As filed with SEC on __________, 2001, File No. 333-90575
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SEC FILE NO. 333-90575
Commission file number 0-26559
XIN NET CORP.
(Exact name of registrant as specified in its charter)
FLORIDA 7379 33-0751560
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
#830, 789 W. PENDER STREET, VANCOUVER B.C., CANADA V6C IH2
(Address of principal executive offices) (Zip Code)
MARC HUNG, PRESIDENT, #830, 789 W.PENDER STREET, VANCOUVER B.C., CANADA V6C IH2
(604) 632-9638
(Agent for Service of Process)
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering /__/.
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering /__/.
If this form is a post-effective registration statement filed pursuant
to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering /__/.
If delivery of the prospectus is expected to be made pursuant to Rule
434; please check the following box /__/.
Pages 1 of 103 pages
Exhibit Index Begins on Page 104
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<TABLE>
<CAPTION>
Calculation of Registration Fee
<S> <C> <C> <C> <C>
Title of each Proposed Proposed Proposed Amount of
class of Amount of maximum maximum registration fee
securities to be shares to be offering price aggregate
registered registered per share offering price
--------------------------------------------------------------------------------------------------------------------
Common 4,733,910 $.875 $4,142,171 (4) $ 852.10
Stock(1)
Common Shares 5,885,000 $.875 $5,149,375 (4) $ 1,287.34
Underlying "A"
Warrants(2)
Common Shares 5,885,000 $.875 $5,149,375 (4) $ 1,287.34
Underlying "B"
Warrants(3)
======================= ======================= ======================= ======================= ======================
Total 16,503,910 $14,440,921 $ 3,610.22*
======================= ======================= ======================= ======================= ======================
</TABLE>
* $8,708.83 previously paid
(1) The shares of common stock registered represent the number of shares held by
selling shareholders.
(2) The shares of common stock registered represent the shares underlying "A"
warrants held by selling shareholders.
(3) The shares of common stock registered represent the shares underlying "B"
warrants which may be purchased by selling shareholders if the "A" warrants are
exercised.
(4) Based on the average of the bid and ask price on the OTC Bulletin Board for
the company's common stock for the trading day preceding amended filing computed
pursuant to Rule 457.
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<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K and Rule 404(a) the following
cross-reference sheet shows the location in the prospectus of the information
required to be included in response to Items of Form SB-2.
PART I
<S> <C> <C>
ITEM LOCATION
Item 1 Forepart of Registration Forepart of Registration
Statement and Outside Front Cover Statement and Outside Front
Page of Prospectus Cover Page of Prospectus
Item 2 Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Pages of Prospectus
Item 3 Summary Information, Risk Factors Summary, Risk Factors
and Ratio of Earnings to Fixed
Charges
Item 4 Use of Proceeds Use of Proceeds
Item 5 Determination of Offering Price Determination of Offering Price
Item 6 Dilution Not Applicable
Item 7 Selling Security Holders Selling Security Holders
Item 8 Plan of Distribution Plan of Distribution
Item 9 Legal Proceedings Legal Matters
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Item 10 Directors, Executive Officers, Directors, Executive Officers,
Promoters and Control Persons Promoters and Control Persons
Item 11 Security Ownership of Certain Security Ownership of Certain
Beneficial Ownership and Beneficial Ownership and
Management Management
Item 12 Description of Securities Description of Securities
Item 13 Interest of Named Experts and Experts
Counsel
Item 14 Disclosure of Commission Position Management - Indemnification of
on Indemnification For Securities Officers and Directors
Act Liabilities
Item 15 Organization within Last Five Business History
Years
Item 16 Description of Business Business History
Item 17 Management Discussion and Management Discussion and
Analysis of Operations Analysis of Operations
Item 18 Description of Property Business History
Item 19 Certain Relationships and Related Relationships and
Party Transactions Related Party Transactions
Item 20 Market for Common Equity and Price Range of Our Common Stock
Related Stockholder Matters & Stockholder Matters
Item 21 Executive Compensation Executive Compensation
Item 22 Financial Statements Financial Statements
Item 23 Changes In and Disagreements Changes In and Disagreements
With Accountants With Accountants
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PART II
Item 24 Indemnification of Officers and Indemnification
Directors
Item 25 Other Expenses of Issuance and Other Expenses of Offering
Distribution Registration and Distribution
Item 26 Recent Sales of Unregistered Recent Sales of Unregistered
Securities Securities
Item 27 Exhibits, Financial Statements Exhibits, Financial Statements
and Schedules and Schedules
Item 28 Undertakings Undertakings
Item 29 Financial Statements and Schedules Financial Statements and Schedules
5
</TABLE>
<PAGE>
XIN NET CORP.
16,503,910 shares of common stock
XIN NET CORP. is engaged in an internet related joint venture business in
the People's Republic of China ("PRC").
We are registering 16,503,910 shares of common stock, any and all of which
may be sold by our selling shareholders.
WE URGE YOU TO READ THE RISK FACTORS BEGINNING ON PAGE 13 ALONG WITH THIS
PROSPECTUS BEFORE YOU MAKE YOUR INVESTMENT DECISION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SHARES, OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Our offering is not being underwritten. Our shareholders are offering
shares of common stock owned by them to purchasers directly, or through agents,
brokers or dealers at market or negotiated prices. (See "Plan of Distribution").
Our selling shareholders' shares registered under this prospectus may be sold
over an extended period of time, on a delayed or continuous basis.
Our common stock is currently trading on the OTC Bulletin Board under the
symbol of "XNET." The last reported sale price of common stock on January 3,
2001 on the OTCBB was $.875 closing.
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TABLE OF CONTENTS
Page
Prospectus Summary 8
Summary of Financial Information 11
Risk Factors 13
Risks Relating to the PRC and Internet Industry 13
Political, Economic and Regulatory Risks in the PRC 15
Other Risks 22
Business 26
Price Range of our common stock & stockholder matters 46
Management's Discussion and Analysis of Financial
Condition and Results of Operations 47
Capitalization 52
Management 55
Security Ownership of Principal Owners and Management 61
Relationships and Related Transactions 64
Changes In and Disagreements with Accountants 65
Description of Securities 66
Transfer Agent and Registrar 67
Limitations on Directors Liability 67
Plan of Distribution 67
Selling Stockholders 68
Determination of Offering Price 76
Experts 77
Where You Can Find More Information 77
Index to Financial Statements F-1
7
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SIGNIFICANT ASPECTS OF OUR BUSINESS AND THIS OFFERING,
BUT YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. WHEN WE REFER TO OUR
COMPANY IN THIS PROSPECTUS, WE REFER TO US AND OUR SUBSIDIARIES, AS A COMBINED
ENTITY, EXCEPT WHERE WE INDICATE OTHERWISE. YOU SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER "RISK FACTORS."
XIN NET CORP.
On September 6, 1996, we were incorporated under the laws of the State of
Florida under the name of Placer Technologies, Inc. We 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.
Our initial primary service consisted of developing web home pages for
small businesses in USA. Minimal revenues were generated in 1996.
On April 2, 1997, we acquired 100% interest of Infornet Investment Limited,
a Hong Kong corporation ("Infornet"). Through this subsidiary in 1997, we
entered into a Joint Venture Agreement (the "Joint Venture") with Xin Hai
Technology Development Ltd. ("Xin Hai"). Xin Hai is an experienced internet
service provider (ISP) which owns and operates internet licenses in the cities
of Beijing, Shenyang, and Shanghai, China.
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On June 11, 1997, we purchased 100% interest of Infornet Investment Corp.,
a British Columbia corporation. Our subsidiary, Infornet Investment Corp.,
manages the daily operations for our company.
On July 24, 1998, we changed our company name from Placer Technologies,
Inc. to Xin Net Corp. in order to reflect our core business.
We believe the Chinese and Asian markets, and Chinese language users
globally, represent one of the largest and fastest growing user groups on the
web today. As the internet gains broader acceptance as a new business medium in
the People's Republic of China ("PRC") and Asia, we believe internet service
provider usage, online advertising and e-commerce will also experience
significant growth. To capitalize on this opportunity, our business strategy is
to continue to improve and expand our existing business under the joint venture,
either independently or through strategic alliances, partnerships or
acquisitions, and to continue to expand our business locations to other cities
in the PRC.
However, business opportunities in Chinese internet markets and our ability
to implement our business strategy are, and will in the future, be limited by:
o The laws and regulations in the PRC under which we conduct our
businesses that impose liability for content retrieved from
any websites we may maintain or require that we obtain
specific licenses, approvals or consents;
o The failure to realize expected growth in internet usage and
low internet penetration rates in the PRC that may compromise
our future operating results;
o The lack of a sophisticated internet infrastructure and
limited internet access in some markets necessary to deliver
our internet and services, which may compromise our capacity
for growth;
o The intense competition from existing and potential
competitors with longer operating histories, greater name
recognition, larger customer bases and greater resources that
reduce our user traffic; and
o The economic developments in the PRC that result in reduced
spending for advertising and web solutions services or
that effect our ability to collect payments on our accounts
receivable.
Although we intend to explore all potential markets for our internet
services, we generated revenue exclusively from the PRC during the 1998 and 1999
years, and through date hereof in 2000.
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We are still in the early stages of operations, and we may not fulfill our
stated goals until much later in the future, if at all. We have had a limited
operating history since our organization in 1996 and have experienced
significant losses since inception. We are dependent on private placements with
investors for our capital resources and funding. (See "Risk Factors.")
SELLING SHAREHOLDERS
Our selling shareholders are offering up to 16,503,910 common shares for
sale, which they previously purchased, or were granted, or will receive if they
exercise "A" warrants which they hold, or if they then exercise "B" warrants.
(See "Selling Shareholders" and "Plan of Distribution.")
THE OFFERING
Our selling shareholders propose to offer 16,503,910 shares of our common
stock at the market prices, continuously, upon effectiveness of the Registration
Statement. (See "Plan of Distribution" for information concerning the offering.)
NET PROCEEDS TO THE SELLING SHAREHOLDERS
Offering @ market price $ (To be inserted in final amendment)
Common stock offered
by our selling shareholders 16,503,910 shares
(including shares underlying warrants)
Common stock outstanding now 21,360,010 shares
Common stock outstanding if our
shareholders exercise all of "A" warrants 27,245,000 shares
Common stock outstanding if all of
"B" warrants are exercised by our 33,130,000 shares
shareholders
Use of Proceeds We will not receive any proceeds
from the sale of shares of common
stock by our selling stockholders.
We will, however, receive the
proceeds of warrant exercise for
"A" warrants at $2.00 per share and
"B" warrants at $5.00 per share.
Proceeds will be used for expansion
and working capital. See "Use of
Proceeds".
OTC Bulletin Board Symbol XNET
10
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SUMMARY FINANCIAL INFORMATION
The summary financial information presented below as of December 31, 1999
and 1998 was derived from our audited financial statements appearing elsewhere
in this prospectus. The financial information for the nine months ended
September 30, 2000, was derived from our unaudited financial statements. In the
opinion of management the financial information for the nine months ended
September 30, 2000, contain all adjustments, consisting only of normal recurring
accruals necessary for the fair presentation of the results of operations and
financial position for that period. You should read this summary financial
information in conjunction with our plan of operation, financial statements and
related notes to the financial statements, each appearing elsewhere in our
prospectus.
Financial information for the year ended December 31, 1999 is compared to
the year ended December 31, 1998.
1998 1999
---- ----
Total Currents Assets 376,179 5,851,647
Other 228,396 423,543
------- ----------
Total Assets 604,575 6,275,190
Total Current Liabilities 73,816 339,700
Total Shareholder's Equity 530,759 5,809,221
Total Revenues and Fees 494,676 982,108
Total Cost of Revenues and Fees 96,710 238,429
General and Administrative Expenses 454,330 2,007,719
(Loss) Income From Operations (56,364) (1,257,040)
Total Other Income (Expenses) 4,845 173,013
Net Income (Loss) (51,519) (1,084,027)
Basic and Diluted Earnings Per
Common Shares ($0.004) ($0.06)
========== ============
Weighted Average Number of Common
Shares Outstanding 14,075,000 18,647,411
========== ============
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The following unaudited supplementary data presents comparative summary
financial information for the nine months ended September 30, 2000, and 1999
(unaudited):
First Nine Months First Nine Months
1999 2000
-------------- ----------------
Total Revenues $556,719 $ 2,361,964
General & Administrative Expenses $795,504 $ 4,347,043
Income (loss) From Operations (333,688) $(2,422,491)
-------------- ----------------
Net Profit (Loss) (230,973) (2,311,531)
============== ================
Basic and Diluted Earnings Per Common Share $ (0.01) $ (0.11)
============== ================
Basic Weighted Average Number of Common
Shares Outstanding 17,733,278 21,360,000
============== ================
The following unaudited supplementary data presents net income per share
for the fiscal year ended December 31, 1999 and the nine months ended September
30, 2000 (unaudited).
PERIOD
1999 2000
(nine months)
-------------------- -----------------
Net income $(1,084,027) $(2,311,531)
Basic and diluted Weighted
average common shares outstanding 18,647,411 21,360,000
Basic and diluted Income per common share $(0.06) $(0.11)
==================== =================
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO PURCHASE SHARES OF OUR COMMON
STOCK.
RISKS RELATING TO THE PRC AND INTERNET INDUSTRY
OUR INDUSTRY IS INTENSELY COMPETITIVE
The PRC and Asian internet market is characterized by an increasing
number of entrants because the start-up costs are low. In addition, the internet
industry is relatively new and subject to continuing definition and as a result,
our competitors may better position themselves to compete in this market as it
matures. Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories in the internet market, greater
name recognition, larger customer bases and databases and significantly greater
financial, technical and marketing resources than we do.
We will continue to encounter competition from other ISPs and internet
companies. Our competitors may develop services that provide significant
performance, price, creative, or other advantages, superior to those we offer
our users. This could place our Company at a significant competitive
disadvantage and cause us to lose market share, customers, and fail to ever be
profitable. We may not be able to compete successfully.
OUR COMPETITION WITH RESPECT TO USER TRAFFIC, EASE OF USE AND FUNCTIONALITY
INCLUDE:
- Chinese language based Web search and retrieval companies such as Yahoo!
China.com, Sina.com., Netease, Soho, Shanghai Online, ChinaByte and Netvigator
(which is owned by Hongkong Telecom);
- English language based Web search and retrieval companies such as Infoseek,
Lycos, Yahoo! and Microsoft Network, (MSN); and
- Retrieval services and products offered by Altavista, HotWired Ventures, and
Inktomi's HotBot and OpenText.
In the future, the Company and joint venture will encounter competition
from other ISPs and internet companies. Competitors may develop services that
are equal or superior to those offered by us to users and may achieve greater
market acceptance than the joint venture's offerings in the area of performance,
ease of use and functionality.
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THE PRC INTERNET INDUSTRY IS A DEVELOPING MARKET AND HAS NOT BEEN PROVEN AS AN
EFFECTIVE COMMERCIAL MEDIUM
The market for internet services in the PRC has only recently begun to
develop. Since the internet is an unproven medium for advertising and other
commercial services, our future operating results from online advertising and
connection services will depend substantially upon the increased use of the
internet for information, publication, distribution and commerce and the
emergence of the internet as an effective advertising medium in the PRC. Many
potential customers will have limited experience with the internet as an
advertising medium or sales and distribution channel, will not have devoted a
significant portion of their advertising expenditures or other available funds
to web-related business or web site development and may not find the internet to
be effective for promoting their products and services relative to traditional
print and broadcast media. "E-commerce" is yet an unproven concept on the
internet in PRC.
E-COMMERCE IS LIMITED IN PRC DUE TO SYSTEMIC FACTORS
Critical issues concerning the commercial use of the internet in the PRC
and Asia such as security, reliability, cost, ease of deployment, administration
and quality of service may affect the adoption of the internet to solve business
needs. For example, the cost of access may prevent many potential users in Asia
from using the Internet. Moreover, the use of credit cards in sales transactions
is not a common practice in parts of Asia. Until the use of credit cards, or
another alternative viable means of electronic payment becomes more prevalent,
the development of e-commerce on our internet will be seriously impeded. In
addition, even when credit cards or another means of electronic payment becomes
prevalent throughout Asia, consumers will have to be confident that adequate
security measures protect electronic sale transactions conducted over the
internet and prevent fraud.
ADVERTISING TARGETING THE PRC MARKET MAY NOT INCREASE UNLESS A SIGNIFICANT
AMOUNT OF LOCAL LANGUAGE CONTENT IS DEVELOPED ON THE INTERNET WHICH MAY AFFECT
OUR GROWTH AND USER BASE ADVERSELY
Currently, there are a limited number of web sites on the internet that
provide content for Chinese browsers. We can provide no assurances that content
provided through the internet will increase for Chinese and become an attractive
source of information for the PRC market that will generate use of our network.
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OUR EXPANSION INTO THE CHINESE INTERNET MARKET DEPENDS ON THE ESTABLISHMENT AND
MAINTENANCE OF AN ADEQUATE TELECOMMUNICATIONS INFRASTRUCTURE IN THE PRC BY THE
CHINESE GOVERNMENT AND IF INADEQUATE, IT COULD LIMIT OUR SERVICES TO CUSTOMERS
AND IMPAIR OUR REVENUES
Unlike Taiwan and Hong Kong, where the telecommunications infrastructure is
comparable to U.S. standards and where private companies compete as ISPs, the
telecommunications infrastructure in the PRC is not well developed. In addition,
access to the internet is accomplished primarily by means of the government's
backbone of separate national interconnecting networks that connect with the
international gateway to the internet, which is owned and operated by the
Chinese government and is the only channel through which the domestic Chinese
internet network can connect to the international internet network. Although
private sector ISPs exist in the PRC, almost all access to the internet is
accomplished through ChinaNet, the PRC's primary commercial network, which is
owned and operated by the Chinese government. We rely on this backbone and China
Telecom to provide data communications capacity primarily through local
telecommunications lines. As a result, we will continue to depend on the Chinese
government to establish and maintain a reliable internet infrastructure to reach
a broader base of internet users in the PRC. We will have no means of getting
access to alternative networks and services, on a timely basis or at all, in the
event of any disruption or failure. There can be no assurance that the internet
infrastructure in the PRC will support the demands associated with continued
growth and, if the necessary infrastructure standards or protocols or
complementary products, services or facilities are not maintained or developed
by the Chinese government, our business could be materially and adversely
affected.
OUR COMPUTER SYSTEM IS VULNERABLE TO HACKING, VIRUSES AND OTHER DISRUPTIONS
WHICH COULD IMPAIR OUR OPERATIONS
Inappropriate use of our internet services could jeopardize the security of
confidential information stored in our computer system, which may cause losses
to us. Inappropriate use of the internet includes attempting to gain
unauthorized access to information or systems-commonly known as "cracking" or
"hacking." Although we have implemented security measures to protect our
facilities, these measures could be circumvented. Alleviating problems caused by
computer viruses or other inappropriate uses or security breaches may require
interruptions, delays or cessation in our services. We do not carry "errors and
omissions" or other insurance covering losses or liabilities caused by computer
viruses or security breaches.
POLITICAL, ECONOMIC AND REGULATORY RISKS IN THE PRC
---------------------------------------------------
THERE ARE ECONOMIC RISKS ASSOCIATED WITH DOING BUSINESS IN THE PRC WHICH COULD
AFFECT OUR OPERATIONS
The Chinese economy has experienced significant growth in the past decade,
but this growth has been uneven across geographic and economic sectors and has
recently been slowing. There can be no assurance that this growth will not
continue to decrease or that the slow down will not have a negative effect on
our business. The Chinese economy is also experiencing deflation which may
continue in the future. The current economic situation may adversely affect our
profitability as expenditures for internet-related services may decrease due to
the results of slowing domestic demand and deflation.
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An example of this economic risk is that on October 7, 1999, the Guangdong
International Trust and Investment Corporation, an investment holding company of
Guangzhou Province, was declared insolvent and shut down by the PRC government.
Subsequently, many other similarly situated PRC provincial investment holding
companies have defaulted on their loans and experienced financial difficulties.
As a result, our clients and suppliers may have limited access to credit which
may adversely affect our business. In addition, the international financial
markets in which the securities of the PRC government, agencies and private
entities are traded also have experienced significant price fluctuations upon
speculation that the PRC government may devalue the Renminbi which could
increase our costs relative to our PRC revenues.
REGULATION OF THE INFORMATION INDUSTRY IN THE PRC MAY ADVERSELY AFFECT OUR
BUSINESS
The PRC enacted regulations governing internet access and the distribution
of news and other information. The Propaganda Department of the Communist Party
was given the responsibility to censor news published in the PRC to ensure,
supervise and control political correctness. The Ministry of Information
Industry has published implementing regulations that subject online information
providers to potential liability for content included on their portals and the
actions of subscribers and others using their systems, including liability for
violation of Chinese laws prohibiting the distribution of content deemed to be
socially destabilizing. Because many Chinese laws, regulations and legal
requirements with regard to the internet are relatively new and untested, their
interpretation and enforcement of what is deemed to be socially destabilizing by
Chinese authorities may involve significant uncertainty. In addition, the
Chinese legal system is a civil law system in which decided legal cases have
little precedential value. As a result in many cases it is difficult to
determine the type of content that may result in liability. We cannot predict
the effect of further developments in the Chinese legal system, particularly
with regard to the internet, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement, or the preemption of local
regulations by national laws.
Periodically the Ministry of Public Security has stopped the distribution
of information over the internet which it believes to be socially destabilizing.
The Ministry of Public Security, has the authority to cause any local ISP to
block any website maintained outside of the PRC at its sole discretion. Web
sites that are blocked in the PRC include many major news-related web sites such
as www.cnn.com, www.latimes.com, www.nytimes.com and www.appledaily.com. The
Chinese government has also expressed its intention to closely control possible
new areas of business presented by the Internet, such as internet telephony. If
the Chinese government were to take any action to limit or eliminate the
distribution of information through our website or to limit or regulate any
current or future applications available to users on our website, this action
could have a material adverse effect on our business, financial condition and
results of operations.
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The Chinese government also regulates access to the internet by imposing
strict licensing requirements and requiring ISPs in the PRC to use the
international inbound and outbound internet backbones. Our business is MOFTEC
(Ministry of Foreign Trade and Economic Cooperation) approved and holds a
license to operate in the PRC. We cannot provide assurance that we will be able
to obtain any necessary additional licenses required in the future or that
future changes in Chinese government policies affecting the provision of
information services, including the provision of online services and internet
access, will not impose additional regulatory requirements on us or our service
providers, intensify competition in the Chinese information industry or
otherwise have a material adverse effect on our business, financial condition
and results of operations.
RESTRICTIONS ON CURRENCY EXCHANGE COULD LIMIT OUR ABILITY TO REPATRIATE OUR
REVENUES FROM CHINA AND PAY FOR TECHNOLOGY AND EQUIPMENT
Although Chinese governmental policies were introduced in 1996 to allow
greater convertibility of the Renminbi, significant restrictions still remain.
We can provide no assurance that the Chinese regulatory authorities will not
impose greater restrictions on the convertibility of the Renminbi to western
currencies. The government could refuse to allow the exchange, or could restrict
the amount or volume of exchange. Because the majority of our future revenues
may be in the form of Renminbi, any future restrictions on currency exchange may
limit our ability to utilize revenue generated in Renminbi to fund our business
activities outside the PRC, if we ever have any. This restriction, if it occurs,
may affect our ability to pay non-chinese suppliers of technology and equipment
in U.S. dollars or other acceptable currency.
A GENERAL ECONOMIC DOWNTURN IN PRC COULD ADVERSELY AFFECT OUR BUSINESS
In the last few years the general health of the economy, in PRC where we
have conducted all of our operations to date, has been relatively strong and
growing, a consequence of which has been increasing capital spending by
individuals and growing companies to keep pace with rapid technological
advances. To the extent the general economic health of PRC declines from recent
levels, or to the extent individuals or companies fear a decline is imminent,
these individuals and companies may reduce expenditures such as those for our
services. Any decline or concern about an imminent decline could delay decisions
among certain of our customers to roll out our services or could delay decisions
by our prospective customers to make initial evaluations of our services. Any
delays would have a material and adverse effect on our business, prospects,
operating results and financial condition.
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WE DEPEND ON LOCAL TELECOM COMPANIES IN THE PRC FOR COLLOCATION AND TRANSMISSION
FACILITIES WHICH, IF NON-FUNCTIONAL OR INEFFICIENT, COULD AFFECT OUR BUSINESS BY
LIMITING SERVICE TO CUSTOMERS
We must use copper telephone lines controlled by the local telecom entities
in the PRC to provide internet connections to customers. We also depend on the
local telecom companies for rental of space to place server equipment
(collocation) and for a substantial portion of the transmission facilities
(wire, switches, etc.) we use to connect our equipment to our servers and users.
Interruption or impairment of service in an area could significantly affect our
customers and revenues in that area.
Our ability to provide internet connections services to potential customers
depends on the quality, physical condition, availability and maintenance of
telephone lines within the control of the local telecom companies in the PRC. We
believe that the current condition of telephone lines in many cases will be
inadequate to permit us to fully implement our network services. In addition,
the telecom companies may not maintain the telephone lines in a condition that
will allow us to implement our network effectively. The telephone lines may not
be of sufficient quality or the telecom companies may claim they are not of
sufficient quality to allow us to fully implement or operate our network
services. Further, some customers use technologies other than copper lines to
provide telephone services, and connections might not be available to these
customers.
WE CANNOT PREDICT OUR SUCCESS BECAUSE WE HAVE A HISTORY OF LOSSES AND WE
ANTICIPATE FUTURE LOSSES
We formed our company in September 1996, and we have a short operating
history for you to review in evaluating our business. We have limited historical
financial and operating data upon which you can evaluate our business and
prospects. Our recent revenue growth is primarily a result of our entry into our
Chinese internet venture, and this growth may not be indicative of our future
operating results. We have incurred net losses since our corporate organization
in 1996 and as a result of our joint venture we have incurred net losses. We
anticipate that we will continue to incur operating losses for the foreseeable
future due to a high level of planned operating and capital expenditures,
increased sales and marketing costs, additional personnel hires, greater levels
of product development and our general growth objectives. It is possible that
our operating losses may increase in the future and we may never achieve or
sustain profitability. (See "Management Discussion and Analysis").
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OUR FUTURE REVENUE IS UNCERTAIN
Although we expect to generate revenue from service subscription, domain
name registration, e-commerce and advertising in the future, this revenue may
not be substantial. Our business plan is dependent on the anticipated expansion
of ISP subscribers, domain name registration and e-commerce, web hosting and
services in the PRC and the growth of our revenues is dependent on increased
revenues generated by subscribers and services. We anticipate that a substantial
portion of our future revenues will be derived from e-commerce, hosting, and
other services if online advertising becomes more broadly accepted in the PRC.
The loss of our subscribers to competition or a reduction in traffic on
these hosted web sites or on our ISP network may cause advertisers or web hosts
to withdraw from our business, which, in turn, could reduce our future revenues.
IF ADVERTISING IS BLOCKED, IT MAY AFFECT OUR REVENUES
The development of web software that blocks internet advertisements before
they appear on a user's screen may hinder the growth of online advertising. The
expansion of ad blocking an the internet may decrease our revenues because when
an ad is blocked, it is not downloaded from our ad server, which means that
these advertisements are not tracked as a delivered advertisement. In addition,
advertisers may choose not to advertise on the internet and on our advertising
network because of the use of internet advertisement blocking software. The use
of web software that blocks internet advertisements may materially and adversely
affect our business.
WE RELY ON SOFTWARE AND HARDWARE SYSTEMS THAT ARE SUSCEPTIBLE TO FAILURE
Any system failure or inadequacy that causes interruptions in the
availability of our services, or increases the response time of our services, as
a result of increased traffic or otherwise, could reduce user satisfaction,
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future traffic and our attractiveness to advertisers and consumers. In addition,
as the amount of web pages and traffic increases, there can be no assurance that
we will be able to scale our systems proportionately. We are also dependent upon
web browsers, other ISPs, and other web site operators in the PRC and elsewhere,
which have experienced significant system failures and electrical outages in the
past and our users have experienced difficulties due to system failures
unrelated to our systems and services.
OUR OPERATING RESULTS IN FUTURE PERIODS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS OR
INVESTORS
Our annual and quarterly operating results are likely to fluctuate
significantly in the future due to numerous factors, many of which are outside
of our control. These factors include every conceivable aspect of our business,
some of which are discussed in other risk factors, from low revenues to
extremely high operating costs.
Because of these factors, our operating results in future periods could
fail to meet or exceed the expectations of securities analysts or investors. In
that event, any trading price of our common stock would likely decline.
WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS, WHICH WE MAY NOT BE ABLE TO OBTAIN
The expansion and development of our business will require significant
additional capital. We intend to seek substantial additional financing in the
future to fund the growth of our operations, including funding the significant
capital expenditures necessary for us to provide service in our targeted
markets. Our current capital resources have been expended and we need additional
capital to continue expansion.
We may be unable to obtain any future equity or debt financing on
acceptable terms or at all. Recently the financial markets have experienced
extreme price fluctuations. A market downturn or general market uncertainty may
adversely affect our ability to secure additional financing. If we are unable to
obtain additional capital or are required to obtain it on terms less
satisfactory than what we desire, we will need to delay deployment of our
network services or take other actions that could adversely affect our business,
prospects, operating results and financial condition. To date, our cash flow
from operations has been insufficient to cover our expenses and capital needs.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."
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WE MAY BE UNABLE TO EFFECTIVELY EXPAND OUR SERVICES AND PROVIDE A SUBSTANTIAL
NUMBER OF USERS, WHICH MAY RENDER US UNABLE TO EVER BE PROFITABLE
Due to the limited access to our internet services, we cannot guarantee
that our business will be able to attract a substantial number of end users at
high volume. Access is limited a) by the relatively low number of computers in
the population, b) cost of computers, and c) local access problems such as
location of telephone connections. Accordingly, we may always be unprofitable.
PRIVACY CONCERNS MAY PREVENT US FROM SELLING DEMOGRAPHICALLY TARGETED SERVICES
IN THE FUTURE WHICH WILL IMPACT OUR REVENUES ADVERSELY
To the extent we collect data derived from user activity on our network
and from other sources, we cannot be certain that any trade secret, copyright or
other protection will be available for this data or that others will not claim
rights to this data.
Ad serving technology enables the use of "cookies," in addition to
other mechanisms to deliver targeted advertising, to help compile demographic
information, and to limit the frequency with which an advertisement is shown to
the user. Cookies are bits of information keyed to a specific server, file
pathway or directory locations that are stored on a user's hard drive and passed
to a web site's server through the user's browser software. Cookies are placed
on the user's hard drive without the user's knowledge or consent, but can be
removed by the user at any time. Due to privacy concerns, some internet
commentators, advocates and governmental bodies have suggested that the use of
cookies be limited or eliminated. Any limitation on our ability to use cookies
could impair our future targeting capabilities and adversely affect our
business, by limiting our ability to use and sell customer data for advertising.
OUR FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE FOR OUR COMPUTER SYSTEMS MAY
ADVERSELY AFFECT OUR BUSINESS
Currently, many computer systems and hardware and software products are
coded to accept only two digit entries in the date code field and, consequently,
cannot distinguish 21st century dates from 20th century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to function properly after December 31, 1999. We have conducted
assessments of our year 2000 readiness and have upgraded or replaced the system
hardware and software that we have identified as non-compliant for year 2000
purposes. We have contacted our third-party vendors, licensors and providers of
software, hardware, content and services regarding their year 2000 readiness.
Following our testing and after contacting our vendors and licensors, we have
made a complete evaluation of our year 2000 readiness, and determined and
completed all known changes necessary to be year 2000 compliant, and have
developed contingency plans in the event of problems. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Year
2000 Compliance" for detailed information concerning our state of readiness,
potential risks, and contingency plans regarding the year 2000 issue. If,
however a year 2000 software problem exists undetected and unremedied, it could
adversely affect our systems for up to two weeks.
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WE MAY BE INVOLVED IN FUTURE LITIGATION WITH RESPECT TO OUR USE OF TECHNOLOGY
RIGHTS WHICH COULD ADVERSELY AFFECT OUR BUSINESS
We currently license technology from third parties. As we continue to
introduce new services that require new technology, we anticipate that we may
need to license additional third-party technology. We cannot provide assurance
that these technology licenses will be available to us on commercially
reasonable terms, if at all. In addition, it is possible that in the course of
using new technology, we may inadvertently breach the technology rights of
others and face liabilities for the breach. Our inability to obtain any of these
technology licenses or inadvertent breach of others' technology rights could
delay or compromise the introduction of new services and could materially and
adversely affect our business and financial condition. Either the lack of
availability or disputes about licenses could adversely impact our business by
limiting our services to customers.
WE MAY BE HELD LIABLE FOR INFORMATION RETRIEVED FROM OUR NETWORK, WHICH THE PRC
COULD USE AS GROUNDS TO LIMIT OPERATIONS OR PENALIZE US
Because our services can be used to download and distribute information
to others, there is a risk that claims may be made against us for defamation,
negligence, copyright or trademark infringement or other claims based on the
nature and content of this material, such as violation of censorship laws in the
PRC. Although we carry general liability insurance, our insurance may not cover
potential claims of this type, or may not be adequate to indemnify us for all
liability that may be imposed. Any imposition of liability that is not covered
by our insurance or is in excess of our insurance coverage could have a material
adverse effect on our business, results of operations and financial condition.
OTHER BUSINESS RISKS
--------------------------
OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL AND ON THE PERFORMANCE OF
THOSE PERSONNEL, AND IF WE DON'T KEEP PERSONNEL, IT COULD BE DETRIMENTAL, TO OUR
OPERATIONS
Our success depends on the performance of our officers and key employees.
They are Marc Hung, Angela Du, Xin Wei and Kun Wei. Members of our management
team have worked together for only a short period of time. We do not have "key
person" life insurance policies on any of our employees nor do we have
employment agreements for fixed terms with any of our employees. Any of our
employees, including any member of our management team, may terminate his or her
employment with us at any time. Given our early stage of development, we depend
on our ability to retain and motivate high quality personnel, especially our
management. Our future success also depends on our continuing ability to
identify, hire, train and retain highly qualified technical, sales, marketing
and customer service personnel. Moreover, the industry in which we compete has a
high level of employee mobility and aggressive recruiting of skilled personnel.
We may be unable to continue to employ our key personnel or to attract and
retain qualified personnel in the future. We face intense competition for
qualified personnel, particularly in software development, network engineering
and product management. Please see "Management."
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WE DEPEND ON THIRD PARTIES FOR EQUIPMENT, INSTALLATION AND PROVISION OF FIELD
SERVICE AND NON-PERFORMANCE OR DELAYS COULD ADVERSELY EFFECT OPERATIONS AND
REVENUES.
We currently plan to purchase all of our equipment from vendors and
outsource part of the installation and field service of our networks to third
parties. Our reliance on third party vendors involves number of risks, including
the absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance, delivery and costs. If any of our suppliers reduces or
interrupts its supply, or if any significant installer or suppliers reduces or
interrupts its service to us, this reduction or interruption could disrupt our
business. Although multiple manufacturers currently produce or are developing
equipment that will meet our current and anticipated requirements, our suppliers
may be unable to manufacture and deliver the amount of equipment we order, or
the available supply may be insufficient to meet our demand. If our suppliers or
licensors enter into competition with us, or if our competitors enter into
exclusive or restrictive arrangements with the suppliers or licensors, or if we
encounter delays in supply, then these events may materially and adversely
affect the availability and pricing of the equipment we purchase and technology
we license, and our services to customers.
A NATURAL DISASTER COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE TO OUR
CUSTOMERS
Our operations depend on our ability to avoid damages from fires,
earthquakes, floods and power losses resulting from natural disasters. A natural
disaster or other unanticipated problem at our owned or leased facilities could
interrupt our services. Additionally, if a local carrier, competitive carrier or
other service provider fails to provide the communications capacity we require,
as a result of a natural disaster, then this failure could interrupt our
services and affect our revenues adversely.
WE EXPECT OUR STOCK PRICE TO BE VOLATILE WHICH COULD CAUSE INVESTMENT LOSSES TO
PURCHASERS OF OUR STOCK.
The trading price of our common stock has been and is likely to continue to
be highly volatile. Our stock price could fluctuate widely in response to many
factors, including the following:
o our historical and anticipated quarterly and annual operating results;
o announcements of new products or services by us or our competitors or
new competing technologies;
o investor perceptions of us and investments relating to the PRC and Asia;
o developments in the internet industry;
o technological innovations;
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o changes in pricing made by us, our competitors or providers of
alternative services;
o the addition or loss of business customers;
o variations between our actual results and analyst and investor
expectations;
o conditions or trends in the telecommunications industry, including
regulatory developments;
o announcements by us of significant acquisitions, strategic
partnerships, joint venture or capital commitments;
o additions or departures of key personnel;
o general market and economic conditions.
In addition, in recent years the stock market in general, and the Nasdaq
National Market and the market for internet and technology companies in
particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may materially
and adversely affect our stock price, regardless of our operating performance.
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS MAY NOT BE ACCURATE
Included in this prospectus are various forward-looking statements which
can be identified by the use of forward looking terminology such as "may,"
"will," "expect," "anticipate," "estimate," "continue," "believe" or other
similar words. We have made forward-looking statements with respect to the
following, among others:
o our goals and strategies;
o the importance and expected growth of internet technology;
o the pace of change in internet marketplace; the demand for internet
services; and
o revenues.
These statements are forward-looking and reflect our current expectations.
They are subject to a number of risks and uncertainties, including but not
limited to, changes in the economic and political environments in the PRC and
Asia, changes in technology and changes in the internet marketplace. In light of
the many risks and uncertainties surrounding, the PRC, Asia and the internet
marketplace, prospective purchasers of the shares offered should keep in mind
that we cannot guarantee that the forward-looking statements described this
prospectus will transpire.
THERE ARE SPECIAL RISKS INVOLVED WITH INVESTING IN STOCKS OF NON U.S. REVENUE
COMPANIES
You should carefully consider the special risk that our revenues are solely
from the PRC, together with all of the other information included in this
prospectus before you decide to purchase our common shares.
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There are major risks associated with investing in our common shares not
typical with investments in common stock of U.S. revenue companies, because all
of our operations and revenues are from the PRC, and are subject to all of the
economic, political, business and regulatory risks previously discussed for the
PRC operations.
SHARE PURCHASERS COULD SUFFER DILUTION FROM ISSUANCES OF SHARES IN THE FUTURE
We may issue additional shares to finance our future capital and operations
requirements and for acquisitions of other companies to consolidate into our
operations. Any issuance will reduce the present percent of ownership of
previous investors (see "Risk Factor Control") and may result in additional
dilution to investors purchasing shares from this offering.
POSSIBLE DEPRESSIVE EFFECT OF FUTURE SALES OF COMMON STOCK
We have currently outstanding 21,360,010 shares of common stock, including
those being offered for resale in this registration. The 4,733,920 shares of
common stock offered by the selling shareholders, and the shares underlying
warrants held by selling shareholders (up to 11,769,990 shares) if all warrants
are exercised, will be freely tradable without restriction under the Securities
Act when our registration statement becomes effective. Subject to restrictions
on transfer referred to below, all other shares of common stock which we have
not registered are treated as "restricted securities" as defined under the
Securities Act and in the future may be sold in compliance with Rule 144 under
the Securities Act or pursuant to a registration statement filed under the
Securities Act. Rule 144 generally provides that a person holding restricted
securities for a period of one year may sell every three months in brokerage
transactions or market-maker transactions an amount equal to the greater of (i)
one percent (1%) of our issued and outstanding common stock or (ii) the average
weekly trading volume of the common stock during the four calendar weeks prior
to the sale. Rule 144 also permits, under certain circumstances, the sale of
shares without any quantity limitation by a person who is not an affiliate of
the company and who has satisfied a two year holding period. The sale of
substantial numbers of these shares, whether pursuant to Rule 144 or pursuant to
a registration statement, may have a depressive effect on the market price of
our common stock.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST OUR COMPANY
All of our assets are located outside the United States. In addition, all
of our directors and officers are nationals and/or residents of countries other
than the United States, and all or a substantial portion of our or these
persons' assets are located outside the United States. As a result, it may be
difficult for you, within the United States, to enforce against them or against
us, judgments obtained in United States courts, including judgments predicated
upon the civil liability provisions of the securities laws of the United States
or any state.
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XIN NET CORP.
PREVIOUS HISTORY
On September 6, 1996, we were incorporated under the laws of the State of
Florida under the name of Placer Technologies, Inc. We 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.
Our initial primary service consisted of developing web home pages for
small businesses in USA. Minimal revenues were generated by us in 1996.
On April 2, 1997, we acquired 100% interest of Infornet Investment Limited
("Infornet"), a Hong Kong corporation. In August 1997 our subsidiary, 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, we purchased 100% interest of Infornet Investment Corp.,
a British Columbia corporation. Infornet Investment Corp. is our subsidiary
which manages daily operations for us in the PRC.
On July 24, 1998, we changed our name from Placer Technologies, Inc. to Xin
Net Corp. in order to reflect the core business more accurately.
BUSINESS
CORPORATE OVERVIEW
Our structure showing our 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 Ltd.)
We have also incorporated Xinbiz Corp. (British Virgin Islands) on January 14,
2000 and its subsidiary Xinbiz Ltd. (Hong Kong) on March 10, 2000, but these
corporations only became operational recently. Both of these companies are our
wholly owned subsidiaries.
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OUR COMPANY
Our primary focus is to be an internet service company in the PRC, through
our joint venture with Xin Hai Technology Development Ltd. ("Xin Hai"). The
joint venture company which we formed with Xin Hai is called Placer Technologies
Corp. (Placer). In the PRC we do not have any operations other than our joint
venture participation with Xin Hai.
We currently maintain an office at: #830 - 789 West Pender Street,
Vancouver, B.C. Canada V6C 1H2 (telephone number is 1-604-632-9638). We also
have offices as part of the joint venture in Beijing at Suite 210, Building B,
No - 11 Wu Gen Lin Road, West District, Beijing, China, in Shenyang at # 44
North HuangHe St., HuangGu, Shenyang, Liaoning, China, Postal Code 110034 and in
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
the PRC by covering the major cities through the Placer joint venture with an
operating partner Xin Hai. Businesses include ISP, home-page portal, internet
advertising, domain name registration, e-commerce and other value-added
services.
Through our wholly owned subsidiary, Infornet Investment Ltd. (Hong Kong)
we formed a joint venture with Xin Hai Technology Development Ltd. (Xin Hai) for
upgrading telecommunication technology and services in the PRC under the name
Placer Technologies Corp. This has evolved into an internet focused service
provider and e-commerce business. Xin Hai started its internet service in
Beijing in April 1997. Our sole business is through the joint venture with Xin
Hai and Xin Hai has no other business except the joint venture.
ISP licenses in the PRC 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. Our Placer joint venture with
Xin Hai implements and develops software and computer network systems and
provides capital for the ISP business owned and operated by Xin Hai. Through our
subsidiary Infornet, the Xin Hai agreement provides our Company with 100% profit
participation in the Placer joint venture until we recoup our investment, at
which time the profit share reverts to 20% to Xin Hai and 80% to us (through
Infornet). In other words, a) before we have recouped our capital investment,
100% of the profits go to us, none to Xin Hai; and b) after we have recouped our
invested capital, we will receive 80% of profits and 20% will go to Xin Hai. A
different allocation of profits was originally agreed upon, but our Company and
Xin Hai subsequently amended the profit allocation. No profits were allocated
either to Infornet or Xin Hai prior to the amendment.
Our joint venture partner Xin Hai, is currently a supplier of internet
services in the PRC in the major cities of Beijing, Chengdu, Guangzhou, Shanghai
and Shenyang. Xin Hai management is currently planning to open offices in some
other cities in the PRC, for which licenses are already in hand.
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Revenues: Xin Hai will contribute all revenues from its business to our
Placer joint venture. Placer exclusively owns the revenues collected from all
the services and activities of Xin Hai in its ISP operations in the PRC. Xin Hai
receives no revenues from business other than through the Placer joint venture
with our subsidiary, Infornet.
Paying customers: Our business presently comprises three (3) aspects:
internet access and content services, domain name registration and online
auction & e-commerce. During the month of August 2000, total customers reached
300,000. Of these, approximately 55% were paying customers, with the others
taking advantage of the various free trial periods or services offered to them.
Placer Technologies Corp., our 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 in the PRC.
OUR JOINT VENTURE AGREEMENT FOR ISP BUSINESS
Our operations in Placer Technologies Corp., the "joint venture company,"
are defined in the "Operating Agreement of the Cooperative Joint Venture
Contract". Xin Hai Technology Development Ltd., our Chinese partner in the joint
venture, is contracted by the joint venture to conduct the day-to-day
operations.
Under our 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 the PRC 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
the PRC 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 that our subsidiary Infornet
can have access to all required U.S. dollars or other foreign currency
acceptable to it and that our subsidiary, Infornet, can send profits from
the joint venture and return of investment to us overseas;
- Xin Hai warrants that it will not cooperate with any party other than
our subsidiary, Infornet, with regard to our business;
- performing any other responsibilities as may be agreed upon by and between
Parties.
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We are responsible for:
- making the capital contribution to the joint venture company as
contemplated in our joint venture agreements for capital and operations
funds in accordance with the laws and regulations in the PRC;
- assisting Xin Hai in purchasing and/or leasing equipment, material, office
supplies, transportation, communication lines from local or overseas
suppliers;
- within the PRC territory, we warrant that we will not cooperate with any
other party than Xin Hai for the business specified in this agreement.
Placer Technologies Corp., our joint venture, owns all revenues collected
by Xin Hai Technology Development Ltd. from customers. 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 joint venture company 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 Xin Hai while the other sixty percent (60%) of the
revenue shall be transferred to a bank account of our joint venture company. 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 our 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 our investment
capital, fees for technical and management services performed by the joint
venture, or remitted as profits to our joint venture participants.
Our 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.
Our subsidiary, Infornet Investment Ltd. is obligated to contribute all of
the registered capital of the Placer joint venture. Xin Net Corp. provides the
funds to the subsidiary, Infornet. Under the joint venture the registered
capital is 525,000 USD and total amount of investment (registered capital plus
external financing) is 2,000,000 USD. Both of these amounts have been increased
in order to better reflect foreseen requirements. Through Infornet we have
contributed an additional capital amount of 1,225,000 USD, resulting in a total
contribution of 1,750,000 USD. No further capital contribution is required from
us or Infornet, however we have advanced and will continue to advance loans to
the joint venture as necessary to continue the business, but subject to the
limits of our capital. Loans made to the Placer joint venture by us amounted to
$2,588,021 USD at September 30, 2000. These loans are further described in
"Certain Relationships and Related Transactions". Xin Hai has not contributed to
the registered capital or loans to the Placer joint venture.
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OBLIGATIONS OF OUR JOINT VENTURE COMPANY
Under our joint venture contract, the joint venture provides Xin Hai with
all the software and equipment as well as the accessories necessary for selling
services to end users.
Our joint venture also shall provide 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 equipment and instruments to the
internet network.
Our joint venture partner 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 our joint venture. Subject to the prior
written approval of our 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 our joint venture. Xin Hai is not liable for further capital contribution in
our joint venture.
Our day-to-day network operations are conducted by the Chinese partner, Xin
Hai. General management is assumed by Mr. Xin Wei, an employee of Infornet
Investment Corp. (our 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 us, and thereafter for a period of 15 years, we will designate the
managers/directors of the joint venture and control the decisions of our joint
venture.
Our 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 our 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.
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Upon termination, the assets of our joint venture will be liquidated or sold and
the proceeds will be allocated:
-a) if we (through Infornet) have not yet recouped our invested capital, 100%
goes to Infornet and none goes to Xin Hai.
-b) if we have already recouped our 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 our joint venture
company or causes directly or indirectly, the failure to reach the goals
regarding the operations specified in our 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 our joint venture contract by filing an application to the
competent examination and approval authorities. Should our 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.
FINANCIAL REPORTS
We will receive a joint venture annual report within eighty (80) days after
the end of each fiscal year containing: audited financial statements as at the
end of, and for, the fiscal year (prepared in accordance with international
generally accepted accounting principles (International GAAP) adopted in the PRC
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 the financial
statements stating that the financial statements have been prepared in
accordance with international generally accepted accounting principles
(International GAAP) adopted in the PRC consistently applied; and a report of
allocations and distributions (whether directly or indirectly) to us and Xin
Hai.
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INTERNET INDUSTRY AND THE PRC MARKET
THE PRC ECONOMY
The PRC is one of the largest countries in the world and is the most
populated. Since 1949, the PRC 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,
the PRC 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.
COMPUTER INDUSTRY IN PRC
With 1.2 billion people, the PRC 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 personal computer 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 personal computer units were sold, making
the Chinese market the second-fastest growing market for personal computers 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 personal
computer 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.)
COMPUTER AFFORDABILITY IN PRC
The Beijing Review, December 14-20, 1998 reportED: "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.
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INTERNET IN PRC
Personal computer 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 personal computers (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 PRC market. In March 1999, Microsoft
unveiled a new product called Venus, developed by a joint venture in the PRC.
"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 THE PRC
The PRC has recently allowed other domestic companies to do businesses
formerly monopolized by China TeleCom. Presently, foreign investors are still
restricted from direct operation. The PRC 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, we plan to open more offices in major cities
and enhance e-commerce and other value-added services.
GOVERNMENTAL REGULATION FOR INTERNET SERVICES IN THE PRC
To date, Chinese internet operating licenses have been restricted to
Chinese companies only.
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."
Through our subsidiary, Infornet, we participate in the joint venture with
Xin Hai Technology Development Ltd., a Chinese privately owned company in the
internet business in the PRC. 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 foreign participants' assets in the
PRC. Any such action could have disastrous financial consequences to us and our
business.
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COMPETITIVE CONDITIONS
Privately owned ISPs in PRC like ours 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). We do not have a joint venture with a Chinese
government owned company, but rather we lease lines from China Telecom. In the
PRC, 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, we plan to grow our business in
the PRC based on quality of service, user friendliness and interesting content
on our 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, at work or at home.
Dial-up internet access is still expensive in the PRC as compared to North
America, and 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 free installation of a
second telephone line.
We introduced an expanded online e-commerce service to the Chinese market
in 1999. We now operate a live online auction site and provides online domain
name registration services. We have numerous competitors who also offer the same
services.
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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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IDC has projected high growth in internet usage in the PRC. The following
table summarizes key historical and projected data in the PRC market
(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%
(a) International Data Corporation, March 1999
(b) Calculated by dividing number of internet users by country population
(c) United States Census Bureau, December 1998
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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, we believe 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, we believe Hong Kong should be quick to utilize
internet technologies, and will access our services and our subscriber base.
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 personal computer 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. Our services cater directly
to such businesses seeking to expand online, and our 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, our 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.
We have has also sought to engage in e-commerce to capitalize on the
revenue generating opportunities through our ISP system. In September 1999, our
joint venture launched on online auction site in the PRC. IDC projects that
e-commerce in the PRC, 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).
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OUR BUSINESS
We offer a comprehensive suite of internet related services to the PRC
markets. We believe that by offering an integrated platform of content, access
and community and commerce related services, we believe we are positioned to
capitalize on the growth of the internet throughout the PRC.
OUR STRATEGY
Our strategy is to capitalize on the internet growth in the PRC among
Chinese users. We believe the Chinese 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 Chinese and Asian
internet markets, we seek to:
(a) Provide access to subscribers/users; and
(b) Create a platform for e-commerce and value-added services specifically
tailored to the Chinese market.
We believe the PRC 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, our strategy is to facilitate
e-commerce developments in these markets and generate revenues on a transaction
basis for businesses over our network.
(c) Utilize strategic alliances, business partnerships and acquisitions to
enhance our products and services and to expand our presence
geographically throughout Asia.
In order to increase our traffic and build our market we 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.
OUR JOINT VENTURE
All of our services are offered through our joint venture with our partner
Xin Hai. Xin Hai has been granted in 1999 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.
Our Shanghai office is fully operational as of July 1, 1999. We have opened an
office in Guangzhou, the key city in Southern China, and in Chengdu, in
Southeast China. All of the licenses owned by Xin Hai are part of joint venture
operations.
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OUR SERVICES
We are now offering domain name registration services. We have recently
incorporated the website www.chinadns.com, the first in the PRC to offer online
site registration. Our online domain name registration business, Chinadns,
continues to enjoy significant growth. In October 1999, Chinadns was approved as
an Official Agent of Network Solutions, Inc. Our chinadns.com business has
signed agreements with several hundred agents to sell its domain name
registration services in the PRC. Amongst these are several local telecom
companies, including Beijing Telecom and Luo-Yang Telecom, which have adopted
and purchased the proprietary Chinadns platform, and Ji Tong, China's third
largest telecommunications company. In just a few months, Chinadns had
registered over 13,000 domain names, making it one of the largest online domain
name registration services in the country. We also have an advertising banner on
Yahoo's Chinese site http://cn.yahoo.com. We also provides web hosting and web
page design services.
We have been awarded "Strategic Partner" status from IBM China. This status
officially identifies us as a Value Added Retailer for IBM hardware and software
including Netfinity servers, personal computers, Intellistation Work Stations,
ThinkPad, Aptiva multimedia personal computer's and all related products. We now
have the right to use IBM in its advertising and promotional material, and
receive special support and training from IBM.
We have been awarded a nationwide access number. We now own the five digit
95777 number which has become the standard access number for all of our
subscribers regardless of the city they are in. The Ministry of Information
Industry (MII) only grants a limited supply of these numbers which, besides the
prestige they confer, constitute a strong selling point. Our users also enjoy a
substantial discount from the normal telephone usage charges.
On December 21, 1999 we were accredited by ICANN (Internet Corporation for
Assigned Names and Numbers) as a new domain name registration service putting us
on a comparable position to Network Solutions, Inc.
The Commercial and Industrial Bank of China has signed an agreement to
collect payments from our customers through its network of more than 500
branches scattered across Beijing. We have also begun a series of special
promotions to increase sales of its prepaid internet access card, the Instant
Card, and recognition of the Xinnet brand name.
Content Services. We provide 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 the PRC. This localized
content is delivered through our network ISP. Xinnet.com.cn is our premier site
for content, community and commerce products and services in simplified Chinese,
entertainment as well as providing value-added community services through our
chat and message board services.
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MARKETING
We have already achieved some name recognition and market share. In the
future, we 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. We regularly enhance services and
update content hosted on the network in order to encourage frequent visits by
users. We offer community building services designed to increase user usage and
loyalty. We are 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, we believe that consumers who
use personalized services will continue to use portals and not switch to a
competitive service.
To facilitate growth we will solicit personal computer 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 our joint venture's web
site. We currently receive 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. We will enhance portal type home pages 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. We will also look for strategic alliances with
suitable partners.
The network in which we participate as a joint venturer has attracted more
than 300,000 clients in 3 years of operations as of August 31, 2000.
EMPLOYEES
As of the end of August 2000, we (through Xin Hai) had approximately 230
full-time employees in marketing, sales, technical operations, management and
support. All employees exclusively work on our joint venture business. Our
future success will depend in part on our ability to continue to attract, retain
and motivate highly qualified technical and marketing personnel. From time to
time, we also employ independent contractors to support development, marketing,
sales and support and administrative organizations. Our employees are not
represented by any collective bargaining unit and we have never experienced a
work stoppage.
FACILITIES
Servers. Our systems infrastructure consists of multi-vendor server systems
geographically located in the PRC, in Beijing, Shanghai, and Shenyang
interconnected to the internet through co-location at major ISP data center
facilities and at our own sites. Our auction site infrastructure is located in
British Columbia, Canada.
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REGULATION OF INTERNET OPERATIONS IN PRC
Under the Administrative Measures on Security Protection for International
Connections to Computer Information Networks, any use of the PRC 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 PRC 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 the PRC, we commit 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 the PRC. Where breaches are severe, criminal proceedings
may be initiated against our joint venture and the company.
Our joint venture partner, Xin Hai, provides regulatory advice and reviews
content provided through the network to determine whether such content is in
compliance with the PRC regulatory requirements. Because of the stringent
requirements relating to the type of content allowed utilizing the PRC internet
infrastructure and a conservative interpretation of such regulations, the
content provided over our joint venture network is stringently edited and may
not be as interesting as other web sites which do not try to comply with the PRC
regulatory requirements. Such web sites, however, may run the risk of being
blocked from the Chinese internet infrastructure by local public security
bureaus.
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The PRC 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. Our joint venture has complied
with these requirements.
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. We have fulfilled these registration procedures.
We 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 our principal services. The market is
focused on the PRC's major cities. Xin Hai offices in Beijing and Shenyang have
been operating since 1997. Our Shanghai office opened in June/July 1999.
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 arise primarily from: the need for capital for
expanding existing capacity of our services, to open more offices in other major
cities, to launch new value-added services, enhance capability for e-commerce
design and development in the PRC. 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. This provides the
needed working capital for current operations and limited growth of our
business up to the end of year 2001. Exercise of 5,885,000 series "A" warrants,
and then 5,885,000 series "B" warrants may provide further capital for much
faster and wider growth of our company.
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DEPENDENCE ON CLIENT BASE.
Presently all revenues come from subscription fees, net cards, advertising
and domain name registration from the client base in Beijing, Chengdu,
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. Our dependence on this client
base will continue in the foreseeable future.
Backlog of Orders. None.
Government Contracts. None.
COMPETITIVE CONDITIONS.
A number of factors, beyond our control and the effect of which cannot be
accurately predicted, may affect the marketing of the internet access and
services to our 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 the PRC is
highly competitive. Our 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 our 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 the PRC 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 our 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.
XIN NET SPONSORED RESEARCH AND DEVELOPMENT. None.
COMPLIANCE WITH RELATED LAWS AND REGULATIONS.
The operations of our joint venture with Xin Hai are subject to local,
provincial and national laws and regulations in the People's Republic of China.
Xin Hai Technology Development Ltd. holds licenses to do businesses in the
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currently operated locations: Beijing, Chengdu, Guangzhou, Shanghai and
Shenyang, as well as in five other cities. We are unable to assess or predict at
this time what effect the regulations or legislation could have on our
activities in the future.
(a) Local regulation -
We cannot determine to what extent our future operations and earnings may
be affected by new legislation, new regulations or changes in existing
regulations on a local level in PRC.
(b) National regulation -
We cannot determine to what extent our future operations and earnings may
be affected by new legislation, new regulations or changes in existing
regulations on a national level. (See Discussion of such laws previously under
"Regulations of internet Operations" and "Government Regulation for Internet
Service in China").
The value of our investments in PRC may be adversely affected by
significant political, economic and social uncertainties in the PRC. Any changes
in the policies by the government of the PRC could adversely affect us 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) - we entered into
a joint venture with Xin Hai Technology Ltd. to provide technology and capital
to expand ISP services in the PRC. We 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 our 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 us. Please see the extensive discussions
of these agreements on pages 28 to 31.
NUMBER OF PERSONS EMPLOYED
As of August 31, 2000, we 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 our company: Du in Canada and Wei in
China. Xin Hai, our partner in the Placer joint venture, had approximately 230
full-time employees in PRC at the end of August 2000.
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YEAR 2000 CONSIDERATION
We have assessed and continue to assess the risk of "Y2K" problems in
the operation of our 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 our disruption of 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. We are 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 our hardware and
software have been upgraded for 2000 compliance accordingly, we do not believe
that we 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. We rely on non-IT systems that may suffer from Year
2000 problems including telephone systems, facsimile and other office machines.
Moreover, while we rely on third-parties that may suffer from Year 2000 problems
that could affect our operations, we do not believe that third-party Year 2000
problems will affect the company in a manner that is different or more
substantial than the problems affecting other similarly situated companies. We
have designed a limited contingency plan with respect to Year 2000 problems that
may affect us or third-party suppliers.
The foregoing is a "Year 2000 Readiness Disclosure" within the meaning of
the Year 2000 Information and Readiness Disclosure Policy. The nature of our
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 our capital expenditures,
earnings or competitive position.
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<PAGE>
PRICE RANGE OF OUR COMMON STOCK & STOCKHOLDER MATTERS
(a) Our common stock is traded on the NASD Electronic Bulletin Board. The
following table sets forth high and low bid prices of the our common stock for
years ended December 31, 1997, December 31, 1998, December 31, 1999 and to date,
as follows:
Bid (U.S. $)
2000 HIGH LOW
First Quarter $20.12 $2.78
Second Quarter $ 9.37 $2.00
Third Quarter $ 6.50 $1.34
Fourth Quarter $ 2.81 $0.53
1999
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
Because of recent changes in the rules and regulations governing the
trading of small issuers securities, our securities are presently classified as
"Penny Stock," which classification places significant restrictions upon
broker-dealers desiring to make a market in these securities. It has been
difficult for management to interest any broker-dealers in our securities and it
is anticipated that these difficulties will continue until we are able to obtain
a listing on NASDAQ at which time market makers may trade our securities without
complying with the stringent requirements. The existence of market quotations
should not be considered evidence of the "established public trading market."
The public trading market is presently extremely limited as to number of market
markers in our stock and the number of states within which our stock is
permitted to be traded.
The over-the-counter market quotations above reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
(b) Shareholders. As of August 30, 2000 we had approximately
6800 shareholders of record.
(c) Dividends. We haven't ever paid any dividends.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
We had cash capital of $5,293,429 at 1999 year end compared to $336,189 at
year end 1998. We have no other capital resources other than the ability to use
our common stock to achieve additional capital raising in a private placement.
We have 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 we 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.
RESULTS OF OPERATIONS
We will carry out the plan of business as discussed above. We cannot
predict to what extent our liquidity and capital resources will be depleted by
the operating losses (if any) of the Placer Technologies Corp. joint venture.
For fiscal year 1999, we 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
We achieved revenues of $982,108 in 1999 in the form of net sales from our
joint venture with Xin Hai Technology Ltd. Our net sales in 1998 were $494,676.
We 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. We 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. We 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, our 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, we expanded our business in the PRC 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.
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<PAGE>
Moreover, we 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.
Future trends: We cannot assure that any profit on revenues can occur in
the future, because we intend to expand the business, including investing in
further internet "backbone" and technology for our PRC internet operations. We
may spend in excess of $3,000,000 in 2000 on development of our business in the
PRC, and it should be expected that we may have a loss on operations.
Expenditure may be significantly higher if we acquire additional capital, for
example through investors exercising warrants, and decide to accelerate our
expansion plans.
CHANGES IN FINANCIAL CONDITION
At year end 1999 our 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 and current liabilities at year end
1999 were $339,700 compared to $73,816 at 1998 year end. In May, 1999, we
completed a private offering of units which achieved $5,500,000 in cash. At
December 31, 1999 we had $5,293,429 in cash.
We began operations as an ICANN-accredited domain name registrar in the
third quarter of this year. As a result, an important accounting change was made
in the way we recognize revenues and costs related to .com, .net and .org domain
name registration services. Prior to this event we acted as agents of other
ICANN-accredited registrars. International domain name revenues and costs were
then recognized when collected and incurred respectively. Such revenues and
costs are now spread over the various periods during which the services are
rendered. Generally, revenues collected are non-refundable and we have not made
any refunds since we started operations.
This change in accounting practice conforms with SEC (Securities and
Exchange Commission) recommendations. As a consequence, third quarter financial
statements show revenue and cost of revenue which are lower than they would have
been otherwise. At the same time unearned revenue and prepaid expenses increase
correspondingly.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000
COMPARED TO THE SAME PERIOD IN 1999
We had revenues from our operations in PRC in the amount of $882,623 in the
third quarter of 2000 as compared to $190,630 in the same period in 1999. As a
result of increased marketing and branding efforts, internet access revenues
increased to $512,850 from $165,679 and domain name revenues increased to
$107,822 from $14,449. Also, our diversification into the e-commerce enabling
business caused e-solutions revenues to increase to $261,951 from $10,502 in the
same period in 1999.
As a result of increased sales and the accounting change in recognizing
domain name revenue, unearned revenue increased to $982,011 from $410,642 during
the period, as compared to a nominal increase during the same period in 1999.
We had a cost of revenue of $94,589 which resulted in a gross profit of
$788,034 in the third quarter of 2000, as opposed to a cost of revenue of
$29,007 which resulted in a gross profit of $161,623 in the third quarter in
1999.
We incurred total expenses of $1,837,612 in the third quarter in 2000
compared to $429,170 in the same period of 1999, as a result of expenditures to
expand its ISP, domain name registration and e-commerce business in PRC. The
largest expenses of operations in the quarter were $566,641 for administration
and office, $616,931 for advertising and promotion, and $321,815 for salaries,
wages and benefits. Now that our expansion to other cities in PRC for this year
has taken place, expenses are expected to increase at a slower rate during the
rest of the year.
We had an operating loss of ($1,049,578) in the period in 2000 compared to
a loss of ($267,547) in the period in 1999. Loss per share was ($0.05) in the
period in 2000 and ($0.01) in 1999.
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<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
COMPARED TO THE SAME PERIOD IN 1999
We had revenues from our operations in PRC in the amount of $2,361,964 in
the first nine months of 2000 as compared to $556,719 in the same period in
1999. As a result of increased marketing, branding and diversification efforts,
all the three revenue streams increased significantly: internet access revenues
to $1,309,530 from $531,768; domain name revenues to $607,032 from $14,449 and
e-solutions revenues to $445,402 from $10,502.
We had a cost of revenue of $437,412 which resulted in a gross profit of
$1,924,552 in the first nine months of 2000, as opposed to the previous year
period cost of revenue of $94,903 which resulted in a gross profit of $461,816
in the first nine months in 1999.
As a result of increased sales and the accounting change in recognizing
domain name revenue, unearned revenue for the nine month ended September 30,
2000 totaled $982,011 as compared to a nominal amount for the same period in
1999.
We incurred total expenses of $4,347,043 in the first nine months in 2000
compared to $795,504 in the first nine months of 1999. We had a very significant
increase in expenses in the period in 2000 over 1999 as a result of expenditures
to expand our ISP, domain name registration and e-commerce business in PRC. The
largest expenses of operations in the first nine months were $1,397,802 for
administration and office, $1,468,471 for advertising and promotion, and
$678,872 for telephone and communication. Now that our expansion to other cities
in PRC for this year has taken place, expenses are expected to increase at a
slower rate during the rest of the year.
We had an operating loss of ($2,422,491) in the period in 2000 compared to
a loss of ($333,688) in 1999. Loss per share was ($0.11) in the period in 2000
and ($0.01) in 1999.
Interest income: Interest income was $125,105 for the nine months ended
September 30, 2000 as compared to $108,414 for the same period in 1999. Interest
income earned in the future will be dependent on our funding cycles and
prevailing interest rates.
Provision for income tax: As of the nine month period ended September 30,
2000, our accumulated deficit was ($3,630,476) and as a result, there has been
no provision for income taxes to date. We have net operating loss carry forwards
that will expire principally in 2012 unless utilized.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had total current assets of $3,848,409 of
which $2,742,662 was cash. At the same time, there was $1,270,885 in current
liabilities leaving a working capital of $2,577,524. We have no debt.
We had $2,742,662 in cash at September 30, 2000, compared to $6,109,389 at
the same time one year earlier. The capital structure, with the exception of the
accumulated losses, has remained the same for both periods.
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<PAGE>
We have 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. We completed a private offering of common stock at $0.40 per share
for $750,000 in June 1998. In 1999 we 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.
NEED FOR ADDITIONAL FINANCING
We have capital sufficient to meet our current cash needs, including the
costs of compliance with the continuing reporting requirements of the Securities
Exchange Act of 1934. We may have to seek loans or equity placements to cover
future cash needs to continue expansion. We have no assurance, however, that the
available funds will ultimately prove to be adequate to continue our business
and our needs for additional financing are likely to increase substantially.
For our proposed expansion budget for the period from January 1, 2000 to
December 31, 2001, our assumptions are:
1. Cash on hand at September 30, 2000 was $2,742,662.
2. Revenues generated from ongoing business are insufficient to
finance existing operations and we have an average deficit of
($269,165) per month.
3. All series "A" warrants will be exercised, bringing a new capital
of $11,770,000.
4. No series "B" warrants are exercised.
Total capital available for expansion: $11,770,000 (See "Our Proposed Use
of Proceeds", pg. 53)
No commitments to provide additional funds have been made by management or
other stockholders. Accordingly, we have no assurance that any additional funds
will be available to us to allow it to cover operations expenses. We achieved a
private placement of $5,500,000 in May 1999 and retain over $2,742,662 as
capital at September 30, 2000.
If our future revenue declines, or our operations are unprofitable, we will
be forced to develop another line of business, or to finance operations through
the sale of assets, or enter into the sale of stock for additional capital, none
of which may be feasible when needed. We have no other specific management
ability, nor financial resources or plans to enter any other business as of this
date.
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From the aspect of whether we can continue toward our business goal of
maintaining and expanding our joint venture for internet services in the PRC, we
may use all of our available capital without generating a profit at current
monthly loss rates of ($195,000) we will expend all of our capital in twenty
four months or less.
The effects of inflation have not had a material impact on our operation,
nor is it expected to in the immediate future.
Although we are 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.
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. We adopted
SFAS No. 128 for the six-months ended December 31, 1997. The adoption of this
standard did not affect our 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 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 our chief operating decision maker to make decisions about
resources to be allocated to the segment and to assess its performance.
SFAS Numbers 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 our financial position or our
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results of operations. The adoption of SFAS No. 131 will have no effect on the
our financial position or results of operations and we are 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
We do 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 these
instruments.
LEGAL PROCEEDINGS
We, in the normal course of business, may be engaged in lawsuits, as a
plaintiff or defendant, involving matters such as compensation disputes,
employment matters, contract disputes and other matters related to its business.
No lawsuits are presently pending against us.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We have not submitted any
matters to security holders in the past year.
CAPITALIZATION
Our capitalization as of September 30, 2000 and as adjusted to reflect the
sale and issuance of the shares underlying the "A" warrants and shares
underlying "B" warrants being registered by us is as follows (see Financial
Statements for further information):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Amount Amount to be outstanding if
outstanding as Warrants are exercised
--------------------------------------------
of September "A" warrant "B" warrant
30, 2000 shares shares
STOCKHOLDER'S EQUITY
Common Stock, $0.001 par value,
50,000,000 shares authorized 21,360,010 27,245,000 33,130,000
Paid in Capital 21,360 27,245 31,130
Capital in excess of par value (2) 7,214,045 18,978,140 48,403,140
Accumulated deficit (3,630,476) (3,730,476) (3,730,476)
Accumulated other comprehensive loss (126,664) (126,664) (126,664)
---------------------- ----------------------- --------------------
TOTAL SHAREHOLDER'S EQUITY 3,478,265 15,148,245 44,579,130
====================== ======================= ====================
</TABLE>
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(1) Does not include up to 2,136,000 shares reserved for issuance pursuant to an
Incentive Stock Option Plan. See "Management: Stock Option Plans."
(2) After estimated expenses of this offering.
(3) Assumes $100,000 in expensed incurred.
OUR PROPOSED USE OF PROCEEDS
From Exercise of 5,885,000 Series "A" warrants at
US$2.00/warrant and 5,885,000 Series "B"
warrants at US$5.00/warrant
(US$11,770,000 + US$ 29,425,000)
We will not receive any of the proceeds of the sale of 5,885,000 shares by
selling shareholders.
We will use the proceeds resulting from the exercise of the 5,885,000
series "A" warrants and the 5,885,000 series "B" warrants if all are exercised,
for a total amount of US$41,195,000 to expand the business in the PRC, by
opening new offices in the six (6) cities for which ISP licenses are already in
hand and in another nineteen (19) major cities, and develop our internet
business.
The following breakdown indicates our best estimates at the present time.
However, actual numbers for any expenditure item may differ significantly from
estimates.
After deducting the estimated registration expenses not yet paid, our net
proceeds from exercise of our warrants will be approximately $11,770,000 if "A"
warrants are sold and $29,425,000 if all our shares underlying "B" warrants are
sold. We expect to apply the net proceeds of the "A" warrant exercises
substantially in the manner set forth below. In the case of the maximum
exercise, we expect to expend the proceeds during the next 12 months, and in the
case of the "B" warrant exercises, we anticipate expending proceeds during the
next 36 months.
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A warrant exercise % B warrant exercise %
Proceeds Proceeds
------------------ ----------- ------------------ -----------
Joint Venture Expenses:
Telecom Lines Leasing 1,200,000 10.0% 3,800,000 12.9%
Software 1,200,000 10.0% 3,800,000 12.9%
Offices (News) 300,000 2.5% 950,000 3.2%
Advertising Promotion 900,000 7.6% 1,100,000 3.7%
Online Auction Expenses 1,500,000 12.7% 1,500,000 5.0%
Domain Name 500,000 4.2% 500,000 0.5%
Hardware 1,500,000 12.7% 5,700,000 10.0%
General and Administrative Expenses
Officers' Salaries and Related 300,000 2.5% 450,000 1.5%
Benefits (2)
Support Personnel (3) 1,000,000 8.4% 1,500,000 5.0%
Office Rent 100,000 0.8% 150,000 0.5%
Accounting and Legal 200,000 1.6% 300,000 1.0%
Travel and Related Expenses 100,000 0.8% 150,000 0.5%
Working Capital and Contingency 2,540,000 21.5% 10,025,000 34.0%
TOTAL 11,770,000 100.0% 29,425,000 100.0%
</TABLE>
(1) See Business
(2) See Management: Executive Compensation
(3) See Business: Employees
Our projected expenditures are estimates or approximations only. To the extent
that the proposed expenditures cannot be achieved for the scheduled amounts, we
may draw supplemental amounts required from other categories of estimated
expenses, if available, or derived from additional financing, of which we have
no assurance. Any amounts which we don't expend for scheduled purposes we will
use as general working capital.
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<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS
AND SIGNIFICANT MEMBERS OF MANAGEMENT
(a) The following table furnishes the information concerning our directors
and officers as of June 30, 2000. Our directors are elected every year and
serve until their successors are elected and qualify.
<S> <C> <C> <C>
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.
(Our joint venture partner in China)
</TABLE>
On March 10, 1999 Jing Liang resigned as a director.
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 our company:
Ernest Cheung 25% Angela Du 100%
Marc Hung 100% Maurice Tsakok 25%
The term of office for each director is one (1) year, or until his/her
successor is elected at our annual meeting and is qualified. The term of office
for each officer of our company is at the pleasure of the board of directors.
The board of directors had neither a nominating nor auditing committee.
Therefore, the selection of persons or election to the board of directors was
neither independently made nor negotiated at arm's length.
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(b) Identification of Significant Employees.
Strategic matters and critical decisions are handled by our directors and
executive officers of our 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 of our directors and executive officers, including principal
occupations and employment during that period and the name and principal
business of any corporation or other organization in which the 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 our 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., our wholly
owned subsidiary in Canada, and remains a director of our company.
ERNEST CHEUNG, Secretary and Director, age 49, has been Secretary of our
company since May 1998. He received a B.A. in 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 known as Merrill Lynch Canada. From
1992 until 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 our 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 our company since
April 6, 1999. From May 1992 to April 1997, Marc Hung was director of 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
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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 (since 1997), 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).
XIN WEI, age 30, is President of Xin Hai Technology Development Corp., the
joint venture partner in Placer Technology Corp., our 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, and also served as a director of Xin Hai Technology Development Corp.
EXECUTIVE COMPENSATION
(a) Cash Compensation.
Compensation paid by us for all services provided up to December 31, 1999
(1) to each of our executive officers and (2) to all officers as a group.
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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
President 1999 0 0 17,500 0 0 $4,500 (2)
------------------------------------------------------------------------------
Ernest Cheung, 1998 0 0 0 0 0 (1)
Secretary 1999 0 0 8,000 0 0 $385,000
------------------------------------------------------------------------------
Officers as a 1998 20,000 0 0 0 0
Group 1999 27,474 0 41,500 0 0 $389,500
(CDN) (CDN)
Effective on April 6, 1999, Marc Hung was appointed as President and Angela
X. Du resigned as our President. She is the President of Infornet Investment
Corp., the wholly owned operating subsidiary in Canada.
(1)Richco Investors, Inc. of which Mr. Cheung is an officer and director,
and Mr. Tsakok is an officer and director, received 385,000 units for its
services in structuring the private placement.
(2) Compensation in the form of options at a below market price.
58
<PAGE>
SUMMARY COMPENSATION TABLE OF DIRECTORS
(To December 31, 1999)
Cash Compensation Security Grants
-----------------------------------------------------------------------------
Name and Year Annual Meeting Consulting Number Securities
Principal retainer Fees ($) 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 as listed above, received
any compensation in 1998.
Effective on May 1, 1998, Jing Liang resigned from his position as
Secretary. Ernest Cheung was appointed Secretary as of the same date.
Effective March 10, 1999 Jing Liang resigned as director.
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.
59
<PAGE>
(f) Stock purchase options:
On February 26, 1999, stock options for a total of 480,000 shares at $.40
per share we granted to officers and employees (or persons who became officers)
that had contributed to our 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,
but an employee of our subsidiary, Infornet Investment Corp.) All share options
were exercised as of April 6, 1999.
On November 12, 1999 we granted 2,136,000 options to purchase shares at
$1.30 per share to entities/persons who contributed to the successful results
achieved by us in 1999, as follows:
(a) 262,000 options to Gemsco Management Ltd. 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. for their
contributions to the general management of our 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
that market;
(e) 50,000 options to Ernest Cheung for services rendered as
secretary and director;
(f) 20,000 options to Yonderiche International Consultants Ltd.
for services rendered in matters regarding Chinese government
policies and regulations; and
(g) 1,068,000 options to a group of persons who made key
contributions to the successful continued development of the
business in the PRC and helped Xin Hai Technology Development
Ltd. achieve 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 of our stock for the five trading days ended on
November 12, 1999 was $1.28 per share. The closing price for our stock on
November 12, 1999 was $1.187 per share.
Section 16(a) of the Securities Exchange Act of 1934, requires our officers
and directors, and persons who own more than 10% of a registered class of our
securities, to file reports of ownership and changes in ownership of our equity
securities with the SEC and NASDAQ. Officers, directors and greater-than 10%
shareholders are required by the SEC regulation to furnish our company with
copies of all Section 16(a) information that they file.
60
<PAGE>
Some of our officers and directors 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 our company. There will be occasions when the time
requirements of our business conflict with the demands of their other business
and investment activities. These conflicts may require that we attempt to employ
additional personnel. There is no assurance that the services of these persons
will be available to us or that they can be obtained upon terms favorable to us.
There is no procedure in place which would allow our 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.
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF PRINCIPAL OWNERS AND MANAGEMENT
(a) Beneficial owners of five percent (5%) or greater, of our common stock:
The following sets forth information with respect to ownership by holders of
more than five percent (5%) of our common stock known by us based upon
21,360,010 shares outstanding at September 30, 2000, and in the event of
exercise of all options for our stock.
<S> <C> <C> <C> <C> <C>
Title of Name and Address Amount of Percent of If "A" If "B"
Class of Beneficial Owner Beneficial Interest Class warrants warrants
exercised* exercised**
-----------------------------------------------------------------------------------------------------------------------------------
Common Xiao-qing Du
Stock #2754 Adanac St. 2,760,000 12.9% 10.0% 8.3%
Vancouver, BC V5K 2M9 (2)
Common Richco Investors, Inc. 5,824,500 24.0% 20.2% 17.4%
Stock Ste. 830-789 West Pender St. (1)(3)(9)(10)
Vancouver, BC V6C 1H2
Common Ernest Cheung 5,562,500 23.4% 19.3% 16.7%
Stock Ste. 830-789 West Pender St. (1)(3)(5)(8)(9)(10)
Vancouver, BC V6C 1H2
Common Maurice Tsakok 5,204,500 21.8% 18.9% 15.5%
Stock Ste. 830-789 West Pender St. (1)(3)(6)(10)
Vancouver, BC V6C 1H2
</TABLE>
<TABLE>
<CAPTION>
(b) The following sets forth information with respect to our common stock
beneficially owned by each Officer and Director, and by all Directors and
Officers as a group, at September 30, 2000, and in the event of exercise of all
options for our stock.
<S> <C> <C> <C> <C> <C>
Title of Name and Address Amount of Percent of If "A" If "B"
Class of Beneficial Owner Beneficial Interest Class warrants warrants
exercised* exercised**
----------------------------------------------------------------------------------------------------------------------------------
Common Xiao-qing Du (Director) 2,760,000 12.9% 10.0% 8.3%
Stock 2754 Addnac St. (2)
Vancouver, B.C. V5K 2M9
Common Ernest Cheung 5,562,500 23.4% 19.3% 16.7%
Stock (Secretary & Director) (1)(3)(5)(8)(10)
(See Richco Investors above)
61
<PAGE>
Common Maurice Tsakok 5,204,500 21.8% 18.9% 15.5%
Stock (Director) (1)(3)(6)(10)
(See Richco Investors above)
Common S.Y. Marc Hung (President & Director) 540,000 2.47% 1.99% 1.6%
Stock Ste. 830-789 W. Pender St. (4)(7)(10)
Vancouver B.C. V6C 1H2
Total for officers and directors as a group 6,102,500 24.7% 20.9% 18.1%
</TABLE>
(1) Richco Investors, Inc., owns 2,772,500 shares. Messrs. Cheung and Tsakok
are officers, directors and beneficial owners of Richco Investors Inc. For
purposes of this table, the shares owned by Richco are deemed owned by Mr.
Cheung and Mr. Tsakok, individually.
(2) As an officer Ms. Du may participate in the company stock option plan and
receive options to purchase shares, but the amount is indeterminate at this
time, since options are awarded by the Award Committee.
(3) Richco Investors has 1,085,000 "A" warrants to purchase shares of common
stock and has 1,085,000 "B" warrants to purchase shares of common stock *.
(4) Marc Hung has 80,000 "A" warrants to purchase shares of common stock and he
has 80,000 "B" warrants to purchase shares of common stock.*
62
<PAGE>
(5) Ernest Cheung has 50,000 options to purchase shares at $1.30.
(6) Maurice Tsakok has 262,000 options to purchase shares at $1.30.
(7) Marc Hung has 262,000 options to purchase shares at $1.30.
(8) Ernest Cheung is President of Development Fund II of Nova Scotia, Inc.
which owns 190,000 common shares and 190,000 "A" warrants (and potentially
"B" warrants).
(9) Includes all shares of Richco Investors, Inc., Ernest Cheung, Maurice
Tsakok, and Development Fund II of Nova Scotia since there is common
control.
(10) Assumes exercise of all warrants and options within 60 days pursuant to
Rule 13(d)3(d)(i).
*If all "A" warrants for units are exercised.
**If all "B" warrants for shares are exercised.
Compensation Committee
We established a Compensation Committee on October 5, 1999 which consists
of two directors, Marc Hung and Ernest Cheung. 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 our
officers and directors.
Committees of our Board of Directors
Audit Committee. On August 31, 1999, our Board of Directors established an
Audit Committee, which consists of two directors, Marc Hung and Ernest Cheung.
Our Audit Committee will be charged with recommending the engagement of
independent accountants to audit our financial statements, discussing the scope
and results of the audit with the independent accountants, reviewing the
functions of our management and independent accountants pertaining to our
financial statements and performing other related duties and functions as are
deemed appropriate by our Audit Committee and our Board of Directors.
DIRECTOR RENUMERATION
All of our directors will be reimbursed for out-of-pocket expenses incurred
in connection with attendance at board and committee meetings. We have granted
options to directors under our Stock Incentive Plan subsequently adopted.
63
<PAGE>
RELATIONSHIPS AND RELATED TRANSACTIONS
We have made loans to the Placer joint venture during the year 1999. These
loans bear 0% interest and are payable on demand. At September 30, 2000 the
cumulative amount of the loans was $2,588,021.
On February 20, 1997, we issued 4,000,000 shares of common stock for
services rendered at $.001 per share to 15 shareholders, none of whom were
affiliated or shareholders. The following shareholders received shares equal to
or greater than 5% of the then outstanding shares: Xin Wei - 750,000 shares. Xin
Wei was awarded 750,000 shares as founder of Xin Hai Technology Development Ltd.
and for obtaining the necessary ISP permit, business license and MOFTEC approval
on February 20, 1997. We received no cash from the issuance of the shares. Mr.
Wei is President of Xin Hai Technology Development, Ltd., our joint venture
partner in China.
In 1997, we issued 5,000,000 shares of common stock to acquire the wholly
owned subsidiary, Infornet Investment Corp. (Canada) to X. Qing (Angela) Du -
4,000,000 shares and Jing Liang - 1,000,000 shares.
On August 25, 1997, through the wholly-owned subsidiary, Infornet
Investment Limited (Hong Kong), we formed a cooperative joint venture called
Placer Technologies Corp. (a limited liability company) with Xin Hai Technology
Development Ltd. (a People's Republic of China Corporation) as a partner, for a
term of twenty (20) years. Xin Hai Technology Development Ltd. (Xin Hai) is
engaged in the business of developing computer hardware, software, and
telecommunication network technology, owning and operating internet Service
Providers, and providing consultation and training services.
On February 26, 1999, stock options for a total of 1.4 million shares at
$.40 per share were granted to parties that had contributed to the efforts of
our company in the past. The option recipients were Lancaster Pacific Investment
Ltd., Tandoor Holdings Limited, Marc Hung, Kun Wei and Xin Wei. All 1.4 million
share options were exercised as of April 6, 1999.
(1) Tandoor Holdings was instrumental in the formation of
our company. It prepared the original business plan
for Xin Hai Technologies and helped in the
structuring of the Xin Hai/Infornet joint venture. It
also helped in presentations to potential investors.
(2) Lancaster Pacific introduced the Shenyang office team
to Xin Hai and contributed to the establishment of
our second operating location. It also helped in the
design of the accounting and management information
systems for Xin Hai.
(3) 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 our advisor in matters relating to
management, technology and strategies.
64
<PAGE>
(4) In February 1999, Kun Wei, a shareholder, was granted
and exercised (in March 1999) 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 our joint venture, in
particular with regards to technology development and
implementation.
(5) In February 1999, Xin Wei, a shareholder, who is
President of Xin Hai Technology Development, Ltd.,
our Placer 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 our joint venture, in
particular with regards to general management of Xin
Hai Technology Development Ltd., business development
and governmental relations.
(6) In May 1999, Marc Hung, President and Director,
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 and purchased 700,000 units in the
private placement at $1.00 per unit in May 1999.
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 in
May 1999. Richco Investors is an affiliate of us through share ownership, and
Ernest Cheung and Maurice Tsakok are officers and directors of Richco. Mr.
Cheung is our Secretary and Director and Mr. Tsakok is a Director.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Clancy & Co. P.L.L.C. completed the audit of the balance sheets as of
December 31, 1998, and 1999 and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998, and
1999. The Independent Audit Report for 1997 contained an opinion which included
a paragraph discussing uncertainties related to our continuation as a going
concern. In connection with these prior audits, no disagreement exists with any
former Accountant on any matter of accounting principles or practices, financial
statements disclosure, or auditing scope of procedure, which
65
<PAGE>
disagreement, if not resolved to the satisfaction of the former Accountant,
would have caused the Accountant to make reference in connection with his report
to the subject matter of the disagreement(s).
DESCRIPTION OF SECURITIES
COMMON STOCK
Our Articles of Incorporation as amended authorize the issuance of
50,000,000 shares of common stock at $.001 par value. Each record holder of
common stock is entitled to one vote for each share held on all matters properly
submitted to the stockholders for their vote. Cumulative voting for the election
of directors is not permitted by the Articles of Incorporation.
Holders of outstanding shares of common stock are entitled to dividends as
may be declared from time to time by the Board of Directors out of legally
available funds; and, in the event of liquidation, dissolution or winding up of
our affairs, holders are entitled to receive, ratably the net assets of us
available to stockholders after distribution is made to the creditors. Holders
of outstanding shares of common stock have no preemptive, conversion or
redemptive rights. All of the issued and outstanding shares of common stock are,
and all unissued shares when offered and sold will be, duly authorized, validly
issued, fully paid, and nonassessable. To the extent that additional shares of
our common stock are issued, the relative interests of then existing
stockholders may be diluted.
WARRANTS
We have issued 5,500,000 warrants as part of our 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 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) common share of the
Issuer at a price of US $5.00 per share on or before March 31, 2002. On
September 17, 1999 we issued 385,000 warrants to Richco Investors, Inc. for
services rendered in structuring the private placement in May 1999.
REPORT TO STOCKHOLDERS
We shall make available annual reports to a stockholders containing audited
financial statements reported upon by our independent auditors. We intend to
release unaudited quarterly and other interim reports to our stockholders as we
deem appropriate.
66
<PAGE>
TRANSFER AGENT AND REGISTRAR
Holladay Stock Transfer, Inc. is the transfer agent and registrar for all
of our securities, including the $.001 par value common stock.
LIMITATIONS ON DIRECTOR LIABILITY
Our bylaws require us to indemnify our directors and officers, and allow us
to indemnify our other employees and agents, to the fullest extent permitted by
law. We have also entered into agreements to indemnify our directors and
executive officers. We believe that these provisions and agreements are
necessary to attract and retain qualified directors and executive officers. At
present, there is no pending litigation or proceeding involving any director,
officer, employee or agent where indemnification will be required or permitted.
We are not aware of any threatened litigation or proceeding that might result in
a claim for indemnification. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling our company pursuant to the foregoing provisions, we have been
informed that, in the opinion of the Securities and Exchange Commission, it is
against public policy and is therefore unenforceable.
The Board of Directors may alter, amend or repeal our Bylaws by the
affirmative vote of at least a majority of the entire Board of Directors,
provided that any Bylaws adopted by the Board of Directors may be amended or
repealed by the shareholders. The shareholders may also adopt, repeal, or amend,
our Bylaws by the affirmative vote of at least a majority of the shares that are
issued and outstanding and entitled to vote.
PLAN OF DISTRIBUTION
The shares of common stock have been registered for offer and sale from
time to time by selling stockholders to purchasers directly or through agents,
brokers or dealers. These sales may be made in the over-the-counter market or
otherwise at market prices then prevailing or in negotiated transactions. No
selling stockholder is obligated to sell any common stock pursuant to this
prospectus.
Selling stockholders and any brokers or dealers participating in the
registration of the shares of common stock may be deemed to be "underwriters"
under the Securities Act, and any profit on the sale of the shares of common
stock by them and any discounts, commissions or concessions received by any
broker or dealer may be deemed to be underwriting discounts and commissions
under the Securities Act. We are not aware of any arrangement among selling
stockholders to sell or refrain from selling any shares of common stock.
Expenses in connection with the registration of the shares of common stock
pursuant to this prospectus, including fees and expenses of our legal
67
<PAGE>
counsel and independent auditors, filing fees and printing expenses, will be
borne by us. Selling stockholders will bear additional legal expenses that they
incur, if any, as well as commissions and discounts received by brokers or
dealers in connection with the sale of shares of common stock. We have agreed to
indemnify selling stockholders against civil liabilities in connection with the
Registration Statement of which this prospectus is a part (the "Registration
Statement"), including liabilities under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the shares of common stock may not simultaneously
engage in market making activities for specified periods prior to the
commencement of the distribution. In addition, and without limiting the
foregoing, each selling stockholder will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including, without
limitation, Rules 10b-6 and 10b-7, which provisions may limit the timing of
purchases and sales of common stock by selling stockholders.
Selling stockholders, Marc Hung, Ernest Cheung, Richco Investors, Inc.,
Maurice Tsakok and Development Fund of Nova Scotia, and any broker-dealer who
acts in connection with the sale of shares of these persons or entities will be
deemed to be "underwriters," as that term is defined in the Securities Act. Our
selling stockholders will pay or assume brokerage commissions or underwriting
discounts incurred in connection with the sale of their shares of common stock
and commissions or discounts will not be paid or assumed by us.
SELLING STOCKHOLDERS
Our Registration Statement has been filed pursuant to Rule 415 under the
Securities Act to afford our holders of shares of common stock being registered,
the opportunity to sell the shares of common stock in a public transaction
rather than pursuant to an exemption from the registration and prospectus
delivery requirements of the Securities Act.
We are registering outstanding shares of common stock owned by selling
shareholders under the Securities Act and shares underlying "A" warrants and "B"
warrants. The registration fee related to the registration of these shares is
being paid by us. The selling shareholders will be responsible for their own
accounting expenses, brokerage commissions or underwriting discounts, and
transfer fees incurred in the sale of their shares. The selling security holders
intend to sell their shares directly, through agents, dealers, or underwriters
in the public market or otherwise on terms and conditions and at prices
determined at the time of sale by the selling security holders or as a result of
private negotiations between buyer and seller. We will not be assisting the
selling security holders in selling their shares. We intend to deliver to the
selling security holders copies of a current prospectus to be used in connection
with their sales. They will be advised as to the date as of which this
prospectus will no longer be current. Expenses of any sale will be borne by the
parties as they may agree. We will realize no proceeds from the sale of any of
the shares now held by selling shareholders, but will receive $2.00 per share
upon exercise of "A" warrants and $5.00 per share upon exercise of "B" warrants.
All of the selling security holders are listed below. We are registering
the specified shares owned by each selling security holder (concurrent with the
effectiveness of the Registration Statement) and common shares underlying "A"
warrants and "B" warrants. If all of the selling security holders are successful
in offering all of their shares currently owned, they will own no shares, but
may retain warrants to purchase units or shares until warrants are exercised.
Several selling security holders have held positions or offices with us or have
material relationships with us, as noted in the footnotes.
68
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Shares owned Percentage of
NAME & ADDRESS before offering Number Shares Underlying Common owned if
(excluding warrants) of shares offered A warrants B warrants all shares and
to be offered to be offered warrant shares
are sold
-----------------------------------------------------------------------------------------------------------------------------------
Mitsukiku Investments Ltd 86,400 86,400 625,000 625,000 0%
PO Box 428 Les Braves House,
Les Banques
St. Peter Port
Guernsey 4V1 3W2
Tandoor Holdings Ltd 470,000 470,000 570,000 570,000 0%
20D Primrose
Mansion
Taikooshing
Hong Kong
Richco Investors Inc. 2,772,500 1,085,000 (1)(3) 1,085,000 1,085,000 6%
830-789 West Pender Street
Vancouver B.C., Canada V6C 1H2 5,824,500(4) 1,275,000 (4) 1,275,000(4) 1,275,000(4) 6%(4)
Development Fund II of
Nova Scotia Inc. 190,000 190,000 (1)(3) 190,000 190,000 6%
c/o Richco Investors Inc.
830-789 West Pender Street
Vancouver B.C., Canada V6C 1H2 5,824,500(3)(4) 1,275,000 (4) 1,275,000(4) 1,275,000(4) 6%(4)
Mr. Minhas Sayani 0 0 75,000 75,000 0%
PO Box 30020 Dubai
United Arab Emirates
69
<PAGE>
Xerxes Venture Capital Fund Ltd. 50,000 50,000 50,000 50,000 0%
PO Box 88 I Grenville St.
St. Helier, Jersey
JE4 9PF UK
Goldpac Investment Fund 0 0 40,000 40,000 0%
16D 139 Drake St
Vancouver B.C.
V6Z 2T8 Canada
Nottinghill Resources Ltd. 0 0 50,000 50,000 0%
Mareva House 4 George St.
Nassau, Bahamas
Mr. Allan Slaughter 0 0 10,000 10,000 0%
1368 Madrona Dr.
Bay, B.C. V9P 9C9 Canada
Mr. David Atkinson 7,500 7,500 7,500 7,500 0%
4590 Keith RD
West Vancouver B.C.
V7W 1W2 Canada
Mr. Michael Atkinson 7,500 7,500 7,500 7,500 0%
#210 1315 W. 11th Ave.
Vancouver B.C.
V6H 1K7 Canada
Mrs. Juanita L. Po 5,000 5,000 5,000 5,000 0%
842 Clements Ave.
North Vancouver B.C.
V7R 2K7 Canada
Mr. Joseph Go and 10,000 10,000 10,000 10,000 0%
Mrs. Babs Po
1045 Montroyal Blvd.
N. Vancouver 13C
V7R 2H5 Canada
Merseyside Int'l Ltd. 95,000 95,000 120,000 120,000 0%
Room B, 19/FTunghip Comm'l
244-252 Des Vocux Rd.
Central, HK
Finten Bank Zurich 100,000 100,000 100,000 100,000 0%
Claridenstrasse 35
CH-8002, Zurich, Switzerlan
70
<PAGE>
Bradstone Equity Partners Inc. 200,000 200,000 200,000 200,000 0%
#638-375 Water St.,
Vancouver B.C.
V6B 5C6 Canada
403401 B.C.Ltd. 0 0 150,000 150,000 0%
#638-375 Water St.,
Vancouver B.C. V6B 5C6 Canada
Silver Shadow Investments Ltd. 20,000 20,000 20,000 20,000 0%
PO Box546 28-30 The Parade
St. Helier Jersey
Channel Islands
Cayman Islands Securities Ltd. 0 0 80,000 80,000 0%
PO Box 2835 G.T.
Grand Cayman, BWI
Chelsea Capital Corp. 50,000 50,000 70,000 70,000 0%
#200-750 W. Pender St.
Vancouver B.C.
V6C 1B5 Canada
Mr. Carlo K. Rahal 0 0 25,000 25,000 0%
6410 Charing Crt.
Burnaby B.C.
V5E 3Y3 Canada
Mr. David M. Lyall 0 0 100,000 100,000 0%
6745 W. Blvd
B.C.V6P 5R8 Canada
Ms. Linda A. Massie 0 0 10,000 10,000 0%
305-1750 West 13th Ave
Vancouver B.C.
V6J 2H1 Canada
71
<PAGE>
Mr. Marc Hung 118,000 80,000 (2) 80,000 80,000 .12%
(President & Director)
6- 1200 Brunette Ave.
Coquittam B.C.
V3K 1G3 Canada
Clariden Bank, 180,000 180,000 180,000 180,000 0%
Claridestrasse 26,
8002 Zurich
Switzerland
Mr. Brian Findlay 0 0 50,000 50,000 0%
29433 Simpson Rd,
Abbotsford, B.C.
V6C I H9 Canada
Mrs. Hazel L. Allington 3,500 3,500 3,500 3,500 0%
4614 Woodgreen Dr.
West Vancouver B.C.
V7S 2V2 Canada
Ms. Sharon Allington 1,500 1,500 1,500 1,500 0%
4614 Woodgreen Dr
West Vancouver B.C.
V7S 2V2 Canada
Orbit Leasing Corp. 0 0 90,000 90,000 0%
310-1324 17th Ave. SW
Calgary Alberta
T2T 5S8 Canada
72
<PAGE>
Taylor Oil Products Ltd. 0 0 80,000 80,000 0%
PO Box 1062 GT
Grand Cayman.
B.W.I.
Caribbean Avionics Ltd. 10 10 279,990 280,000 0%
PO Box 599
Carribean Place Providenciales,
Turks & Caicos Is.
Yonderiche
International Consultant 15,000 15,000 15,000 15,000 0%
102-1318 West 6th Ave.
Vancouver, B.C.
V6H 1A7 Canada
Ms. Jane Lee Kennedy 1,500 1,500 1,500 1,500 0%
1253 Hunter Rd
Delta B.C.
V4L 1Y9 Canada
Mrs. Billee Davidson 10,000 10,000 10,000 10,000 0%
3902 West 38th Ave.
Vancouver B.C.
V6N 2Y6 Canada
Mr. F. Goelo 120,000 120,000 120,000 120,000 0%
PO Box 10910
Grand Cayman
Cayman Islands
B.W.I.
Aberdeen Holdings Ltd. 0 0 50,000 50,000 0%
60 Market Square
Belize City
Belize
Mr. Ken Aloysius Kow 16,000 16,000 16,000 16,000 0%
Ms. Dannie Kow
2957 East 56 Ave
Vancouver B.C.
V5S 2A2 Canada
73
<PAGE>
Mr. Floyd Hill 0 0 25,000 25,000 0%
1800-609 Granville St.
Vancouver B.C.
V7S IC4 Canada
Ms. Linda Collins 0 0 25,000 25,000 0%
3939 W. 38th Ave
Vancouver B.C.
V6N 2Y7 Canada
Mr. Patrick C. Lincoln 5,000 5,000 5,000 5,000 0%
17 Leacock CT
Thornhill ON
L3T 6X9 Canada
Mr. Rodney B. Johnston 25,000 25,000 25,000 25,000 0%
17412-29th Ave.
S. Surrey B.C.
V4P 9R1 Canada
Mr. L. C. Allington 50,000 50,000 50,000 50,000 0%
4614 Woodgreen Dr
West Vancouver B.C.
V7S 2V2 Canada
Mr. Hugh Cooper 0 0 10,000 10,000 0%
425 Rabbit Lane
West Vancouver B.C.
V7S 1J1 Canada
Ms. Sharon Cooper 0 0 40,000 40,000 0%
425 Rabbit Lane
West Vancouver 13C
V7S 1J1 Canada
J.F. Yang Capital Corp. 0 0 250,000 250,000 0%
15 Starling House
Charlbert St.London
NW8 7BS UK
74
<PAGE>
Mr. Brent Petterson 0 0 2,500 2,500 0%
603-1500 Ostler Court,
North Vancouver B.C.
V7G 2S2 Canada
Prism Holdings Inc. 0 0 25,000 25,000 0%
PO Box 150,
Design House,
Providenciales,
I Turks & Caicos Islands B.W.I.
Ms. Christine Smith 0 0 10,000 10,000 0%
#314-3738 Norfolk St.
Burnaby B.C.
V5G 4V4 Canada
First Nevisian Stockbrokers Ltd. 0 0 40,000 40,000 0%
Barclays Building,
Maw St. Charlestown Nevis
B.W.I.
Tedburn Ltd. 0 0 150,000 150,000 0%
2C Engineers Road,
Gibraltar
J.R. Ing Associates 35,000 35,000 35,000 35,000 0%
130 Adelaide St. West
Toronto ON
M5P I G6 Canada
Sirhc Holdings, Ltd. 0 0 150,000 150,000 0%
9 Church St.
Hamilton Hm11
Bermuda
A&E Capital Funding Inc. 100,000 100,000 250,000 250,000 0%
2300 Yonge St. Suite 3000
Toronto ON
M4P 1E4 Canada
75
<PAGE>
Thesis Group Inc. 150,000 150,000 150,000 150,000 0%
19 Hanover Terrace Regents Park
London
NW1 4RJ UK
Mr. Barry Fraser 0 0 15,000 15,000 0%
1300-777 Dunsmuir St.
Vancouver B.C.
V7Y I K2 Canada
Mr. William Adams 0 0 10,000 10,000 0%
PO Box 92240102
Skyline Pl.
Garibaldi Highlands
Vancouver B.C.
VON 1TO Canada
Mr. Fred TSE 40,000 40,000 40,000 40,000 0%
186 Stevens Dr.
West Vancouver B.C.
CIMAX TECHNOLOGIA SA 250,000 250,000 0 0 0%
Chrienweg 6 Ch 8126
Zumikon, Switzerland
TOTAL 4,733,910 shares
</TABLE>
(1) Richco Investors is a public company of which Ernest Cheung and Maurice
Tsakok are directors. Richco owns a total of 2,772,500 shares plus
2,170,000 warrants for additional units of our stock.
(2) Marc Hung is President and a Director of our company.
(3) Development Fund II of Nova Scotia, Inc. has Ernest Cheung as President.
Richco Investors, Inc. has non-voting shares of the Fund, but does not
control the Board. Mr. Cheung is an officer and director of Xin Net Corp.
(4) Assumes that Richco Investors, Inc. and Development Fund II of Nova Scotia,
Inc. are aggregated due to Ernest Cheung being an officer of both companies
(under Reg. 13d-3).
DETERMINATION OF OFFERING PRICE
There has been a very limited market for the shares of our common stock.
The offering price will be based upon the market price at the time of sale of
shares now outstanding. There is no direct relation between any price and the
assets, book value, shareholders' equity or net worth of our company.
LEGAL MATTERS
The law firm of Michael A. Littman, 7609 Ralston Road, Arvada, Colorado
80002, has acted as our counsel in connection with this Offering.
76
<PAGE>
EXPERTS
Our financial statements as of December 31, 1998, December 31, 1999 and
September 30, 2000 have been included in the Registration Statement in reliance
upon the report of Clancy & Co., P.L.L.C., independent auditor, and upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND INFORMATION
We have filed a Registration Statement on Form SB-2 under the
Securities Act of 1933 with the Securities and Exchange Commission, Washington,
D.C., relating to the securities offered. For further information with respect
to us and the securities offered, you may review the Registration Statement,
including the exhibits, without charge at the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, or inspected and
copied at, and obtained at prescribed rates from, the Public Reference Section
of the Securities and Exchange Commission at its principal office at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
IN ADDITION, WE FILE REPORTS, PROXY STATEMENTS AND OTHER INFORMATION WITH THE
SEC. YOU MAY READ AND COPY ANY DOCUMENT WE FILE AT THE SEC'S PUBLIC REFERENCE
ROOMS IN WASHINGTON, D.C., NEW YORK, NEW YORK AND CHICAGO, ILLINOIS. PLEASE CALL
THE SEC AT 1-800-SEC-0330 FOR FURTHER INFORMATION ON THE PUBLIC REFERENCE ROOMS.
OUR SEC FILINGS ARE ALSO AVAILABLE TO THE PUBLIC ON THE SEC'S WEBSITE AT
HTTP://WWW.SEC.GOV.
77
<PAGE>
PART II
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a statement of expenses expected to be incurred by
the company in connection with the issuance and distribution of the securities
to be registered, other than underwriting discounts and commissions.
Legal Fees $35,000*
Accounting Fees $15,000*
Filing Fees $15,000*
Printing & Engraving
share certificates and prospectuses $10,000*
Non-Accountable Expenses $10,000*
(* Estimates Only)
<TABLE>
<CAPTION>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three (3) years, the following sales have been made of
the Company's $.001 par value voting common stock. Consideration received is
shown.
1996 YEAR PURCHASERS LIST
<S> <C> <C> <C> <C>
NAME & ADDRESS DATE OF NUMBER CONSIDERATION PRICE
PURCHASE OF SHARES PER
SHARE
-------------------------------------------------------------------------------------------------------------------------
Sinh Le
1403- 4300 Mayberry St. Burnaby,
B.C. V5H-4A4 12/11/96 1000 $250 $.25
Terrence Johnson
1403- 4030 Mayberry St. Burnaby,
B.C. V5H-4A4 12/11/96 1000 $250 $.25
Kashmir Singh
1025- Augusta Ave, Burnaby,
B.C. V5A-1K3 12/11/96 2000 $500 $.25
78
<PAGE>
Noah Natovitch
121-3280 E. 58th Ave, Vancouver,
B.C V5S-3T2 12/11/96 1000 $250 $.25
Todd H. Weaver
2000 South Ocean Lane #11,
Ft. Lauderdale FL 33316 12/11/96 4000 $1,000 $.25
Fleet Sparrow, Inc.
7 Prince Street, P.O. Box 1117,
Belize City, Belize 12/11/96 2000 $500 $.25
David Mundie
2419 TreeTop Lane, N. Vancouver,
B.C. V2H-2K6 12/11/96 2000 $500 $.25
Redbrook Creek Corp
7 Prince St. P.O. Box 1117,
Belize City, Belize 12/11/96 2000 $500 $.25
Wes Janzen
#100- 8500 Alexandra Road,
Richmond, B.C. V6X-1C4 12/11/96 2000 $500 $.25
Wes Kroeker
#100- 8500 Alexandra Road,
Richmond, B.C. V6X-1C4 12/11/96 2000 $500 $.25
L. James Harder
5512 Okanagan N. Ave., Site 1B
Camp 11, Vernon B.C.V1T-6Y5 12/11/96 2000 $500 $.25
Kari - Anne Chase
85 Walnut Crescent, Whitehorse,
Yukon Y1A-5C7 12/11/96 2000 $500 $.25
Steven Giles
309-727 Hughton Road, Kelowna,
B.C. V1X-7J7 12/11/96 1000 $250 $.25
Robert N. Hatton
1830 Large Ave, RR #5 S-17B, C-53,
Kelowna, B.C. V1X-4K4 12/11/96 1000 $250 $.25
79
<PAGE>
Adrian Klien
575 Perry Road, Kelowna,
B.C. V1X-1J1 12/11/96 1000 $250 $.25
Lamber Dhaliwal
3556 Calder Ave, N.
Vancouver, B.C. 12/11/96 2000 $500 $.25
Biro Dhaliwal
3556 Calder Ave, N.
Vancouver, B.C. 12/11/96 2000 $500 $.25
Doris Mackney
Box 44021, Oyama,
B.C. V4V01ZS 12/11/96 2000 $500 $.25
Stephane Martin
1704 Smithson Dr., Kelowna,
B.C. V1Y-4E3 12/11/96 1000 $250 $.25
Guy Martin
1704 Smithson Dr., Kelowna,
B.C. V1Y-4E3 12/11/96 1000 $250 $.25
Lawrence Kit
Box 32, Vegreville,
Alberta, T9C-1R1
Mervyn Kit
6604-132 A/ Ave.
Edmonton, AB T5C-2 B.C. 12/11/96 1000 $250 $.25
Emil Kit
5365 Bogette Place
Kamloops, B.C. V2C-6B2 12/11/96 1000 $250 $.25
Robert Thompson
14250 Middlebench Rd,
Oyama, B.C. V4V-2B9 12/11/96 1000 $250 $.25
Bob Mackney
P.O. Box 44021,
Oyama, B.C. V4V-1Z5 12/11/96 11,000 $2,750 $.25
80
<PAGE>
Dean Mackney
11574 Artela Rd,
Winfield, B.C. V4V-1H4 12/11/96 1000 $250 $.25
Robert Brown
13525 Lake Pine
Winfield B.C. V4V-1A3 12/11/96 1000 $250 $.25
Susan Bozyk
109-980 Dilworth Dr,
Kelowna, B.C. V1V01S6 12/11/96 500 $125 $.25
Cal McCarthy
10060 McCarthy Road,
Winfield, B.C. V4V-1T1 12/11/96 1000 $250 $.25
Sheelagh Thompson
14250 Middllebench Road,
Oyama, B.C. V4V-2B9 12/11/96 1000 $250 $.25
Tarif Mapara
1790 Boundary Rd,
Burnaby, B.C. V5M-4M2 12/11/96 1000 $250 $.25
Saira Mapara
1790 Boundary Rd,
Burnaby, B.C. V5M-4M2 12/11/96 1000 $250 $.25
Zaher Mapara
1576 Lodgepole Pl,
Coquitlam, B.C. V3E-2V9 12/11/96 1000 $250 $.25
Mumtaz Mapara
1576 Lodgepole Pl,
Coquitlam, B.C. V3E-2V9 12/11/96 1000 $250 $.25
Riaz Mapara
1576 Lodgepole Pl,
Coquitlam, B.C. V3E-2V9 12/11/96 1000 $250 $.25
Fairous Mapara
1576 Lodgepole PI,
Coquitlam, B.C. V3E-2V9 12/11/96 1000 $250 $.25
81
<PAGE>
Sam Mapara ITF:
Arman Mapara 2932
Blackbear Ct. Coq, B.C. 12/11/96 1000 $250 $.25
Sam Mapara ITF:
Ariana. Mapara 2932
Blackbear Ct. Coq, B.C. 12/11/96 1000 $250 $.25
Anisha Mapara
2932 Blackbear Court,
Coquitlam, B.C. 12/11/96 1000 $250 $.25
Sameer Mapara
2932 Blackbear Court,
Coquitlam, B.C. 12/11/96 1000 $250 $.25
Tazmina MangaIji
8214 Lakeland Drive,
Burnaby, B.C. V5A-4C9 12/11/96 2000 $500 $.25
Maidenhood MangaIji
8214 Lakeland Drive,
Burnaby, B.C. V5A-4C9 12/11/96 2000 $500 $.25
Garry McColl
#1405-2020 Bell Wood Ave,
Burnaby, B.C. V5B-4P8 12/11/96 1000 $250 $.25
Larry Kozak
1103-9595 Erickson Dr,
Burnaby, B.C. V3J-7N9 12/11/96 2000 $500 $.25
Rob Kozak
1103-9595 Erickson Dr,
Burnaby, B.C. V3J-7N9 12/11/96 500 $125 $.25
Garry Messer
25767 La Salina Pl,
Moreno Valley, CA 92551 12/11/96 500 $125 $.25
Sharon Delbridge
25767 La Salina PI,
Moreno Valley, CA 92551 12/11/96 1000 $250 $.25
82
<PAGE>
James M. Lucas
P.O. Box 872,
Blue Jay, CA 92317 12/11/96 2000 $500 $.25
Joe Gamache
1421 Barber Ct.
Bunning, CA 92220 12/11/96 1000 $250 $.25
Dustin Lee Sexton
8350 Magnolia Ave, Unit 125,
Riverside, CA 92504 12/11/96 1000 $250 $.25
Ramona Lee Sexton
3957 San Mateo,
Riverside, CA 92504 12/11/96 1000 $250 $.25
William Navarro
23403 Silver Strike Dr,
Canyon Lake, CA 92587 12/11/96 2000 $500 $.25
Jake Penner
1688 West 65th Ave,
Vancouver, B.C. V6P-2R3 12/11/96 2000 $500 $.25
Vern Craig
1369 Compton Cres,
Tsawwassen, B.C. V4L-IP8 12/11/96 1000 $250 $.25
Doug Maxwell
605 West Kent Ave,
Vancouver, B.C. V6P-6T7 12/11/96 1000 $250 $.25
M. Erik Nylin
RR6-S600, C36,
Courtenay, B.C. V9N-8H9 12/11/96 1000 $250 $.25
Dorothy L. Nylin
RR6-S600, C36,
Courtenay, B.C. V9N-8H9 12/11/96 500 $125 $.25
Richard T, Wotruba
501 Las Alturas Rd,
Santa Barbara, CA 93103 12/11/96 500 $125 $.25
83
<PAGE>
Patricia A. Wotruba
501 Las Alturas Rd,
Santa Barbara, CA 93 10-1 12/11/96 1200 $300 $.25
Bhupinder Mroke
5076 Victoria Dr,
Vancouver, B.C. V5P-3T8 12/11/96 1000 $250 $.25
Jackueline Herauf
#56-28 Berwick Cres NW,
Calgary, AB T3K-IY7 12/11/96 2000 $500 $.25
Larry I Sandler D.D.S
272 Wolverine Lake Dr,
Wolverine Lake, MI 48390 12/11/96 2000 $500 $.25
Linda C. Sandler
272 Wolverine Lake Dr,
Wolverine Lake, NU 483 90 12/11/96 1000 $250 $.25
D. Percy Ryan
2423 37th Street SE,
Calgary, AB T2B-OZI 12/11/96 2000 $500 $.25
Jageero Singh
122 West Braemar Rd, N.
Vancouver, B.C. V7N-2S8 12/11/96 2000 $500 $.25
Jagbir Johl
122 West Braemar Rd, N.
Vancouver, B. C. V7N-2 S 8 12/11/96 2000 $500 $.25
Bob L. Stobbe
9420 98A Ave,
Fort St John, B.C. V 15-1 1R4 12/11/96 500 $125 $.25
Britt L. Weaver
6741 Alexandria Lane,
Charlotte, NC 28270 12/11/96 500 $125 $.25
Katherine H. Weaver
6741 Alexandria Lane,
Charotte, NC 28270 12/11/96 1000 $250 $.25
84
<PAGE>
Dorilda Limoges
6509 Coach Hill Rd SW,
Calgary, A13 T2B-1H5 12/11/96 1000 $250 $.25
Vincent Luong
192 Saratoga Close NE,
Calgary, AB T 1 Y-7AI 12/11/96 1000 $250 $.25
Sigurd B. Peterson
2671 MacDonald Dr,
Victoria, B.C. V8N-1Y1 12/11/96 1000 $250 $.25
Dr. John Dale
Box 499, Nelson, B.C. VIL-5R3 12/11/96 1000 $250 $.25
Diana Haschke
Box 489,
Nelson, B.C. VIL-5R3 12/11/96 1000 $250 $.25
Errol Biebrick
104 Pinewind Close NE,
Calgary, AB TI 8-2H3 12/11/96 1000 $250 $.25
Bradley T. Johns
4602- 45th Ave NE #3 29,
Tacoma, WA 98422 12/11/96 1000 $250 $.25
Bhupinder Mann
1182 E, 33rd Ave,
Vancouver, B.C. V5V-3B3 12/11/96 1000 $250 $.25
Nirmal S. Mann
1182 F. 33rd Ave,
Vancouver, B.C. V5V-3B3 12/11/96 1000 $250 $.25
S.P. Swadron
3914 W 11th Ave,
Vancouver, B.C. V6R-2L2 12/11/96 2000 $500 $.25
Sylvia Moir
905 Signal Hill Green SW,
Calgary, AB T3H-2Y4 12/11/96 1000 $250 $.25
85
<PAGE>
John R. Moir
214 555 Strathcona Blvd SW,
Calgary, AB T3H-2Z9 12/11/96 1000 $250 $.25
Charanjit S. Parmar
17924-99A Ave,
Edmonton, AB T5T-3RI 12/11/96 2000 $500 $.25
Harjit K. Parmar
17924-99A Ave,
Edmonton, AB T5T-3RI 12/11/96 2000 $500 $.25
Murray Bisset
11402-120 St,
Edmonton, AB T5G-2Y2 12/11/96 2000 $500 $.25
Tom Schreiber
14316-123 St,
Edmonton, AB T5X-3M2 12/11/96 2000 $500 $.25
Don Pierson
100 Nottingham Rd,
Sherwood Park, AB T8A-5M5 12/11/96 2000 $500 $.25
Usha Bibra
6112-34A Ave,
Edmonton, AB T6L-IE4 12/11/96 1000 $250 $.25
Sachin Bibra
6112-34A Ave,
Edmonton, AB T6L-1E4 12/11/96 500 $125 $.25
KamaIjit Lall
3664-31A St,
Edmonton, AB T6T-1H6 12/11/96 500 $125 $.25
Tajinder Chohan
165 W. 65th Ave,
Vancouver, B.C. V5R-3T7 12/11/96 73,300 $8,325 $.25
------ ------
TOTAL 200,000 $50,000
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
The offering and sales of the shares was made in reliance upon the
exemptions contained in Rule 504 of Regulation D and Regulation S to offshore
residents, and in Canada pursuant to the exemptions from registration contained
in section 55(2) (4) and 55 (2) (9) of the Securities Company Act (B.C. and/or
paragraphs 128(a) or 128(h) of the Securities Rules to the Securities Act).
1997 PRIVATE PLACEMENT
<S> <C> <C> <C> <C>
SUBSCRIBER DATE OF CONSIDERATION SHARES PRICE
PURCHASE PER
SHARE
-----------------------------------------------------------------------------------------------------------------------
Balraj Mann 6/2/97 $40,000 100,000 $.40
6228 Tiffany Blvd.
Richmond, B.C. V7C 4Z2
Thesis Group Inc. 6/2/97 $20,000 50,000 $.40
19 Hanover Terrace
Regents Park
London, England NW1 4RT
Hare & Co. 6/2/97 $40,000 100,000 $.40
EB.C. Zurich AG
Bellariastrasse 23
8027 Zurich, Switzerland
Cayman Islands Securities Ltd. 6/2/97 $100,000 250,000 $.40
P.0, Box 1062 GT
Grand Cayman
BWI
Strategic Lines Asset Management 6/2/97 $40,000 100,000 $.40
3/F 73 Front Street
Hamilton HM NX
Bermuda
Floyd Hill 6/2/97 $29,000 72,500 $.40
4557 - W, 8th Ave.
Vancouver, B.C. V6R 2A4
Richard Angus 6/2/97 $100,000 250,000 $.40
1548 Marine Dr.
Vancouver, B.C. V7V 1H8
87
<PAGE>
Taylor Oil Products 6/2/97 $100,000 250,000 $.40
Box 1062
3rd Floor, One Capital Place
Grand Cayman, BWI
Silver Shadow Investment Ltd. 6/2/97 $100,000 250,000 $.40
P.O. Box 546
St. , Helier, Jersey J E4 8XY
Channel Islands
Billee Davidson 6/2/97 $25,000 62,500 $.40
3902 - W. 38th Avenue
Vancouver, B.C. V6N 2Y6
A. Gregori Imports Ltd, 6/2/97 $60,000 150,000 $.40
112 - 1010 West Georgia St,
Vancouver, B.C. V6E 2Y2
J R Ing & Associates 6/2/97 $30,000 75,000 $.40
1360 W. 32nd
Vancouver, B.C. V6H 2J3
Linda A. Massie 6/2/97 $6,000 15,000 $.40
4379 Arbutus St,
Vancouver, B.C. V6J 4S4
Debby Tonn 6/2/97 $15,000 37,500 $.40
4899 Meadfield Rd.
West Vancouver, B.C.
V7W 3E6
Daphne Killas 6/2/97 $25,000 62,500 $.40
608-1888 York Ave.
Vancouver, B.C. V6J 5A7
Chris MacPherson 6/2/97 $10,000 25,000 $.40
Suite 3434 - 666 Burrard Street
Vancouver, B.C. V6C 2X8
Rod Morreau 6/2/97 $5,000 12,500 $.40
Suite 3434 - 666 Burrard Street
Vancouver, B.C. V6C 2X8
Wendy Chan 6/2/97 $5,000 12,500 $.40
Suite 3434 - 666 Burrard Street
Vancouver, B.C. V6C 2X8
TOTAL 6/2/97 $750,000 1,875,000 $.40
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
The issuance of the shares was made in reliance upon the exemption
contained in Regulation S as amended, to offshore residents and in Canada
pursuant to the exemptions from registration contained in section 55(2) (4) and
55 (2) (9) of the Securities Company Act (British Columbia) and/or paragraphs
128(a) or 128(h) of the Securities Rules to the Securities Act.
1997
<S> <C> <C> <C> <C>
DATE OF CONSIDERATION NUMBER OF PRICE PER
PURCHASE SHARES SHARE
----------------------------------------------------------------------------------------------------------------------
Xiao Qing Du March 3,1997 4,000,000
2754 Adanac Street
Vancouver, B.C., V5K 2M9 ( Exchange for
( acquisition of
( 100% of stock of
( Infornet Investment,
( Corp.
Jing Liang March 3,1997 1,000,000
403-1333 Haro Street
Vancouver, B.C., V6E 1G4
TOTAL 5,000,000
</TABLE>
The issuance of the shares was made in reliance upon the exemption to
Registration contained in Regulation S as amended, to offshore residents, and in
Canada pursuant to the exemptions from registration contained in section 55(2)
(4) and 55 (2) (9) of the Securities Company Act (British Columbia) and/or
paragraphs 128(b) and or 128(h) of the Securities Rules to the Securities Act.
89
<PAGE>
<TABLE>
<CAPTION>
1999 OPTION EXERCISE NOTE:
The Options were granted to persons or entities which had contributed to
our company effort in the past. The average closing price of the common stock
ten (10) days prior to February 26, 1999 was $0.40.
<S> <C> <C> <C> <C>
DATE OF CONSIDERATION PRICE NUMBER
PURCHASE PER OF SHARES
SHARE
------------------------------------------------------------------------------------------------------------
1.Lancaster Pacific Investment Ltd. 4/6/99 $ 88,000 $.40 220,000
14/F Tung Hip Commercial Building
244-252 Des Voeux Road C.
Hong Kong
2.Tandoor Holdings Limited 4/6/99 $148,000 $.40 370,000
20D Primrose Mansion
Taikooshing, Hong Kong
3.S.Y.Marc Hung 4/4/99 $ 60,000 $.40 150,000
6-1200 Brunette Ave.
Coquitlam, B.C.,
Canada V3K I G3
4.Kun Wei 4/4/99 $132,000 $.40 330,000
#69 West Gulou Street
Beijing, P.R. China
5.Xin Wei 4/4/99 $132,000 $.40 330,000
#2754 Adanac Street
Vancouver, B.C.
Canada V5K 2M9
TOTAL $ 560,000 1,400,000
</TABLE>
The issuance of the shares was made in reliance upon the exemption
contained in Regulation S as amended, to offshore residents and in Canada
pursuant to the exemptions from registration contained in section 55(2) (4) and
55 (2) (9) of the Securities Company Act (British Columbia) and/or paragraphs
128(a) or 128(h) of the Securities Rules to the Securities Act.
90
<PAGE>
<TABLE>
<CAPTION>
1999 PRIVATE PLACEMENT
<S> <C> <C> <C> <C>
NAME & ADDRESS *NUMBER CONSIDERATION DATE OF PRICE PER
OF SHARES PURCHASE SHARE
(UNITS)
------------------------------------------------------------------------------------------------------------
Mitsukiku Investments Ltd 625,000 $625,000 5/19/99 $1.00
PO Box 428
Les Braves House,
Les Banques St. Peter Port
Guernsey
4V1 3W2
Tandoor Holdings Ltd 570,000 $570,000 5/19/99 $1.00
20D Primrose
Mansion
Taikooshing
Hong Kong
Richco Investors Inc. 700,000 $700,000 5/19/99 $1.00
830-789 West Pender Street
Vancouver B.C.
Canada V6C 1H2
Development Fund 11 of 190,000 $190,000 5/19/99 $1.00
Nova Scotia Inc.
c/o Richco Investors Inc.
830-789 West Pender Street
Vancouver B.C.
Canada V6C 1H2
Mr. Minhas Sayani 75,000 $75,000 5/19/99 $1.00
PO Box 30020 Dubai
United Arab Emirates
Xerxes Venture Capital Fund Ltd. 50,000 $50,000 5/19/99 $1.00
PO Box 88 I Grenville St.
St. Helier, Jersey
JE4 9PF UK
91
<PAGE>
Goldpac Investment Fund 40,000 $40,000 5/19/99 $1.00
16D 139 Drake St
Vancouver B.C.
V6Z 2T8 Canada
Nottinghill Resources Ltd. 50,000 $50,000 5/19/99 $1.00
Mareva House 4 George St.
Nassau, Bahamas
Mr. Allan Slaughter 10,000 $ 10,000 5/19/99 $1.00
1368 Madrona Dr. Bay, B.C.
V9P 9C9 Canada
Mr. David Atkinson 7,500 $7,500 5/19/99 $1.00
4590 Keith Rd
West Vancouver B.C.
V7W 1W2 Canada
Mr. Michael Atkinson 7,500 $7,500 5/19/99 $1.00
#210 1315 W. 11th Ave.
Vancouver B.C.
V6H 1K7 Canada
Mrs. Juanita L. Po 5,000 $5,000 5/19/99 $1.00
842 Clements Ave.
North Vancouver B.C.
V7R 2K7 Canada
Mr. Joseph Go and 10,000 $10,000 5/19/99 $1.00
Mrs. Babs Po
1045 Montroyal Blvd.
N. Vancouver 13C
V7R 2H5 Canada
Bradstone Equity Partners Inc. 200,000 $200,000 5/19/99 $1.00
#638-375 Water St.,
Vancouver B.C.
V6B 5C6 Canada
403401 B.C. Ltd. 150,000 $150,000 5/19/99 $1.00
#638-375 Water St.,
Vancouver B.C.
V6B 5C6 Canada
92
<PAGE>
Silver Shadow Investments Ltd. 20,000 $20,000 5/19/99 $1.00
PO Box
546 28-30 The Parade
St. Helier Jersey
Channel Islands
Cayman Islands Securities Ltd. 80,000 $80,000 5/19/99 $1.00
PO Box 2835 G.T.
Grand Cayman
B.W.I.
Chelsea Capital Corp. 70,000 $70,000 5/19/99 $1.00
#200-750 W. Pender St.
Vancouver B.C.
V6C 1B5 Canada
Mr. Carlo K. Rahal 25,000 $25,000 5/19/99 $1.00
6410 Charing Crt.
Burnaby B.C.
V5E 3Y3 Canada
Mr. David M. Lyall 100,000 $100,000 5/19/99 $1.00
6745 W. Blvd B.C.
V6P 5R8 Canada
Ms. Linda A. Massie 10,000 $10,000 5/19/99 $1.00
305-1750 West 13th Ave
Vancouver B.C.
V6J 2H1 Canada
Mr. Patrick Hung 60,000 $60,000 5/19/99 $1.00
6-1200 Brunette Ave.
Coquitlam B.C.
V3K 1G3 Canada
Ms Chantal Hung 60,000 $60,000 5/19/99 $1.00
6C Winston Churchill Lane
Curepipe
Mauritius
93
<PAGE>
Mr. Marc Hung 80,000 $80,000 5/19/99 $1.00
6- 1200 Brunette Ave.
Coquittam B.C.
V3K 1G3 Canada
Hare & Co. 100,000 $100,000 5/19/99 $1.00
c\o Bank of New York
1 Wall Street - 3rd Floor
New York, N.Y. 10286
Clariden Bank, 180,000 $180,000 5/19/99 $1.00
Claridestrasse 26,
8002 Zurich
Switzerland
Mr. Brian Findlay 50,000 $50,000 5/19/99 $1.00
29433 Simpson Rd,
Abbotsford, B.C.
V6C I H9 Canada
Mrs. Hazel L. Allington 3,500 $3,500 5/19/99 $1.00
4614 Woodgreen Dr.
West Vancouver B.C.
V7S 2V2 Canada
Ms. Sharon Allington 1,500 $1,500 5/19/99 $1.00
4614 Woodgreen Dr
West Vancouver B.C.
V7S 2V2 Canada
Orbit Leasing Corp. 90,000 $90,000 5/19/99 $1.00
310-1324 17th Ave. SW
Calgary Alberta
T2T 5S8 Canada
Taylor Oil Products Ltd. 80,000 $80,000 5/19/99 $1.00
PO Box 1062 GT Grand Cayman.
B.W.I.
Caribbean Avionics Ltd. 280,000 $280,000 5/19/99 $1.00
PO Box 599
Carribean Place Providenciales,
Turks & Caicos Is.
94
<PAGE>
Yonderiche International 15,000 $15,000 5/19/99 $1.00
Consultant
102-1318 West 6th Ave.
Vancouver, B.C.
V6H 1A7 Canada
Ms. Jane Lee Kennedy 1,500 $1,500 5/19/99 $1.00
1253 Hunter Rd
Delta B.C.
V4L 1Y9 Canada
Mrs. Billee Davidson 10,000 $10,000 5/19/99 $1.00
3902 West 38th Ave.
Vancouver B.C.
V6N 2Y6 Canada
Mr. F. Goelo 120,000 $120,000 5/19/99 $1.00
PO Box 10910 Grand Cayman
Cayman Islands
B.W.I.
Aberdeen Holdings Ltd. 50,000 $50,000 5/19/99 $1.00
60 Market Square
Belize City, Belize
Mr. Ken Aloysius Kow 16,000 $16,000 5/19/99 $1.00
Ms. Dannie Kow
2957 East 56 Ave
Vancouver B.C.
V5S 2A2 Canada
Mr. Floyd Hill 25,000 $25,000 5/19/99 $1.00
1800-609 Granville St.
Vancouver B.C.
V7S IC4 Canada
Ms. Linda Collins 25,000 $25,000 5/19/99 $1.00
3939 W. 38th Ave
Vancouver B.C.
V6N 2Y7 Canada
95
<PAGE>
Mr. Patrick C. Lincoln 5,000 $5,000 5/19/99 $1.00
17 Leacock CT
Thornhill ON
L3T 6X9 Canada
Mr. Rodney B. Johnston 25,000 $25,000 5/19/99 $1.00
17412-29th Ave.
S. Surrey B.C.
V4P 9R1 Canada
Mr. L. C. Allington 50,000 $50,000 5/19/99 $1.00
4614 Woodgreen Dr
West Vancouver B.C.
V7S 2V2 Canada
Mr. Hugh Cooper 10,000 $10,000 5/19/99 $1.00
425 Rabbit Lane
West Vancouver B.C.
V7S 1J1 Canada
Ms. Sharon Cooper 40,000 $40,000 5/19/99 $1.00
425 Rabbit Lane
West Vancouver 13C
V7S 1J1 Canada
J.F. Yang Capital Corp. 250,000 $250,000 5/19/99 $1.00
15 Starling House
Charlbert St.
London NW8 7BS UK
Mr. Brent Petterson 2,500 $2,500 5/19/99 $1.00
603-1500 Ostler Court,
North Vancouver B.C.
V7G 2S2 Canada
Prism Holdings Inc. 25,000 $25,000 5/19/99 $1.00
PO Box 150, Design House,
Providenciales,
I Turks & Caicos Islands
B.W.I.
96
<PAGE>
Ms. Christine Smith 10,000 $10,000 5/19/99 $1.00
#314-3738 Norfolk St.
Burnaby B.C.
V5G 4V4 Canada
First Nevisian Stockbrokers Ltd. 40,000 $40,000 5/19/99 $1.00
Barclays Building. Maw St.
Charlestown Nevis
B.W.I.
Tedburn Ltd. 150,000 $150,000 5/19/99 $1.00
2C Engineers Road,
Gibraltar
J.R. Ing Associates 35,000 $35,000 5/19/99 $1.00
130 Adelaide St. West
Toronto ON
M5P I G6 Canada
Sirhc Holdings Ltd. 150,000 $150,000 5/19/99 $1.00
9 Church St.
Hamilton Hm11
Bermuda
A&E Capital Funding Inc. 250,000 $250,000 5/19/99 $1.00
2300 Yonge St. Suite 3000
Toronto ON
M4P 1E4 Canada
Thesis Group Inc. 150,000 $150,000 5/19/99 $1.00
19 Hanover Terrace Regents Park
London
NW1 4RJ UK
Mr. Barry Fraser 15,000 $15,000 5/19/99 $1.00
1300-777 Dunsmuir St.
Vancouver B.C.
V7Y I K2 Canada
97
<PAGE>
Mr. William Adams 10,000 $10,000 5/19/99 $1.00
PO Box 922
40102 Skyline Pl.
Garibaldi Highlands
Vancouver B.C.
VON 1TO Canada
Mr. Fred TSE 40,000 $40,000 5/19/99 $1.00
186 Stevens Dr
West Vancouver B.C.
TOTAL 5,5000,000 $5,500,000
shares
</TABLE>
*The Offering consisted of units - each unit containing one share and
one warrant. The warrant entitles the holder to purchase one additional common
unit of the Issuer at $2.00 per unit on or before March 31, 2001, which unit
consists of one common share and one additional warrant to purchase a share of
common stock at $5.00 per share on or before March 31, 2002.
On September 17, 1999, 385,000 units were issued to Richco Investors,
Inc. as a consulting fee for structuring the Private Placement.
The issuance of the shares was made in reliance upon the exemption
contained in Regulation S as amended, to offshore residents and in Canada
pursuant to the exemptions from registration contained in section 55(2) (4) and
55 (2) (9) of the Securities Company Act (British Columbia) and/or paragraphs
128(a) or 128(h) of the Securities Rules to the Securities Act.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PRICE PER
DATE SHARE CONSIDERATION SHARES
-------------------------------------------------------------------------------------------------------------
Xin Wei
2754 Adanac Street
Vancouver, B.C. VSK 3M9 2/20/97 $.001 $750 750,000
Kun Wei
403 No I Blvd
Qianmachang Lane
Gulou Street, West
Beijing, China 2/20/97 $.001 $450 450,000
Xi-ping Qu
403 - 1333 Haro Street
Vancouver, B.C. V6E 1G4 2/20/97 $.001 $300 300,000
98
<PAGE>
Nicole Alagich
1400 - 400 Burrard Street
Vancouver, B.C. V6C 3G2 2/20/97 $.001 $3 3,000
Terry Johnston
1408 - 4300 Mayberry Street
Burnaby, B.C. V5H 4A4 2/20/97 $.001 $3 3,000
Ranjit Bhogal
9042 135 A Street
Surrey, B.C. V3V 7CS 2/20/97 $.001 $3 3,000
Bhupinder Mann
1182 East 33rd Ave.
Vancouver, B.C. V5F 3B3 2/20/97 $.001 $3 3,000
Charles Grahn
203 - 1386 West 73rd Ave
Vancouver, B.C. V6P 3E8 2/20/97 $.001 $3 3,000
Gemsco Management Ltd.
53 Woodland Drive
Delta, B.C. V4L 2H4 2/20/97 $.001 $700 700,000
Farmind Link Corp.
2998 Park Lane
West Vancouver, B.C. V7V 1E9 2/20/97 $.001 $700 700,000
Simon Yuen
19835 64th Avenue
Langley, B.C. V2Y 11S 2/20/97 $.001 $700 700,000
Lionel Welch
7 Prince Street
Belize City, Belize 2/20/97 $.001 $320 320,000
Kathleen Robinson
P.O. Box 170
Grand Turk
Turks & Caicos Islands, BWI 2/20/97 $.001 $10 10,000
Mr. Joseph A. Gamache
1421 Barber Court
Banning CA 92220 2/20/97 $.001 $10 10,000
Hartford Capital Corporation
1400 - 400 Burrard Street
Vancouver, B.C. V6C 3G2 2/20/97 $.001 $ 45 45,000
</TABLE>
The issuance of the shares was made in reliance upon the exemption
contained in Regulation S as amended, to offshore residents and in Canada
pursuant to the exemptions from registration contained in section 55(2) (4) and
55 (2) (9) of the Securities Company Act (British Columbia) and/or paragraphs
128(a) or 128(h) of the Securities Rules to the Securities Act.
99
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Item.
3.1 Articles of Incorporation to Placer Technology, Inc.*
3.2 Articles of Amendment to Placer Technology, Inc.*
3.3 Articles of Amendment to Placer Technology, Inc. to change name to Xin
Net.*
3.4 Bylaws to Placer Technology, Inc. (Xin Net)*
3.5 Articles of Incorporation to Infornet (B.C.) Investment Corp. & Amendment.*
3.6 Articles of Incorporation to Micro Express (Hong Kong) and Amendment to
change name to Infornet Investment, LTD. *
3.7 Articles of Association Placer Technology Corp. (China)*
5.1 Form of Opinion of Michael A. Littman
10.1 Contract between Xin Hai Technology Development, L.T.D and Infornet
Investment, L.T.D. dated August 25, 1997.*
10.2 Cooperative Joint Venture Contract Placer Technologies/Xin Hai.*
10.3 EDUVERSE Non-Exclusive Binding Agreement.*
10.4 "A" warrant certificate*
10.5 "B" warrant certificate*
10.6 Addendum to Agreement/Cooperative Joint Venture*
10.7 Letter between Xin Hai Technology Development L.T.D. and Infornet
Investment, L.T.D. dated April 13, 2000**
10.8 Amendment to Agreement among Placer Technologies Corp. and Xin Hai
Technology Development, L.T.D. and Infornet Investment Limited dated April
25, 2000**
23.1 Consent of Michael A. Littman, dated September 29, 2000
23.2 Consent of Auditor, dated December 15, 2000
* Incorporated by reference to Form 10SB Registration Statements filed 1999 and
2000, file #026559
100
<PAGE>
FINANCIAL STATEMENT SCHEDULES
(1) Financial statements of Xin Net Corp. (formerly Placer Technologies, Inc.)
and subsidiaries
YEAR 1999 PAGE
Cover Page
Index to Financial Statements
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
Notes to the Consolidated Financial Statements . . . . . . . . . . . . F-7-F-15
Interim Financial Statements for September 30, 2000
Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-16
Consolidated Balance Sheet as of September 30, 2000 . . . . . . . . . . . F-17
Consolidated Statement of Operations as of September 30, 2000 . .. . . . . F-18
Consolidated Statement of Stockholders' Equity . .. . . . . . . . . . . . .F-19
Consolidated Statement of Cash Flows as of September 30, 2000 . . . . F-20-F-21
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-22-F-26
(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.
101
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned registrant undertakes:
(1) To file, during any period in which offers or sales are being made,
a post effective amendment to this registration statement.
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933; +
(ii) To reflect in the prospectus facts or events arising
after the effective date of the registration statement (or the
most recent post effective amendment) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
(iii) To include any material information with respect to the
plan of distribution previously disclosed in the registration
statement or any material change to the information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of these securities at that time shall be deemed to be the initial bona
fide offering.
(3) To remove from registration by means of a post effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide certificates in denominations and registered in names as
required by Selected Dealers to permit prompt delivery to each purchaser.
(5) See Item 14 for Registrant's undertaking with respect to
indemnification.
102
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vancouver, British Columbia, Canada, on January 4,
2001.
XIN NET CORP.
BY:/s/S.Y. MARC HUNG
Its: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
------------------------------------------------------------------------------------------------------------
/s/Xiao-qing Du Director January 4, 2001
Xiao-qing Du
/s/S.Y. Marc Hung President and Director January 4, 2001
S.Y. Marc Hung
/s/Ernest Cheung Secretary and Director January 4, 2001
Ernest Cheung
/s/Maurice Tsakok Director January 4, 2001
Maurice Tsakok
103
</TABLE>
<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
Notes to the Consolidated Financial Statements . . . . . . . . . . . . F-7-F-15
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 40,504
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
Internet Access Cards $813,500 $494,676
Domain Name Registration 168,608 0
------------- --------------
Total Revenues 982,108 494,676
Costs of Revenues
Internet Access Cards 131,702 96,710
Domain Name Registration 106,727 0
------------- --------------
Total 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)
Cash and Cash Equivalents, Beginning of Year 336,189 337,366
--------- -------
Cash and Cash Equivalents, End of Year 5,293,429 $ 336,189
========= =======
Year Ended December 31, 1999 1998
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
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<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
(Infornet), is obligated to contribute all of the capital of the joint
venture. The required 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, however,
the Company continues to advance loans to the joint venture as
necessary to fund the operations of the business. Our joint venture
originally designated distribution of 80% of the profits to Infornet
and 20% to Xin Hai, until recoupment of the Company's invested capital.
On April 25, 2000, the Company amended our joint venture agreement to
reallocate the distribution of profits as 100% to Infornet and 0% to
Xin Hai, until Infornet't total investment in our joint venture has
been fully recovered by Infornet. On April 13, 2000, the Company
amended the joint venture agreement to give the Company control over
our joint venture for another fifteen (15) years after the recovery of
total investment and interest from the external financing in the joint
venture. Infornet has, since inception of our joint venture, and will
in the future for fifteen years subsequent to the recovery
F-7
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - ORGANIZATION (CONTINUED)
------------------------
of total investment and interest from the external financing, approve
all board of directors. Due to the life of the joint venture, twenty
(20) years, Infornet will control the joint venture for subtantially
all of the joint venture life. 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 our joint venture because the Company's Board of
Directors is authorized to make all major decisions for the joint
venture and all Board of Directors are approved by the Company.
Therefore, until this point, 100% of the profits and losses are
consolidated and no minority interest is recorded. Total advances to
our joint venture as of December 31, 1999 and 1998 were $1,558,689 and
$424,883, respectively.
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. Our joint venture will be operated in accordance with the laws
and regulations in PRC 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
F-8
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
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 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 our 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 percentage 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. Revenue derived from access and content services is
recognized over the period the services are provided. Revenue from
domain name registration services is recognized when the customer pays
the nonrefundable registration fee. The Company acts as agents for
certain accredited registrars of the International Corporation for
Assigned Names and Numbers (ICANN) and remits to these registrars an
agreed-upon fixed portion of the fees collected from the domain name
registrants.
Other revenues, which are minimal, consist principally of electronic
commerce and advertising revenues, and developing web site home pages,
are recognized as the services are performed or when the goods are
delivered. Additionally, the Company provides consultation and
training services as part of its promotional and advertising packages,
but no revenues have been derived or recorded from such services.
COST RECOGNITION
Cost of revenue includes direct costs to produce and distribute product
and direct costs to provide online services, consulting and product
support. Selling, general, and administrative costs are expensed as
incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
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)
------------------------------------------
PRODUCT DEVELOPMENT COSTS
In accordance with SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," computer software
costs incurred in the preliminary project stage, such as direct labor
and related overhead, and purchased software and computer equipment
from third parties, 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.
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.
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
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)
------------------------------------------
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 fluctations
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 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.
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)
------------------------------------------
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 classifed 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
======================== ===============
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.
F-12
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 6 - CAPITAL LEASE OBLIGATION (CONTINUED)
-----------------------------------
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 $ 393,790 $ 63,668
VALUATION ALLOWANCE (393,790) (63,668)
---------- ---------
NET DEFERRED TAX ASSETS $ 0 $ 0
========== =========
The Company has available net operating loss carryforwards of
approximately $1,100,000 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.
F-13
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 $ 1,067,535 $ 0 $ 0 $ 1,067,535
Operating Income (Loss) (653,323) (32,596) (443,694) (1,129,613)
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 $ 527,988 $43,827 $ 0 $ 571,815
Operating Income (Loss) 111,181 (22,236) (111,997) (23,052)
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 3,566 1,279 0 4,845
</TABLE>
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)
F-14
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - WARRANTS (CONTINUED)
-------------------
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 - SUBSEQUENT EVENTS
On April 25, 2000, the Company amended the joint venture agreement for
the distribution of profits as 100% to Infornet and 0% to Xin Hai,
until Infornet't total investment in the joint venture has been fully
recovered by Infornet. (See Note 1)
F-15
<PAGE>
XIN NET CORP.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Stated in U.S. dollars)
(Unaudited)
CONTENTS
Interim Financial Statements for September 30, 2000
Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-16
Consolidated Balance Sheet as of September 30, 2000 . . . . . . . . . . . F-17
Consolidated Statement of Operations as of September 30, 2000 . .. . . . . F-18
Consolidated Statement of Stockholders' Equity . .. . . . . . . . . . . . . F-19
Consolidated Statement of Cash Flows as of September 30, 2000 . . . . F-20-F-21
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-22-F-27
F-16
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
( Prepared by management and without audit )
<S> <C> <C>
Stated in U.S. dollars 2000 1999
-------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 2,742,662 $ 5,512,614
Other Receivables 588,134 223,466
Inventory (Note 2) 153,769 99,206
Prepaid Expenses 363,844 16,361
----------------------- -----------------------
Total Current Assets 3,848,409 5,851,647
Property and Equipment, Net 976,032 422,620
Other Assets
Organizational Costs, Net 2,055 923
----------------------- -----------------------
Total Assets $ 4,826,496 $ 6,275,190
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Other Accrued Liabilities $ 228,146 $ 162,041
Unearned Revenue 982,011 118,739
Current portion of Obligation under Capital Lease (Note 3) 60,728 58,920
----------------------- -----------------------
1,270,885 339,700
Obligation under Capital Lease (Note 3) 77,346 126,269
Commitments and Contingencies (Note 9)
Stockholders' Equity
Common Stock : $0.001 Par Value
Authorized : 50,000,000
Issued and Outstanding : 21,360,010 (1999: 21,360,000) 21,360 21,360
Additional Paid In Capital 7,214,045 7,214,025
Accumulated Deficit (3,630,476) (1,318,945)
Accumulated Other Comprehensive Income (126,664) (107,219)
----------------------- -----------------------
Total Stockholders' Equity 3,478,265 5,809,221
----------------------- -----------------------
Total Liabilities and Stockholders' Equity $ 4,826,496 $ 6,275,190
======================= =======================
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(Prepared by management and without audited)
<S> <C> <C> <C> <C>
Three Months Ended September 30 Nine Months Ended September 30
Stated in U.S. dollars 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------
Revenue
Internet Access Cards $512,850 $165,679 $1,309,530 $531,768
Domain Name Registration 107,822 14,449 607,032 14,449
E-Solutions 261,951 10,502 445,402 10,502
----------------------------------------------------------------------------
882,623 190,630 2,361,964 556,719
Cost of Revenue
Internet Access Cards 30,749 25,504 213,558 91,400
Domain Name Registration 55,624 3,503 206,181 3,503
E-Solutions 8,216 - 17,673 -
----------------------------------------------------------------------------
94,589 29,007 437,412 94,903
----------------------------------------------------------------------------
Gross Profit 788,034 161,623 1,924,552 461,816
Expenses
Administration and office 566,641 222,593 1,397,802 386,392
Advertising and promotion 616,931 46,636 1,468,471 46,636
Amortization 47,752 58,474 147,396 62,220
Salaries, wages and benefits 321,815 84,352 654,502 113,438
Telephone and communication 284,473 17,115 678,872 186,818
----------------------------------------------------------------------------
1,837,612 429,170 4,347,043 795,504
----------------------------------------------------------------------------
Operating Profit (Loss) (1,049,578) (267,547) (2,422,491) (333,688)
Other Income
Interest income 35,352 62,767 125,105 108,414
Interest expense (4,846) (2,973) (14,145) (5,699)
----------------------------------------------------------------------------
Net Earnings (Loss) Available to
Common Stockholders ($1,019,072) ($207,753) ($2,311,531) ($230,973)
============================================================================
Basic Earnings (Loss) per
Common Shares (Note 5) ($0.05) ($0.01) ($0.11) ($0.01)
============================================================================
Basic Weighted Average Common
Shares Outstanding 21,360,000 21,033,587 21,360,000 17,733,278
============================================================================
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND YEAR ENDED DECEMBER 31, 1999
( Prepared by management and without audit )
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Stock Additional Other
Common Amount At Paid In Accumulated Comprehensive
Stated in U.S. dollars Shares Par Value Capital Deficit Income Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance , December 31, 1998 14,075,000 $ 14,075 $ 862,990 $ (234,918) $ (111,388) $ 530,759
Exercise of Stock Option for cash at $0.40 1,400,000 1,400 558,600 560,000
per share in April 1999
Compensatory Cost - Stock Options 42,000 42,000
Private placement of Common Stock for cash 5,500,000 5,500 5,494,500 5,500,000
at $1.00 per share in May 1999
Offering Costs (385,000) (385,000)
Common Stock for Services Rendered at 385,000 385 384,615 385,000
$1.00 per share in September 1999
Capital Contributions for Past Services 256,320 256,320
Loss for the year ended December 31, 1999 (1,084,027) (1,084,027)
Other Comprehensive Income : Translation 4,169 4,169
Adjustments
--------------------------------------------------------------------------------------
Balance, December 31, 1999 21,360,000 $ 21,360 $ 7,214,025 $ (1,318,945) $ (107,219) $ 5,809,221
Exercise of Warrant for cash at $2.00 10 - 20 20
per share in September 2000
Loss for the nine months ended September
30, 2000 (2,311,531) (2,311,531)
Other Comprehensive Income : Translation (19,445) (19,445)
Adjustments
--------------------------------------------------------------------------------------
Balance, September 30, 2000 21,360,010 $ 21,360 $ 7,214,045 $ (3,630,476) $ (126,664) $ 3,478,265
======================================================================================
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
( Prepared by management and without audit )
<S> <C> <C>
Stated in U.S. dollars 2000 1999
--------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (2,311,531) $ (230,973)
Adjustments to reconcile net loss to net cash
Provided by (Used in) operating activities
Depreciation and amortization 147,396 62,220
Compensatory cost - stock options - 42,000
Common stock issued for services - 385,000
Translation adjustments (19,445) -
Changes in assets and liabilities
(Increase) Decrease in other receivables (364,668) (338,908)
(Increase) Decrease in prepaid expenses (347,483) (6,162)
Decrease (Increase) in inventory (54,563) (15,970)
(Decrease) in accounts payable 66,105 358,196
Increase in unearned revenue 863,272 32,644
---------------------- ----------------------
Net cash provided by (used in) operating activities (2,020,917) 288,047
---------------------- ----------------------
Cash flows from investing activities
Purchases of property and equipment (700,670) (155,009)
Increase in organizational costs (1,270) -
---------------------- ----------------------
Net cash flows used in investing activities (701,940) (155,009)
---------------------- ----------------------
Cash flows from financing activities
Principal payments on capital lease obligations (47,115) (14,838)
Issuance of common stock 20 6,060,000
Offering cost - (385,000)
Related party repayment - (20,000)
---------------------- ----------------------
Net cash flows provided by (used in) financing activities (47,095) 5,640,162
---------------------- ----------------------
Increase (Decrease) in cash and cash equivalents (2,769,952) 5,773,200
Cash and cash equivalents - beginning of period 5,512,614 336,189
---------------------- ----------------------
Cash and cash equivalents - end of period $ 2,742,662 $ 6,109,389
====================== ======================
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
( Prepared by management and without audit )
<S> <C> <C>
Stated in U.S. dollars 2000 1999
---------------------------------------------------------------------------------------------
Supplemental Information :
Cash paid for :
Interest $ 14,145 $ 5,699
Income taxes - -
Noncash investing and financing :
Common stock issued for services $ - $ 385,000
Compensatory cost - Stock option - 42,000
Equipment acquired under capital lease obligation - 214,959
</TABLE>
F-21
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
( Prepared by management and without audit )
1 Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles. However,
certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted or condensed pursuant to the
rules and regulations of the Securities and Exchange Commission
("SEC"). In the opinion of the management all adjustments of a normal
recurring nature necessary for a fair presentation have been included.
The results for interim periods are not necessarily indicative of
results for the entire year. These condensed consolidated financial
statements and accompanying notes should be read in conjunction with
the Company's annual consolidated financial statements and the notes
thereto for the fiscal year ended December 31, 1999 included in its
Annual Report on Form 10-KSB.
The unaudited condensed consolidated financial statements include Xin
Net Corp. and its subsidiaries. Significant inter-company transactions
and accounts have been eliminated.
Certain prior-period amounts have been reclassified to conform to the
current period's presentation.
2 Significant Accounting Policies
Revenue Recognition
-------------------
The Company's revenue is primarily derived from the sale of
nonrefundable subscription services (Internet access usage cards and
content services), domain name registration services and e-solutions.
Revenue derived from Internet access and content services and domain
name registration services is recognized over the period the services
are provided.
In the period prior to July 1, 2000 the Company acted as an agent of
certain accredited registrars of the Internet Corporation for Assigned
Names and Numbers (ICANN) and remitted to these registrars an agreed-on
fixed portion of the fees collected for registering international .com,
.net and .org domain names. Such domain name revenue was recognized
when collected and on a net commission basis. As of July 1, 2000 when
the Company itself became fully
F-22
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
( Prepared by management and without audit )
2 Significant Accounting Policies (Continued)
Revenue Recognition (Continued)
-------------------------------
operational as an ICANN-accredited registrar, international domain name
revenue is recognized over the period of the services provided.
The e-solutions revenue consists principally of electronic commerce and
advertising revenues, and developing web-site home pages. The revenue
is recognized as the services are performed or when the goods are
delivered. Additionally, the Company provides consultation and training
services as part of its promotional and advertising packages, but no
revenues have been derived or recorded from such services.
Cost Recognition
----------------
Cost of revenue includes direct costs to produce products and provide
on-line services.
Cost in relation to provide Internet access and content services and
provide domain name registration in the capacity of a registrar is
recognized over the period of services provided.
Cost in relation to e-solutions is recognized as the services are
performed or when the goods are delivered.
3 Inventory
Inventory at September 30, 2000, of $153,769, consists of computer
equipment, peripherals, modems, Internet access cards and accessories.
4 Capital Lease Obligation
The Company leases computer equipment, through its wholly owned
subsidiary company Infornet Investment Corp., repayable at
approximately $5,719 (CND 8,407) per month to June 30, 2002. The
liability includes imputed interest at an average rate of 6.12% per
annum.
F-23
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
( Prepared by management and without audit )
4 Capital Lease Obligation (Continued)
Total minimum lease payments
for the year ended September 30
2001 $ 66,943
2002 80,544
----------------
147,487
Less : Amount representing interest (9,413)
----------------
Present value of minimum lease payment 138,074
Less : Current portion (66,943)
----------------
$ 71,131
================
5 Stockholders' Equity
On September 29, 2000, the shareholders at the price of $2 each
exercised ten warrants.
As at September 30, 2000, 5,884,990 Series A warrants are outstanding.
Each warrant entitles the holder to purchase, on or before March 31,
2001, one additional unit of common share at a price of $2.00 per unit,
each unit consisting of one common share and one Series B warrant. The
Series B warrant entitles the holder to purchase one additional common
share at a price of $5.00 per share on or before March 31, 2002.
As at September 30, 2000, 10 Series B warrants are outstanding. Each
warrant entitles the holder to purchase one common share at a price of
$5.00 per share on or before March 31, 2002.
F-24
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
( Prepared by management and without audit )
6 Earnings Per Share
Basic earnings per share are computed by dividing net earnings
available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share
is computed by dividing net earnings available to common stockholders
by the weighted-average number of common shares outstanding during the
period increased to include the number of additional common shares that
would have been outstanding if potentially dilutive common shares had
been issued.
The following table sets forth the computations of shares and net
earnings used in the calculation of basic earnings per share for the
third quarter and the nine-month periods ended September 30, 2000 and
1999 :
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months ended Nine months ended
09/30/00 09/30/99 09/30/00 09/30/99
-------- -------- -------- --------
Net income (loss) for the period $ (1,019,072) $ (207,753) $ (2,311,531) $ (230,973)
Weighted-average shares outstanding 21,360,000 21,033,587 21,360,000 17,733,278
Basic earnings per share $ (0.05) $ (0.01) $ (0.11) $ (0.01)
========= ======== ========= =========
Diluted earnings per share $ (0.05) $ (0.01) $ (0.11) $ (0.01)
========= ======== ========= =========
</TABLE>
Due to the loss for the three-month and nine-month periods ended
September 30, 2000 and 1999, the effect of outstanding options and
warrants was not included as the effect would be anti-dilutive.
7 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
expenses not allocated to reportable segments.
F-25
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
( Prepared by management and without audit )
7 Segment and Geographic Data (cont'd)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For 3 months ended 9/30/2000 China Canada Other Total
---------------------------- ----- ------ ----- -----
Revenue from customers $ 882,623 $ - $ - $882,623
Interest revenue 400 56 34,896 35,352
Inter-segment revenue - - - -
Operating income (loss) (978,164) (5,657) (70,603) (1,054,424)
Total assets 2,755,732 18,426 2,052,338 4,826,496
For 3 months ended 9/30/1999 China Canada Other Total
---------------------------- ----- ------ ----- -----
Revenue from customers $ 190,630 $ - $ - $190,630
Interest revenue - - 62,767 62,767
Inter-segment revenue - - - -
Operating income (loss) (129,363) (76,967) (64,190) (270,520)
Total assets 1,901,305 253,995 4,890,529 7,045,829
For 9 months ended 9/30/2000 China Canada Other Total
---------------------------- ----- ------ ----- -----
Revenue from customers $2,361,964 $ - $ - $2,361,964
Interest revenue 1,249 56 123,800 125,105
Inter-segment revenue - - - -
Operating income (loss) (2,141,893) (18,315) (276,428) (2,436,636)
Total assets 2,755,732 18,426 2,052,338 4,826,496
For 9 months ended 9/30/1999 China Canada Other Total
---------------------------- ----- ------ ----- -----
Revenue from customers $ 556,719 $ - $ - $556,719
Interest revenue - - 108,414 108,414
Inter-segment revenue - - - -
Operating income (loss) (49,084) (111,146) (179,157) (339,387)
Total assets 1,901,305 253,995 4,890,529 7,045,829
</TABLE>
F-26
<PAGE>
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
( Prepared by management and without audit )
8 Total Amount Advanced to Joint Venture
As at September 30, 2000, the total amount advanced to the joint
venture project is $2,588,021.
The registered capital of the joint venture has been increased by
$225,000 to $1,750,000 and the amount was fully contributed on
September 18, 2000.
9 Property and Equipment
Property and equipment consists of the following :
September 30, 2000 December 31, 1999
Office equipment 211,250 8,586
Equipment 919,833 521,627
Furniture 28,912 5,455
-------------------------------------
Total 1,159,995 535,668
Less : Accumulated depreciation (183,963) (113,048)
-------------------------------------
Net book value 976,032 422,620
=====================================
The depreciation expense charged to operations for the nine-month
period is $147,258.
10 Commitments and Contingencies
The Company issued a standby letter of credit in sum of $100,000 as
security deposit to a domain name registrar in June 2000. The standby
letter of credit is secured by the same amount of fixed deposit
maintained at a bank and will expire on June 30, 2001.
F-27
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
XIN NET CORP.
(Exact name of Registrant as specified in charter)
EXHIBITS
104
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C>
Exhibit
No. Item
3.1 Articles of Incorporation to Placer Technology, Inc.*
3.2 Articles of Amendment to Placer Technology, Inc.*
3.3 Articles of Amendment to Placer Technology, Inc. to change name to Xin
Net.*
3.4 Bylaws to Placer Technology, Inc. (Xin Net)*
3.5 Articles of Incorporation to Infornet (B.C.) Investment Corp. & Amendment.*
3.6 Articles of Incorporation to Micro Express (Hong Kong) and Amendment to
change name to Infornet Investment, LTD. *
3.7 Articles of Association Placer Technology Corp. (China)*
5.1 Form of Opinion of Michael A. Littman
10.1 Contract between Xin Hai Technology Development, L.T.D and Infornet
Investment, L.T.D. dated August 25, 1997.*
10.2 Cooperative Joint Venture Contract Placer Technologies/Xin Hai.*
10.3 EDUVERSE Non-Exclusive Binding Agreement.*
10.4 "A" warrant certificate*
10.5 "B" warrant certificate*
10.6 Addendum to Agreement/Cooperative Joint Venture*
10.7 Letter between Xin Hai Technology Development L.T.D. and Infornet
Investment, L.T.D. dated April 13, 2000*
10.8 Amendment to Agreement among Placer Technologies Corp. and Xin Hai
Technology Development, L.T.D. and Infornet Investment Limited dated April
25, 2000*
23.1 Consent of Michael A. Littman, dated September 29, 2000
23.2 Consent of Auditor, dated December 15, 2000
*Incorporated by reference to Form 10SB Registration Statements filed 1999 and
2000, file #026559
105
</TABLE>
