SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, for the fiscal year ended: December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, for the transition period from ___________ to __________.
COMMISSION FILE NO: 333-8958
EQUITY FINANCE HOLDING CORPORATION
(Exact name of registrant as specific in its charter)
Belize, Central America
(Jurisdiction of incorporation or organization)
SUITE 408
CALLE CLEOFAS RUIZ #853-B
ZONA CENTRO - C.P. 22710
PLAYAS DE ROSARITO, B.C., MEXICO
(Address of principal executive offices.)
Registrant's area code and telephone number:
888-450-3342
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class:
None
Name of each exchange on which registered:
NASD OTCBB, United States
Securities to be registered pursuant to Section 12(g) of the Act:
Title of each class: None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
Title of each class:
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
5,149,000 Shares of Common Stock
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[ X ] YES [ ] NO
Indicate by check mark which financial statement item the registrant has elected
to follow:
[ ] ITEM 17 [X] ITEM 18
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] YES [ ] NO
1
INDEX BEGINS ON PAGE 2
INTRODUCTION
Equity Finance Holding Corporation (the "Company") was incorporated under the
laws of Belize, Central America on March 6, 1998. Its principal executive
offices are located at Suite 408, Calle Cleofas Ruiz #853-B, Zona Centro - C.P.
22710, Playas De Rosarito, B.C., Mexico. Its telephone number in the United
States is (888) 450-3342. Equity Finance Holding Corporation trades on the
United States NASD OTCBB stock exchange with the trading symbol of EFHLF.
As used herein, except as the context otherwise requires, the term "Company"
refers to Equity Finance Holding Corporation, a corporation organized under the
laws of Belize.
The Company publishes its financial statements expressed in United States
dollars. In this document, references to "US dollars" or "US$" are to the
currency of the United States of America.
The Company's fiscal year ends on December 31 of each year. References in
this document to a particular year are to the fiscal year unless otherwise
indicated.
In the future, the Company will continue to produce annual reports containing
audited financial statements and an opinion thereon by the Company's independent
public accountants. The financial statements contained in this registration
statement have been audited in accordance with United States Generally Accepted
Accounting Principles ("US GAAP").
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of 1995
Forward Looking Statements
The statements included in this annual report on Form 20-F ("Form 20-F")
regarding future financial performance and results and the other statements that
are not historical facts are forward-looking statements. The words "believes,"
"intends," "expects," "anticipates," "projects," "estimates," "predicts," and
similar expressions are also intended to identify forward-looking statements.
Such statements reflect various assumptions by the Company concerning
anticipated results and are subject to significant business, economic and
competitive risks, uncertainties and contingencies. Accordingly, there can be no
assurance that such statements will be realized. Such risks, uncertainties and
contingencies could cause the Company's actual results for 2001 and beyond to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company. The Company makes no representation or
warranty as to the accuracy or completeness of such statements contained in this
Form 20-F.
In addition, this annual report includes forward-looking statements relating to
our potential exposure to various types of market risks, such as foreign exchange
rate risk, interest rate and other risks related to financial assets and
liabilities and equity price risk. You should not rely on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors which are, in many cases, beyond our control and may cause our actual
results, performance or achievements to differ materially from anticipated future
results, performance or achievements expressed or implied by the forward-looking
statements and from past results, performance or achievements.
For further discussion of these factors, see "Item 3-Key Information-Selected
Financial Information," "Item 4-Information on the Company", "Item 5-Operating
and Financial Review ", and "Item 11-Quantitative and Qualitative Disclosures
about Market Risk".
You are cautioned not to place undue reliance on these forward-looking
statements. These forward-looking statements are made as of the date of this
annual report on Form 20-F and are not intended to give any assurance as to
future results.
2
INDEX
PART I
Item 1. Identity of Directors, Senior Management and Advisers._________________4
Item 2. Offer Statistics and Expected Timetable._______________________________4
Item 3. Key Information._______________________________________________________4
Item 4. Information on the Company.____________________________________________8
Item 5. Operating and Financial Review________________________________________12
Item 6. Directors, Senior Management and Employees.___________________________15
Item 7. Major Shareholders and Related Party Transactions.____________________19
Item 8. Financial Information.________________________________________________22
Item 9. The Offering and Listing._____________________________________________35
Item 10. Additional Information.______________________________________________35
Item 11. Quantitative and Qualitative Disclosures about Market Risk.__________38
Item 12. Description of Securities Other than Equity Securities.______________39
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies._____________________39
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds.__________________________________________________________39
Item 15. [Reserved].__________________________________________________________39
Item 16. [Reserved].__________________________________________________________39
PART III
Item 17. Financial Statements.________________________________________________39
Item 18. Financial Statements.________________________________________________39
Item 19. Exhibits.____________________________________________________________39
3
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL INFORMATION
The Company is a management consulting corporation and marketer of management
and financial consulting services offered principally to small businesses with
annual sales of $2,000,000 to $20,000,000. The Company provides resources to a
variety of business clients, assisting them in developing their capitalization
to achieve corporate growth. Additionally, the Company provides counsel and
expertise to this market segment, which will allow the closely-held client
corporations to be held more broadly.
As disclosed in the Form 8-K filing with the Securities and Exchange Commission
filed on EDGAR June 26, 2002, the accounting firm of Malone & Bailey,
PLLC,(Malone) has become Equity Finance Holding Company's independent public
accountants for 2001. The Company selected new independent accountants after it
was notified by Perry-Smith LLP that it declined to stand for re-election as the
Company's independent public accountants. The Company believes Malone is well
suited to deliver external audit services to Equity Finance Holding Company in
light of such relevant factors as the firm's depth of experience, resources and
commitment to provide exceptional service. The decision to retain Malone was
approved by the Company's Board of Directors at their meeting of June 5, 2002
based upon the Company's audit committee recommendations. During the two most
recent fiscal years ended December 31, 2001 and the subsequent period to June 5,
2002, there were no disagreements between the Company and Perry-Smith LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement if not resolved to Perry-Smith
LLP's satisfaction would have caused them to make reference to the subject
matter of the disagreement in connection with their reports. None of the
reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred
within the Company's two most recent fiscal years and the subsequent interim
period through June 5, 2002. Perry-Smith LLP's report on the Company's financial
statements was filed with the Securities and Exchange on April 26, 2001 in
conjunction with the Company's filing of its Annual Report on Form 20-F for the
year ended December 31, 2000. The audit reports of Perry-Smith LLP on the
financial statements of the Company as of and for the years ended December 31,
2000 and 1999 did not contain any adverse opinion or disclaimers of opinion, nor
were they qualified or modified as to audit scope or accounting principles;
however, the opinion was modified as to the uncertainty related to substantial
doubt about the Company's ability to continue as a going concern. During the two
most recent fiscal years ended December 31, 2000 and the subsequent period
through June 5, 2002, the Company did not consult with Malone regarding any of
the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
The Company provided Perry-Smith LLP with a copy of this disclosure. Perry-Smith
LLP provided a letter dated June 26, 2002, stating its agreement with these
statements.
The Company has operated only since 1998, therefore, only the period from then
until 31 December 2001 is included in this annual report, not 5 years as
required.
4
FOR THE PERIOD ENDED DECEMBER 31,
- --------------------------- ---------- ---------- -------------- ----------
OPERATIONS FOR THE PERIOD: 2001 2000 1999 1998
- --------------------------- ---------- ---------- ----------- ----------
Consulting fees $ - $ - $ 1,429 $ 4,922
Loss from operations $(360,576) $(297,287) $ (236,109) $(341,578)
Loss from operations per
share of common stock
diluted $ (0.07) $ (0.06) $ (0.05) $ (0.07)
Cash dividends declared per
share of stock $ - $ - $ - $ -
DECEMBER 31,
- --------------------------- ---------- ---------- -------------- ----------
BALANCE AT THE END OF THE 2001 2000 1999 1998
PERIOD:
- --------------------------- ---------- ---------- -------------- ----------
Total Assets $ 9,612 $ 49,689 $ 582 $ 2,898
Long-term obligations $ 116,439 $ 102,345 $ 69,805 $ 27,069
DIVIDENDS
As of December 30, 2001, the Company has distributed to the shareholders of its
common stock 514,920 common shares of International Technology Enterprises Ltd.,
a Belize International Business Corporation, 514,920 common shares of Hacienda
International Resorts Ld., a Belize International Business Corporation, and
514,920 common shares of QVP International Ltd., a Belize International Business
Corporation, as non-cash dividends. No cash dividends were distributed or paid
in previous years.
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable
D. RISK FACTORS
RISK FACTORS RESULTING SUBEQUENT TO DECEMBER 31, 2001
Shareholders Are At Risk Because the Company Does Not Currently Meet Standards
Of The NEW BBX Stock Exchange.
In June 2003, the OTC Bulletin Board (OTCBB) will be phased out. A new market,
the Bulletin Board Exchange (BBX), will be launched to take the place of the
OTCBB. The BBX will appeal to many of the same companies that are currently
quoted on the OTCBB, but will be a higher quality market. The BBX will offer a
significant improvement over the OTCBB for qualifying small companies by
increasing liquidity in the market for their securities, augmenting the
opportunity to raise equity capital and conferring the recognition of trading on
a listed Market. One of the listing requirements is presence of 200 shareholders
owning trading blocks. The Company presently does not meet that standard. If an
OTCBB issuer elects not to list on either the BBX or a national securities
exchange, its shares can still trade through informal, over-the-counter methods.
For example, market makers maychoose to move their quotes in that security to
the PinkSheets. Unfortunately, the PinkSheet market generally is substantially
less liquid and efficient and many investors are reluctant to consider PinkSheet
companies. The Company intends to comply with BBX listing requirements, but no
assurance can be provided that this will occur.
Shareholders Have Potential Risk Due To Change In The Company's Auditors.
As disclosed in the Form 8-K filing with the Securities and Exchange Commission
filed on EDGAR June 26, 2002, the accounting firm of Malone & Bailey,
PLLC,(Malone) has become Equity Finance Holding Company's independent public
accountants for 2001. The Company selected new independent accountants after it
was notified by Perry-Smith LLP that it declined to stand for re-election as the
Company's independent public accountants. The Company believes Malone is well
suited to deliver external audit services to Equity Finance Holding Company in
light of such relevant factors as the firm's depth of experience, resources and
commitment to provide exceptional service. However, the potential exists for
this change to negatively impact the Company and the Shareholder.
Negative Results May Impact Shareholders Due To The Resignation Of Mr. William
Cate From The Board of Directors.
As Reported to the Securities and Exchange Commission per Form 8-K filing
dated 31 December 2002, on 1 January 2002, Mr. William Cate, resigned as
Director of the Board as a normal result of the vote of shareholders at the annual
shareholder meeting held December 30, 2001. The new Director, elected by the
shareholders, taking office was: CHAN KAI HON, Director, 49 years of age, a
Management Consultant residing in Hong Kong.
The Global Economic Downturn Had, And Is Expected To Continue To Have,
A Material Adverse Effect On The Demand For Our Products, Our Business, Results
Of Operations And Financial Condition.
During 2001 there has been a significant downturn in economic conditions
in the world generally, exacerbated by the September 11 terrorist attacks on
the U.S., and in the management consulting industry in particular. We now
anticipate that the global economic downturn may be deeper and last longer than
we had previously expected. Many management consulting companies have not
achieved their financial and operating goals and have been unable to obtain
additional financing to run their business. Accordingly, many of these companies
are seeking to reduce the level of their expenditures and some have sought
bankruptcy protection. The financial difficulties experienced by the management
consulting industry may diminish our ability to obtain additional capital and may
require us to consider undertaking restructurings to reduce costs.
5
In addition to the effect on any new clients, the global downturn may also
affect the amount of service we deliver to some of our existing customers, as
they may be having difficulty obtaining necessary capital resources required to
fund the expansion of their businesses. The current volatility of the financial
markets and economic conditions in the U.S. and internationally may also
intensify the uncertainty experienced by some of our customers, who may find it
increasingly difficult to predict demand for their products and services. As a
result, some customers may attempt to slow or postpone the use of new management
consulting services. These factors may adversely affect demand for our services,
including possible suspension of contracts with us and the reluctance of
potential customers to evaluate our services. Also due to the difficult
financing and economic conditions, some of our customers may not be able to pay
us for services that we have already delivered. These factors together could
have a material adverse effect on our business, results of operations and
financial condition.
The Company's business is dependent on current and anticipated market demand for
management consulting services, which has been negatively impacted by the
slowdown in the economies of the United States, Asia, and elsewhere. The
uncertainty regarding the growth rate of the worldwide economies has caused
companies to reduce capital investment. These cutbacks have been particularly
severe in the management consulting industry that the Company serves. We cannot
predict if or when the growth rate of worldwide economies will rebound or
whether the growth rate of the Company's business will rebound when the
worldwide economies begin to grow. While the Company's diverse businesses may
allow the Company to perform better than some companies in periods of economic
decline, the effects of the economic decline are being felt across all
management consulting business. At the same time, ailing companies may require
management consulting during the downturn.
The Company And Shareholders May Suffer From Heavy Competition.
As described in more detail in the section titled "Information on the Company,"
below, the Company is primarily engaged in the management consulting business.
There are competitors in the management consulting industry that provide similar
products and services to those, which are provided by the Company. In many cases
these competitors are larger companies with greater capital resources on which
to draw. The Company's future success will depend to an extent upon its ability
to remain competitive in the areas of service, quality, price, marketing,
product development, service delivery, distribution and client processing. There
can be no assurance that the Company will be able to compete successfully.
Prices for the Company's services are typically determined by market conditions.
To remain competitive, the Company reviews and adjusts its pricing structure
from time to time in response to such industry-wide price changes. To the extent
that the Company may be obligated to adjust its pricing policies to meet
competition, the Company's financial performance may be adversely affected by
its inability to reduce its costs in response to industry-wide price reductions
or by its inability to increase its prices in response to increases in its costs
and expenses.
We Are Dependent On Our Significant International Operations, Which Face
Unique Obstacles And Could Have A Material Adverse Effect On Our Business.
Various international risks could negatively impact our international
operations, which could have a material adverse effect on our revenues, access
to capital and market position. Our international operations are subject to the
risks normally associated with international operations, including: - currency
conversion risks and currency fluctuations,- imposition of tariffs,-
limitations, including taxes, on the repatriation of earnings,- political
instability, civil unrest and economic instability,- concentration of credit
risk of customers and the Company's own credit risk, which may be increasing due
to the present trend of concentration around major units in the international
management consulting industry;-greater difficulty enforcing intellectual
property rights and weaker laws protecting such rights, - complications in
complying with laws in varying jurisdictions and changes in governmental
policies,- natural disasters and the greater difficulty and expense in
recovering therefrom,- transportation delays and interruptions.
An Adverse Result May Occur Due To The Possibility Of Setting Aside The
Lockup/Pooling Agreement.
Beowulf Investments is a party to the Lockup/Pooling Agreement (the Agreement)
along with the Company and certain companies beneficially owned by principal
shareholders of the Company. The Agreement restricts the trading of unregistered
shares of the Company. There cannot be unqualified assurance that this pooling
agreement will not be broken. The parties to the agreement would not be obligated
to consider the public shareholders in a decision to break the pooling agreement
because the public shareholders are not a party to the Agreement. If the pooling
agreement were broken, the insiders could sell some or all of their shares to the
public. Should this occur, the sales could depress the share price. Such EFHC
insider sales would be subject to SEC regulation as are the sales of all insider
stock.
6
Shareholders May Suffer Loss Due To The Limited Number of Sales Representatives
And Customers.
The Company markets its services through a global network of business consultants.
At present, it has six representatives, located in Berkeley California, Woodland,
California, Phoenix, Arizona, Los Angles, California, Singapore, Singapore and
Hong Kong, China. EFHC has no assurances that it can attract additional
representatives or more clients. The Company currently only has three clients.
The loss of any of these three clients could have a material adverse impact on
the Company.
Independent Accountant's Report Referring To Going Concern Uncertainties May
Alert Shareholders to Risk of Loss.
The accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As shown in the financial statements, the
Company has an accumulated deficit of $1,243,274, and, during the year ended
December 31,2001 the Company incurred a loss of $360,576. In addition, the
Company's current liabilities exceed its current assets by $304,874 at
December 31, 2001. These factors, among others, raise a substantial doubt about
the Company's ability to continue as a going concern for a reasonable period of
time, generally defined as a period not to exceed one year beyond the balance
sheet date. The financial statements do not include any adjustments relating to
the classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. Management has established a plan that it
believes will generate sufficient cash flows, through operations and additional
debt financing, to remove the threat to the continuation of the Company. However,
there can be no assurances that the Company will be successful in generating
sufficient cash flows from operations or obtaining additional debt financing.
Loses May Result From Penny Stock Disclosure Rules.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a "penny
stock." The Commission's regulations generally define a penny stock to be an
equity security that has a price of less than $5.00 per share, subject to
certain exceptions (such exceptions include an equity security listed on NASDAQ
or issued by an issuer that has
(1) net tangible assets of at least $2 million, if such issuer has been
in continuous operation for three years,
(2) net tangible assets of at least $5 million, if such issuer has been
in continuous operation for less than three years, or
(3) average annual revenues of at least $6 million, if such issuer has
been in continuous operation for less than three years).
No such exceptions are applicable to the Company. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith. In addition, unless and until the
securities of the Company are listed for trading on NASDAQ or the Company has $2
million in net tangible assets, trading in the Company's securities will be
subject to Rule 15c2-6 promulgated under the Securities Exchange Act of 1934 for
non-NASDAQ and nonexchange listed securities. Under the penny stock rules,
broker-dealers who recommend such securities to persons other than institutional
accredited investors (generally institutions with assets in excess of
$5,000,000) must make a special written suitability determination for the
purchaser, receive the purchaser's written agreement to the transaction prior to
sale and provide the purchaser with risk disclosure documents which identifies
certain risks associated with investing in penny stock and which describe the
market as well as the purchaser's legal remedies. Further, the broker-dealer
must also obtain a signed and dated acknowledgment from the purchaser
demonstrating that the purchaser has actually received the required risk
disclosure document before a transaction in a penny stock can be consummated.
These requirements may have the effect of reducing the level of trading activity
in the secondary market for securities that become subject to the penny stock
rules. With the Company's securities becoming subject to the penny stock rules,
investors may find it more difficult to sell such securities, which could have
an adverse effect on the market price thereof. Because the Common Stock would be
characterized as penny stock, the market liquidity for the Company's securities
could be adversely affected. In such an event, the regulations on penny stocks
could limit the ability of broker-dealers to sell the Company's securities and
the ability of stockholders to sell their securities in the secondary market.
7
Shareholder Risk Results From The Company's Dependence On Key Personnel.
The Company's ability to compete is largely dependent on the personal efforts
and abilities of its senior management, particularly, as of December 31, 2001,
as James A. Bishop, Director and Chief Operating Officer, Jack L. Mahan, Jr.,
President and Secretary of the Board of Directors, and William Cate, Chairman of
the Board of Directors. Since Mr. Cate resigned effective January 1, 2002, his
absence may negatively effect the Company operations. The Company believes that
the loss of the services of any of these executives could have a material
adverse effect on the Company. In addition, the Company believes that its
success is dependent on its ability to attract and retain additional qualified
employees, and the failure to recruit additional skilled personnel could have a
materially adverse effect on the Company's financial condition and results of
operations. The Company currently does not maintain key employee insurance on
any of its employees.
Shareholders May Encounter An Adverse Result Because of Absence Of Cash
Dividends.
The Company anticipates that all of its earnings in the foreseeable future will
be retained for the development and expansion of its business and, therefore,
has no current plans to pay cash dividends. The Company's future dividend policy
will depend on the Company's earnings, capital requirements, financial
condition, bank facilities and other factors considered relevant by the Board of
Directors. However, at present, the Company does not have any plans to pay cash
dividends in the future.
Shareholder Risk Increases Because The Company Provides No Warranties
Regarding Performance.
At no time has the Company, or any of its officers, directors, agents or
employees, or any other person, expressly or by implication, guaranteed or
warranted the future successful operation of the Company.
Shareholder Risk Is Increased Because The Company Provides No Warranties
Regarding Benefits To Investors.
The information and statements contained in this document are not intended to
contain any representations or warranties with respect to the economic returns
or benefits, which may accrue to investors in the future. No assurance can be
given that existing tax, securities or other laws, which are discussed herein,
will not be changed in the future or interpreted adversely. Prospective
investors are not to construe the contents of this document, or any
communications with the Company or any of its representatives, as constituting
legal, tax or investment advice. Each investor should consult with his or her
own counsel or advisors as to the advisability of an investment in the shares
considering the legal, tax and other effects of such an investment. Each
investor should consult with his or her own counsel, accountant and other
advisors as to the legal, tax and related matters concerning a purchase by such
investor of shares.
Changes In Income Tax Laws Could Increase Risk to Shareholders.
Prospective investors should not rely on the prospect that tax effects provided
by existing law will continue. There can be no assurance that individual
countries nor the U.S. Congress or the U.S. Internal Revenue Service ("IRS")
will not modify the tax consequences of owning Shares, or that changes or
modifications in existing judicial decisions or in the current positions of the
U.S. IRS or in applicable country, state or local tax laws will not
substantially (and unfavorably) modify such tax treatment or the consequences
which may arise therefrom.
8
RISK FACTORS THAT MIGHT CREATE LOSS TO SHARHOLDERS
Certain Factors May Affect Future Results And Loses by Shareholders.
From time to time, information provided by the Company, statements made by its
officers or information included in its filings with the Securities and Exchange
Commission contains statements that are not purely historical, but are forward
looking statements, made under the Safe Harbor provisions of the Private
Securities Litigation Act of 1995, which involve risks and uncertainties. In
particular, forward looking statements include projections, plans, and
objectives for The Company's business, financial condition, operating results,
future operations, future economic performance or statements relating to the
sufficiency of capital to meet working capital, planned capital expenditures,
and expectations as to customer orders. The Company's actual future results may
differ materially from those stated in any forward-looking statements. Factors
that may cause such differences, such as the risk factor that the Company's
business could be adversely affected by acquisitions, include, but are not
limited to, the factors discussed below. These factors, and others, are
discussed from time to time in the Company's filings with the Securities and
Exchange Commission, including the Company's future Annual Reports on Form 20-F
that may be filed. It should be noted that the Safe Harbor provisions do not
apply to statements that are untrue. Note also that the statutory safe harbor is
not available to non-reporting issuers; disclosure should not imply that the
safe harbor applies to the Company's statements made when the Company was not a
reporting issuer. Liabilities from such statements remain a source of potential
shareholder loss.
RISK FACTORS RELATED TO THE "GOING CONCERN" FINANCIAL CONDITION OF THE COMPANY:
Shareholders Might Be At Risk Because The Company's Auditors Have Issued A Going
Concern Opinion And Because The Company's Officers And Directors Will Not Loan
Any More Money To The Company, The Company May Not Be Able To Achieve Its
Objectives And May Have To Suspend Or Cease Operations.
The Company's auditor has issued a going concern opinion. This means that there
is doubt that the Company can continue as an ongoing business for the next twelve
months. Because our officers and directors are unwilling to loan or advance any
additional capital to the Company, management believes that if the Company is not
successful in its operations, it may have to suspend or cease operations within
four months. Further, it will be more difficult for the Company to obtain debt
financing at favorable rates while such an opinion exists because of creditors
unwillingness to loan funds to a corporation that is in danger of going out of
business.
Shareholders Are At Risk of Loss Because The Company Lacks A Profitable
Operating History And Has Losses, Which It Expects To Continue Into The Future.
If the losses continue the Company will have to suspend operations or cease
operations. Since the Company was incorporated, it has not been profitable in
its proposed business operations or realized any revenues. It has no profitable
operating history upon which an evaluation of its future success or failure can
be made. Its ability to achieve and maintain profitability and positive cash
flow is dependent upon: --Its ability to locate customers who require the
Company's services. --Its ability to generate a profit from its operations.
Based upon current plans, the Company expects to incur operating losses in
future periods. This will happen because there are fixed and variable expenses
associated with the Company's operations. Until revenues exceed the fixed and
variable expenses, the Company will operate at a loss. Failure to generate a
profit will cause the Company to go out of business.
Shareholders Might Loose Their Investment Because The Company Does Not Have
Enough Cash To Raise Capital.
The Company believes that it does not have the cash it needs for at least the
next twelve months based upon its internally prepared budget. Further, the
Company's cash requirements are not easily predictable and there is a
possibility that its budget estimates will prove to be inaccurate. If the
Company is unable to generate a positive cash flow, it will be required to
curtail operations substantially and seek additional capital. There is no
assurance that the Company will be able to obtain additional capital if
required, or if capital is available, to obtain it on terms favorable to the
Company. The Company may suffer from a lack of liquidity in the future, which
could impair its short-term marketing and sales efforts and adversely affect its
results of operations.
If The Company Is Unable To Operate Profitably Or Obtain Loans, It May Have
To Attempt To Raise Capital Through The Sale Of Its Securities.
Because the Company is in a start-up phase and has not generated any revenues,
it is unlikely that it will be able to raise capital through the sale of its
common stock. If the Company is unable to generate a profit from its operations
and cannot borrow money, its only available source of capital will be through
the sale of its common stock. Because the Company is in a start-up stage, has
not generated any revenues, and there is no market for the Company's common
stock, it is unlikely that the Company will be successful in raising money
through the sale of its common stock. If the Company is unable to raise
additional needed capital, it will have to suspend or cease operations.
Investors May Suffer Loss As A Result Of Management Having No Funding Plan Or
From The Risks Associated With A Funding Plan If A Plan Is Ever Developed.
Management has not developed a funding plan to raise equity at this time. If a
plan is ever developed for shares that may be traded publicly under applicable
rules, the Company will incur costs associated with Company disclosure
obligations in this registration statement. Also, given the lack of a market and
the Company's intent to sell securities to raise funds, there is a risk that the
Company will not be able to price the shares in the fundraising transactions at
their true market value. Also, issuance of new shares, which could be provided
for in the fundraising plan, will dilute investor positions increasing the
number of shares freely traded. Shareholders could suffer loss from such
potential dilution. For debt financing portions of the funding plan, debt
financing may subordinate the claims of common stockholders in liquidation or
impose material restrictions on Company operations.
Investor Loss Might Result from The Company Needing Additional Financing,
Which Could Be Difficult To Obtain.
The Company expects that the Company's existing cash and investment balances
will not be sufficient to meet the Company's cash requirements to fund
operations and expected capital expenditures for at least twelve months. In the
event we may need to raise additional funds, we cannot be certain that we will
be able to obtain additional financing on favorable terms, if at all. Further,
if we issue additional equity securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of common stock. Future financings may place
restrictions on how we operate the Company's business. If we cannot raise funds
on acceptable terms, if and when needed, we may not be able to develop or
enhance the Company's products and services, take advantage of future
opportunities, grow the Company's business or respond to competitive pressures
or unanticipated requirements, which could seriously harm the Company's
business.
Shareholders May Suffer Loss From The Company Substantially Increasing The
Company's Indebtedness.
We may incur substantial indebtedness in the future. The level of the Company's
indebtedness, among other things, could:- make it difficult for the Company to
make payments on the Notes; - make it difficult for the Company to obtain any
necessary future financing for working capital, capital expenditures, debt
service requirements or other purposes; - require the dedication of a
substantial portion of any cash flow from operations to service for
indebtedness, thereby reducing the amount of cash flow available for other
purposes, including capital expenditures; - limit the Company's flexibility in
planning for, or reacting to changes in, the Company's business and the
industries in which we compete; - place the Company at a possible competitive
disadvantage with respect to less leveraged competitors and competitors that
have better access to capital resources; and - make the Company more vulnerable
in the event of a further downturn in the Company's business. There can be no
assurance that we will be able to meet the Company's future debt service
obligations, including the Company's obligations under any notes.
Shareholder Loss Could Result From The Company's Operating Results Likely To
Fluctuate Significantly.
The Company's quarterly and annual operating results will be affected by a wide
variety of factors that could materially adversely affect revenues and
profitability, including: - competitive pressures on selling prices; - the
timing of customer orders and the deferral or cancellation of orders previously
received; - changes in product mix; - the Company's ability to introduce new
products and technologies on a timely basis; - the introduction of products and
technologies by the Company's competitors; - market acceptance of the Company's
and the Company's competitors' products; - fulfilling backlog on a timely basis.
As a result of the foregoing and other factors, we have and may continue to
experience material fluctuations in future operating results on a quarterly or
annual basis which could materially and adversely affect the Company's business,
financial condition, operating results and stock price.
9
RISK FACTORS RELATED TO THE LACK OF LIQUIDITY OF THE SHARES:
Investors May Suffer Loss Caused By Limit Of Free Trading Shares In The
Market.
514,900 of the Company shares are freely tradable to the public in the United
States. This small number of shares can be traded. Buyers of shares could
experience difficulty-finding sellers with whom to trade. Sellers could
experience difficulty liquidating their shares.
Issuance Of Additional Shares By The Company Could Make Individual
Shareholder's Holdings Worth Less.
The Company is authorized to issue 100,000,000 common shares. 5,149,193 or 5% of
the common shares are currently issued and outstanding and 94,850,807 or 95.1%
of the common shares are unissued. The Board of Directors has the power to issue
such shares. Although the Company presently has no commitments or contracts to
issue any additional shares to other persons, the Company may in the future
attempt to issue shares to acquire products, equipment or properties, or for
other corporate purposes. Any additional issuance by the Company, from its
authorized but unissued shares, would have the effect of diluting the interest
of existing shareholders.
Shareholders May Not Be Able To Sell Shares Because Of Thin Market; Ninety
Percent (90%) Of The Company's Issued Shares Are Insider Shares.
They are subject to Rule 144. This means that these shares can't be sold for one
year. At the end of the one-year holding period, these shares would be subject
to the Insider Trading Rules, which would limit the rate of sale of insider
shares into the Market. However, any sale of insider shares will adversely
affect the Company's share price.
Should The Company Issue Shares In The Future The Additional Shares Would
Dilute Present Shareholder Equity In The Company.
The sale of such shares would adversely affect the Company's share price. While
such insider sales would be subject to American Securities Laws, the result of
such sales risks the loss in any investment made by shareholders in the
Company's stock.
Because The SEC Imposes Additional Sales Practice Requirements On Brokers Who
Deal In The Company's Shares, Which Are Penny Stocks, Some Brokers May Be
Unwilling To Trade Them.
This means that a shareholder may have difficulty in reselling his shares and
may cause the price of the shares to decline. The Company's shares qualify as
penny stocks and are covered by Section 15(g) of the Securities Exchange Act of
1934, which imposes additional sales practice requirements on broker/dealers who
sell the Company's securities in the aftermarket. For after-market sales of the
Company's securities, the broker/dealer must make a special suitability
determination and receive from a potential buyer, a written agreement prior to
making a sale to him. Because of the imposition of the foregoing additional
sales practices, it is possible that brokers will not want to make a market in
the Company's shares. This could prevent a shareholder from reselling his shares
and may cause the price of the shares to decline.
Cumulative Voting, Preemptive Rights and Control.
There are no preemptive rights in connection with the Company's common stock.
Shareholders may be further diluted in their percentage ownership of the Company
in the event the Company issues additional shares in the future. Cumulative
voting in the election of Directors is not provided for. Accordingly, the
holders of a majority of the shares of common stock, present in person or by
proxy, will be able to elect all of the Company's Board of Directors.
Shareholders Might Lose Return On Their Investment Due To No Dividends
Anticipated By The Company.
At the present time the Company does not anticipate paying dividends, cash or
otherwise, on it's Common Stock in the foreseeable future. If they would be paid
on a pro rata basis based on the number of shares held Future dividends will
depend on earnings, if any, of the Company, its financial requirements and other
factors.
Since Insider Shareholders Have Agreed To Limit Transferability Of Stock In A
"Stock Pooling" Agreement, Shareholders May Not Be Able To Trade Their
Stock.
The "insider" shareholders have agreed, through a stock pooling agreement, to
limit the transferability of their Company shares. They have agreed not to trade
the insider 4,634,100 shares for 5 years, however this agreement can be set
aside by mutual agreement of the insider shareholders participating in the
agreement. This agreement impacts about 90% percent of the outstanding shares of
the Company and therefore, may limit the number of buyers for stock. This
agreement does not affect the transferability of free trading registered shares
held by non-participants of the Stock Pooling Agreement. The Stock Pooling
agreement may be set-aside at any time by a unanimous vote of the participants.
These policies may negatively impact some shareholders.
10
RISK FACTORS RELATED TO OFFICERS AND DIRECTORS OF THE COMPANY:
Reliance Upon Directors And Officers Who Will Be Devoting Limited Time To The
Operations Of The Company Might Put Shareholders At Risk Of Loosing Their
Investment.
The Company is wholly dependent, at the present, upon the personal efforts
and abilities of its Officers and Directors, who exercise control over the
day-to-day affairs of the Company. Because all of the officers and directors
have other business interest, each will only be devoting approximately 10% of
his time to the operation of the Company.
Management Could Engage In Unknown Business Causing Loss To Investors.
The Company has no obligation to engage in the business described in the
registration statement. Present management has disclosed the intent of the
Company to engage in the disclosed business. Management could, at some future
time, engage in presently unknown business opportunities other than those the
Company has presently disclosed in this registration document.
Investors May Suffer Loss Because Officers Of The Company Are Officers And
Directors Of Related Companies.
The Company's president, Mr. Jack Mahan, is also the Chairman of the Company's
Board of Directors. Mr. Mahan is also President and Member of the Board of
Directors of the principal shareholder of the Company. Mr. Mahan is also an
officer and member of the Board of Directors of Equity Finance International
Corporation (EFIC). Although Mr. Mahan is not a shareholder of the Company, his
presence on all Boards of Directors has a potential to create a conflict of
interest between ITEL, EFIC, HIRL, QVPI and EFHC Boards of Directors. The
Company does maintain a policy on Conflict of Interest. This policy requires a
fiduciary duty on the part of each and every director and officer of the
Company. Should such a conflict develop, the appointed client board member would
withdraw from the discussion and vote on the issue before the EFHC Board. In any
potential conflict issue, it is the responsibility of the individual director to
state that they see a conflict and withdraw from the discussion and voting on
that topic. Further, the Board of Directors will also determine if a conflict of
interest exists pursuant to the policy of the Company.
Directors are empowered to enact policies, which may be contrary to
shareholder interests.
Article B. of the Company's Memorandum and Articles of Association empowers the
Company's Board of Directors to vote in ways that could negatively impact
investors' holdings. A director is entitled to vote on any proposal
notwithstanding that he may have interest therein, provided before the proposal
is put to a vote he shall disclose the nature of his interest.
Directors May Take Actions That Might Enrich Themselves, Thus Placing
Shareholders At Risk Of Loss.
There is no prohibition that prevents directors, in the absence of an independent
quorum, to vote compensation to themselves. Directors may borrow money. There is
no prohibition preventing the Company from loaning money to directors. There is
no retirement or non-retirement age limitation with respect to directors. There
is no requirement that directors own shares of the Company's common stock. The
Board may declare dividends that may not benefit shareholders.
Shareholders Might Not Be Entitled To Share In The Profits Of The Company.
Shareholders are entitled to share in any surplus in the event of liquidation,
after all debts are paid and all securities having rights superior to common
shares are paid. There are no redemptions provisions for the Company's
securities. There are no sinking fund provisions for the Company's securities.
The Company's shares of common stock are not subject to further capital calls by
the Company. There are no provisions discriminating against any existing or
prospective holder or such securities as a result of such shareholder owing a
substantial number of shares. Therefore, shareholders might lose their right to
participate in the return on their investment.
Shareholders Might Not Participate In The Annual Meeting Of Shareholders.
EFHC, as a foreign private issuer is not subject to the proxy rules under the
Exchange Act, Section 14, thus shareholders might not be able to tender proxy
votes. Belize law doesn't require that an international business corporation
hold an annual general meeting of its shareholders. If an annual meeting of
shareholders and special meetings of shareholders may be called, the chairman,
the board of directors, or stockholders of 1/5th of the outstanding shares could
call it at any time. Only shareholders of record are entitled to attend the
shareholders meetings. Without an Annual General Meeting, minority shareholders
effectively have no voice in the decisions of the Company's Board of Directors.
Nor would they be able to influence the direction of the Company. Under Belize
Law, there would be no basis in Law for them to seek legal redress in the Courts
of Belize.
11
RISK FACTORS RELATED TO THE BUSINESS OPERATIONS OF THE COMPANY:
The Company's Business May Be Adversely Impacted By Acquisitions That May Affect
The Company's Ability To Manage And Maintain The Company's Business.
Since the Company's inception, we have intended to acquire a number of
businesses. In the future, we may undertake acquisitions of businesses that
complement the Company's existing operations. Such future acquisitions could
involve a number of risks, including: - the possibility that one or more such
acquisitions may not close due to closing conditions in the acquisition
agreements, the inability to obtain regulatory approval, or the inability to
meet conditions imposed for government or court approvals for the transaction; -
the diversion of the attention of management and other key personnel; - the
inability to effectively integrate an acquired business into the Company's
culture, product and service delivery methodology and other standards, controls,
procedures and policies; - the inability to retain the management, key personnel
and other employees of an acquired business; - the inability to retain the
customers of an acquired business; - the possibility that the Company's
reputation will be affected by customer satisfaction problems of an acquired
business; - potential known or unknown liabilities associated with an acquired
business, including but not limited to regulatory, environmental and tax
liabilities; - the amortization of acquired identifiable intangibles, which may
adversely affect the Company's reported results of operations; and - litigation
which has or which may arise in the future in connection with such acquisitions.
For example, we may be required to spend significant management time operating
this non-core business unit and managing a potential divestiture. Further, there
can be no guarantee that the line of business will break-even or operate at a
profit in the near future, if at all. Any losses from the line of business will
have a negative impact on the Company's operating results.
The Company's Business May Be Adversely Impacted By Divestitures Of Lines Of
Business That May Affect The Company's Ability To Manage And Maintain The
Company's Business.
If and when acquisitions are made then we may divest ourselves of certain
non-profit creating lines of the Company's business. In the future, we may
undertake such divestitures. Such future divestitures could involve a number of
risks, including: - the diversion of the attention of management and other key
personnel; - disruptions and other effects caused by the divestiture of a line
of business on the Company's culture, product and service delivery methodology
and other standards, controls, procedures and policies; - customer satisfaction
problems caused by the loss of a divested line of business; and - the decreased
diversification of the Company's product lines caused by the divestiture of a
line of business may make the Company's operating results subject to increased
market fluctuations. In addition, any divested line of business could
significantly outperform relative to the Company's expectations.
If The Company is Unable To Protect Customer's Intellectual Property, We May
Lose A Valuable Product Line Or May Incur Costly Litigation To Protect The
Company's Rights.
At times, we may be notified that we may be in violation of intellectual
property held by others. An assertion of patent infringement against the
Company, if successful, could have a material adverse effect on the Company's
ability to sell the Company's products, or could require a lengthy and expensive
defense that could adversely affect the Company's operating results.
Shareholder Loss Might Result From No Market Studies.
The Company has relied on the assumptions, considerations and judgment of our
directors, management and officers in the formation of our business plan. No
formal independent market studies concerning the demand for our proposed
services and products have been conducted or proposed. We have not engaged any
independently qualified financial consultants and advisors in the carrying out
of an analysis of the effects and consequences this sale of Common Stock may
have on the present and future operations of the Company, the ability of the
Company to obtain funds or financing or the variations in share price due to
additional shares being available for sale.
12
RISK FACTORS RELATED TO BEING A BELIZE CORPORATION: Effect Of Changes In
Belize Laws Could Negatively Impact Shareholders.
Because the Company is incorporated in Belize, Central America, it is subject to
potential changes in Belize law. The effects of any change in Belize laws on the
Company are unknown at this time, but such effects may be adverse to the
Company's shareholders' best interests. These potential changes include changes
in tax law, corporate law, political instability, economic collapse, and
currency fluctuations.
Because The Company, Without Shareholder Approval, Can Issue Shares With
Rights Superior To Those Of Common Shareholders, The Rights Of Common
Shareholders Can Essentially Be Eliminated.
Because the Company, without shareholder approval, can issue additional shares
with rights superior to those of common shareholders, a common shareholders
right can essentially be eliminated through dilution to an insignificant
percentage of ownership of the outstanding securities. The board determines the
rights and preferences of shares at the time of issuance. This dilution that may
occur by the Company issuing newly issued shares with multiple votes per share.
However, newly issued shares are not planned to have multiple votes.
Because The Company's Articles Of Association Provide That These Securities
Of An Investor Will Be Subject To A Lien For Any Money Owed By An Investor To
The Company, The Company May Have Difficulty In Persuading Broker/ Dealers To
Make Markets In The Company's Securities.
The Company's articles of association provide that the Company will have a lien
on an investor's securities for all money owed to the Company by the investor.
As such, the shares may be subject to attachment and sale at anytime an unpaid
debt is owed to the Company. Because an orderly market requires the transfer of
unencumbered, unrestricted shares and because the foregoing provisions impedes
both orderliness, market makers may be reluctant to make a market in the
Company's securities. This could result in an investor's inability to sell or
transfer his securities.
Loss May Result From The Company's Articles Of Association Which Provide That
The Board Of Directors May Decline To Register Any Transfer Of The Securities;
The Company May Have Difficulty In Persuading Broker/Dealers To Make Markets In
The Company's Securities.
The Company's Articles of Association provide that the Company's board of
directors may decline to register any transfer of the Company's securities.
Because an orderly market requires the unconditional transfer of securities and
because the foregoing provisions impedes the unconditional transfer of
securities, market makers may be reluctant to make a market in the Company's
securities. This could result in an investor's inability to sell or transfer his
securities.
Indemnification Of Officers And Directors For Securities Liabilities Could
Create Loss of Return on Investment for Shareholders.
The laws of Belize provide that the Company could indemnify any Director,
Officer, agent and/or employee as to those liabilities and on those terms and
conditions as provided for by law. Further, the Company may purchase and
maintain insurance on behalf of any such persons whether or not the corporation
would have the power to indemnify such person against the liability insured
against. The foregoing could result in substantial expenditures by the Company
and prevent any recovery from such Officers, Directors, agents and employees for
losses incurred by the Company as a result of their actions. Further, the
Company has been advised that in the opinion of the Securities and Exchange
Commission, indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable.
Shareholder Loss Might Result Because A U.S. Citizen Who Purchases Shares Of
Common Stock May Have Difficulty In Enforcing His Rights Against The Company.
The Company is incorporated under the laws of Belize. Further, all of the
Company's assets are located in Belize. As such, a U.S. citizen may have
difficulty in enforcing his rights against the Company. In the event that a
shareholder sues the Company in the United States and obtains a judgment in
federal or a state court, the shareholder may find that it is impracticable or
impossible to enforce his judgment in Belize, unless he travels to Belize to do
so. Further, Belize laws do not grant much, if any, protection to consumers in
general. Accordingly, it is quite possible that any judgment obtained against
the Company outside of the United States will be unenforceable in Belize.
The International Business Company Legislation Enacted In 1990 By Belize,
Central America, The Company's Country of Incorporation, May Impact Investor's
Holdings.
Since Belize IBC law is designed to protect the Company, it may not protect the
shareholders. The key features of the Belize act are as follows: no income tax,
stamp duty, estate taxes, capital gains or withholding tax: having only one
shareholder/subscriber permitted; share may be held by corporations or trusts; a
single director allowed which may be a corporation or trust; on-disclosure of
beneficial owners; bearer shares permitted - shares maybe issued without par
value; IBC'S can be used for financial management, investment holding, ship or
property ownership, share ownership of other companies, leasing of assets,
copyrighting and/or licensing as well as general commercial trading no exchange
control; private label company availability; low fees for setup and renewal; no
statutory accounting or auditing records need to be filed in Belize; no minimum
capital requirements. Minimal restrictions: cannot carry on business with
residents of Belize; cannot own real estate in Belize; cannot operate as a bank
or an insurance company unless an offshore banking license is granted; cannot
provide Registered Office Or Serve As Registered Agent; An IBC must maintain a
Registered Agent and a Registered Office in Belize. Also, governing law does not
require that shareholders elect all directors.
13
Shareholder Rights May Be At Risk As A Result Of The Company Organizing In
Belize, Central America.
In Belize, there is no established body of corporate law on which shareholders
can rely for clarifying and protecting their rights. These rights differ
materially from typical rights of investors in U.S. companies. For example,
(1) Shareholders do no have the right to approve mergers and sales of
substantially all of the Company assets by a vote of the majority
of common shares outstanding, and
(2) Appraisal rights do not exist by law. (In Belize, there is not an
established body of law upon which shareholders can rely for
clarifying and protecting their rights.)
The Company lacks offices in the United States. Most of Company directors and
officers reside outside the United States. Therefore, it may be difficult to
serve process upon them in the United States or to collect upon a judgment
obtained in the United States against them There is doubt as to the
enforceability of liabilities predicated on U.S. federal securities laws
determined in original actions in Belize and judgments of U.S. courts obtained
in actions based upon the civil liability provisions of U.S. federal securities
laws are not enforceable inBelize. Moreover, no treaty exists between the United
States and Belize for thereciprocal enforcement of foreign court judgments.
Consequently, the Company American shareholders may be effectively prevented
from pursuing remedies under U.S. federal securities laws against the Company,
its officers and directors.
Company Operations May Suffer Loss Relative To Currency Fluctuations And Foreign
Exchange Controls Yield A Loss For Shareholders.
As part of the Company's ordinary business operations, the Company will be
required to make purchases from suppliers. The Company may be required to
accomplish such purchases through the use of foreign currencies other than the
United States dollar. As a result, fluctuations in exchange rates of the United
States dollar against foreign currencies could adversely affect the Company's
results of operations. The Company may attempt to limit its exposure to the risk
of currency fluctuations by purchasing forward exchange contracts that could
expose the Company to substantial risk of loss. In such a transaction, the Company
would purchase a predetermined amount of foreign currency to ensure that the
Company in the future will own a known amount of such currency to pay for goods
at a predetermined cost. The Company believes that the use of such transactions
will successfully allow the Company to better determine costs involved in its
operations, and thus better manage currency fluctuations. There can be no
assurance that the Company will in the future successfully manage its exposure
to currency fluctuations or that such fluctuations will not have a material
adverse effect on the Company.
Investors May Suffer Loss From Political Policies And Foreign Operations Of The
Company.
The Company anticipates dealing with international companies in the future. The
Company's operations may be affected by economic, political, governmental,
infrastructure and labor conditions in countries where the Company operates and/or
has contractual relationships with other international companies.
Investors Rights To Litigation Are Limited.
Investors cannot bring actions under the civil liability provisions of the U. S.
federal securities laws against the Company; it's officers, directors and experts.
Investors cannot affect service in the United States against the Company; it's
officers, directors and experts. Investors cannot enforce judgments obtained in
a U. S. court against the Company, it's officers, and directors and experts based
upon the civil liability provisions of the U. S. Federal securities laws.
Investors cannot enforce, in the Belize Courts, judgments of U. S. Courts made
under the civil liability provisions of the U. S. federal securities laws against
the Company, it's officers, directors and experts. Investors cannot bring an
original action under the civil liability provisions of the U. S. federal
securities laws in the Belize Courts.
Shareholders Might Suffer Loss Because Belize Is Not Considered An Independent
Country.
Mexico and Guatemala now recognize Belize as an independent country. However,
that recognition is the result of economic pressure by the United States and the
British Government's willingness to send their troops to protect Belize's Border
with Guatemala. There can be no assurance that neither Mexican nor Guatemalan
recognition of Belize would continue, without the protection of the United States
and Great Britain. If an invasion occurred, Belize's history of political stability
would end. Business would be impossible to conduct in Belize.
The Company, And Its Shareholders, Has Suffered Loss Because Belize Is Subject
To Annual Hurricanes.
In 2001, a Force IV Hurricane destroyed most of the buildings in the Toledo
District of Belize, including the Company's office in Punta Gorda Belize. As with
any natural disaster, Hurricanes cause economic lose and some of this loss must
be borne by the Company.
The Belize Economy Is Highly Dependent Upon Tourist Travel, The Loss Of Which
Could Create Loss For Company Investors.
The primary attraction for foreign tourists is the Belize Reef, which is the
second largest reef in the World. The Belize Reef is dying. Without the Belize
Reef to attract Tourists, the Belize Economy may go into a serious recession.
Such circumstances could create loss for the Company and its shareholders.
Shareholders And The Company Could Encounter Loss Due To The Poverty In Belize.
Like most Central America countries, Belize faces high unemployment problems and
limited employment prospects for a rapidly growing workforce. Belize has the
highest rate of people who are HIV positive in Central America. The AIDS Public
Health problem can't be met with the resources currently available to Belize.
Theft and disease from potential employees of the Company might create loss for
the Company and investors.
Shareholders And The Company Could Encounter Loss Due To The High Crime In
Belize.
Belize City and Dangriga have crime rates equal to New York City, Los
Angeles or Chicago. Historically, most crime was petty theft. However, the
spread of crack cocaine into these urban areas has lead to a significant
increase in violent crime. The potential for violent crime discourages tourists
and increases the risks in doing any type of business.
Shareholder Loss Might Result From Incomplete Knowledge Of Company Insiders.
The Company insiders' are entities whose purpose, activities and ownership are
unknown to management. Without knowing the beneficial ownership of the Company,
shareholders might not have necessary information to avoid loss of investment.
14
RISK FACTORS RELATED TO TAXATION:
An Investor May Not Be Able To Make A Beneficial Tax Election As A Result Of
The Company's Unwillingness To Provide Necessary Information.
There is a chance that the Company could become a passive foreign investment
company. If that occurs an investor may be able to make favorable tax
election, provided he is notified of the favorable tax status. The Company,
however, has decided that it may or may not provide the information necessary
for investors to make favorable tax elections. As a result, an investor may
lose such favorable tax election.
If The Company Is Judged A Foreign Passive Investment Company, Investors May
Suffer A Loss From Tax Consequences To The Investor.
As a foreign corporation with U.S. Holders, the Company could potentially be
treated as a passive foreign investment company ("PFIC"), as defined in Section
1297 of the Code, depending upon the percentage of the Company's income which is
passive, or the percentage of the Company's assets which is held for the purpose
of producing passive income.
Certain United States income tax legislation contains rules governing PFIC that
can have significant tax effects on U.S.shareholders of foreign corporations.
These rules do not apply to non-US. share holders. Section 1297 of the Code
defines a PFIC as a corporation that is not formed in the United States and, for
any taxable year, either
(i) 75% or more of its gross income is "passive income," which includes
interest, dividends and certain rents and royalties or
(ii) the average percentage, by fair market value (or, if the company is
a controlled foreign corporation or makes an election, by adjusted
tax basis) of its assets that produce or are held for the production
of "passive income" is 50% or more.
A U.S. shareholder who holds stock in a foreign corporation during any year in
which such corporation qualifies as a PFIC is subject to U.S. federal income
taxation under one of two alternative tax regimes at the election of each such
U.S. shareholder (the deferred tax charge regime and the Qualified Election Fund
"QEF" regime).
The following is a discussion of these two alternative tax regimes as applied to
U.S. shareholders of the Company. Both regimes, however, may apply if the
shareholder makes the QEF election after the first year in which it owned stock
in the PFIC.
A U.S. shareholder who elects in a timely manner (an "Electing U.S. Shareholder")
to treat the Company as a QEF, as defined in the Code, will be subject, under
Section 1293 of the Code, to current federal income tax for any taxable year in
which the Company qualifies as a PFIC on his or her pro-rata share of the Company's:
(i) "net capital gain" (the excess of net long-term capital gain over net
short-term capital loss), which will be taxed as long-term capital
gain to the Electing U.S. Shareholder and
(ii) "ordinary earnings" (the excess of earnings and profits over net
capital gain), which will be taxed as ordinary income to the
Electing U.S. Shareholder, in each case, for the shareholder's
taxable year in which (or with which) the Company's taxable year
ends, regardless of whether such amounts are actually distributed.
The effective QEF election also allows the Electing U.S. Shareholder to
(i) generally treat any gain realized on the disposition of his or her
Common Shares (or deemed to be realized on the pledge of his or her
Common Shares) as capital gain;
(ii) treat his or her share of the Company's net capital gain, if any, as
long-term capital gain instead of ordinary income, and
(iii) either avoid interest charges resulting from PFIC status altogether,
or make an annual election, subject to certain limitations, to defer
payment of current taxes on his or her share of the Company's annual
realized net capital gain and ordinary earnings subject, however, to
an interest charge.
If the Electing U.S. Shareholder is not a corporation, such an interest charge
would be treated as "personal interest" that can be deducted only when it is paid
or accrued and is only 10% deductible in taxable years beginning in 1990 and not
deductible at all in taxable years beginning after 1990.
15
The procedure with which a U.S. shareholder must comply in making an effective
QEF election will depend on whether the year of the election is the first year
in the U.S. shareholder's holding period in which the Company is a PFIC. If the
U.S. shareholder makes a QEF election in such first year, i.e. a timely QEF
election, then the U.S. shareholder may make the QEF election by simply filing
the appropriate documents at the time the U.S. shareholder files its tax return
for such first year. If, however, the Company qualified as a PFIC in a prior
year, then in addition to filing documents, the U.S. shareholder must elect to
recognize
(i) (under the rules of (S)1291 (discussed below), any gain that he
would otherwise recognize if the U.S. shareholder sold his or her
stock on the application date or
(ii) if the Company is a controlled foreign corporation, the U.S.
shareholder will be deemed to have made a timely QEF election.
When a timely QEF election is made, if the Company no longer qualifies as a PFIC
in a subsequent year, normal Code rules will apply. It is unclear whether a new
QEF election is necessary if the Company thereafter re-qualifies as a PFIC. U.S.
shareholders should seriously consider making a new QEF election under those
circumstances.
If a U.S. shareholder does not make a timely QEF election during a year in which
it holds (or is deemed to have held) the Common Shares in question and the
Company is a PFIC (a "Non-electing U.S. Shareholder"), then special taxation
rules under Section 1291 of the Code will apply to
(i) gains realized on the disposition (or deemed to be realized by reason
of a pledge) of his or her Common Shares and
(ii) certain "excess distributions," as specially defined, by the Company.
A Non-electing U.S. Shareholder generally would be required to pro-rate all
gains realized on the disposition of his or her Common Shares and all excess
distributions over the entire holding period for the Common Shares. All gains or
excess distributions allocated to prior years of the U.S. shareholder (other
than years prior to the first taxable year of the Company during such U.S.
shareholder's holding period and beginning after January 1, 1987 for which it
was a PFIC) would be taxed at the highest tax rate for each such prior year
applicable to ordinary income. The Non-electing U.S. Shareholder also would be
liable for interest on the foregoing tax liability for each such prior year
calculated as if such liability had been due with respect to each such prior
year. A Non-electing Shareholder that is not a corporation must treat this
interest charge as "personal interest" which, as discussed above, is partially
or wholly non-deductible. The balance of the gain or the excess distribution
will be treated as ordinary income in the year of the disposition or
distribution, and no interest charge will be incurred with respect to such
balance.
If the Company is a PFIC for any taxable year during which a Non-electing U.S.
Shareholder holds Common Shares, then the Company will continue to be treated as
a PFIC with respect to such Common Shares, even if it is no longer definitionaly
a PFIC. A Non-electing U.S. Shareholder may terminate this deemed PFIC status by
electing to recognize a gain (which will be taxed under the rules discussed
above for Non-Electing U.S. Shareholders) as if such common shares had been sold
on the last day of the last taxable year for which it was a PFIC.
Under Section 1291(f) of the Code, the Department of the Treasury has issued
proposed regulations that would treat as taxable certain transfers of PFIC stock
by Non-electing U.S. Shareholders that are generally not otherwise taxed, such
as gifts, exchanges pursuant to corporate reorganizations, and transfers at
death. Certain special, generally adverse, rules will apply with respect to the
Common Shares while the Company is a PFIC whether or not it is treated as a QEF.
For example under Section 1298(b)(6) of the Code, a U.S. shareholder who uses
PFIC stock as security for a loan (including a margin loan) will, except as may
be provided in the regulations, be treated as having made a taxable disposition
of such stock.
The foregoing discussion is based on existing provisions of the Code, existing
and proposed regulations thereunder, and current administrative rulings and
court decisions, all of which are subject to change. Any such change could
affect the validity of this discussion. In addition, the implementation of
certain aspects of the PFIC rules require the issuance of regulations which in
many instances have not been promulgated and which may have retroactive effect.
There can be no assurance that any of the proposals will be enacted or
promulgated, and if so, the form they will take or the effect that they may have
on this discussion. Accordingly, and due to the complexity of the PFIC rules,
U.S. persons who are shareholders of the Company are strongly urged to consult
their own tax advisors concerning the impact of these rules on their investment
in the Company.
Controlled Foreign Corporation. If more than 50% of the voting power of all
classes of stock or the total value of the stock of the Company is owned,
directly or indirectly, by citizens or residents of the United States, United
States domestic partnerships and corporations or estates or trusts other than
foreign estates or trusts, each of whom own 10% or more of the total combined
voting power of all classes of stock of the Company or the total value of the
stock of the Company ("United States shareholder"), the Company could be treated
as a "controlled foreign corporation" under Subpart F of the Code. This
classification would result in many complex consequences including the required
inclusion into income by such United States shareholders of their pro rata
shares of "Subpart F income" (as specially defined by the Code) of the Company
and the Company's earnings invested in U.S. property and previously excluded
Subpart F withdrawn from certain types of investments (as specifically defined
by the Code). In addition, under Section 1248 of the Code, gain from the sale or
exchange of Common Shares of the Company by a U.S. person who is or was a United
States shareholder (as defined in the Code, a holder of Common Shares of the
Company who is or was a United States shareholder at any time during the five
year period ending with the sale or exchange) is treated as ordinary dividend
income to the extent of earnings and profits of the Company attributable to the
stock sold or exchanged. Because of the complexity of Subpart F, and because it
is not clear that Subpart F would apply to the holders of Common Shares of the
Company, a more detailed review of these rules is outside the scope of this
discussion.
16
The Shareholder May Suffer Loss By Reclassification Of The Company's Foreign
Personal Holding Company Status.
A foreign corporation will be classified as a foreign personal holding company
(an "FPHC") if
(i) at any time during the Company's taxable year, five or fewer
individuals, who are United States citizens or residents, directly or
indirectly own more than 50% of the corporation's stock (by either
voting power or value) (the "FPHC shareholder test") and
(ii) the corporation receives at least 60% of its gross income (regardless
of source), as adjusted, from certain passive sources (the "FPHC
income test").
After its initial year of qualification as an FPHC, a corporation may remain an
FPHC even if only 50% of its gross income is FPHC income (i.e., passive income
such as interest, dividends, etc.). The Company believes that it does not satisfy,
and expects that it will continue to fail to satisfy, the FPHC income test. The
Company believes that the FPHC shareholder test also was not met prior to the
Offering and will not be met immediately after the Offering. However, due to a
number of factors (including the FPHC stock attribution rules, possible change in
residence by current indirect shareholders, and possible acquisition of Common
Stock by purchase, gift, or bequest by individuals related to or partners of
current indirect shareholders) there can be no assurance that the Company will
not become an FPHC in the future.
If the Company were classified as an FPHC, U.S. Holders (including certain
indirect holders) would be required to include in income their pro rata share of
the Company's undistributed FPHC income if they were holders on the last day of
the Company's taxable year (or if earlier, the last day on which the Company
satisfies the shareholder test). Such income would be taxable to such persons as
a dividend, even if no cash dividend were actually paid. In such a case, a U.S.
Holder would be entitled to increase its tax basis in the Common Stock by the
amount of such deemed FPHC dividend. U.S. Holders who dispose of their Common
Stock prior to the date discussed above would not be subject to these rules.
Moreover, if the Company became an FPHC, United States persons who acquire
Common Stock from decedents would not receive a "stepped-up" basis in such
Common Stock. Instead, such a holder would have a tax basis equal to the lower
of fair market value or the decedent's basis. The Company will notify U.S.
Holders in the event that it concludes that it is classified as FPHC for any
taxable year.
The Shareholder May Suffer Loss Resulting From The Company Becoming Liable For
Personal Holding Company Tax.
A corporation will be classified as a personal holding company (a "PHC") if
(i) at any time during the last half of the Company's taxable year, five
or fewer individuals own more than 50% of the corporation's stock
(by value) directly or indirectly (the "PHC Shareholder test") and
(ii) the corporation receives at least 60% of its gross income, as adjusted,
from certain passive sources (the "PHC Income test").
However, if a corporation is an FPHC (see above) it cannot be a PHC.
The Company believes that it does not satisfy, and will continue to fail to
satisfy, the PHC shareholder test. The Company believes that the PHC income test
will not be met for the current taxable year and that it consequently will not
be classified as a PHC. However, there can be no assurance that the Company will
not become a PHC in the future.
A corporation classified as a PHC is subject to a 39.6% tax on its undistributed
personal holding company income. Foreign corporations (such as the Company)
determine their liability for PHC tax by considering only (i) gross income
derived from United States sources and (ii) gross income which is effectively
connected with a United States trade or business (collectively, "U.S. Taxable
Income").
17
RISK FACTORS RELATING TO MEETING UNITED STATES SECURITIES AND EXCHANGE
COMMISSION DEFINITIONS:
Loss Relative To The Stock Trading Requirements Of SEC Rule 144 May Impact
Shareholders.
Ninety percent (90%) of the Company's issued shares are insider shares. They are
subject to Rule 144. This means that these shares cannot be sold for one year.
At the end of the one-year holding period, these shares would be subject to the
Insider Trading Rules that would limit the rate of sale of insider shares into
the United States Market. However, any sale of insider shares will adversely
affect the Company's share price. Should the Company issue shares in the future
the additional shares would dilute present shareholder equity in the Company. The
sale of such shares would adversely affect the Company's share price. While such
insider sales would be subject to American Securities Laws, the result of such
sales risks the loss in any investment made by shareholders in the Company's
stock.
RISK FACTORS RELATED TO POLITICAL AND ECONOMIC STABILITY IN GLOBAL
OPERATIONS:
The Company Shareholders May Suffer Loss Related To International Operations And
Particular Operations In The PRC And Hong Kong As A Result Of Political And
Economic Developments.
Since the Company targets Asia and particularly the Peoples Republic of China as
a business location, the shareholders may suffer loss doing business in China.
Pursuant to the Sino-British Joint Declaration, the government of the PRC began
to exercise sovereignty over Hong Kong, effective July 1, 1997, through the Hong
Kong Special Administrative Region, which was established pursuant to Article 31
of the PRC constitution. The PRC has agreed that
(i) Hong Kong's current social and economic system will remain unchanged
for 50 years after July 1,1997, with the Special Administrative
Region to be administered by local inhabitants under the PRC's
"Basic Law," and
(ii) the laws currently enforced in Hong Kong will remain largely in
unchanged and foreign investment will be protected by the law.
There can be no assurance that the Basic Law as adopted in its present form will
not be changed or interpreted in a materially adverse manner for the Company in
the future or that any such changes or interpretations would not be given
retroactive effect. As of December 2000, we were required by the government of
the Hong Kong Special Administrative Region to comply with its laws and
regulations in connection with the Mandatory Provident Fund ("MPF") to be set up
for each of our employees. We believe that all of our operations in Hong Kong
are in compliance with the relevant laws and regulations of the Hong Kong
Special Administrative Region, however, amendment of its existing laws and
regulations may impose additional requirements and compliance with such laws and
regulations may require us to incur significant capital expenditures or
liabilities, which could create substantial financial burden and hence make it
impractical, inefficient or impossible for us to conduct business in or from
Hong Kong.
The Company Shareholder may suffer loss from the PRC Exchange Controls and
Other Limitations affecting Security Holders.
There are no exchange control restrictions on the payment of dividends on the
Common Stock in Hong Kong. The shares of Common Stock of the Company are issued
in the currency of the United States. Should the Company decide to take on
purchases and sales for or with our customers in the currency of the PRC, the
Renminbi, we would subject ourselves to dealing with a currency that is not
freely convertible into foreign currency. The PRC government imposes control
over its foreign currency reserves in part through direct regulation of the
conversion of Renminbi into foreign currency and through restrictions on foreign
trade. Prior to January 1, 1994, the PRC had a dual exchange rate system, which
consisted of the rate fixed time-to-time by the PRC State Administration of
Exchange Control (the "SAEC") and the rates prevailing in the various swap
centers around the country (the "Swap Rates"). In most cases, foreign
enterprises satisfied their need for foreign currency through such means as
exporting products for foreign currency, selling "import substitute" products in
the PRC for payment in foreign currency, or accessing a swap center. Among the
more widely used Swap Rates was the rate at the swap center in Shanghai.
Effective January 1, 1994, a new unitary, managed floating-rate system was
introduced in the PRC to replace the previous dual-track foreign exchange
system, which was abolished pursuant to the Notice of the People's Bank of China
Concerning Further Reform of the Foreign Currency Control System (the "PBOC
Notice"). The conversion of Renminbi into U.S. dollars must now be based on the
rate set by the People's Bank of China, which is set based on the previous day's
PRC interbank foreign exchange market rate and with reference to current
exchange rates on the world financial markets. In furtherance of these currency
reforms, the China Foreign Exchange Trading Center (the "CFETC") was formally
established in Shanghai and began operating in April 1994. The establishment of
the CFETC was originally intended to coincide with the phasing out of the swap
centers. However, the swap centers have been retained as an interim measure and
it is envisaged that the local swap centers will be phased out gradually.
Currently, foreign investment enterprises ("FIEs") in the PRC (including
Sino-foreign equity and co-operative joint ventures) are required to apply to
the local bureau of the SAEC for "foreign exchange registration certificates
foreign investment enterprises." Upon the presentation of appropriate
documentation, FIEs may enter into foreign exchange transactions at swap
centers, or in the future, in the event the unitary exchange rate system is
implemented as anticipated, through the unified market when all swap centers are
consolidated under the CFETC. On January 29, 1996, the State Council promulgated
the Regulations of the People's Republic of China Regarding Foreign Exchange
Control (the "Regulations") that came into effect on April 1, 1996. Pursuant to
the Regulations, conversion of Renminbi into foreign exchange for current
account items is permissible. Conversion of Renminbi into foreign exchange for
capital items, such as direct investment, loans or security is still under the
sole jurisdiction and requires approval of the SAEC.
As a result of the adoption of the unitary exchange rate system on January 1,
1994, the official bank exchange rate for Renminbi to U.S. dollars experienced
an immediate devaluation of approximately 50% to US$1.00 .2 = Rmb 8.7000. Any
future volatility or devaluation of the Renminbi could have a material adverse
effect on our business, results of operations and financial condition.
As we have not entered into any Renminbi-denominated purchases or sales for or
with our customers, we currently do not have to obtain any required approvals
for the conversion and remittance abroad of foreign currency necessary for the
operations of any of our business in the PRC. However, if we do transact
business in Renminbi in the future and obtain the required approvals, such
approvals do not guarantee the availability of foreign currency, and no
assurance can be given that we will be able to convert sufficient amounts of
foreign currency in the PRC's foreign exchange markets in the future at
acceptable rates, or at all, for the repayment of debt, payments of interest,
purchases of equipment or payment of dividends, if any, and payments for
services and other contracts.
All of our sales and purchases for and with customers will be denominated in
U.S. Dollars. If we were to transact business in Renminbi or other currencies,
we would subject ourselves to a variety of risks associated with changes among
the relative currency values. We do not currently hedge our foreign exchange
positions. Since 1983, the Hong Kong government has maintained a policy of
linking the U.S. Dollar and the Hong Kong Dollar at an exchange rate of
approximately HK$7.75 to US$1.00. There can be no assurance that such link will
be continued, although we are not aware of any intention of the Hong Kong
government to abandon such link. The PRC government sets the exchange rate
between the Renminbi and all other currencies. Over the last five years, the
Renminbi has experienced significant devaluation against most major currencies.
If the value of the Renminbi (if we were to transact business for or with our
customers in Renminbi) or the Hong Kong Dollar decreases relative to the U.S.
Dollar, such fluctuations may have a positive effect on our results of Renminbi
relative to the U.S. Dollar would increase our expenses and therefore would have
a material adverse effect on our business, financial condition and results of
operations.
18
Political And Economic Instability In The PRC May Result In Loss To The
Company Shareholders.
Since 1979, the PRC adopted an open-door policy and the country is gradually
shifting itself towards a more market-oriented economy. Such reforms have
resulted in significant economic growth and social progress. Many of the reforms
are unprecedented or experimental and will be refined and improved upon. The
reforms over the past 20 years have significantly opened up the country's
investment and business environment compared with the past, but as the economy
is now at a transitional stage, a number of reforms are subject to further
refinements and readjustments. We are operating on the assumption that, in the
long term, such refinements and readjustments should in most cases improve the
overall investment and business environment that would be advantageous to us.
However, there is no guarantee that such reforms will benefit us immediately,
and it is difficult to determine whether such reforms may have direct or
indirect negative impacts on our business and operations in the future.
The Legal And Regulatory Framework Of The PRC Could Create Losses For The
Company Shareholders.
The National People's Congress, or its Standing Committee, is responsible for
the passing of new laws of the PRC and any amendments thereto. The PRC legal
system is based on written statutes. Court judgments are therefore not legally
binding - although judges in subsequent cases will often make reference to them
in forming their judgment. The interpretation of the PRC laws may be subject to
policy changes reflecting the domestic, political and social developments at the
time. Since 1979, to facilitate foreign investments and to meet the needs of
investors, the PRC government has been developing and modifying its economic
systems by promulgating a series of economic related laws and regulations. As
the legal system of the PRC keeps evolving, the promulgation of new legislation,
the changes to existing laws and regulations and the precedence of national laws
over local regulations may have negative impacts on foreign investors. Although
throughout the past 19 years, the legal system of the PRC in general has been
evolving in favor of foreign investors, there is no guarantee that the changes
and modifications of laws and regulations in future will be advantageous to
foreign investors as in the past. Therefore uncertainty therefore exists as to
changes to and/or development of any PRC laws and regulations and of the legal
system itself. There is no assurance that any change in and interpretation of
the PRC laws and regulations in future will not have any adverse effect on our
business and prospects.
The Company Is Subject To Risks Of Operating Internationally; Therefore
Shareholders Are Accepting A Global Business Risk.
We expect to derive a significant portion of the Company's total revenue from
customers outside the United States. The Company's international sales are subject
to significant risks and difficulties, including: - unexpected changes in legal
and regulatory requirements and in policy changes affecting the Company's markets;
- - changes in tariffs and exchange rates; - political and economic instability and
acts of terrorism; - difficulties in accounts receivable collection; - difficulties
in staffing and managing international operations; and - potentially adverse
tax consequences, such as the World Trade Organization's dispute against
the U.S. Foreign Sales Credit.
ADDITIONAL RISK FACTORS:
Shareholder Loss May Result From Poor Management of Potential Growth. The
Company's ability to manage future potential growth, if any, will require a
continual process of implementation and improvement in our operational,
financial and management information systems and control; employment and
effective training of its new employees, including management, marketing
and technical personnel; and also proper motivation and management of our
new employees so as to allow our overall operations to flow effectively and
to integrate them into our corporate culture. Although the directors and
officers have previously contributed to the growth of other companies,
there can be no assurance that our management will be able to achieve
similar or identical results and performances successfully. If the Company
fails to manage future potential growth effectively or lose the services of
one or more of our key personnel, we would incur a material adverse effect
on our results of operations and our ability to execute our business
strategy.
19
Shareholders Cannot Be Assured Of The Company's Ability to Attract and
Retain Qualified Personnel.
Our ability to attract and retain qualified personnel is critical to the
implementation of our business plan. No assurances can be given that we will be
able to retain or attract such qualified personnel or agents to implement our
business plan successfully. If for any reason, the Company were unable to attract
and retain the qualified personnel necessary, ability to implement the business
plan would be adversely affected.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company was formed in Belize, Central America, under the Belize
International Business Corporation Act, pursuant to Section 14(3), on March 6,
1998 as IBC #6826. The Company operates under the laws of Belize, Central
America. The registered office of the Company is at 1st Floor East Wing, 65
Front St., Punta Gorda, Belize, Central America. The International Corporate
address is Suite 408, Calle Cleofas Ruiz #853-B, Zona Centro - C.P. 22710,
Playas De Rosarito, B.C., Mexico. EFHC business operations are located outside
the United States. EFHC's representative in the United States is located at 1296 E.
Gibson Road, #149, Woodland, CA, 95776, USA. The U.S. telephone number is
888-450-3342.
B. BUSINESS OVERVIEW
Equity Finance Holding Corporation ("the Company") is a management-consulting
corporation that assists clients in obtaining equity investments in their company.
The U.S. SIC Code is 8742, Management Consulting Services. The Company's global
target market is small to medium-size enterprises with gross sales between
US$1,000,000 and US$20,000,000. EFHC commenced operations in March 1998. The
Company shares office space in Punta Gorda, Belize with its resident agent. It
also shares office space in Playas de Rosarito, B.C., Mexico with Equity Finance
International Corporation. It is being provided office space without charge.
The Company identifies foreign and United States companies that can carry out an
expansion program designed to groom them for sale or merger with an industry
giant. EFHC will assist the client in becoming a reporting company and listing
with the NASD OTCBB for trading. Shares of the client company will be sold to
public and private investors to arrange a funding of up to $10 million. EFHC
will then work with the client company for the period. EFHC will assist with
developing sound growth, shareholder value, and investor relations. Shares in
the name of principals of the client company will be pooled and vaulted for five
years. The pooling and vaulting agreement will be designed to protect new
shareholders; however, this agreement may be modified at any time by unanimous
vote of all parties to the pooling and vaulting agreement. Because the parties
pooling and vaulting their shares may modify the pooling and vaulting agreement,
shareholders not party to the agreement may suffer significant adverse effects,
specifically a material decline in their share value. EFHC has represented this
program to some potential clients under the name "Advantage 2000 Program." EFHC
representatives and strategic partners may use other names for the program.
The Company markets its services through a global network of business
representatives. Representatives are freelance consultants who provide client
referrals to EFHC on a commission basis. The representative refers clients to
EFHC. The representative can:
(1) simply refer clients to EFHC, or
(2) refer the client, help the client provide underwriting documentation
and assist with the client investor relations program after equity
investments are obtained.
Representatives act as a strategic partner to EFHC, usually located outside of
the United States. They are generally in the business of assisting companies
with venture financing. EFHC and the strategic partner jointly venture to assist
companies. EFHC pays referral fees to strategic partners identifying client
companies and strategic partners participate in the fees for services provided
on a shared basis. The fees for services will be mutually agreed upon. EFHC and
the strategic partner will agree on a fee, scope of work, tasks and roles in
advance of commencing services for the client. Strategic partners are being
sought in various parts of the world including Australia, China, Cypress,
England, Germany, India, Pakistan, Singapore, and the United States. EFHC is
also seeking to develop strategic partner relationships with Venture Capital
companies throughout the world. EFHC has no assurances that it can attract
strategic partners, representatives or additional clients.
As of December 31, 2001, the Company has three clients: QVP International Ltd.,
International Technology Enterprises Ltd. and Hacienda International Resorts
Ltd. To date International Technology Enterprises Ltd. and QVP International
Ltd. have become reporting companies and no companies have received equity
investments through the efforts of the Company. There is no assurance that any
of these companies will remain a going concern.
If EFHC is able to increase its capital resources, either through a debt or
equity financing, the Company may seek to grow through the acquisition of
Management Consulting or other Firms whose clients need EFHC's help. However,
management can provide no assurances that such financing will be available to
the Company or that suitable acquisition or merger candidates will be
identified.
The Company plans to reinvest profits, if received, and does not envision the
payment of cash dividends to stockholders. The Company does plan to pay non-cash
dividends in client companies to EFHC shareholders. However, since inception,
three non-cash dividends in client companies have been paid to EFHC shareholders
and no assurances can be provided that such dividends will be paid in the
future.
20
START-UP OF BUSINESS OPERATIONS
The Company continues to interview prospective clients. EFHC anticipates losing
money for several years. Without paid employees or paid office space, the
Company's operating costs are minimal.
COMPETITION AND PRICING
Many firms offer financial solutions to businesses. Many of these firms are
larger and better financed than EFHC. EFHC must price its services
competitively.
CONFLICT OF INTEREST
EFHC has a policy of appointing a member to the Board of Directors of each of
its client companies. At present, EFHC would select Mr. J. Mahan, Mr. J. Bishop,
or Mr. W. Cate as their representative to the client's Board of Directors. This
policy has a potential to create a conflict of interest between EFHC and the
client company's Board of Directors. The Company does maintain a policy on
Conflict of Interest. This policy requires a fiduciary duty on the part of each
director and officer of the Company. Should such a conflict develop, the
appointed client board member would withdraw from the discussion and vote on the
issue before the EFHC Board. In any potential conflict issue, it is the
responsibility of the individual director to state that they see a conflict and
withdraw from the discussion and voting on that topic. Further, the Board of
Directors will also determine if a conflict of interest exists pursuant to the
policy of the Company.
C. ORGANIZATIONAL STRUCTURE.
The Company is not part of a group, nor does the Company own subsidiaries at
this time. The body of accounting principles used in preparing the financial
statements is primarily U.S. GAAP.
D. PROPERTY, PLANT AND EQUIPMENT.
There is no property, tangible or intangible, recorded in the Financial
Statements of the Company. All office space is shared and the Company does not
pay any part of the rent for its use.
ITEM 5. OPERATING AND FINANCIAL REVIEW
A. Operating results.
GENERAL
All statements contained herein that are not historical facts, such as
statements regarding the Company's current business strategy and plans for
future operations, are based upon current expectations. These statements are
forward-looking in nature and involve a number of risks and uncertainties. Such
risks and uncertainties include, but are not limited to, those described herein
including, among other things:
(1) significant increases in competitive pressure in the management and
financial consulting industry;
(2) general global economic conditions;
(3) changes in the regulatory environment; and
(4) changes in the securities markets.
Therefore, the information set forth in such forward-looking statements should
be carefully considered when evaluating the business prospects of the Company.
21
FINANCIAL RESULTS
The Company had a net loss of $360,576 for the year ended December 31, 2001
compared to the net loss of $297,287 for the year ended December 31, 2000, a net
loss of $236,109 for the year ended December 31, 1999 and a net loss of $341,578
for the period from inception (March 6, 1998) to December 31, 1998. The increase
in the current year loss of $63,289 or 21.2% and the increase in loss for year
2000 of $61,178, or 25.9%, relates primarily to an increase in professional fees
and foreign license fees. The reduction in the 1999 loss compared to 1998 of
$105,469, or 30.9%, relates primarily to a reduction in professional fees and
referral fees. These reductions in 1999 were offset by an increase in salary
expense, which covered a full year in 1999.
To date the Company has not been successful in meeting the milestones that would
allow for revenue recognition. Accordingly, revenue includes other consulting
fees related to services provided on an ad hoc basis to clients not enrolled in
the Advantage 2000 Program.
The Company incurred $50,947, $50,283, $2,171 and $128,737 in professional fees
during the years ended December 31, 2001, December 31, 2000 and 1999 and for the
period from inception (March 6, 1998) to December 31, 1998, respectively.
Changes in the level of professional fees relate to the timing of external
reporting requirements and to changes in the level of Company operations. In
addition, 1998 fees reflect costs associated with starting the business and SEC
registration. No referral fees were collected in 2001, no change when compared
to 2000 as no referral clients were accepted in 2001, 2000 or 1999 under
arrangements requiring the payment of a referral fee to a third party. These
expense reductions in 1999 were offset by an increase in salary expense related
to the fact that 2001, 2000 and 1999 included twelve months and the initial
operating period in 1998 included approximately 10 months.
The Company's financial position reflects nominal assets and negative working
capital. At December 31, 2001, December 31, 2000 and 1999, obligations in
accounts payable included a $42,750 refund due to a former EFHC recipient of
services terminating receipt of services from EFHC and thereby increasing the
amount of trade payables by $34,757 and $22,753, respactively .Trade payables
decreased at December 31, 2001 to $63,004, an 8.6 decrease over year 2000. In
2001 and 2000 trade payables is also due to increase in operating expenses
during 2001 and 2000 compared to 1999. Deferred revenue increased by $103,515 as
of December 31, 2001 compared to $95,000 as of December 31, 2000. This increase
relates to retainer amounts received from a client during 2001. The $45,000 in
work in process as of December 31, 2000 relates to a commission paid in
connection with obtaining the retainer.
The total shareholders' deficit is $421,313 as of December 31, 2001 and $270,163
at December 31, 2000 compared to $179,726 at December 31, 1999. The
shareholders' deficit has been reduced by the value of services provided to the
Company by its principals without compensation. Such amounts are reflected in
additional paid-in capital. Basic and diluted loss per share was $0.07, $0.06,
$0.07 and $0.07 for the years ended December 31, 2001, December 31, 2000 and
1999 and the period from inception (March 6, 1998) to December 31, 1998,
respectively. The reduction in the loss per share in 1999 compared to 1998 is
attributable primarily to lower professional fees and larger number of
outstanding shares brought about by the sale of 514,900 shares of common stock
to A&A International Industries. The weighted average common shares outstanding
during each period was 5,149,000, 5,149,000, 5,065,770 and 4,587,910,
respectively.
22
INFORMATION REGARDING SIGNIFICANT FINANCIAL FACTORS
Inflation generally affects companies by the cost of labor, equipment, and raw
materials. The Company does not believe that inflation has had, or will have,
any material effect on the Company's business during the periods discussed
herein. Most of the Company's business is transacted in United States dollars.
Although transactions could occur utilizing other world currencies, the Company
anticipates these transactions to be translated directly into values equivalent
to United States dollars.
FUTURE CASH FLOWS
The terminating client referenced previously has requested the return of
unearned advances totaling $42,750. Accordingly, unearned advances equal to this
amount have been reclassified and reflected in accounts payable in the financial
statements for the years ended December 31,2001, December 31,2000, and 1999 .The
repayment of unearned advances will have a negative impact on future cash flows.
Due to the limited operations reflected in the financial statements (from
inception to December 31, 2001), the cash flows for these periods might not be
indicative of cash flows in future period. The repayment of unearned advances
related to the client termination, other client termination and/or other events
might negatively impact the Company's cash flows in future periods. Management
has considered the required cash outflows and loss of future revenues related to
the terminated client in assessing the Company's ability to sustain operations,
as outlined below.
B. LIQUIDITY AND CAPITAL RESOURCES
As noted in the financial statements for the years ended December 31, 2001,
December 31, 2000 and 1999 and the period from inception (March 6, 1998) to
December 31, 1998, the Company has incurred significant operating losses and has
limited cash resources. Management continues to operate under a plan designed to
generate cash for operations from the
(1) acquisition of additional clients, and
(2) additional debt or equity financing,
(3) exercise of the warrants, and
(4) Merger with or Acquisition of other corporations.
In years 2001, 2000 and 1999, the Company revised the fee collection methods
related to the Advantage 2000 Program. Previously, the Company required a
$45,000 fee deposit prior to providing services to the client. Management found
the initial capital outlay presented a significant obstacle to obtaining Program
participants. Under the revised fee collection method operational during 2000,
total cash compensation for the Program was $250,000. After an initial payment
of $15,000, the client remits payments of $10,000 to EFHC on the first of each
month to a maximum cumulative total of $100,000. No further payments beyond the
cumulative total of $100,000 are due until the company trades its stock on the
NASD OTCBB. At that time, $150,000 dollars is due and payable by the client to
EFHC.
Currently, three (3) clients are enrolled in the EFHC Advantage 2000 Program and
no prospective clients are reviewing the Company's product.
While Management believes that the plan of operations in place is viable, the
Company's ability to obtain additional clients or financing cannot be assumed or
assured. Accordingly, substantial doubt about the Company's ability to continue
as a going concern exists.
23
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Not Applicable
D. TREND INFORMATION
The most significant recent trend for the Company is the refocusing on marketing
to international clients by breaking EFHC consulting services into individually
priced items as opposed to selling only the Advantage 2000 program. As a result,
more services may be marketed and additional revenue could be anticipated. Other
significant recent trends in production involve acquisition of additional legal
professional services for assistance with client Securities and Exchange
Commission filings, focus of sales through expansion of the representative and
strategic partner networks, and the attraction of more clients in year 2002.
Service delivery costs have increased as a function of additional professional
services, but management is working to keep increases to a minimum. Currently,
there is an economic downturn in international business; the Company may not be
able to attract new clients wishing to avail themselves of management consulting
services or equity opportunities. Therefore, the Company may loose
competitiveness and may be required to develop other strategies for financial
survival. The trend to phase out the OTCBB in favor of the new BBX stock
exchange may have negative impacts on the Company. Compliance with the new
listing requirements by the Company cannot be assured. The Company will focus on
achieving a stock market listing on a European or Asian Stock Exchange.
Other than those discussed herein, the Company, for at least the current
financial year, is unaware of any further trends, uncertainties, demands,
commitments or events that are reasonably likely to have a material effect on
the Company's net sales or revenues, income from continuing operations,
profitability, liquidity or capital resources, or that would cause reported
financial information not necessarily to be indicative of future operating
results or financial condition.
PLAN FOR OPERATIONS
As noted, EFHC has incurred significant operating losses and has limited cash
resources. Management is operating under a plan of action that considers
generating cash for operations through
(1) acquisition of additional clients,
(2) additional debt or equity financing or
(3) exercise of currently outstanding warrants, or
(4) Merger with or acquisition of other corporations.
The Company's ability to obtain additional debt or equity financing and the
exercise of options cannot be assumed or assured. Accordingly, management's
plans focus primarily on continuing operations using proceeds generated from the
acquisition of new client companies and from the provision of consulting services,
but also to seek expansion through merger with or acquisition of other
corporations providing access to potential revenue, equity or debt opportunities.
24
The Company continues to market itself to potential client companies, both
directly and through its sales representative and strategic partner networks.
The Company is currently reviewing the qualifications of three companies
(pipeline companies). Management will only provide services to qualified
companies. A qualified company is one that management believes will be
successful in obtaining equity capital. Accordingly, management estimates that
only one to two of the pipeline companies will ultimately prove to be qualified
companies. Management is unable to provide an estimate of the number of
qualified companies, if any that will ultimately become client companies.
EFHC has never received a referral from a venture capital company nor have any
venture capital companies agreed to refer clients to EFHC. Only three (3) EFHC
sales representatives have referred potential clients to EFHC.
Management estimates that receipt of initial deposits from one (1) additional
client companies in 2002 will provide sufficient cash flows to service client
companies and sustain operations for a reasonable period. While management
believes it will be able to achieve these sales, no assurances can be provided
that this will occur.
Present results of operations lead to the conclusion that the Company may not be
financially feasible in the long term. Moreover,
(1) it appears that the Company will be dependent upon EFIC exercising
warrants for the substantial portion of proceeds necessary to
implement the Company's business plan; and
(2) the exercise of those warrants is not assured.
However, management believes that the Company's operations can continue without
the immediate exercise of such warrants and that the plan currently in place is
viable and has a reasonable capability of allowing the Company to sustain
operations and meet its financial objectives. The plan includes increasing
revenues and closely monitoring costs. Additional focus is being given to the
acquisition and management of international resort properties with an eye toward
marketing them as time share properties.
The plan to increase revenues includes expanding the search for clients by
developing relationships for client referrals from more business consultants,
venture capital companies and equity search networks throughout the United
States and abroad. Venture capital company selection standards exclude many
companies EFHC could assist. There are an estimated 1,500 venture capital firms
in the United States. The average venture capital company receives equity
capital requests from 1,400 companies each year. Of the 1,400 companies, 100 are
chosen to review. Of the 100, 10 companies are selected for serious
consideration and 1 company is provided equity capital by that venture capital
company.
PLAN FOR LIQUIDITY AND CAPITAL RESOURCES
The principal sources of cash to operate the Company are anticipated to be
generated from the Company's operations. The Company believes that based upon
current levels of operations and anticipated growth, it will be able to satisfy
its ongoing cash requirements through the end of fiscal 2002 primarily with cash
flow from operations plus contributed capital.
Bank loans or borrowing may be necessary to supplement cash flow generated from
operations. Borrowings to date have been from the EFIC. No assurances can be
provided that necessary loans will be available to the Company, and if such loans
are available, no assurances can be provided as to what the costs would be for
these funds.
25
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT.
The Company's Board of Directors consists of five (5) directors. Each director
is elected by the shareholders of the Company and will serve until the next
annual meeting or until a successor is elected or appointed. Executive
officers are appointed annually and serve at the discretion of the board of
directors. There are currently no arrangements or understandings between or
among any of the above persons pursuant to which they were selected as director
or executive officer. The Membership of the Board of Directors for 1 January to
31 December 2001 was as follows:
Name Position Country Off-Board Activity
- --------------------------------------------------------------------------------
Jack L. Mahan, Jr. President/Secretary US Management Consultant
James A. Bishop COO US Management Consultant
William Cate Chairman BZ/US Management Consultant
King Kwok Yu Director Hong Kong Management Consultant
Ian N. Collins Director UK Management Consultant
The principal managers of the Company have experience with business start-up,
management financing, consulting, credit underwriting, and public corporation
growth and development. J. Mahan is president, with four years experience in the
Company, and J. Bishop is COO, with four years experience in the Company. They
have managed the Company from its inception. None of the managers or the board
members has any familial relationship. There are no arrangements of
understandings with major shareholders, customers, suppliers or others, pursuant
to which any person referred to above was selected as a director or member of
senior management.
B. COMPENSATION
As per the recommendation of the EFHC Board of Directors Compensation Committee
meeting held in December 2001 in Hong Kong, the Company disclosed the
information below to its shareholders through the proxy solicitation and at the
annual shareholders meeting held on December 30, 2001.
COMPENSATION OF DIRECTORS
For the year ended December 31, 2001 and the three (3) preceding years of the
Company's existence, there was no compensation paid by the Company to its
directors as a group. In the year 2002, the directors may receive compensation
in the amount of $100.00 per month and $500.00 for each board of directors
meeting that they attend. This applies to directors who are not paid a salary by
the Company. Board members will be reimbursed for all travel expenses for the
general annual meeting. There are no stock options, retirement plans, nor
agreements for compensation upon separation from the Board of Directors.
COMPENSATION OF OFFICERS
For the year ended December 31, 2001 and the three (3) preceding years of the
Company's existence, there was no compensation paid by the Company to its
officers. The estimated value of services contributed by the Company's Officers
has been recorded in additional paid in capital. The Company has developed a
formal strategic policy regarding the compensation of its executives and
officers that will be implemented when profitable operating results are achieved
and appear sustainable. This policy is intended to ensure executives a total
compensation package that is commensurate with their skill and experience. In
addition to salary, each officer will receive a benefits package including
medical, dental, vision, liability and life insurance. J. Mahan, Jr. and J. A.
Bishop, as President/Secretary and COO/Director, respectively, will each receive
an annual salary of $100,000. W. Cate, in his capacity as Chairman, will
receive an annual salary of $12,000.00. The eventual aggregate salary paid to
the officers, excluding the management benefits package described above, will be
$212,000. There are no stock options, retirement plans, nor agreements for
compensation upon separation from the Company.
26
C. BOARD PRACTICES
The experience and committee assignments of the Company Board of Directors are
described below. The Company has been in existence for approximately 4 years.
Years Experience and Committee Position:
- ----------------------------------------
Name Position Years Committee
- -----------------------------------------------------------------------------
Jack L. Mahan, Jr. President/Secretary 4 Executive
James A. Bishop CFO/Director 4 Executive
William Cate Chairman 4 Executive
King Kwok Yu Director 2 Audit/Compensation
Ian N. Collins Director 3 Audit/Compensation
The Board of Directors meets on a quarterly basis, or more often at the
discretion of the Chairman. An executive committee of three directors is
authorized to meet at its discretion. A quorum is necessary for voting. Each
Board Member is provided one vote. Votes may be cast in person, by
teleconference/videoconference, fax, or email. Year 2001 Board Meetings were
held in United States and Hong Kong. The Board Audit and Compensation Committees
met in December of 2001, in the Hong Kong, prior to the Annual Shareholder
Meeting. The Annual Shareholders meeting is generally scheduled for December of
each year.
Article 4.5 of the Memorandum of Association provides that the remuneration
of the directors shall from time to time be determined by the Company by
ordinary resolution. Article 4.11 of the Memorandum of Association provides
that directors may exercise all the powers of the Company to borrow money, and
to mortgage or charge its undertaking, property and uncalled capital or any part
thereof, and to issue securities whether outright or as security for any debt,
liability or obligation of the Company for any third party. Such borrowing
powers can only be altered through an amendment to the Memorandum of
Association. Directors of the Company are not required to own shares of the
Company in order to serve as directors.
The 2001 annual shareholders meeting was conducted December 30, 2001 in Hong
Kong. At this meeting, Mr. Mahan was elected to the office of Chairman of the
Board of Directors and Mr. Bishop to the office of Secretary of the Board.
Additionally Mr. Chan Kai Hon (Roy),49 years of age whose profession is that of
a Management Consultant, of Hong Kong, China, was elected to the Board to
replace the retiring William Cate. Mr. Hon was appointed to the audit committee
and the compensation committee. The election was effective January 1, 2002. The
other directors were elected to continue in their present positions.
As a new Board Member, Mr. Roy, Chan Kai Hon's background is as follows: Chan
Kai Hon received his Bachelor of Arts in Administrative Studies from York
University, Toronto (Canada) in 1979, and a Certificate of Computer Programming
from Control Data Corporation, Toronto (Canada) in 1979. Since 1979 Mr. Chan
held the position of Sales Manager for Fairmont Industries Limited (Hong Kong).
The position at Fairmont required Mr. Chan to develop new markets and sales
programs for the sales and marketing of Silk Garments worldwide. Mr. Chan was
recruited as an EDP Department Manager in 1981 for Joyce Boutique (Hong Kong).
He was charged with the responsibility of developing Computer Software Programs
for the Boutique's Point-of Sales, Inventory and Accountings Systems. Mr. Chan
started his owner Computer Business that provided total solutions of hardware
and software for Companies in Hong Kong and in the People's Republic of China.
In 1987, Mr. Chan moved to Toronto, Canada and worked for Kitronics, a Computer
Hardware Company that was involved in the sales of Personal Computers. Mr. Chan,
in 1990 was involved as a free agent for many Companies in the USA and Canada,
representing them in the purchases of various kinds of products from The
People's Republic of China. In 1997, Mr. Chan was invited to start a financial
planning and consultancy service Company (Honmark Company Limited (Hong Kong),
the Company had since been dormant and no business transactions had ever taken
place). Mr. Chan had since been providing advisory service to the Hung Yeung
(translated only) Electrolyte Copper Manufacturing Company in the People's
Republic of China.
27
D. EMPLOYEES
The Company has no employees. There are no stock options, retirement plans, nor
agreements for compensation upon separation from the Company.
E. SHARE OWNERSHIP
Members of the Board own the following EFHC shares*:
DATE WHO SHARES STOCK TRANSACTION
16-Aug-00 JAMES BISHOP Less EFHLF (0RD)
than 1%
29-Dec-00 CATE, WILLIAM * 2,000 EFHLF (ORD) Purchased at $1.50/Share.
Director Cost of $3,000.
26-Dec-00 CATE, WILLIAM * 1,000 EFHLF (ORD) Purchased at $1.75/Share.
Director Cost of $1,750.
23-Oct-00 CATE, WILLIAM * 3,500 EFHLF (ORD) Purchased at $0.75/Share.
Director Cost of $2,625.
2001-02-07 CATE, WILLIAM * 1,500 EFHLF (ORD) Purchase at $3.125/share.
Director (Cost of $4,687)
*Insider & restricted shareholder transactions reported over the last year
(HTTP://FINANCE.YAHOO.COM/Q?S=EFHLF.OB&d=t). EFHLF is the NASD OTCBB trading
symbol for EFHC shares.
Mr. Cate's shares, as reflected in insider trading filings with the Securities
and Exchange Commission on EDGAR and on the Internet at
HTTP://FINANCE.YAHOO.COM/Q?S=EFHLF.OB&d=t, are owned in the name of Beowulf
Investments. There are no stock options, retirement plans, nor agreements for
employees; or share compensation upon separation from the Company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following is provided regarding the Company's major shareholders; that
is, the beneficial owners of 5% or more of the Company's common share voting
securities. Provided are the names of the major shareholders, and the number of
shares and the percentage of outstanding shares of the common shares owned by
each of them as of December 2001.
EFHC REGISTRANT NAME COMMON SHARES PERCENTAGE
Equity Finance International Corporation, Belize, C.A. 1,588,416 30.84%
Equity Finance Information Systems, Belize, C.A. 1,180,333 22.59%
Augen Opticien GMBH of Honk Kong Ltd., Belize, C.A. 1,133,525 22.01%
International Money School, Belize, C.A. 1,133,525 22.01%
The Company's major shareholders do not have different voting rights.
28
B. RELATED PARTY TRANSACTIONS
The Company has four shareholders that own more than 5% of the total shares
outstanding. These shareholders are resident in Belize. Their stock has not been
registered with the United States Securities and Exchange Commission and,
therefore, cannot be sold in the United States. Any sale of such shares outside
the United States would not be afforded any protection under American Securities
Laws, since the unregistered shares are not subject to the United States
Securities and Exchange regulation.
William Cate, director, has filed disclosures of interest with the
Securities and Exchange Commission. These are exhibited on the EDGAR Internet
service and HTTP://FINANCE.YAHOO.COM/Q?S=EFHLF.OB&d=t. The filings are as
follows:
29-Dec-00 CATE, WILLIAM * 2,000 EFHLF (ORD) Purchased at
Director Cost of $3,000. $1.50/Share.
26-Dec-00 CATE, WILLIAM * 1,000 EFHLF (ORD) Purchased at
Director Cost of $1,750 $1.75/Share.
23-Oct-00 CATE, WILLIAM * 3,500 EFHLF (ORD) Purchased at
Director Cost of $2,625 $0.75/Share.
2001-02-07 CATE, WILLIAM * 1,500 EFHLF (ORD) Purchase at
Director (Cost of $4,687) $3.125/share.
Mr. James A. Bishop, Director and Officer, has disclosed the purchase of
the Company shares as of 16 August 2000 totaling less than 1% of the Company
shares. His son, Christopher Bishop, is also the beneficial holder of less than
1% of the Company shares.
Certain Directors of the Company are the directors of EFIC, QVPI, HIRL and
ITEL. QVPI, HIRL and ITEL are startup companies with nominal assets. These
companies were formed by EFHC on behalf of Program clients. At December 31,
2001, these Directors represent the beneficial owners of approximately 31% of the
Company's shares and approximately 10% of the shares of QVPI, HIRL and ITEL.
During 1998, the Company distributed 4,634,097 shares valued at US$.001 per
share to EFIC to partially repay principal and interest outstanding on a
related party note payable. Equity Finance International Corporation has
provided capital to the Company and in return has received an unsecured
note, plus accrued interest, totaling $60,063 at 31 December 2001. A note
has been provided to International Technology Enterprises Ltd., a Belize,
Central America, and Hacienda International Resorts Ltd. a Belize, Central
America, International Business Corporations, in the amount of US$2,575
each, for purchase of 514,920 shares of common stock.
On April 1, 1998, Beowulf Investments (Beowulf), whose managing director is
a director of the Company, purchased 3,000,000 warrants from the Company for
$2,000. The warrant exercise prices were as follows: 1,000,000 warrants at
US$1.95, 1,000,000 at US$3.25 per share and 1,000,000 warrants at US$5.20 per
share. The unchanged documenting agreement, the Warrant Funding Agreement, has
been reported previously in a registration statement on Form F-1 Amendment 6,
effective 23 March 1999 under the Securities Act, of Equity Finance Holding
Corporation, IBC No. 6825, incorporated, Belize, Central America, 6 March 1998,
and is hereby incorporated by specific reference in this annual report to the
previous registration statement which was determined effective by the U.S.
Securities and Exchange Commission on March 23, 1999. The warrants expired on
September 30,1999.
On April 1, 1998, the Company, EFIC, and Beowulf Investments entered into a
Stock Pooling Agreement. The unchanged documenting agreement, the Stock Pooling
Agreement, has been reported previously in a registration statement on Form F-1
Amendment 6, filed under the Securities Act of Equity Finance Holding
Corporation, IBC No. 6825, incorporated, Belize, Central America, 6 March 1998,
and is hereby incorporated by specific reference in this annual report to the
previous registration statement which was determined effective by the U.S.
Securities and Exchange Commission on March 23, 1999. The warrants expired on
September 30 1999. Shares purchased by EFIC are subject to a Lockup/Pooling
agreement between EFHC, EFIC and Beowulf Investments which restricts the sale of
the shares for a period of five years from the March 1, 1999 sale date. The
parties can amend the Lockup/Pooling agreement.
29
During April 1998, the Company entered into an agreement to provide a loan
up to $500,000 to a client, QVP Family Products, Inc., a private United States
company for the purposes of sustaining their operations and financing their
acquisition of a target company should the Company be unable to arrange equity
funding of up to $10,400,000 for the client company prior to October 1998. Such
financing has not been arranged; however, the Company was only obligated to
provide this loan from the proceeds received from the exercise of outstanding
warrants.
On October 22, 1998, the Company distributed 4,634,097 shares valued at
US$.001 per share to EFIC to partially repay principal and interest outstanding
on the related party note payable discussed above. These shares will be subject
to the Lockup/Pooling agreement between EFHC, EFIC and Beowulf Investments
outlined below. Management believes that the agreed upon per share value was
materially consistent with fair value.
During 1998, the Company sold 514,900 shares of its common stock to A&A
International Industries, Inc. a Canadian corporation publicly traded in the
United States (A&A), for Canadian $.01 (approximately US$00.65). A&A
distributed the shares to its shareholders as a non-cash dividend. Certain A&A
shareholders entered into separate agreements and immediately sold 346,455 of
the distributed EFHC shares at a price of Canadian $.02 (approximately US$.013)
to EFIC, the sole shareholder of the Company prior to the A&A sale. Shares
purchased by EFIC are subject to a Lockup/Pooling agreement between EFHC, EFIC
and Beowulf Investments which restricts the sale of the shares for a period of
five years from the March 1, 1999 sale date. The parties can amend the
Lockup/Pooling agreement.
On October 22, 1999, warrants for 3,000,000 shares of the Company's common
stock were distributed to EFIC. The related party note to EFIC (discussed above)
was reduced by US$1,000. The warrants have an exercise price of US$3.34 per
share and expire on October 22, 2002, with an option to extend. Management
believes the agreed-upon warrant purchase price is materially consistent with
the fair value of the warrants.
On December 28, 2000, the Company purchased 514,920 shares, representing
10% of the outstanding shares, of stock of QVP International Ltd. (QVPI), a
related party, for US$0.005 per share. The stock was purchased with the
issuance of a $2,574.60 note payable to QVPI. The Company distributed one share
of QVPI stock for every 10 shares of EFHC stock held to EFHC shareholders as a
non-cash dividend declared December 28, 2000 to shareholders of record December
29, 2000. Management believes the agreed-upon purchase price is materially
consistent with the fair value of the shares purchased.
On December 28, 2000, the Company purchased 514,920 shares, representing
10% of the outstanding shares, of stock from International Technology
Enterprises Ltd. (ITEL), a related party, for US$0.005 per share. The stock was
purchased with the issuance of a $2,574.60 note payable to ITEL. The Company
distributed one share of ITEL stock for every 10 shares of EFHC stock held to
EFHC shareholders as a non-cash dividend declared December 28, 2000 to
shareholders of record December 29, 2000. Management believes the agreed-upon
purchase price is materially consistent with the fair value of the shares
purchased.
On 15 January 2001, the Company purchased 514,920 shares, representing 10%
of the outstanding shares, of stock from Hacienda International Resorts
Ltd. (HIRL), a related party, for US$0.005 per share. The stock was
purchased with the issuance of a $2,574.60 note payable to HIRL. The
Company distributed one share of HIRL stock for every 10 shares of EFHC
stock held to EFHC shareholders as a non-cash dividend declared 15 January
2001 to shareholders of record December 29, 2000. Management believes the
agreed-upon purchase price is materially consistent with the fair value of
the shares purchased.
30
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. STATEMENTS AND OTHER FINANCIAL INFORMATION
Relevant audited financial information appears below.
EQUITY FINANCE HOLDING CORPORATION
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, DECEMBER 31, 2000
AND 1999, AND INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITORS REPORT
To the Board of Directors
Equity Finance Holding Corporation
Playas De Rosarito, B.C., Mexico
We have audited the accompanying balance sheet of Equity Finance Holding
Corporation, (the "Company") as of December 31, 2000 and the related statements
of operations, stockholders' deficit, and cash flows for the years ended
December 31, 2000 and 1999. These financial statements are the responsibility of
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 management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Equity Finance Holding
Corporation at December 31, 2000 and the results of its operations
and its cash flows for the years ended December 31, 2000 and 1999 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the profitable
financial statements, Equity Finance has suffered recurring losses from
operations. Additionally, current liabilities exceed current assets by $167,818.
This raises substantial doubt about the Company's ability to continue as going
concern. The Financial Statements do not include any adjustments that might
result from the outcome of this uncertainty.
Perry-Smith LLP
Sacramento, California
March 2, 2001
31
INDEPENDENT AUDITORS REPORT
To the Board of Directors
Equity Finance Holding Corporation
Playas De Rosarito, B.C., Mexico
We have audited the accompanying balance sheets of Equity Finance Holding
Corporation, as of December 31, 2001 and the related statement of expenses,
stockholders' deficit, and cash flows for the year ended December 31, 2001.
These financial statements are the responsibility of Equity Finance's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Equity Finance Holding
Corporation as of December 31, 2001 and the results of its operations and its
cash flows for the year ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, Equity Finance has suffered recurring losses from
operations and has a net capital deficiency, which raises substantial doubt
about its ability to continue as a going concern. Management's plans regarding
those matters also are described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
MALONE & BAILEY, PLLC
Houston, Texas
www.malone-bailey.com
July 8, 2002
32
EQUITY FINANCE HOLDING CORPORATION
BALANCE SHEETS
As of December 31, 2001 and 2000
2001 2000
---------- ----------
ASSETS
Current Assets
Cash $ 9,612 $ 1,189
Work in process 45,000
Other assets 3,500
----------- -----------
Total Current Assets $ 9,612 $ 49,689
=========== ===========
LIABILITIES
Current liabilities
Accounts payable and other liabilities $ 70,971 $ 77,507
Customer deposits 243,515 140,000
----------- -----------
Total Current Liabilities 314,486 217,507
----------- -----------
Note payable 48,270 45,971
Related party notes payable 68,169 56,374
----------- -----------
Total liabilities 430,925 319,852
STOCKHOLDERS' DEFICIT
Common stock, $.001 par value,
100,000,000 shares authorized,
5,149,000 shares outstanding 5,149 5,149
Additional paid in capital 816,812 604,812
Retained deficit (1,243,274) 880,124)
----------- ----------
Total Stockholders' Deficit ( 421,313) (270,163)
----------- ----------
TOTAL LIABILITIES
STOCKHOLDERS' DEFICIT $ 9,612 $ 49,689
=========== ===========
See Accompanying Summary of Accounting Policies and Notes to Financial Statements
F-1
EQUITY FINANCE HOLDING CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
--------- --------- ---------
Revenues
Consulting fees - - $ 1,429
General & administrative $ 306,229 $ 291,472 233,583
Impairment expense 48,500
--------- --------- ---------
Operating loss (354,729) (291,472) (232,154)
Other Income and (Expense)
Interest Income 893 400
Interest Expense (6,739) (6,215) (3,955)
--------- --------- -------
Total other income (expense) (5,847) (5,815) (3,955)
--------- --------- --------
Net loss $(360,576) $(297,287) $(236,109)
========= ========= =========
Net loss per common share $(.07) $(.06) $(.05)
Weighted average common
shares outstanding 5,149,000 5,149,000 5,065,770
See Accompanying Summary of Accounting Policies and Notes to Financial Statements
F-2
EQUITY FINANCE HOLDING CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2001, 2000 and 1999
Common Stock Paid In Retained
Shares Amount Capital Earnings Totals
---------- ------- -------- ---------
Balances,
December 31, 1998 4,634,100 $4,634 $176,980 $(341,578) $(159,964)
Issuance of stock
in exchange for
note payable 514,900 515 2,832 3,347
Issuance of stock
purchase warrants - - 1,000 - 1,000
Services contributed by
principals without
compensation - - 212,000 - 212,000
Net loss (236,109) (236,109)
---------- -------- -------- ---------- ---------
Balances,
December 31, 1999 5,149,000 5,149 392,812 (577,687) (179,726)
Issuance of non-cash
dividends - - - (5,150) (5,150)
Services contributed by
principals without
compensation - - 212,000 - 212,000
Net loss (297,287) (297,287)
---------- -------- -------- ----------- --------
Balances,
December 31, 2000 5,149,000 5,149 604,812 (880,124) (270,163)
Issuance of non-cash - - - - -
dividends - - - (2,574) (2,574)
Services contributed by
principals without
compensation - - 212,000 - 212,000
Net loss (360,576) (360,576)
---------- ------- -------- ---------- --------
Balances,
December 31, 2001 5,149,000 $5,149 $816,812 $(1,243,274) $(421,313)
========== ====== ======== =========== =========
See Accompanying Summary of Accounting Policies and Notes to Financial Statements
F-3
EQUITY FINANCE HOLDING CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
--------- --------- -------
CASH FLOWS FROM OPERATING ATIVITIES
Net loss $(360,576) $(297,287) $(236,109)
Adjustments to reconcile
net loss to cash used by
operating activities
Increase in work in process - (45,000) -
Decrease (increase) in other assets 48,500 (3,500) -
Decrease in accounts payable
and other liabilities (6,536) 12,004 16,710
Increase in customer deposits 103,515 95,000 -
Increase in accrued interest
included in notes payable 6,020 5,510 3,433
Services contributed by principals 212,000 212,000 212,000
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITY 2,923 (21,273) (3,966)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITY
Proceeds from related party notes
payable 5,500 21,880 1,650
--------- --------- ---------
NET INCREASE (DECREASE)
IN CASH 8,423 607 (2,316)
CASH AT BEGINNING OF PERIOD 1,189 582 2,898
--------- --------- ---------
CASH AT END OF PERIOD $ 9,612 $ 1,189 $ 582
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 0 $ 0 $ 0
Income taxes paid 0 0 0
NONCASH ACTIVITIES:
Increase in accumulated deficit through
the issuance of non-cash dividends $ 2,575 $ 5,150 -
Issuance of related party notes
payable in purchase of Hacienda
International Resorts, Ltd. stock 2,575 - -
Issuance of related party notes
payable in purchase of QVP
International stock - 2,575 -
Issuance of related party notes
payable in purchase of International
Technology Enterprises Limited stock - 2,575 -
Conversion of an account payable to an
unsecured note payable - - $ 42,000
Reduction of related party note payable
through issuance of common stock - - 3,347
Reduction of related party note payable
through sale of warrants - - 1,000
See Accompanying Summary of Accounting Policies and Notes to Financial Statements
F-4
EQUITY FINANCE HOLDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business. Equity Finance Holding Corporation ("Equity Finance") was
incorporated on March 6, 1998 in Belize, Central America with offices in
PuntaGorda, Belize and Playas De Rosarito, B.C., Mexico. Equity Finance is a
management consulting company and marketer of management and financial
consulting services offered principally to small businesses with annual sales of
$1,000,000 to $20,000,000. Equity Finance assists small businesses in accessing
the U.S. capital markets for financing.
Equity Finance provides its management consulting services through a five-year
program of planning for growth and equity sales to investors under the name "The
Advantage 2000 Program." Equity Finance markets and sells its services
principally through representatives.
Equity Finance maintains its books and records in United States dollars using
accounting principles generally accepted in the United States of America.
Revenue Recognition. Revenues are recognized for Advantage 2000 Program ("the
Program") services using the specific performance method with revenue
recognition tied to the completion of identifiable milestones. Substantially all
services to be provided by the Equity Finance in connection with the Program
will have been completed prior to the recognition of revenue. Revenue for other
consulting services provided to Program clients will be recognized upon
completion of the contracted task. Equity Finance clients are not required to
purchase supplemental services from the company and client entitlements related
to refunds vary by contract, but generally allow for the return of unearned
advances, less a 5% processing fee. Deferred revenue consists of retainers
collected from clients in advance of reaching contractual milestones for
recognizing the revenue.
Estimates and assumptions that affect amounts reported are used by management to
prepare these financial statements and accompanying footnotes in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ from those estimates.
Cash and Cash Equivalents. For purposes of the statements of cash flows, Equity
Finance considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Income Taxes. Equity Finance recognizes deferred tax assets and liabilities
based on differences between the financial reporting and tax basis of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. Equity Finance
provides a valuation allowance for deferred tax assets for which it does not
consider realization of such assets to be more likely than not.
Basic and diluted loss per common share are calculated by dividing the net loss
by the weighted average shares outstanding. There are no dilutive securities.
Impairment reviews are performed at least annually, whenever conditions indicate
that assets may not be realized for their recorded values.
Recently issued accounting pronouncements. Equity Finance does not expect the
adoption of recently issued accounting pronouncements to have a significant
impact on Equity Finance's results of operations, financial position or cash
flow.
F-5
NOTE 2 - GOING CONCERN
As shown in the accompanying financial statements, Equity Finance has
recurring net losses and has a net deficit of $369,313 as of December 31, 2001.
These conditions create an uncertainty as to Equity Finance's ability to
continue as a going concern. Management is trying to raise additional capital
through sales of its common stock as well as seeking financing from third
parties. The financial statements do not include any adjustments that might be
necessary if the Equity Finance is unable to continue as a going concern.
NOTE 3 - ASSET IMPAIRMENT
In 2001, management determined that a $45,000 sales commission and a $3,500
expenditure capitalized in 2000 that related to a customer signed in 2000 had no
continuing value and was written off.
NOTE 4 - ACCOUNTS PAYABLE
At December 31, 2001, and 2000, accounts payable includes a $42,750 refund due
to a former Program participant who invested in 1998.
NOTE 5 - NOTE PAYABLE
In June 1999, Equity Finance negotiated the settlement of an outstanding account
payable through the issuance of an unsecured note payable to the service provider
totaling $42,000. The note bears interest at 5% and is due June 2004.No payment
of either principal or interest is required prior to the maturity date. The
service provider has the ability to exchange the note for 100,000 shares of
Equity Finance's stock owned by Equity Finance International Corporation (EFIC).
Accrued interest included in the balance of the note payable totaled $6,270 and
$3,971 at December 31, 2001 and 2000, respectively.
F-6
NOTE 6 - RELATED PARTY NOTES PAYABLE
Related party notes payable consist of the following:
2001 2000
-------- --------
Equity Finance International Corporation (EFIC),
6% annual interest, principal and interest
due March 2003. $60,063 $51,224
Purchase of inactive shell companies:
QVP International (QVPI), 5% annual interest,
Principal and interest due December 2005 2,704 2,575
International Technology Enterprises Limited
(ITEL), 5% annual interest, principal and
interest due December 2002 2,704 2,575
Hacienda International Resorts, Ltd. (HIRL), 5%
annual interest, principal and interest
due December 15, 2006 2,698 -
------- -------
$68,169 $56,374
======= =======
Accrued interest included in the balance of the note payable to EFIC totaled
$9,514 and $6,175 at December 31, 2001 and 2000, respectively.
Certain directors of Equity Finance are the principal owners of EFIC and an
Equity Finance director serves on the board of QVPI, ITEL and HIRL. QVPI, ITEL
and HIRL are inactive shell companies with nominal assets that have been
established by Program clients. At December 31, 2001, these directors are the
beneficial owners of approximately 31% of Equity Finance's shares and
approximately 10% of the outstanding shares of QVPI, ITEL and HIRL. All related
party notes payable are unsecured.
NOTE 7 - INCOME TAXES
Equity Finance is domiciled and operated in Mexico and Belize, and has no
operations in the United States. Mexico and Belize both have corporate income
tax laws. Equity Finance has had losses since inception.
A summary of deferred tax assets and liabilities is as follows:
Deferred tax assets $ 131,000
Less: valuation allowance (131,000)
---------
Net deferred taxes $ 0
=========
Equity Finance has net operating losses of $148,000, $85,000, $24,000 and
$129,000 in the years 2001, 2000, 1999 and 1998.
NOTE 8 - STOCK DIVIDENDS
As part of the agreements with customers to establish and promote investor
financing through the inactive shell entities, Equity Finance receives 10% of
each of these entities and this same 10% is immediately distributed pro rata to
the four major shareholders of Equity Finance, which collectively own 97.8% of
Equity Finance. These transfers have been recorded as non-cash dividends because
3 of these 4 stockholders are not involved in the operations of Equity Finance.
33
ITEM 9. THE OFFER AND LISTING.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION.
A. SHARE CAPITAL.
Not Applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION.
The information called for by Item 10.B has been reported previously in a
registration statement on Form F-1 Amendment 6, a registration statement filed
under the Securities Act, and has not changed. This information, contained in
the by-laws of Equity Finance Holding Corporation and The Memorandum of
Association and Articles of Association of Equity Finance Holding Corporation,
IBC No. 6825, incorporated, Belize, Central America, 6 March 1998, is hereby
incorporated by specific reference in this annual report to the previous
registration statement which was determined effective by the U.S. Securities and
Exchange Commission on March 23, 1999.
C. MATERIAL CONTRACTS.
The following represents a summary of each material contract (not discussed
in item 7B. above), other than contracts entered into in the ordinary course of
business, to which the Company or any member of the group is a party, for the
two years immediately preceding publication of this document, including dates,
parties, general nature of the contracts, terms and conditions, and amount of
any consideration passing to or from the company or any other member of the
group:
On October 29, 2000 the Company entered into a Transfer Agent and Registrar
Agreement with Transfer Online Inc., Portland, Oregon, U.S.A. This agreement
substitutes Transfer Online Inc. for the previous stock transfer agent, Stock
Transfer.com LLC. The new agreement with Transfer Online Inc. provides for
stock transfer and registrar services for Equity Finance Holding Corporation
including maintaining of shareholder account records viewable to Equity Finance
Holding Corporation shareholders by Internet access to the
HTTP://WWW.TRANSFERONLINE.COM/ WEBSITE. Instructions to the Company shareholders
for opening the Transfer Online shareholder account, as well as other
shareholder information, is available at HTTP://WWW.EFHLF-SHAREHOLDER.COM/, the
Company's Shareholder Information Center on the Internet. EFHLF is the NASD
OTCBB trading symbol for the Company.
At the May 2001 meeting of the Board of Directors, the Board directed the
President to explore and execute the Letter of Engagement (executed date
May 22, 2001) with Geneva Group, Inc. whereby Geneva Group, Inc. would
cause to happen a listing of EFHC on the Frankfurt Germany Stock Exchange.
The Geneva Group reported that EFHC was short on issues of compliance with
listing requirements on the Frankfurt exchange. The Company documented
compliance; however, The Geneva Group, Inc. did not perform on the
agreement and did not return 90% of the $10,000 fee as described in the
agreement.
34
EXCHANGE CONTROLS.
Because the Company is incorporated in Belize, Central America, it is
subject to potential changes in Belize law. The effects of any change in Belize
laws on the Company are unknown at this time, but such effects may be adverse to
the Company's shareholders best interests. At this time, there are no
governmental laws, decrees, regulations or other legislation in Belize, the
Company's home country, which are known to the Company, that may negatively
affect the import or export of capital, including the availability of cash and
cash equivalents for use by the Company, or the remittance of dividends,
interest or other payments to nonresident holders of the Company's securities.
Most of the Company's business is transacted in United States. Although
transactions could occur utilizing other world currencies, the Company
anticipates these transactions to be translated directly into values equivalent
to United States. While the Company is incorporated in Belize and has its
primary office in Mexico, the Company does business in the United States. This
policy may exclude some potential clients from using EFHC's services. EFHC's
U.S. Dollar policy appears to limit foreign exchange risk.
D. TAXATION.
The discussion does not deal with all possible tax consequences relating to
an investment in the Common Stock and does not purport to deal with the tax
consequences applicable to all categories of investors, some of which (such as
dealers in securities, insurance companies and tax-exempt entities) may be
subject to special rules. In particular, the discussion does not address the
tax consequences under state, provincial, local and other national tax laws.
Accordingly, each prospective investor should consult its own tax advisor
regarding the particular tax consequences to it of an investment in the Common
Stock. The following discussion is based upon laws, regulations and relevant
interpretations thereof in effect as of the date of this Prospectus, all of
which are subject to change, possibly retroactively.
Belize Tax Law
Since the Company operates under Belize IBC laws, the Company's primary tax
reporting country is Belize. These tax laws are summarized as follows. The
Company is responsible for income tax under Belize law. Unless exempt under an
investment incentive, resident companies are liable for corporate income tax on
all of their income, whether derived from Belize or not, although foreign earned
income is taxed only on remittances to Belize. A company is resident if it is
incorporated in Belize or if it's central management and control are exercised
in Belize. If a company does not operate under a Fiscal Incentives (Approved
Enterprise Order) the total tax payable is 35% of the chargeable income. All
companies should file a Company's Income Tax Return, together with their
financial statements within three (3) months of the end of the financial period,
to the nearest Income Tax Department. If more time is required, a request in
writing should be directed to the Commissioner of Income Tax before the due
date. Otherwise a penalty for late filing is a levy of 3% of the tax for the
financial period, for each month or part of the month in which the return is
late to a total of twenty (20) months. The penalty for late payment of income
tax is 1.5% per month on the unpaid amount from the due date to the date of
payment. This applies to any deficiencies in installment as well as to any
other amount. In the case of installments this charge is based on the tax
calculated on the chargeable income for the previous financial period or the
actual income tax for the financial period for which this return is filed,
whichever is less. This charge also applies to any amount unpaid after the date
for final payment. A company should pay its income tax by quarterly
installments. Installments are due no later than the last day of the 3rd, 6th,
9th, and 12th month of the company's financial period. If a company wishes to
employ foreign consultancy, technicians etc. who are not normally resident in
Belize, their names should be registered at the Income Tax Department and a
company should deduct 25% of total income paid to non-residents.
Corporate income tax is charged on net profits, as adjusted for tax
purposes. Net profits comprise the aggregate amount of net income derived from
conducting business in Belize. Inventory valuation is not specifically
addressed in income tax law and, in any event, is inapplicable to the Company.
Methods that conform to generally accepted accounting principles may be used as
long as they are consistently applied. Dividends are taxable in the hands of
recipients, the cash amount of the dividends paid being grossed up by the amount
of corporate income tax paid by the distributing company, although the latter is
liable only for corporate income tax and does not actually account to the tax
authorities for any withholding. Some dividends are not taxable on recipients,
including those paid to exempt entities and those paid under specified tax
incentives.
35
Foreign Source Income
Foreign-source earned income is taxable only when it is remitted to Belize.
Income derived from the United Kingdom qualifies for tax credit relief under a
double tax treaty. Unilateral relief is available for income received from
countries in the British Commonwealth and from the CARICOM countries.
Belize's legislation does not specifically address exchange differences.
Realized exchange gains are in practice taxed like other business income, and
realized exchange losses are deducted like other business expenses.
Taxation Of Nonresident Entities
Nonresident companies are liable for tax at the normal rate of 35% on
income arising in Belize and all foreign income brought into Belize. Branches
of foreign companies operating in Belize must register there. Foreign entities
qualify for various tax and customs duty incentives when they satisfy the
relevant rules.
Tax Treatment Of Groups & Companies
Exempt in the case of public investment companies, there are no rules in
Belize under which consolidated returns can be submitted or losses transferred
between companies in a group. Also, there are no special rules governing
inter-company payments or transfers of assets within a group. Belize has no
specific provisions dealing with capitalization or transfer-pricing issues. As
far as public investment companies are concerned, a group consists of the public
investment company itself and its subsidiaries (those in which it has a greater
than 50% holding). Subsidiaries may or may not be public investment companies,
and they may include nonresident as well as resident companies. The group may
file one return as if it comprised a single company, and it effectively may
transfer losses between group companies. The public investment company group
pays tax as one entity on the combined net profit of the Belizean subsidiaries
at the special rate of 25%.
License Fees
License Fees are payable by the 31st of December in the year following
incorporation, and then annually. Companies with an authorized capital up to
$5,000 pay the sum of $100.00 per year, which is fixed for a period of twenty
years. Companies with a share capital between $5,001 and $50,000 pay $300.00
per year, and companies with share capitals in excess of $50,001 pay the sum of
$1,000 per year. Companies whose authorized capitals have some or all of its
shares with no par value pay the sum of $350.00 per year
Financial Statement Requirement
While there is no requirement to file audited accounts with the
authorities, a company is required to keep financial records that reflect the
financial position of a company.
35
F. DIVIDENDS AND PAYING AGENTS.
The Company has a plan for paying dividends to EFHC shareholders in the
form of non-cash dividends of each of the client companies successfully
served by EFHC. The EFHC Board of Directors approved the distribution of
non-cash dividends as of May 11, 2001 in the form of dividends of equity
securities of one client, Hacienda International Resorts Ltd. (HIRL). The
stock transfer agent, Transfer Online, Inc. of Portland Oregon, U.S.A
perfected the distribution. The records are available to shareholders
through Internet access. The Company plans to distribute certificates
documenting ownership when HIRL is registered with the Securities and
Exchange Commission. The timing of the distribution of such dividends is
dependent upon many factors including the time and uncertainty of
completing the US Securities and Exchange Commission registration process
and listing the client company's stock on the NASD OTCBB, BBX, or Pink
Sheets for trading.
On December 28, 2000, the Company distributed equity securities of two
client companies, QVP International Ltd. and International Technology
Enterprises Ltd. to its registered shareholders. The stock transfer agent,
Transfer Online, Inc. of Portland Oregon, U.S.A perfected the distribution.
The records are available to shareholders through Internet access. Stock
Certificates were distributed for International Technology Ltd. The Company
plans to distribute certificates documenting ownership for QVP
International Ltd. when both International Technology Enterprises Ltd. and
QVP International Ltd. become effective with the Securities and Exchange
Commission.
G. STATEMENT BY EXPERTS.
Not Applicable.
H. DOCUMENTS ON DISPLAY.
Not Applicable.
I. SUBSIDIARY INFORMATION.
The Company is a subsidiary of no other corporation and the Company has no
subsidiaries.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Since the Company does not maintain nor invest in market sensitive or
interest rate sensitive holdings, the Company has no quantitative or qualitative
exposure to market risk associated with activities in derivative financial
instruments, other financial instruments and derivative commodity instruments.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not Applicable.
36
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
Not Applicable.
ITEM 15. [Reserved]
ITEM 16. [Reserved]
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
Not Applicable
ITEM 19. EXHIBITS
None
SIGNATURES
THE REGISTRANT hereby certifies that it meets all of the requirements for filing
- --------------
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
EQUITY FINANCE HOLDING CORPORATION
(Registrant)
/s/ JACK L. MAHAN, JR.
-----------------------
JACK L. MAHAN, JR., President
------------------
(Signature)*
Date: July 16, 2001
