and other Asian countries. Over-capacity in the global steel industry may return if increase in demand from developing countries that have experienced significant growth in recent years does not meet this growth in production capacity.
 
We distribute our export products mostly through Korean trading companies and our overseas sales subsidiaries. Our largest export market in 2006 was China, which accounted for 25.3% of our export volume of steel products, including sales by our overseas subsidiaries. The principal products exported to China are cold rolled products and stainless steel products. Our exports to China amounted to 3.1 million tons in 2004, 2.6 million tons in 2005 and 2.5 million tons in 2006. Exports to China decreased by 10.6% in 2004 and 15.9% in 2005 primarily due to our decision to focus on meeting increased domestic demand. Our exports to China further decreased in 2006 by 4.4% primarily due to an adjustment of our sales volume from China to other countries with more favorable market price conditions. Our exports to Japan recovered from 1.7 million tons in 2004 to 1.8 million tons in 2005 and 2.0 million tons in 2006 primarily due to a general increase in the Japanese market price for our products. Sales volume to Asian countries other than China and Japan increased from 1.5 million tons in 2004 to 1.6 million tons in 2005 and increased further to 1.9 million tons primarily due to an adjustment of our sales volume from China to other Asian countries with more favorable market price conditions.
 
In 2004 and 2005, our exports to the United States and Europe remained at relatively low levels primarily due to our decision to export to Asian countries other than Japan that have higher profit margins. However, our sales volume to the United States and Europe increased from 0.8 million tons in 2005 to 1.3 million tons in 2006, primarily due to favorable market price conditions in these regions during the first half of 2006.
 
A significant part of our sales in North America are made to USS-POSCO Industries (“UPI”), a 50-50 joint venture between U.S. Steel Corporation and us. We sell hot rolled products to UPI, which uses such products to manufacture cold rolled and galvanized steel products for sale in the United States. Our sales to UPI were 639


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thousand tons in 2004, 572 thousand tons in 2005 and 730 thousand tons in 2006, accounting for approximately 87% of our sales to North America in 2004, 75% in 2005 and 76% in 2006.
 
In the United States, a number of our products have been subject to anti-dumping and countervailing proceedings since 1992. As a result of these proceedings, our sales of corrosion resistant steel are subject to a countervailing duty of 0.07% and an anti-dumping duty of 0.35%, our sales of stainless steel plates are subject to an anti-dumping duty of 1.19% and our sales of stainless steel sheets are subject to an anti-dumping duty of 0.92%.
 
In China, we are subject to an anti-dumping duty of 11.0% on our sales of stainless cold rolled steel since December 2000. However, we entered into a suspension agreement in December 2000 with China and agreed to certain price undertakings. Since then, we have been exporting certain types of stainless cold rolled steel products to China that are exempt from such anti-dumping duty.
 
Our products that have been subject to anti-dumping or countervailing proceedings in the aggregate have not accounted for a material portion of our total sales in recent years. Consequently, the anti-dumping or countervailing duties imposed on our products have not had a material adverse effect on our total sales. However, there can be no assurance that further increases in or new imposition of dumping duties, countervailing duties, quotas or tariffs on our sales in the United States, China or elsewhere may not have a material adverse effect on our exports to these or other regions in the future.
 
Pricing Policy
 
We determine the sales price of our products based on market conditions. In setting prices, we take into account our costs, including those of raw materials, supply and demand in the Korean market, exchange rates, and conditions in the international steel market.
 
Our export prices can fluctuate considerably over time, depending on market conditions and other factors. The export prices of our higher value-added steel products in the largest markets are determined considering the prices of the similar products charged by our competitors. Export prices in Dollar terms increased in 2004 and the first half of 2005, primarily as a result of general recovery of the global economy and continued increase in steel consumption in China, as well as increases in transportation cost and price of raw materials. However, our export prices in Dollar terms decreased in the second half of 2005 due to excessive supply of steel products from China. Our export prices in Dollar terms rebounded in the first half of 2006 due to the recovery of the global steel markets resulting primarily from an increase in demand from the United States and Europe starting in the second quarter, but decreased in the second half of 2006 as such demand slowed. Our export prices in Dollar terms have rebounded and stabilized in the first half of 2007 as demand from Japan remained strong and various steel producers in China, the United States and Europe increased their sales prices.
 
Raw Materials
 
Steel Production
 
The principal raw materials used in producing steel through the basic oxygen steelmaking method are iron ore and coal. We import all of the coal and virtually all of the iron ore that we use. In 2006, we imported approximately 42.6 million tons of iron ore and 19.7 million tons of coal. Iron ore is imported primarily from Australia, Brazil and India. Coal is imported primarily from Australia, China, Canada and Russia.
 
In 2006, we purchased most of our iron ore and coal imports pursuant to long-term contracts. We purchased approximately 15.4% of our iron ore and coal imports in 2006 from foreign mines in which we have made an investment. The long-term contracts generally have terms of three to ten years and provide for periodic price adjustments to the then-market prices. The long-term contracts require us to purchase certain fixed amounts of relevant raw materials each year, and we typically have an option to increase or decrease such fixed amounts up to 5% or 10% each year. We or the suppliers may cancel the long-term contracts only if performance under the contracts is prevented by causes beyond our or their control and these causes continue for a specified period.
 
The prices of coal and iron ore increased substantially in recent years. The average price of coal per ton (including all associated costs such as customs duties and transportation costs) increased from $72.00 in 2004 to


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$114.40 in 2005 and stabilized at $111.30 in 2006. The average price of iron ore per ton (including all associated costs such as customs duties and transportation costs) increased from $32.00 in 2004 to $44.60 in 2005 and increased further to $55.10 in 2006. We currently do not depend on any single country or supplier for our coal or iron ore.
 
In April 2002, we entered into an agreement with BHP Billiton, Itochu Corporation and Mitsui Corporation and invested A$16.3 million to establish the largest iron ore development project in Australia. We have a 20% interest in the project, while BHP Billiton, Itochu and Mitsui have 65%, 8% and 7% interests, respectively. We are obligated under the agreement to purchase 3.0 million tons of iron ore each year, representing approximately 8% of our total annual iron ore procurement amount, for twenty-five years starting in 2003. The purchase price is determined based on the global market price at the time of purchase. We purchased 2.4 million tons of iron ore from this development project in 2004, 3.2 million tons in 2005 and 2.9 million tons in 2006.
 
Since 2004, we have made the following investments in Australia: (i) A$51 million to acquire a 20% interest in a coal mine project in Foxleigh, Australia, securing 1.5 million tons of coal per year, (ii) A$10 million to acquire a 3.6% interest in a coal mine in Glennies Creek, NSW, Australia, securing 0.5 million tons of coal per year, (iii) A$12.5 million to acquire a 5% interest in a coal mine in Carborough Downs, Queensland, Australia, securing 50 thousand tons of coal per year, (iv) A$18 million to acquire 40 million shares of Murchison Metals Ltd. to develop iron ore mines in the western region of Australia, and (v) A$30 million to acquire a 10% interest in a coal mine in Newpac, NSW, Australia, to secure 0.5 million tons of coal per year. In addition, we invested approximately $25 million to acquire a 2.5% stake in a coal mine project in Elkview, Canada, securing an additional 0.5 million tons of coal per year. We continue to seek opportunities to enter into additional strategic relationships that would enhance our ability to meet our requirements for high quality raw materials.
 
Stainless Steel Production
 
The principal raw materials for the production of stainless steel are wrought nickel, ferrochrome, stainless steel scrap and carbon steel scrap. We purchase a substantial portion of our requirements for wrought nickel from leading producers in Australia, Indonesia, New Caledonia, Russia and Japan, as well as Korea. A substantial portion of requirements for ferrochrome are purchased from producers in South Africa, India and Kazakhstan. Most of the requirements for stainless steel scrap are sourced from domestic and overseas suppliers in Japan, United States and Southeast Asian countries. As for the requirements for carbon steel scrap, scrap from the Pohang Steelworks is also utilized. The average nickel price per ton increased from $13,852 in 2004 to $15,230 in 2005, and further to $21,654 in 2006.
 
In April 2005, we executed a joint venture agreement with Société Minière du Sud Pacifique, a New Caledonian nickel mining company, to procure nickel ore deposits in New Caledonia and operate a ferro-nickel production plant in Korea with annual production capacity of approximately 30,000 metric tons of nickel. Pursuant to the joint venture agreement, two joint venture companies were established in Korea and New Caledonia in May 2006 and June 2006, respectively. We have ownership interest of 49% in each joint venture company and our aggregate investment amount in the joint venture companies is $352 million. The joint venture company in New Caledonia will own the nickel mines and assets relating to nickel mining operations. We plan to purchase all of the ferro-nickel produced by the joint venture company in Korea using the nickel ore supplied from the joint venture company in New Caledonia starting in 2009 and use it for our stainless steel production.
 
Transportation
 
Since 1983, we have retained a fleet of dedicated bulk carriers to transport our raw materials through long-term contracts with shipping companies in Korea. These dedicated bulk carriers transported approximately 75% of our coal and iron ore in 2006, with the remaining 25% transported by other vessels through chartering contracts. All imported raw materials are unloaded at our port facilities in Pohang and Gwangyang. Costs of transportation of iron ore and coal represented approximately 18% and 9% of the total cost of such materials in 2006.


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The Steelmaking Process
 
Our major production facilities, Pohang Works and Gwangyang Works, produce steel by the basic oxygen steelmaking method. The stainless steel plant at Pohang Works produces stainless steel by the electric arc furnace method. Continuous casting improves product quality by imparting a homogenous structure to the steel. Pohang Works and Gwangyang Works produce all of their products through continuous casting.
 
Steel — Basic Oxygen Steelmaking Method
 
First, molten pig iron is produced in a blast furnace from iron ore, which is the basic raw materials used in steelmaking. Molten pig iron is then refined into molten steel in converters by blowing pure oxygen at high pressure to remove impurities. Different desired steel properties may also be obtained by regulating the chemical contents.
 
At this point, molten steel is made into semi-finished products such as slab, blooms or billets at the continuous casting machine. Slab, blooms and billets are produced at different standardized sizes and shapes. Slab, blooms and billets are semi-finished lower margin products that we either use to produce our further processed products or sell to other steelmakers that produce further processed steel products.
 
Slab are processed to produce hot rolled coils products at hot strip mills or to produce plates at plate mills. Hot rolled coils are an intermediate stage product that may either be sold to our customers as various finished products or be further processed by us or our customers into higher value-added products, such as cold rolled sheets and silicon steel sheets. Blooms and billets are processed into wire rods at wire rod mills.
 
Stainless Steel — Electric Arc Furnace Method
 
Stainless steel is produced from stainless steel scrap, chrome, nickel and steel scrap using an electric arc furnace. Stainless steel is then processed into higher value-added products by methods similar to those used for steel production. Stainless steel slab are produced at a continuous casting mill. The slab are processed at hot rolling mills into stainless steel hot coil, which can be further processed at cold strip mills to produce stainless cold rolled steel products.
 
Competition
 
Domestic Market
 
We are currently the only fully integrated steel producer in Korea. As we had an overall market share of 42.3% of the total sales volume of steel products sold in Korea in 2006, we generally face fragmented competition in the domestic market. In hot rolled products, where we had a market share of approximately 51.3% in 2006, we face competition from a Korean operator of mini-mills, which produces lower quality products, and from various foreign producers, primarily from China and Japan. In cold rolled products and stainless steel products, where we had a market share of approximately 52.3% and 53.9% in 2006, respectively, we compete with smaller specialized domestic manufacturers and various foreign producers, primarily from China and Japan.
 
We may face increased competition in the future from new specialized or integrated domestic manufacturers of steel products in the Korean market. Our biggest competitor in Korea is Hyundai Steel, an electric-furnace steel producer with annual crude steel production of 9.3 million tons in 2006.
 
The Korean Government does not impose quotas on or provide subsidies to local steel producers. As a World Trade Organization signatory, Korea has also removed all steel tariffs.
 
Export Markets
 
The competitors in our export markets include all the leading steel manufacturers of the world. In recent years, there has been a trend toward industry consolidation among our competitors, and smaller competitors in the global steel market today may become larger competitors in the future. For example, Mittal Steel’s takeover of Arcelor in 2006 created a company with approximately 10% of global steel production capacity. Competition from global steel manufacturers with expanded production capacity such as Mittal-Arcelor, and new market entrants, especially from China and India, could result in a significant increase in competition. Major competitive factors include range of


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products offered, quality, price, delivery performance and customer service. Our larger competitors may use their resources, which may be greater than ours, against us in a variety of ways, including by making additional acquisitions, investing more aggressively in product development and capacity and displacing demand for our export products.
 
Various export markets currently impose tariffs on different types of steel products. However, we do not believe that tariffs significantly affect our ability to compete in these markets.
 
Joint Venture and Other Investments
 
In September 1996, we entered into an agreement with Sagang Group Co. to establish Zhangjiagang Pohang Stainless Steel Co., Ltd., a joint venture company in China for the manufacture and sale of stainless cold rolled steel products. We have a 82.5% interest in the joint venture (including 23.9% interest of POSCO China Holding Corporation). The plant commenced production of stainless cold rolled steel products in December 1998. The joint venture also completed the construction of new mills in July 2006 with additional annual production capacity of 600 thousand tons of stainless hot rolled products. Zhangjiagang Pohang Stainless Steel produced 458 thousand tons of stainless steel products in 2006.
 
We established POSCO Specialty Steel Co., Ltd. as a wholly-owned subsidiary in Korea in February 1997. POSCO Specialty Steel produces high-quality steel for automobiles, machinery, nuclear power plants, ship-building, aeronautics and electronics industries. The plants operated by POSCO Specialty Steel have an aggregate annual production capacity of 835 thousand tons of wire rods, round bars, steel pipes and semi-finished products. POSCO Specialty Steel Co., Ltd. produced 831 thousand tons of such products in 2006.
 
We currently hold an 80.0% interest in Qingdao Pohang Stainless Steel Co., Ltd. (including 10.0% interest of POSCO China Holding Corporation), a joint venture set up to manufacture and sell stainless cold rolled steel products in China. Construction of the plant operated by Qingdao Pohang Steel began in August 2003 and became operational in December 2004, with an annual production capacity of 180 thousand tons of stainless cold rolled steel products. Qingdao Pohang Steel produced 171 thousand tons of such products in 2006.
 
In August 2003, we entered into a joint venture agreement with Benxi Iron and Steel Group in China to establish Benxi Steel POSCO Cold Rolled Sheet Co., Ltd. and build a cold rolling mill with annual production capacity of 1.8 million tons. The cold rolling mill became operational in March 2006 and produced 506 thousand tons of such products in 2006. We currently hold a 10.0% interest in this joint venture.
 
In November 2003, we launched POSCO China Holding Corporation, a wholly-owned holding company for our investments in China. POSCO China Holding Corporation also provides support to our Chinese investment projects and affiliated companies with their marketing efforts in China and solidify their business relationships with clients and suppliers.
 
In addition to the above investments, we are carefully seeking out additional promising investment opportunities abroad. In June 2005, we entered into a memorandum of understanding with Orissa State Government of India for the construction of an integrated steel mill and the development of an iron ore mine in Orissa state. We estimate the aggregate costs of the initial round of construction and mine development to be approximately $3.7 billion and an additional cost of approximately $8.3 billion in order to increase the annual production capacity to 12 million tons of slab and hot rolled products. We are currently obtaining the necessary regulatory approvals for the construction of the mill and the development of an iron ore mine.
 
We also obtained an approval from the Government of Vietnam in November 2006 to construct steel mills with annual production capacities of 1.2 million tons of cold rolled products and 3.0 million tons of hot rolled products, pursuant to which we plan to invest $196 million and finance the remainder to start construction of a $491 million cold rolling mill in November 2007 with target completion in December 2009. We also entered into a memorandum of understanding with Vina-shin Group in May 2007 to jointly study feasibility of construction and operation of an integrated steel mill in Vietnam.
 
In Mexico, we are planning to build an automotive steel sheet plant to supply automobile manufacturers in Mexico and Southwestern United States. We plan to invest $84 million and finance the remainder to start


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construction of a $210 million automotive steel sheet plant with an annual capacity of 0.4 million tons in September 2007 with target completion in June 2009.
 
Subsidiaries
 
In order to complement our steel operations, we also engage in engineering and construction activities through POSCO Engineering & Construction Co., Ltd., a 90.9%-owned subsidiary, and steel products trading activities through POSCO Steel Service & Sales Co., Ltd., a 95.3%-owned subsidiary.
 
POSCO Engineering & Construction
 
Our engineering and construction activities include the planning, designing and construction of: (1) plant construction, which involves the construction and enhancement of iron and steel works, power generation facilities, sewage treatment plants and other industrial facilities; (2) civil engineering, which involves the construction of roads and bridges, reservoirs and transportation facilities, land reclamation and other infrastructure projects; (3) architectural works, involving the construction of office and commercial buildings and educational and cultural facilities, as well as urban planning and redevelopment; (4) housing, which involves the construction or reconstruction of apartment buildings; and (5) overseas business, which includes a broad range of construction projects for both public and private sector clients outside Korea, primarily in Asia and the Middle East.
 
Major construction projects that we have been involved in recent years include steel plant construction projects in India and the Middle East and a power plant construction project in Chile, as well as urban planning and development for An Khanh new city project in Vietnam. In addition, we are involved in various construction projects for the Incheon Songdo international city development project.
 
POSCO Steel Service & Sales Co., Ltd.
 
Our trading activities consist of exporting and importing a wide range of steel products that are both obtained from and supplied to POSCO, as well as between other suppliers and purchasers in Korea and overseas. Our trading activities are coordinated through a global trading network comprised of overseas subsidiaries, branches and representative offices. Such subsidiaries and offices support our trading activities by locating suitable local suppliers and purchasers on behalf of customers, identifying business opportunities and providing information regarding local market conditions.
 
Diversification
 
Our first priority is to maximize revenues and profits from our steel operations. In addition, we selectively seek opportunities in growth industries, in part to prepare for the eventual maturation of the Korean steel market. When determining our diversification projects, we consider attractiveness of the industry and its future growth potential, as well as our capabilities to become competitive in such an industry.
 
New businesses related to our steel operations include liquefied natural gas production, logistics and magnesium coil and sheet production. We completed the construction of a liquefied natural gas terminal in July 2005. In January 2003, we also entered into a joint venture with Mitsui Corporation of Japan for a 51.0% interest in POSCO Terminal Co., Ltd. which provides logistics services related to storage and transportation of raw materials used in steel production and other industries. Facilities operated by POSCO Terminal Co., Ltd. currently have an annual handling capacity of 6.3 million tons and enable us to transport raw materials on behalf of third parties, including electric power companies, cement companies and overseas steel manufacturers. In February 2004, we launched a research and development program with Research Institute of Science and Technology on magnesium sheet production using the strip casting and coil rolling technologies. We expect to complete our first magnesium coil and sheet plant with annual capacity of 3,000 tons in July 2007.
 
New businesses not related to our steel operations in which we intend to focus our efforts for diversification include power generation, development of alternative energy and advanced materials, information and technology related consulting services and Wireless broadband Internet access service, or WiBro. We purchased a 50.0% interest in POSCO Power Corporation for Won 291 billion in July 2005 and purchased the remaining 50% interest


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for Won 306 billion in March 2006. POSCO Power Corporation is the largest private power generation company in Korea that operates power plants with total power generation capacity of 1,800 megawatts. In order to meet the increasing demand for clean and renewable sources of energy, POSCO Power Corporation signed a strategic partnership agreement in February 2007 with FuelCell Energy, a global leader in molten carbonate fuel cell technology, pursuant to which POSCO Power Corporation will explore opportunities to expand into the stationary fuel cell market. As for production of advanced materials, we plan to utilize our proprietary steel rolling and strip casting technologies and to develop additional technologies and manufacturing capabilities. Through POSDATA, a 61.9%-owned subsidiary, we also engage in information and technology consulting and system network integration and outsourcing services, as well as WiBro service under the “FLYVO” brand name. POSDATA also manufactures electronic toll collection terminals, Internet protocol phones and digital video recorders.
 
Insurance
 
As of December 31, 2006, our property, plant and equipment are insured against fire and other casualty losses up to Won 9,729 billion. In addition, we carry general insurance for vehicles and accident compensation insurance for our employees to the extent we consider appropriate.
 
Item 4.C.   Organizational Structure
 
The following table sets out their jurisdiction of incorporation and our ownership interests of our significant subsidiaries:
 
                 
    Jurisdiction of
    Percentage of
 
Name
  Incorporation     Ownership  
 
POSCO Engineering & Construction Co., Ltd. 
    Korea       90.9 %
POSCO Power Corporation
    Korea       100.0 %
Zhangjiagang Pohang Stainless Steel Co., Ltd. 
    China       82.5 %
POSCO Specialty Steel Co., Ltd. 
    Korea       100.0 %
POSCO Steel Service & Sale Co., Ltd. 
    Korea       95.3 %
POSDATA Co., Ltd. 
    Korea       61.9 %
 
Item 4.D.   Property, Plants and Equipment
 
Our principal properties are Pohang Works, which is located at Youngil Bay on the southeastern coast of Korea, and Gwangyang Works, which is located in Gwangyang City in the southwestern region of Korea. We expect to increase our production capacity in the future when we increase our capacity as part of our facilities expansion or as a result of continued modernization and rationalization of our existing facilities. For a discussion of major items of our capital expenditures currently in progress, see “Item 5. Operating and Financial Review and Prospects — Item 5B. Liquidity and Capital Resources — Liquidity — Capital Expenditures and Capital Expansion.”
 
Pohang Works
 
Construction of Pohang Works began in 1970 and ended in 1983. Currently, Pohang Works has an annual crude steel and stainless steel production capacity of 13.3 million tons. Pohang Works produces a wide variety of steel products. Products produced at Pohang Works include hot rolled sheets, plates, wire rods and cold rolled sheets, as well as specialty steel products such as stainless steel sheets and silicon steel sheets. These products can also be customized to meet the specifications of our customers.
 
Situated on a site of 8.9 million square meters at Youngil Bay on the southeastern coast of Korea, Pohang Works consists of 40 plants, including iron-making, crude steelmaking and continuous casting and other rolling facilities. Pohang Works also has docking facilities capable of accommodating ships as large as 250,000 tons for unloading raw materials, storage areas for up to 45 days’ supply of raw materials and separate docking facilities for ships carrying products for export. Pohang Works is equipped with an up-to-date computerized production-management system allowing constant monitoring and control of the production process.


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The following table sets out Pohang Work’s capacity utilization rates for the periods indicated.
 
                                         
    Year Ended December 31,  
    2002     2003     2004     2005     2006  
 
Crude steel and stainless steel production capacity (million tons per year)
    12.20       12.67       13.30       13.30       13.30  
Actual crude steel and stainless steel output (million tons)
    12.16       12.67       13.45       13.36       12.60  
Capacity utilization rate(%)(1)
    99.7       100.0       101.1       100.4       94.7  
 
 
(1) Calculated by dividing actual crude steel and stainless steel output by the actual crude steel and stainless steel production capacity for the relevant period as determined by us.
 
Gwangyang Works
 
Construction of Gwangyang Works began in 1985 on a site of 13.5 million square meters reclaimed from the sea in Gwangyang City in the southwestern region of Korea. Production capacity is currently 16.7 million tons per year. Gwangyang Works specializes in high volume production of a limited number of steel products. Products manufactured at Gwangyang Works include both hot and cold rolled types.
 
Gwangyang Works is comprised of 43 plants, including iron-making plants, steelmaking plants, continuous casting plants, hot strip mills and thin-slab hot rolling plants. The site also features docking and unloading facilities for raw materials capable of accommodating ships of as large as 300,000 tons for unloading raw materials, storage areas for 40 days’ supply of raw materials and separate docking facilities.
 
We believe Gwangyang Works is one of the most technologically advanced integrated steel facilities in the world. Gwangyang Works has a completely automated, linear production system that enables the whole production process, from iron-making to finished products, to take place without interruption. This advanced system reduces the production time for hot rolled products to only four hours. Like Pohang Works, Gwangyang Works is equipped with an up-to-date computerized production-management system allowing constant monitoring and control of the production process.
 
Capacity utilization has kept pace with increases in capacity. The following table sets out Gwangyang Works’ capacity utilization rates for the periods indicated.
 
                                         
    Year Ended December 31,  
    2002     2003     2004     2005     2006  
 
Crude steel and stainless steel production capacity (million tons per year)
    15.80       16.23       16.70       16.70       16.70  
Actual crude steel and stainless steel output (million tons)
    15.90       16.23       16.76       17.19       17.45  
Capacity utilization rate(%)(1)
    100.6       100.0       100.4       102.9       104.5  
 
 
(1) Calculated by dividing actual crude steel and stainless steel output by the actual crude steel and stainless steel production capacity for the relevant period as determined by us.
 
The Environment
 
We believe we are in compliance with applicable environmental laws and regulations in all material respects. Our levels of pollution control are higher than those mandated by Government standards. We established an on-line environmental monitoring system with real-time feedback on pollutant levels and a forecast system of pollutant concentration in surrounding areas. We also undergo periodic environmental inspection by both internal and external inspectors in accordance with ISO 14001 standards to monitor execution and maintenance of our environmental management plan. We recently invested in comprehensive flue gas treatment facilities at some of sinter plants, dust collector at steelmaking plants and coke wastewater treatment facilities. In addition, we recycle most of by-products from the steelmaking process. We also have been developing environmentally friendly


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products such as chrome-free steel sheets in an effort to compete with products from the European Union, the United States and Japan and meet strengthened environmental regulations. Anticipating the trend toward increasing regulation of chrome in various steel products, we have introduced chrome-free steel products meeting international environment standards in 2006 that are used to manufacture automobile oil tanks.
 
We plan to continue to invest in developing more environmentally friendly steel manufacturing processes. We commenced research and development for a new steel manufacturing technology called FINEX in 1992 jointly with the Research Institute of Industrial Science and Technology and VOEST Alpine, an Australian company, and we completed the construction of our first FINEX plant with an annual production capacity of 1.5 million tons in May 2007. We will continue to refine FINEX, a low cost, environmentally friendly steel manufacturing process that we believe optimizes our production capacity by utilizing non-agglomerated iron ore fines and using non-coking coal as an energy source and a reducing agent. We believe that FINEX offers considerable environmental and economic advantages by eliminating major sources of pollution such as sinter and coke plants, as well as decreasing operating and raw material costs.
 
POSCO spent Won 145.5 billion in 2004, Won 127.0 billion in 2005 and 194.0 billion in 2006 on anti-pollution facilities.
 
Item 4A.   Unresolved Staff Comments
 
We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.
 
Item 5.   Operating and Financial Review and Prospects
 
Item 5.A.   Operating Results
 
Our results of operations are affected by sales volume, unit prices and product mix, costs and production efficiency and exchange rate fluctuations.
 
Overview
 
Sales Volume, Prices and Product Mix
 
In recent years, our net sales have been affected by the following factors:
 
  •  the demand for our products in the Korean market and our capacity to meet that demand;
 
  •  our ability to compete for sales in the export market;
 
  •  price levels; and
 
  •  our ability to improve our product mix.
 
Domestic demand for our products is affected by the condition of major steel consuming industries, such as construction, shipbuilding, automobile, electrical appliances and downstream steel processors, and the Korean economy in general.
 
Our sales volume decreased by 2.1% in 2005 and further decreased by 0.4% in 2006. While our crude steel output increased from 31.1 million tons in 2004 to 31.4 million tons in 2005, sales volume decreased from 31.8 million tons in 2004 to 31.1 million tons in 2005 due to an increase in our inventory in the second half of 2005 resulting from adverse Chinese market conditions. In 2006, our crude steel output decreased to 31.2 million tons and sales volume decreased to 31.0 million tons due to a temporary suspension of the second blast furnace and the second hot rolled mill at Pohang Works for revamping from March to May 2006. For a discussion of our sales volume and revenues by major products and markets from 2002 to 2006, see “Item 4. Information on the Company — Item 4.B. Business Overview — Major Products” and “— Markets.”
 
Unit sales price in Won for all of our principal product lines increased in 2005 despite an appreciation of the Korean Won against the Dollar. The weighted average unit prices for our products increased by 10.6% in 2005 compared to 2004. Unit sales price of plates, which accounted for 10.3% of total sales volume, increased by 20.2%


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in 2005. Unit sales price of wire rods, which accounted for 7.6% of total sales volume, increased by 19.7% in 2005. Unit sales price of hot rolled products, which accounted for 33.2% of total sales volume, increased by 14.5% in 2005.
 
In 2006, unit sales price in Won for all of our principal product lines other than silicon steel sheets and stainless steel products decreased, and the weighted average unit prices for our products decreased by 4.8%, partially due to appreciation of the Korean Won against the Dollar in 2006 that contributed to a decrease in our export prices in Won terms. The average exchange rate of the Korean Won against the Dollar appreciated from Won 1,023.2 per Dollar in 2005 to Won 954.3 per Dollar in 2006. Unit sales price of hot rolled products, which accounted for 31.0% of total sales volume, decreased by 14.9% in 2006. Unit sales price of cold rolled products, which accounted for 35.1% of total sales volume, decreased by 13.4% in 2006. Unit sales price of wire rods, which accounted for 6.9% of total sales volume, decreased by 10.6%. Unit sales price of plates, which accounted for 11.7% of total sales volume, decreased by 6.7% in 2006. These decreases were partially offset by a 7.5% increase in unit sales price of stainless steel products, which accounted for 7.3% of total sales volume in 2006 and also by a 6.2% increase in unit sales price of silicon steel sheets, which accounted for 2.2% of total sales volume in 2006.
 
Export prices in Dollar terms increased in 2004 and the first half of 2005 primarily as a result of general recovery of the global economy and continued increase in steel consumption in China, as well as increases in transportation cost and price of raw materials. However, our export prices in Dollar terms decreased in the second half of 2005 due to excessive supply of steel products from China. Our export prices in Dollar terms rebounded in the first half of 2006 due to the recovery of the global steel markets resulting primarily from an increase in demand from the United States and Europe starting in the second quarter, but decreased in the second half of 2006 as such demand slowed during this period. Our export prices in Dollar terms have rebounded and stabilized in the first half of 2007 as demand from Japan remained strong and various steel producers in China, the United States and Europe increased their sales prices. See “Item 4. Information on the Company — Item 4.B. Business Overview — Markets — Exports.”
 
The table below sets out the average unit sales prices for our semi-finished and finished steel products for the periods indicated.
 
                         
    Year Ended December 31,  
Product
  2004     2005     2006  
    (In thousands of Won per ton)  
 
Hot rolled products
  W 496.9     W 568.9     W 484.2  
Plates
    586.8       705.4       658.4  
Wire rods
    539.6       645.9       577.2  
Cold rolled products
    640.8       719.0       622.7  
Silicon steel sheets
    753.0       934.0       991.8  
Stainless steel products
    2,378.4       2,366.9       2,544.3  
Others
    494.4       538.6       476.6  
                         
Average(1)
  W 684.1     W 756.8     W 720.6  
                         
 
 
(1) “Average” prices are based on the weighted average, by sales volume, of our sales for the listed products. See “Item 4. Information on the Company — Item 4.B. Business Overview — Major Products.”


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Costs and Production Efficiency
 
Our major costs and operating expenses are raw material purchases, depreciation, labor and other purchases.
 
The table below sets out a breakdown of our total costs and operating expenses as a percentage of our net sales for the periods indicated.
 
                         
    Year Ended December 31,  
    2004     2005     2006  
    (Percentage of net sales)  
 
Cost of goods sold
    72.4 %     71.4 %     77.0 %
Selling and administrative expenses(1)
    5.4       5.5       6.0  
Total operating expenses
    77.8       76.9       83.0  
Gross margin
    27.6       28.6       23.0  
Operating margin
    22.2       23.1       17.0  
 
 
(1) See Note 23 of Notes to Consolidated Financial Statements.
 
Our production efficiency in recent years has continued to benefit from operation near or in excess of stated capacity levels. Production capacity represents our maximum production capacity that can be achieved with an optimal level of operations of our facilities. We expect to increase our production capacity in the future when we increase our production capacity as part of our facilities expansion or as a result of continued modernization and rationalization of our existing facilities. See “Item 4. Information on the Company — Item 4.D. Property, Plants and Equipment.”
 
The table below sets out certain information regarding our efficiency in the production of steel products for the periods indicated.
 
                         
    2004     2005     2006  
 
Crude steel and stainless steel production capacity(1) (million tons per year)(1)(2)
    30.9       30.9       31.2  
Actual crude steel and stainless steel output (million tons)(2)
    31.1       31.4       31.2  
Capacity utilization rate(%)(2)
    100.6       101.6       99.9  
Steel product sales (million tons)(2)
    31.80       31.12       30.98  
Man-hours per ton of crude steel produced(3)
    1.12       1.16       1.13  
 
 
(1) Includes production capacity of POSCO Specialty Steel Co., Ltd. and Zhangjiagang Pohang Stainless Steel Co., Ltd.
 
(2) Includes sales by our consolidated sales subsidiaries of steel products purchased by them from third parties, including trading companies to which we sell steel products. These sales amounted to approximately 1.2 million tons in 2002, 1.4 million tons in 2003, 1.0 million tons in 2004, 1.0 million tons in 2005 and 0.8 million tons in 2006.
 
(3) Does not include in the calculation employees of our subsidiaries or subcontractors.
 
Exchange Rate Fluctuations
 
Exchange rate fluctuations also have affected our results of operations and liquidity in recent years. Foreign exchange translation gains and losses arise as a result of fluctuations in the rates of exchange of Won to the foreign currencies in which some of our assets and liabilities are denominated (primarily Dollars and Yen). Depreciation of the Won may materially affect the results of our operations because, among other things, it causes:
 
  •  an increase in the amount of Won required for us to make interest and principal payments on our foreign currency-denominated debt, which accounted for approximately 50.8% of our total long-term debt (excluding discounts on debentures issued and including current portion) as of December 31, 2006;
 
  •  an increase in Won terms in the costs of raw materials and equipment that we purchase from overseas sources and a substantial portion of our freight costs, which are denominated in Dollars; and
 
  •  foreign exchange translation losses on liabilities, which lower our earnings for accounting purposes.


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Appreciation of the Won, on the other hand, (i) causes our export products to be less competitive by raising our prices in Dollar terms and (ii) reduces net sales and accounts receivables in Won from export sales, which are primarily denominated in Dollars. However, because of the larger positive effects of the appreciation of the Won (i.e., the reverse of the negative effects caused by the depreciation of the Won, as discussed above), appreciation of the Won generally has a positive impact on our results of operations. In terms of the average noon buying rate, the Won appreciated against the Dollar from Won 1,035.1 to US$1 as of December 31, 2004 to Won 930.0 to US$1 as of December 29, 2006. See “Item 3. Key Information — Exchange Rate Information.”
 
We attempt to minimize our exposure to currency fluctuations by attempting to maintain export sales, which result in foreign currency receipts, at a level that covers foreign currency obligations to the extent feasible. As a result, a decrease in our export sales could increase our foreign exchange risks. From time to time we also enter into cross currency swap agreements in the management of our interest rate and currency risks and currency forward contracts with financial institutions to reduce the fluctuation risk of future cash flows. As of December 31, 2006, we had entered into one option contract and seven currency forward contracts. The net valuation gain of the above contracts was approximately Won 1.0 billion and the net transaction loss was Won 24.9 billion in 2006. We may incur losses under our existing contracts or any swap or other derivative product transactions entered into in the future. See Note 22 of Notes to Consolidated Financial Statements.
 
Impairment Loss on the No. 2 Mini-mill at Gwangyang Works
 
We started the construction of the no. 2 mini-mill at Gwangyang Works in 1997. Our board of directors decided in May 1998 to temporarily suspend the construction of the mini-mill due to the unstable economic condition in Korea and the Asia Pacific Region. Due to the continuing unstable economic condition and related decrease in the selling price of products, which in turn resulted in the deterioration in profitability, the management’s operations committee decided in April 2002 to cease the construction of the No. 2 mini-mill. We recognized impairment losses on the construction-in-progress in Gwangyang No. 2 mini-mill amounting to Won 469.6 billion in 2003 and 2004 and reclassified related machinery held to be disposed of in the future as other investment assets as of December 31, 2004. We entered into a contract with Al-Tuwairqi Trading and Contracting Establishment of Saudi Arabia in June 2006 to sell the no. 2 mini-mill equipment for $96 million. The book values of property, plant and equipment held for sale amounted to Won 64 billion and are classified as other investment assets as of December 31, 2006.
 
Reportable Operating Segments
 
We have three reportable operating segments — a steel segment, an engineering and construction segment and a trading segment. The steel segment includes production of steel products and sale of such products. The engineering and construction segment includes planning, designing and construction of industrial plants, civil engineering projects and commercial and residential buildings, both in Korea and overseas. The trading segment consists of exporting and importing a wide range of steel products that are both obtained from and supplied to POSCO, as well as between other suppliers and purchasers in Korea and overseas. The operations of all other entities which fall below the reporting thresholds are included in the “others” segment, and include power generation, liquefied natural gas production, logistics and magnesium coil and sheet production. See Note 29 of Notes to Consolidated Financial Statements.
 
Inflation
 
Inflation in the Republic, which was 3.6% in 2004, 2.8% in 2005 and 2.2% in 2006 has not had a material impact on our results of operations in recent years.
 
Critical Accounting Estimates
 
Our financial statements are prepared in accordance with Korean GAAP and reconciled to U.S. GAAP. The preparation of these financial statements under Korean GAAP as well as the U.S. GAAP reconciliation requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and


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expenses during the reporting period. Actual results could differ from those estimates. We have identified the following areas where we believe assumptions and estimates are particularly critical to the financial statements:
 
Allowance for Doubtful Accounts
 
We maintain an allowance for doubtful accounts for exposures in our receivable balances that represent our estimate of probable losses in our short-term and long-term receivable balances. Determining the allowance for doubtful accounts requires significant management judgment and estimates including, among others, the credit worthiness of our customers, experience of historical collection patterns, potential events and circumstances affecting future collections and the ongoing risk assessment of our customers’ ability to pay. Unforeseen circumstances such as adverse market conditions that deviate significantly from our estimates may require us to change the timing of and make additional allowances to our receivable balances.
 
Valuation of Investment Securities and Derivatives
 
We invest in various financial instruments including debt and equity securities and derivatives. Depending on the accounting treatment specific to each type of financial instrument, an estimate of fair value is required to determine the instrument’s effect on our consolidated financial statements.
 
If available, quoted market prices provide the best indication of fair value. We determine the fair value of our securities using quoted market prices when available, including quotes from dealers trading those securities. If quoted market prices are not available, we determine the fair value based on pricing or valuation models, quoted prices of instruments with similar characteristics or discounted cash flows. The fair value of unlisted equity securities held for investment (excluding those of affiliates and subsidiaries) is based on the latest obtainable net asset value of the investees, which often reflects cost or other reference events. These fair values based on pricing and valuation models, discounted cash flow analysis, or net asset values are subject to various assumptions used which, if changed, could significantly affect the fair value of the investments.
 
When the fair value of a listed equity security or the net equity value of an unlisted equity security declines compared to acquisition cost and is not expected to recover (impaired investment security), the value of the equity security is adjusted to its fair value or net asset value, with the valuation loss charged to current operations. When the fair value of a held-to-maturity or an available-for-sale investment debt security declines compared to the acquisition cost and is not expected to recover (impaired investment security), the carrying value of the debt security is adjusted to its fair value with the resulting valuation loss charged to current operations.
 
As part of this impairment review, the investee’s operating results, net asset value and future performance forecasts as well as general market conditions are taken into consideration. If we believe, based on this review, that the market value of an equity security or a debt security may realistically be expected to recover, the loss will continue to be classified as temporary. If economic or specific industry trends worsen beyond our estimates, valuation losses previously determined to be recoverable may need to be charged as a valuation loss in current operations.
 
Significant management judgment is involved in the evaluation of declines in value of individual investments. The estimates and assumptions used by our management to evaluate declines in value can be impacted by many factors, such as the financial condition, earnings capacity and near-term prospects of the company in which we have invested, the length of time and the extent to which fair value has been less than cost, and our intent and ability to hold the related security for a period of time sufficient to allow for any recovery in market value. The evaluation of these investments is also subject to the overall condition of the economy and its impact on the capital markets. Any changes in these assumptions could significantly affect the valuation and timing of recognition of valuation losses classified as other than temporary.
 
Impairment of Long-lived Assets
 
The depreciable lives of long-lived assets are estimated and the assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The recoverable amount is measured at the greater of net selling price or value in use. When the book value of long-lived asset


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exceeds the recoverable value of the asset due to obsolescence, physical damage or a sharp decline in market value and the amount is material, the impairment of assets is recognized and the asset’s carrying value is reduced to its recoverable value and the resulting impairment loss is charged to current operations. Such recoverable value is based on our estimates of the future use of assets that is subject to changes in market conditions.
 
Our estimates of the useful lives and recoverable values of long-lived assets are based on historical trends adjusted to reflect our best estimate of future market and operating conditions. Also, our estimates include the expected future period in which the future cash flows are expected to be generated from continuing use of the assets that we review for impairment and cash outflows to prepare the assets for use that can be directly attributed or allocated on a reasonable and consistent basis. If applicable, estimates also include net cash flows to be received or paid for the disposal of the assets at the end of their useful lives. As a result of the impairment review, when the sum of the discounted future cash flows expected to be generated by the assets is less than the book value of the assets, we recognize impairment losses based on the recoverable value of those assets. We made a number of significant assumptions and estimates in the application of the discounted cash flow model to forecast cash flows, including business prospects, market conditions, selling prices and sales volume of products, costs of production and funding sources. Further impairment charges may be required if triggering events occur, such as adverse market conditions, suggesting deterioration in an asset’s recoverability or fair value. Assessment of the timing of when such declines become other than temporary and/or the amount of such impairment is a matter of significant judgment. Results in actual transactions could differ from those estimates used to evaluate the impairment of such long-lived assets. A percentage difference in cash flow projections or discount rate used would not likely result in an impairment write-down.
 
Operating Results
 
2006 Compared to 2005
 
Our sales in 2006 decreased by 1.7% to Won 25,842 billion from Won 26,302 billion in 2005, primarily due to a decrease of 4.8% in the average unit sales price per ton of our steel products, as discussed in “— Overview — Sales Volume, Prices and Product Mix” above, and a 0.4% decrease in the sales volume of our steel products, which were offset in part by recognition of sales of Won 413 billion from POSCO Power Corporation and Won 198 billion from POSCO-Foshan Steel Processing Center Co., Ltd., our newly consolidated subsidiaries in 2006.
 
Sales volume of wire rods, which accounted for 6.9% of total sales volume, showed the greatest decrease among our major steel product categories in 2006 with a decrease of 9.0%. Sales volume of hot rolled products, which accounted for 31.0% of total sales volume, decreased by 7.0%. In addition, sales volume of silicon steel sheets, which accounted for 2.2% of total sales volume, decreased by 6.9%. These decreases in sales volume were partially offset by increases in sales volume of stainless steel products and plates. Sales volume of stainless steel products, which accounted for 7.3% of total sales volume, showed the greatest increase among our major steel product categories in 2006 with an increase of 17.8%. Sales volume of plates, which accounted for 11.7% of total sales volume, increased by 13.2%. See “Item 4. Information on the Company — Item 4B. Business Overview — Major Products.”
 
Our domestic sales in 2006 decreased by 7.1% in terms of total sales revenues and decreased by 8.3% in terms of sales volume of steel products compared to 2005. In 2006, our domestic sales accounted for approximately 67.7% of our total sales volume of steel products, compared to 73.5% in 2005. The decrease in domestic sales revenues in 2006 compared to 2005 was attributable primarily to a decrease in domestic sales volume, as well as a decrease in the price of steel products sold in Korea.
 
Our export sales in 2006 increased by 11.1% in terms of sales revenues and by 21.4% in terms of sales volume compared to 2005. Exports as a percentage of total sales volume increased to 32.3% of our total sales volume of steel products in 2006 compared to 26.5% in 2005. The increase in export sales in terms of sales revenues in 2006 compared to 2005 was primarily attributable to an increase in export sales volume, which more than offset a decrease in the price of steel products sold abroad and the reduction in net sales in Won from export sales caused by appreciation of the Won against the Dollar.


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Gross profit in 2006 decreased by 21.1% to Won 5,946 billion from Won 7,535 billion in 2005. Gross margin in 2006 decreased to 23.0% from 28.6% in 2005 due to a 6.0% increase in cost of goods sold in 2006 to Won 19,897 billion from Won 18,767 billion in 2005, as well as a 1.7% decrease in sales discussed above. The increase in cost of goods sold was attributable primarily to an increase in raw materials costs, which more than offset the impact from our cost savings programs, including implementation of the Mega Y project to reduce raw material costs and steel production costs related to sintering and coking processes. Raw materials costs in 2006 increased primarily as a result of a general increase in unit costs of iron ore and nickel, the impact of which was offset in part by a decrease in our production of crude steel to 31.2 million tons in 2006 compared to 31.4 million tons in 2005, as well as recognition of gain from disposition of scrap metal as a partial offset to raw material costs starting in 2006. The average price of iron ore per ton (including all associated costs such as customs duties and transportation costs) increased by 23.5% to $55.10 in 2006 from $44.60 in 2005, and the average price of nickel per ton (including all associated costs such as customs duties and transportation costs) increased by 42.2% to $21,654 in 2006 from $15,230 in 2005. Depreciation and amortization increased by 10.5% to Won 1,783 billion in 2006 from Won 1,613 billion in 2005, primarily due to an increase in capital investment in our facilities for production of higher value-added products.
 
Operating income in 2006 decreased by 27.8% to Won 4,389 billion compared to Won 6,083 billion in 2005. Operating margin decreased to 17.0% in 2006 from 23.1% in 2005, as selling and administrative expenses increased by 7.2% in 2006 to Won 1,556 billion compared to Won 1,451 billion in 2005. The increase in selling and administrative expenses resulted principally from increases in transportation and storage expenses and sales commissions, the impact of which were offset in part by a significant decrease in fees and charges. Transportation and storage expenses increased by 9.5% to Won 540 billion in 2006 compared to Won 493 billion in 2005 primarily due to an increase in our total export volume. Our sales commission expenses increased by 82.2% to Won 43 billion in 2006 compared to Won 23 billion in 2005 primarily due to reclassification of claim-related expenses as sales commissions starting in 2006. Our fees and charges in 2006 decreased by 48.8% to Won 63 billion compared to Won 122 billion in 2005, primarily as a result of a decrease in charges related to construction projects of POSCO Engineering & Construction. Our labor-related expenses included in selling and administrative expenses, which consist of salaries, welfare expenses and provisions for severance benefits, increased by 2.2% to Won 322 billion in 2006 from Won 315 billion in 2005, primarily as a result of a Won 15 billion increase in salaries resulting from the addition of POSCO Power Corporation and POSCO-Foshan Steel Processing Center Co., Ltd. as consolidated subsidiaries.
 
Our net income in 2006 decreased by 17.6% to Won 3,314 billion compared to Won 4,022 billion in 2005 primarily due to decreases in operating income, non-operating income-others and gain on foreign currency translation, as well as increases in other bad debt expense and interest expense, the aggregate impact of which were partially offset by a decrease in non-operating expenses-others. Our non-operating income-others decreased by 36.9% to Won 133 billion in 2006 from Won 211 billion in 2005 primarily due to recognition of gain from disposition of scrap metal as a partial offset to raw material costs instead of non-operating income starting in 2006. Our gain on foreign currency translation decreased by 43.3% to Won 84 billion in 2006 from Won 149 billion in 2005 primarily due to a decrease in the magnitude of appreciation of the Korean Won against the Dollar in 2006 compared to such appreciation in 2005. Other bad debt expense increased by 133.4% to Won 70 billion in 2006 from Won 30 billion in 2005 primarily due to allocation of Won 31 billion in bad debt expenses relating to accounts receivable for the construction expenses of POSCO Engineering & Construction. Interest expense increased by 22.7% to Won 183 billion in 2006 from Won 149 billion in 2005 primarily due to an increase in long-term borrowings, as well as a general increase in market interest rates in Korea. Our non-operating expenses-others decreased by 76.0% to Won 205 billion in 2006 from Won 854 billion in 2005 due to a significant decrease in special subsidies granted to 1,672 employees who were transferred to outsourcing companies in 2006 compared to such subsidies paid out to 23 employees who were transferred to outsourcing companies in 2005, as well as payment of additional income taxes of Won 179 billion in 2005 assessed following a regular audit conducted by the National Tax Service of our corporate income tax returns for 2000 to 2004; we have commenced an administrative action to challenge such assessment.
 
Our effective tax rate in 2006 was 21.5% compared to 26.9% in 2005. The statutory income tax rate applicable to us, including resident tax surcharges, remain the same in 2006 to 27.5% as in 2005. See Note 25 of Notes to Consolidated Financial Statements.


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Segment Results — Steel
 
Our sales to external customers decreased by 4.7% to Won 23,728 billion in 2006 from Won 24,887 billion in 2005, primarily as a result of the reasons discussed above. After adjusting for inter-segment transactions, our net sales decreased by 5.6% to Won 19,743 billion in 2006 from Won 20,912 billion in 2005.
 
Operating profit decreased by 30.6% to Won 4,079 billion in 2006 from Won 5,880 billion in 2005, primarily as a result of the reasons discussed above. Depreciation and amortization increased by 6.8% to Won 1,713 billion in 2006 from Won 1,604 billion in 2005, primarily due to an increase in capital investment in our facilities for production of higher value-added products.
 
Segment Results — Engineering and Construction
 
Our sales to external customers decreased by 6.1% to Won 3,752 billion in 2006 from Won 3,994 billion in 2005, primarily due to a decrease in our plant construction activities. After adjusting for inter-segment transactions, our net sales decreased by 1.3% to Won 2,121 billion in 2006 from Won 2,148 billion in 2005.
 
Operating profit increased by 15.3% to Won 282 billion in 2006 from Won 245 billion in 2005, primarily due to an increase in profit margins of our construction projects.
 
Segment Results — Trading
 
Our sales to external customers decreased by 9.7% to Won 3,046 billion in 2006 from Won 3,374 billion in 2005, primarily due to reduction in the use of POSCO Steel Service & Sale and POSCO Asia by POSCO in our exporting activities. After adjusting for inter-segment transactions, our net sales increased by 1.3% to Won 2,413 billion in 2006 from Won 2,383 billion in 2005.
 
Operating profit remained relatively unchanged, decreased by 1.0% to Won 24.2 billion in 2006 from Won 24.5 billion in 2005.
 
2005 Compared to 2004
 
Our sales in 2005 increased by 9.7% to Won 26,302 billion from Won 23,973 billion in 2004, reflecting an increase of 10.6% in the average unit sales price per ton of our steel products, as discussed in “— Overview — Sales Volume, Prices and Product Mix” above, which more than offset a 2.1% decrease in the sales volume of our steel products.
 
Sales volume of stainless steel products, which accounted for 6.2% of total sales volume, showed the greatest decrease among our major steel product categories in 2005 with a decrease of 7.3%. Sales volume of hot rolled products, which accounted for 33.2% of total sales volume, decreased by 5.8%. In addition, sales volume of plates, which accounted for 10.3% of total sales volume, decreased by 5.7%. These decreases in sales volume were partially offset by increases in sales volume of silicon steel sheets and cold rolled products. Sales volume of silicon steel sheets, which accounted for 2.4% of total sales volume, showed the greatest increase among our major steel product categories in 2005 with an increase of 4.5%. Sales volume of cold rolled products, which accounted for 33.6% of total sales volume, increased by 2.2%. See “Item 4. Information on the Company — Item 4B. Business Overview — Major Products.”
 
Our domestic sales in 2005 increased by 10.9% in terms of total sales revenues but decreased by 3.0% in terms of sales volume of steel products compared to 2004. In 2005, our domestic sales accounted for approximately 73.5% of our total sales volume, compared to 74.2% in 2004. The increase in domestic sales revenues in 2005 compared to 2004 was attributable primarily to an increase in the price of steel products sold in Korea, which more than offset a decrease in domestic sales volume.
 
Our export sales in 2005 increased by 6.9% in terms of sales revenues and by 0.4% in terms of sales volume compared to 2004. Exports as a percentage of total sales volume increased to 26.5% of our total sales volume of steel products in 2005 compared to 25.8% in 2004. The increase in export sales in terms of sales revenues in 2005 compared to 2004 was primarily attributable to an increase in the price of steel products sold abroad and to a lesser


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extent, an increase in export sales volume, which more than offset the reduction in net sales in Won from export sales due to appreciation of the Won against the Dollar.
 
Gross profit in 2005 increased by 13.9% to Won 7,535 billion from Won 6,612 billion in 2004. Gross margin in 2005 increased to 28.6% from 27.6% in 2004, as the 9.7% increase in sales more than offset an 8.1% increase in cost of goods sold in 2005 to Won 18,767 billion from Won 17,361 billion in 2004. The increase in cost of goods sold was attributable primarily to increases in purchase of raw materials, as well as an increase in labor expenses resulting from higher performance bonuses. Raw materials costs in 2005 increased primarily as a result of a general increase in the unit costs of coal, iron ore, nickel and scrap metal, as well as an increase in our production of crude steel to 31.4 million tons in 2005 compared to 31.1 million tons in 2004. The average price of coal per ton (including all associated costs such as customs duties and transportation costs) increased from $72.02 in 2004 to $112.15 in 2005. The average price of iron ore per ton (including all associated costs such as customs duties and transportation costs) increased from $31.96 in 2004 to $44.22 in 2005.
 
Operating income in 2005 increased by 14.4% to Won 6,083 billion compared to Won 5,319 billion in 2004. Operating margin increased to 23.1% in 2005 from 22.2% in 2004, as selling and administrative expenses increased by 12.3% in 2005 to Won 1,451 billion compared to Won 1,293 billion in 2004. The increase in selling and administrative expenses resulted principally from increases in provision for doubtful accounts, advertising expenses, fees and charges and labor-related expenses. Our provision for doubtful accounts increased by 94.4% in 2005 to Won 104 billion from Won 54 billion in 2004 primarily as a result of slowdown in the construction industry and an increase in reserve for doubtful receivables of POSCO Engineering & Construction Co., Ltd. Advertising expenses increased by 98.8% in 2005 to Won 98 billion from Won 49 billion in 2004 primarily as a result of reclassification of advertising expenses incurred in our Pohang and Gwangyang plants, which had been classified as manufacturing cost until 2004, pursuant to recommendation by our internal accounting standards review committee in 2005. Our fees and charges in 2005 increased by 59.3% to Won 122 billion compared to Won 77 billion in 2004, primarily as a result of an increase in such expenses from POSCO Engineering & Construction. Our labor-related expenses included in selling and administrative expenses, which consist of salaries, welfare expenses and provisions for severance benefits, increased by 13.3% to Won 315 billion in 2005 from Won 278 billion in 2004, primarily as a result of a Won 20 billion increase in salaries, as well as higher welfare expenses and performance bonuses. Our welfare expenses increased by Won 12 billion in 2005 compared to 2004 primarily as a result of our decision to sell 1,325,800 shares of treasury stock in 2005 to the employee stock ownership association, with the difference between the fair value and the proceeds being recognized as welfare expenses.
 
Our net income in 2005 increased by 5.2% to Won 4,012 billion compared to Won 3,814 billion in 2004 as an increase in operating income discussed above, a decrease in loss on impairment of investments, an increase in non-operating income-others and a decrease in interest expense more than offset effects from an increase in non-operating expenses-others and a decrease in gain on recovery of allowance for doubtful accounts. Loss on impairment of investments decreased by 87.5% to Won 12 billion from Won 95 billion in 2004 primarily due to the absence of large impairments of investments in 2005 such as the impairment of Won 79 billion in 2004 related to our decision to permanently cease construction of our mini-mill discussed above. Non-operating income-others increased by 50.6% to Won 211 billion compared to Won 140 billion in 2004 primarily due to the reclassification of certain research and development costs relating to a strip casting testing plant previously recognized as expenses and an increase in interest payments to POSCO Engineering & Construction by its subcontractors from delayed receivables. We previously recognized research and development costs relating to a strip casting plant as expenses based on our conclusion that the technology was not available for immediate commercialization. However, we made an adjustment to non-operating income-others in 2005 because we classified the testing plant as tangible asset in 2005 and plan to use the plant to test our new technologies. Our interest expense decreased by 22.2% to Won 149 billion in 2005 from Won 192 billion in 2004 as we reduced our borrowings in 2005. Our non-operating expenses-others increased to Won 854 billion in 2005 from Won 165 billion in 2004 primarily due to an increase in subsidies to 1,672 employees who were transferred to outsourcing companies in 2005 to increase our labor productivity compared to 40 such employees in 2004, our payment of additional income taxes of Won 179 billion in 2005 assessed following a regular audit conducted by the National Tax Service of our corporate income tax returns for 2000 to 2004, as well as a loss of Won 120 billion related to our disposal of SK Telecom shares to enhance shareholders’ equity through disposition of non-core assets. Our gain on recovery of allowance for doubtful


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accounts in 2005 decreased by 85.3% to Won 19 billion compared to Won 127 billion in 2004, primarily due to the absence of large recoveries in 2005 such as our recovery of Won 108 billion from settlement of liquidation dividends from POSVEN in 2004.
 
Our effective tax rate in 2005 was 26.9% compared to 28.1% in 2004. The statutory income tax rate applicable to us, including resident tax surcharges, decreased to 27.5% in 2005 from 29.7% in 2004. See Note 25 of Notes to Consolidated Financial Statements.
 
Segment Results — Steel
 
Our sales to external customers increased by 9.7% to Won 24,887 billion in 2005 from Won 22,684 billion in 2004, primarily as a result of the reasons discussed above. After adjusting for inter-segment transactions, our net sales increased by 8.0% to Won 20,912 billion in 2005 from Won 19,361 billion in 2004.
 
Operating profit increased by 13.5% to Won 5,880 billion in 2005 from Won 5,181 billion in 2004, primarily as a result of the reasons discussed above. Depreciation and amortization increased by 3.2% to Won 1,604 billion in 2005 from Won 1,554 billion in 2004, primarily due to an increase in capital investment in our facilities for production of higher value-added products.
 
Segment Results — Engineering and Construction
 
Our sales to external customers increased by 45.7% to Won 3,994 billion in 2005 from Won 2,741 billion in 2004, primarily due to an increase in sales from domestic construction activities of POSCO Engineering & Construction. After adjusting for inter-segment transactions, our net sales increased by 27.2% to Won 2,148 billion in 2005 from Won 1,689 billion in 2004.
 
Operating profit increased by 161.0% to Won 245 billion in 2005 from Won 94 billion in 2004, primarily due to an increase in profitable domestic construction activities of POSCO Engineering & Construction.
 
Segment Results — Trading
 
Our sales to external customers increased by 13.0% to Won 3,374 billion in 2005 from Won 2,986 billion in 2004, primarily due to an increase in the average unit sales price per ton of steel products, which more than offset a decrease in the sales volume of steel products.
 
Operating profit decreased by 29.7% to Won 24 billion in 2005 from Won 35 billion in 2004, primarily due to a decrease in the sales volume of steel products.
 
Item 5.B.   Liquidity and Capital Resources
 
The following table sets forth the summary of our cash flows for the periods indicated:
 
                         
    Year Ended December 31,  
    2004     2005     2006  
    (In billions of Won)  
 
Net cash provided by operating activities
  W 4,946     W 5,464     W 3,900  
Net cash used in investing activities
    3,386       3,744       3,379  
Net cash used in financing activities
    1,650       1,578       227  
Cash and cash equivalents at beginning of period
    594       482       654  
Cash and cash equivalents at end of period
    482       654       936  
Net increase (decrease) in cash and cash equivalents
    (112 )     172       282  
 
Capital Requirements
 
Historically, uses of cash consisted principally of purchases of property, plant and equipment and other assets and payments of long-term debt. Net cash used for investing activities was Won 3,386 billion in 2004, Won 3,744 billion in 2005 and Won 3,379 billion in 2006. These amounts included purchases of property, plant and equipment of Won


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2,265 billion in 2004, Won 3,361 billion in 2005 and Won 3,709 billion in 2006. We recorded net acquisition of trading securities of Won 64 billion in 2004 and net disposal of trading securities of Won 222 billion in 2005 and Won 806 billion in 2006. We also recorded acquisition of other investment assets of Won 1,083 billion in 2004, Won 239 billion in 2005 and Won 131 billion in 2006, as well as net acquisition of available-for-sale securities of Won 167 billion in 2004, Won 273 billion in 2005 and Won 524 billion in 2006. In our financing activities, we used cash of Won 1,125 billion in 2004, Won 1,368 billion in 2005 and Won 1,353 billion in 2006 for principal repayments of outstanding long-term debt. We used Won 305 billion in 2004, Won 1,295 billion in 2005 and Won 851 billion in 2006 for the repurchase of our shares from the market as treasury stock. We raised cash of Won 82 billion in 2004, Won 932 billion in 2005 and Won 70 billion in 2006 from disposal of treasury shares, including our sale of 3,500,000 shares in the form of ADSs in connection with the listing on the Tokyo Stock Exchange in November 2005.
 
We paid dividends on common stock in the amount of Won 525 billion in 2004, Won 681 billion in 2005 and Won 636 billion in 2006.
 
We anticipate that capital expenditures and repayments of outstanding debt will represent the most significant uses of funds for the next several years. From time to time, we may also require capital for investments involving acquisitions and strategic relationships and repurchase of our shares from the market as treasury stock. Our total capital expenditures (acquisition of property, plant and equipment) were Won 3,709 billion in 2006 and, under current plans, are estimated to increase to approximately Won 4,600 billion in 2007. We retain the ability to reduce or suspend our planned capital expenditures. However, our failure to undertake planned expenditures on steel-producing facilities could adversely affect the modernization of our production facilities and our ability to produce higher value-added products.
 
In addition to our funding requirements relating to our capital investment program, payments of the principal of and interest on indebtedness and repurchase of our shares from the market as treasury stock will require considerable resources. Principal repayment obligations with respect to long-term debt outstanding as of December 31, 2006 are Won 404 billion in 2007, Won 476 billion in 2008, Won 423 billion in 2009, Won 199 billion in 2010 and Won 1,641 billion in 2011 and beyond. As of December 31, 2006, we had short-term borrowings of Won 1,239 billion and current portion of long term debt of Won 404 billion. We expect to repay these obligations primarily through cash provided by operations and additional borrowings. We plan to spend Won 889 billion in 2007 to repurchase our shares from the market as treasury stock.
 
The following table sets forth the amount of long-term debt, capital lease and operating lease obligations, excluding current portion of long-term debt, as of December 31, 2006.
 
                                         
    Payments Due by Period  
          Less than
                After
 
Contractual Obligations
  Total     1 Year     1 to 3 Years     4 to 5 Years     5 Years  
    (In billions of Won)  
 
Long-term debt obligations
    2,738.7             1,098.0       1,640.7        
Capital lease obligations
    0.3       0.3                    
Operating leases obligations
    5.2       4.2       1.0              
Purchase obligations
    (a )     (a )     (a )     (a )     (a )
Other long-term liabilities
                             
                                         
Total
    2,744.2       4.5       1,099.0       1,640.7        
                                         
 
 
(a) Our purchase obligations include long-term contracts to purchase iron ore, coal, nickel, chrome, stainless steel scrap and liquefied natural gas. These contracts generally have terms of three to ten years and provide for periodic price adjustments to then-market prices. As of December 31, 2006, 462 million tons of iron ore and 120 million tons of coal remained to be purchased under long-term contracts.
 
In addition, as of December 31, 2006, contingent liabilities for outstanding guarantees provided for the repayment of loans of affiliated companies and non-affiliated companies totaled Won 598 billion and Won 476 billion, respectively. See Note 17 of Notes to Consolidated Financial Statements for our commitments and contingent liabilities.


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Capital Resources
 
We have traditionally met our working capital and other capital requirements principally from cash provided by operations, while raising the remainder of our requirements primarily through long-term and short-term debt. We do not depend on the use of off-balance sheet financing arrangements.
 
Our major sources of cash have been net earnings before depreciation and amortization and proceeds of long-term debt and other long-term liabilities, and we expect that these sources will continue to be our principal sources of cash in the future. Net income before depreciation and amortization were Won 5,380 billion in 2004, Won 5,635 billion in 2005 and Won 5,097 billion in 2006, and cash proceeds from long-term debt were Won 280 billion in 2004, Won 594 billion in 2005 and Won 2,160 billion in 2006. Total long-term debt, including current portion and excluding discount on debentures issued, was Won 3,104 billion as of December 31, 2004, Won 2,190 billion as of December 31, 2005 and Won 3,143 billion as of December 31, 2006.
 
We believe that we have sufficient working capital available to us for our current requirements and that we have a variety of alternatives available to us to satisfy our financial requirements to the extent that they are not met by funds generated by operations, including the issuance of debt and equity securities and bank borrowings denominated in Won and various foreign currencies. However, our ability to rely on some of these alternatives could be affected by factors such as the liquidity of the Korean and other financial markets, prevailing interest rates, our credit rating and the Government’s policies regarding Won currency and foreign currency borrowings.
 
Our total shareholders’ equity increased from Won 16,386 billion as of December 31, 2004 to Won 22,402 billion as of December 31, 2006. This growth is attributable primarily to growth in retained earnings.
 
Liquidity
 
Our liquidity is affected by exchange rate fluctuations. See “— Overview — Exchange Rate Fluctuations.” Approximately 30.2% of our sales in 2004, 29.4% of our sales in 2005 and 33.2% of our sales in 2006 were denominated in foreign currencies, of which approximately 85% were denominated in Dollars and around 15% in Yen and which were derived almost entirely from export sales. As of December 31, 2006, approximately 50.8% of our long-term debt (excluding discounts on debentures issued and including current portion) was denominated in foreign currencies, principally in Dollars and Yen. We have incurred foreign currency debt in the past principally due to the cost of Won-denominated financing in the Republic, which had historically been higher than for Dollar or Yen-denominated financings.
 
Our liquidity is also affected by our construction expenditures and raw materials purchases. Cash used for purchases of property, plant and equipment was Won 2,265 billion in 2004, Won 3,361 billion in 2005 and Won 3,709 billion in 2006. We have entered into several long-term contracts to purchase iron ore, coal and other raw materials. The long-term contracts generally have terms of three to ten years and provide for periodic price adjustments to then-market prices. At December 31, 2006, 462 million tons of iron ore and 120 million tons of coal remained to be purchased under long-term contracts. We may face unanticipated increases in capital expenditures and raw materials purchases. There can be no assurance that we will be able to secure funds on satisfactory terms from financial institutions or other sources which are sufficient for our unanticipated needs.
 
We had a working capital (current assets minus current liabilities) surplus of Won 5,493 billion as of December 31, 2004, Won 5,759 billion as of December 31, 2005 and Won 7,155 billion as of December 31, 2006. As of December 31, 2006, we had unused credit lines of Won 1,330 billion out of total available credit lines of Won 1,535 billion. We have not had, and do not believe that we will have, difficulty gaining access to short-term financing sufficient to meet our current requirements.


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The following table sets forth the summary of our significant current assets for the periods indicated:
 
                         
    As of December 31,  
    2004     2005     2006  
    (In billions of Won)  
 
Cash and cash equivalents, net of government grants
  W 480     W 653     W 936  
Short-term financial instruments
    647       760       867  
Trading securities
    2,690       2,611       2,001  
Trade accounts and notes receivable, net of allowance for doubtful accounts and present value discount
    3,094       3,045       3,492  
Inventories
    3,066       3,793       4,018  
 
Under Korean GAAP, bank deposits and all highly liquid temporary cash instruments within maturities of three months are considered as cash equivalents. Short-term financial instruments primarily consist of time and trust deposits with maturities between four to twelve months.
 
The following table sets forth the summary of our significant current liabilities for the periods indicated:
 
                         
    As of December 31,  
    2004     2005     2006  
    (In billions of Won)  
 
Trade accounts and notes payable
  W 1,082     W 1,146     W 1,507  
Short-term borrowings
    658       860       1,239  
Income tax payable
    1,087       1,367       701  
Current portion of long-term debt, net of discount on debentures issued
    1,047       1,057       404  
 
In January 2000, we reduced our credit terms of accounts receivable for all customers from a range of 70 days to 80 days to a range of 30 days to 60 days. We do not believe that these changes in the credit terms for our customers have had or will have a material effect on our cash flows.
 
Capital Expenditures and Capacity Expansion
 
Our capital expenditures for 2004, 2005 and 2006 amounted to 2,265 billion, Won 3,361 billion and Won 3,709 billion, respectively.


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Our current capital investment in production facilities emphasizes capacity rationalization, increased production of higher value-added products and improvements in the efficiency of older facilities in order to reduce operating costs. Our total capital expenditures are estimated to be approximately Won 4,600 billion in 2007. The following table sets out the major items of our capital expenditures as of December 31, 2006:
 
                         
                Estimated Remaining
 
    Expected
          Cost of Completion
 
    Completion
    Total Cost of
    as of December 31,
 
Project
  Date     Project     2006  
    (In billions of Won)  
 
Pohang Works:
                       
Construction of FINEX plant(1)
    April 2007       731       37  
Second relining of no. 3 blast furnace
    July 2007       256       13  
Installation of de-phosporization facility at no. 2. steelmaking plant(1)
    March 2007       149       14  
Expansion of cokes plant
    December 2007       277       139  
Modernization of no. 2 plate mill
    January 2008       115       104  
Installation of heat treatment furnace at no. 3 plate plant
    August 2007       110       79  
Pickling and tandem cold rolled mill at no. 2 cold rolling mill(1)
    March 2007       141       38  
Gwangyang Works:
                       
Modernization of no. 3 hot rolled mill
    December 2007       235       142  
Coke oven gas purification facility(1)
    June 2007       175       73  
Relining of no. 3 blast furnace
    December 2007       147       119  
Modernization of no. 2 continuous galvanizing line
    December 2007       61       50  
Installation of de-phosporization facility at no. 2. steelmaking department
    December 2007       195       166  
 
 
(1) Completed as of the filing date of this annual report on Form 20-F.
 
Significant Changes in Korean GAAP
 
In December 2004, the Korean Accounting Standards Bond (“KASB”) issued Statements of Korean Financial Accounting Standards (“SKFAS”) No. 23, “Earning per share.” This statement improves the determination and presentation for earning per share amounts in order to conform to the international financial reporting standards. The provisions of this standard are effective prospectively for earnings per share beginning on or after December 31, 2006. We do not expect the adoption of this statement to have a material impact on our financial position or results of operations.
 
In February 2006, the KASB issued SKFAS No. 21, “Preparation and Presentation of Financial Statements.” Under SKFAS No. 21, the financial statements consist of a balance sheet, a statement of income, a statement of appropriations (disposition) of retained earnings (accumulated deficit), a statement of cash flows, a statement of changes in stockholders equity and footnotes. The provisions of this standard are effectively for financial statements beginning on or after December 31, 2006. We do not expect the adoption of this statement to have a material impact on our financial position or results of operations.
 
In April 2006, the KASB issued SKFAS No. 22, “Share-based Payment.” Under SKFAS No. 22, a share-based payment in which the entity receives or acquires goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity’s shares or other equity instruments of the entity should be recognized in the financial statements based on its fair value. The provisions of this standard are effective for share-based payment agreements beginning on or after December 31, 2006. We do not expect the adoption of this statement to have a material impact on our financial position or results of operations.


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In January 2007, the KASB issued SKFAS No. 25, “Consolidated financial statements.” SKFAS No. 25 defines consolidated scope and entities and revises the presentation method of minority interest in the consolidated financial statements. The provisions of this standard are effective for the financial year ending on or after December 31, 2007. We do not expect the adoption of this statement to have a material impact on our financial position or results of operations.
 
U.S. GAAP Reconciliation
 
Our consolidated financial statements are prepared in accordance with Korean GAAP, which differ in significant respects from U.S. GAAP. For a discussion of the significant differences between Korean GAAP and U.S. GAAP, see Note 32 of Notes to Consolidated Financial Statements.
 
We recorded net income under U.S. GAAP of Won 3,408 billion in 2006 compared to net income of Won 4,102 billion in 2005 and Won 3,460 billion in 2004 primarily due to the factors discussed in “— Operating Results.” Our net income under U.S. GAAP of Won 3,408 billion in 2006 is 2.8% higher than our net income under Korean GAAP of Won 3,314 billion. See Note 32(a) of Notes to Consolidated Financial Statements.
 
Recent Accounting Pronouncements in U.S. GAAP
 
In February 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” and is effective for all financial instrument acquired or issued after beginning of an entity’s first fiscal year that begins after September 15, 2006. We are currently evaluating the impact of this new standard but do not expect the adoption of this statement to have a material impact on our financial position or result of operations.
 
In June 2006, the FASB issued Financial Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, which applies to all tax positions related to income taxes. FIN No. 48 prescribes a recognition threshold and measurement process for recording in the consolidated financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN No. 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We assess tax positions taken in the consolidated financial statements and evaluate quarterly for realizability on a more likely than not basis. We are in the process of evaluating the impact that FIN 48 may have on our consolidated financial statements.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact that SFAS 157 may have on our consolidated financial position, results of operations or cash flows.
 
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires that the funded status of defined benefit postretirement plans be recognized on our balance sheet, and changes in the funded status be reflected in comprehensive income, effective fiscal years ending after December 15, 2006. The standard also requires companies to measure the funded status of the plan as of the date of its fiscal year-end, effective for fiscal years ending after December 15, 2008. We are currently evaluating the impact that SFAS 158 may have on our consolidated financial position, results of operations or cash flows.
 
In September 2006, the FASB issued FASB Staff Position AUG AIR-1, “Accounting for Planned Major Maintenance Activities.” This position does not permit the “accrue-in-advance method” for accounting for planned major maintenance activities. The position is effective for fiscal year beginning after December 15, 2006 and earlier adoption is permitted. We believe the adoption of FASB Staff Position AUG AIR-1 will not have a material impact on our financial position or results of operations.


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In February 2007, the FASB issued SFAS Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits companies and not-for-profit organizations to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the impact that SFAS 159 may have on our consolidated financial statements.
 
Item 5.C.   Research and Development, Patents and Licenses, Etc.
 
We maintain a research and development program to carry out basic research and applied technology development activities. Our technology development department works closely with the Pohang University of Science & Technology, Korea’s first research-oriented college founded by us in 1986, and the Research Institute of Industrial Science and Technology, Korea’s first private comprehensive research institute founded by us in 1987. As of December 31, 2006, Pohang University of Science & Technology and the Research Institute of Industrial Science and Technology employed a total of 321 researchers.
 
In 1994, we founded the POSCO Technical Research Laboratory to carry out applied research and technology development activities. As of December 31, 2006, the Technical Research Laboratory employed a total of 311 researchers.
 
We recorded research and development expenses of Won 206 billion as cost of goods sold in 2004, Won 173 billion in 2005 and Won 271 billion in 2006, as well as research and development expenses of Won 71 billion as selling and administrative expenses in 2004, Won 53 billion in 2005 and Won 54 billion in 2006. In addition, we made donations to educational foundations supporting basic science and technology research, amounting to Won 40 billion in 2004, Won 33 billion in 2005 and Won 33 billion in 2006. We also donated Won 32 billion in 2004, Won 17 billion in 2005 and Won 22 billion in 2006 to Pohang University of Science & Technology, a university founded by us. See Notes 23 and 24 of Notes to Consolidated Financial Statements.
 
Our research and development program has filed over twenty thousand industrial rights applications relating to steel-making technology, approximately one-fourth of which were registered as of December 31, 2006, and has successfully applied many of these to the improvement of our manufacturing process.
 
Item 5.D.   Trend Information
 
These matters are discussed under Item 5A. and Item 5B. above where relevant.
 
Item 5.E.   Off-balance Sheet Arrangements
 
As of December 31, 2004, 2005 and 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Item 5.F.   Tabular Disclosure of Contractual Obligations
 
These matters are discussed under Item 5.B. above where relevant.
 
Item 5.G.   Safe Harbor
 
See “Item 3. Key Information — Item 3.D. Risk Factors — This annual report contains “forward-looking statements” that are subject to various risks and uncertainties.


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Item 6.   Directors, Senior Management and Employees
 
Item 6.A.   Directors and Senior Management
 
Board of Directors
 
Our board of directors has the ultimate responsibility for the management of our business affairs. Under our articles of incorporation, our board is to consist of six directors who are to also act as our executive officers (“Standing Directors”) and nine directors who are to be outside directors (“Outside Directors”). Our shareholders elect both the Standing Directors and Outside Directors at a general meeting of shareholders. Candidates for Standing Director are recommended to shareholders by the board of directors after the board reviews such candidates’ qualifications and candidates for Outside Director are recommended to the shareholders by a separate board committee consisting of three Outside Directors and one Standing Director (the “Director Candidate Recommendation Committee”) after the committee reviews such candidates’ qualifications. Any shareholder holding an aggregate of 0.5% or more of our outstanding shares with voting rights for at least six months may suggest candidates for Outside Directors to the Director Candidate Recommendation Committee.
 
Our board of directors maintains the following six sub-committees:
 
  •  the Director Candidate Recommendation Committee;
 
  •  the Evaluation and Compensation Committee;
 
  •  the Finance and Operation Committee;
 
  •  the Executive Management Committee;
 
  •  the Audit Committee; and
 
  •  the Insider Trading Committee.
 
Our board committees are described in greater detail below under “— Item 6.C. Board Practices.”
 
Under the Commercial Code and our articles of incorporation, one Chairman should be elected among the Outside Directors and several Representative Directors may be elected among the Standing Directors by our board of directors’ resolution.


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Standing Directors
 
Our current Standing Directors are:
 
                                     
            Years
  Years
      Expiration
        Responsibility
  as
  with
      of Term
Name
 
Position
 
and Division
 
Director
 
POSCO
 
Age
 
of Office
 
Lee, Ku-Taek
  Chief Executive Officer and Representative Director     18   38   61   February 2010
Yoon, Seok-Man
  President and Representative Director   Chief Marketing Officer, Corporate Communication Dept.   4   30   58   February 2010
Lee, Youn
  President and Representative Director   General Superintendent, Stainless Steel Division   3   33   59   February 2008
Chung, Joon-Yang
  President and Representative Director   Chief Operating Officer and Technology Officer   4   32   59   February 2010
Cho, Soung-Sik
  Senior Executive Vice President   POSCO-India Pvt. Ltd.   2   32   56   February 2009
Lee, Dong-Hee
  Senior Executive Vice President   Chief Finance Officer   2   30   57   February 2009
 
All Standing Directors are engaged in our business on a full-time basis.


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Outside Directors
 
Our current Outside Directors are set out in the table below. Each of our Outside Directors meets the applicable independence standards set forth under the rules of the Korean Securities and Exchange Act of 1962 (the “Securities and Exchange Act”).
 
                             
                    Expiration
            Years as
      of Term
Name
 
Position
 
Principal Occupation
 
Director
 
Age
 
of Office
 
Kim, E. Han
  Chairman of the Board   Professor, University of Michigan   5   60   February 2008
Park, Young-Ju
  Director   Chairman, Eagon Industrial Co., Ltd.   4   66   February 2009
Jun, Kwang-Woo
  Director   Chairman, Deloitte Consulting   4   58   February 2010
Jones, Jeffrey D
  Director   Attorney, Kim & Chang   4   54   February 2010
Suh, Yoon-Suk
  Director   Professor, Ewha Woman’s University   4   52   February 2009
Park, Won-Soon
  Director   Executive Director, Beautiful Foundation   4   51   February 2010
Sun, Wook
  Director   Former President & CEO, Samsung Human Resources Development Center   3   62   February 2008
Ahn, Charles
  Director   Chairman of the Board, AhnLab, Inc.   3   45   February 2008
Huh, Sung K
  Director   President, Gwangju Institute of Science and Technology   2   59   February 2009
 
The term of office of the Directors is up to three (3) years. Each Director’s term expires at the close of the ordinary general meeting of shareholders convened in respect of the fiscal year that is the last one to end during such Director’s tenure.
 
Senior Management
 
In addition to the Standing Directors who are also our executive officers, we have the following executive officers:
 
                         
            Years with
   
Name
 
Position
 
Responsibility and Division
 
POSCO
 
Age
 
Kim, Dong-Jin
  Senior Executive Vice President   POSCO-China Holding Corp.   33   60
Choi, Jong-Tae
  Senior Executive Vice President   Chief Staff Officer   33   57
Kim, Sang-Ho
  Executive Vice President   Legal Affairs Dept.   6   53
Hur, Nam-Suk
  Executive Vice President   General Superintendent, Gwangyang Works   32   57
Oh, Chang-Kwan
  Executive Vice President   General Superintendent, Pohang Works   29   54
Kwon, Young-Tae
  Executive Vice President   Coal Procurement Dept., Iron Ore Procurement and Raw Materials Investment Dept., Steelmaking Raw Materials Procurement Dept.   32   56


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            Years with
   
Name
 
Position
 
Responsibility and Division
 
POSCO
 
Age
 
Chang, Hyun-Shik
  Executive Vice President   Energy Business Dept.   5   56
Kim, Jin-Il
  Executive Vice President   Market Development Dept., Production Order and Process Dept., Product Technology Dept.   32   54
Kwon, Oh-Joon
  Executive Vice President   General Superintendent, Technical Research Laboratories   20   56
Park, Han-Yong
  Executive Vice President   Human Resources Dept.   29   56
Chung, Keel-Sou
  Executive Vice President   Zhangjiagang POSCO Stainless Steel Co. Ltd.   32   57
Ha, Sang-Wook
  Senior Vice President   Deputy General Superintendent, Technical Research Laboratories   32   54
Kim, Sang-Young
  Senior Vice President   Corporate Communication Dept.   20   55
Lee, Young-Suk
  Senior Vice President   Stainless Steel Strategy Dept., Stainless Steel Sales Dept., Stainless Steel Sales Development Dept.   30   56
Kim, Sang-Myun
  Senior Vice President   Deputy General Superintendent, Gwangyang Works (Administration)   29   56
Park, Kee-Young
  Senior Vice President   Hot Rolled Steel Sales Dept., API Steel Sales Dept., Plate Sales Dept., Wire Rod Sales Dept.   30   55
Won, Jong-Hai
  Senior Vice President   Materials Purchasing and Supply Management Dept.   30   55
Kim, Tae-Man
  Senior Vice President   Deputy General Superintendent, Pohang Works (Administration)   28   53
Cho, Jun-Gil
  Senior Vice President   Deputy General Superintendent, Pohang Works (Hot and Cold Rolling)   30   54
Yoo, Kwang-Jae
  Senior Vice President   Stainless Steel Production and Technology   29   55
Yoon, Yong-Chul
  Senior Vice President   Deputy General Superintendent, Gwangyang Works (Iron and Steel Making)   29   54
Cho, Noi-Ha
  Senior Vice President   Deputy General Superintendent, Gwangyang Works (Hot and Cold Rolling)   29   54
Yoon, Yong-Won
  Senior Vice President   Facilities Investment Planning Dept., Plant and Equipment Procurement Dept.   29   54

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            Years with
   
Name
 
Position
 
Responsibility and Division
 
POSCO
 
Age
 
Kim, Soo-Kwan
  Senior Vice President   Auditing Dept., Corporate Ethics Dept.   30   55
Park, Ki-Hong
  Senior Vice President   Corporate Strategic Planning Dept.   1   49
Choo, Wung-Yong
  Senior Vice President   European Union Office   24   54
Kim, Sung-Kwan
  Senior Vice President   India Project Dept.   30   56
Jang, Byung-Hyo
  Senior Vice President   POSCO-Japan Corp.   30   53
Kim, Joon-Sik
  Senior Vice President   Technology Development Dept.   26   53
Jang, Young-Ik
  Senior Vice President   Stainless Steel Raw Materials Procurement Dept.   28   53
Kim, Moon-Seok
  Senior Vice President   Seoul Office   28   53
Yun, Tai-Han
  Senior Vice President   Marketing Strategy Dept., Sales and Production Planning Dept.   27   54
Cho, Bong-Rae
  Senior Vice President   Deputy General Superintendent, Pohang Works (Iron and Steel Making)   27   54
Chang, In-Hwan
  Senior Vice President   Cold Rolled Steel Sales Dept., Automotive Flat Products Sales Dept., Automotive Flat Products Exports Dept., Flat Products Sales SCM Dept., Coated Steel Sales Dept., Electrical Steel Sales Dept.   26   52
Kong, Yoon-Chan
  Senior Vice President   Human Resources Development Center, Corporate Philanthropy Dept.   27   53
Lee, In-Bong
  Vice President   Information Planning Dept.   26   52
Shin, Jung-Suk
  Vice President   Zhangjiagang POSCO Stainless Steel Co. Ltd.(Marketing)   28   54
An, Byung-Sik
  Vice President   Deputy General Superintendent, Pohang Works (Maintenance)   29   51
Baek, Sung-Kwan
  Vice President   Business Investment Dept., Vietnam Steel Project Dept., Magnesium Project Dept.   26   51
Cho, Chang-Hwan
  Vice President   Deputy General Superintendent, Gwangyang Works (Maintenance)   27   52
Yoon, Dong-Jun
  Vice President   Business Innovation Dept.   23   48
 
Item 6.B.   Compensation
 
Compensation of Directors and Officers
 
Salaries and bonuses for Standing Directors and salaries for Directors are paid in accordance with standards decided by the board of directors within the limitation of directors remuneration approved by the annual general

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meeting of shareholders. In addition, executive officers’ compensation is paid in accordance with standards decided by the board of directors. The aggregate compensation paid and accrued to all Directors and executive officers was approximately Won 16.4 billion in 2006 and the aggregate amount set aside or accrued by us to provide pension and retirement benefits to such persons was Won 5.8 billion in 2006.
 
We have also granted stock options to some of our Directors and executive officers. See “— Item 6E. Share Ownership” for a list of stock options granted to our Directors and executive officers. At the annual shareholders’ meeting held in February 2006 our shareholders elected to terminate the stock option program. Stock options granted prior to this meeting remain valid and outstanding pursuant to the articles of incorporation in effect at the time of the issuance of the stock option.
 
Item 6.C.   Board Practices
 
Director Candidate Recommendation Committee
 
The Director Candidate Recommendation Committee comprises three Outside Directors, Young-Ju Park (committee chair), Yoon-Suk Suh, and Won-Soon Park, and one Standing Director, Seok-Man Yoon. The Director Candidate Recommendation Committee reviews the qualifications of potential candidates and proposes nominees to serve on our board of directors as an Outside Director. Any shareholder holding an aggregate of 0.5% or more of our outstanding shares with voting rights for at least six months may suggest candidates for Outside Directors to the committee.
 
Evaluation and Compensation Committee
 
The Evaluation and Compensation Committee comprises four Outside Directors, Kwang-Woo Jun (committee chair), Wook Sun, Charles Ahn and Sung K. Huh. The Evaluation and Compensation Committee’s primary responsibilities include establishing evaluation procedures and compensation plans for executive officers and taking necessary measures to execute such plans.
 
Finance and Operation Committee
 
The Finance and Operation Committee is comprised of three Outside Directors, Sung K. Huh (committee chair), Young-Ju Park and Won-Soon Park and two Standing Directors, Seok-Man Yoon and Dong-Hee Lee. This committee is an operational committee that oversees decisions with respect to finance and operational matters, including making assessments with respect to potential capital investments and evaluating prospective capital-raising activities.
 
Executive Management Committee
 
The Executive Management Committee comprises six Standing Directors: Ku-Taek Lee (committee chair), Seok-Man Yoon, Youn Lee, Joon-Yang Chung, Soung-Sik Cho and Dong-Hee Lee. This committee oversees decisions with respect to our operational and management matters, including review of management’s proposals of new strategic initiatives, as well as deliberation over critical internal matters related to organization structure and development of personnel.
 
Audit Committee
 
Under Korean law and our articles of incorporation, we are required to have an Audit Committee. The Audit Committee may be composed of three or more directors; all members of the Audit Committee must be Outside Directors. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. Members of the Audit Committee are elected by the shareholders at the ordinary general meeting of shareholders. We currently have an Audit Committee composed of four Outside Directors. Members of our Audit Committee are Yoon-Suk Suh (committee chair), E. Han Kim, Jeffrey D. Jones and Wook Sun.


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The duties of the Audit Committee include:
 
  •  engaging independent auditors;
 
  •  approving independent audit fees;
 
  •  approving audit and non-audit services;
 
  •  reviewing annual financial statements;
 
  •  reviewing audit results and reports, including management comments and recommendations;
 
  •  reviewing our system of controls and policies, including those covering conflicts of interest and business ethics; and
 
  •  examining improprieties or suspected improprieties.
 
In addition, in connection with general meetings of stockholders, the committee examines the agenda for, and financial statements and other reports to be submitted by, the board of directors at each general meeting of stockholders. Our internal and external auditors report directly to the Audit Committee. The committee holds regular meetings at least once each quarter, and more frequently as needed.
 
Insider Trading Committee
 
The Insider Trading Committee is comprised of four Outside Directors, Yoon-Suk Suh (committee chair), Jeffrey D. Jones, E. Han Kim and Wook Sun. This committee reviews related party and other internal transactions and ensures compliance with the Monopoly Regulation and Fair Trade Act.


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Differences in Corporate Governance Practices
 
Pursuant to the rules of the New York Stock Exchange applicable to foreign private issuers like us that are listed on the New York Stock Exchange, we are required to disclose significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law and in accordance with our own internal procedures. The following is a summary of such significant differences.
 
     
NYSE Corporate Governance Standards
 
POSCO’s Corporate Governance Practice
 
     
Director Independence
   
Independent directors must comprise a majority of the board
  Our articles of incorporation provide that our board of directors must comprise no less than a majority of Outside Directors. Our Outside Directors must meet the criteria for outside directorship set forth under the Securities and Exchange Act of Korea.
    The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), and 9 out of 15 directors are Outside Directors.
     
Nomination/Corporate Governance Committee
   
Listed companies must have a nomination/corporate governance committee composed entirely of independent directors   We have not established a separate nomination/ corporate governance committee. However, we maintain a Director Candidate Recommendation Committee composed of three Outside Directors and one Standing Director.
     
Compensation Committee
   
Listed companies must have a compensation committee composed entirely of independent directors   We maintain an Evaluation and Compensation Committee composed of four Outside Directors.
     
Executive Session
   
Listed companies must hold meetings solely attended by non-management directors to more effectively check and balance management directors   Our Outside Directors hold meetings solely attended by Outside Directors in accordance with operation guidelines of our board of directors.
     
Audit Committee
   
Listed companies must have an audit committee that is composed of more than three directors and satisfy the requirements of Rule 10A-3 under the Exchange Act   We maintain an Audit Committee comprised of four Outside Directors who meet the applicable independence criteria set forth under Rule 10A-3 under the Exchange Act.
     
Shareholder Approval of Equity Compensation Plan
   
Listed companies must allow its shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan   We currently have an employee stock ownership program. We previously provided a stock options program for officers and directors, as another equity compensation plan. However, during our annual shareholders’ meeting in February 2006, our shareholders resolved to terminate the stock option program and amended our articles of incorporations to delete the provision allowing grant of stock options to officers and directors. Consequently we may not grant stock options to officers and directors starting February 24, 2006. Matters related to the Employee Stock Ownership Program are not subject to shareholders’ approval under Korean law.


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NYSE Corporate Governance Standards
 
POSCO’s Corporate Governance Practice
 
Corporate Governance Guidelines
   
Listed companies must adopt and disclose corporate governance guidelines   We have adopted a Corporate Governance Charter setting forth our practices with respect to relevant corporate governance matters. Our Corporate Governance Charter is in compliance with Korean law but does not meet all requirements established by the New York Stock Exchange for U.S. companies listed on the exchange. A copy of our Corporate Governance Charter is available on our website at www.posco.co.kr.
     
Code of Business Conduct and Ethics
   
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers   We have adopted a Code of Conduct for all directors, officers and employees. A copy of our Code of Conduct is available on our website at www.posco.co.kr.
 
Item 6.D.   Employees
 
As of December 31, 2006, we had 28,297 employees, including 10,774 persons employed by our subsidiaries, almost all of whom were employed within Korea. Of the total number of employees, approximately 80% are technicians and skilled laborers and 20% are administrative staff. We use subcontractors for maintenance, cleaning and transport activities. We had 28,853 employees, including 9,849 persons employed by our subsidiaries, as of December 31, 2005, and 27,919 employees, including 8,524 persons employed by our subsidiaries, as of December 31, 2004. To improve operational efficiency and increase labor productivity, we plan to reduce the number of our employees in future years through natural attrition. However, we expect the number of persons employed by our subsidiaries in growth industries to increase in the future.
 
We consider our relations with our work force to be excellent. We have never experienced a work stoppage or strike. Wages of our employees are among the highest of manufacturing companies in Korea. In addition to a base monthly wage, employees receive periodic bonuses and allowances. Base wages are determined annually following consultation between the management and employee representatives, who are currently elected outside the framework of the POSCO labor union. A labor union was formed by our employees in June 1988. Union membership peaked at 19,026 employees at the beginning of 1991, but has steadily declined since then. As of December 31, 2006, only 18 of our employees were members of the POSCO labor union.
 
We maintain a retirement plan, as required by Korean labor law, pursuant to which employees terminating their employment after one year or more of service are entitled to receive a lump-sum payment based on the length of their service and their total compensation at the time of termination. We are required to transfer a portion of retirement and severance benefit amounts accrued by our employees to the National Pension Fund. The amounts so transferred reduce the retirement and severance benefit amounts payable to retiring employees by us at the time of their retirement. We also provide a wide range of fringe benefits to our employees, including housing, housing loans, company- provided hospitals and schools, a company-sponsored pension program, an employee welfare fund, industrial disaster insurance, and cultural and athletic facilities.
 
As of December 31, 2006, our employees owned approximately 1.5% of our common stock through an employee stock ownership association.

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Item 6.E.   Share Ownership
 
Common Stock
 
The persons who are currently our Directors or executive officers held, as a group, 3,061 common shares as of December 31, 2006, the most recent date for which this information is available. The table below shows the ownership of our common shares by Directors and executive officers.
 
         
    Number of Common
 
Shareholders
  Shares Owned  
 
Chang-Kwan Oh
    770  
Jong-Tae Choi
    673  
E. Han Kim
    364  
Jin-Il Kim
    150  
Young-Ik Jang
    138  
In-Bong Lee
    130  
Tai-Han Yun
    130  
In-Hwan Jang
    130  
Joon-Sik Kim
    128  
Tae-Man Kim
    91  
Yong-Chul Yoon
    81  
Yong-Won Yoon
    79  
Noi-Ha Cho
    70  
Soo-Kwan Kim
    42  
Sang-Wook Ha
    40  
Oh-Joon Kwon
    19  
Han-Yong Park
    12  
Jun-Gil Cho
    2  
Youn Lee
    2  
Dong-Jin Kim
    2  
Nam-Suk Hur
    2  
Kee-Yeoung Park
    2  
Jong-Hai Won
    2  
Kwang-Jae Yoo
    2  
         
Total
    3,061  
         


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Stock Options
 
The following table sets forth information regarding the stock options we have granted to our current Directors and executive officers as of March 31, 2007. With respect to all of the options granted, we may elect either to issue shares of common stock, distribute treasury stock or pay in cash the difference between the exercise and the market price at the date of exercise. The options may be exercised by a person who has continued employment with POSCO for two or more years from the date on which the options are granted and within seven years from the second anniversary of the issuance of such options. All of the stock options below relate to our common stock.
 
At the annual shareholders’ meeting held in February 2006, our shareholders elected to terminate the stock option program. Stock options granted prior to this meeting remain valid and outstanding pursuant to the articles of incorporation in effect at the time of the issuance of the stock option.
 
                                                     
                          Number of
    Number of
    Number of
 
        Exercise Period     Exercise
    Granted
    Exercised
    Exercisable
 
Directors
  Grant Date   From     To     Price     Options     Options     Options  
 
Ku-Taek Lee
  July 23, 2001     7/24/2003       7/23/2008       98,900       45,184       24,518       20,666  
    July 23, 2004     7/24/2006       7/23/2011       151,700       49,000       0       49,000  
Tae-Hyun Hwang
  July 23, 2001     7/24/2003       7/23/2008       98,900       9,037       7,653       1,384  
    April 26, 2003     4/27/2005       4/26/2010       102,900       1,921       192       1,729  
Seok-Man Yoon
  September 18, 2002     9/19/2004       9/18/2009       116,100       11,179       4,000       7,179  
    July 23, 2004     7/24/2006       7/23/2011       151,700       7,840       0       7,840  
Youn Lee
  July 23, 2001     7/24/2003       7/23/2008       98,900       9,037       903       8,134  
    April 26, 2003     4/27/2005       4/26/2010       102,900       1,921       192       1,729  
    July 23, 2004     7/24/2006       7/23/2011       151,700       7,840       0       7,840  
Joon-Yang Chung
  April 27, 2002     4/28/2004       4/27/2009       136,400       9,316       3,931       5,385  
    July 23, 2004     7/24/2006       7/23/2011       151,700       4,900       0       4,900  
Soung-Sik Cho
  July 23, 2001     7/24/2003       7/23/2008       98,900       9,037       5,903       3,134  
    April 26, 2003     4/27/2005       4/26/2010       102,900       1,921       192       1,729  
Dong-Hee Lee
  April 26, 2003     4/27/2005       4/26/2010       102,900       9,604       960       8,644  
Young-Ju Park
  July 23, 2004     7/24/2006       7/23/2011       151,700       1,862       0       1,862  
E. Han Kim
  April 26, 2003     4/27/2005       4/26/2010       102,900       2,401       0       2,401  
Kwang-Woo Jun
  July 23, 2004     7/24/2006       7/23/2011       151,700       1,862       0       1,862  
Jeffrey D. Jones
  July 23, 2004     7/24/2006       7/23/2011       151,700       1,862       0       1,862  
Yoon-Suk Suh
  July 23, 2004     7/24/2006       7/23/2011       151,700       1,862       0       1,862  
Wook Sun
  April 28, 2005     4/29/2007       4/28/2012       194,900       2,000       0       2,000  
Charles Ahn
  April 28, 2005     4/29/2007       4/28/2012       194,900       2,000       0       2,000  
 


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                          Number of
    Number of
    Number of
 
        Exercise Period     Exercise
    Granted
    Exercised
    Exercisable
 
Executive Officers
  Grant Date   From     To     Price     Options     Options     Options  
 
Dong-Jin Kim
  July 23, 2001     7/24/2003       7/23/2008       98,900       9,037       7,903       1,134  
    April 26, 2003     4/27/2005       4/26/2010       102,900       1,921       192       1,729  
    July 23, 2004     7/24/2006       7/23/2011       151,700       7,840       0       7,840  
Jin-Chun Kim
  July 23, 2001     7/24/2003       7/23/2008       98,900       9,037       8,037       1,000  
Jong-Tae Choi
  July 23, 2001     7/24/2003       7/23/2008       98,900       9,037       4,903       4,134  
    April 26, 2003     4/27/2005       4/26/2010       102,900       1,921       192       1,729  
Sang-Ho Kim
  April 28, 2005     4/29/2007       4/28/2012       194,900       12,000       0       12,000  
Nam-Suk Hur
  April 27, 2002     4/28/2004       4/27/2009       136,400       9,316       5,316       4,000  
    April 28, 2005     4/29/2007       4/28/2012       194,900       2,000       0       2,000  
Chang-Kwan Oh
  April 27, 2002     4/28/2004       4/27/2009       136,400       9,316       3,931       5,385  
Young-Tae Kwon
  September 18, 2002     9/19/2004       9/18/2009       116,100       9,316       931       8,385  
Hyun-Shik Chang
  April 26, 2003     4/27/2005       4/26/2010       102,900       9,604       960       8,644  
Jin-Il Kim
  April 26, 2003     4/27/2005       4/26/2010       102,900       9,604       8,272       1,332  
Oh-Joon Kwon
  April 26, 2003     4/27/2005       4/26/2010       102,900       9,604       960       8,644  
Han-Yong Park
  April 26, 2003     4/27/2005       4/26/2010       102,900       9,604       5,282       4,322  
Keel-Sou Chung
  July 23, 2004     7/24/2006       7/23/2011       151,700       9,800       0       9,800  
Sang-Wook Ha
  July 23, 2004     7/24/2006       7/23/2011       151,700       9,800       0       9,800  
Sang-Young Kim
  July 23, 2004     7/24/2006       7/23/2011       151,700       9,800       0       9,800  
Young-Suk Lee
  July 23, 2004     7/24/2006       7/23/2011       151,700       9,800       0       9,800  
Sang-Myun Kim
  July 23, 2004     7/24/2006       7/23/2011       151,700       9,800       0       9,800  
Kee-Yeoung Park
  July 23, 2004     7/24/2006       7/23/2011       151,700       9,800       0       9,800  
Kyu-Jeong Lee
  July 23, 2004     7/24/2006       7/23/2011       151,700       9,800       0       9,800  
Jong-Hai Won
  April 28, 2005     4/29/2007       4/28/2012       194,900       10,000       0       10,000  
Tae-Man Kim
  April 28, 2005     4/29/2007       4/28/2012       194,900       10,000       0       10,000  
Jun-Gil Cho
  April 28, 2005     4/29/2007       4/28/2012       194,900       10,000       0       10,000  
Kwang-Jae Yoo
  April 28, 2005     4/29/2007       4/28/2012       194,900       10,000       0       10,000  
Yong-Chul Yoon
  April 28, 2005     4/29/2007       4/28/2012       194,900       10,000       0       10,000  
Noi-Ha Cho
  April 28, 2005     4/29/2007       4/28/2012       194,900       10,000       0       10,000  
Yong-Won Yoon
  April 28, 2005     4/29/2007       4/28/2012       194,900       10,000       0       10,000  

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Item 7.   Major Shareholders and Related Party Transactions
 
Item 7.A.   Major Shareholders
 
The following table sets forth certain information relating to the shareholders of our common stock issued as of December 31, 2006.
 
                 
    Number of
       
Shareholders
  Shares Owned     Percentage  
 
National Pension Corporation
    2,496,272       2.86  
SK Telecom
    2,481,310       2.85  
Pohang University of Science and Technology
    2,330,000       2.67  
Directors and executive officers as a group
    3,061       0.00  
Public(1)
    70,282,299       80.61  
POSCO (held in the form of treasury stock)
    7,022,466       8.06  
POSCO (held through treasury stock fund)
    2,571,427       2.95  
                 
Total issued shares of common stock
    87,186,835       100.00 %
                 
 
 
(1) Includes 18,753,548 shares of common stock, representing 21.51% of the total issued shares of common stock, in the form of ADRs.
 
Item 7.B.   Related Party Transactions
 
We have issued guarantees of Won 443 billion as of December 31, 2004, Won 561 billion as of December 31, 2005 and Won 598 billion as of December 31, 2006, in favor of affiliated and related companies. We have also engaged in various transactions with our subsidiaries and affiliated companies. Please see Note 17 of Notes to Consolidated Financial Statements.
 
As of December 31, 2004, 2005 and 2006, we had no loans outstanding to our executive officers and Directors.
 
Item 7.C.   Interests of Experts and Counsel
 
Not Applicable
 
Item 8.   Financial Information
 
Item 8.A.   Consolidated Statements and Other Financial Information
 
See “Item 18. Financial Statements” and pages F-1 through F-83.
 
Legal Proceedings
 
Claim against the Fair Trade Commission
 
In December 2000, Hyundai HYSCO requested us to sell hot rolled coils which are necessary in manufacturing cold rolled coils used in the automobile industry to produce car body panels. In response to our refusal to sell hot rolled coils to Hyundai HYSCO, Hyundai Motors announced in January 2001 that it would reduce its purchase of cold rolled products from us. In addition, the Fair Trade Commission began an investigation into a potential anti-competitive action by us.
 
On April 12, 2001, the Fair Trade Commission determined that we were involved in anti-competitive action by refusing to sell our hot rolled coils to Hyundai HYSCO. In addition to issuing a suspension order, the Fair Trade Commission imposed on us a surcharge of Won 1.6 billion. We brought a claim against the Fair Trade Commission but the Seoul High Court rendered its decision against us in August 2002. We appealed to the Supreme Court of Korea in August 2002 and our petition for an injunction against the decision of the Fair Trade Commission was granted in October 2002 in our favor. Our appeal is still pending, and we cannot predict the ultimate outcome.


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Anti-dumping and Countervailing Proceedings and Safeguard Measures
 
We have been subject to a number of anti-dumping and countervailing proceedings in the United States and China. The U.S. and China anti-dumping and countervailing proceedings have not had a material adverse effect on our business and operations. However, there can be no assurance that further increases in or new imposition of countervailing duties, dumping duties, quotas or tariffs on our sales in the United States or China may not have a material adverse effect on our exports to these regions in the future. See “Item 4. Information on the Company — Item 4B. Business Overview — Markets — Exports.”
 
Except as described above, we are not involved in any pending or threatened legal or arbitration proceedings that may have, or have had during the last 12 months, a material adverse effect on our results of operations or financial position.
 
Dividends
 
The amount of dividends paid on our common stock is subject to approval at the annual general meeting of shareholders, which is typically held in February or March of the following year. In addition to our annual dividends, our board of directors is authorized to declare and distribute interim dividends once a year under our articles of incorporation. If we decide to pay interim dividends, our articles of incorporation authorize us to pay them in cash and to the shareholders of record as of June 30 of the relevant fiscal year. We may pay cash dividends out of retained earnings that have not been appropriated to statutory reserves.
 
The table below sets out the annual dividends declared on the outstanding common stock to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding common stock to shareholders of record on June 30 of the years indicated. A total of 87,186,835 shares of common stock were issued at the end of 2006. Of these shares, 77,592,942 shares were outstanding and 7,022,466 shares were held by us in treasury and 2,571,427 shares were held through our treasury stock fund. The annual dividends set out for each of the years below were paid in the immediately following year.
 
                         
                Average Total
 
    Annual Dividend per
    Interim Dividend per
    Dividend per
 
Year
  Common Stock to Public     Common Stock     Common Stock  
    (In Won)  
 
2002
    3,000       500       3,500  
2003
    5,000       1,000       6,000  
2004
    6,500       1,500       8,000  
2005
    6,000       2,000       8,000  
2006
    6,000       2,000       8,000  
 
Owners of the ADSs are entitled to receive any dividends payable in respect of the underlying shares of common stock.
 
Historically, we have paid to holders of record of our common stock an annual dividend. However, we can give no assurance that we will continue to declare and pay any dividends in the future.
 
Item 8.B.   Significant Changes
 
Not Applicable
 
Item 9.   The Offer and Listing
 
Item 9.A.   Offer and Listing Details
 
Market Price Information
 
Notes
 
Not Applicable


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Common Stock
 
The principal trading market for our common stock is the Stock Market Division of the Korea Exchange. Our common stock, which is in registered form and has a par value of Won 5,000 per share, has been listed on the first section of the Stock Market Division of the Korea Exchange since June 1988 under the identifying code 005490. The table below shows the high and low trading prices and the average daily volume of trading activity on the Stock Market Division of the Korea Exchange for our common stock since January 1, 2001.
 
                         
    Price   Average Daily
    High   Low   Trading Volume
    (In Won)   (Number of Shares)
 
2002
                       
First Quarter
    160,000       117,500       303,579  
Second Quarter
    154,000       121,500       323,772  
Third Quarter
    139,000       101,000       324,477  
Fourth Quarter
    130,500       103,500       269,624  
2003
                       
First Quarter
    133,000       92,400       336,187  
Second Quarter
    127,000       97,500       300,224  
Third Quarter
    152,500       123,500       310,936  
Fourth Quarter
    163,000       131,500       345,272  
2004
                       
First Quarter
    181,000       156,500       312,764  
Second Quarter
    177,000       131,000       413,523  
Third Quarter
    184,000       145,000       241,698  
Fourth Quarter
    203,000       163,000       287,632  
2005
                       
First Quarter
    225,500       176,500       293,360  
Second Quarter
    203,000       174,500       298,650  
Third Quarter
    240,500       182,000       295,458  
Fourth Quarter
    236,500       199,500       334,140  
2006
                       
First Quarter
    251,500       196,500       391,776  
Second Quarter
    287,000       217,500       381,220  
Third Quarter
    254,000       225,500       269,202  
Fourth Quarter
    318,500       239,000       243,547  
2007
                       
First Quarter
    395,000       286,500       282,570  
January
    329,500       286,500       249,795  
February
    377,500       338,000       296,034  
March
    395,000       333,000       304,724  
Second Quarter (through June 26)
    481,000       366,000       252,448  
April
    400,000       366,000       274,187  
May
    446,000       392,500       212,728  
June (through June 26)
    481,000       443,000       274,661  


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ADSs
 
Our common stock is also listed on the New York Stock Exchange, the London Stock Exchange and the Tokyo Stock Exchange in the form of ADSs. The ADSs have been issued by The Bank of New York as ADR depositary and are listed on the New York Stock Exchange under the symbol “PKX.” One ADS represents one-fourth of one share of common stock. As of December 31, 2006, 18,753,548 ADSs were outstanding, representing 21.51% shares of common stock.
 
The table below shows the high and low trading prices and the average daily volume of trading activity on the New York Stock Exchange for our ADSs since January 1, 2001.
 
                         
    Price     Average Daily
 
    High     Low     Trading Volume  
    (In US$)     (Number of ADSs)  
 
2002
                       
First Quarter
    29.25       22.41       372,788  
Second Quarter
    30.64       23.35       355,145  
Third Quarter
    29.52       21.30       354,089  
Fourth Quarter
    27.40       21.20       268,750  
2003
                       
First Quarter
    28.66       18.46       324,595  
Second Quarter
    26.55       19.26       333,511  
Third Quarter
    32.49       26.08       262,191  
Fourth Quarter
    33.97       28.98       477,580  
2004
                       
First Quarter
    38.43       33.55       578,963  
Second Quarter
    39.01       27.97       1,013,306  
Third Quarter
    40.14       32.47       729,723  
Fourth Quarter
    47.50       36.49       765,003  
2005
                       
First Quarter
    54.85       41.22       866,811  
Second Quarter
    49.70       43.75       790,208  
Third Quarter
    57.08       44.12       606,928  
Fourth Quarter
    56.01       47.85       671,024  
2006
                       
First Quarter
    63.80       48.97       812,089  
Second Quarter
    74.41       56.07       922,906  
Third Quarter
    66.88       58.59       760,752  
Fourth Quarter
    84.88       63.00       748,789  
2007
                       
First Quarter
    106.88       76.49       770,003  
January
    88.18       76.49       718,195  
February
    59.77       89.96       728,882  
March
    106.88       89.87       852,614  
Second Quarter (through June 26)
    129.60       99.34       719,552  
April
    107.93       99.34       736,761  
May
    119.30       105.16       639,143  
June (through June 26)
    129.60       117.9       798,707  


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Item 9.B.   Plan of Distribution
 
Not Applicable
 
Item 9.C.   Markets
 
The Korean Securities Market
 
The Korea Stock Exchange began its operations in 1956. On January 27, 2005, the Korea Exchange was established pursuant to the Korea Exchange Act through the consolidation of the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc. (the “KOSDAQ”) and the KOSDAQ Committee within the Korea Securities Dealers Association, which was in charge of the management of the KOSDAQ. The Stock Market Division of the Korea Exchange (formerly the Korea Stock Exchange) has a single trading floor located in Seoul. The Korea Exchange is a limited liability company, the shares of which are held by (i) securities companies and futures companies that were the members of the Korea Stock Exchange or the Korea Futures Exchange and (ii) the stockholders of the KOSDAQ.
 
The Korea Exchange has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security. The Korea Exchange also restricts share price movements. All listed companies are required to file accounting reports annually, semi-annually and quarterly and to release immediately all information that may affect trading in a security.
 
The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector business community which can have the intention or effect of depressing or boosting the market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers excess capacity in a particular industry and induced private companies to offer publicly their securities.
 
The Korea Exchange publishes the Korea Composite Stock Price Index (“KOSPI”) every thirty seconds, which is an index of all equity securities listed on the Stock Market Division of the Korea Exchange. On January 1, 1983, the method of computing KOSPI was changed from the Dow Jones method to the aggregate value method. In the new method, the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.


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Movements in KOSPI are set out in the following table together with the associated dividend yields and price earnings ratios.
 
                                                 
                            Period Average  
                            Dividend
    Price
 
                            Yield(1)(2)
    Earnings
 
Year
  Opening     High     Low     Closing     (Percent)     Ratio(2)(3)  
 
1979
    131.28       131.28       104.38       118.97       17.8       3.8  
1980
    100.00       119.36       100.00       106.87       20.9       2.6  
1981
    97.95       165.95       93.14       131.37       13.2       3.1  
1982
    123.60       134.48       106.00       128.99       10.5       3.4  
1983
    122.52       134.46       115.59       121.21       6.9       3.8  
1984
    115.25       142.46       115.25       142.46       5.1       4.5  
1985
    139.53       163.37       131.40       163.37       5.3       5.2  
1986
    161.40       279.67       153.85       272.61       4.3       7.6  
1987
    264.82       525.11       264.82       525.11       2.6       10.9  
1988
    532.04       922.56       527.89       907.20       2.4       11.2  
1989
    919.61       1,007.77       844.75       909.72       2.0       13.9  
1990
    908.59       928.82       566.27       696.11       2.2       12.8  
1991
    679.75       763.10       586.51       610.92       2.6       11.2  
1992
    624.23       691.48       459.07       678.44       2.2       10.9  
1993
    697.41       874.10       605.93       866.18       1.6       12.7  
1994
    879.32       1,138.75       855.37       1,027.37       1.2       16.2  
1995
    1,027.45       1,016.77       847.09       882.94       1.2       16.4  
1996
    882.29       986.84       651.22       651.22       1.3       17.8  
1997
    647.67       792.29       350.68       376.31       1.5       17.0  
1998
    374.41       579.86       280.00       562.46       1.9       10.8  
1999
    565.10       1,028.07       498.42       1,028.07       1.1       13.5  
2000
    1,028.33       1,059.04       500.60       504.62       1.6       18.6  
2001
    503.31       704.50       468.76       693.70       2.0       14.2  
2002
    698.00       937.61       584.04       627.55       1.4       17.8  
2003
    633.03       822.16       515.24       810.71       2.2       10.9  
2004
    821.26       936.06       719.59       895.92       2.1       15.8  
2005
    896.00       1,379.37       870.84       1,379.37       1.7       11.0  
2006
    1,383.32       1,464.70       1,203.86       1,434.46       1.7       11.4  
2007 (through June 26)
    1,438.89       1,813.84       1,345.08       1,749.55       1.6       14.5  
 
 
Source:  The Stock Market Division of the Korea Exchange
 
(1) Dividend yields are based on daily figures. Before 1983, dividend yields were calculated at the end of each month. Dividend yields after January 3, 1984 include cash dividends only.
 
(2) Starting in April 2000, dividend yield and price earnings ratio are calculated based on KOSPI 200, an index of 200 equity securities listed on the Stock Market Division of the Korea Exchange. Starting in April 2000, excludes classified companies, companies which did not submit annual reports to the Stock Market Division of the Korea Exchange, and companies which received qualified opinion from external auditors.
 
(3) The price earnings ratio is based on figures for companies that record a profit in the preceding year.
 
Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period; since the calendar year is the accounting period for the majority of companies, this may account for the drop in KOSPI


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between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.
 
With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the Stock Market Division of the Korea Exchange to 15% of the previous day’s closing price of the shares, rounded down as set out below:
 
         
    Rounded Down
 
Previous Day’s Closing Price (Won)
  to (Won)  
 
Less than 5,000
    5  
5,000 to less than 10,000
    10  
10,000 to less than 50,000
    50  
50,000 to less than 100,000
    100  
100,000 to less than 500,000
    500  
500,000 or more
    1,000  
 
As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.
 
Due to deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the Stock Market Division of the Korea Exchange by the securities companies. In addition, a securities transaction tax at the rate of 0.15% will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares. A special agricultural and fishery tax at the rate of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the Korea Exchange. See “Item 10. Additional Information — Item 10E. Taxation — Korean Taxation.”


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The number of companies listed on the Stock Market Division of the Korea Exchange, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table:
 
                                                 
    Market Capitalization
       
    on the Last Day of Each Period     Average Daily Trading Volume and Value  
    Number of
                               
    Listed
    (Billions of
    (Millions of
    Thousands
    (Millions of
    (Thousands of
 
Year
  Companies     Won)     Dollars)(1)     of Shares     Won)     Dollars)(1)  
 
1979
    355       2,609       5,391       5,382       4,579       4,641  
1980
    352       2,527       3,829       5,654       3,897       5,905  
1981
    343       2,959       4,224       10,565       8,708       12,432  
1982
    334       3,000       4,408       9,704       6,667       8,904  
1983
    328       3,490       4,387       9,325       5,941       7,468  
1984
    336       5,149       6,223       14,847       10,642       12,862  
1985
    342       6,570       7,381       18,925       12,315       13,834  
1986
    355       11,994       13,924       31,755       32,870       38,159  
1987
    389       26,172       33,033       20,353       70,185       88,583  
1988
    502       64,544       94,348       10,367       198,364       289,963  
1989
    626       95,477       140,490       11,757       280,967       414,430  
1990
    669       79,020       110,301       10,866       183,692       256,411  
1991
    686       73,118       96,107       14,022       214,263       281,629  
1992
    688       84,712       107,448       24,028       308,246       390,977  
1993
    693       112,665       139,420       35,130       574,048       710,367  
1994
    699       151,217       191,730       36,862       776,257       984,223  
1995
    721       141,151       182,201       26,130       487,762       629,613  
1996
    760       117,370       139,031       26,571       486,834       575,680  
1997
    776       70,989       50,162       41,525       555,759       392,707  
1998
    748       137,799       114,091       97,716       660,429       546,803  
1999
    725       349,504       305,137       278,551       3,481,620       3,039,655  
2000
    704       188,042       149,275       306,163       2,602,211       2,065,739  
2001
    689       255,850       192,934       473,241       1,997,420       1,506,237  
2002
    683       258,681       215,496       857,245       3,041,598       2,533,815  
2003
    684       355,363       296,679       542,010       2,216,636       1,850,589  
2004
    683       412,588       395,275       372,895       2,232,109       2,138,445  
2005
    702       655,075       646,158       467,629       3,157,662       3,114,679  
2006
    731       704,588       757,948       279,096       3,435,180       3,695,331  
2007 (through June 26)
    732       860,124       928,658       332,119       4,278,673       4,619,599  
 
 
Source:  The Stock Market Division of the Korea Exchange
 
(1) Converted at the Concentration Base Rate of The Bank of Korea or the Market Average Exchange Rate as announced by the Seoul Money Brokerage Services Limited, as the case may be, at the end of the periods indicated.
 
The Korean securities markets are principally regulated by the FSC and the Securities and Exchange Act. The Securities and Exchange Act was amended fundamentally numerous times in recent years to broaden the scope and improve the effectiveness of official supervision of the securities markets. As amended, the Securities and Exchange Act imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy


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solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests.
 
Further Opening of the Korean Securities Market
 
A stock index futures market was opened on May 3, 1996 and a stock index option market was opened on July 7, 1997, in each case at the Stock Market Division of the Korea Exchange. Remittance and repatriation of funds in connection with investment in stock index futures and options are subject to regulations similar to those that govern remittance and repatriation in the context of foreign investment in Korean stocks.
 
Starting from May 1, 1996, foreign investors were permitted to invest in warrants representing the right to subscribe for shares of a company listed on the Stock Market Division of the Korea Exchange, subject to certain investment limitations. A foreign investor may not acquire such warrants with respect to shares of a class of a company for which the ceiling on aggregate investment by foreigners has been reached or exceeded.
 
As of December 30, 1997, foreign investors were permitted to invest in all types of corporate bonds, bonds issued by national or local governments and bonds issued in accordance with certain special laws without being subject to any aggregate or individual investment ceiling. The FSC sets forth procedural requirements for such investments. The Government announced on February 8, 1998 its plans for the liberalization of the money market with respect to investment in money market instruments by foreigners in 1998. According to the plan, foreigners have been permitted to invest in money market instruments issued by corporations, including commercial paper, starting February 16, 1998 with no restrictions as to the amount. Starting May 25, 1998, foreigners have been permitted to invest in certificates of deposit and repurchase agreements.
 
Currently, foreigners are permitted to invest in certain securities including shares of all Korean companies which are not listed on the Stock Market Division of the Korea Exchange and in bonds which are not listed.
 
Protection of Customer’s Interest in Case of Insolvency of Securities Companies
 
Under Korean law, the relationship between a customer and a securities company in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a securities company, the customer of the securities company is entitled to the proceeds of the securities sold by the securities company.
 
When a customer places a sell order with a securities company which is not a member of the Korea Exchange and this securities company places a sell order with another securities company which is a member of the Korea Exchange, the customer is still entitled to the proceeds of the securities sold received by the non-member company from the member company regardless of the bankruptcy or reorganization of the non-member company. Likewise, when a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.
 
Under the Securities and Exchange Act, the Korea Exchange is obliged to indemnify any loss or damage incurred by a counter party as a result of a breach by its members. If a securities company which is a member of the Korea Exchange breaches its obligation in connection with a buy order, the Korea Exchange is obliged to pay the purchase price on behalf of the breaching member.
 
As the cash deposited with a securities company is regarded as belonging to the securities company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the securities company if a bankruptcy or reorganization procedure is instituted against the securities company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that Korea Deposit Insurance Corporation will, upon the request of the investors, pay investors up to Won 50 million per depositor per financial institution in case of the securities company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. Pursuant to the Securities and Exchange Act, as amended,


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securities companies are required to deposit the cash received from its customers to the extent the amount is not covered by the Depositor Protection Act with the Korea Securities Finance Corporation, a special entity established pursuant to the Securities and Exchange Act. Set-off or attachment of cash deposits by securities companies is prohibited. The premiums related to this insurance are paid by securities companies.
 
Item 9.D.   Selling Shareholders
 
Not Applicable
 
Item 9.E.   Dilution
 
Not Applicable
 
Item 9.F.   Expenses of the Issuer
 
Not Applicable
 
Item 10.   Additional Information
 
Item 10.A.   Share Capital
 
Currently, our authorized share capital is 200,000,000 shares, which consists of shares of common stock, par value Won 5,000 per share (“Common Shares”) and shares of non-voting stock, par value Won 5,000 per share (“Non-Voting Shares”). Common Shares and Non-Voting Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issue Non-Voting Shares up to the limit prescribed by applicable law, the aggregate of which currently is one-half of our total issued and outstanding capital stock. As of December 31, 2006, 87,186,835 Common Shares were issued, of which 7,022,466 shares were held by us in treasury and an additional 2,571,427 shares were held by our treasury stock fund. We have never issued any Non-Voting Shares. All of the issued and outstanding Common Shares are fully-paid and non-assessable and are in registered form. We issue share certificates in denominations of 1, 3, 4, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.
 
Item 10.B.   Memorandum and Articles of Association
 
This section provides information relating to our capital stock, including brief summaries of material provisions of our articles of incorporation, the Korean Securities and Exchange Act, the Commercial Code and related laws of Korea, all as currently in effect. The following summaries are subject to, and are qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the Securities and Exchange Act and the Commercial Code. We have filed copies of our articles of incorporation and these laws as exhibits to registration statements under the Securities Act or the Securities Exchange Act previously filed by us.
 
Dividends
 
We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. The Common Shares represented by the ADSs have the same dividend rights as other outstanding Common Shares.
 
Holders of Non-Voting Shares are entitled to receive dividends in priority to the holders of Common Shares in an amount not less than 9% of the par value of the Non-Voting Shares as determined by the board of directors at the time of their issuance. If the amount available for dividends is less than the aggregate amount of such minimum dividend, we do not have to declare dividends on the Non-Voting Shares.
 
We may declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in Shares. However, a dividend of Shares must be distributed at par value. If the market price of the Shares is less than their par value, dividends in Shares may not exceed one-half of the annual dividend. In addition, we may declare, and distribute in cash, interim dividends pursuant to a board resolution once a fiscal year. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.


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Under the Commercial Code, we may pay an annual dividend only out of the excess of our net assets, on a non-consolidated basis, over the sum of (1) our stated capital and (2) the total amount of our capital surplus reserve and earned surplus reserve accumulated up to the end of the relevant dividend period. We may not pay an annual dividend unless we have set aside as earned surplus reserve an amount equal to at least 10% of the cash portion of the annual dividend or unless we have accumulated earned surplus reserve of not less than one-half of our stated capital. In addition, we are required under the Securities and Exchange Act and the relevant regulations to set aside as reserve a certain amount every fiscal year until our capital ratio is at least 30%. We may not use legal reserve to pay cash dividends but may transfer amounts from legal reserve to capital stock or use legal reserve to reduce an accumulated deficit.
 
Distribution of Free Shares
 
In addition to paying dividends in Shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from our capital surplus or legal reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.
 
Preemptive Rights and Issuance of Additional Shares
 
We may issue authorized but unissued shares at the times and, unless otherwise provided in the Commercial Code, on the terms our board of directors may determine. All our shareholders are generally entitled to subscribe for any newly issued Shares in proportion to their existing shareholdings. We must offer new Shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ register as of the relevant record date. Under the Commercial Code, we may vary, without shareholders’ approval, the terms of these preemptive rights for different classes of shares. We must give public notice of the preemptive rights regarding new Shares and their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute Shares for which preemptive rights have not been exercised or where fractions of Shares occur.
 
Under our articles of incorporation, we may issue new Shares pursuant to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights, if the new Shares are:
 
  •  publicly offered pursuant to the Securities and Exchange Act;
 
  •  issued to members of our employee stock ownership association;
 
  •  represented by depositary receipts;
 
  •  issued through offering to public investors, the amount of which is no more than 10% of the outstanding Shares;
 
  •  issued to our creditors pursuant to a debt-equity swap;
 
  •  issued to domestic or foreign corporations pursuant to a joint venture agreement, strategic coalition or technology inducement agreement; or
 
  •  issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.
 
In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of Won 2,000 billion, to persons other than existing shareholders.
 
Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20% of the Shares publicly offered pursuant to the Securities and Exchange Act. This right is exercisable only to the extent that the total number of Shares so acquired and held by members of our employee stock ownership association does not exceed 20% of the total number of Shares then issued. As of December 31, 2006, approximately 1.5% of the outstanding Shares were held by members of our employee stock ownership association.


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General Meeting of Shareholders
 
We hold the annual general meeting of shareholders within three months after the end of each fiscal year. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:
 
  •  as necessary;
 
  •  at the request of holders of an aggregate of 3% or more of our outstanding Shares;
 
  •  at the request of shareholders holding an aggregate of 1.5% or more of our outstanding Shares for at least six months; or
 
  •  at the request of our audit committee.
 
Holders of Non-Voting Shares may request a general meeting of shareholders only after the Non-Voting Shares or Convertible Shares become entitled to vote or “enfranchised,” as described under “— Voting Rights” below.
 
We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of 1% or less of the total number of issued and outstanding voting Shares, we may give notice by placing at least two public notices in at least two daily newspapers at least two weeks in advance of the meeting. Currently, we use The Seoul Shinmun published in Seoul, The Maeil Shinmun published in Taegu and The Kwangju Ilbo published in Kwangju for this purpose. Shareholders not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders of Non-Voting Shares or Convertible Shares, unless enfranchised, are not entitled to receive notice of general meetings of shareholders, but may attend such meetings.
 
Our general meetings of shareholders are held either in Pohang or Seoul.
 
Voting Rights
 
Holders of our Common Shares are entitled to one vote for each Common Share, except that voting rights of Common Shares held by us, or by a corporate shareholder that is more than 10% owned by us either directly or indirectly, may not be exercised. A recent amendment to the Commercial Code permitted cumulative voting, under which voting method each shareholder would have multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting rights cumulatively to elect one director.
 
Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting Shares present or represented at the meeting, where the affirmative votes also represent at least one-fourth of our total voting Shares then issued and outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at least two-thirds of the voting Shares present or represented at a meeting, where the affirmative votes also represent at least one-third of our total voting Shares then issued and outstanding:
 
  •  amending our articles of incorporation;
 
  •  removing a director;
 
  •  effecting any dissolution, merger or consolidation of us;
 
  •  transferring the whole or any significant part of our business;
 
  •  effecting our acquisition of all of the business of any other company;
 
  •  issuing any new Shares at a price lower than their par value; or
 
  •  approving matters required to be approved at a general meeting of shareholders, which have material effects on our assets, as determined by the Board of Directors.
 
In general, holders of Non-Voting Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, or any merger or consolidation of us, or in some other cases that affect the rights or interests of the Non-Voting Shares, approval of


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the holders of Non-Voting Shares is required. We may obtain the approval by a resolution of holders of at least two-thirds of the Non-Voting Shares present or represented at a class meeting of the holders of Non-Voting Shares, where the affirmative votes also represent at least one-third of our total issued and outstanding Non-Voting Shares. In addition, the holders of Non-Voting Shares may be entitled to vote during the period between the general meeting of shareholders in which required preferred dividends are not paid to such holders until the next general meeting of shareholders at which the payment of such preferred dividends to such holders is declared. The holders of enfranchised Non-Voting Shares have the same rights as holders of Common Shares to request, receive notice of, attend and vote at a general meeting of shareholders.
 
Shareholders may exercise their voting rights by proxy. A shareholder may give proxies only to another shareholder, except that the Government may give proxies to a designated public official and a corporate shareholder may give proxies to its officers or employees.
 
Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying Common Shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote the Common Shares underlying their ADSs.
 
Rights of Dissenting Shareholders
 
In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their Shares. To exercise this right, shareholders, including holders of Non-Voting Shares, must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Within 20 days after the relevant resolution is passed at a meeting, the dissenting shareholders must request us in writing to purchase their Shares. We are obligated to purchase the Shares of dissenting shareholders within one month after the expiration of the 20-day period. The purchase price for the Shares is required to be determined through negotiation between the dissenting shareholders and us. If we cannot agree on a price through negotiation, the purchase price will be the average of (1) the weighted average of the daily Share prices on the Korea Exchange for the two-month period before the date of the adoption of the relevant board resolution, (2) the weighted average of the daily Share price on the Korea Exchange for the one month period before the date of the adoption of the relevant resolution and (3) the weighted average of the daily Share price on the Korea Exchange for the one week period before such date of the adoption of the relevant resolution. However, the FSC may adjust this price if we or holders of 30% or more of the Shares we are obligated to purchase do not accept the purchase price. Holders of ADSs will not be able to exercise dissenter’s rights unless they have withdrawn the underlying common stock and become our direct shareholders.
 
Register of Shareholders and Record Dates
 
Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It registers transfers of Shares on the register of shareholders on presentation of the Share certificates.
 
The record date for annual dividends is December 31. For the purpose of determining the shareholders entitled to annual dividends, the register of shareholders may be closed for the period from January 1 to January 31 of each year. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the Shares, we may, on at least two weeks’ public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of Shares and the delivery of share certificates may continue while the register of shareholders is closed.
 
Annual Report
 
At least one week before the annual general meeting of shareholders, we must make our annual report and audited non-consolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the audited non-consolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.
 
Under the Securities and Exchange Act, we must file with the FSC and the Korea Exchange (1) an annual securities report within 90 days after the end of our fiscal year, (2) a half-year report within 45 days after the end of


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the first six months of our fiscal year, and (3) quarterly reports within 45 days after the end of the third month and the ninth month of our fiscal year. Copies of these reports are or will be available for public inspection at the FSC and the Korea Exchange.
 
Transfer of Shares
 
Under the Commercial Code, the transfer of Shares is effected by delivery of share certificates. However, to assert shareholders’ rights against us, the transferee must have his name and address registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. A non-Korean shareholder may file a specimen signature in place of a seal, unless he is a citizen of a country with a sealing system similar to that of Korea. In addition, a non-resident shareholder must appoint an agent authorized to receive notices on his behalf in Korea and file a mailing address in Korea. The above requirements do not apply to the holders of ADSs.
 
Under current Korean regulations, Korean securities companies and banks, including licensed branches of non-Korean securities companies and banks, asset management companies, futures trading companies and internationally recognized foreign custodians and the Korea Securities Depository may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of Shares by non-residents or non-Koreans. See “Item 10. Additional Information — Item 10.D. Exchange Controls.”
 
Our transfer agent is Kookmin Bank, located at 24-3, Yoido-dong, Youngdungpo-gu, Seoul, Korea.
 
Acquisition of Shares by Us
 
We may not acquire our own Shares except in limited circumstances, such as a reduction in capital. In addition, we may acquire Shares through purchases on the Korea Exchange or through a tender-offer. In addition, we may acquire interests in our own Shares through agreements with trust companies and asset management companies. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends, subject to certain procedural requirements.
 
Under the Commercial Code, except in the case of a reduction in capital, we must resell or transfer any Shares acquired by us from a third party within a reasonable time. In general, corporate entities in which we own more than 50% equity interest may not acquire our Shares. Under the Securities and Exchange Act, we are subject to certain selling restrictions for the Shares acquired by us. In the case of a reduction in capital, we must immediately cancel the Shares acquired by us.
 
Liquidation Rights
 
In the event of our liquidation, after payment of all debts, liquidation expenses and taxes, our remaining assets will be distributed among shareholders in proportion to their shareholdings. Holders of Non-Voting Shares and Convertible Shares have no preference in liquidation.
 
Item 10.C.   Material Contracts
 
None.
 
Item 10.D.   Exchange Controls
 
Notes
 
Korean law does not limit the right of non-Koreans to hold notes denominated in foreign currencies outside Korea. In order for us to issue such notes outside Korea, we are required to submit a report to the Minister of Finance and Economy or our designated foreign exchange bank (depending on the aggregate issuance amount) with respect to the issuance of the notes. Furthermore, in order for us to make payments of principal of or interest on the notes and other amounts as provided in the indenture and the notes, each actual payment should be reviewed by a foreign


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exchange bank at the time of such actual payment. The purpose of this review is to ensure that the actual remittance amount is consistent with the amounts payable under the notes.
 
Under Korean law, if the Government deems that certain emergency circumstances, including, but not limited to, sudden fluctuations in interest rates, or exchange rates, extreme difficulty in stabilizing the balance of payments or a substantial disturbance in the Korean financial and capital markets, are likely to occur, it may impose any necessary restrictions such as suspending or restricting transactions involving foreign exchange or cross border payments (including payments of principal of an interest on the notes), requiring prior approval from the Minister of Finance and Economy for any such transactions or obligating a certain portion of the foreign investor’s holdings to be deposited in Korea.
 
Shares and ADSs
 
The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively the “Foreign Exchange Transaction Laws”) and the Foreign Investment Promotion Law regulate investment in Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean securities only to the extent specifically allowed by these laws. The FSC has also adopted, pursuant to its authority under the Korean Securities and Exchange Act, regulations that restrict investment by foreigners in Korean securities.
 
Under the Foreign Exchange Transaction Laws, if the Government deems that certain emergency circumstances, including, but not limited to, sudden fluctuations in interest rates or exchange rates, extreme difficulty in stabilizing the balance of payments or a substantial disturbance in the Korean financial and capital markets, are likely to occur, it may impose any necessary restrictions such as requiring foreign investors to obtain prior approval from the Minister of Finance and Economy or obligating a certain portion of the foreign investors’ holdings to be deposited in Korea.
 
Government Review of Issuance of ADRs
 
In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with our designated foreign exchange bank or the MOFE, depending on the issuance amount. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.
 
Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required.
 
Reporting Requirements for Holders of Substantial Interests
 
Any person whose direct or beneficial ownership of shares, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively, the “Equity Securities”) together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5% or more of the total outstanding Equity Securities is required to report the status and the purpose (whether or not to exert an influence on management control over the issuer) of the holdings to the FSC and the Korea Exchange within five business days after reaching the 5% ownership interest. In addition, any change in the purpose of holding such ownership interest or a change in the ownership interest subsequent to the report which equals or exceeds 1% of the total outstanding Equity Securities is required to be reported to the FSC and the Korea Exchange within five business days from the date of the change.
 
Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the ownership of Equity Securities exceeding 5%. Furthermore, the FSC may issue an order to dispose of non-reported Equity Securities.


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In addition to the reporting requirements described above, any person whose direct or beneficial ownership of a company’s shares accounts for 10% or more of the total issued and outstanding shares (a “major stockholder”) must report the status of his or her shareholding to the Korea Securities and Futures Commission and the Korea Exchange within ten days after he or she becomes a major stockholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Korea Securities and Futures Commission and the Korea Exchange within the 10th day of the month following the month in which the change occurred. Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment.
 
Restrictions Applicable to ADSs
 
No Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal of shares underlying ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration card from the Financial Supervisory Service (the “FSS”) as described below. The acquisition of the shares by a foreigner must be immediately reported by the foreigner or his standing proxy in Korea to the Governor of the FSS (the “Governor”).
 
Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further governmental approval.
 
Restrictions Applicable to Shares
 
Under the Foreign Exchange Transaction Laws and FSC regulations (together, the “Investment Rules”), foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the Stock Market Division of the Korea Exchange, unless prohibited by specific laws. Foreign investors may trade shares listed on the Stock Market Division of the Korea Exchange only through the Stock Market Division of the Korea Exchange, except in limited circumstances, including, among others:
 
  •  odd-lot trading of shares;
 
  •  acquisition of shares (“Converted Shares”) by exercise of warrant, conversion right under convertible bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company;
 
  •  acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;
 
  •  over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded with certain exceptions; and
 
  •  direct investment as defined in the Foreign Investment Promotion Law.
 
For over-the-counter transactions of shares between foreigners outside the Korea Exchange with respect to which the limit on aggregate foreign ownership has been reached or exceeded, a securities company licensed in Korea must act as an intermediary. Odd-lot trading of shares outside the Korea Exchange must involve a licensed securities company in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions with respect to shares which are subject to a foreign ownership limit.
 
The Investment Rules require a foreign investor who wishes to invest in shares on the Korea Exchange (including Converted Shares) to register its identity with the FSS prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares. Upon registration, the FSS will issue to the foreign investor an investment registration card which must be presented each time the foreign investor opens a brokerage account with a securities company. Foreigners eligible to obtain an investment registration card include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by decree of the MOFE. All Korean offices of a foreign corporation as a group


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are treated as a separate foreigner from the offices of the corporation outside Korea. However, a foreign corporation or depositary issuing depositary receipts may obtain one or more investment registration cards in its name in certain circumstances as described in the relevant regulations.
 
Upon a foreign investor’s purchase of shares through the Korea Exchange, no separate report by the investor is required because the investment registration card system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the Korea Exchange (as discussed above) must be reported by the foreign investor or his standing proxy to the Governor at the time of each such acquisition or sale; provided, however, that a foreign investor must ensure that any acquisition or sale by it of shares outside the Korea Exchange in the case of trades in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor by the securities company engaged to facilitate such transaction. A foreign investor must appoint one or more standing proxies from among the Korea Securities Depository, foreign exchange banks, including domestic branches of foreign banks, securities companies, including domestic branches of foreign securities companies, asset management companies, futures trading companies and internationally recognized custodians which will act as a standing proxy to exercise shareholders’ rights or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor in cases deemed inevitable by reason of conflict between laws of Korea and those of the home country of the foreign investor.
 
Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only foreign exchange banks, including domestic branches of foreign banks, securities companies, including domestic branches of foreign securities companies, the Korea Securities Depository, asset management companies, futures trading companies and internationally recognized custodians are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his custodian deposits its shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.
 
Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40% ceiling on the acquisition of shares by foreigners in the aggregate. Designated public corporations may set a ceiling on the acquisition of shares by a single person according to its articles of incorporation. We set this ceiling at 3% until the discontinuation of our designation as a public corporation on September 28, 2000. As a result, we currently do not have any ceiling on the acquisition of shares by a single person or by foreigners in the aggregate. Furthermore, an investment by a foreign investor of not less than 10% of the outstanding shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Law, which is, in general, subject to the report to, and acceptance by, the Minister of Commerce, Industry and Energy. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company.
 
Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened in the name of a securities company. Funds in the foreign currency account may be remitted abroad without any governmental approval.
 
Dividends on Shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by a non-resident of Korea must be deposited either in a


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Won account with the investor’s securities company or his Won Account. Funds in the investor’s Won Account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won Account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.
 
Securities companies and asset management companies are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these securities companies and asset management companies may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, as a counterparty to foreign investors, without the investors having to open their own accounts with foreign exchange banks.
 
Item 10.E.   Taxation
 
The following summary is based upon tax laws of the United States and the Republic of Korea as in effect on the date of this annual report on Form 20-F, and is subject to any change in United States or Korean law that may come into effect after such date. Investors in the notes, shares of common stock or ADSs are advised to consult their own tax advisers as to the United States, Korean or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any national, state or local tax laws.
 
Korean Taxation
 
The following summary of Korean tax considerations applies to you so long as you are not:
 
  •  a resident of Korea;
 
  •  a corporation with registered office or main office is located in Korea or actual management of which takes place in Korea; or
 
  •  engaged in a trade or business in Korea through a permanent establishment or a fixed base to which the relevant income is attributable or with which the relevant income is effectively connected.
 
Note
 
Taxation of Interest
 
Under current Korean tax laws, when we make payments of interest to you on the notes, no amount will be withheld from such payments for, or on account of, any income taxes of any kind imposed, levied, withheld or assessed by Korea or any political subdivision or taxing authority thereof or therein.
 
Taxation of Capital Gains
 
Under specific exemptions granted under Korean tax law, you will not be subject to any Korean income or withholding taxes in connection with the capital gains from sale, exchange or other disposition of a note if (i) you transfer the note to another non-resident (other than to such transferee’s permanent establishment in Korea) under the corporation tax law or (ii) you transfer the note to a resident or a non-resident of Korea outside Korea (regardless of whether the transferees have a permanent establishment in Korea) by virtue of the Special Tax Treatment Control Law of Korea (the “STTCL”), provided that the issuance of the note outside Korea is deemed to be an overseas issuance under the STTCL. If you sell or otherwise dispose of a note through other ways than those mentioned above, any gain realized on the transaction will be taxable at ordinary Korean withholding tax rates (the lesser of, subject to the production of satisfactory evidence of the acquisition cost of, and certain direct transaction costs attributable to the disposal of, the relevant notes, 27.5% of the net gain or 11% of the gross sale proceeds), unless an exemption is available under an applicable income tax treaty. See the discussion under “— Tax Treaties” below for an additional explanation on treaty benefits.


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Inheritance Tax and Gift Tax
 
If you die while you are the holder of a note, the subsequent transfer of the notes by way of succession will be subject to Korean inheritance tax. Similarly, if you transfer a note as a gift, the donee will be subject to Korean gift tax and you may be required to pay the gift tax if the donee fails to do so.
 
At present, Korea has not entered into any tax treaty relating to inheritance or gift taxes.
 
Shares or ADSs
 
Dividends on the Shares of Common Stock or ADSs
 
We will deduct Korean withholding tax from dividends paid to you at a rate of 27.5%. If you are a qualified resident in a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax. See the discussion under “— Tax Treaties” below for an additional explanation on treaty benefits.
 
In order to obtain the benefits of a reduced withholding tax rate under a tax treaty, you must submit to us, prior to the dividend payment date, such evidence of tax residence as may be required by the Korean tax authorities. Evidence of tax residence may be submitted to us through the ADR depositary. If we distribute to you free shares representing a transfer of certain capital reserves or asset revaluation reserves into paid-in capital, that distribution may be subject to Korean tax.
 
Taxation of Capital Gains
 
As a general rule, capital gains earned by non-residents upon the transfer of the common shares or ADSs would be subject to Korean withholding tax at a rate equal to the lesser of (i) 11% of the gross proceeds realized or (ii) 27.5% of the net realized gain (subject to the production of satisfactory evidence of the acquisition costs and certain direct transaction costs arising out of the transfer of such common shares or ADSs), unless such non-resident is exempt from Korean income taxation under an applicable Korean tax treaty into which Korea has entered with the non-resident’s country of tax residence. See the discussion under “— Tax Treaties” below for an additional explanation on treaty benefits. Even if you do not qualify for any exemption under a tax treaty, you will not be subject to the foregoing withholding tax on capital gains if you qualify for the relevant Korean domestic tax law exemptions discussed in the following paragraphs.
 
With respect to shares of our common stock, you will not be subject to Korean income taxation on capital gains realized upon the transfer of such shares through the Korea Exchange if you (i) have no permanent establishment in Korea and (ii) did not own or have not owned (together with any shares owned by any entity with which you have a certain special relationship and possibly including the shares represented by the ADSs) 25% or more of our total issued and outstanding shares at any time during the calendar year in which the sale occurs and during the five calendar years prior to the calendar year in which the sale occurs.
 
Under a tax ruling issued by the Korean tax authority in 1995 (the “1995 tax ruling”), ADSs are treated as securities separate from the underlying shares represented by such ADSs and, based on such ruling, (i) capital gains earned by you from the transfer of ADSs to another non-resident (other than to such transferee’s permanent establishment in Korea) will not be subject to Korean income taxation and (ii) capital gains earned by you (regardless of whether you have a permanent establishment in Korea) from the transfer of ADSs outside Korea will be exempt from Korean income taxation by virtue of the STTCL, provided that the issuance of the ADSs is deemed to be an overseas issuance under the STTCL.
 
If you are subject to tax on capital gains with respect to the sale of ADSs, or of shares of common stock which you acquired as a result of a withdrawal, the purchaser or, in the case of the sale of shares of common stock on the Korea Exchange or through a licensed securities company in Korea, the licensed securities company, is required to withhold Korean tax from the sales price in an amount equal to 11% (including resident surtax) of the gross realization proceeds and to make payment of these amounts to the Korean tax authority, unless you establish your entitlement to an exemption under an applicable tax treaty or domestic tax law or produce satisfactory evidence of your acquisition cost and transaction costs for the shares of common stock or the ADSs. To obtain the benefit of an exemption from tax pursuant to a tax treaty, you must submit to the purchaser or the securities company, or through


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the ADR depositary, as the case may be, prior to or at the time of payment, such evidence of your tax residence as the Korean tax authorities may require in support of your claim for treaty benefits. See the discussion under “— Tax Treaties” below for an additional explanation on claiming treaty benefits.
 
Tax Treaties
 
Korea has entered into a number of income tax treaties with other countries (including the United States), which would reduce or exempt Korean withholding tax on dividends on, and capital gains on transfer of, shares of our common stock or ADSs. For example, under the Korea-United States income tax treaty, reduced rates of Korean withholding tax of 16.5% or 11.0% (respectively, including resident surtax, depending on your shareholding ratio) on dividends and an exemption from Korean withholding tax on capital gains are available to residents of the United States that are beneficial owners of the relevant dividend income or capital gains. However, under Article 17 (Investment of Holding Companies) of the Korea-United States income tax treaty, such reduced rates and exemption do not apply if (i) you are a United States corporation, (ii) by reason of any special measures, the tax imposed on you by the United States with respect to such dividends or capital gains is substantially less than the tax generally imposed by the United States on corporate profits, and (iii) 25% or more of your capital is held of record or is otherwise determined, after consultation between competent authorities of the United States and Korea, to be owned directly or indirectly by one or more persons who are not individual residents of the United States. Also, under Article 16 (Capital Gains) of the Korea-United States income tax treaty, the exemption on capital gains does not apply if you are an individual, and (a) you maintain a fixed base in Korea for a period or periods aggregating 183 days or more during the taxable year and your ADSs or shares of common stock giving rise to capital gains are effectively connected with such fixed base or (b) you are present in Korea for a period or periods of 183 days or more during the taxable year.
 
You should inquire whether you are entitled to the benefit of an income tax treaty with Korea. It is the responsibility of the party claiming the benefits of an income tax treaty in respect of dividend payments or capital gains to submit to us, the purchaser or the securities company, as applicable, a certificate as to his or her tax residence. In the absence of sufficient proof, we, the purchaser or the securities company, as applicable, must withhold tax at the normal rates. In addition, effective starting July 1, 2002, in order for you to obtain the benefit of a tax exemption on certain Korean source income (e.g., dividends and capital gains) under an applicable tax treaty, Korean tax law requires you (or your agent) to submit the application for tax exemption along with a certificate of your tax residency issued by a competent authority of your country of tax residence, subject to certain exceptions. Such application should be submitted to the relevant district tax office by the ninth day of the month following the date of the first payment of such income.
 
Inheritance Tax and Gift Tax
 
If you die while holding an ADS or donate an ADS, it is unclear whether, for Korean inheritance and gift tax purposes, you will be treated as the owner of the shares of common stock underlying the ADSs. If the tax authority interprets depositary receipts as the underlying share certificates, you may be treated as the owner of the shares of common stock and your heir or the donee (or in certain circumstances, you as the donor) will be subject to Korean inheritance or gift tax presently at the rate of 10% to 50%; provided that the value of the ADSs or shares of common stock is greater than a specified amount.
 
If you die while holding a share of common stock or donate a share of common stock, your heir or donee (or in certain circumstances, you as the donor) will be subject to Korean inheritance or gift tax at the same rate as indicated above.
 
At present, Korea has not entered into any tax treaty relating to inheritance or gift taxes.
 
Securities Transaction Tax
 
If you transfer shares of common stock on the Korea Exchange, you will be subject to securities transaction tax at the rate of 0.15% and an agriculture and fishery special surtax at the rate of 0.15% of the sale price of the shares of common stock. If your transfer of the shares of common stock is not made on the Korea Exchange, subject to certain


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exceptions you will be subject to securities transaction tax at the rate of 0.5% and will not be subject to an agriculture and fishery special surtax.
 
With respect to transfer of ADRs, a tax ruling was issued in 2004 by the Korean tax authority (the “2004 tax ruling”) to the effect that depositary receipts (which the ADRs fall under) constitute share certificates subject to the securities transaction tax; provided that, under the Securities Transaction Tax Law, the transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq National Market or other qualified foreign exchanges is exempt from the securities transaction tax. Based on the 2004 tax ruling and the relevant provisions of the Securities Transaction Tax Law, once the ADSs are listed on the New York Stock Exchange, your transfer of ADRs should not be subject to the securities transaction tax.
 
In principle, the securities transaction tax, if applicable, must be paid by the transferor of the shares or rights. When the transfer is effected through a securities settlement company, such settlement company is generally required to withhold and pay the tax to the tax authorities. When such transfer is made through a securities company only, such securities company is required to withhold and pay the tax. Where the transfer is effected by a non-resident without a permanent establishment in Korea, other than through a securities settlement company or a securities company, the transferee is required to withhold the securities transaction tax.
 
United States Taxation
 
This summary describes the material U.S. federal income tax consequences for a U.S. holder (as defined below) of owning our notes, shares of common stock or ADSs. This summary applies to you only if you hold notes, shares of common stock or ADSs as capital assets for tax purposes and, in the case of the notes, only if you purchased such notes in the applicable initial offering at their issue price. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:
 
  •  a dealer in securities or currencies;
 
  •  a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;
 
  •  a bank;
 
  •  a life insurance company;
 
  •  a tax-exempt organization;
 
  •  a person that holds notes, shares of common stock or ADSs that are a hedge or that are hedged against interest rate or currency risks;
 
  •  a person that holds notes, shares of common stock or ADSs as part of a straddle or conversion transaction for tax purposes;
 
  •  a person whose functional currency for tax purposes is not the U.S. dollar; or
 
  •  a person that owns or is deemed to own 10% or more of any class of our stock.
 
This summary is based on laws, treaties and regulatory interpretations in effect on the date hereof, all of which are subject to change, possibly on a retroactive basis.
 
Please consult your own tax advisers concerning the U.S. federal, state, local and other national tax consequences of purchasing, owning and disposing of notes, shares of common stock or ADSs in your particular circumstances.
 
For purposes of this summary, you are a “U.S. holder” if you are a beneficial owner of a note, share of common stock or ADS that is:
 
  •  a citizen or resident of the United States;
 
  •  a U.S. domestic corporation; or
 
  •  subject to U.S. federal income tax on a net income basis with respect to income from the note, share of common stock or ADS.


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Notes
 
Interest
 
Interest on the notes will be includible in your income at the time the interest is accrued or received, in accordance with your method of tax accounting.
 
Sale, Exchange or Retirement
 
Upon the sale, exchange or retirement of a note, you generally will recognize gain or loss equal to the difference between the amount realized (less any accrued interest, which will be taxable as interest income) and your tax basis in such note. Such gain or loss generally will be long-term capital gain or loss if you held the note for more than one year at the time of disposition. Your ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at reduced rates of tax.
 
Shares of Common Stock and ADSs
 
In general, if you hold ADSs, you will be treated as the holder of the shares of common stock represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an ADS for the shares of common stock represented by that ADS.
 
Dividends
 
The gross amount of cash dividends that you receive (prior to deduction of Korean taxes) generally will be subject to U.S. federal income taxation as foreign source dividend income. Dividends paid in Won will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your (or, in the case of ADSs, the depositary’s) receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income.
 
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2011 with respect to the ADSs will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends.” Dividends paid on the ADSs will be treated as qualified dividends if (i) the ADSs are readily tradable on an established securities market in the United States and (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The ADSs are listed on the New York Stock Exchange, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2005 or 2006 taxable year. In addition, based on our audited financial statements and its current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2007 taxable year.
 
The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or common stock and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them. Holders of ADSs and common shares should consult their own tax advisers regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances.
 
Distributions of additional shares in respect of shares of common stock or ADSs that are made as part of a pro-rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.


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Sales and Other Dispositions
 
For U.S. federal income tax purposes, gain or loss you realize on the sale or other disposition of shares of common stock or ADSs will be capital gain or loss, and will be long-term capital gain or loss if the shares of common stock or ADSs were held for more than one year. Your ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at a reduced rate.
 
Foreign Tax Credit Considerations
 
You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Korea. If no such rules apply, you may claim a credit against your U.S. federal income tax liability for Korean taxes withheld from dividends on shares of common stock or ADSs, so long as you have owned the shares of common stock or ADSs (and not entered into specified kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may, at your election, deduct such Korean taxes in computing your taxable income, subject to generally applicable limitations under U.S. tax law. Korean taxes withheld from a distribution of additional shares that is not subject to U.S. tax will be treated for U.S. federal income tax purposes as imposed on “general limitation” income. Such treatment may affect your ability to utilize any available foreign tax credit in respect of such taxes.
 
Any Korean securities transaction tax or agriculture and fishery special tax that you pay will not be creditable for foreign tax credit purposes.
 
The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involve the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.
 
U.S. Information Reporting and Backup Withholding Rules
 
Payments in respect of the notes, shares of common stock or ADSs that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.
 
Item 10.F.   Dividends and Paying Agents
 
See “Item 8.A. Consolidated Statements and Other Financial Information — Dividends” above for information concerning our dividend policies and our payment of dividends. See “Item 10B. Memorandum and Articles of Association — Dividends” for a discussion of the process by which dividends are paid on shares of our common stock. See “Item 12. Description of Securities Other than Equity Securities — Dividends, Other Distributions and Rights” for a discussion of the process by which dividends are paid on our ADSs. The paying agent for payment of our dividends on ADSs in the United States is Bank of New York.
 
Item 10.G.   Statements by Experts
 
Not applicable
 
Item 10.H.   Documents on Display
 
We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at the Public Reference Rooms in Washington, D.C., New York, New York and Chicago, Illinois. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Any


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filings we make electronically will be available to the public over the Internet at the SEC’s web site at http://www.sec.gov.
 
Item 10.I.   Subsidiary Information
 
Not applicable
 
Item 11.   Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to foreign exchange rate and interest rate risk primarily associated with underlying liabilities, and to changes in the commodity prices of principal raw materials and the market value of our equity investments. Following evaluation of these positions, we selectively enter into derivative financial instruments to manage the related risk exposures. These contracts are entered into with major financial institutions, which minimizes the risk of credit loss. The activities of our finance division are subject to policies approved by our senior management. These policies address the use of derivative financial instruments, including the approval of counterparties, setting of limits and investment of excess liquidity. Our general policy is to hold or issue derivative financial instruments for hedging purposes. From time to time, we may also enter into derivative financial contracts for trading purposes.
 
Exchange Rate Risk
 
Korea is our most important market and, therefore, a substantial portion of our cash flow is denominated in Won. Most of our exports are denominated in Dollars. Japan is also an important market for us, and we derive significant cash flow denominated in Yen. We are exposed to foreign exchange risk related to foreign currency denominated liabilities and anticipated foreign exchange payments. Anticipated foreign exchange payments, which represent a substantial sum and are mostly denominated in Dollars, relate primarily to imported raw material costs and freight costs. Foreign currency denominated liabilities relate primarily to foreign currency denominated debt. We use, to a limited extent, cross-currency interest rate swaps to reduce our exchange rate exposure with respect to foreign currency denominated debt. Under cross-currency interest rate swaps, we typically agree with the other parties to exchange, at the maturity date, a fixed amount denominated in one currency with a fixed amount denominated in another currency. Until the maturity date, we agree to exchange interest payments, at specified intervals, calculated based on different interest rates for each currency. We also use, to a limited extent, currency forward contracts to purchase Dollars to reduce our exchange rate exposure. Under currency forward contracts, we typically agree with the other parties to exchange, at the maturity date, a fixed amount denominated in Dollars with an amount denominated in Yen or Won at a fixed exchange rate.
 
As of December 31, 2006, we had entered into seven currency forward contracts and one option contract. Our aggregate net valuation gain of above contracts was approximately Won 1 billion but net transaction loss was Won 25 billion in 2006. We may incur losses under our existing contracts or any swap or other derivative product transactions entered into in the future. See Note 22 of Notes to Consolidated Financial Statements.
 
Interest Rate Risk
 
We are also subject to market risk exposure arising from changing interest rates. A reduction of interest rates increases the fair value of our debt portfolio, which is primarily of a fixed interest nature. From time to time, we use, to a limited extent, interest rate swaps to reduce interest rate volatility on some of our debt and manage our interest expense by achieving a balanced mixture of floating and fixed rate debt. As of December 31, 2006, we did not have any outstanding interest rate swap contract.


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The following table summarizes the carrying amounts, fair values, principal cash flows by maturity date and weighted average interest rates of our short-term and long-term liabilities as of December 31, 2006 which are sensitive to exchange rates and/or interest rates. The information is presented in Won, which is our reporting currency.
 
                                                                                 
    Maturities  
                                        December 31, 2006     December 31, 2005  
    2007     2008     2009     2010     2011     Thereafter     Total     Fair Value     Total     Fair Value  
    (In millions of Won except rates)  
 
Local currency:
                                                                               
Fixed rate
    344,974       33,825       336,217       4,288       874,315       58,379       1,651,998       1,640,606       991,100       1,017,635  
Average weighted rate(1)
    4.38 %     4.90 %     4.54 %     3.43 %     4.98 %     2.68 %     4.68 %           5.30 %      
Variable rate
                5,000                         5,000       5,000              
Average weighted rate(1)
                5.31 %                       5.31 %                  
                                                                                 
Sub-total
    344,974       33,825       341,217       4,288       874,315       58,379       1,656,998       1,645,606       991,100       1,017,635  
                                                                                 
Foreign currency, principally Dollars and Yen:
                                                                               
Fixed rate
    1,290,619       433,678       73,325       190,670       15,194       693,112       2,696,599       2,753,934       2,020,892       2,035,777  
Average weighted rate(1)
    3.54 %     0.30 %     4.48 %     5.92 %     5.39 %     3.70 %     3.27 %           2.82 %      
Variable rate
    8,019       8,019       8,019       4,010                   28,068       28,068       37,357       37,357  
Average weighted rate(1)
    6.17 %     6.17 %     6.17 %     6.17 %                 6.17 %           5.50 %      
                                                                                 
Sub-total
    1,298,639       441,698       81,344       194,680       15,194       693,112       2,724,666       2,782,002       2,058,249       2,073,134  
                                                                                 
Total
    1,643,612       475,523       422,562       198,968       889,509       751,491       4,381,664       4,427,607       3,049,349       3,090,769  
                                                                                 
 
 
(1) Weighted average rates of the portfolio at the period end.
 
Commodity Price Risk
 
We are exposed to market risk of price fluctuations related to the purchase of raw materials, especially iron ore and coal. To ensure adequate supply of raw materials, we enter into long-term supply contracts to purchase iron ore, coal, nickel, chrome, stainless steel scrap and liquefied natural gas. These contracts generally have terms of three to ten years and provide for periodic price adjustments to then-market prices. As of December 31, 2006, 462 million tons of iron ore and 120 million tons of coal remained to be purchased under long-term supply contracts. We generally do not use commodity derivatives to manage our commodity price risks. As of December 31, 2006, we had entered into one nickel forward contract, which recorded net transaction loss of Won 12 billion in 2006.
 
Equity Price Risk
 
We are exposed to equity price risk primarily from changes in the stock price of SK Telecom and Nippon Steel Corporation. As of December 31, 2006, we hold a 2.88% interest in SK Telecom (excluding shares placed as collateral for exchangeable bonds issued in August 2003) and a 3.07% interest in Nippon Steel Corporation. We have not entered into any derivative instruments or any other arrangements to manage our equity price risks.
 
Item 12.   Description of Securities Other than Equity Securities
 
Not Applicable


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PART II
 
Item 13.   Defaults, Dividend Arrearages and Delinquencies
 
Not Applicable
 
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds
 
Not Applicable
 
Item 15.   Controls and Procedures
 
a.   Disclosure Controls and Procedures
 
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2006. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
b.   Management’s Annual Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 based on criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.
 
Our management has excluded POSCO Power Corporation, our wholly-owned subsidiary, from its assessment of internal control over financial reporting as of December 31, 2006 because we acquired the company in a purchase


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business combination in 2006. POSCO Power Corporation comprised approximately 2% of our consolidated sales in 2006 and approximately 3% of our consolidated total assets as of December 31, 2006.
 
Samil PricewaterhouseCoopers, an independent registered public accounting firm, which also audited our consolidated financial statements as of, and for the year ended December 31, 2006, as stated in their report which is included herein, has issued an attestation report on management’s assessment of our internal control over financial reporting.
 
c.   Attestation Report of the Independent Registered Public Accounting Firm
 
The attestation report of our independent registered public accounting firm on the management’s assessment of our internal control over financial reporting is furnished in Item 18 of this Form 20-F.
 
d.   Changes in Internal Control Over Financial Reporting
 
There has been no change in our internal control over financial reporting during 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Item 16.   [Reserved]
 
Item 16A.   Audit Committee Financial Expert
 
At our annual general meeting of shareholders in February 2007, our shareholders elected the following four members of the audit committee: E. Han Kim (committee chair), Jeffrey D. Jones, Yoon-Suk Suh and Wook Sun. In addition, they determined and designated that Yoon-Suk Suh is an “audit committee financial expert” within the meaning of this Item 16A. The board of directors have approved this newly elected audit committee, and reaffirmed the determination by our shareholders that Yoon-Suk Suh is an audit committee financial expert and further determined that he is independent within the meaning of applicable SEC rules.
 
Item 16B.   Code of Ethics
 
We have adopted a code of business conduct and ethics, as defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of business conduct and ethics, called Code of Conduct, applies to our chief executive officer and chief financial officer, as well as to our directors, other officers and employees. Our Code of Conduct is available on our web site at www.posco.co.kr. If we amend the provisions of our Code of Conduct that apply to our chief executive officer or chief financial officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our web site at the same address.
 
Item 16C.   Principal Accountant Fees and Services
 
Audit and Non-Audit Fees
 
The following table sets forth the fees billed to us by our independent auditors, Samil Pricewaterhouse Coopers, during the fiscal years ended December 31, 2005 and 2006:
 
                 
    For the Year Ended December 31,  
    2005     2006  
    (In millions of Won)  
 
Audit fees
    W1,064       W1,485  
Audit-related fees
    846       141  
Tax fees
    59       104  
Other fees
           
Total fees
    W1,969       W1,730  
                 
 
Audit fees in the above table are the aggregate fees billed by Samil PricewaterhouseCoopers, the Korean member firm of PricewaterhouseCoopers, in connection with the audit of our annual financial statements and the


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annual financial statements of POSCO Canada Ltd. and POSCO Terminal Co., Ltd. and review of interim financial statements. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
 
Audit-related fees in the above table are the aggregate fees billed by Samil PricewaterhouseCoopers for due diligence service related to an acquisition project, accounting advisory service on consolidation and general consultation on financial accounting and reporting standards.
 
Tax fees in the above table are fees billed by Samil PricewaterhouseCoopers for our tax compliance and tax planning, as well as tax planning and preparation of Canadian tax returns for POSCO Canada Ltd.
 
Audit Committee Pre-Approval Policies and Procedures
 
Our audit committee has not established pre-approval policies and procedures for the engagement of our independent auditors for services. Our audit committee expressly approves on a case-by-case basis any engagement of our independent auditors for audit and non-audit services provided to our subsidiaries or us.
 
Item 16D.   Exemptions from the Listing Standards for Audit Committees
 
Not Applicable
 
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
The following table sets forth the repurchases of common shares by us or any affiliated purchasers during the fiscal year ended December 31, 2006:
 
                                 
                Total Number of
    Maximum Number
 
                Shares Purchased as
    of Shares that may
 
    Total Number of
    Average Price
    Part of Publicly
    yet be Purchased
 
Period
  Shares Purchased     Paid per Share     Announced Plans     under the Plans  
          (In Won)              
 
January 1 to January 31
                       
February 1 to February 29
                       
March 1 to March 31
                       
April 1 to April 30
                       
May 1 to May 31
    1,347,417     W 261,759       1,347,417       396,318  
June 1 to June 30
    1,055,988       234,409       396,318        
July 1 to July 31
    613,815 (1)     240,064              
August 1 to August 31
    117,457 (1)     234,085              
September 1 to September 30
    73,292 (1)     238,035              
October 1 to October 31
    15,000 (1)     251,742              
November 1 to November 30
    8,000 (1)     271,934              
December 1 to December 31
    177,219 (1)     297,054              
                                 
Total
    3,408,188     W 249,729       1,743,735        
                                 
 
 
(1) Stocks purchased through the treasury stock fund
 
PART III
 
Item 17.   Financial Statements
 
Not Applicable


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Item 18.   Financial Statements
 
         
    Page
 
Report of Independent Registered Public Accounting Firm
  F-1
Consolidated Balance Sheets as of December 31, 2005 and 2006
  F-3
Consolidated Statements of Income for the Years Ended December 31, 2004, 2005 and 2006
  F-4
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2005 and 2006
  F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006
  F-6
Notes to Consolidated Financial Statements
  F-7


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Item 19.   Exhibits
 
             
  1 .1     Articles of incorporation of POSCO (English translation)
  2 .1     Form of Common Stock Certificate (including English translation) (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement No. 33-81554)*
  2 .2     Form of Deposit Agreement (including Form of American Depositary Receipts) (incorporated by reference to the Registrant’s Registration Statement (File No. 33-84318) on Form F-6)*
  2 .3     Letter from ADR Depositary to the Registrant relating to the Pre-release of American Depositary Receipts (incorporated by reference to the Registrant’s Registration Statement (File No. 33-84318) on Form F-6)*
  7 .1     Computation of ratio of earnings to fixed charges
  8 .1     List of subsidiaries of POSCO
  12 .1     Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  12 .2     Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  13 .1     Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  15 .1     Consent of Samil PricewaterhouseCoopers, the Korean member firm of PricewaterhouseCoopers
 
 
* Filed previously


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SIGNATURES
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
POSCO
 
(Registrant)
 
/s/  Ku-Taek Lee

Name: Ku-Taek Lee
  Title:  Chief Executive Officer and
Representative Director
 
Date: June 27, 2007


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(LETTERHEAD)
 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders of
POSCO:
 
We have completed an integrated audit of POSCO’s 2006 consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 and audits of its 2005 and 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
 
Consolidated financial statements
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareholders’ equity, and cash flows present fairly, in all material respects, the financial position of POSCO and its subsidiaries (the “Company”) at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the Republic of Korea. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
Accounting principles generally accepted in the Republic of Korea vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 32 to the consolidated financial statements.
 
Internal control over financial reporting
 
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 15(b), that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit

Samil PricewaterhouseCoopers is the Korean member firm of PricewaterhouseCoopers. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.


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to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded POSCO Power Corp. from its assessment of internal control over financial reporting as of December 31, 2006 because it was acquired by the Company in a purchase business combination during 2006. We have also excluded POSCO Power Corp. from our audit of internal control over financial reporting. POSCO Power Corp. comprised approximately 2% of the Company’s 2006 consolidated sales and approximately 3% of the Company’s consolidated total assets at December 31, 2006.
 
/s/ Samil PricewaterhouseCoopers
Seoul, Republic of Korea
May 15, 2007


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POSCO and Subsidiaries
 
Consolidated Balance Sheets
December 31, 2006 and 2005
 
                         
                (Note 2)  
    2006     2005     2006  
    (In millions of Korean won
 
    and thousands of US dollar)  
 
ASSETS
Current assets
                       
Cash and cash equivalents, net of government grants (Notes 3 and 27)
  W 936,288     W 653,364     $ 1,006,761  
Short-term financial instruments (Notes 3, 13 and 27)
    867,310       760,371       932,591  
Trading securities (Note 4)
    2,000,647       2,610,502       2,151,234  
Current portion of available-for-sales securities (Note 7)
    13,375       90,889       14,381  
Current portion of held-to-maturity securities (Note 7)
    153,476       2,688       165,028  
Trade accounts and notes receivable, net of allowance for doubtful accounts and present value discount (Notes 5, 13, 27 and 28)
    3,491,659       3,044,720       3,754,472  
Other accounts and notes receivable, net of allowance for doubtful accounts and present value discount (Notes 5, 17, 27 and 28)
    246,804       241,587       265,381  
Inventories, net (Notes 6, 13 and 29)
    4,018,205       3,792,594       4,320,651  
Deferred income tax assets (Note 25)
    118,073       131,790       126,960  
Other current assets, net of allowance for doubtful accounts (Note 11)
    391,116       311,831       420,555  
                         
Total current assets
    12,236,953       11,640,336       13,158,014  
Property, plant and equipment, net (Notes 8, 13, 14 and 29)
    14,643,120       12,271,710       15,745,290  
Investment securities (Notes 7, 13, 27 and 29)
    3,165,055       2,815,741       3,403,285  
Intangible assets, net (Notes 9 and 29)
    557,082       453,709       599,013  
Long-term loans receivable, net of allowance for doubtful accounts and present value discount (Notes 5, 27, 28 and 29)
    62,295       42,040       66,984  
Long-term trade accounts and notes receivable, net of allowance for doubtful accounts and present value discount (Notes 5, 27 and 29)
    44,348       41,390       47,686  
Deferred income tax assets (Notes 25 and 29)
    266,866       39,922       286,953  
Guarantee deposits (Notes 27 and 29)
    60,368       49,081       64,911  
Long-term financial instruments (Notes 3, 13, 27 and 29)
    12,339       19,506       13,267  
Other long-term assets, net of allowance for doubtful accounts and present value discount (Notes 5, 11 and 29)
    100,647       133,875       108,224  
                         
Total assets
  W 31,149,073     W 27,507,310     $ 33,493,627  
                         
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
                       
Trade accounts and notes payable (Notes 27 and 28)
  W 1,507,227     W 1,145,729     $ 1,620,674  
Short-term borrowings (Notes 12, 27 and 28)
    1,238,749       859,774       1,331,988  
Current portion of long-term debts, net of discount on debentures issued (Notes 13 and 27)
    404,412       1,057,200       434,851  
Accrued expenses (Note 27)
    221,936       698,062       238,641  
Other accounts and notes payable (Notes 27 and 28)
    290,867       194,486       312,760  
Withholdings (Note 27)
    133,131       101,956       143,151  
Income tax payable
    701,037       1,366,847       753,803  
Deferred income tax liabilities (Note 25)
    77,541       645       83,377  
Other current liabilities (Note 16)
    507,395       456,864       545,589  
                         
Total current liabilities
    5,082,295       5,881,563       5,464,834  
Long-term debts, net of current portion and discount on debentures issued (Notes 13, 27 and 28)
    2,725,502       1,131,270       2,930,648  
Accrued severance benefits, net (Note 15)
    331,006       274,812       355,920  
Deferred income tax liabilities (Note 25)
    460,342       213,867       494,992  
Other long-term liabilities (Notes 14, 16 and 21)
    148,186       132,121       159,338  
                         
Total liabilities
    8,747,331       7,633,633       9,405,732  
                         
Commitments and contingencies (Note 17)
                       
Shareholders’ equity
                       
Common stock (Note 1)
    482,403       482,403       518,713  
Capital surplus (Note 18)
    4,035,273       3,991,409       4,339,003  
Retained earnings (Note 19)
    18,863,333       16,168,892       20,283,154  
( Net income: W3,314,181 million in 2006 and W4,022,492 million in 2005
                       
Losses in excess of minority interest: W2,568 million in 2006 and W22,448 million in 2005) 
                       
Capital adjustments, net (Note 20)
    (1,468,474 )     (1,153,697 )     (1,579,005 )
                         
      21,912,535       19,489,007       23,561,865  
                         
Minority interest
                       
Common stock
    251,479       174,457       270,408  
Capital surplus and retained earnings
    237,728       210,213       255,622  
                         
      489,207       384,670       526,030  
                         
Total shareholders’ equity
    22,401,742       19,873,677       24,087,895  
                         
Total liabilities and shareholders’ equity
  W 31,149,073     W 27,507,310     $ 33,493,627  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

POSCO and Subsidiaries
 
Consolidated Statements of Income
Year Ended December 31, 2006, 2005 and 2004
 
                                 
                      (Note 2)  
    2006     2005     2004     2006  
    (In millions of Korean won and thousands of US dollar,
 
    except per share amounts)  
 
Sales (Notes 28 and 29)
  W 25,842,326     W 26,301,788     W 23,973,053     $ 27,787,447  
Cost of goods sold (Note 28)
    19,896,764       18,767,195       17,360,706       21,394,370  
                                 
Gross profit
    5,945,562       7,534,593       6,612,347       6,393,077  
Selling and administrative expenses (Note 23)
    1,556,415       1,451,317       1,292,928       1,673,564  
                                 
Operating income
    4,389,147       6,083,276       5,319,419       4,719,513  
                                 
Non-operating income
                               
Interest and dividend income (Note 28)
    182,832       161,135       141,054       196,594  
Gain on foreign currency transactions
    156,722       114,615       130,915       168,518  
Gain on foreign currency translation
    84,269       148,857       177,889       90,611  
Gain on valuation of trading securities
    19,467       15,357       22,497       20,932  
Gain on disposal of trading securities
    67,284       59,436       43,012       72,349  
Gain on disposal of property, plant and equipment
    19,144       24,225       13,769       20,585  
Gain on valuation of derivatives (Note 22)
    1,857       1,671       9,594       1,997  
Gain on derivative transactions (Note 22)
    15,477       3,857       12,452       16,642  
Earnings of equity method investees (Note 7)
    47,147       26,095       3,505       50,695  
Gain on recovery of allowance for doubtful accounts
    13,776       18,591       126,861       14,812  
Gain on disposal of investments
    8,183       2,973       7,304       8,799  
Others
    133,066       210,853       139,967       143,083  
                                 
      749,224       787,665       828,819       805,617  
                                 
Non-operating expenses
                               
Interest expense (Note 28)
    183,290       149,337       192,030       197,086  
Other bad debt expense
    70,370       30,146       16,229       75,667  
Loss on foreign currency transactions
    137,567       95,646       112,343       147,922  
Loss on foreign currency translation
    4,855       9,091       17,407       5,220  
Losses of equity method investees (Note 7)
    722       6,371             776  
Donations (Note 24)
    154,678       153,018       169,546       166,321  
Loss on disposal of property, plant and equipment
    54,179       42,815       29,086       58,257  
Loss on valuation of derivatives (Note 22)
    820       21,393       2,646       882  
Loss on derivative transactions (Note 22)
    40,363       9,000       9,332       43,401  
Loss on impairment of investments
    2,088       11,846       94,824       2,245  
Others
    204,847       854,089       165,273       220,265  
                                 
      853,779       1,382,752       808,716       918,042  
                                 
Extraordinary income
                3,388        
                                 
Net income before income tax expense and minority interest
    4,284,592       5,488,189       5,342,910       4,607,088  
Income tax expense (Note 25)
    921,951       1,473,589       1,501,646       991,345  
                                 
Net income before minority interest
    3,362,641       4,014,600       3,841,264       3,615,743  
Minority interest in income of consolidated subsidiaries
    48,460       (7,892 )     27,039       52,108  
                                 
Net income
  W 3,314,181     W 4,022,492     W 3,814,225     $ 3,563,635  
                                 
Per share data(Note 26) (in Korean won and US dollar)
                               
Basic and diluted ordinary income per share
  W 42,115     W 50,790     W 47,155     $ 45.28  
Basic and diluted earnings per share
    42,115       50,790       47,185       45.28  
 
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

POSCO and Subsidiaries
 
Consolidated Statements of Changes in Shareholders’ Equity
Year Ended December 31, 2006, 2005 and 2004
 
                                                         
    Common
    Common
    Capital
    Retained
    Capital
    Minority
       
    Stock     Amount     Surplus     Earnings     Adjustments     Interest     Total  
    (In millions of Korean won and thousands of US dollar)  
 
Balance as of January 1, 2004
    88,966,155     W 482,403     W 3,828,773     W 9,875,080     W (1,229,988 )   W 293,299     W 13,249,567  
Net income for 2004
                      3,814,225                   3,814,225  
Effect of change in percentage of ownership of investees
                1,527       1,167                   2,694  
Dividends
                      (524,602 )                 (524,602 )
Change in losses in excess of minority interest (Note 19)
                      (10,042 )           10,042        
Retirement of treasury stock
    (1,779,320 )                 (304,711 )                 (304,711 )
Change in treasury stock
                63,695             158,025             221,720  
Overseas operations translation adjustment
                            (126,552 )           (126,552 )
Changes in valuation gain and loss on investment securities
                            51,933             51,933  
Effect of change in percentage of minority interest
                                  (22,488 )     (22,488 )
Minority interest in income of consolidated subsidiaries
                                  27,038       27,038  
Others
                1,383       1       (4,152 )           (2,768 )
                                                         
Balance as of December 31, 2004
    87,186,835     W 482,403     W 3,895,378     W 12,851,118     W (1,150,734 )   W 307,891     W 16,386,056  
                                                         
Balance as of January 1, 2005
    87,186,835     W 482,403     W 3,895,378     W 12,851,118     W (1,150,734 )   W 307,891     W 16,386,056  
Net income for 2005
                      4,022,492                   4,022,492  
Effect of change in scope of consolidation (Note 1)
                167       3,981                   4,148  
Effect of change in percentage of ownership of investees
                (12,893 )     598                   (12,295 )
Dividends
                      (680,794 )                 (680,794 )
Change in losses in excess of minority interest (Note 19)
                      (22,448 )           22,448        
Change in treasury stock
                108,018             (279,061 )           (171,043 )
Overseas operations translation adjustment
                            (11,524 )           (11,524 )
Changes in valuation gain and loss on investment securities
                            290,143             290,143  
Effect of change in percentage of minority interest
                                  62,223       62,223  
Minority interest in income of consolidated subsidiaries
                                  (7,892 )     (7,892 )
Others
                739       (6,055 )     (2,521 )           (7,837 )
                                                         
Balance as of December 31, 2005
    87,186,835     W 482,403     W 3,991,409     W 16,168,892     W (1,153,697 )   W 384,670     W 19,873,677  
                                                         
Balance as of January 1, 2006
    87,186,835     W 482,403     W 3,991,409     W 16,168,892     W (1,153,697 )   W 384,670     W 19,873,677  
Net income for 2006
                      3,314,181                   3,314,181  
Effect of change in scope of consolidation (Note 1)
                (1,012 )     40,649                   39,637  
Effect of change in percentage of ownership of investees
                (8,645 )                       (8,645 )
Dividends
                      (636,487 )                 (636,487 )
Change in losses in excess of minority interest (Note 19)
                      (2,568 )           2,568        
Change in treasury stock
                50,565             (711,485 )           (660,920 )
Overseas operations translation adjustment (Note 20)
                            (51,839 )           (51,839 )
Changes in valuation gain and loss on investment securities (Note 20)
                            462,912             462,912  
Effect of change in percentage of minority interest
                                  53,509       53,509  
Minority interest in income of consolidated subsidiaries
                                  48,460       48,460  
Others
                2,956       (21,334 )     (14,365 )           (32,743 )
                                                         
Balance as of December 31, 2006
    87,186,835     W 482,403     W 4,035,273     W 18,863,333     W (1,468,474 )   W 489,207     W 22,401,742  
                                                         
Balance as of January 1, 2006
    87,186,835     $ 518,713     $ 4,291,838     $ 17,385,906     $ (1,240,535 )   $ 413,624     $ 21,369,546  
Net income for 2006
                      3,563,635                   3,563,635  
Effect of change in scope of consolidation (Note 1)
                (1,088 )     43,709                   42,621  
Effect of change in percentage of ownership of investees
                (9,296 )                         (9,296 )
Dividends
                      (684,394 )                 (684,394 )
Change in losses in excess of minority interest (Note 19)
                      (2,762 )           2,762        
Change in treasury stock
                54,371             (765,037 )           (710,666 )
Overseas operations translation adjustment (Note 20)
                            (55,741 )           (55,741 )
Changes in valuation gain and loss on investment securities (Note 20)
                            497,755             497,755  
Effect of change in percentage of minority interest
                                  57,537       57,537  
Minority interest in income of consolidated subsidiaries
                                  52,107       52,107  
Others
                3,178       (22,940 )     (15,447 )           (35,209 )
                                                         
Balance as of December 31, 2006
    87,186,835     $ 518,713     $ 4,339,003     $ 20,283,154     $ (1,579,005 )   $ 526,030     $ 24,087,895  
                                                         
 
The accompanying notes are an integral part of these consolidated financial statements.


F-5


Table of Contents

POSCO and Subsidiaries
 
Consolidated Statements of Cash Flows
Year Ended December 31, 2006, 2005 and 2004
 
                                 
                      (Note 2)  
    2006     2005     2004     2006  
    (In millions of Korean won and thousands of US dollar)  
 
Cash flows from operating activities
                               
Net income
  W 3,314,181     W 4,022,492     W 3,814,225     $ 3,563,635  
                                 
Adjustments to reconcile net income to net cash provided by operating activities
                               
Depreciation and amortization
    1,782,738       1,612,556       1,565,361       1,916,923  
Accrual of severance benefits
    144,931       213,082       192,648       155,840  
Provision for doubtful accounts, net
    173,931       115,865       (56,961 )     187,024  
Gain on foreign currency translation, net
    (76,453 )     (138,296 )     (165,136 )     (82,208 )
Gain on valuation of trading securities, net
    (18,863 )     (15,124 )     (22,497 )     (20,282 )
Loss (gain) on valuation of derivatives, net
    (1,037 )     19,722       (6,948 )     (1,115 )
Loss (gain) on derivatives transaction, net
    24,886       5,143       (3,120 )     26,759  
Gain on disposal of trading securities and investments, net
    (66,507 )     (58,865 )     (42,159 )     (71,513 )
Loss on disposal of property, plant and equipment, net
    35,035       18,590       15,317       37,672  
Earnings of equity method investees, net
    (46,425 )     (19,724 )     (3,505 )     (49,919 )
Minority interest in income of consolidated subsidiaries
    48,460       (7,892 )     27,039       52,107  
Others
    374,968       391,778       382,045       403,190  
                                 
      2,375,664       2,136,835       1,882,084       2,554,478  
                                 
Changes in operating assets and liabilities
                               
Decrease(Increase) in trade accounts and notes receivable
    (398,201 )     45,112       (869,353 )     (428,173 )
Increase in inventories
    (380,143 )     (706,528 )     (903,532 )     (408,756 )
Increase in other accounts and notes receivable
    (30,932 )     (94,499 )     (63,329 )     (33,260 )
Increase in accrued income
    (26,205 )     (19,757 )     33,906       (28,178 )
Increase in advance payments
    (73,034 )     (83,702 )     1,076       (78,531 )
Increase in prepaid expenses
    (5,009 )     (1,360 )     (1,565 )     (5,386 )
Increase(Decrease) in trade accounts and notes payable
    272,270       (170,131 )     317,983       292,764  
Increase(Decrease) in other accounts and notes payable
    122,673       (7,571 )     73,813       131,906  
Increase(Decrease) in advances received
    78,449       (7,888 )     104,073       84,354  
Increase(Decrease) in accrued expenses
    (459,579 )     493,376       52,874       (494,171 )
Increase(Decrease) in income tax payable
    (715,691 )     281,240       486,198       (769,560 )
Deferred income tax, net
    (59,480 )     (151,602 )     137,986       (63,957 )
Payment of severance benefits
    (36,817 )     (84,049 )     (28,346 )     (39,588 )
Increase in group severance insurance deposits
    (48,880 )     (98,790 )     (95,848 )     (52,559 )
Increase(Decrease) in other current liabilities
    5,855       (30,479 )     (4,598 )     6,296  
Others
    (35,515 )     (58,375 )     8,247       (38,189 )
                                 
      (1,790,239 )     (695,003 )     (750,415 )     (1,924,988 )
                                 
Net cash provided by operating activities
    3,899,606       5,464,324       4,945,894       4,193,125  
                                 
Cash flows from investing activities
                               
Disposal of trading securities
    15,322,978       12,758,304       10,482,755       16,476,321  
Acquisition of trading securities
    (14,516,637 )     (12,536,599 )     (10,546,422 )     (15,609,287 )
Disposal of available-for-sale securities
    145,990       347,987       27,558       156,978  
Acquisition of available-for-sale securities
    (669,732 )     (620,686 )     (194,344 )     (720,142 )
Disposal of short-term financial instruments
    1,516,362       1,322,222       1,416,087       1,630,497  
Acquisition of short-term financial instruments
    (1,610,510 )     (1,434,935 )     (1,354,342 )     (1,731,732 )
Disposal of long-term financial instruments
    113,339       1,509       3       121,870  
Acquisition of property, plant and equipment
    (3,709,422 )     (3,360,537 )     (2,265,074 )     (3,988,626 )
Disposal of property, plant and equipment
    425,976       66,273       74,041       458,039  
Collection of short-term loans
    64,436       107,484       100,983       69,286  
Short-term loans provided
    (62,641 )     (119,033 )     (39,864 )     (67,356 )
Long-term loans provided
    (6,388 )     (33,406 )     (4,665 )     (6,869 )
Acquisition of intangible assets
    (131,575 )     (81,605 )     (89,739 )     (141,479 )
Acquisition of other investment assets
    (131,096 )     (239,211 )     (1,083,445 )     (140,962 )
Others
    (130,556 )     77,816       90,326       (140,383 )
                                 
Net cash used in investing activities
    (3,379,476 )     (3,744,417 )     (3,386,142 )     (3,633,846 )
                                 
Cash flows from financing activities
                               
Proceeds from short-term borrowings
    4,119,189       4,828,860       5,847,951       4,429,236  
Proceeds from long-term debt
    2,160,279       594,312       280,038       2,322,881  
Proceeds from other long-term liabilities
    15,535       497,193       72,136       16,704  
Disposal of treasury stock
    69,779       931,664       81,724       75,031  
Repayment of current portion of long-term debt
    (1,188,281 )     (1,040,410 )     (1,018,064 )     (1,277,722 )
Repayment of short-term borrowings
    (3,821,014 )     (4,715,293 )     (5,861,889 )     (4,108,617 )
Repayment of long-term debt
    (165,212 )     (328,037 )     (106,558 )     (177,648 )
Payment of cash dividends
    (636,487 )     (680,794 )     (524,570 )     (684,394 )
Acquisition of treasury stock
    (851,123 )     (1,295,163 )     (304,712 )     (915,186 )
Repayment of other long-term liabilities
    (78,173 )     (398,998 )     (76,300 )     (84,057 )
Others
    148,808       29,024       (39,477 )     160,010  
                                 
Net cash used in financing activities
    (226,700 )     (1,577,642 )     (1,649,721 )     (243,762 )
                                 
Effect of exchange rate changes on cash and cash equivalents
    (15,245 )     (4,425 )     (22,267 )     (16,393 )
                                 
Net increase in cash and cash equivalents from changes in consolidated subsidiaries
    4,364       33,939       382       4,693  
                                 
Net increase(decrease) in cash and cash equivalents
    282,549       171,779       (111,854 )     303,817  
Cash and cash equivalents
                               
Beginning of the period
    653,871       482,092       593,946       703,087  
                                 
End of the period
  W 936,420     W 653,871     W 482,092     $ 1,006,904  
                                 
 
Supplemental cash flow information for the years ended December 31 is follows:
 
                                 
    2006     2005     2004     2006  
    (In millions of Korean won and thousands of US dollar)  
 
Cash paid during the year for interest
  W 179,501     W 154,240     W 214,845     $ 193,012  
                                 
Cash paid during the year for Income tax
    1,305,077       1,443,439       854,899       1,403,309  
 
The accompanying notes are an integral part of these consolidated financial statements.


F-6


Table of Contents

POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
 
1.   Consolidated Companies
 
General descriptions of POSCO, the controlling company, and its controlled subsidiaries (Collectively the “Company”), including POSCO Engineering & Construction Co., Ltd. (POSCO E & C) and 17 other domestic subsidiaries and 34 overseas subsidiaries, whose accounts are included in the consolidated financial statements, and 17 equity-method investees, are provided below.
 
The Controlling Company
 
POSCO, the controlling company, was incorporated on April 1, 1968, under the Commercial Code of the Republic of Korea, to manufacture and distribute steel rolled products and plates in the domestic and overseas markets. The shares of POSCO have been listed on the Korea Stock Exchange since 1988. POSCO operates two plants and one office in Korea, and seven liaison offices overseas. POSCO operates its principal market in the domestic market in Korea and concentrates export and overseas sales in the Asia Pacific region including Japan, China and other countries.
 
As of December 31, 2006, POSCO’s shareholders are as follows:
 
                 
          Percentage of
 
    Number of Shares     Ownership (%)  
 
National Pension Corporation
    2,496,272       2.86  
SK Telecom Co., Ltd. 
    2,481,310       2.85  
Pohang University of Science and Technology
    2,330,000       2.67  
Others
    79,879,253       91.62  
                 
      87,186,835       100.00  
                 
 
As of December 31, 2006, the shares of POSCO are listed on the Korea Stock Exchange, and its depository receipts are listed on the New York, London and Tokyo Stock Exchanges.
 
Consolidated Subsidiaries
 
The consolidated financial statements include the accounts of POSCO and its controlled subsidiaries. The following table sets forth certain information with regard to consolidated subsidiaries as of December 31, 2006:
 
                                                             
              Number of
                      Percentage of
        Percentage of
    Primary
        Outstanding
    Number of Shares     Ownership
        Ownership of
Subsidiaries
 
Business
  Net Assets     Shares     POSCO     Subsidiaries     Total     (%)     Location   Subsidiaries (%)
    (In millions of Korean Won)(1)
 
Domestic
                                                           
POSCO E & C
  Engineering and
construction
  W 1,106,668       30,000,000       27,281,080             27,281,080       90.94     Pohang  
Posteel Co., Ltd.
  Steel sales and
service
    293,447       18,000,000       17,155,000             17,155,000       95.31     Pohang  
                                                             
POSCON Co., Ltd.
  Electronic
control devices
manufacturing
    129,593       3,519,740       3,098,610             3,098,610       88.04     Pohang  
Pohang Coated Steel
Co., Ltd.
  Coated steel
manufacturing
    267,016       6,000,000       4,000,000             4,000,000       66.67     Pohang  
POSCO Machinery & Engineering Co., Ltd.
  Steel work maintenance     51,062       1,700,000       1,700,000             1,700,000       100.00     Pohang  
POSDATA Co., Ltd. 
  Computer hardware
and software
    159,511       81,551,600       50,440,720             50,440,720       61.85     Sungnam  
    distribution                                                        
POSCO Research Institute
  Economic research     23,010       3,800,000       3,800,000             3,800,000       100.00     Seoul  
    and consulting                                                        
Seung Kwang Co., Ltd. 
  Athletic facilities     43,647       3,945,000       2,737,000       1,208,000       3,945,000       100.00     Suncheon   POSCO E & C
    operation                                                       (30.62)


F-7


Table of Contents

POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

                                                             
              Number of
                      Percentage of
        Percentage of
    Primary
        Outstanding
    Number of Shares     Ownership
        Ownership of
Subsidiaries
 
Business
  Net Assets     Shares     POSCO     Subsidiaries     Total     (%)     Location   Subsidiaries (%)
    (In millions of Korean Won)(1)
 
POS-AC Co., Ltd. 
  Architecture and   W 23,294       230,000       230,000             230,000       100.00     Seoul  
    consulting                                                        
POSCO Specialty Steel Co., Ltd.
(Formerly Changwon Specialty Steel Co., Ltd.)
  Specialty steel
manufacturing
    436,303       26,000,000       26,000,000             26,000,000       100.00     Changwon  
POSCO Machinery Co., Ltd. 
  Machinery
installation
    33,135       1,000,000       1,000,000             1,000,000       100.00     Gwangyang  
POSTECH Venture Capital Corp. 
  Investment in
venture companies
    32,740       6,000,000       5,700,000             5,700,000       95.00     Pohang  
POSCO Refractories & Environment Company Ltd. (POSREC)
  Manufacturing     120,342       5,907,000       3,544,200             3,544,200       60.00     Pohang  
POSCO Terminal Co., Ltd. 
  Distribution and
warehousing
    32,600       5,000,000       2,550,000             2,550,000       51.00     Gwangyang  
Posmate Co., Ltd.
(Formerly Dongwoosa Service Inc.)
  Facilities management     31,385       714,286       214,286             214,286       30.00     Seoul  
Samjung Packing & Aluminum Co., Ltd. 
  Packing materials
manufacturing
    68,955       3,000,000       270,000       831,756       1,101,756       36.73     Pohang   Posmate Inc.
(27.73)
POSCO Power Corp. 
  Generation of Electricity     489,762       40,000,000       40,000,000             40,000,000       100.00     Seoul   —(3)
POSTECH 2006 Energy Fund
  Investment in new
technology
    28,619                               22.11     Seoul   POSTECH
Venture
Capital Corp.
(10.53)(2)(3)
POSCO Power
Corp.(11.58)
POSCO America Corporation (POSAM)
  Steel trading     111,614       317,806       316,051       1,755       317,806       100.00     U.S.A.   POSCAN (0.55)
POSCO Australia Pty. Ltd. (POSA)
  Steel trading     88,772       761,775       761,775             761,775       100.00     Australia  
POSCO Canada Ltd. (POSCAN)
  Coal trading     59,582       1,099,885             1,099,885       1,099,885       100.00     Canada   Posteel (100.00)
POSCO Asia Co.,Ltd. (POA)
  Steel trading     18,353       9,360,000       9,360,000             9,360,000       100.00     Hongkong  
VSC POSCO Steel Corporation (VPS)
  Steel manufacturing     11,352                               40.00     Vietnam   Posteel (5.00)
Posteel (15.00)(2)
DALIAN POSCO — CFM Coated Steel Co., Ltd. 
  Coated steel
manufacturing
    12,894                               55.00     China   POSCO-China
Holding Corp.
(10.00)(2)
POS-Tianjin Coil Center Co., Ltd. 
  Steel service center     7,880                               70.00     China   Posteel (60.00)(2)
POSMETAL Co., Ltd. 
  Steel service center     6,304       6,000             3,000       3,000       50.00     Japan   Posteel (50.00)
Shanghai Real Estate Development Co., Ltd. 
  Real estate rental     76,688                               100.00     China   POSCO E & C
(100.00)(2)
POSCO E & C
IBC Corporation
  Real estate rental     21,958                               60.00     Vietnam   (60.00)(2)
POSLILAMA Steel Structure Co., Ltd. 
  Steel structure
fabrication and sales
    (14,075 )                             70.00     Vietnam   POSCO E & C
(60.00),
Posteel
(10.00)(2)
Zhangjiagang Pohang Stainless Steel Co., Ltd. (ZPSS)
  Stainless steel
manufacturing
    481,471                               82.48     China   POSCO-China
Holding Corp.
(23.88)(2)
Guangdong Pohang Coated Steel Co., Ltd. 
  Coated steel
manufacturing
    18,377                               95.19     China   POSCO-China
Holding Corp.
                                                            (11.52)(2)
POSCO-Thailand Co., Ltd. 
  Steel service
center
    15,247       5,941,570       2,327,288       2,136,187       4,463,475       75.12     Thailand   Posteel (35.95)

F-8


Table of Contents

POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

                                                             
              Number of
                      Percentage of
        Percentage of
    Primary
        Outstanding
    Number of Shares     Ownership
        Ownership of
Subsidiaries
 
Business
  Net Assets     Shares     POSCO     Subsidiaries     Total     (%)     Location   Subsidiaries (%)
    (In millions of Korean Won)(1)
 
Zhangjiagang POSHA Steel Port Co., Ltd. (ZPSP)
  Depot service   W 12,391                               90.00     China   POSCO E & C
(25.00),
ZPSS (65.00)(2)
POSCO Investment Co., Ltd. 
  Finance     64,793       5,000,000       5,000,000             5,000,000       100.00     Hongkong  
Qingdao Pohang Stainless Steel Co., Ltd. 
  Stainless steel
manufacturing
    63,728                               80.00     China   POSCO-China
Holding Corp.
(10.00)(2)
POSCO (Suzhou) Automotive Processing Center Co., Ltd. 
  Steel service
center
    21,279                               100.00     China   POSCO-China
Holding Corp.
(10.00)(2)
                                                             
POSEC-Hawaii Inc. 
  Construction     15,186       24,400             24,400       24,400       100.00     U.S.A.   POSCO E & C
(100.00)
POS-Qingdao Coil Center Co., Ltd. 
  Steel service
center
    7,876                               100.00     China   Posteel (100.00)(2)
POS-ORE Pty. Ltd. 
  Iron ore mining
and trading
    27,994       17,500,001             17,500,001       17,500,001       100.00     Australia   POSA (100.00)
POSCO-China Holding Corp. 
  Investment     167,666                               100.00     China   —(2)
POSCO-JAPAN Co., Ltd. 
  Steel trading     49,481       90,438       90,438             90,438       100.00     Japan  
POSCO Engineering & Consulting Co., Ltd. (Zhangjiagang)
  Facilities
manufacturing
    5,104                               100.00     China   POSCO E & C
(100.00)(2)
POS-CD Pty. Ltd. 
  Coal trading     9,360       12,550,000             12,550,000       12,550,000       100.00     Australia   POSA (100.00)
POS-GC Pty. Ltd. 
  Coal trading     7,813       11,050,000             11,050,000       11,050,000       100.00     Australia   POSA (100.00)
POSCO — India Private Ltd. 
  Coal trading     47,608       225,000,000       224,999,999             224,999,999       100.00     India  
POS-India Steel Processing Centre Pvt. Ltd. 
  Steel service center     13,746       65,790,858       42,764,058             42,764,058       65.00     India  
POS-NPC
  Steel service center     (504 )     20,000             18,000       18,000       90.00     Japan   POSCO-JAPAN
(90.00)(3)
POSCO-Foshan Steel Processing Center Co.,Ltd. 
  Steel service center     13,325                               100.00     China   POA(40.00)
POSCO-China
(60.00)(2),(3)
POSCAN Elkview Coal Ltd. 
  Coal trading     28,646       304,016             304,016       304,016       100.00     Canada   POSCAN
(100.00)
POS-MPC S.A. de C.V. 
  Steel service center     13,308                               61.00     Mexico   POSAM
(61.00)(2),(3)
Zhangjigang Pohang Port Co., Ltd. 
  Raw material and
steel depot service
    9,743                               100.00     China   ZPSS(47.30)
ZPSP(27.70)
POSCO-China
(25.00)(2),(3)
POSCO-Vietnam Co., Ltd. 
  Cold-rolled steel
manufacturing
and sales
    34,512                               100.00     Vietnam   —(2),(3)
 
 
(1) Net assets of the Company’s overseas subsidiaries are translated at the exchange rate as of the balance sheet date.
 
(2) No shares have been issued in accordance with the local laws and regulations.
 
(3) These subsidiaries are newly included in the consolidation.

F-9


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
Equity-Method Investees
 
The following table sets forth certain information with regard to equity-method investees as of December 31, 2006:
 
                                                     
                                Percentage of
        Percentage of
    Primary
        Number of Shares     Ownership
        Ownership of
Investees
 
Business
  Net Assets     POSCO     Subsidiaries     Total     (%)     Location   Subsidiaries (%)
    (In millions of Korean Won)(1)
 
Domestic
                                                   
eNtoB Corporation
  E-business   W 20,936       560,000       180,000       740,000       23.13     Seoul   POSDATA and
others (5.63)
MIDAS Information Technology Co., Ltd. 
  Engineering     16,889             866,190       866,190       25.46     Seoul   POSCO E & C
(25.46)
Songdo New City Development Inc. 
  Real estate     (119,916 )                       29.90     Seoul   POSCO E&C
(29.90)3
SNNC Co., Ltd. 
  Fe-Cr manufacturing     38,402       3,822,000             3,822,000       49.00     Gwangyang   —(2)
Gale International Korea, Inc. 
  Real estate     7,527                         29.90     Seoul   POSCO E&C
(29.90)3
Foreign
                                                   
KOBRASCO
  Steel trading     74,422       2,010,719,185             2,010,719,185       50.00     Brazil   —(2)
Fujiura Butsuryu Center Co., Ltd. 
  Warehousing     2,782             600       600       30.00     Japan   POSCO-JAPAN
(30.00)
USS — POSCO Industries (UPI)
  Steel processing     121,016                         50.00     U.S.A.   POSAM
(50.00)(2),(3)
Poschrome (Proprietary) Limited
  Fe-Cr manufacturing     24,253       21,675             21,675       25.00     Republic of
South Africa
 
Guangdong Xingpu Steel Center Co., Ltd. 
  Steel processing     13,773                         21.00     China   Posteel (10.50)(3)
POS-Hyundai Steel Manufacturing India Private Ltd. 
  Steel processing     9,422       2,345,558       4,573,842       6,919,400       29.50     India   Posteel (19.50)
POSCO Bioventures LP. 
  Investment in
companies in the
bio-tech industry
    29,271                         100.00     U.S.A.   POSAM
(100.00)(3),(4)
POSVINA Co., Ltd. 
  Steel manufacturing     4,305                         50.00     Vietnam   —(2),(3)
POSMMIT Steel Centre SDN BHD (POSMMIT)
  Steel service center     13,064       4,200,000             4,200,000       30.00     Malaysia  
PT POSMI Steel Indonesia (POSMI)
  Steel service center     8,291       1,193       3,579       4,772       37.87     Indonesia   Posteel (28.40)(2)
CAML Resources Pty. Ltd. 
  Material Processing     55,332             3,239       3,239       33.34     Australia   POSA(33.34)(2)
Hubei Huaerliang POSCO Silicon Science & Technology Co., Ltd. 
  Material Processing     10,574                         30.00     China   POSCO-China
(30.00)(3)
 
 
(1) Net assets of the Company’s overseas subsidiaries are translated at the exchange rate as of the balance sheet date.
 
(2) The Company owns over 30% equity interest in KOBRASCO, UPI, POSMI, POSVINA Co., Ltd and CAML Resources Pty. Ltd. As the Company is not the major shareholder, they were excluded from consolidation.
 
(3) No shares have been issued in accordance with the local laws and regulations.
 
(4) The Company owns 100% equity interest in POSCO Bioventures LP. However, due to an agreement with POSCO Bioventures LP., which prohibits the Company from engaging in management activities, POSCO Bioventures LP. was excluded from consolidation.


F-10


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
Subsidiaries Excluded from the Consolidated Financial Statements
 
                                                     
                                          Percentage of
              Number of Shares     Percentage of
        Ownership of
Investees
 
Primary Business
  Net Assets     POSCO     Subsidiaries     Total     Ownership (%)     Location   Subsidiaries (%)
    (In millions of Korean Won)(1)
 
Domestic
                                                   
Metapolis Co., Ltd. 
  Construction   W 38,477             400,500       400,500       40.05     Hwasung   POSCO E & C
(40.05)(2)
Aroma Soft Corp. 
  Software consulting,
reseach, and
development
    6,497             1,004,080       1,004,080       22.35     Seoul   POSTECH Venture
Capital Corp.
(22.35)(2)
Applied Science Corp. 
  Semiconductor
componants
manufacturing
    665             33,870       33,870       29.97     Seoul   POSTECH Venture
Capital Corp.
(29.97)(2)
POSBRO Co., Ltd. 
  WiBro Multi-Player
terminals R&D and
sales
    395             1,224,000       1,224,000       51.00     Gunpo   POSDATA
(51.00)(4)
PHP Co., Ltd. 
  Rental residence
construction and
management
    300             400,000       400,000       100.00     Incheon   POSCO E & C
(100.00)(4)
Foreign
                                                   
PT. POSNESIA Stainless Steel Industry
  STS/CR     11,458       29,610,000             29,610,000       70.00     Indonesia   —(3)
Myanmar- POSCO Steel Co., Ltd. 
  Steel manufacturing
and sales
    3,506       13,440             13,440       70.00     Myanmar   —(5)
Dalian Poscon Dongbang Automatic Co., Ltd. 
  Facilities
manufacturing
    1,437                         70.00     China   POSCON (70.00)(2)
Qingdao Posco Steel Processing Co., Ltd. 
  Steel service center     1,321                         100.00     China   POA (100.00)(2)
VECTUS Ltd. 
  Transportation
(transportation
system, PRT)
    4,219             3,250,000       3,250,000       100.00     U.K.   POSTEEL (76.93)
POSCON (7.69)
POSDATA (7.69)(2)
POSCO Machinery
& Engineering (7.69)
Yingkou Putie Furnace Refractories Co., Ltd. 
  Manufacturing     132                         25.00     China   POSREC (25.00)(2)
Liaoning Rongyuan Posco Refractories Co., Ltd. 
  Manufacturing     4,030                         35.00     China   POSREC (35.00)(2)
POSCO E&C (Beijing) Co., Ltd. 
  Construdtion and
engineering
    6,381                         100.00     China   POSCO E & C
(100.00)(2)
Zhangjiagang Pohang Refractories Co., Ltd. 
  Manufacturing     1,166                         50.00     China   POSREC (50.00)(2)
POSCO Engineering & Construction Nigeria, Ltd. 
  Construdtion and
engineering
    1,929                         100.00     Nigeria   POSCO E & C
(100.00)(4)
Nickel Mining Company SAS
  Fe-Cr manufacturing     57       490             490       49.00     New Caledonia   —(4)
POSDATA-China
  Computer service     193                         100.00     China   POSDATA
(100.00)(4)
POS-YPC Co., Ltd
  Steel manufacturing,
warehousing, and
shipping
    (169 )           34,000       34,000       69.40     Japan   POSCO-Japan
(69.4)(4)
POSK Steel (Pinghu) Processing Center Co., Ltd. 
  Steel manufacturing
and sales
    4,653                         20.00     China   —(4)
 
 
(1) The net assets of the Company’s overseas subsidiaries are translated at the exchange rate as of the balance sheet date.
 
(2) Total assets were less than W7,000 million as of December 31, 2006.
 
(3) The investee is in the process of liquidation as of December 31, 2006.
 
(4) The capital investment was less than W7,000 million as of December 31, 2006.
 
(5) The investee has shut down operations as of December 31, 2006.


F-11


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
Change in Scope of Consolidation
 
The consolidated financial statements now include the accounts of POS-NPC Co., Ltd. and POSCO-Foshen Steel Processing Center Co., Ltd. as their total assets exceeded W7,000 million as of December 31, 2005. POS-MPC S.A. de C.V., Zhangjigang Pohang Port Co., Ltd., and POSCO-Vietnam Co., Ltd. are included in the consolidated financial statements as the Company made an investment to establish these entities during 2006 and has more than 50% ownership interest.. POSCO also established POSTEC 2006 Energy Fund during 2006 and holds less than 50% ownership interest. POSCO consolidates POSTEC 2006 Energy Fund because it has control over the entity by having the ability to appoint majority of the board of directors.
 
As a result, the total assets, sales, shareholders’ equity and net income of the consolidated financial statements as of December 31, 2006, increased by W1,204,151 million, W613,292 million, W705,627 million, and W217,190 million, respectively.
 
Following are the subsidiaries which were consolidated in the prior year, but excluded from consolidation as of December 31, 2006.
 
         
Subsidiaries
 
Location
 
Reason
 
Myanmar- POSCO Steel Co., Ltd. 
  Myanmmar   Suspension of business
Korea Energy Investment, Ltd. 
  Korea   Disolved after being merged by
POSCO Power Corp.
SEO MUEUN Development Inc. 
  Korea   Cancelation of management agreement
 
2.   Summary of Significant Accounting Policies
 
The significant accounting policies followed by the Company in the preparation of its consolidated financial statements for December 31, 2006, are summarized below:
 
Basis of Consolidated Financial Statements Presentation
 
POSCO and its domestic subsidiaries maintain their accounting records in Korean won and prepare statutory consolidated financial statements in the Korean language (Hangul) in conformity with accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. The accompanying consolidated financial statements have been condensed, restructured and translated into English from the Korean language consolidated financial statements. Certain information attached to the Korean language consolidated financial statements, but not required for a fair presentation of POSCO and its domestic subsidiaries’ financial position, results of operations or cash flows, is not presented in the accompanying consolidated financial statements.
 
Accounting Estimates
 
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect amounts reported therein. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.
 
Application of the Statements of Korean Financial Accounting Standards
 
The Korean Accounting Standards Board has published a series of Statements of Korean Financial Accounting Standards (SKFAS), which will gradually replace the existing financial accounting standards established by the Korean Financial Supervisory Commission. As SKFAS Nos. 15 through 17 became applicable to the Company on January 1, 2005, the Company adopted these standards in its consolidated financial statements covering periods


F-12


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

beginning January 1, 2005. In addition, as SKFAS Nos. 18 through 20 became effective for the Company on January 1, 2006, the Company adopted these standards in its consolidated financial statements for the year ended December 31, 2006.
 
In addition, the Company adopted early the Korea Accounting Institute’s Accounting Implementation Guide 06-2 and changed its method accounting for income taxes on temporary differences in relation to investments in subsidiaries and equity method investees to comply with the new requirement. The effect was a decrease in net income for 2006 by W16,311 million. The consolidated financial statements as of and for the year ended December 31, 2005, have been retroactively restated to reflect the accounting changes pursuant to SKFAS No. 1.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of POSCO and its controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
 
The Company records differences between the investment account and corresponding capital account of subsidiaries as a goodwill or a negative goodwill, and such differences are amortized over the estimated useful lives using the straight-line method. However, differences which occur from additional investments acquired in consolidated subsidiaries are reported in a separate component of shareholders’ equity, and are not included in the determination of the results of operations. The Company records the equity of the consolidated subsidiaries, which is not included in the equity of the controlling company, as a minority interest in consolidated subsidiaries. In addition, if losses of the consolidated subsidiaries, included in minority interest, are in excess of minority interest, the deficit in excess of minority interest is charged to the equity of the controlling company. Until losses charged to the equity of the controlling company are recovered, all gains on related consolidated subsidiaries are recognized in the equity of the controlling company.
 
Cash and Cash Equivalents, and Financial Instruments
 
Cash and cash equivalents include cash on hand, cash in banks, and highly liquid temporary cash investments with original maturities of three months or less. Investments which are readily convertible into cash within four months or more of purchase are classified in the balance sheet as financial instruments. The carrying amount of short-term financial instruments approximates fair value.
 
Revenue Recognition
 
Revenue from the sale of products is recognized when title and the significant risks and rewards of ownership have been transferred to the buyer, which is generally upon physical delivery. The Company deems delivery to have occurred upon shipment or upon delivery, depending upon shipping terms of the transaction. No revenue is recognized if there are significant uncertainties regarding collectibility of the amount due, associated costs or the possible return of goods.
 
Revenue is measured at the fair value of the consideration received or receivable and represents amounts due for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes.
 
Revenue from construction and other services are generally recognized using the percentage-of-completion method.
 
Allowance for Doubtful Accounts
 
The Company provides an allowance for doubtful accounts based on management’s estimate of the collectibility of individual accounts and historical collection experience.


F-13


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Inventories
 
The quantity of inventory on hand is verified using the perpetual inventory system, which continuously updates the quantity of the inventory during the period, and by physical count as of the balance sheet date. Inventories are stated at the lower of cost or market, with cost being determined using the moving-average method, except for materials-in-transit, which are stated at actual cost using the specific identification method. If the net realizable value of inventories (current replacement cost for raw materials) is lower than its cost, the carrying amount is reduced to the net realizable value and the difference between the cost and revalued amount is charged to current operations. If, however, the circumstances which caused the valuation loss ceased to exist, causing the market value to rise above the carrying amount, the valuation loss is reversed limited to the original carrying amount before valuation. The said reversal is a deduction from cost of sales.
 
For certain other subsidiaries, inventories are stated at the lower of cost or market, generally with cost being determined using the gross average method, moving-average method or first-in, first-out (FIFO) method. Individual accounting policies on inventories of POSCO and each subsidiary are enumerated on pages 32 and 33.
 
Investments in Securities
 
The Company accounts for equity and debt securities under the provision of SKFAS No. 8, Investments in Securities. This statement requires investments in equity and debt securities to be classified into three categories: trading, available-for-sale and held-to-maturity.
 
Securities that are bought and held principally for near-term sale to generate profits from short-term price differences are classified as trading. Trading generally involves active and frequent buying and selling. Debt securities that have fixed or determinable payments and fixed maturity shall be classified as held-to-maturity only if the reporting entity has both the positive intent and ability to hold those securities to maturity. Securities that are not classified as either held-to-maturity securities or trading securities are classified into available-for-sale.
 
Securities are initially carried at cost, including incidental expenses, with cost being determined using the gross average method or moving-average method. Debt securities, which the Company has the intent and ability to hold to maturity, are generally carried at cost, adjusted for the amortization of discounts or premiums. Premiums and discounts on debt securities are amortized over the term of the debt using the effective interest rate method. Trading and available-for-sale securities are carried at fair value, except for non-marketable securities classified as available-for-sale securities, which are carried at cost. Non-marketable debt securities are carried at a value using the present value of future cash flows, discounted at a reasonable interest rate determined considering the credit ratings by the independent credit rating agencies.
 
Unrealized valuation gains or losses on trading securities are charged to current operations, and those resulting from available-for-sale securities are recorded as a capital adjustment, the accumulated amount of which shall be charged to current operations when the related securities are sold, or when an impairment loss on the securities is recognized. Impairment losses are recognized in the statement of income when the recoverable amounts are less than the acquisition costs of securities or adjusted costs of debt securities for the amortization of discounts or premiums.
 
Investments in Affiliates
 
Investments in equity securities of companies, over which the Company exercises a significant control or influence, are recorded using the equity method of accounting. Under the equity method, the Company records changes in its proportionate ownership in the book value of the investee in current operations, as capital adjustment or as adjustments to retained earnings, depending on the nature of the underlying change in the book value of the investee. The Company discontinues the equity method of accounting for investments in equity method investees when the Company’s share in the accumulated losses equals the cost of the investments, and until the subsequent cumulative changes in its proportionate net income of the investees equals its cumulative proportionate net losses


F-14


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

not recognized during the periods when the equity method was suspended. If the book value of the investee has changed due to the capital increase of the investee, net losses not recognized in the prior periods are reflected in equity method investment securities as an adjustment to retained earnings.
 
Differences between the initial purchase price and the Company’s initial proportionate ownership in the net book value of the investee are amortized over the period, not to exceed 20 years, using the straight-line method. However, in case of the investee which is also a subsidiary of the Company, if the additional investment results in the change in the ownership percentage, the difference between the change in the proportionate ownership in the book value of the investee and additional investment is recorded as capital adjustment.
 
The Company’s proportionate unrealized profit arising from sales by the Company to equity method investee, sales by the equity method investees to the Company or sales between equity method investees are eliminated to the extent of the Controlling Company’s ownership. Only unrealized profit arising from sales by the Company to subsidiaries is fully eliminated.
 
Foreign currency financial statements of equity method investees are translated into Korean won using the exchange rates in effect as of the balance sheet date for assets and liabilities (the exchange rates on the acquisition date for capital accounts), and annual average exchange rates for income and expenses. Any resulting translation gain or loss is included in the capital adjustments account, a component of shareholders’ equity.
 
The equity method of accounting is applied based on the most recent available unreviewed financial statements of subsidiaries and affiliates. The Company believes that if the financial statements were reviewed, differences between unreviewed and reviewed financial statements would not have a material effect on the consolidated financial statements of the Company.
 
Property, Plant and Equipment
 
Property, plant and equipment are stated at cost, net of accumulated depreciation, except for certain assets subject to upward revaluations in accordance with the Asset Revaluation Law. Individual depreciation methods for property, plant and equipment of POSCO and each subsidiary are enumerated on pages 32 and 33. Depreciation is computed using the straight-line method or declining-balance method over the estimated useful lives of the assets, as follows:
 
         
    Estimated
 
    Useful Lives  
 
Buildings and structures
    5-60 years  
Machinery and equipment
    3-25 years  
Tools
    4-20 years  
Vehicles
    3-10 years  
Furniture and fixtures
    3-20 years  
 
The acquisition cost of an asset consists of its purchase price and any directly attributable cost of bringing the asset to working condition for its intended use. When the estimated cost of dismantling and removing the asset and restoring the site, after the termination of the asset’s useful life, meets the criteria for the recognition of provisions, the present value of the estimated expenditure shall be included in the cost of the asset.
 
Subsequent expenditure on property, plant and equipment shall be capitalized only when it increases future economic benefits beyond its most recently assessed standard of performance; all other subsequent expenditures shall be recognized as an expense in the period in which they are incurred.


F-15


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Intangible Assets
 
Intangible assets are stated at acquisition cost, including incidental expenses, net of accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives as described below.
 
         
    Estimated
 
    Useful Lives  
 
Goodwill
    5 years  
Negative goodwill
    5-10 years  
Intellectual property rights
    5-10 years  
Port facilities usage rights
    1-75 years (2)
Land usage rights
    20-50 years (2)
Deferred development expenses
    (1)
Long term power capacity rights
    contract term  
Other intangible assets
    2-25 years  
 
 
(1) The costs incurred in relation to the development of new products and new technologies, including the development cost of internally used software and related costs, are recognized and recorded as development costs only if it is probable that future economic benefits that are attributable to the asset will flow into the entity and the cost of the asset can be measured reliably. The useful life of development costs is based on its estimated useful life, not to exceed 20 years from the date when the asset is available for use.
 
(2) Port facilities usage rights and land usage rights represent the rights to use certain port facilities and land. Estimated useful lives of those rights whose estimated useful lives of 20 years or more are determined based on the term of contractual rights.
 
As of December 31, 2006, port facilities usage rights are related to the quay and inventory yard donated by POSCO in April 1987 to the local bureaus of the Maritime Affairs and Fisheries in Kwangyang, Pohang, Pyoungtaek and Masan. In connection with the acquisition of POSCO Power Corp., the Company recognize intangible asset relating to the electricity power supply agreement, entered into with Korea Electric Power Corporation. The fair value of the agreement is recorded as long-term electricity supply contract rights as of the balance sheet date.
 
Discounts on Debentures
 
Discounts on debentures are amortized over the term of the debenture using the effective interest rate method. The discount is reported on the balance sheet as a direct deduction from the face amount of the debenture. Amortization of the discount is treated as an interest expense.
 
Government Grants
 
POSCO and domestic subsidiaries accounted for the government grants intended to be used for the acquisition of certain assets as deduction from the cost of the acquired assets. Before the acquisition of the assets specified by the grant, the amounts are recognized as a deduction from the account under which the asset to be acquired is to be recorded, or from the other assets acquired as a temporary investment of the grant received.
 
The government grants, contributed to compensate for specific expenses, are offset against the related expenses. Other government grants, for which the use or purpose is not specified, are recorded as gains from assets contributed, and are recognized in current operations.


F-16


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Valuation of Assets and Liabilities at Present Value
 
POSCO and domestic subsidiaries value long-term loans receivable and long-term trade accounts and notes receivable at their present value as discounted at an appropriate discount rate. Discounts are amortized using the effective interest rate method and recognized as an interest income over the life of the related assets.
 
Restructuring of Receivables
 
The Company recognizes losses on doubtful receivables from financially troubled companies being restructured under work-out plans or other similar rescheduling agreements if the total discounted future cash receipts of such receivables as specified under the modified terms of the work-out plans or other similar rescheduling agreements are less than the nominal amount of the receivables.
 
Accrued Severance Benefits
 
Employees and directors with at least one year of service are entitled to receive a lump-sum payment upon termination of their employment, based on their length of service and rate of pay at the time of termination. Accrued severance benefits represent the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the balance sheet date. In addition, in accordance with the applicable laws and regulations, POSAM and 33 other overseas subsidiaries recorded the amount, which would be payable to employees at the time of termination, as accrued severance benefits.
 
POSCO and domestic subsidiaries have partially funded the accrued severance benefits through group severance insurance deposits with Samsung Life Insurance Company and others. The amounts funded under these insurance deposits are classified as a deduction from the accrued severance benefits liability. Subsequent accruals are to be funded at the discretion of the companies.
 
The Company made deposits to the National Pension Fund in accordance with the National Pension Act of the Republic of Korea. The use of the deposit is restricted to the payment of severance benefits. Accordingly, accrued severance benefits in the accompanying balance sheet are presented net of this deposit.
 
Derivative Instruments
 
The Company enters into derivative transactions to hedge against financial risks. Derivatives are required to be recorded on the balance sheets at fair value and classified into: cash flow hedges, fair market value hedges and transactions entered into for nontrading purposes that do not qualify for hedge accounting treatment or otherwise hedge accounting treatment is not applied. When derivatives qualify for cash flow hedges, unrealized holding gains and losses of the derivatives are recorded as capital adjustments in the balance sheet and recognized in the statement of earnings when the hedged item affects earnings. When derivatives qualify for fair market value hedge, unrealized holding gains and losses of the derivatives as well as the changes in the fair value of the hedged items are recorded in the statement of income. If the contract expires, the gains and losses from fair value hedge transactions are charged to earnings and the gains and losses from cash flow hedge transaction are offset against the gains and losses from hedged transactions.
 
Lease Transactions
 
The Company accounts for lease transactions as either operating leases or capital leases, depending on the terms of the underlying lease agreement. Machinery and equipment, acquired under capital lease agreements, are recorded at cost as property, plant and equipment, and depreciated using the straight-line method over their estimated useful lives. In addition, the aggregate lease payments are recorded as obligations under capital leases, net of accrued interest. Accrued interest is amortized over the lease period using the effective interest rate method.


F-17


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Machinery and equipment acquired under operating lease agreements are not included in property, plant and equipment. The related lease rentals are charged to expense when incurred.
 
Foreign Currency Translation
 
Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the exchange rates in effect at the balance sheet date, and resulting translation gains and losses are recognized in current operations.
 
Translation of Foreign Operations
 
Foreign currency assets and liabilities of the Company’s overseas business branches and offices are translated at the exchange rate as of the balance sheet date, and income and expenses are translated at the weighted-average exchange rate of the reporting period. Gains or losses on translation are offsetted, and the net amount is recognized as an overseas operations translation debit or credit in the capital adjustments account. Overseas operations translation credit or debit is treated as an extraordinary gain or loss upon closing the foreign branch or office.
 
Reclassification of Prior Year Consolidated Financial Statement Presentation
 
Certain amounts in consolidated financial statements as of and for the year ended December 31, 2005, have been reclassified to conform to the December 31, 2006 consolidated financial statement presentation. These reclassifications had no effect on previously reported net income or shareholders’ equity.
 
Income Taxes
 
The company estimates tax expenses as the sum of current income taxes imposed and any accrued taxes which is adjusted for changes in deferred taxes. The Company recognizes deferred income taxes for anticipated future tax consequences resulting from temporary differences between amounts reported for financial reporting and income tax purposes. Deferred income tax assets and liabilities are computed on such temporary differences by applying enacted statutory tax rates applicable to the years when such differences are expected to reverse. Deferred tax assets are recognized when it is more likely that such deferred tax assets will be realized. Income tax effect of temporary differences is reflected as income tax expenses in the period incurred, and income tax effect of temporary differences in relation to item in shareholders’ equity is directly reflected in the related shareholders’ equity account. The total income tax provision includes the current income tax expense under applicable tax regulations and the change in the balance of deferred income tax assets and liabilities during the year.
 
Deferred tax assets and liabilities in the balance sheet are classified into current and non-current portion, and within each classification, deferred tax assets and deferred tax liabilities are offset and recorded.
 
Impairment of Assets
 
The Company assesses the potential impairment of assets which are not recorded at fair value when there is evidence that events or changes in circumstances have made the recovery of an asset’s carrying value to be unlikely. The carrying value of the assets is reduced to the estimated realizable value, and an impairment loss is recorded as a reduction in the carrying value of the related asset and charged to current operations. However, the recovery of the impaired assets is recorded in current operations up to the cost of the asset, net of accumulated depreciation or amortization, if any, before impairment, when the estimated value of the assets exceeds the carrying value after impairment.
 
Capitalization of Financing Expenses
 
Financing expense on borrowings associated with certain qualifying assets during the construction period that meet certain criteria for capitalization can be either capitalized or expensed as incurred. The Company chooses to


F-18


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

expense as a financing expense the cost of manufacturing, acquisition, and construction of property, plant, and equipment that require more than one year to complete from the initial date to the date of the estimated completion of the manufacturing, acquisition and construction.
 
Contingent Liabilities
 
When there is a probability that an outflow of economic benefits will occur due to a present obligation resulting from a past event, and whose amount is reasonably estimable, a corresponding amount of provision is recognized in the financial statements. However, when such outflow or inflow is dependent upon a future event, is not certain to occur, or cannot be reliably estimated, a disclosure regarding the contingent liability in case of an outflow, or the contingent asset in case of an inflow, is made in the notes to the consolidated financial statements.
 
Sale of Receivables
 
The Company sells or discounts certain amounts or notes receivable to financial institutions and accounts for these transactions as sale of the receivables if the rights and obligations relating to the receivables sold are substantially transferred to the buyers. The losses from the sale of the receivables are charged to operations as incurred.
 
Treasury Stock
 
In accordance with the cost method, the acquisition cost of the Company’s treasury stocks are recorded as an adjustment to shareholders’ equity. Gain on disposal of treasury stock is recorded as other capital surplus and loss on disposal of treasury stock is first deducted from gain on disposal of treasury stock recorded in other capital surplus, recording the balance as capital adjustments and then offset against retained earnings in accordance with the order of disposition of deficit.
 
Stock Appreciation Rights
 
Compensation expense for stock appreciation rights, either partially or fully vested, is recorded based on the differences between the base unit price at the date of grant and the moving weighted average of quoted market price at the end of the period proportionally recognized over the vesting period and adjusted for previous recognized expense.
 
Basic Earnings Per Share and Basic Ordinary Income Per Share
 
Basic earnings per share is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the year. Basic ordinary income per share is computed by dividing ordinary income allocated to common stock as adjusted by extraordinary gains or losses and net of related income taxes, by the weighted average number of common shares outstanding during the year.
 
United States Dollar Amounts
 
The Company operates primarily in Korean won and its accounting records are maintained in Korean won. The U.S. dollars amounts, provided herein, represent supplementary information, solely for the convenience of the reader. All won amounts are expressed in U.S. dollars at US$1:W930.00, the US Federal Reserve Bank of New York noon buying exchange rate in effect on December 29, 2006. The U.S. dollar amounts are unaudited and are not presented in accordance with accounting principles generally accepted in either the Republic of Korea or the United States, and should not be construed as a representation that the won amounts shown could be readily converted, realized or settled in U.S. dollars at this or any other rate.


F-19


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Cost determination methods for Inventories and Depreciation methods for Property, Plant and Equipment of POSCO and its Controlled Subsidiaries are as follow:
 
         
        Depreciation of Property,
Company
 
Inventories(1)
  Plant and Equipment
 
POSCO
  Moving-average method   Straight-line method
POSCO E & C
  ²   ²
Posteel Co., Ltd. 
  ²   ²
POSCON Co., Ltd. 
  ²   Straight-line method,
Declining-balance method
Pohang Coated Steel Co., Ltd. 
  Gross average method   Straight-line method
POSCO Machinery & Engineering Co., Ltd. 
  Moving-average method   ²
POSDATA Co., Ltd. 
  ²   ²
POSCO Research Institute
  N/A   ²
Seung Kwang Co., Ltd. 
  Gross average method   Straight-line method,
Declining-balance method
POS-AC Co., Ltd. 
  N/A   ²
POSCO Specialty Steel Co., Ltd. 
  Moving-average method   Straight-line method
POSCO Machinery Co., Ltd. 
  ²   ²
POSTECH Venture Capital Co., Ltd. 
  N/A   Declining-balance method
POSCO Refractories & Environment Company Ltd. (POSREC)
  Moving-average method   Straight-line method,
Declining-balance method
POSCO Terminal Co., Ltd. 
  N/A   ²
Samjung Packing & Aluminum Co., Ltd. 
  ²   ²
Posmate Co., Ltd. 
  ²   Declining-balance method
POSCO Power Co., Ltd. 
  Moving-average method   Straight-line method
Postech 2006 Energy Fund
  N/A   N/A
POSCO America Corp. (POSAM)
  Moving-average method   ²
POSCO Australia Pty. Ltd. (POSA)
  Gross average method   ²
POSCO Canada Ltd. (POSCAN)
  ²   Straight-line method,
Unit of production method
POSCO Asia Co., Ltd. (POA)
  N/A   Declining-balance method
VSC POSCO Steel Corporation (VPS)
  Moving-average method   Straight-line method
DALIAN POSCO — CFM Coated Steel Co., Ltd. 
  ²   ²
POS-Tianjin Coil Center Co., Ltd. 
  ²   ²
POSMETAL Co., Ltd. 
  ²   ²
Shanghai Real Estate Development Co., Ltd. 
  N/A   ²
IBC Corporation
  Specific identification method   ²
POSLILAMA Steel Structure Co., Ltd. 
  Moving-average method   ²
Zhangjiagang Pohang Stainless Steel Co., Ltd. 
  ²   ²
Guangdong Pohang Coated Steel Co., Ltd. 
  ²   ²
POS-THAI Steel Service Center Co., Ltd. 
  ²   ²
Qingdao Pohang Stainless Steel Co., Ltd. 
  ²   ²
Zhangjiagang POSHA Steel Port Co., Ltd. 
  ²   ²
POSCO Investment Co., Ltd. 
  N/A   ²
POSCO (SUZHOU) Automotive Processing Center Co., Ltd. 
  Moving-average method   ²
POS-Qingdao Coil Center Co., Ltd. 
  Moving-average method   Straight-line method
POSCO-China Holding Corp. 
  N/A   ²
POS-ORE Pty. Ltd. 
  ²   ²
POSCO-Japan Co., Ltd. 
  Gross average method   ²
POSEC-Hawaii Inc. 
  N/A   ²
POSCO E&C (Zhangjiagang) Engineering & Consulting Co., Ltd. 
  ²   ²
POS-GC Pty. Ltd. 
  Gross average method   ²
POS-CD Pty. Ltd. 
  ²   ²
POSCO-India Private Ltd. 
  N/A   ²
POS-India Steel Processing Centre Pvt. Ltd. 
  ²   ²
POS-NPC Co., Ltd. 
  Moving-average method   ²
POSCO-Foshan Steel Processing Center Co., Ltd. 
  Specific identification method   ²
POSCAN Elkview Coal Ltd. 
  N/A   N/A
POS-MPC S.A. de C.V. 
  ²   Straight-line method
Zhangjigang Pohang Port Co., Ltd. 
  ²   ²
POSCO-Vietnam Co., Ltd. 
  ²   ²
 
 
(1) Specific identification method is used for materials-in-transit.


F-20


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
3.   Cash and Cash Equivalents, and Financial Instruments
 
Cash and cash equivalents, and short-term and long-term financial instruments as of December 31, 2006 and 2005, consist of the following:
 
                         
    Annual Interest
             
    Rate (%)     2006     2005  
    (In millions of Korean Won)  
 
Cash and cash equivalents
                       
Cash on hand and bank deposits
    0.00 ~ 1.00     W 19,925     W 13,498  
Checking accounts
          4,123       5,801  
Corporate bank deposits
    0.00 ~ 4.00       18,541       10,470  
Time deposits in foreign currency and others
    0.00 ~ 5.29       567,333       348,844  
Maintained by overseas affiliates
    0.00 ~ 6.00       326,498       275,258  
                         
              936,420       653,871  
Less : Government grants
            (132 )     (507 )
                         
            W 936,288     W 653,364  
                         
Short-term financial instruments
                       
Time deposits
    3.00 ~ 5.00     W 473,710     W 86,750  
Installment accounts
    4.00 ~ 5.00       1,534       1,169  
Specified money in trust
          20,447       23,753  
Certificates of deposit
    3.00 ~ 5.14       199,000       129,500  
Commercial papers
    4.00 ~ 5.00       20,220       34,805  
Others
    3.00 ~ 5.05       127,591       475,431  
Maintained by overseas affiliates
    3.00 ~ 5.00       24,808       8,963  
                         
            W 867,310     W 760,371  
                         
Long-term financial instruments
                       
Installment accounts
    4.00-5.00     W 11,212     W 12,041  
Guarantee deposits for opening accounts
          116       104  
Others
    0.00-4.00       1,011       7,361  
                         
            W 12,339     W 19,506  
                         
 
As of December 31, 2006, the Company’s financial assets amounting to W18,138 million (2005: W17,037 million) are pledged as collaterals and accordingly, withdrawal of such financial assets is restricted. The financial assets pledged as collaterals include short-term financial instruments and long-term financial instruments amounting to W5,565 million (2005: W9,172 million) and W8,013 million (2005: W2,921 million), respectively, in relation to performance guarantee deposits, short-term borrowings and long-term debts, and others; short-term financial instruments amounting to W4,444 million (2005: W4,840 million) in relation to government-appropriated projects; and long-term financial instruments amounting to W116 million (2005: W104 million) in relation to maintaining deposits for opening checking accounts (Note 13).


F-21


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

4.   Trading Securities
 
Trading securities as of December 31, 2006 and 2005 are as follows:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Beneficiary certificates
  W 1,985,888     W 2,161,453  
Corporate bond
    14,118        
Money market fund
    641       449,049  
                 
    W 2,000,647     W 2,610,502  
                 
 
5.   Accounts and Notes Receivable, and Others
 
Accounts and notes receivable, and their allowance for doubtful accounts and present value discounts as of December 31, 2006 and 2005, are as follows:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Trade accounts and notes receivable
  W 3,723,033     W 3,188,928  
Less: Allowance for doubtful accounts
    (231,215 )     (144,060 )
Present value discount
    (159 )     (148 )
                 
    W 3,491,659     W 3,044,720  
                 
Other accounts and notes receivable
  W 285,919     W 312,218  
Less: Allowance for doubtful accounts
    (38,573 )     (70,556 )
Present value discount
    (542 )     (75 )
                 
    W 246,804     W 241,587  
                 
Long-term loans receivable
  W 62,814     W 42,332  
Less: Allowance for doubtful accounts
    (469 )     (263 )
Present value discount
    (50 )     (29 )
                 
    W 62,295     W 42,040  
                 
Long-term trade accounts and notes receivable
  W 57,567     W 55,771  
Less: Allowance for doubtful accounts
    (9,901 )     (12,134 )
Present value discount
    (3,318 )     (2,247 )
                 
    W 44,348     W 41,390  
                 


F-22


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Accounts stated at present value under long-term deferred payment and others included as part of accounts and notes receivable, and others are as follows:
 
                                 
          Present Value
    Book
    Maturity
  Discount
    Face Value     Discount     Value     Date   Rate (%)
    (In millions of Korean Won)
 
Other accounts receivable
                               
Tawryu Construction Co., Ltd. 
  W 19,418     W 542     W 18,876     2007   5.00
                                 
Long-term loans receivable
                               
Oh Sehwan and others
  W 305     W 50     W 255     2017   7.50
                                 
Short-term and long-term trade accounts receivable
                               
BNG Steel Co., Ltd.(1)
  W 37,218     W 5,687     W 31,531     2008 ~2009   8.60
Others
    31,441       3,477       27,964     2011 ~2014   3.00 ~7.50
                                 
    W 68,659     W 9,164     W 59,495          
                                 
Other long-term assets
                               
Softpartk Co., Ltd. 
  W 198     W 43     W 155     2009   6.50
Others
    254       69       185     2008-2018   6.50-7.50
                                 
    W 452     W 112     W 340          
                                 
 
 
(1) The company recognizes allowance for bad debts on present value discounts incurred from restructured receivables under work-out plans.
 
The Company computed discounts on account receivable using the Company’s weighted-average borrowing rate incurred as of the date nearest to the Company’s year end.
 
Valuation and qualifying accounts for allowance for doubtful accounts for the years ended December 31, 2006, 2005 and 2004 are as follows:
 
                                         
          Additions              
    Balance at
    Charged to
    Change in
          Balance at
 
    Beginning of
    Costs and
    Scope of
          the End of
 
Description
  Period     Expenses     Consolidation     Deductions(1)     Period  
    (In millions of Korean Won)  
 
Year ended December 31, 2006:
                                       
Reserves deducted in the balance sheet from the assets to which the apply:
                                       
Allowance for doubtful accounts
  W 263,111     W 173,931     W     W 69,805     W 367,237  
Year ended December 31, 2005:
                                       
Reserves deducted in the balance sheet from the assets to which the apply:
                                       
Allowance for doubtful accounts
    158,944       115,865       11       11,709       263,111  
Year ended December 31, 2004:
                                       
Reserves deducted in the balance sheet from the assets to which the apply:
                                       
Allowance for doubtful accounts
    325,187       (56,961 )           109,282       158,944  
 
 
(1) Deduction for allowance for doubtful accounts includes amount written off as uncollectible and others.


F-23


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
6.   Inventories
 
Inventories as of December 31, 2006 and 2005, consist of the following:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Finished goods, net
  W 844,790     W 724,930  
By-products
    30,795       3,326  
Semi-finished goods, net
    800,754       790,251  
Raw materials, net
    1,113,870       1,103,373  
Fuel and materials
    395,331       296,444  
Materials-in-transit
    716,271       645,441  
Others, net
    116,394       228,829  
                 
    W 4,018,205     W 3,792,594  
                 
 
7.   Investment Securities
 
Long-term portion of investment securities as of December 31, 2006 and 2005, consist of the following:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Available-for-sale securities
  W 2,848,226     W 2,090,079  
Held-to-maturity securities
    110,326       241,474  
Equity-method investments
    206,503       484,188  
                 
    W 3,165,055     W 2,815,741  
                 
 
Available-For-Sale Securities
 
Available for sale securities as of December 31, 2006 and 2005 consist of the following:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Current portion of available-for-sale securities
               
Investments in bonds
  W 13,375     W 90,889  
                 
Available-for-sale securities
               
Marketable equity securities
    2,337,984       1,647,770  
Non-marketable equity securities
    459,188       384,466  
Investments in bonds
    35,581       41,292  
Equity investments
    15,473       16,551  
                 
      2,848,226       2,090,079  
                 
    W 2,861,601     W 2,180,968  
                 


F-24


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Investments in marketable equity securities as of December 31, 2006 and 2005, are as follows:
 
                                         
    2006     2005  
    Number of
    Percentage of
    Acquisition
    Book
    Book
 
    Shares     Ownership (%)     Cost     Value(1)     Value  
    (In millions of Korean Won)  
 
Hanil Iron & Steel Co., Ltd. 
    206,798       10.14     W 2,413     W 4,435     W 3,846  
HI Steel Co., Ltd. 
    135,357       9.95       1,609       2,166       2,166  
Munbae Steel Co., Ltd. 
    1,849,380       9.02       3,588       2,395       2,904  
Hana Bank
    4,663,776       2.26       29,998       228,058       213,333  
SK Telecom Co., Ltd.(2)
    4,195,552       5.17       1,187,162       931,735       874,827  
Dong Yang Steel Pipe Co., Ltd. 
    1,564,250       2.45       3,911       1,025       1,095  
Nippon Steel Corporation
    208,876,000       3.07       548,108       1,117,010       534,152  
Korea Line Corp. 
    217,373       2.17       8,067       10,760       5,608  
Others
                    21,149       40,400       9,839  
                                         
                    W 1,806,005     W 2,337,984     W 1,647,770  
                                         
 
 
(1) Marketable equity securities are stated at fair market value and the difference between the acquisition cost and the fair market value is accounted for as a capital adjustment and minority interest accounts in the consolidated balance sheets.
 
(2) The 1,853,981 SK Telecom Co., Ltd. shares have been placed as a collateral for exchangeable bonds (Note 13).


F-25


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
Investments in non-marketable equity securities as of December 31, 2006 and 2005, are as follows:
 
                                         
    2006     2005  
    Number of
    Percentage of
    Acquisition
    Book
    Book
 
    Shares     Ownership (%)     Cost     Value     Value  
    (In millions of Korean Won)  
 
Hankyung Shinmun Co., Ltd. 
    28,728       0.15     W 309     W 309     W 309  
Keo Yang Shipping Co., Ltd. 
    150,000       0.88       780       780       780  
Jeonnam Pro Football Co., Ltd. 
    19,799       13.20       99       99       99  
Dae Kyeong Special Steel Co., Ltd. 
    1,786,000       19.00       8,930       8,930       8,930  
The Korea Metal Journal Co., Ltd. 
    2,000       2.67       20       20       20  
Pohang Steelers Co., Ltd. 
    40,000       16.67       200       200       200  
Kihyup Technology Banking Corp. 
    600,000       10.34       3,000       3,000       3,000  
Poshome Co., Ltd. 
    10,000       3.69       50       50       50  
LG Powercom Corporation(1)
    7,500,000       5.00       246,000       106,845       86,258  
The Seoul Shinmun Co., Ltd. 
    1,614,000       19.40       7,479              
ESCO Professionals, Ltd. 
    4,210       7.02       21       21       21  
TFS Global Co., Ltd. 
    5,290       8.82       26       26       26  
The Siam United Steel
    11,071,000       12.30       34,658       34,658       26,640  
Global Unity Ltd. 
    70,649       13.33       710       710       710  
PT. POSNESIA Stainless Steel Industry(4)
    29,610,000       70.00       9,474       1,567       1,567  
BX STEEL POSCO Cold Rolled Sheet Co., Ltd.(2)
          10.00       26,803       26,803       26,803  
CTA Co., Ltd. 
    73,390       14.68       37       37       37  
Woori DCI Co., Ltd. 
    5,653       18.84       28       28       28  
RCC Co., Ltd. 
    9,053       18.11       45       45       45  
Myanmar- POSCO Steel Co., Ltd.(3)
    13,440       70.00       2,192       3,717        
Nickel Mining Company SAS(4)
    490       49.00       28       28        
Wuhan Excellent Steel Center(2)
          5.00       432       432        
POSK Steel (Pinghu) Processing Center Co., Ltd.(2),(4)
          20.00       928       928        
Incheon International Airport Railroad Co., Ltd. 
    22,101,940       12.00       110,510       110,510       103,048  
Busan-Gimhae Light Rail Transit Co., Ltd. 
    2,028,600       14.00       17,954       17,954       9,555  
Seoul Metro Line Nine Corporation
    1,516,045       10.00       8,515       8,515       15,160  
Hankuk Leisure Co., Ltd. 
    839,964       16.42       8,476       8,476       8,476  
Vectus Limited(4)
    3,250,000       100.00       6,241       4,219       4,633  
POSCO-Foshan Steel Processing Center Co.,Ltd.(2)
                            5,001  
Others
                228,284       120,281       83,070  
                                         
                    W 722,229     W 459,188     W 384,466  
                                         


F-26


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
(1) The fair value of LG Powercom Corporation was based on the valuation report of a public rating services company. Investments without an objective fair value were recorded as acquisition costs, except for LG Powercom Corporation.
 
(2) No shares have been issued in accordance with the local laws or regulations.
 
(3) Myanmar- POSCO Steel Co., Ltd. is reclassified from equity-method investments into available-for-sale securities due to non-operations for year 2006.
 
(4) Investees in the process of liquidation, or in possession of total assets less than W7,000 million as of December 31, 2006, were excluded from the equity method investments.
 
Available-for-sale securities are stated at fair market value, and the difference between the acquisition cost and fair market value is accounted for in the capital adjustment account. The movements of such differences for the years ended December 31, 2006 and 2005, are as follows:
 
                                                 
    2006     2005  
    Beginning
    Increase
    Ending
    Beginning
    Increase
    Ending
 
    Balance     (Decrease)     Balance     Balance     (Decrease)     Balance  
    (In millions of Korean Won)  
 
Marketable equity securities
                                               
Hanil Iron & Steel Co., Ltd. 
  W 1,039     W 428     W 1,467     W 689     W 350     W 1,039  
HISteel Co., Ltd. 
    404             404       139       265       404  
Moonbae Steel Co., Ltd. 
    (496 )     (369 )     (865 )     (1,221 )     725       (496 )
Hana Financial Group Inc. 
    132,918       10,676       143,594       89,136       43,782       132,918  
Korea Investment Corporation
                      (453 )     453        
SK Telecom Co., Ltd. 
    (352,910 )     167,725       (185,185 )     (495,027 )     142,117       (352,910 )
Samjung Packing & Aluminum Co., Ltd. 
                      (770 )     770        
Dong Yang Steel Pipe Co., Ltd. 
    (2,041 )     (51 )     (2,092 )     (3,410 )     1,369       (2,041 )
Nippon Steel Corporation
    180,562       231,891       412,453       90,547       90,015       180,562  
Korea Line Corporation
    (1,783 )     3,735       1,952       (372 )     (1,411 )     (1,783 )
Others
    3,221       15,424       18,645       10       3,211       3,221  
                                                 
      (39,086 )     429,459       390,373       (320,732 )     281,646       (39,086 )
                                                 
Non-marketable equity securities
                                               
LG Powercom Corporation
    (115,813 )     14,926       (100,887 )     (169,875 )     54,062       (115,813 )
Others
    670       (1,288 )     (618 )     8,102       (7,432 )     670  
                                                 
      (115,143 )     13,638       (101,505 )     (161,773 )     46,630       (115,143 )
                                                 
    W (154,229 )   W 443,097     W 288,868     W (482,505 )   W 328,276     W (154,229 )
                                                 


F-27


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Investments in bonds as of December 31, 2006 and 2005, are as follows:
 
                             
    2006     2005  
    Maturity   Acquisition Cost     Book Value     Book Value  
    (In millions of Korean Won)  
 
Government bonds
  Less than 1 year   W     W     W 90,889  
    1-5 years     1       1       63  
    5-10 years                  
Others
  Less than 1 year     13,375       13,375        
    1-5 years     49,372       35,580       41,229  
                             
          62,748       48,956       132,181  
Less: Current portion
        (13,375 )     (13,375 )     (90,889 )
                             
        W 49,373     W 35,581     W 41,292  
                             
 
Equity investments as of December 31, 2006 and 2005, are as follows:
 
                         
    2006     2005  
    Acquisition Cost     Book Value     Book Value  
    (In millions of Korean Won)  
 
Contractor financial fund
  W 12,284     W 12,284     W 12,167  
Software financial fund and others
    3,171       3,189       4,384  
                         
    W 15,455     W 15,473     W 16,551  
                         
 
Details of gross unrealized gains and losses on available-for-sale securities for the years ended December 31, 2006 and 2005 are as follows:
 
                                                                 
    2006     2005  
          Gross
    Gross
                Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
    Fair
    Amortized
    Unrealized
    Unrealized
    Fair
 
    Cost     Gains     Losses     Value     Cost     Gains     Losses     Value  
    (In millions of Korean Won)  
 
Government and municipal bonds
  W 1     W     W     W 1     W 93,024     W     W 2,072     W 90,952  
Other bonds
    48,452       503             48,955       41,786             557       41,229  
                                                                 
      48,453       503             48,956       134,810             2,629       132,181  
                                                                 
Marketable equity securities
    1,812,118       356,023       (169,843 )     2,337,984       1,459,796       189,383       1,409       1,647,770  
Non-Marketable equity securities
    439,450       3       (19,735 )     459,188       335,764       54,062       5,360       384,466  
                                                                 
    W 2,300,021     W 356,529     W (189,578 )   W 2,846,128     W 1,930,370     W 243,445     W 9,398     W 2,164,417  
                                                                 
 
For the years ended December 31, 2006, 2005 and 2004, proceeds from sales of available-for-sale securities amounted to W145,990 million, W347,987 million and W27,558 million, respectively. Gross realized gains and losses amounted to W1,271 million and W60,768 million, respectively, for the year ended December 31, 2006.


F-28


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Held-To-Maturity Securities
 
Held-to-maturity securities as of December 31, 2006 and 2005, are as follows:
 
                             
        2006     2005  
        Acquisition
    Book
    Book
 
    Maturity   Cost     Value     Value  
    (In millions of Korean Won)  
 
Current portion of held-to-maturity securities
                           
Government and municipal bonds
  Less than 1 year   W 153,411     W 153,476     W 2,688  
                             
Held-to-maturity securities
                           
Government and municipal bonds
  1 ~5 years     79,646       79,854       211,051  
²
  5 ~10 years     30,333       30,472       30,423  
                             
          109,979       110,326       241,474  
                             
        W 263,390     W 263,802     W 244,162  
                             
 
The Company provided national treasury bonds, amounting to W29,570 million, and certain government and municipal bonds, amounting to W1,764 million, to the Gyeongsangbuk-do provincial office as a performance guarantee in relation to the development of a waste disposal area.


F-29


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Equity-Method Investments
 
Equity-method investees as of December 31, 2006 and 2005, are as follows:
 
                                                 
    Number of
    Percentage of
    Acquisition
    Net
    Book value  
    Shares Owned     Ownership     Cost     Asset(1)     2006     2005  
    (In millions of Korean Won)  
 
KOBRASCO
    2,010,719,185       50.00     W 32,950     W 37,211     W 32,622     W 30,268  
Fujiura Butsuryu Center Co., Ltd. 
    600       30.00       632       835       835       824  
USS-POSCO Industries(2)
          50.00       234,293       60,508       49,380       61,707  
Poschrome (Proprietary) Limited
    21,675       25.00       4,859       6,063       4,826       6,153  
Guangdong Xingpu Steel Center Co., Ltd.(2)
          21.00       1,852       2,892       2,487       2,985  
POS-Hyundai Steel Manufacturing India Private Limited
    6,919,400       29.50       3,136       2,780       2,780       2,229  
eNtoB Corporation
    740,000       23.13       3,700       4,842       4,399       4,188  
POSVINA Co., Ltd.(2)
          50.00       1,527       2,153       2,066       1,593  
Posmmit Steel Centre Sdn Bhd
    4,200,000       30.00       2,308       3,919       3,891       3,212  
PT POSMI Steel Indonesia
    4,772       37.87       1,467       3,140       3,205       1,746  
MIDAS Information Technology Co., Ltd. 
    866,190       25.46       433       4,300       4,292       3,226  
Posco Power Co., Ltd.(3)
          0.00                         290,255  
CAML Resources Pty Ltd
    3,239       33.34       40,388       18,448       37,717       38,673  
POSCO Bioventures. LP(2)
          100.00       43,691       29,271       33,931       33,717  
Songdo New City Development Inc.(2),(4)
          29.90       6,674       (35,855 )            
Hubei Huaerliang POSCO Silicon Science & Technology Co., Ltd.(2)
          30.00       3,236       3,172       3,186       3,412  
SNNC Co., Ltd. 
    3,822,000       49.00       19,110       18,817       18,816        
Gale International Korea, Inc.(2)
          29.90       21       2,251       2,070        
                                                 
                    W 400,277     W 164,747     W 206,503     W 484,188  
                                                 
 
 
(1) Due to the delay in the closing of December 31, 2006 accounts and the settlement of closing differences, the equity method of accounting is applied based on the most recent available December 31, 2006 financial information, which has not been audited or reviewed.
 
(2) No shares have been issued in accordance with the local laws and regulations.
 
(3) POSCO Power Corp. is included in the scope of consolidation as a consolidated subsidiary and excluded from the equity-method investments.
 
(4) Unrecorded changes in equity interest in Songdo New City Development Inc. amounted to a negative W42,529 million.


F-30


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
Details of equity method valuation for December 31, 2006 and 2005, are as follows:
 
                                 
          Earnings
             
          (Losses) of
    Other
       
    January 1,
    Equity Method
    Increase
    December 31,
 
    2006     Investees     (Decrease)(1)     2006  
    (In millions of Korean Won)  
 
KOBRASCO
  W 30,268     W 21,831     W (19,477 )   W 32,622  
Fujiura Butsuryu Center Co., Ltd. 
    824       105       (94 )     835  
USS-POSCO Industries
    61,707       8,469       (20,796 )     49,380  
Poschrome (Proprietary) Limited
    6,153       1,481       (2,808 )     4,826  
Guangdong Xingpu Steel Center Co., Ltd. 
    2,985       (342 )     (156 )     2,487  
POS-Hyundai Steel Manufacturing India Private Limited
    2,229       677       (126 )     2,780  
eNtoB Corporation
    4,188       211             4,399  
POSVINA Co., Ltd. 
    1,593       975       (502 )     2,066  
Posmmit Steel Centre Sdn Bhd
    3,212       737       (58 )     3,891  
PT POSMI Steel Indonesia
    1,746       (78 )     1,537       3,205  
MIDAS Information Technology Co., Ltd. 
    3,227       1,255       (190 )     4,292  
Posco Power Co., Ltd. 
    290,255       1,580       (291,835 )      
CAML Resources Pty Ltd
    38,673       1,335       (2,291 )     37,717  
POSCO Bioventures. LP
    33,716       4,521       (4,306 )     33,931  
Songdo New City Development Inc. 
                       
Hubei Huaerliang POSCO Silicon Science & Technology Co., Ltd. 
    3,412       (50 )     (176 )     3,186  
SNNC Co., Ltd. 
          (252 )     19,068       18,816  
Gale International Korea, Inc. 
          3,970       (1,900 )     2,070  
                                 
    W 484,188     W 46,425     W (324,110 )   W 206,503  
                                 
 


F-31


Table of Contents

POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

                                 
          Earnings
             
          (Losses) of
    Other
       
    January 1,
    Equity Method
    Increase
    December 31,
 
    2005     Investees     (Decrease)(1)     2005  
    (In millions of Korean Won)  
 
KOBRASCO
  W 11,203     W 17,663     W 1,402     W 30,268  
Fujiura Butsuryu Center Co., Ltd. 
    648       296       (120 )     824  
USS-POSCO Industries
    65,084       (517 )     (2,860 )     61,707  
Suzhou Dongshin Color Metal Sheet Co., Ltd. 
    3,361       (60 )     (3,301 )      
Poschrome (Proprietary) Limited
    7,000       1,303       (2,150 )     6,153  
Guangdong Xingpu Steel Center Co., Ltd. 
    3,094       (89 )     (20 )     2,985  
POS-Hyundai Steel Manufacturing India Private Limited
    2,276       357       (404 )     2,229  
eNtoB Corporation
    3,762       426             4,188  
POSVINA Co., Ltd. 
    3,145       (789 )     (763 )     1,593  
POSMMIT Steel Centre Sdn Bhd
    3,015       317       (120 )     3,212  
PT POSMI Steel Indonesia
    1,599       173       (26 )     1,746  
POSCO Bioventures LP
    33,221       (4,103 )     4,598       33,716  
MIDAS Information Technology Co., Ltd. 
    2,646       667       (86 )     3,227  
Seoul Metro Line Nine Corporation
    2,152             (2,152 )      
Posco Power Co., Ltd. 
          (811 )     291,066       290,255  
CAML Resources Pty Ltd
          4,863       33,810       38,673  
Hubei Huaerliang POSCO Silicon Science & Technology Co., Ltd. 
          28       3,384       3,412  
                                 
    W 142,206     W 19,724     W 322,258     W 484,188  
                                 
 
 
(1) Other increase or decrease represents the changes in investment securities due to acquisitions (disposals), dividends received, valuation gain or loss on investment securities, changes in retained earnings and others.

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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
Details on the elimination of unrealized gain or loss from inter-company transactions for December 31, 2006 and 2005 are as follows:
 
                                                 
    2006     2005  
          Property, Plant
                Property, Plant
       
          and Equipment,
                and Equipment,
       
    Current
    and Intangible
          Current
    and Intangible
       
    Assets     Assets     Total     Assets     Assets     Total  
    (In millions of Korean Won)  
 
KOBRASCO
  W 5,370     W     W 5,370     W (7,997 )   W     W (7,997 )
Fujiura Butsuryu Center Co., Ltd. 
    18             18       (6 )           (6 )
USS-POSCO Industries
    1,433             1,433       (12,562 )           (12,562 )
Poschrome (Proprietary) Limited
    (63 )           (63 )     (371 )           (371 )
Guangdong Xingpu Steel Center Co., Ltd. 
    (358 )           (358 )     39             39  
eNtoB Corporation
    37       (6 )     31       (149 )     (65 )     (214 )
POSVINA Co., Ltd. 
    777             777       (531 )           (531 )
Posmmit Steel Centre Sdn Bhd
    306             306       (143 )           (143 )
PT POSMI Steel Indonesia
    (57 )           (57 )     115             115  
MIDAS Information Technology Co., Ltd. 
          (8 )     (8 )                  
                                                 
    W 7,463     W (14 )   W 7,449     W (21,605 )   W (65 )   W (21,670 )
                                                 
 
Details of differences between the initial purchase price and the Company’s initial proportionate ownership in the book value of the investee are as follows:
 
                                 
    January 1,
    Increase
    Amortization
    December 31,
 
    2006     (Decrease)     (Recovery)     2006  
    (In millions of Korean Won)  
 
POSMMIT Steel Centre Sdn Bhd
  W 39     W     W 20     W 19  
PT POSMI Steel Indonesia
    354       49       182       221  
CAML Resources Pty. Ltd. 
    25,042             5,763       19,279  
Posco Power Co., Ltd. 
    65,804       (62,148 )     3,656        
                                 
    W 91,239     W (62,099 )   W 9,621     W 19,519  
                                 


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Summary of financial information on equity-method investees as of and for December 31, 2006, is as follows:
 
                                 
          Total
          Net Income
 
    Total Assets     Liabilities     Sales     (Loss)  
    (In millions of Korean Won)  
 
KOBRASCO
  W 179,347     W 104,925     W 332,507     W 32,923  
Fujiura Butsuryu Center Co., Ltd. 
    15,886       13,104       17,924       289  
USS-POSCO Industries
    442,407       321,391       989,269       14,071  
Poschrome (Proprietary) Limited
    31,882       7,629       33,574       6,310  
Guangdong Xingpu Steel Center Co., Ltd. 
    38,939       25,166       70,730       300  
POS-Hyundai Steel Manufacturing India Private Limited
    18,715       9,293       67,780       2,296  
eNtoB Corporation
    62,033       41,097       322,192       984  
POSVINA Co., Ltd. 
    5,668       1,363       18,859       230  
Posmmit Steel Centre Sdn Bhd
    37,025       23,961       48,504       1,566  
PT POSMI Steel Indonesia
    42,606       34,315       48,667       234  
MIDAS Information Technology Co., Ltd. 
    21,445       4,556       17,708       4,682  
CAML Resources Pty Ltd
    102,949       47,617       102,229       20,973  
POSCO Bioventures. LP
    29,271             19       938  
Songdo New City Development Inc. 
    914,973       1,034,889       152,068       (52,489 )
Hubei Huaerliang POSCO Silicon Science & Technology Co., Ltd. 
    21,232       10,658       15,421       (168 )
SNNC Co., Ltd. 
    38,584       182             (513 )
Gale International Korea, Inc. 
    11,834       4,307       20,731       7,210  
                                 
    W 2,014,796     W 1,684,453     W 2,258,182     W 39,836  
                                 


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

8.   Property, Plant and Equipment
 
Property, plant and equipment as of December 31, 2006 and 2005, consist of the following:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Buildings and structures
  W 6,308,204     W 5,755,154  
Machinery and equipment
    24,280,940       21,333,817  
Vehicles
    201,878       176,715  
Tools
    402,294       404,094  
Furniture and fixtures
    257,624       231,263  
                 
      31,450,940       27,901,043  
Less: Accumulated depreciation
    (20,804,990 )     (19,312,121 )
Less: Accumulated impairment loss
          (2,786 )
                 
      10,645,950       8,586,136  
                 
Land
    1,311,755       1,203,300  
Less: Accumulated impairment loss
          (565 )
                 
      1,311,755       1,202,735  
                 
Construction-in-progress
    2,685,415       2,566,456  
Less: Accumulated impairment loss
          (83,617 )
                 
      2,685,415       2,482,839  
                 
    W 14,643,120     W 12,271,710  
                 
 
The value of land based on the posted price issued by the Korean tax authority amounted to W3,320,047 million as of December 31, 2006 (2005: W3,087,656 million).
 
As of December 31, 2006, property, plant and equipment are insured against fire and other casualty losses for up to W9,728,538 million (2005: W4,783,546 million). In addition, the Company carries general insurance for vehicles and accident compensation insurance for its employees.
 
In accordance with the Asset Revaluation Law, POSCO and certain subsidiaries revalued a substantial portion of their property, plant and equipment and increased the related amount of assets by W3,942 billion as of December 31, 2000, the latest revaluation date. The revaluation surplus amounting to W3,234 billion, net of related tax and transfers to capital stock, was credited to capital surplus, a component of shareholders’ equity (Note 18).
 
Construction-in-progress includes capital investments in Gwangyang No. 2 Minimill. Through a resolution of the Board of Directors in May 1998, the construction on the Minimill was temporarily suspended due to the economic situation in the Republic of Korea and the Asia Pacific region. The continuing unstable economic condition and related decrease in the selling price of products, resulting in the deterioration in profitability, drove the management’s operation committee to cease the construction on the No. 2 Minimill in April 2002, and to use the buildings for the Tailor Welded Blank (“TWB”) project designed to manufacture custom-made automobile body panels. The Company previously recognized impairment losses on the construction-in-progress in Gwangyang No. 2 Minimill amounting to W469,581 million and reclassified related machinery held to be disposed of in the future as other investment assets as of December 31, 2004. As of December 31, 2006, the Company entered into a contract with Al-Tuwairqi Trading & Contracting Establishment in Saudi Arabia to sell the No. 2 Minimill equipment for US$96 million. The book values of property, plant and equipment held for sale amounted to W63,932 million and are classified as other investment assets as of December 31, 2006.


F-35


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

During 2006, the Company incurred capital expenditure of W3,346,112 million in relation to construction in progress, such as FINEX No. 1.
 
The changes in the carrying value of property, plant and equipment for December 31, 2006, are as follows:
 
                                                         
                                  Elimination of
       
    Beginning
                            Intercompany
    Ending
 
    Balance     Acquisition(1)     Disposal     Depreciation(3)     Others(2)     Transactions     Balance  
    (In millions of Korean Won)  
 
Land
  W 1,202,734     W 56,561     W 10,116     W     W 62,639     W (63 )   W 1,311,755  
Buildings
    2,268,834       314,727       7,770       175,188       165,398       (165,902 )     2,400,099  
Structures
    1,246,290       175,023       3,569       110,623       136,735       (77,298 )     1,366,558  
Machinery and equipment
    4,866,840       2,873,485       31,762       1,394,402       886,787       (526,770 )     6,674,178  
Vehicles
    30,429       28,597       647       16,760       4,737       (2,255 )     44,101  
Tools
    101,568       36,409       415       52,247       790       (1,971 )     84,134  
Furniture and fixtures
    72,176       38,907       678       29,346       1,028       (5,208 )     76,879  
Construction-in-progress
    2,482,839       3,346,112       441,589             (2,568,247 )     (133,699 )     2,685,416  
                                                         
    W 12,271,710     W 6,869,821     W 496,546     W 1,778,566     W (1,310,133 )   W (913,166 )   W 14,643,120  
                                                         
 
The changes in the carrying value of property, plant and equipment for December 31, 2005, were as follows:
 
                                                         
                                  Elimination of
       
    Beginning
                            Intercompany
    Ending
 
    Balance     Acquisition(1)     Disposal     Depreciation(3)     Others(2)     Transactions     Balance  
    (In millions of Korean Won)  
 
Land
  W 1,108,817     W 95,381     W 14,110     W     W 12,655     W (9 )   W 1,202,734  
Buildings
    2,199,308       261,371       27,150       161,172       (8,578 )     5,055       2,268,834  
Structures
    889,437       425,886       5,666       89,966       26,178       421       1,246,290  
Machinery and equipment
    3,851,869       2,274,621       28,596       1,235,562       (12,228 )     16,736       4,866,840  
Vehicles
    35,624       9,554       1,120       13,997       425       (57 )     30,429  
Tools
    98,294       50,999       304       48,055       697       (63 )     101,568  
Furniture and fixtures
    57,064       38,328       1,113       23,197       261       833       72,176  
Construction-in-progress
    2,199,878       3,618,271       131,909             (2,945,299 )     (258,102 )     2,482,839  
                                                         
    W 10,440,291     W 6,774,411     W 209,968     W 1,571,949     W (2,925,889 )   W (235,186 )   W 12,271,710  
                                                         
 
 
(1) Includes asset transfer from construction-in-progress.
 
(2) Includes foreign currency translation adjustments, asset transfers and adjustments resulting from the effect of changes in the scope of consolidation.
 
(3) Includes depreciation expense of idle property.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
9.   Intangible Assets
 
Intangible assets, net of accumulated amortization, as of December 31, 2006 and 2005, consist of the following:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Goodwill
  W 90,105     W  
Negative goodwill
    (1,388 )     (1,794 )
Intellectual property rights
    1,221       1,394  
Land usage rights
    23,439       43,422  
Development costs
    67,862       47,299  
Port facilities usage rights
    112,102       127,258  
Long-term electricity supply contract rights
    68,544        
Other intangible assets(1)
    195,197       236,130  
                 
    W 557,082     W 453,709  
                 
 
 
(1) The Company capitalized costs directly related to the Enterprise Resource Planning (ERP) system and the process innovation as other intangible assets.
 
The changes in the carrying value of intangible assets during 2006 are as follows:
 
                                                         
                                  Elimination of
       
    Beginning
                Amortization
          Intercompany
    Ending
 
    Balance     Acquisition     Disposal     (Recovery)     Others(1)     Transactions     Balance  
    (In millions of Korean Won)  
 
Goodwill
  W     W 100,088     W     W 9,983     W       W     W 90,105  
Negative goodwill
    (1,794 )                 (406 )                 (1,388 )
Intellectual property rights
    1,394       50       9       230       16             1,221  
Land usage rights
    43,422       2,503       21,571       195       (720 )           23,439  
Development costs
    47,299       3,527       418       5,025       22,870       (391 )     67,862  
Port facilities usage rights
    127,258       3,272             18,429       1             112,102  
Long-term electricity supply contract rights
          73,559             5,015                   68,544  
Other intangible assets
    236,130       58,057       650       66,340       (25,969 )     (6,031 )     195,197  
                                                         
    W 453,709     W 241,056     W 22,648     W 104,811     W (3,802 )   W (6,422 )   W 557,082  
                                                         


F-37


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

The changes in the carrying value of intangible assets during 2005 were as follows:
 
                                                         
                                  Elimination of
       
    Beginning
                Amortization
          Intercompany
    Ending
 
    Balance     Acquisition     Disposal     (Recovery)     Others(1)     Transactions     Balance  
    (In millions of Korean Won)  
 
Negative goodwill
  W (457 )   W (2,031 )   W     W (694 )   W     W     W (1,794 )
Intellectual property rights
    485       1,159             186       (64 )           1,394  
Land usage rights
    32,416       10,053       192       (2,653 )     (1,508 )           43,422  
Development costs
    32,591       29,381             13,021       (1,770 )     118       47,299  
Port facilities usage rights
    146,396       595             19,732       (1 )           127,258  
Other intangible assets
    284,884       134,709       89,635       95,845       (857 )     2,874       236,130  
                                                         
    W 496,315     W 173,866     W 89,827     W 125,437     W (4,200 )   W 2,992     W 453,709  
                                                         
 
 
(1) Includes impairment loss, transfers of an asset, adjustments arising from foreign currency translations and changes in consolidation scope, and others.
 
The estimated aggregated amortization expenses for each of the next five fiscal years are as follows:
 
         
    (In millions of Korean Won)  
 
2007
  W 99,462  
2008
    83,839  
2009
    47,887  
2010
    24,240  
2011
    10,836  
         
    W 266,264  
         
 
10.   Research and Development Costs, and Others
 
For the year ended December 31, 2006, the Company expensed research and development costs amounting to W325,040 million (2005: W225,615 million), charging W271,005 million (2005: W173,070 million) to cost of goods sold, and W54,035 million (2005: W52,545 million) to selling and administrative expenses.


F-38


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

11.   Other Assets
 
Other assets as of December 31, 2006 and 2005, consist of the following:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Other current assets
               
Short-term loans receivable (Notes 27 and 28)
  W 34,071     W 42,665  
Accrued income
    74,037       45,517  
Advance payments
    263,623       199,580  
Prepaid expenses
    18,285       15,724  
Others
    53,533       40,728  
                 
      443,549       344,214  
Less: Allowance for doubtful accounts
    (52,433 )     (32,383 )
                 
    W 391,116     W 311,831  
                 
Other long-term assets
               
Other investment assets (Notes 5, 8 and 29)
  W 135,405     W 139,320  
Less: Allowance for doubtful accounts
    (34,646 )     (3,714 )
Present value discount
    (112 )     (1,731 )
                 
    W 100,647     W 133,875  
                 
 
12.   Short-Term Borrowings
 
Short-term borrowings as of December 31, 2006 and 2005, consist of the following:
 
                     
    Annual
           
Financial Institutions
  Interest Rate (%)   2006     2005  
    (In millions of Korean Won)  
 
Won currency borrowings
                   
Shinhan Bank and others
  3.83-5.00   W 111,394     W 216,150  
                     
Foreign currency borrowings
                   
Yamaguchi Bank and others
  1.00-5.00     24,029       13,716  
Shinhan Bank and others
  1.00-6.00     1,103,326       629,908  
                     
          1,127,355       643,624  
                     
        W 1,238,749     W 859,774  
                     


F-39


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

13.   Long-Term Debts
 
Current portion of long-term debts as of December 31, 2006 and 2005, consist of the following:
 
                     
    Annual
           
Financial Institutions
  Interest Rate (%)   2006     2005  
    (In millions of Korean Won)  
 
Debentures
                   
Domestic and foreign debentures
  1.84-8.00   W 231,100     W 991,609  
Less: Discount on debentures issued
        (203 )     (1,083 )
                     
          230,897       990,526  
                     
Won currency borrowings
                   
Korea Exchange Bank and others
  1.00-5.70     1,885       26,731  
Foreign currency borrowings
                   
Development Bank of Japan and others
  1.00-4.60     162,485       28,202  
                     
          164,370       54,933  
                     
Loans from foreign financial institutions
                   
Sumitomo Bank and others
  2.00                
    LIBOR + 0.80     8,797       9,065  
                     
Lease obligation
                   
HP Financial Services
  5.00     348       2,676  
                     
        W 404,412     W 1,057,200  
                     
 
Debentures as of December 31, 2006 and 2005, are as follow:
 
                     
    Annual
           
    Interest Rate   2006     2005  
    (In millions of Korean Won)  
 
Domestic debentures
  4.66 - 5.00   W 1,467,653     W 562,060  
Yankee Bonds
            263,547  
Samurai Bonds
  2.05     390,915       258,012  
Euro Bonds
  5.88     278,880        
Exchangeable bonds(1)
      403,596       443,970  
                     
          2,541,044       1,527,589  
Less: Current portion
        (231,100 )     (991,609 )
Discount on debentures issued
        (13,144 )     (2,697 )
                     
        W 2,296,800     W 533,283  
                     


F-40


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Long-term borrowings as of December 31, 2006 and 2005, are as follows:
 
                     
    Annual
           
Financial Institutions
  Interest Rate (%)   2006     2005  
    (In millions of Korean Won)  
 
Won currency borrowings
                   
The Korea Development Bank and others
  1.00-6.00   W 77,951     W 212,890  
Less: Current portion
        (1,885 )     (26,731 )
                     
          76,066       186,159  
                     
Foreign currency borrowings
                   
Development Bank of Japan and others
  1.00-7.00     488,672       403,926  
Less: Current portion
        (162,485 )     (28,202 )
                     
          326,187       375,724  
                     
Loans from foreign financial institutions
                   
Sumitomo Bank and others
  2.00                
    LIBOR + 0.80     35,246       45,169  
Less: Current portion
        (8,797 )     (9,065 )
                     
          26,449       36,104  
                     
        W 428,702     W 597,987  
                     
 
Certain current assets, inventories, investments and property, plant and equipment are pledged as collaterals for the above borrowings.
 
 
(1) POSCO issued exchangeable bonds on August 20, 2003. They are exchangeable with 15,267,837 SK Telecom Co., Ltd. American Depository Receipts (ADRs).
 
Details of exchangeable bonds as of December 31, 2006, are as follows:
 
     
Issuance date:
  August 20, 2003
Maturity date:
  August 20, 2008 (full amount of principal is repaid if not exercised)
Rate:
  Interest rate of zero percent
Face value:
  JPY 51,622,000,000
Issuance price:
  JPY 51,880,110,000
Exchangeable price:
  JPY 3,094/ADR
Exercise call period:
  Commencing ten business days following the issuance date until ten business days prior to maturity date
Exercise put period:
  Exactly three years following the payment date
 
On August 20, 2003, POSCO sold its 15,267,837 SK Telecom Co., Ltd. ADRs to Zeus (Cayman), a tax-exempted subsidiary formed under the laws of Cayman Islands. Zeus issued zero-coupon, exchangeable bonds amounting to JPY51,622 million which are fully and unconditionally guaranteed by POSCO and due in 2008. POSCO may elect to pay the holder cash in lieu of delivering SK Telecom Co., Ltd. ADRs (the “Cash Settlement Option”). The number of ADRs the holder is entitled to receive will be calculated by dividing the aggregate principal amount of the Notes to be exchanged by the exchangeable price. Under the Cash Settlement Option, such holder is entitled to receive the cash equivalent of the market value of ADRs upon exercise. These bonds are non-interest bearing and are exchangeable with SK Telecom Co., Ltd. ADRs at the option of the bondholder. The


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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

transaction between the POSCO and Zeus is deemed a borrowing transaction under the Korean generally accepted accounting principles. In 2005 and 2006, in compliance with the terms of the exchangeable bonds, the dividends earned by Zeus from the SK Telecom Co., Ltd. ADRs were used to purchase additional 1,417,998 ADRs which brought down the exchangeable bond price to JPY3,094/ADR.
 
Contractual maturities of long-term debts outstanding as of December 31, 2006, are as follows:
 
                                         
                      Loans from
       
                Foreign
    Foreign
       
          Won Currency
    Currency
    Financial
       
Period
  Debentures     Borrowings     Borrowings     Institutions     Total  
    (In millions of Korean Won)  
 
2008
  W 433,646     W 3,825     W 29,304     W 8,797     W 475,572  
2009
    336,756       5,282       72,547       8,797       423,382  
2010
          4,288       189,892       4,787       198,967  
Thereafter
    1,539,542       62,671       34,444       4,068       1,640,725  
                                         
    W 2,309,944     W 76,066     W 326,187     W 26,449     W 2,738,646  
                                         
 
Details of assets pledged as collaterals for short-term borrowings and long-term debts, as well as for performance guarantee, as of December 31, 2006 and 2005, are as follows:
 
                     
   
Beneficiaries
  2006     2005  
        (In millions of Korean won)  
 
Land
  Shinhan Bank and others   W 74,198     W 43,005  
Buildings and structures
  The Korea Development Bank and others     134,531       42,304  
Machinery and equipment
  Mizuho Bank and others     461,413       28  
Cash and cash equivalents
  Mizuho Bank and others           12,041  
Short-term and long-term financial instruments
  The Korea Development Bank     5,600       4,650  
Inventories
  Korea First Bank           195,000  
Trade accounts and notes receivable
  Mizuho Bank and others     44,445       40,630  
Available-for-sale securities
  Exchangeable bond creditor     410,796       333,366  
Held-to-maturity securities
  Gyeongsangbuk-do provincial office     31,334       31,298  
                     
        W 1,162,317     W 702,322  
                     
 
Details of loans from foreign financial institutions guaranteed by financial institutions as of December 31, 2006 and 2005, are as follows:
 
                                 
    2006     2005  
    Foreign
    Won
    Foreign
    Won
 
Financial Institutions
  Currency     Equivalent     Currency     Equivalent  
    (In millions of Korean Won )  
 
The Korea Development Bank
    EUR 6,062,451       7,410       EUR 6,389,136       7,668  
                                 
 
As of December 31, 2006, subsidiaries are provided with guarantees amounting to W229,826 million from Seoul Guarantee Insurance Company for their contract commitments.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

14.   Capital Lease and Operating Lease Agreements
 
Capital Lease
 
As of December 31, 2006, the Company acquired certain tools and vehicles under capital lease agreements, with acquisition cost amounting to W2,242 million. The assets and liabilities under the capital leases are recognized at the present value of the minimum lease payments over the lease terms. The Company’s depreciation expense, with respect to the above lease agreements, for December 31, 2006, amounted to W561 million.
 
Future minimum lease payments under capital lease agreements are as follows:
 
                         
Period
  Principal     Interest     Total  
    (In millions of Korean Won)  
 
2007
  W 334     W 4     W 338  
                         
 
Operating Lease
 
As of December 31, 2006, the Company acquired certain tools and equipment under operating lease agreements with Macquarie Capital Korea Co., Ltd. The Company’s lease expenses, with respect to the above lease agreements, amounted to W6,737 million for December 31, 2006. Future lease payments under the above lease agreements are as follows:
 
         
Period
  Amount  
    (In millions of
 
    Korean Won)  
 
2007
  W 4,183  
2008
    883  
2009
    138  
2010
    1  
         
    W 5,205  
         
 
15.   Accrued Severance Benefits
 
The changes in accrued severance benefits for December 31, 2006, are as follows:
 
                                         
    Beginning
                      Ending
 
    Balance     Increase     Decrease     Adjustments(1)     Balance  
    (In millions of Korean Won)  
 
Accrued severance benefits
  W 723,954     W 144,602     W 41,048     W 6,539     W 834,047  
National Pension Fund
    (2,515 )           (218 )     (87 )     (2,384 )
Group severance insurance deposits
    (446,627 )     (113,682 )     (63,507 )     (3,855 )     (500,657 )
                                         
    W 274,812     W 30,920     W (22,677 )   W 2,597     W 331,006  
                                         
 
 
(1) Includes foreign currency adjustments, changes in consolidation scope and others.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
The Company expects to pay the following future benefits to its employees upon their normal retirement age:
 
         
    (In millions of Korean Won)  
 
2007
  W 16,953  
2008
    27,433  
2009
    33,534  
2010
    45,018  
2011 ~2016
    381,420  
         
    W 504,358  
         
 
The above amounts were determined based on the employee’ current salary rates and the number of service years that will be accumulated upon their retirement date. These amounts do not include amounts that might be paid to employees that will cease working with the Company before their normal retirement age.
 
16.   Other Liabilities
 
Other liabilities as of December 31, 2006 and 2005, consist of the following:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Other current liabilities
               
Advances received
  W 405,450     W 334,166  
Unearned revenue
    2,648       3,164  
Others
    99,297       119,534  
                 
    W 507,395     W 456,864  
                 
Other long-term liabilities
               
Reserve for allowance
  W 22,427     W 17,524  
Others (Notes 14 and 21)
    125,759       114,597  
                 
    W 148,186     W 132,121  
                 


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

17.   Commitments and Contingencies
 
As of December 31, 2006, contingent liabilities for outstanding guarantees provided for the repayment of loans of affiliated companies are as follows:
 
                         
    Entity Being
  Financial
  Amount
    Won
 
Grantors
 
Guaranteed
 
Institution
  Guaranteed(1)     Equivalent  
                  (In millions)  
 
POSCO
  POSCO Investment Co., Ltd.   Bank of Tokyo-Mitsubishi UFJ, Ltd.   US$ 56,845,654     W 52,844  
    Zhangjiagang Pohang Stainless Steel Co., Ltd.   Bank of China and others     329,925,000       306,698  
    BX STEEL POSCO Cold Rolled Sheet Co., Ltd.   Industrial & Commercial Bank of China     33,023,068       30,698  
POSCO E&C
  IBC Corporation   The Korea Development Bank and others     47,000,000       43,691  
    Shanghai Real Estate Development Co., Ltd.   Woori Bank and others     20,000,000       18,592  
    POSLILAMA Steel Structure Co., Ltd.   The Export-Import Bank of Korea and others     43,000,000       39,973  
    POSCO E&C (Beijing) Co., Ltd.   Korea Exchange Bank     4,446,000       4,146  
POSCO Investment Co., Ltd. 
  Qingdao Pohang Stainless Steel Co., Ltd.   Bank of Tokyo-Mitsubishi UFJ, Ltd.     56,000,000       52,058  
    POSVINA Co., Ltd.   Shinhan Bank     1,500,000       1,394  
    POSCO(Guangdong) Coated Steel Co.,Ltd   Bank of Tokyo-Mitsubishi UFJ, Ltd.     15,000,000       13,944  
    POS-MPC S.A. de C.V.   Bank of Tokyo-Mitsubishi UFJ, Ltd.     6,600,000       6,135  
POSCO-Japan Co., Ltd. 
  Fujiura Butsuryu Center Co., Ltd.   Nippon Life Insurance Company and others   JPY 950,000,000       7,427  
    POS-NPC Co., Ltd.   Mizuho Bank and others     2,600,000,000       20,328  
                         
                    W 597,928  
                         
 
 
(1) Currencies other than US$ or JPY are translated into US$ amounts.
 
As of December 31, 2005, contingent liabilities for outstanding guarantees provided for the payment of loans of affiliated companies amounted to W561,493 million.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

As of December 31, 2006, contingent liabilities for outstanding guarantees provided to non-affiliated companies for the repayment of loans are as follows:
 
                         
    Entity Being
  Financial
  Amount
    Won
 
Grantors
 
Guaranteed
 
Institution
  Guaranteed     Equivalent  
    (In millions of Korean Won)  
 
POSCO
  DC Chemical Co., Ltd.   E1 Co., Ltd.   W 961       961  
    The Siam United Steel Co., Ltd.   Japan Bank for International Cooperation   US$ 10,241,684       9,521  
    Zeus   Related creditors   JPY 51,622,000,000       403,596  
POSCO E&C
  Daejeon Energy System Co., Ltd.   Woori Bank   W 23,900       23,900  
    Pan Pacific Corp   Korea Exchange Bank     12,508       12,508  
    Ioncity Co.,Ltd   Samsung Life Insurance Co., Ltd.     2,400       2,400  
Others
            22,953       22,953  
                         
                    W 475,839  
                         
 
In addition to the outstanding guarantees provided above, as of December 31, 2006, the Company had the following guarantees outstanding:
 
  •  a performance guarantee to Samsung Corporation amounting to W1,391,110 million, in exchange Samsung Corporation provided a performance guarantee and a payment guarantee on customers’ borrowings on behalf of the Company amounting to W1,096,265 million.
 
  •  guaranteed debts for Jungwoo Construction and 21 other companies amounting to W954,544 million.
 
  •  guaranteed debts for Eco-Town Corporation, an investee, amounting to W143,260 million.
 
  •  A payment guarantee for Keumseki Co., Ltd.’s borrowing amounting to W60,555 million. In connection with its guarantee, the Company accrued W41,300 million in guarantee liability due to Keumseki Co., Ltd. financial condition . Also, the Company provided an allowance for bad debts on the trade receivables and short-term loans receivable amounting to W35,771 million from Keumseki Co., Ltd.
 
The Company maintains escrow account of W226,918 million under its name based on the operation agreements with customers in certain construction contracts. The Company does not record this escrow account in its books but maintains as a memo account to reflect economic substance in which the ownership belongs to the customers.
 
As of December 31, 2005, contingent liabilities for outstanding guarantees provided to non-affiliated companies for the repayment for loans amounted to W508,837 million.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

As of December 31, 2006, the Company and certain subsidiaries are defendants in legal actions arising from the normal course of business. Details as follows:
 
                 
Company
 
Plaintiff
 
Claim Amount
   
Description
    (In millions of Korean Won)
 
POSCO
  Songdo Construction Co.,Ltd. And others   W 2,728     15 lawsuits including claim for operation damages due to loss of the sands beach
    Gu ja eun and other 19     7,363     Claim for refund of Sindorim Posvill Bldg land sale amount
    Hwang jae ho and others     6,140     Lawsuit filed on construction of residents-only sports comlex in Songdo Firstworld
POSCO E & C
  Choi ki hyo and other 378     963     Claim for damages by Starcity
    Kookmin Bank     1,223     Claim for damages by Sindorim Posvill Bldg
    Korea Construction Financial Co.,     6,692     Claim filed by Daesung Construction
Posteel Co., Ltd.
  Metal Industry Co.,Ltd.   US$ 1,246,535     Claim for damages due to breach of contract (second trial won, plaintiff appeals)
    Duetsch Brauhaus Co.,Ltd.   W 700     Claim for damages due to breach of lease agreement (lost the first trial, filed an appeal)
POSCO Research Institute
  An hong sik     100     Lawsuit claiming for excessive profits (lost the first trial, motion for a new trial in process)
    Wang dong wha   CNY 2,502,236     Labor dispute on additional wages and compensation for damages (first public trial on going)
POSCO Specialty Steel Co., Ltd. 
  BNG Steel Co., Ltd.   W 21,329     Counteraction against claim on restructured receivables regarding undertaking of BNG Steel’s asset
POSCO Refractories & Environment Company Ltd. (POSREC)
  Kim Choong il     224     Claim for damages(second trial won, plaintiff appeals)
POSCON Co., Ltd. 
  DIBO TECH CO.,LTD.     787     Claim for non existence of debt
 
The Company believes that although the outcome of these matters is uncertain, they would not result in a material ultimate loss for the Company.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

POSCO entered into long-term contracts to purchase iron ore, coal, nickel, chrome and stainless steel scrap. These contracts generally have terms of five to ten years and provide for periodic price adjustments to the market price. As of December 31, 2006, 462 million tons of iron ore and 120 million tons of coal remained to be purchased under such long-term contracts.
 
POSCO entered into a contract on the usage of bulk carriers with Keo Yang Shipping Co., Ltd. and others in order to ensure the transportation of raw materials.
 
On July 1, 2005, POSCO entered into an agreement with Tangguh Liquefied Natural Gas (LNG) Consortium in Indonesia regarding the commitment to purchase 550 thousand tons of LNG annually for 20 years commencing in May 2006.
 
POSCO Power Corp. provides its entire electric power generating capacity to Korea Electric Power Corp. in accordance with a long term supply agreement. The price of electric power is determined by certain cost incurred by POSCO Power Corp. and mark up pursuant to the agreement. The cost incurred includes production cost and capital expenditures. In addition, the Company received a guarantee of W36,160 million from Seoul Guarantee Insurance in relation to the supply agreement with Korea Electric Power Corp.
 
As of December 31, 2006, POSCO has bank overdraft agreements of up to W320,000 million with Woori Bank and other six banks. In addition, the Company entered into a credit purchase loan agreement with Industrial Bank of Korea and seven other banks for credit lines of up to W250,000 million and short-term borrowing agreement of up to W190,000 million with Woori Bank and other two banks. The Company has an agreement with Woori Bank and others to open letters of credit, documents against acceptance and documents against payment amounting to US$1,100 million and to borrow US$250 million in foreign short-term borrowings. The accounts receivables in foreign currency sold to financial institutions and outstanding as of December 31, 2006, amount to US$158 million for which the Company is contingently liable upon the issuers’ default. In addition, POSCO has provided two blank promissory notes to Korea Resources Corp. as collateral for long term debt.
 
As of December 31, 2006, POSCO E & C has bank overdraft agreements of up toW20,000 million with Woori Bank and other banks, and has a daily bank overdraft of up to W20,000 million with Woori Bank. In addition, the Company entered into a credit purchase loan agreement with Woori Bank and another bank for credit lines of up to W110,000 million, and short-term borrowing agreement of up to W334,200 million with Woori Bank and others. POSCO E & C has provided eight blank promissory notes and 18 other notes, approximately amounting to W212,013 million, to other financial institutions as collaterals for agreements and outstanding loans. POSCO E&C has provided seven blank checks and one other check, approximately amounting to W2,500 million as collaterals for agreements and outstanding loans as of December 31, 2006.
 
As of December 31, 2006, Posteel Co., Ltd. has entered into local and foreign credit agreements, of up to W630,351 million and with Hana Bank and other banks of which W455,966 million remain unused. In addition, Posteel Co., Ltd. has an unsettled document against acceptance amounting to JPY 864 million and US$72 million, and an unsettled document against payment and usance balances in relation to exports amounting to US$4,823,480 and US$18,681 respectively.
 
As of December 31, 2006, POSCON Co., Ltd. has credit purchase loan agreements with Shinhan Bank and other banks for credit lines of up to W6,000 million and revolving loan agreements of up to W45,000 million. In addition, POSCON Co., Ltd. has entered into agreements with Kookmin Bank and other banks for opening letters of credit in relation to trade of up to US$14 million.
 
As of December 31, 2006, Pohang Coated Steel Co., Ltd. has provided a blank promissory note to Korea Zinc Company Ltd. as a guarantee for the repayment of loan. In addition, Pohang Coated Steel Co., Ltd. has entered into agreements to discount its trade accounts receivable with Shinhan Bank and other banks for amount of up to W2,000 million. In addition, Pohang Coated Steel Co., Ltd. has local credit loan agreements, credit purchase loan agreements and letters of credit in relation to trade of up to W29,000 million and JPY 500 million with Shinhan


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Bank. Pohang Coated Steel Co., Ltd. has entered into an agreement with the Export and Import Bank of Korea for export financing up to W50,000 million.
 
As of December 31, 2006, POSDATA Co., Ltd. has provided a blank promissory note to HP Financial Services for an outstanding lease agreement. In addition, POSDATA Co., Ltd. has a foreign currency loan agreement with Korea Exchange Bank of up to US$10 million and POSDATA Co., Ltd. entered into loan on bills agreements of up to W103,600 million with Shinhan Bank and other banks as of December 31, 2006.
 
As of December 31, 2006, POSCO Machinery & Engineering Co., Ltd. has entered into a bank overdraft agreement of up to W2,000 million with Shinhan Bank, local credit loan agreements of up to W6,000 million and credit lines up to W9,000 million with Shinhan Bank and other banks. In addition, POSCO Machinery & Engineering Co., Ltd. has entered into a letter of credit agreement with Shinhan Bank in relation to trade of up to US$3 million and GBP 1,907,400.
 
As of December 31, 2006, POS-AC Co., Ltd. has a bank overdraft agreement with Woori Bank amounting to W1,000 million and a loan agreement. In addition, POS-AC Co., Ltd. has entered into an agreement with Woori Bank amounting to W1,000 million in relation to discount of commercial bills.
 
As of December 31, 2006, POSCO Specialty Steel Co., Ltd. has a loan agreement, secured by trade accounts receivable, of up to W150,000 million with Woori Bank. As of December 31, 2006, the Company has used W55,425 million of this loan agreement, consisting of trade payables of W37,254 million, and non-trade payables of W18,171 million. In addition POSCO Specialty Steel Co., Ltd. also has agreements with Woori Bank and seven other banks for letters of credit of up to US$73 million and W31,000 million, respectively, and has a loan agreement of up to W115,000 million with them.
 
As of December 31, 2006, POSCO Machinery Co., Ltd. has a loan agreement, secured by trade accounts receivables, of up to W6,000 million and W4,000 million with Woori Bank and Korean Industry Banks, respectively. POSCO Machinery Co., Ltd. has a working capital loan agreement of up to W3,272 million with Woori Bank. In addition, POSCO Machinery Co., Ltd. has entered into an agreement with Korea Exchange Bank for opening letters of credit of up to US$3 million. POSCO Machinery Co., Ltd. also has entered into a performance guarantee contract of up to W10,000 million with Kwangju Bank. In addition, the amount of the transferred accounts receivables to financial institutions by discount of commercial bills is W200 million. The total transfer price amounted to W199,847,000, and the loss on sale of accounts receivable disposal amounted to W153,000. As of December 31, 2006, there are no discounts of notes receivables.
 
As of December 31, 2006, POSCO America Corp. has loan agreements of up to US$85 million with Bank of America and other banks.
 
As of December 31, 2006, POSCO Asia Co., Ltd. has loan agreements of up to US$160 million with Bank of America and other banks.
 
As of December 31, 2006, POS-Tianjin Coil Center Co., Ltd. has loan agreements of up to CNY 21,864,360 and US$5 million with HSBC.
 
As of December 31, 2006, POSMETAL Co., Ltd. has loan agreements of up to JPY 4,300 million with the Bank of Fukuoka and other banks.
 
As of December 31, 2006, Zhangjiagang Pohang Stainless Steel Co., Ltd. has loan agreements of up to CNY 1,178 million and US$330 million with Bank of China and other banks.
 
As of December 31, 2006, POSCO Refractories & Environment Company Ltd. (POSREC) has a bank overdraft agreement of up to W3,000 million each with Pusan Bank and Woori Bank. In addition, POSREC has entered into agreements of up to US$5 million and W5,000 million with Pusan Bank and Citibank Korea, respectively, for opening letters of credit.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

As of December 31, 2006, POSMATE Co., Ltd. has provided a blank promissory note to Hyundai Motor Service as a guarantee for the maintenance of vehicles. In addition, POSMATE Co., Ltd. has a bank overdraft agreements of up toW3,000 million with Woori Bank.
 
As of December 31, 2006, Samjung Packing & Aluminum Co., Ltd. has a bank overdraft agreement of up to W1,000 million with Woori Bank, and purchase loan agreements of up to W45,000 million with Woori Bank and other banks. In addition, Samjung Packing & Aluminum Co., Ltd. has entered into agreements of up to US$40 million with Woori Bank and other banks for opening letters of credit in relation to trade. The accounts receivables in foreign currency sold to financial institutions and outstanding as of December 31, 2006, amount to W4,549 million, for which the Company is contingently liable upon the issuers’ default. In addition, Samjung Packing & Aluminum Co., Ltd. has loan agreements up to W1,000 million with Woori Bank.
 
As of December 31, 2006, POSCO-Japan has bank overdraft agreements for working capital of up to JPY 46,557,463,442 with MIZUHO bank and other banks.
 
18.   Capital Surplus
 
Capital surplus as of December 31, 2006 and 2005, consist of the following:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Additional paid-in capital
  W 462,810     W 463,825  
Revaluation surplus
    3,233,730       3,233,730  
Others
    338,733       293,854  
                 
    W 4,035,273     W 3,991,409  
                 
 
19.   Retained Earnings
 
Retained earnings as of December 31, 2006 and 2005, consist of the following:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Appropriated
               
Legal reserve
  W 241,201     W 241,201  
Appropriated retained earnings for business stabilization
    918,300       918,300  
Other legal reserve
    1,383,333       1,303,333  
Voluntary reserve
    12,926,733       9,735,199  
                 
      15,469,567       12,198,033  
Unappropriated
    3,393,766       3,970,859  
                 
    W 18,863,333     W 16,168,892  
                 
 
Legal Reserve
 
The Commercial Code of the Republic of Korea requires the Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid, until such reserve equals 50% of its issued capital stock. The reserve is not available for the payment of cash dividends, but may be transferred to capital stock, or used to reduce accumulated deficit, if any, with the ratification of the Company’s majority shareholders.


F-50


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Other Legal Reserve
 
Pursuant to the Special Tax Treatment Control Law, the Company appropriates retained earnings as a reserve for overseas investment loss and research and human resource development. These reserves are not available for dividends, but may be transferred to capital stock, or used to reduce accumulated deficit, if any, with the ratification of the Company’s majority shareholders.
 
Voluntary Reserve
 
The Company appropriates a certain portion of retained earnings, such as reserve for business rationalization, reserve for business expansion and appropriated retained earnings for dividends, with the shareholders’ approval, as a voluntary reserve. This reserve may be transferred to unappropriated retained earnings the approval of shareholders, and may be distributed as dividends after its reversal.
 
Additional Losses of Minority Interest
 
The accumulated deficit of POSLILAMA Steel Structure Co., Ltd and POS-NPC Co., Ltd.., affiliates included in the consolidated financial statements, resulted in losses in excess of minority interest amounting to W5,561 million for December 31, 2006 (2005: W42,766 million). The additional losses are deducted from the consolidated retained earnings to be charged to the Controlling Company. The Company plans to add any profits resulting from POSLILAMA Steel Structure Co., Ltd. and POS-NPC Co., Ltd. to the Controlling Company’s equity until they recover the amount of losses in excess of minority interest.
 
Dividends
 
Details of interim and year-end dividends for the years ended December 31, 2006, 2005 and 2004, are as follows:
 
                         
Interim Cash Dividends
  2006     2005     2004  
    (In millions of Korean Won)  
 
Number of outstanding shares
    77,780,460       78,759,934       80,707,945  
Dividend ratio
    40 %     40 %     30 %
                         
Dividend amount
  W 155,561     W 157,520     W 121,062  
                         
 
                         
Year-End Cash Dividends
  2006     2005     2004  
    (In millions of Korean Won)  
 
Number of outstanding shares
    77,592,942       80,154,281       80,503,664  
Dividend ratio
    120 %     120 %     130 %
                         
Dividend amount
  W 465,558     W 480,926     W 523,274  
                         
 
Details of the dividend payout ratio and dividend yield ratio for the years ended December 31, 2006, 2005 and 2004, are as follows:
 
                                                 
    2006     2005     2004  
    Dividend
    Dividend
    Dividend
    Dividend
    Dividend
    Dividend
 
    Payout Ratio     Yield Ratio     Payout Ratio     Yield Ratio     Payout Ratio     Yield Ratio  
 
Common shares
    18.74 %     2.59 %     15.87 %     3.96 %     16.89 %     4.28 %
                                                 


F-51


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

20.   Capital Adjustments
 
Capital adjustments as of December 31, 2006 and 2005 consist of the following:
 
                 
    2006     2005  
    (In millions of Korean Won)  
 
Treasury stock
  W (1,670,690 )   W (959,205 )
Cumulative foreign currency translation adjustment
    (47,452 )     4,386  
Valuation loss on investment securities and others
    249,668       (198,878 )
                 
    W (1,468,474 )   W (1,153,697 )
                 
 
As of December 31, 2006, the Company holds 9,593,893 shares of its own common stock amounting to W1,670,690 million.
 
The voting rights of treasury stock are restricted in accordance with the Korean Commercial Code of the Republic of Korea. In addition, the Company sold 910,360 shares of its treasury stock to the association of employee stock ownership on July 26, 2006, as approved by the Board of Directors on July 21, 2006, and the difference between the fair value and the proceeds from the sale was recognized as welfare expense.
 
21.   Stock Appreciation Rights
 
POSCO granted stock appreciation rights to its executive officers in accordance with the stock appreciation rights plan approved by the Board of Directors. The details of the stock appreciation rights granted are as follows:
 
                                                 
    1st Grant     2nd Grant     3rd Grant     4th Grant     5th Grant     6th Grant  
 
                                                 
Before the modifications(1)
                                               
Number of shares
    498,000 shares       60,000 shares       22,000 shares       141,500 shares       218,600 shares       90,000 shares  
Exercise price
  W 98,400 per share     W 135,800 per share     W 115,600 per share     W 102,900 per share     W 151,700 per share     W 194,900 per share  
After the modifications(1)
                                               
Grant date
    July 23, 2001       April 27, 2002       September 18, 2002       April 26, 2003       July 23, 2004       April 28, 2005  
Exercise price
  W 98,900 per share     W 136,400 per share     W 116,100 per share     W 102,900 per share     W 151,700 per share     W 194,900 per share  
Number of shares granted
    453,576 shares       55,896 shares       20,495 shares       135,897 shares       214,228 shares       90,000 shares  
Number of shares cancelled
    19,409 shares                                
Number of shares exercised
    377,745 shares       32,741 shares       4,931 shares       74,931 shares              
Number of shares outstanding
    56,422 shares       23,155 shares       15,564 shares       60,966 shares       214,228 shares       90,000 shares  
Exercise period
    July 24, 2003 -       April 28, 2004 -       Sept. 19, 2004 -       April 27, 2005 -       July 24, 2006 -       April 29, 2007 -  
      July 23, 2008       April 27, 2009       Sept. 18 2009       April 26, 2010       July 23, 2011       April 28, 2012  
 
 
(1) The Company changed the number of shares granted and the exercise price as presented above, in accordance with the resolutions of the Board of Directors dated April 26, 2003, October 17, 2003, and October 22, 2004.
 
POSCO applied the intrinsic value method to calculate the compensation cost related to the stock appreciation rights, and such compensation costs are accounted as other long-term liabilities and amortized over the vesting period of the stock grants.


F-52


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

The compensation costs for stock appreciation rights granted to executives recognized for the year ended December 31, 2006, and for the future periods are as follows:
 
                                                         
    1st Grant     2nd Grant     3rd Grant     4th Grant     5th Grant     6th Grant     Total  
    (In millions of Korean Won)  
 
Prior period
  W 39,645     W 3,749     W 1,732     W 13,235     W 8,243     W 310     W 66,914  
Current period
    7,315       3,070       1,537       6,556       23,720       7,687       49,885  
Future period
                                  1,543       1,543  
                                                         
    W 46,960     W 6,819     W 3,269     W 19,791     W 31,963     W 9,540     W 118,342  
                                                         
 
The following table summarizes information about appreciation rights granted and expense recognized at the award date:
 
                                 
    2006     2005  
    Number of Stock
    Weighted-Average
    Number of Stock
    Weighted-Average
 
Stock Appreciation
  Appreciation
    Exercise Price per
    Appreciation
    Exercise Price per
 
Rights Outstanding,
  Rights     Share     Rights     Share  
    (In Korean Won)  
 
Beginning of year
    534,642     W 140,258       722,007     W 118,711  
Granted
                90,000       194,900  
Excercised
    (74,307 )     109,404       (277,365 )     101,899  
Canceled
                       
Forfeited
                       
                                 
Stock appreciation rights outstanding, end of year
    460,335       145,238       534,642       140,258  
                                 
Excercisable at the year end
    370,335     W 133,169       230,414     W 108,276  
                                 
Weighted-average fair value at grant date
          W 116,176             W 116,176  
                                 
 
The following table summarizes information about stock appreciation rights outstanding at December 31, 2006:
 
                             
      Appreciation Rights Outstanding  
            Weighted-Average
    Weighted-Average
 
            Remaining
    Exercise Price
 
Exercise Prices     Shares     Contractual Life     per Share  
      (In Korean Won)  
 
  98,900       56,422       1.56 years     W 98,900  
  136,400       23,155       2.32 years       136,400  
  116,100       15,564       2.72 years       116,100  
  102,900       60,966       3.32 years       102,900  
  151,700       214,228       4.56 years       151,700  
  194,900       90,000       5.33 years       194,900  
                             
          460,335       4.00 years     W 145,238  
                             


F-53


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

22.   Derivatives
 
The Company has entered into cross currency swap agreements to reduce interest rates and currency risks and currency forward contracts with financial institutions to hedge the currency risk of future cash flows. The gains and losses on currency swap and currency forward contracts for December 31, 2006, and related contracts outstanding as of December 31, 2006, are as follows:
 
                                             
    Type of
  Purpose of
  Financial
  Valuation
    Valuation
    Transaction
    Transaction
 
Company
 
Transaction
  Transaction  
Institutions
  Gain     Loss     Gain     Loss  
    (In millions of Korean Won)  
 
POSCO
  Currency forward   Trading   SC Korea First   W     W     W 779     W 11,491  
    Nickel future     Bank and others Sempra Metal Ltd.                       12,205  
POSCO E&C
  Currency forward     Citibank Korea and others     1       791       732       920  
Posteel Co., Ltd. 
      Hana bank and others                 37       300  
Pohang Coated
      Shinhan Bank                 1,258       843  
Steel Co., Ltd. 
  Option         1,856       12       1,734       83  
POSDATA
  Currency forward   Cash flow
hedge
  Korea Exchange Bank                 53       25  
POSCO Specialty Steel Co., Ltd. 
    Fair market
value hedge
  SC Korea First Bank           17       190       78  
POSCO Power Co., Ltd. 
  SWAP   Trading   Korea Development Bank and others                 10,694       14,418  
                                             
                W 1,857     W 820     W 15,477     W 40,363  
                                             
 
The gains and losses on currency swap and currency forward contracts for the year ended December 31, 2005, and related contracts outstanding as of December 31, 2005, were as follows:
 
                                             
    Type of
  Purpose of
  Financial
  Valuation
    Valuation
    Transaction
    Transaction
 
Company
 
Transaction
  Transaction  
Institutions
  Gain     Loss     Gain     Loss  
    (In millions of Korean Won)  
 
POSCO
  Currency forward   Trading   SC Korea First Bank and others   W     W 18,727     W 688     W 861  
    Nickel future     Sempra Metal Ltd.                 1,674       637  
POSCO E&C
  Currency forward     Citibank Korea and others     1,546       1,982       600       6,722  
Posteel Co., Ltd. 
      Hana bank and others                   170       37  
Pohang Coated
      Shinhan Bank           684       112       125  
Steel Co., Ltd. 
  Option         125             486       564  
POSDATA
  Currency forward     Korea Exchange Bank                 90       12  
POSCO Specialty Steel Co., Ltd. 
      SC Korea First Bank                 37       42  
                                             
                W 1,671     W 21,393     W 3,857     W 9,000  
                                             


F-54


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

The gains and losses on currency swap and currency forward contracts for the year ended December 31, 2004, and related contracts outstanding as of December 31, 2004, were as follows:
 
                                             
    Type of
  Purpose of
  Financial
  Valuation
    Valuation
    Transaction
    Transaction
 
Company
 
Transaction
  Transaction  
Institutions
  Gain     Loss     Gain     Loss  
    (In millions of Korean Won)  
 
POSCO
  Currency swap   Trading   Citybank Korea and others   W     W     W 683     W  
    Nickel future     Sempra Metal Ltd.                 2,800       5,980  
    Currency forward       CALYON     6             597       1,092  
POSCO E&C
      Citibank Korea and others     9,588       2,646       4,900       1,499  
Posteel Co., Ltd. 
      Citibank Korea                 328       694  
Pohang Coated Steel Co., Ltd. 
      Shinhan Bank                 3,106       67  
POSCO Specialty Steel Co., Ltd. 
      SC Korea First Bank                 38        
                                             
                W 9,594     W $2,646     W 12,452     W 9,332  
                                             
 
23.   Selling and Administrative Expenses
 
Selling and administrative expenses for December 31, 2006, 2005 and 2004, consist of the following:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Transportation and storage
  W 539,589     W 492,921     W 493,790  
Salaries
    183,943       168,746       149,153  
Welfare
    111,666       116,542       103,638  
Depreciation and amortization
    72,983       60,742       68,145  
Fees and charges
    62,610       122,204       76,710  
Advertising
    87,666       98,158       49,382  
Research and development expenses
    54,035       52,545       70,949  
Severance benefits
    26,109       29,475       25,051  
Sales commissions
    42,644       23,409       18,286  
Travel
    21,468       18,808       18,530  
Rent
    16,313       16,345       17,287  
Repairs
    8,846       14,736       20,047  
Training
    18,496       17,367       11,765  
Office supplies
    6,957       7,654       8,103  
Provision for doubtful accounts
    117,337       104,310       53,671  
Meeting
    9,368       9,680       8,576  
Taxes and public dues
    18,936       14,914       13,661  
Vehicle expenses
    2,941       2,155       6,509  
Membership fees
    7,273       8,876       5,391  
Sales promotions
    22,471       5,745       6,474  
Entertainment
    7,904       7,315       6,444  
Others
    116,860       58,670       61,366  
                         
    W 1,556,415     W 1,451,317     W 1,292,928  
                         


F-55


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

24.   Donations
 
Donations by the Company for December 31, 2006, 2005 and 2004, consist of the following:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
POSTECH
  W 22,000     W 17,050     W 32,479  
POSCO Educational Foundation
    33,000       33,000       39,500  
POSCO Welfare Fund
    59,400       69,960       58,000  
Others
    40,278       33,008       39,567  
                         
    W 154,678     W 153,018     W 169,546  
                         
 
25.   Income Taxes
 
Income tax expense for December 31, 2006, 2005 and 2004, consists of the following:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Current income taxes
  W 691,315     W 1,547,761     W 1,361,874  
Deferred income taxes
    230,636       (74,172 )     139,772  
                         
    W 921,951     W 1,473,589     W 1,501,646  
                         
 
The following table reconciles income tax expense computed at the statutory rates to the actual income tax expense recorded by the Company:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Net income before income tax expense
  W 4,284,592     W 5,488,189     W 5,342,910  
Statutory tax rate (%)
    27.5       27.5       29.7  
                         
Income tax expense computed at statutory rate
    1,178,260       1,509,252       1,586,844  
Tax credit
    (181,739 )     (215,892 )     (161,939 )
Others, net
    (74,570 )     180,229       76,741  
                         
Income tax expense
  W 921,951     W 1,473,589     W 1,501,646  
                         
Effective rate (%)
    21.52       26.85       28.11  
                         
 
The consolidated financial statements as of and for the year ended December 31, 2006 reflect the early adoption of the Korea Accounting Institute’s opinion on the Korean Accounting Statement Implementation 06-2, ‘Accounting treatment for taxable temporary differences associated with investments in subsidiaries, associates, and interest in joint ventures’. The consolidated financial statements as of and for the year ended December 31, 2005 have been restated to reflect the accounting changes to pursuant to SKFAS No. 1.


F-56


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

The effects of the change in accounting policy for the year ended December 31, 2006 and the adjustments for the year ended December 31, 2005 are as follows:
 
                         
    2006  
    Before Adjustment     Adjustment     After Adjustment  
    (In millions of Korean Won)  
 
Deferred income tax liabilities(1)
  W 450,955     W 9,387     W 460,342  
Minority interest
    491,133       (1,926 )     489,207  
Income tax expense
    903,714       18,237       921,951  
Net income before minority interest
    3,380,878       (18,237 )     3,362,641  
Minority interest in income of consolidated subsidiaries
    50,385       (1,925 )     48,460  
Net income
    3,330,492       (16,311 )     3,314,181  
 
                         
    2005  
    Before Adjustment     Adjustment     After Adjustment  
    (In millions of Korean Won)  
 
Deferred income tax liabilities(1)
  W 220,628     W (6,761 )   W 213,867  
Capital adjustments
    (1,151,609 )     (2,088 )     (1,153,697 )
Minority interest
    386,766       (2,096 )     384,670  
Income tax expense
    1,482,438       (8,849 )     1,473,589  
Net income before minority interest
    4,005,751       8,849       4,014,600  
Minority interest in income of consolidated subsidiaries
    (5,796 )     (2,096 )     (7,892 )
Net income
    4,011,547       10,945       4,022,492  
Basic and diluted earnings per share
  W 50,652/share             W 50,790/share  
 
 
(1) Part of deferred tax liabilities is classified as non-current liabilities.
 
26.   Earnings Per Share
 
Basic earnings per share is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the year. Basic ordinary income per share is computed by dividing ordinary income allocated to common stock as adjusted by extraordinary gains or losses and net of related income taxes, by the weighted average number of common shares outstanding during the year.
 
                         
    2006     2005     2004  
 
Number of Shares Issued(1)(I)
    87,186,835       87,186,835       87,186,835  
Accumulated Number of Treasury Shares(2)
    3,099,818,765       2,915,875,434       2,324,518,992  
Number of Days Outstanding
    365       365       366  
Weighted-Average Number of Treasury Shares (II)
    8,492,654       7,988,700       6,351,145  
Weighted-Average Number of Common Shares ((I)-(II))
    78,694,181       79,198,135       80,835,690  
 
 
(1) No change for the year ended December 31, 2006.
 
(2) This number is comprised of acquisitions and disposals of treasury stocks, which are shown on a net basis.
 
For the computation of weighted average number of common shares outstanding, the weighted-average number of treasury shares was excluded.


F-57


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Ordinary income per share for the years ended December 31, 2006, 2005 and 2004, are calculated as follows:
 
                         
    2006     2005     2004  
    (In millions of Korean Won,
 
    except per share amounts)  
 
Net ordinary income
  W 3,314,181     W 4,022,492     W 3,811,843  
Weighted-average number of common shares outstanding
    78,694,181       79,198,135       80,835,690  
Basic ordinary income and earnings per share
  W 42,115     W 50,790     W 47,155  
 
Earnings per share for the years ended December 31, 2006, 2005 and 2004 are calculated as follows:
 
                         
    2006     2005     2004  
    (In millions of Korean Won,
 
    except per share amounts)  
 
Net income
  W 3,314,181     W 4,022,492     W 3,814,225  
Weighted-average number of common shares outstanding
    78,694,181       79,198,135       80,835,690  
Basic net income and earnings per share
  W 42,115     W 50,790     W 47,185  
 
Diluted Earnings Per Share
 
Diluted earnings per share for the years ended December 31, 2006, 2005 and 2004, are identical to basic earnings per share, since there is no dilutive effect resulting from the stock option plan as of December 31, 2006, 2005 and 2004.


F-58


Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

27.   Assets and Liabilities Denominated in Foreign Currencies
 
Monetary assets and liabilities denominated in foreign currencies as of December 31, 2006 and 2005, are as follows:
 
                             
    2006     2005  
              Won
    Won
 
    Foreign Currency(3)     Equivalent     Equivalent  
    (In millions of Korean Won)  
 
Assets
                           
Cash and cash equivalents(1)
  US$     310,532,020     W 288,671     W 320,964  
    JPY     2,813,798       22       275  
    Overseas subsidiaries (US$)     323,083,993       300,339       284,221  
Trade accounts and notes receivable
  US$     232,664,898       216,285       552,622  
    JPY     2,358,376,350       18,438       31,912  
    EUR     7,491,962       9,157       4,346  
    Overseas subsidiaries (US$)     464,123,798       431,449       244,741  
Other accounts and notes receivable
  US$     30,132,257       28,011       10,066  
    JPY     16,987,193       133       336  
    Overseas subsidiaries (US$)     67,780,423       63,009       18,526  
Short-term and long-term loans receivable
  Overseas subsidiaries (US$)     41,075,306       38,184       19,302  
Long-term trade accounts and notes receivable
  Overseas subsidiaries (US$)                 71  
Investment securities(2)
  Overseas subsidiaries (US$)     43,628,434       40,557       37,502  
Guarantee deposits
  US$     162,449       151       332  
    EUR     34,458       42        
    Overseas subsidiaries (US$)     25,657,296       23,851       1,306  
                             
                W 1,458,299     W 1,526,522  
                             
 


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Notes to Consolidated Financial Statements — (Continued)

                             
    2006     2005  
              Won
    Won
 
    Foreign Currency(3)     Equivalent     Equivalent  
    (In millions of Korean Won)  
 
Liabilities
                           
Trade accounts and notes payable
  US$     52,627,051     W 48,922     W 782,304  
    JPY     1,687,520,861       13,194       19,564  
    EUR     3,161,589       3,864       13,215  
    Overseas subsidiaries (US$)     338,829,755       314,976       72,520  
Other accounts and notes payable
  US$     18,616,545       17,306       7,599  
    JPY     809,139,661       6,326       2,624  
    EUR     5,887,443       7,196       4,937  
    Overseas subsidiaries (US$)     42,430,861       39,444       362  
Accrued expenses
  US$     94,066       87       8,591  
    Overseas subsidiaries (US$)     16,160,872       15,023       18,785  
Short-term borrowings
  US$     15,180,781       14,112       10,424  
    Overseas subsidiaries (US$)     1,181,389,845       1,098,220       633,200  
Withholdings
  US$     22,211       21       5,025  
    EUR     301,745       369       6,796  
    Overseas subsidiaries (US$)     3,067,691       2,852       8,058  
Debentures(2), (4)
  US$     300,000,000       278,880       263,547  
    JPY     101,622,000,000       794,512       701,982  
Foreign currency loans(4)
  US$     34,288,961       31,875        
    JPY     576,000,000       4,503       24,109  
    Overseas subsidiaries (US$)     311,756,670       289,809       379,817  
Loans from foreign financial institutions(4)
  US$     14,918,501       13,868       19,430  
    EUR     17,490,732       21,378       25,739  
                             
                W 3,016,737     W 3,008,628  
                             
 
 
(1) Includes cash and cash equivalents, short-term financial instruments and long-term financial instruments.
 
(2) Presented at face value.
 
(3) Currencies other than US dollars, Japanese yen, and Euros are converted into US dollars. The amounts of overseas subsidiaries are converted into US dollars.
 
(4) Includes current portion of long-term debts.

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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
28.   Related Party Transactions
 
Significant transactions, which occurred in the ordinary course of business, with consolidated subsidiaries for the years ended December 31, 2006, 2005 and 2004, and the related account balances as of December 31, 2006 and 2005, are as follows:
 
                                                 
    Sales and Others (1)     Purchases and Others(1)  
    2006     2005     2004     2006     2005     2004  
    (In millions of Korean Won)  
 
POSCO E&C
  W 12,134     W 3,758     W 9,317     W 1,618,205     W 1,732,462     W 891,474  
Posteel Co., Ltd. 
    966,254       1,030,276       919,618       93,315       86,005       67,193  
POSCON Co., Ltd. 
    177       131       139       219,602       235,232       194,847  
Pohang Steel Co., Ltd. 
    367,443       426,007       303,425       853       1,105       271  
POSCO Machinery & Engineering Co., Ltd. 
    1,908       92       5,001       125,996       160,787       116,424  
POSDATA Co., Ltd. 
    2,290       1,009       989       175,046       182,149       209,839  
POSCO Research Institute
                      18,553       14,350       13,203  
Seung Kwang Co., Ltd. 
                      6       110       35  
POS-AC Co., Ltd. 
    732       566       517       30,546       29,554       20,980  
POSCO Specialty Steel Co., Ltd. 
    2,844       3,440       31       70,299       53,618       75,984  
POSCO Machinery Co., Ltd. 
    1,929       121       116       76,189       107,648       95,892  
POSCO Refractories & Environment (POSREC)
    166       261       137       211,122       195,329       173,917  
POSTECH Venture Capital Co., Ltd. 
    77       63       59                    
Pohang Steel America Corporation (POSAM)
    84,227       97,920       33,446       277              
POSCO Australia Pty. Ltd. (POSA)
    17,821       10,163       1,115       2,235       31,305       41,673  
POSCO Canada Ltd. (POSCAN)
                      91,502       102,841       56,143  
POSCO Asia Co., Ltd. (POA)
    440,078       552,694       573,772       73,353       130,871       146,016  
Zhangjiagang Pohang Stainless Steel Co., Ltd. 
    487,037       723,522       714,832                    
POSCO — Japan Co., Ltd. 
    566,208       544,636       409,845       75,170       75,604       30,846  
Others
    324,358       317,176       86,821       253,698       338,718        
                                                 
    W 3,275,683     W 3,711,835     W 3,059,180     W 3,135,967     W 3,477,688     W 2,134,737  
                                                 
 


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Notes to Consolidated Financial Statements — (Continued)

                                 
    Receivables(2)     Payables(2)  
    2006     2005     2006     2005  
    (In millions of Korean Won)  
 
POSCO E&C
  W 7,933     W 53     W 77,678     W 193,856  
Posteel Co., Ltd. 
    69,539       111,790       3,198       1,760  
POSCON Co., Ltd. 
    1       1       18,016       28,638  
Pohang Steel Co., Ltd. 
    41,029       33,896       94       66  
POSCO Machinery & Engineering Co., Ltd. 
    4       4       13,211       14,449  
POSDATA Co., Ltd. 
    1       43       26,639       26,709  
POSCO Research Institute
                3,766       2,674  
Seung Kwang Co., Ltd. 
    2,034       2,063              
POS-AC Co., Ltd. 
          1       1,177       888  
POSCO Specialty Steel Co., Ltd. 
          1,231       3,103       2,119  
POSCO Machinery Co., Ltd. 
    30       1       11,203       9,863  
POSCO Refractories & Environment (POSREC)
    9       17       23,742       23,774  
POSTECH Venture Capital Co., Ltd. 
                      53  
Pohang Steel America Corporation (POSAM)
    401       9              
POSCO Australia Pty. Ltd. (POSA)
          618              
POSCO Canada Ltd. (POSCAN)
    13             14,166       5,726  
POSCO Asia Co., Ltd. (POA)
    20,827       8,749       1,277       6,931  
Zhangjiagang Pohang Stainless Steel Co., Ltd. 
    6       175,415              
POSCO — Japan Co., Ltd. 
    20,685       19,599       5,428       1,542  
Others
    9,430       97,123       23,396       28,772  
                                 
    W 171,942     W 450,613     W 226,094     W 347,820  
                                 
 
 
(1) Sales and others include sales, non-operating income and others; purchases and others include purchases, overhead expenses and others.
 
(2) Receivables include trade accounts, other accounts receivable and others; payables include trade accounts, other accounts payable and others.

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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
Significant transactions, which occurred in the ordinary course of business, with equity method investees for the years ended December 31, 2006 and 2005, and related account balances as of December 31, 2006 and 2005, are as follows:
 
                                                 
    Sales and others(1)     Purchases and others(1)  
    2006     2005     2004     2006     2005     2004  
    (In millions of Korean Won)  
 
eNtoB Corporation
  W     W     W     W 134,703     W 170,258     W 131,377  
KOBRASCO
                      141,859       202,262       104,848  
POSCHROME
                      35,009       45,043       51,820  
Posmmit Steel Centre SDN BHD (POS-MMIT)
    3,971       10,229       7,655                    
PT POSMI Steel Indonesia
                5                    
POSVINA
    2,684       11,239       12,599                    
USS — POSCO Industries (UPI)
    356,190       312,377       365,362                    
Guangdong Xingpu Steel Center Co., Ltd. 
    10,295                                
MIDAS Information Technology., Ltd. 
                                  15  
                                                 
    W 373,140     W 333,845     W 385,621     W 311,571     W 417,563     W 288,060  
                                                 
 
                                 
    Receivables(2)     Payables(2)  
    2006     2005     2006     2005  
    (In millions of Korean Won)  
 
eNtoB Corporation
  W     W     W 1,917     W 2,329  
KOBRASCO
                9,737        
POSCHROME
                      4,719  
Posmmit Steel Centre SDN BHD (POS-MMIT)
          29              
POSVINA
          1,100              
Guangdong Xingpu Steel Center Co., Ltd. 
    2,337                    
                                 
    W 2,337     W 1,129     W 11,654     W 7,048  
                                 
 
 
(1) Sales and others include sales, non-operating income and others; purchases and others include purchases, overhead expenses and others.
 
(2) Receivables include trade accounts, other accounts receivable and others; payables include trade accounts, other accounts payable and others.


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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
Eliminations of intercompany revenues and expenses for the years ended December 31, 2006, 2005 and 2004, are as follows:
 
                                                     
    Revenues         Expenses  
    2006     2005     2004         2006     2005     2004  
    (In millions of Korean Won)         (In millions of Korean Won)  
 
Sales
  W 7,670,446     W 8,293,069     W 5,982,359     Cost of goods sold   W 7,332,282     W 8,094,089     W 5,849,925  
Interest income
    694       1,322       2,242     Interest expense     3,912       3,778       2,272  
Rental income
    1,273       1,014       727     Selling and administrative expenses     259,038       156,157       120,428  
Others
    8,107       3,074       3,693     Others     85,288       44,455       16,396  
                                                     
    W 7,680,520     W 8,298,479     W 5,989,021         W 7,680,520     W 8,298,479     W 5,989,021  
                                                     
 
Eliminations of significant intercompany receivables and payables as of December 31, 2006 and 2005, are as follows:
 
                                     
    2006     2005         2006     2005  
    (In millions of Korean Won)         (In millions of Korean Won)  
 
Trade accounts and notes receivable
  W 709,207     W 1,046,732     Trade accounts and notes payable   W 494,980     W 728,395  
Short-term loans receivable
    41,642       36,310     Short-term borrowings     71,630       28,064  
Other accounts and notes receivable
    8,431       5,415     Other accounts and notes payable     173,648       269,287  
Long-term loans receivable
    56,613       37,359     Long-term debts     25,121       23,557  
Other assets
    113,497       208,316     Other liabilities     164,011       284,829  
                                     
    W 929,390     W 1,334,132         W 929,390     W 1,334,132  
                                     
 
29.   Segment and Regional Information
 
The following table provides information on the significant financial status of each operating segment of the consolidated subsidiaries as of and for the year ended December 31, 2006:
 
                                                 
          Engineering and
                Consolidation
       
    Steel     Construction     Trading     Others     Adjustment     Consolidated  
    (In millions of Korean Won)  
 
Statement of income
                                               
External customers
  W 23,727,533     W 3,752,233     W 3,046,127     W 2,986,879     W (7,670,446 )   W 25,842,326  
Less: Inter-segment
    3,984,759       1,631,547       632,841       1,421,299       7,670,446        
                                                 
Net sales
  W 19,742,774     W 2,120,686     W 2,413,286     W 1,565,580     W     W 25,842,326  
                                                 
Operating income
  W 4,078,997     W 282,489     W 24,202     W 252,283     W (248,824 )   W 4,389,147  
Depreciation and amortization
    1,712,672       12,284       5,967       141,114       (89,299 )     1,782,738  
Balance sheet
                                               
Inventories
  W 3,550,674     W 225,378     W 127,600     W 217,963     W (103,410 )   W 4,018,205  
Investments
    5,867,366       434,047       276,560       527,388       (3,393,443 )     3,711,918  
Property, plant and equipment
    14,075,709       75,712       201,797       1,358,874       (1,068,972 )     14,643,120  
Intangible assets
    258,874       25,889       430       125,147       146,742       557,082  


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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

The following table provides information on the significant financial status of each operating segment of the consolidated subsidiaries as of and for the year ended December 31, 2005:
 
                                                 
          Engineering and
                Consolidation
       
    Steel     Construction     Trading     Others     Adjustment     Consolidated  
    (In millions of Korean Won)  
 
Statement of income
                                               
External customers
  W 24,886,534     W 3,993,961     W 3,373,587     W 2,340,775     W (8,293,069 )   W 26,301,788  
Less: Inter-segment
    3,974,711       1,845,747       990,742       1,481,869       8,293,069        
                                                 
Net sales
  W 20,911,823     W 2,148,214     W 2,382,845     W 858,906     W     W 26,301,788  
                                                 
Operating income
  W 5,879,972     W 244,910     W 24,453     W 190,378     W (256,437 )   W 6,083,276  
Depreciation and amortization
    1,604,241       11,874       7,626       70,693       (81,880 )     1,612,554  
Balance sheet
                                               
Inventories
  W 3,275,723     W 205,622     W 102,569     W 314,233     W (105,553 )   W 3,792,594  
Investments
    4,662,747       348,143       273,938       468,074       (2,611,346 )     3,141,556  
Property, plant and equipment
    12,223,681       63,747       213,681       571,320       (800,719 )     12,271,710  
Intangible assets
    326,780       26,712       505       110,527       (10,815 )     453,709  
 
The following table provides information on the significant financial status of each operating segment of the consolidated subsidiaries as of and for the year ended December 31, 2004:
 
                                                 
          Engineering and
                Consolidation
       
    Steel     Construction     Trading     Others     Adjustment     Consolidated  
    (In millions of Korean Won)  
 
Statement of income
                                               
External customers
  W 22,683,873     W 2,741,240     W 2,986,345     W 1,543,954     W (5,982,359 )   W 23,973,053  
Less: Inter-segment
    3,322,773       1,051,816       626,580       981,190       5,982,359        
                                                 
Net sales
  W 19,361,100     W 1,689,424     W 2,359,765     W 562,764     W     W 23,973,053  
                                                 
Operating income
  W 5,180,632     W 93,851     W 34,770     W 90,640     W (80,473 )   W 5,319,420  
Depreciation and amortization
    1,553,823       10,983       7,933       77,002       (84,380 )     1,565,361  
Balance sheet
                                               
Inventories
  W 2,541,127     W 285,129     W 72,463     W 223,809     W (57,007 )   W 3,065,521  
Investments
    4,089,017       303,413       282,491       328,247       (2,298,630 )     2,704,538  
Property, plant and equipment
    10,198,426       66,330       230,082       510,987       (565,534 )     10,440,291  
Intangible assets
    410,192       18,633       1,515       78,445       (12,470 )     496,315  


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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Substantially all of the Company’s operations are for the production of steel products. Net sales for the years ended December 31, 2006, 2005 and 2004, and non-current assets by geographic location as of December 31, 2006 and 2005, are as follows:
 
                                         
    Sales(1)     Long-Lived Assets  
Customer Location
  2006     2005     2004     2006     2005  
    (In millions of Korean Won)  
 
Korea
  W 17,250,163     W 18,566,060     W 16,738,372     W 14,658,557     W 12,310,240  
Japan
    1,311,685       1,371,510       1,163,541       59,540       65,282  
China
    3,070,422       3,117,909       3,315,789       1,102,657       951,921  
Asia/Pacific, excluding Japan and China
    1,486,331       1,502,205       1,257,108       164,018       113,001  
North America
    610,240       550,331       529,080       88,794       52,337  
Others
    2,113,485       1,193,773       969,163       48,866       44,172  
Consolidation adjustments
                      (922,230 )     (811,534 )
                                         
    W 25,842,326     W 26,301,788     W 23,973,053     W 15,200,202     W 12,725,419  
                                         
 
 
(1) Represents revenues, net of consolidation adjustments, incurred based on customers’ locations instead of the Company and subsidiaries’ locations.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

 
Condensed consolidated balance sheets as of December 31, 2006, categorized by types of business are as follows:
 
                 
    2006  
    Non-Financial
    Financial
 
    Institution     Institution  
    (In millions of Korean Won)  
 
Assets
               
Current assets
  W 12,161,686     W 75,267  
Non-current assets
    18,776,636       135,485  
Investment assets
    3,576,481       135,438  
Property, plant and equipment
    14,643,073       47  
Intangible assets
    557,082        
                 
Total assets
  W 30,938,322     W 210,752  
                 
Liabilities
               
Current liabilities
  W 4,994,825     W 87,471  
Non-current liabilities
    3,664,895       141  
                 
Total liabilities
    8,659,720       87,612  
                 
Shareholders’ equity
               
Common stock
    373,716       108,687  
Capital surplus
    4,035,273        
Retained earnings
    18,839,242       24,091  
Capital adjustments
    (1,458,837 )     (9,638 )
Minority interest
    489,208        
                 
Total shareholders’ equity
    22,278,602       123,140  
                 
Total liabilities and shareholders’ equity
  W 30,938,322     W 210,752  
                 


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Condensed consolidated statements of income for the year ended December 31, 2006, categorized by types of business are as follows:
 
                 
    2006  
    Non-Financial
    Financial
 
    Institution     Institution  
    (In millions of Korean Won)  
 
Sales
  W 25,832,162     W 10,164  
Cost of goods sold
    19,891,544       5,220  
Selling and administrative expenses
    1,553,868       2,547  
                 
Operating income
    4,386,750       2,397  
Non-operating income
    743,537       5,687  
Non-operating expenses
    851,338       2,441  
                 
Net income before income tax expense and minority interest
    4,278,949       5,643  
Income tax expense
    921,382       569  
                 
Net income before minority interest
    3,357,567       5,074  
Minority interest in income of consolidated subsidiaries
    (48,460 )      
                 
Net income
  W 3,309,107     W 5,074  
                 
 
30.   Operating Results for the Final Interim Period
 
Significant operating results for the three-month periods ended December 31, 2006 and 2005, are as follows:
 
                 
    2006     2005  
    (Unaudited)     (Unaudited)  
    (In millions of Korean Won, except per share amount)  
 
Sales
  W 7,363,295     W 6,353,114  
Cost of sales
    5,651,442       5,004,931  
Operating income
    1,238,385       1,108,800  
Net income
    1,051,779       377,935  
Ordinary income per share
    13,531       4,792  
Net income per share
    13,531       4,792  


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

31.   Supplemental Cash Flow Information
 
Significant noncash financing and investing activities for the year ended December 31, 2006, 2005 and 2004 are as follows:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Noncash financing activities:
                       
Reclassification to current from noncurrent relating to loans from foreign financial institutions
  W 8,797     W 9,065     W 10,678  
Reclassification to current from noncurrent relating to long-term debt
    164,370       54,933       74,241  
Reclassification to current from noncurrent relating to debentures
    231,100       991,609       961,607  
Noncash investing activities:
                       
Reclassification to current from noncurrent relating to held-to-maturity securities
    153,476       2,688       13,769  
 
Certain amounts in consolidated financial statements as of and for the year ended December 31, 2005, have been reclassified to conform to the December 31, 2006 consolidated financial statement presentation. These reclassifications had no effect on previously reported net income or shareholders’ equity.
 
32.   Significant Differences between Korean GAAP and U.S. GAAP
 
Reconciliation to U.S. Generally Accepted Accounting Principles
 
The consolidated financial statements of the Company are prepared in accordance with generally accepted accounting principles in the Republic of Korea (“Korean GAAP”), which differs in certain material respects from generally accepted accounting principles in the United States of America (“U.S. GAAP”). Application of U.S. GAAP would have affected the balance sheets as of December 31, 2006, 2005 and 2004 and the net income for each of the three year periods ended to the extent described below.
 
A description of the material differences between Korean GAAP and U.S. GAAP as they relate to the Company are discussed in detail below.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

(a)   Reconciliation of net income from Korean GAAP to U.S. GAAP
 
                         
    Adjustments Before
    Income Tax
    Adjustments After
 
    Income Tax     Effect     Income Tax  
    (In millions of Korean Won, except share data)  
 
For the year ended December 31, 2006
                       
Net income under Korean GAAP
                  W 3,314,181  
Adjustments:
                       
Fixed asset revaluation
  W 20,152     W (5,542 )     14,610  
Capitalized costs
    35,435       (9,745 )     25,690  
Capitalized repairs
    (1,269 )     349       (920 )
Investment securities
    54,070       (14,869 )     39,201  
Amortizing of goodwill
    25,322       (6,964 )     18,358  
Others, net
    (4,588 )     1,263       (3,325 )
                         
    W 129,122     W (35,508 )   W 93,614  
                         
Net income as adjusted in accordance with U.S. GAAP
                  W 3,407,795  
                         
Basic and diluted earnings per share, as adjusted, in accordance with U.S. GAAP
                  W 43,304  
                         
Weighted-average shares outstanding
                    78,694,181  
                         
 
                         
    Adjustments Before
    Income Tax
    Adjustments After
 
    Income Tax     Effect     Income Tax  
    (In millions of Korean Won, except share data)  
 
For the year ended December 31, 2005
                       
Net income under Korean GAAP
                  W 4,022,492  
Adjustments:
                       
Fixed asset revaluation
  W 19,301     W (5,222 )     14,079  
Capitalized costs
    15,381       (4,230 )     11,151  
Capitalized repairs
    (5,312 )     1,461       (3,851 )
Investment securities
    81,659       (22,456 )     59,203  
Amortizing of goodwill
    8,875       (2,441 )     6,434  
Others, net
    4,187       (12,097 )     (7,910 )
                         
    W 124,091     W (44,985 )   W 79,106  
                         
Net income as adjusted in accordance with U.S. GAAP
                  W 4,101,598  
                         
Basic and diluted earnings per share, as adjusted, in accordance with U.S. GAAP
                  W 51,789  
                         
Weighted-average shares outstanding
                    79,198,135  
                         
 


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Table of Contents

POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

                         
    Adjustments Before
    Income Tax
    Adjustments After
 
    Income Tax     Effect     Income Tax  
    (In millions of Korean Won, except share data)  
 
For the year ended December 31, 2004
                       
Net income under Korean GAAP
                  W 3,814,225  
Adjustments:
                       
Fixed asset revaluation
  W 26,428     W (6,840 )     19,588  
Capitalized costs
    47,458       (13,051 )     34,407  
Capitalized repairs
    (9,422 )     2,591       (6,831 )
Investment securities
    (557,615 )     153,344       (404,271 )
Others, net
    4,270       (1,174 )     3,096  
                         
    W (488,881 )   W 134,870     W (354,011 )
                         
Net income as adjusted in accordance with U.S. GAAP
                  W 3,460,214  
                         
Basic and diluted earnings per share, as adjusted, in accordance with U.S. GAAP
                  W 42,806  
                         
Weighted-average shares outstanding
                    80,835,690  
                         
 
(b)   Reconciliation of shareholders’ equity from Korean GAAP to U.S. GAAP
 
                         
    Adjustments Before
    Income Tax
    Adjustments After
 
    Income Tax     Effect     Income Tax  
    (In millions of Korean Won)  
 
As of December 31, 2006
                       
Total shareholders’ equity under Korean GAAP
                  W 22,401,742  
Minority interest
                    (489,207 )
                         
                      21,912,535  
Adjustments:
                       
Fixed asset revaluation
  W (155,755 )   W 19,986       (135,769 )
Capitalized costs
    321,643       (88,452 )     233,191  
Capitalized repairs
    2,455       (675 )     1,780  
Investment securities
    (84,269 )     23,174       (61,095 )
Amortizing of goodwill
    34,196       (9,404 )     24,792  
Cumulative effect of FAS 123R
    (4,097 )     1,127       (2,970 )
Others, net
    (431 )     119       (312 )
                         
    W 113,742     W (54,125 )   W 59,617  
                         
Shareholders’ equity, as adjusted, in accordance with U.S. GAAP
                  W 21,972,152  
                         
 

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Table of Contents

POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

                         
    Adjustments Before
    Income Tax
    Adjustments After
 
    Income Tax     Effect     Income Tax  
    (In millions of Korean Won)  
 
As of December 31, 2005
                       
Total shareholders’ equity under Korean GAAP
                  W 19,873,677  
Minority interest
                    (384,670 )
                         
                      19,489,007  
Adjustments:
                       
Fixed asset revaluation
  W (175,907 )   W 25,528       (150,379 )
Capitalized costs
    286,208       (78,707 )     207,501  
Capitalized repairs
    3,724       (1,024 )     2,700  
Investment securities
    (66,594 )     18,313       (48,281 )
Amortization of goodwill
    8,875       (2,441 )     6,434  
Others, net
    60       (8,873 )     (8,813 )
                         
    W 56,366     W (47,204 )   W 9,162  
                         
Shareholders’ equity, as adjusted, in accordance with U.S. GAAP
                  W 19,498,169  
                         
 
                         
    Adjustments Before
    Income Tax
    Adjustments After
 
    Income Tax     Effect     Income Tax  
    (In millions of Korean Won)  
 
As of December 31, 2004
                       
Total shareholders’ equity under Korean GAAP
                  W 16,386,056  
Minority interest
                    (307,891 )
                         
                      16,078,165  
Adjustments:
                       
Fixed asset revaluation
  W (195,045 )   W 30,705       (164,340 )
Capitalized costs
    270,827       (74,477 )     196,350  
Capitalized repairs
    9,036       (2,485 )     6,551  
Investment securities
    (48,399 )     214,510       166,111  
Others, net
    (4,127 )     1,135       (2,992 )
Deferred taxed related to OCI
                (71,788 )
                         
    W 32,292     W 169,388     W 129,892  
                         
Shareholders’ equity, as adjusted, in accordance with U.S. GAAP
                  W 16,208,057  
                         
 
(c)   Fixed asset revaluation
 
Under Korean GAAP, certain fixed assets were subject to upward revaluations in accordance with the Asset Revaluation Law, with the revaluation increment credited to capital surplus. As a result of this revaluation, depreciation expense on these assets was adjusted to reflect the increased basis. Under U.S. GAAP, such a revaluation is not permitted and depreciation expense should be based on historical cost. When assets are sold, any revaluation surplus related to those assets under Korean GAAP would be reflected in income as additional gain on sale of assets under U.S. GAAP.

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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

(d)   Capitalized costs
 
Under Korean GAAP, the Company capitalizes certain foreign exchange gains and losses on borrowings associated with property, plant and equipment during the construction period. Under U.S. GAAP, all foreign exchange gains and losses are included in the results of operations for the current period. No foreign exchange gains and losses have been capitalized for the years ended December 31, 2006, 2005 and 2004 under Korean GAAP. Depreciation of net capitalized foreign exchange gains and losses carried forward from prior periods amounted to W(2,099) million, W8,097 million and W20,611 million for the years ended December 31, 2006, 2005 and 2004, respectively.
 
In addition, effective from the period beginning after December 31, 2002, under Korean GAAP, interest costs that would have been theoretically avoided had expenditures not been made for assets which require a period of time to prepare them for their intended use are generally expensed as incurred, except when certain criteria are met for capitalization. The Company has adopted this application and expensed financing costs subject to the capitalization. Under U.S. GAAP, the Company is required to capitalize such amount. Capital projects that have had their progress halted would suspend the capitalization of interest and would also delay the accumulation of depreciation during the suspense period.
 
Capitalized interest for the years ended December 31, 2006, 2005 and 2004 are as follows:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Capitalized interest
  W 123,350     W 86,269     W 84,948  
Depreciation of capitalized interest
    (72,034 )     (60,581 )     (55,871 )
                         
Net income impact
  W 51,316     W 25,688     W 29,077  
                         
 
Under Korean GAAP, research and development costs, organization costs and internal use software costs have been recorded as intangible assets and amortized over a period not exceeding 20 years. Under U.S. GAAP, organization costs as well as research and developments costs are generally expensed as incurred. In addition, certain costs incurred for software developed for internal use, U.S. GAAP requires that costs incurred in the preliminary project stage be expensed as incurred. External direct costs such as material and service, payroll or payroll related costs for employees who are directly associated with the project, and interest costs incurred when developing computer software for internal use, should be capitalized and amortized on a straight-line method over the estimated useful life. Training costs, data conversion costs and general administrative costs should be expensed as incurred.
 
U.S. GAAP reconciliation adjustments for the capitalization and amortization of intangible assets which arose mostly from research and development cost for the years ended December 31, 2006, 2005 and 2004, are as follows:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Net income impact
  W (13,782 )   W (18,404 )   W (2,230 )
                         
 
(e)   Capitalized repairs
 
Under Korean GAAP, major repair costs associated with the Company’s furnaces had been expensed as incurred, regardless of the nature of the expenditure until 2001. U.S. GAAP requires that repairs which extend an asset’s useful life or significantly increase its value be capitalized when incurred and depreciated. Routine maintenance and repairs are expensed as incurred. Depreciation of capitalized repairs carried forward from prior periods has been recorded.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

(f)   Guarantees
 
Under Korean GAAP, the guarantor is required to disclose guarantees, including indirect guarantees of indebtedness of others. Under U.S. GAAP, the guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee for guarantees issued or modified after December 31, 2002. As of December 31, 2006, the guarantees issued or modified after December 31, 2002 by the Company for the repayment of loans amounts to W109,364 million, excluding guarantees issued either between parents and their subsidiaries or between corporations under common control (Note 17). The fair value of the liability recorded at the inception is amortized into income over the life of the guarantee contract. The Company has recognized the fair value of liabilities net of amortization amounting to W(417) million and W1,732 million and W(559) for the years ended December 31, 2006, 2005 and 2004, respectively. This adjustment is included in Others, net.
 
(g)   Stock Appreciation Rights
 
Under Korean GAAP, the Company accounted for stock-based compensation in accordance with the intrinsic value method for awards that call for settlement in cash, shares, or a combination of both measures. Stock compensation liabilities at the end of each period are determined as the amount by which the moving weighted average of quoted market value of the shares of the enterprise’s stock covered by a grant exceeds the option price. The moving weighted average of quoted market value is calculated based on the weighted average market price of last one week, last one month and last two months of each period.
 
Under U.S. GAAP, Statement of Financial Accounting Standards (“SFAS”) No. 123(R) is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005, which applies to new awards and to awards modified, repurchased or cancelled after effective date. The Company adopted FAS 123(R) on January 1, 2006 using the modified prospective method. The compensation expense for the portion of the awards for which the requisite service period has not been rendered that are outstanding at December 31, 2005 needs to be remeasured from its intrinsic value to its fair value on the adoption date, and any difference to be reflected as the cumulative effect of change in accounting principle, net of any related tax effect. Also, reflected in the cumulative effect of change in accounting principle is the net cumulative impact of estimating future forfeitures in the determination of periodic expense, rather than recording forfeitures when they occur as previously permitted. Prior to adoption of FAS 123(R), the Company applied APB 25, intrinsic value method, as permitted under FAS 123 and recorded stock compensation liabilities under intrinsic value method using the quoted market value of the shares of the Company’s stock covered by a grant exceed the option price.
 
The Company remeasured the value of its stock appreciation rights as of January 1, 2006 and applied the estimated future forfeitures, which resulted in a cumulative effect of change in accounting principle, net of tax, totaling W(2,970) million.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

The following table illustrates the effect on Net Income and Earnings per Share if the Company had applied the fair value recognition provisions of SFAS No. 123(R) to stock-based employee compensation for the year ended December 31, 2005 and 2004:
 
                 
    2005     2004  
    (In millions of Korean Won, except per-share amounts)  
 
Net Income, as reported
  W 4,101,598     W 3,460,214  
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
    4,574       1,215  
Deduct: Stock-based employee compensation expense determined under the fair value method, net of related tax effects
    (6,457 )     (2,303 )
Pro forma net earnings
    4,099,715       3,459,126  
Earning per share-basic:
               
As reported
    51,789       42,806  
Pro forma
    51,765       42,792  
Earning per share-diluted:
               
As reported
    51,789       42,806  
Pro forma
    51,765       42,792  
 
The fair value of stock options granted was remeasured as of the reporting date using a Black-Scholes option-pricing model with the following weighted average assumptions:
 
         
    2006  
 
Dividend yield range
    3.23 ~3.34 %
Expected volatility range
    31.29 ~31.63 %
Risk-free interest rate range
    4.82 ~4.84 %
Expected lives (in years)
    2.81 ~3.57  
 
U.S. GAAP reconciliation adjustments for stock appreciation rights granted to employees and executives recognized for the years ended December 31, 2006, 2005 and 2004 are included in Others, net and are as follows:
 
                         
    2006   2005   2004
    (In millions of Korean Won)
 
Net income impact
  W (4,171 )   W 2,455     W 4,829  
                         
 
The total stock compensation expense, in accordance with U.S. GAAP, for the years ended December 31, 2006, 2005 and 2004 amounts to W54,056 million, W15,782 million and W19,956 million, respectively.
 
(h)   Investment Securities
 
The differences in accounting for investment securities relate to (i) recognition of an impairment loss under U.S. GAAP but not under Korean GAAP and (ii) Recognition of gain or loss on disposal of investments due to different classification under Korean GAAP and US GAAP.
 
(i)   Recognition of an impairment loss
 
Under Korean GAAP, if the fair value of investments classified as either available-for-sale or held to maturity permanently declines compared to its acquisition cost as evidenced by events such as bankruptcy, liquidation, negative net asset values and cessation of operations, the carrying value of the debt or equity security is adjusted to fair value, with the resulting impairment loss charged to current operations. If the fair value of the security subsequently recovers, a gain is recognized up to the amount of previously recognized impairment loss.


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Table of Contents

 
POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Under U.S. GAAP, if the decline in fair value of investments classified as either available-for-sale of held to maturity is determined to be other-than-temporary, the cost basis of the individual security is written down to fair value as the new cost basis and the amount of the impairment loss is charged to current operations. In addition, U.S. GAAP prohibits gain recognition based on subsequent recoveries of previously impaired investments.
 
Both Korean GAAP and U.S. GAAP requires that all unrealized gains and losses arising from available-for-sale securities be recorded in accumulated other comprehensive income.
 
As a result of the above differences, the Company recognized an impairment loss recorded in the statement of income on available-for-sale securities under U.S. GAAP of W1,026 million for which the decline in fair value was considered to be other-than-temporary under U.S. GAAP but not “permanently impaired” under Korean GAAP. This U.S. GAAP adjustment also results in a reclassification adjustment within accumulated other comprehensive income, resulting in higher unrealized losses under Korean GAAP, compared to U.S. GAAP.
 
No other-than-temporary impairment is recorded for held-to-maturity securities for the years ended December 31, 2006, 2005 and 2004.
 
(ii)   Recognition of gain on disposal of available for sale investments
 
The Company disposed of certain securities that had been previously impaired under U.S. GAAP purposes. The fair value of these securities subsequently recovered resulting in the reversal of the impairment under Korean GAAP. As a result, the Company’s cost basis relating to those securities was higher under Korean GAAP than under U.S. GAAP. This difference in cost basis resulted in a gain of W55,096 million under U.S. GAAP upon disposal.
 
A summary of the U.S. GAAP adjustments relating to investment securities for the years ended December 31, 2006, 2005 and 2004 are as follows:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Impairment loss
  W (1,026 )   W (7,882 )   W (562,838 )
Recognition of gains on disposal
    55,096       89,541       5,223  
                         
Net income impact
  W 54,070     W 81,659     W (557,615 )
                         
 
Information with respect to available-for-sale debt and equity securities as of December 31, 2006, 2005 and 2004 is as follows:
 
Available-for-Sale Securities:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Book value at prior yearend plus investment acquired during current year
  W 2,420,474     W 1,864,297     W 2,261,620  
Unrealized gains and losses incurred during current year
    443,097       328,276       47,272  
Permanent impairment loss incurred during current year
    (1,970 )     (11,605 )     (3,190 )
                         
Fair value (Korean GAAP)
    2,861,601       2,180,968       2,305,702  
Accumulated other-than-temporary impairment
    (86,357 )     (68,682 )     (50,487 )
                         
Fair value (US GAAP)
  W 2,775,244     W 2,112,286     W 2,255,215  
                         


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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

(i)   Goodwill
 
Under Korean GAAP, goodwill is amortized over the useful life during which future economic benefits are expected to flow to the enterprise, not exceeding twenty years. The Company amortizes goodwill over five years using straight-line method. Under U.S. GAAP, goodwill is not subject to amortization rather an impairment test is required at least annually.
 
(j)   Deferred Income Taxes
 
In general, accounting for deferred income taxes is substantially the same between Korean GAAP and U.S. GAAP. The Company is also required to recognize the additional deferred tax effects that result from differences between the reported Korean GAAP and U.S. GAAP amounts.
 
33.   Additional Financial Information in Accordance with U.S. GAAP
 
(a)   Deferred taxes in accordance with U.S. GAAP
 
The tax effects of temporary differences that resulted in significant portions of the deferred tax assets and liabilities at December 31, 2006, 2005 and 2004, computed under U.S. GAAP, and a description of the consolidated financial statement items that created these differences are as follows:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Deferred tax assets:
                       
Fixed asset revaluation
  W 19,986     W 25,528     W 30,705  
Capitalized foreign exchange losses
                3,071  
Investment securities
    221,139       77,984       69,822  
Impairment loss on fixed assets
    129,264       129,135       129,135  
Impairment loss on investment securities
    45,979       23,078       221,337  
Allowance for doubtful accounts
    91,478       61,142       32,148  
Allowance for severance benefits
    21,964       101,867       69,913  
Depreciation expense
    2,168       18,980       17,299  
Capital expenditures
    74             9,489  
Research and development expense
          12,988       9,804  
Deferred taxes related to OCI
    12,141       182,824        
Denied accrual expenses
    78,402       120,198       16,452  
Others
    45,172       86,287       115,681  
                         
Total deferred tax assets
    667,767       840,011       724,856  
                         
 


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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Deferred tax liabilities:
                       
Gain on valuation of equity method investments
    118,895       134,441       81,400  
Reserve for repairs
    110,930       132,120       137,394  
Accrued income
    16,446       917       3,453  
Reserve for technology
    397,375       388,117       367,283  
Capitalized repairs
    675       1,024       2,485  
Capitalized costs
    89,361       78,707       78,876  
Deferred taxes related to OCI
    141,155       162,434       71,788  
Others
          30,159       101,061  
                         
Total deferred tax liabilities
    874,837       927,919       843,740  
                         
Net deferred tax assets (liabilities)
  W (207,070 )   W 87,908     W 118,884  
                         
 
(b)   Comprehensive income
 
Under Korean GAAP, there is no requirement to present comprehensive income. Under U.S. GAAP, comprehensive income and its components are required to be presented under the provisions of SFAS No. 130, Reporting Comprehensive Income. Comprehensive income includes all changes in shareholders’ equity during the period except those resulting from investments by, or distributions to owners, including certain items not included in the current year’s results of operations. Comprehensive income for the years ended December 31, 2006, 2005 and 2004 is summarized as follows:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Net income, as adjusted, in accordance with U.S. GAAP
  W 3,407,795     W 4,101,598     W 3,460,214  
Other comprehensive income, net of tax:
                       
Foreign currency translation adjustments
    (51,838 )     (7,150 )     (91,750 )
Unrealized gains (losses) on investments
    351,307       85,195       434,753  
Add (less): Reclassification adjustment for losses (gains) included in income
    43,135       (1,665 )     (1,288 )
                         
Comprehensive income, as adjusted, in accordance with U.S. GAAP
  W 3,750,399     W 4,177,978     W 3,801,929  
                         

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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Accumulated other comprehensive income as of December 31, 2006, 2005 and 2004, is summarized as follows:
 
                         
    Foreign Currency
    Unrealized Gains
    Accumulated other
 
    Translation
    (Losses) on
    Comprehensive
 
    Adjustments     Investments     Income  
    (In millions of Korean Won)  
 
Balance, December 31, 2003
  W 103,286     W (255,742 )   W (152,456 )
Foreign currency translation adjustments, net of tax benefit of W34,801 million
    (91,750 )           (91,750 )
Unrealized gains on investments, net of tax expense of W(164,905) million
          434,753       434,753  
Less: Reclassification adjustment for net realized gain included in income, net of tax expense of W488 million
          (1,288 )     (1,288 )
                         
Current period change
    (91,750 )     433,465       341,715  
                         
Balance, December 31, 2004
  W 11,536     W 177,723     W 189,259  
Foreign currency translation adjustments, net of tax benefit of W2,712 million
    (7,150 )           (7,150 )
Unrealized gains on investments, net of tax expense of W(32,316) million
          85,195       85,195  
Less: Reclassification adjustment for net realized gain included in income, net of tax expense of W632 million
          (1,665 )     (1,665 )
                         
Current period change
    (7,150 )     83,530       76,380  
                         
Balance, December 31, 2005
  W 4,386     W 261,253     W 265,639  
Foreign currency translation adjustments, net of tax benefit of W19,663 million
    (51,838 )           (51,838 )
Unrealized gains on investments, net of tax expense of W(147,661) million
          351,307       351,307  
Add: Reclassification adjustment for net realized losses included in income, net of tax benefit of W (16,362) million
          43,135       43,135  
                         
Current period change
    (51,838 )     394,442       342,604  
                         
Balance, December 31, 2006
  W (47,452 )   W 655,695     W 608,243  
                         
 
(c)   Fair Value of financial instruments
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
 
(i) Cash and cash equivalents, short-term financial instruments, trading securities, trade accounts and notes receivable, trade accounts and notes payable, and short-term borrowings
 
The carrying amount approximates fair value due to the short-term nature of those instruments.
 
(ii) Investment Securities
 
The fair value of market-traded investments such as listed company’s stocks, public bonds and other marketable securities are based on quoted market prices for those investments. Investments in non-listed companies’ stock, for which there are no quoted market prices, estimate of fair value is based on acquisition cost less impairment if any.


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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

(iii) Long-Term loans, trade account and notes receivable
 
Loans receivable, accounts and notes receivable are reported net of specific and general provisions for impairment as well as present value discount factor. As a result, the fair values of long-term loans approximate their carrying values.
 
(iv) Long-Term debt
 
The fair value of long-term debt is based on quoted market prices, where available. For those notes where quoted market prices are not obtainable, a discounted cash flow model is used based on the current rates for issues with similar maturities.
 
The estimated fair values of the Company’s financial instruments stated under Korean GAAP as of December 31, 2006 and December 31, 2005 are summarized as follows:
 
                                 
    2006     2005  
    Carrying Amount     Fair Value     Carrying Amount     Fair Value  
    (In millions of Korean Won)  
 
Cash and cash equivalents
  W 936,288     W 936,288     W 653,364     W 653,364  
Short-term financial instruments
    867,310       867,310       760,371       760,371  
Trading securities
    2,000,647       2,000,647       2,610,502       2,610,502  
Trade accounts and notes receivable, including long-term loans
    3,845,106       3,845,106       3,369,737       3,369,737  
Investment securities
    3,165,055       3,165,055       2,815,741       2,815,741  
Short-term borrowings
    1,238,749       1,238,749       859,774       859,774  
Trade accounts and notes payable
    1,507,227       1,507,227       1,145,729       1,145,729  
Long-term debt, including current portion
    3,129,914       3,189,205       2,188,470       2,233,670  
 
(d)   Minority interest
 
Minority interests in consolidated subsidiaries are disclosed within the shareholders’ equity section of the balance sheet. Under U.S. GAAP, minority interests are recorded between the liability section and the shareholders’ equity section in the consolidated balance sheet.
 
(e)   Classification differences in the Consolidated Statements of Income
 
Certain income and expense items in the Company’s Consolidated Statements of Income including: (i) gains and losses on disposal of property, plant and equipment; (ii) impairment of property, plant and equipment; (iii) gains on recovery of allowance for doubtful accounts; (iv) other bad debt expenses; (v) and provision for early retirement benefits have been classified as non-operating under Korean GAAP and excluded from the determination of operating income. Under U.S. GAAP, the above noted income and expense items would be included in the determination of operating income. In addition, as a result of tax assessments, amendments to tax return filings and related tax penalties and interest have been classified as non-operating expenses under Korean GAAP. Under U.S. GAAP, these expenses would be included as part of the Company’s income tax. After reclassification of those items, operating income under U.S. GAAP would be W4,306,707 million and W5,725,875 million and W5,407,351 million for the years ended December 31, 2006, 2005 and 2004, respectively.


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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Components of “Other” non-operating expenses
 
“Other” non-operating expenses disclosed within the Korean GAAP Consolidated Statements of Income are comprised of the following:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Loss on disposal of investments
  W 66,116     W 121,474     W 7,869  
Loss on impairment of property, plant and equipment
    2,740             72,692  
Additional payment of income taxes
    13,472       194,506       10,054  
Provision for early retirement benefits(1)
    14,672       418,567       16,637  
Others
    107,847       119,542       58,021  
                         
Total
  W 204,847     W 854,089     W 165,273  
                         
 
 
(1) In 2000, the Company initiated an ongoing plan to offer special termination benefits to employees who voluntarily accept early retirement and received applications for early retirement from employees. The Company recorded an expense amounting to W14,672 million, W418,567 million and W16,637 million, for the years ended December 31, 2006, 2005 and 2004, respectively, which represents lump sum early retirement benefits which were either paid or accrued for the applicants who were notified of acceptance and approval of their applications at each year end. The employees were terminated effective on or before December 31, 2006 and all liabilities associated with these early retirement benefits were settled by December 2006.
 
Extraordinary income
 
Under Korean GAAP, extraordinary income and loss include items such as non operating income and losses with unusual in nature and infrequency of occurrence, gain or loss on extinguishment of debt. However, under USGAAP, certain items classified as extraordinary items under Korean GAAP are not classified as extraordinary items. The item reported as extraordinary income under Korean GAAP for the year ended December 31, 2004 would be classified as other income under US GAAP. Based on the US GAAP classification of extraordinary income, the basic and diluted ordinary income per share and basic and diluted earnings per share would be same.
 
(f)   Consolidated statement of cash flows
 
Under both Korean GAAP and US GAAP, cash flows are classified under operating activities, investing activities and financing activities.
 
Under U.S. GAAP, cash flows related to purchases and sales of trading securities are classified as cash flows from operating activities. However, under Korean GAAP, they are classified as cash flows from investing activities. Net cash flows from purchases and sales of trading securities are W5,118,352 million, W221,705 million and W(63,667) for the years ended December 31, 2006, 2005 and 2004, respectively.


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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

Components of “Others” financing activities
 
“Others” financing activities disclosed within the Korean GAAP Consolidated Statements of cash flows are comprised of the following:
 
                         
    2006     2005     2004  
    (In millions of Korean Won)  
 
Proceeds from other current liabilities
  W 88,907     W 2,289     W 5,344  
Repayment of other current liabilities
          (1,640 )     (44,539 )
Issuance of new shares by subsidiaries
    67,431       39,675       8,948  
Dividends paid by subsidiaries
    (7,530 )     (11,300 )     (9,230 )
                         
Total
  W 148,808     W 29,024     W (39,477 )
                         
 
(g)   Segment
 
The following table provides information on reconciliation of total assets of the reportable segments under Korean GAAP as of December 31, 2006:
 
                                                         
                            Subtotal
             
                            before
    Reconciling
       
    Steel     Construction     Trading     Others     Elimination     Adjustments     Consolidated  
    (In millions of Korean Won)  
 
Segments’ total assets
  W 29,553,435     W 2,255,376     W 1,026,031     W 3,412,719     W 36,247,561     W (5,098,488 )   W 31,149,073  
 
34.   Recent Accounting Pronouncements
 
U.S. GAAP
 
In February 2006, the FASB issued Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” and is effective for all financial instrument acquired or issued after beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the impact of this new standard but believes that it will not have a material impact on our financial position, results of operations or cash flows. The Company does not expect the adoption of this statement to have a material impact on its financial position or result of operations.
 
In June 2006, the FASB issued Financial Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, which applies to all tax positions related to income taxes. FIN No. 48 prescribes a recognition threshold and measurement process for recording in the consolidated financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN No. 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company assesses tax positions taken in the consolidated financial statements and evaluates quarterly for realizability on a more likely than not basis. The Company is in the process of evaluating the impact that FIN 48 may have on the consolidated financial statements.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that SFAS 157 may have on the consolidated financial position, results of operations or cash flows.
 
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158


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POSCO and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)

requires that the funded status of defined benefit postretirement plans be recognized on the company’s balance sheet, and changes in the funded status be reflected in comprehensive income, effective fiscal years ending after December 15, 2006. The standard also requires companies to measure the funded status of the plan as of the date of its fiscal year-end, effective for fiscal years ending after December 15, 2008. The Company is currently evaluating the impact that SFAS 158 may have on the consolidated financial position, results of operations or cash flows.
 
In September 2006, the FASB issued FASB Staff Position AUG AIR-1, Accounting for Planned Major Maintenance Activities. This position does not permit ’accrue-in-advance method’ for accounting for planned major maintenance activities. The position is effective for fiscal year beginning after December 15, 2006 and earlier adoption is permitted. The Company believes the adoption of FASB Staff Position AUG AIR-1 will not have a material impact on our financial position or results of operations.
 
In February 2007, the FASB issued SFAS Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This statement permits companies and not-for-profit organizations to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact that SFAS 159 may have on the consolidated financial statements.
 
Korean GAAP
 
In December 2004, the KASB issued SKFAS No. 23, “Earning per share.” This statement improves the determination and presentation for earning per share amounts in order to match the international financial reporting standards. The provisions of this standard are effective prospectively for earning per share beginning on or after December 31, 2006. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.
 
In February 2006, the KASB issued SKFAS No. 21, “Preparation and Presentation of Financial Statements.” Under SKFAS No. 21, the financial statements consist of a balance sheet, a statement of income, a statement of appropriations (disposition) of retained earnings (accumulated deficit), a statement of cash flows, a statement of changes in equity and footnotes. The provisions of this standard are effectively for financial statements beginning on or after December 31, 2006. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.
 
In April 2006, the KASB issued SKFAS No. 22, “Share-based Payment.” Under SKFAS No. 22, a share-based payment in which the entity receives or acquires goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity’s shares or other equity instruments of the entity should be recognized in the financial statements based on its fair value. The provisions of this standard are effective for share-based payment agreement beginning on or after December 31, 2006. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.
 
In January 2007, the KASB issued SKFAS No. 25, “Consolidated financial statements” Under SKFAS No. 25, it clearly defines consolidated scope and entities and revises the presentation method of minority interest in the consolidated financial statements. The provisions of this standard are effective for the financial year ending on or after December 31, 2007. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.


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Exhibit Index
 
             
  1 .1     Articles of incorporation of POSCO (English translation)
  2 .1     Form of Common Stock Certificate (including English translation) (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement No. 33-81554)*
  2 .2     Form of Deposit Agreement (including Form of American Depositary Receipts) (incorporated by reference to the Registrant’s Registration Statement (File No. 33-84318) on Form F-6)*
  2 .3     Letter from ADR Depositary to the Registrant relating to the Pre-release of American Depositary Receipts (incorporated by reference to the Registrant’s Registration Statement (File No. 33-84318) on Form F-6)*
  7 .1     Computation of ratio of earnings to fixed charges
  8 .1     List of subsidiaries of POSCO
  12 .1     Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  12 .2     Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  13 .1     Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  15 .1     Consent of Samil PricewaterhouseCoopers, the Korean member firm of PricewaterhouseCoopers
 
 
* Filed previously