1
EXHIBIT 99.2
FINANCIAL STATEMENTS INDEX
PAGE
AMTEC, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT.....................................................................................F-3
FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997:
Consolidated Balance Sheets.................................................................................F-4
Consolidated Statements of Operations.......................................................................F-5
Consolidated Statements of Stockholders' Equity (Deficit)...................................................F-6
Consolidated Statements of Cash Flows.......................................................................F-8
Notes to Consolidated Financial Statements..................................................................F-9
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
INDEPENDENT AUDITORS' REPORT....................................................................................F-26
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE
PERIOD FROM APRIL 29, 1997, (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1997:
Balance Sheets.............................................................................................F-27
Statements of Operations...................................................................................F-28
Statements of Investors' Equity............................................................................F-29
Statements of Cash Flows...................................................................................F-30
Notes to Financial Statements..............................................................................F-31
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
INDEPENDENT AUDITORS' REPORT....................................................................................F-37
FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1998, 1997 AND PERIOD FROM JANUARY 31, 1996
(COMMENCEMENT OF OPERATIONS) TO DECEMBER, 1996:
Balance Sheets.............................................................................................F-38
Statements of Operations...................................................................................F-39
Statements of Investors' Equity (Deficit)..................................................................F-40
Statements of Cash Flows...................................................................................F-41
Notes to Financial Statements..............................................................................F-42
AMTEC, INC. AND SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS FOR THE PERIODS ENDED DECEMBER 31, 1998 AND
1999:
Condensed Consolidated Balance Sheets......................................................................F-50
Condensed Consolidated Statements of Operations............................................................F-51
Condensed Consolidated Statements of Cash Flows............................................................F-52
Notes to Condensed Consolidated Financial Statements.......................................................F-54
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS FOR THE YEARS ENDED
MARCH 31, 1999 AND 1998:
Report of Independent Certified Public Accountants.........................................................F-58
Consolidated Balance Sheets................................................................................F-59
Consolidated Statements of Operations......................................................................F-60
F-1
2
Consolidated Statements of Stockholders' Equity ...........................................................F-61
Consolidated Statements of Cash Flows......................................................................F-62
Notes to Consolidated Financial Statements.................................................................F-64
UNAUDITED FINANCIAL STATEMENTS FOR THE PERIODS ENDED DECEMBER 31, 1999 AND
1998:
Consolidated Balance Sheets................................................................................F-78
Consolidated Statements of Operations and
Changes in Stockholders' Equity .......................................................................F-79
Consolidated Statements of Cash Flows......................................................................F-81
Notes to Consolidated Financial Statements.................................................................F-83
TERREMARK CENTRE
Report of Independent Certified Public Accountants.........................................................F-87
Statement of Revenue and Certain Expenses..................................................................F-88
Notes to Statement of Revenue and Certain Expenses.........................................................F-89
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
AMTEC INC.
We have audited the accompanying consolidated balance sheets of AmTec Inc.
and subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1999. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of March
31, 1999 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended March 31, 1999, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
June 29, 1999
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
- ---------------------------------------------------------------------------------------------------------------------
1999 1998
-------------------- --------------------
Assets
Current Assets:
Cash ......................................................... $ 2,093,141 $ 2,134,662
Accounts receivable .......................................... -- 114,661
Prepaid expenses and other current assets .................... 38,805 108,082
------------ ------------
Total current assets ..................................... 2,131,946 2,357,405
Investments in and advances to unconsolidated subsidiary ..... 2,496,480 5,074,217
Property, plant and equipment, net ........................... 96,926 139,136
Office lease deposit ......................................... 55,733 112,600
------------ ------------
Total assets ............................................. $ 4,781,085 $ 7,683,358
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ............................................. $ 439,195 $ 541,888
Accrued expenses ............................................. 528,548 792,006
Loans payable - shareholders ................................. -- 1,452,553
------------ ------------
Total current liabilities ................................ 967,743 2,786,447
------------ ------------
F-2
3
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock: authorized 10,000,000 shares:
Series E Convertible Preferred Stock: $.001 par value;
74 shares issued, 29.8 and 73.2 shares outstanding in
1999 and 1998, respectively .............................. 1 1
Series G Convertible Preferred Stock: $.001 par value;
20 and 0 shares issued and outstanding in 1999 and 1998,
respectively ............................................. 1 --
Common Stock: $.001 par value, authorized 100,000,000 shares;
30,736,721 and 26,532,502 issued and outstanding in 1999
and 1998, respectively ................................... 30,737 26,533
Additional Paid-In Capital ................................... 36,947,244 33,149,142
Accumulated deficit .......................................... (33,646,491) (27,394,590)
Nonemployee deferred option cost, net ........................ -- (1,378,125)
Warrants ..................................................... 481,850 493,950
------------ ------------
Total Stockholders' Equity ........................................ 3,813,342 4,896,911
------------ ------------
Total Liabilities & Stockholders' Equity .......................... $ 4,781,085 $ 7,683,358
============ ============
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------- --------------- ----------------
Revenues .................................................. $ $ -- $ --
-------------- -------------- -------------
Expenses
Selling, general and administrative .................. 4,649,770 4,282,613 3,563,568
-------------- -------------- -------------
Loss from Operations ...................................... (4,649,770) (4,282,613) (3,563,568)
-------------- -------------- -------------
Other Income (Expense):
Amortization of stock options granted to non-employees (459,374) (459,375) --
Interest expense ..................................... -- (125,586) (129,039)
Other - net .......................................... (85,161) 70,853 (33,216)
Write off of investment in affiliate ................. -- -- (198,538)
-------------- -------------- -------------
Total other expense .............................. (544,535) (514,108) (360,793)
-------------- -------------- -------------
Loss Before Equity in Losses of Unconsolidated Subsidiary . (5,194,305) (4,796,721) (3,924,361)
Equity in losses of unconsolidated subsidiary ............. (385,139) (606,647) (140,524)
-------------- -------------- -------------
Net Loss .................................................. (5,579,444) (5,403,368) (4,064,885)
Preferred Stock Dividend .................................. 672,457 1,398,686 10,000
-------------- -------------- -------------
Loss Applicable to Common Shareholders .................... $ (6,251,901) $ (6,802,054) $ (4,074,885)
-------------- -------------- -------------
Basic Loss per Common Share ............................... $ (0.23) $ (0.23) $ (0.14)
============== ============== =============
Weighted Average Common Shares Outstanding ................ 27,495,213 29,843,712 29,102,347
============== ============== =============
See notes to consolidated financial statements
F-3
4
AMTEC INC. AND SUBSIDIARIES
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------------------------------------------------------------------
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
BALANCE, March 31, 1996............................... 28,436,982 $28,437 1,524,178 $1,524 -- $ --
Issuances of Series B preferred stock................. -- -- -- -- 100 1
Conversion of Series B shares......................... 1,507,477 1,507 -- -- (100) (1)
Issuance of Series D preferred Stock.................. -- -- -- -- -- --
Common shares issued for services rendered............ 90,962 91 -- -- -- --
Common shares issued to employees as compensation..... 212,500 213 -- -- -- --
Common shares issued for directors' fees.............. 10,000 10 -- -- -- --
Sale of common shares................................. 1,000,000 1,000 -- -- -- --
Cumulative foreign currency exchange loss............. -- -- -- -- -- --
Preferred dividends................................... -- -- -- -- -- --
Warrants.............................................. -- -- -- -- -- --
Net loss.............................................. -- -- -- -- -- --
----------- ----------- ---------- -------- ------- --------
BALANCE, March 31, 1997............................... 31,257,921 31,258 1,524,178 1,524 -- --
Exercise of employee stock options.................... 69,000 69 -- -- -- --
Issuance of Series C preferred stock.................. -- -- -- -- -- --
Common shares issued for services rendered............ 23,233 23 -- -- -- --
Conversion of Series D shares to common stock......... 2,236,507 2,237 -- -- -- --
Common stock investment agreement-- net of
cancellation........................................ 1,019,465 1,019 -- -- -- --
Common shares issued for directors' fees.............. 40,000 40 -- -- -- --
Cancellation of Series A Preferred.................... -- -- (1,524,178) (1,524) -- --
Cancellation of common stock.......................... (12,727,909) (12,728) -- -- -- --
Tweedia loan cancellation............................. -- -- -- -- -- --
Allocation of non-refundable deposit from former
affiliate........................................... -- -- -- -- -- --
Other................................................. -- -- -- -- -- --
Conversion of Series C shares to common stock......... 4,507,639 4,508 -- -- -- --
Issuance of Series E preferred stock.................. -- -- -- -- -- --
Conversion of Series E shares to common stock......... 106,646 107 -- -- -- --
Buyback of Series C preferred stock................... -- -- -- -- -- --
Deferred financing costs, net of amortization......... -- -- -- -- -- --
Stock options issued to third party................... -- -- -- -- -- --
Cumulative foreign currency exchange loss............. -- -- -- -- -- --
Advance to joint venture partner...................... -- -- -- -- -- --
Preferred stock dividends............................. -- -- -- -- -- --
Cancellation of Warrants.............................. -- -- -- -- -- --
Net loss.............................................. -- -- -- --
----------- ----------- ---------- ---------------- --------
BALANCE, March 31, 1998............................... 26,532,502 26,533 -- -- -- --
Conversion of Series E shares to common stock......... 5,554,484 5,554 -- -- -- --
Common Shares buyback................................. (330,800) (331) -- -- -- --
Preferred Shares buyback.............................. -- -- -- -- -- --
Cancellation of common stock investment agreement..... (1,019,465) (1,019) -- -- -- --
Issuance of Series G preferred stock.................. -- -- -- -- -- --
Issuance of Warrants.................................. -- -- -- -- -- --
Cancellation of Warrants.............................. -- -- -- -- -- --
Cancellation of shareholders' loans and accrual
interest............................................ -- -- -- -- -- --
Cumulative foreign currency exchange loss............. -- -- -- -- -- --
Preferred stock dividends............................. -- -- -- -- -- --
Cancellation of Stock options issued to third party... -- -- -- -- -- --
Options issued for services rendered.................. -- -- -- --
Net loss.............................................. -- -- -- --
----------- ----------- ---------- --------- ------- --------
BALANCE, March 31, 1999............................... 30,736,721 $30,737 -- $-- -- $--
=========== =========== ========== ========= ======= ========
AMTEC INC. AND SUBSIDIARIES
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- -----------------------------------------------------------------------------------------------------------------------------------
SERIES C SERIES D SERIES E SERIES G
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
BALANCE, March 31, 1996............................... -- $-- -- $-- -- $-- -- $--
Issuances of Series B preferred stock................. -- -- -- -- -- -- -- --
Conversion of Series B shares......................... -- -- -- -- -- -- -- --
Issuance of Series D preferred Stock.................. -- -- 150 1 -- -- -- --
Common shares issued for services rendered............ -- -- -- -- -- -- -- --
Common shares issued to employees as compensation..... -- -- -- -- -- -- -- --
Common shares issued for directors' fees.............. -- -- -- -- -- -- -- --
Sale of common shares................................. -- -- -- -- -- -- -- --
Cumulative foreign currency exchange loss............. -- -- -- -- -- -- -- --
Preferred dividends................................... -- -- -- -- -- -- -- --
Warrants.............................................. -- -- -- -- -- -- -- --
Net loss.............................................. -- -- -- -- -- -- -- --
-------- -------- ------ -------- -------- -------- ------- -------
BALANCE, March 31, 1997............................... -- -- 150 1 -- -- -- --
Exercise of employee stock options.................... -- -- -- -- -- -- -- --
Issuance of Series C preferred stock.................. 250 1 -- -- -- -- -- --
Common shares issued for services rendered............ -- -- -- -- -- -- -- --
Conversion of Series D shares to common stock......... -- -- (150) (1) -- -- -- --
Common stock investment agreement-- net of
cancellation........................................ -- -- -- -- -- -- -- --
Common shares issued for directors' fees.............. -- -- -- -- -- -- -- --
Cancellation of Series A Preferred.................... -- -- -- -- -- -- -- --
F-4
5
Cancellation of common stock.......................... -- -- -- -- -- -- -- --
Tweedia loan cancellation............................. -- -- -- -- -- -- -- --
Allocation of non-refundable deposit from former
affiliate........................................... -- -- -- -- -- -- -- --
Other................................................. -- -- -- -- -- -- -- --
Conversion of Series C shares to common stock......... (219) (1) -- -- -- -- -- --
Issuance of Series E preferred stock.................. -- -- -- -- 74 1 -- --
Conversion of Series E shares to common stock......... -- -- -- -- (1) -- -- --
Buyback of Series C preferred stock................... (31) -- -- -- -- -- -- --
Deferred financing costs, net of amortization......... -- -- -- -- -- -- -- --
Stock options issued to third party................... -- -- -- -- -- -- -- --
Cumulative foreign currency exchange loss............. -- -- -- -- -- -- -- --
Advance to joint venture partner...................... -- -- -- -- -- -- -- --
Preferred stock dividends............................. -- -- -- -- -- -- -- --
Cancellation of Warrants.............................. -- -- -- -- -- -- -- --
Net loss.............................................. -- -- -- -- -- -- --
-------- -------- ------ -------- -------- -------- ------- -------
BALANCE, March 31, 1998............................... -- -- -- -- 73 1 -- --
Conversion of Series E shares to common stock......... -- -- -- -- (40) -- -- --
Common Shares buyback................................. -- -- -- -- -- -- -- --
Preferred Shares buyback.............................. -- -- -- -- (3) -- -- --
Cancellation of common stock investment agreement..... -- -- -- -- -- -- -- --
Issuance of Series G preferred stock.................. -- -- -- -- -- -- 20 1
Issuance of Warrants.................................. -- -- -- -- -- -- -- --
Cancellation of Warrants.............................. -- -- -- -- -- -- -- --
Cancellation of shareholders' loans and accrual interest -- -- -- -- -- -- -- --
Cumulative foreign currency exchange loss............. -- -- -- -- -- -- -- --
Preferred stock dividends............................. -- -- -- -- -- -- -- --
Cancellation of Stock options issued to third party... -- -- -- -- -- -- -- --
Options issued for services rendered.................. -- -- -- -- -- -- -- --
Net loss.............................................. -- -- -- -- -- -- -- --
-------- -------- ------ -------- -------- -------- ------- --------
BALANCE, March 31, 1999............................... -- $-- -- $-- 30 $ 1 20 $ 1
======== ======== ====== ======== ======== ========= ====== ========
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL ACCUMULATED
WARRANTS PAID-IN CAPITAL DEFICIT
--------------- --------------------- -------------------
BALANCE, March 31, 1996............................................ $ -- $18,648,620 $(16,527,651)
Issuances of Series B preferred stock.............................. -- 2,341,218 --
Conversion of Series B shares...................................... -- (1,506) --
Issuance of Series D preferred Stock............................... -- 1,499,999 --
Common shares issued for services rendered......................... -- 316,249 --
Common shares issued to employees as compensation.................. -- 318,538 --
Common shares issued for directors' fees........................... -- 89,990 --
Sale of common shares.............................................. -- 1,999,000 --
Cumulative foreign currency exchange loss.......................... -- (1,231) --
Preferred dividends................................................ -- (10,000) --
Warrants........................................................... 479,500 -- --
Net loss........................................................... -- -- (4,064,885)
--------------- --------------------- -------------------
BALANCE, March 31, 1997............................................ 479,500 25,200,877 (20,592,536)
Exercise of employee stock options................................. -- 34,681 --
Issuance of Series C preferred stock............................... -- 2,499,999 --
Common shares issued for services rendered......................... -- 66,934 --
Conversion of Series D shares to common stock...................... -- 129,673 --
Common stock investment agreement-- net of cancellation............ -- (1,019) --
Common shares issued for directors' fees........................... -- 84,960 --
Cancellation of Series A Preferred................................. -- (4,571,012) --
Cancellation of common stock....................................... -- 12,728 --
Tweedia loan cancellation.......................................... -- 25,000 --
Allocation of non-refundable deposit from former affiliate......... -- 850,000 --
Other.............................................................. -- (580) --
Conversion of Series C shares to common stock...................... -- (4,508) --
Issuance of Series E preferred stock............................... -- 6,759,000 --
Conversion of Series E shares to common stock...................... -- (107) --
Buyback of Series C preferred stock................................ -- (406,100) --
Deferred financing costs, net of amortization...................... 161,450 (229,415) --
Stock options issued to third party................................ -- 1,837,500 --
Cumulative foreign currency exchange loss.......................... -- 1,844 --
Advance to joint venture partner................................... -- (540,000) --
Preferred stock dividends.......................................... -- 1,398,686 (1,398,686)
Cancellation of Warrants........................................... (147,000) -- --
Net loss........................................................... -- -- (5,403,368)
--------------- --------------------- -------------------
F-5
6
BALANCE, March 31, 1998............................................ 493,950 33,149,142 (27,394,590)
Conversion of Series E shares to common stock...................... -- 138,821
Common Shares buyback.............................................. -- (383,052) --
Preferred Shares buyback........................................... -- (100,000) --
Cancellation of common stock investment agreement.................. -- 1,019 --
Issuance of Series G preferred stock............................... -- 2,000,000 --
Issuance of Warrants............................................... 210,400 (210,400) --
Cancellation of Warrants........................................... (222,500) 222,500 --
Cancellation of shareholders' loans and accrual interest........... -- 2,359,621 --
Cumulative foreign currency exchange loss.......................... -- (613) --
Preferred stock dividends.......................................... -- 672,457 (672,457)
Cancellation of Stock options issued to third party................ -- (918,751) --
Options issued for services rendered............................... -- 16,500 --
Net loss........................................................... -- -- (5,579,444)
--------------- --------------------- -------------------
BALANCE, March 31, 1999............................................ $481,850 $36,947,244 $(33,646,491)
=============== ===================== ===================
PURCHASE DEFERRED
DEPOSIT OPTION COSTS TOTAL
------------------ --------------- -----------------
BALANCE, March 31, 1996............................................ $(4,572,536) $-- $(2,421,606)
Issuances of Series B preferred stock.............................. -- -- 2,341,219
Conversion of Series B shares...................................... -- -- --
Issuance of Series D preferred Stock............................... -- -- 1,500,000
Common shares issued for services rendered......................... -- -- 316,340
Common shares issued to employees as compensation.................. -- -- 318,751
Common shares issued for directors' fees........................... -- -- 90,000
Sale of common shares.............................................. -- -- 2,000,000
Cumulative foreign currency exchange loss.......................... -- -- (1,231)
Preferred dividends................................................ -- -- (10,000)
Warrants........................................................... -- -- 479,500
Net loss........................................................... -- -- (4,064,885)
------------------ --------------- -----------------
BALANCE, March 31, 1997............................................ (4,572,536) -- 548,088
Exercise of employee stock options................................. -- -- 34,750
Issuance of Series C preferred stock............................... -- -- 2,500,000
Common shares issued for services rendered......................... -- -- 66,958
Conversion of Series D shares to common stock...................... -- -- 131,909
Common stock investment agreement-- net of cancellation............ -- -- 0
Common shares issued for directors' fees........................... -- -- 85,000
Cancellation of Series A Preferred................................. 4,572,536 -- 0
Cancellation of common stock....................................... -- -- 0
Tweedia loan cancellation.......................................... -- -- 25,000
Allocation of non-refundable deposit from former affiliate......... -- -- 850,000
Other.............................................................. -- -- (580)
Conversion of Series C shares to common stock...................... -- -- (1)
Issuance of Series E preferred stock............................... -- -- 6,759,001
Conversion of Series E shares to common stock...................... -- -- 0
Buyback of Series C preferred stock................................ -- -- (406,100)
Deferred financing costs, net of amortization...................... -- -- (67,965)
Stock options issued to third party................................ -- (1,378,125) 459,375
Cumulative foreign currency exchange loss.......................... -- -- 1,844
Advance to joint venture partner................................... -- -- (540,000)
Preferred stock dividends.......................................... -- -- 0
Cancellation of Warrants........................................... -- -- (147,000)
Net loss........................................................... -- -- (5,403,368)
------------------ --------------- -----------------
BALANCE, March 31, 1998............................................ -- (1,378,125) 4,896,911
Conversion of Series E shares to common stock...................... -- 144,375
Common Shares buyback.............................................. -- -- (383,383)
Preferred Shares buyback........................................... -- -- (100,000)
Cancellation of common stock investment agreement.................. -- -- 0
Issuance of Series G preferred stock............................... -- -- 2,000,001
Issuance of Warrants............................................... -- -- 0
Cancellation of Warrants........................................... -- -- 0
Cancellation of shareholders' loans and accrual interest........... -- -- 2,359,621
Cumulative foreign currency exchange loss.......................... -- -- (613)
Preferred stock dividends.......................................... -- -- 0
Cancellation of Stock options issued to third party................ -- 1,378,125 459,374
Options issued for services rendered............................... -- -- 16,500
Net loss........................................................... -- -- (5,579,444)
------------------ --------------- -----------------
BALANCE, March 31, 1999............................................ $-- $-- $3,813,342
================== =============== =================
See notes to consolidated financial statements.
F-6
7
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
Cash Flows from Operating Activities:
Net loss.................................................................... $(5,579,444) $(5,403,368) $(4,064,885)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred option cost.................................... 459,375 459,375 --
Depreciation............................................................ 55,250 43,432 28,905
Loss from abandoned assets.............................................. -- 87,441 --
Gain from sale of assets................................................ 137 -- --
Issuance of warrants for services rendered.............................. -- -- 479,500
Issuance of common stock in connection with Series E buyback transaction 144,375 -- --
Issuance of common stock and options for directors' fees and
professional services rendered ......................................... 16,500 151,957 725,091
Equity in losses of unconsolidated subsidiary........................... 385,139 606,647 140,524
(Increase) decrease in:
Accounts receivable................................................ 114,661 (114,661) --
Prepaid expenses and other current assets.......................... 69,277 63,839 (111,243)
Office lease deposit............................................... 56,867 (1,100) 55,700
Increase (decrease) in:
Accounts payable and accrued expenses.............................. 540,917 293,027 (485,959)
Loans payable - stockholders....................................... -- (111,000) (150,000)
--------------- -------------- ---------------
Net cash used in operating activities.............................. (3,736,946) (3,924,411) (3,382,367)
--------------- -------------- ---------------
Cash Flows from Investing Activities:
Investment in Netmatics..................................................... -- (87,441) --
Purchase of property and equipment.......................................... (13,427) (29,212) (106,028)
Investment in unconsolidated subsidiary..................................... -- (276,000) (654,000)
Proceeds from sale of assets................................................ 250 -- --
--------------- -------------- ---------------
Net cash used in investing activities................................... (13,177) (392,653) (760,028)
--------------- -------------- ---------------
Cash Flows from Financing Activities:
Warrants issued for services rendered - net of charges to APIC.............. -- (215,546) --
Buyback common stock........................................................ (383,383) -- --
Buyback Series E convertible preferred stock................................ (100,000) -- --
Loans payable to stockholders............................................... -- 25,000 --
Repayment from(Advance to) unconsolidated subsidiary........................ 2,191,985 (3,724,000) (538,000)
Proceeds from sale of common stock.......................................... -- 166,659 2,000,000
Proceeds from sale of Series B convertible preferred stock.................. -- -- 2,341,219
Proceeds from sale of Series D convertible preferred stock.................. -- -- 1,500,000
Proceeds from sale of Series C convertible preferred stock - net............ -- 2,093,900 --
Proceeds from sale of Series E convertible preferred stock.................. -- 6,759,000 --
Proceeds from sale of Series G convertible preferred stock.................. 2,000,000 -- --
--------------- -------------- ---------------
Net Cash Provided by Financing Activities........................................ 3,708,602 5,105,013 5,303,219
--------------- -------------- ---------------
Net (Decrease) Increase in Cash and Cash Equivalents............................. (41,521) 787,949 1,160,824
Cash and Cash Equivalents, Beginning of Year..................................... 2,134,662 1,346,713 185,889
--------------- -------------- ---------------
Cash and Cash Equivalents, End of Year........................................... $2,093,141 $2,134,662 $1,346,713
=============== ============== ===============
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------
1. SUPPLEMENTAL CASH INFORMATION:
No interest or income taxes were paid during fiscal 1999, 1998 and 1997.
2. NONCASH FINANCING ACTIVITIES:
In fiscal 1999, shareholder loans payable of $1,452,553 and related
accrued interest of $907,068 were cancelled and credited to Additional
Paid-In Capital.
In fiscal 1999, the Company paid a dividend in kind of 210,400 as part
of the issuance of Series G Preferred Stock.
In fiscal 1999, 40.4 shares of Series E Convertible Preferred Stock
were converted into 5,554,424 shares of common stock (inclusive of
conversions of preferred dividends of $462,057).
In fiscal 1999, warrants valued at $222,500 were cancelled and
credited to Additional Paid-In Capital.
F-7
8
In fiscal 1999, the Company cancelled a Common Stock Investment
Agreement, as permitted by the Agreement, with Promethean Investment Group.
1,019,465 shares previously held in escrow designated for issuance under
terms of the agreement were cancelled.
In fiscal 1999, the option granted to the Hebei Provincial Government
to acquire 3,000,000 shares of the Company's common stock at a price of
$3.0625 per share was cancelled. Unamortized Deferred Option Cost valued at
$918,751 was charged to Additional Paid in Capital.
In fiscal 1998, 150 shares of Series D Convertible Preferred Stock
were converted into 2,236,507 shares of common stock (inclusive of
conversions of preferred dividends and related warrants).
In fiscal 1998, 219 shares of Series C Convertible Preferred Stock
were converted into 4,507,639 shares of common stock.
In fiscal 1998, 0.8 share of Series E Convertible Preferred Stock was
converted into 106,646 shares of common stock.
In fiscal 1998, 12,727,909 shares of common stock were canceled upon
determination that the full purchase price for such shares was not paid.
In fiscal 1998, $850,000 Notes Payable related to a nonrefundable
deposit received from a former affiliate was credited to Additional Paid in
Capital.
In fiscal 1998, 1,524,178 shares of the Company's Series A Convertible
Preferred Shares were canceled in accordance with the terms of a
subscription agreement.
In fiscal 1998, the Company issued stock options valued at $1,837,500
to the Hebei provincial government in exchange for a long-term cooperation
agreement.
In fiscal 1997, 100 shares of Series B Preferred Stock were converted
into 1,507,477 shares of common stock.
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business. AmTec Inc. (the "Company" or
"AmTec") through its majority-owned subsidiary (accounted for under the
equity method of accounting) in the People's Republic of China ("PRC") is
involved in providing financing and assistance in building
telecommunications networks for third parties in the PRC. The Company,
through its wholly-owned subsidiary ITV Communications, Inc. ("ITV") was
engaged in the design, manufacture and sale of technologically advanced
communication devices. In January 1996, the Company sold all of the
business and operating assets of ITV and is no longer involved in the
business that ITV was engaged in. ITV remains inactive during the year
ended March 31, 1999.
On July 8, 1997, the Company changed its name from AVIC Group
International, Inc. to AmTec, Inc.
During fiscal 1998 the Company organized two wholly-owned
subsidiaries, one a Bermuda company and the other a British Virgin Island
company. There was no activity in either company during the year ended
March 31, 1999 and 1998.
Principles of Consolidation. The consolidated financial statements
include the Company's wholly-owned subsidiaries, ITV Communications, Inc,
and the Bermuda company and the British Virgin Island company, as noted
above, all dormant companies. All significant intercompany accounts and
transactions are eliminated in consolidation.
Equity Method of Accounting. The Company accounts for its subsidiary
Hebei United Telecommunications Equipment Co., Ltd. ("Hebei Equipment") (a
limited life Sino-foreign joint venture) using the equity method of
accounting as minority shareholders of Hebei Equipment have substantive
participating rights under the joint venture contracts. The Company reports
its investment in Hebei Equipment under the caption Investments in and
advances to unconsolidated subsidiary. Under the equity method, the
investment is carried at cost of acquisition, plus the Company's equity in
undistributed earnings or losses since acquisition. Equity in the losses of
the unconsolidated subsidiary is recognized according to the Company's
percentage ownership in the unconsolidated subsidiary until the Company
contributed capital has been fully depleted. Reserves are provided where
management determines that the investment or equity in earnings is not
realizable. For the period ended March 31, 1998, the Company used an
F-8
9
ownership percentage of 60.8% for purposes of calculating the share of
losses of its unconsolidated subsidiary since it did not increase its
ownership percentage in Hebei Equipment to 70% until after the close of
Hebei Equipment's fiscal year-end on December 31, 1997. For the year ended
March 31, 1999, the Company recognized 70% of losses of its unconsolidated
subsidiary. Hebei Equipment owns 51% of Hebei United Telecommunications
Engineering Company, Ltd. ("Hebei Engineering"). Hebei Equipment also
accounts for its investment using equity method of accounting as minority
shareholders of Hebei Engineering have substantive participating rights
under the joint venture contracts.
Difference in Year End. The Company's share of equity in losses of
Hebei Equipment included in the consolidated financial statements are as of
and for the years ended December 31, 1998 and 1997, Hebei Equipment's
year-end. Since inception the Company has had a March 31 year-end. The
Company kept this year-end even though its subsidiaries have a calendar
year-end so that delays in receiving information from China would not cause
problems for the Company in meeting its reporting deadlines. However, the
Company does monitor events in the lag period and, where appropriate, would
disclose the occurrence of any significant event during such lag period.
All companies established under PRC law are required to have a December 31
fiscal year-end date. Hebei Equipment and Hebei Engineering are equity
joint venture companies established under PRC law.
Management Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expense during the reporting period. Actual results
could differ from those estimates.
Cash Equivalents. For purposes of the statements of cash flows, the
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method, to write off
the cost of property and equipment over their estimated useful lives, after
deducting the estimated salvage value of the assets as follows:
Furniture, fixtures and equipment 5 years
Leasehold improvements 5 years
Computer software 3 years
Long-Lived Assets. The Company evaluates long-lived assets and
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the net carrying amount may not be recoverable.
When such events occur, the Company measures impairment by comparing the
carrying value of the long-lived asset to the estimated undiscounted future
cash flows expected to result from the use of the assets and their eventual
disposition. If the sum of the expected undiscounted future cash flows is
less than the carrying amount of the assets, the Company would recognize an
impairment loss. The impairment loss, if determined, would be measured as
the amount by which the carrying amount of the asset exceeds the fair value
of the asset. The Company determined that, as of March 31, 1999 and 1998,
there had been no impairment in the carrying value of the long-lived
assets.
Income tax. Deferred income taxes are provided for using the liability
method. Under the liability method, deferred income taxes are recognized
for all significant temporary differences between the tax and financial
statement bases of assets and liabilities. The tax consequences of those
differences are classified as current or non-current based upon the
classification of the related assets or liabilities in the financial
statements. A valuation allowance is provided to reduce the amount of
deferred tax assets if it is considered more likely than not that some
portion of, or all of, the deferred tax assets will not be realized.
Disclosure of Fair Value of Financial Instruments. The carrying amount
reported in the balance sheets for cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates fair value
because of the immediate short-term maturity of these financial
instruments.
Loss Per Share. Basic loss per common share is based on the weighted
average number of common shares outstanding during the year. The effect of
shares issuable upon exercise of warrants and stock options is
anti-dilutive, therefore diluted earnings per share is not presented. The
Company adopted the provisions of FASB 128 during the fiscal year ended
March 31, 1998. Adoption of such statement did not have a material effect
on results of operations and financial condition.
Comprehensive Income. Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" establishes new rules
for reporting and display of comprehensive income and its components. Other
than an insignificant amount of foreign currency transactions, the Company
has no other items of other comprehensive income and the net loss reported
in the statement of operations is equivalent to the total comprehensive
loss.
Segments of an Enterprise and Related Information. SFAS No. 131,
F-9
10
"Disclosure about Segments of an Enterprise and Related Information"
requires the reporting of profit and loss, specific revenue and expense
items, and assets for reportable segments. It also requires the
reconciliation of total segment revenues, total segment profit or loss,
total segment assets, and other amounts disclosed for segments, in each
case to the corresponding amounts in the general purpose financial
statements. The Company adopted FASB 131 during the year and since the
Company only invested in the Hebei Equipment, no other reportable segments
were reported in the financial statements.
New accounting standard not yet adopted. The Financial Accounting
Standards Board has issued a new standard SFAS No. 133 "Derivative
Instruments and Hedging Activities", which, as amended, is effective for
fiscal years beginning after July 1, 2000. Management has not yet completed
the analysis of the impact this would have on the financial statements of
the Company and has not adopted this standard.
2. INVESTMENT IN AND ADVANCE TO UNCONSOLIDATED SUBSIDIARY
The Company determined that it should conduct its operations in the
PRC through a Sino Foreign Joint Venture ("SFJV"), Hebei Equipment. In
March 1996, the Company invested $1,170,000 in a PRC joint venture,
advanced $540,000 to its joint venture partner and requested from the Hebei
Provincial government approval for conversion of such company to an SFJV.
In September 1996, preliminary regulatory approval for Hebei Equipment was
granted and the SFJV was formed with the Company holding a 60.8% interest
in the entity. In April 1997, the Company received final PRC regulatory
approval for the SFJV. The Company invested an additional $276,000 in Hebei
Equipment during the fiscal-year ended March 31, 1998, resulting in an
increase in its holding to 70%. An additional $3,722,000 was advanced as a
loan to the joint venture during the fiscal year March 31, 1998. $
2,191,985 was repaid by Hebei Equipment during the fiscal year March 31,
1999.
The Company's investments in the joint venture were accounted for by
the equity method of accounting because minority shareholders of Hebei
Equipment and Hebei Engineering have substantive participating rights under
the provision of the Joint Venture contracts.
The following summarizes the total equity investment by the Company in
Hebei Equipment:
1999 1998
------------- ------------
Investment in unconsolidated subsidiary..................... $ 2,100,000 $ 2,100,000
Less: Share of equity losses................................ (1,133,535) (747,783)
------------- ------------
966,465 1,352,217
Add: Advance to unconsolidated subsidiary................... 1,530,015 3,722,000
------------- ------------
Investment in and advanced to unconsolidated subsidiary..... $ 2,496,480 $ 5,074,217
============= ============
Hebei Equipment holds a 51% interest in Hebei Engineering, which is
developing GSM networks in the ten largest cities in Hebei Province, PRC.
Nippon Telegraph and Telephone International, Inc. ("NTTI") and Itochu
Corporation hold the remaining 49% interest in Hebei Engineering. As of
March 31, 1999, Hebei Equipment's equity interest in Hebei Engineering was
zero. The total investment of $1,530,000 made by Hebei Equipment in Hebei
Engineering was offset by its share of equity losses in Hebei Engineering.
Hebei Equipment stopped recognizing additional losses as it is not required
either contractually or otherwise to make any additional capital
investments. In addition, Hebei Equipment has not guaranteed any of Hebei
Engineering debts.
The following summarized the major activities of Hebei Equipment and its
subsidiary:
A. HEBEI ENGINEERING'S INVESTMENT IN GSM NETWORKS
Hebei Equipment, through its 51%-owned subsidiary, Hebei Engineering has
borrowed approximately $33,560,000 to purchase equipment which was
contributed to China United Communications Company ("UNICOM") to construct
the GSM networks in Hebei Province and has received the right to receive
future cash flow. The GSM networks are being built pursuant to a 15-year
Project Cooperation Contract. Terms of the Project Cooperation contract
include the following:
Initially, Hebei Engineering owned 100% of the assets prior to contributing
such assets to UNICOM and once contributed, Hebei Engineering owned and
retained title to a 70% interest in the assets and UNICOM owned and
retained title to a 30% interest in the assets.
Both parties agree to distribute the profit according to the "Distributable
Cash Flow" (as defined) with 22% going to UNICOM and 78% going to Hebei
Engineering.
Each year, Hebei Engineering will transfer ownership of assets to UNICOM
equal in value to the Distributable Cash Flow received up to 60% of the
F-10
11
assets in any one year. The maximum amount of assets transferred will not
exceed 90% of the assets until termination of the Project Cooperation
Contract.
Upon the termination of the contract the remaining 10% of the network
assets shall be assigned to UNICOM without any further consideration.
Hebei Engineering will continue to receive 78% of the Distributable Cash
Flow after transfer of all the assets for the remainder of the 15-year
period.
Under PRC law, foreign investment entities, such as Hebei Engineering, are
not permitted to own or operate telecommunications networks. Substantially
all of the Hebei Engineering's revenues are derived from contractual
arrangements for the sharing of cash flow from network operations rather
than from ownership or operation of the networks. Hebei Engineering has
recorded its investment (GSM Construction Costs) as a right to receive
future cash flow at cost and is amortizing its cost of these rights based
upon the greater of the amount computed using (a) the ratio that current
gross revenues from the GSM networks to the total of current and
anticipated future gross revenues from the GSM networks or (b) the
straight-line method over 15 years which was the remaining estimated
economic life of the GSM networks at the inception of this investment.
Amortization of the Investment in GSM Networks for the year ended March 31,
1999 amounted to approximately $4,600,000.
Income from the GSM Networks is recognized at the time when Hebei
Engineering can estimate or calculate the portion of its Distributable Cash
Flow from the Networks. UNICOM commenced operation of the GSM Networks in
February 1997.
Net revenue from GSM Networks recognized by Hebei Engineering for the year
ended December 31, 1998 and 1997 was $781,745 and $216,348, respectively.
B. SUMMARY FINANCIAL INFORMATION FOR THE UNCONSOLIDATED SUBSIDIARY
The following tables represent summary financial information of the
Company's subsidiary, Hebei Equipment, and its indirect subsidiary, Hebei
Engineering, as of and for the years ended December 31, 1998 and 1997:
HEBEI HEBEI
EQUIPMENT EQUIPMENT
------------------ ------------------
1998 1997
------------------ ------------------
Revenues................................ $ -- $ --
================== ================
Net (loss) income....................... $ (548,806) $ (1,239,100)
================== ================
Current assets.......................... $ 2,698,980 $ 4,891,936
Non-current assets...................... 46,904 587,612
------------------ ----------------
Total assets............................ $ 2,745,884 $ 5,479,548
================== ================
Current liabilities..................... $ 1,530,994 $ 3,715,850
Non-current liabilities................. -- --
------------------- ----------------
Total liabilities....................... $ 1,530,994 $ 3,715,850
=================== ================
HEBEI HEBEI
ENGINEERING ENGINEERING
-------------------- -------------------
1998 1997
-------------------- -------------------
Revenues........................ $ 781,745 $ 216,348
============== ===============
Net (loss) income............... $ (1,729,431) $ (1,972,013)
============== ===============
Current assets.................. $ 3,755,416 $ 3,642,561
Non-current assets.............. 29,605,048 29,093,456
-------------- ---------------
Total assets.................... $ 33,360,464 $ 32,736,017
============== ===============
Current liabilities............. $ 5,385,717 $ 10,354,023
Non-current liabilities......... 28,653,783 21,331,600
============== ===============
Total liabilities............... $ 34,039,500 $ 31,685,623
============== ===============
F-11
12
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1999 1998
-------------- ------------
Furniture, fixtures and equipment............. $208,277 $201,258
Leasehold improvements........................ 18,009 17,498
Computer software............................. 15,385 12,273
-------------- ------------
241,671 231,029
Less accumulated depreciation................. 144,745 91,893
-------------- ------------
$ 96,926 $139,136
============== ============
Depreciation expense for fiscal years ended March 31, 1999, 1998 and
1997 was $55,250, $43,432 and $28,905 respectively.
4. COMMITMENTS AND CONTINGENCIES
Leases. The Company leases a facility for its corporate and operations
offices under a long-term lease agreement. Minimum annual rental
commitments under this lease are as follows:
MARCH 31,
2000............................................. $ 334,400
2001............................................. 55,733
----------------------
$ 390,133
======================
Rent expense for fiscal years ended March 31, 1999, 1998 and 1997 was
$356,357, $337,763 and $369,969 respectively.
Employment Agreements. The Company has entered into employment agreements
with officers expiring through January 2001 with aggregate annual salaries
of $1,000,000.
Litigation. A first amended complaint, dated April 15, 1996, was filed
against the Company, ITV, and other parties, including certain of the
Company's officers, directors and principal stockholders, by Jacqueline
Brandwynne, a stockholder of the Company, in a matter captioned "Jacqueline
B. Brandwynne vs. AVIC Group International, Inc., et al." The complaint,
filed in the Superior Court of California, County of Los Angeles, alleges
fraud, misrepresentation and breach of contract with respect to the sale of
666,667 shares of ITV stock for $1,000,000 prior to the completion of the
Reorganization Agreement between the Company and ITV (the "Reorganization
Agreement") in February 1995, in connection with which the shares of ITV
were exchanged on a two for one basis for shares of the Company. The
complaint alleges that certain misrepresentations were made in connection
with the sale of the 666,667 shares and that the claimant was entitled to
receive 666,667 shares of the Company after the completion of the
Reorganization Agreement. The complaint seeks rescission of the transaction
and damages of no less than $1,000,000. The complaint also alleges a claim
in connection with an alleged oral employment agreement for 125,000 options
to purchase shares of the Company's Common Stock at an exercise price of
$0.35 per share and the right to purchase additional shares of Common Stock
at $1.00 per share, plus other benefits, including a salary of no less than
$130,000. Management of the Company believes that these claims are without
merit, that there are valid defenses to each claim and is in the process of
vigorously defending the matter. (See note 10)
The Company is not aware of any pending litigation that could have a
materially adverse effect on the Company's business, financial condition or
results of operations.
Regulation. The PRC's legal system is a civil law system based on written
statutes and is a system in which decided legal cases have little
precedential value. The PRC Government began to promulgate a comprehensive
system of laws in 1979. Many laws and regulations governing economic
matters in general have been promulgated. The general effect of this
legislation has been to enhance the protection afforded to foreign invested
enterprises in the PRC. However, as these laws and regulations are
relatively new, their interpretation and enforcement involve significant
uncertainty.
The current PRC regulations prohibit foreign investors and foreign invested
enterprises from operating or participating in the operation of
telecommunications networks in China. The relevant PRC laws and regulations
do not define what constitutes foreign operations or participation in
operations, and it is not clear what rights or actions would violate such
laws and regulations. Based on advice of its Chinese legal counsel, the
Company has structured its investments in China by establishing
Chinese-foreign joint ventures in the PRC to provide financing and
consultancy services to licensed telecommunications operators, i.e.,
utilizing the commonly-known Chinese-Chinese-Foreign ("CCF") structure. The
PRC Government is currently undertaking a review of the CCF structure used
by Unicom. It has been reported that Unicom has been instructed by the PRC
Government not to use the CCF structure in the future and that the PRC
Government is examining and evaluating the existing CCF contracts. It is
F-12
13
unclear if, and to what extent, the existing CCF contracts entered into by
Unicom will be required to be amended. It is also unclear whether foreign
entities involved in the CCF structures will be required to divest
themselves of their respective interests in the Chinese-foreign joint
venture companies. The evaluation of the CCF structure by the PRC
Government may have a material adverse impact on the contracts entered into
by Hebei Engineering and by the Company which utilize the CCF structure and
may have a material adverse effect on the Company's business, financial
condition and results of operations.
In order to provide a uniform regulatory framework to encourage the orderly
development of the PRC telecommunications industry, the PRC authorities are
currently preparing a draft Telecommunications Law. Once formulated, the
draft law will be submitted to the National People's Congress for review
and adoption. It is unclear if and when the Telecommunications Law will be
adopted. The nature and the scope of the regulation envisaged by the
Telecommunications Law is not fully known but the Company believes that, if
adopted, the Telecommunications Law will have a positive effect on the
overall development of the telecommunications industry in the PRC. However,
the Telecommunications Law, if adopted, may have an adverse effect on the
Company's business, financial condition or results of operations.
The Chinese laws and regulations governing the telecommunications industry
may also be changed or applied in a manner which would have a material
adverse effect on the business, financial condition and results of
operations of the Company.
Each of the Company's joint ventures, Hebei Equipment and Hebei
Engineering, is organized under the laws of the PRC as a Sino-foreign
equity joint venture enterprise, a distinct legal entity with limited
liability. Such entities are governed by the Law of the PRC on Joint
Ventures Using Chinese and Foreign Investments, and implementing
regulations related thereto. The parties to an equity joint venture have
rights to the financial returns of the joint venture in proportion to the
joint venture interests that they hold. The operation of equity joint
ventures is subject to an extensive body of law governing such matters as
formation registration, capital contribution, capital distributions,
accounting, taxation, foreign exchange, labor and liquidation. The transfer
or increase of an interest in a Sino-foreign equity joint venture
enterprise requires agreement among the parties to the venture and is
effective upon approval of relevant government agencies.
Foreign Currency Exchange. The Company's joint ventures will receive nearly
all of their revenue in Renminbi, which will need to be converted to other
currencies, primarily U.S. dollars, and remitted outside of the PRC.
Although the Renminbi is not a freely convertible currency at present,
effective July 1, 1996, foreign currency "current account" transactions by
foreign investment enterprises, including Sino-foreign joint ventures, are
no longer subject to the approval of State Administration of Foreign
Exchange ("SAFE", formerly, "State Administration of Exchange Control").
These transactions need only a ministerial review, according to the
Administration of the Settlement, Sale and Payment of Foreign Exchange
Provisions promulgated in 1996. "Current account" items include
international commercial transactions, which occur on a regular basis, such
as those relating to trade and provision of services. Distributions to
joint venture parties also are considered a "current account transaction."
Other noncurrent account items, known as "capital account" items, remain
subject to SAFE approval.
5. STOCKHOLDERS' EQUITY
Cancellation of Loans Payable to Shareholders. In fiscal 1999, loans
payable and accrued interest in the amount of $2,359,621 were cancelled and
credited to Additional Paid-In Capital account.
Cancellation of Certain Shares of Common Stock. On December 8, 1997, the
Company reduced its outstanding common stock and credited its Additional
Paid in Capital $12,728 as a result of canceling 12,727,909 shares of its
common stock and 318,182 options to purchase its common stock issued to
Tweedia International, Ltd. The cancellation was based on a determination
that the full purchase price for the shares was never paid. The 12,727,909
canceled shares represented approximately thirty-eight percent of the total
number of the Company's common shares outstanding prior to the cancellation
of such shares.
Repurchase of Common Stock. On September 14, 1998 the Company announced its
intention to purchase up to $1 million of its Common Stock on the open
market. As of March 31, 1999, the Company had purchased 330,800 shares
under this program for a total cost of approximately $383,383. All the
common stock repurchased were cancelled as of March 31, 1999.
Sale of Common Stock. In November 1996, the Company sold 1,000,000 shares
of the Company's common stock through subscription agreements. The Company
received $2 million in proceeds with respect to these subscriptions. The
price per share reflected the quoted market value of the common shares at
the time of the transactions.
During fiscal 1998, 69,000 common shares were issued in connection with the
exercise of certain employee stock options. Proceeds from these issuance
aggregated $34,750.
Series A Convertible Preferred Stock. On August 19, 1997, upon
determination that the entire amount of a nonrefundable deposit had been
F-13
14
forfeited by a former affiliate, the Company canceled all of the
outstanding Series A Convertible Preferred Stock (the "Series A Shares").
On December 19, 1995, the Company had issued 1,524,178 shares of the
Company's Series A Shares in consideration of the transfer of a $4,572,536
nonrefundable equipment purchase deposit to the Company from a former
affiliate. The Subscription Agreement for the Series A Convertible
Preferred Stock provided that, if all or any portion of the deposit should
be forfeited at any time and for any reason whatsoever by the former
affiliate an equivalent number of the Series A Shares issued to it would be
canceled.
Series B Convertible Preferred Stock. In June 1996, the Company completed a
$2,500,000 offering of its Series B Convertible Preferred Stock ("Series B
Preferred"). The net proceeds the Company received were approximately
$2,341,000. The offering consisted of 100 shares of Series B Preferred at
$25,000 per share and warrants to purchase common stock of the Company.
Each warrant entitled the holder to purchase one share of common stock at a
fixed conversion price. During fiscal 1997, all outstanding Series B shares
were converted to 1,507,477 common shares.
Series D Convertible Preferred Stock. In March 1997, the Company completed
a $1,500,000 offering of its Series D Convertible Preferred Stock ("Series
D Preferred"). The offering consisted of 150 shares of Series D Preferred
at $10,000 per share and warrants to purchase common stock of the Company.
The holder was entitled to cumulative dividends at the annual rate of 8%
per annum per share, payable quarterly in shares of Common Stock or, in
cash in connection with any payment pursuant to a Conversion Default at the
election of the Company's board of directors. During fiscal 1998, the
Series D Preferred was converted into common stock of the Company at a
conversion rate equal to the lowest trading price of the Company's common
stock during the 30 days preceding each conversion date. In addition, the
Series D Preferred shareholders converted their warrants into common stock
at prices aggregating $131,909. Such Series D Preferred and warrants
conversions aggregated 2,236,507 shares. In connection with the discount
for the above conversion, the Company credited Additional Paid in Capital
$48,677 and charged preferred dividends in an equal amount.
Series C Convertible Preferred Stock. In June 1997, the Company completed a
$2,500,000 offering of its Series C Convertible Preferred Stock ("Series C
Preferred"). The offering consisted of 250 shares of Series C Preferred at
$10,000 per share and entitled the holder to cumulative dividends at an
annual rate of 8% per annum per share. The dividends were payable quarterly
in shares of Common Stock or, in cash in connection with any payment
pursuant to a Conversion Default at the election of the Company's board of
directors. Such Series C shares were converted at conversion rates equal to
the lowest trading price of the Company's common stock during the 30
business days immediately preceding each conversion date. During fiscal
1998, 219 outstanding Series C shares were converted into 4,507,639 common
shares. In addition, the Company repurchased for consideration of $406,100
and retired 31 Series C shares. In connection with the discount for the
above conversion, the Company credited Additional Paid in Capital $260,784
and charged preferred dividends in an equal amount.
Series E Convertible Preferred Stock. On October 22, 1997, the Company
issued 74 shares of its Series E Convertible Preferred Stock (the "Series E
Preferred"), par value $.001 per share and at a price of $100,000 per share
and paying an 8% in-kind dividends. The net proceeds the Company received
were approximately $6,759,000. The Series E Preferred has a stated
liquidation preference value of $100,000 per share plus accrued in-kind 8%
dividends since the date of issuance. Such liquidation preference is senior
to all common stock but in parity with other series of preferred stock of
the Company. The holders of Series E Preferred have no voting rights except
with respect to certain matters that affect the rights related to the
Series E Preferred.
Conversion of the Series E Preferred into Common Stock, which are
restricted by certain "lock-up" agreements, is based on the lower of: (i)
the lesser of a 10% premium to the market price of the Company's Common
Stock, as reported on the American Stock Exchange, at the time of the
investment's closing or of a 10% premium to the 10 day average trading
price six months after the close or (ii) a discount to the lowest trade
during the five (5) trading days prior to each conversion. The discount,
which ranges from 15% to 20%, depends upon the date of the shareholders'
conversion of the Series E Preferred, with the discount increasing as the
period the shares are held increases. Warrants were issued to five of the
Series E Investors to purchase up to 1,236,364 shares of the Company's
Common Stock at a price equal to 120% of the market price of the Company's
Common Stock at the time of the investment's closing. The number of
warrants issued to each investor depended upon the amount invested and the
length of the "lock-up" agreed upon between the Company and investor.
The Company registered 13,832,792 shares of common stock on January 16,
1998, to cover the common stock issuable to the Series E Holders upon
conversion of their Series E shares and exercise of their warrants. As of
March 31, 1999, 41.16 share of the Series E Preferred Stock was converted
into 5,661,070 shares of the Company's common stock.
On November 10, 1998, 38.5 shares of the Company's Series E Preferred were
acquired from an investment fund by the Company and investors known to the
Company. As a result of this transaction, the Company bought back 3.08
shares of its Series E Preferred for $100,000. All of the Series E
Preferred repurchased by the Company, which have 53,655 warrants attached,
F-14
15
were retired and cancelled on January 20, 1999. 35.42 of the Series E
Preferred bought by other investors were converted to Common Stocks on
November 11, 1998. In connection to the conversion, the investors entered
into a non-binding agreement to hold the converted Common Stock for a
specified period of time. An additional 141,680 shares of Common Stocks
were issued to the investors with respect to the agreement entered and
$144,375 was charged to expenses in the statement of operations.
Series G Convertible Preferred Stock. In March 1999, the Company completed
a $2,000,000 offering of its Series G Convertible Preferred Stock ("Series
G Preferred"). The offering consisted of 20 shares of Series G Preferred at
$100,000 per share and warrants to purchase common stock of the Company.
Each warrant entitled the holder to purchase one share of common stock at a
fixed exercise price of $1.25 per share. The Company allocated $210,400 for
the warrants issued using a Black-Scholes model. The value allocated to the
Series G Preferred was $1,789,600. In connection with the discount on the
Series G Preferred, the Company credited Additional Paid-in Capital
$210,400 and charged preferred dividends in an equal amount.
The Series G Preferred has a stated liquidation preference value of
$100,000 per share plus 8% accrued in-kind dividends since the date of
issuance. Such liquidation preference is senior to all common stock but in
parity with other series of preferred stock of the Company. The holders of
Series G Preferred have no voting rights except with respect to certain
matters that affect the rights related to the Series G Preferred.
There was no conversion on Series G Preferred up to March 31, 1999.
Stock Warrants. During fiscal 1999, the Company issued 600,000 warrants to
purchase the Company's common stock at a fixed exercise price of $1.25 per
share. The warrants were issued in connection with the Company's issuance
of Series G Preferred (see Series G Convertible Preferred Stock).
During fiscal 1998, the Company issued warrants to purchase 326,171 shares
of the Company's Common Stock to the Placement Agent as fees for services
in connection with the placement of the Series E Preferred described above.
These warrants have an exercise price of $2.475 per share and expire on
October 22, 2002. The Company has assigned a value of $161,450 to these
warrants.
During fiscal 1998, the Company rescinded an agreement it entered into in
July 1996 with an investment banking firm in which such firm was to act as
a financial advisor to the Company. As part of this rescission the Company
canceled warrants to purchase 200,000 shares of the Company's common stock.
Professional fees and Warrants were reduced by $147,000 to reflect this
cancellation.
During fiscal 1997, the Company issued 186,111 warrants to purchase the
Company's common stock at a conversion price of 110% of the quoted market
value at the time of grant. The warrants were issued in connection with the
Company's issuance of Series B Preferred (see Series B Convertible
Preferred Stock).
On October 15, 1996, the Company agreed to issue warrants to purchase
200,000 shares of the Company's Common Stock to an advisor for services
related to advising the Company with respect to its Sino-foreign joint
ventures and marketing activities in the PRC. The warrants issued have a
three year term and an exercise price of $1.50, which was the market value
of the Company's Common Stock the warrants were issued. In connection with
this agreement, the Company recorded $110,000 in professional fees which
management determined to be the fair value of the warrants.
In connection with a financial services agreement which has been cancelled
during 1999, the Company issued 600,000 warrants to an investment banking
firm, 300,000 of which vested at the time the agreement was entered into
and 300,000 which were to vest when such firm had raised a minimum of $10
million. During fiscal 1997, with respect to the vested 300,000 warrants,
the Company recorded $222,500 in professional fees which management
determined to be the fair value of the warrants. The warrants were not
exercised and were subsequently cancelled during fiscal 1999. The value of
such warrants was credited to Additional Paid-In Capital upon cancellation.
Issuance of Common Stock for Services - During the year ended March 31,
1998 the Company issued shares of its common stock for services rendered.
The number of shares issued in each case was based upon the quoted market
value of the stock at the issue date and the value of the services
rendered. Total shares issued in connection with these services amounted to
63,233 covering the $151,957 of expenses which are included in the
accompanying financial statements.
In April 1996, two outside directors each received 5,000 shares of common
stock for a total value of $90,000 which was recorded as compensation
expense. The number of shares issued was based on the quoted market value
of the common stock at the time of issuance.
In May 1996, 5,000 shares of the Company's common stock were issued as
payment for $45,625 of services rendered. In December 1996, 5,000 shares of
the Company's common stock were issued as payment for $18,125 for services
rendered. Both issuance have been recorded as professional fees at a value
of the quoted market price of the common stock at the time of the
transaction.
F-15
16
In October 1996, the Company entered into agreements to settle $98,000 of
outstanding professional fees through the issuance of options to purchase
44,962 common shares. The number of shares was determined based upon the
quoted market value of the shares at the time of issuance.
The Promethean Common Stock Equity Agreement. On March 31, 1997 the Company
entered into a Common Stock Investment Agreement with Promethean Investment
Group L.L.C. ("Promethean") pursuant to which Promethean would provide a
$10 million equity line to the Company. The agreement was cancelled during
fiscal year 1999 by the Company in accordance with the terms in the
agreement.
Initially, 1,570,998 shares were issued into escrow on behalf of
Promethean. During the year ended March 31, 1998, none of the shares issued
under this agreement were released from escrow. During the year ended
March 31, 1999, this agreement was cancelled and all the shares issued into
escrow on behalf of Promethean were cancelled.
Stock Options. The Company has adopted two stock option plans (the AmTec,
Inc. 1995 Stock Plan and the AmTec, Inc. 1996 Stock Option Plan). Incentive
and nonqualified options and stock appreciation rights may be granted to
employees, officers, directors, and consultants of the Company. There are
12,500,000 shares of common stock reserved for issuance under these plans.
The exercise price of the options are determined by the board of directors,
but in the case of an incentive stock option, the exercise price may not be
less than 100% of the fair market value on the date of grant. Options vest
over periods not to exceed ten years.
A summary of the status of all of the Company's stock options issued as of
March 31, 1999, 1998 and 1997 and changes during the years then ended is
presented below:
March 31, 1999 March 31, 1998 March 31, 1997
----------------------- --------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
----------- ---------- ----------- ---------- -------------- ----------
Outstanding at beginning of year 12,460,102 $1.42 7,905,000 $1.40 7,635,000 $1.39
Granted 527,500 1.14 4,624,102 2.55 280,000 1.74
Exercised 0 (69,000) 0.35 0
Cancelled (3,000,000) 3.06 0 (10,000) 8.25
----------- ---------- ----------- ---------- -------------- ----------
Outstanding at end of year 9,987,602 $1.43 12,460,102 $1.42 7,905,000 $1.40
=========== ========== =========== ========== ============== ==========
Options exercisable at end of year 9,111,994 $1.46 7,671,102 $1.28 4,155,000 $0.42
=========== =========== ==============
Weighted average fair value of options $0.19 $0.53 $0.69
granted during the year =========== =========== ==============
The above options include options granted to the Hebei Provincial
Government during fiscal 1998 to acquire 3,000,000 shares of the Company's
common stock at a price of $3.0625 per share. These options, which vest 25%
every six months from the date of grant, were cancelled during fiscal 1999.
In connection with granting these options, $1,837,500 was recorded as a
charge to Deferred Option Cost and a corresponding credit was made to
Additional Paid in Capital. During the quarter ended December 31, 1998, the
Company cancelled these option granted. Deferred Option Cost of $918,751
was amortized through the cancellation date of these options. The
unamortized Deferred Option Cost up to the date of cancellation was charged
to Additional Paid in Capital.
The Company followed the guidelines under SFAS No. 123 to determine the
fair value of options at the date of grant. The value was determined using
an adjusted Black-Scholes option pricing model. The Black-Scholes model is
generally accepted as appropriate primarily for short-term, exchange-traded
options. The Company's management has determined that the longer term
options it has issued do not have the liquidity of an exchange traded
option and where the underlying common stock is not highly liquid (as is
the case with the Company's Common Stock), the Black-Scholes formula needs
to be adjusted, especially in reference to the volatility measurement used.
The Company's stock is thinly traded, averaging around 100,000 shares per
day, and cannot be considered highly liquid. For the purpose of valuing the
Company's options, which can have up to a ten year life, the following
assumptions were used, where the volatility measurement was based on
management's expectations and judgement:
Risk-free rate 4.69 - 5.64%
Volatility 20-23%
Expected Life 3 - 5 years
Expected Dividends 0%
The following table summarizes information about options outstanding at
March 31, 1999:
F-16
17
Weighted
Number Average Number
Range of Outstanding Remaining Average Exercisable Average
Exercise At Contractual Exercise Options at Exercise
Prices March 31, 1999 Life (Years) Price March 31, 1999 Price
- ------------------ ------------------- ---------------------- ------------- ------------------- --------------
$0.35-0.355 4,625,000 7.00 $0.350 4,625,000 $0.350
0.75 640,000 9.00 0.823 140,000 0.747
1.5 165,000 9.00 1.114 165,000 1.114
2.125 527,602 8.00 1.501 277,602 1.502
3.000 1,012,500 8.00 2.128 886,892 2.128
3.05-3.10 3,017,500 7.00 3.000 3,017,500 3.000
------------------- -------------------
9,987,602 9,111,994
=================== ===================
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its employee plans. Accordingly, no compensation cost has
been recognized with respect to such plans. Had compensation cost for the
Company's stock option plans been determined consistent with Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's net earnings and earnings per
share would have approximated the pro forma amounts indicated below:
1999 1998
----------------- ----------------
Net loss applicable to common shares - as reported $ (6,251,901) $ (6,802,054)
================= ================
Net loss - pro forma $ (6,812,194) $ (8,635,367)
================= ================
Loss per common share - as reported $ (0.23) $ (0.23)
================= ================
Loss per common share - pro forma $ (0.25) $ (0.29)
================= ================
6. NONREFUNDABLE DEPOSIT
On March 31, 1998, the Company reduced notes payable of $850,000
related to a nonrefundable deposit it received from a former affiliate.
Additional Paid-In Capital was credited for an equal amount.
7. INCOME TAXES
The Company had net losses for 1999, 1998 and 1997 and, therefore, no
income taxes have been provided.
As of March 31, 1999, the Company has federal net operating loss carry
forwards of approximately $8,933,722 through 2014.
Significant components of the Company's deferred assets and tax
liabilities for federal income taxes consist of the following:
1999 1998
-------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 4,125,593 $ 6,394,688
Start-up and other costs 6,623,557 3,027,575
Research credit 266,000 266,000
-------------- -------------
Total deferred tax assets (11,015,150) 9,688,263
Valuation allowance for deferred tax assets (11,015,150) (9,688,263)
-------------- -------------
Net deferred tax assets $ -- $ --
============== =============
The net change in the valuation allowance for the years ended March
31, 1999 and 1998 was an increase of $1,326,887 and $1,976,552,
respectively.
8. ITEMS RECORDED IN THE FOURTH QUARTER
The Company recorded the following noncash items in the fourth quarter
of fiscal 1999:
In connection to Series E Preferred conversion, an additional 141,680
shares of Common Stocks were issued to some investors with respect to a
non-binding agreement to hold the converted Common Stock for a specified
period of time and $144,375 was charged to expenses in the statement of
operations.
F-17
18
The Company recorded the following noncash items in the fourth quarter
of fiscal 1998:
Preferred stock dividends payable in the form of common stock of
$1,399,000;
A value of stock options awarded to non employees of $1,837,500 was
recognized and $459,375 of such value was amortized, and
Professional fees were reduced by $147,000 as a result of the
cancellation of 200,000 warrants issued to an investment-banking firm.
9. SIGNIFICANT TRANSACTIONS
On August 27, 1998 the Company signed an agreement with a subsidiary
of Global TeleSystems, Inc. ("GTS"), under which a subsidiary of GTS will
acquire approximately 5.9 million shares of the Company's common stock and
the Company, through a subsidiary, will acquire GTS's 75% interest in a
Shanghai-based joint venture. This joint venture hold the rights to a
majority share of the cash flow generated by Shanghai VSAT Network Systems
(SVC), the premier satellite-based telecommunications network operator in
China.
The consummation of this transaction with GTS is subject to various
conditions, including receipt of necessary governmental approvals and other
customary closing conditions. In addition, under the American Stock
Exchange guidelines the Company will be required to obtain shareholder
approval for the number of shares related to this issuance that are in
excess of 19.9% of the Common Stock outstanding on the date of issuance.
Once all of the conditions in China necessary for the consummation of the
transaction are completed, the Company's shareholders will be asked to
approve the necessary increase in the shares to be issued for such
transaction. At present, GTS is working to complete the pre-closing
conditions in China, including obtaining the necessary governmental
approvals. The successful completion of this merger is subject to final due
diligence and shareholder approval, among other conditions.
On December 23, 1998, the company signed an agreement with UIHH, an
indirect subsidiary of United International Holdings, Inc., under which
AmTec will issue to UIHH's direct parent company $12 million of convertible
preferred stock ("Series F Shares") in exchange for 100% of the common
stock of UIHH. UIHH holds a 49% interest in a Sino-foreign joint venture
with the Broadcasting Bureau of Hunan, the monopoly cable television
operator in Hunan Province, People's Republic of China.
The consummation of this transaction with UIHH is subject to various
conditions, including receipt of necessary governmental approvals and other
customary closing conditions. In addition, under the American Stock
Exchange guidelines the Company will be required to obtain shareholder
approval for the number of Common Stock related to this issuance that are
in excess of 19.9% of the Common Stock outstanding on the date of issuance.
Once all of the conditions in China necessary for the consummation of the
transaction are completed, the Company's shareholders will be asked to
approve the necessary increase in the shares to be issued for the
transaction. At present, UIH is working to complete the pre-closing
conditions in China, including necessary governmental approvals. The
successful completion of this merger is subject to final due diligence and
shareholder approval, among other conditions.
10. SUBSEQUENT EVENTS
On April 28, 1999, the Company formed a 50-50% joint venture, IP.TEL,
LLC with Fusion Telecommunications International, Inc. ("Fusion"), a
private facilities-based, multinational long-distance company. Fusion's
current service offerings include voice and data, switched and dedicated,
domestic and international long-distance and domestic and international
prepaid calling cards, provided through a network of owned and leased
facilities, leased lines and resale agreements.
The joint venture will provide value-added telecommunication services,
including telephony and data, to and from Asia. Utilizing the Company's
established presence in China and Fusion's telecommunications franchise,
the companies plan to expand the service offerings of the joint venture to
include a fully integrated Internet protocol based network to provide voice
and fax services. The joint venture agreement includes language that gives
both parties the right of first refusal regarding projects in China within
the scope of IP.TEL, LLC's business proposition.
During May 1999, the Company formed a three-way alliance with Fusion
and IXS.NET, a private IP fax service provider, to develop IP fax services
Asia. The Company and Fusion agreed to make an equal convertible debt
investment into IXS.NET and the Company has an option to acquire up to 50%
of IXS.NET. The Company has invested $175,000 under a loan agreement to
IXS.NET and expects to enter into an eighteen months convertible debt
agreement shortly. The convertible debt agreement will allow for the
Company to advance up to $575,000 over the eighteen months period, subject
to certain terms and conditions. The business is in the process of starting
up in Hebei Province. During the next quarter, the Company anticipates
obtaining licenses to expand the service in Sichuan, Beijing, Tanjain and
other provinces in China.
With respect to the complaint related to the "Jacqueline B. Brandwynne
F-18
19
vs. AVIC Group International, Inc., et al.", on June 18, 1999, the Company
and Jacqueline B. Brandwynne have reached a settlement in principle of the
legal proceedings. Subject to documentation and signing of the final
agreement, the parties have agreed to release each other from all claims.
The Company has agreed to pay Ms. Brandwynne $250,000 in AmTec Common
Stock, which includes her claim for attorney's fees. A full provision for
the settlement amount was made during the year ended March 31, 1999. While
the management of the Company believes that these claims are without merit,
and that there are valid defenses to each claim, management believes it is
in the best interest of the Company to settle the litigation, eliminate any
possible liability exposure, and avoid additional legal fees to defend the
litigation.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
We have audited the accompanying balance sheets of Hebei United
Telecommunications Equipment Co., Ltd. as of December 31, 1998 and 1997 and
the related statements of operations, investors' equity and cash flows for
the year ended December 31, 1998 and the period April 29, 1997
(commencement of operations) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
the management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Hebei United
Telecommunications Equipment Co., Ltd. as of December 31, 1998 and 1997 and
the results of its operations and its cash flows for the year ended
December 31, 1998 and the period April 29, 1997 (commencement of
operations) to December 31, 1997 in conformity with accounting principles
generally accepted in the United States of America.
Deloitte Touche Tohmatsu
Beijing, People's Republic of China
June 1, 1999
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
December 31, 1998 December 31, 1997
------------------ ----------------
RMB RMB
Assets
Current Assets:
Cash and cash equivalents 16,232,535 39,500,312
Other receivables 6,169,000 1,102,753
------------------ ----------------
Total current assets 22,401,535 40,603,065
Property and equipment, net 389,305 493,430
Investments in a Joint Venture -- 4,383,750
------------------ ----------------
Total Assets 22,790,840 45,480,245
================== ================
Liabilities and Investors' Equity
Current Liabilities:
Amount due to an investor 12,656,909 30,808,631
Other payables 50,340 32,925
------------------ ----------------
Total current liabilities 12,707,249 30,841,556
------------------ ----------------
Total Liabilities 12,707,249 30,841,556
------------------ ----------------
F-19
20
Commitments and Contingencies
Investors' Equity:
Capital contribution 24,923,218 24,923,218
Accumulated deficit (14,839,627) (10,284,529)
------------------ ----------------
Total Investors' Equity 10,083,591 14,638,689
------------------ ----------------
Total Liabilities and Investors' Equity 22,790,840 45,480,245
================== ================
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD
APRIL 29, 1997 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1997
April 29, 1997
Year ended (commencement of
December 31, operations) to
1998 December 31, 1997
--------------- -----------------
RMB RMB
General and administrative expenses (1,508,326) (758,658)
Other (expense) income:
Operation set up expense -- (2,000,000)
Share of losses of investment in Joint Venture (4,383,750) (8,347,533)
Exchange loss -- (24,680)
Interest income 1,336,978 846,342
--------------- ------------
Net loss (4,555,098) (10,284,529)
=============== ============
See notes to financial statements
F-20
21
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
STATEMENTS OF INVESTORS' EQUITY
DECEMBER 31, 1998 AND 1997
Capital Accumulated Total
Contribution Deficit
------------------ ------------------- ------------------
RMB RMB RMB
Balance, April 29, 1997 -- -- --
Capital contribution 24,923,218 -- 24,923,218
Net loss -- (10,284,529) (10,284,529)
------------------ ------------------- ------------------
Balance, December 31, 1997 24,923,218 (10,284,529) 14,638,689
Net loss -- (4,555,098) (4,555,098)
Balance, December 31, 1998 24,923,218 (14,839,627) 10,083,591
================== =================== ==================
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD
APRIL 29, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
April 29, 1997
(commencement of
Year ended operations) to
December 31, 1998 December 31, 1997
---------------------- -----------------
RMB RMB
Cash flows from operating activities:
Net loss (4,555,098) (10,284,529)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 95,981 37,928
Loss on disposal of equipment 10,944 --
Equity in losses of investment in Joint Venture 4,383,750 8,347,533
Changes in assets and liabilities:
Other receivables (5,066,247) (1,102,753)
Amount due to an investor (18,151,722) 30,808,631
Other payables 17,415 32,925
------------- --------------
Net cash (used in) provided by operating activities (23,264,977) 27,839,735
------------- --------------
Cash flows from investing activities:
Additions of property and equipment (2,800) (531,358)
------------- --------------
Net cash used in investing activities (2,800) (531,358)
------------- --------------
Cash flow from financing activities:
Capital contribution -- 12,191,935
------------ -------------
Net cash provided by financing activities -- 12,191,935
------------ -------------
Net (decrease) increase in cash and cash equivalents (23,267,777) 39,500,312
Cash and cash equivalents, beginning of period 39,500,312 --
------------- ------------
Cash and cash equivalents, end of period 16,232,535 39,500,312
============ ============
NON-CASH TRANSACTIONS:
During the period ended December 31, 1997, DEVELOPMENT CO. and
CATCH contributed their interest in a Joint Venture valued at RMB
12,731,283 into the Company as capital contribution.
See notes to financial statements.
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE PERIOD APRIL 29, 1997 (COMMENCEMENT
OF OPERATIONS) TO DECEMBER 31, 1997
1. ORGANIZATION
Hebei United Telecommunications Equipment Co., Ltd ("the Company")
was established on April 29, 1997 as a limited liability joint venture
company in the People's Republic of China ("PRC"). The period of operation
is twenty years. The registered capital of the Company was US$3 million, of
which 60.8% (US$ 1.824 million) was contributed by AmTec, Inc. (formerly
known as AVIC Group International, Inc.), 9.2% (US$ 276,000) by CATCH
Telecommunication Co., Ltd. (the "CATCH") and 30% (US$ 900,000) by Hebei
United Telecommunications Development Co., Ltd. (the "DEVELOPMENT CO."). On
November 7, 1997, CATCH agreed to transfer its interest in the Company to
AmTec, Inc. Subsequent to the transfer (which occurred after December 31,
1997), AmTec, Inc. owns 70% (US$ 2.1 million) and DEVELOPMENT CO. owns 30%
(US$900,000) of the Company's registered capital. The Company's major
activity to date is an investment in a Chinese joint venture which is
mainly engaged in the development and construction of telecommunication
systems, and providing related technical consulting and repair services.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the Company, which are required to be
prepared in accordance with the accounting principles and relevant
financial regulations as established by the Ministry of Finance of the PRC.
The principal adjustments made to conform the statutory financial
statements of the Company to US GAAP included the following:
o Adjustment to write off organization and operation set up
expenses.
o Adjustment to write off exchange loss.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
F-21
22
The principal accounting policies which have been adopted in
preparing the financial statements set out in this report, and which
conform with accounting principles generally accepted in the United States
of America are as follows:
Cash and cash equivalents. Cash and cash equivalents include cash
on hand, demand deposits and highly liquid instruments with a maturity of
three months or less at the time of purchase.
Property and equipment. Property and equipment is stated at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method to write off the cost of property and equipment, net of the
estimated residual value of 10% of cost, over their estimated useful lives
as follows:
Furniture, fixture and equipment 5 years
Motor vehicles 5 years
Long lived assets. The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the
net carrying amount may not be recoverable. When such events
occur, the Company measures impairment by comparing the carrying value of
the long-lived asset to the estimated undiscounted future cash flows
expected to result from the use of the assets and their eventual
disposition. If the sum of the expected undiscounted future cash flows is
less than the carrying amount of the assets, the Company would recognize an
impairment loss. The impairment loss, if determined, would be measured as
the amount by which the carrying amount of the asset exceeds the fair value
of the asset.
Investment in Joint Venture. Hebei Equipment owns 51% of Hebei
United Telecommunications Engineering Company, Ltd. ("Hebei Engineering").
Hebei Equipment accounts for its investment using equity method of
accounting as minority shareholders of Hebei Engineering have substantive
participating rights under the joint venture contracts. Under the equity
method, the investment is carried at cost of acquisition, plus the
Company's equity in undistributed earnings or losses since acquisition.
Equity in the losses of the unconsolidated subsidiary is recognized
according to the Company's percentage ownership in the unconsolidated
subsidiary until the Company contributed capital has been fully depleted.
Income tax. Deferred income taxes are provided for using the
liability method. Under the liability method, deferred income taxes are
recognized for all significant temporary differences between the tax and
financial statement bases of assets and liabilities. The tax consequences
of those differences are classified as current or non-current based upon
the classification of the related assets or liabilities in the financial
statements. A valuation allowance is provided to reduce the amount of
deferred tax assets if it is considered more likely than not that some
portion of, or all of, the deferred tax assets will not be realized.
Foreign currency translation. The Company's financial statements
are prepared using Renminbi as the reporting currency. Foreign currency
transactions are translated at the rates ruling on the dates of the
transactions. Monetary assets and liabilities denominated in foreign
currencies are translated at the rates ruling on the balance sheet date.
Exchange gains and losses are reported in the statement of operation.
Comprehensive Income. Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" establishes new rules
for reporting and display of comprehensive income and its components. The
Company has no items of other comprehensive income and the net loss
reported in the statement of operations is equivalent to the total
comprehensive loss.
Segments of an Enterprise and Related Information. SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information"
requires the reporting of profit and loss, specific revenue and expense
items, and assets for reportable segments. It also requires the
reconciliation of total segment revenues, total segment profit or loss,
total segment assets, and other amounts disclosed for segments, in each
case to the corresponding amounts in the general purpose financial
statements. The Company adopted FASB 131 during the year and since the
Company only invested in the Hebei Engineering, no other reportable
segments were reported in the financial statements.
Concentration of credit risk. Financial instruments that
potentially subject the Company to concentrations of credit risk consists
principally of temporary cash investments. The Company places its temporary
cash investments with various financial institutions in the PRC. The
Company believes that no significant credit risk exists as these
investments are made with high-credit, quality financial institutions.
Use of estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the recorded
amounts of assets and liabilities and disclosures of contingent assets and
liabilities in the financial statements and recorded amounts of revenue and
expenses during the period. Actual results could differ from these
estimates.
F-22
23
Fair value of financial instrument. The carrying values of cash
and cash equivalents, other receivables, other payables, and amount due to
an investor approximate fair value because of the short maturity of these
instruments.
New accounting standard not yet adopted. The Financial Accounting
Standards Board has issued a new standard SFAS No. 133, "Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. Management has not yet completed the
analysis of the impact this would have on the financial statements of the
Company and has not yet adopted this standard.
4. OPERATION SET UP EXPENSE
Amount represents payment to CATCH for services provided in
connection with the formation of the Company.
5. INCOME TAX
The statutory income tax rate of the Company is 33%. There is no
provision for the income taxes during the year ended December 31, 1998 and
the period from April 29, 1997 (commencement of operations) to December 31,
1997 as the Company incurred losses during the relevant periods.
Deferred tax assets of RMB695,754 and RMB639,209 existed as at the
end of 1998 and 1997, respectively, arising from a temporary difference. A
valuation allowance has been established for the full amount of the
deferred tax assets since it is considered more likely than not that all of
the deferred assets will not be realized.
Deferred tax assets are composed of the following:
December 31,
-------------------------------------
1998 1997
--------------- ----------------
RMB RMB
Operation set up expense 660,000 660,000
Organization expenses 20,948 (60,980)
Exchange gain/loss 8,144 8,144
Other 6,662 32,045
Valuation allowance (695,754) (639,209)
--------------- ----------------
-- --
=============== ================
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, DECEMBER 31,
1998 1997
------------------- --------------
RMB RMB
At cost:
Furniture, fixtures and equipment 222,358 233,958
Motor vehicles 297,400 297,400
------------------- --------------
519,758 531,358
Less: Accumulated depreciation 130,453 37,928
------------------- --------------
389,305 493,430
=================== ==============
All assets are located in the PRC.
7. INVESTMENT IN A JOINT VENTURE
The Company holds a 51% interest in Hebei Engineering, which is
developing GSM networks in the ten largest cities in Hebei Province, PRC.
Nippon Telegraph and Telephone International, Inc. ("NTTI") and Itochu
Corporation hold the remaining 49% interest in Hebei Engineering.
The Company's investment in the joint venture were accounted for
by the equity method of accounting because minority shareholders of Hebei
Engineering have substantive participating rights under the provision of
the Joint Venture contracts.(See Note 3)
DECEMBER 31, DECEMBER 31,
1998 1997
------------------ -------------------
RMB RMB
Cost 12,731,283 12,731,283
Less: Share of losses (12,731,283) (8,347,533)
------------------ --------------------
-- 4,383,750
================== ===================
F-23
24
Hebei Engineering is a Sino-foreign equity joint venture
established on January 31, 1996 in the PRC. The period of operation is
twenty-five years. The registered capital of the Company is US$ 3 million.
The Company is mainly engaged in the development and construction of
telecommunication systems, and providing related technical consulting
services.
The summarized balance sheet of Hebei Engineering as of December 31, 1998
and 1997 and its statement of operations for the years ended December 31,
1998 and the period April 29, 1997 (commencement of operations) to December
31, 1997 are as follows:
BALANCE SHEET
DECEMBER 31, DECEMBER 31,
1998 1997
--------------------- ---------------------
RMB RMB
Assets
Current Assets: 31,169,950 30,233,253
Other assets 5,336,274 5,840,362
Investment in GSM networks 240,385,622 235,635,325
--------------------- ---------------------
Total Assets 276,891,846 271,708,940
===================== =====================
Liabilities and Investors' (Deficit) Equity
Current liabilities 44,701,454 85,938,393
Long-term Liabilities: 237,826,398 177,052,277
--------------------- ---------------------
Total Liabilities 282,527,852 262,990,670
--------------------- ---------------------
Investors' (deficit) equity: (5,636,006) 8,718,270
--------------------- ---------------------
Total Liabilities and Investors'(deficit) equity 276,891,846 271,708,940
===================== =====================
STATEMENT OF OPERATIONS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
--------------------- ---------------------
RMB RMB
Net revenue from GSM networks 6,488,482 1,706,499
Total expenses (22,726,394) (20,348,240)
--------------------- ---------------------
Net loss from operations (16,237,912) (18,641,741)
Total other income, net 1,883,636 2,274,029
--------------------- ---------------------
Net loss (14,354,276) (16,367,712)
===================== =====================
8. AMOUNT DUE TO AN INVESTOR
The amount represents funds advanced to the Company by AmTec, Inc.
These amounts are payable on demand and bear no interest.
9. CAPITAL CONTRIBUTION
DECEMBER 31, 1998 AND 1997
-----------------------------------------
OWNERSHIP RMB
----------------- -----------------
CAPITAL CONTRIBUTED BY:
DEVELOPMENT CO. 30% 7,480,150
AmTec Inc. 70% 17,443,068
----------------- -----------------
100% 24,923,218
================= =================
10. COMMITMENTS
The Company leases certain buildings under operating leases, which
expire through March 1999. Rental expense under operating leases was RMB
100,128 and RMB 62,580 in 1998 and 1997 respectively.
The aggregate annual minimum operating lease commitments under all
non-cancellable leases at December 31, 1998 is RMB 16,700 for a lease
expiring during the fiscal year 1999.
F-24
25
11. RETIREMENT BENEFITS
The Company's employees are entitled to a retirement pension
calculated with reference to their basic salaries on retirement and their
length of service in accordance with a government managed pension plan. The
PRC government is responsible for the pension liability to these retired
employees. The Company is required to make contributions to the state
retirement plan at rates ranging from 18% to 20% of the adjusted monthly
basic salaries of the current employees. The expense of such arrangements
to the Company was insignificant for the periods presented. The Company is
not obligated under any other post-retirement plans and post-employment
benefits are not material.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
We have audited the accompanying balance sheets of Hebei United
Telecommunications Engineering Co., Ltd. as of December 31, 1998 and 1997
and the related statements of operations, investors' equity and cash flows
for the years ended December 31, 1998 and 1997 and the period from January
31, 1996 (commencement of operations) to December 31,1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the 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
the management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Hebei United
Telecommunications Engineering Co., Ltd. as of December 31, 1998 and 1997
and the results of its operations and its cash flows for the year ended
December 31, 1998, 1997 and the period from January 31, 1996 (commencement
of operations) to December 31, 1996 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 13
to the financial statements, the Company has suffered recurring losses from
operations and has negative working capital that rises substantial doubt
about the ability to continue as a going concern. Management's explanations
in regard to these matters are also described in Note 13. The financial
statements do not include any adjustments that might result from the
outcome of the uncertainty.
Deloitte Touche Tohmatsu
Beijing, People's Republic of China
June 1, 1999
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
DECEMBER 31
------------------------------------
1998 1997
---------------- ----------------
RMB RMB
Current Assets:
Cash and cash equivalents 23,869,946 29,278,905
Accounts receivable 6,829,981 -
Other receivables 470,023 954,348
---------------- ---------------
Total current assets 31,169,950 30,233,253
Property and equipment, net 5,273,129 5,783,117
Deferred assets 63,145 57,245
Investment in GSM networks, net 240,385,622 235,635,325
---------------- ----------------
F-25
26
Total Assets 276,891,846 271,708,940
================ ================
Liabilities and Investors' Equity (Deficiency)
Current Liabilities:
Amount due to investors 844,392 997,597
Other payables 10,675,770 84,888,076
Accrued expenses 66,492 52,720
Long-term loan due within 1 year 33,114,800 --
---------------- ----------------
Total current liabilities 44,701,454 85,938,393
---------------- ----------------
Long-term Liabilities:
Long-term loans 230,313,434 165,816,800
Other payables 7,512,964 11,235,477
---------------- ----------------
237,826,398 177,052,277
Total Liabilities 282,527,852 262,990,670
---------------- ----------------
Commitments and Contingencies Investors' equity (deficit):
Capital contribution 24,963,300 24,963,300
Capital reserve (4,800) (4,800)
Accumulated deficit (30,594,506) (16,240,230)
---------------- -----------------
Total investors' (deficit) equity (5,636,006) 8,718,270
---------------- ----------------
Total Liabilities and Investors' (Deficit) Equity 276,891,846 271,708,940
================ ================
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND THE PERIOD JANUARY 31, 1996
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
JANUARY 31, 1996
(COMMENCEMENT
YEAR ENDED YEAR ENDED OF OPERATIONS)
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
-------------------- -------------------- --------------------
RMB RMB RMB
Net revenue from GSM networks 6,488,482 1,706,499 --
-------------------- -------------------- --------------------
Expenses:
General and administrative expenses (2,694,259) (2,222,446) (1,340,568)
Amortization of GSM networks (20,032,135) (18,125,794) --
-------------------- ------------------- ---------------------
Total expenses (22,726,394) (20,348,240) (1,340,568)
-------------------- -------------------- --------------------
Net loss from operations (16,237,912) (18,641,741) (1,340,568)
-------------------- -------------------- --------------------
Other income (expense) :
Rental income, net 461,784 736,965 352,724
Other income, net -- 250,000 --
Interest income 1,266,668 1,328,727 1,277,390
Exchange (gain) loss 233,713 (41,663) (162,064)
Interest expense (78,529) -- --
--------------------- -------------------- --------------------
Total other income (expense) 1,883,636 2,274,029 1,468,050
-------------------- -------------------- --------------------
Net (loss) income (14,354,276) (16,367,712) 127,482
==================== ==================== ====================
See notes to financial statements
F-26
27
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
STATEMENTS OF INVESTORS' EQUITY/ (DEFICIT)
DECEMBER 31, 1998, 1997 AND 1996
RETAINED
EARNING/
CAPITAL CAPITAL (ACCUMULATED
CONTRIBUTION RESERVE DEFICIT) TOTAL
------------- ------------- ------------- ----------------
RMB RMB RMB RMB
Balance, January 31, 1996 -- -- -- --
Capital contribution 24,963,300 -- -- 24,963,300
Exchange difference on capital contribution -- (4,800) -- (4,800)
Net income -- -- 127,482 127,482
------------- ------------ -------------- -------------
Balance, December 31, 1996 24,963,300 (4,800) 127,482 25,085,982
Net loss -- -- (16,367,712) (16,367,712)
------------- ------------- --------------- --------------
Balance, December 31, 1997 24,963,300 (4,800) (16,240,230) 8,718,270
Net loss -- -- (14,354,276) (14,354,276)
------------- ------------ -------------- -------------
Balance, December 31, 1998 24,963,300 (4,800) (30,594,506) (5,636,006)
============= ============ ============== =============
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND THE PERIOD FROM JANUARY 31, 1996
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
JANUARY 31, 1996
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1998 1997 1996
-------------------- ------------------- -------------------
RMB RMB RMB
Cash flows from operating activities:
Net (loss) income (14,354,276) (16,367,712) 127,482
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Loss on disposals of equipment 6,043 9,407 --
Depreciation 501,745 358,278 119,003
Amortization of investment in GSM networks 20,032,135 18,125,794 --
Changes in assets and liabilities:
Accounts receivable (6,829,981) -- --
Other receivables 484,325 (869,654) (84,694)
Other payables 364,203 369,218 324,892
Accrued expenses 13,772 28,160 24,560
-------------------- ------------------- -------------------
Net cash provided by operating activities 217,966 1,653,491 511,243
-------------------- ------------------- -------------------
Cash flows from investing activities:
Short-term investment -- 270,300 (270,300)
Additions of property and equipment -- (3,113,736) (3,156,070)
Proceeds from disposal of equipment 2,200 -- --
Investment in GSM networks (103,234,659) (69,144,541) (88,189,538)
Others (5,900) (8,500) (48,744)
-------------------- ------------------- -------------------
Net cash used in investing activities (103,238,359) (71,996,477) (91,664,652)
-------------------- ------------------- -------------------
Cash flow from financing activities:
Proceeds from loans 107,211,434 66,238,400 161,997,650
Repayment of loans (9,600,000) -- (62,419,250)
Capital contribution -- -- 24,958,500
-------------------- ----------------- ------------------
Net Cash provided by investing activities 97,611,434 66,238,400 124,536,900
-------------------- ----------------- ------------------
(Decrease) increase in cash and cash equivalents (5,408,959) (4,104,586) 33,383,491
Cash and cash equivalents, beginning of period 29,278,905 33,383,491 --
-------------------- ------------------- -------------------
Cash and cash equivalents, end of period 23,869,946 29,278,905 33,383,491
==================== =================== ===================
Supplemental disclosures of cash flows information:
Interest paid 20,602,968 8,144,426 --
==================== =================== ===================
See notes to financial statements.
F-27
28
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
Hebei United Telecommunications Engineering Co., Ltd (the
"Company") was established on January 31, 1996 as a limited liability joint
venture company in the People's Republic of China ("PRC"). The period of
operation is twenty-five years. The registered capital of the Company is
US$3 million, of which 51% (US$1.53 million) was contributed by Hebei
United Telecommunications Equipment Co., Ltd. ("Hebei Equipment"), and 49%
(US$ 1.47 million) by NTT International Corporation ("NTT"). On October 18,
1996, NTT agreed to transfer 19.6% of the capital in the Company to Itochu
Corporation ("ITOCHU") with effect from December 27, 1996. Subsequent to
the transfer, Hebei Equipment owns 51% (US$1.53 million), NTT owns 29.4%
(US$882,000) and ITOCHU owns 19.6% (US$588,000) of the Company's registered
capital. The Company is mainly engaged in developing and assisting in
construction of telecommunication systems, and providing related technical
consulting services.
The Company has invested approximately RMB 253 million in the
construction of GSM telecommunications networks (the "GSM networks") in
Hebei Province of the PRC. The GSM networks are being built pursuant to a
15-year Project Cooperation Contract with China United Communications
Company ("UNICOM"), the operator of the GSM Networks. Terms of the contract
include the following:
Initially, UNICOM will own 30% of the assets while the Company
will own 70% of the assets. Both parties agreed to distribute the profit
according to the "Distributable Cash Flow" (as defined) with 22% going to
UNICOM and 78% going to the Company. Each year, the Company will transfer
ownership of assets to UNICOM equal in value to the Distributable Cash Flow
received up to 60% of the assets. The maximum amount of assets transferred
will not exceed 90% of the assets until termination of the Project
Cooperation Contract.. Upon the termination of the contract the remaining
10% of the network assets shall be assigned to UNICOM without any further
consideration. The Company will continue to receive 78% of the
Distributable Cash Flow after transfer of all the assets for the remainder
of the 15-year period.
Under PRC law, foreign investment enterprises, such as the
Company, are not permitted to own or operate telecommunications networks.
Substantially all of the Company's revenues are derived from contractual
arrangements for the sharing of cash flow from network operations rather
than from ownership or operation of the networks. The Company has recorded
its investment (GSM Construction Costs) at cost and is amortizing it over
the remaining life of the project. Income from the GSM networks is
recognized at the time when the Company can estimate or calculate the
portion of its Distributable Cash Flow from the network. UNICOM commenced
operation of the GSM networks in February 1997.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the Company, which are required to be
prepared in accordance with the accounting principles and relevant
financial regulations as established by the Ministry of Finance of the PRC.
The principal adjustments made to conform the statutory financial
statements of the Company to US GAAP mainly included the following:
o Adjustment to write off organization expenses.
o Adjustment to write off exchange loss.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies which have been adopted in
preparing the financial statements set out in this report, and which
conform with accounting principles generally accepted in the United States
of America are as follows:
Cash and cash equivalents. Cash and cash equivalents include cash
on hand, demand deposits and highly liquid instruments with a maturity of
three months or less at the time of purchase.
Property and equipment. Property and equipment is stated at cost
less accumulated depreciation. Depreciation is provided using the
straight-line method to write off the cost of property and equipment, net
of the estimated residual value of 10% of cost, over their estimated useful
F-28
29
lives as follows:
Land and buildings 20 years
Furniture, fixtures and equipment 5 years
Motor vehicles 5 years
Long lived assets. The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the
net carrying amount may not be recoverable. When such events occur, the
Company measures impairment by comparing the carrying value of the
long-lived asset to the estimated undiscounted future cash flows expected
to result from the use of the assets and their eventual disposition. If the
sum of the expected undiscounted future cash flows is less than the
carrying amount of the assets, the Company would recognize an impairment
loss. The impairment loss, if determined, would be measured as the amount
by which the carrying amount of the asset exceeds the fair value of the
asset.
Investment in GSM networks. Investment in GSM networks is stated
at cost less accumulated amortization. The investment in GSM networks is
amortized on a straight-line basis over the remaining life of the Project
Cooperation Contract between the Company and UNICOM.
Capitalization of borrowing costs. Borrowing costs directly
attributable to the acquisition, construction or production of qualifying
assets, i.e. assets that necessarily take a substantial period of time to
get ready for their intended use or sale, are capitalized as part of the
cost of those assets. Capitalization of such borrowing costs ceases when
the assets are substantially ready for their intended use or sale. Interest
capitalized at December 31, 1998 and 1997 was RMB20,524,439 and
RMB8,144,426, respectively.
Revenue recognition. Revenue related to the GSM networks is
recognized at the time when the Company can estimate or calculate the
portion of its distributable cash flow from the network.
Income tax. Deferred income taxes are provided for using the
liability method. Under the liability method, deferred income taxes are
recognized for all significant temporary differences between the tax and
financial statement bases of assets and liabilities. The tax consequences
of those differences are classified as current or non-current based upon
the classification of the related assets or liabilities in the financial
statements. A valuation allowance is provided to reduce the amount of
deferred tax assets if it is considered more likely than not that some
portion of, or all of, the deferred tax assets will not be realized.
Foreign currency translation. The Company's financial statements
are prepared using Renminbi as the reporting currency. Foreign currency
transactions are translated at the rates ruling on the dates of the
transactions. Monetary assets and liabilities denominated in foreign
currencies are translated at the rates ruling on the balance sheet date.
Exchange gains and losses are taken to the statement of operations.
Fair value of financial instruments. The carrying values of cash
and cash equivalents, short-term investments, accounts receivable, other
receivables, other payables, and amount due to investors approximate fair
value because of the short maturity of these instruments.
Concentration of credit risk. Financial instruments which
potentially subject the Company to concentrations of credit risk consist
principally of temporary cash investments and trade accounts receivable.
The Company places its temporary cash investments with various
financial institutions in the PRC. The Company believes that no significant
credit risk exists as these investments are made with high-credit, quality
financial institutions.
The Company's account receivable represents revenue from GSM
networks due from UNICOM, the operator of the GSM networks. The Company
believes that no significant credit risk exists, as UNICOM is a high-credit
PRC state-owned enterprise.
Use of estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the recorded
amounts of assets and liabilities and disclosures of contingent assets and
liabilities in the financial statements and recorded amounts of revenue and
expenses during the period. Actual results could differ from these
estimates.
Comprehensive Income. Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" establishes new rules
for reporting and display of comprehensive income and its components. The
Company has no items of other comprehensive income and the net loss
reported in the statement of operations is equivalent to the total
comprehensive loss.
Segments of an Enterprise and Related Information. In June 1997,
the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information." This statement requires the reporting of profit
and loss, specific revenue and expense items, and assets for reportable
F-29
30
segments. It also requires the reconciliation of total segment revenues,
total segment profit or loss, total segment assets, and other amounts
disclosed for segments, in each case to the corresponding amounts in the
general purpose financial statements. The Company adopted FASB 131 during
the year and since the Company only invested in the GSM networks, no other
reportable segments were reported in the financial statements.
New accounting standard not yet adopted. The Financial Accounting
Standards Board has issued a new standard SFAS No. 133 "Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. Management has not yet completed the
analysis of the impact this would have on the financial statements of the
Company and has not adopted this standard.
4. INCOME TAX
The statutory income tax rate of the Company is 33%. There is no
provision for income taxes during the year ended December 31, 1998, 1997
and the period from January 31, 1996 (commencement of operations) to
December 31, 1996 as the Company did not have any assessable income for the
relevant periods.
No provision for deferred taxation has been made in the financial
statements for the period from January 31, 1996 (commencement of
operations) to December 31, 1996 as no significant temporary differences
arose during period and no significant deferred tax assets and liabilities
existed at the relevant balance sheet date.
Deferred tax assets of RMB10,096,188 and RMB5,359,276 existed as
at the end of 1998 and 1997 arising from temporary differences. A valuation
allowance has been established for the full amount of the deferred tax
assets since it is considered more likely than not that all of the deferred
assets will not be realized.
Deferred tax assets are composed of the following:
DECEMBER 31,
-----------------------------------------------
1998 1997
--------------------- --------------------
RMB RMB
Amortization of GSM networks 12,592,117 5,981,512
Organization expense 218,310 (126,321)
Exchange (gain)loss (9,895) 67,230
GSM networks revenue (2,704,344) (563,145)
Valuation allowance (10,096,188) (5,359,276)
--------------------- --------------------
-- --
===================== ====================
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
----------------------------------------------
1998 1997
--------------------- ---------------------
RMB RMB
AT COST:
Land and buildings 4,629,909 4,629,909
Furniture, fixtures and equipment 641,751 656,751
Motor vehicles 973,738 973,738
--------------------- ---------------------
6,245,398 6,260,398
Less: accumulated depreciation (972,269) (477,281)
--------------------- ---------------------
5,273,129 5,783,117
===================== =====================
All assets are located in the PRC.
6. INVESTMENT IN GSM NETWORKS
DECEMBER 31,
----------------------------------------------
1998 1997
--------------------- ---------------------
RMB RMB
Cost of investment 278,543,551 253,761,119
Less: accumulated amortization (38,157,929) (18,125,794)
--------------------- ---------------------
240,385,622 235,635,325
===================== =====================
F-30
31
The investment represents the investment in a GSM
telecommunication networks in Hebei Province, PRC. The GSM networks were
built pursuant to a 15-year agreement with UNICOM commencing in
February 1996. UNICOM commenced operation of the GSM networks in February
1997. The investment is being amortized on a straight-line basis over the
remaining 13-year life of the agreement commencing from the operation of
the networks.
7. RELATED PARTY TRANSACTIONS
DECEMBER 31,
---------------------------------
COMPANY NAME 1998 1997
- ----------------------------------- -------------- --------------
RMB RMB
Amount due to NTT 512,300 729,014
Amount due to ITOCHU 332,092 268,583
-------------- ---------------
Total 844,392 997,597
============== ===============
Guarantee fees paid and payable to NTT and ITOCHU are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
COMPANY NAME 1998 1997
- ----------------------------------- -------------- ---------------
RMB RMB
Amount paid and payable to NTT 1,541,283 2,167,260
Amount paid and payable to ITOCHU 755,081 467,482
-------------- --------------
Total 2,296,364 2,634,742
============== ==============
8. OTHER PAYABLES
The Company has acquired a digital microwave system and a GSM
mobile phone system under deferred payment terms with the final installment
payable in 2001 and 1998, respectively. The liabilities are guaranteed by
NTT at December 31, 1998 and are payable as follows:
RMB
LIABILITIES PAYABLE:
1998 --
1999 3,756,482
2000 3,756,482
2001 3,756,482
-----------
11,269,446
Less: Liabilities due within one year (included in other payables) 3,756,482
-----------
Long-term payables 7,512,964
===========
9. LONG-TERM LOANS
Scheduled repayments for the long-term loans are as follows:
DECEMBER 31,
1998
--------------
RMB
LIABILITIES PAYABLE:
1999 33,114,800
2000 66,229,600
2001 98,218,496
2002 43,281,044
2003 22,584,294
----------------
263,428,234
Less: Liabilities due within one year 33,114,800
----------------
230,313,434
===============
On August 5, 1996, the Company was granted a long-term loan
facility of US$ 20,000,000 by the Bank of Tokyo-Mitsubishi, Ltd. Beijing
Branch at an annual interest rate of 6.82%. The Company has utilized
US$20,000,000 (RMB165,574,000). Interest shall be paid on the outstanding
balance six months after the date of the agreement, every six months
thereafter, and at maturity.
On July 10, 1998, the Company was granted a long-term loan
facility of US$5,000,000 by the Bank of Tokyo-Mitsubishi, Ltd. Beijing
Branch at an annual interest equal to the bank's funding rate plus 0.625%.
F-31
32
The Company has utilized US$ 5,000,000 (RMB 41,393,500 ) as of December 31,
1998. Interest shall be paid on the outstanding balance on February 5,
1999, every six months thereafter, and at maturity.
On September 30, 1998, the Company was granted a long-term loan
facility of US$6,820,000 by the Bank of Tokyo-Mitsubishi, Ltd. Beijing
Branch at an annual interest equal to the bank's funding rate plus 0.75%.
The Company has utilized US$ 6,820,000 (RMB 56,460,824 ) as of December 31,
1998. Interest shall be paid on the outstanding balance on February 5,
1999, every six months thereafter, and at maturity.
All the obligations of the Company under the above agreements are
guaranteed 60% by NTT and 40% by Itochu.
10. CAPITAL CONTRIBUTION
DECEMBER 31, 1998 AND 1997
---------------------------------------
OWNERSHIP RMB
--------------- ------------------
CAPITAL CONTRIBUTED BY:
EQUIPMENT CO. 51.00% 12,731,283
NTT 29.40% 7,339,210
Itochu 19.60% 4,892,807
-------------- ------------------
100% 24,963,300
=============== ==================
11. COMMITMENTS
The Company leases certain buildings under operating leases, which
expire through March 1999. Rental expense under these operating leases was
both RMB 319,200 for the years 1998 and 1997.
The aggregate annual minimum operating lease commitments under all
non-cancellable leases at December 31, 1998 is RMB 79,800 for a lease
expiring during the fiscal year 1999.
The Company has entered into a Project Cooperation Agreement with
UNICOM relating to the construction of a telecommunication network in Hebei
Province, PRC. The total estimated investment under the terms of this
agreement is RMB320 million for the first phase and RMB279 million has been
incurred up to December 31, 1998. The term of this agreement is fifteen
years.
12. EMPLOYEE RETIREMENT BENEFITS AND POST-RETIREMENT BENEFIT
The Company's employees are entitled to a retirement pension
calculated with reference to their basic salaries on retirement and their
length of service in accordance with a government managed pension plan. The
PRC government is responsible for the pension liability to these retired
employees. The Company is required to make contributions to the state
retirement plan at rates ranging from 18% to 20% of the adjusted monthly
basic salaries of the current employees. The expense of such arrangements
to the Company was immaterial in all the periods presented. The Company is
not obligated under any other post-retirement plans and post-employment
benefits are not material.
13. FINANCIAL RESULTS AND LIQUIDITY
The Company has incurred net losses of RMB14,354,276 and
RMB16,367,712 in 1998 and 1997, respectively. As of December 31, 1998, the
Company's total liabilities exceeded its total assets by RMB5,636,006, and
its total current liabilities exceeded its total current assets by
RMB13,531,504.
The Company recognized net revenue of RMB6,488,482 and
RMB1,706,499 in 1998 and 1997, respectively. Since the business operation
of the Company highly depends on the operation of GSM network run by
UNICOM, which has made substantial progress in broadening its subscribers
bases and its position in the cellular market, the Company is expecting
share of a larger distributable cash flow in the following years. The
Company will also attempt to obtain additional financing to support its
operation in the future if necessary.
F-32
33
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DEC. 31, 1999
------------------
(UNAUDITED)
Assets
Current Assets:
Cash..................................................................................... $ 629,960
Prepaid expenses and other current assets................................................ 53,295
------------------
Total current assets................................................................. 683,255
Investments in and advances to unconsolidated subsidiary................................. 2,439,300
Investments in affiliate................................................................. 631,453
Property, plant and equipment, net....................................................... 62,226
Loans receivable......................................................................... 575,000
Office lease deposit and other assets.................................................... 55,733
------------------
Total assets......................................................................... $ 4,446,967
==================
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable......................................................................... $ 593,666
Accrued expenses......................................................................... 25,034
Loans payable............................................................................ 1,125,050
------------------
Total current liabilities..................................................................... 1,743,750
------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock: authorized 10,000,000 shares:
Series E Convertible Preferred Stock: $.001 par value; 74 shares
issued, 0 outstanding at Dec. 31, 1999............................................. --
Series G Convertible Preferred Stock: $.001 par value; 20
shares issued and outstanding at Dec. 31, 1999 ...................................... 1
Common Stock: $.001 par value, authorized 100,000,000 shares;
36,309,189 issued and outstanding at Dec. 31, 1999................................... 36,309
Additional Paid-In Capital............................................................... 38,267,202
Accumulated deficit...................................................................... (36,082,145)
Warrants................................................................................. 481,850
------------------
Total Stockholders' Equity.................................................................... 2,703,217
------------------
Total Liabilities & Stockholders' Equity...................................................... $ 4,446,967
==================
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED DEC. 31
----------------------------------------
1999 1998
------------------ ------------------
Revenues................................................................ $ -- $ --
Expenses
General and administrative......................................... 2,402,917 2,849,742
------------------ ------------------
Loss from Operations.................................................... (2,402,917) (2,849,742)
------------------ ------------------
Other Income (Expense):
Amortization of stock options granted to non-employees............. -- (459,376)
Other - net........................................................ 46,435 37,304
------------------ ------------------
Total other expense............................................ 46,435 (422,072)
------------------ ------------------
Loss Before Equity in Income (Losses) of Unconsolidated Subsidiary and
Affiliate............................................................... (2,356,482) (3,271,814)
Equity in Losses of Affiliate........................................... (171,730) --
Equity in Income from (Losses of) Unconsolidated Subsidiary
and Affiliate......................................................... 442,820 (1,412,881)
------------------ ------------------
Net Loss................................................................ (2,085,392) (,4,684,695)
Preferred Stock Dividend................................................ 350,262 614,051
------------------ ------------------
Loss Applicable to Common Shareholders.................................. $ (2,435,654) $ (5,298,746)
================== ==================
F-33
34
Basic Loss per Common Share............................................. $ (0.07) $ (0.20)
================== ==================
Weighted Average Common Shares Outstanding.............................. 32,924,478 26,458,488
================== ==================
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DEC. 31
------------------------------------------
1999 1998
------------------- --------------------
UNAUDITED UNAUDITED
Cash Flows from Operating Activities:
Net loss $ (2,085,392) $ (4,684,695)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred option cost -- 459,374
Depreciation 34,200 35,699
Issuance of common stock for directors' fees 25,000 --
Equity in losses of affiliate 171,730 --
Equity in (income) losses of unconsolidated subsidiary (442,820) 1,458,765
(Increase) decrease in:
Prepaid expenses and other current assets (14,490) 82,225
Office lease deposit and other assets -- 55,186
Increase (decrease) in:
Accounts payable and accrued expenses 58,453 (222,796)
------------------- --------------------
Net cash used in operating activities (2,253,319) (2,816,242)
------------------- --------------------
Cash Flows from Investing Activities:
Sale (purchase) of property and equipment 500 (13,427)
Loans receivable (575,000) --
Investment in affiliate (803,183) --
------------------- --------------------
Net cash used in investing activities (1,377,683) (13,427)
------------------- --------------------
Cash Flows from Financing Activities:
Common stock buy back (88,633) (321,606)
Series E Preferred stock buy back -- (100,000)
Repayment of advance form unconsolidated subsidiary 500,000 --
Proceeds from loans payable 1,125,050 --
Proceeds from exercise of employee stock options 631,404 2,191,986
------------------- --------------------
Net cash provided by financing activities 2,167,821 1,770,380
------------------- --------------------
Net Decrease in Cash and Cash Equivalents (1,463,181) (1,059,289)
Cash and Cash Equivalents, Beginning of Period 2,093,141 2,134,662
------------------- --------------------
Cash and Cash Equivalents, End of Period $ 629,960 $ 1,075,373
=================== ====================
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CASH INFORMATION:
No interest or income taxes were paid during the first nine months
of fiscal 1999 or 1998.
NON CASH FINANCING ACTIVITIES:
NINE MONTHS ENDED DECEMBER 31, 1999
29.8 shares of Series E Convertible Preferred Stock were converted
into 3,858,346 shares of common stock.
A total of 180,000 shares of Common Stock were issued to officers
of the Company as stock awards pursuant to their employment agreements. And
a total of 20,000 shares of its Common Stock were issued to some of its
directors as compensations.
On June 18, 1999, the Company and Jacqueline B. Brandwynne reached
a settlement in principle of the legal proceedings filed against the
F-34
35
Company on April 15, 1996. The Company has paid Ms. Brandwynne $250,000 in
AmTec Common Stock, which includes her claim for attorney's fees. A total
of 210,525 shares of Common Stock were issued to Ms. Brandwynne and her
attorney in September 1999 pursuant to the settlement agreement.
NINE MONTHS ENDED DECEMBER 31, 1998
Shareholder loans payable of $1,452,553 and related accrued
interest of $906,488 were credited to Additional paid-in capital
34.9 shares of Series E Convertible Preferred Stock were converted
into 4,776,188 shares of common stock (inclusive of conversions of
preferred dividends).
Warrants valued at $222,500 were cancelled and credited to
Additional paid-in capital.
The Company cancelled a Common Stock Investment Agreement, as
permitted by the Agreement, with Promethean Investment Group on August 12,
1998. 1,019,465 shares previously held in escrow designated for issuance
under terms of the agreement were cancelled.
The option granted to the Hebei Provincial Government to acquire
3,000,000 shares of the Company's common stock at a price of $3.0625 per
share was cancelled. Unamortized Deferred Option Cost valued at $918,751
was charged to Additional Paid in Capital.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements at December 31, 1999 are
unaudited and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim period. All of the adjustments are of a
normal recurring nature. The consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto together with management's discussion and analysis of financial
condition and results of operations, contained in the Annual Report on Form
10-K/A filed by the Company on August 23, 1999 for the Company's fiscal
year ended March 31, 1999. The results of operations for the nine months
ended December 31, 1999 are not necessarily indicative of the results for
the entire year ending March 31, 2000.
Basis of Presentation - The accompanying financial statements have
been prepared in conformity with generally accepted accounting principles.
Realization of a major portion of the assets in the accompanying balance
sheet is dependent upon the Company's existing investments developing
profitable operations.
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND EQUITY METHOD OF ACCOUNTING
Consolidation - The consolidated financial statements include the
Company's wholly- owned subsidiary, ITV Communications, Inc. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Equity Method of Accounting - The Company accounts for its
subsidiary Hebei United Telecommunications Equipment Co., Ltd. and
subsidiary ("Hebei Equipment") (a limited life Sino-foreign joint venture)
using the equity method of accounting, as minority shareholders of Hebei
Equipment have substantive participating rights under the joint venture
contract. The Company reports its investment in Hebei Equipment under the
caption "Investment in and advances to unconsolidated subsidiary". Under
the equity method, the investment is carried at cost of acquisition, plus
the Company's equity in undistributed earnings or losses since acquisition.
Equity in the losses of the unconsolidated subsidiary is recognized
according to the Company's percentage ownership in the unconsolidated
subsidiary until the Company's contributed capital has been fully depleted.
Reserves are provided where management determines that the investment or
equity in earnings is not realizable. The Company has used its ownership
percentage of 70% for purposes of calculating the share of earnings of its
unconsolidated subsidiary, Hebei Equipment. Hebei Equipment owns 51% of
Hebei United Telecommunications Engineering Company, Ltd. ("Hebei
Engineering"). Hebei Equipment also accounts for its investment in Hebei
Engineering by using the equity method of accounting as minority
shareholders of Hebei Engineering have substantive participating rights
under the joint venture contract.
Included in the financial statements are the financial statements
of the Company for the nine months ended December 31, 1999 and 1998. The
Company's share of equity in losses of Hebei Equipment included in the
consolidated financial statements are as of and for the nine months ended
September 30, 1999 and 1998. This is done so that the Company can ensure
that delays in receiving information from China would not cause problems
for the Company in meeting its reporting deadlines. However, the Company
does monitor events in the lag period and, where appropriate, would
disclose the occurrence of any significant event during such lag period
under Subsequent Events. The summary financial information of Hebei
Equipment and Hebei Engineering are included in Note 6 to the financial
statements.
F-35
36
The Company owns 50% of IP.Com, LLC and accounts for its
investments using the equity method of accounting. The summary financial
information of IP.Com, LLC are included in Note 7 to the financial
statements. The Company reports its investment in IP.Com, LLC under the
caption "Investment in affiliate."
NOTE 3 - ASSETS
The December 31,1999 consolidated balance sheet includes total
current assets of approximately $0.7 million and total assets of
approximately $4.4 million. Of these amounts, approximately $0.6 million of
cash is planned for parent company operations, approximately $2.4 million
represents an investment in and advance to Hebei Equipment and
approximately $0.6 million represents a loan receivable from IXS.NET, a
private IP fax service provider. See Note 8.
NOTE 4 - LIABILITIES
The December 31, 1999 consolidated balance sheet includes total
liabilities of approximately $1.7 million. Approximately $0.6 million were
accounts payable and accrued expenses which are mainly legal and
professional fees payable. During the quarter ended December 31, 1999,
Terremark Holdings, Inc. ("Terremark"), a privately held, full service real
estate and development company based in Miami, Florida, agreed to provide
short-term capital requirements and working capital needs. The bridge loan
bears 10% annual interest and will become immediately due and payable if
the merger agreement is not approved by AmTec's stockholders. Additionally,
if the merger does not close by July 1, 2000, AmTec is obligated to repay,
if any, the outstanding balance on the bridge loan. As of December 31,
1999, AmTec has obtained approximately $1.1 million under this facility.
AmTec has collateralized the bridge financing by pledging all of its
tangible and intangible assets to secure the bridge loan.
NOTE 5 - CHANGES TO EQUITY
The decrease in Stockholders' Equity of approximately $1.1 million
for the nine months ended December 31, 1999 was primarily due to the
operating net loss of approximately $2.1 million and was partly offset by
the issuance of common stock for approximately $1.0 million.
As per Section 5 (d) of the Certificate of Designations of
Preferences of the Series E Convertible Preferred Stock, all Series E
Shares outstanding as of the second anniversary of the issuance, which is
October 22, 1999, were subject to automatic conversion into the Company's
common stock. On October 22, 1999, the 19.404 Series E Preferred Shares
outstanding all converted into 2,679,599 shares of Common Stock. During the
nine months ended December 31, 1999, the Company issued a total of
3,858,346 shares of its Common Stock upon the conversion of 29.8 shares of
its Series E Convertible Preferred Stock.
On September 14, 1998 the Company announced its intention to
purchase up to $1 million of its common stock on the open market. During
the nine months ended December 31, 1999, the Company purchased 70,000
shares under this program for a total cost of approximately $89,000. All
the common stock repurchased was cancelled as of December 31,1999.
During the nine months ended December 31, 1999, the Company issued
1,373,597 shares of its Common Stock upon the exercise of stock options by
former employees. The Company also issued 180,000 shares of its Common
Stock as stock awards to some of its officers pursuant to their employment
agreements.
As of June 18, 1999, the Company and Jacqueline B. Brandwynne
reached a settlement in principle of the legal proceedings filed against
the Company on April 15, 1996. A final agreement has been signed and the
parties have agreed to release each other from all claims. The Company has
paid Ms. Brandwynne $250,000 in AmTec Common Stock, which included her
claim for attorney's fees. A total of 210,525 shares
of Common Stock were issued to Ms. Brandwynne and her attorney during the
quarter ended September 30, 1999 pursuant to the settlement agreement.
NOTE 6 - UNCONSOLIDATED SUBSIDIARIES
The following tables represent summary financial
information of the Company's subsidiary, Hebei Equipment, and its indirect
subsidiary, Hebei Engineering, for the Company's nine months ended December
31, 1999 and 1998:
NINE MONTHS ENDED DEC. 31 THREE MONTHS ENDED DEC. 31
-------------------------------------- ------------------------------------------
UNAUDITED UNAUDITED
1999 1998 1999 1998
------------------- ----------------- ------------------- ---------------------
HEBEI EQUIPMENT
Revenues $ -- $ -- $ -- $ --
=================== ================= =================== =====================
Net (loss) income $ 632,600 $ (1,982,181) $ 743,440 $ (1,505,256)
=================== ================= =================== =====================
F-36
37
HEBEI ENGINEERING
Revenues $ -- $ 606,629 $ -- $ 173,994
=================== ================= =================== =====================
Net (loss) income $ 3,292,534 $ (1,323,681) $ 3,887,384 $ (526,001)
=================== ================= =================== =====================
During the quarter ended December 31, 1999, the Company learned
that Unicom terminated its cashflow sharing and technical services
agreement with Hebei Engineering. With the termination of that agreement,
Hebei Engineering ceased to receive revenue from Unicom and Hebei
Engineering's interest in Hebei Province has been transferred to Unicom.
Hebei Engineering recorded a gain of approximately $7.4 million with
respect to the transfer of the networks, of which $0.8 million was
transferred to Hebei Equipment.
NOTE 7 - INVESTMENT IN AFFILIATE
The following tables represent summary financial information of
the Company's investment in an affiliate company, IP.Com. for the quarter
and nine months ended December 31, 1999 and 1998:
NINE MONTHS ENDED DEC. 31 THREE MONTHS ENDED DEC. 31
-------------------------------------- ------------------------------------------
UNAUDITED UNAUDITED
1999 1998 1999 1998
------------------- ----------------- ------------------- ---------------------
IP.COM
Revenues $ 1,143,016 $ -- $ 1,101,862 $ --
=================== ================= =================== =====================
Net (loss) income $ (343,459) $ -- $ (163,635) $ --
=================== ================= =================== =====================
AmTec owns 50% of IP.Com LLC and accounts for its investment using
the equity method of accounting. IP.Com began its operations in late
September 1999 and AmTec's shares of its equity loss was $171,730 for the
nine months ended December 31, 1999.
NOTE 8 - LOAN RECEIVABLE
Loan receivable represents a convertible debt investment made by
AmTec in IXS.NET. The loan receivable bears a prime interest rate and a
prime plus 4% interest payable upon defaults. During May 1999, the Company
formed a three-way alliance with Fusion Telecommunications International,
Inc. ("Fusion") and IXS.NET. The Company and Fusion have made an equal
convertible debt investment into IXS.NET and the Company has an option to
acquire up to 50% of IXS.NET. AmTec intends to convert the debt into equity
investment during fiscal year 2001.
IXS.NET purchases network and transmission services from
established carriers at discounted prices and resells the services to its
customers. Revenues derived from the provision of telecommunications
services are recognized in the period during which the call terminates.
Revenues are derived from the sale of IP Fax, IP Phone and calling card
services. The following table represents summary financial information of
IXS.NET for the quarter and nine months ended December 31, 1999 and 1998:
NINE MONTHS ENDED DEC. 31 THREE MONTHS ENDED DEC. 31
------------------------- -----------------------
Unaudited Unaudited
------------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
IXS.NET
Revenues $ 955,961 $ -- $ 724,553 $ --
================ ================ ================ ===============
Net loss $ (468,496) $ -- $ (220,129) $ --
================ ================ ================ ===============
NOTE 9 - NEW ACCOUNTING STANDARD NOT YET ADOPTED
The Financial Accounting Standards Board has issued a new standard
SFAS No. 133 "Derivative Instruments and Hedging Activities", which is
effective for fiscal years beginning after July 1, 2000. Management has not
yet completed the analysis of the impact this would have on the financial
statements of the Company and has not adopted this standard.
NOTE 10 - UNCOMPLETED TRANSACTIONS
During 1998, AmTec signed an agreement with a subsidiary of Global
TeleSystems, Inc. ("GTS"), under which a subsidiary of GTS would acquire
approximately 5.9 million shares of the Company's common stock and the
Company would acquire GTS's 75% interest in a Shanghai-based joint venture.
F-37
38
This joint venture hold the rights to a majority share of the cash flow
generated by Shanghai VSAT Network Systems (SVC), the premier
satellite-based telecommunications network operator in China. AmTec has
terminated the agreement because, among other reasons, necessary
governmental approvals were not granted. GTS has agreed to the termination.
During 1998, AmTec entered into an agreement to acquire an
investment in a cable television network venture located in Hunan province,
PRC, from United International Holdings ("UIH"). AmTec terminated the
agreement during the quarter ended December 31, 1999 because, among other
reasons, the closing had not occurred by December 31, 1999 through no fault
of AmTec. AmTec believes that it had the right to terminate the agreement.
NOTE 11 - PROPOSED ACQUISITION
On November 9, 1999, the Company announced it signed a Letter of
Intent to acquire Terremark Holdings, Inc. ("Terremark"), a privately held,
full service real estate and development company based in Miami, Florida.
AmTec will be the surviving company and under the terms of the proposed
acquisition, will acquire all existing Terremark's net assets, including
real estate, development projects, management and construction contracts
and brokerage operations.
The two companies signed a definitive merger agreement on November
24, 1999. The transaction, which requires the approval of the stockholders
is proceeding and is expected to close in the first half of 2000.
Failure of the AmTec stockholders to approve the terms of the
merger could result in material adverse change to AmTec, including an
impaired ability to fund its capital expenditures to expand its business
opportunities to expand its business opportunities. In turn, this could
result in an inability to fund the Company's ongoing operations. Failure to
repay this loan could have a material adverse effect on the Company's
ability to continue as a going concern.
NOTE 12 - SUBSEQUENT EVENTS
Hebei Engineering ceased its operations and began its winding up
procedures after the transfer of its interests in the cellular networks in
Hebei Province to Unicom. As of January 24, 2000, Hebei Equipment received
approximately $817,000 as a result of the liquidation of Hebei Engineering.
During the month of January and through February 8, 2000, AmTec
received $1,254,599 from a former employee upon the exercise of 590,434
stock options and $61,751 upon the conversion of 24,950 warrants.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Terremark Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Terremark Holdings, Inc. and its subsidiaries at
March 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 1999 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
October 28, 1999, except Note 13
dated December 22, 1999
F-38
39
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------
MARCH 31,
---------------------------------------------
1999 1998
----------------------- --------------------
Assets
Real estate inventories $ 12,888,206 $ 33,310,940
Cash and cash equivalents 2,808,033 6,376,178
Restricted cash 31,317 17,000
Accounts receivable 589,578 62,163
Advance to shareholder -- 548,795
Notes receivable 337,050 724,642
Furniture and equipment, net of accumulated 191,018 46,534
depreciation of $52,679 and $20,914
Deferred income tax asset 106,924 106,924
Other assets 645,465 1,737,530
----------------------- --------------------
Total assets $ 17,597,591 $ 42,930,706
======================= ====================
Liabilities and Stockholders' Equity
Notes payable $ 8,630,556 $ 32,081,079
Trade payable and other liabilities 1,734,281 3,463,471
Interest payable 387,696 2,674,063
Customer deposits 235,396 2,578,452
Deferred revenue 100,000 317,934
Income taxes payable -- 106,924
----------------------- --------------------
11,087,929 41,221,923
----------------------- --------------------
Preferred stock, $1 par value, 4,176,693 shares authorized, 4,176,693 --
issued and outstanding
Common stock, $.01 par value, 5,000,000 shares 11,212 11,212
authorized, 1,121,250 shares issued and outstanding
Paid in capital 8,013,483 8,013,483
Retained deficit (5,691,726) (6,315,912)
Commitments and contingencies
----------------------- --------------------
6,509,662 1,708,783
----------------------- --------------------
Total liabilities and stockholders' equity $ 17,597,591 $ 42,930,706
======================= ====================
The accompanying notes are an integral part of these
consolidated financial statements.
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED MARCH 31,
---------------------------------------------------
1999 1998 1997
----------------- --------------- -----------------
Revenues
Real estate sales $ 42,041,391 $ 37,038,299 $ 300,000
Commission income 1,021,560 162,367 879,917
Development fees 625,000 -- 333,000
Management fees 768,161 311,791 301,214
Construction fees -- 120,000 814,949
----------------- --------------- ---------------
Operating revenues 44,456,112 37,632,457 2,629,080
----------------- --------------- ---------------
Expenses
Cost of real estate sold 31,147,530 22,666,891 --
Construction expenses -- -- 742,287
General and administrative expenses 6,020,047 7,023,862 976,115
Sales and marketing expenses 5,479,561 1,783,621 934,932
Provision for write down of real estate -- 3,891,911 --
Bad debt expense 71,472 81,900 --
Depreciation 50,012 19,475 28,981
----------------- --------------- ---------------
Operating expenses 42,768,622 35,467,660 2,682,315
----------------- --------------- ---------------
Income (loss) from operations 1,687,490 2,164,797 (53,235)
Other income (expense)
Interest income 263,179 80,944 94,594
Interest expense (1,493,539) (1,210,191) (76,631)
Other income 167,056 61,000 --
Other expense -- -- (2,253)
----------------- --------------- ---------------
Total other (expense) income (1,063,304) (1,068,247) 15,710
----------------- -------------- --------------
Income (loss) before income taxes 624,186 1,096,550 (37,525)
Income taxes
Current tax expense -- 106,924 --
Deferred tax (benefit) -- (106,924) --
----------------- --------------- ---------------
F-39
40
Total income tax expense (benefit) -- -- --
----------------- --------------- ---------------
Net income (loss) $ 624,186 $ 1,096,550 $ (37,525)
================= =============== ===============
Basic and Diluted earnings (loss) per common share $ 0.56 $ 0.98 $ (0.03)
================= =============== ===============
Weighted average common shares outstanding 1,121,250 1,121,250 1,125,000
================= =============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------
COMMON STOCK
PAR VALUE $.01
---------------------------
ADDITIONAL
PREFERRED ISSUED PAID-IN RETAINED
STOCK SHARES AMOUNT CAPITAL DEFICIT
-------------- ------------ ------------- -------------- --------------
Balance at March 31, 1996 $ -- 1,125,000 $ 11,250 $ 8,063,445 $ (7,374,937)
Common stock acquisition and retirement (3,750) (38) (49,962)
Net loss (37,525)
-------------- ------------ ------------- -------------- --------------
Balance at March 31, 1997 -- 1,121,250 11,212 8,013,483 (7,412,462)
Net income 1,096,550
-------------- ------------ ------------- -------------- --------------
Balance at March 31, 1998 -- 1,121,250 11,212 8,013,483 (6,315,912)
Preferred stock issued in conversion of 4,176,693
debt (4,176,693 shares, $1/share)
Net income 624,186
-------------- ------------ ------------- -------------- --------------
Balance at March 31, 1999 $ 4,176,693 1,121,250 $ 11,212 $ 8,013,483 $ (5,691,726)
============== ============ ============= ============== ==============
The accompanying notes are an integral part of these consolidated financial statements
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED MARCH 31,
-------------------------------------------------
1999 1998 1997
----------------- --------------- --------------
Cash flows from operating activities:
Net income (loss) $ 624,186 $ 1,096,550 $ (37,525)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation 38,847 19,475 29,959
Amortization of loan costs to interest expense 118,362 169,557 --
Amortization of capital lease 11,165 -- --
Write off of bad debt 71,472 81,900 --
Gain on sale of building -- (61,690) --
Provision for impairment -- 3,891,911 --
(Increase) decrease in:
Restricted cash (14,317) 586,105 (4,000)
Accounts receivable (598,887) 237,511 (320,954)
Shareholder receivable 548,795 (1,377,657) 614,862
Notes receivable 387,592 (371,990) 92,498
Receivable from affiliate -- 872,090 (872,090)
Real estate under development:
Additions to real estate inventories (8,940,739) (34,115,795) (4,521,368)
Capitalized interest and real estate taxes (1,784,057) (2,816,879) (1,167,574)
Cost of sales, including amortization of capitalized
interest and real estate taxes 31,147,530 22,666,851 --
Deferred tax asset -- (106,924) --
Other assets 973,703 (1,209,299) (614,142)
(Decrease) increase in:
Trade payable and other liabilities (1,880,818) 1,302,035 903,035
Customer deposits (2,343,056) 1,754,552 4,000
F-40
41
Deferred revenue (217,934) 317,934 --
Interest payable (2,286,367) (66,025) 939,621
----------------- --------------- --------------
Net cash provided by (used in) operating activities 15,855,477 (7,129,788) (4,953,678)
----------------- --------------- --------------
Cash flows from investing activities:
Purchase of fixed assets (194,496) (13,290) (162,463)
Sale of building -- 564,884 --
Cash acquired in acquisition of Grove Hill, Ltd. -- 935,308 --
----------------- --------------- --------------
Net cash (used in) provided by investing activities (194,496) 1,486,902 (162,463)
----------------- --------------- --------------
Cash flows from financing activities:
New borrowings 18,136,761 26,881,503 9,249,925
Payments on loans (37,410,591) (17,850,094) (1,218,000)
Purchase of treasury stock -- -- (50,000)
Cash overdraft 44,704 -- --
----------------- --------------- --------------
Net cash (used in) provided by financing activities (19,229,126) 9,031,409 7,981,925
----------------- --------------- --------------
Net (decrease) increase in cash (3,568,145) 3,388,523 2,865,784
Cash and cash equivalents at beginning of year 6,376,178 2,987,655 121,871
----------------- --------------- --------------
Cash and cash equivalents at end of year $ 2,808,033 $ 6,376,178 $ 2,987,655
================= =============== ==============
Supplemental Disclosure
Non-monetary transactions:
Conversion of debt to equity
Notes payable $ (3,597,474) $ -- $ --
Interest payable (579,219) -- --
Preferred stock 4,176,693 -- --
Assumption of debt
Notes payable -- (3,597,474) --
Acquisition of Grove Hill, Ltd. -- 3,597,474 --
----------------- --------------- --------------
$ -- $ -- $ --
================= =============== ==============
Interest paid (net of amount capitalized) $ 990,245 $ 1,315,377 $ --
================= =============== ==============
Taxes paid $ 320,375 $ -- $ --
================= =============== ==============
Asset acquired under capital lease $ 111,654 $ -- $ --
================= =============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BUSINESS AND ORGANIZATION
Terremark Holdings, Inc. (formally known as Terremark Investment
Services, Inc.) and its subsidiaries (the Company), are engaged
in project management, development, construction, sales, leasing,
management and financing of various real estate projects. The
Company was founded in 1982.
The Company has developed and is selling condominium units in
Fortune House, a 29 story, 296 unit residential condominium
building in the Brickell Avenue area of Miami, Florida. The
Company purchased a controlling interest in the Grove Hill, Ltd.
partnership effective April 15, 1997. This partnership developed a
77 unit multi-story residential condominium building in Coconut
Grove, Florida, of which, four units remain to be sold at March
31, 1999.
Under various project management agreements, the Company is
overseeing development of the following real estate projects in
the Miami-Dade County area: (a) Four Seasons Hotel and Tower, a
1.4 million square foot, mixed-use urban living center in the
Brickell Avenue area, consisting of hotel, office, residential
condominium, retail, sports club and interval ownership
components; (b) 150 Alhambra, a major renovation of a landmark
Coral Gables office building; (c) Royal Palm Doral Center III, a
110,000 square foot office building overlooking the Doral Golf
Course; (d) Galloway Medical Park II, a 30,000 square foot medical
office building in west Miami-Dade County and (e) a major
mixed-use project on an assemblage of land in the Brickell Avenue
area. As of March 31, 1999, the assemblage totaled 7.9 acres, with
F-41
42
an additional 2.9 acres under contract.
The Company currently has over 1.5 million square feet of
commercial and residential property under management in South
Florida. It is the leasing, management and/or sales agent for
Terremark Centre, SunTrust International Center, 150 Alhambra,
Snapper Creek Medical Center, Royal Palm Doral Center I and III,
Galloway Medical Park I and II, The Four Seasons Hotel and Tower,
Fortune House, Grove Hill, and Fortune House Condo Association.
The Company has been retained to provide mortgage brokerage
services for construction and/or permanent financing of
approximately $260 million for The Four Seasons Hotel and Tower,
Galloway Medical Park I and II, and Royal Palm Doral Center III.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting principles and
practices used in the preparation of the consolidated financial
statements follows.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The Company's consolidated financial statements include the Company's
wholly-owned subsidiaries, including Terremark Group, Inc.,
Terremark Development, Inc., Terremark Realty, Inc., Terremark
Management Services, Inc., Terremark Financial Services, Inc.,
Terremark Construction Services, Inc. and Terremark Brickell,
Inc. All significant intercompany balances and transactions are
eliminated in consolidation.
The accounts of Grove Hill, Ltd., whose General Partner is also a
shareholder of the Company, are also consolidated in these
financial statements. The Company acquired a 49.5% interest in
Grove Hill through the assumption of a $3,597,473 note due to a
financial institution. At the time of acquisition the only
significant assets of Grove Hill were 32 completed condominium
units held for sale. The fair value of the liabilities assumed of
$25,166,415 were greater than the fair value of the assets, and as
a result an impairment of $3,891,911 was recorded. The Company
also controls the partnership through a voting agreement, and is
responsible for funding 100% of its cash deficits, and is
allocated all of Grove Hill's losses.
USE OF ESTIMATES
The Company prepares its financial statements in conformity with
generally accepted accounting principles. These principles require
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," effective January 1, 1998.
At March 31, 1999 and 1998, the Company had no comprehensive
income.
REVENUE AND PROFIT RECOGNITION
Revenues from construction and development activities are
recognized on a completed contract basis. The related profit is
recognized in full when collectibility of the sale price is
reasonably assured and the earnings process is substantially
complete. Revenues and expenses related to the leasing,
management, and financing activities are recognized at the time
service is provided.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all amounts held in highly liquid
instruments with an original purchased maturity of three months or
less to be cash equivalents. Cash and cash equivalents include
cash balances maintained in the operating and interest-bearing
money market accounts at the Company's banks. Restricted cash
includes escrowed cash balances for tenant security deposits.
FURNITURE AND EQUIPMENT, NET
Furniture and equipment include acquired assets and those
accounted for under a capital lease. These assets are depreciated
on a straight-line method over their estimated remaining useful
lives, which range from 3 to 5 years. In 1999, depreciation
expense of $50,012 includes $11,165 of amortization expense
associated with a capital lease asset.
REAL ESTATE INVENTORIES AND COST OF REAL ESTATE SOLD
F-42
43
Real estate inventories consist of completed condominiums and
condominiums under development. Real estate inventories, including
capitalized interest and real estate taxes, are carried at the
lower of cost or fair value determined by evaluation of individual
projects. Acquisition, development, interest and other indirect
costs related to acquisition and development of real estate
projects are capitalized. The capitalized costs are being charged
to earnings as the related revenue is recognized. Sales and
marketing costs and the carrying costs of condominium units
completed and held for sale are expensed as incurred. Total land,
development, and common costs are apportioned on the relative
sales value method for each project.
The Company subcontracts construction to third parties and the
construction contracts require subcontractors to repair or replace
deficiencies related to their trade.
Whenever events or circumstances indicate that the carrying value
of the real estate inventories may not be recoverable, impairment
losses are recorded and the related assets are adjusted to their
estimated fair market value, less selling costs.
OTHER ASSETS
Other assets primarily consist of prepaid commissions, receivable
for income taxes, loan costs, utility advances and other prepaid
expenses. Loan costs, principally loan origination and related
fees, are deferred and amortized as interest expense over the life
of the respective loan using the straight-line method, which
approximates the effective interest method.
CUSTOMER DEPOSITS
Customer deposits represent amounts received from customers under
condominium sales contracts.
TRADE PAYABLE AND OTHER LIABILITIES
Trade payable and other liabilities includes obligations under
capital lease and license fees payable.
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (EPS). This statement
supersedes Accounting Principles Board Opinion No. 15 and replaces
primary and fully diluted EPS with a dual presentation of basic
and diluted EPS. Basic EPS equals net income divided by the number
of weighted average common shares. Diluted EPS includes
potentially dilutive securities such as stock options and
convertible securities. At March 31, 1999, 1998 and 1997,
respectively, the Company had no potentially dilutive securities.
1999 1998 1997
------------- ------------ -------------
Basic EPS Computation
Net income (loss) $ 624,186 $ 1,096,550 $ (37,525)
Weighted average common shares 1,121,250 1,121,250 1,125,000
--------------- --------------- -----------------
Basic earnings (loss) per common share $ 0.56 $ 0.98 $ (0.03)
=============== =============== =================
Dilutive EPS Computation
Net income (loss) $ 624,186 $ 1,096,550 $ (37,525)
Weighted average common shares 1,121,250 1,121,250 1,125,000
--------------- --------------- ----------------
Dilutive earnings (loss) per common share $ 0.56 $ 0.98 $ (0.03)
=============== =============== ================
The computation of diluted EPS for 1999 excludes the convertible
preferred stock issued on March 31, 1999 because it is
antidilutive.
EMPLOYEE BENEFIT PLAN
The Company's benefit plan is a Defined Contribution and Profit
Sharing Plan ("401(K) Plan"). The 401(K) Plan is available to
employees on January 1st or July 1st who have completed one year
of service in which they worked at least 1,000 hours and attained
the age of 21. Employees may contribute up to 15% of annual
compensation to the maximum amount set by law. The Company may
make matching contributions to the 401(K) Plan on employee
contributions up to 8%, as determined by the Company. Vesting in
Company matching contributions is at a rate of 20% after two years
of service and 20% for each year thereafter. Company contributions
for fiscal years 1999, 1998 and 1997 were approximately $12,540,
F-43
44
$12,044 and $12,095, respectively.
INCOME TAXES
The Company recognizes income tax currently payable, as well as
deferred tax assets and liabilities resulting from temporary
differences, by applying enacted statutory tax rates applicable to
future years to differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. The
differences related primarily to the timing of recognition on
income from sale of real estate under development, including the
effects of the provision for impairment. Income recognition is
accelerated for tax under percentage of completion requirements.
The deferred tax asset represents the future tax return
consequences of these differences which reverse as real estate
sales are reported for financial statement purposes. Deferred
taxes are also recognized for operating losses and contribution
carryovers which are available to offset future taxable income.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (FASB 131),
"Disclosures about Segments of an Enterprise and Related
Information", which became effective for years beginning after
December 15, 1997. FASB 131 establishes standards for the way that
public business enterprises report information about segments. The
Company believes it does not have any reportable segments.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (FASB 133),
"Accounting for Derivative Instruments and Hedging Activities."
FASB 133, as amended, becomes effective for years beginning after
June 15, 2000. FASB 133 requires all derivatives to be recorded on
the balance sheet at fair value. FASB 133 establishes the
accounting procedures for hedges that will affect the timing of
recognition and the manner in which hedging gains and losses are
recognized in the Company's financial statements. Derivatives that
are not hedges must be adjusted to fair value through income. If
derivatives are hedges, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or will be
recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company has no derivative instruments.
3. REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows:
MARCH 31,
---------------------------------
1999 1998
---------------- ---------------
Work in progress $ -- $ 29,999,695
Completed inventories 14,662,428 7,203,156
---------------- ---------------
14,662,428 37,202,851
Less: impairment allowance (1,774,222) (3,891,911)
---------------- ---------------
$ 12,888,206 $ 33,310,940
================ ===============
As of March 31, 1999, 20 condominium units are under contract in
Fortune House and no units are under contract in the Grove Hill
project.
4. NOTES RECEIVABLE
Notes receivable consist of the following:
March 31,
------------------------
1999 1998
------------------------
Note receivable from a corporation, $200,000 $ 207,974 $ --
principal, interest accrues annually at 8%.
Interest and principal due upon demand.
Note receivable from a corporation, $439,900 -- 439,900
principal, interest accrues annually at 9%.
Interest and principal due June 1998
Other notes receivable 129,076 284,742
---------- -----------
$ 337,050 $ 724,642
========== ===========
F-44
45
5. OTHER ASSETS
Other assets consist of the following:
March 31,
----------------------------
1999 1998
------------ ---------------
Loan costs, net of accumulated amortization of $ 207,060 $ 228,326
$957,846 and $695,560
Prepaid commissions 71,531 1,204,596
Prepaid insurance 73,552 --
Receivable for income taxes 213,451 --
Other prepaid expenses 79,871 200
Deposits -- 304,408
------------ ---------------
$ 645,465 $ 1,737,530
============ ===============
6. NOTES PAYABLE
Notes payable consist of the following:
MARCH 31,
----------------------------------
1999 1998
---------------- ----------------
Note payable to a commercial lender, secured by a first $ 7,217,557 $ 17,531,747
mortgage on the real estate. Principal payable in installments
as condominium units are sold. Interest accrues at prime,
payable through an interest reserve. Principal and unpaid
interest due November 2000, with an option for two six month
extensions guaranteed by majority shareholder.
Note payable to a commercial lender, payable in installments 1,124,999 3,145,000
as condominiums are sold with minimum annual principal
payments of $1.2 million. The loan matures in August 2002.
Interest at 1% over prime, payable monthly. Secured by the condominiums
guaranteed by majority shareholder.
Note payable to corporation in seventy-five monthly 288,000 --
installments of principal and interest beginning January 1,
1999. Interest accrues at 9.5%.
Line of credit facility with offshore financial institution. -- 7,733,758
Interest accrues at 15% per annum. Outstanding balance and
unpaid accrued interest due October 1999.
Note payable to offshore financial institution due April 1999. -- 3,597,474
Interest accrues at 8.21%, payable annually. Converted to
Preferred stock in 1999 - see Note 8
Other notes payable -- 73,100
---------------- ----------------
$ 8,630,556 $ 32,081,079
================ ================
At March 31, 1999 the Company has $10,000,000 available under the
line of credit facility.
Interest expense of $1,493,539, $1,210,191 and $76,631, net of
amounts capitalized to real estate inventories totaling
$1,657,948, $2,759,694 and $1,063,461, was recognized in fiscal
years 1999, 1998 and 1997, respectively.
The future maturities of the Company's borrowing as of March 31,
1999 are as follows:
2000 $ 8,390,556
2001 48,000
2002 48,000
2003 48,000
2004 48,000
Thereafter 48,000
----------------------
Total $ 8,630,556
======================
7. CONCENTRATION OF RISK
The Company has concentrated its credit risk for cash by
F-45
46
maintaining deposits in banks in excess of federally insured
limits. The maximum loss that would have resulted from the risk
totaled $2.6 million as of March 31, 1999 and $6.9 million as of
March 31, 1998, for the excess of the deposit liabilities reported
by the banks over the amounts that would have been covered by
federal insurance. The funds are on deposit in banks that have
extended credit to the Company in excess of the amounts at risk.
The Company business and customer base is primarily in the Miami,
Florida area. Consequently, any significant economic downturn in
this market could have an effect on the Company's business,
results of operations and financial condition.
8. PREFERRED STOCK
On March 31, 1999, the Company converted $3,597,474 of debt and
$579,219 in accrued interest payable into 4,176,693 shares of
Preferred Stock. The $1 par value preferred stock has a 10%
cumulative preferred dividend, payable annually commencing March
31, 2000. The preferred stock is convertible into common stock, at
the time of a merger transaction or beginning in 2002. The
conversion price is based on the fair market value of the common
stock at time of conversion. The stock has no voting rights and is
callable by the Company at 105% of par plus accumulated but unpaid
dividends beginning in 2002. Preferred stock has preference in
liquidation. At March 31, 1999, there were no cumulative unpaid
dividends.
9. TREASURY STOCK
During fiscal year 1997, the Company bought back 3,750 shares of
common stock and retired them upon acquisition.
10. INCOME TAXES
The deferred tax provision consists of income taxes relating to
differences between the tax bases of assets and liabilities and
their financial reporting amounts.
MARCH 31,
-------------------------------
1999 1998
-------------- --------------
Excess of tax basis over book basis on real estate investment $ 31,934 $ 1,253,243
Charitable contributions 197,126 43,170
Deferred revenue (percentage of completion vs. completed contract) 309,547 186,989
Net operating loss carryforwards 694,178 --
Tax credits 245,780 245,780
-------------- --------------
Total deferred tax assets 1,478,565 1,729,182
Valuation allowance (1,371,641) (1,622,258)
-------------- --------------
Net deferred tax assets $ 106,924 $ 106,924
============== ==============
The Company provides a valuation allowance against deferred tax
assets if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will
not be realized. The Company has established a valuation allowance
against deferred tax assets of $1,371,641 and $1,622,258 as of
March 31, 1999 and 1998, respectively since the Company has a
history of operating losses and in the near term does not expect
future taxable income. Accordingly, there is uncertainty regarding
their realizability.
Federal and State net operating loss carryforwards of
approximately $1,800,000 are available to offset future taxable
income and expire in 2019. Utilization of these net operating
losses may be limited if there is a significant change in
ownership.
The reconciliation between the statutory income tax provision and
the actual tax provision for the years ended March 31, 1999 and
1998 is shown as follows:
March 31,
-------------------------
1999 1998 1997
------- -------- -------
Rate reconciliation
Statutory rate 34.0% 34.0% (34.0%)
State income taxes, net of federal income 3.0% 3.0% (3.0%)
tax benefit
Realization of deferred tax asset previously (37.0%) (37.0%) --
subject to valuation allowance
Increase in valuation allowance -- -- 37.0%
------- -------- -------
Total 0.0% 0.0% 0.0%
======= ======== =======
F-46
47
11. COMMITMENTS AND CONTINGENCIES
LEASING ACTIVITIES
The Company leases space for its property management operations,
office equipment and furniture under operating leases. Equipment
is also leased under a capital lease which is summarized as
follows:
March 31,
--------------------------
1999 1998
---------- ---------
Equipment $ 111,654 $ --
Less: accumulated amortization 11,165 --
---------- ---------
Net capitalized leased asset $ 100,489 $ --
========== =========
At March 31, 1999, future minimum lease payments under operating
and capital leases having a remaining term in excess of one year
are as follows:
Capital Operating
Leases Leases
------------------- -------------------
2000 $ 28,004 $ 51,678
2001 28,004 35,052
2002 28,004 --
2003 28,004 --
2004 11,668 --
------------------- -------------------
Total minimum lease payments 123,684 $ 86,730
===================
Amounts representing interest (24,029)
-------------------
Present value on net minimum lease payments $ 99,655
===================
Occupancy lease expense amounted to $33,824, $0 and $0 for fiscal
years 1999, 1998 and 1997, respectively.
LITIGATION
The Company is a defendant in various lawsuits arising in the
ordinary course of business. Management, after consultation with
its legal counsel, believes its positions to be meritorious.
However, if the decisions are adverse, management does not believe
the outcome of these matters would have a material effect on the
consolidated financial statements.
CONTINGENT PROFIT
In January 1998, the Company acquired for approximately $10,000 an
interest in real estate. In August 1998, contemporaneously with
the sale of such interest for approximately $1.1 million, the
Company entered into an agreement with the buyer wherein the
Company is entitled to an additional development payment of $2.75
million plus a 10% cumulative return on the payment. The fee is
due once the buyer has recovered their invested capital plus a 10%
return. The Company also has a right to share in additional funds
distributed above these returns. While the Company has recognized
the gain from the sale, it has not recognized any income under the
development payment provisions as of March 31, 1999.
12. RELATED PARTY TRANSACTIONS
Due to the nature of the following relationships, the terms of the
respective agreements might not be the same as those which would
result from transactions among wholly unrelated parties. All
significant related party transactions require approval by the
Company's board of directors.
TERREMARK CENTRE
In 1994, the Company entered into a property management and real
estate brokerage services agreement with Terremark Centre, Ltd.
whose Partners share an officer with the Company. The Company
recorded as income, management fees of $320,964, $311,791 and
$301,214 and brokerage commissions of $456,789, $133,517 and
$167,522 in fiscal 1999, 1998 and 1997, respectively. In
connection with providing these services, the Company also
F-47
48
occupies space in the building rent free.
GROVE HILL, LTD.
In fiscal 1997, prior to its acquisition, the Company recognized
$814,950 in construction management revenue, $706,268 in real
estate brokerage revenue and $125,000 in development revenue to
Grove Hill, Ltd.
DEVELOPMENT FEES
The Company recorded development fee income from an affiliate in
the amount of $20,000 in fiscal 1999 and from a shareholder in the
amount of $120,000 in fiscal 1998.
MANAGEMENT FEES
Certain officers and executives of the Company own partnership
interests in One Merrick Way and Galloway Medical Park Associates,
Ltd., which owns Alhambra Center and Galloway Medical Park,
respectively. The Company provides management services to both
partnerships for a fee. Management fees earned totaled $243,000,
$0 and $0 for the years ended March 31, 1999, 1998 and 1997,
respectively.
In fiscal 1999, the Company provided management services to the
Fortune House Condominium Association. The Company recorded as
income $30,780 relating to the services performed.
13. SUBSEQUENT EVENTS
On December 22,1999, the Company acquired for approximately $56.0
million all partnership interests of Terremark Centre, Ltd.,
("TCL"). TCL is a single purpose entity and is fee simple owner of
a 294,000 square foot 21-story Class A office building with 1100
parking spaces and 16 townhouses on approximately 3.2 acres known
as Terremark Centre, located in Coconut Grove, Florida. The
acquisition was financed primarily through assumption of an
approximate $28.3 million first mortgage on Terremark Centre, and
issuance of approximately $27.1 million in purchase money notes to
the sellers. The purchase money notes are secured by all
partnership interests in TCL , an unrecorded second mortgage and a
pledge not to further encumber Terremark Centre.
On November 24, 1999, the Company entered into an agreement to
merge with AmTec, Inc. (AmTec), a public company, whereby all
outstanding shares of the Company will be exchanged for shares of
AmTec, the surviving company. The transaction is subject to
satisfaction of certain conditions and approval from AmTec's
shareholders. The Company anticipates the exchange will occur
prior to June 30, 2000 and intends to account for the merger under
the purchase method of accounting, with the Company treated as the
acquirer.
Prior to merger, the Company intends to sell Terremark Centre and
repay the existing first mortgage and purchase money notes.
Pursuant to an agreement dated November 24, 1999 between AmTec and
the purchase money notes holders, AmTec has agreed to sell a 35.0%
ownership interest in the merged company for all proceeds from
repayment of the purchase money notes. Subsequent to the merger
and the stock purchase transactions, the Company's shareholders
will hold 40% of the merged company.
The Company has also committed to provide AmTec with up to $1.5
million in bridge loans to assist AmTec in meeting its capital
requirements and working capital needs. If the merger is
unsuccessful, the loan is due five days from termination.
The following summarized unaudited Pro Forma financial information
includes the operations of the Company, which assumes that AmTec
was acquired on April 1, 1998 and 1997, respectively.
FOR THE YEARS ENDED MARCH 31,
1999 1998
------------------- -------------------
(UNAUDITED)
------------------- -------------------
Revenue $ 44,456,000 $ 37,632,000
Net Loss $ (16,338,000) $ (14,594,000)
These amounts include AmTec's actual results for the years ended
March 31, 1999 and 1998, respectively. In preparing the pro forma
information, various assumptions were made, and the
Company does not purport this information to be indicative of what
would have occurred had these transactions been made as of April
1, 1998 and 1997, nor is it indicative of the results of future
combined operations.
On December 17, 1999, the Company sold for approximately $1.2
F-48
49
million all assets of Grove Hill, Ltd., consisting primarily of
three condominium units. The purchaser paid $100,000 in cash,
assumed an existing first mortgage of approximately $740,000 and
provided the Company with a $360,000 purchase money second
mortgage. The Company continues to unconditionally guaranty
payment of the first mortgage and recognized a $33,316 loss on the
sale.
* * * * *
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31, DECEMBER 31,
------------------- ----------------- -------------------
1999 1999 1998
------------------- ----------------- -------------------
(UNAUDITED) (UNAUDITED)
Assets
Real estate inventories $5,316,889 $12,888,206 $16,188,370
Cash and cash equivalents 1,389,737 2,808,033 2,601,720
Restricted cash 281,307 31,317 31,328
Accounts receivable 1,074,856 589,578 1,722,629
Advance to shareholder -- -- 12,045
Deposit on real estate 500,000 -- 100,000
Notes receivable 1,717,132 337,050 339,227
Furniture and equipment, net of accumulated
depreciation of $106,456, $52,679 and
$43,326, respectively 369,408 191,018 175,890
Real estate held for sale 55,850,000 -- --
Deferred income tax asset -- 106,924 106,924
Other assets 1,749,012 645,465 866,840
------------------- ----------------- -------------------
Total assets $68,248,341 $17,597,591 $22,144,973
=================== ================= ===================
Liabilities and Stockholders' Equity
Notes payable $60,517,660 $8,630,556 $15,761,659
Trade payable and other liabilities 3,415,270 1,734,281 1,599,288
Interest payable 752,182 387,696 697,828
Customer deposits 514,021 235,396 680,247
Deferred revenue -- 100,000 100,000
------------------- ----------------- -------------------
65,199,133 11,087,929 18,839,022
------------------- ----------------- -------------------
Preferred stock, $1 par value 4,176,693 shares
authorized, issued and outstanding 4,176,693 4,176,693 --
Common stock, $.01 par value, 5,000,000
shares authorized, 1,121,250 shares issued
and outstanding 11,212 11,212 11,212
Paid in capital 8,013,483 8,013,483 8,013,483
Retained deficit (9,152,180) (5,691,726) (4,718,744)
Commitments and contingencies
------------------- ----------------- -------------------
3,049,208 6,509,662 3,305,951
------------------- ----------------- -------------------
Total liabilities and stockholders' equity $68,248,341 $17,597,591 $22,144,973
=================== ================= ===================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS
ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998
----------------------------- -------------------------
(UNAUDITED)
Revenues
Real estate sales $ 10,396,157 $ 37,518,060
Commission income 570,176 807,239
Development fees 1,025,000 463,333
Management fees 1,006,079 529,219
Construction fees 392,185 --
----------------------------- -------------------------
F-49
50
Operating revenues 13,389,597 39,317,851
----------------------------- -------------------------
Expenses
Cost of real estate sold 8,778,438 27,699,541
Construction expenses 321,832 --
General and administrative expenses 5,188,859 4,390,246
Sales and marketing expenses 1,751,897 4,730,943
Bad debt expense -- 71,472
Depreciation 63,130 22,412
----------------------------- -------------------------
Operating expenses 16,104,156 36,914,614
----------------------------- -------------------------
(Loss) income from operations (2,714,559) 2,403,237
Other (expense) income
Interest income 185,814 187,607
Interest expense (613,478) (1,115,985)
Other (expense) income (4,979) 122,309
Dividend on preferred stock (313,252) -
----------------------------- -------------------------
Total other expense (745,895) (806,069)
----------------------------- -------------------------
(Loss) income before income taxes (3,460,454) 1,597,168
Income taxes
Current tax expense -- --
Deferred tax expense -- --
----------------------------- -------------------------
Total income tax expense -- --
----------------------------- -------------------------
Net (loss) income (3,460,454) 1,597,168
Retained deficit at beginning of period (5,691,726) (6,315,912)
----------------------------- -------------------------
Retained deficit at end of period $ (9,152,180) $ (4,718,744)
============================= =========================
Basic and Diluted loss per common share $ (3.09) $ 1.42
============================= =========================
Weighted average common shares outstanding 1,121,250 1,121,250
============================= =========================
The accompanying notes are in integral part of these unaudited
consolidated financial statements.
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN STOCKHOLDERS' EQUITY
FOR THE QUARTER ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998
----------------------------- -------------------------
(UNAUDITED)
Revenues
Real estate sales $ 2,279,364 $ 20,990,379
Commission income 440,095 172,833
Development fees 341,666 203,333
Management fees 365,837 226,299
Construction fees 358,852 --
----------------------------- -------------------------
Operating revenues 3,785,814 21,592,844
----------------------------- -------------------------
Expenses
Cost of real estate sold 1,695,550 14,607,746
Construction expenses 321,832 --
General and administrative expenses 2,549,979 1,491,042
Sales and marketing expenses 761,897 3,804,307
Depreciation 22,630 7,447
----------------------------- -------------------------
Operating expenses 5,351,888 19,910,542
----------------------------- -------------------------
(Loss) income from operations (1,566,074) 1,682,302
Other income (expense)
Interest income 86,118 8,803
Interest expense (194,662) (670,605)
Other (expense) income (94,382) 72,293
Dividend on preferred stock (104,417) --
----------------------------- -------------------------
Total other (expense) (307,343) (589,509)
----------------------------- -------------------------
(Loss) income before income taxes (1,873,417) 1,092,793
Income taxes
Current tax expense -- --
F-50
51
Deferred tax expense -- --
----------------------------- -------------------------
Total income tax expense -- --
----------------------------- -------------------------
Net (loss) income (1,873,417) 1,092,793
Retained deficit at beginning of period (7,278,763) (5,811,537)
----------------------------- -------------------------
Retained deficit at end of period $ (9,152,180) $ (4,718,744)
============================= =========================
Basic and Diluted (loss) income per common share $ (1.67) $ 0.97
============================= =========================
Weighted average common shares outstanding 1,121,250 1,121,250
============================= =========================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
--------------------- ---------------------
(Unaudited)
Cash flows from operating activities:
Net (loss) income $ (3,460,454) $ 1,597,168
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation 63,130 22,412
Amortization of loan costs to interest expense 95,594 67,635
Write off of bad debt -- 71,472
Write down of Terremark Centre 150,000 --
(Increase) decrease in:
Restricted cash (13,134) (14,328)
Accounts receivable (133,377) (1,731,938)
Shareholder receivable -- 536,750
Real estate inventories:
Additions to real estate inventories (1,207,121) (8,792,914)
Capitalized interest and real estate taxes -- (1,784,057)
Cost of sales, including amortization of capitalized
interest and real estate taxes 8,778,438 27,699,541
Notes receivable (255,082) 385,415
Deposits on real estate (500,000) (100,000)
Deferred tax asset 106,924 --
Other assets (82,488) 803,055
(Decrease) increase in:
Trade payables and other liabilities (276,927) (1,971,107)
Customer deposits (54,500) (1,898,205)
Deferred revenue (100,000) (217,934)
Interest payable 327,956 (1,976,235)
--------------------- ---------------------
Net cash provided by operating activities 3,465,227 12,696,730
--------------------- ---------------------
Cash flows from investing activities:
Receivable from AmTec (1,125,000) --
Purchase of fixed assets (241,520) (151,768)
Cash received in acquisition of Terremark Centre 10,250 --
--------------------- ---------------------
Net cash used in by investing activities (1,356,270) (151,768)
--------------------- ---------------------
Cash flows from financing activities:
New borrowings 2,230,000 11,511,426
Payments on loans (5,757,253) (27,830,846)
--------------------- ---------------------
Net cash provided by (used in) financing activities (3,527,253) (16,319,420)
Net increase (decrease) in cash (1,418,296) (3,774,458)
Cash and cash equivalents at beginning of period 2,808,033 6,376,178
--------------------- ---------------------
Cash and equivalents at end of period $ 1,389,737 $ 2,601,720
===================== =====================
Supplemental Disclosure
Interest paid (net of amount capitalized) $ 329,698 $ 1,364,324
===================== =====================
Taxes Paid $ 2,083 $ 276,652
===================== =====================
Assets acquired under capital lease $ 194,934 $ 111,654
===================== =====================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
F-51
52
TERREMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Non-monetary transactions:
During the nine months ended December 31, 1999, the following assets and
liabilities related to Terremark Centre were acquired:
Cash and cash equivalents..................................................... $ 10,250
Restricted cash............................................................... 263,124
Accounts receivable........................................................... 351,901
Other assets................................................................... 1,116,653
Real estate held for sale....................................................... 56,000,000
-------------------
Total assets acquired...................................................$ 57,741,928
===================
Trade payable and other liabilities............................................ .$ 1,957,916
Interest Payable.............................................................. 36,530
Customer deposits............................................................. 333,125
Notes Payable................................................................... 55,414,357
-------------------
Total liabilities assumed.............................................. $ 57,741,928
===================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
1. BUSINESS AND ORGANIZATION
Terremark Holdings, Inc. (formally known as Terremark Investment
Services, Inc.) and its subsidiaries (the "Company"), founded in
1982, are engaged in project management, development,
construction, sales, leasing, management and financing of various
real estate projects.
2. BASIS OF PRESENTATION
The consolidated financial statements include the Company's wholly
owned subsidiaries and Grove Hill, of which the Company had
acquired 49.5% interest. The Company controlled the Grove Hill
partnership through a voting agreement, was responsible for
funding 100% of its cash deficit, and was allocated all of Grove
Hill's losses. All significant intercompany balances and
transactions are eliminated in consolidation.
The Company's financial information contained in the financial
statements and notes thereto as of December 31, 1999 and for the
nine month periods ended December 31, 1999 and 1998, is unaudited.
In the opinion of management, all adjustments necessary for the
fair presentation of such financial information have been
included. These adjustments are of a normal recurring nature.
There have been no changes in accounting policies since the year
ended March 31, 1999. The composition of accounts has not changed
significantly since March 31, 1999.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
Certain reclassifications have been made to the prior year's
financial statements to conform with the 1999 presentation. These
financial statements, footnotes and discussions should be read in
conjunction with the financial statements and related footnotes
and discussions contained in the Company's 1999 annual financial
statements.
The Company historically has experienced, and expects to
experience, variability in quarterly results. The consolidated
statement of operations for the nine months ended December 31,
1999 is not necessarily indicative of the results to be expected
for the full year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
3. AMTEC TRANSACTION
On November 24, 1999, the Company entered into an agreement to
merge with AmTec, (AmTec), a public company, whereby all
outstanding shares of the Company will be exchanged for shares of
AmTec, the surviving company. The transaction is subject to
satisfaction of certain conditions and approval from AmTec's
shareholders. The Company anticipates the exchange will occur
prior to June 30, 2000 and intends to account for the merger under
the purchase method of accounting, with the Company treated as the
F-52
53
acquirer.
Prior to merger, the Company intends to sell Terremark Centre and
repay the existing first mortgage and purchase money notes (Note
6). Pursuant to an agreement dated November 24, 1999 between AmTec
and the purchase money note holders, AmTec has agreed to sell a
35.0% ownership interest in the merged company for all proceeds
from repayment of the purchase money notes. Subsequent
to the merger and the stock purchase transactions, the Company's
shareholders will hold 40% of the merged company.
The Company has also committed to provide AmTec with up to $1.5
million in bridge loans to assist AmTec in meeting its capital
requirements and working capital needs. If the merger is
unsuccessful, the loans will be due five days from termination. As
of December 31, 1999, approximately $1.1 million has been funded
under the Company's commitment and is included in notes
receivable.
4. REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows:
DECEMBER 31,
-------------------------------------------
1999 1998
------------------- -------------------
Completed condominiums $ 5,316,889 $ 18,406,148
Less: impairment allowance -- (2,217,778)
------------------- -------------------
$ 5,316,889 $ 16,188,370
=================== ===================
As of December 31, 1999 and 1998, 4 and 18 units, respectively,
are under contract in Fortune House.
On December 17, 1999, the Company sold for approximately $1.2
million the remaining three condominium units in the Grove Hill
project. The purchaser paid $100,000 in cash, assumed an existing
first mortgage of approximately $740,000 and provided the Company
with a $360,000 second mortgage. The Company continues to
unconditionally guaranty payment of the first mortgage and
recognized a $33,316 loss on the sale.
5. REAL ESTATE HELD FOR SALE
On December 22, 1999, the Company acquired for approximately $56.0
million all partnership interests of Terremark Centre, Ltd.
("TCL"). TCL is a single purpose entity and is fee simple owner of
a 294,000 square foot 21-story Class A office building with 1100
parking spaces and 16 townhouses on approximately 3.2 acres known
as Terremark Centre, located in Coconut Grove, Florida. The
acquisition was financed through primarily assumption of a first
mortgage of approximately $28.3 million on Terremark Centre and
issuance of approximately $27.1 million in purchase money notes to
the sellers.
6. NOTES PAYABLE
Notes payable at December 31, 1999 consists primarily of a $28.3
million first mortgage payable to a commercial lender and $27.1
million in purchase money notes secured by TCL's partnership
interests, an unsecured second mortgage and a pledge not to
further encumber Terremark Centre for the acquisition of Terremark
Centre, Ltd. The first mortgage accrues interest at 7.74% per
annum payable monthly and requires monthly principal payments and
interest of $254,000 with the remaining balance of $27.1 million
due at maturity in May 2001. The purchase money notes accrue
interest at the greater of 7% per annum or $1 million payable at
the earlier of the sale of the building or December 31, 2000.
7. TAXES
The deferred tax provision consists of income taxes relating to
differences between the tax bases of assets and liabilities and
their financial amounts.
DECEMBER 31
---------------------------------
1999 1998
---------------- ---------------
Excess of tax basis over book basis on real estate investment $ 296,756 $ 507,383
Charitable contributions 204,182 158,637
Deferred revenue (percentage of completion vs. completed
contract) 309,548 278,908
Other 12,894 11,696
F-53
54
Net operating loss carryforwards 1,422,443 83,620
Tax credits 245,780 245,780
---------------- ---------------
Total deferred tax asset 2,491,603 1,286,024
Valuation allowance (2,491,603) (1,179,100)
---------------- ---------------
Net deferred tax asset $ -- $ 106,924
================ ===============
The Company provides a valuation against deferred tax assets if,
based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be
realized. The Company has established a valuation allowance
against deferred tax assets of $2,491,603 and $1,179,100 as of
December 31, 1999 and 1998, respectively, since the Company has a
history of operating losses and in the near term does not expect
future taxable income. Accordingly, there is uncertainty regarding
their realizability.
Federal and State net operating loss carryforwards of
approximately $3,700,000 are available to offset future taxable
income and expire in 2019. Utilization of these net operating
losses may be limited if there is a significant change in
ownership.
The reconciliation between the statutory income tax provisions and
the actual tax provision for the periods ended December 31, 1999
and 1998 is shown as follows:
DECEMBER 31,
1999 1998
------ --------
Rate reconciliation
Statutory rate (34.0%) 34.0%
State income taxes, net of federal income tax benefit (3.0%) 3.0%
Realization of deferred tax asset previously subject to
valuation allowance -- (37.0%)
Increase in valuation allowance 37.0% --
-------- ---------
Total 0.0% 0.0%
======== =========
8. SUBSEQUENT EVENTS
In March, 2000, the Company received and accepted a letter of
intent from a third party buyer to purchase Terremark Centre,
subject to due diligence and negotiation. Management believes the
buyer has financial resources to complete the transaction. The net
sales price is expected to be $55.85 million, which is $150,000
less than cost. The difference between cost and net expected
sales price is reflected as an expense in other income (expense)
in these financial statements.
Centre Credit Corporation, a foreign lender and investor, owns
approximately 4,176,693 shares of Terremark Holdings, Inc.'s 10%
cumulative convertible preferred stock. CCC's basis in the stock
is $1.00 per share plus accrued dividends. It has agreed to enter
into agreements with certain members of Terremark's management to
sell the stock for approximately $4.2 million in total. These
agreements will close only if and when the merger closes.
The Company has agreed to acquire all outstanding stock of Telecom
Real Estate Exchange Developers, Inc. (T-REX) in exchange for
eight million shares of the post merged company of Terremark and
AmTec, assuming the merger is consummated by December 31, 2000.
T-REX's business is to provide operational support and development
expertise in exchange for fees and a minority interest in profits
to entities involved in acquiring, developing, renovating,
managing and operating real property used as telecommunications
routing exchange facilities. The post merged company will employ
T-REX's two current shareholders.
On March 10, 2000, the Company acquired the Riviera Hotel in Fort
Lauderdale, Florida. The acquisition price was $8.0 million and
was paid using a portion of a $15.0 million commercial bank line
of credit at an interest rate of prime plus 1% for a term of one
year. A principal shareholder is a co-maker of the line of credit.
Undrawn amounts may be used for working capital purposes. The
Company plans to demolish the existing hotel and replace it with a
luxury condominium hotel containing 280 units.
F-54
55
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
Terremark Centre, Ltd.
We have audited the accompanying historical statement of revenue and
certain expenses of Terremark Centre, described in Note 1, for the period
from January 1, 1999 to December 22, 1999 and for the years ended December
31, 1998 and 1997. This historical statement is the responsibility of
Terremark Centre, Ltd.'s management. Our responsibility is to express an
opinion on this historical statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the historical statement is free
of material misstatement. An audit includes examining, on a test bases,
evidence supporting the amounts and disclosures in the historical
statement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall presentation of the historical statement. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying historical statement was prepared for the purpose of
complying with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission (for inclusion in the Proxy Statement of AmTec, Inc.) as
described in Note 2 and is not intended to be a complete presentation of
Terremark Centre's revenues and expenses.
In our opinion, the historical statement referred to above presents fairly,
in all material respects, the revenue and certain expenses of Terremark
Centre, described in Note 2, for the period from January 1, 1999 to
December 22, 1999 and for the years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Ft. Lauderdale, Florida
December 22, 1999
TERREMARK HOLDINGS, INC.
TERREMARK CENTRE
STATEMENT OF REVENUE AND CERTAIN EXPENSES
- -------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FROM JANUARY
1, 1999 FOR THE YEARS ENDED
TO DECEMBER 22, DECEMBER 31,
------------------- ----------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
REVENUES
Rental income $ 6,263,757 $ 6,351,692 $ 6,193,843
Recoveries from tenants 746,165 673,469 567,511
Other rent 447,583 439,695 411,611
Miscellaneous income 73,790 62,665 62,961
------------------- ------------------- -------------------
Total revenue 7,531,295 7,527,521 7,235,926
------------------- ------------------- -------------------
EXPENSES
Operating and maintenance 2,737,530 2,637,836 2,542,538
Interest expense 2,331,099 2,287,904 2,340,850
Real estate taxes 1,323,001 1,129,228 309,922
------------------- ------------------- -------------------
Total expenses 6,391,630 6,054,968 5,193,310
Revenue in excess of certain expenses $ 1,139,665 $ 1,472,553 $ 2,042,616
=================== =================== ===================
The accompanying notes are an integral part of this financial
statement.
F-55
56
TERREMARK HOLDINGS, INC.
TERREMARK CENTRE
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
1. OPERATIONS AND ACQUISITION OF TERREMARK CENTRE
The accompanying statement of revenue and certain expenses relates
to the operations of Terremark Centre (the "Property"), a 294,000
square foot 21-story Class A office building with 1100 parking
spaces and 16 townhouses on approximately 3.2 acres in Coconut
Grove, Florida. The property is owned by Terremark Centre, Ltd. a
Florida Limited Partnership.
On December 22, 1999, Terremark Holdings, Inc. acquired for
approximately $56.0 million all partnership interests of Terremark
Centre, Ltd. The acquisition was financed primarily through
assumption of an approximate $28.3 million first mortgage note and
the giving of purchase money notes totaling $27.1 million which
are secured by a pledge not to further encumber the Property and a
pledge of partnership interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying statement of revenue and certain expenses has
been prepared on the accrual basis of accounting.
The accompanying financial statement is not representative of the
actual operations for the periods presented as certain revenues
and expenses, which may not be comparable to the revenues and
expenses expected to be earned or incurred by Terremark Holdings,
Inc. in future operations of the Property, have been excluded.
Revenues excluded consist of interest and other revenues unrelated
to the continuing operations of the Property. Expenses excluded
consist of depreciation and other general and administrative
expenses not directly related to the future operations of the
Property.
Income Recognition
Rental income is recorded on the straight line basis over the term
of the related lease, including option periods.
Concentration of Risk
The Property is located in Coconut Grove, Florida. The principal
competitive factors in this market are price, location, quality of
space and amenities. The Property represents a small portion of
the total similar space in the market and competes with other
properties for tenants. For the period from January 1, 1999
through December 22, 1999 and for the years ended December 31,
1998 and 1997, four tenants accounted for approximately 50% of the
combined base rents.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-56