SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------
FORM 10-QSB
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
or
[ ] Transition Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 0-21907
NewState Holdings, Inc.
-----------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 84-1182875
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16 W. 32nd Street, Suite 801, New York, NY 10001
- -------------------------------------------------------- --------------------
(Address of Principal Executive Offices)
(212) 643-2080
--------------------
(Registrant's Telephone Number
Including Area Code)
RACOM SYSTEMS, INC.
P.O. Box 3224,Boulder, Colorado 80307-3224
Former Fiscal Year - December 31
--------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes: X No: ___
--
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of September 30, 1999:
Class Number of Shares Outstanding
- ------ -------------------------------------
Common Stock, .01 par value 11,416,184
<PAGE>
INDEX
Part I Financial Information Page
- ------ --------------------- ----
Item 1. Condensed Balance Sheets as of September 2
30, 1999 and at March 31, 1999
Condensed Statements of Operations for the three 3
month periods ended September 30, 1999,
September 30, 1998, June 30, 1999 and June 30,
1998, and the Six month periods ended September
30, 1999 and September 30, 1998
Condensed Statements of Cash Flows for the six 4
months ended September 30, 1999
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Part II Other Information and Signatures 15
- ------- --------------------------------
Statements contained in this Report which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "should", or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations governing the Company's products and international trade, the
ability of the Company to market successfully its products in an increasingly
competitive worldwide market, changes in the Company's operating strategy,
failure to consummate or successfully integrate products developments, the
general economy of the United States and the specific global markets in which
the Company competes, the availability of financing from internal and external
sources and other factors as may be identified from time to time in the
Company's filings with the Securities and Exchange Commission or in the
Company's press releases. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
<PAGE>
<TABLE>
<CAPTION>
NEWSTATE HOLDINGS, INC.
(FORMERLY RACOM SYSTEMS, INC.)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31,
September 30, 1999
1999 (Pro-forma)
--------------------- ---------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 9,795,960 $ 26,118,761
Interest-bearing deposits with banks 3,379,128 6,430,168
Securities available for sale 7,208,974 10,853,802
Securities held to maturity 139,397 52,284
Loans 75,906,125 96,547,097
Premises and equipment 156,416 -
Accrued interest receivable 2,044,047 2,422,333
Other assets 2,268,120 1,763,322
--------------- -------------
Total assets $ 100,898,167 $ 144,187,767
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings 51,489,292 54,441,505
Accrued expenses and other liabilities 1,522,787 1,897,308
Long-term debt 32,238,846 70,371,873
Accrued employee benefit 1,310,385 561,532
Negative goodwill 11,518,680 12,775,963
--------------- --------------
Total liabilities 98,079,990 140,048,182
Minority interest 27,014 34,539
Shareholders' equity:
Common stock ($.01 par value ; 40,000,000 shares
authorized; 9,332,482 shares issued and outstanding as of
March 31, 1999; 11,416,184 shares issued and outstanding)
as of September 30, 1999) 114,162 93,325
Preferred stock (no par value, 10,000,000 shares authorized in
1999, no shares issued and outstanding) -
Additional paid-in capital 4,931,146 3,892,006
Retained earnings (427,074) 91,071
Accumulated other comprehensive income (881,820) 28,645
Foreign currency translation adjustments (945,251) -
--------------- --------------
Total shareholders' equity 2,791,163 4,105,047
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 100,898,167 $ 144,187,767
=============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
<TABLE>
<CAPTION>
NEWSTATE HOLDINGS, INC.
(FORMERLY RACOM SYSTEMS, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended Six Months Ended
-----------------------------------------------------------------------------------------------
September 30, September 30, June 30, June 30, September 30, September 30,
1999 1998 1999 1998 1999 1998
--------------------------------------------------------------- -------------------------------
(Pro-forma) (Pro-forma) (Pro-forma)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 3,975,628 $ 3,330,360 $ 2,727,491 $ 3,770,572 $ 6,703,119 $ 7,100,931
Deposits with banks 510,165 217,026 914,104 794,710 1,424,269 1,011,736
----------- ----------- ----------- ----------- ----------- ------------
Total interest income 4,485,793 3,547,386 3,641,595 4,565,282 8,127,388 8,112,667
----------- ----------- ----------- ----------- ----------- ------------
Interest expenses:
Short-term borrowings 1,363,506 1,746,171 1,616,480 2,063,848 2,979,986 3,810,019
Long-term debt 1,427,697 2,326,516 1,994,708 2,222,115 3,422,405 4,548,631
----------- ----------- ----------- ----------- ----------- ------------
Total interest expenses 2,791,203 4,072,687 3,611,188 4,285,963 6,402,391 8,358,650
----------- ----------- ----------- ----------- ----------- ------------
Net interest income (expenses) 1,694,590 (525,301) 30,407 279,319 1,724,997 (245,983)
Reversal of (addition to)
provision for loan losses 688,795 98,695 (3,474) (202,220) 685,321 (103,525)
----------- ----------- ----------- ----------- ----------- ------------
Net interest income (expenses)
after provision for loan losses 2,383,385 (426,606) 26,933 77,099 2,410,318 (349,508)
Other income and expenses:
Salaries (568,083) (125,231) (889,469) (99,116) (1,457,552) (224,347)
General and administrative (1,001,773) (181,287) (719,003) (136,388) (1,720,777) (317,675)
Employee benefit (684,869) - (138,253) - (823,122) -
Amortization of negative goodwill 690,403 - 683,438 - 1,373,841 -
Other income (loss), net 135,119 (15,290) 203,893 (123,909) 339,012 (139,199)
----------- ----------- ----------- ----------- ----------- ------------
(1,429,203) (321,808) (859,394) (359,413) (2,288,598) (681,221)
Income (loss) before
provision for income taxes 954,182 (748,414) (832,461) (282,314) 121,720 (1,030,729)
Provision for income taxes (116,941) - (96,540) - (213,481) -
Minority interest (731) - 8,662 - 7,931 -
----------- ----------- ----------- ----------- ----------- ------------
Net income (loss) 836,510 (748,414) (920,339) (282,314) (83,830) (1,030,729)
=========== =========== =========== =========== =========== ============
Net income (loss)
per share of common stock $ 0.07 $ (0.08) $ (0.10) $ (0.03) $ (0.01) $ (0.11)
=========== =========== =========== =========== =========== ============
Average shares outstanding 11,235,505 9,332,482 9,332,482 9,332,482 10,283,994 9,332,482
=========== =========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
<TABLE>
<CAPTION>
NEWSTATE HOLDINGS, INC.
(FORMERLY RACOM SYSTEMS, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the six months ended
September 30, September 30,
1999 1998
------------------ --------------------
(Pro forma)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (83,830) $ (1,030,729)
Adjustment to reconcile net loss to net cash
used in operating activities:
Minorities interest (7,931) -
Provision for loan loss - 103,525
Depreciation and amortization 71,505 46,276
Amortization of negative goodwill (1,373,841) -
Increase in accrued employee benefit 823,122 -
Decrease in accrued expenses and other liabilities (1,002,224) (345,635)
Increase in accrued income and other assets (1,038,457) (248,126)
------------------ ---------------
Net cash used in operating activities (2,611,656) (1,474,689)
------------------ ---------------
Cash flows from investing activities:
Decrease in loans, net 23,342,614 16,544,206
Decrease in interest bearing deposits with banks 3,181,701 9,633,192
Proceed from available-for-sale securities 1,929,862 -
Investment in subsidiary (5,000,000) -
Other (291,219) -
------------------ ---------------
Net cash provided by investing activities 23,162,958 26,177,398
------------------ ---------------
Cash flows from financing activities:
Decrease in short-term borrowings, net (3,396,026) (27,139,250)
Payments on long-term debt (39,439,906) 4,692,248
Proceeds from issuance of common stock 5,419,980 -
------------------ ----------------
Net cash used in financing activities (37,415,952) (22,447,002)
Effect of exchange rate changes on cash and cash equivalents 541,849 (85,907)
------------------ ----------------
Net (decrease) increase in cash and cash equivalents (16,322,801) 2,169,800
Cash and cash equivalents at beginning of period 26,118,761 4,440,734
------------------ ----------------
Cash and cash equivalents at end of period $ 9,795,960 $ 6,610,534
================== ================
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
NEWSTATE HOLDINGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 1999
NOTE 1: BASIS OF PRESENTATION
The accompanying financial statements report the consolidated
accounts of NewState Holding, Inc. (formerly Racom Systems, Inc.) and its
wholly-owned subsidiaries, NSK Holdings, Inc. (a Delaware corporation), Racom
Systems, Inc. (a Colorado corporation) and its 99.6% owned and newly acquired
subsidiary, NewState Capital Co., Ltd. (a Korean corporation). Pursuant to the
acquisition described in Note 4 below, the Company has treated the transaction
as a reverse acquisition and, accordingly, has reported the pro forma effect in
the 1998 financial statements in order to achieve comparability in its
operations and cash flows. The Company was incorporated on June 3, 1991 pursuant
to the laws of the State of Delaware and presently has its principal executive
offices in Seoul, Korea and New York, New York.
NOTE 2: UNAUDITED FINANCIAL STATEMENTS
The consolidated financial statements as of September 30, 1999,
and for the periods ended June 30, 1999 and 1998 and September 30, 1999 and
1998, included herein are unaudited; however, such information reflects all
adjustments consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of the information for
such periods. The 1998 pro forma presentation gives effect to the reverse
acquisition in July 1999, in order to provide comparability in the presentation
of operations and cash flows. In addition, the results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year. The accompanying financial statements are in condensed form and
should be read in conjunction with the Company's annual report filed on Form
10-KSB.
NOTE 3: PROVISION FOR LOAN LOSSES
Since the acquisition of NewState Capital by the Company in which all
loans were marked to market, the Company has established no provisions for
losses. 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 acquisitions
of NewState Capital, net of discounts associated with the adjusting loans to
estimated market values.
Any collection from prior written off loans are recorded in the income
statements under the reversal of provision for loan losses. Based on
management's experience with new mortgage loans originated, the Company does not
believe that it is necessary to include a provision for loan losses at this
time. However, this policy may change as management reviews future loan loss
experience.
NOTE 4: STOCK SPLITS
On March 1, 1999, the Company effected a reverse stock split of
the Company's common stock on the basis of one share for each four and one-half
(4 1/2) shares. The authorized number of shares was not split.
On July 12, 1999, the Company effected a reverse stock split of
the Company's common stock on the basis of one share for each fifteen (15)
shares. The authorized number of shares was not split.
The outstanding and weighted average number of shares of common
stock and per share data in these financial statements have been adjusted to
reflect the impact of the stock splits for all period presented.
NOTE 5: ACQUISITION
On July 20, 1999, the Company acquired approximately 99.6%
(4,958,000 shares) of the issued and outstanding capital stock of NewState
Capital Co., Ltd., a Korean corporation ("NewState Capital") which was formerly
a subsidiary of NewState Capital Corp., a New York corporation ("NewState NY"),
in exchange for issuing 8,000,000 shares of the Company's common stock,
representing approximately 80% of the Company's total issued and outstanding
shares of common stock, to NewState. The Company also assumed a $5,000,000
liability of NewState NY to a bank. The terms and conditions of the acquisition
are more fully set forth in the Agreement and Plan of Reorganization, dated as
of July 14, 1999 (the "Acquisition Agreement"), by and among the Company,
NewState NY, NewState Capital and a newly formed wholly-owned subsidiary of the
Company, NSK Holdings, Inc., a Delaware corporation ("NSK"), which is
incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission ("Commission") on July 21, 1999. As a result
of the Acquisition Agreement, (i) NewState Capital has become a subsidiary of
NSK, (ii) several new investors acquired 667,000 shares of the Company for
$1,000,000 ($1.50 per share) pursuant to the terms and conditions of the Common
Stock Purchase Agreement dated July 14, 1999 by and among the Company, Ocean
Strategic Holdings Limited and Zebra Strategic Holdings Limited which is
incorporated herein by reference to the Company's Form 8-K filed with the
Commission on July 21, 1999, and (iii) NewState NY owns 80% of the common stock
in the Company. Accordingly, following the consummation of the Acquisition,
NewState NY controls the Company.
The Company accounted for the acquisition as a purchase under a
reverse acquisition procedure whereby NewState Capital's operations and retained
earnings are reported as continuous.
NewState Capital is a finance company incorporated on February 18,
1994 under the laws of the Republic of Korea to engage in factoring commercial
notes and accounts receivables, and to provide short-term and long-term
financing, including home mortgage loans, to customers. On March 12, 1999,
NewState Capital acquired all the outstanding stock of Youngnam Housing Finance
Co., Ltd., a Korean company providing financings for the purchase of homes to
middle-income individuals. The acquisition was recorded under the purchase
method of accounting.
NOTE 6: CERTAIN TRANSACTIONS
In July and August, 1999, the Company completed a private
placement for the sales of 1,416,660 shares of the its common stock with
aggregated proceeds amounting to $4,249,980. The Company utilized these funds to
retire a portion of $5,000,000 liability assumed with the acquisition of
NewState Capital. The entire $5,000,000 liability was repaid on August 19, 1999.
NOTE 7: SHORT TERM BORROWINGS
Short-term borrowings at September 30, 1999 comprise the
following:
Annual Interest Thousands
Rate (%) of Won U.S. Dollars(a)
--------------------------------- ----------------
General term borrowings 12.95 W 6,500,000 $ 5,793,898
Notes with short-term 10.66 56,250,000 50,139,499
finance companies
----------------- ---------------
W 62,750,000 $ 55,933,397
========== =========
(a) translated at the rate of W1,128.7: $1.00, the prevailing Won
to U.S. Dollar exchange rate on September 30, 1999
NOTE 8: LONG -TERM DEBT
Long-term debt at September 30, 1999 comprises the following:
Thousands
Reference of Won U.S. Dollars(a)
----------------------------------------------
Debentures (A) W 33,289,482 $ 29,673,208
Won currency loans (B) 6,000,000 5,348,213
----------------- ----------------
W 39,289,482 $ 35,021,421
========== ==========
(A) Debentures outstanding at September 30, 1999 comprise the following:
Annual Thousands
Rates (%) of Won U.S. Dollars(a)
----------------------------------------------
Debentures collateralized
by bank letter of credit 11.0 W 24,000,000 $ 21,392,853
Non-collateralized debentures 15.5-17.0 9,250,000 8,245,162
----------------- ----------------
W 33,250,000 $ 29,673,208
Profit: premium 39,482 35,193
----------------- ---------------
W 33,289,482 $ 29,673,208
========== ==========
<PAGE>
(B) Won currency loans outstanding at September 30, 1999 comprise the following:
Annual Thousands
Rates (%) of Won U.S. Dollars(a)
----------------------------------------------
Kukmin Bank 10.5 W 6,000,000 $ 5,348,213
----------------- ---------------
W 6,000,000 $ 5,348,213
========== ==========
(a) translated at the rate of W1,128.7: $1.00, the prevailing Won
to U.S. Dollar exchange rate on September 30, 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING ANALYSIS OF THE OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY
SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING NOTES THERETO, OF THE COMPANY CONTAINED ELSEWHERE IN THIS
FORM 10-QSB.
Overview
The Company was winding down its operations during the second half of 1998 and
until July 1999, when it acquired 99.6% of the capital stock of NewState Capital
Co., Ltd., a Korean corporation ("NewState Capital") from NewState Capital Corp.
(NewState NY), a New York corporation.
NewState Capital was formed in February 1994 under the name Dongsuh Finance Co.,
Ltd. The name of the Company was changed to NewState Capital on December 9, 1998
when Dongsuh Horizon Securities Co., Ltd. ("Dongsuh Securities") sold 3,980,000
shares (99.5%) of the outstanding common stock of NewState Capital to NewState
NY. In connection with the acquisition, Dongsuh Securities forgave
W13,076,230,000 of short term loan receivable due from NewState Capital. The
negative goodwill resulting from the purchase, and the resulting push down of
NewState NY's basis, amounted to W8,675,257,000 which is being amortized over 5
years using straight-line method.
On December 9, 1998, NewState Capital issued 978,000 shares of common stock to
NewState NY, bringing NewState NY's ownership of NewState Capital to 99.6%. On
March 12, 1999, NewState NY acquired all the outstanding stock of Youngnam
Housing Finance Co., Ltd. ("Youngnam") for W19,000,000,000 in cash. The
acquisition resulted in negative goodwill of approximately W7,707,661,000 which
is being amortized over 5 years using straight-line method.
From the period December 1997 to April 1999, as a result of the International
Monetary Fund debt crisis in Korea ("IMF Crisis"), NewState Capital and
Youngnam, after its acquisition by NewState Capital, suspended new loan
originations. With the change in management in 1999, NewState Capital has
revamped its loan origination procedures, increased staffing and enhanced loan
origination and servicing software. Consequently, the accompanying financial
statements do not reflect the Company's normal business activities in a stable
economic environment.
The Company's current business plan is to expand its mortgage origination
efforts throughout Korea, develop innovative new mortgage products to Korean
middle-income families and individuals, and to securitize and sell its mortgage
loan portfolio as mortgage-backed securities. The Company has opened four branch
offices in 1999, which are located in the cities of Taegu, Changwon, Jinju, and
Pusan, and will continue to expand its presence in other major Korean cities.
Home mortgage loans in Korea, including those originated by NewState Capital,
typically have variable interest rates and are for terms of 15 years. There is
no standard lending rate by which mortgage interest rates are determined;
however, mortgage lenders, including NewState Capital, typically adjust their
interest rates on a monthly basis to reflect the lender's on-going cost of
funding.
COMPARISON OF THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 TO THE THREE MONTH
PERIOD ENDED SEPTEMBER 30, 1998 AND THE THREE MONTHS ENDED JUNE 30, 1999
Interest Income
Interest income increased to $4.5 million for the three months ended September
30, 1999 ("Second Quarter 1999"), from $3.6 million for the three months ended
June 30, 1999 ("First Quarter 1999"), and $3.5 million for the three months
ended September 30, 1998 ("Second Quarter 1998"). The increase in interest
income in the Second Quarter 1999 as compared to the First Quarter 1999 was due
to increased loan originations, offset by lower interest income from bank
deposits. The increase in interest income in the Second Quarter 1999 as compared
to Second Quarter 1998 was due to the acquisition of Youngnam in April 1999,
offset by a reduction of average mortgage loan rate due to the stabilization of
the Korean financial markets after the IMF Crisis. Excluding the effect of the
Youngnam acquisition, the Company's total loan outstanding decreased
approximately $8.6 million in the Second Quarter 1999 as compared to Second
Quarter 1998. This is due to prepayment of mortgage loans during the first six
months of 1999 when the Company suspended loan originations while the new
management reviewed and revamped the existing loan underwriting, servicing and
foreclosure procedures.
Interest income on bank deposits decreased to $0.5 million in the Second Quarter
1999 from $0.9 million in the First Quarter 1999 due to a decline in cash and
bank deposits to $13.1 million from $26.9 million. This is due to increased
originations in the Second Quarter 1999 as compared to the First Quarter 1999.
Total mortgage originations increased to $7.2 million in the Second Quarter 1999
as compared to $0.7 million in the First Quarter of 1999. Interest income on
bank deposits increased by $0.3 million in the Second Quarter 1999 from Second
Quarter 1998 due to the acquisition of Youngnam.
Interest Expenses
Total interest expense decreased to $2.7 million in the Second Quarter 1999 from
$3.5 million in the First Quarter 1999 due to lower outstanding borrowings. The
Company utilized funds from early loan repayments to reduce total borrowings to
$83.7 million at the end of Second Quarter 1999 from $111.8 million at the end
of the First Quarter 1999. Total interest expense decreased by $1.3 million in
the Second Quarter 1999 as compared to Second Quarter 1998 due to a lowering of
the average cost of borrowings from 16.3% to 10.8% annual interest rate, offset
by borrowings assumed with the acquisition of Youngnam.
Net Interest Income
Net interest income increased to $1.7 million in the Second Quarter 1999 as
compared to $30,407 in the First Quarter 1999 and an expense of $525,301 in the
Second Quarter 1998. The increase in net interest income was due to (i) the
Youngnam acquisition which provided additional interest income and (ii) lower
interest expenses resulting from lower borrowings and borrowing costs, and
offset by (i) lower interest rate on outstanding loans and (ii) lower loans
outstanding resulting from prepayments.
Reversal of Provision For Loan Losses
Reversal of provision for loan losses increased to $0.7 million in the Second
Quarter 1999 from a negative $3,474 in First Quarter 1999 and $98,695 in Second
Quarter 1998 due to collection of accrued interest and principal receivables
previously written off.
Total Operating Expenses
Total operating expenses were $2.3 million in the Second Quarter 1999 compared
to $1.7 million in the First Quarter 1999 and $0.3 million in the Second Quarter
1998. The increase during Second Quarter 1999 as compared to First Quarter 1999
was primarily attributed to an increase in employee benefits, from $138,253 to
$684,869, due to accrued service and commission payments for the private
placement of common stock of the Company in July and August 1999. The increase
during Second Quarter 1999 as compared to Second Quarter 1998 was primarily
attributed to an increase in salaries, employee benefits, and general and
administrative expense due to increased staffing and office expansions
associated with the resumption of normal operations during the Second Quarter
1999.
Salaries and Employee Benefits
Salaries decreased to $568,083 in the Second Quarter 1999 compared to $889,469
in the First Quarter 1999 due to a reduction in base salary for salespersons
after the initial training period of approximately three months. The Company has
increased staffing during the First Quarter 1999 in connection with the
resumption of normal operations. Salaries increased 460% in the Second Quarter
1999 from $125,231 in the Second Quarter 1998 due to the acquisition of Youngnam
and an increase of personnel to 66 from 22.
Employee benefits are accrued for employees and directors with more than one
year of service and are based on their annual compensation and years of service.
There were no employee benefits accrued during the Second Quarter 1998 due to
the termination of most employees during 1998, resulting in no employee with
more than one-year of service during Second Quarter 1998.
Amortization of Negative Goodwill
Negative goodwill totaling approximately $11.5 million resulting from the
acquisition of NewState Capital in December 1998 and Youngnam in March 1999 is
being amortized at rate of approximately $690,000, at the current Won:US Dollar
exchange rate, each quarter over a 5 year period. There was no amortization of
negative goodwill in the Second Quarter 1998.
Other Income
Other income increased to $131,119 in the Second Quarter 1999 from $203,893 in
the First Quarter 1999 and a loss of $15,290 in the Second Quarter 1998. Other
income consists primarily of fees from collection of loan losses and financial
service commissions.
<PAGE>
Write-down of Accrued Liabilities
In connection with the Company's acquisition of NewState Capital in July 1999,
the majority of the Company's creditors agreed to forgive a portion of the
accounts payable owed to each creditor. Approximately $226,000 in accounts
payable were forgiven in Second Quarter 1999.
Net Income
The Company recorded a net income of $836,510 or $0.07 per share for the Second
Quarter 1999 compared to a net loss of $920,339 or $0.10 per share for the First
Quarter 1999. The increase in net income was primarily attributable to an
increase in net interest income and reversal of provision for loan losses in the
Second Quarter 1999. This was offset by higher employee benefits expense.
Similarly, compared to a net loss of $748,414 in the Second Quarter 1998, the
increase in net income was primarily attributable to an increase in net interest
income, reversal of provision for loan losses, and amortization of negative
goodwill. This was offset by higher operating expenses associated with the
resumption of normal business operations.
<PAGE>
COMPARISON OF THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1999 TO THE SIX MONTH
PERIOD ENDED SEPTEMBER 30, 1998
Interest Income
Interest income increased to $8.1 million for the six months ended September 30,
1999 ("Interim 1999"), approximately the same for six months ended September 30,
1998("Interim 1998"). The acquisition of Youngnam added approximately $3.2
million in interest income to Interim 1999. Excluding the effect of the
acquisition, interest income declined by approximately 47% to $4.3 million in
Interim 1999 as compared to Interim 1998. The decrease in interest income in
Interim 1999 is primarily due to a reduction in average interest rate on
outstanding mortgage loans and bank deposits resulting from the stabilization of
the Korean financial markets in 1999 following the IMF Crisis. Interest income
on bank deposits increased to $1.4 million in Interim 1999 from $1.0 million in
Interim 1998 as a result of the Youngnam acquisition. Excluding Youngnam
acquisition, interest income on bank deposits decreased by approximately $0.3
million in Interim 1999 as compared to Interim 1998 due to a decrease in bank
deposits and bank deposit rate.
Interest Expenses
Total interest expenses decreased to $6.4 million for Interim 1999 from $8.4
million in Interim 1998. Excluding the effect of Youngnam acquisition, total
interest expenses in Interim 1999 was $4.0 million, a decline of 52% from
Interim 1998. The decrease in interest expenses was primarily attributable to
lower borrowing costs following the IMF Crisis and lower outstanding borrowings
resulting from the applying loan prepayments to long-term debt retirement.
Net Interest Income
Net interest income increased to $1.7 million in Interim 1999 from an expense of
$246,000 in Interim 1998. The increase in net interest income was due to (i) the
Youngnam acquisition which provided additional interest income and (ii) lower
interest expenses resulting from lower borrowings and borrowing costs, and
offset by (i) lower interest rate on outstanding loans and (ii) lower loans
outstanding resulting from prepayments.
Reversal of Provision For Loan Losses
Reversal of provision for loan losses increased to $0.7 million in Interim 1999
from a negative $0.1 million in Interim 1999 due to collection of accrued
interest and principal receivables previously written off.
Total Operating Expenses
Total operating expenses were $4.0 million in Interim 1999 compared to $542,022
in Interim 1998. The increase in operating expenses was primarily attributed to
an increase in salaries, general and administrative expense and employee
benefits, and commission payments for the private placement of common stock of
the Company in July and August 1999. The increase in salaries and general and
administrative expenses are due to increased staffing and office expansions
associated with the resumption of normal operations during Interim 1999.
Salaries and Employee Benefits
Salaries increased to $1.5 million in Interim 1999 compared to $224,347 in
Interim 1998 due to the acquisition of Youngnam and an increase of personnel to
66 from 22.
Employee benefits increased to $823,122 in Interim 1999 compared to nil in
Interim 1998. Employee benefits are accrued for employees and directors with
more than one year of service and are based on their annual compensation and
years of service. There were no employee benefits accrued during Interim 1998
due to the termination of most employees during 1998, resulting no employee with
more than one-year service during Interim 1998.
Amortization of Negative Goodwill
Negative goodwill totaling approximately $11.5 million resulting from the
acquisition of NewState Capital in December 1998 and Youngnam in March 1999 is
being amortized at rate of approximately $690,000, at the current Won:US Dollar
exchange rate, each quarter over a 5 year period. There was no amortization of
negative goodwill in Interim 1998.
Other Income
Other income increased to $339,0121 in Interim 1999 from a loss of $139,199 in
Interim 1998. Other income consists primarily of collection of loan losses and
financial service commissions.
Write-down of Accrued Liabilities
In connection with the Company's acquisition of NewState Capital in July 1999,
the majority of the Company's creditors agreed to forgive a portion of the
accounts payable owed to each creditor. Approximately $226,000 in accounts
payable were forgiven in Interim 1999.
Net Income
The Company recorded a net loss of $83,830 or $0.01 per share for Interim 1999
compared to a net loss of $1,030,729 or $0.11 per share for Interim 1998. The
decrease in net loss was primarily attributable to (i) an increase in net
interest income, (ii) reversal of provision for loan losses and (iii)
amortization of negative goodwill. This was offset by higher operating expenses
associated with the resumption of normal operations in Interim 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents and
interesting-bearing deposits totaling $13.2 million compared to $32.5 million at
March 31, 1999. For the six months ended September 30, 1999, cash used in
operating activities of $2.6 million was due to (i) the net loss of $83,830,
(ii) amortization of negative goodwill of $1.4 million, (iii) decrease in
accrued expenses of $1.0 million, and (iv) increase in accrued income of $1.0
million.
Cash provided by investing activities was $23.2 million was primarily due to (i)
repayment of loans outstanding of $23.3 million, (ii) decrease in bank deposits
of $3.2 million and (iii) sales of securities of $1.9 million, offset by the
repayment of $5 million liability assumed with the reverse acquisition of
NewState Capital.
For Interim 1999, cash used in financing activities of $37.4. million was
primarily due to (i) decrease in short-term borrowings of $3.4 million, (ii)
repayment of long-term debt of $39.4 million and (iii) private placements of
shares of common stock in the aggregated amount of $5.4 million. The Company
will require additional capital to continue its operations. The Company intends
to secure additional capital by issuing corporate bonds, pledging assets for
bank borrowings, and issuing mortgage-back securities. The Company may also
issue additional equity or convertible debt securities, if required, which may
result in additional dilution to the holders of the Company's common stock.
There can be no assurance that additional financing will be available on terms
and conditions acceptable to the Company, if available at all.
YEAR 2000 DISCLOSURE
The Year 2000 issue exists because many computer systems and applications
currently use two-digit fields to designate a year. As the century date change
occurs, date-sensitive systems will recognize the year 2000 as 1900, or not at
all. This inability to recognize or properly treat the Year 2000 may cause
systems to process critical financial and operational information incorrectly.
The Company has completed an internal study to determine the full scope and
related costs to insure that the Company's systems continue to meet its internal
needs and those of its customers. The results of the internal study indicate
that its products are not affected by the Year 2000 issue. As of September 30,
1999, the major systems utilized by the Company is its personal computer and
mini-computer systems. The Company does not believe that the Year 2000 issue
will have a material effect on these two systems.
The Company believes that there is greater risk that its vendors and customers
will be affected by the Year 2000 issue. The Company is currently unable to
assess, and may be unable to accurately determine, the magnitude of any Year
2000 problems that may reside in the computer and information systems of its
vendors and customers, or the impact that any such problems could have on the
products and services provided by the Company to such customers.
The Company believes, based upon the progress to date, that its suppliers and
customers are either Year 2000 compliant, or are themselves in an assessment
phase. However, there can be no assurance that all such problems will be
resolved. The occurrence of Year 2000 related failures in the computer and
information systems of any of the Company's significant customers or vendors
could have a material adverse effect on the business, results of operations and
financial position of the Company.
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
----------------------
None
Item 2. Changes in Securities and Use of Proceeds
----------------------------------------------------
On July 26, 1999, the Company issued 874,750 shares of its common
stock, $0.01 par value per share, at a price of $3.00 per share, to four (4)
Korean individuals and one (1) Korean corporate investor, pursuant to an
exemption from registration under the Securities Act provided by Section 4(2)
thereunder and Regulation S. Proceeds of the offering, aggregating $2,624,250,
were used for the payment of outstanding liabilities and for general overhead
expenses.
On August 20, 1999, the Company issued 541,910 shares of its
common stock, $0.01 par value per share, at a price of $3.00 per share, to eight
(8) Korean individuals, pursuant to an exemption from registration under the
Securities Act provided by Section 4(2) thereunder and Regulation S. Proceeds of
the offering, aggregating $1,625,730, were used for the payment of outstanding
liabilities and for general overhead expenses.
Item 3. Defaults Upon Senior Securities
--------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------------------
A Special Meeting of Stockholders was held on July 12, 1999. The
following proposal was approved by the stockholders.
Proposal #1 - To amend the Company's Certificate of Incorporation
to reverse split the Company's common stock on the basis of one share for each
fifteen shares outstanding.
FOR AGAINST ABSTAIN
----- ------------ -------------
17,084,741 95,643 2,347
Item 5. Other Information
----------------------
None
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K
* Form 8-K Filed July 21, 1999 - - The Company
announced that it had acquired approximately 99.6% of the issued and outstanding
capital stock of NewState Capital Co., Ltd., a Korean corporation, 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 Capital
Corp, a New York corporation.
* Form 8-K/A filed on October 1, 1999 - - The Company
amended its Report on Form 8-K filed on July 21, 1999 by providing certain
financial statements and pro forma financial information of NewState Capital
Co., Ltd., a recently acquired Korean subsidiary in a reverse acquisition. The
Company also announced that effective September 15, 1999 the Company changed its
name to NewState Holdings, Inc. and that at the opening of business on September
17, 1999 the Company's new OTC Bulletin Board symbol was "NSTH".
* Form 8-K filed on October 20, 1999 - - The Company
announced that it had adopted a fiscal year consistent with the fiscal year of
NewState Capital Co., Ltd., a recently acquired Korean subsidiary in a reverse
acquisition. As a result of this change, the Company's fiscal year will end on
March 31 of each year.
<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.
NEWSTATE HOLDINGS, INC.
ALEXANDER T. SHANG
By: _________________________________
Alexander T. Shang, Treasurer and
Chief Financial Officer
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<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
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<SECURITIES> 10,727,499
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<COMMON> 114,162
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<INCOME-PRETAX> 121,720
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