ITEM 1. BUSINESS.
OVERVIEW
We are a company that provides value-added telecommunications services to the Far East and has telecommunications investments in the People's Republic of China. We initially focused our business on China because of that country's large and rapidly growing need for telecommunications services and its requirement for foreign capital and technology to meet that need. We have also formed a joint venture with Fusion Telecommunications International to provide telecom services, both voice and data, to and from Asia. We have invested in IXS.NET, Inc. to provide fax services over the Internet, prepaid credit cards and other Internet Protocol based services.
On April 28, 2000, we completed a merger with Terremark Holdings, Inc., a company engaged, since 1982, in the development, construction, sale, leasing, management and financing of various real estate projects. Pursuant to this merger, we changed our name from AmTec, Inc. to Terremark Worldwide, Inc. Terremark has provided these services to private and institutional investors, as well as for its own account. The real estate projects with which Terremark has been involved have included retail, high rise office complexes, mixed use projects, condominiums, condominium hotels, and governmental assisted housing. Terremark is also involved in a number of ancillary businesses which complement its core development operations. Specifically, Terremark engages in brokering financial services, property management, construction, construction management, condominium hotel management, residential sales and commercial leasing and brokerage and advisory services.
In connection with our merger with Terremark, we also sold 68,722,349 shares of our common stock for approximately $28,122,925 to Vistagreen Holdings (Bahamas), Ltd., Paradise Stream (Bahamas) Limited and Moraine Investments Inc. In this document, we sometimes refer to these three stockholders together as the Vistagreen Group.
This report and other written reports and oral statements made from time to time by us may contain so-called "forward looking statements," all of which are subject to risks and uncertainties. You can identify these forward-looking statements by the use of words such as "expects," "plans," "will," "estimates," "forecasts," "projects" and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address our growth strategy, financial results and development programs. You must carefully consider any such statement and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors could include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Although it is not possible to predict or identify all such factors, they may include those listed below, which should not be considered an exhaustive statement of all potential risks and uncertainties:
o Realization of the anticipated benefits of our recent merger with Terremark will depend in part on whether we can integrate our operations in an efficient and effective manner.
o As a result of the merger, we have a new focus to our business. Our primary business will now involve both telecommunications and real estate. Because of this new focus, our results of operations to date may not reflect future results. In addition, we will encounter challenges and difficulties frequently encountered by early-stage companies in new and evolving markets.
o We plan additional international expansion in both the telecommunication and real estate areas which may subject us to numerous risks associated with international operations.
o We may face substantial liabilities for indemnification of tax obligations if we are or become a United States real property holding corporation. We have agreed to indemnify the Vistagreen Group against certain tax liabilities that could be incurred by them relating to their purchase of 68,722,349 shares of our common stock immediately after the merger in the event that our company was, at the time of the merger, or becomes, a United States real property holding corporation as defined in Section 897(c)(2) of the U.S. Internal Revenue Code.
o We could be sued as a result of an uncompleted transaction. During 1998, AmTec entered into an agreement to acquire an investment in a cable television network venture located in Hunan province, PRC, from United International Holdings or UIH. AmTec terminated the agreement because, among other reasons, the closing had not occurred by December 31, 1999 through no fault of AmTec. On December 30, 1999, UIH had indicated that it was ready to close the agreement. Although we believe that AmTec had clear rights to terminate the agreement, should UIH seek judicial relief to require us to close, its superior financial resources could limit our ability to defend ourself.
o China telecommunications regulations could impact our business. Chinese laws and regulations have prohibited foreign investors and foreign invested enterprises from owning or operating telecommunication networks in China.
o Internet regulation in China is unclear, and no single regulatory act has been promulgated to govern the Internet in China. Consequently, our ability to operate or invest in Internet-based services is unclear.
o We have limited operating control in our joint ventures. Because we do not have majority voting rights in certain of our joint ventures, we cannot completely control or direct the operation of these entities.
o Political risks in China may adversely affect our business operations. China has been a socialist state since 1949 and is controlled by the Communist Party of China. Changes in the political leadership of China may have a significant effect on their laws and policies.
o Technological advances may make our telecommunications operations obsolete.
o We face severe competition. The Internet service provider, or ISP, market is highly competitive in China. There are five national ISPs owned and operated by the national government. There are over 150 private ISPs licensed to operate in various provinces. Thus, privately owned ISPs often compete with government owned or affiliated ISPs. The playing field is unequal, with government-affiliated ISPs having access to subsidized dial up lines, leased lines and Internet bandwidth. Our strategic partners may face severe competition as the Internet develops in China.
o Economic conditions, including interest rates, greatly impact the real estate market.
o The real estate industry is cyclical and affected by changes in general and local economic and other conditions including employment levels, demographic considerations, availability of financing, interest rate levels, consumer confidence and real estate demand.
o Up front cash requirements may create cash flow problems. We develop real estate projects. Acquiring land and committing the financial and managerial resources to develop such projects involve significant risks. Before a development generates any revenue, material expenditures are required for items such as acquiring land, professional fees, construction, financing costs, sales and marketing.
o Our real estate investments are highly leveraged and we may not be able to make the debt service payments.
o A significant portion of the financing of our real estate business is structured as balloon payments, which may be harder for us to pay off than debt that is structured with level amortization.
o Our real estate management contracts are generally cancellable on short notice.
o Our real estate operations are situated primarily in South Florida and this geographic concentration exposes us to certain risks.
o The occurrence of uninsured losses could have a material adverse effect on our financial condition.
o We are subject to a variety of federal, state and local statutes, ordinances, rules and regulations concerning land use that may adversely impact our business.
o Liability relating to environmental contamination may adversely impact our business.
We were originally founded as a Colorado corporation on May 10, 1982, and were reincorporated under the laws of the State of Delaware on July 10, 1996. Since April 1995, we have been engaged in the business of developing telecommunications networks in the PRC. In January 1996, we sold substantially all of the assets of ITV Communications, Inc., our former primary operating subsidiary. On July 8, 1997, we changed our name to AmTec, Inc. from AVIC Group International, Inc. On April 28, 2000 we merged with Terremark Holdings, Inc. and changed our name to Terremark Worldwide, Inc. Our principal executive office is located at 2601 S. Bayshore Drive, 9th Floor, Coconut Grove, Florida 33133. Our telephone number is (305) 856-3200.
Telecommunications Operations - -----------------------------
TELECOM HOTELS. On May 31, 2000, we acquired Telecom Routing Exchange Developers, also known as "T-Rex Developers," a facilities provider to the telecommunications industry. T-Rex Developers develops new facilities and converts existing properties for use as telecommunications routing exchanges. Telecommunications routing exchanges are facilities used by telecommunications companies to house their switches and provide leasable space for internet service providers, content providers, co-location companies and other similar tenants. T-Rex Developers is the exclusive real estate service provider for Telecom Partners, an entity in which the founders of T-Rex Developers have an interest. Telecom Partners presently owns four properties, one located in each of Boca Raton, Florida, Cleveland, Ohio, Hartford, Connecticut, and Miami, Florida.
On June 22, 2000, we completed a transaction to acquire Post Shell Technology Contractors, Inc. Post Shell Technology Contractors is a 17 year old Miami company which has performed general contracting services for complex construction projects, including telecommunications facilities. We feel their experience will be of benefit to us in our development of our T-Rex brand of telecom hotels.
CELLULAR TELEPHONE NETWORKS. We hold a 70% interest in Hebei United Telecommunications Equipment Company Limited, or Hebei Equipment, a Sino-foreign joint venture with a wholly-owned subsidiary of the Electronics Industry Department of Hebei Province. Hebei Equipment, in turn, held a 51% interest in Hebei United Telecommunications Engineering Company Limited, or Hebei Engineering, a joint venture with NTT International, or NTTI, and Itochu Corp. Since the fall of 1998, the government of the PRC has taken a number of actions that have changed the legal environment in which we operate in China, including the requirement that China United Telecommunications, Incorporated, which we refer to as Unicom, terminate or revise its agreements with foreign invested companies. Consequently, Unicom terminated Hebei Engineering's cash flow sharing and technical services agreement. With the termination of that agreement, Hebei Engineering was liquidated and our joint venture interests in six cellular networks in Hebei Province have been transferred to Unicom. As of January 24, 2000, Hebei Equipment received approximately $817,000 as a result of the liquidation of Hebei Engineering. Our investment in Hebei Equipment is accounted for under the equity method. Hebei Equipment is organized as Sino-foreign equity joint venture, or SFJV, under the laws of China and is headquartered in Shijiazhuang, the capital of Hebei Province. We are currently pursuing the liquidation of Hebei Equipment.
IP.COM, LLC. On April 28, 1999, we formed IP.Com, LLC, a 50-50% joint venture, with Fusion Telecommunications International, Inc., or Fusion, a private facilities-based, multinational long-distance company. Fusion's current service offerings include voice and data, switched and dedicated, domestic and international long-distance and domestic and international prepaid calling cards, provided through a network of owned and leased facilities, leased lines and resale agreements.
IP.Com provides long distance international telecommunication services, including telephony and data, to Asia. Currently IP.Com markets its services only outside China. The joint venture agreement provides a right of first refusal, to both us and Fusion, to participate as equal partners in new projects in China.
IXS.NET, INC. During May 1999, we formed a three-way alliance with Fusion and IXS.NET, a private IP fax service provider, to develop IP fax services in Hong Kong, Taiwan and Guangdong Province and to act as a value-added reseller for Jitong Communications Corp., one of the three licensed IP fax operators in China. We, together with Fusion, agreed to make an equal convertible debt investment into IXS.NET and we have an option to acquire up to a 50% interest in IXS.NET.
The IXS.NET business equips a local business with a modem that transfers international fax calls through a local phone call on the Public Switched Telephone Network, or PSTN, to an Internet node in the city of origin, then transmits the fax on the Internet internationally to the city of destination, and converts the fax call to a local telephone call in the city of destination on its PSTN which is transmitted to the destination fax telephone number. This model saves the standard international telephone phone call charges, which can be very expensive to and from China. This business model can result in a significant savings to any business that faxes internationally on a regular basis.
IXS.NET purchases network and transmission services from established carriers at discounted prices and resells the services to its customers. Revenue derived from the provision of telecommunications services are recognized in the period during which the call terminates. Revenues are derived from the sale of IP fax, IP phone and calling card services.
Real Estate Operations - ----------------------
Since our merger on April 28, 2000 with Terremark, we have been engaged in the real estate activities described below.
DEVELOPMENT. Our development activities involve concept development, the acquisition of land, the design of the project, arranging for equity and financing, construction, sales and leasing and ultimate disposition. Our history of development operations has included variations from this full scale concept of development to an exit strategy which has involved reselling undeveloped land, selling a project before completion, joint ventures and redevelopment of existing projects.
We intend to build on the success of our Fortune House condominium hotel development by creating a brand name for similar future developments and to manage similar projects for other developers. We currently own over two acres of oceanfront property in Ft. Lauderdale, on which we intend to build the second Fortune House Condominium Hotel.
Other current development projects include the following:
o the Four Seasons Hotel and Tower, a 63 story, 1.2 million square foot mixed use project located in Miami, Florida which includes a five star hotel, class A office, retail and ultra luxury condominium units, and for which we are acting as the co-developer, along with New York based Millennium
Partners, and for which we are also providing mortgage brokerage, sales, construction management, leasing and property management services;
o Brickell Village, an 11 acre development on the Miami River in Miami's central business district, for which we are also acting as co-developer, along with Millennium Partners, and which project will include, in phases, approximately 900,000 square feet of retail entertainment and 2 million square feet of residential and office towers;
o Fortune House-Fort Lauderdale Beach, a 280 unit four star condominium hotel which we are developing for our own account and which is located on the property facing the ocean in the heart of Fort Lauderdale Beach; and
o Royal Palm Doral Center III, a 105,000 square foot office building overlooking the Doral Golf Course in the western part of Miami-Dade County and which we are developing for a German investor with whom we have previously transacted business, and for whom leasing, property management and mortgage brokerage services are also being provided.
REAL-ESTATE AND MORTGAGE BROKERAGE. Our mortgage and real estate brokerage subsidiaries provide diverse brokerage services to our projects and for other developers and owners, on a third party basis.
Our real estate brokerage subsidiary is involved with both commercial and residential properties. We currently represent, as the owners' exclusive leasing agent, various office buildings containing collectively, over 1.2 million square feet of office space. We also have a number of exclusive and non-exclusive appointments as the agents for various tenants who are in the market for new or additional office space. On the residential side, we handle condominium sales for our own projects such as the Fortune House Condominium Hotels (Brickell Avenue and Fort Lauderdale Beach locations), and the Four Seasons Hotel and Tower (once units are ready for the market). In addition, we have recently been retained by another developer to be the developer's exclusive agent at two condominium projects located on Miami Beach: The Bentley Beach Club and the Bentley Bay. We are also acting as the exclusive sales agent for, and providing advisory services to, a project named the Segovia Tower.
PROPERTY MANAGEMENT. We currently manage buildings that total in excess of 1.5 million square feet of property, two of which are included in the top ten largest office buildings in the Miami-Dade area.
CONSTRUCTION SERVICES. We have, in the past, provided construction management and general contracting services as a part of our development activities. However, we have expanded this aspect of our business to include post-shell construction and general contracting services for limited risk projects, such as mid-size office buildings and retail boxes, on behalf of owners and developers with whom we have existing relationships.
CONDOMINIUM HOTEL MANAGEMENT. We developed the Fortune House brand of condominium hotel to enable purchasers to buy furnished condominium suites, which can be rented to guests when the owner is not in residence. We provide hotel management services for Fortune House. The second Fortune House, which is located on Fort Lauderdale Beach, is currently in the development stage. Once Fortune House Fort Lauderdale is completed, we will operate and manage that property. We intend to sell the right to participate in the rental program pursuant to a registration statement filed with the Securities and Exchange Commission. The interests will thereafter be subject to public reporting under SEC rules.
ADVISORY AND CONSULTING. Closely related to our financial services and property management operations, we also provide institutional and private advisory and consulting services.
GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS. In developing real estate, we must obtain the approval of numerous government authorities regulating such matters as permitted land uses, levels of density and the availability of utility services such as water and waste disposal. Several authorities in Florida and other states have imposed impact fees as a means of defraying the cost of providing certain governmental services to developing areas and the amount of these fees has increased significantly during recent years. Many state laws require the use
of specific construction materials. Local governments also, at times, declare moratoriums on the issuance of building permits and impose other restrictions.
To date, the governmental approval processes and the restrictive zoning and moratoriums discussed above have not had a material adverse effect on our development activities. However, there is no assurance that these and other restrictions will not adversely affect us in the future.
We are subject to a variety of federal, state and local statutes, ordinances, rules and regulations concerning land use. Land use and zoning laws can vary greatly and may result in delays, cause us to incur substantial compliance and other costs and prohibit or severely restrict development in some environmentally sensitive regions or areas. Before consummating the purchase of land, we engage independent environmental engineers to evaluate that land for the presence of hazardous or toxic materials, wastes or substances. We have not been materially affected to date by the presence or potential presence of such materials. We cannot assure you that these inspections will uncover all environmental hazards and we will not be adversely affected by such hazards.
To varying degrees, permits and approvals will be required to complete the developments currently being planned by us. Our ability to obtain necessary approvals and permits for these projects is often beyond our control, and could restrict or prevent the development of otherwise desirable property. The length of time necessary to obtain permits and approvals increases the carrying costs of unimproved property acquired for the purpose of development and construction. In addition, the continued effectiveness of permits already granted is subject to factors such as changes in policies, rules and regulations and their interpretation and application.
In recent years, regulation by federal and state authorities relating to the sale and advertising of residential real estate has also become more restrictive. In order to advertise and sell condominiums and other residential real estate in many jurisdictions, we have been required to prepare registration statements or other disclosure documents and, in some cases, to file such materials with designated regulatory agencies.
COMPETITION AND MARKET FACTORS. The development and sale of real estate is a highly competitive and fragmented industry. We are not able to estimate the total number of competitors we face, but are aware that we compete with numerous national, regional and local developers, including some developers with greater financial resources. Developers compete not only for tenants and buyers, but also for desirable properties. When marketing our properties, we must compete with sales and leases of existing properties. The real estate industry is cyclical and affected by consumer confidence levels, prevailing economic conditions generally and, in particular, by interest rate levels. A variety of other factors affect the real estate industry and demand for new construction, including the availability of labor and materials and increases in the costs thereof, changes in associated costs such as increases in property taxes and energy costs, changes in consumer preferences, demographic trends, the availability of and changes in financing programs and changing economic conditions in ancillary markets (e.g., South America).
EMPLOYEES
As of March 31, 2000, we had 10 full time employees in New York and our subsidiary Hebei Equipment had 10 employees. As a result of our merger with Terremark, as of June 15, 2000, we had approximately 130 full time employees in Miami, New York and Washington, D.C.
Our employees are not represented by a labor union and are not covered by a collective bargaining agreement. We believe that our relations with our employees are good.
ITEM 2.
ITEM 2. PROPERTIES.
Until our merger on April 28, 2000, our principal executive offices were comprised of 7,760 square feet of rental office space located at 599 Lexington Avenue, 44th Floor, New York, New York 10022. We paid an annual rent of $334,400 pursuant to the lease for this space, which expired in May 2000. While we have obtained an extension of this lease until October 30, 2000, we are moving our New York office to the Chrysler Building, also located in New
York City, in order to accommodate our need for a larger space. Since the merger, our corporate headquarters have been relocated to the Terremark Centre, 2601 S. Bayshore Drive, Miami, Florida 33133. Since April 1, 2000, we have been paying $36,650 rent per month for our 14,660 square feet of office space in the Terremark Centre. We also maintain smaller Florida offices in downtown Miami, Coral Gables, Boca Raton and South Miami, Florida as well as in Washington D.C. and Manhattan. We also maintain temporary sales and construction offices. We believe that our current space is adequate for our expected growth in the next year.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
We are, from time to time, involved in litigation relating to claims arising out of our operations in the normal course of business. These claims against us are generally covered by insurance. We are not currently subject to any litigation which singularly or in the aggregate could reasonably be expected to have a material adverse effect on our financial conditions or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our stockholders during the quarter ended March 31, 2000. A special meeting of the stockholders was held on April 28, 2000 in order to, among other things, approve our merger with Terremark.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON STOCK AND PREFERRED STOCK INFORMATION
Our common stock, par value $.001 per share, is quoted under the symbol "TWW" on the American Stock Exchange. Prior to April 28, 2000, our common stock traded under the symbol "ATC" on the American Stock Exchange. As of March 31, 2000, our authorized capital stock consisted of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock. As a part of the merger, our authorized capital stock was increased to 300,000,000 shares of common stock and 10,000,000 shares of preferred stock. As of June 27, 2000, 193,551,679 shares of common stock were outstanding and held by 190 holders of record and 20 shares of our series G convertible preferred stock were outstanding and held by one holder of record. We believe we have in excess of 9,700 beneficial owners of our common stock.
The following table sets forth, for the fiscal quarters indicated, the high and low sales prices for our common stock on the American Stock Exchange. American Stock Exchange quotations are based on actual transactions and not bid prices.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not plan to pay cash dividends in the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity and Capital Resources."
RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to our merger with Terremark, we issued to the Terremark shareholders 78,539,830 shares of our common stock. Pursuant to a Stock Purchase Agreement by and between Vistagreen Holdings (Bahamas), Ltd., Moraine Investments, Inc., Paradise Stream (Bahamas) Limited and AmTec, Inc., dated as of November 24, 1999, as amended, we sold 68,722,349 shares of our common stock on April 28, 2000. These shares were not registered under the Securities Act of 1933, as amended, based on the exemptions provided by Section 4(2) of the Securities Act.
Proceeds of the sale of the stock to the Vistagreen group are being used for general corporate development, acquisitions and working capital.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is selected financial data for, and as of the end of, each of the five years ended March 31, 2000. The selected statement of operations and balance sheet data for each of the five years ended March 31, 2000 have been derived from our financial statements, which have been audited by our independent auditors. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and the Notes thereto included elsewhere in this report.
- ---------------------------- Financial information for the year 1996 is not comparable to the financial information provided for 1997, 1998, 1999 and 2000, because prior to 1997 we were not engaged in the development of telecommunications networks in the PRC.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of results of operations and financial condition is based upon and should be read in conjunction with our Consolidated Financial Statements and Notes thereto, the Selected Financial Data and other financial data appearing elsewhere in this report.
On April 28, 2000, after approval by our stockholders, we completed our merger with Terremark Holdings, Inc. Pursuant to this merger, we changed our name from AmTec, Inc. to Terremark Worldwide, Inc. We intend to account for the merger as a reverse acquisition.
The reverse acquisition will be accounted for as a purchase business combination in which Terremark is the accounting acquirer and we are the legal acquirer. As a result of the reverse acquisition, the financial statements on an ongoing basis will be that of the accounting acquirer, Terremark. The net assets of the legal acquirer, AmTec, will be revalued and the purchase price will be allocated to the assets acquired and liabilities assumed.
As the merger was completed after March 31, 2000, all financial statements and other information contained herein are reflective of business operations of AmTec only, and do not include the financial results of Terremark. Certain information relating to the effects of the merger on our financial condition, are reflected in our Definitive Proxy Statement filed with the Securities and Exchange Commission on March 24, 2000. The post-merger company will begin to report combined financial results for the quarter ended June 30, 2000.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2000 AS COMPARED TO THE YEAR ENDED MARCH 31, 1999
Our joint venture, IP.Com, started its operations in September 1999 and recorded revenues of approximately $2.4 million through March 31, 2000. We reported no revenue on our consolidated financial statements because the results of operations of our subsidiary Hebei Equipment and its subsidiary, Hebei Engineering, as well as IP.Com, have been accounted for under the equity method of accounting. We recorded only our share of income (losses) of our unconsolidated subsidiaries according to the percentage of our equity interest.
Selling, general and administrative expenses decreased from approximately $4.6 million during the year ended March 31, 1999 to approximately $4.4 million during the year ended March 31, 2000. The decrease is primarily related to a reduction in legal and professional fees related to the incomplete Global TeleSystems, Inc., or GTS, and UIH merger transaction and a reduction in salaries and fringe benefits as some employees resigned in June 1999.
We recorded approximately $380,000 equity income from our unconsolidated subsidiary, Hebei Equipment, during the year ended March 31, 2000. The equity income represents our share of income reported by Hebei Equipment for the year ended December 31, 1999. We recorded an equity loss of approximately $385,000 during the year ended March 31, 1999. The equity loss represents our share of loss reported by Hebei Equipment for the year ended December 31, 1998. Hebei Equipment's net income for the year ended December 31, 1999 was attributed to its equity income from its subsidiary, Hebei Engineering which had a gain on sale of its GSM network during the year. We are currently pursuing the liquidation of Hebei Equipment.
We recorded approximately $698,000 of equity losses from our affiliate, IP.Com, during the year ended March 31, 2000. The equity loss represents our share of loss reported by IP.Com for the year ended March 31, 2000.
We had net losses of approximately $4.6 million and $5.6 million during the years ended March 31, 2000 and 1999, respectively. Our loss applicable to common shareholders decreased 21% from approximately $6.2 million during the year ended March 31, 1999 to approximately $4.9 million during the year ended March 31, 2000. This decrease in loss applicable to common shares was primarily due to a decrease in general and administrative expenses, a decrease in the recognition of preferred stock dividends as well as a decrease in the share of equity loss from Hebei Equipment, offset by an increase in the equity in loss of IP.Com.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1999 AS COMPARED TO THE YEAR ENDED MARCH 31, 1998
Our indirect subsidiary, Hebei Engineering, recorded revenues of RmB 6,488,482 (approximately $786,000) for the year ended December 31, 1998, and RmB 1,706,499 (approximately $216,000) for the year ended December 31, 1997. We have no revenues on our consolidated financial statements because the results of operations of our subsidiary, Hebei Equipment, were accounted for under the equity method of accounting. We recorded only our share of losses of our unconsolidated subsidiary according to the percentage of our equity interest. We had net losses of $5.6 million and $5.4 million during the fiscal years ended March 31, 1999 and 1998, respectively.
Selling, general and administrative expenses increased from $4.3 million during the year ended March 31, 1998, to $4.6 million during the year ended March 31, 1999, due to increases in salaries and legal and professional expenses incurred during the past year.
The equity in losses of our unconsolidated subsidiary of $607,000 recorded during the year ended March 31, 1998 and $385,000 during the year ended March 31, 1999 represents our share of losses reported by Hebei Equipment for the year ended December 31, 1997 and December 31, 1998, during which period we owned a 60.8% and a 70.0% equity interest, respectively, of Hebei Equipment.
Amortization of stock options granted to non employees was related to the three million options issued to the Hebei Provincial Government to purchase an equal number of shares of our common stock at a price of $3.0625 per share. In accordance with generally accepted accounting principles, we recorded their estimated value of $1,837,500 during the year
ended March 31, 1998, and amortized approximately $459,000 during each of the years ended March 31, 1998 and 1999. The amortization of these options is a non-cash expense. The options were cancelled as of December 31, 1998.
Other expense of approximately $85,000 was primarily franchise and other tax paid during the year ended March 31, 1999. We received a tax refund of approximately $70,000 during the year ended March 31, 1998.
Our loss applicable to common stockholders decreased 9% from $6.8 million during the year ended March 31, 1998, to $6.3 million during the year ended March 31, 1999. This decrease in loss applicable to common shares was primarily due to a decrease in the recognition of preferred stock dividends as well as a decrease in the share of equity loss from Hebei Equipment, offset by increases in selling, general and administrative expenses.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998 AS COMPARED TO THE YEAR ENDED MARCH 31, 1997
We experienced net losses of $5.4 million and $4.1 million during the years ended March 31, 1998 and 1997, respectively.
Selling, general and administrative expenses increased from $3.6 million during the year ended March 31, 1997, to $4.3 million during the year ended March 31, 1998, due to increased levels of salaries paid to employees and legal and professional expenses incurred during the past year.
The equity in losses of our unconsolidated subsidiary of $141,000 recorded during the year ended March 31, 1997 and $607,000 during the year ended March 31, 1998 represents our share of losses reported by Hebei Equipment for the year ended December 31, 1996 and December 31, 1997, during which period we owned a 60.8% equity interest Hebei Equipment.
We issued to the Hebei Provincial Government three million options to purchase an equal number of shares of our common stock at a price of $3.0625 per share. In accordance with generally accepted accounting principles, we recorded their value of $1.8 million and have amortized approximately $459,000. The issuance of these options is a non-cash expense.
Loss from abandoned assets relates to the assets of Netmatics which have been written off for the total amount of $87, 000.
Interest expense during the year ended March 31, 1998, decreased to approximately $125,000 from approximately $129,000 during the year ended March 31, 1997, due to a reduction in the outstanding balance of stockholder loans payable.
Other income (net) of approximately $70,000 during the year ended March 31, 1998 was related to a tax refund previously paid.
Our net loss increased 33% from $4.1 million during the year ended March 31, 1997, to $5.4 million during the year ended March 31, 1998. This increase in net loss was primarily due to the share of equity loss from Hebei Equipment, amortization of stock options issued to the Hebei Provincial Government, as well as increases in selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Approximately $3,147,000 of cash was used in our operations during the fiscal year ended March 31, 2000, compared to cash used of approximately $3,737,000 during the year ended March 31, 1999. The decrease was primarily due to decreased selling, general and administrative expenses.
We used approximately $2,284,000 in our investing activities in the year ended March 31, 2000, compared to approximately $13,000 in the year ended March 31, 1999. The increase in investing activities is related primarily to an investment in IP.Com and loans provided to IXS.Net and T-Rex made by us during the fiscal year 2000.
The cash inflows from financing activities during the year ended March 31, 2000 were generated primarily from the cash received from the exercise of stock options and warrants of approximately $5,640,000, a bridge loan obtained from Terremark of $1,125,000 and the repayment of an advance made to Hebei Equipment of $500,000.
During the year ended March 31, 2000, we issued 3,858,346 shares of our common stock upon conversion of 29.8 outstanding shares of our Series E convertible preferred stock.
During the year ended March 31, 2000, we issued 3,296,408 shares of our common stock as a result of the exercise of certain employee stock options and stock warrants. In connection with services performed, we issued 20,000 shares of our common stock to members of our Board of Directors and we issued a total of 180,000 shares of our common stock to certain of our officers as stock awards pursuant to their employment agreements. We also issued 210,525 shares of our common stock upon settlement of a legal proceeding filed against us by a former stockholder.
We anticipate that our cash and cash equivalents should be adequate to finance our operating requirements for the current fiscal year. However, in the event that we expand our operations, we will need additional financing to develop the same. Although we believe that financing is available to us, there can be no assurance that we will be able to obtain the same, or if available, that the terms will be acceptable to us.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued a new standard SFAS No. 133, "Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after July 1, 1999. Our management has not yet completed the analysis of the impact that would have on our financial statements and has not yet adopted this standard.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have not entered into any financial instruments for trading or hedging purposes.
We are not exposed to fluctuations in foreign currencies relative to the U.S. dollar, as our revenues, costs, assets and liabilities are, for the most part, denominated in local currencies. The results of operations of our subsidiaries were as reported in their local currencies.
Our carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses is a reasonable approximation of their fair value.
Economic, interest rates and other conditions greatly impact the real estate market. It is possible that our operations will not generate income sufficient to meet our operating expenses or will generate income and capital appreciation, if any, at a rate less than that anticipated or available through comparable real estate or other investments.
The real estate industry is cyclical and affected by changes in general and local economic and other conditions including employment levels, demographic considerations, availability of financing, interest rate levels, consumer confidence and real estate demand. In addition, developers are subject to various risks, many of them outside their control including competitive overbuilding, availability and cost of property, materials and labor, adverse weather conditions which can cause delays in construction schedules, cost overruns, changes in government regulations pertaining to building standards or environmental matters, increases in real estate taxes and other local government fees and acts of God, such as hurricanes and floods.
We cannot predict whether interest rates will be at levels attractive to prospective tenants or buyers and any increase in interest rates could affect our business adversely.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this Item 8 are attached to hereto as Exhibit (a)(1).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On April 28, 2000, Terremark merged with and into AmTec, Inc. AmTec was the surviving corporation in this merger and its name was changed to Terremark Worldwide, Inc.
Prior to the transaction with Terremark, Deloitte & Touche LLP was engaged by AmTec to perform the March 31, 2000 audit of AmTec, Inc. As a result of the transaction with Terremark, PricewaterhouseCoopers, LLP was engaged by Terremark Worldwide as its principal accountants to audit the Terremark Worldwide financial statements for the year ending March 31, 2001. The engagement of PricewaterhouseCoopers was made effective April 28, 2000.
The decision to change independent accountants was not recommended or approved by AmTec's board of directors or the audit committee of its board of directors. However, the decision to retain one independent accounting firm was made by the board of directors of Terremark Worldwide on April 28, 2000.
Deloitte & Touche LLP was engaged to audit AmTec's March 31, 2000 financial statements. During AmTec's two most recent fiscal years ended March 31, 2000, there were no disagreements between management and Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP, would have caused Deloitte & Touche LLP to make reference to the subject matter of the disagreement in connection with its report. In addition, the financial statements of AmTec for such periods contained no adverse opinion or disclaimers of opinion, and were not qualified or modified in any way. Also, during this same period there were no reportable events as defined or listed in Item 304 of Regulation S-K.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our executive officers and directors, and their ages as of May 15, 2000, are as follows:
Manuel D. Medina has served as our Chairman of the Board, President and Chief Executive Officer since April 28, 2000, the date of our merger, and as that of Terremark since its founding in 1982. In addition, Mr. Medina is a managing partner of Communications Investors Group, the holder of AmTec Series G preferred stock. Mr. Medina has been a director of Fusion Telecommunications International since December 14, 1998. Before founding Terremark, Mr. Medina, a certified public accountant, worked with PricewaterhouseCoopers LLP. Subsequently, he established and operated an independent financial and real estate consulting company. Mr. Medina earned a Bachelors of Science degree in Accounting from Florida Atlantic University in 1974.
Joseph R. Wright, Jr. has served as our Vice Chairman of the Board as well as the President of Terremark Communications Group since April 28, 2000. Prior to that, Mr. Wright served as AmTec's Chairman of the Board since May 1995, Chief Executive Officer since March 1996 and President since May 1996. Mr. Wright also served as Chairman of the Board of GRC International, Inc. a U.S. public company that provides technical information technology support to government and private entities from 1996 to 2000. He is also Co-Chairman of Baker & Taylor Holdings, Inc., an international book and video distribution company, and Vice Chairman of Jefferson Consulting Group, a Washington D.C. consulting firm. From 1989 to 1994, Mr. Wright served as Executive Vice President, Vice Chairman and Director of W.R. Grace & Co., an international chemicals and health care company, President of Grace Energy Corporation and Chairman of Grace Environmental Company. From 1982 to 1989, Mr. Wright held the positions of Director and Deputy Director of the Office of Management and Budget, The White House, and was a member of President Reagan's cabinet. Before 1982, he served as Deputy Secretary, United States Department of Commerce, President of Citicorp Retail Services and Retail Consumer Services, held posts in the United States Department of Agriculture and the United States Department of Commerce, and was Vice President and Partner of Booz Allen & Hamilton, a management consulting firm. Mr. Wright also serves on the Boards of Directors of PanAm Sat corporation, Fusion Telecommunications International, Inc., Cereus Technology Partners, RealMed Corporation and serves on the AT&T Government Markets Advisory Board. He is a former member of
the President's Export Council and a former member of the Board of Directors of Travelers, Harcourt Brace Janovich, and Hampton University.
Joel A. Schleicher has served as a member of our board of directors since August 1999. Mr. Schleicher has been President and Chief Executive Officer for Exp@nets since June of 1998. Exp@nets is a leading nationwide provider of networked communication solutions to business. His previous communications industry experience started as the Chief Operating Officer, President and director of Nextel Communications, Inc. from 1989 to 1995 and subsequently with ProCommunications, Inc. from 1996 to 1997. He has been a member of the board of directors of NovAtel, Inc., a global GPS provider, since 1997, Fusion Telecommunications, an international long distance service provider, since 1998, and TechTronic Industries, a Hong Kong based manufacturer of consumer appliances, since 1998. Before Nextel, Mr. Schleicher spent 10 years in the consumer durables and energy sectors of industry and four years with KPMG Peat Marwick in various capacities. He is a graduate of the Carlson School of the University of Minnesota.
Marvin S. Rosen has served as a member of our board of directors since March 1999. Mr. Rosen is a co-founder of Fusion Telecommunications International and has served as its Vice Chairman since December 1998. Mr. Rosen is a principal shareholder and member of the executive committee of Greenberg Traurig, P.A., an international law firm. From September 1995 through January 1997, Mr. Rosen served as the Finance Chairman of the Democratic National Committee. Mr. Rosen currently serves on the Board of Directors of the Children's Health Fund (New York City), since 1994, the Robert F. Kennedy Memorial, since 1995, Bio-Medical Disposal, Inc., since 1998 and Fusion Telecommunications International, Inc., since 1997, where he has also been Vice-Chairman since December 1998. Mr. Rosen received his Bachelor of Science degree in Commerce from the University of Virginia, his LL.B. from Dickinson School of Law and his LL.M. in Corporations from New York University Law School.
Kenneth I. Starr has served as a member of our board of directors since April 28, 2000. Mr. Starr has also served as the Chairman and Chief Executive Officer of Starr & Company, a New York City-based accounting and business management firm, since he founded this firm in 1986.
Timothy Elwes served as a member of our board of directors since April 28, 2000. Mr. Elwes has also served as member of the board of directors of Timothy Elwes & Partners Ltd., a financial services company, from May 1978 until October 1994, the business of which was merged into Fidux Trust Co. Ltd. in December 1995. Mr. Elwes is a director of Fidux Trust Co. Ltd. He is also a non-executive director of Partridge Fine Arts plc, a public company since 1989. He has served as a director of Makecater Ltd., a property-developing company, since 1995. Since 1989 he has served as a director of Tagring Ltd., a financial services company.
Miguel J. Rosenfeld has served as a member of our board of directors since April 28, 2000 and has also served as a Senior Vice President of Delia Feallo Productions, Inc. since November 1991, where he was responsible for the development of soap opera productions in Latin America. From January 1995 until May 1998, he was the Director of Affiliates and Cable for Latin America for Protele, a division of Televisa International LLC. From December 1984 until September 1998, he was a sales manager for Capitalvision International Corporation. Mr. Rosenfeld holds a Bachelors degree in Administration from the University of Buenos Aires which he earned in 1975.
Clifford J. Preminger served as a member of our board of directors since June 2000. Mr. Preminger is the president of T-Rex Developers, and co-founded Telecom Realty Partners, LLC. He is also a founding partner of the Washington, D.C. law firm of Preminger & Glazer, a boutique practice specializing in corporate and large-scale commercial real estate transactions on a national basis. In addition, he is actively engaged in the operation and management of start-up and operating companies engaged in diverse lines of business. Prior to joining Preminger & Glazer, Mr. Preminger served as President and Chief Operating Officer of Seafield Center, Inc., a recognized leader in providing Drug and Alcohol Rehabilitation Services throughout the United States and was a partner in the law firm Kaye, Scholer, Fierman, Hays & Handler. Mr. Preminger is also a founder of Service USA, a national mortgage banking field service company, and Fusion International Telecommunications, Inc., an international long distance reseller. He presently serves on the Board of Directors of Service USA, Nuthena, and The Washington
Woodworking Company. Mr. Preminger received a B.A. from the Maxwell School of Citizenship and Public Affairs of Syracuse University and a J.D. from Case Western Reserve University.
Brian K. Goodkind has served as our Executive Vice President and General Counsel since April 28, 2000. Prior to that, since April 1998, Mr. Goodkind served as the Vice-Chairman, Executive Vice President, and General Counsel to Terremark. In this capacity, Mr. Goodkind oversaw the operations, office management, risk management, development of systems, human resources, and legal matters for Terremark. Mr. Goodkind has been a member of the Florida Bar since 1982, and was in private practice for 16 years, specializing in commercial litigation, employment law, international transactions and real estate. His experience includes over 11 years, from 1986 until 1998, as one of two founding partners of a seventy-attorney full-service law firm, for which he served as managing partner for over five years. Mr. Goodkind received his Bachelor of Arts degree from the University of Alabama and his J.D. from the University of Florida.
Irving A. Padron, Jr. has served as our Senior Vice President and Chief Financial Officer since April 28, 2000. Prior to that, beginning in 1997, Mr. Padron served as the Senior Vice President and Chief Financial Officer of Terremark. From 1992 until joining Terremark, Mr. Padron was a Manager with KPMG Peat Marwick's financial service practice in Miami, Florida, focusing on the development of that firm's real estate practice. His experience also includes providing audit and consulting services to multinational manufacturing, retailing and distribution clients as well as to international banks. Mr Padron holds a Certified Public Accountant License and is a licensed real estate sales person in the State of Florida.
Edward P. Jacobsen has served as President of Terremark Construction Services, Inc. since 1991, where he administers all construction operations for the company. This role includes research and analysis of potential development opportunities, as well as feasibility, construction, and budget analysis. Mr. Jacobsen joined Terremark in 1991 to help establish offices and manage post-war construction projects in Kuwait and Saudi Arabia. In 1993, he returned to Terremark's corporate headquarters in Miami to assume managerial responsibility of all development, construction, and property management operations. Mr. Jacobsen holds licenses as a professional engineer, general contractor, and real estate salesperson in the State of Florida.
Michael L. Katz has served as the President and Chief Operating Officer of Terremark Real Estate Group, Inc. since April 28, 2000. Prior to that, Mr. Katz served as the President and Chief Operating Officer of Terremark Group, Inc., the predecessor to Terremark Real Estate Group. Mr. Katz has had primary responsibility for supervising all operations of Terremark Group and all its subsidiaries since 1998. Mr. Katz co-founded KB Commercial and served as its Chairman from 1987 to 1997. KB Commercial provided a full range of real estate services, primarily focused on asset management and all of its discipline for its institutional clients. Mr. Katz has been a member of the Florida Bar since 1974. Mr. Katz received his Bachelor of Arts degree from the University of Maryland and his J.D. from the University of Florida.
William J. Biondi has served as the President of Terremark Management Services, Inc., Terremark Realty, Inc., and Terremark Financial Services, Inc. since April 28, 2000. Mr. Biondi joined the senior management of Terremark Group upon the merger of Terremark with KB Commercial Real Estate Group in 1998. As President of Terremark Management Services, Inc., Terremark Realty, Inc., and Terremark Financial Services, Inc., Mr. Biondi has overseen the management, brokerage, and leasing activities of these three divisions, as well as being responsible for business generation. Mr. Biondi has over 25 years of commercial real estate experience covering all aspects of office building development, rehabilitation, sales, leasing and day-to-day portfolio management in the South Florida marketplace. The positions he has held have included President, CEO and Co-founder of Clark-Biondi Company, President and CEO of Grubb & Ellis of Florida, and President and CEO of KB Commercial Real Estate Group.
Aviva D. Budd has served as President of Terremark Northeast, Inc. since April, 1999. From April 1997 until April 1999, Ms. Budd was a Senior Vice President of U.S. Realty Advisors, L.L.C. From February 1995 until April 1997, Ms. Budd served as Principal Investment Officer for real estate for Combined Retirement and Trust Funds of the State of Connecticut. Ms. Budd has also served as Senior Vice President of Business Development since June 23, 2000. Ms. Budd received her Bachelor of Arts degree from the University of Connecticut and her J.D. from Harvard Law School.
EMPLOYMENT AGREEMENTS
Mr. Wright has entered into a one year employment contract with us to serve as President and Vice Chairman of Terremark Communications Group, Inc. The agreement provides for an annual base salary of $250,000 and a surrender by him of options to purchase two million shares of the common stock at $3 per share and of options to purchase one million shares of common stock at $0.35 per share. We have also entered into employment agreements with Manuel D. Medina, Brian K. Goodkind, Irving I. Padron, Jr., Michael L. Katz, Edward P. Jacobson, William J. Biondi and Aviva D. Budd.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Registrant's 2000 definitive proxy statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Registrant's 2000 definitive proxy statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from the Registrant's 2000 definitive proxy statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. and 2. The financial statements listed in the accompanying Table of Contents to Consolidated Financial Statements and Financial Statement Schedule at page herein are filed as part of this report.
3. The exhibits listed in the Exhibit Index are filed with or incorporated by reference as part of this report.
(b) No Reports on Form 8-K were filed by us during the fourth quarter of the fiscal year ended March 31, 2000.
(c) The following exhibits, which are furnished with this Annual Report or incorporated herein by reference, are filed as a part of this Annual Report.
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ -------------------
2.1 Agreement for Sale of Assets by and between ITV Communications, Inc. and Netmatics, Inc., dated January 11, 1996, and Promissory Note and Security Agreement dated January 16, 1996(1) 2.2 Agreement of Merger between AVIC Group International, Inc., a Colorado corporation, with and into AVIC Group International, Inc., a Delaware corporation dated July 10, 1996(4) 2.3 Agreement and Plan of Merger by and between Terremark Holdings, Inc. and AmTec, Inc., dated as of November 24, 1999, as amended by that certain Amendment to Agreement and Plan of Merger, dated as of February 11, 2000(7) 3.1 Amendments to Certificate of Incorporation of the Company dated June 7, 1996 and June 10, 1996 (5) 3.2 Restated Certificate of Incorporation of the Company (3) 3.3 Certificate of Ownership and Merger Merging China Telecommunications and Technologies, Inc. into the Company(6) 3.4 Certificate of Merger of Terremark Holdings, Inc. with and into AmTec, Inc. (8) 3.5 Restated Bylaws of the Company (8) 4.1 Certificate of Designations of Preferences of Series G Convertible Preferred Stock of the Company (8) 4.2 Specimen Common Stock Certificate (6) 10.1 1995 Stock Option Plan (2) 10.2 1996 Stock Option Plan (2) 10.3 Real Property lease between Lexreal Associates and the Company dated May 8, 1995 (2) 10.4 Form of Indemnification Agreement for directors and officers of the Company (4) 10.5 Form of Employment Agreement 10.6 Employment Agreement with Joseph R. Wright 21 Subsidiaries of the Company 27 Financial Data Schedule
- ---------------
(1) Previously filed as part of the Company's Current Report on Form 8-K dated January 19, 1996. (2) Previously filed as part of the Company's Transition Report on Form 10-KSB for the transition period from October 1, 1994 to March 31, 1995. (3) Previously filed as part of the Company's Current Report on Form 8-K dated March 6, 1997. (4) Previously filed as part of the Company's Definitive Proxy Statement dated April 18, 1996. (5) Previously filed as part of the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996.
(6) Previously filed as part of the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997. (7) Previously filed as part of the Company's Definitive Proxy Statement filed on March 24, 2000. (8) Previously filed as part of the Company's Registration Statement on Form S-3 filed on May 15, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29th day of June, 2000.
Terremark Worldwide, Inc.
By: /s/ Manuel D. Medina ------------------------- Manuel D. Medina, Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of AmTec, Inc. New York, New York
We have audited the accompanying consolidated balance sheets of AmTec, Inc. and subsidiaries (the "Company") as of March 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 12 to the consolidated financial statements, on April 28, 2000, the Company merged with Terremark Holdings, Inc. and changed its name to Terremark Worldwide, Inc.
DELOITTE & TOUCHE LLP
New York, New York June 22, 2000
AMTEC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
See notes to consolidated financial statements.
AMTEC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
AMTEC, INC. AND SUBSIDIARIES YEARS ENDED MARCH 31, 2000, 1999 AND 1998 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - --------------------------------------------------------------------------------
See notes to financial statements
AMTEC, INC. AND SUBSIDIARIES YEARS ENDED MARCH 31, 2000, 1999 AND 1998 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED - --------------------------------------------------------------------------------
See notes to financial statements
AMTEC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
AMTEC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED MARCH 31, 2000, 1999 AND 1998 - --------------------------------------------------------------------------------
1. SUPPLEMENTAL CASH INFORMATION:
No interest or income taxes were paid during fiscal 2000, 1999 and 1998.
2. NONCASH FINANCING ACTIVITIES:
FISCAL 2000
29.8 shares of Series E Convertible Preferred Stock were converted into 3,858,346 shares of Common Stock.
A total of 180,000 shares of Common Stock were issued to certain officers of the Company as stock awards pursuant to their employment agreements, and a total of 20,000 shares of its Common Stock were issued to certain of its directors as compensation.
On June 18, 1999, the Company and Jacqueline B. Brandwynne reached a settlement in principle of the legal proceedings filed against the Company on April 15, 1996. In September 1999, the Company gave Ms. Brandwynne and her attorney a total of 210,525 shares of Common Stock with a value of $250,000 pursuant to the settlement agreement.
FISCAL 1999
Shareholder loans payable of $1,452,553 and related accrued interest of $907,068 were cancelled and credited to Additional Paid-In Capital.
The Company paid a dividend in-kind of $210,400 as part of the issuance of Series G Preferred Stock.
40.4 shares of Series E Convertible Preferred Stock were converted into 5,554,424 shares of common stock.
Warrants valued at $222,500 were cancelled and credited to Additional Paid-In Capital.
The Company cancelled a Common Stock Investment Agreement, as permitted by the Agreement, with Promethean Investment Group. 1,019,465 shares previously held in escrow designated for issuance under terms of the agreement were cancelled.
The option granted to the Hebei Provincial Government to acquire 3,000,000 shares of the Company's common stock at a price of $3.0625 per share was cancelled. Unamortized Deferred Option Cost valued at $918,751 was charged to Additional Paid in Capital.
FISCAL 1998
150 shares of Series D Convertible Preferred Stock were converted into 2,236,507 shares of common stock.
AMTEC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED MARCH 31, 2000, 1999 AND 1998 - --------------------------------------------------------------------------------
219 shares of Series C Convertible Preferred Stock were converted into 4,507,639 shares of common stock.
0.8 share of Series E Convertible Preferred Stock was converted into 106,646 shares of common stock.
12,727,909 shares of common stock were canceled upon determination that the full purchase price for such shares was not paid.
$850,000 Notes Payable related to a nonrefundable deposit received from a former affiliate was credited to Additional Paid in Capital.
1,524,178 shares of the Company's Series A Convertible Preferred Shares were canceled in accordance with the terms of a subscription agreement.
The Company issued stock options valued at $1,837,500 to the Hebei provincial government in exchange for a long-term cooperation agreement.
See notes to consolidated financial statements.
AMTEC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2000, 1999 AND 1998 - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
AmTec, Inc., ("the Company") through its majority-owned subsidiary in the People's Republic of China ("PRC") provides value-added telecommunications services in the Far East and was involved in providing financing and assistance in building telecommunications networks for third parties in the PRC. Additionally, the Company through its 50% joint venture, IP.Com, provides value-added telecommunication services, including telephony and data, to Asia.
During fiscal 1998 the Company organized two wholly-owned subsidiaries, one a Bermuda company and the other a British Virgin Island company. There was no activity in either company during the years ended March 31, 2000, 1999 and 1998.
As discussed in Note 12, on April 28, 2000, the Company acquired Terremark Holdings, Inc. ("Terremark") in a transaction expected to be accounted for as a reverse acquisition in which the Company is the legal acquirer and Terremark is the accounting acquirer. The Company changed its name to Terremark Worldwide, Inc on April 28, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
EQUITY METHOD OF ACCOUNTING - The Company accounts for its subsidiary Hebei United Telecommunications Equipment Co., Ltd. and subsidiary ("Hebei Equipment") (a limited life Sino-foreign joint venture) using the equity method of accounting, as minority shareholders of Hebei Equipment have substantive participating rights under the joint venture contract. The Company reports its investment in Hebei Equipment under the caption, "Investment in and advances to unconsolidated subsidiary". Under the equity method, the investment is carried at cost of acquisition, plus the Company's equity in undistributed earnings or losses since acquisition. Equity in the losses of the unconsolidated subsidiary is recognized according to the Company's percentage ownership in the unconsolidated subsidiary until the Company's contributed capital has been fully depleted. Reserves are provided where management determines that the investment or equity in earnings is not realizable. The Company has used its ownership percentage of 70% for purposes of calculating the share of earnings of its unconsolidated subsidiary, Hebei Equipment. Hebei Equipment owns 51% of Hebei United Telecommunications Engineering Company, Ltd. ("Hebei Engineering"). Hebei Equipment also accounts for its investment in Hebei Engineering by using the equity method of accounting as minority shareholders of Hebei Engineering have substantive participating rights under the joint venture contract. The summary financial information of Hebei Equipment and Hebei Engineering are included in Note 3 to the financial statements.
The Company owns 50% of IP.Com, LLC and accounts for its investment using the equity method of accounting. The summary financial information of IP.Com, LLC are included in Note 4 to the financial statements. The Company reports its investment in IP.Com, LLC under the caption "Investment in affiliate".
DIFFERENCE IN YEAR END - The Company's share of equity in losses of Hebei Equipment included in the consolidated financial statements are as of and for the years ended December 31, 1999, 1998 and 1997, Hebei Equipment's year-end. Since inception the Company has had a March 31 year-end. The Company maintained this year-end even though its subsidiaries have a calendar year-end so that delays in receiving information from China would not cause problems for the Company in meeting its reporting deadlines. However, the Company does monitor events in the lag period and, where appropriate, would disclose the occurrence of any significant event during such lag period. All companies established under PRC law are required to have a December 31 fiscal year-end date. Hebei Equipment and Hebei Engineering are equity joint venture companies established under PRC law.
MANAGEMENT ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATION - Certain amounts in the prior years financial statements have been reclassified to conform with the current year presentations.
CASH AND CASH EQUIVALENTS - For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method, to write off the cost of property and equipment over their estimated useful lives, after deducting the estimated salvage value of the assets as follows:
Furniture, fixtures and equipment 5 years Leasehold improvements 5 years Computer software 3 years
LONG-LIVED ASSETS - The Company evaluates long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the net carrying amount may not be recoverable. When such events occur, the Company measures impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss. The impairment loss, if determined, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company determined that, as of March 31, 2000 and 1999, there had been no impairment in the carrying value of the long-lived assets.
INCOME TAXES - Deferred income taxes are provided for using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. The tax consequences of those differences are classified as current or non-current based upon the classification of the related assets or liabilities in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, loan receivable, accounts payable, loan payable and accrued expenses approximates fair value because of the immediate short-term maturity of these financial instruments.
LOSS PER SHARE - Basic loss per common share is based on the weighted average number of common shares outstanding during the year. The effect of shares issuable upon exercise of warrants and stock options is anti-dilutive, therefore diluted earnings per share is not presented.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" establishes new rules for reporting and display of comprehensive income and its components. Other than an insignificant amount of foreign currency transactions, the Company has no other items of other comprehensive income and the net loss reported in the statement of operations is equivalent to the total comprehensive loss.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" requires the reporting of profit and loss, specific revenue and expense items, and assets for reportable segments. It also requires the reconciliation of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments, in each case to the corresponding amounts in the general purpose financial statements. The Company adopted SFAS 131 during the fiscal year 1999 and since the Company only invests in telecommunication networks, no other reportable segments were reported in the financial statements.
NEW ACCOUNTING STANDARD NOT YET ADOPTED - The Financial Accounting Standards Board has issued SFAS No. 133, "Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after July 1, 1999. Management has not yet completed the analysis of the impact this will have on the financial statements of the Company.
3. INVESTMENT IN AND ADVANCE TO UNCONSOLIDATED SUBSIDIARY
The Company conducts its operations in the PRC through a Sino Foreign Joint Venture ("SFJV"). The Company invested $2.1 million and holds a 70% interest in Hebei United Telecommunications Equipment Company Limited ("Hebei Equipment"), a SFJV with a wholly-owned subsidiary of the Electronics Industry Department of Hebei Province. Hebei Equipment, in turn, held a 51% interest in Hebei United Telecommunications Engineering Company Limited ("Hebei Engineering"), a joint venture with NTT International ("NTTI") and Itochu Corp. Both the Company's investments in the joint venture were accounted for by the equity method of accounting because minority shareholders of Hebei Equipment and Hebei Engineering have substantive participating rights under the provision of the Joint Venture contracts.
The following summarizes the total equity investment by the Company in Hebei Equipment as of March 31, 2000 and 1999:
Hebei Equipment held a 51% interest in Hebei Engineering, which was involved in developing GSM networks in the ten largest cities in Hebei Province, PRC for China United Communications Company ("Unicom"). Since the fall of 1998, the government of the PRC has taken a number of actions that have changed the legal environment in which the Company operates in China, including the requirement that Unicom terminate or revise its agreements with foreign invested companies. Consequently, Unicom terminated Hebei Engineering's cash flow sharing and technical services agreement. With the termination of that agreement, Hebei Engineering was liquidated in December 1999 and the Company's joint venture interests in six cellular networks in Hebei Province have been transferred to Unicom. As a result of the termination of the agreement, Hebei Engineering did not record any network revenue for the year ended December 31, 1999. As of January 24, 2000, Hebei Equipment received approximately $817,000 as a result of the liquidation of Hebei Engineering. While Hebei Engineering's operation had been terminated, Hebei Equipment has tried to negotiate to continue an ongoing participation in these networks. Hebei Equipment is also engaged in the development of Internet Protocol related businesses. The Company is currently pursuing the liquidation of Hebei Equipment.
The following summarized the major activities of Hebei Equipment and Hebei Engineering prior to its liquidation:
A. HEBEI ENGINEERING'S INVESTMENT IN GSM NETWORKS
Hebei Engineering had borrowed approximately $33,560,000 to purchase equipment which was contributed to Unicom to construct the GSM networks in Hebei Province and had received the right to receive future cash flow. The GSM networks were being built pursuant to a 15-year Project Cooperation Contract. Terms of the Project Cooperation contract included the following:
Initially, Hebei Engineering owned 100% of the assets prior to contributing such assets to Unicom and once contributed, Hebei Engineering owned and retained title to a 70% interest in the assets and Unicom owned and retained title to a 30% interest in the assets.
Both parties agreed to distribute the profit according to the "Distributable Cash Flow" (as defined) with 22% going to Unicom and 78% going to Hebei Engineering.
Each year, Hebei Engineering would transfer ownership of assets to Unicom equal in value to the Distributable Cash Flow received up to 60% of the assets in any one year. The maximum amount of assets transferred could not exceed 90% of the assets until termination of the Project Cooperation Contract.
Upon the termination of the contract the remaining 10% of the network assets would be assigned to Unicom without any further consideration.
Hebei Engineering would receive 78% of the Distributable Cash Flow after transfer of all the assets for the remainder of the 15-year period.
Under PRC law, foreign investment entities, such as Hebei Engineering, are not permitted to own or operate telecommunications networks. Substantially all of the Hebei Engineering's revenues were derived from contractual arrangements for the sharing of cash flow from network operations rather than from ownership or operation of the networks. Hebei Engineering had recorded its investment (GSM Construction Costs) as a right to receive future cash flow at cost and amortized its cost of these rights based upon the greater of the amount computed using (a) the ratio that current gross revenues from the GSM networks to the total of current and anticipated future gross revenues from the GSM networks or (b) the straight-line method over 15 years which was the remaining estimated economic life of the GSM networks at the inception of this investment.
Income from the GSM Networks was recognized at the time when Hebei Engineering could estimate or calculate the portion of its Distributable Cash Flow from the Networks. Unicom commenced operation of the GSM Networks in February 1997.
B. SUMMARY FINANCIAL INFORMATION FOR THE UNCONSOLIDATED SUBSIDIARY
The following tables represent summary financial information of the Company's subsidiary, Hebei Equipment, and its indirect subsidiary, Hebei Engineering, as of and for the years ended December 31, 1999 and 1998:
HEBEI HEBEI EQUIPMENT EQUIPMENT 1999 1998 ----------- ----------- Revenues $ -- $ -- =========== =========== Net (loss) income $ 543,365 $ (548,806) =========== ===========
Current assets $ 1,819,490 $ 2,698,980 Non-current assets 852,644 46,904 ----------- ----------- Total assets $ 2,672,134 $ 2,745,884 =========== =========== Current liabilities $ 910,797 $ 1,530,994 Non-current liabilities -- -- ----------- ----------- Total liabilities $ 910,797 $ 1,530,994 =========== ===========
HEBEI HEBEI EQUIPMENT EQUIPMENT 1999 1998 --------- ---------
Revenues $ -- $ 781,745 ============ ============ Net (loss) income $ 2,286,824 $ (1,729,431) ============ ============
Current assets $ 1,606,065 $ 3,755,416 Non-current assets -- 29,605,048 ------------ ------------ Total assets $ 1,606,065 $ 33,360,464 ============ ============
Current liabilities $ -- $ 5,385,717 Non-current liabilities -- 28,653,783 ------------ ------------ Total liabilities $ -- $ 34,039,500 ============ ============
4. INVESTMENT IN AFFILIATE
On April 28, 1999, the Company formed a joint venture, IP.Com, with Fusion Telecommunications International, Inc. ("Fusion"), a private facilities-based, multinational long-distance company. Fusion's current service offerings include voice and data, switched and dedicated, domestic and international long-distance and domestic and international prepaid calling cards, provided through a network of owned and leased facilities, leased lines and resale agreements.
The joint venture provides value-added telecommunication services, including telephony and data, to Asia. Utilizing the Company's established presence in China and Fusion's telecommunications franchise, the companies plan to expand the service offerings of the joint venture to include a fully integrated Internet protocol based network to provide voice and fax services.
The following table represents summary financial information of the Company's investment in IP.Com for the year ended March 31, 2000:
Revenues $ 2,353,400 =========== Net loss $(1,396,484) =========== Current assets $ 299,782 Non-current assets 1,216,551 ----------- Total assets $ 1,516,333 =========== Current liabilities $ 608,851 Non-current liabilities 154,169 ----------- Total liabilities $ 763,020 ===========
The Company owns 50% of IP.Com and accounts for its investment using the equity method of accounting. IP.Com began it's operations in September 1999 and the Company's share of its equity loss was $698,242 for the year ended March 31, 2000.
5. LOAN RECEIVABLE
During May 1999, the Company formed a three-way alliance with Fusion and IXS.NET, a private IP fax service provider, to develop IP fax services to Asia. IXS.NET purchases network and transmission services from established carriers at discounted prices and resells the services to its customers. As of March 31, 2000, the Company advanced $750,000 to IXS.NET. The loan receivable represents a convertible debt investment made by the Company in IXS.NET. The loan bears a bank reference interest rate plus 4% (13% as of March 31, 2000) payable upon defaults. The Company and Fusion have made an equal convertible debt investment into IXS.NET and the Company has an option to acquire up to 50% of IXS.NET.
On March 7, 2000, the Company entered into a Services and Loan Agreement with Telecom Routing Exchange Developers, Inc.,("T-REX"), the wholly-owned subsidiary of Terremark. T-REX's business is to provide operational support and development expertise in exchange for fees and a minority interest in profits to entities involved in acquiring, developing, renovating, managing and operating real property used as telecommunications routing exchange facilities. The Company agreed to provide certain support and consulting services for T-REX and to provide a working capital loan in the aggregate amount of $300,000. During the year ended March 31, 2000, the Company charged T-REX a $15,602 service fee and loaned them $300,000 for working capital. The loan bears 10% interest per annum.
On January 24, 2000, the Company agreed to lend up to $150,000 to a subsidiary of Fusion, Fusion Asia, LLC, under a note which is convertible into 50% of the equity of Fusion Asia. As of March 31, 2000, the Company advanced $150,000 to Fusion Asia.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of March 31, 2000 and 1999:
2000 1999 -------- --------
Furniture, fixtures and equipment $205,858 $208,277 Leasehold improvements 18,009 18,009 Computer software 15,385 15,385 -------- -------- 239,252 241,671 Less accumulated depreciation 187,429 144,745 -------- -------- $ 51,823 $ 96,926 ======== ========
Depreciation expense for fiscal years ended March 31, 2000, 1999 and 1998 was $45,111, $55,250 and $43,432 respectively.
7. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases a facility for its corporate and operations offices under a lease agreement which expires in fiscal year 2001. Minimum annual rental commitments under this lease for the year ending March 31, 2001 is $55,733.
Rent expense for fiscal years ended March 31, 2000, 1999 and 1998 was $236,867, $356,357 and $337,763 respectively.
EMPLOYMENT AGREEMENTS - As of March 31, 2000, the Company has entered into employment agreements with two officers expiring through January 2001 with aggregate annual salaries of $400,000. Those agreements were replaced with new employment agreements as of April 28, 2000, as a result of the merger with Terremark (see Note 12).
LITIGATION - A first amended complaint, dated April 15, 1996, was filed against the Company, ITV, and other parties, including certain of the Company's officers, directors and principal stockholders, by Jacqueline Brandwynne, a stockholder of the Company. The complaint, filed in the Superior Court of California, County of Los Angeles, alleges fraud, misrepresentation and breach of contract with respect to the sale of 666,667 shares of ITV stock for $1,000,000 prior to the completion of the Reorganization Agreement between the Company and ITV (the "Reorganization Agreement") in February 1995, in connection with which the shares of ITV were exchanged on a two for one basis for shares of the Company. The complaint seeks rescission of the transaction and damages of no less than $1,000,000. The complaint also alleges a claim in connection with an alleged oral employment agreement for 125,000 options to purchase shares of the Company's Common Stock at an exercise price of $0.35 per share and the right to purchase additional shares of Common Stock at $1.00 per share, plus other benefits, including a salary of no less than $130,000.
On June 18, 1999, the Company and Jacqueline B. Brandwynne reached a settlement in principle of the legal proceedings. In September 1999, the Company agreed to pay Ms. Brandwynne and her attorney, a total of 210,525 in the Company's Common Stock valued at $250,000 pursuant to the settlement agreement.
During 1998, the Company entered into an agreement to acquire an investment in a cable television network venture located in Hunan Province, PRC, from United International Holdings or UIH. The Company terminated the agreement because, among other reasons, it believes the closing had not occurred by December 31, 1999 through no fault of the Company. On December 30, 1999, UIH had indicated that it was ready to close the agreement. Should UIH seek judicial relief to require the Company to close, its superior financial resources could limit the Company's ability to defend management of the Company. The Company believes that it had clear rights to terminate the agreement. However, any unfavorable outcome resulting from this termination could have a material effect on the financial statements.
The Company is not aware of any pending litigation that could have a materially adverse effect on the Company's business, financial condition or results of operations.
REGULATION - The PRC's legal system is a civil law system based on written statutes and is a system in which decided legal cases have little precedential value. The PRC Government began to promulgate a comprehensive system of laws in 1979. Many laws and regulations governing economic matters in general have been promulgated. The general effect of this legislation has been to enhance the protection afforded to foreign invested enterprises in the PRC. However, as these laws and regulations are relatively new, their interpretation and enforcement involve significant uncertainty.
Chinese laws and regulations have prohibited foreign investors and foreign invested enterprises from owning or operating telecommunication networks in China. Since the fall of 1998, the Chinese government has taken a number of actions which have changed the legal environment in which the Company is operating in China, such as:
o preparing a new telecommunications law not yet issued; and o seeking admission to the World Trade Organization.
The result of these actions is difficult to predict since negotiations with relevant parties are ongoing and political uncertainties exist in China. Among other possibilities:
o the Company may be unable to convert returns of or on its investment it receives, if any, to U.S. currency or repatriate funds from China; o the new telecommunications law may facilitate entry into telecommunications businesses in China by national and international entities and increase competition; and o WTO accession will require China to abide by certain rules which assures foreign investors minimum direct ownership percentages in licensed telecommunications operators and may foster competition from Chinese or foreign telecommunications operators or investors.
In order to provide a uniform regulatory framework to encourage the orderly development of the PRC telecommunications industry, the PRC authorities are currently preparing a draft Telecommunications Law. Once formulated, the draft law will be submitted to the National People's Congress for review and adoption. It is unclear if and when the Telecommunications Law will be adopted. The nature and the scope of the regulation envisaged by the Telecommunications Law is not fully known but the Company believes that, if adopted, the Telecommunications Law will have a positive effect on the overall development of the telecommunications industry in the PRC. However, the Telecommunications Law, if adopted, may have an adverse effect on the Company's business, financial condition or results of operations.
The Chinese laws and regulations governing the telecommunications industry may also be changed or applied in a manner which would have a material adverse effect on the business, financial condition and results of operations of the Company.
Each of the Company's joint ventures, Hebei Equipment and Hebei Engineering, is organized under the laws of the PRC as a Sino-foreign equity joint venture enterprise, a distinct legal entity with limited liability. Such entities are governed by the Law of the PRC on Joint Ventures Using Chinese and Foreign Investments, and implementing regulations related thereto. The parties to an equity joint venture have rights to the financial returns of the joint venture in proportion to the joint venture interests that they hold. The operation of equity joint ventures is subject to an extensive body of law governing such matters as formation registration, capital contribution, capital distributions, accounting, taxation, foreign exchange, labor and liquidation. The transfer or increase of an interest in a Sino-foreign equity joint venture enterprise requires agreement among the parties to the venture and is effective upon approval of relevant government agencies.
FOREIGN CURRENCY EXCHANGE - The Company's joint ventures will receive nearly all of their revenue in Renminbi, which will need to be converted to other currencies, primarily U.S. dollars, and remitted outside of the PRC. Although the Renminbi is not a freely convertible currency at present, effective July 1, 1996, foreign currency "current account" transactions by foreign investment enterprises, including Sino-foreign joint ventures, are no longer subject to the approval of State Administration of Foreign Exchange ("SAFE", formerly, "State Administration of Exchange Control"). These transactions need only a ministerial review, according to the ADMINISTRATION OF THE SETTLEMENT, SALE AND PAYMENT OF FOREIGN EXCHANGE PROVISIONS promulgated in 1996. "Current account" items include international commercial transactions, which occur on a regular basis, such as those relating to trade and provision of services. Distributions to joint venture parties also are
considered a "current account transaction." Other noncurrent account items, known as "capital account" items, remain subject to SAFE approval.
8. STOCKHOLDERS' EQUITY
CANCELLATION OF LOANS PAYABLE TO SHAREHOLDERS - In fiscal 1999, loans payable and accrued interest in the amount of $2,359,621 were cancelled and credited to Additional Paid-In Capital account.
CANCELLATION OF CERTAIN SHARES OF COMMON STOCK - On December 8, 1997, the Company reduced its outstanding common stock and credited its Additional Paid-in Capital $12,728 as a result of canceling 12,727,909 shares of its common stock and 318,182 options to purchase its common stock issued to Tweedia International, Ltd. The cancellation was based on a determination that the full purchase price for the shares was never paid. The 12,727,909 canceled shares represented approximately thirty-eight percent of the total number of the Company's common shares outstanding prior to the cancellation of such shares.
REPURCHASE OF COMMON STOCK - On September 14, 1998 the Company announced its intention to purchase up to $1 million of its Common Stock on the open market. As of March 31, 1999, the Company had purchased 330,800 shares under this program for a total cost of approximately $383,383. During fiscal 2000, the Company purchased additional 70,000 shares for a total cost of approximately $88,633. All the common stock repurchased were cancelled as of March 31, 2000.
SALE OF COMMON STOCK - During fiscal 1998, 69,000 common shares were issued in connection with the exercise of certain employee stock options. Proceeds from this issuance aggregated $34,750. The Company did not sell any common shares during fiscal 1999. During fiscal 2000, 3,296,408 common shares were issued in connection with the exercise of certain employee stock options and stock warrants. Proceeds from this issuance aggregated $5,640,017.
SERIES A CONVERTIBLE PREFERRED STOCK - On August 19, 1997, upon determination that the entire amount of a nonrefundable deposit had been forfeited by a former affiliate, the Company canceled all of the outstanding Series A Convertible Preferred Stock (the "Series A Shares"). On December 19, 1995, the Company had issued 1,524,178 shares of the Company's Series A Shares in consideration of the transfer of a $4,572,536 nonrefundable equipment purchase deposit to the Company from a former affiliate. The Subscription Agreement for the Series A Convertible Preferred Stock provided that, if all or any portion of the deposit should be forfeited at any time and for any reason whatsoever by the former affiliate an equivalent number of the Series A Shares issued to it would be canceled.
SERIES C CONVERTIBLE PREFERRED STOCK - In June 1997, the Company completed a $2,500,000 offering of its Series C Convertible Preferred Stock ("Series C Preferred"). The offering consisted of 250 shares of Series C Preferred at $10,000 per share and entitled the holder to cumulative dividends at an annual rate of 8% per annum per share. The dividends were payable quarterly in shares of Common Stock or, in cash in connection with any payment pursuant to a Conversion Default at the election of the Company's board of directors. Such Series C shares were converted at conversion rates equal to the lowest trading price of the Company's common stock during the 30 business days immediately preceding each conversion date. During fiscal 1998, 219 outstanding Series C shares were converted into 4,507,639 common shares. In addition, the Company repurchased for consideration of $406,100 and retired 31 Series C shares. In connection with the discount for the above conversion, the Company credited Additional Paid-in Capital $260,784 and charged preferred dividends in an equal amount.
SERIES D CONVERTIBLE PREFERRED STOCK - In March 1997, the Company completed a $1,500,000 offering of its Series D Convertible Preferred Stock ("Series D Preferred"). The offering consisted of 150 shares of Series D Preferred at $10,000 per share and warrants to purchase common stock of the Company. The holder was entitled to cumulative dividends at
the annual rate of 8% per annum per share, payable quarterly in shares of Common Stock or, in cash in connection with any payment pursuant to a Conversion Default at the election of the Company's board of directors. During fiscal 1998, the Series D Preferred was converted into common stock of the Company at a conversion rate equal to the lowest trading price of the Company's common stock during the 30 days preceding each conversion date. In addition, the Series D Preferred shareholders converted their warrants into common stock at prices aggregating $131,909. Such Series D Preferred and warrants conversions aggregated 2,236,507 shares. In connection with the discount for the above conversion, the Company credited Additional Paid-in Capital $48,677 and charged preferred dividends in an equal amount.
SERIES E CONVERTIBLE PREFERRED STOCK - On October 22, 1997, the Company issued 74 shares of its Series E Convertible Preferred Stock (the "Series E Preferred"), par value $.001 per share and at a price of $100,000 per share and paying an 8% in-kind dividends. The net proceeds the Company received were approximately $6,759,000. The Series E Preferred has a stated liquidation preference value of $100,000 per share plus accrued in-kind 8% dividends since the date of issuance. Such liquidation preference is senior to all common stock but in parity with other series of preferred stock of the Company. The holders of Series E Preferred have no voting rights except with respect to certain matters that affect the rights related to the Series E Preferred.
Conversion of the Series E Preferred into Common Stock, which are restricted by certain "lock-up" agreements, is based on the lower of: (i) the lesser of a 10% premium to the market price of the Company's Common Stock, as reported on the American Stock Exchange, at the time of the investment's closing or of a 10% premium to the 10 day average trading price six months after the close or (ii) a discount to the lowest trade during the five (5) trading days prior to each conversion. The discount, which ranges from 15% to 20%, depends upon the date of the shareholders' conversion of the Series E Preferred, with the discount increasing as the period the shares are held increases. Warrants were issued to five of the Series E Investors to purchase up to 1,236,364 shares of the Company's Common Stock at a price equal to 120% of the market price of the Company's Common Stock at the time of the investment's closing. The number of warrants issued to each investor depended upon the amount invested and the length of the "lock-up" agreed upon between the Company and investor.
On November 10, 1998, 38.5 shares of the Company's Series E Preferred were acquired from an investment fund by the Company and investors known to the Company. As a result of this transaction, the Company bought back 3.08 shares of its Series E Preferred for $100,000. All of the Series E Preferred repurchased by the Company, which have 53,655 warrants attached, were retired and cancelled on January 20, 1999. 35.42 of the Series E Preferred bought by other investors were converted to Common Stocks on November 11, 1998. In connection to the conversion, the investors entered into a non-binding agreement to hold the converted Common Stock for a specified period of time. An additional 141,680 shares of Common Stock was issued to the investors with respect to the agreement and $144,375 was charged to expense in the statement of operations.
The Company registered 13,832,792 shares of common stock on January 16, 1998, to cover the common stock issuable to the Series E Holders upon conversion of their Series E shares and exercise of their warrants. As of March 31, 2000, all 70.92 shares (74 shares net of 3.08 shares bought back by the Company) of the Series E Preferred Stock were converted into 9,519,416 shares of the Company's common stock.
SERIES G CONVERTIBLE PREFERRED STOCK - In March 1999, the Company completed a $2,000,000 offering of its Series G Convertible Preferred Stock ("Series G Preferred"). The offering consisted of 20 shares of Series G Preferred at $100,000 per share and Warrants to purchase Common Stock of the Company. Each Warrant entitled the holder to purchase one share of Common Stock at a fixed exercise price of $1.25 per share. The Company allocated $210,400 for the Warrants issued using the Black-Scholes valuation model. The value allocated to the Series G Preferred was
$1,789,600. In connection with the discount on the Series G Preferred, the Company credited $210,400 to Additional Paid-in Capital and charged preferred dividends for an equal amount.
The Series G Preferred has a stated liquidation preference value of $100,000 per share plus 8% accrued in-kind dividends since the date of issuance. Such liquidation preference is senior to all Common Stock but in parity with other series of preferred stock of the Company. The holders of Series G Preferred have no voting rights except with respect to certain matters that affect the rights related to the Series G Preferred.
None of the Series G Preferred was converted into common stock up to March 31, 2000.
STOCK WARRANTS -During fiscal 1998, the Company issued Warrants to purchase 326,171 shares of the Company's Common Stock to the Placement Agent as fees for services in connection with the placement of the Series E Preferred described above. These Warrants have an exercise price of $2.475 per share and expire on October 22, 2002. The Company has assigned a value of $161,450 to these Warrants.
During fiscal 1998, the Company rescinded an agreement it entered into in July 1996 with an investment banking firm in which such firm was to act as a financial advisor to the Company. As part of this rescission the Company canceled Warrants to purchase 200,000 shares of the Company's common stock. Professional fees and Warrants were reduced by $147,000 to reflect this cancellation.
In connection with a financial services agreement which was cancelled during fiscal 1999, the Company issued 600,000 Warrants to an investment banking firm, 300,000 of which vested at the time the agreement was entered into and 300,000 which were to vest when such firm had raised a minimum of $10 million. During fiscal 1997, with respect to the vested 300,000 Warrants, the Company recorded $222,500 in professional fees which management determined to be the fair value of the Warrants. The Warrants were not exercised and were subsequently cancelled during fiscal 1999. The value of such Warrants was credited to Additional Paid-In Capital upon cancellation.
During fiscal 1999, the Company issued 600,000 Warrants to purchase the Company's Common Stock at a fixed exercise price of $1.25 per share. The Warrants were issued in connection with the Company's issuance of Series G Preferred (see Series G Convertible Preferred Stock above).
During fiscal 2000, the Company received $3,067,908 from the exercise of Warrants to purchase 1,009,533 shares of Common Stock of the Company.
ISSUANCE OF COMMON STOCK FOR SERVICES - During the year ended March 31, 1998 the Company issued shares of its Common Stock for services rendered. The number of shares issued in each case was based upon the quoted market value of the stock at the issue date and the value of the services rendered. Total shares issued in connection with these services amounted to 63,233 covering the $151,957 of expenses which are included in the accompanying financial statements.
THE PROMETHEAN COMMON STOCK EQUITY AGREEMENT - On March 31, 1997 the Company entered into a Common Stock Investment Agreement with Promethean Investment Group L.L.C. ("Promethean") pursuant to which Promethean would provide a $10 million equity line to the Company. The agreement was cancelled during fiscal year 1999 by the Company in accordance with the terms in the agreement.
Initially, 1,570,998 shares were issued into escrow on behalf of Promethean. During the year ended March 31, 1998, none of the shares issued under this agreement were released from escrow. During the year ended March 31, 1999, this agreement was cancelled and all the shares issued into escrow on behalf of Promethean were cancelled.
STOCK OPTIONS - The Company has adopted two stock option plans which were The Company, Inc. 1995 Stock Plan and The Company, Inc. 1996 Stock Option Plan. Under those plans, incentive and nonqualified options and stock appreciation rights may be granted to employees, officers, directors, and consultants of the Company. There are 12,500,000 shares of common stock reserved for issuance under these plans. The exercise price of the options are determined by the board of directors, but in the case of an incentive stock option, the exercise price may not be less than 100% of the fair market value on the date of grant. Options vest over periods not to exceed ten years.
A summary of the status of all of the Company's stock options issued as of March 31, 2000, 1999 and 1998 and changes during the years then ended is presented below:
The above options include options granted to the Hebei Provincial Government during fiscal 1998 to acquire 3,000,000 shares of the Company's common stock at a price of $3.0625 per share. These options, which vest 25% every six months from the date of grant, were cancelled during fiscal 1999. In connection with granting these options, $1,837,500 was recorded as a charge to Deferred Option Cost and a corresponding credit was made to Additional Paid-in Capital. During the quarter ended December 31, 1998, the Company cancelled these options granted. Deferred Option Cost of $918,751 was amortized through the cancellation date of these options. The unamortized Deferred Option Cost up to the date of cancellation was charged to Additional Paid-in Capital.
The Company followed the guidelines under SFAS No. 123 to determine the fair value of options at the date of grant. The value was determined using an adjusted Black-Scholes option pricing model. The Black-Scholes model is generally accepted as appropriate primarily for short-term, exchange-traded options. As of March 31, 1999, the Company's management had determined that the longer term options it has issued did not have the liquidity of an exchange traded option and where the underlying common stock was not highly liquid (as is the case with the Company's Common Stock), the Black-Scholes formula needs to be adjusted, especially in reference to the volatility measurement used. The Company's stock was thinly traded, averaging around 100,000 shares per day, and cannot be considered highly liquid. For the purpose of valuing the Company's options, which could have up to a ten year life, the following assumptions were used, where the volatility measurement was based on management's expectations and judgement:
Risk-free rate 4.69 - 5.64% Volatility 20-23% Expected Life 3 - 5 years Expected Dividends 0%
As of March 31, 2000, the Company determined the fair value of options at the date of grant using a Black-Scholes option pricing model. The Company abandoned the adjustments made to the model in fiscal 1998 and 1999 as trading volume of the Company's common stocks improved. For the purpose of valuing the Company's options, which can have up to a ten-year life, the following assumptions were used:
Risk-free rate 5.27 - 6.4% Volatility 80-105% Expected Life 5 years Expected Dividends 0%
The following table summarizes information about options outstanding at March 31, 2000:
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and related Interpretations in accounting for its employee options. Accordingly, no compensation cost has been recognized with respect to such awards. Had compensation cost for the Company's stock option plans been determined consistent with Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net earnings and earnings per share would have approximated the pro forma amounts indicated below:
9. LOAN PAYABLE
During the quarter ended December 31, 1999, Terremark agreed to provide the Company with collateralized bridge financing up to $1.5 million, to meet the Company's short-term capital requirements and working capital needs. The bridge loan bears 10% annual interest and will become immediately due and payable if the merger agreement (see Note 12) is not approved by the Company's stockholders. Additionally, if the merger does
not close by July 1, 2000, the Company is obligated to repay, if any, the outstanding balance on the bridge loan. As of March 31, 2000, the Company has obtained approximately $1,125,000 under this facility. The Company has collateralized the bridge financing by pledging all of its tangible and intangible assets to secure the bridge loan. The loan was fully repaid in April 2000.
10. INCOME TAXES
As of March 31, 2000, the Company has federal net operating loss carry forwards of approximately $12,900,000 through 2020. In considering previous years stock issuance and the merger with Terremark (see Note 12) using these losses to offset future profits may be subject to limitation under Section 382 of the Internal Revenue Code if it is determined that an ownership change has occurred in connection with the stock issuance and the merger.
Significant components of the Company's deferred assets and tax liabilities for federal income taxes consist of the following:
A valuation allowance has been provided equal to the amount of the deferred tax assets, as management of the company does not believe that it is more likely than not that the deferred tax assets will be realized. The net change in the valuation allowance for the years ended March 31, 2000 and 1999 was an increase of $2,003,750 and $1,326,887, respectively.
11. UNCOMPLETED TRANSACTIONS
During fiscal 1999, the Company signed an agreement with a subsidiary of Global TeleSystems, Inc. ("GTS"), under which that subsidiary of GTS would acquire approximately 5.9 million shares of the Company's common stock and the Company would acquire GTS's 75% interest in a Shanghai-based joint venture. This joint venture hold the rights to a majority share of the cash flow generated by Shanghai VSAT Network Systems (SVC), the premier satellite-based telecommunications network operator in China. The Company has terminated the agreement because, among other reasons, necessary governmental approvals were not granted. GTS has agreed to the termination.
During fiscal 1999, the Company entered into an agreement to acquire an investment in a cable television network venture located in Hunan province, PRC, from United International Holdings ("UIH"). The Company has terminated the agreement because, among other reasons, believes the closing had not occurred by December 31, 1999 through no fault of the Company. The Company believes that it had clear rights to terminate the agreement.
12. SUBSEQUENT EVENTS
On November 24, 1999, the Company signed a definitive merger agreement with Terremark, a privately held, full service real estate and development company based in Miami, Florida. Terremark has been engaged in the development, construction, sale, leasing, management and financing of various real estate projects since 1982. Terremark has provided these services to private and institutional investors, as well as for its own account. The real estate projects with which Terremark has been involved have included retail, high rise office complexes, mixed-use projects, condominiums, condominium hotels, and governmental assisted housing. Terremark is also involved in a number of ancillary businesses which complement its core development operations. Specifically, Terremark engages in brokering financial services, property management, construction, construction management, condominium hotel management, residential sales and commercial leasing and brokerage, and advisory services.
Pursuant to the merger agreement, Terremark will merge with and into AmTec with AmTec as the surviving company. Under the terms of the proposed transaction, the Company will acquire all existing Terremark's net assets, including real estate, development projects, management and construction contracts and brokerage operations. Concurrent with the signing of the merger agreement, the Company entered into a stock purchase agreement with Vistagreen Holdings (Bahamas), Ltd., a Bahamian international business company, Moraine Investments, Inc., a British Virgin Islands company and Paradise Stream (Bahamas) Limited, a Bahamian international business company. These parties with whom the Company has entered into the stock purchase agreement will be collectively referred to as Vistagreen. Under the stock purchase agreement, the Company will sell to Vistagreen 68,520,236 shares of outstanding shares of common stock of the combined company, representing 35% of the outstanding common stock of the combined company on a fully diluted basis, after giving effect to the merger. Both the merger and stock purchase transactions are subject to satisfaction of certain conditions and approval from the Company's shareholders.
On April 28, 2000, after approval by AmTec's shareholders, AmTec completed its merger with Terremark. Pursuant to this merger, the Company changed its name from AmTec, Inc. to Terremark Worldwide, Inc. The Company intends to account for the merger as a reverse acquisition.
The reverse acquisition will be accounted for as a purchase business combination in which Terremark is the accounting acquirer and the Company is the legal acquirer. As a result of the reverse acquisition, the financial statements on a prospective basis will be that of the accounting acquirer (Terremark), while the net assets of the legal acquirer (the Company) will be revalued and the purchase price will be allocated to the assets acquired and liabilities assumed.
On May 31, 2000, the Company acquired Telecom Routing Exchange Developers, also known as "T-Rex Developers," a facilities provider to the telecommunications industry. T-Rex Developers develops new facilities and converts existing properties for use as telecommunications routing exchanges. Telecommunications routing exchanges are facilities used by telecommunications companies to house their switches and provide leasable space for internet service providers, content providers, co-location companies and other similar tenants. T-Rex Developers is the exclusive real estate service provider for Telecom Partners, an entity in which the founders of T-Rex Developers have an interest. Telecom Partners presently owns four properties, one located in each of Boca Raton, Florida, Cleveland, Ohio, Hartford, Connecticut, and Miami, Florida.
On May 9, 2000, the Company announced that it had reached agreement to acquire Post Shell Technology Contractors, Inc. The Company expects to close this transaction in June 2000. Post Shell Technology Contractors is a 17 year old Miami company which has performed general contracting services for complex construction projects, including telecommunications facilities.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
We have audited the accompanying balance sheets of Hebei United Telecommunications Equipment Co., Ltd. as of December 31, 1999 and 1998 and the related statements of operations, investors' equity and cash flows for the years ended December 31, 1999, 1998 and the period from April 29, 1997 (date of establishment) to December 31, 1997. 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 United States of America. Those standards require that we plan and perform the audits 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 the 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, such financial statements present fairly, in all material respects, the financial position of Hebei United Telecommunications Equipment Co., Ltd. as of December 31, 1999 and 1998 and the results of its operations and its cash flows for the years ended December 31, 1999, 1998 and the period from April 29, 1997 (date of establishment) to December 31, 1997 in conformity with accounting principles generally accepted in the United States of America.
Deloitte Touche Tohmatsu Beijing, People's Republic of China May 26, 2000
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. BALANCE SHEETS DECEMBER 31, 1999 AND 1998
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND THE PERIOD APRIL 29, 1997 (DATE OF ESTABLISHMENT) TO DECEMBER 31, 1997
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. STATEMENTS OF INVESTORS' EQUITY DECEMBER 31, 1999, 1998 AND 1997
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND THE PERIOD APRIL 29, 1997 (DATE OF ESTABLISHMENT) TO DECEMBER 31, 1997
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999, 1998 AND THE PERIOD APRIL 29, 1997 (DATE OF ESTABLISHMENT) TO DECEMBER 31, 1997
1. ORGANIZATION
Hebei United Telecommunications Equipment Co., Ltd. ("the Company") was established on April 29, 1997 as a limited liability joint venture company in the People's Republic of China ("PRC"). The period of operation is twenty years. The registered capital of the Company was US$3 million, of which 60.8% (US$ 1.824 million) was contributed by AmTec, Inc. (formerly known as AVIC Group International, Inc.), 9.2% (US$276,000) by CATCH Telecommunication Co., Ltd. (the "CATCH") and 30% (US$900,000) by Hebei United Telecommunications Development Co., Ltd. (the "DEVELOPMENT CO.") . On November 7, 1997, CATCH agreed to transfer its interest in the Company to AmTec, Inc. Subsequent to the transfer (which occurred on November 30, 1997), AmTec, Inc. owns 70% (US$2.1 million) and DEVELOPMENT CO. owns 30% (US$900,000) of the Company's registered capital. The Company's major activity to date is an investment in a Chinese joint venture which was mainly engaged in the development and construction of telecommunication systems, and providing related technical consulting and repair services. The Chinese joint venture was in the process of dissolution as of December 31, 1999 and the Company received the final distribution on dissolution of the Chinese joint venture on January 19, 2000.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). This basis of accounting differs from that used in the statutory financial statements of the Company, which are required to be prepared in accordance with the accounting principles and relevant financial regulations as established by the Ministry of Finance of the PRC.
The principal adjustments made to conform the statutory financial statements of the Company to US GAAP included the following:
o Adjustment to write off organization and operation set up expenses. o Adjustment to write off exchange loss.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies which have been adopted in preparing the financial statements set out in this report, and which conform with accounting principles generally accepted in the United States of America are as follows:
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand, demand deposits and highly liquid instruments with a maturity of three months or less at the time of purchase.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method to write off the cost of property and equipment, net of the estimated residual value of 10% of cost, over their estimated useful lives as follows:
Furniture, fixture and equipment 5 years Motor vehicles 5 years
LONG LIVED ASSETS - The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the net carrying amount may not be recoverable. When such events occur, the Company measures impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss. The impairment loss, if determined, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.
INVESTMENT IN JOINT VENTURE - The Company had owned 51% interest in Hebei United Telecommunications Engineering Company, Ltd. ("Hebei Engineering") up to January 20, 2000 Hebei Engineering was dissolved. The Company accounts for its investment using the equity method of accounting as the minority shareholders of Hebei Engineering have substantive participating rights under the joint venture contract. Under the equity method, the investment is carried at cost of acquisition, plus the Company's equity in undistributed earnings or losses since acquisition. Equity in the losses of the unconsolidated subsidiary is recognized according to the Company's percentage ownership in the unconsolidated subsidiary until the Company's contributed capital has been fully depleted. The Company's investment in Hebei Engineering has been fully offset by its share of losses up to December 31, 1998. Hebei Engineering was dissolved on January 20, 2000 and the Company received approximately RMB6.7 million final distribution on January 19, 2000.
INCOME TAX - Deferred income taxes are provided for using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. The tax consequences of those differences are classified as current or non-current based upon the classification of the related assets or liabilities in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.
FOREIGN CURRENCY TRANSLATION - The Company's financial statements are prepared using Renminbi as the reporting currency. Foreign currency transactions are translated at the rates ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the rates ruling on the balance sheet date. Exchange gains and losses are reported in the statement of operation.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" establishes new rules for reporting and display of comprehensive income and its components. The Company has no items of other comprehensive income and the net loss reported in the statement of operations is equivalent to the total comprehensive loss.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" requires the reporting of profit and loss, specific revenue and expense items, and assets for reportable segments. It also requires the reconciliation of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments, in each case to the corresponding amounts in the general purpose financial statements. The Company adopted SFAS 131 during the year and since the Company only invested in the Hebei Engineering, no other reportable segments were reported in the financial statements.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject the Company to concentrations of credit risk consists principally of temporary cash investments. The Company places its temporary cash investments with various financial institutions in the PRC. The Company believes that no significant credit risk exists as these investments are made with high-credit, quality financial institutions.
USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosures of contingent assets and liabilities in the financial statements and recorded amounts of revenue and expenses during the period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of cash and cash equivalents, other receivables, other payables, and amount due to an investor approximate fair value because of the short maturity of these instruments.
NEW ACCOUNTING STANDARD NOT YET ADOPTED - The Financial Accounting Standards Board has issued a new standard SFAS No. 133, "Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after July 1, 1999. Management has not yet completed the analysis of the impact this would have on the financial statements of the Company and has not yet adopted this standard.
4. OPERATION SET UP EXPENSE
Amount represents payment to CATCH for services provided in connection with the formation of the Company.
5. INCOME TAX
The statutory income tax rate of the Company is 33%. There is no provision for the income taxes during the years ended December 31, 1999 and 1998 and the period from April 29, 1997 (date of establishment) to December 31, 1997 as the Company has no assessable profits during the relevant periods.
Deferred tax assets of RMB1,260,872, RMB695,754 and RMB639,209 existed as at the end of 1999, 1998 and 1997 respectively, arising from temporary differences. A valuation allowance has been made for the full amount of the deferred tax assets since it is considered more likely than not that all of the deferred assets will not be realized.
Deferred tax assets are composed of the following:
December 31, 1999 December 31, 1998 ------------------- --------------------
Operation set up expense 686,400 660,000 Organization expenses 563,648 20,948 Exchange gain/loss 8,009 8,144 Other 2,815 6,662 Valuation allowance (1,260,872) (695,754) ---------- -------- -- -- ========== ========
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, ---------------------------- 1999 1998 ---------- ---------- RMB RMB
At cost: Furniture, fixtures and equipment 225,358 222,358 Motor vehicles 342,600 297,400 ------- ------- 567,958 519,758 Less: Accumulated depreciation 227,624 130,453 ------- ------- 340,334 389,305 ======= ======= All assets are located in the PRC
7. INVESTMENT IN A JOINT VENTURE
The Company holds a 51% interest in Hebei Engineering, which is developing GSM networks in the ten largest cities in Hebei Province, PRC. Nippon Telegraph and Telephone International, Inc. ("NTT") and Itochu Corporation hold the remaining 49% interest in Hebei Engineering.
The Company's investments in the joint venture was accounted for by the equity method of accounting because minority shareholders of Hebei Engineering have substantive participating rights under the provision of the Joint Venture contracts. (See Note 3).
DECEMBER 31, ------------------------------ 1999 1998 ---------- ------------ RMB RMB
Cost 12,731,283 12,731,283 Less: Accumulative share of losses (6,012,578) (12,731,283) ----------- ----------- 6,718,705 -- =========== ===========
Hebei Engineering was a Sino-foreign equity joint venture established on January 31, 1996 in the PRC. The period of operation was 25 years. The registered capital of Hebei Engineering is US$ 3 million and was mainly engaged in the development and construction of telecommunication systems, and providing related technical consulting services. Hebei Engineering was in the process of dissolution as of December 31, 1999 and Unicom had terminated Hebei Engineering's cash flow sharing and technical services agreement. As a result of the termination of the agreement, Hebei Engineering did not record any networks revenue during the year ended December 31, 1999. The Company received a distribution of approximately RMB 6.7 million on January 19, 2000.
Summarized balance sheets of Hebei Engineering as of December 31, 1999 and 1998 and summarized statements of operations for the years ended December 31, 1999 and 1998 and for the period April 29, 1997 (date of establishment) to December 31, 1997 are as follows:
8. AMOUNT DUE TO AN INVESTOR
Amount due to an investor represents funds advanced to the Company by AmTec, Inc. These amounts are interest free and payable on demand.
9. CAPITAL CONTRIBUTION
DECEMBER 31, 1999 AND 1998 --------------------------------- OWNERSHIP RMB
Capital contributed by:
DEVELOPMENT CO. 30% 7,480,150 AmTec Inc. 70% 17,443,068 -------------- --------------- 100% 24,923,218 ============= ===============
10. COMMITMENTS
The Company leases certain buildings under operating leases, which expire through 2000. Rental expense under these operating leases was RMB17,640 in 1999, RMB100,128 in 1998 and RMB62,580 in 1997.
The aggregate minimum operating lease commitments under all non-cancellable leases at December 31, 1999, require payment of RMB51,400 in 2000.
11. RETIREMENT BENEFITS
The Company's employees are entitled to a retirement pension calculated with reference to their basic salaries on retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to these retired staff. The Company is required to make contributions to the state retirement plan at rates ranging from 18% to 20% of the adjusted monthly basic salaries of the current employees. The expense of such arrangements to the Company was insignificant for the periods presented. The Company is not obligated under any other post-retirement plans and post-employment benefits are not significant.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
We have audited the accompanying balance sheets of Hebei United Telecommunications Engineering Co., Ltd. as of December 31, 1999 and 1998 and the related statements of operations, investors' equity (deficit) and cashflows for the years ended December 31, 1999, 1998 and 1997. 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 audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 the 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, such financial statements present fairly, in all material respects, the financial position of Hebei United Telecommunications Engineering Co., Ltd. as of December 31, 1999 and 1998, the results of its operations and its cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity with accounting principles generally accepted in the United States of America.
Deloitte Touche Tohmatsu Beijing, People's Republic of China May 26, 2000
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. BALANCE SHEETS DECEMBER 31, 1999 AND 1998
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. STATEMENTS OF INVESTORS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS
1. GENERAL
Hebei United Telecommunications Engineering Co., Ltd. ("the Company") was established on January 31, 1996 as a limited liability joint venture company in the People's Republic of China ("PRC"). The period of operation is 25 years. The registered capital of the Company is US$ 3 million, of which 51% (US$1.53 million) was contributed by Hebei United Telecommunications Equipment Co., Ltd.("EQUIPMENT CO."), and 49% (US$ 1.47 million) by NTT International Inc. ("NTT"). On October 18, 1996, NTT agreed to transfer 19.6% of the capital in the Company to Itochu Corporation ("ITOCHU") with effect from December 27, 1996. Subsequent to the transfer, EQUIPMENT CO. owned 51% (US$1.53 million), NTT owned 29.4% (US$882,000) and ITOCHU owned 19.6% (US$588,000) of the Company's registered capital. The Company was mainly engaged in developing and assisting in construction of telecommunication systems, and providing related technical consulting services.
The Company had invested approximately RMB253 million in the construction of GSM telecommunications network (the "GSM network") in Hebei Province of the PRC. The GSM network was built pursuant to a 15-year Project Cooperation Contract with China United Communications Company ("UNICOM"), the operator of the GSM network. Terms of the contract include the following:
Initially, UNICOM will own 30% of the assets while the Company will own 70% of the assets. Both parties agree to distribute the profit according to the "Distributable Cash Flow" (as defined) with 22% going to UNICOM and 78% going to the Company. Each year, the Company will transfer assets equal in value to the Distributable Cash Flow received up to 60% of the assets. The maximum amount of assets transferred will not exceed 90% of the assets until termination of Cooperation Contract. Upon the termination of the contract the remaining 10% of the network assets shall be assigned to UNICOM without any further consideration. The Company will continue to receive 78% of the Distributable Cash Flow after transfer of the assets for the remainder of the 15-year period.
Under PRC law, foreign investment enterprises, such as the Company, are not permitted to own or operate telecommunications networks. Substantially all of the Company's revenues are derived from contractual arrangements for the sharing of cash flow from network operations rather than from ownership or operation of the network. The Company recorded its investment(GSM Construction Costs) at cost and amortized it over the remaining life of the project. Income from the GSM network is recognized at the time when the Company can estimate or calculate the portion of its Distributable Cash Flow from the network. UNICOM commenced operation of the GSM network in February 1997.
On August 9, 1999, the Company and UNICOM entered into an agreement to terminate the Project Cooperation Contract. According to the agreement, the Company would transfer the GSM network to UNICOM and UNICOM would pay RMB287million to the Company as cost of transferring the GSM network, settlement of the Company's prior year revenue and compensation for terminating the cooperation. On August 18, 1999 the Company commenced a liquidation process which was completed on December 6, 1999. The final distribution to investors happened in January 2000 and the business license of the Company was formally cancelled on January 20, 2000.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). This basis of accounting differs from that used in the statutory financial statements of the Company, which are required to be prepared in accordance with the accounting principles and relevant financial regulations as established by the Ministry of Finance of the PRC.
The principal adjustments made to conform to the statutory financial statements of the Company to US GAAP mainly included the following:
o Adjustment to write off organization expenses o Adjustment to write off exchange loss and gain
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies which have been adopted in preparing the financial statements set out in this report, and which conform with accounting principles generally accepted in the United States of America are as follows:
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand, demand deposits and highly liquid instruments with a maturity of three months or less at the time of purchase.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method to write off the cost of property and equipment, net of the estimated residual value of 10% of cost, over their estimated useful lives as follows:
Land and buildings 20 years Furniture, fixtures and equipment 5 years Motor vehicles 5 years
LONG LIVED ASSETS - The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the net carrying amount may not be recoverable. When such events occur, the Company measures impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss. The impairment loss, if determined, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the assets. The Company has liquidated all the assets as of December 31, 1999.
INVESTMENT IN GSM NETWORKS - Investment in GSM network is stated at cost less amortization. The investment in GSM network is amortized on a straight-line basis over the remaining life of the project cooperation agreement between the Company and UNICOM. The investment in GSM telecommunication networks was sold to UNICOM pursuant to a termination agreement with UNICOM effected August 9, 1999. An amount of approximately RMB279 million was received by the Company as proceeds from the sale of the investment resulting in a gain of approximately RMB 52 million.
CAPITALIZATION OF BORROWING COSTS - Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e. assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalized as part of the cost of those
assets. Capitalization of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned from the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from borrowing costs capitalized.
REVENUE RECOGNITION - Revenue related to the GSM networks is recognized at the time when the Company can estimate or calculate the portion of its distributable cash flow from the network.
INCOME TAX - Deferred income taxes are provided for using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. The tax consequences of those differences are classified as current or non-current based upon the classification of the related assets or liabilities in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.
FOREIGN CURRENCY TRANSLATION - The Company's financial statements are prepared using Renminbi as the reporting currency. Foreign currency transactions are translated at the rates ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the rates ruling on the balance sheet date. Exchange gains and losses are taken to the statement of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of cash and cash equivalents, short-term investments, accounts receivable, other receivables, other payables, and amount due to investors approximate fair value because of the short maturity of these instruments.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivable.
The Company places its temporary cash investments with various financial institutions in the PRC. The Company believes that no significant credit risk exists as these investments are made with high-credit, quality financial institutions.
The Company's account receivable represents revenue from GSM networks due from UNICOM, the operator of the GSM networks. The Company believes that no significant credit risk exists, as UNICOM is a high-credit PRC state-owned enterprise.
USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosures of contingent assets and liabilities in the financial statements and recorded amounts of revenue and expenses during the period. Actual results could differ from these estimates.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" establishes new rules for reporting and display of comprehensive income and its components. The Company has no items of other comprehensive income and the net loss reported in the statement of operations is equivalent to the total comprehensive loss.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This statement requires the reporting of profit and loss, specific revenue and expense items, and assets for reportable segments. It also requires the reconciliation of total segment revenues, total segment profit or loss, total segment assets, and other amounts
disclosed for segments, in each case to the corresponding amounts in the general purpose financial statements. The Company adopted SFAS 131 during the year and since the Company only invested in the GSM networks, no other reportable segments were reported in the financial statements.
NEW ACCOUNTING STANDARD NOT YET ADOPTED - The Financial Accounting Standards Board has issued a new standard SFAS No. 133, "Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after July 1, 1999. Management has not yet completed the analysis of the impact this would have on the financial statements of the Company and has not adopted this standard.
4. INCOME TAX
The statutory income tax rate of the Company is 33%. There is no provision for the income taxes during the years ended December 31, 1999 and 1998, as the Company did not have any assessable income for the relevant periods.
Deferred tax assets of RMB10,096,188 and RMB5,359,276 existed as at the end of 1998 and 1997 arising from temporary differences. A valuation allowance has been made for the full amount of the deferred tax assets since it is considered more likely than not that all of the deferred assets will not be realized.
No provision for deferred taxation has been made in the financial statements for the year ended December 31, 1999 as no significant temporary differences arose during the period and no significant deferred tax assets and liabilities existed at the relevant balance sheet date.
Deferred tax assets are composed of the following:
DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------ ----------------- RMB RMB
Amortization of GSM networks -- 12,592,117 Organization expenses -- 218,310 Exchange gain/loss -- (9,895) GSM networks revenue -- (2,704,344) Valuation allowance -- (10,096,188) ----------- ----------- -- -- =========== ===========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
All assets were located in the PRC before they were disposed in the course of dissolution. As of December 31, 1999, all assets have been disposed.
6. INVESTMENT IN GSM NETWORKS
Investment represents investment in GSM telecommunication network in Hebei Province, the PRC. The GSM network was built pursuant to a 15-year agreement with UNICOM commencing in February, 1996. UNICOM commenced operation of the GSM networks in February 1997. The investment was amortized on a straight-line basis over the remaining 12-year life of the agreement commencing from the operation of the networks to the date of its disposal.
The investment in GSM telecommunication networks was sold to UNICOM pursuant to a termination agreement with UNICOM effected August 9, 1999 for RMB279 million. The amount was received in two payments on August 10 and October 11, 1999.
7. RELATED PARTY TRANSACTIONS
Guarantee fees paid to NTT and ITOCHU are as follows:
8. OTHER PAYABLES
The Company has acquired a digital microwave system under deferred payment terms with final installments payable in 2001. The liabilities are guaranteed by NTT .
All above liabilities have been paid off as of December 31, 1999.
9. LONG-TERM LOANS
Scheduled repayments for the long-term loans are as follows:
On August 5, 1996, the Company was granted a long-term loan facility of US$ 20,000,000 by the Bank of Tokyo-Mitsubishi, Ltd. Beijing Branch at an annual interest rate of 6.82%. The Company has utilized US$20,000,000 (RMB165,574,000) as of December 31, 1998. Interest is payable on the outstanding balance six months after the date of the agreement, every six months thereafter, and at maturity. The principal is payable in five equal, consecutive, semiannual installments, each in an amount of US$4,000,000 commencing on the third anniversary of the date of the agreement.
On July 10, 1998, the Company was granted a long term loan facility of US$5,000,000 by the Bank of Tokyo-Mitsubishi, Ltd. Beijing Branch with an annual interest rate equals to the funding rate plus 0.625%. The Company has utilized US$5,000,000 (RMB41,393,500) as of December 31, 1998. Interest is payable on the outstanding balance on February 5, 1999, every six months thereafter, and at maturity. The principal is payable in four equal, consecutive, semiannual installments, each in an amount of US$1,250,000 commencing on the fifth interest payment date.
On September 30, 1998, the Company was granted a long term loan facility of US$6,820,000 by the Bank of Tokyo-Mitsubishi, Ltd. Beijing Branch with an annual interest rate equals to the funding rate plus 0.75%. The Company has utilized US$ 6,820,000 (RMB56,460,824) as of December 31, 1998. Interest is payable on the outstanding balance on February 5, 1999, every six months thereafter, and at maturity. The principal is payable in five equal, consecutive, semiannual installments, each in the amount of US$1,364,000 commencing on the sixth interest payment date.
All the obligations of the Company under the above agreements are guaranteed 60% by NTT International Corporation and 40% by ITOCHU. All such obligations had been paid off as of December 31, 1999.
10. CAPITAL CONTRIBUTION
11. EMPLOYEE RETIREMENT BENEFITS AND POST-RETIREMENT BENEFIT
The Company's retired employees are entitled to a retirement pension calculated with reference to their basic salaries on retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to these retired staff. The Company is required to make contributions to the state retirement plan at rates ranging from 18% to 20% in 1997, 1998 and the period from January 1, 1999 to December 6, 1999 of the adjusted monthly basic salaries of the current employees. The expense of such arrangements to the Company was insignificant in all the periods presented. The Company is not obligated under any other post-retirement plans and post employment benefits are insignificant.