Financial Statements June 30, 2016 and 2015 (With Independent Auditors Report Thereon)
Contents Page Independent Auditors Report 1 Statements of Financial Position 3 Statements of Income 4 Statements of Cash Flows 6 Notes to the Financial Statements 7
Independent Auditors Report Based on a report originally issued in Korean The Board of Directors DAEGU INTERNATIONAL SCHOOL We have audited accompanying statements of financial position of DAEGU INTERNATIONAL SCHOOL ( DIS ) as of June 30, 2016 and 2015 and related statements of income and cash flows for each years then ended. Management is responsible for the preparation and fair presentation of these financial statements, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Accounting Standards for Foreign Education Institute in the Republic of Korea, and for internal controls as management determines, which are necessary to enable the preparation of financial statements that are free from material misstatement due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Korean Standards on Auditing. Those standards require that we comply with ethical requirements, plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1
Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of DIS as of June 30, 2016 and 2015 and the results of its operations, its cash flows for each years then ended in accordance with Accounting Standards for Foreign Education Institute and Generally Accepted Accounting Principles in the Republic of Korea. Ankyung Accounting Corp. Daegu, Korea September 27, 2016 This report is effective as of September 27, 2016, 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 the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any. 2
Statements of Financial Position As of June 30, 2016 and 2015 (In won) Note 2016 2015 Assets: Cash and cash equivalents 4,13 W 3,042,675,973 2,354,838,658 Short-term financial instruments 4,800,000,000 4,900,000,000 Accrued income 5,661,918 9,074,055 Short-term loans - 563,000 Prepaid expenses 2,771,268 2,325,951 Income tax refund receivables 9,515,250 15,113,680 Total current assets 7,860,624,409 7,281,915,344 Long-term financial instruments - 500,000,000 Leasehold deposits 7 355,000,000 345,000,000 Total investment & other assets 355,000,000 845,000,000 Property, plant and equipment 5 545,124,295 738,050,353 Structures 255,285,000 255,285,000 Accumulated depreciation - Structures (55,442,880) (42,541,098) Vehicles 54,173,020 54,173,020 Accumulated depreciation - Vehicles (52,895,450) (42,539,206) Equipment 2,512,267,090 2,425,644,062 Accumulated depreciation - Equipment (2,168,262,485) (1,911,971,425) Intangible assets 6 10,449,304 18,302,273 Software 10,449,304 18,302,273 Total non-current assets 555,573,599 756,352,626 Total assets W 8,771,198,008 8,883,267,970 Liabilities: Withholdings W 95,446,363 95,131,910 Advances from customers 8 4,916,259,189 4,580,550,000 Accrued expenses 16 187,046,528 208,743,288 Current portion long-term borrowings 1,9,13,16 350,927,523 561,984,452 Total current liabilities 5,549,679,603 5,446,409,650 Long-term borrowings 1,9,13,16 51,448,150 385,513,723 Provision for severance benefits 12 667,233,219 486,545,633 Leasehold deposits received 71,700,000 73,500,000 Total non-current liabilities 790,381,369 945,559,356 Total liabilities 6,340,060,972 6,391,969,006 Stockholders equity: Retained earnings 10 2,431,137,036 2,491,298,964 Total stockholders equity 2,431,137,036 2,491,298,964 Total liabilities and stockholders equity W 8,771,198,008 8,883,267,970 See accompanying notes to the financial statements 3
Statements of Income (In won) Note 2016 2015 Operating Revenue: Tuition & fee income Tuition income W 7,148,491,386 6,007,457,883 Donations & government grants revenue Donations 76,000,000 4,027,200 Other education revenue Other tuition income - 39,800,000 Application fee income 21,000,000 15,200,000 Dorm income 11 164,830,560 210,229,500 School bus operation income 11 49,830,000 18,700,000 Other education revenue 8,400,000 115,400,000 Others Interest income 64,576,129 103,483,074 Gains on foreign currency transaction - 24,635 Gains on foreign currency translation 13 9,293,613 28,536,911 Miscellaneous revenue 27,306,008 16,559,662 Total operating Revenue W 7,569,727,696 6,559,418,865 Operating Expense: Educational activity expenses Salaries of teachers Salaries expenses 14 W 2,618,425,360 2,219,714,341 Bonuses 14 29,250,000 - Miscellaneous Benefits 14 35,834,786 - Legally required labor cost 14 344,348,674 - Miscellaneous salaries 14 71,969,800 6,531,580 Accrual for retirement and severance benefits 12,14 191,297,540 91,090,640 Student expenses Scholarship expenses 33,548,500 - Exemption of tuition fee 1,303,992,500 - Student support expenses 132,288,822 - Dormitory expenses 11 15,331,200 - School bus operation expenses 11 72,270,000 - Meal expenses 11 51,748,700 70,107,680 Other student expenses - 104,254,630 Total educational activity expenses 4,900,305,882 2,491,698,871 4
Statements of Income, Continued (In won) Note 2016 2015 Support activity expenses Salaries of others Salaries expenses 14 W 543,925,100 511,757,314 Bonuses 14 8,250,000 - Miscellaneous Benefits 14 33,503,438 - Legally required labor cost 14 43,557,958 - Miscellaneous salaries 300,000 - Accrual for retirement and severance benefits 12,14 119,849,035 50,719,230 Facility expenses Maintenance expenses for Buildings 61,132,050 - Maintenance expenses for Landscape 2,250,000 - Insurance premium 1,836,313 14,933,275 Lease & Rental expenses 14 196,683,100 189,088,706 Depreciation 5,14 279,549,086 495,084,243 Amortization 6,14 7,852,969 16,916,595 Other facility expenses 11,903,700 81,021,559 Administrative expenses Travel expenses 73,423,065 120,521,905 Vehicles maintenance 3,234,002 4,921,891 Supplies expenses 208,557,151 297,310,809 Publication expenses 31,728,163 36,908,008 Utility expenses 130,498,811 - Communication expenses 22,446,687 19,836,242 Taxes and dues 14 44,808,440 182,723,462 Service fees 16 399,660,936 503,118,421 Program fees 16 119,411,353 105,139,536 Other operating expenses Employee benefits 14 79,584,131 398,579,017 Training expenses 1,444,000 46,503,534 Advertising expenses 40,924,719 34,715,866 Conference expenses 8,827,710 36,811,151 Other operating expenses 211,417,633 - Other expenses Losses on foreign currency translation 13 16,861,950 28,522,681 Losses on foreign currency transaction 1,537 1,592,366 Interest expense 16 26,151,621 51,464,703 Donations - 1,218,229 Miscellaneous losses 9,084 3,094,210 Total support activity expenses 2,729,583,742 3,232,502,953 Total operating expense W 7,629,889,624 5,724,201,824 Net income (loss) 10 W (60,161,928) 835,217,041 See accompanying notes to the financial statements. 5
Statements of Cash Flows (In won) 2016 2015 Cash flows from educational activities Net income (loss) W (60,161,928) 835,217,041 Adjustments for: Depreciation 279,549,086 495,084,243 Amortization 7,852,969 16,916,595 Accrual for retirement and severance benefits 311,146,575 141,809,870 Losses (gains) on foreign currency translation 16,861,950 28,522,681 Losses (gains) on foreign currency transaction - 1,567,731 615,410,580 683,901,120 Changes in assets and liabilities: Accrued income 3,412,137 4,495,809 Short-term loans - (563,000) Advance payments (445,317) (865,045) Income tax refund receivables 5,598,430 (2,148,390) Withholdings 314,453 67,616,892 Advances from customers 335,709,189 658,704,060 Accrued expenses (21,696,760) 15,581,891 Leasehold deposits (1,800,000) - Payments of retirement and severance benefits (130,458,989) (61,567,360) 190,633,143 681,254,857 Net cash provided by educational activities 745,881,795 2,200,373,018 Cash flows from investing activities Proceeds from sale of short-term financial instruments 600,000,000 1,673,299,798 Decrease of short-term loans 563,000 - Increase of leasehold deposits received - 11,400,000 Acquisition of short-term financial instruments - (2,973,299,798) Acquisition of long-term financial instruments - (500,000,000) Acquisition of property, plant and equipment (86,623,028) (236,932,744) Acquisition of tangible assets - (1,035,000) Increase of leasehold deposits (10,000,000) (35,000,000) Decrease of leasehold deposits received - - Net cash used in investing activities 503,939,972 (2,061,567,744) Cash flows from financing activities Repayment of current portion long-term borrowings (561,984,452) (447,199,959) Repayment of long-term borrowings - - Net cash used in financing activities (561,984,452) (447,199,959) Net increase (decrease) in cash and cash equivalents 687,837,315 (308,394,685) Cash and cash equivalents at beginning of year 2,354,838,658 2,663,233,343 Cash and cash equivalents at end of year W 3,042,675,973 2,354,838,658 See accompanying notes to the financial statements. 6
Notes to the Financial Statements 1. Reporting Entity DAEGU INTERNATIONAL SCHOOL ( DIS ) was established in Dong-gu, Daegu in 2010 according to the approval of the Ministry of Education in accordance with the Special Act on the establishment and operation of foreign educational institutions in the Free Economic Zone and Jeju Free International City and DIS is a non-profit foreign educational institution. DIS manages 13 grades from kindergarten to high school and the number of domestic students which can be recruited is less than 30% of the full quota. DIS is governed by a board of directors composed of members appointed by Lee Academy board of trustees excluding two directors from Daegu metropolitan city government and Daegu office of education. In addition, the board of directors consists of at least 8 members and not to exceed 10. DIS received an investment of $2,000,000 from Lee Academy and other investors at the time of its establishment, and the investment is repaid annually in accordance with the terms of the agreement. The amount of investment outstanding is classified as the account of (current portion) long-term borrowings as of June 30, 2016 (See Note 9). 2. Basis of Preparation (1) Statement of compliance DIS has decided to introduce the Accounting Standards for Foreign Education Institute in the Republic of Korea since the annual reporting period beginning after July 1, 2014. Except the matters presented according to Accounting Standards for Foreign Education Institute above, accompanying financial statements are prepared in accordance with accounting principles and practices generally accepted in the Republic of Korea. (2) Basis of measurement The financial statements have been prepared on the historical cost basis. (3) Use of estimates and judgments The preparation of the financial statements in conformity with Accounting Standards for Foreign Education Institute and Generally Accepted Accounting Principles in the Republic of Korea requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. 7
3. Significant Accounting Policies The significant accounting policies applied by DIS in preparation of its financial statements are included below. (1) Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits, and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. DIS considers investments with maturities of three months or less on acquisition date to be cash and cash equivalents. (2) Financial instruments DIS recognizes financial assets or financial liabilities in the statements of financial position when DIS becomes the counterpart of the contract. Upon initial recognition, non-derivative financial instruments (other than financial instruments at fair value through profit or loss) are measured at their fair value; plus (less) transaction costs that are directly attributable to acquisition of a financial asset or issuance of a financial instrument. Subsequently, financial assets or financial liabilities are measured at amortized cost. When DIS transfers financial assets, except for investments in securities as a transferor, DIS derecognizes the asset when the following conditions are met: - DIS does not have rights to ownership of the transferred assets; - DIS does not have effective control over the transferred assets; and - the transferee has the right to sell the assets. If the transfer does not meet the above conditions, it is accounted for as a secured borrowing transaction. (3) Property, plant and equipment Property, plant and equipment are initially measured at cost. The cost of property, plant and equipment includes the expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. Assets acquired through investment in kind of donation are recorded at their fair value upon acquisition. For assets acquired in exchange for a non-monetary asset, the fair value of the asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident. 8
3. Significant Accounting Policies, Continued Significant expenditures or improvements extending the useful life of assets are capitalized. maintenance and repairs are charged to expense as incurred. Normal Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Useful lives (years) Structures 20 Vehicles 5 Equipment 5 Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized in profit or loss. (4) Intangible assets Cost of intangible assets includes expenditures arising directly from the construction or acquisition of the asset and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Intangible assets, which consist of software, are amortized using the straight-line method over five years. The expenditures that occur subsequent to acquisition of intangible assets are capitalized when it is probable the expenditures will generate future economic benefits and the amount can be measured reliably. If the criteria are not met, the expenditures are recognized in profit or loss. (5) Revenue recognition DIS s revenue categories consist of services and commissions. Services Revenue from services rendered is recognized in the statement of income based on the percentage of completion when all of the following conditions are met: - the amount of revenue can be measured reliably; - it is probable that the economic benefits associated with the transaction will flow into the entity; - the stage of completion of the transaction at the end of the reporting period can be measured reliably; and - the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. 9
3. Significant Accounting Policies, Continued When the percentage of completion method is applied, DIS uses lecture period for work performed to date to the estimated total contract period to measure the amount of work performed. Commissions When DIS acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is the net amount of commission made by DIS. (6) Employee Benefits 1 Expenses related to accumulating compensated absences The expenses and liabilities related to accumulating compensated absences are recognized in the reporting period in which the employees render the related services. 2 Retirement and severance benefits Employees who have been with DIS for more than one year are entitled to lump-sum payments based on salary rates and length of service at the time they leave DIS. DIS's estimated liability under the plan, which would be payable if all employees left at the end of the reporting period, is accrued in the accompanying statements of financial position. (7) Foreign currency transactions 1 Functional and presentation currency These financial statements are presented in Korean won, which is DIS s functional currency and the currency of the primary economic environment in which DIS operates. 2 Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of DIS at exchange rates at the dates of the transactions. Non-monetary items that are measured in terms of historical cost in foreign currency are retranslated to the exchange rate at the date of the transaction. When a gain or loss on a non-monetary item is recognized in profit or loss, any exchange component of that gain or loss is recognized in profit or loss. (8) Reclassification of accounts on financial statements as of June, 2015 DIS has reclassified some accounts of income statements in the prior year according to classification criteria in the current year to improve comparability. By the reclassification, the amount of service fees in the prior year has decreased 105,139,536 won, the amount of program fees has increased 105,139,536 won. The reclassification affects neither equity amount nor net income reported in the prior year. 10
4. Cash and Cash Equivalents Cash and cash equivalents as of June 30, 2016 and 2015 are summarized as follows: (In won) 2016 2015 Cash W 768,076 1,225,296 Savings account, etc. 3,041,907,897 2,353,613,362 W 3,042,675,973 2,354,838,658 5. Property, Plant and Equipment Property, plant and equipment as of June 30, 2016 and 2015 are summarized as follows: (In won) 2016 2015 Property, plant and equipment, at cost W 2,821,725,110 2,735,102,082 Accumulated depreciation (2,276,600,815) (1,997,051,729) Property, plant and equipment, net W 545,124,295 738,050,353 (a) Changes in property, plant and equipment for the year ended June 30, 2016 are as follows: 2016 Book value Book value as of as of (In won) July, 1 Acquisitions Depreciation June,30 Structures W 212,743,902 - (12,901,782) 199,842,120 Vehicles 11,633,814 - (10,356,244) 1,277,570 Equipment 513,672,637 86,623,028 (256,291,060) 344,004,605 W 738,050,353 86,623,028 (279,549,086) 545,124,295 11
5. Property, Plant and Equipment, Continued (b) Changes in property, plant and equipment for the year ended June 30, 2015 are as follows: 2015 Book value Book value as of as of (In won) July, 1 Acquisitions Depreciation June,30 Structures W 203,830,894 20,752,000 (11,838,992) 212,743,902 Vehicles 22,468,418 - (10,834,604) 11,633,814 Equipment 769,902,540 216,180,744 (472,410,647) 513,672,637 W 996,201,852 236,932,744 (495,084,243) 738,050,353 (c) Insurance As of June 30, 2016, DIS carries general insurance for vehicles. 6. Intangible Assets Intangible assets, which consist of software, as of June 30, 2016 and 2015 are summarized as follows: (In won) 2016 2015 Net balance at beginning of year W 18,302,273 34,183,868 Additions - 1,035,000 Amortization (7,852,969) (16,916,595) Net balance at end of year W 10,449,304 18,302,273 7. Guarantee Deposits Guarantee deposits as of June 30, 2016 and 2015 are summarized as follows: (In won) 2016 2015 Apartment leasehold deposits W 355,000,000 345,000,000 W 355,000,000 345,000,000 12
8. Advances from Customers Advances from customers as of June 30, 2016 and 2015 are summarized as follows: (In won) 2016 2015 Tuition W 4,835,691,875 4,521,810,000 Development fund 26,000,000 9,000,000 Registration fee 13,000,000 4,500,000 Application fee 5,167,314 1,800,000 Dormitory charge 36,400,000 39,040,000 School bus fee - 4,400,000 W 4,916,259,189 4,580,550,000 9. Long-term Borrowings Long-term borrowings as of June 30, 2016 and 2015 are summarized as follows: (In won) Lender Annual interest rate 2016 2015 Local currency borrowings Key management personnel 5.00% W 266,595,029 655,225,193 Foreign currency borrowings Lee Academy and others 5.00% 135,780,644 292,272,982 Less: current portion of long-term debt (350,927,523) (561,984,452) W 51,448,150 385,513,723 The borrowings will be repaid with up to 50% of the profits for 5 years from the date of the school opening (August 23, 2010). Subsequently, the borrowings will be repaid from the profit for the year in accordance with the agreement with lender(s). 13
10. Retained Earnings Statements of appropriation of retained earnings for the years ended June 30, 2016 and 2015 are as follows: Date of Appropriation for 2016 : August 30, 2016 Date of Disposition for 2015 : August 31, 2015 (In won) 2016 2015 Unappropriated retained earnings Balance at beginning of year W 2,491,298,964 1,656,081,923 Cumulative effects, change in accounting policy - - Net income (60,161,928) 835,217,041 Balance at end of year before appropriation 2,431,137,036 2,491,298,964 Appropriation of retained earnings - - Unappropriated retained earnings to be carried over to subsequent year W 2,431,137,036 2,491,298,964 11. Other education revenue and student expenses Other education revenue and student expenses for the years ended June 30, 2016 and 2015 are as follows: (In won) Other education revenue 2016 2015 Student Other education expenses revenue Student expenses Dormitory W 164,830,560 15,331,200 210,229,500 - School bus 49,830,000 72,270,000 18,700,000 - Meal - 51,748,700-70,107,680 W 214,660,560 139,349,900 228,929,500 70,107,680 14
12. Retirement and Severance Benefits Changes in retirement and severance benefits for the years ended June 30, 2016 and 2015 are as follows: (In won) 2016 2015 Provision for retirement and severance benefits at beginning of year W 486,545,633 406,303,123 Accrual for retirement and severance benefits (130,458,989) (61,567,360) Payments 311,146,575 141,809,870 Provision for retirement and severance benefits at end of year W 667,233,219 486,545,633 13. Assets and Liabilities Denominated in Foreign Currency Assets and liabilities denominated in foreign currency as of June 30, 2016 are summarized as follows: (In won) 2016 Foreign currency Exchange rate Translation into won Cash and cash equivalents $ 324,462.29 W 1,164.70 W 377,901,229 Total foreign currency denominated assets 324,462.29 1,164.70 377,901,229 Long-term borrowings and others 116,579.93 1,164.70 135,780,644 Total foreign currency denominated liabilities $ 116,579.93 W 1,164.70 W 135,780,644 DIS recognized gain (loss) on foreign currency translation amounting to W9,293,613 (W16,861,950) as other income in relation to the above foreign currency translations. 15
13. Assets and Liabilities Denominated in Foreign Currency, Continued Assets and liabilities denominated in foreign currency as of June 30, 2015 are summarized as follows: (In won) 2015 Foreign currency Exchange rate Translation into won Cash and cash equivalents $ 211,522.79 W 1,124.10 W 237,772,768 Total foreign currency denominated assets 211,522.79 1,124.10 237,772,768 Long-term borrowings and others 260,006.21 1,124.10 292,272,982 Total foreign currency denominated liabilities $ 260,006.21 W 1,124.10 W 292,272,982 DIS recognized gain (loss) on foreign currency translation amounting to W28,536,911 (W28,522,681) as other income in relation to the above foreign currency translations. 14. Value Added Information Details of accounts included in the computation of value added for the years ended June 30, 2016 and 2015 are as follows: (In won) 2016 2015 Salaries and wages W 3,729,365,116 2,738,003,235 Accrual for retirement and severance benefits 311,146,575 141,809,870 Other employee benefits 79,584,131 398,579,017 Rent 196,683,100 189,088,706 Depreciation 287,402,055 512,000,838 Taxes and dues 44,808,440 182,723,462 W 4,648,989,417 4,124,876,231 16
15. Guarantees Guarantees provided by third parties on behalf of the DIS as of June 30, 2016 are summarized as follows: (In won) 2016 Guarantor Lender Type of Guarantees Guaranteed amount Seoul Guarantee Insurance Ministry of Education Performance guarantee W 3,163,231,000 16. Transactions and Balances with Related Parties (a) Account balances with related parties as of June 30, 2016 and 2015 are as follows: (In won) Name Accounts 2016 2015 Key management Borrowings personnel W 266,595,029 655,225,193 Accrued expenses 17,162,815 34,730,202 Lee Academy and others Borrowings 135,780,644 292,272,982 Accrued expenses 8,988,806 16,734,501 Borrowings Total W 402,375,673 947,498,175 Accrued expenses Total 26,151,621 51,464,703 The amount of W561,984,452 of borrowings was redeemed for the period ended June 30, 2016 (2015 : W447,199,959). Meanwhile, in the 2016, DIS paid accrued expenses of W51,464,703 recorded as of June 30, 2015. In addition, borrowings for Lee Academy are repaid by confirmation of the Chairman of the Board and principal of Lee Academy, Bruce Lindberg in August 9, 2012 to FLSM 17
16. Transactions and Balances with Related Parties, Continued (b) Related party transactions as of June 30, 2016 and 2015 are as follows: (In won) Name Accounts 2016 2015 Key management personnel Interest expense W 17,162,815 34,730,202 Lee Academy and others Interest expense 8,988,806 16,734,501 Lee Academy Program fees 119,411,353 105,139,536 Service fees (*) 12,229,350 9,819,681 FLSM Other operation expenses 205,123,259 - W 362,915,583 166,423,920 (*) Lee Academy supports educational courses, programs and evaluation methods. Regarding these supports, DIS pays USD 100,000 yearly as program fees. And also DIS pays USD 500 per student regarding to graduation. 18