Financial Statements (With Independent Auditors Report Thereon)
Independent Auditors Report Based on a report originally issued in Korean The Board of Directors and Stockholders : We have audited the accompanying balance sheets of (the Company ) as of, and the related statements of income, appropriation of retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of as of, and the results of its operations, the appropriation of its retained earnings, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea. Without qualifying our opinion, we draw attention to following: As discussed in note 2 (a) to the financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable in Korean accounting principles and auditing standards and their application in practice. KPMG Samjong Accounting Corp. Seoul, Korea April 17, 2007 This report is effective as of April 17, 2007, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.
Balance Sheets Assets Current assets: Cash and due from banks (note 3) W 1,066,950 1,163,840 Marginal deposits (notes 5 and 12) 338,212,095 311,506,526 Short-term held-to-maturity securities (note 6) 25,109,476 24,772,280 Accounts receivable (note 12) 4,431 2,067 Accrued income (note 12) 3,609,215 2,859,700 Prepaid expenses 123,738 91,903 Total current assets 368,125,905 340,396,316 Investment assets: Long-term financial instruments (notes 3 and 4) 3,000 3,000 Available-for-sale securities (note 7) 3,000,000 3,000,000 Long-term held-to-maturity securities (note 6) 9,999,406 - Long-term loans to employees 1,057,907 1,173,690 Guarantee deposits 312,612 312,854 Collective funds for default loss 4,488,592 4,357,725 Non-current deferred income tax assets (note 18) 5,475 6,797 Other investment assets 3,658,271 2,092,062 22,525,263 10,946,128 Property and equipment (note 8): Vehicles 102,782 102,782 Furniture and fixtures 3,748,057 3,119,000 3,850,839 3,221,782 Less: Accumulated depreciation (3,070,330) (2,835,967) 780,509 385,815 Intangible assets, net of amortization (note 9) 318,079 233,896 23,623,851 11,565,839 Total assets W 391,749,756 351,962,155
Balance Sheets, Continued (In thousands of Won, except share data) Liabilities and Stockholders Equity Current liabilities: Customers marginal deposits (notes 11 and 12) W 335,294,719 301,992,871 Accrued expenses 1,333,569 1,530,167 Accounts payable 3,565 2,737 Income tax payable 2,283,878 2,426,660 Unearned revenue - 493 Current deferred income tax liabilities (note 18) 51,287 55,442 Total current liabilities 338,967,018 306,008,370 Retirement and severance benefits (notes 10 and 20) 50,986 459,251 Total liabilities 339,018,004 306,467,621 Stockholders equity (notes 1, 14 and 15): Common stock of W10,000 par value Authorized 5,000,000 shares Issued and outstanding 2,500,000 shares 25,000,000 25,000,000 Retained earnings: Legal reserve 250,000 - Reserve for loss on futures transactions 101,608 82,541 Appropriated retained earnings for business improvement 670,000 670,000 Unappropriated retained earnings 26,710,144 19,741,993 Total stockholders equity 52,731,752 45,494,534 Commitments and contingencies (note 13) - - W 391,749,756 351,962,155 See accompanying notes to financial statements.
Statements of Income Years ended (In thousands of Won, except earnings per share) Operating revenues: Brokerage commissions (note 20) W 18,265,219 19,067,991 Interest income (note 20) 15,912,511 9,547,710 Dividend income 76,473 76,474 Gain on derivatives transactions 7,060 25,023 Others 809 468 34,262,072 28,717,666 Operating expenses: Brokerage fees 2,955,535 2,698,418 Interest expense 4,565,519 3,105,543 Loss on derivatives transactions 77,509 72,395 Loss on sales of trading securities 570 - General and administrative expenses (notes 16, 17 and 20) 13,008,438 12,377,924 Others 114,273 22,454 20,721,844 18,276,734 Operating income 13,540,228 10,440,932 Non-operating income: Gain on foreign currency transactions 2,873 4,385 Gain on foreign currency translations 97 - Gain on disposal of property and equipment - 9,946 Income tax refunds - 1 Others 12,153 4,481 15,123 18,813 Non-operating expenses: Loss on disposal of property and equipment 14,580 14 Loss on disposal of other investment assets 561 - Loss on foreign currency transactions 8,317 9,794 Loss on foreign currency translations 1,762 1,414 Donations 8,000 7,540 Additional income taxes paid 18 64,014 33,238 82,776 Income before income taxes 13,522,113 10,376,969 Income taxes (note 18) 3,784,896 3,013,443 Net income W 9,737,217 7,363,526 Ordinary income per share in Won (note 19) W 3,895 2,945 Net income per share in Won (note 19) W 3,895 2,945 See accompanying notes to financial statements.
Statements of Appropriation of Retained Earnings Years ended Date of Appropriation for 2006 : May 30, 2007 Date of Appropriation for 2005 : May 26, 2006 Unappropriated retained earnings Balance at beginning of year W 16,972,927 12,378,467 Net income 9,737,217 7,363,526 26,710,144 19,741,993 Appropriation of retained earnings Legal reserve 250,000 250,000 Dividends - 10% on par value at 10,000 Won per share 2,500,000 2,500,000 Reserve for loss on futures transactions (note 14) 18,258 19,066 Other legal reserve (note 15) 500,000-3,268,258 2,769,066 Unappropriated retained earnings to be carried over to subsequent year W 23,441,886 16,972,927 See accompanying notes to financial statements.
Statements of Cash Flows Years ended Cash flows from operating activities: Net income W 9,737,217 7,363,526 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision of retirement and severance benefits 518,072 459,395 Depreciation 268,712 215,708 Amortization of intangible assets 125,371 300,113 Bad debts expenses 46,610 15,757 Loss on disposal of other investment assets 561 - Loss on disposal of property and equipment 14,580 14 Loss on foreign currency translation 1,762 1,414 Loss on sale of trading securities 570 - Gain on disposal of property and equipment - (9,946) Interest income (49,227) (161,277) Gain on foreign currency translation (97) - Increase in marginal deposits (26,707,235) (147,934,976) Increase in accounts receivable (2,364) (1,565) Increase in accrued income (796,124) (1,651,095) Decrease (increase) in prepaid expenses (31,835) 33,776 Decrease (increase) in non-current deferred income tax assets 1,322 (6,797) Increase in accounts payable 828 2,737 Increase (decrease) in unearned revenue (493) 494 Increase in customers marginal deposits 33,301,848 141,123,858 Increase (decrease) in accrued expenses (196,598) 353,652 Increase (decrease) in income tax payable (142,782) 1,842,732 Increase (decrease) in current deferred income tax liabilities (4,155) 23,085 Payment of severance benefits (308,224) (289,279) Increase in plan assets (1,290,289) - Decrease (increase) in deposit for severance benefits 672,176 (91,627) Net cash provided by operating activities W 15,160,206 1,589,699
Statements of Cash Flows, Continued Years ended Cash flows from investing activities: Withdrawal of long-term financial instruments W - 5,000 Disposal of trading securities 4,767,929 - Collection of long-term loans 388,033 444,445 Collection of guarantee deposits 484 17,721 Disposal of property and equipment 2,070 21,420 Disposal of other investment assets 24,600 - Disposal of short-term held-to-maturity securities 24,839,321 39,772,590 Collection of collective funds for default loss 72,632 4,569,625 Acquisition of cash and due from banks - (700,000) Acquisition of trading securities (4,768,500) - Acquisition of short-term held-to-maturity securities (25,127,317) (44,415,321) Acquisition of long-term held-to-maturity securities (9,999,378) - Increase in long-term loans (272,250) (260,000) Payment of guarantee deposits (242) (30) Payment to collective funds for default loss (203,499) (259,308) Acquisition of property and equipment (680,056) (106,925) Acquisition of other investment assets (1,591,369) (613,200) Additions to other intangible assets (209,554) (48,400) Net cash used in investing activities (12,757,096) (1,572,383) Cash flows from financing activities: Issuance of subordinated debts - 5,000,000 Dividends paid (2,500,000) - Repayment of subordinated debts - (5,000,000) Net cash used in financing activities (2,500,000) - Net increase (decrease) in cash and cash equivalents (96,890) 17,316 Cash and cash equivalents at beginning of year 163,840 146,524 Cash and cash equivalents at end of year W 66,950 163,840 See accompanying notes to financial statements.
(1) The Company (the Company ), a majority-owned subsidiary of Samsung Securities Co., Ltd. (the Parent ), executes and clears futures and options on behalf of institutional clients. Founded in 1992, the Company s principal office is located in Seoul, Korea and the Company is a member of the Korea Exchange, which commenced its trading in April 1999. As of March 31, 2007, the Company currently carries on all operations permitted by Futures Trading Act, including the receipt of trust funds, and is required by relevant laws to report any changes in the paid-in capital, major stockholders, members of the board of directors to the Financial Supervisory Commission. The Company is required to maintain its net capital ratio at or above 100% in accordance with the Futures Trading Act and Supervisory Regulations. Also, it is prohibited from owning securities issued by major investors and acting as a guarantor for another party. As of March 31, 2007, the Company s capital stock totals W25,000 million and its stockholders comprise as follows: Number of shares Ownership ratio (%) Samsung Securities Co., Ltd. 1,275,000 51.00 Samsung Life Insurance Co., Ltd. 1,025,000 41.00 Samsung Fire & Marine Insurance Co., Ltd. 100,000 4.00 Samsung Life Public Welfare Foundation 50,000 2.00 Employee Stock Ownership Association 30,085 1.20 Others 19,915 0.80 2,500,000 100.00
(2) Summary of Significant Accounting Policies (a) Basis of Presenting Financial Statements 2 The Company maintains its accounting records in Korean Won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are solely intended for use by only those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Company's financial position, results of operations or cash flows, is not presented in the accompanying financial statements. Effective January 1, 2006, the Company adopted Statements of Korea Accounting Standards No. 20 Related Party Disclosures. The adoption of this standard did not have a significant impact on the accompanying financial statements. As allowed by this standard, prior year balances were not reclassified to conform to the current year presentation. The significant accounting policies followed by the Company in the preparation of its financial statements are summarized below. (b) Financial Instruments Cash and due from bank means cash and short-term financial instruments which are held for short-term cash management purposes or will mature within one year, including time deposits and installment deposits. Long-term financial instruments are financial instruments which are not classified to current asset. (c) Allowance for Doubtful Accounts The allowance for doubtful accounts is estimated based on an analysis of individual accounts and past experience of collection. (d) Investments in Securities Upon acquisition, the Company classifies certain debt and equity securities into one of the three categories: held-to-maturity, available-for-sale, or trading securities and such determination is reassessed at each balance sheet date. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-tomaturity. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) are classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used to generate profit on short-term differences in price. Investments not classified as either held-to-maturity or trading securities are classified as available-for-sale securities.
3 (2) Summary of Significant Accounting Policies, Continued (d) Investments in Securities, Continued Trading securities are carried at fair value, with unrealized holding gains and losses included in current income. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a capital adjustment, net of tax. Investments in equity securities that do not have readily determinable fair values are stated at cost. Declines in value judged to be other-than-temporary on available-for-sale securities are charged to current results of operations. Investments in debt securities that are classified into held-to-maturity are reported at amortized cost at the balance sheet date and such amortization is included in interest income. The fair value of marketable securities is determined using quoted market prices as of the period end. Non-marketable debt securities are recorded at the fair values derived from the discounted cash flows by using an interest rate deemed to approximate the market interest rate. The market interest rate is determined by the issuers credit rate announced by the accredited credit rating agencies in Korea. Money market funds are recorded at the fair value determined by the investment management companies. Trading securities are classified as current assets, whereas available-for-sale securities and held-to-maturity securities are classified as long-term investments. However, available-forsale securities whose maturity dates are due within one year from the balance sheet date or whose likelihood of being disposed of within one year from the balance sheet date is probable are classified as current assets. Likewise, held-to-maturity securities whose maturity dates are due within one year from the balance sheet date are classified as current assets. (e) Collective Funds for Default Loss As of March 31, 2007, in accordance with the provisions of Article 27 of the Futures Trading Act, the Company has deposited a collective funds for default loss amounting to W4,488,592 thousand with the Korea Exchange as guaranty for the payment of related futures transactions. (f) Property and Equipment Property, plant and equipment are stated at cost, except in the case of revaluation made in accordance with the old Asset Revaluation Law. However, assets acquired through exchange, investment in kind or donation are recorded at their fair value. Depreciation is computed by the straight-line method over the estimated useful lives of the assets as follows: Useful lives (years) Vehicles 4 Furniture and fixtures 4~40 Significant additions or improvements extending useful lives of assets are capitalized. However, normal maintenance and repairs are charged to expense as incurred.
4 (2) Summary of Significant Accounting Policies, Continued (g) Intangible Assets Expenditure on development incurred in conjunction with new products or technologies, in which the elements of costs can be identified and future economic benefits are clearly expected, is capitalized and amortized on a straight-line basis over the expected periods to be benefited, generally four years. The expenditure capitalized includes the cost of materials, direct labor and an appropriate proportion of overheads. Other intangible assets are stated at cost less accumulated amortization and impairment losses. Such intangible assets are amortized using the straight-line method over a reasonable period, generally four years, based on the nature of the asset. (h) Leases The Company accounts for and classifies its lease transactions as either an operating or capital lease, depending on the terms of the lease under statement of Korea Accounting Standards. (i) Retirement and Severance Benefits Through March 2006, employees who have been with the Company for more than one year are entitled to lump-sum payments based on current salary rates of pay and length of service when they leave the Company. The Company's estimated liability under the plan which would be payable if all employees left on the balance sheet date is accrued in the accompanying balance sheets. Through March 1999, under the National Pension Scheme of Korea, the Company transferred a certain portion of retirement allowances for employees to the National Pension Fund. The amount transferred will reduce the retirement and severance benefit amount to be payable to the employees when they leave the Company and is accordingly reflected in the accompanying financial statements as a reduction from the retirement and severance benefits liability. However, due to the new regulation effective April 1999, such transfers to the National Pension Fund are no longer required. Effective April 1, 2006, the Company introduced a defined benefit pension plan, under which each eligible employee receives a fixed amount of pension after retirement. The Company accrued, as the liability for retirement and severance benefits, lump-sum payments payable to employees who are currently in service, assuming that they left the Company as of the balance sheet date. All employees with a minimum of one year of service are eligible to participate and must elect to participate in the plan. Participants accrue estimated benefits based on actuarial assumptions measured on the balance sheet date at the discounted present value.
5 (2) Summary of Significant Accounting Policies, Continued (i) Retirement and Severance Benefits, Continued Pension plan assets and the deposit previously made to the National Pension Fund under old National Pension Law, as referred to above, is reflected in the accompanying balance sheets as a reduction of the liability for retirement and severance benefits. The Company sponsors a defined contribution plan in which contributions in the amount of 1/12 of employee s annual salary is made by the Company. The amount of benefit payments depends on the performance of the plan assets and is not guaranteed. (j) Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at the balance sheet date, with the resulting gains and losses recognized in current results of operations. Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at the rate of exchange on March 31, 2007 that is permitted by the Financial Accounting Standards. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated into Korean Won at the foreign exchange rate ruling at the date of the transaction. (k) Derivatives Derivative instruments are recorded either as an asset or a liability principally at the fair value of rights or obligations associated with the derivative contracts. The unrealized gain or loss from derivative transactions is recognized in current operations. (l) Revenue Recognition Commissions due from the brokerage of futures transactions are recorded as revenue when the brokerage services have been rendered and the service fees are determined. The Company performs trading of dollar futures, KTB futures, MSB futures, KOSPI futures, CD futures, gold futures and others through the Korea Exchange for clients and the Company s own accounts. Deposits for customers futures trading kept by the external custodian institution are accounted for separately from the Company s own account and related valuation gains or losses are directly adjusted to deposits. Deposits for the Company s proprietary trading are also in custodian institution and valuation gains or losses from the proprietary trading are recorded in current operations.
6 (2) Summary of Significant Accounting Policies, Continued (m) Income Taxes Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related asset or liability for financial reporting or the expected reversal date of the temporary difference for those with no related asset or liability such as loss carryforwards and tax credit carryforwards. The deferred tax amounts are presented as a net current asset or liability and a net non-current asset or liability. Deferred taxes are recognized on the temporary differences related to unrealized gains and losses on investment securities that are reported as a separate component of capital adjustments. (n) Earnings Per Share Earnings per common share are calculated by dividing net income by the weighted-average number of shares of common stock outstanding during each period. (o) Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the Republic of Korea requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. Actual results could differ from those estimates.
7 (3) Financial Instruments Cash and due from banks and long-term financial instruments as of are as follows: Cash and due from banks: Cash on hand W 3,362 1,475 Demand deposits 63,588 162,365 Time deposits 1,000,000 1,000,000 1,066,950 1,163,840 Long-term financial instruments: Restricted deposits 3,000 3,000 W 1,069,950 1,166,840 (4) Restricted Deposits There are certain amounts included in long-term financial instruments which are restricted in use for expenditures for certain business purposes and guarantee deposit for current account as of March 31, 2007 and 2006 as follows: Reference Long-term financial instruments W 3,000 3,000 Pledged as security for maintaining checking account (5) Marginal Deposits The Company places deposits with financial institutions or futures commission merchants (FCM) of which the amount is equal to the customers marginal deposits for its futures trading received from clients who are trading futures through the Company. Accordingly, marginal deposits are restricted in use under Futures Trading Act. Marginal deposits as of are summarized as follows: Restricted: Deposits for domestic futures trading W 276,964,402 272,887,662 Deposits for overseas futures agency trading 25,867,816 13,905,190 Deposits for domestic futures agency trading 29,700,000 23,200,000 Other deposits 5,679,877 1,513,674 W 338,212,095 311,506,526
(6) Held-to-maturity Securities 8 Held-to-maturity securities as of are summarized as follows: 2006 Interest Nominal Acquisition rate(%) amount cost Book value Short-term held-to-maturity securities: Industrial financial debentures 4.89 W 10,000,000 10,010,508 10,005,140 Government bonds 6.15 5,100,000 5,185,841 5,121,839 Bank debentures 4.76 3,000,000 2,993,777 2,994,615 Monetary stabilization bonds 3.69~4.07 7,000,000 6,937,191 6,987,882 25,100,000 25,127,317 25,109,476 Long-term held-to-maturity securities: Bank debentures 4.96 10,000,000 9,999,378 9,999,407 W 35,100,000 35,126,695 35,108,883 2005 Interest Nominal Acquisition rate(%) amount cost Book value Short-term held-to-maturity securities: Industrial financial debentures 4.45 W 10,000,000 9,629,000 9,820,370 Monetary stabilization bonds 3.72~4.70 15,000,000 14,954,736 14,951,910 W 25,000,000 24,583,736 24,772,280 As of, held-to-maturity securities amounting to W35,108,883 thousand and W24,772,280 thousand, respectively, were pledged to the Korea Exchange as a guarantee deposit for the futures transactions. The maturities of debt securities as of are summarized as follows: Year ending March 31, 2008 W 25,109,476 24,772,280 2009 9,999,407 - W 35,108,883 24,772,280
(7) Available-for-sale Securities 9 Available-for-sale securities as of are summarized as follows: 2006 Ownership Acquisition Net asset percentage (%) cost value Book value Unlisted stock - Korea Exchange 0.40 W 3,000,000 5,377,987 3,000,000 2005 Ownership Acquisition Net asset percentage (%) cost value Book value Unlisted stock - Korea Exchange 0.40 W 3,000,000 5,507,434 3,000,000 (8) Property and Equipment The changes in the property and equipment for the years ended are as follows: 2006 March March 31, 2006 Acquisition Disposal Depreciation 31, 2007 Vehicles W 56,424 - - 25,696 30,728 Furniture and fixtures 329,391 680,056 16,650 243,016 749,781 W 385,815 680,056 16,650 268,712 780,509 2005 March March 31, 2005 Acquisition Disposal Depreciation 31, 2006 Vehicles W 97,721-11,472 29,825 56,424 Furniture and fixtures 408,365 106,925 16 185,883 329,391 W 506,086 106,925 11,488 215,708 385,815
10 (9) Intangible Assets The changes in intangible assets for the years ended are as follows: 2006 March March 31, 2006 Acquisition Amortization 31, 2007 Development costs W 43,762 105,732 45,391 104,103 Others 190,134 103,822 79,980 213,976 W 233,896 209,554 125,371 318,079 2005 March March 31, 2005 Acquisition Amortization 31, 2006 Development costs W 268,887-225,125 43,762 Others 23,122 242,000 74,988 190,134 W 292,009 242,000 300,113 233,896 (10) Retirement and Severance Benefits The changes in the retirement and severance benefits for the years ended March 31, 2007 and 2006 are summarized as follows: Beginning balance W 1,136,104 965,988 Provision for severance benefits 518,072 459,395 Actual payment of severance benefits (308,224) (289,279) Ending balance 1,345,952 1,136,104 Less: Transfer to National Pension Fund (4,677) (4,677) Plan assets (1,290,289) - Severance benefits insurance deposit - (672,176) Net balance at end of year W 50,986 459,251 Retirement and severance benefits are approximately 96% funded as of March 31, 2007, through an retirement pension plan of which the beneficiaries are respective employees.
(11) Customers Marginal Deposits 11 (In thousands of Won, except foreign currencies) Customers marginal deposits as of are as follows: Customers deposits for domestic futures and option trading W 303,965,441 286,687,664 Customers deposits for overseas futures and option trading 31,222,726 15,168,939 Other deposits 106,552 136,268 W 335,294,719 301,992,871 (12) Assets and Liabilities Denominated in Foreign Currencies Assets and liabilities denominated in foreign currencies as of are summarized as follows: Foreign currency Won equivalent Assets: Marginal deposits USD 26,982,479 11,556,977 W 25,371,625 11,278,453 JPY 531,492,309 473,766,241 4,235,994 3,940,409 EUR 819,982-1,028,208 - SFr 628,201-485,172 - CAD 271,923-220,622 - GBP 1,915-3,534 - Accounts receivables USD 1,961 1,250 1,844 1,220 Accrued income USD 339,223 111,089 318,972 108,412 JPY 773,400 326,000 6,164 2,711 EUR 2,718-3,408 - SFr 590-456 - CAD 164-133 - GBP 1-2 - W 31,676,134 15,331,205 Liabilities: Customers marginal deposits USD 26,888,771 11,518,449 W 25,283,512 11,240,855 JPY 528,914,641 473,766,241 4,215,450 3,940,408 EUR 819,982-1,028,208 - SFr 628,201-485,172 - CAD 271,923-220,622 - GBP 1,915-3,534 - W 31,236,498 15,181,263
(13) Commitments and Contingencies 12 As of March 31, 2007, the Company has entered into a secured loan agreement with The Korea Securities Finance Corporation up to 50% of customers marginal deposits. As of March 31, 2007, the customers securities are deposited in the Korea Exchange with the substitute price amounting to W651,456 million. As of March 31, 2007, the Company carries a professional indemnity liability insurance up to W500 million with Samsung Fire & Marine Insurance Co., Ltd. (14) Reserve for Loss on Futures Transactions In accordance with the provisions of Article 50 of the Korea Futures Trading Act, the Company has reserved 0.1% of the brokerage commission as an appropriation of retained earnings for loss resulting from any default of payment of customer s futures transactions during the year. The portion of the reserve not utilized after three years from appropriation date can be reverted to unappropriated retained earnings. (15) Other Legal Reserve In accordance with the provisions of Article 9 of the Electronic Financial Transaction Act, financial institutions and electronic financial service companies shall be responsible to compensate for the losses occurred to service users due to electronic financial accidents. They shall either provide reserves or purchase an insurance based on the standards established by Financial Supervisory Service. The Company provided reserves of W500 million as other legal reserves for the possible responsibility which may occur.
(16) Selling and Administrative Expenses 13 Details of selling and administrative expenses for the years ended March, 31, 2007 and 2006 are as follows: Salaries W 6,458,538 5,791,436 Provision for severance benefits 520,226 459,395 Employee welfare 1,137,043 1,024,543 Depreciation 268,712 215,708 Amortization 125,371 300,113 Travel 178,658 129,657 Repairs 7,227 22,831 Supplies 13,858 13,277 Communications 1,154,144 1,095,200 Taxes and dues 438,900 463,381 Electronic data processing 654,070 754,608 Commissions and fees 362,431 316,853 Rent 624,078 614,193 Entertainment 291,788 457,183 Insurance 53,868 100,786 Advertising 3,552 48,788 Conference 169,138 123,722 Utilities 16,895 25,197 Bad debts 46,610 15,757 Miscellaneous 483,331 405,296 W 13,008,438 12,377,924 (17) Added Value The components of selling and general administrative expenses which are necessary in calculating added value at are as follows: Salaries W 6,458,538 5,791,436 Provision for severance benefits 520,226 459,395 Employee welfare 1,137,043 1,024,543 Depreciation 268,712 215,708 Amortization 125,371 300,113 Taxes and dues 438,900 463,381 Rent 624,078 614,193 W 9,572,868 8,868,769
14 (18) Income Taxes The components of income taxes for the years ended are summarized as follows: Current W 3,787,728 2,997,155 Deferred (2,832) 16,288 W 3,784,896 3,013,443 The changes in cumulative temporary differences during 2006 and related deferred income taxes as of March 31, 2007 are as follows: Beginning Addition Deduction Ending Provision for severance benefits W 676,985 332,482 139,275 870,192 Accrued income (40,783) (233,462) (40,783) (233,462) Deposit for severance benefits (672,176) (337,291) (139,275) (870,192) Suspense accounts 27,720 29,150 27,720 29,150 Allowance expense 19,909 - - 19,909 Interest income (188,544) 17,812 (188,544) 17,812 (176,889) (191,309) (201,607) (166,591) Statutory tax rate 27.5% 27.5% Deferred income tax assets (liabilities), net W (48,644) (45,812)
15 (In thousands of Won, except earnings per share) (18) Income Taxes, Continued The changes in cumulative temporary differences during 2005 and related deferred income taxes as of March 31, 2006 are as follows: Beginning Addition Deduction Ending Provision for severance benefits W 574,915 220,410 118,340 676,985 Accrued income (86,950) (40,783) (86,950) (40,783) Deposit for severance benefits (574,915) (215,601) (118,340) (672,176) Suspense accounts 27,500 27,720 27,500 27,720 Allowance expense 19,909 - - 19,909 Interest income (78,118) (188,544) (78,118) (188,544) (117,659) (196,798) (137,568) (176,889) Statutory tax rate 27.5% 27.5% Deferred income tax assets (liabilities), net W (32,356) (48,644) The effective tax rates, after adjustments for certain differences between amounts reported for financial accounting and income tax purposes, were approximately 27.99 % and 29.04 % in 2006 and 2005, respectively. (19) Ordinary Income Per Share and Net Income Per Share Ordinary income per share and net income per share are calculated as follows: Net income W 9,737,217 7,363,526 Extraordinary items - - Income tax on extraordinary items - - Ordinary income W 9,737,217 7,363,526 Weighted average number of common shares outstanding during the year 2,500,000 2,500,000 Ordinary income per share in Won W 3,895 2,945 Net income per share in Won W 3,895 2,945
16 (20) Related Party Transactions Details of parent and subsidiary relationships as of March 31, 2007 are as follows: Parent Control relationship Samsung Securities Co., Ltd. Parent Significant transactions which occurred in the ordinary course of business with related companies of Samsung group during 2006 and 2005 and the related balances as of are as follows: 2006 General and Brokerage Interest administrative Accounts Accounts commissions income expenses receivable payable Parent: Samsung Securities Co., Ltd. W 252,795-32,275-6,467 Other: Samsung Life Insurance Co., Ltd. 26,308 23,628 96,055 64 14,526 Cheil Industries Inc. - - 48,173 - - Samsung Fire & Marine Insurance Co., Ltd. 12,224-50,643-113 Samsung SDS Co., Ltd. - - 1,291,097-55,524 imarket Korea Inc. - - 6,788-484 Samsung Networks Inc. - - 3,000 - - Samsung Card Co., Ltd. - - 87,002 - - Samsung Everland Co., Ltd. - - - 600,000 - Other affiliated companies within the Samsung Group - - 10,770 - - W 291,327 23,628 1,625,803 600,064 77,114 The Company has deposited W1,290,289 thousand and W672,176 thousand for the retirement pension and the retirement and severance insurance in Samsung Life Insurance, etc, a related company, as of March, 31, 2007 and 2006, respectively.
17 (20) Related Party Transactions, Continued 2005 General and Brokerage Interest administrative Accounts Accounts commissions income expenses receivable payable Parent: Samsung Securities Co., Ltd. W 433,509-41,463 700 6,238 Other: Samsung Life Insurance Co., Ltd. 28,148 21,082 110,300-15,436 Cheil Industries Inc. - - 26,269 - - Samsung Fire & Marine Insurance Co., Ltd. 8,880-69,699-314 Samsung SDS Co., Ltd. - - 822,736-70,656 imarket Korea Inc. - - 12,154-586 Samsung Networks Inc. - - 7,069-330 Samsung Card Co., Ltd. - - 12,765 - - Samsung Everland Co., Ltd. - - - 600,000 - Other affiliated companies within the Samsung Group - - 5,232 - - W 470,537 21,082 1,107,687 600,700 93,560
Internal Accounting Control System Review Report English translation of a Report Originally Issued in Korean To the President of : We have reviewed Report on the Operations of Internal Accounting Control System ( IACS ) of Samsung Futures Inc. (the Company ) as of March 31, 2007. In accordance with Article 2-2 of the Act on External Audit for Stock Companies (the External Audit Law ) of the Republic of Korea, the Company s management is responsible for assessing the design and operation of its IACS. Our responsibility is to review management s assessment and issue a report based on our review. We conducted our review in accordance with Article 2-3 of the External Audit Law. Our review included inquiries of management and employees, inspection of related documents and checking up on the operating status of the Company s IACS. We did not perform an audit of the Company s IACS and accordingly, we do not express an audit opinion. Based on our review, no material weakness in the design or operation of the Company s IACS under Article 2-2 of the External Audit Law as of March 31, 2007 has come to our attention. This report applies to the Company s IACS in existence as of March 31, 2007. We did not review the Company s IACS subsequent to March 31, 2007. This report has been prepared for Korean regulatory purposes, pursuant to the External Audit Law, and may not be appropriate for other purposes or for other users. As this report is based on Interim Guidelines on Auditors Review and Report on Management s Assessment of IACS, issued by the Korean Audit Standards Committee on March 29, 2005, it applies only from that date until the date the IACS Framework and IACS Review Standards become effective. A review performed based on the final standards may have different results and accordingly, the content of our report may be different. KPMG Samjong Accounting Corp. Seoul, Korea April 17, 2007 Notice to Readers This report is annexed in relation to the audit of the financial statements as of March 31, 2007 and the review of internal accounting control system pursuant to Article 2-3 of the Act on External Audit for Stock Companies of the Republic of Korea.