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 June 30, 2000
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)
156 W. 56th Street, Suite 2005, New York, NY 10019
--------------------------------------------------------
(Address of Principal Executive Offices)
(212) 245-5801
--------------------
(Registrant's Telephone Number
Including Area Code)
RACOM SYSTEMS, INC.
16 W. 32nd Street, New York, New York 10001
Former Fiscal Year - December 31
---------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the 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 August 8, 2000:
Class Number of Shares Outstanding
------ -------------------------------------
Common Stock, .01 par value 11,508,684
<PAGE>
<TABLE>
<CAPTION>
INDEX
<S> <C> <C>
Part I Financial Information Page
Item 1. Condensed Consolidated Balance Sheet as of 4
June 30, 2000
Condensed Consolidated Statements of 5
Operations for the three months ended
June 30, 2000 and June 30,1999
Condensed Consolidated Statements of Cash 6
Flows for the three months ended June 30,
2000 and June 30, 1999
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Part II Other Information and Signatures 14
----------------------------------------------
</TABLE>
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>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 2000
-------------
<S> <C>
ASSETS
Cash and cash equivalents $ 242,443
Restricted cash 37,556
Interest-bearing deposits with banks 3,339,783
Securities available for sale 1,442,258
Securities held to maturity 24,263
Loans held for investment 7,783,323
Loans held for sale 11,126,486
Residual interest in securitization 7,123,698
Premises and equipment, net 98,103
Accrued interest receivable 954,576
Building and land 3,234,921
Other assets 5,314,924
Total assets $ 40,722,334
LIABILITIES AND SHAREHOLDERS' DEFICIT
Short-term borrowings $ 31,543,177
Accrued expenses and other liabilities 556,559
Long-term debt 8,647,030
Severance and retirement benefits 3,403
Negative goodwill 10,142,104
Total liabilities 50,892,273
Minority interest (31,982)
Commitments and contingencies
Shareholders' deficit:
Common stock: $.01 par value;
40,000,000 shares authorized; 5,512,480
11,508,684 shares issued and outstanding
Preferred Stock: no par value
10,000,000 shares authorized;
none issued and outstanding
Accumulated deficit (14,749,908)
Accumulated other comprehensive loss (900,529)
Total shareholders' deficit (10,137,957)
Total liabilities and shareholders' deficit $ 40,722,334
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------- ------------------
<S> <C> <C>
Interest income:
Loans $ 1,299,876 $ 2,727,491
Deposits with banks 237,574 914,104
--------- -----------
Total interest income 1,537,450 3,641,595
Interest expense:
Short-term borrowings 918,653 1,616,480
Long-term debt 317,655 1,994,708
--------- -----------
Total interest expense 1,236,308 3,611,188
--------- -----------
Net interest income 301,142 30,407
Provision for loan losses (16,349) (3,474)
--------- -----------
Net interest expense after provision for loan losses 284,793 26,933
--------- -----------
Other income and expenses:
Salaries and employee benefits (516,384) (889,469)
General and administrative (436,968) (719,003)
Provision for severance and retirement benefits 0 (138,253)
Amortization of negative goodwill 672,666 683,438
Other income (expense), net (162) 203,893
--------- -----------
(280,848) (859,394)
--------- ------------
Income (loss) before income taxes 3,945 (832,461)
Provision for income taxes 0 (96,540)
Minority interest 2,602 8,662
--------- -----------
Net income (loss) 6,547 $ (920,339)
========== ===========
Basic and diluted net income (loss) per share of common stock $ 0.00 $ (0.10)
Average number of shares outstanding 11,508,684 9,332,482
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------- ------------------
<S> <C>
Cash flows from operating activities:
Net income (loss) $ 6,547 $ (920,339)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Minority interest (2,602) (8,662)
Depreciation and amortization - 16,026
Amortization of negative goodwill (672,666) (683,438)
Provision for loan losses 16,350 -
Net loss on disposal of securities available for sale 76,443 -
Provision for severance and retirement benefits (16,873) -
Increase in accrued employee benefit - 218,451
Decrease in accrued expenses and other liabilities (629,287) (272,183)
Increase in accrued interest receivable and other (732,196) 107,646
----------- -------------
assets
Net cash used in operating activities (1,954,284) (1,542,499)
Cash flows from investing activities:
Decrease in loans, net 7,279,951 16,781,703
Decrease in interest bearing deposits with banks 801,760 1,207,685
Proceeds from sale of securities available for sale 75,406 -
Purchase of securities available for sale (26,259) (1,233,767)
Acquisition of building and land (3,278,599) -
Others 25,766 166,545
------------- -------------
Net cash provided by investing activities 4,878,025 16,922,166
Cash flows from financing activities:
Increase in short-term borrowings, net 1,659,762 (3,027,707)
Proceeds from issuance of long-term debt 447,948 -
Payment on long term-debt (5,150,077) (18,712,052)
------------- ------------
Net cash used in financing activities (3,042,367) (21,739,759)
Effect of exchange rate changes on cash 272 1,570,770
------------- ------------
Net decrease in cash and cash equivalents (118,354) (4,789,322)
Cash and cash equivalents at beginning of year 360,797 26,118,761
------------- ------------
Cash and cash equivalents at end of year 242,443 21,303,942
------------- ------------
Supplemental cash flow information:
Cash paid for interest $ 1,603,078 $ 2,693,365
============= ============
Cash paid for income taxes $ 0 $ 0
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
NEWSTATE HOLDINGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
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 3 below, the Company has treated the transaction as a reverse
acquisition and, accordingly, has reported the pro forma effect in the 1999
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 June 30, 2000, and for the periods
ended June 30, 2000 and 1999, 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 1999 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: 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 4: LOANS
Loans held for investment at June 30, 2000 are as followings (in thousands of
Won):
<TABLE>
<CAPTION>
Allowance for
Principal loan losses Balance U.S.Dollars(a)
------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C>
Loans held for investment W17,549,004 W8,871,377 W8,677,627 $7,783,323
</TABLE>
Loans held for investment consist of residential mortgage loans
(approximately 62%) and commercial and consumer loans (approximately 38%) at
June 30, 2000.
(a) translated at the rate of W1,114.9: $1.00, the prevailing Won to U.S.
Dollar exchange rate on June 30, 2000
NOTE 5: SHORT TERM BORROWINGS
Short-term borrowings at June 30, 2000 comprise the following:
<TABLE>
<CAPTION>
Annual Interest Thousands
Rate (%) of Won U.S. Dollars(a)
------------------- ---------------- ------------------
<S> <C> <C> <C>
General term borrowings 12.75 ~ 14.5 W 967,488 $ 867,780
Notes with short-term
Finance companies 9.25 ~ 14.0 W34,200,000 $30,675,397
----------- ------------
W35,167,488 $31,543,177
=========== ============
</TABLE>
(a) translated at the rate of W1,114.9: $1.00, the prevailing Won to U.S.
Dollar exchange rate on June 30, 2000
NOTE 6: LONG-TERM DEBT
Long-term debt at June 30, 2000 comprise the following:
Thousands
Reference of Won U.S. Dollars(a)
-------------- ---------------
Debentures (A) W 3,240,574 $ 2,906,605
Won currency loans (B) W 6,400,000 $ 5,740,425
-------------- ---------------
W 9,640,574 $ 8,647,030
=============== ===============
(A) Debentures outstanding at June 30, 2000 comprise the following:
Annual Thousands
Rates(%) of Won U.S. Dollars(a)
-------- ------ ---------------
Debentures collateralized
by bank letter of credit 9.7 W 490,574 $ 440,016
Non-collateralized debentures 10.5 W2,750,000 $2,466,589
---- --------- ---------
W3,240,574 $2,906,605
========= =========
(a) translated at the rate of W1,114.9: $1.00, the prevailing Won to U.S.
Dollar exchange rate on June 30, 2000
(B) Won currency loans outstanding at June 30, 2000 comprise the
following:
Annual Thousands
Rates(%) of Won U.S. Dollars(a)
-------------- -------------- -----------------
Won currency loans 10.25 ~ 14.5 W6,400,000 $5,740,425
------------ --------- ---------
W6,400,000 $5,740,425
========= =========
(a) translated at the rate of W1,114.9: $1.00, the prevailing Won to U.S.
Dollar exchange rate on June 30, 2000
NOTE 7: SUBSEQUENT EVENT
The company issued debentures on July 31, 2000 amounting to approximately $27
million (Korean Won equivalent 30,000 million.) The debentures were issued at a
discount basis of 1.99% with maturing dates of January 31, 2002 and July 31,
2002, respectively.
<PAGE>
Item 2. Management's Discussion and Analysis of Plan of Operation.
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's business strategy, undertaken by its operating subsidiary NewState
Capital Co. Ltd. ("NewState Capital"), is primarily focused on three areas:
residential mortgage loan production, loan servicing and capital markets in
Korea. Loan production and loan servicing comprise the Company's mortgage
banking business and is core to the Company's whole operation. The operations of
the capital markets segment include issuing and selling mortgage-backed
securities (MBS) and making bulk purchases and sales of whole loans. Currently,
issuing and selling MBS is only considered a source of funding primarily for the
Company's mortgage banking business. However, the Company plans to expand this
segment as a revenue generating operation in the near future.
The Company's current business plan is to expand its mortgage origination
efforts throughout Korea, develop and offer innovative new mortgage products to
Korean middle-income families and individuals, and to securitize and sell its
mortgage loan portfolio as MBS to investors in Korea.
The Company's results of operations are influenced primarily by the level of
demand for mortgage loans, which is affected by such external factors as the
level and direction of interest rates and the strength of the overall economy,
as well as the economy in the Company's lending markets. Home mortgage loans in
Korea, including those originated by the Company, typically have variable
interest rates. There is no standard lending rate by which mortgage interest
rates are determined; however, mortgage lenders, including the Company,
typically adjust their interest rates monthly to reflect the lender's on-going
cost of funding.
The fiscal year ended March 31, 2000 was the first year since its acquisition
that the Company was able to resume normal business activities. The Company
restructured its systems of operations and processes with an emphasis on
efficiently originating, underwriting and servicing investment quality
residential mortgage loans. On March 20, 2000, the Company issued through a
special purpose entity (SPE) mortgage-backed securities in the principal amount
of $38.8 million and became the first issuer of mortgage-backed securities in
Korea. The Company services the MBS, taking responsibility for collecting on
delinquent loans and recovering on defaulted loans. The Company intends to enter
the public mortgage-backed securitization market on a periodic basis.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1999
INTEREST INCOME
Interest income on loans decreased 53.6% to $1.3 million for the three months
ended June 30, 2000 ("First Quarter 2000") from $2.7 million for the three
months ended June 30, 1999 ("First Quarter 1999"). The decrease was due to the
decrease of approximately $65.9 million in loans, compared to the amount
outstanding as of June 30, 1999. The decrease in outstanding loans is a result
of mortgage loans sold in connection with the issuance of MBS and prepaid loans.
Interest income on bank deposits decreased to $237,574 in the First Quarter 2000
from $914,104 in the First Quarter 1999 due to a decline in cash and bank
deposits to $3.6 million from $27 million.
INTEREST EXPENSES
Total interest expense decreased to $1.2 million in the First Quarter 2000 from
$3.6 million in the First Quarter 1999 due to lower outstanding borrowings. The
Company utilized funds raised from the issuance of MBS and prepaid loans to
reduce total borrowings to $40.2 million at the end of the First Quarter 2000
from $111 million at the end of the First Quarter 1999.
NET INTEREST INCOME
Net interest income increased to $301,142 for the First Quarter 2000 from net
income of $30,407 for the First Quarter 1999. This increase was due to lower
interest expenses resulting from decrease in borrowing rates and related costs.
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits decreased to $516,384 in the First Quarter 2000
from $889,469 in the First Quarter 1999. The decrease was due to the one-time
payment of special bonuses to employees in May 1999.
GENERAL AND ADMINISTRATION ("G&A")
G&A decreased to $436,968 for the First Quarter 2000 from $719,003 for the First
Quarter 1999 due mainly to one-time consulting and professional service fees
incurred with respect to the acquisition of NewState Capital in 1999.
AMORTIZATION OF 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.
The amount of amortization for the First Quarter 2000 was $672,666.
OTHER INCOME (EXPENSE), NET
Other income (expense) decreased to ($162) in the First Quarter 2000 from
$203,893 in First Quarter 1999. Other income in the First Quarter 1999 was
primarily attributed to the reversal of discount on loans recorded at March 31,
1999 in connection with prepayments of outstanding loans.
NET INCOME
The Company recorded a net income of $6,547 or $0.00 per share for the First
Quarter 2000 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 a reduction in salaries and employee
benefits.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had cash and cash equivalents and interest-bearing
deposits totaling $3.6 million compared to $26.9 million at June 30, 1999. For
the three months ended June 30, 2000, cash used in operating activities of $2.0
million was primarily due to (i) amortization of negative goodwill of $672,666,
(ii) decrease in accrued expenses and other liabilities of $629,287, and (iii)
increase in accrued interest receivable and other assets of $732,295.
Cash provided by investing activities was $4.9 million was primarily due to (i)
proceeds received from decrease in loans outstanding of $7.3 million, (ii)
decrease in interest bearing deposits with banks of $0.8 million, and (iii)
acquisition of premises and equipment of $3.3 million.
For the First Quarter 2000, cash used in financial activities of $3.0 million
was primarily due to (i) increase in short-term borrowings of $1.7 million, (ii)
increase in long-term debt of $0.4 million, and (iii) repayment of long-term
debt of $5.2 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-backed 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.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
----------------------
None.
Item 2. Changes in Securities and Use of Proceeds.
----------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
--------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------------------
None.
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
None.
<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.
By: ERNEST B. KIM
----------------------------
Ernest B. Kim, Chief Executive
Officer and President
