UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 21, 1999
RACOM SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 000-21907 84-1182875
- -------------------------------- ----------------------- -----------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification
incorporation) Number
</TABLE>
16 W. 32nd Street, Suite 801, New York, NY 10001
------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 643-2080
6080 Greenwood Plaza Blvd., Greenwood Village, Colorado 80111
-------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
This Form 8-K/A amends the Current Report on Form 8-K of Racom Systems,
Inc. (the "Registrant") dated July 21, 1999 (the "Original Form 8-K"),
previously filed with the Securities and Exchange Commission (the "Commission").
The Original Form 8-K was filed to report the announcement of the acquisition by
the Registrant of approximately 99.6% (4,958,000 shares) of the issued and
outstanding capital stock of NewState Capital Co., Ltd., a Korean corporation
which was formerly a subsidiary of NewState Capital Corp., a New York
corporation ("NewState"), in exchange for issuing 8,000,000 shares of its common
stock, representing approximately 80% of its total issued and outstanding shares
of common stock, to NewState and assuming $5 million of debt.
<PAGE>
ITEM 5. OTHER EVENTS
Effective September 15, 1999 the Registrant changed its name to NewState
Holdings, Inc. Effective at the opening of business on September 17, 1999 the
Registrant's new OTC Bulletin Board symbol is "NSTH". Existing share
certificates will continue to be valid and exchanged when presented for transfer
to the Registrant's transfer agent.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) The financial statements required by this item are contained in Exhibit
99.2.
(b) The pro forma financial statement information required by this item are
contained in Exhibit 99.3.
(c) Exhibits:
99.1 Agreement and Plan of Reorganization as of July 14, 1999*
99.2 Financial Statements of Business Acquired
99.3 Pro forma Financial Information
* This exhibit was previously filed as an exhibit to the Registrant's
Form 8-K filed with the Commission on July 21, 1999 and thus is not included in
this filing.
Forward Looking Statements
This Form 8-K/A contains forward-looking statements which involve risks
and uncertainties. When used herein, the words "anticipate", "believe",
"estimate" and "expect" and similar expressions as they relate to the Company or
its management, are intended to identify such forward-looking statements. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
results, performance or achievements could differ materially from the results
expressed in or implied by these forward-looking statements. Factors that could
cause or contribute to such differences are detailed from time to time in the
Company's Securities and Exchange Commission reports. Historical results are not
necessarily indicative of trends in operating results for any future period.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RACOM SYSTEMS, INC.
Dated: October 1, 1999 By: ALEXANDER T. SHANG
----------------------------------------
Alexander T. Shang, Treasurer
and Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
99.1 Agreement and Plan of Reorganization as of July 14, 1999*
99.2 Financial Statements of Business Acquired
99.3 Pro forma Financial Information
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Newstate Capital Co., Ltd., a subsidiary of Newstate Capital Corp. U.S.A.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Newstate
Capital Co., Ltd. and its subsidiary as of March 31, 1999, and the results of
their operations and their cash flows for the periods from December 9, 1998 to
March 31, 1999 (Post-acquisition period), and from April 1, 1998 to December 8,
1998 (Pre-acquisition period) in conformity with accounting principles generally
accepted in the United States of America. 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 audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the consolidated financial statements, effective
December 9, 1998, Newstate Capital Corp. U.S.A. acquired 99.5% of the
outstanding stock of the Company in a business combination accounted for as a
purchase. As a result of the acquisition, the consolidated financial information
for the period after the acquisition is presented on a different cost basis than
that for the period before the acquisition and, therefore, is not comparable.
As described in Note 1, the Company operates under adverse economic conditions
in Korea and the Asia Pacific region.
/s/ SAMIL ACCOUNTING CORPORATION
--------------------------------
Samil Accounting Corporation
Seoul, Korea
July 30, 1999
Samil Accounting Corporation is the Korean member firm of the worldwide
PricewaterhouseCoopers organization.
<PAGE>
<TABLE>
<CAPTION>
NEWSTATE CAPITAL CO., LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1999
-----------------
In Thousands of U.S. Dollars
Korean Won (Unaudited)
---------------------- ----------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents W 32,006,329 US$ 26,134,016
Interest-bearing deposits with banks 7,889,816 6,442,244
Securities available for sale (Note 3) 13,317,615 10,874,186
Securities held to maturity (Note 3) 64,153 52,383
Loans (Note 4) 118,463,288 96,728,413
Accrued interest receivable 2,972,203 2,426,882
Other assets 2,163,596 1,766,633
---------------------- ----------------------
Total assets W 176,877,000 US$ 144,424,757
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings (Note 5) W 66,799,727 US$ 54,543,747
Accrued expenses and other liabilities 1,933,356 1,578,636
Long-term debt (Note 6) 86,346,288 70,504,032
Accrued employee benefit (Note 7) 689,000 562,587
Negative goodwill (Notes 2 and 12) 15,676,107 12,799,957
---------------------- ----------------------
Total liabilities 171,444,478 139,988,959
---------------------- ----------------------
Minority interest 42,379 34,603
Commitments and contingencies (Note 9)
Shareholders' equity:
Common stock: W5,000 par value;
16,000,000 shares authorized ; 4,978,000 shares
issued and outstanding (Note 10) 4,890,001 3,992,816
Retained earnings 464,995 379,681
Accumulated other comprehensive income 35,147 28,698
---------------------- ----------------------
Total shareholders' equity 5,390,143 4,401,195
---------------------- ----------------------
Total liabilities and shareholders' equity W 176,877,000 US$ 144,424,757
====================== ======================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 1
NEWSTATE CAPITAL CO., LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
Periods from December 9, 1998 to March 31, 1999
and from April 1, 1998 to December 8, 1998
-----------------
<TABLE>
<CAPTION>
Period from December 9, 1998 to March Period from April 1, 1998 to
March 31, 1999 December 8, 1998
---------------------------------------- --------------------------------------
In Thousands of U.S. Dollars In Thousands of U.S. Dollars
Korean Won (Unaudited) Korean Won (Unaudited)
------------------ ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Loans W 3,878,500 US$ 3,166,898 W 12,624,511 US$ 10,373,468
Deposits with banks 1,960,517 1,600,814 2,070,331 1,701,176
------------------ ------------------- ------------------- -----------------
Total interest income 5,839,017 4,767,712 14,694,842 12,074,644
------------------ ------------------- ------------------- -----------------
Interest expenses:
Short-term borrowings 2,186,995 1,785,739 6,681,407 5,490,063
Long-term debt 2,246,847 1,834,610 7,931,642 6,517,372
------------------ ------------------- ------------------- -----------------
Total interest expense 4,433,842 3,620,349 14,613,049 12,007,435
------------------ ------------------- ------------------- -----------------
Net interest income 1,405,175 1,147,363 81,793 67,209
Provision for loan losses (1,300,771) (1,068,834)
- -
------------------ ------------------- ------------------- -----------------
Net interest income (loss) after provision for
loan losses 1,405,175 1,147,363 (1,218,978) (1,001,625)
Other income and expense:
Salaries and employee benefits (513,324) (419,143) (449,568) (369,407)
General and administration (1,297,658) (1,059,572) (665,216) (546,603)
Employee benefit (213,000) (173,920) (476,000) (391,126)
Amortization of negative goodwill 706,812 577,130 - -
Other income, net 375,775 306,830 (192,313) (158,022)
------------------ ------------------- ------------------- -----------------
(941,395) (768,675) (1,783,097) (1,465,158)
------------------ ------------------- ------------------- -----------------
Income (loss) before income taxes and minority
interest 463,780 378,688 (3,002,075) (2,466,783)
Provision for income taxes (Note 11) - - - -
Minority interest 1,215 993
------------------ ------------------- ------------------- -----------------
Net income (loss) W 464,995 US$ 379,681 W (3,002,075) US$ (2,466,783)
================== =================== =================== =================
Net income (loss) per common share, basic
and diluted
W 93 US$ 0.08 W (751) US$ (0.62)
------------------ ------------------- ------------------- -----------------
Average number of shares outstanding 4,978,000 4,978,000 4,000,000 4,000,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
NEWSTATE CAPITAL CO., LTD.
STATEMENT OF SHAREHOLDERS' EQUITY
Periods from December 9, 1998 to March 31, 1999,
and from April 1, 1998 to December 8, 1998
-----------------
<TABLE>
<CAPTION>
In thousands of Korean Won
---------------------------------------------------------
Capital stock Accumulated other
-------------------------- Retained earning comprehensive In U.S. Dollars
Shares Amount (deficit) Income Total (Unaudited)
------------ ------------- -------------- --------------- --------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Balance April 1, 1998 4,000,000 W 20,000,000 W (17,947,338) W (321,524) W 1,731,138 US$ 1,413,520
Net loss - (3,002,075) - (3,002,075) (2,466,783)
Net change in unrealized
appreciation on
available-for-sale securities - - 228,146 228,146 186,287
------------ ------------- -------------- --------------- --------------- --------------------
Comprehensive income (2,773,929) (2,280,496)
Balance December 8, 1998 4,000,000 20,000,000 (20,949,413) (93,378) (1,042,791) (866,976)
Acquisition of the Company by
the Parent (19,999,999) 20,949,413 93,378 1,042,792 866,977
Shares issued to Parent 978,000 4,890,000 4,890,000 3,992,816
Net income - 464,995 - 464,995 379,680
Net change in unrealized
appreciation on
available-for-sale securities - - - 35,147 35,147 28,698
--------------- --------------- --------------------
Comprehensive income 500,142 408,378
------------ ------------- -------------- --------------- --------------- --------------------
Balance March 31, 1999 4,978,000 W 4,890,001 W 464,995 W 35,147 W 5,390,143 US$ 4,401,195
============ ============= ============== =============== =============== ====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NEWSTATE CAPITAL CO., LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Periods from December 9, 1998 to March 31,1999,
and from April 1, 1998 to December 8, 19998
-----------------
<TABLE>
<CAPTION>
Period from December 9, 1998 Period from April 1, 1998
to March 31, 1999 to December 8, 1998
------------------------------------------ -----------------------------------
In Thousands In Thousands
of U.S. Dollars of U.S. Dollars
Korean Won (Unaudited) Korean Won (Unaudited)
------------------ --------------------- ------------------- -------------
<S> <C> <C> <C>> <C>
Cash flows from operating activities:
Net income (loss) W 464,995 US$ 379,681 W (3,002,075) US$ (2,466,783)
Adjustment to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Minorities interest (1,215) (993) - -
Depreciation and amortization 403,701 329,633 906,716 745,042
Amortization of negative goodwill (715,440) (584,176) - -
Provision for loan losses - - 1,300,771 1,068,834
Increase in accrued employee benefit 213,000 173,920 476,000 391,126
Decrease in accrued expenses and other
liabilities (281,542) (229,887) (545,247) (448,026)
Increase in accrued income and other assets (70,756) (57,773) 286,033 235,031
--------------- ----------------- ------------------- -------------------
Net cash provided by (used in) operating
activities 12,743 10,405 (577,802) (474,776)
--------------- ----------------- ------------------- -------------------
Cash flows from investing activities:
Decrease in loans, net 12,497,882 10,204,852 32,703,842 26,872,508
Decrease (increase) in interest bearing
deposits with banks, net 19,424,464 15,860,590 (5,899,275) (4,847,391)
Purchase of available-for-sale securities (354,500) (289,459) (93,378) (76,728)
Payment for purchase of subsidiary,
net of cash acquired (12,974,134) (10,593,724) - -
Other (22,410) (18,298) - -
--------------- ----------------- ------------------- -------------------
Net cash provided by investing activities 18,571,302 15,163,961 26,711,189 21,948,389
--------------- ----------------- ------------------- -------------------
Cash flows from financing activities:
Increase (decrease) in short-term borrowings, net 20,500,000 16,738,793 (3,400,000) (2,793,755)
Decrease in long-term debt (18,272,359) (14,919,866) (22,572,500) (18,547,658)
Issuance of common stock 4,890,000 3,992,815
--------------- ----------------- ------------------- -------------------
Net cash provided by (used in) financing activities 7,117,641 5,811,742 (25,972,500) (21,341,413)
--------------- ----------------- ------------------- -------------------
Net increase in cash and cash equivalents 25,701,686 20,986,108 160,887 132,200
Cash and cash equivalents at beginning of period 6,304,643 5,147,908 6,143,756 5,048,279
=============== ================= =================== ===================
Cash and cash equivalents at end of period W 32,006,329 US$ 26,134,016 W 6,304,643 US$ 5,180,479
=============== ================= =================== ===================
<PAGE>
Supplemental schedule of non-cash investing
and financing activities:
The Parent acquired 99.5%of NEWSTATE capital stock (see note1) and
NEWSTATE acquired all of YOUNGNAM capital stock (see note12). In
conjunction with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired W 188,123,541 US$ 153,607,855 US$
Cash paid for the capital stock 19,000,001 15,514,003 - -
- -
------------------ --------------------- ------------------- --------------
Liabilities assumed 169,123,540 138,093,852 - -
<PAGE>5
Supplemental cashflow information:
Cash paid for interest 1,488,393 1,215,312 2,976,785 2,446,002
================== ===================== =================== ===================
Cash paid for income taxes - - - -
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>6
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
-----------------
1. Basis of Presentation:
NEWSTATE CAPITAL CO., LTD. ("NEWSTATE"), a 99.6%-owned subsidiary of
Newstate Capital Corp. U.S.A.(the "Parent"), is a financing company
incorporated on February 18, 1994 under the laws of the Republic of Korea
to engage in factoring commercial notes and accounts receivable, and to
provide short-term and long-term financing to customers. The name of the
company was changed from Dongsuh Finance Co., Ltd. to NEWSTATE CAPITAL
CO., LTD. on December 9, 1998 when the Parent acquired 3,980,000 (99.5%)
shares of NEWSTATE's common stock from Dongsuh Horizon Securities Co., Ltd
for $1 in cash. On December 9, 1998, NEWSTATE issued 978,000 shares of
common stock to the Parent at W5,000 per share, bringing the Parent's
ownership of NEWSTATE to 99.6%. Yongnam Housing Finance Co., Ltd.
("YOUNGNAM"), a wholly owned subsidiary of NEWSTATE, is a business that
provides financing for the purchase of homes to middle-income individuals.
The accompanying consolidated financial statements include the accounts of
NEWSTATE and YOUNGNAM (collectively, the "Company"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
As a result of the effects of the International Monetary Fund debt crisis in
Korea, NEWSTATE and YOUNGNAM, since its acquisition by NEWSTATE, suspended
new loan originations from the period December 1997 to April 1999.
Consequently, the accompanying financial statements do not reflect the
Company's normal business activities in a stable economic environment.
The Company operates a branch in Seoul and two branches in the Kyungsang
Province of the Republic of Korea.
The official accounting records of the Company are maintained in Korean Won
in accordance with the relevant laws and regulations of the Republic of
Korea. The U.S. Dollar amounts are provided herein as supplementary
information solely for the convenience of the reader. All Won amounts are
expressed in U.S. Dollars at the rate of 1,224.7 : US$1, the prevailing
rate on March 31, 1999. This presentation should not be construed as a
representation that the Won amounts shown could be converted in or settled
in U.S. Dollars at this or any other rate.
The Company's primary source of revenue is from providing loans to
customers who are predominantly small and middle-market businesses and
middle-income individuals. A substantial portion of the Company's revenues
is from housing loans.
Liquidity Risk -
A significant portion of the Company's liabilities are short-term or due on
demand whereas most of its assets are long-term loans or investments. In
order to meet its obligations and sustain its operations, the Company must
generate sufficient cash flow through refinance of borrowings (see note
5), collections on or sale of loans, sale of securities, or through
capital contributions.
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
2. Summary of Significant Accounting Policies:
The significant accounting policies followed by the Company in the
preparation of the accompanying consolidated financial statements are
summarized below.
Use of Estimates in the Preparation of Financial Statements -
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported therein. Due to the
inherent uncertainty involved in making estimates, actual results reported
may differ from those estimates.
Risks and Uncertainties -
The operations of the Company have been affected, and may continue to be
affected for the foreseeable future by the unstable economic conditions in
the Republic of Korea and the Asia Pacific region. Specific factors that
have impacted the Company include increased unemployment in Korea, limited
availability of credit, significant numbers of corporate bankruptcies and
the general deterioration of the economies of countries in the Asia
Pacific region. Given the current economic conditions, it is at least
reasonably possible that a continuation of the economic crisis or a lack
of significant improvement in the Korean economy may require a material
adjustment in the short-term for the recoverability of the Company's
assets.
Recognition of Interest Income -
Interest income on loans and investments is recognized on an accrual basis.
Discounts or premiums associated with the acquisition of NEWSTATE and the
acquisition of YOUNGNAM (see note 12) are recognized on an effective yield
method. Acquisition discounts from impaired or past due loans where
collection is not anticipated are recognized as cash, if any, is received.
Cash Equivalents -
Cash and cash equivalents comprise cash and time deposits in banks with
original maturities of three months or less.
Securities Held to Maturity -
Investments for which the Company has the positive intent and ability to
hold to maturity are reported at amortized cost.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
2. Summary of Significant Accounting Policies, Continued:
Securities Available for Sale -
Securities available for sale consist of certain equity and debt securities
which management believes could be sold in response to changes in market
conditions or other factors. Unrealized holding gains or losses, net of
tax if applicable, are included as a component of other comprehensive
income in shareholders' equity until realized.
Realized gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
Realized declines in the fair value of individual securities held to
maturity and available for sale securities below their cost that are
determined to be other than temporary result in write-downs of the
individual securities to their fair value. The related write-downs are
included as losses in the statement of operations.
Premiums and discounts are recognized in interest income using the effective
interest method over the period to maturity.
Loans, Allowance and Discontinuance of Interest Income Recognition -
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity are reported at their outstanding
principal balance, net of allowance for loan losses, and since the
acquisition of NEWSTATE, net of discounts associated with the adjusting
loans to estimated market values.
The accrual of interest is discontinued if, in management's opinion, full
payment of principal or interest is in doubt, or when principal or
interest is past due over 90 days or more, and collateral, if any, is
insufficient to cover principal and interest. Non-accrual loans are those
on which the accrual of interest is discontinued. When the interest
accrual is discontinued, all uncollected accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash
payments are received.
The allowance for loan losses is increased by charges to expense and
decreased by charge-offs, if applicable. Management's periodic evaluation
of the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrowers' ability to repay, the estimated value of
any underlying collateral, and current economic conditions.
Losses on consumer and residential mortgage loans are generally provisioned
through a charge to the allowance for loan losses based upon specified
stages of delinquency and estimated losses on such loans.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
2. Summary of Significant Accounting Policies, Continued:
Loans, Allowance and Discontinuance of Interest Income Recognition,
Continued-
Since the acquisition of NEWSTATE by the Parent in which all loans were
marked to market, the Company has established no provisions for loan losses
(see note 1 with respect to the lack of loan originations during the
periods).
The Company considers all non-accrual commercial loans as impaired loans.
Loan allowances on commercial loans deemed to be impaired are determined
based upon an estimate of future cash flows discounted at the related
loans' effective rate. Generally, the Company estimates cash flows for a
period of 3 to 5 years, regardless of whether the original or restructured
term of an impaired loan exceeds such periods. Charge-offs are recorded
only after all practical efforts to collect the loan have been exhausted.
Under Korean law, a loan to an individual remains legally binding in
perpetuity.
Foreclosed Real Estate -
Real estate properties acquired through, or in lieu of, loan foreclosure are
to be sold and are initially recorded at fair value less cost to sell at
the date of foreclosure. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of
carrying amount or fair value, less cost to sell.
Premises and Equipment -
Company premises, furniture and equipment are carried at cost, less
accumulated depreciation computed principally by the declining-balance
method over the estimated useful lives of the assets.
Accrued Employee Benefits -
Employees and directors with more than one year of service are entitled to
receive a lump-sum payment upon termination of their service with the
Company, either voluntary or involuntary, based on their length of
employment and rate of pay at the time of termination. Severance benefits
are accrued based primarily on the employees' compensation and years of
service.
Inaccordance with the National Pension Act, a certain portion of accrued
employee benefits is remitted to the National Pension Fund and deducted
from accrued employee benefits. The contributed amount is refunded to
employees from the National Pension Fund upon their retirement.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
2. Summary of Significant Accounting Policies, Continued :
Negative Goodwill -
Negative goodwill, which represents the excess of fair value over purchase
price of net assets acquired, is amortized on the straight-line basis over
5 years.
Debt Issuance Costs -
Debt issuance costs are deferred and amortized over the life of the related
debt instrument on the effective interest method.
Income Taxes -
Deferred income taxes are recognized for the future tax consequences of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. A valuation allowance is provided on
deferred income tax assets where it is more likely than not that such
assets will not be realized.
Net Income (Loss) Per Share -
Earnings (loss) per share is computed using the weighted average number of
common shares outstanding during the year. Basic and diluted earnings
(loss) per share amount are the same as there are no convertible or other
equity securities outstanding.
Comprehensive Income -
The Company has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income", which defines and establishes the
standards for reporting comprehensive income. Comprehensive income for the
Company includes net income and the change in unrealized gains and losses
on available for sale securities. The Company has presented these item in
the statement of shareholders' equity.
Push Down Accounting -
Inaccordance with Securities & Exchange Commission Staff Accounting Bulletin
No. 54 ("SAB No. 54"), the Company has "pushed down" the Parent's purchase
price in revaluing the assets and liabilities of the Company. According to
the provisions of SAB No. 54, purchase transactions that result in an
entity becoming substantially wholly owned require a new basis of
accounting for the purchased assets and liabilities. For the periods
subsequent to December 9, 1998, the consolidated financial statements of
the Company reflect the accounting basis used by the Parent subsequent to
the acquisition of the Company.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
2. Summary of Significant Accounting Policies, Continued :
Push Down Accounting, Continued -
As a result of the purchase, the following purchase price adjustments are
recorded as of December 9, 1998 (amounts in thousands of Won):
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------------------------------
<S> <C> <C>
Interest-bearing deposits with bank W 7,679 US$ 6,270
Securities held to maturity 4,156 3,393
Loans (2,840,145) (2,319,054)
Accrued interest receivable (103,065) (84,155)
Long-term debt 113,862 92,971
Premises and equipment (199,634) (163,006)
</TABLE>
In connection with the acquisition of NEWSTATE, Dongsuh Horizon Securities
Co., Ltd. forgave W13,076,230 thousand of short term loan receivable due
from NEWSTATE. The negative goodwill resulting from the purchase, and the
resulting push down of the Parent's basis, amounted to W8,675,257 thousand.
3. Securities:
Securities at March 31,1999 are as follow (in thousands of Won):
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Amortized cost gains losses Fair value
------------------ ---------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Available for sale:
Equity securities W 970,621 W 35,147 - W 1,005,768
Interest in pools
of debt securities 12,311,847 - - 12,311,847
------------------ ---------------- ----------------- -------------------
W 13,282,468 W 35,147 - W 13,317,615
================== ================ ================= ===================
Held to maturity :
Bond W 64,153 W 1,213 - W 65,366
</TABLE>
The Company's investment in the interests in pools of debt securities, which
the Company acquired from the subsidiary on March 12, 1999 (see note 12),
functions similarly to mutual fund or debt fund where the holders'
interests represent their share of the net assets of the pools of debt
securities.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
3. Securities, Continued :
The scheduled maturities of securities held to maturity at March 31, 1999
are follows (in thousands of Won):
<TABLE>
<CAPTION>
Securities
held-to-maturity
----------------------------------
Cost Fair value
---------------- ---------------
<S> <C> <C>
Due in one year or less - -
Due from one to five years 60,505 62,058
Due from five to ten years 3,648 3,308
---------------- ---------------
64,153 65,366
</TABLE>
4. Loans:
As a result of acquisition transactions described in notes 1 and 12, the
Company's loan balances were adjusted to fair value as of those acquisition
dates. Accordingly, the loan balances at March 31, 1999 comprise the
following components by loan types:
<TABLE>
<CAPTION>
Thousands of Won
------------------------------------------------------------------------------------------
Unamortized
interest premium Balance at
Principal (discount) Credit Discount March 31, 1999
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Commercial W 23,594,429 W 130,334 W (14,513,299) W 9,211,464
Residential real estate 108,580,075 (2,247,948) (629,640) 105,702,487
Consumer 6,479,325 (235,176) (2,694,812) 3,549,337
--------------------- --------------------- --------------------- ---------------------
Sub-total W138,653,829 W(2,352,790) W (17,837,751) W 118,463,288
===================== ===================== ===================== =====================
</TABLE>
The effective interest rates used for purposes of calculating interest
premium or discount were based on the loan rates at which the same loans,
after adjusting for amounts not expected to be collected, would be made
under conditions prevailing at the time.
At March 31, 1999, residential real estate loans of 54,396,799(par value)
thousand are pledged as collateral for certain short-term and long-term
borrowings (see Notes 5 and 6).
An analysis of the change in the allowance for loan losses is as follows:
Thousands of Won
-----------------------
Balance at March 31, 1998 17,760,105
Provision for loan losses 1,300,771
Adjustment for push down (19,060,876)
-----------------------
Balance at March 31,1999 -
Until the acquisition of NEWSTATE, W14,416,740 thousand of impairment losses
were recorded in relation to impaired loans. Impaired loans at the end of
the year totaled W18,181,919 thousand in principal balances. Interest
income on impaired commercial loans amounted to 253,262 thousand on cash
basis during the fiscal year.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
4. Loans, Continued :
Scheduled maturities of loans receivable at March 31, 1999 (net of applicable
discounts) are as follows:
Thousands of Won
-----------------------
Due in one year or less W 29,045,689
Due from one to five years 41,355,076
Due from five to ten years 22,533,246
Due after ten years 25,529,277
-----------------------
W 118,463,288
=======================
5. Short-term Borrowings:
Short-term borrowings at March 31, 1999 comprise the following:
Annual Interest
Rates (%) Thousands of Won
------------------- -----------------------
Overdraft 8.95 W 1,999,727
General term borrowings 12.69 10,800,000
Notes with short-term
finance companies 12.40 54,000,000
-----------------------
W 66,799,727
Certain bank deposits and financing assets are pledged as collateral for the
above borrowings (see Note 4). Historically, short-term borrowings have
been revolving in nature and refinanced by new borrowings as they become
due. Management believes that the Company will continue to borrow in the
near term short-term funds for operations through renewals of existing
borrowing arrangements.
Maximum and average borrowings and weighted average interest rate on short-term
borrowings for the year ended March 31, 1999 were as follows:
Thousands of Won
---------------------
Maximum borrowings W 66,799,727
Average borrowings outstanding 47,623,839
Weighted average interest rate 13.72%
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
6. Long-term Debt:
Long-term debt at March 31, 1999 comprises the following:
Reference Thousands of Won
-------------- ------------------------
Debentures (A) W 52,346,288
Bank loans (B) 34,000,000
------------------------
W 86,346,288
(A) Debentures outstanding at March 31, 1999 comprise the following:
Annual Interest
Rates (%) Thousands of Won
------------------- ----------------------
Debentures collateralized
by bank letter of credit 11.0 W 24,000,000
Non-collateralized debentures 15.5-17.0 11,000,000
Unlisted private debentures 10.0-10.5 17,500,000
----------------------
52,500,000
Less : discounts (153,712)
----------------------
W 52,346,288
======================
(B) Bank loans at March 31, 1999 comprise the following:
Annual Interest
Rates (%) Thousands of Won
------------------- -----------------------
Korea First Bank 10.35-12.25 W 24,000,000
Hanareum Merchant Bank 16.0 4,000,000
Kukmin Bank 10.5 6,000,000
-----------------------
W 34,000,000
========================
Certain bank deposits and financing assets are pledged as collateral for the
above debt (see Note 4).
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
6. Long-term Debt, Continued:
The maturities of long-term debt outstanding at March 31, 1999, excluding
discounts on debentures, are as follows:
<TABLE>
<CAPTION>
Thousands of Won
---------------------------------------------------------------------
Debentures Bank
(par value) Loans Total
------------------- ------------------ --------------------
<S> <C> <C> <C>
1999 W 13,896,369 W 30,000,000 W 43,896,369
2000 31,514,701 2,400,000 33,914,701
2001 6,935,218 1,600,000 8,535,218
=================== ================== ====================
W 52,346,288 W 34,000,000 W 86,346,288
=================== ================== ====================
</TABLE>
7. Accrued Employee Benefit:
The following information relates to the Company's benefit obligation under
its severance benefit plan.
Change in benefit obligation:
<TABLE>
<CAPTION>
As of December 8, As of
1998 March 31,
1999
------------------- --------------------
<S> <C> <C>
Benefit obligation at beginning of period W 167,000 W 638,000
Service cost 457,000 205,000
Interest cost 14,000 6,000
------------------- --------------------
Benefit obligation at end of period 638,000 849,000
Unrecognized prior service cost (162,000) (160,000)
------------------- --------------------
Accrued benefit cost W 476,000 W 689,000
=================== ====================
Components of net periodic benefit cost:
Service cost 457,000 205,000
Interest cost 14,000 6,000
Amortization of prior service cost 5,000 2,000
-------------------- --------------------
476,000 213,000
=================== ====================
</TABLE>
The discount and rate of increase for future compensation used to determine
the actuarial value above were 12% and 4%, respectively.
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
8. Financial Instruments:
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
Thousands of Won
---------------------------------------
Book Fair
Value Value
------------------ ------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalent 31,990,862 31,990,862
Interest- bearing deposits with banks 7,903,478 8,079,671
Securities available for sale 13,317,615 13,317,615
Securities held to maturity 64,153 65,366
Loans 118,463,288 118,187,136
Accrued interest receivable 2,974,008 2,974,008
Financial liabilities:
Short-term borrowings 66,799,727 66,799,727
Long-term debt 86,346,288 87,719,641
</TABLE>
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
- Cash and short-term instruments
Carrying amounts (which represent cost) of cash and short-term instruments
approximate their fair value.
- Available for sale and held to maturity securities
Fair values for securities are based on quoted market prices.
- Loans receivable
Fair values for loans are estimated using discounted cash flow analysis
using interest currently being offered for loans with similar term to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral
values, where applicable.
- Accrued interest receivable
The carrying amounts of accrued interest receivable approximate their fair
values.
Continued:
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
8. Financial Instruments , Continued:
- Short-term borrowings
Carrying amounts (which represent cost) of short-term borrowings approximate
their fair value.
- Long-term debt
Fair values of long-term debt are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
9. Commitments and Contingencies:
At March 31, 1999, the Company has entered into bank overdraft agreements for
borrowings of up to W2,000 million with Daegu Bank.
10. Capital Stock:
The basis of NEWSTATE'S common stock outstanding at acquisition was changed
from 20,000,000 thousand Won to 1 thousand Won as a result of pushdown
accounting (See Note 2).
NEWSTATE issued 978,000 shares of common stock for cash at W5,000 per share
on December 9, 1998.
11. Income taxes:
The statutory income tax rate, including resident tax surcharges, applicable
to the Company is approximately 30.8% in 1999. However, the actual income
tax expense reported by the Company differs from the expected income tax
computed at the statutory income tax rate as follows:
Period from December 9, Period from April 1, 1998 to
1998 to March 31, 1999 to December 8, 1998
----------------------- -----------------------------
Tax Rate Thousand Tax Rate Thousand
(%) of Won (%) of Won
-------- -------- -------- --------
Income tax expense
computed at
statutory rate 30.8 W 143,218 (30.8) W (924,639)
Disallowed interest
and expenses 10.4 48,573 0.2 78,856
Net amortization/
accretion of good-will 19.1 89,024 -- --
Change in deferred tax
valuation allowance (60.3) (280,815) 30.6 845,783
----- ---------- ------- -----------
Income tax expense as
reported -- W -- -- W --
===== ========== ======= ===========
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
March 31, 1999
-----------------
11. Income Taxes, Continued:
The significant components of deferred tax assets are reflected in the
following:
Thousand of Won
--------------------
Deferred tax assets:
Loss carry forward W 973,384
Loan discount and allowances 1,775,401
Accrued employee benefit 210,978
Debt forgiveness 4,027,479
Other purchase discounts 356,335
--------------------
7,343,577
Deferred tax liabilities:
Accrued interest income 10,116
Other purchase premiums 1,476,739
--------------------
1,486,855
Net deferred tax assets
before valuation allowance 5,856,722
--------------------
Valuation allowance on net
deferred tax assets (5,856,722)
--------------------
Net deferred tax assets W 0
====================
12. Acquisition of Youngnam Housing Finance Co., Ltd.:
On March 12, 1999, NEWSTATE acquired all of the outstanding stock of YOUNGNAM
for approximately W19,000,000 thousand in cash. The acquisition was
recorded under the purchase method of accounting. The acquisition resulted
in negative goodwill of approximately W7,707,661 thousand which is being
amortized over 5 years using straight-line method.
The following pro forma results reflect the assumption that the transaction
was effective at April 1, 1998 (in thousands, except per share amounts):
Unaudited
-----------------------------------------
Period from Period from
April 1, 1998 to December 9, 1998 to
December 8, 1998 March 31, 1999
----------------- -------------------
Revenues W 23,575,984 W 8,796,731
Net income (loss) (1,874,448) 840,870
Net income (loss) per share (468) 169
(in Korean Won)
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Newstate Capital Co., Ltd.
In our opinion, the accompanying balance sheet and the related statements of
operations, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Newstate Capital Co., Ltd. as of March 31,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
As described in Note 1, the Company operates under adverse economic conditions
in Korea and the Asia Pacific region.
/s/ SAMIL ACCOUNTING CORPORATION
------------------------------------
Samil Accounting Corporation
Seoul, Korea
July 30, 1999
Samil Accounting Corporation is the Korean member firm of the worldwide
PricewaterhouseCoopers organization.
<PAGE>
NEWSTATE CAPITAL CO., LTD.
BALANCE SHEET
March 31, 1998
-----------------
<TABLE>
<CAPTION>
In Thousands of U.S. Dollars
Korean Won (Unaudited)
---------------------- ----------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents W 6,143,756 US$ 4,455,872
Interest-bearing deposits with banks 33,333,185 24,175,504
Securities available for sale (Note 3) 124,530 90,318
Securities held to maturity (Note 3) 20,550 14,904
Loans, net of allowance for loan losses of
W17,760,105 thousand (Note 4) 113,232,708 82,124,099
Premises and equipment (Note 5) 283,102 205,325
Accrued interest receivable 2,407,303 1,745,941
Other assets 1,196,237 867,592
---------------------- ----------------------
Total assets W 156,741,371 US$113,679,555
====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings (Note 6) W 52,976,230 US$ 38,421,983
Accrued expenses and other liabilities 1,462,141 1,060,445
Long-term debt (Note 7) 100,571,862 72,941,588
---------------------- ----------------------
Total liabilities 155,010,233 112,424,016
---------------------- ----------------------
Shareholders' equity:
Common stock: W5,000 par value;
16,000,000 shares authorized; 4,000,000 shares
issued and outstanding 20,000,000 14,505,367
Accumulated deficit (17,947,338) (13,016,636)
Accumulated other comprehensive loss (321,524) (233,192)
---------------------- ----------------------
Total shareholders' equity 1,731,138 1,255,539
---------------------- ----------------------
Total liabilities and shareholders' equity W 156,741,371 US$113,679,555
====================== ======================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
NEWSTATE CAPITAL CO., LTD.
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1998
-----------------
<TABLE>
<CAPTION>
In Thousands of U.S. Dollars
Korean Won (Unaudited)
---------------------- ----------------------
<S> <C> <C>
Interest income:
Loans W 23,314,686 US$ 16,909,404
Deposits with banks 3,091,867 2,242,433
---------------------- ----------------------
Total interest income 26,406,553 19,151,837
---------------------- ----------------------
Interest expenses:
Short-term borrowings 13,413,472 9,728,367
Long-term debt 10,513,742 7,625,284
---------------------- ----------------------
Total interest expense 23,927,214 17,353,651
---------------------- ----------------------
Net interest income 2,479,339 1,798,186
Provision for loan losses (10,183,159) (7,385,523)
---------------------- ----------------------
Net interest losses after provision for loan losses (7,703,820) (5,587,337)
---------------------- ----------------------
Other income and expenses:
Salaries and employee benefits (1,799,505) (1,305,124)
General and administration (1,174,898) (852,116)
Loss on sale of available for sale securities(Note 3) (1,279,299) (927,835)
Other income, net 89,112 64,630
---------------------- ----------------------
(4,164,590) (3,020,445)
---------------------- ----------------------
Loss before income taxes (11,868,410) (8,607,782)
Provision for income taxes (Note 9) - -
---------------------- ----------------------
Net loss W (11,868,410) US$ (8,607,782)
====================== ======================
Net loss per common share, basic and diluted W (2,967) US$ (2.15)
Average number of shares outstanding 4,000,000 4,000,000
====================== ======================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
NEWSTATE CAPITAL CO., LTD.
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED MARCH 31, 1998
-----------------
<TABLE>
<CAPTION>
In thousands of Korean Won
---------------------------------------------------------------
Accumulated
Capital stock Other
----------------------------- Accumulated comprehensive In U.S. Dollars
Shares Amount deficit loss Total (Unaudited)
------------ --------------- --------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance April 1, 1997 4,000,000 W 20,000,000 W (6,078,928) W (73,000) W 13,848,072 US$10,043,567
------------ --------------- --------------- --------------- ------------ -------------
Net loss - - (11,868,410) - (11,868,410) (8,607,782)
Net change in unrealized
depreciation on
available-for-sale securities - - - (248,524) (248,524) (180,247)
------------ -------------
Comprehensive loss - - - - (12,116,934) (8,788,029)
------------ --------------- --------------- --------------- ------------ -------------
Balance March 31, 1998 4,000,000 W 20,000,000 W(17,947,338) W (321,524) W 1,731,138 US$ 1,255,539
============ =============== =============== =============== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
NEWSTATE CAPITAL CO., LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31, 1998
-----------------
<TABLE>
<CAPTION>
In Thousands of U.S. Dollars
Korean Won (Unaudited)
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss W (11,868,410) US$ (8,607,782)
Adjustment to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,413,508 1,025,173
Loss on sale of available for sale securities 1,279,299 927,835
Provision for loan losses 10,183,159 7,385,523
Other non-cash gains (93,874) (68,084)
Increase in accrued interest receivable (1,583,022) (1,148,116)
Decrease in accrued expenses and other liabilities (863,961) (626,603)
Decrease in other assets 985,791 714,963
---------------------- ----------------------
Net cash used in operating activities (547,510) (397,091)
---------------------- ----------------------
Cash flows from investing activities:
Increase in interest bearing deposits with banks, net (14,678,575) (10,645,906)
Purchase available for sale securities (20,991,553) (15,224,509)
Proceeds from sales of available for sale securities 19,712,254 14,296,674
Decrease in loans, net 33,683,430 24,429,526
Purchase of premises and equipment (61,504) (44,607)
Proceeds from sales of premises and equipment 4,670 3,387
---------------------- ----------------------
Net cash provided by investing activities 17,668,722 12,814,565
---------------------- ----------------------
Cash flows from financing activities:
Decrease in short-term borrowings, net (47,709,974) (34,602,534)
proceeds from long-term debt borrowings 35,375,274 25,656,566
---------------------- ----------------------
Net cash used in financing activities (12,334,700) (8,945,968)
---------------------- ----------------------
Net increase in cash and cash equivalents 4,786,512 3,471,506
Cash and cash equivalents at March 31, 1997 1,357,244 984,366
---------------------- ----------------------
Cash and cash equivalents at March 31, 1998 W 6,143,756 US$ 4,455,872
====================== ======================
Supplemental cashflow information:
Cash paid for interest W 22,806,346 US$ 16,540,721
Cash paid for income taxes - -
====================== ======================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
-----------------
1. Basis of Presentation:
Newstate Capital Co., Ltd. (the "Company"), a 99.6%-owned subsidiary of
Newstate Capital Corp. U.S.A., is a financing company incorporated on
February 18, 1994 under the laws of the Republic of Korea to engage in
factoring commercial notes and accounts receivable, and to provide
short-term and long-term financing to customers. The name of the Company
was changed from Dongsuh Finance Co., Ltd. to Newstate Capital Co., Ltd.
on December 9, 1998.
As a result of the effects of the International Monetary Fund debt crisis in
Korea, the Company suspended new loan originations from the period December
1997 to April 1999. Consequently, the accompanying financial statements do
not reflect the company's normal business activities in a stable economic
environment.
The official accounting records of the Company are maintained in Korean Won
in accordance with the relevant laws and regulations of the Republic of
Korea. The U.S. Dollar amounts are provided herein as supplementary
information solely for the convenience of the reader. All Won amounts are
expressed in U.S. Dollars at the rate of W1,378.8 : US$1, the prevailing
rate on March 31, 1998. This presentation should not be construed as a
representation that the Won amounts shown could be converted in or settled
in U.S. Dollars at this or any other rate.
The Company's primary source of revenue is from providing loans to customers,
who are predominantly small and middle-market businesses and middle-income
individuals. A substantial portion of the Company's revenues is from
housing loans.
Liquidity Risk -
A significant portion of the Company's liabilities are short-term or due on
demand, whereas most of its assets are long-term loans or investments. In
order to meet its obligations and sustain its operations, the Company must
generate sufficient cash flow through refinance of borrowings (see note 6),
collections on or sale of loans, sale of securities or through capital
contributions.
2. Summary of Significant Accounting Policies:
The significant accounting policies followed by the Company in the
preparation of the accompanying financial statements are summarized below.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998
-----------------
2. Summary of Significant Accounting Policies, Continued:
Use of Estimates in the Preparation of Financial Statements -
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported therein. Due to the inherent
uncertainty involved in making estimates, actual results reported may
differ from those estimates.
Risk and Uncertainties -
The operations of the Company have been affected, and may continue to be
affected for the foreseeable future, by the unstable economic conditions in
the Republic of Korea and the Asia Pacific region. Specific factors that
have impacted the Company include increased unemployment in Korea, limited
availability of credit, significant numbers of corporate bankruptcies and
the general deterioration of the economies of countries in the Asia Pacific
region. Given the current economic conditions, it is at least reasonably
possible that a continuation of the economic crisis, or a lack of
significant improvement in the Korean economy, may require material
adjustment in the short-term for the recoverability of the Company's
assets.
Recognition of Interest Income -
Interest income on loans and investments is recognized on an accrual basis.
Cash Equivalents -
Cash and cash equivalents comprise cash and time deposits in banks with
original maturities of three months or less.
Securities Held to Maturity -
Investments for which the Company has the positive intent and ability to hold
to maturity are reported at amortized cost.
Securities Available for Sale -
Securities available for sale consist of certain equity securities which
management believes could be sold in response to changes in market
conditions or other factors. Unrealized holding gains or losses, net of tax
if applicable, are included as a component of other comprehensive income in
shareholders' equity until realized.
Realized gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998
-----------------
2. Summary of Significant Accounting Policies, Continued:
Securities Available for Sale, Continued:
Realized declines in the fair value of individual held to maturity and
available for sale securities below their cost that are determined to be
other than temporary result in write-downs of the individual securities to
their fair value. The related write-downs are included as losses in the
statement of operations.
Premiums and discounts are recognized in interest income using the effective
interest method over the period to maturity.
Loans, Allowance and Discontinuance of Interest Income Recognition -
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity are reported at their outstanding
principal balance, net of allowance for loan losses.
The accrual of interest is discontinued if, in management's opinion, full
payment of principal or interest is in doubt, or when principal or interest
is past due over 90 days or more, and collateral, if any, is insufficient
to cover principal and interest. Non-accrual loans are those on which the
accrual of interest is discontinued. When the interest accrual is
discontinued, all uncollected accrued interest is reversed. Interest income
is subsequently recognized only to the extent cash payments are received.
The allowance for loan losses is increased by charges to expense and
decreased by charge-offs, if applicable. Management's periodic evaluation
of the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrowers' ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Losses on consumer and residential mortgage loans are generally provisioned
through a charge to the allowance for loan losses based upon specified
stages of delinquency and estimated losses on such loans.
The Company considers all non-accrual commercial loans as impaired loans.
Allowances on commercial loans deemed to be impaired are determined based
upon an estimate of future cash flows discounted at the related loans'
effective rate. Generally, the Company estimates cash flows for a period of
3 to 5 years, regardless of whether the original or restructured term of an
impaired loan exceeds such periods. Charge offs are recorded only after all
practical efforts to collect the loan have been exhausted. Under Korean
law, a loan to an individual remains legally binding perpetuity.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998
-----------------
2. Summary of Significant Accounting Policies, Continued:
Premises and Equipment -
Company premises, furniture and equipment are carried at cost, less
accumulated depreciation computed principally by the declining-balance
method over the estimated useful lives of the assets.
Accrued Employee Benefits -
Employees and directors, with more than one year of service are entitled to
receive a lump-sum payment upon termination of their service with the
Company, either voluntary or involuntary, based on their length of
employment and rate of pay at the time of termination. Severance benefits
are accrued based primarily on the employees' compensation and years of
service.
In accordance with the National Pension Act, a certain portion of accrued
employee benefits is remitted to the National Pension Fund and deducted
from accrued employee benefits. The contributed amount is refunded to
employees from the National Pension Fund upon their retirement.
Debt Issuance Costs -
Debt issuance costs are deferred and amortized over the life of the related
debt instrument on the effective interest method.
Income Taxes -
Deferred income taxes are recognized for the future tax consequences of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. A valuation allowance is provided on
deferred income tax assets where it is more likely than not that such
assets will not be realized.
Net Income (Loss) Per Share -
Earnings (loss) per share is computed using the weighted average number of
common shares outstanding during the year. Basic and diluted earnings
(loss) per share amount are the same.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998
-----------------
2. Summary of Significant Accounting Policies, Continued:
Comprehensive Income -
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which defines and establishes the
standards for reporting comprehensive income. Comprehensive income for the
Company includes net income and the change in unrealized gains and losses
on available for sale securities. The Company has presented these items in
the statement of shareholders' equity.
3. Securities:
Securities at March 31, 1998 are as follows (in thousands of Won).
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Amortized cost gains losses Fair value
------------------- ------------- --------------- -------------------
<S> <C> <C> <C> <C>
Available for sale:
Equity securities W 446,054 - W 321,524 W 124,530
=================== ============= =============== ===================
Held to maturity :
Bond W 20,550 - W 6,229 W 14,321
=================== ============= =============== ===================
</TABLE>
Proceeds from sales of securities available for sale were approximately
W19,712,254 thousand for the year ended March 31, 1998. During the fiscal
year, gross losses on the sales of securities available for sale amounted
W1,279,299 thousand.
The scheduled maturities of securities held to maturity at March 31, 1998 are
as follows (in thousands of Won) :
Securities
held-to-maturity:
----------------------------------
Cost Fair Value
--------------- ----------------
Due in one year or less W 1,000 W 871
Due from one to five years 12,320 10,933
Due from five to ten years 7,230 2,517
--------------- ----------------
W 20,550 W 14,321
=============== ================
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998
-----------------
4. Loans:
The components of loans are as follows:
Thousands of Won
-----------------------
Commercial W 26,404,024
Residential real estate 93,106,536
Consumer 11,482,253
-----------------------
Sub-total 130,992,813
Allowance for loan losses (17,760,105)
-----------------------
W 113,232,708
=======================
At March 31, 1998, residential real estate loans of W 51,453 million are
pledged as collateral for certain short-term and long-term borrowings (see
Notes 6 and 7).
An analysis of the change in the allowance for loan losses is as follows:
Thousands of Won
-----------------------
Balance at March 31, 1997 W 7,576,946
Provision for loan losses 10,183,159
=======================
Balance at March 31,1998 W 17,760,105
=======================
During the year ended March 31, 1998, W14,933,926 thousand of allowance on
impaired loans were recorded in relation to impaired loans having recorded
investments of W18,723,828 thousand. As of March 31, 1998, there is no
impaired loan for which an allowance for loan loss has not been provided.
The average recorded investment in impaired loans during the fiscal year
was W21,468,478 thousand.
Interest income on impaired commercial loans amounted to W455,226 thousand
on cash basis during the fiscal year.
Scheduled maturities of loans receivable at March 31, 1998, are as follows:
Thousands of Won
-----------------------
Due in one year or less W 12,142,189
Due from one to five years 39,351,285
Due from five to ten years 26,636,807
Due after ten years 52,862,532
-----------------------
W 130,992,813
=======================
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998
-----------------
5. Premises and Equipment:
Components of properties and equipment included in the balance sheet at March
31, 1998, are as follows:
Thousands of Won Estimated Useful Life
---------------- --------------------------
Vehicles W 74,191 4 - 5
Furniture and equipment 1,110,090 4 - 8
----------------
Total 1,184,281
Less accumulated depreciation (901,179)
----------------
Net book value W 283,102
================
Rental expense of certain Company facilities and equipment was W195,360
thousand in 1998.
6. Short-term Borrowings:
Short-term borrowings at March 31, 1998 comprise the following:
Annual Interest
Rates (%) Thousands of Won
------------------- -----------------------
General term borrowings 22.0 W 27,476,230
Notes with short-term
finance companies 24.75 25,500,000
-----------------------
W 52,976,230
=======================
Certain bank deposits and financing assets are pledged as collateral for the
above loans (see Note 4). Historically, short-term borrowings have been
revolving in nature and refinanced by new borrowings as they become due.
Maximum and average borrowings and weighted average interest rate on
short-term borrowings for the year ended March 31, 1998 were as follows:
Thousands of Won
---------------------
Maximum borrowings W 126,200,000
Average borrowings outstanding 89,399,225
Weighted average interest rate 12.81%
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998
-----------------
7. Long-term Debt:
Long-term debt at March 31, 1998 comprises the following:
Reference Thousands of Won
-------------- ------------------------
Debentures (A) W 44,399,362
Bank loans (B) 56,172,500
------------------------
W 100,571,862
========================
(A) Debentures outstanding at March 31, 1998 comprise the following:
Annual Interest
Rates (%) Thousands of Won
----------------- -----------------------
Debentures collateralized
by bank letter of credit 10.0 W 5,000,000
Non-collateralized debentures 5.0-15.0 40,500,000
-----------------------
45,500,000
Less : discounts (1,100,638)
-----------------------
W 44,399,362
========================
(B) Bank loans at March 31, 1998 comprise the following:
Annual Interest
Rates (%) Thousands of Won
------------------- -----------------------
Korea First Bank 10.35-12.90 W 26,000,000
Samsung Life Insurance 15.8 4,172,500
Shinhan Bank 9.15-12.60 20,000,000
Kukmin Bank 12.82 6,000,000
-----------------------
W 56,172,500
=======================
Certain bank deposits and financing assets are pledged as collateral for the
above loans (see Note 4).
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998
-----------------
7. Long-term Debt, Continued :
The maturities of long-term debt outstanding at March 31, 1998, excluding
discounts on debentures, are as follows:
Thousands of Won
---------------------------------------------------------------------
Debentures Bank
(par value) Loans Total
------------------- ------------------ --------------------
1999 W 32,313,706 W - W 32,313,706
2000 12,085,656 56,172,500 68,258,156
------------------- ------------------ --------------------
W 44,399,362 W 56,172,500 W100,571,862
=================== ================== ====================
8. Financial Instruments :
The estimated fair values of the Company's financial instruments are as
follows:
Thousands of Won
-------------------------------------
Book Fair
Value Value
---------------- ------------------
Financial assets:
Cash and cash equivalent W 6,143,756 W 6,143,756
Interest- bearing deposits with bank 33,333,185 32,002,100
Securities available for sale 124,530 124,530
Securities held to maturity 20,550 14,321
Loans receivable 113,232,708 96,281,557
Accrued interest receivable 2,407,303 2,407,303
Financial liabilities:
Short-term borrowings 52,976,230 52,976,230
Long-term debt 100,571,862 94,507,067
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
- Cash and short-term instruments
Carrying amounts (which represent cost) of cash and short-term instruments
approximate their fair value.
Continued;
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998
-----------------
8. Financial Instruments, Continued :
- Available for sale and held to maturity securities
Fair values for securities are based on quoted market prices.
- Loans receivable
Fair values for loans are estimated using discounted cash flow analysis
using interest currently being offered for loans with similar term to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral
values, where applicable.
- Short-term borrowings
Carrying amounts (which represent cost) of short-term borrowings approximate
their fair value.
- Long-term debt
Fair values of long-term debt are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
- Accrued interest receivable
The carrying amounts of accrued interest receivable approximate their fair
values.
<PAGE>
NEWSTATE CAPITAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998
-----------------
9. Income Taxes:
The statutory income tax rate, including resident tax surcharges,
applicable to the Company is approximately 30.8% in 1998. However, the
actual income tax expense reported by the Company differs from the expected
income tax computed at the statutory income tax rate as follows:
Tax Rate (%) Thousand of Won
--------------- -----------------------
Income tax expense computed
at statutory rate (30.8) W (3,655,470)
Disallowed interest and expenses 0.0 8,035
Change in deferred tax
valuation allowance 30.8 3,647,435
--------------- -----------------------
Income tax expense as reported - W -
=============== =======================
At March 31, 1998, the Company had tax basis net operating loss carryovers
of W2,018,085 thousand available to offset future taxable income. These
carryovers expire through March 31, 2003.
At March 31,1998, the Company has fully reserved valuation allowance on net
deferred income tax assets arising from loss carry forwards and temporary
differences between amounts reported for financial accounting and income
tax purposes because it is uncertain that the Company will generate enough
taxable income in the future to fully utilize the loss carry forwards and
temporary differences.
The significant components of deferred tax assets are reflected in the
following:
Thousand of Won
-----------------------
Deferred income tax assets:
Loss carry forward W 621,570
Allowance for loan losses 5,222,976
-----------------------
5,844,546
Deferred income tax liabilities:
Accrued interest income 281
-----------------------
Net deferred income tax assets
before valuation allowance W 5,844,265
-----------------------
Valuation allowance on net
deferred income tax assets W (5,844,265)
=======================
Racom Systems, Inc. and NewState Capital Co., Ltd. Unaudited Pro Forma Financial
Information
On July 20, 1999, Racom Systems Inc. acquired 99.6% (4,958,000 shares) of the
issued and outstanding capital stock of NewState Capital Co., Ltd., a Korean
corporation which was formerly a subsidiary of NewState Capital Corp., a New
York corporation, in exchange for issuing 8,000,000 shares of its common stock,
representing approximately 80% of its total issued and outstanding common stock,
to NewState Capital Corp..
The Unaudited Pro Forma Consolidated Statements of Operations for the year ended
December 31, 1998 and the six months ended June 30, 1999 and the Unaudited Pro
Forma Consolidated Statement of Financial Condition as of June 30, 1999, include
the amounts of Racom Systems, Inc. and NewState Capital Co., Ltd. in U.S.
Dollars. The unaudited pro forma financial statements reflect the acquisition -
accounted for as a recapitalization of NewState Capital Co., Ltd. to acquire the
net assets of Racom Systems, Inc. The unaudited pro forma financial statements
were derived by adjusting the financial statements of Racom Systems, Inc. and
NewState Capital Co., Ltd. for the acquisition.
The Unaudited Pro Forma Consolidated Statements of Operations for the year ended
December 31, 1998 and the six months ended June 30, 1999 were prepared as if the
acquisition had occurred on January 1, 1998. The Unaudited Pro Forma
Consolidated Statement of Financial Condition was prepared as if the acquisition
had occurred on June 30, 1999. The pro forma financial data does not purport to
be indicative of the results which actually could have been obtained had such
transaction been completed as of the assumed dates or which may be obtained in
the future.
The Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1998 includes the operational result of NewState Capital Co., Ltd.
for the year ended March 31, 1999. The operational result of NewState Capital
Co., Ltd. for the three months ended March 31, 1999 is included in both the
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1998 and the Unaudited Pro Forma Consolidated Statement of
Operations for the six months ended June 30, 1999. The following is the selected
financial data of NewState Capital Co., Ltd. for the three months ended March
31, 1999:
Interest income $ 3,280,188
Interest expenses 2,645,325
-----------
Net interest income $ 634,863
===========
The unaudited pro forma financial data should be read in conjunction with the
financial statements of Racom Systems, Inc. and NewState Capital Co., Ltd..
<PAGE>
<TABLE>
<CAPTION>
Racom Systems Inc.
Pro forma Consolidated Statement of Operations
For the year ended December 31, 1998
===================================================================================================================
Racom NewState Pro forma
Systems, Inc. Capital Co., Ltd. Adjustments Pro forma
Debit Credit
<S> <C> <C> <C> <C> <C>
Interest income $16,842,356 $ 16,842,356
Interest expenses 15,627,784 15,627,784
----------- --------------
Net interest income 1,214,572 1,214,572
License revenues $ 1,500,000 1 $ 1,500,000 -
Provision for loan losses - 1,068,634 1,068,634
Noninterest income
Amortization of negative goodwill - 577,130 577,130
Other income 297,537 148,808 1 297,537 148,808
------------ ----------- ---------- ------------
Total other income 297,537 725,938 725,938
Noninterest expenses
Salaries and employee benefits 1,353,596 2 204,000 1,557,596
Research and development 1,024,984 - 1 $ 1,024,984 -
General and administrative 2,108,772 1,606,175 1 1,880,772 1,630,175
2 204,000
Loss on impairment of tech. license 1,399,816 - 1 1,399,816 -
Other expenses 476,349 - 1 476,349 -
---------- ------------ -----------
Total other expense 5,009,921 2,959,771 3,187,771
Loss before income taxes (3,212,384) (2,088,095) (2,316,095)
Provision for taxes - - -
Minority interest - 993 - - 993
---------- ------------ ---------- --------- -----------
Net loss $ (3,212,384) $(2,087,102) $ 2,001,537 $4,985,921 $(2,315,102)
</TABLE>
Pro forma Adjustments
1 Effects the elimination of the operational results of Racom
Systems, Inc. ("Racom") except Racom's salaries, rent expenses
and telephone bills which have a recurring, continuing effect
on the future NewState Capital Co., Ltd. ("NewState")'s P/L.
2 Effects the reclassification of Racom's salaries from "General
and administrative" to "Salaries and employee benefits."
Note: NewState's financial numbers are translated into US Dollars at the
exchange rate of W1,224.7:US$1.
<PAGE>
<TABLE>
<CAPTION>
Racom Systems Inc.
Pro forma Consolidated Statement of Operations
For the six months ended June 30, 1999
=====================================================================================================================
Racom NewState Pro forma
Systems, Inc. Capital Co., Ltd. Adjustments Pro forma
Debit Credit
<S> <C> <C> <C> <C> <C>
Interest income $ 7,781,652 $ 7,781,652
Interest expenses 6,880,372 6,880,372
----------- ------------
Net interest income 901,280 901,280
Provision for loan losses - - -
Noninterest income
Amortization of negative goodwill - 1,195,060 1,195,060
Other income $ 66,152 95,562 1 $ 66,152 95,562
--------- ----------- -----------
Total other income 66,152 1,290,622 1,290,622
Noninterest expenses
Salaries and employee benefits - 1,598,792 2 102,000 1,700,792
Research and development 128,117 - 1 $ 128,117 -
General and administrative 410,403 1,584,262 1 296,403 1,596,262
2 102,000
Other expenses 38,725 - 1 38,725 -
--------- ----------- -------------
Total other expense 577,245 3,183,054 3,297,054
Loss before income taxes (511,093) (991,152) (1,105,152)
Provision for taxes - (100,204) (100,204)
Minority interest - 8,932 - - 8,932
---------- ------------ ---------- --------- -----------
Net loss $(511,093) $(1,082,424) $ 168,152 $ 565,245 $(1,196,424)
---------- ------------ ---------- --------- -----------
</TABLE>
Pro forma Adjustments
1 Effects the elimination of the operational results of Racom
except Racom's salaries, rent expenses and telephone bills
which have a recurring, continuing effect on the future
NewState's P/L.
2 Effects the reclassification of Racom's salaries from "General
and administrative" to "Salaries and employee benefits."
Note: NewState's financial numbers are translated into US Dollars at the
exchange rate of W1,155.9:US$1.
<PAGE>
<TABLE>
<CAPTION>
Racom Systems Inc.
Pro forma Consolidated Balance Sheet
June 30, 1999
===================================================================================================================
Racom NewState Pro forma
Systems, Inc. Capital Co., Ltd. Adjustments Pro forma
Assets Debit Credit
<S> <C> <C> <C> <C> <C>
Cash & due from banks $ 80,303 $ 21,303,942 $ 21,384,245
Int.-bearing deposits with banks - 5,618,005 5,618,005
Securities available for sale - 11,961,649 11,961,649
Securities held to maturity - 140,718 140,718
Loans - 84,857,118 84,857,118
Accrued interest receivable - 2,555,340 2,555,340
Premises and equipment, net - 81,327 81,327
Other assets 100,000 2,162,642 2,262,642
Investment in subsidiary - - 3 $ 80,000 5 $ 80,000 -
----------- ------------ ----------- ---------- -------------
$ 180,303 $128,680,741 $ 80,000 $ 80,000 $ 128,861,044
----------- ------------ ----------- ---------- -------------
Liabilities:
Short-term borrowings $ 54,762,523 $ 54,762,523
Accrued expenses and others $ 349,845 1,452,323 1,802,168
Long-term debts - 55,988,431 55,988,431
Accrued severance benefit - 814,524 814,524
Negative goodwill - 12,853,154 12,853,154
----------- ------------ ----------- ---------- -------------
Total liabilities 349,845 125,870,955 126,220,800
Minority Interest - 27,732 - - 27,732
Shareholders' Equity:
Common stock 13,325 4,230,470 5 $ 4,230,470 3 $ 80,000 93,325
Additional paid-in capital 17,396,843 - 4 17,579,710 5 4,150,470 3,967,603
Retained earnings (accum. deficit) (17,579,710) (685,280) - 4 17,579,710 (685,280)
Accum. other comprehensive income - (763,136) - - (763,136)
----------- ------------ ----------- ---------- -------------
Total shareholders' equity (169,542) 2,782,054 2,612,512
----------- ------------ ----------- ---------- -------------
$ 180,303 $128,680,741 $21,810,180 $21,810,180 $ 128,661,044
----------- ------------ ----------- ---------- -------------
</TABLE>
Pro forma Adjustments
3 Effects Racom's acquisition of substantially all (99.6%) the
shares of NewState in exchange for 8,000,000 shares of Racom's
common stock at the par value of $.01 per share.
4 Effects the extinguishment of Racom's accumulated deficit.
5 Effects the elimination of the investment in subsidiary and
the reverse acquisition treatment in consolidation.
Note: NewState's financial numbers are translated into US Dollar at the exchange
rate of W1,155.9:US$1.
