SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
General Form for Registration of Securities of Small business Issuers
Commission file number 0-26559
CIK No. 0001082603
XIN NET CORP.
(Exact name of registrant as specified in this charter)
Florida 330-751560
------------------------------- --------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
#830 - 789 West Pender Street, Vancouver, B.C. Canada V6C 1H2
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 632-9638
Securities Registered to be Pursuant to Section 12(b) of the Act:
NONE
Securities Registered to be Pursuant to Section 12(g) of the Act
COMMON STOCK $.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes X No
----- -----
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
-----
State issuer's revenues for its most recent fiscal year. $982,108
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Transitional Small Business Disclosure Format:
______ Yes ____X___ No
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 1999: $77,112,515.
Number of outstanding shares of the registrant's no par value common stock, as
of December 31, 1999: 21,360,000.
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TABLE OF CONTENTS
PART I
Page
Item 1. Business .................................. 1
Item 2. Properties ................................ 21
Item 3. Legal Proceedings.......................... 21
Item 4. Submission of Matters to a Vote of
Security Holders.......................... 21
PART II
Item 5. Market for Registrant's Common Stock and
Security Holder Matters .................. 22
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 23
Item 7. Financial Statements and Supplementary Data.. 28
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..... 28
PART III
Item 9. Directors and Executive Officers of the
Registrant................................. 28
Item 10. Executive Compensation...................... 31
Item 11. Security Ownership of Certain Beneficial
Owners and Management...................... 35
Item 12. Certain Relationships and Related
Transactions............................... 37
PART IV
Item 13. Exhibits, Financial Statement Schedule
and Reports on Form 8-K.................... 38
Signature Page 39
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PART I
ITEM 1. BUSINESS
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(a) General Description and Development of Business.
HISTORY OF COMPANY
On September 6, 1996, the Company was incorporated under the laws of the
State of Florida under the name of Placer Technologies, Inc. The Company
conducted a small public offering of 200,000 shares @ $.25 per share to achieve
$50,000 in capital. In December 1996 a Rule 15c2-11 filing resulted in trading
approval on the OTCBB.
The Company's initial primary service consisted of developing Web Home
Pages for small businesses in USA. Minimal revenues were generated in 1996.
On April 2, 1997, the Company acquired 100% interest of Infornet Investment
Limited ("Infornet"), a Hong Kong corporation. In August 1997, Infornet entered
into a joint venture agreement with Xin Hai Technology Development Ltd., (Xin
Hai), an experienced Internet Service Provider (ISP) which owns and operates
internet licenses in the cities of Beijing, Shenyang and Shanghai, China.
On June 11, 1997, the Company purchased 100% interest of Infornet
Investment Corp., a British Columbia corporation. Infornet Investment Corp.
manages daily operations for the Company.
On July 24, 1998, the Company changed its name from Placer Technologies,
Inc. to Xin Net Corp. in order to reflect the core business more accurately.
BUSINESS
Corporate Overview
The Company structure and major subsidiaries is as follows, with the
jurisdiction of incorporation of each subsidiary included in parentheses:
Xin Net Corp.
(Florida, USA)
Infornet Investment Corp. Infornet Investment Ltd.
(100% Owned) (100% Owned)
(BC. Canada) (Hong Kong)
Placer Technologies Corp.
joint venture
(Beijing, China)
(with Xin Hai Technology
Development Ltd.)
The Company incorporated Xinbiz Corp. (British Virgin Islands) on January 14,
2000 and its subsidiary Xinbiz Ltd. (Hong Kong) on March 10, 2000, but to this
date these corporations are non-operational.
1
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Business of Issuer. General Operations.
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The primary focus of the Company is to be an internet service company in
China, through the joint venture with Xin Hai Technology Development Ltd. ("Xin
Hai"). The joint venture company is called Placer Technologies Corp. (Placer).
Presently Xin Hai is the fifth largest ISP company in Beijing and the third
largest ISP company in Shenyang. It is one of only a handful of privately owned
internet service companies in China.
The Company does not have any other operations besides its investment in
and the services it provides through the Placer joint venture.
The Company currently maintains an office at: #830 - 789 West Pender
Street, Vancouver, B.C. Canada V6C 1H2 (telephone number is 1-604-632-9638). It
also has offices as part of the joint venture in Beijing at Suite 210, Building
B, No - 11 Wu Gen Lin Road, West District, Beijing, China, and in Shenyang, at #
44 North HuangHe St., HuangGu, Shenyang, Liaoning, China, Postal Code 110034 and
Shanghai, at 17A Hua ye Building No. 69 Yixueyuan Rd, Xujiahui District,
Shanghai, China Postal Code 200032.
The core business is to act as a co-venturer to supply internet services in
China by covering the major cities through the Placer joint venture with
operating partner Xin Hai. Businesses include ISP, Home-page portal, internet
advertising, domain name registration, e-commerce and other value-added
services.
Current Business
- ----------------
Through its wholly owned subsidiary Infornet Investment Ltd. (Hong Kong)
the Company is in a joint venture with Xin Hai Technology Development Ltd. (Xin
Hai) for upgrading telecommunication technology and services in China. This has
evolved into an internet focused service provider and e-commerce business. Xin
Hai started its internet service in Beijing in April 1997. For purposes of this
discussion, the joint venture operations will sometimes be simply termed
"Placer" or "Placer joint venture". Hence Placer, Placer joint venture and
Placer Technologies Corp. all refer to one and the same entity.
ISP licenses in China are tightly controlled by the Ministry of Information
Industry and provide a substantial barrier to entry. Foreign ownership is not
allowed in Chinese ISP operators. The Placer joint venture with Xin Hai provides
the Company designs and develops the computer software and computer network
systems and provides capital for the ISP business owned and operated by Xin Hai.
The Infornet/Xin Hai agreement provides Infornet with 100% profit participation
in the Placer joint venture until Infornet recoups its investment, at which time
the profit share reverts to 20% to Xin Hai and 80% to Infornet. In other words,
a) before Infornet has recouped its capital investment, 100% of the profits go
to Infornet, 0% to Xin Hai; and b) after Infornet has recouped its invested
capital, 80% of profits go to Infornet and 20% go to Xin Hai.
Xin Hai is currently a supplier of internet services in China in the major
cities Beijing, Guangzhou, Shanghai and Shenyang. Xin Hai management is
currently planning to open offices in some other cities, for which licenses are
already in hand. Licenses in 6 other major cities are in hand.
Revenues: Xin Hai will contribute all revenues to Placer. Placer
exclusively owns the revenues collected from all the services and activities of
Xin Hai. Xin Hai will receive no revenues other than through its Placer joint
venture with Infornet.
Paying customers: The Company business presently comprises three (3)
aspects: internet access and content services, domain name registration and
online auction & e-commerce. During the month of December 1999, total customers
reached 50 000, triple the subscriber base achieved at year-end 1998. Of these,
approximately 45,000 were paying customers, the others taking advantage of the
various free trial periods or services offered to them.
Placer Technologies Corp., the Company's joint venture with Xin Hai
Technology Development Ltd., has obtained the approval of MOFTEC, China's
Ministry of Foreign Trade and Economic Cooperation, and has a business license.
3
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JOINT VENTURE AGREEMENT
- ------------------------
Operations of Placer Technologies Corp., the joint venture Company, are
defined in the "Operating Agreement of the Cooperative joint venture Contract".
Xin Hai Technology Development Ltd., the Chinese partner in the Placer joint
venture, is contracted by the Placer to conduct the day-to-day operations.
Joint Venture
- --------------
Under the joint venture agreements, Xin Hai is responsible for:
- - coordinating with all existing customers and actively promoting sales and
applications of the joint venture company's products, as well as supporting
sales of goods and services of the joint venture company to customers;
- - obtaining all required permits and authorizations (whether local,
municipal, provincial, state or other) and registrations which may be
required or applicable to the constitution of the joint venture company
including the preparation and submission of the necessary documents for the
examination and approval authorities;
- - securing and obtaining all necessary licenses, permits and authorizations
from the administration which may be applicable or necessary to the
business of the company;
- - assisting the joint venture company in handling the applications for
processing import customs declarations for the machinery and mechanical and
electronic equipment to be used and arranging transportation and delivery
within the Chinese territory;
- - assisting the joint venture company in contracting for and obtaining all
necessary infrastructure and utility facilities, such as water,
electricity, transportation, etc;
- - according to applicable laws and regulations in China, assisting the joint
venture Company in applying for and obtaining a reduction or exemption of
taxes, including local taxes, business tax, import or custom duties, sales
taxes or other duties on material, equipment or other goods imported into
China for the purposes of the joint venture company, and in obtaining other
preferential tax treatments for the joint venture company and the parties
for the maximum available period;
- - obtaining all necessary permits or authorization from the appropriate
foreign exchange control bureaus confirming the Infornet can have access to
all required U.S. dollars or other foreign currency acceptable to it and
that Infornet can send its investments to the overseas;
- - Xin Hai warrants that it will not cooperate with any party other than
Infornet with regard to business of the Company;
- - Performing any other responsibilities as may be agreed upon by and between
Parties.
4
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The Company is responsible for:
- - making the capital contribution to the joint venture company as
contemplated in the joint venture agreements for capital and operations
funds in accordance with the laws and regulations in China;
- - assisting Xin Hai in purchasing and/or leasing equipment, material, office
supplies, transportation, communication lines from local or overseas
suppliers;
- - within the China's territory, Infornet warrants that it will not cooperate
with any other party than Xin Hai for the business specified in this
agreement.
Placer Technologies Corp., the joint venture, owns all revenues collected
by Xin Hai Technology Development Ltd. All revenues are deposited by Xin Hai
into a bank account in the name of Xin Hai which shall require joint signatures
and joint seals of both a Xin Hai authorized officer and a Placer joint venture
authorized officer for any withdrawal of money from it. Forty percent (40%) of
the Revenue shall be transferred to another bank account (second account) of the
Xin Hai while the other sixty percent (60%) of the revenue shall be transferred
to a bank account of the Placer joint venture. The forty percent (40%) revenue
transferred to a second account of Xin Hai shall be used to cover the operating
expenditures. If the amount is less than actual operating expenditures, Xin Hai
shall obtain the "balance" from the joint venture company (on a month by month
basis). If the amount is higher than the actual operating expenditures then the
Xin Hai must remit the "surplus" to the joint venture company. The use of the
sixty percent (60%) internet revenue transferred to the joint venture company
(plus the aforementioned "surplus" or minus the aforementioned "balance") shall
be treated as business revenue of the joint venture company and shall be used to
pay returns of investment capital, fees for technical and management services
performed by the joint venture, or remitted as profits to the joint venture
participants.
The Placer joint venture is liable for the operating expenditures of the
internet network. These operating expenditures include: space and office rental,
salaries, and overhead of network operators, leased lines, miscellaneous office
furniture and equipment, internet system hardware and software, advertising,
travel and promotion, reasonable entertainment, marketing costs, insurance and
management cost.
Infornet Investment Ltd. is obligated to contribute all of the registered
capital of the Placer joint venture. Xin Net Corp. provides the funds to
Infornet. Under the joint venture the registered capital is 525,000 USD and
total amount of in- vestment (registered capital plus external financing) is
2,000,000 USD. Both of these amounts have been increased in order to better
reflect foreseen requirements. Infornet has contributed an additional capital
amount of 1,000,000 USD, resulting in a total contribution of 1,525,000 USD. No
further capital contribution is required from Infornet, however the Company has
advanced and will continue to advance loans to the joint venture as necessary to
continue the business, but subject to the limits of the Company's capital. Loans
made to the Placer joint venture by the Company amounted to 1,558,689 USD at
December 31, 1999. These loans are further described in Part III Item 12
"Certain Relationships and Related Transactions". Xin Hai has not contributed to
the registered capital or loans to the Placer joint venture.
5
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Certain Obligations of the Joint Venture Company
- ------------------------------------------------
Under the joint venture contract, the joint venture provides the internet
network with all the communication equipment as well as the necessary
accessories for selling or leasing to end users.
The joint venture also shall perform or cause to be performed all the
engineering services in respect of the internet network which include but shall
not be limited to: the engineering design; the integration, the installation and
the testing of the internet network; the customization of the internet network
protocol and of the network management software; the development of end user
interface software and user application software; the technical support to the
internet network and advisory service on maintenance; the supply of parts and
instruments to the internet network.
Xin Hai Technology Development Ltd. holds the "business," including ISP
operating licenses, industrial property rights, and network. The ownership and
title to all of the assets comprising the internet Network shall remain with the
joint venture during the term of the joint venture. Xin Hai shall, subject to
the Agreements, be entitled to the custody and control of such assets on behalf
of the joint venture. Subject to the prior written approval of the joint
venture, title to any such assets may be vested in Xin Hai and, in all such
cases, such assets shall be held by Xin Hai in trust for the joint venture. Xin
Hai is not liable for further capital contribution.
The day-to-day network operations of the joint venture are conducted by the
Chinese partner, Xin Hai. General management is assumed by Mr. Xin Wei, an
employee of Infornet Investment Corp. (the Company's wholly owned Canadian
subsidiary), who is also the president of Xin Hai Technology Development Ltd.
Strategic issues and decisions are tackled by a team comprised of the Company's
board of directors and Mr. Xin Wei. Xin Hai Technology Ltd. has agreed as an
addendum to the joint venture agreement that until all investment in the Placer
joint venture has been recouped by the Company and thereafter for a period of 15
years, the Company will designate the managers/directors of the joint venture
and control the decisions of the joint venture.
6
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The joint venture may be terminated prior to the expiration of its 20 year
term in one of the following ways:
- -breach of agreement which goes uncured
- -by mutual agreement between the partners;
- -in case the joint venture is bought by a third party;
- -or, in case of bankruptcy, or receivership or liquidation of a party;
- -excessive losses due to force majeure.
Upon termination, the assets of the joint venture will be liquidated or sold and
the proceeds will be allocated:
-a) if Infornet Investment Ltd. has not yet recouped its invested
capital, 100% goes to Infornet and 0% goes to Xin Hai.
-b) if Infornet Investment Ltd. has already recouped its invested
capital, 80% goes to Infornet and 20% goes to Xin Hai.
Events of Default
- -----------------
If any party fails to perform its duties specified in the present joint
venture contract or in the Articles of Association, or if the Party seriously
breaches the provisions of the joint venture contract or of the Articles of
Association, and thereby causes damage to the operations of the joint venture
company or causes directly or indirectly, the failure to reach the goals
regarding the operations specified in the joint venture contract, such act shall
be deemed an event of default by the Party who breaches the joint venture
contract. The other Party is entitled to claim for remedy, and shall have the
right to terminate the joint venture contract by filing an application to the
competent examination and approval authorities. Should the joint venture company
continue to operate, the Party who breaches the joint venture contract must
compensate for the economic losses and damages incurred by the joint venture
company and the shareholders thereof.
7
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The joint venture provides that within eighty (80) days after the end of
each Fiscal Year, an annual report will be prepared for such Fiscal Year
containing: audited financial statements as at the end of, and for, such Fiscal
Year (prepared in accordance with international generally accepted accounting
principles (International GAAP) adopted in China consistently applied, with
comparative financial statements as at the end of, and for, the immediately
preceding Fiscal Year) containing a balance sheet; a statement of profit and
loss; a statement of changes in financial position; and a statement of change
capital; a report of the Auditors on such financial statements stating that such
financial statements have been prepared in accordance with international
generally accepted accounting principles (International GAAP) adopted in China
consistently applied; a report an allocations and distributions (whether
directly or indirectly) to the Parties;
INDUSTRY AND CHINA MARKET
China Economy
- -------------
China is one of the largest countries in the world and is the most
populated. Since 1949, China underwent about 30 years of severe central planning
and was mostly closed to the outside world. Within that period the country was
subjected to the "Great Leap Forward" of the late 50's and the "Cultural
revolution" of the late 60's. When the country was returned to a market economy
by Deng Xiaoping, 1 billion Chinese were set free to pursue economic growth and
its rewards. Today, after over 20 years of economic reforms, China has risen
from an under-developed economy with little technical or industrial expertise to
the third largest economy in the world after the United States and Japan.
China - Computer Industry
With 1.2 billion people, China accounts for about one fifth of the world's
population. Computer usage is rapidly growing leading to an optimistic outlook
about the prospects for the computer market ("Computer: A Rising Household
Necessity", Beijing Review, Dec. 14-20, 1998; "Computer Sales Surge in China",
Asia Times, Tuesday February 4, 1997; "Computer huge growth industry in China",
The Vancouver Sun, Thursday December 17, 1998)).
According to the Vancouver Sun article, "computer consultant International
Data Corp. (IDC) predicted that PC sales in China would amount to 3.9 million
units in 1998, a 30% increase over the previous year. During the second quarter
of the year, 994,000 PC units were sold, making the Chinese market the
second-fastest growing market for PCs in Asia, after India. Growth is expected
to keep climbing in 1999, with IDC forecasting sales of 4.9 million units for
this year. Analysts expect tremendous long-term growth in the consumer market
because of China's large population and the actually low penetration rate of
home computers." Although large companies like IBM and Microsoft dominate the
world market, in 1998 Chinese PC companies held about 60% of the domestic market
share. The reason is simply one of price and affordability (Asia Times, Feb. 4,
1997, Beijing Review, Dec. 14-20, 1998.)
China - Computer Affordability
- ------------------------------
The following is an excerpt from the Beijing Review, December 14-20, 1998
report: "At present, 10 million computers are in use in China, and the computer
industry's output value in 1997 was 135 billion yuan, equaling the combined
total in the previous five years. Families are the chief buyers. According to a
sample survey, 30 percent of computers sold in 1995 were bought by households,
rising to 50 percent in 1997. This is attributed to such factors as improved
purchasing power, increasing demand for information, and computer prices
gradually falling to a commonly acceptable level. Total computer sales in 1997
rose 63 percent over the previous year, and this year and next will see another
10 percent of Chinese families buying a PC."
An article in the Wall Street Journal, August 19, 1999, titled "Chinese
Consumers Are New Market for PCs" reported that computer sales for use at home
grew 80% in 1998 in China.
8
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China - Internet
- ----------------
PC sales are most relevant to the growth of the number of internet users
(South China Morning Post, August 12, 1999). Over 93% of Internet users in China
access the Internet through PC's (BDA Report, p.2 and p.243). Chinese internet
users have increased from 5,000 in 1994 to 900,000 by the end of 1997. There
were about 2.1 million at the end of 1998, and by the end of year 1999, there
were 8.9 million users (BDA Report, p. 163 and China Internet Network
Information Center, December 1999 survey).
Large corporations are entering the China market. In March 1999, Microsoft
unveiled a new product called Venus, developed by a joint venture in China.
"Venus" would let Chinese consumers view the internet through their TV sets and
is similar to Microsoft Web TV product in the U.S.("Microsoft Sees Internet as
Key to China", The Globe and Mail, Thursday March 11, 1999)
Future Plans for ISP in China
- -----------------------------
China has recently allowed other domestic companies to do businesses
formerly monopolized by China TeleCom. Presently, foreign investors are still
restricted from direct operation. China is also investing heavily to improve the
bandwidth and the quality of their backbone - ChinaNet, while at the same time
reducing the rates for telecommunications services (BDA Report, p. 53-57 and p.
249). Based on those facts, Xin Hai plans to open more offices in major cities
and enhance e-commerce and other value-added services.
Governmental regulation for internet services in China
- ------------------------------------------------------
To date, Chinese internet operating licenses have been restricted to
Chinese companies only.
The Company, through its subsidiary Infornet, participates in the joint
venture with Xin Hai Technology Development Ltd., a Chinese privately owned
company in the internet business in China. If the Chinese government liberalizes
policy toward foreign participation in internet Operating Licenses, it could
substantially increase competition in the markets where the joint venture
operates. Thereby adversely affecting the company markets.
The Chinese government, while currently open to joint venture, could at any
time, restrict operations, or expropriate from foreign participants' assets in
China. Any such action could have disastrous financial consequences to the
company and its business.
An article in the August 1999 issue of "China Today", titled "Government
Encourages Market Competition in Telecommunications Industry" mentions "Since
1990, fixed telephone line use has been steadily increasing at an annual rate of
40 percent, and mobile phone use has been increasing 157 percent annually.
According to the World Telecommunications Yearbook, China's telecommunications
industry growth is the fastest in the world."
9
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Competitive Conditions
- ----------------------
Privately owned ISPs often compete with government owned or affiliated
ISPs. The playing field is not always level, as the latter can benefit from
subsidized access to dial-up lines, leased lines and internet bandwidth (BDA
Report p. 94). The Company does not have a joint venture with a Chinese
government owned company, but rather leases lines from China Telecom. In China,
access to the internet is predominantly achieved using telephone lines. Growth
in internet usage is largely an urban phenomenon; to the 20% of the Chinese
population who reside in the cities, the telephone is a common commodity.
In spite of severe competitive conditions, the Company plans to grow its
business in China based on excellent service, user friendliness and interesting
content on its web site.
The growth in number of internet users does not translate into the same
growth in number of internet subscribers. This is due to the fact that many
users access the internet at work, through their employers' internet access;
moreover, several individuals may access the internet using a single subscriber
account.
Dial-up internet access is still expensive in China as compared to North
America for example, even more so when the average salary is taken into
consideration. However long distance telephone rates are coming down, as shown
by the significant tariff reduction by Chinanet on March 1, 1999. In addition,
the Shanghai Telecom offers to its telephone subscribers the free installation
of a second telephone line.
The Company has introduced an expanded online E-Commerce service to the
Chinese market in 1999. The joint venture now operates a live online auction
site.
To facilitate growth the joint venture will solicit PC manufacturers and
retailers to bundle services, put more effort on system integration services,
and will offer more value-added services. Types of value-added services include:
daily news (world, national, local & community, weather, sports, financial),
hyperlinks to other websites, games, chatrooms, auction, e-commerce (business to
business, business to consumer, consumer to consumer) and advertising. Revenues
from e-commerce operations will consist of fees collected from businesses, such
as restaurants, flower shops, etc. that advertise on the joint venture's web
site. The joint venture currently receives revenues from the new on-line auction
business in the form of listing fees from sellers and commissions from sellers
on goods and services sold through successful bids. Portal type home page will
be enhanced by the provision of the daily news, hyperlinks, games and chatroom.
E-commerce will be enhanced by having more and more e-business to use our
xinbid.com (presently auction) platform and ultimately adding business to
consumer and consumer to consumer on-line trading. The joint venture will also
look for strategic alliances with suitable partners.
10
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The network in which the Company participates as a joint venturer has
attracted more than 200,000 clients in 3 years of operations. Xin Hai Technology
Development Ltd. (joint venture partner) has about 200 employees at its present
locations in Beijing, Shenyang, Shanghai and Guangzhou.
Industry Background
- -------------------
Development of the internet. The internet is a global network of
interconnected, separately administered public and private computer networks
that enables commercial organizations, educational institutions, government
agencies and individuals to communicate, access and share information, provide
entertainment and conduct business remotely. Use of the internet has grown
rapidly since the start of its commercialization in the early 1990's.
International Data Corporation, also referred to as IDC, estimates that there
were approximately 12.9 million internet users in Asia (excluding Japan) at the
end of 1998 and projected that the number of users will grow to 57.5 million by
the end of 2003. This reflects a compound annual growth rate of 34.8% (Table 4,
pg. 11, IDC Report, March 1999). This rapid growth in the popularity of the
internet is due in large part to increasing computer and modem penetration,
development of the Web, the introduction of easy-to-use navigational tools and
utilities, and the growth in the number of informational, entertainment and
commercial applications available on the internet (BDA Report, p. 141-148,
179-198, 200-209). Technological advances relating to the internet have occurred
and continue to occur rapidly, resulting in more robust and lower cost
infrastructures, improved security and increased value-added services and
content. Growth in client/server computing, multimedia personal computers and
online computing services and the proliferation of networking technologies have
resulted in a large and growing group of people who are accustomed to using
networked computers for a variety of purposes, including e-mail, electronic file
transfers, online computing and electronic financial transactions. These trends
have led businesses increasingly to explore opportunities to provide internet
based applications and services within their organization and to customers and
business partners.
World Wide Web. An important factor in the widespread adoption of the
internet has been the emergence of a network of servers and information
available called the World Wide Web. The Web is a network medium rich in
content, activities and services. A few examples of what is available on the Web
include magazines, news feeds, radio broadcasts, and corporate, product,
educational, research, and political information, as well as activities,
including chat and Web communities and customer services, including
reservations, banking, games and discussion groups.
The rapid deployment of the Web has introduced fundamental changes in the
way information can be produced, distributed and consumed, lowering the cost of
publishing information and extending its potential reach. Companies from many
industries are publishing products and company information or advertising
materials and collecting customer feedback and demographic information
interactively. The structure of Web documents allows an organization to publish
significant quantities of information while simultaneously allowing each user to
view selected information that is of particular interest in a cost effective and
timely fashion.
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Asia-Pacific internet Growth Opportunities: The Company believes the
Asia-Pacific region presents a promising market for internet growth. IDC
forecasts in its March 1999 publications that in the Asia-Pacific region
(excluding Japan), the number of internet users will increase from 12.9 million
at the end of 1998 to 57.5 million by the end of 2003, reflecting a compound
annual growth rate of 34.8%, while in the more developed U.S. internet market,
the number of internet users will increase from 70.1 million in 1998 to 181.1
million in 2003, reflecting a compound annual growth rate of 20.9%. Industry
research projects that internet users outside the United States will surpass
U.S. users by the year 2000.
The Company believes the recent economic downturn in the Asia-Pacific
region has not significantly slowed the rate of internet penetration in many
individual Asia-Pacific markets, as consumers and corporate customers have
discovered that internet applications, such as e-mail and Web site advertising,
represent lower-cost substitutes for comparable non-internet products and
services. In addition, the Company believes the recent volatility in
Asia-Pacific financial markets has increased the demand for reliable,
around-the-clock news and information on local, regional and global events,
which is often readily available only through the internet.
IDC has projected high growth in internet usage in China and the Asia
Pacific Region. The following table summarizes key historical and projected data
in the China and Asia markets (information provided by IDC, "The Internet Market
in Asia Pacific (excluding Japan), 1997-2003", March 1999, Pete Hitchen):
Compound
Annual
Growth Rate
1998 2003 1998-2003
--------------------------------
(in millions except
penetration rates)
China (Table 46, pg 70)
Number of internet users (a) 2.4 16.1 46.3%
Internet penetration rate (b) 0.2% 1.3% 45.4%
Population (c) 1,236.9 1,291.1 0.7%
Hong Kong (Table 32, pg 50)
Number of internet users (a) 0.7 2.2 25.7%
Internet penetration raw (b) 10.6% 30.3% 23.4%
Population (c) 6.7 7.2 1.4%
Asia (excluding Japan) (d)(Table 4, pg 11)
Number of internet users (a) 12.9 57.5 34.8%
Internet penetration rate (b) 0.5% 2.0% 32.0%
Population (c) 2,769.0 2,936.0 1.2%
(a) International Data Corporation, March 1999
(b) Calculated by dividing number of internet users by country population
(c) United States Census Bureau, December 1998
(d) Sum of China, Hong Kong, Taiwan, Australia, New Zealand, Singapore, Malaysia
Thailand, Philippines, Indonesia, India, South Korea and Vietnam
12
<PAGE>
CHINA. China has a population of approximately 1.2 billion and an internet
penetration rate of approximately 0.2% at 1998. With its large population and
government commitment to the development of the internet, the Company believes
China represents enormous potential for internet use in the long-term.
HONG KONG. Hong Kong has a well-educated, technologically sophisticated
population. With a population of 6.7 million and an internet penetration rate of
approximately 10.6% at 1998, the Company believes Hong Kong should be quick to
utilize internet technologies.
ASIA (excluding Japan). With a projected internet user compounded annual growth
rate of over 30% per year during the five-year period between 1998 and 2003, the
Company expects online opportunities to develop significantly in Asia.
The Internet as a New Business Medium
- -------------------------------------
The growth in the number of internet users, the amount of time users spend
on the internet, the increase in the number of Web sites and the rate of
internet and PC penetration is being driven by the increasing importance of the
internet as a content resource, advertising medium and platform for consumer
services.
E-commerce. The internet is dramatically affecting the methods by which
consumers and businesses are evaluating and buying goods and services, and by
which businesses are providing customer service. Businesses have sought to
capitalize on the internet as a platform for consumer services through the
establishment of Web sites devoted exclusively to the dissemination of
information relating to their products and services. The Company's services
cater directly to such businesses seeking to expand online, and the joint
venture is able to provide comprehensive solutions to clients ranging from the
design and development of their Web site to access.
As part of providing services, the joint venture also assists businesses
seeking to conduct sales transactions directly to consumers through e-commerce
on their Web sites. The internet provides online merchants with the ability to
reach a global audience and to operate with minimal infrastructure, reduced
overhead and greater economics of scale, while providing consumers with a broad
selection, increased pricing power and unparalleled convenience. As a result,
the volume of business transacted on the internet is anticipated to grow in
significance.
The joint venture has also sought to engage in e-commerce to capitalize on
the revenue generating opportunities through our ISP system. In September 1999,
the joint venture launched on online auction site in China. IDC projects that
e-commerce in China, will grow by a compound annual growth rate of 242.8% and
will reach approximately $3.8 billion, in 2003. (IDC Report, Table 49, pg 74)
The Xin Net Opportunity
- -----------------------
Xin Net offers a comprehensive suite of internet related services and
solutions to the China and Asia markets. The Company believes that by offering
an integrated platform of content, community and commerce and related services,
the Company is well positioned to capitalize on the growth of the internet
throughout Asia.
13
<PAGE>
Company Strategy
- ----------------
The Company strategy is to capitalize on the internet growth in China and
Asia and among Chinese users. The Company believes the China and Asian markets
represent one of the fastest growing and potentially one of the largest user
groups on the internet today. In order to capitalize on this growth opportunity
in the China and Asian internet markets, the Company entered into the joint
venture to provide access to subscribers/users, create a platform for e-commerce
and value-added services specifically tailored to the China market.
The Company believes the China market will adopt Web-based e-commerce as an
increasing number of businesses and consumers embrace the internet as a viable
method of purchasing goods and services. Over the long-term, the strategy is to
facilitate e-commerce developments in these markets and generate revenues on a
transaction basis for businesses over the joint venture network.
In order to increase traffic and build the market, the Company will
continue to pursue strategic relationships with prominent, internationally
recognized business partners who offer quality content, technology and
distribution capabilities as well as marketing and cross-promotional
opportunities.
Company Products, Services and Solutions
- ------------------------------------
The operating partner in China, Xin Hai, has been granted internet licenses
in six new Chinese cities. They are Guangzhou (formerly Canton), Dalian,
Nanjing, Wuhan, Chengdu and Xian. Together with Beijing, Shanghai, Shenyang and
Taiyuan, Xin Hai now has licenses for ten major cities with a combined
population of about 80 million. Geographically, Xin Hai has enough cities to
form a major national ISP company. After a month of pre-opening sales and
marketing, the Shanghai office is fully operational as of July 1, 1999.
Following Shanghai, management opened an office in Guangzhou, the key city
in Southern China, in November 1999.
The joint venture is now offering domain name registration services. Xin
Hai has recently incorporated the website WWW.CHINADNS.COM, the first in China
to offer online site registration. The joint venture also provides web hosting
and web page design services.
The partner in the joint venture, Xin Hai, has been awarded "Strategic
Partner" status from IBM China. This status officially identifies Xin Hai as an
OEM for IBM hardware and software including Netfinity servers, PC's,
Intellistation Work Stations, ThinkPad, Aptiva Multimedia PC's and all related
products. OEM stands for "Original Equipment Manufacturer." Although neither the
joint venture nor Xin Hai is an equipment manufacturer, IBM uses this OEM term
to describe its partnership with Xin Hai. Xin Hai now has the right to use IBM
in its advertising and promotional material, and receive special support and
training from IBM. This is recognition from IBM of Xin Hai position in the China
internet market.
14
<PAGE>
Xin Hai Network
- ---------------
The joint venture ISP system and business is organized on the fundamental
concept of internet access and commerce. This basic structure is a platform for
creating a rich variety of online products and allows the joint venture to be an
attractive host to online advertisers. The joint venture not only hosts and
serves advertising, but strategically directs internet traffic to Web sites
designed hosted, or maintained or on the joint venture network.
Content Services. The joint venture provides a one-stop gateway to the
internet that aggregates, organizes and delivers information to meet the needs
of users interested in localized information pertaining to China. This
localized content is delivered through our network ISP.
Chnmail.com is the joint venture premier site for content, community and
commerce products and services in simplified Chinese, entertainment as well as
providing value-added community services through chat and message board
services.
Marketing
- ---------
The Company has already achieved some name recognition and market share.
Going forward, the joint venture will seek to achieve even broader market
penetration and increase the use of services by well designed advertising
campaigns and advantageous promotional offers to new subscribers.
Increasing Usage By Existing Consumers. The joint venture regularly
enhances services and updates content hosted on the network in order to
encourage frequent visits by users. The joint venture offers community building
services designed to increase user usage and loyalty. The joint venture is
developing personalized services that enable consumers to establish a personal
profile and receive information targeted to their interests. Because customizing
these personalized services typically requires some effort and time on the part
of the consumer, the Company believes that consumers who use personalized
services will continue to use the joint venture services and not switch to a
competitive service.
Employees
- ---------
As of the end of March 2000, Xin Hai had approximately 200 full-time
employees in marketing, sales, technical operations, management and support. All
employees exclusively work on the joint venture business. The Company's future
success will depend in part on the joint venture's ability to continue to
attract, retain and motivate highly qualified technical and marketing personnel.
From time to time, the joint venture also employs independent contractors to
support development, marketing, sales and support and administrative
organizations. Xin Hai employees are not represented by any collective
bargaining unit and the joint venture has never experienced a work stoppage.
Facilities
- ----------
Servers. The systems infrastructure consists of multi-vendor server systems
geographically located in China, in Beijing, Shanghai and Shenyang
interconnected to the internet through co-location at major ISP data center
facilities and at our own sites. The auction site infrastructure is located in
British Columbia, Canada.
15
<PAGE>
Regulation of Internet Operations
- ---------------------------------
Under the Administrative Measures on Security Protection for International
Connections to Computer Information Networks, any use of the China internet
infrastructure which results in a breach of the public security or the provision
of socially destabilizing content is a violation of Chinese laws and
regulations. A breach of the public security includes:
- - breach of national security or disclosure of State secrets;
- - infringement on State, social or collective interests or the legal rights
and interests of citizens; or
- - illegal or criminal activities.
Socially destabilizing content includes content that:
- - incites defiance or violation of the China Constitution, laws, or
administrative statutes;
- - incites subversion of State power and the overturning of the socialist
system;
- - incites national division and harms national unification;
- - incites hatred and discrimination among nationalities and destroys
national unity;
- - fabricates or distorts the truth, spreads rumors or disrupts social
order;
- - spreads feudal superstition, involves obscenities, pornography.
gambling, violence, murder, horrific acts or instigates criminal acts;
- - openly humiliates another party or slanders another party through a
fabrication of the truth;
- - damages the reputation of a State organ; or
- - violates the Constitution, laws or administrative statutes.
If through the provision of services to users in China, the joint venture
commits any of the above, whether with or without intent, it would be subject to
significant liability. Potential liability would include being disconnected from
the ChinaNet or blocked in China. Where breaches are severe, criminal
proceedings may be initiated against the joint venture and the Company.
The joint venture partner, Xin Hai, provides regulatory advice and reviews
content provided through the network to determine whether such content is in
compliance with China regulatory requirements. Because of the stringent
requirements relating to the type of content allowed utilizing the China
internet infrastructure and a conservative interpretation of such regulations,
the content provided over the joint venture network is stringently edited and
may not be as interesting as other Web sites which do not try to comply with
China regulatory requirements. Such Web sites, however, may run the risk of
being blocked from the PRC internet infrastructure by local public security
bureaus.
China has also enacted other regulations governing internet connections and
the distribution of information via the internet According to the Administrative
Measures on China Public Multimedia Telecommunication. internet content
providers are required to report to the Ministry Information Industry (the
predecessor of Ministry of Post and Telecommunications) or provincial Post and
Telecommunication Bureau for verification and to enter into an interconnection
agreement and undertaking letter for information security with China Telecom or
other node Service Providers. The joint venture has complied with these
requirements.
16
<PAGE>
Under the Administrative Measures on Security Protection for International
Connection to Computer Information Networks, entities with their computer
information networks interconnected with the internet are required to register a
notice filing with the relevant authorities designated by local public security
bureaus. The joint venture has fulfilled these registration procedures.
The joint venture will encounter substantial competition from other
internet service companies, most of which are major multinational corporations.
Any potential purchaser of the shares should carefully review all "Risk Factors"
section and the "Financial Statements" section herein.
Products, Services, Markets, Methods of Distribution and Revenues.
- -------------------------------------------------------------------
Internet Services are presently the principal services of the Company
through its joint venture. The market is focused on China's major cities. Xin
Hai offices in Beijing and Shenyang have been operating since 1997. The Shanghai
office opened in June/July 1999. The Guangzhou office opened in November 1999.
Revenues come from subscription fees, domain name registration, online usage
fees, home page design fees and other miscellaneous sources.
Working Capital Needs
- ---------------------
The working capital needs of the Company arise primarily from: the need for
capital for the joint venture, expanding existing capacity of the joint venture
services, to open more offices in other major cities, to launch new value-added
services, enhance capability for E-commerce design and development in China.
These requirements have been met by a private placement for an amount of US$5.5
million in May 1999 which provided the needed working capital for the near and
medium term of the Company.
Dependence on client base.
- --------------------------
Presently all revenue comes through the joint venture from subscription
fees, net cards, advertising and domain name registration from the client base
in Beijing, Guangzhou, Shanghai and Shenyang. At the end of October 1999, the
number of subscribers totaled over 31,000 and increased to over 40,000 at the
end of November 1999 and to over 200,000 in April 2000. The joint venture and
Company's dependence on this client base will continue in the foreseeable
future.
Backlog of Orders. None.
Government Contracts. None.
17
<PAGE>
Competitive Conditions.
- -----------------------
A number of factors, beyond the Company's control and the effect of which
cannot be accurately predicted, may affect the marketing of the internet access
and services to the joint venture. These factors include political policy on
ISP's operation, political policy to open the doors to foreign investors, and
the availability of adequate capital. The internet Services industry in China is
highly competitive. The joint venture faces competition from government owned
ISPs and other privately owned ISPs. Many of them possess greater financial and
personnel resources than Xin Hai and the joint venture and therefore have
greater leverage to use in developing new services, expanding capacities, hiring
personnel and marketing. Accordingly, a high degree of competition in these
areas is expected to continue. The markets for internet services and content
have increased substantially in recent years, but cost of lines rental is still
the major expense of the joint venture. Currently, all ISPs can only rent lines
from Chinese Government Telecommunications Companies. There is uncertainty as to
future line cost, although it has been reduced by half recently and is expected
to continue to come down. There is no assurance the Registrant's revenues will
not be adversely affected by these factors.
The market in China is monitored by the government, which could impose
taxes or restrictions at any time which would make operations unprofitable and
infeasible and cause a write-off of capital investment in Chinese ISP
opportunities.
A number of factors, beyond the Company's control and the effect of which
cannot be accurately predicted may affect the marketing of the ISP and services.
These factors include political policy on ISP's operation, political policy to
open the doors to foreign investors, the availability of adequate and width of
the ChinaNet backbone and gateway.
Registrant Sponsored Research and Development. None.
- -----------------------------------------------------
Compliance with related Laws and Regulations.
- ---------------------------------------------
The operations of the joint venture are subject to local, provincial and
national laws and regulations in China. Xin Hai Technology Development Ltd.
holds licenses to do businesses in the currently operated locations: Beijing,
Shanghai, Guangzhou and Shenyang, as well as in six other cities. The joint
venture is unable to assess or predict at this time what effect such regulations
or legislation could have on its activities in the future.
(a) Local regulation -
The Company cannot determine to what extent future operations and earnings
of the Placer Technologies Corp. joint venture may be affected by new
legislation, new regulations or changes in existing regulations.
(b) National regulation -
The Company cannot determine to what extent future operations and earnings
of the Placer joint venture may be affected by new legislation, new regulations
or changes in existing regulations. (See Discussion of such laws previously
under "Regulations of internet Operations" and "Government Regulation for
Internet Service in China").
18
<PAGE>
The value of the Registrant's investments in the Placer joint venture may
be adversely affected by significant political, economic and social
uncertainties in China. Any changes in the policies by the government of China
could adversely affect the Placer joint venture by, among other factors, changes
in laws, regulations or the interpretation thereof, confiscatory taxation,
restrictions on currency conversion, the expropriation or nationalization of
private enterprises, or political relationships with other countries.
Material Agreements
- -------------------
Joint Venture Agreement
In a joint venture agreement dated August 25, 1997 through a 100% owned
subsidiary Infornet Investment Ltd., (Registered in Hong Kong) - the Company
entered into a joint venture with Xin Hai Technology Ltd. to provide technology
and capital to expand ISP services in China. The Company agreed to contribute
100% of the capital expenditure of the joint venture; in return, Infornet
Investment Ltd. will receive 100% of the profit generated by the joint venture
until recoupment of its investment and thereafter the profit share will revert
to 20% to Xin Hai Technology Development, Ltd. and 80% to the Company.
Substantial description of other substantive provisions have been summarized in
the Business section under "Joint Venture Agreement" on page 5.
YEAR 2000 CONSIDERATIONS
The Company has assessed and continue to assess the risk of "Y2K" problems
in the operation of its business. This includes an examination of all
computer-controlled processing and analytical equipment, the power supply to the
facility, telephone, banking services and water supply to the facility. We have
completed the Y2K assessment and taken all corrective action required through
software upgrades and equipment modification. Should further problem areas be
noted, corrective action will be taken to minimize disruption of the Company's
operation.
Year 2000 issues "Year 2000 problems" result primarily from the inability
of some computer software to properly store, recall or use data after December
31, 1999. The Company is engaged in business activities, which rely on
information technology ("IT") systems including for billing and accounting, as
well as system connections for ISP customers and servers. All of the joint
venture hardware and software have been upgraded for 2000 compliance
accordingly, the Company does not believe that it will be materially affected by
Year 2000 problems, except potentially from third party internet and telephone
systems which could be impaired by partial system disruptions. Moreover, while
the Company relies on third-parties that may suffer from Year 2000 problems that
could affect the Company's operations, it does not believe that such third-party
Year 2000 problems will affect the company in a manner that is different or more
substantial than such problems affect other similarly situated companies. The
joint venture has designed a limited contingency plan with respect to Year 2000
problems that may affect the Company or third-party suppliers.
19
<PAGE>
The foregoing is a "Year 2000 Readiness Disclosure" within the meaning of
the Year 2000 Information and Readiness Disclosure Policy. The nature of the
Company's business does not subject it to compliance with federal, state and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, which would have a material effect upon capital expenditures,
earnings or competitive position.
(b) Parents and Subsidiaries
Parent
XIN NET CORP., a Florida corporation
Subsidiaries
INFORNET INVESTMENT CORP., a British Columbia corporation (100%)
INFORNET INVESTMENT LTD., a Hong Kong corporation (100%)
PLACER TECHNOLOGIES CORP., a joint venture in China (100%, reverting to 80%
Infornet Investment Limited and 0%, reverting to 20%, Xin Hai Technology
Development).
20
<PAGE>
Number of Persons Employed.
- ---------------------------
As of March 31, 2000, the Company had two employees, Xiao-qing Du and
Xin Wei, through Infornet Investment Corp., each at a salary of C$2,500 per
month, involved in the day-to-day management of the Company: Du in Canada and
Wei in China.
Xin Hai,the Chinese partner in the Placer joint venture, had approximately
200 full-time employees in China at the end of March 2000.
ITEM 2. PROPERTIES
- ----------------------
The Company currently maintains an office at #830, 789 W. Pender Street,
Vancouver, B.C., Canada as its corporate headquarters. It has offices in Beijing
China at Suite 210, Building B, No. 11 Wu Gen Lin Road, West District, Beijing,
China, which are the offices of Xin Hai and the joint venture. Other offices
are in Shanghai, Shenyang and Guangzhou.
As of December 31, 1999, The Registrant had the following tangible assets.
(The amount is quoted in US Dollar)
(a) Real Estate. None
(b) Computer and Office Equipment $422,620
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Company is not a party to any pending legal proceedings and no such
proceedings are known to be contemplated.
No director, officer or affiliate of the Company, and no owner of record
of beneficial owner of more than 5.0% of the securities of the Company, or any
associate of any such director, officer or security holder is a party adverse to
the Company or has a material interest adverse to the Company in reference to
pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted during the fiscal year covered by this report to
a vote of security holders of the Company, through the solicitation of proxies
or otherwise.
21
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
- ----------------------------------------------------------------------------
(a) The Registrant's common stock is traded on the NASD Electronic Bulletin
Board. The following table sets forth high and low bid prices of the
Registrant's common stock for years ended December 31, 1997, December 31,
1998 and December 31, 1999 as follows:
Bid (U.S. $)
------------
1999
----
High Low
---- ---
First Quarter $2.00 $ .34
Second Quarter $6.625 $1.625
Third Quarter $4.00 $1.469
Fourth Quarter $5.187 $1.125
1998
----
First Quarter $ .53 $.187
Second Quarter .375 .15
Third Quarter 1.06 .25
Fourth Quarter .78 .24
1997
----
First Quarter $ .75 $.03
Second Quarter .84 .68
Third Quarter .45 .25
Fourth .50 .156
Such Bulletin Board quotations reflect interdealer prices, without mark
up, mark down or commission and may not necessarily represent actual
transactions.
(b) As of December 31, 1999, the Registrant had approximately 6,800
shareholders of record of the common stock.
(c) No dividends on outstanding common stock have been paid within the last
two fiscal years, and interim periods. The Registrant does not anticipate or
intend upon paying dividends for the foreseeable future.
22
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The information presented herein, should be read in conjunction with the
Registrant's consolidated financial statements and related notes appearing
elsewhere herein.
The Company had cash capital of $5,293,429 at 1999 year end compared
to $336,189 at year end 1998.
The Company had no other capital resources other than the ability to use
its common stock to achieve additional capital raising in a private placement.
The Company has equipment of $422,620 on the books which is not necessarily
liquid at such value. Other than cash capital, the other assets would be
illiquid.
At the fiscal year end the Company had $5,851,647 in current assets and
current liabilities of $339,700. The increase in cash was largely due to a
private placement of units in May, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash capital at the end of the period of $5,293,429 which
will be used to fund operations in China. The Company has material commitments
to expend funds to cover operating expenses of operations in China and
investment to expand its business in China with internet servers. The trend of
operating losses could continue due to costs of equipment, start up operations
for new locations and marketing which precede development of additional revenue
for the internet.
At the period end, the assets of the Company were $6,275,190 and
liabilities were $465,969.
The Company has revenues from joint venture operations at this time.
However capital from private placements and/or borrowing against assets and/or
from warrants being exercised by warrant holders, is required to fund future
operations. The Company completed a private offering of common stock at $0.40
per share for $750,000 in June 1998. In 1999 the Company closed a private
placement of 5.5 million units of common stock at US$1.00 per Unit consisting of
one (1) common share and one (1) Non-Transferable Share Purchase Warrant. One
(1) warrant entitles the holder to purchase on or before March 31, 2001 one (1)
additional unit of the issuer at a price of US$2.00 per Unit, each Unit
consisting of one (1) common share and one (1) additional warrant. The
additional warrant entitles the holder to purchase one (1) additional common
share of the issuer at a price of US$5.00 per share on or before March 31, 2002.
Outstanding warrants are not included in the "Liquidity and Capital
Resources" and they are not valued in the financial statements.
23
RESULTS OF OPERATIONS
The Company will carry out the plan of business as discussed above. The
Company cannot predict to what extent its liquidity and capital resources will
be depleted by the operating losses (if any) of the Placer Technologies Corp.
joint venture. For fiscal year 1999, the Company increased revenues derived from
an increase in subscriber base, domain name registration and expanded e-commerce
business.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1998
The Company achieved revenues of $982,108 in 1999 in the form of net sales
from its joint venture with Xin Hai Technology Ltd. Its net sales in 1998 were
$494,676. The Company had cost of revenues of $238,429 in 1999, as compared to
$96,710 in 1998. Gross profit in 1999 was $743,679 compared to $397,966 in 1998.
The Company incurred operating expenses of $ 2,000,719 in 1999 compared to
operating expenses of $ 454,330 in 1998. Operating loss for 1999 was $1,257,040
in contrast to the 1998 operating loss of $56,364. The Company had other
(interest) income of $173,013 in 1999 and $4,845 in 1998. The net loss in 1999
was $1,084,027 compared to the net loss in 1998 of $51,519. The per share loss
for 1999 was $0.06, and the per share loss for 1998 was $0.004.
Revenues increased from $ 494,676 in 1998 to $982,108 in 1999 mainly due
to increased fees from dial-up access & e-mail subscribers and registration fees
derived from the new online domain name registration business. New offices were
opened in Shanghai in May 1999 and Guangzhou in November 1999. At the end of the
year, the Company's subscriber base had increased to 68,000 ISP subscribers and
domain name registrants, as compared to 17,000 ISP subscribers at the end of
1998.
Operating expenses increased to $2,000,719 in 1999 from $454,330 in 1998.
During year 1999, the Company expanded its business in China and undertook an
aggressive marketing effort in order to develop a brand name. This initiative
caused a significant increase in business development expenditure. The main
items in this category comprised the following:
-opening of new office in Shanghai and Guangzhou;
-entering the online domain name registration business;
-starting an online live auction business and leasing the required computer
hardware;
-increasing employee ranks and renting new and additional office space; and
-carrying on an aggressive advertising and promotional campaign, including
giving out free modems to new subscribers.
Moreover, the Company became a fully reporting company in 1999, and had to
comply with substantial additional requirements, which resulted in a significant
increase in professional fees expenditure. Additionally, a grant of 2,136,000
stock options in November 1999, resulted in an amount of $256,320 USD added to
Paid in Capital.
24
<PAGE>
Future trends: The Company cannot assure that any profit on revenues can
occur in the future, because the Company intends, under its joint venture
agreement, to expand the business, including investing in further internet
"backbone" and technology for its China internet operations. The Company expects
to spend in excess of $3,000,000 in 2000 on development of its business in
China, and it should be expected that it may have a loss on operations.
Expenditure may be significantly higher if the Company acquires additional
capital, for example through investors exercising warrants, and decides to
accelerate its expansion plans.
CHANGES IN FINANCIAL CONDITION
At year end 1999 the Company's assets had increased to $6,275,190 compared
to $604,575 at year 1998. The current assets totaled $5,851,647 at 1999 year end
compared to $376,179 at 1998 year end. Total liabilities at year end 1999 were
$465,969 compared to $73,816 at 1998 year end. In May, 1999, the company
completed a private offering of units which achieved $5,500,000 in cash. At
December 31, 1999 the Company had $5,293,429 in cash.
25
<PAGE>
NEED FOR ADDITIONAL FINANCING
The Company has capital sufficient to meet the Company's current cash
needs, including the costs of compliance with the continuing reporting
requirements of the Securities Exchange Act of 1934. The Company may have to
seek loans or equity placements to cover future cash needs to continue
expansion. There is no assurance, however, that the available funds will
ultimately prove to be adequate to continue its business and our needs for
additional financing are likely to increase substantially.
No commitments to provide additional funds have been made by management or
other stockholders. Accordingly, there can be no assurance that any additional
funds will be available to the Company to allow it to cover operations expenses.
If future revenue declines, or operations are unprofitable, the Company
will be forced to develop another line of business, or to finance its operations
through the sale of assets it has, or enter into the sale of stock for
additional capital, none of which may be feasible when needed. The registrant
has no specific management ability, nor financial resources or plans to enter
any other business as of this date.
From the aspect of whether the Company can continue toward the business
goal of maintaining and expanding the joint venture for internet services in
China, the Company may use all of its available capital without generating a
profit.
The effects of inflation have not had a material impact on our operation,
nor is it expected to in the immediate future.
Although the Company is unaware of any major seasonal aspect that would
have a material effect on the financial condition or results of operation, the
first quarter of each fiscal year is always a financial concern. It is not
uncommon for companies to shut down their operation or operate on a skeletal
crew during the Chinese New Year holiday. Therefore in effect, the first quarter
really has only two months for generating revenue.
26
<PAGE>
Recent Accounting Pronouncements
- --------------------------------
In December 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which is effective for both interim and annual periods ending after
December 15, 1997. SFAS No. 128 requires all prior period earnings per share
data to be restated to conform to the provisions of the statement. The Company
adopted SFAS No.128 for the six-months ended December 31, 1997. The adoption of
this standard did not effect the Company's earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by, or
distributions to, owners. Among other disclosures, SFAS No.130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes
standards for the reporting of certain information about operating segments by
public companies in both annual and interim financial statements. SFAS No. 131
defines an operating segment as a component of an enterprise for which separate
financial information is available and whose operating results are reviewed
regularly by the chief operating decision maker to make decisions about
resources to be allocated to the segment and to assess its performance.
SFAS Nos. 130 and 131 are both effective for financial statements for
periods beginning after December 15, 1997 and both require comparative
information for earlier years to be restated. The adoption of SFAS No. 130 is
not expected to have a material effect on the Company's financial position or
results of operations. The adoption of SFAS No. 131 will have no effect on the
Company's financial position or results of operations and the Company is
currently reviewing SFAS No. 131 in order to fully evaluate the impact, if any,
the adoption of the provisions of this Statement, will have on future financial
disclosures.
Market Risk
- -----------
The Company does not hold any derivatives or investments that are subject
to market risk. The carrying values of any financial instruments, approximate
fair value as of those dates because of the relatively short-term maturity of
these instruments which eliminates any potential market risk associated with
such instruments.
27
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The response to this Item is included as a separate Exhibit to this report.
Please see pages F-1 through F-15.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
In connection with the audits of the most recent fiscal years and any
interim period preceding resignation, no disagreements exist with any former
accountant on any matter of accounting principles or procedure, which
disagreements if not resolved to the satisfaction of the former accountant would
have caused them to make reference in connection with their report to the
subject matter of the disagreement(s).
The principal accountant's report on the financial statements for any of
the past two years contained no adverse opinion or a disclaimer of opinion nor
was qualified as to uncertainty, audit scope or accounting principles.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS AND SIGNIFICANT MEMBERS OF MANAGEMENT
- --------------------------------------------------------------------------------
(a) The following table furnishes the information concerning our directors
and officers as of March 31, 2000. The directors of the Registrant are elected
every year and serve until their successors are elected and qualify.
Name Age Title Term
- ---- --- ----- ----
Xiao-qing Du 29 President of Subsidiary Annual
Infornet Investment Corp.
and Director Annual
S.Y. Marc Hung 55 President and Director Annual
Ernest Cheung 49 Director and Secretary Annual
Maurice Tsakok 48 Director Annual
Xin Wei 30 President of Xin Hai Annual
Technology Development Ltd.
(Joint venture partner of
the Company in China)
On March 10, 1999 Jing Liang resigned as a director of the Company.
On April 6, 1999, Xiao-qing (Angela) Du resigned as president of Xin Net
Corp. Messrs. Maurice Tsakok and Marc Hung were elected to the board of
directors. Marc Hung was appointed to the position of President.
The following table sets forth the portion of their time the Directors devote to
the company:
Ernest Cheung 25% Angela Du 100%
Marc Hung 100% Maurice Tsakok 25%
28
<PAGE>
The term of office for each director is one (1) year, or until his/her
successor is elected at the Registrant's annual meeting and is qualified. The
term of office for each officer of the Registrant is at the pleasure of the
board of directors.
The board of directors does not have a nominating committee. Therefore, the
selection of persons or election to the board of directors was neither
independently made nor negotiated at arm's length.
(b) Identification of Certain Significant Employees.
Strategic matters and critical decisions are handled by the directors and
executive officers of the Company, Marc Hung, Xiao-qing Du, Ernest Cheung and
Maurice Tsakok. Day-to-day management is delegated to Xiao-qing (Angela) Du,
Marc Hung in Canada and Xin Wei in China. Du and Wei are employees of the
wholly-owned subsidiary, Infornet Investment Corp. Xin Wei occupies the position
of President of Xin Hai Technology Development, Ltd. and is also a director of
the Placer joint venture. His time is split approximately 60% Xin Hai
(operations) and 40% Placer (strategies, planning, business development).
(c) Family Relationships. Xiao-qing Du and Xin Wei are husband and wife.
(d) Business Experience.
The following is a brief account of the business experience during the
past five years of each director and executive officer of the Company, including
principal occupations and employment during that period and the name and
principal business of any corporation or other organization in which such
occupation and employment were carried on.
Xiao-qing (Angela) Du, President of subsidiary Infornet Investment Corp.
and Director, age 29, was President and Director of the company from 1996 to
April 1999. She received a Bachelor of Science in International Finance in 1992
from East China Normal University. She received a Master of Science in Finance
and Management Science in 1996 from the University of Saskatchewan, Canada. She
has been Business Manager of China Machinery & Equipment I/E Corp. (CMEC) from
1992 to 1994. She is now President of Infornet Investment Corp., the wholly
owned subsidiary in Canada and remains a director of the company.
29
<PAGE>
Ernest Cheung, Secretary and Director, age 49, has been Secretary of the
Company since May, 1998. He received a B. Math in 1973 from University of
Waterloo Ontario. He received an MBA in Finance and Marketing from Queen's
University, Ontario in 1975. From 1991 to 1993 he was Vice President of Midland
Walwyn Capital, Inc. of Toronto, Canada, now Merrill Lynch Canada. From 1992 -
1995 he served as Vice President and Director of Tele Pacific International
Communications Corp. He has also served as President for Richco Investors, Inc.
since 1995. He has been a Director of the Company since 1996. He is currently a
Director of Agro International Holdings, Inc. since 1997, Spur Ventures, Inc.
since 1997, Richco Investors, Inc. since 1995 and Drucker Industries, Inc. since
1997.
Marc Hung, B.A.Sc.(E.E.), M.A. Sc. (E.E.) University of Montreal (1969 &
1971), President and Director, age 55, has been President of the Company since
April 6, 1999. From May 1992 to April 1997, Marc Hung was director, Power System
Technology, a division of Institut de Recherche en Electricite du Quebec (IREQ),
Hydro-Quebec's Research Institute. His main tasks consisted of general
management, networking, promotion of the division's technological products and
services and negotiations with potential partners for spinning off promising
innovations. The field of responsibility included, amongst others, software
products and services, software engineering and telecommunications technology.
From May 1997 to June 1998, he was loaned by Hydro-Quebec to the Canadian
Centre for Magnetic Fusion (CCFM), a fundamental research entity formed by
Hydro-Quebec, the Institut National de Recherche Scientifique (INRS) and (up to
March 1997) Atomic Energy of Canada Ltd. Besides general management, his main
mandate was to develop and propose a plan for the commercialization of the
Centre's innovative products and services. From 1999 to date he has been
President and principal of Sinhoy Management, Ltd. From July 1998 to March 1999,
Mr. Hung was on sabbatical for personal reasons, but acted as a consultant to
Xin Net.
Maurice Tsakok, Director, age 48, was employed, from 1994 to 1996, by Sagit
Mutual Funds, a mutual fund company who as a Vice-President was responsible for
computer operations and research on global technology companies. From 1997 to
present, he acted as a consultant on the high-tech industry and provides
technical analysis on high-tech companies. He holds a Mechanical Engineering
degree (1974 University of Minnesota) as well as an MBA specializing in
Management Information Systems (MIS) (1976 Hofstra University). From 1997 to
date he has been a principal director in Gemsco Management, Ltd.
Xin Wei, age 30, is President of Xin Hai Technology Development Corp., the
joint venture partner in Placer Technologies Corp., the joint venture in China.
Xin Wei graduated from Beijing Industry University in 1991 with a diploma in
Computer Science. From 1991 to 1992 Xin Wei was a sales engineer of Beijing
Sino-Soft Computer Institution. From 1992 to 1995 he was a Director of Beijing
Xin Hai Technology Development Corp. From 1995 to 1996 he was a student in
Canada. Mr. Wei has been director and secretary of Infornet Investment
Corporation since January 1997. He became president and director of Xin Hai
Technology Development, Ltd. in 1997 and retains such positions.
30
<PAGE>
(e) Directors Compensation
Directors who are also officers of the Registrant receive no cash
compensation for services as a director. The Company may grant options to
directors under the Company's Stock Incentive Plan.
ITEM 10. EXECUTIVE COMPENSATION
- -------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (The
"Exchange Act"), requires the Registrant's officers and directors, and persons
who own more than 10% of a registered class of the Registrant's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Registrant with the Securities and Exchange Commission and
NASDAQ. Officers, directors and greater-than 10% shareholders are required by
the Securities and exchange Commission regulation to furnish to Registrant with
copies of all Section 16(a) that they file.
Some of the officers and directors of the Company will not devote more than
a portion of their time to the affairs of the Company, although Marc Hung and
Angela Du devote full time to the company. There will be occasions when the time
requirements of the Company's business conflict with the demands of their other
business and investment activities. Such conflict may require that the company
attempt to employ additional personnel. There is no assurance that the services
of such persons will be available or that they can be obtained upon terms
favorable to the Company.
There is no procedure in place which would allow officers or directors to
resolve potential conflicts in an arms - length fashion. Accordingly, they will
be required to use their discretion to resolve them in a manner which they
consider appropriate.
EXECUTIVE COMPENSATION
(a) Cash Compensation.
Compensation paid by the Company for all services provided up to December
31, 1999 (1) to each of our executive officers and (2) to all officers as a
group.
31
<PAGE>
SUMMARY COMPENSATION TABLE OF EXECUTIVES
Cash Compensation Security Grants
- ------------------------------------------------------------------------------
Name and Year Salary Bonus Consulting Number Securities Long Term
Principal Fees/Other of Underling Compensation/
Position Fees ($) Shares Options/ Option
SARs(#)
- ------------------------------------------------------------------------------
Xiao-qing Du 1997 20,000 0 0 0 0 0
President of 1998 20,000 0 0 0 0 0
Infornet 1999 27,474 0 16,000 0 0 0
Subsidiary
- ------------------------------------------------------------------------------
Marc Hung 1998 0 0 0 0 0 0
President 1999 0 0 17,500 0 0 $4,500 (2)
- ------------------------------------------------------------------------------
Ernest Cheung, 1998 0 0 0 0 0 0
Secretary 1999 0 0 8,000 0 0 $385,000(1)
- ------------------------------------------------------------------------------
Officers as a 1998 20,000 0 0 0 0 0
Group 1999 27,474 0 41,500 0 0 $389,500
(CDN) (CDN)
Effective on April 6, 1999, Marc Hung was appointed as President of the
Company and Angela X. Du resigned as the President of the Company. She is the
President of Infornet Investment Corp., the wholly owned operating subsidiary in
Canada.
(1)Richco Investors, Inc. of which Mr. Cheung is an officer and director,
and Mr. Tsakok is an officer and director, received 385,000 units for its
services in structuring the private placement.
(2) Compensation in the form of options at a below market price.
32
<PAGE>
SUMMARY COMPENSATION TABLE OF DIRECTORS
(To December 31, 1999)
Cash Compensation Security Grants
- -----------------------------------------------------------------------------
Name and Year Annual Meeting Consulting Number Securities
Principal retainer Fees ($) Fees/Other of Underlying
Position Fees ($) Fees($) Shares Options/SARs(#)
(#)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Xiao-qing Du, 1998 0 0 0 0 0
Director 1999 0 0 0 0 0
- -----------------------------------------------------------------------------
Jing Liang, 1998 0 0 0 0 0
Director 1999 0 0 0 0 0
(resigned in
1999)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Marc Hung 1999 0 0 0 0 $4,500 (2)
Director
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Ernest Cheung, 1998 0 0 0 0 0
Director 1999 0 0 0 0 $385,000 (1)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Maurice Tsakok 1999 0 0 14,000 CDN 0 $385,000 (1)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Directors as a 1999 0 0 14,000 CDN 0 $389,500
group
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(1) See note (1) under Compensation Table of Executives
(2) See note (2) under Compensation Table of Executives
No director, except for those who are also officers of the Company as
listed above, received any compensation in 1998.
Effective on May 1, 1998, Jing Liang resigned from his position as
Secretary of the Company. Ernest Cheung was appointed Secretary of the Company
as of the same date.
Effective March 10, 1999 Jing Liang resigned as director of the Company.
Effective on April 6, 1999, Mr. Marc Hung and Mr. Maurice Tsakok were
elected as directors of the board.
(e) Termination of Employment and Change of Control Arrangements. None.
33
<PAGE>
(f) Stock purchase options:
On February 26, 1999, stock options for a total of 480,000 shares at $.40
per share were granted to officers and employees (or persons who became
officers) that had contributed to the success of the company in the past: Marc
Hung (150,000 shares) and Xin Wei (330,000 shares) (Note: Mr. Wei is not an
officer of the Company, but an employee of Infornet Investment Corp.) All share
options were exercised as of April 6, 1999.
On November 12, 1999 the Company granted 2,136,000 options to purchase
shares at $1.30 per share to entities/persons who contributed to the successful
results achieved by the Company in 1999, as follows:
a. 262,000 options to Gemsco Management Ltd. (owned beneficially by
director Maurice Tsakok) for designing and implementing the Company's corporate
website, advising on technological matters, researching the technology sector
and for services as a director.
b. 262,000 options to Farmind Link Corp. for their role as advisor on
strategic issues, technology market trends, and financial and capital market
issues.
c. 262,000 options to Sinhoy Management Ltd. (owned beneficially by officer
and director Marc Hung) for their contributions to the general management of the
Company, investor relations, technological matters and for services as a
director.
d. 212,000 options to Lancaster Pacific Investment, Ltd. for their
contributions in the areas of regulatory matters, Chinese market conditions and
strategies aimed at penetrating the market.
e. 50,000 options to Ernest Cheung for services rendered as secretary and
director of the Company.
f. 20,000 options to Yonderiche International Consultants Ltd. for services
rendered in matters regarding Chinese government policies and regulations.
g. 1,068,000 options to Weststar Holdings Limited (owned beneficially by
Xiao-qing Du, a director and president of Infornet Investment Corp., and Xin
Wei, a director and secretary of Infornet Investment Corp. and president of XIN
HAI) and employees of Xin Hai Technology Development Ltd., as a group, for the
successful continued development of the business in China and achieving
excellent operational results during the year. The breakdown of the 1,068,000
options is to be determined at a later date.
The average closing price for the five trading days ended on November 12,
1999 was $1.28 per share. The closing price on November 12, 1999 was $1.187 per
share.
34
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CONFLICTS OF INTEREST
- --------------------------------------------------------------------------------
(a) Beneficial owners of five percent (5%) or greater, of the Registrant's
common stock: No preferred stock is outstanding at the date of this offering.
The following sets forth information with respect to ownership by holders of
more than five percent (5%) of the Registrant's common stock known by the
Registrant based upon 21,360,000 shares outstanding at December 31, 1999.
Title of Name and Address Amount of Percent of
Class of Beneficial Owner Beneficial Interest Class
- ----- ------------------- ------------------- -----
Common Stock Xiao-qing Du
#2754 Adanac St. 2,760,000 12.9%
Vancouver, BC V5K 2M9
Common Stock Richco Investors Inc. 2,962,500 13.9%
Ste 830 789 West Pender St.
Vancouver, BC V6C 1H2
Common Stock Ernest Cheung (1) 2,962,500 13.9%
Ste 830 789 West Pender St.
Vancouver, BC V6C 1H2
Common Stock Maurice Tsakok (1) 2,962,500 13.9%
Ste 830 789 West Pender St.
Vancouver, BC V6C 1H2
(b) The following sets forth information with respect to the Registrant's
common stock beneficially owned by each Officer and Director, and by all
Directors and Officers as a group, at December 31, 1999.
Title of Name of Amount of Percent of
Class Beneficial Owner Beneficial Ownership Class
- ----- ---------------- -------------------- -----
Common Stock Xiao-qing Du (Director) 2,760,000 12.9%
2754 Adonac St.
Vancouver, B.C. V5K 2M9
35
<PAGE>
Common Stock Ernest Cheung (1) 2,962,500 13.9%
Richco Investors
(See Richco Investors below)
Common Stock Maurice Tsakok (1) 2,962,500 13.9%
Richco Investors
(See Richco Investors below)
Common Stock Richco Investors, Inc. 2,962,000 13.9%
Ste. 830,789 W. Pender St.
Vancouver B.C. V6C 1H2
(beneficially owned by
Ernest Cheung, Director and
Secretary) and Maurice Tsakok
(a Director) are also
Directors of Richco Investors, Inc.
Common Stock S. Y. Marc Hung 118,000 .5%
830,789 W. Pender St.
Vancouver B.C. V6C 1H2
Total as a group 5,840,500 27.3%
(1) Through Richo Investors, Inc. which owns 2,962,500 shares. Messrs.
Cheung and Tsakok are officers, directors and shareholders of Richco Investors
Inc.
Compensation Committee Interlocks and Insider Participation
The Company has established a Compensation Committee on October 5, 1999
which consists of two directors, Marc Hung and Ernest Cheung.
Committees of the Board of Directors
Audit Committee. On August 31, 1999, the Board of Directors established an
Audit Committee, which consists of two directors, Marc Hung and Ernest Cheung.
The Audit Committee will be charged with recommending the engagement of
independent accountants to audit the Company's financial statements, discussing
the scope and results of the audit with the independent accountants, reviewing
the functions of the Company's management and independent accountants pertaining
to the Company's financial statements and performing such other related duties
and functions as are deemed appropriate by the Audit Committee and the Board of
Directors.
36
<PAGE>
Compensation Committee. The Compensation Committee will be responsible for
reviewing general policy matters relating to compensation and benefits of
directors and officers, determining the total compensation of the officers and
directors of the Company.
Director Renumeration
All directors will be reimbursed for out-of-pocket expenses incurred in
connection with attendance at board and committee meetings. The Company may
grant options to directors under the Company's Stock Incentive Plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company has made loans to the Placer joint venture during the year
1999. These loans bear 0% interest and are payable on demand. At December 31,
1999 the cumulative amount of the loans was $1,558,689.
On February 26, 1999, stock options for 480,000 shares at $.40 per share
were granted to related parties that had contributed to the efforts of the
company in the past. They are: Marc Hung and Xin Wei. All share options were
exercised as of April 6, 1999.
In May 1999, Marc Hung, President and Director of the Company, purchased
80,000 units of the private placement at the $1.00 offering price. Richco
Investors, Inc., a public company of which both Messrs. Ernest Cheung and
Maurice Tsakok are directors, officers and shareholders, purchased 700,000 units
in the private placement at $1.00 per unit in May 1999.
In February 1999, Marc Hung, who was neither an officer nor director but
since has become President and Director, was granted and exercised (in March,
1999) an option to purchase 150,000 shares of common stock at $.40 per share.
The option to purchase shares was granted to him for services rendered since
July 1998 as advisor to the Company in matters relating to management,
technology and strategies.
In February 1999, Kun Wei, a shareholder, was granted and exercised (in
March) an option to purchase 330,000 shares of common stock at $.40 per share.
The option to purchase shares was granted to him for contributing to the success
of the joint venture, in particular with regards to technology development and
implementation. Kun Wei is Vice President of Xin Hai Technology Development,
Ltd. and the brother of Xin Wei.
In February 1999, Xin Wei, a shareholder, who is President of Xin Hai
Technology Development, Ltd., the Company's joint venture Partner, was granted
and exercised (in March 1999) an option to purchase 330,000 shares of common at
$.40 per share. The option to purchase shares was granted to him for
contributing to the success of the joint venture, in particular with regards to
general management of Xin Hai Technology Development Ltd., business development
and governmental relations.
37
<PAGE>
On September 17, 1999 385,000 units were issued to Richco Investors, Inc.
as a consulting fee for services rendered in structuring the unit placement.
The units consisted of one share and a warrant to purchase an additional
unit at $2.00 per unit, such additional unit consisting of one share and a
warrant to purchase an additional share at $5.00 per share.
On November 12, 1999 the Company granted 2,136,000 options to purchase
shares at $1.30 per share to entities/persons who contributed to the successful
results achieved by the Company in 1999, as described under Item 10 (f): Stock
Purchase Options.
PART IV
Item 13. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- --------------------------------------------------------------
(a) Financial Statements and Schedules. The following financial statements
and schedules for the Registrant as of December 31, 1999 are filed as part
of this report.
(1) Financial statements of Xin Net Corp. (formerly Placer Technologies,
Inc.) and subsidiaries.
Year 1999
- --------- Page
----
Cover Page
Index to Financial Statements
Independent Auditor's Report for years ended
December 31, 1999 F-1
Consolidated Balance Sheet at end of December 31, 1999 F-2-F-3
Consolidated Statement of Operations at end of December 31, 1999 F-4
Consolidated Statement of Stockholders' Equity at end of
December 31, 1999 F-5
Consolidated Statement of Cash Flows at end of December 31, 1999 F-6-F-7
Notes to the Consolidated Financial Statements F-8-F-16
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: May 5, 2000
XIN NET CORP.
by:/s/ Marc Hung, President
----------------------------
Marc Hung, President
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
/s/Xiao-qing Du Director May 5, 2000
- -----------------
Xiao-qing Du
/s/ S.Y. Marc Hung President and Director May 5, 2000
- ------------------
S.Y. Marc Hung
/s/Ernest Cheung Secretary and Director May 5, 2000
- -----------------
Ernest Cheung
/s/Maurice Tsakok Director May 5, 2000
- ----------------
Maurice Tsakok
39
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
Vancouver, BC
AUDIT REPORT
DECEMBER 31, 1999 AND 1998
<PAGE>
C O N T E N T S
Independent Auditors' Report . . . . . . . . . . . . . . . . . . .F-1
Consolidated Balance Sheet as of December 31, 1999 and 1998 . F-2-F-3
Consolidated Statement of Operations For The Years Ended
December 31, 1999 and 1998 . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Stockholders' Equity For The Years Ended
December 31, 1999 and 1998 . . . . . . . . . . . . F-5
Consolidated Statement of Cash Flows For The Years Ended
December 31, 1999 and 1998 . . . . . . . . . . . . . . . F-6-F-7
Notes to the Consolidated Financial Statements . .. . . F-8-F-16
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
<PAGE>
Clancy and Co., P.L.L.C. 26th Place Ph:(602) 266-2646
Certified Public Accountants 2601 E. Thomas Rd. Fax: (602) 224-9496
Suite 110 Email: [email protected]
Phoenix, AZ 85016
INDEPENDENT AUDITORS' REPORT
Board of Directors
Xin Net Corp. and Subsidiaries
Vancouver, B.C. V6C 1H2
We have audited the consolidated balance sheet of Xin Net Corp. and Subsidiaries
(the Company), as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. 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 audit.
We conducted our audit 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 audit of the financial statements provides a reasonable
basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the consolidated financial position of Xin Net Corp. and Subsidiaries
as of December 31, 1999 and 1998, and the consolidated results of their
operations and their consolidated cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/Clancy and Co., P.L.L.C.
Phoenix, Arizona
April 14, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<S> <C> <C>
ASSETS 1999 1998
---- ----
Current Assets
Cash $ 5,293,429 $ 336,189
Investments (Note 3) 219,185 0
Inventory (Note 4) 99,206 0
Other Receivables 207,388 37,376
Accrued Interest Receivable (Note 3) 16,078 0
Prepaid Expenses 16,361 2,614
------ -----
Total Current Assets 5,851,647 376,179
Property and Equipment, Net (Note 5) 422,620 227,427
Other Assets
Organizational Costs, Net (Note 2) 923 969
--- ---
TOTAL ASSETS $ 6,275,190 $ 604,575
========= =======
The accompanying notes are an integral part of these financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---- ----
Current Liabilities
Accounts Payable and Other Accrued Liabilities $ 162,041 $ 20,504
Capital Lease Obligation, Current Portion (Note 6) 58,920 0
Unearned Revenue 118,739 33,312
Other Advances (Note 7) 0 20,000
-------- ------
Total Current Liabilities 339,700 73,816
Long Term Liabilities
Capital Lease Obligation, Noncurrent Portion (Note 6) 126,269 0
------- -
Total Liabilities 465,969 73,816
Commitments and Contingencies (Note 6) None None
Stockholders' Equity
Common Stock: $0.001 Par Value, Authorized
50,000,000; Issued and Outstanding, 21,360,000 and
14,075,000, respectively 21,360 14,075
Additional Paid In Capital 7,214,025 862,990
Retained Earnings (Accumulated Deficit) (1,318,945) (234,918)
Accumulated Other Comprehensive Loss (107,219) (111,388)
-------- -------
TOTAL STOCKHOLDERS' EQUITY 5,809,221 530,759
--------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,275,190 $ 604,575
========= =======
The accompanying notes are an integral part of these financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<S> <C> <C>
YEAR ENDED, DECEMBER 31: 1999 1998
---- ----
Revenues $ 982,108 $ 494,676
Costs of Revenues 238,429 96,710
------- ------
Gross Profit 743,679 397,966
Expenses
General and Administrative 2,000,719 454,330
--------- -------
Operating Loss (1,257,040) (56,364)
Other Income
Interest Income 173,013 4,845
------- -----
Net Loss Available to Common Stockholders $ (1,084,027) $ (51,519)
========= =======
Basic Loss Per Common Share $ (0.06) $ (0.004)
===== =====
Basic Weighted Average Common
Shares Outstanding 18,647,411 14,075,000
========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<S> <C> <C> <C> <C> <C> <C>
Retained Accumulated
Additional Earnings / Other
Common Stock Paid In Accumulated Comprehensive
Shares Amount Capital Deficit Income (Loss) Total
------ ------ ------- ------- ------------- -----
Balance, December 31, 1997,
as restated 14,075,000 $ 14,075 $822,490 $ (183,399) $ (111,373) $ 541,793
Loss, Year Ended December 31, 1998 (51,519) (51,519)
Capital Contributions For Past Services 40,500 40,500
Other Comprehensive Income:
Translation Adjustments (15) (15)
------- --------
Balance, December 31, 1998 14,075,000 14,075 862,990 (234,918) (111,388) 530,759
Exercise of Stock Options For
Cash at $.40 Per Share, April 1,400,000 1,400 558,600 560,000
Compensatory Cost-Stock Options 42,000 42,000
Private Placement of Common Stock
for Cash at $1.00 Per Share, May 5,500,000 5,500 5,494,500 5,500,000
Offering Costs (385,000) (385,000)
Common Stock For Services
Rendered at $1.00 Per Share, September 385,000 385 384,615 385,000
Capital Contributions For Past Services 256,320 256,320
Loss, Year Ended December 31, 1999 (1,084,027) (1,084,027)
Other Comprehensive Income:
Translation Adjustments 4,169 4,169
------------ ----------
BALANCE, DECEMBER 31, 1999 21,360,000 $ 21,360 $ 7,214,025 $ (1,318,945) $ (107,219) $ 5,809,221
========== ====== ========= ========= ======== =========
The accompanying notes are an integral part of these financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999 1998
---- ----
Cash Flows From Operating Activities
Net Loss $(1,084,027) $ (51,519)
Adjustments to Reconcile Net Loss to Net Cash
Depreciation and Amortization 54,181 47,930
Recognition of Unearned Revenue From Prior Periods (33,312) 0
Capital Contributions For Services Performed 256,320 40,500
Compensatory Cost - Stock Options 42,000 0
Common Stock Issued for Services 385,000 0
Translation Adjustments 4,169 (15)
Changes in Assets and Liabilities
(Increase) Decrease in Inventory (99,206) 0
(Increase) Decrease in Other Receivables (170,012) (9,314)
(Increase) Decrease in Prepaid Expenses (13,747) (2,614)
(Increase) Decrease in Accrued Interest Receivable (16,078) 0
Increase (Decrease) in Accounts Payable 141,537 7,529
Increase (Decrease) in Unearned Revenue 118,739 33,312
------- ------
TOTAL ADJUSTMENTS 669,591 117,328
------- -------
Net Cash Provided By (Used In) Operating Activities (414,436) 65,809
Cash Flows From Investing Activities
Purchase of Property and Equipment (34,369) (86,986)
Purchase of Investments (219,185) 0
-------- -
Net Cash Flows Used In Investing Activities (253,554) (86,986)
Cash Flows From Financing Activities
Proceeds From Sale of Common Stock 6,060,000 0
Offering Costs (385,000) 0
Principal Payments on Capital Lease Obligations (29,770) 0
Related Party Advances (Repayments) (20,000) 20,000
------- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,625,230 20,000
--------- ------
Increase (Decrease) in Cash and Cash Equivalents 4,957,240 (1,177)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999 1998
---- ----
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 336,189 337,366
------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,293,429 $ 336,189
========= =======
SUPPLEMENTAL INFORMATION:
Cash paid for:
INTEREST $ 5,055 $ 0
=========
INCOME TAXES $ 0 $ 0
============
Noncash Investing and Financing:
CAPITAL CONTRIBUTIONS FOR SERVICES PERFORMED $ 256,320 $ 40,500
======= ========
COMPENSATORY COST - STOCK OPTIONS $ 42,000 $ 0
======== ===========
COMMON STOCK ISSUED FOR SERVICES $ 385,000 $ 0
======= ===========
EQUIPMENT ACQUIRED UNDER CAPITAL LEASE OBLIGATION $ 214,959 $ 0
======= ===========
The accompanying notes are an integral part of these financial statements.
F-7
</TABLE>
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - ORGANIZATION
Xin Net Corp. (the Company) was incorporated under the laws of the
State of Florida on September 12, 1996, under the name of Placer
Technologies, Inc., with an authorized capital of 2,000 shares of
common stock with a par value of one cent ($0.01) per share. On
December 11, 1996, the Company amended its Articles of Incorporation to
increase its capital stock to 50,000,000 shares with a par value of one
mil ($0.001) per share. On July 22, 1998, the Company amended its
Articles of Incorporation and changed its name to Xin Net Corp. The
Company provides internet services in China including internet access
and content services, domain name registration, and other value-added
services, such as e-commerce, auction, and advertising.
The Company has two wholly owned subsidiaries: Infornet Investment
Limited, (a Hong Kong Corporation) which is a telecommunication and
management network company providing financial resources and expertise
in telecommunication projects; and Infornet Investment Corp., (a
Canadian Corporation), which is engaged in a similar line of business,
has 100,000,000 common shares of no par value authorized, with 100
shares issued and outstanding.
The Company acquired Infornet Investment Limited, formerly Micro
Express Limited, at no cost. The name change took place on July 18,
1997.
During 1997, the Company issued 5,000,000 shares of common stock to
acquire the wholly owned subsidiary, Infornet Investment Corp.
(Canada), for a total value of $65, representing the organizational
costs of filing fees. The shares were issued on March 3, 1997.
On August 25, 1997, through its wholly owned subsidiary, Infornet
Investment Limited (Hong Kong), under the laws of the People's Republic
of China, the Company formed an 80% cooperative joint venture called
Placer Technologies Corp. (a limited liability company) with Xin Hai
Technology Development Ltd. (a People's Republic of China Corporation)
(Xin Hai) as a 20% partner, for a term of twenty (20) years. The
Company's wholly owned subsidiary, Infornet Investment Limited, is
obligated to contribute all of the capital of the joint venture. The
registered capital was initially $525,000 U.S. Dollars and subsequently
increased by $1,000,000 by an amendment to the joint venture agreement
dated December 15, 1999, for a total registered capital of $1,525,000.
The Company has already contributed this figure and no further capital
contribution is required from Infornet Investment Limited, however, the
Company continues to advance loans to the joint venture as necessary to
fund the operations of the business. The joint venture designates
distribution of 100% of the profits to Infornet and 0% to Xin Hai,
until recoupment of the Company's invested capital. On April 13, 2000,
the Company amended the joint venture agreement to give the Company
control over the joint venture for another fifteen (15) years after the
recovery of total investment and interest from the external financing
in the joint venture. In accordance with Statement of Financial
Accounting Standards ("SFAS") 94, "Consolidation of All Majority-Owned
Subsidiaries," the purchase method is used to account for the
investment in the joint venture because the Company controls the
decisions of the joint venture. Therefore, until this point, 100% of
the profits and losses are consolidated and no minority interest is
recorded. Total advances to the joint venture as of December 31, 1999
and 1998 were $1,558,689 and $424,883, respectively.
F-8
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - ORGANIZATION (CONTINUED)
-----------------------
Xin Hai's business consists of upgrading telecommunication technology
and services in China. Xin Hai is an experienced Internet Service
Provider (ISP) based in Beijing, China. ISP licenses are tightly
controlled by the Ministry of Information Industry (MII) and provide a
substantial barrier to entry. Xin Hai plans to position itself as a
major supplier of Internet services in China by covering the major
cities. The joint venture will be operated in accordance with the laws
and regulations in China which allow Sino-foreign joint venture
companies to construct Internet access networks and to have ownership
rights and rights for return on investment, but disallow joint venture
companies to operate such networks.
The Company was classified as a development stage company in prior
years.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The Company's financial statements are prepared using the accrual
method of accounting.
CASH AND CASH EQUIVALENTS
Cash equivalents consists of time deposits with original maturities of
three months or less.
INVESTMENTS
The Company determines the appropriate classification of marketable
debt and equity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. At December 31, 1999, the
Company's had marketable debt securities classified as
held-to-maturity, carried at amortized cost, which approximates fair
value.
CONCENTRATION OF CREDIT RISK
The Company maintains U.S. Dollar cash balances in Canadian banks, that
are not insured.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, Infornet Investment
Corp. (Canada) and Infornet Investment Limited (Hong Kong) and the
corporate joint venture to include the assets, liabilities, revenues
and expenses of all entities over which the Company has control. All
significant intercompany transactions and balances have been eliminated
in consolidation.
PURCHASE METHOD
Investments in companies have been included in the financial report
using the purchase method of accounting on the basis of the fair value
of the acquired assets less liabilities assumed. The
F-9
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
Company retains the acquired companies as subsidiaries. The Company's
wholly owned subsidiaries, Infornet Investment Corp. (Canada) and
Infornet Investment Limited (Hong Kong), provide similar Internet
services to the Canadian and Chinese markets. The Company also
consolidates the assets, liabilities, revenues and expenses of the
joint venture because it has control over its operating and financing
decisions.
INVENTORY
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND RETURN ALLOWANCES
Accounts receivable are shown net of allowances for doubtful accounts
and returns which are estimated as a percent of accounts receivable and
sales, respectively, based on prior year's experience.
PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is depreciated under the
straight-line method over their estimated useful lives, ranging from
three to seven years.
REVENUE RECOGNITION
Revenue is recognized when earned. The Company's revenue is primarily
derived from the sale of nonrefundable subscription services (Internet
access usage cards and content services) and domain name registration
services, and are recognized over the period the services are provided
or the services are delivered. Revenue attributable to undelivered
elements, including technical support and Internet browser
technologies, is based on the average sales price of those elements and
is recognized ratably on a straight-line basis over the product's life
cycle. Other revenues, which are minimal, consist principally of
electronic commerce and advertising revenues, developing of web site
home pages, developing computer hardware, software, and
telecommunications network technology, and are recognized as the
services are performed or when the goods are delivered.
COST RECOGNITION
Cost of revenue includes direct costs to produce and distribute product
and direct costs to provide online services, consulting and product
support. Costs incurred for the production of computer software used in
the sale of its services, including direct labor and related overhead
for software produced by the Company and the cost of software purchased
from third parties are capitalized. All costs in the software
development process which are classified as research and development
are expensed as incurred until technological feasibility has been
established. Once established, such costs are capitalized until the
software has completed testing and is generally
F-10
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
available. Product development costs are expensed as incurred. SFAS No
86, "Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed, does not materially affect the Company. Selling,
general, and administrative costs are expensed as incurred.
Advertising costs are expensed as incurred
UNEARNED REVENUE
Unearned revenue consists primarily of prepaid subscription agreements.
End users receive certain elements of the Company's products over a
period of time. These elements include browser technologies and
technical support. Consequently, the Company's earned revenue reflects
the recognition of the fair value of these elements over the product's
life cycle.
AMORTIZATION
Costs incurred to organize the Company have been capitalized and are
amortized using the straight-line method over seven years. Amortization
charged to expense during 1999 and 1998 was $46 and $62, respectively.
USE OF ESTIMATES
Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. Actual results may differ from
these estimates.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax
liabilities and assets are determined based on the difference between
the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
PER SHARE OF COMMON STOCK
Effective January 1, 1997, basic earnings or loss per share has been
computed based on the weighted average number of common shares
outstanding. All earnings or loss per share amounts in the financial
statements are basic earnings or loss per share, as defined by SFAS No.
128, "Earnings Per Share." Diluted earnings or loss per share does not
differ materially from basic earnings or loss per share for all periods
presented. Diluted weighted average shares outstanding exclude the
potential common shares from warrants and stock options because to do
so would have been antidilutive. All per share and per share
information are adjusted retroactively to reflect stock splits and
changes in par value.
F-11
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Compensation cost for stock
options, if any, is measured as the excess of the quoted market price
of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value-based method
of accounting for stock-based employee compensation plans. The Company
has elected to remain on its current method of accounting as described
above, and has adopted the disclosure requirements of SFAS No. 123,
effective January 1, 1997.
FOREIGN OPERATIONS
The assets and liabilities of the Company's foreign operations are
generally translated into U.S. dollars at current exchange rates, and
revenues and expenses are translated at average exchange rates for the
year. Resulting translation adjustments are reflected as a separate
component of stockholders' equity.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the functional
currency, except those transactions which operate as a hedge of an
identifiable foreign currency commitment or as a hedge of an foreign
currency investment position, are included in the results of operations
as incurred.
BUSINESS SEGMENT INFORMATION
The Company implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective January 1, 1998. The
Company's reportable segments are geographic areas that provide
Internet services and products.
CAPITAL STRUCTURE
The Company has implemented SFAS No. 129, "Disclosure of Information
about Capital Structure," effective January 1, 1998, which established
standards for disclosing information about an entity's capital
structure. The implementation of SFAS No. 129 has no effect on the
Company's financial statements
COMPREHENSIVE INCOME
The Company has implemented SFAS No. 130, "Reporting Comprehensive
Income," effective January 1, 1998, which requires companies to
classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other
comprehensive
F-12
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
income separately from retained earnings and additional paid in capital
in the equity section of a statement of financial position. The
implementation of SFAS No. 130 required the Company to reclassify
translation adjustments as other comprehensive income, as a separate
component of stockholders' equity.
START-UP COSTS
Effective January 1, 1998, the Company also adopted the provisions of
the American Institute of Certified Public Accountants' Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities."
SOP 98-5 provides guidance on the financial reporting of start-up and
organization costs and requires such costs to be expensed as incurred.
This new requirement did not have a significant effect on the financial
statements for 1999 or 1998.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
PENDING ACCOUNTING PRONOUNCEMENTS
It is anticipated that current pending accounting pronouncements will
not have an adverse impact on the financial statements of the Company.
NOTE 3 - INVESTMENTS
All marketable debt securities were classified as held-to-maturity and
carried at amortized cost. Investments at December 31, 1999, consisted
of Canadian Treasury Securities of $316,349 Canadian Dollars, or
$219,185 U.S. Dollars, with a maturity date of May 25, 2000. The
estimated fair value approximated its amortized cost and therefore,
there were no significant unrealized gains or losses. Accrued interest
receivable at December 31, 1999, was $5,884.
NOTE 4 - INVENTORY
Inventory at December 31, 1999, of $99,206 consists of internet access
cards, modems, and accessories.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1999 1998
------------------ ----
Office Equipment $ 8,586 $ 3,440
Equipment 521,627 279,551
FURNITURE 5,455 3,349
------------------ ----------
Total 535,668 286,340
LESS ACCUMULATED DEPRECIATION (113,048) (58,913)
------------------ ----------
NET BOOK VALUE $ 422,620 $227,427
================== ==========
F-13
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 5 - PROPERTY AND EQUIPMENT (CONTINUED)
---------------------------------
Depreciation charged to expense for the years ended 1999 and 1998 was
$54,135 and $47,868.
NOTE 6 - CAPITAL LEASE OBLIGATION
The Company leases computer equipment through its wholly owned
subsidiary, Infornet Investment Corp., for a term of thirty-six (36)
months at approximately $5,719 (Canadian $8,407) per month, payable in
advance, through June 30, 2002. The liability includes imputed interest
at an average rate of 6.12% per annum. Before the end of the initial
lease term, the Company has following options upon one month's written
notice: return the leased items, purchase the leased items, or renew
the lease. The initial lease term will automatically extend on a month
to month basis, under the same terms, until canceled by either party
upon one month's written notice.
Total minimum lease payments for the year ended December 31:
2000 $ 68,530
2001 68,530
2002 65,167
--------
202,227
LESS: AMOUNT REPRESENTING INTEREST (17,038)
--------
Present value of minimum lease payment 185,189
LESS: CURRENT PORTION (58,920)
---------
NONCURRENT PORTION 126,269
=========
NOTE 7 - OTHER ADVANCES
Other advances of $20,000 at December 31, 1998, represent funds
advanced to the Company, bearing no interest and due on demand. The
advance was paid in full during April 1999.
NOTE 8 - INCOME TAXES
There is no current or deferred tax expense for the years ended
December 31, 1999 and 1998, due to the Company's loss position. The
benefits of timing differences have not been previously recorded. The
deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, as
appropriate. Realization of the future tax benefits related to the
deferred tax assets is dependent on many factors, including the
Company's ability to generate taxable income within the net operating
loss carryforward period. Management has considered these factors in
reaching its conclusion as to the valuation allowance for financial
reporting purposes. The income tax effect of temporary differences
comprising the deferred tax assets and deferred tax liabilities on the
accompanying consolidated balance sheet is a result of the following:
DEFERRED TAXES 1999 1998
----------------------------------- ---------- -------
Net Operating Loss Carryforwards $ 461,361 $ 82,221
DEFERRED REVENUES (41,559) (11,660)
---------- -------
F-14
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8 - INCOME TAXES (CONTINUED)
-----------------------
1999 1998
----------- ----
Total 419,802 70,561
VALUATION ALLOWANCE (419,802) (70,561)
------- ------
NET DEFERRED TAX ASSETS $ 0 $ 0
=============== ==========
The Company has available net operating loss carryforwards of
approximately $1,300,000 for tax purposes to offset future taxable
income, which expire principally in the year 2012.
Pursuant to the Tax Reform Act of 1986, annual utilization of the
Company's net operating loss carryforwards may be limited if a
cumulative change in ownership of more than 50% is deemed to occur
within any three-year period.
<TABLE>
<CAPTION>
NOTE 9 - SEGMENT AND GEOGRAPHIC DATA
The Company's reportable segments are geographic areas that provide
Internet services and products to the Chinese markets. Summarized
financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column includes corporate
related items, and, as it relates to segment profit (loss), income and
expense not allocated to reportable segments.
<S> <C> <C> <C> <C>
CHINA CANADA OTHER TOTAL
----- ------ ----- -----
DECEMBER 31, 1999
-----------------
Revenue $ 982,108 $ 0 $ 0 $ 982,108
Operating Income (Loss) (738,750) (32,596) (485,694) (1,257,040)
Total Assets 2,561,103 20,739 3,693,348 6,275,190
Capital Expenditures 415,012 3,440 7,253 425,705
Depreciation/Amortization 52,323 596 1,262 54,180
Interest Income 2,239 0 170,774 173,013
DECEMBER 31, 1998
Revenue $ 494,676 $43,827 $ 0 $ 538,503
Operating Income (Loss) 77,869 (22,236) (111,997) (56,364)
Total Assets 593,510 5,759 5,306 604,575
Capital Expenditures 282,900 3,440 0 286,340
Depreciation/Amortization 47,146 784 0 47,930
Interest Income 1,279 0 4,845
</TABLE>
F-15
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
RECONCILIATION OF SEGMENT INFORMATION - The reconciling item to adjust
total revenues to consolidated revenues for 1998 is the amount of
revenues recorded on Canada's books (a subsidiary) as management fee
income, recorded as an expense on the parent's books, and eliminated in
consolidation. Management fee income/expense is $43,827 for the year
ended December 31, 1998.
NOTE 10 - WARRANTS
The Company has issued 5,500,000 warrants as part of the unit private
placement in May 1999. Each warrant entitles the holder to purchase, on
or before March 31, 2001, one (1) additional unit at a price of $2.00
per unit, each unit consisting of one (1) common share and one (1)
additional warrant. The additional warrant entitles the holder to
purchase one (1) additional common share of the Company at a price of
$5.00 per share on or before March 31, 2002.
The Company has also issued 385,000 warrants as part of the unit
private placement in May 1999 to Richco Investors, Inc. for services
rendered in structuring and arranging the private placement. Each
warrant entitles the holder to purchase, on or before March 31, 2001,
one (1) additional unit at a price of $2.00 per unit, each unit
consisting of one (1) common share and one (1) additional warrant. The
additional warrant entitles the holder to purchase one (1) additional
common share of the Company at a price of $5.00 per share on or before
March 31, 2002.
The warrants were not valued because the exercise price of the warrants
exceeded the fair market value of the common stock at the date of
issuance.
As of the date of issuance of these financial statements, all of the
warrants are outstanding.
NOTE 11 - STOCK OPTIONS
On November 12, 1999, the Company granted 2,136,000 options to various
parties for services contributed to the success and development of the
Company, at an exercise price of $1.30 per share, and expiring on
November 12, 2004. As of the date of issuance of these financial
statements, none of the options have been exercised.
The effect of applying SFAS No. 123 on 1999 pro forma net loss as
stated below is not necessarily representative of the effects on
reported net income (loss) for future years due to, among other things,
the vesting period of the stock options and the fair value of
additional stock options in future years. Had compensation cost for the
Company's stock options been determined based upon fair value at the
grant date, the Company's net loss in 1999 would have been $1,207,777,
or $(0.06) per share. The fair value of the option grants are estimated
on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: no dividend yield, volatility of 185%, a
risk-free interest rate of 5%, and an expected life of 5 years.
F-16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,293,429
<SECURITIES> 0
<RECEIVABLES> 207,388
<ALLOWANCES> 0
<INVENTORY> 99,206
<CURRENT-ASSETS> 5,851,647
<PP&E> 422,620
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,275,190
<CURRENT-LIABILITIES> 339,700
<BONDS> 0
0
0
<COMMON> 21,360
<OTHER-SE> 5,799,861
<TOTAL-LIABILITY-AND-EQUITY> 6,275,190
<SALES> 982,108
<TOTAL-REVENUES> 982,108
<CGS> 238,429
<TOTAL-COSTS> 2,000,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (173,013)
<INCOME-PRETAX> (956,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,084,027)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,084,027)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
