EX-99.3 4 c72866exv99w3.htm EXHIBIT 99.3 Filed by Bowne Pure Compliance
 

Exhibit 99.3
2007 Annual Business Report
Table of Contents
1.  
Business Overview
  (1)  
Business Results and Financial Statements for the Past Three Fiscal Years (FY2005 — FY2007)
2.  
Company Overview
  (1)  
Registered Purpose of the Company
 
  (2)  
Description of Primary Business
 
  (3)  
Problems Confronting the Company
 
  (4)  
Business Offices and Game Development Facilities
 
  (5)  
Stock
 
  (6)  
Debenture
 
  (7)  
Major Shareholders
 
  (8)  
Investment in other Companies
 
  (9)  
Directors Holding Concurrent Positions
 
  (10)  
Material Transactions with Related Parties
 
  (11)  
Significant Creditors
 
  (12)  
Employees
 
  (13)  
Trustees and Auditors
 
  (14)  
Material Events after the end of FY 2007
3.  
Financial Statements as of and for the fiscal years ended December 31, 2007 and 2006
  (1)  
Balance Sheets
 
  (2)  
Income Statements
 
  (3)  
Statements of Disposition of Accumulated Deficit

 

 

 

1.  
Business Overview
  (1)  
Business Results and Financial Statements for the Past Three Fiscal Years (FY2005 — FY2007)
                         
[Unit: KRW]  
Category   FY 2007     FY 2006     FY 2005  
Current Assets
     61,201,545,490       83,876,073,744       99,200,415,135  
• Quick Assets
     61,156,844,543       83,858,591,722       99,179,458,227  
• Inventories
     44,700,947       17,482,022       20,956,908  
Fixed Assets
     34,147,146,665       37,207,315,211       44,382,247,932  
• Investment Asset
     14,444,810,113       20,036,799,526       27,180,534,556  
• Tangible Asset
     4,246,307,112       5,219,076,055       7,856,326,936  
• Intangible Asset
     12,310,767,578       7,866,351,440       9,345,386,440  
Total Assets
     95,348,692,155       121,083,388,955       143,582,663,067  
Current Liabilities
     8,083,683,838       10,997,883,653       18,240,688,002  
Non-Current Liabilities
     10,471,639,071       6,235,588,685       3,370,855,505  
Total Liabilities
     18,555,322,909       17,233,472,338       21,611,543,507  
Common Stock
     3,474,450,000       3,474,450,000       3,474,450,000  
Additional paid-in capital
     73,851,580,153       73,255,072,627       73,255,072,627  
Retained earnings (Accumulated Deficit)
     (2,076,674,908 )     25,482,297,977       43,860,442,320  
Capital Adjustment
     1,597,604,250       2,016,181,782       1,381,154,613  
Total Shareholders’ Equity
     76,793,369,246       103,849,916,617       121,971,119,560  
Revenues
     33,685,656,151       34,687,370,367       49,259,407,445  
Operating Income (Loss)
     (10,020,381,637 )     (9,913,086,777 )     (1,881,503,342 )
Income (Loss) before income tax
     (24,703,747,165 )     (7,188,641,667 )     (4,092,700,710 )
Net Income (Loss)
     (27,558,972,885 )     (18,378,144,343 )     (3,451,125,174 )
2.  
Company Overview
  (1)  
Registered Purpose of the Company
  1)  
Software Consulting, development and publishing
 
  2)  
Software, CD development and sales
 
  3)  
Development of telecommunication related software
 
  4)  
Making, development, publishing, sales and consulting of digital contents including game software
 
  5)  
Online network gaming service
 
  6)  
Software development regarding applicator package
 
  7)  
Computer program development and sales
 
  8)  
Software Export-Import
 
  9)  
E-commerce
 
  10)  
Character business
 
  11)  
Animation business
 
  12)  
Leasing business
 
  13)  
Restaurant business
 
  14)  
Media related business
 
  15)  
Printing & publishing business
 
  16)  
Record & video making and distribution
 
  17)  
All business related to above items 1) — 16)

 

 

 

  (2)  
Description of Primary Business
The Company is the developer of an MMORPG, Ragnarok OnlineTM, which has been commercialized in 21 countries since August 2002 and distributed in 22 countries worldwide, including Korea, Japan, Taiwan, Thailand, US and Europe.
In 2007, the Company released its new game line-up by commercializing two casual games, Emil Chronicle Online and Pucca Racing, and one MMORPG, Requiem. The Company also commenced open beta testing of the MMORPG Ragnarok Online2TM and two other casual games, W Baseball and Bodycheck Online. The Company has already entered into license agreements for Ragnarok Online 2TM for ten countries.
The Company’s wholly-owned subsidiaries are Gravity Interactive, Inc. in the U.S., Gravity Entertainment Corp. in Japan, Gravity EU SASU in France and Gravity Middle East & Africa FZ-LLC in Dubai. The Company also owns 99.9% of Gravity RUS Co, Ltd. in Russia. In 2007, Gravity Interactive established an online game development studio, L5 Games Inc., in San Mateo, California.
  (3)  
Problems Confronting the Company
Since the Company operates in a highly competitive industry, the Company is working to enhance its development capacity and maintain and increase its market share in overseas markets. The Company is confronting decreased revenues and decreased number of users of Ragnarok OnlineTM, its flagship product. To address these declines, the Company has provided continual updates of the game and has introduced the micro-transaction model, which has already been implemented in several overseas markets.
  (4)  
Business Offices and Game Development Facilities
     
Classification   Location
Head Office
  Nuritkum Square Business Tower 15F, 1605 Sangam-Dong, Mapo-Gu, Seoul 121-270 Korea
Game Development Facilities
  Nuritkum Square R&D Tower 15F, 1605 Sangam-Dong, Mapo-Gu, Seoul 121-270 Korea
  (5)  
Stock
         
 
     Total number of shares
         
[As of December 31, 2007]
Total number of shares authorized   Total number of shares issued   Total number of shares unissued
40,000,000 shares   6,948,900 shares   33,051,100 shares
         
 
  ‚   Type of Stock issued
                 
[Par value per share: KRW 500]   [As of December 31, 2007]
Type   No. of shares   Total face value   %   Remarks
Registered common stock   6,948,900 shares   KRW 3,474,450,000   100%    
  (6)  
Debenture
                         
[As of December 31, 2007]
Type   Date of issuance   Issuing Amount   Interest Rate   Balance from issuance   Redemption date   Remarks
                         
—   —   —   —   —   —   —
     
*  
Company currently has no debentures and has no plan to have debentures in the future.
  (7)  
Major Shareholders
                                 
[As of December 31, 2007]  
                    Transaction with        
Shareholder   Shares owned     %     the Company     Remarks  
Son Asset Management, LLC
     3,640,619       52.39       —       —  
Ramius Capital Group, L.L.C.
     683,895       9.84       —       —  
Moon Capital Management LP
     591,937       8.52       —       —  
LaGrange Capital Administration, L.L.C.
     483,193       6.95                  
Government of Singapore Investment Corporation Pte Ltd.
     321,733       4.63       —       —  
Others
     1,227,523       17.67       —       —  
Total
     6,948,900       100.00       —       —  

 

 

 

  (8)  
Investment in Other Companies
                         
Subsidiaries   Relationship with Company
Name   Location   Common Stock   Main business   Shares
owned		   %   Transaction
relationship
Gravity Interactive, Inc.1)
  California, US   USD 5,040,000   Gaming Service   100,000   100.00%   Subsidiary
Gravity Entertainment Corp   Tokyo, Japan   JPY 50,000,000   Animation making/service   1,000   100.00%   Subsidiary
Gravity EU SASU   Paris, France   EUR 1,800,000   Gaming Service   18,000   100.00%   Subsidiary
Gravity Middle East & Africa FZ-LLC2)   Dubai, United Arab Emirates   AED 7,000,000   Gaming Service   7,000   100.00%   Subsidiary
Gravity RUS Co., Ltd.3)   Moscow, Russia   RUB 63,809,220   Gaming Service   N/A   99.99%   Subsidiary
NeoCyon, Inc.   Seoul, Korea   KRW 964,005,000   Mobile game development   185,301   96.11%   Subsidiary
     
1)  
On November 30, 2007, Gravity Interactive, Inc. increased its capital by USD 5,000,000.
 
2)  
On May 7, 2007, the Company founded a wholly-owned subsidiary in Dubai, United Arab Emirates.
 
3)  
On December 12, 2007, the Company sold all of its shares in Gravity CIS Co., Ltd., its then existing Russia-based subsidiary, to Gravity RUS Co., Ltd.
  (9)  
Directors Holding Concurrent Positions
                                         
Director   Company      
Name   Position   Name   Position   Responsibility   Remarks
                                         
Il Young Ryu
   Representative
Director		   Gravity Co., Ltd.   CEO   Overall management        
                                 
    Gravity Interactive, Inc.   CEO   Overall management        
                                 
    Gravity Entertainment Corp.   CEO   Overall management        
                                 
    L5 Games Inc.   Director           A subsidiary of Gravity Interactive, Inc.
                                 
Seung Taik Baik
   Executive
Director		   Gravity Co., Ltd.   Executive Director   COO        
                                 
    NeoCyon, Inc.   CEO   Overall management        
                                 
    Gravity EU SASU   CEO   Overall management        
                                 
    Gravity Middle East &   CEO   Overall management        
    Africa FZ-LLC                        
                                 
    Gravity Interactive, Inc.   Director                
                                 
    Gravity Entertainment Corp.   Director                

 

 

 

  (10)  
Material Transactions with Related Parties
                                                                 
[Unit: 1,000 KRW]  
    Revenue     Purchase Amount     Credit     Liabilities  
Related persons, companies   FY2007     FY2006     FY2007     FY2006     FY2007     FY2006     FY2007     FY2006  
Gravity Interactive, Inc.
     342,211       405,997       —       —       28,614       23,730       —       1,979  
Gravity Entertainment Corp.
     1,825       —       —       —       —       —       506,535       501,977  
Gravity CIS Co, Ltd.
     376,549       61,887       —       —       2,081,448       1,415,489       194,015       208,045  
Gravity EU SASU
     93,234       —       —       —       48,620       —       54,974       30,930  
Gravity Middle East & Africa FZ-LLC
     —       —       —       —       —       —       20,012       —  
Gravity RUS Co., Ltd.
     20720       —       —       —       20,720       —       —       —  
TriggerSoft Corp.1)
     144,382       245,874       172,026       298,004       —       2,135,595       —       110,083  
NEOCYON, Inc.
     878,324       47,038       742,961       12,592       209,929       57,038       451,473       —  
 
                                                
Total
     1,857,245       760,796       914,987       310,596       2,389,331       3,631,852       1,227,009       853,014  
 
                                                
     
1)  
The liquidations of TriggerSoft Corp. was completed on October 10, 2007.
  (11)  
Significant Creditors
The Company had no significant creditors as of the end of FY 2007.
  (12)  
Employees
                 
[As of December 31, 2007]
Category   Directors & Officers   Finance & Marketing   Developers   Total
Employees
  6   43   462   511
  (13)  
Trustees and Auditors
                     
                Transaction    
Permanent/Non               with the    
permanent   Name   Position   Main work   Company   Remarks
Permanent   Il Young Ryu   CEO   CEO   —    
Permanent   Seung Taik Baik   Executive Director   COO   —    
Permanent   William Woojae Hahn   Independent Director   Member of audit committee   —    
Permanent   Jungil Lee   Independent Director   Member of audit committee   —    
Permanent   Kwangsuk Lee   Independent Director   Member of audit committee   —    
  (14)  
Material Events after the end of FY 2007
N/A
3.  
Financial statements as of and for the fiscal year ended December 31, 2007 and 2006
  (1)  
Balance Sheets
FY 2007: as of December 31, 2007
FY 2006: as of December 31, 2006
                                 
[Unit: KRW]  
    FY 2007     FY 2006  
Items   Amount     Amount  
Assets
                                
Current Assets
             61,201,545,490               83,876,073,744  
Quick assets
             61,156,844,543               83,858,591,722  
Cash and cash equivalents
     45,791,724,755               31,872,477,492          
Short-term financial instruments
     6,539,121,400               45,700,000,000          
Accounts receivable
     4,078,103,938               1,668,264,953          
Allowance for doubtful accounts
     (139,316,072 )             (107,706,390 )        
Short-term loans
     63,333,360               38,055,620          

 

 

 

                                 
[Unit: KRW]  
    FY 2007     FY 2006  
Items   Amount     Amount  
Other accounts receivable
     362,735,519               1,264,378,260          
Allowance for doubtful accounts
     (19,020,883 )             (14,703,425 )        
Accrued income
     250,093,980               487,777,404          
Advance payments
     2,066,907,367               893,309,137          
Prepaid expenses
     388,056,006               401,787,204          
Prepaid income taxes
     1,330,561,516               1,215,752,829          
Refund of income taxes receivable
     444,543,657               439,198,638          
Inventories
             44,700,947               17,482,022  
Inventory-resale
     44,700,947               17,482,022          
Non-current Assets
             34,147,146,665               37,207,315,211  
Investment assets
             14,444,810,113               20,036,799,526  
Equity method investments
     12,526,527,337               8,326,501,493          
Available-for-sale securities
     677,684,728               10,753,372,227          
Long-term loans
     1,955,566,563               3,412,733,160          
Allowance for doubtful accounts
     (714,968,515 )             (2,505,807,354 )        
Other investments
     —               50,000,000          
Tangible assets
             4,246,307,112               5,219,076,055  
Computer and equipment
     11,061,811,704               9,619,134,538          
Accumulated depreciation
     (7,303,245,059 )             (5,427,891,950 )        
Vehicles
     195,420,688               317,872,298          
Accumulated depreciation
     (131,469,314 )             (158,368,148 )        
Furniture and fixtures
     864,330,638               891,383,918          
Accumulated depreciation
     (451,399,865 )             (267,479,600 )        
Leasehold improvements
     614,600,000               509,800,000          
Accumulated depreciation
     (603,741,680 )             (265,375,001 )        
Intangible assets
             12,310,767,578               7,866,351,440  
Capitalized R&D cost, net
     10,545,366,890               6,180,938,065          
Software
     1,682,534,768               1,577,441,742          
Other intangible assets, net
     82,865,920               107,971,633          
Other non-current assets
             3,145,261,862               4,085,088,190  
Leasehold deposits
     2,177,855,000               2,639,355,000          
Long-term prepaid expenses
     41,373,672               —          
Other non-current assets
     926,033,190               1,445,733,190          
Total assets
             95,348,692,155               121,083,388,955  
Liabilities
                                
Current liabilities
             8,083,683,838               10,997,883,653  
Accounts payable
     4,422,898,556               4,804,104,460          
Advances received
     31,172,200               48,378,514          
Withholdings
     211,075,178               154,444,034          
Leasehold deposit received
     40,920,000               65,000,000          
Deferred income
     3,134,229,047               5,753,473,567          
Income tax payable
     233,388,857               162,483,078          
Deposits received
     10,000,000               10,000,000          
Non-current liabilities
             10,471,639,071               6,235,588,685  
Long-term deferred income
     10,147,864,921               6,111,419,855          
Accrued severance benefits
     224,774,150               124,168,830          
Asset retirement obligation
     99,000,000               —          
Total liabilities
             18,555,322,909               17,233,472,338  
Shareholders’ equity
                                
Common stock
             3,474,450,000               3,474,450,000  
Common stock
     3,474,450,000               3,474,450,000          
Capital surplus
             73,851,580,153               73,255,072,627  
Additional paid-in capital
     73,255,072,627               73,255,072,627          
Other capital surplus
     596,507,526               —          
Capital adjustments
             1,597,604,250               2,016,181,782  

 

 

 

                                 
[Unit: KRW]  
    FY 2007     FY 2006  
Items   Amount     Amount  
Stock options
     1,597,604,250               2,016,181,782          
Accumulated other comprehensive income and expense
             (53,590,249 )             (378,085,769 )
Losses on valuation of available-for-sale securities
     (1,119,704 )             (1,119,704 )        
Change in equity from equity-method
     205,973,332               7,760,860          
Change in equity from negative equity-method
     (258,443,877 )             (384,726,925 )        
Retained earnings (accumulated deficit)
             (2,076,674,908 )             25,482,297,977  
Unappropriated retained earnings (undisposed accumulated deficit) carried forward to subsequent year
     (2,076,674,908 )             25,482,297,977          
Total shareholders’ equity
             76,793,369,246               103,849,916,617  
Total liabilities and shareholders’ equity
             95,348,692,155               121,083,388,955  

 

 

 

  (2)  
Income Statements
FY 2007: for the year ended December 31, 2007
FY 2006: for the year ended December 31, 2006
                                 
[Unit: KRW]  
    FY 2007     FY 2006  
Items   Amount     Amount  
Revenues
             33,685,656,151               34,687,370,367  
Online games-subscription revenue
     6,393,088,491               5,642,837,873          
Online games-royalties and license fees
     25,152,804,069               26,481,630,832          
Mobile games
     880,535,004               545,935,048          
Character merchandising, animation and other revenue
     1,259,228,587               2,016,966,614          
Cost of revenues
             13,745,645,176               11,977,826,826  
Cost of revenues-games
     13,720,824,301               11,923,063,281          
Cost of revenues-other
     24,820,875               54,763,545          
Gross profit
             19,940,010,975               22,709,543,541  
Selling, general & administrative expenses
             29,960,392,612               32,622,630,318  
Salaries
     6,088,721,313               6,948,970,450          
Severance benefits
     565,812,980               586,102,898          
Employee benefits
     1,326,852,481               1,155,933,296          
Transportation
     522,199,100               637,958,559          
Entertainment
     184,371,486               235,077,250          
Communication
     106,498,760               104,674,066          
Taxes and dues
     445,017,240               960,268,450          
Depreciation
     1,045,752,752               829,694,178          
Rent
     2,239,652,665               2,157,061,175          
Insurance premium
     274,412,427               275,389,022          
Vehicles maintenance
     28,957,900               18,918,187          
Freight expenses
     9,344,763               11,650,256          
Repairs expenses
     7,436,982               6,630,999          
Training expenses
     25,939,849               34,777,762          
Books & subscription
     78,177,155               48,786,507          
Office supplies
     106,953,475               201,208,787          
Commission paid
     4,029,912,578               4,985,288,245          
Advertising
     6,123,787,462               3,372,592,739          
Research and development
     6,095,858,117               9,228,756,234          
Bad debt
     35,927,140               122,409,815          
Amortization on intangible assets
     534,677,182               553,538,969          
Utilities
     —               15,193,584          
Compensation expenses associated with stock option
     84,128,805               131,748,890          
Operating income (loss)
             (10,020,381,637 )             (9,913,086,777 )
Non-operating income
             5,829,785,205               10,869,118,699  
Interest income
     3,150,414,100               3,131,453,251          
Gain on foreign currency translations
     56,867,661               56,019,645          
Gain on foreign exchange transactions
     374,325,059               160,480,199          
Gain on valuation of equity-method investments
     2,074,015,672               569,599,563          
Reversal of allowance for doubtful accounts
     17,774,357               —          
Gain on disposition of other investments
     26,000,000               —          
Gain on disposal of investment in properties
     —               1,081,346,160          

 

 

 

                                 
[Unit: KRW]  
    FY 2007     FY 2006  
Items   Amount     Amount  
Gain on disposition of property and equipment
     2,451,596               9,280,109          
Gain on foreign currency forward contract transactions
     —               156,250,000          
Proceeds from the former chairman due to fraud
     —               4,947,492,054          
Miscellaneous income
     127,936,760               757,197,718          
Non-operating expenses
             20,513,150,733               8,144,673,589  
Interest expense
     72,765,193               14,350,846          
Loss on foreign currency translation
     13,672,542               576,735,629          
Loss on foreign exchange transactions
     141,004,511               465,823,823          
Loss on valuation of equity-method investments
     3,081,867,856               3,570,538,346          
Loss on disposition of equity method investments
     2,264,419,181               —          
Impairment loss on available-for-sale securities
     10,075,687,499               —          
Other bad debt expenses
     185,000,000               1,138,428,710          
Loss on disposal of property and equipment
     51,787,451               29,340,619          
Loss on retirement of property and equipment
     6,450,339               —          
Impairment losses on property and equipment
     —               675,000,000          
Impairment losses on intangible assets
     —               1,487,985,221          
Loss on foreign currency forward contract transactions
     —               4,950,000          
Additional payment of income taxes
     —               99,656,449          
Litigation charges
     4,619,000,000               —          
Donations
     —               5,890,000          
Miscellaneous losses
     1,496,161               75,973,946          
Income (loss) before income tax
             (24,703,747,165 )             (7,188,641,667 )
Income tax expense
             2,855,225,720               11,189,502,676  
Net income (loss)
             (27,558,972,885 )             (18,378,144,343 )
Earnings (loss) per share
             (3,966 )             (2,645 )

 

 

 

  (3)  
Statements of Disposition of Accumulated Deficit for fiscal years ended December 31, 2007 and 2006
             
    From January 1, 2007       From January 1, 2006
FY 2007   Until December 31, 2007   FY 2006   Until December 31, 2006
Confirmed disposition date
  March 28, 2008   Confirmed disposition date   March 22, 2007
                                 
[Unit: KRW]  
    FY 2007     FY 2006  
Category   Amount     Amount  
Accumulated deficit before disposition (unappropriated retained earnings)
             2,076,674,908               (25,482,297,977 )
Unappropriated retained earnings carried over from prior period
     25,482,297,977               43,860,442,320          
Net loss
     (27,558,972,885 )             (18,378,144,343 )        
Disposition of accumulated deficit
             —               —  
Undisposed accumulated deficit (unappropriated retained earnings) carried forwards to subsequent year
             2,076,674,908               (25,482,297,977 )