EX-99.2 3 d326458dex992.htm 2011 ANNUAL BUSINESS REPORT

2011 Annual Business Report

[Exhibit 99.2]

2011 Annual Business Report

Table of Contents

1. Business Overview

(1) Business Results and Financial Statements for the Past Three Fiscal Years (FY2009 – FY2011)

2. Company Overview

(1) Registered Purpose of the Company

(2) Description of Primary Business

(3) Problems Confronting the Company

(4) Business Offices and Game Development Facilities

(5) Stock

(6) Debenture

(7) Major Shareholders

(8) Investment in Other Companies

(9) Directors Holding Concurrent Positions

(10) Material Transactions with Related Parties

(11) Significant Creditors

(12) Employees

(13) Directors and Auditors

(14) Material Events after the End of Fiscal Year 2011

3. Financial Statements as of and for the fiscal years ended December 31, 2011 and 2010

(1) Balance Sheets

(2) Income Statements

(3) Statements of Appropriation of Retained Earnings

1. Business Overview

(1) Business Results and Financial Statements for the Past Three Fiscal Years (FY2009 – FY2011)

[Unit: KRW]

Category		FY 2011				FY 2010				FY 2009
Current Assets			61,944,250,781				65,301,167,921				74,522,234,178
•   Quick Assets			61,944,250,781				65,259,072,544				74,480,138,801
•   Inventories			—				42,095,377				42,095,377
Non-current Assets			56,759,120,403				40,551,586,832				26,444,523,461
•   Investment Asset			21,072,545,640				21,990,555,066				10,948,571,804
•   Tangible Asset			1,261,672,069				1,038,239,275				1,453,967,737
•   Intangible Asset			19,905,123,988				15,187,420,428				11,831,295,901
•   Other Non-current Asset			14,519,778,706				2,335,372,063				2,210,688,019
Total Assets			118,703,371,184				105,852,754,753				100,966,757,639
Current Liabilities			9,847,425,028				10,546,645,634				8,337,706,064
Non-current Liabilities			7,531,044,348				8,310,198,785				9,842,151,958
Total Liabilities			17,378,469,376				18,856,844,419				18,179,858,022
Common Stock			3,474,450,000				3,474,450,000				3,474,450,000
Additional paid-in capital			75,380,209,013				75,380,209,013				74,935,002,691
Retained earnings			20,833,492,247				6,061,919,806				1,926,762,342
Capital Adjustment			—				—				445,206,322
Accumulated other comprehensive income and expense			1,636,750,548				2,079,331,515				2,005,478,262
Total Shareholders’ Equity			101,324,901,808				86,995,910,334				82,786,899,617
Revenues			40,224,258,623				38,979,077,887				43,945,590,171
Operating Income			8,462,252,055				6,437,933,773				11,770,320,038
Income before income tax			7,987,324,201				7,778,763,483				7,069,619,206
Net Income			14,771,572,441				4,135,157,464				3,082,496,755

2. Company Overview

(1) Registered Purpose of the Company

1) Software consulting, development and supply

2) Development and sales of software and CD

3) Information-technology-related software development

4) Production, development, distribution, sales and consulting of digital contents, including game software, as well as corresponding licensing

5) Online network game services

6) Applied package-related software development

7) Production and sales of computer programs

8) Import and export of software

9) E-commerce

10) Character development business

11) Animation business

12) Real estate leasing

13) Service-area restaurant business

14) Media-related business

15) Printing and publication

16) Record & video production and distribution

17) Any other businesses incidental to the above businesses

(2) Description of Primary Business

Gravity Co., Ltd. (the “Company”) is the developer of Ragnarok Online^TM , an MMORPG, which is commercially offered in 79 markets worldwide, including Korea, Japan, Taiwan, Southeast Asia, the United States and Europe since its launch in August 2002.

The Company commercially launched Emil Chronicle Online in August 2007, which is currently offered in China, Taiwan, Hong Kong and Indonesia. Requiem, which was commercially launched in October 2007, is currently serviced worldwide including the United States and Russia.

Having strong global network and success from Ragnarok Online^TM , the Company is expanding its business areas from online game development and publishing to cultural contents business based on various platforms, such as animation, game character merchandising, development of console, IPTV and smartphone games.

In addition, in order to strengthen its presence in the overseas markets, the Company has subsidiaries in the United States and Japan, and joint venture companies in France and Russia. The Company also has NeoCyon, Inc., a subsidiary for its mobile business, and Gravity Games Corp., a subsidiary for its online game development, in Korea.

(3) Problems Confronting the Company

Since the Company operates in a highly competitive industry, the Company is making every effort to enhance its development capacity and to maintain and increase its market share in overseas markets to preserve its competitive advantage.

Due to its high dependence on Ragnarok Online^TM , the Company is in need of diversified revenue structure, global market expansion and new business initiatives for sustainable revenue growth. The Company is doing its best to build its next game line-up in various genres through in-house development and publishing, as well as diversifying its business portfolio with multi-platform business.

(4) Business Offices and Game Development Facilities

Classification		Location
Head Office		Nuritkum Square Business Tower 15F, 1605 Sangam-Dong, Mapo-Gu, Seoul 121-795, Korea
Game Development Facilities		Nuritkum Square R&D Tower 15F, 1605 Sangam-Dong, Mapo-Gu, Seoul 121-795, Korea

(5) Stock

 Total number of shares

		[As of December 31, 2011]
Total number of shares authorized		Total number of shares issued		Total number of shares unissued
40,000,000 shares		6,948,900 shares		33,051,100 shares

‚ Type of Stock issued

[Par value per share: KRW 500]						[As of December 31, 2011]
Type		No. of shares		Total face value		%		Remarks
Registered common stock		6,948,900 shares		KRW 3,474,450,000		100%

(6) Debenture

[As of December 31, 2011]

Type

Date of issuance

Issuing Amount

Interest Rate

Balance from issuance

Redemption date

Remarks

-

-

-

-

-

-

-

* Company currently has no debentures and has no plan to have debentures in the future.

(7) Major Shareholders

[As of December 31, 2011]

Shareholder		Shares owned				%				Transaction with the Company				Remarks
GungHo Online Entertainment, Inc.			4,121,739				59.31				*				—
Others			2,827,161				40.69				—				—
Total			6,948,900				100.00				—				—

* Refer to “(10) Material Transactions with Related Parties.”

(8) Investment in Other Companies

[As of December 31, 2011]

Companies

Relationship with the Company

Name

Location

Common Stock

Main business

Shares owned

%

Relationship

Gravity Interactive, Inc.

California, US

USD 5,040,000

Gaming Service

100,000

100.00%

Subsidiary

Gravity Entertainment Corp.

Tokyo, Japan

JPY 167,850,000

Animation making/service

1,000

100.00%

Subsidiary

Gravity Middle East & Africa FZ-LLC*

Dubai, U.A.E.

AED 7,800,000

Gaming Service

7,800

100.00%

Subsidiary

Gravity RUS Co., Ltd.

Moscow, Russia

RUB 63,809,220

Gaming Service

N/A

99.99%

Subsidiary

NeoCyon, Inc.

Seoul, Korea

KRW 964,005,000

Mobile game development

185,301

96.11%

Subsidiary

Gravity Games Corp.

Seoul, Korea

KRW 1,673,665,000

Online game development

170,138

50.83%

Subsidiary

Ingamba LLC

Moscow, Russia

RUB 133,333,333

Gaming Service

1,000

25.00%

Joint Venture

Gravity EU SAS

Paris, France

EUR 1,000,000

Gaming Service

2,500

25.00%

Joint Venture

* The liquidation of Gravity Middle East & Africa FZ-LLC was in progress as of December 31, 2011.

(9) Directors Holding Concurrent Positions

Name		Company						Remarks
		Name		Position		Responsibility
Hyun Chul Park		Gravity Co., Ltd.		CEO		Overall management
		NeoCyon, Inc.		Executive Director		Chief Strategy Officer
		Gravity Games Corp.		Executive Director		—
Yoshinori Kitamura		Gravity Co., Ltd.		Executive Director		Chief Operating Officer
		Gravity Interactive, Inc.		CEO		Overall management
		Gravity Entertainment Corp.		CEO		Overall management
		NeoCyon, Inc.		CEO		Overall management
		Gravity Games Corp.		Executive Director		—
		Gravity EU SAS		Executive Director		—

(10) Material Transactions with Related Parties

[Unit: 1,000 KRW]

Related persons, companies		Revenue								Purchase Amount								Credit								Liabilities
		FY2011				FY2010				FY2011				FY2010				FY2011				FY2010				FY2011				FY2010
GungHo Online Entertainment, Inc.			24,041,388				25,148,456				701,228				1,801,715				2,604,620				2,586,952				5,360,054				6,902,588
Gravity Interactive, Inc.			1,141,499				942,331				—				—				2,045,544				888,435				184,959				28,489
Gravity Entertainment Corp.			91,687				—				—				—				—				29,425				162				604,059
Gravity CIS Co., Ltd.			27,680				201,162				—				—				1,293,108				1,273,843				—				—
Gravity EU SAS*			518,311				333,386				—				—				317,447				1,458,079				182,199				—
Gravity Middle East & Africa FZ-LLC			—				—				—				—				—				—				1,820,301				1,820,301
Ingamba LLC			275,416				93,894				—				—				46,621				93,894				—				—
NeoCyon, Inc.			1,992,510				1,473,274				1,455,010				1,319,596				1,006,957				910,371				242,071				256,934
Gravity Games Corp.			6,570				—				75,300				18,825				1,580,373				207,075				182,213				—
Total			28,095,061				28,192,503				2,231,538				3,140,136				8,894,670				7,448,074				7,971,959				9,612,371

* Gravity EU SASU, our former wholly-owned subsidiary, was converted into a joint venture company, Gravity EU SAS, in which our equity interest is 25%, on July 26, 2011.

(11) Significant Creditors

The Company had no significant creditors as of December 31, 2011.

(12) Employees

[As of December 31, 2011]

Category		Directors & Officers				Developers				Marketing/Operating				Finance/Administration				Total
Employees			11				222				87				37				357

(13) Directors and Auditors

Permanent/Non permanent		Name		Position		Main work		Transaction with the Company		Remarks
Permanent		Hyun Chul Park		CEO		Chief Executive Officer		-		-
Permanent		Yoshinori Kitamura		Executive Director		Chief Operating Officer		-		-
Permanent		Kazuki Morishita		Executive Director		-		-		-
Permanent		Kazuya Sakai		Executive Director		-		-		-
Permanent		Jong Gyu Hwang		Independent Director		Member of audit committee		-		-
Permanent		Doo Hyun Ryu		Independent Director		Member of audit committee		-		-
Permanent		Jung Yoo		Independent Director		Member of audit committee		-		-

(14) Material Events after the end of FY 2011

N/A

3. Financial statements as of and for the fiscal year ended December 31, 2011 and 2010

(1) Balance Sheets

FY 2011: as of December 31, 2011

FY 2010: as of December 31, 2010

[Unit: KRW]

Items		FY 2011 Amount								FY 2010 Amount
Assets
Current Assets							61,944,250,781								65,301,167,921
Quick assets							61,944,250,781								65,259,072,544
Cash and cash equivalents			31,740,564,444								34,280,209,546
Short-term financial instruments			15,000,000,000								12,000,000,000
Short-term available-for-sale securities			—								5,000,124,629
Accounts receivable			7,820,845,522								8,926,866,046
Allowance for doubtful accounts			(308,192,458	)							(877,267,190	)
Short-term loans			926,233,296								2,457,096,938
Allowance for doubtful accounts			—								(514,624,000	)
Other accounts receivable			695,503,872								298,586,177
Allowance for doubtful accounts			(4,448,510	)							(4,332,655	)
Accrued income			451,699,988								328,434,323
Allowance for doubtful accounts			—								(60,920,609	)
Advance payments			2,823,335,300								1,700,259,357
Prepaid expenses			474,073,648								457,930,270
Current deferred tax assets			1,239,000,000								—
Prepaid income taxes			897,446,608								1,011,604,540
Refund of income taxes receivable			188,189,071								255,105,172
Inventories							—								42,095,377
Inventory-resale			—								42,095,377
Non-current Assets							56,759,120,403								40,551,586,832
Investment assets							21,072,545,640								21,990,555,066
Equity method investments			19,996,357,354								20,870,435,497
Long-term available-for-sale securities			1,046,466,233								1,066,786,529
Long-term loans			1,029,722,053								338,873,680
Allowance for doubtful accounts			(1,000,000,000	)							(285,540,640	)
Tangible assets							1,261,672,069								1,038,239,275
Computer and equipment			11,266,484,387								10,652,007,528
Accumulated depreciation			(10,101,973,246	)							(9,931,635,683	)
Vehicles			28,110,738								28,110,738
Accumulated depreciation			(28,110,738	)							(28,110,738	)
Furniture and fixtures			887,604,356								907,962,220
Accumulated depreciation			(811,615,252	)							(797,758,443	)
Leasehold improvements			745,967,319								745,967,319
Accumulated depreciation			(724,795,495	)							(538,303,666	)
Intangible assets							19,905,123,988								15,187,420,428
Capitalized R&D cost, net			18,464,789,177								13,700,336,659
Software			282,663,523								332,974,514
Other intangible assets, net			1,157,671,288								1,154,109,255
Other non-current assets							14,519,778,706								2,335,372,063
Leasehold deposits			1,376,595,810								1,254,259,980
Long-term prepaid expenses			222,258,499								154,488,893
Non-current deferred tax assets			8,747,000,000								—
Other non-current assets			4,173,924,397								926,623,190
Total assets							118,703,371,184								105,852,754,753
Liabilities
Current liabilities							9,847,425,028								10,546,645,634
Accounts payable			4,269,286,123								5,079,244,643
Advances received			1,920,365,988								1,859,668,102
Withholdings			210,685,157								148,878,935
Deferred income			3,134,985,266								3,085,673,437
Income tax payable			312,102,494								373,180,517
Non-current liabilities							7,531,044,348								8,310,198,785
Long-term deferred income			7,287,820,066								8,143,263,385
Asset retirement obligation			99,000,000								99,000,000
Leasehold deposit received			144,224,282								67,935,400
Total liabilities							17,378,469,376								18,856,844,419
Shareholders’ equity
Common stock							3,474,450,000								3,474,450,000
Common stock			3,474,450,000								3,474,450,000
Capital surplus							75,380,209,013								75,380,209,013
Additional paid-in capital			73,255,072,627								73,255,072,627
Other capital surplus			2,125,136,386								2,125,136,386
Accumulated other comprehensive income and expense							1,636,750,548								2,079,331,515
Unrealized loss on available-for-sale securities			—								(1,119,704	)
Net accumulated comprehensive income of equity method investees			1,636,750,548								2,080,451,219
Retained earnings							20,833,492,247								6,061,919,806
Unappropriated retained earnings			20,833,492,247								6,061,919,806
Total shareholders’ equity							101,324,901,808								86,995,910,334
Total liabilities and shareholders’ equity							118,703,371,184								105,852,754,753

(2) Income Statements

FY 2011: for the year ended December 31, 2011

FY 2010: for the year ended December 31, 2010

[Unit: KRW]

Items		FY 2011 Amount												FY 2010 Amount
Revenues							40,224,258,623								38,979,077,887
Online games-subscription revenue			4,766,264,315								3,932,515,964
Online games-royalties and license fees			32,754,389,269								32,780,080,049
Mobile games			1,925,512,861								1,604,976,232
Character merchandising, animation and other revenue			778,092,178								661,505,642
Cost of revenues							11,327,110,850								12,127,470,519
Cost of revenues-games			11,327,110,850								12,127,470,519
Gross profit							28,897,147,773								26,851,607,368
Selling and administrative expenses							20,434,895,718								20,413,673,595
Salaries			6,817,923,548								6,677,513,840
Severance benefits			421,574,620								439,958,710
Employee benefits			1,081,793,849								1,088,989,424
Transportation			445,009,981								603,959,335
Entertainment			80,007,506								84,509,603
Communication			72,292,212								77,052,847
Taxes and dues			913,993,524								290,223,183
Depreciation			340,915,075								404,612,306
Rent			1,034,712,084								1,057,166,187
Insurance premium			161,752,790								184,850,922
Vehicles maintenance			2,701,290								7,238,000

Items		FY 2011 Amount												FY 2010 Amount
Freight expenses			7,474,203								6,297,000
Repairs expenses			1,299,100								2,978,683
Training expenses			19,008,828								16,624,360
Books & subscription			22,851,612								25,485,557
Office supplies			66,783,838								39,401,408
Commission paid			4,007,934,541								2,320,110,532
Advertising			2,793,249,998								1,560,434,876
Research and development			1,738,494,088								4,623,793,266
Bad debt			81,274,844								444,469,729
Amortization on intangible assets			323,848,187								458,003,827
Operating income							8,462,252,055								6,437,933,773
Non-operating income							5,309,227,888								5,271,354,957
Interest income			1,647,257,622								1,827,577,650
Gain on foreign currency translation			91,506,040								72,583,082
Gain on foreign exchange transactions			999,554,915								1,065,168,878
Short-term realized gain on sale of available-for-sale securities			—								334,715,000
Short-term unrealized gain on available-for-sale securities (ELS)			—								124,629
Gain on valuation of equity-method investments			1,868,880,955								1,447,646,144
Gain on disposition of property and equipment			1,559,092								3,518,248
Gain on disposition of securities under equity method			311,084,673								—
Gain on disposition of other non-current assets			62,392,265								—
Other income			326,992,326								520,021,326
Non-operating expenses							5,784,155,742								3,930,525,247
Other bad debt			1,841,809,822								—
Loss on foreign currency translation			59,690,130								374,878,274
Loss on foreign exchange transactions			823,549,189								595,005,002
Loss on valuation of equity-method investments			2,006,445,548								1,933,240,210
Loss on impairment of long-term available-for-sale securities			—								451,739,853
Loss on impairment of intangible assets			798,957,970								475,425,016
Loss on disposal of short-term available-for-sale securities			124,629								—
Loss on impairment of securities under equity method			235,827,637								—
Donations			10,237,000								100,000,000
Other losses			7,513,817								236,892
Income before income tax							7,987,324,201								7,778,763,483
Income tax expense (benefit)							(6,784,248,240	)							3,643,606,019
Net income							14,771,572,441								4,135,157,464
Earnings per share*
Basic and diluted							2,126								595

* Each ADS represents one-fourth of one share of our common stock. Therefore, earnings per ADS is one-fourth of earnings per share.

(3) Statements of Appropriation of Retained Earnings for fiscal years ended December 31, 2011 and 2010

FY 2011

From January 1, 2011 Until December 31, 2011

FY 2010

From January 1, 2010 Until December 31, 2010

Expected appropriation date

March 27, 2012

Confirmed appropriation date

March 25, 2011

[Unit: KRW]

Category		FY 2011 Amount								FY 2010 Amount
Retained earnings before appreciation							20,833,492,247								6,061,919,806
Unappropriated retained earnings carried over from prior year			6,061,919,806								1,926,762,342
Net income			14,771,572,441								4,135,157,464
Appropriation							—								—
Unappropriated retained earnings carried forwards to subsequent year							20,833,492,247								6,061,919,806