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 December 31, 1999
Commission file number 0-21907
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) (Zip Code)
(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 December 31, 1999:
Class Number of Shares Outstanding
- ----- ----------------------------
Common Stock, .01 par value 11,498,684
<PAGE>
<TABLE>
<CAPTION>
INDEX
-----
Part I Financial Information Page
- ------ --------------------- ----
<S> <C> <C> <C>
Item 1. Condensed Consolidated Balance Sheets as of 4
December 31, 1999 and at March 31, 1999
Condensed Consolidated Statements of 5
Operations for the three months ended
December 31, 1999 and December 31,1998
and for the nine months ended December 31,
1999 and December 31, 1998
Condensed Consolidated Statements of Cash 6
Flows for the nine months ended December
31, 1999 and December 31, 1998
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Part II Other Information and Signatures 21
- ------- -------------------------------- --
</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>
<TABLE>
<CAPTION>
NEWSTATE HOLDINGS, INC.
(FORMERLY RACOM SYSTEMS, INC.)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31,
December 31, 1999
1999 (Pro-forma)
--------------------- ---------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,207,241 $ 26,118,761
Interest-bearing deposits with banks 3,525,550 6,430,168
Securities available for sale 1,440,696 10,853,802
Securities held to maturity 1,593,633 52,284
Loans 78,754,699 96,547,097
Premises and equipment 284,503 -
Accrued interest receivable 2,231,982 2,422,333
Goodwill 1,063,093 -
Other assets 2,362,558 1,763,322
-------------------- --------------------
Total assets $ 95,463,955 $ 144,187,767
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings 55,657,412 54,441,505
Accrued expenses and other liabilities 1,015,093 1,897,308
Long-term debt 21,425,946 70,371,873
Accrued employee benefit 1,111,287 561,532
Negative goodwill 11,553,982 12,775,963
-------------------- --------------------
Total liabilities 90,763,720 140,048,182
Minority interest 26,633 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; 11,498,684 shares
issued and outstanding as of December 31, 1999) 114,987 93,325
Preferred stock (no par value, 10,000,000 shares authorized in
1999, no shares issued and outstanding) - -
Additional paid-in capital 5,552,493 3,892,006
Retained earnings 448,329 91,071
Accumulated other comprehensive income (loss) (1,442,207) 28,645
-------------------- --------------------
Total shareholders' equity 4,673,602 4,105,047
-------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 95,463,955 $ 144,187,767
==================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEWSTATE HOLDINGS, INC.
(FORMERLY RACOM SYSTEMS, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
(Pro-forma) (Pro-forma)
<S> <C> <C> <C> <C>
Interest income:
Loans $2,795,778 $ 3,019,925 $ 9,508,600 $ 10,150,832
Deposits with banks 546,771 743,351 1,981,733 1,747,114
----------------- ----------------- ----------------- -----------------
Total interest income 3,342,549 3,763,276 11,490,333 11,897,946
----------------- ----------------- ----------------- -----------------
Interest expenses:
Short-term borrowings 1,564,334 1,544,671 4,497,351 5,368,836
Long-term debt 986,689 1,831,772 4,429,537 6,408,792
----------------- ----------------- ----------------- -----------------
Total interest expenses 2,551,023 3,376,443 8,926,888 11,777,628
----------------- ----------------- ----------------- -----------------
Net interest income (expenses) 791,526 386,833 2,563,445 120,318
Reversal of (addition to)
provision for loan losses 981,322 (1,036,967) 1,660,373 (1,133,927)
----------------- ----------------- ----------------- -----------------
Net interest income (expenses)
after provision for loan losses 1,772,848 (650,134) 4,223,818 (1,013,609)
Other income and expenses:
Salaries (742,441) (158,902) (2,354,173) (385,148)
General and administrative (540,842) (757,315) (2,018,602) (1,077,866)
Employee benefit (150,902) - (826,083) -
Amortization of negative goodwill 701,444 115,265 2,080,474 115,265
Amortization of goodwill (58,377) - (104,438) -
Loss on sales of securities (1,597,949) - (1,597,949 -
Other income (loss), net 251,731 (3,959) 676,658 (141,369)
----------------- ----------------- ----------------- -----------------
(2,137,336) (804,911) (4,144,113) (1,489,118)
Income (loss) before
provision for income taxes (364,488) (1,455,045) 79,705 (2,502,727)
Provision/credit for income taxes 426,312 - 212,273 -
Minority interest 2,069 6,281 10,151 -
----------------- ----------------- ----------------- -----------------
Net income (loss) 63,893 (1,448,764) 302,129 (2,502,727)
================= ================= ================= =================
Net income (loss)
per share of common stock $ 0.01 $ (0.16) $ 0.03 $ (0.27)
================ ================= ================= =================
Average shares outstanding 11,443,684 9,332,482 10,670,557 9,332,482
================ ================= ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEWSTATE HOLDINGS, INC.
(FORMERLY RACOM SYSTEMS, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the nine months ended
December 31, December 31,
1999 1998
-------------------- --------------------
(Pro-forma)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 302,129 $ (2,496,446)
Adjustment to reconcile net loss to net cash
used in operating activities:
Minorities interest (10,151) (6,281)
Provision (reversal of provision) for loan loss (1,660,373) 1,133,927
Depreciation and amortization 153,603 68,896
Amortization of negative goodwill (2,080,474) (115,265)
Amortization of goodwill 104,438 0
Increase in accrued employee benefit 837,055 0
Loss on sales of available-for-sale securities 1,597,949 0
Decrease in accrued expenses and other liabilities (1,865,568) (450,547)
Increase in accrued interest receivables and other assets (1,060,270) (463,178)
-------------------- --------------------
Net cash used in operating activities (3,681,662) (2,328,894)
-------------------- --------------------
Cash flows from investing activities:
Decrease in loans, net 27,284,302 28,816,810
Decrease (increase) in interest bearing deposits with banks 3,279,266 9,891,303
Proceed from available-for-sale securities 6,665,539 173,482
Investment in subsidiary (5,150,500) 0
Other (2,024,431) (2,347,311)
-------------------- --------------------
Net cash provided by investing activities 30,054,176 36,534,284
-------------------- --------------------
Cash flows from financing activities:
Decrease in short-term borrowings, net (2,581,452) (22,594,256)
Decrease (increase) in long-term debt (52,269,033) (4,000,866)
Proceeds from issuance of common stock 5,419,980 3,718,348
-------------------- --------------------
Net cash used in financing activities (49,430,505) (22,876,774)
Effect of exchange rate changes on cash and cash equivalents 1,146,471 1,683,127
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents (21,911,520) 13,011,743
Cash and cash equivalents at beginning of period 26,118,761 4,440,734
-------------------- --------------------
Cash and cash equivalents at end of period $ 4,207,241 $ 17,452,477
==================== ====================
</TABLE>
<PAGE>
NEWSTATE HOLDINGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 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 5 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 December 31, 1999, and for
the periods ended December 31, 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 acquisition
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 other income (this was erroneously stated in the
December 31, 1999 10-QSB as recorded under reversal of provision for loan
losses). From time to time, the management, in consultation with its Korean
independent auditor, record under reversal of provision for loan losses in the
income statement a portion of previously written-off loans which the Company
believes are recoverable based on recent payment history of individual
borrowers.
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.
<PAGE>
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: LOANS
The loan balances at December 31, 1999 comprise the following
components by loan types (in thousands of Won):
<TABLE>
<CAPTION>
Unamortized
interest premium
and discount and Balance in
Principal credit discount Balance U.S. Dollars(a)
----------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Residential real estate W 84,989,595 W 1,124,480 W 86,114,075 $75,182,534
Consumer 3,492,267 (562,689) 2,929,578 2,557,690
Commercial 15,447,885 (14,285,906) 1,161,979 1,014,475
---------------- ---------------- ------------- --------------
W 103,929,747 W 13,724,115 W 90,205,632 $78,754,699
</TABLE>
(a) translated at the rate of W1,145.4: $1.00, the prevailing Won to
U.S. Dollar exchange rate on December 31, 1999
<PAGE>
NOTE 8: SHORT TERM BORROWINGS
Short-term borrowings at December 31, 1999 comprise the following:
<TABLE>
<CAPTION>
Annual Interest Thousands
Rate (%) of Won U.S. Dollars(a)
--------------------------------- ----------------
<S> <C> <C> <C>
General term borrowings 12.75-14.50 W 8,000,000 $ 6,984,460
Notes with short-term 9.25-11.00 55,750,000 48,672,953
finance companies
----------------- ---------------
W 63,750,000 $ 55,657,412
================= ===============
</TABLE>
(a) translated at the rate of W1,145.4: $1.00, the prevailing Won to
U.S. Dollar exchange rate on December 31, 1999
NOTE 9: LONG -TERM DEBT
Long-term debt at December 31, 1999 comprises the following:
<TABLE>
<CAPTION>
Thousands
Reference of Won U.S. Dollars(a)
------------------------------ ----------------
<S> <C> <C> <C>
Debentures (A) W 21,541,278 $ 18,806,774
Won currency loans (B) 3,000,000 2,619,172
----------------- ----------------
W 24,541,279 $ 21,425,947
================= ================
</TABLE>
(A) Debentures outstanding at December 31, 1999 comprise the following:
<TABLE>
<CAPTION>
Annual Thousands
Rates (%) of Won U.S. Dollars(a)
------------------------------ ----------------
<S> <C> <C> <C>
Debentures collateralized
by bank letter of credit 12.30-12.78 W 18,000,000 $ 15,715,034
Non-collateralized debentures 10.5 3,500,000 3,055,701
----------------- ----------------
W 21,500,000 $ 18,770,735
Profit: premium 41,279 36,039
----------------- ----------------
W 21,541,279 $ 18,806,774
================= ================
</TABLE>
(B) Won currency loans outstanding at December 31, 1999 comprise the following:
<TABLE>
<CAPTION>
Annual Thousands
Rates (%) of Won U.S. Dollars(a)
------------------------------ ----------------
<S> <C> <C> <C>
Kukmin Bank 12.5 W 3,000,000 $ 2,619,172
----------------- ---------------
W 3,000,000 $ 2,619,172
================= ===============
</TABLE>
(a) translated at the rate of W1,145.4: $1.00, the prevailing Won to
U.S. Dollar exchange rate on December 31, 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 ("Dongsuh Finance"). Dongsuh Finance changed its name 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
Dongsuh Finance 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 Capital 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. Effectively on
December 20, 1999, Youngnam merged into NewState Capital.
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 acquisition of the capital stock of NewState Capital by
the Company 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 five branch
offices in 1999, which are located in the cities of Taegu, Changwon, Jinju,
Pusan and Kwang-ju, 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 DECEMBER 31, 1999 TO THE
THREE MONTH PERIOD ENDED DECEMBER 31, 1998
Interest Income
Interest income decreased to $3.3 million, or approximately 13.2%, for the three
months ended December 31, 1999 ("Third Quarter 1999") from $3.8 million for the
three months ended December 31, 1998 ("Third Quarter 1998"). The decrease in
interest income in the Third Quarter 1999 as compared to Third Quarter 1998 was
due to the reduction of average mortgage loan rate resulting from the
stabilization of the Korean financial markets after the IMF Crisis, offset by
the acquisition of Youngnam which provided $1.05 million in interest income in
the Third Quarter 1999. Excluding the effect of the Youngnam acquisition,
interest income decreased approximately $1.55 million, or approximately 40.8%,
in the Third Quarter 1999 as compared to Third Quarter 1998. This is due to a
decrease of approximately $13.3 million in mortgage loans, compared to the
amount outstanding as of December 31, 1998, as a result of prepayments.
Interest income on bank deposits decreased to $0.55 million in the Third Quarter
1999 from $0.74 million in the Third Quarter 1998 due to a decline in cash and
bank deposits to $7.7 million from $34 million. Funds from cash and bank
deposits were used to retire long-term borrowings, which decreased from $52.3
million as of December 31 ,1998 to $21.4 million as of December 31, 1999.
Interest Expenses
Total interest expense decreased to $2.5 million in the Third Quarter 1999 from
$3.4 million in the Third Quarter 1999 due to lower outstanding borrowings. The
Company utilized funds from early loan repayments to reduce total borrowings to
$77.1 million at the end of Third Quarter 1999 from $87.6 million at the end of
the Third Quarter 1999. Interest expenses were also decreased 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 $791,526 in the Third Quarter 1999 as compared
to $386,833 in the Third 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 $1 million in the Third
Quarter 1999 from an addition to provision for loan losses of $1.04 million in
Third Quarter 1998. The reversal is based on collection of accrued interest and
principal payments from previously written-off loans, resulting in higher
recovery projection on these loans.
Total Operating Expenses
Total operating expenses were $1.4 million in the Third Quarter 1999 compared to
$0.9 million in the Third Quarter 1998. The increase during Third Quarter 1999
as compared to Third 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 fiscal year 1999.
Salaries and Employee Benefits
The Company has increased staffing during the fiscal year 1999 in connection
with the resumption of normal operations. Salaries increased 460% in the Third
Quarter 1999 to $742,441 from $158,902 in the Third Quarter 1998 due to the
acquisition of Youngnam and an increase of personnel from 24 to 100.
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 Third Quarter 1998 due to the
termination of most employees during 1998, resulting in no employee with more
than one-year of service during Third Quarter 1998.
Amortization of Negative Goodwill
Negative goodwill totaling approximately $11.5 million resulting from the
acquisition of NewState Capital by NewState NY in December 1998 and Youngnam by
NewState Capital in March 1999 is being amortized at rate of approximately
$700,000, at the current Won:US Dollar exchange rate, each quarter over a 5 year
period. There was no amortization of negative goodwill in the Third Quarter
1998.
Amortization of Goodwill
Goodwill totaling approximately $1.1 million resulting from the acquisition of
NewState Capital by the Company is being amortized at rate of approximately
$58,000 per quarter over 5 years. There was no amortization of goodwill in the
Third Quarter 1998.
Loss on Sales of Available-for-Sale Securities
The Company took a loss of $1.6 million on disposition of 720,000 shares of
common stock of Chung An Finance Co. As of end of Third Quarter 1999, the
Company has a portfolio of available-for-sale securities totaling approximately
$3 million.
Other Income
Other income increased to $251,731 in the Third Quarter 1999 from an expense of
$3,959 in the Third Quarter 1998. Other income consists primarily of fees from
collection of loan losses and financial service commissions.
<PAGE>
Net Income
The Company recorded a net income of $63,893 or $0.01 per share for the Third
Quarter 1999 compared to a net loss of $1.45 million or $0.16 per share for the
Third Quarter 1998. The increase in net income was primarily attributable to an
increase in net interest income, reversal of provision for loan losses,
amortization of negative goodwill, and credit for income taxes in the Third
Quarter 1999. This was offset by higher operating expenses associated with the
resumption of normal business operations in fiscal year 1999. The Company has
recorded a credit for income taxes in Third Quarter 1999 as a result of
over-reporting of income taxes in Second Quarter 1999.
<PAGE>
COMPARISON OF THE NINE MONTH PERIOD ENDED DECEMBER 31, 1999 TO THE NINE MONTH
PERIOD ENDED DECEMBER 31, 1998
Interest Income
Interest income decreased to $11.5 million for the nine months ended December
31, 1999 ("Interim 1999") from $11.9 million for nine months ended December 31,
1998 ("Interim 1998"). The acquisition of Youngnam added approximately $4.2
million in interest income to Interim 1999. Excluding the effect of the
acquisition, interest income declined by approximately 46% to $7.2 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 $2 million in Interim 1999 from $1.7 million in
Interim 1998 as a result of the Youngnam acquisition. Excluding Youngnam
acquisition, interest income on bank deposits decreased by approximately $0.4
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 $8.9 million for Interim 1999 from $11.8
million in Interim 1998. Excluding the effect of Youngnam acquisition, total
interest expenses in Interim 1999 was $5.8 million, a decline of 35% 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 $2.6 million in Interim 1999 from $120,000 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 $1.7 million in Interim 1999
from a provision for loan losses of $1.1 million in Interim 1999. The reversal
is based on collection of accrued interest and principal payments from
previously written-off loans, resulting in higher recovery projection on these
loans.
Total Operating Expenses
Total operating expenses were $5.2 million in Interim 1999 compared to $1.4
million in Interim 1998. The increase in operating expenses was primarily
attributed to an increase in salaries, general and administrative expense and
employee benefits. 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 $2.3 million in Interim 1999 compared to $385,145 in
Interim 1998 due to the acquisition of Youngnam and an increase of personnel
from 24 to 100.
Employee benefits increased to $826,083 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 $700,000, 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.
Amortization of Goodwill
Goodwill totaling approximately $1.1 million resulting from the acquisition of
NewState Capital by the Company is being amortized at rate of approximately
$58,000 per quarter over 5 years. There was no amortization of goodwill in
Interim 1998.
Other Income
Other income increased to $676,658 in Interim 1999 from a loss of $141,369 in
Interim 1998. Other income consists primarily of collection of loan losses and
financial service commissions.
Net Income
The Company recorded a net income of $302,129 or $0.03 per share for the Interim
1999 compared to a net loss of $2.5 million or $0.27 per share for the Interim
1998. The increase in net income was primarily attributable to (i) an increase
in net interest income, (ii) reversal of provision for loan losses, (iii)
amortization of negative goodwill, and (iv) credit for income taxes. This was
offset by higher operating expenses associated with the resumption of normal
business operations in fiscal year 1999. The Company has recorded a credit for
income taxes in Interim 1999 as a result of the merger of Youngnam into NewState
Capital, thus allowing the Company to utilize Youngnam's net operating loss
carry-forwards.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents and
interesting-bearing deposits totaling $7.7 million compared to $32.5 million at
March 31, 1999. For the nine months ended December 31, 1999, cash used in
operating activities of $3.7 million was primarily due to (i) the net income of
$302,129, (ii) reversal of provision for loan losses of $1.7 million, (iii)
amortization of negative goodwill of $2.1 million, (iv) increase in accrued
employee benefit of $837,055, (v) loss on sales of available-for-sale securities
of $1.6 million, (vi) decrease in accrued expenses of $1.8 million, and (iv)
increase in accrued income of $1.1 million.
Cash provided by investing activities was $30 million was primarily due to (i)
repayment of loans outstanding of $27.3 million, (ii) decrease in bank deposits
of $3.3 million and (iii) sales of securities of $6.7 million and (iv)
investment in the subsidiary NewState Capital totaling $5.2 million (equivalent
to the loan and associated interest payments assumed with the reverse
acquisition of NewState Capital).
For Interim 1999, cash used in financing activities of $49.4 million was
primarily due to (i) decrease in short-term borrowings of $2.6 million, (ii)
repayment of long-term debt of $52.3 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 UPDATE
The Company conducted tests of its systems and applications on January 1 and 2,
2000. To date, the Company has not experienced any material disruptions of its
internal computer systems or application software and has not experienced any
material problems with the computer systems or application software of its third
party vendors. The Company continues to monitor its systems and applications and
those of its third party vendors in order to address them promptly, should any
arise.
Although the Company's Year 2000 rollover did not present any material business
disruption, there are some remaining Year 2000 related risks, including risks
due to the fact Year 2000 is a leap year. Management believes that appropriate
actions has been taken to address these remaining Year 2000 issues. However,
management cannot be certain that Year 2000 issues will not have a material
adverse impact on the Company, since it is early in the Year 2000.
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
----------------------
None
Item 2. Changes in Securities and Use of Proceeds
----------------------------------------------------
On November 10, 1999, the Company issued 82,500 shares of its
common stock, $0.01 par value per share, at a price of $3.00 per share, to Mr.
Kim Kyung Dong, a Korean individual, pursuant to an exemption from registration
under the Securities Act provided by Section 4(2) thereunder and Regulation S.
The issuance of these shares by the Company to Mr. Dong was in full and final
payment for certain capital raising services rendered by Mr. Dong to the Company
in Korea.
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
* 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.
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: ALEXANDER T. SHANG
----------------------------
Alexander T. Shang, Treasurer and
Chief Financial Officer
Dated: February 18, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Appendix A to item 601(c) of Regulation S-K
Commercial and Industrial Companies
Article 5 of Regulation S-X
(in thousands, except per share data)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,207,241
<SECURITIES> 6,559,879
<RECEIVABLES> 2,231,982
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 284,503
<DEPRECIATION> 0
<TOTAL-ASSETS> 95,463,955
<CURRENT-LIABILITIES> 55,672,505
<BONDS> 21,425,949
0
0
<COMMON> 114,987
<OTHER-SE> 4,558,615
<TOTAL-LIABILITY-AND-EQUITY> 95,463,955
<SALES> 0
<TOTAL-REVENUES> 11,490,333
<CGS> 8,926,888
<TOTAL-COSTS> 3,696,944
<OTHER-EXPENSES> (378,087)
<LOSS-PROVISION> (1,660,373)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 79,705
<INCOME-TAX> (212,273)
<INCOME-CONTINUING> 302,130
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302,130
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
