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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1998
Commission File No. 33-90696
ANDEAN DEVELOPMENT CORPORATION
(Name of Small Business Issuer in Its Charter)
FLORIDA 65-0420146
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1900 GLADES ROAD, SUITE 351, BOCA RATON, FLORIDA 33431
(Address of Principal Executive Offices) (Zip Code)
Office in Santiago, CHILE
Av. Americo Vespucio 100, Piso 16
Santiago de CHILE
Phone in Chile: 562 2075000
Fax in Chile: 562 2076797
Phone in Florida (USA)(561) 416-8930
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.0001 PAR VALUE
(Title of Class)
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports, and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $2,630,429
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of March 30, 1999 computed
by reference to the closing bid price of the Common Stock was $ 1.625 on that
date: $4,582,663.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
2,820,100 shares of Common Stock, $.001 par value, as of December 31,
1998.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None
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ANDEAN DEVELOPMENT CORPORATION
Report on Form 10KSB
For the Fiscal Year Ended December 31, 1998
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. Description of the Business 1
Item 2. Description of the Property 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to Vote of Security Holders 18
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters 18
Item 6. Management's Discussion and Analysis 19
Item 7. Financial Statements 23
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 23
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons 24
Item 10. Executive Compensation and Employment Agreements 27
Item 11. Security Ownership of Certain Beneficial Owners
And Management 30
Item 12. Certain Relationships and Related Transactions 31
PART IV
Item 13. Exhibits and Reports on Form 8-K 34
Signatures 37
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Andean Development Corporation ("ADC") was organized in 1994 as a holding
company to acquire Errazuriz y Asociados Ingenieros S.A. ("E&A") and Igenor
Andina S.A. ("INA"), both Chilean corporations located in Santiago, Chile.
Except as otherwise specifically noted, ADC, E&A and INA are collectedly
referred to herein as the "Company."
E&A, organized in February 1991, specializes, as an agent, in the sale of major
electrical and mechanical equipment, and in the representation of foreign
manufacturers of electrical and mechanical equipment in South America. E&A also
offers technical assistance for both turnkey and non-turnkey public works and
development projects to be constructed in South America, primarily in Chile.
Since 1991, E&A has facilitated the sale of more than $550 million of equipment
and installations including generators, turbines and conveyors, which has
generated commission for the Company. See "Core Business."
INA, organized in 1986, focuses on providing engineering consulting services and
project management for irrigation, water treatment plants, tunneling and
hydroelectric power plants. Since 1986, INA, alone and in conjunction with
Norconsult International, A.S. of Norway ("Norconsult"), an international
engineering company, has provided engineering, consulting and project management
services relating to engineering projects valued at approximately $22 million
since inception, of which approximately $11.6 million was revenues the Company
has realized. See "Core Business."
The Company's strategy consists of (i) capitalizing on its historical
participation in the electric utility sector, ecology and irrigation projects,
and the potable and waste water treatment fields in order to expand its core
business, and (ii) investing in businesses that will provide a steady cash flow
to the Company. The Company also expects that the continuing stability of the
Chilean economy, inflation rates and privatization of business in Chile which
have increased investment in Chile will have a positive impact on the Company
and its operations. Additionally, other South American countries have undertaken
privatization policies similar to Chile, which may provide other opportunities
to the Company's core business.
Pursuant to the Company's business plan, during 1998, the Company has
consolidated most of the investments and has finished the reorganization and
reengineering of most of its subsidiaries.
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In November 1997, the Company purchased a 670-acre farm in the Itata Region in
Chile for $1,073,000 to establish a vineyard. The vineyard is beginning to be
planted. Up to now about 160 acres have been planted. Their production is
expected for February 2001.
During 1998, the Company acquired a 67% equity interest in Ingesis, a Chilean
software development company ("Ingesis") for $101,031. Ingesis has developed a
system, utilizing a digital signature generated by encrypting a logarithm on a
computer chip.
The Company holds 51% equity interest in Negociaciones y Servidumbre S.A., a
Chilean corporation ("NYSA") for which it paid $125,508. NYSA specializes in
negotiation and purchasing of land easements for use by electrical utilities.
The Company on August 1997 purchased a 31.5% equity interest in a wine
processing facility in Chile ("Vina Valle del Itata S.A.") of which $85,325 was
paid during 1997 and $110,181 during 1998 for a total amount of $ 195,509. The
facility has produced wine during March 1998 that was sold to England. During
1998 the facility reached its full initial production capacity of approximately
1.5 million liters of wine.
In May 1997, Pedro Pablo Errazuriz, the Company's Chairman of the Board,
acquired a 20% interest in Construcciones Electromecanicas Consonni S.A., a
Spanish corporation that manufactures motor control centers and switchgear
("Consonni") and in Equipos de Control Electrico S.A., a Spanish corporation and
the international marketing and sales arm of Consonni ("ECESA", and collectively
with Consonni, "Consonni/ECESA") from unrelated third parties, increasing his
equity interest in Consonni/ECESA to 77%.
In July 1997, the Company acquired an 11% equity interest in Consonni/ECESA for
$670,714 from unrelated third parties. During August 1997, Mr. Errazuriz, his
interest of 77% and the 11% interest owned by the Company, entered into a share
exchange agreement with Consonni USA, Inc., a Florida corporation ("CONUSA"),
where the aggregate 88% interest of Consonni/ECESA was exchanged for 2,300,000
shares of CONUSA Common Stock (representing approximately a 76.7% interest in
CONUSA).
The Company's offices are currently located at 1900 Glades Road, Boca Raton,
Florida, U.S.A. and its telephone number is (561) 416-8930. Its fiscal year end
is December 31.
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BACKGROUND
The Company was incorporated as a Florida corporation on October 19, 1994 under
the name "Igenor U.S.A., Inc." On January 10, 1995, the Company changed its name
to "Andean Development Corporation." The Company undertook a reorganization upon
the closing of its November 1996 initial public offering, but which was given
effect as of December 31, 1994, whereby E&A and INA became majority owned
(99.99%) subsidiaries of the Company pursuant to share exchange agreements.
Chilean corporate law requires that a Chilean corporation have no less than two
different shareholders at any given time and thus, one share of INA is owned by
E&A and one share of E&A is owned by INA.
E&A was organized on February 28, 1991, in Santiago, Chile, as a Chilean limited
partnership under the name "Errazuriz y Asociados Ingenieros Limitada." On
September 21, 1994, E&A was reorganized as a Chilean corporation and its name
was changed to "Errazuriz y Asociados Ingenieros S.A."
INA was organized on June 11, 1986, in Santiago, Chile as a Chilean limited
partnership under the name "Ingenieria Norconsult Andina Limitada." Initially
INA was a joint venture between Norconsult, a worldwide engineering consulting
company based in Oslo, Norway and Errazuriz y Asociados Arquitectos S.A.
("EAA"), a major shareholder of ADC. See "Principal Shareholders." Norconsult
subsequently sold its participation to Igenor Ingenierie et Gestion, S.A., a
Swiss corporation ("Igenor"), which is also a majority shareholder of the
Company. On September 15, 1994, pursuant to Chilean law, INA was reorganized
from a limited partnership to a Chilean corporation, and its name was changed to
"Igenor Andina S.A."
In September 1996, the Company organized ADC Andean, S.A. ("ADC Swiss") as a
Swiss corporation. ADC Swiss is a wholly owned corporation of ADC.
In July 1997, the Company organized AEFC as a Florida corporation. As of
December 31, 1997, AEFC is a wholly owned subsidiary of the Company.
HISTORY AND ECONOMIC OVERVIEW
Since the inception of INA in 1986, the Company has transitioned itself from
sales of equipment to sales of commercial work and procuring large turnkey
projects as a consultant to and representative of international consortiums.
Since 1991, the Company, through INA, has focused on the energy and
infrastructure sectors. In connection with these activities, the Company has
also acted as project manager and supplier of specialized engineering services.
Generally, all services related to engineering, design, consulting, supervising
and inspecting of construction projects have been initiated by INA, and those
related to sale of equipment for construction projects have been initiated by
E&A.
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The Company's services have historically been provided to both private companies
and governmental agencies, with more than half of the Company's total revenues
coming from the private sector during recent years. The Company has been a
supplier of equipment, spare parts and engineering services for most of the
largest utilities in Chile including, among others, private companies such as
ENDESA, S.A. (the largest electrical utility company in Chile), Chilgener S.A.
(the second largest electrical utility company in Chile), Minera Valparaiso S.A.
(a mining company), CREO (Cooperative Regional Ectrica de Osorno) (an electrical
utility company), and Edelnor S.A. (an electrical distribution company); and
government owned companies such as Codelco (Corporacion Nacional del Cobre de
Chile) (the largest government owned mining company in Chile), Colbun S.A. (an
electrical utility company), and Petrox S.A. (a petrol-chemical and oil
company).
CORE BUSINESS
E&A
E&A specializes, as an agent, in the sale of major electrical and mechanical
equipment a representative to foreign manufacturers. A substantial amount of its
sales is for equipment relating to the electrical utilities, mining, and
materials handling industries. This include medium and high voltage generators,
transformers, controls, cables, gas and steam turbines and industrial boilers,
as well as other materials such as cranes, unloading facilities, coal handling
systems, crushers, air cleaning systems and ventilators. Additionally, E&A
offers technical assistance to bidders during the preparation of tender (bid)
documents for turnkey and non-turnkey projects, as well as throughout a project,
once bids have been awarded. E&A has been successful in obtaining and
maintaining its representations of foreign equipment manufacturers by offering
engineering and sales support by experienced civil and industrial engineers.
These professionals are knowledgeable in both the technical and sales aspects of
a project and also have established contacts and networks in Chile necessary to
successfully compete with larger international companies. Although many of the
services offered by the Company are comparable to those of its competitors, the
Company can effectively compete with larger competitors and offer additional
services not available from its competitors, because of the Company's historical
presence in Chile and its reputation for quality services. See "Competition."
The services offered by E&A include, but are not limited to:
1.
o Forecasting of market trends.
o Market research
o Financing (expertise in local and foreign loans)
o Packaging with other manufacturers
o Knowledge of the decision making procedures and the scheduling
of projects
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2.
o Local engineering support (by the Company's employees or
through subcontractors)
o Procurement of local materials and products
o Construction and plant erection capabilities
o Project managing capabilities
o Coordination with customer and customer engineering
While E&A does not charge any fee for the services described in item 1 above and
funds the related operating costs, the services described in item 2 above are
developed for a customer on a fee basis once a project is secured. Additionally,
equipment manufacturers pay E&A a commission upon receipt of the award of a
project. The commission is typically based on a percentage of the amount of the
sale, which varies depending upon the size and scope of a project. See "Recent
Projects."
In preparing bid documents for various projects, E&A has and will continue to
form consortiums of various equipment manufacturers who provide products on
competitive terms and conditions. E&A intend to assist in obtaining financing of
projects through both domestic (Chile) and international financial institutions.
INA
INA focuses primarily on providing engineering consulting services for
hydroelectric plants and civil construction projects (tunneling projects). Most
of the engineering services provided by INA result from INA's exclusive
representation of Norconsult. Currently, one or two hydroelectric plants are
built in Chile every year, while each year Norconsult participates worldwide in
the design of 10 to 15 of such plants. As a result, INA's relationship with
Norconsult provides INA with the ability to offer its customers state-of-the-art
knowledge for these types of projects while, at the same time, associating with
local engineering companies in preparing bid documents for such projects. INA
also offers most services not only relating to hydroelectric power plants, but
also to infrastructure and irrigation projects, from the pre-construction stage
through the commissioning of the project.
Additionally, INA has the ability to erect small electro-mechanical
installations and material handling systems. As a project manager for an
installation, INA coordinates with a consortium of equipment manufacturers in
the preparation and delivery of turnkey projects after a bid has been awarded.
INA also provides local engineering support to its clients.
Both E&A and INA believe they have built superior reputations in their specific
areas of expertise, having been involved in the greater majority of all
hydroelectric plants built in
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Chile since 1985, as well as other major electro-mechanical projects than its
Chilean competitors. A major part of the Company's know-how is its understanding
of a customer's needs and being its ability to offer its customers goods and
services that deviate only to the extent that such deviations or substitutions
make a bid more competitive. The Company believes that in order to be awarded a
bid, a bidder needs to know the end user and through the years, the Company has
obtained this knowledge by working with the major companies in Chile (both
private and public) who request these bids. See "Major Projects."
The Company intends to further grow its core business by expanding in North
America and Europe as well as to seek additional representation of U.S. and
other North American based companies for sales to be made in Chile. To
facilitate this growth, the Company has established a U.S. office located in
Boca Raton, Florida.
Major Representations (Exclusive)
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NAME OF COMPANY COUNTRY OF ORIGIN SECTOR
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Accusonic, Inc./O.R.E. Intl. Inc U.S.A Ecology and water treatment
Berdal Stromme A.S. Norway Engineering
Consonni S.A Spain Energy and electricity
Kvaerner Energy A.S. Norway Energy
Kvaerner Turbin A.B. Sweden Mech. Equip. for energy
Linde A.G Germany Mining, processor, chemical plants
Norconsult Int. A.S Norway Engineering
Union Espanola de Explosivos Spain Mining explosives
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Selected Special Sales Representations (Non-Exclusive)
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NAME OF COMPANY COUNTRY OF ORIGIN SECTOR
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ABB-Air Preheater U.S.A. Ventanas Power Plant
ABB-Sweden Sweden Pangue
ABB-Switzerland Switzerland Curillinque
ABB-Solyvent Ventec Spain Various mines (Exxon)
AEG Germany Pangue
Babcock & Wilcox/Cranes Div Spain Ventanas Cranes
Babcock &Wilcox Espanola, S.A Spain Mejillones Power Plant
Baedeke Navarro (BYNSA) Spain Tocopilla Cranes
Combustion Engineering U.S.A. Chuquicamata
G.E.C. Large Machines U.K Guardia Vieja
G.E.C.Mechanical Handling U.K. Cement,Storage,& Conveyor
Ingemas Spain Ventanas Conveyor System
Marubeni Corp. Japan Copper Concentrates Distr.
Mitsubishi Corp. Japan Polpaico
National Drying Machinery Co. U.S.A. Invertec
Siemens A.G Germany Mejillones Th Power Plant Loma
Alta Hydroelectric
Sumitomo Corp. Japan Submarine Cables
Westinghouse Electric Co. U.S.A. Turbines/Edegel, Peru
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RECENT PROJECTS - 1993 - 1997
Below is a representative list of the main equipment, turnkey projects and
engineering sales made by the Company from 1993 to 1997.(1)(2)
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NAME OF PROJECT EQUIPMENT TYPE OF PROJECT CUSTOMER SUPPLIER APPROXIMATEVALUE
- --------------- --------- --------------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
1993
Ortiga Tunnel Redesign of tunnel Engineering Exxon Norconsult $100,000
Canutillar Power plant tunnels Engineering Endesa Norconsult $200,000
Mejillones Thermal power plant Advisory Edelnor Babcock Wilcox $100 million
Capullo Hydropower Advisory and CREO Kvaerner $5 million
erection Norconsult
1994
Pangue General design & Engineering Kvaerner Norconsult AS $2.7 million
supplier
coordination
Pangue Hydropower Advisory Pangue S.A. Kvaerner $70 million
Turnbin
Antofagasta Sewage system Engineering Bayesa Biwater Int'l $8 million
1995
Patache Cranes Advisory CELTA Babcock Wilcox $10 million
Spain
Lorna Alta Hydropower Advisory Pehuenche Siemens $20 million
hidrovevey
San Ignacio Thermal - electrical Advisory Endesa Mitsubishi $100 million
plant
1996
Andina Water tunnel system Engineering Codelco Norconsult $100,000
Nehuenco Thermal - electrical Advisory Colbun Siemens $100 million
plant
Costaner, Argentina Thermal - electrical Advisory Endesa Mitsubishi $200,000
plant
1997
Alto Cachpoal Hydroelectric Advisory Andrade & Kvaerner $60 million
project Gutierrez
Mampil Pauchen Hydroelectric Advisory Elecnor S.A Kvaerner $5.8 million
project
El Peral Project of realting Engineering Calvo Family Ourselves $1.3 million
Tocopilla Combined cycle Advisory Electroandina ABB $160 million
Yanango Hydropower Advisory Edegel -Peru ABB $30 million
</TABLE>
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(1) A number of the bids awarded for the projects described above were awarded
to a group of bidders forming a consortium.
(2) Typically, for projects valued in excess of $100 million, the Company will
earn a commission of between 0.03% to 1% of the bid price of the project; for
projects valued between $20 million and $100 million, from 1% to 3.5%; and from
$1 million to $20 million, between 3% and 5%. For sales less than $1 million,
the commission typically ranges between 5% and 10%. Factors that determine the
amount of commission include, among others, the amount of engineering services
provided by the Company.
1998 Projects
During 1998 the Company participated in the following projects:
COSTANERA ADVISORY Central Buenos Aires-Endesa/Entergy located in Buenos Aires,
Argentina. Errazuriz & Asociados Contract Commissioning Advisory.
CHIMAY Project. EDEGEL, Peru Cartellone has hired Errazuriz Asociados located
150 km east of Lima consisting Hydroelectric Plant 60 megawatt. Cost of project
$100 million.
CHARRUA PROJECT. ENDESA S.A. Empresa Nacional de Electricidad S.A. the largest
Chilean Electric Utility Errazuriz y Asociados as the representative of Turbo
Power Overseas Ltd. A Pratt & Whitney subsidiary has participated in the
preparation of the bid and sale of two turbogenerator groups consisting of two
FT8 Power Pac and one FT8 Twin Pac for a total of 100MW and its transformer. The
total cost of the project it was $35.6 million.
ANTILHUE PROJECT. ENDESA S.A. Empresa Nacional de Electricidad S.A. the largest
Chilean Electric Utility Errazuriz y Asociados as the representative of Turbo
Power Overseas Ltd. A Pratt & Whitney subsidiary has participated in the
preparation of the bid and sale of two turbogenerator groups consisting of two
FT8 Power Pac for a total of 50MW and its transformer. The total cost of the
project it was $15 million.
WATER RELATED PROJECTS
Aguas y Ecologia S.A. and the Bayesa Project
While Chile has made significant economic gains over the past 12 years in terms
of foreign trade, the development of electrical utilities, the export of
agricultural and cellulose products and the efforts of the Chilean government to
take actions in the sanitary services and waste water treatment have been slow
in developing. The first steps toward waste water treatment commenced in 1987
when the Ministry of Public Works
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called for bids to clean the Mapocho River Systems (which account for 30% of all
the waste water in Santiago), however a number of political stalemates halted
development in this area until 1993, which the Chilean government commenced
privatization of the water utility industry.
The Company, through Igenor Andina S.A., currently owns 67.5% of Aguas y
Ecologia S.A. ("A&E"), a Chilean corporation. A&E, in turn, owns a 10% interest
in Biwater-Aguas y Ecologia S.A. ("Bayesa"), which owns and operates the Bayesa
Project (the "Bayesa Project"). The Bayesa Project includes the design,
construction, and management of a waste water treatment facility in Antafagasta,
Chile for ESSAN (which is the water supply and treatment facility for the second
region of Chile where Antofagasta is located), and the right to sell reclaimed
industrial grade water.
The Bayesa Project will terminate after 30 years of operation, at which time
Bayesa anticipates that it will transfer the Bayesa Project to ESSAN for no
consideration. The Company took the reversion of the Bayesa Project back to
ESSAN into consideration when deciding to take an equity position in the Bayesa
Project. The Company concluded that it was in the Company's best interest to
invest in the Bayesa Project, because of the potential profitability during the
30-year term of the contract.
Realizing that there appeared to be an emerging business in water purification
and treatment in Chile, the Company decided to seek additional relationships
with foreign entities that have experience in water purification and may be
partners in an eventual privatization project. Below is an overview of these
relationships and proposed projects.
Pridesa
Effective September 1997, the Company entered into an agreement with Pridesa, a
medium size Spanish company engaged in developing waste water treatment and
desalinization plants. Under the terms of this agreement, the Company and
Pridesa will seek to construct, own, and manage a 34,000 cubic meter per day
desalinization plant in Iquique in the northern region of Chile, one of the
driest regions in the world. It is anticipated, but there can be no assurances,
that 75% of the funding for this plant will come from Spanish government loans
on favorable terms. The guaranty of the funding is anticipated to be provided as
a project loan from various Chilean banks. It is expected that the Company will
have a significant equity position and management role in this project.
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1999 PROJECTS
Due to the economic crisis in Asia and South America, a significant amount of
the projects anticipated to begin in 1998 were postponed and now appear
hereafter as 1999 projects.
LINEA ALTA TENSION ARGENTINA-BRASIL
Project's owner CIEN Rio de Janeiro Brasil
Location Argentina-Brasil
Type of project Hydroelectric Project
Capacity 220 megawatt approximately
Bid submission date April 1999
Award estimated date June 1999
Estimated Bid Price $200 million
GUAVIO
Project's owner Endesa (Emgesa, Colombia)
Location 200 km east of Bogota
Type of project Hydroelectric Project
Capacity 220 megawatt approximately
Bid submission date September 1999
Award estimated date November 1999
Estimated Bid Price $40 million
PP. RIO de JANEIRO
Project's owner Cachoeira Dorada SA - Endesa/Edegel
Location Rio de Janeiro, Brazil
Type of project Gas Powered Combined Cycle
Capacity 120 megawatt approximately
Bid submission date April 1999
Award estimated date October 1999
Estimated Bid Price $35 million
TERMO BIBLIS
Project's owner Electrica de Cartagena, Colombia -
Termo Biblis
Location Cartagena
Type of project Gas powered Combined Cycle (Siemens)
Capacity 350 megawatt approximately
Bid submission date May 1999
Award estimated date September 1999
Estimated Bid Price $150 million
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COYA-PANGAL
Project's owner Codelco Chile
Location 100 south of Santiago
Type of project Hydroelectric Project, purchase of plant
Capacity 70 megawatt approximately
Bid submission date August 1999
Award estimated date December 1999
Estimated Bid Price $75 million
DESALINIZATION ANTOFAGASTA
Project's owner ESSAN, Joint Venture
Location Antofagasta, Chile
Type of project Desalting Plant, water production
Capacity 350 lkts/sec approx.
Bid submission date July 1999
Award estimated date October 1999
Estimated Bid Price $30 million
A number of Chilean companies with whom the Company has established
relationships are now making investments and developing projects outside Chile
and as indicated above, a number of these companies have engaged the Company to
provide services for these projects.
STRATEGY FOR EQUITY PARTICIPATION
While both E&A and INA have been profitable during recent years, their ability
to produce a steady cash flow for the Company is limited by the nature of their
businesses since their activities depend almost exclusively on the number of
bids that are awarded to each of them. Income from these businesses requires
that first, new projects are developed; second, appropriate equipment is
available to offer to a project at competitive prices; and third, and most
importantly, that the Company is successful in selling the equipment and
services. The Company believes that to expand the businesses of E&A and INA, the
Company may require higher fixed costs and less flexibility. Alternatively,
increasing the number of employees does not necessarily mean increased sales and
profitability to the Company.
Management believes that by establishing an equity position in other ventures
will provide the Company with (a) diversified profitable growth; (b) stabilized
cash flow; and (c) the ability to further capitalize on the stability of the
Chilean economy. As a result, during 1997 and 1998, the Company made a number of
equity investments in business which are anticipated to create a steady cash
flow to the Company and which will grow in the future.
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INVESTMENTS IN NEW COMPANIES
Consonni/ECESA
In May 1997, Mr. Errazuriz, the Company's Chairman of the Board, acquired a 20%
interest in Consonni/ECESA from unrelated third parties, increasing his equity
interest in Consonni/ECESA to 77%. Consonni/ECESA are Spanish corporations that
market, manufacture, distribute and sell motor control centers and switchgear.
In July 1997, the Company purchased an 11% equity interest in Consonni/ECESA for
approximately $670,714 from unrelated third parties.
Consonni/ECESA has experienced significant operating losses up through 1996,
resulting in a substantial accumulated deficit. Under Spanish government
regulations, a company is not allowed to operate with significant accumulated
deficit without government intervention. As a result, in July 1996, the Spanish
government under judicial orders, placed Consonni/ECESA under administrative
supervision whereby management was required to present a strategic plan with the
intent to eliminate the supervision by demonstrating an ability to continue as a
going concern. As part of its plan, Consonni/ECESA developed a strategy to
eliminate a substantial amount of its debt and in particular, the amounts due to
the Social Security Administration of Spain and other governmental agencies and
negotiated with these governmental entities to reduce the amount of debt due to
these agencies, which reduction of debt was approved. In July 1997, once these
negotiations were substantially finalized, the Company purchased an 11% interest
in Consonni/ECESA for approximately $671,000 from unrelated third parties.
Subsequently, during August 1997, Mr. Errazuriz, on behalf of his interest of
77% and the interest owned by the Company approval) of 11%, entered into a share
exchange agreement with CONUSA, whereby the 88% interest of Consonni/ECESA was
exchanged for 2,300,000 shares of CONUSA Common Stock (representing
approximately a 76.7% interest in CONUSA). CONUSA on 1998 has been traded on the
OTC Bulletin Board, which is a limited market. CONUSA intends to apply for
inclusion on the National Association of Security Dealers Automated Quotation
(NASDAQ) SmallCap Market System.
The acquisition of the balance of Conusa shares by ADC, announced as a
possibility in our report of last year, did not take place.
NYSA
Negociaciones y Servidumbre, S.A. (NYSA), a Chilean corporation, was organized
to advise the largest private utilities and the Minister of Public Works in the
acquisition of land easements from private owners in connection with the
installation of electrical lines, piping systems and roads. NYSA, on behalf of
these utilities, assists in determining the appropriate market value in order to
purchase (rather than to expropriate) privately owned property, and typically
undertakes all aspects of the acquisition (including legal matters). During 1998
the Company has completed its acquisition of a 51% equity interest in NYSA for
$125,508.
13
<PAGE> 16
Ingesis
In 1998, the Company acquired a 67% interest in Ingesis, S.A. for $101,032.
Ingesis is a computer software company located in Santiago, Chile that has
developed a system that utilizes a digital signature generated by encrypting a
logarithm on a computer chip, which has been approved by the Chilean Internal
Revenue Service as a replacement for the current system of tracking and auditing
the collection of value added taxes. In addition, the Company developed and
improved a software program "Market" used for the management of sales and
inventory for small to medium sized entities. The Company intends to invest an
additional $250,000 to develop and market these products, and to help develop
and implement Ingesis' business plan.
Vina Valle del Itata S.A
Vina Valle del Itata S.A. ("VVISA"), a Chilean corporation, was organized to
produce wine from grapes originated in the area called "Valle del Itata" located
approximately 400 kilometers south of Santiago. The initial capacity of the
installation is estimated to be 1.5 million liters of wine and this capacity is
expected to double within three years. The project is sponsored by "Fundacion
Chile" which is a joint venture between International Telephone and Telegraph
(ITT) and the Chilean Government and was created to develop new industrial and
agricultural ventures in Chile. The total investment by the joint venture in
this project will be $2.5 million of which $1 million will be used for working
capital. Banks and governmental Institutions will either finance or guarantee
80% of these amounts. The Company currently owns a 31% share in VVISA and has
invested $85,325 to date. The installation was ready for operation in March 1998
in time to process the 1998 vintage.
Vina "Bodegas Garcia Errazuriz"
The Company purchased 670 acres near Chillan for $1,073,000, of which $685,292
was paid during 1997 and the balance was paid in 1998. During 1997, the Company
commenced a program to plant 430 acres of vineyard, which is expected to be
completed in 1999. The first harvest is expected during March 2000 and full
production will be attained three years later. The Company intends to sell up to
a 25% share of the vineyard, mainly to selected strategic partners and to
certain of its employees and workers.
In addition, during 1998, the Company acquired a 40% equity interest in
Funditec, S.A., a Chilean company, in its development stage. Funditec will be in
the business of manufacturing, selling, buying and exporting of cast iron
fittings for potable water systems, cast iron valve bodies and miscellaneous
cast iron parts. Its manufacturing capabilities will be in the range of 100 tons
per month.
14
<PAGE> 17
MARKETING AND SALES
The Company's marketing and sales efforts are currently undertaken by
management, the Company's in-house engineers and other technical employees. A
substantial amount of the Company's marketing is accomplished by word of mouth,
personal contact, leads, and solicitation. The Company also uses written
marketing materials, including brochures, and does limited advertising in trade
journals and publications in Chile.
COMPETITION
Core Business
The Company believes that each aspect of its business is competitive and that
competition is based not only on price but also on quality of service. The
Company's competitors include a number of international companies with local
offices in Santiago, Chile which consists of an administrative staff who, in
certain instances, are not engineers. While these larger competitors may bid on
the same projects as the Company, and although there can be no assurances that
the offers will be competitive, the Company believes that it has and will
continue to participate effectively in the bid process. To the Company's
knowledge, the majority of its competitors rely on the engineering expertise of
local subcontractors (such as the Company) or on engineering companies located
abroad.
The Company believes that in the past, it has demonstrated the ability to seek
and enter into relationships with those manufacturers whose products are most
competitively priced, not only in terms of dollars, but also in terms of overall
product efficiency and support for specific projects. Moreover, the Company has
been successful in helping to put together consortiums of manufacturers, in
order to quote large multi-faceted projects. Nonetheless, the Company believes
that each area of the new projects and investments in which the Company intends
to become involved is highly competitive.
A number of the Company's competitors may be larger, better capitalized, and may
have more experienced management and may have greater access to resources, which
may be necessary to produce a competitive advantage.
Recent Equity Investments
The Company has only recently entered into new equity ventures, the majority of
which are outside the scope of its core business. Accordingly, a number of the
Company's competitors in these ventures are larger, better capitalized, and may
have more experienced management and may have greater access to resources, which
may be a competitive advantage.
15
<PAGE> 18
GOVERNMENT REGULATIONS
The Company's business is subject to the full range of governmental regulation
and supervision generally applicable to companies engaged in business in Chile,
including labor laws, social security laws, public health, environmental laws,
securities laws and anti-trust laws.
Environmental Regulations
Bayesa's agreement with ESSAN for the Bayesa Project provides that certain
water, once treated at the Bayesa Project, will be disposed of in the ocean. In
order for the Bayesa Project to discard this water into the ocean, the amount of
contaminants remaining must meet the requirements mandated by Chilean
environmental laws.
FOREIGN INVESTMENT LAWS AND REGULATIONS
The Chilean Constitution establishes that any Chilean or foreigner may freely
develop any activity in Chile so long as the activity in Chile does not
contravene existing laws dealing with public morals, public safety or national
security and follows the law that regulate such activity. It also establishes
the principle of non-discrimination, thus guaranteeing foreign investors equal
protection under Chilean law. Additionally, Chilean law prohibits any
discretionary acts by the Chilean government or other entities against the
rights of persons or property in derogation of this principle. Foreign investors
may transfer capital and net profits abroad. There are no exchange control
regulations which restrict the repatriation of the investment or earnings except
that the remittance of capital may take place starting a year after the date the
funds were brought into the country, but net profits can be remitted at any
time, after deduction of applicable withholding income taxes. Therefore, equity
investments in Chile by persons who are not Chilean residents follow the same
rules as investments made by Chilean citizens.
These principles are the basis for the DL 600. Based on DL 600, the foreign
investor and the government sign a legally-binding investment contract which may
only be modified by mutual consent. The contract sets forth the current tax and
foreign exchange laws as each relates to the specific investments by that
investor in Chile. Thus, the investor is protected against any subsequent
changes in the law which could adversely affect the investor or his investments
in Chile. Although the Chilean Government has been successful in keeping this
principle in place for the last 23 years, there is no case regarding unilateral
breach of an investment contract by the Government and there can be no
assurances that a breach by the Government will not occur in the future or that
it would not adversely affect the rights of the Company to do business in Chile.
Moreover, while there has been no precedent that political changes had
determined changes in these rules, no assurances can be made that such changes
will not occur in the future.
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<PAGE> 19
FOREIGN CORRUPT PRACTICES ACT
Substantially all of the Company's operations are transacted in South America.
To the extent that the Company conducts operations and sells its products
outside the U.S., the Company is subject to the Foreign Corrupt Practices Act
which makes it unlawful for any issuer to pay or offer to pay, any money or
anything of value to any foreign official, foreign political party or official
thereof or any candidate for foreign political office ("Foreign Officials") or
any person with knowledge that all or a portion of such money or thing of value
will be offered, given, or promised, directly or indirectly, to any Foreign
Official.
The Company has not made any offers, payments, promises to pay, or authorization
of any money or anything of value to any Foreign Official and has implemented a
policy to be followed by its officers, directors, employees and anyone acting on
its behalf, that no such payments can and will be made. The Company has made all
employees cognizant of the need for compliance with the Foreign Corrupt
Practices Act and any violation of the Company policy will result in dismissal.
Further, the Company conducts periodic reviews of this policy with all employees
to ensure full compliance.
EMPLOYEES
As of December 31, 1998, the Company employed 43 full-time employees, eight of
whom are managers/engineers and 35 of whom are administrative or workers.
Employees of the Company are not represented by labor unions. The Company
considers its relationship with its employees to be good.
Effective May 30th, 1998 Mr. Pedro Pablo Errazuriz former CEO and President of
Andean Development Corporation resigned to dedicate all of his time to the
development of new ideas, sales and promotion in the core business area. He
remained as Chairman of the Board.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 4,300 square feet of office in Santiago, Chile,
at a monthly rate of $7,398. The lease commenced on November 1, 1997 and will
terminate on October 30, 2005. The Company also leases approximately 1,600
square feet of office space in Boca Raton, Florida at a monthly rate of $3,300.
The lease commenced on November 1, 1997 and will terminate on October 31, 2000.
The Company, through INA, currently owns land for future developments, however,
the land is limited in its capacity to be subdivided by local Chilean
regulations. The land is located near Villarrica in the south of Chile and
consists of approximately 107.75 acres of non-irrigated land, which is
classified as non-performing property ("Villarrica Land"). As of December 31,
1998, the book value of the land was $789,447 and had outstanding mortgages of
$149,074. Subject to shareholder approval, as part of the consideration to be
paid to Mr. Errazuriz in connection with the purchase of his interest of CONUSA,
the Company will transfer title to this property to Mr. Errazuriz, subject to
the existing outstanding mortgage. See "Investments in New Companies -
Consonni/ECESA" and "Certain Relationships and Related Transactions."
In November 1997, the Company purchased 670 acres near Chillan (Vina"Bodegas
Garcia Errazuriz") for $1,073,000, of which $685,292 was paid during 1997 and
the balance was paid in 1998. During 1997, the Company commenced a program to
plant 430 acres of the vineyard which is expected to be completed in 1999. The
first harvest is expected during March 2000 and full production will be attained
three years later. The Company intends to sell up to 25% share of the vineyard,
mainly to selected strategic partners and certain of its employees and workers.
See "Investments in New Companies - Vina "Bodegas Garcia Errazuriz".
17
<PAGE> 20
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding the resolution of
which, the management of the Company believes, would have a material adverse
effect on the Company's results of operations or financial condition, nor to any
other pending legal proceedings other than ordinary, routine litigation
incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since the Company's initial public offering of its common stock, par value
$.0001 ("Common Stock") and redeemable common stock purchase warrants
("Warrants") on October 29, 1996, the Company's Common Stock and Warrants have
traded principally on the National Association of Security Dealers Automatic
Quotation - National Market System ("NASDAQ NMS") under the symbols "ADCC" AND
"ADCCW", respectively. Prior to October 29, 1996, there was no public market for
the Company's securities. The following table sets forth the high and low bid
quotations for the Common Stock and Warrants for the periods indicated, as
reported by NASDAQ. These quotations reflect prices between dealers, do not
include retail mark-ups, markdowns or commissions and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
High Low High Low
------ ----- -------- ---
<S> <C> <C> <C> <C>
1996
October 29, 1996 to December 31, 1997 6-1/4 5 2-1/4 1/8
1997
January 1, 1997 to March 31, 1997 5-7/8 4-1/8 1-9/16 7/8
April 1, 1997 to June 30, 1997 6 3-1/2 1-7/16 9/16
July 1, 1997 to September 30, 1997 5-7/16 4-1/8 1-3/8 1-25/32
October 1, 1997 to December 31, 1997 5-7/8 4-3/8 1-3/4 1-1/8
1998
January 1, 1998 to March 31, 1998 5-3/4 4-1/8 1-2/3 7/8
April 1, 1998 to June 30, 1998 4-7/8 3 1-3/16 9/16
July 1, 1998 to September 30, 1998 4-1/4 2 7/8 1-10/29 3/8
October 1, 1998 to December 31, 1998 4 2-7/8 1 1/4
</TABLE>
18
<PAGE> 21
On December 31, 1998, the closing bid price for the Common Stock was $2.875, and
for the Warrants was $0.563.
During 1997, the Company declared and paid dividends of $.20 per share. During
1998, the Company declared dividends of $.20 per share, based on 1998 profits.
The payment will be made in five installments payable between March 1999 and
July 1999.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Management's Discussion and Analysis or Plan of Operation contains various
"forward looking statements" within the meaning of the Securities Act of 1933,
as amended, the Securities and Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act 1995. Such statements consist of any statement
other than a recitation of historical fact and can be identified by the use of
forward-looking terminology such as "may", "expect", "anticipate","estimate" or
"continue" or the negative thereof or other variations thereon or comparable
terminology.
The Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those
contained in the forward-looking statements, that these forward-looking
statements are necessarily speculative, and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward-looking statements.
The Company does not have a policy of updating or revising forward-looking
statements and thus it should not be assumed that silence by management of the
Company over time means that actual events are bearing out as estimated in such
forward-looking statements.
19
<PAGE> 22
Overview
During 1998, the Company has continued implementing its business strategy on its
subsidiaries with an effort to increase the revenues of its core business.
Ingesis S.A., one of its newly acquired subsidiaries in the computer technology
segment, has hired a new General Manager who is highly regarded within the
industry. His main focus will be attempting to improve the subsidiaries sales
volume.
NYSA S.A., another subsidiary is in the business of performing engineering
appraisals, selecting sites for development, and negotiations with the owners of
land to obtain easements for various energy projects. During 1998, the company
continued its profitable operations. Future plans involve an expansion of the
type of operations including B.O.T. projects, whereby the private sector invests
in public projects for such things as road and port development.
Bodegas Garcia Errazuriz, the vineyard continues to development its land for the
eventual growing of grapes and ultimate production of wine. Plans are to
generate the first wine production during 2001.
Also, during 1998, the Company acquired a 40% equity interest in Funditec, S.A.,
a Chilean company, in its development stage. Funditec will be in the business of
manufacturing, selling, buying and exporting all types of metal items, mainly
piping for water supply and treatment.
The core business has been recovering from the most recent Asiatic and South
American Crisis which put a halt on the completion of negotiations for increased
investment and development in utility plants from concerned investors,
worldwide. This impacted the core business heavily and the losses seen in the
current year should now diminish during 1999.
However, with the Asiatic and South American Crisis last year, the Company's
American markets could potentially be impacted. Several U.S. customers, usually
involved in the development of power plants in South America, are a little more
hesitant in their approach to invest as quickly as has been seen in the past.
This situation as well has recently shown signs of recovery. We are now of the
belief that the worst of the problems are behind us. As a result, we anticipate
a busy 1999 closing contracts that have been lingering for longer than expected
periods.
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<PAGE> 23
Plan of Operations
The Company intends to increase its efforts within the Core Business and is
seeking additional markets in Peru, Argentina, Colombia and Brazil. The projects
in which ADC is working are (i) CIEN - 220 MW hydroelectric project between
Buenos Aires, Argentina and Brasil, (ii) EMGESA - 220 MW hydroelectric project
located in Colombia, 200 kilometers east of Bogota, (iii) ENDESA/EDEGEL -
Cachoeira Dorada, S.A. - 120 MW gas powered combined cycle project located in
Rio de Janeiro, Brazil, (iv) Electrica de Cartagena, Colombia, 350 MW gas
powered combined cycle project located in Colombia, (v) Codelco, Chile -
purchase of a 70 MW hydroelectric plant in Chile, (vi) ESSAN, Antofagasta Chile
joint venture with a Spanish supplier in a water desalting plant. A number of
the projects mentioned above were scheduled to commence in 1998, however due to
world recession and other economical issues, they have been delayed until 1999.
The Company is studying a joint venture between the Company through Ingesis with
Ibermatica to serve the Chilean and Argentinean markets, Ibermatica is a leading
Spanish company in industrial programming services with more than $100 million
in yearly sales in Spain. Ingesis is continuing its collaboration with the
Chilean IRS to develop the already announced cash register machine that will
incorporate in it an inventory control and a VAT automatic paying system.
Results of Operations (December 31, 1998 compared to December 31, 1997)
Gross Revenues, Costs of Operations and Gross Profit - Gross revenues decreased
from $3,879,062 in 1997 to $2,630.429 in 1998, a decrease of $1,248,633 or 32%.
This decrease in gross revenues is due to the postponement of a number of
projects scheduled to commence 1998 and are now expected to commence in 1999.
Cost of Operations decreased from $1,773,165 in 1997 to $727,022 in 1998, a
decrease of $1,046,143 or 59%. This decrease is directly related to the decrease
in gross revenues. In addition, the Company has decreased its usage of outside
consulting services and has increased its utilization of Company personnel. The
gross profit margin increased in relation to the decrease in revenues and cost
of operations.
Selling and Administrative Expenses, Incomes from Operations and Other Income
(Expenses) - Selling and Administrative Expenses increased from $1,053,221 in
1997 to $1,170,042 in 1998, an increase of $116,821 or 11%. This increase is due
to increased marketing costs in an attempt to improve revenues and an increase
in fixed costs related to the acquisition of new investments. Income from
Operations, decreased from $1,052,676 in 1997 to $733,365 in 1998, a decrease of
$319,311 or 30% as referred to above. On the contrary, Other Income (Expenses)
increased from $27,364 in 1997 to $71,771 in 1998, which is due to the equity in
earnings from unconsolidated subsidiaries acquired during 1998.
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<PAGE> 24
Net Income and Income Tax - Income taxes decreased from $142,137 to $124,214 as
a consequence of the lower level of Income before Taxes, decreasing from
$1,080,040 to $805,136.
Net Income decreased from $937,903 for 1997 to $635,360 for 1998, a decrease of
32% again as a result of the decrease in revenues. The results are explained
because the existing Core business fluctuates from one year to another, which is
why a diversification strategy to obtain more stable revenues, cash flows and
profit during the business year is being developed.
Liquidity and Capital Resources - During the year ended in December 31, 1998 as
compared to December 31, 1997 there were significant changes in the liquidity,
type of assets and structure of debt.
Accounts receivable decreased from$3,205,385 at December 31, 1997 to $2,176,462
at December 31, 1998. This was due to the decrease in revenues during 1998 and
the Company's efforts on collecting prior year receivables.
Property, furniture and equipment increased from $672,875 at December 31, 1997
to $1,689,410, primarily due to the acquisition of a vineyard in Chile.
Other assets have increased from $5,957,585 at December 31, 1997 to $6,304,267
at December 31, 1998. This increase corresponds to increased investments in
subsidiaries in 1998.
Current liabilities decreased from $1,844,578 at December 30, 1997 to $1,297,744
at December 31, 1998, as a results of payments on lines of credit, accounts
payable and income taxes due to increased reductions in accounts receivable.
Long-term liabilities increased from $206,071 at December 31, 1997 to $618,at
December 31, 1998. This increase is due to the mortgage financing assumed with
the purchase of the vineyard.
Working capital decreased from approximately $2,332,000 in 1997 to $1,200,000 in
1998. This reduction in working capital is reflected in the Company's philosophy
to expand its operations in other areas outside the core business; to provide
more stable earnings and cash flow in the future. As a result, expenses related
to the non-core segments have been made with the intent of taking pressure off
the core business and providing a smoother revenue process throughout the year.
During 1998, the Company declared dividends of $.20 per share, based on 1998
profits. The payment will be made in five installments payable between March
1999 and July 1999.
22
<PAGE> 25
Year 2000 Compliance
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems. The
Company has established processed for evaluating and managing the risks and
costs associated with this problem.
Major areas of potential business impact have been identified and initial
conversion efforts are underway. The Company also is communicating with
suppliers, dealers, financial institutions and others with which it does
business to coordinate year 2000 conversion. After evaluations of the responses
from such communications, the Company will prepare a contingency plan to
mitigate year 2000 issues, if necessary. The total cost of compliance and its
effect on the Company's future results of operations is being determined as part
of the detailed conversion planning.
ITEM 7. FINANCIAL STATEMENTS
See "Index to Financial Statements" for a description of the financial
statements included in this Form 10-KSB.
ITEM 8. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
23
<PAGE> 26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of ADC are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Pedro Pablo Errazuriz 62 Chairman of the Board
Jose Luis Yrarrazaval 59 Vice Chairman of the Board/
Secretary Director
Mauricio G. De La Barra 35 Chief Executive Office/ President
Alberto Coddou 60 Director
Sergio Jimenez 63 Director
Claude Mermier 63 Director
</TABLE>
PEDRO PABLO ERRAZURIZ has served as Chief Executive Officer and Chairman of the
Board of Directors of the Company since October 19, 1994, and its President
since January 11, 1995. He has also served as the President, the sole Director
of Andean Export Corporation since February 9, 1995, and a Director of Andean
Engineering & Finance Corp., since its inception in July 1997. Mr. Errazuriz
founded Ingenieria Norconsult Andina, the predecessor company of INA in 1986 as
a continuation of his activities in the sales of equipment, project management
and procurement for electricity generation projects and has served as its
President since its inception and through March 20, 1995. In 1991, Mr. Errazuriz
founded E&A and served as its President since its inception through March 20,
1995. Mr. Errazuriz has also served as Chairman of the Board of Kvaerner Chile
S.A., a subsidiary of Kvaerner A.S., a Norwegian-based manufacturer of
electrical and mechanical equipment) since 1992 and as the exclusive agent for
Kvaerner Turbin A.B. (Sweden) since 1994. Since 1986, Mr. Errazuriz has acted as
an exclusive agent in Chile for Norconsult. Mr. Errazuriz received an
engineering degree from the Catholic University of Chile in 1959.
24
<PAGE> 27
JOSE LUIS YRARRAZAVAL has been a member of the Board of Directors of ADC since
March 20, 1995 and has served as Chief Financial Officer from March 20, 1995
until January 5, 1998, when he resigned to accept the position of Vice Chairman
of the Board of the Company, effective as of January 5, 1998. He also has served
as Executive Vice President and a Director of INA and E&A since March 20, 1995.
Between November 1993 and October 1997, Mr. Yrarrazaval has served as the
General Manager of both E&A and INA, which responsibilities included all
financial matters and personnel management. From April 1988 through October
1993, Mr. Yrarrazaval served as the project manager for INA, supervising the
projects of INA. From 1973 through 1988, Mr. Yrarrazaval was a partner and
technical manager of a construction company, involved in the construction of
industrial plants, buildings, and housing developments. He also acted as
supervisor in the construction of agro-industrial and cold storage plants. Mr.
Yrarrazaval has a civil engineering and construction degree from the State
Technical University in Santiago, Chile.
MAURICIO G. DE LA BARRA has served as Chief Financial Officer of Andean
Development Corporation since January 5, 1998. He has also served as the General
Manager of E&A and INA since October 15, 1997, where his responsibilities
include all financial matters and personnel management. Between March 1992 and
August 1997, Mr. De la Barra was an executive with the Interamerican Development
Bank (IDB) in charge of the development, financing and execution of
infrastructure projects where he also integrated a team project that designed
the framework and government regulation to increase the private investment in
the infrastructure projects. Mr. De la Barra is a civil engineer, having
received his degree from Universidad de Concepcion de Chile in 1987. He also has
received a degree in Economic Evaluation of Projects from Catholic University of
Chile in 1990 and his Master of Business Administration MBA from the Loyola
College University of Maryland in 1996.
ALBERTO CODDOU has served as a member of the Board of Directors of the Company
since March 20, 1995, and as a member of the Board of Directors of E&A since
March 20, 1995. Mr. Coddou has been a partner with the law firm of Figueroa &
Coddou in Santiago, Chile since 1965. He has also been an Assistant Professor of
Law at the University of Chile, School of Law from 1959 through 1982. In May
1995, Mr. Coddou was appointed Chairman of the Board and Legal Representative of
Consorio Periodistico de Chile S.A., the owners and editors of a Chilean
newspaper called La Epoca.
SERGIO JIMENEZ has served on the Board of Directors of ADC since March 20, 1995.
Through June 1997 he was the President of the Santiago Water and Sewage Company
"EMOS". As of June 1995, Mr. Jimenez has been appointed as a member of the Board
of ENAP (Empresa Nacional del Petroleo), the Chilean oil company owned by the
government. Mr. Jimenez served as President of Edelnor S.A. from March 1990 to
March 1994. Edelnor, which generates and transmits electricity in the northern
regions of Chile, was a subsidiary of CORFO, the holding company of Chilean
state-owned companies before it was privatized in 1994. From 1990 through 1992,
Mr. Jimenez was President and Chief Executive Officer of Metro S.A., also a
subsidiary of CORFO, which operates the Santiago subway system. Mr. Jimenez is
also a partner and Managing Director of Consultora Jimenez y Zanartu Limitada,
which consults on engineering projects for segments of the Chilean government
related to public works. Mr. Jimenez is a civil engineer, having received his
degree from the University of Chile, in Santiago and has a post graduate degree
in Project Evaluation from the University of Chile.
25
<PAGE> 28
CLAUDE MERMIER has served on the Board of Directors of ADC since March 20, 1995.
Mr. Mermier has served as the Chairman of the Board of INA since March 20, 1995.
Mr. Mermier has also served as Chairman of Igenor Ingenierie & Gestion S.A., a
principal shareholder of the Company, since its inception in March 1992. Since
1979, Mr. Mermier has been the President of Compagnie Financiere pour le
Commerce Exterieur S.A., a Swiss company involved in property development
throughout Europe.
Directors are elected at the Company's annual meeting of shareholders and serve
for one year until the next annual shareholders' meeting or until their
successors are elected and qualified. Officers are elected by the Board of
Directors and their terms of office are, except to the extent governed by
employment contract, at the discretion of the Board. All of the Company's
executive officers are full-time employees of the Company. The Company pays its
Directors a fee of $1,000 per meeting attended, and reimburses all Directors for
their expenses in connection with their activities as directors of the Company.
Directors of the Company who are also employees of the Company will not receive
additional compensation for their services as directors. The Company intends to
purchase directors and officers insurance to the extent that it is available and
cost effective to do so.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has five committees: the Audit Committee, Compensation and
Investment Committee, Nominating Committee, Employee Stock Option Committee, and
the Directors Stock Option Committee. As of December 31, 1998, the members of
these committees consisted of Mr. Jose Luis Yrarrazaval, Alberto Coddou and
Sergio Jimenez. Messrs. Coddou and Jimenez are considered by the Company to be
independent directors.
The principal functions of the Audit Committees are to recommend the annual
appointment of the Company's auditors concerning the scope of the audit and the
results of their examination, to review and approve any material accounting
policy changes affecting the Company's operating results and to review the
Company's internal control procedures. The Investment and Compensation Committee
reviews and recommends investments, compensation and benefits for the executives
of the Company. The Nominating Committee seeks out qualified persons to act as
members the Company's Board of Directors. The Employee Stock Option Committee
and the Directors Stock Option Committee administer and interpret the Company
Stock Option Plan and the Directors Stock Option Plan and is authorized to grant
options pursuant to the terms of these plans.
26
<PAGE> 29
DIRECTORS AND OFFICERS OF THE SUBSIDIARIES
BERTA DOMINGUEZ, age 58, has served as a Director and President of Errazuriz y
Asociados Arquitectos Limitada, one of the principal shareholders of the Company
since 1990. Mrs. Berta Dominguez is the wife of Mr. Pedro P. Errazuriz.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that
the Company directors and executive officers, and persons who own more than ten
percent (10%) of the Company's outstanding Common Stock, to file with the
Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of Common Stock. Such persons are
required by the Commission to furnish the Company with copies of all such
reports they file. The Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and written representation, as
of December 31, 1997, none of the Section 16(a) filing requirements applicable
to its officers, directors and greater than 10% beneficial owners have been
complied with, however the Company expects that all required reports shall be
filed as soon as practicable.
ITEM 10. EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The following table sets forth compensation awarded to, earned by or paid to the
Company's Chief Executive Officer and each executive officer whose compensation
exceeded $100,000 for the year ended December 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION
- --------------------------- ---- ---------- --------- ---------------
<S> <C> <C> <C> <C>
Mauricio De La Barra 1998 $72,000 $36,000 $12,000 (2)
Chief Executive Officer
Jose L. Yrarrazaval 1998 $76,901 $11,000 $17,000 (2)
Vice Chairman of the Board 1997 $75,040 $35,000 $17,000 (2)
1996 $37,419 $35,000 $32,932 (2)
Juan Phillips 1998 $71,221 - $15,000 (2)
Engineering Executive Officer 1997 $75,060 $15,000 $15,000 (2)
1996 $34,608 $40,000 $31,488 (2)
</TABLE>
<PAGE> 30
(1) The gross salary includes social security and retirement benefits. Social
Security in Chile was established as a private system that requires all
companies to retain 20% of the gross salaries of its employees which is used to
pay both Administrators of Pension Funds Companies ("AFP") and Institutions of
Provisional Health ("ISAPRE"). The allocation of this 20% to each service is as
follows:
(a) 10% to the AFP: This amount is deposited in an individual
interest-bearing account of each employee to cover their retirement. In
Chile, the age of retirement is 60 years in case of women and 65 years
for men.
(b) 3% to the AFP: This amount covers any partial or permanent disability
and, in the case of death, will provide a monthly amount to the
deceased's spouse. The amount paid corresponds to 70% of an employee's
average salary, based upon the last 10 years of the employee's life.
(c) 7% to the ISAPRE: This amount covers medical fees, hospitalization and
clinical examinations, although in many instances it may be necessary
to pay additional costs for health care.
Chilean law requires the payment of one month salary for each year worked by the
employee when he is dismissed. When the employee terminates his or her
employment, no compensation is legally required.
(2) This is allocated to an annual automobile allowance.
EMPLOYMENT AGREEMENTS
On March 15, 1996, the Company entered into employment agreements with Messrs.
Jose Luis Yrarrazaval, and Juan Phillips. Each of the employment contracts are
for one year, which agreements may be automatically renewed. The salaries and
social security benefits will not be less than those for fiscal year 1995, which
shall be determined by the Company's Board of Directors. Additionally, these
individuals will also be entitled to a bonus, as determined by the Company's
Board of Directors. Additionally, on September 15, 1997 the Company entered into
a one year employment agreement with Mr. Mauricio G. de la Barra, which may be
automatically renewed.
28
<PAGE> 31
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLANS
Pursuant to the Company's Stock Option Plan (the "Stock Option Plan") and
Directors Stock Option Plan (the "Directors Plan"), 175,000 shares of Common
Stock and 75,000 shares of Common Stock, respectively, are reserved for issuance
upon exercise of options. The Plans are designed to serve as an incentive for
retaining qualified and competent employees and directors. Both the Stock Option
Plan and the Directors Plan apply to Andean Development Corporation and each of
its subsidiaries. Only non-employee directors are eligible to receive options
under the Directors Plan.
The Company's Board of Directors, or a committee thereof, administers and
interprets the Stock Option Plan and is authorized to grant options thereunder
to all eligible employees of the Company, including officers and directors
(whether or not employees) of the Company. The Stock Option Plan provides for
the granting of "incentive stock options" (as defined in Section 422 of the
Internal Revenue Code), non-statutory stock options and "reload options."
Options may be granted under the Stock Option Plan on such terms and at such
prices as determined by the Board, or a committee thereof, except that in the
case of an incentive stock option granted to a 10% shareholder, the per share
exercise price will not be less than 110% of such fair market value. The
aggregate fair market value of the shares covered by incentive stock options
granted under the Plans that become exercisable by a grantee for the first time
in any calendar year is subject to a $100,000 limit.
The purchase price for any option under the Stock Option Plan may be paid in
cash, in shares of Common Stock or such other consideration that is acceptable
to the Board of Directors or the committee thereof. If the exercise price is
paid in whole or in part in Common Stock, such exercise may result in the
issuance of additional options, known as "reload options," for the same number
of shares of Common Stock surrendered upon the exercise of the underlying
option. The reload option would be generally subject to the same provisions and
restrictions set forth in the Stock Option Plan as the underlying option except
as varied by the Board of Directors or the committee thereof. A reload option
enables the optionee to ultimately own the same number of shares as the optionee
would have owned if the optionee had exercised all options for cash. The Company
initially intended that the Directors Plan would provide for an automatic grant
of an option to purchase 3,000 shares of Common Stock upon a person's election
as a director of the Company and an automatic grant of an option to purchase
3,000 shares of Common Stock at each annual meeting through which a director's
term continues. Subsequently, the Company determined that the issuance of
options pursuant to the Directors Plan would be undertaken by resolution of the
Board of Directors.
Options granted under the Stock Option Plan will be exercisable after the period
or periods specified in the option agreement, and options granted under the
Directors Plan are exercisable immediately. Options granted under the Plans are
not exercisable after the expiration of five years from the date of grant and
are not transferable other than by will or by the laws of descent and
distribution. The Plans also authorize the Company to make loans to optionees to
enable them to exercise their options.
While the Company previously had intended to issue options As of December
31, 1997, the Company has not granted any options to purchase shares of Common
Stock under its Stock Option Plan and Directors Plan.
29
<PAGE> 32
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1998 the number of shares of
Common Stock which were owned beneficially by (i) each person who is known by
the Company to own beneficially more than 5% of its Common Stock, (ii) each
director, (iii) each executive officer and (iv) all directors and executive
officers as a group. As of December 31, 1998, there were 2,820,100 shares issued
and outstanding.
<TABLE>
<CAPTION>
Percentage of/ Amount/ Nature of
Name & Address of Beneficial Owner (1) Beneficial Ownership (2) Shares Owned(3)
- -------------------------------------- ------------------------ ----------------
<S> <C> <C>
Pedro P. Errazuriz (4) 900,100 31.92%
Chairman of the Board
Jose Luis Yrarrazaval -0- -0-
Vice Chairman of the Board
Alberto Coddou (5) -0-
Director
Sergio Jimenez -0-
Director
Claude Mermier 2,250 Less than 1%
Director (6) (7)
All directors and executive officers as a 900,100 31.92%
group (five persons)
Igenor, Ingeniere et Gestion S.A (6) (8) 900,000 31.91%
Errazuriz & Asociados Arquitectos Limitada (9) 525,000 18.62%
Berta Dominguez Covarrubias (10) 1,425,000 50.53%
</TABLE>
(1) Unless otherwise indicated, the address of each beneficial owner is
Avenue Americo Vespucio 100, piso 16, Santiago, Chile.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date hereof upon
exercise of option and warrants. Each beneficial owner's percentage
ownership is determined by assuming that option and warrants that are
held by such person (but not those held by any other person) and that
are exercisable within 60 days from the date hereof have been
exercised.
(3) Does not give effect to the exercise of warrants or options into shares
of Common Stock.
30
<PAGE> 33
(4) Includes shares of Common Stock owned by Igenor, Ingenierie et Gestion,
S.A. of which Mr. Errazuriz owns 50% of the outstanding equity and 100
shares of Common Stock were issued to him on October 19, 1994.
(5) The address is Santa Lucia 280-OF. 12, Santiago, Chile.
(6) The address is c/o Etude Montavon-Mermier, 22, rue Etienne Dumont, 1211
Geneve 3, Switzerland.
(7) M. Mermier owns a 0.25% interest in Igenor, Ingenierie & Gestion, S.A.
(8) This is a company organized pursuant to Swiss law. Based upon
information provided to us by this company, the shareholders of this
company are Mr. Pedro P. Errazuriz (50%), Chairman of the Board of ADC;
Ms. Berta Dominguez (49%), the wife of Mr. Errazuriz and the Chairman,
Chief Executive Officer and director of E&A; Mr. Pedro Pablo
Errazuriz,(0.25%) a son of Mr.Errazuriz and his wife (0.25%); Mr.
Claude Mermier (0.25%), a director of Andean Development Corporation;
and Pierre Yves Montavon (0.25%), an unrelated third party.
(9) The partners are Ms. Berta Dominguez (58%), and the six children of Mr.
Pedro P. Errazuriz and Ms. Dominguez, who each owns a 7% interest and
who are (i) Pedro Pablo Errazuriz Dominguez, (ii) Berta Errazuriz
Dominguez, (iii) Magdalena Errazuriz Dominguez, (iv) Juan Andres
Errazuriz Dominguez, (v) Felipe Errazuriz Dominguez, and (vi) Arturo
Errazuriz Dominguez. During first quarter of 1998, but effective
December 31, 1998 the shares owed by EAA will be transferred to IIG.
(10) Mrs. Dominguez owns 49,25% of Igenor, Ingenierie et Gestion, S.A. and
58% interest in Errazuriz y Asociados Arquitectos, Ltda. She is the
wife of Mr. Errazuriz, Chairman of ADC.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Aguas y Ecologia S.A. (A&E)
During 1995 the Company acquired a 45% interest in A&E, which equals a 4.5%
interest in the Bayesa Project. See "Business - Water Projects." The interest
was acquired from an affiliate of the Company, Invdemco, which is a Chilean
investment company. Immediately following the Company's initial public offering
in November 1996, the Company has purchased an additional 22.5% interest in A&E
from shares held by Invdemco, which translates into an additional 2.25% interest
in the Bayesa Project, for $141,750. The shareholders of Invdemco are (i) Mr.
Pedro P. Errazuriz (50%), President, CEO, and Chairman of the Board of the
Company, ADC, (ii) Berta Dominguez, the wife of Mr. Errazuriz and Director and
President of E & A, one of the principal shareholders of the Company (45%);
(iii) and Berta Errazuriz (5%), a daughter of Mr. Errazuriz and Mrs. Dominguez.
As of August 1, 1997, the Company owned a 6.7% interest in the Bayesa Project.
31
<PAGE> 34
Villarrica Property
In November 1996, the Company sold to Invdemco a non-performing asset of the
Company consisting of a house located near Villarrica, Chile in the south of
Chile, situated on approximately 13.5 acres (the "Villarrica Property").
Invdemco paid $606,031.50, (50% of the purchase price) of the Villarrica
Property in cash at closing, with the balance being paid in four annual
installments of principal together with interest at the rate of 8-1/2% on the
unpaid balance, commencing January 15, 1998, which first installment payment has
been paid.
Villarrica Land
The Company, through INA, currently owns land for future developments, however,
the land is limited in its capacity to be subdivided by local Chilean
regulations. The land is located near Villarrica in the south of Chile and
consists of approximately 107.75 acres of non-irrigated land, which is
classified as non-performing property (Villarrica Land). As of December 31,
1998, the book value of the land was $789,447 and had outstanding mortgages in
favor of Banco Sud Americano as a collateral for loans extended by them for a
total of $262,630.
Proyectos y Equipos S.A. and Electromecanica Osorno S.A.
EAA and Igenor, the principal shareholders of the Company, also own, in the
aggregate, controlling interest in Proyectos y Equipos S.A. and Electromecanica
Osorno S.A., two Chilean corporations located in Santiago, Chile. These
companies specialize in the sale of air compressors and ventilators and related
products and small electrical equipment, respectively. The Company, from time to
time, intends to enter into agreements with these companies to perform certain
services, based upon competitive bids received from these companies.
Consonni/ECESA
In May 1997, Mr. Pedro Errazuriz, the Company's Chairman of the Board, acquired
a 20% interest in Consonni/ECESA from unrelated third parties, increasing his
equity interest in Consonni/ECESA to 77%. Consonni/ECESA are Spanish
corporations that market, manufacture, distribute and sell motor control centers
and switchgear. In June and July 1997, the Company purchased an 11% equity
interest in Consonni/ECESA for approximately $671,000 from unrelated third
parties. See "Business - Investment in New Companies."
32
<PAGE> 35
Subsequently, during August 1997, Mr. Errazuriz, on behalf of his interest of
77% and the 11% interest owned by the Company, entered into a share exchange
agreement with CONUSA, whereby the 88% interest of Consonni/ECESA owned by Mr.
Errazuriz and the Company was exchanged for 2,300,000 shares of CONUSA common
stock (representing approximately a 76.7% interest in CONUSA). CONUSA common
stock are being traded on the OTC Bulletin Board, which is a limited market and
intends to apply for inclusion on the National Association of Security Dealers
Automated Quotation (Nasdaq) SmallCap Market System at such time as CONUSA meets
the necessary listing requirements.
Transactions Between the Company and its Officers, Directors and Affiliates
In May 1997, the Company loaned Mr. Errazuriz the principal sum of $200,000,
plus interest at an annual rate of 8% to buy shares in Consonni/ECESA. As of
March 1999, this debt has been reduced to $ 127.514.
Mr. Pedro P. Errazuriz is a member of the Board of Directors and had power of
attorney for Kvaerner Chile, S.A. and Kvaerner Hydro, Agencia de Kvaerner Turbin
Aguas y Ecologia, S.A., corporations each involved in the manufacturing and
selling of electrical materials. Mr. Errazuriz has resigned from the Board of
Directors and has relinquished his power of attorney.
All transactions between the Company and its officers, shareholders and each of
their affiliated companies have been made on terms no less favorable to the
Company than those available from unaffiliated parties. In the future, the
Company intends to handle transactions of a similar nature on terms no less
favorable to the Company than those available from unaffiliated parties.
33
<PAGE> 36
PART IV
EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report or are incorporated
by reference to previous filings, if so indicated:
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------- ------------------------
1.1 Form of Underwriting Agreement(1)
1.1(a) Revised Form of Underwriting Agreement(1)
1.1(b) Revised Form of Underwriting Agreement(1)
1.1(c) Revised Form of Underwriting Agreement(1)
1.2 Revised Form of Agreement Among the Representatives(1)
1.2(b) Revised Form of Agreement Among Representatives(1)
1.2(c) Revised Form of Agreement Among Underwriters(1)
1.3 Revised Form of Selling Group Agreement(1)
1.3(a) Selected Dealers Agreement(1)
1.3(b) Form of Selected Dealers Agreement(1)
2.1(a)(i) Share Exchange Agreement between the Shareholders of Errazuriz
y Asociados Ingenieros S.A. and the Company(1)
2.1(a)(ii) First Modification to Share Exchange Agreement between the
Shareholders of Errazuriz y Asociados Ingenieros S.A. and the
Company dated June 15, 1995(1)
2.1(a)(iii) Second Modification to Share Exchange Agreement between the
Shareholders of Errazuriz y Asociados Ingenieros S.A. and the
Company dated June 30, 1995(1)
2.1(b)(i) Share Exchange Agreement between the Shareholders of Igenor
Andina S.A. and the Company(1)
2.1(b)(ii) First Modification to Share Exchange Agreement between the
Shareholders of Igenor Andina, S.A. and the Company dated June
15, 1995(1)
2.1(b)(iii) Second Modification to Share Exchange Agreement between the
Shareholders of Igenor Andina, S.A. and the Company dated June
30, 1995(1)
3.1(a) Company's Amended and Restated Articles of Incorporation(1)
3.1(b) Articles of Incorporation for Andean Engineering & Finance
Corporation(2)
3.1(c) Articles of Incorporation and Corporation Bylaws for ADC
Andean, S.A., a Swiss corporation(2)
3.2 Company's Revised Amended and Restated Bylaws(1)
3.2(b) Andean Engineering & Finance Corporation Bylaws(2)
34
<PAGE> 37
4.1 Form of Warrant Agreement together with the form of Warrant
Certificate(1)
4.1(a) Revised Form of Warrant Agreement together with the form of
Warrant Certificate(1)
4.2 Revised Form of Representatives' Warrant Agreement together
with the revised Form of Representatives' Purchase Warrant
Certificate(1)
4.2(a) Form of Representatives Warrant and Registration Rights
Agreement together with the revised Form of Representatives'
Purchase Warrant Certificate(1)
4.2(b) Revised Form of Representative's Warrant Agreement together
with the revised Form of Representative's Purchase Warrant
Certificate(1)
4.3 Specimen of Common Stock Certificate.(1)
4.4 Specimen of Warrant Certificate (to be included in the revised
Form of Warrant Agreement in Exhibit 4.1(a) (1)
4.4(b) Specimen of Warrant Certificate (to be included in the revised
Form of Warrant Agreement in Exhibit 4.2(b)) (1)
4.5 Form of Bridge Warrants(1)
10.1 Stock Option Plan(1)
10.1(a) Revised Stock Option Plan(1)
10.2 Directors Stock Option Plan(1)
10.2(a) Revised Directors Stock Option Plan(1)
10.3 Representation Agreement between Biwater and Errazuriz y
Asociados Ingenieros Ltda.(1)
10.4 Agreement between ESSAN and Bayesa for the Final Disposal of
the Antofagasta Sewage (New translation with Appendices No.
1-5 but without maps)(1)
10.5 Decree from the Municipality of Macul awarding the Land Grant
to Igenor Andina S.A.(1)
10.6 Agreement Between the Municipality of Macul and Igenor Andina
S.A. for the Land Grant (New translation)(1)
10.7 Agreement between Igenor Andina, S.A. and the owner of the
restaurant "Donde la Cuca" to be located at the Macul Park
(in English)(1)
10.8 Agreement between Canales, Errazuriz, Rodriguez, Arquitectos
Asociados and TDS International concerning designing and
consulting services for the Macul Project.(1)
10.9 Agreement between Capullo S.A. and Igenor Andina S.A. in
Connection with the Capullo Hydroelectric Plant(1)
10.10 Form of Agreement Between Inversiones y Desarrollo Demco S.A.
("Invdemco") and Igenor Andina Sociedad Anonima to Exchange
the Interest of Invdemco in Aguas y Ecologia S.A. for Certain
Real Property Near Villarrica, Chile(1)
35
<PAGE> 38
10.11 Protocolization Request - Final Reception Certificate No. 61
for the Villarrica Property(1)
10.12 Lease Agreement between Juan Carlos Marti Medina, landlord,
and Norconsult International A.S., tenant dated September 16,
1992(1)
10.13 Revised Employment Agreement between Andean Development
Corporation and Pedro Pablo Errazuriz, President and CEO of
ADC, and Messrs. Jose Luis Yrarrazaval Torrealba, Juan
Phillips Davila, Gonzalo Cordua Hoffman, Juan Andres Errazuriz
Dominguez and Pedro Pablo Errazuriz Ossa, dated March 15,
1995(1)
10.14 Employment Agreement between Ingenieria Norconsult Andina
Limitada and Jose Luis Yrarrazaval Torrealba dated November 3,
1993 (in English)(1)
10.15 Employment Agreement between Errazuriz y Asociados Ingenieros
Limitada and Juan Phillips Davila dated November 2, 1993
(in English)(1)
10.16 Employment Agreement between Ingenieria Norconsult Andina
Limitada and Gonzalo Cordua Hoffman dated August 1, 1993
(in English)(1)
10.17 Employment Agreement between Ingenieria Norconsult Andina
Limitada and Juan Andres Errazuriz Dominguez dated October 11,
1993 (in English)(1)
10.18 Employment Agreement between Errazuriz y Asociados Arquitectos
Limitada and Pedro Pablo Errazuriz Ossa dated January 1, 1992
(in English)(1)
10.19 Letter from Westinghouse Electric Corporation to the Company
acknowledging the parties' intent for the Company to act as an
agent for Westinghouse for certain projects in Chile dated
July 31, 1995.(1)
10.19(a) Special Sales Representative Agreement between Westinghouse
Electric Company S.A. and Errazuriz Y Asociados Ingenieros
S.A.(1)
10.20 Credit Line Agreement between Bayesa and Banco
Security in connection with the Bayesa Project dated
July 19, 1995.(1)
10.21 Commitment by Sociedad de Inversiones El Rincon S.A. to pay
its remaining contribution of 20% in Inversiones Tiempo Libre
S.A. dated April 26, 1995.(1)
10.22 Commitment by Inversiones Zukunft Ltda. to pay its remaining
contribution of 34% in Inversiones Tiempo Libre S.A. dated
April 26, 1995.(1)
10.23 Commitment by Margarita Maria Errazuriz to pay her remaining
contribution of 13% in Inversiones Tiempo Libre S.A. dated
April 26, 1995.(1)
10.24 Contract with Westinghouse.(1)
36
<PAGE> 39
10.25 Contract with Mitsuishi.(1)
10.26 Contract between Invdemco and Company for Villarrica
Property.(1)
10.27 Revised Shareholder Exchange Agreement(1)
10.28 Form of Financial Advisory Agreement(1)
10.29 Form of Merger and Acquisition Agreement(1)
10.30 Share Exchange Agreement between Consonni USA, Inc. and Pedro
Pablo Errazuriz Ossa dated August 15, 1997(1)
21 Subsidiaries of Registrant(1)
23.1 Consent of Independent Auditors(2)
27 Financial Data Schedule(2)
- --------------------
(1) Incorporated by reference from the Registrant's Registration Statement,
as amended, on Form SB-2 filed with the Securities and Exchange
Commission and declared effective on October 29, 1996.
(2) Filed herewith
(b) Reports on Form 8-K: None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Andean Development Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Andean Development Corporation
By: /s/ Mauricio De La Barra
----------------------------------
Mauricio De La Barra, President, Chief
Executive Officer,
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
37
<PAGE> 40
ANDEAN DEVELOPMENT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE> 41
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................................................F-2
Consolidated Balance Sheets..............................................................................F-3
Consolidated Statements of Income........................................................................F-5
Consolidated Statements of Stockholders' Equity..........................................................F-6
Consolidated Statements of Cash Flows....................................................................F-7
Notes to Consolidated Financial Statements...............................................................F-9
</TABLE>
F-1
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Andean Development Corporation and Subsidiaries
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Andean
Development Corporation and Subsidiaries (the "Company") as of December 31, 1998
and 1997 and the related consolidated statements of income, shareholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Andean Development
Corporation as of December 31, 1998 and 1997 and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Spear, Sofer, Harmon & Co.
Miami, Florida
February 20, 1999
F-2
<PAGE> 43
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 65,036 $ 324,556
Short-term investments 23,483 528,575
Accounts receivable 2,176,462 3,205,385
Other current assets 230,218 118,038
----------- -----------
Total Current Assets 2,495,199 4,176,554
----------- -----------
Property, Plant and Equipment, net 1,689,410 672,875
----------- -----------
Other Assets:
Real estate held for investment 1,147,389 789,447
Due from related parties 875,550 520,000
Note receivable from related party 531,793 606,031
Note receivable - other 1,411,900 1,339,766
Investment in unconsolidated subsidiaries 1,772,569 1,629,998
Deferred charges 482,934 148,957
Deposits and other 82,132 923,386
----------- -----------
6,304,267 5,957,585
----------- -----------
$10,488,876 $10,807,014
=========== ===========
</TABLE>
The accompanying notes are an integral part these financial statements.
F-3
<PAGE> 44
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Obligations with banks $ 157,659 $ 576,756
Current portion of long-term debt 57,223 30,320
Accounts payable 181,293 767,155
Due to related parties 138,751 24,264
Income taxes payable 117,525 197,022
Accrued expenses and withholdings 57,319 77,531
Current portion of staff severance indemnities 23,954 21,530
Dividends payable 564,020 150,000
------------ ------------
Total Current Liabilities 1,297,744 1,844,578
------------ ------------
Long-Term Liabilities:
Long-term debt, excluding current portion 553,563 118,754
Staff severance indemnities, excluding current portion 65,093 87,317
------------ ------------
618,656 206,071
------------ ------------
Minority interest 62,500 --
------------ ------------
Shareholders' Equity:
Preferred stock, $.0001 par value, 5,000,000 shares
authorized, 0 shares issued and outstanding -- --
Common stock, $.0001 par value, 20,000,000 shares
authorized, 2,820,100 shares issued and outstanding 282 282
Additional paid-in capital 5,724,320 5,724,320
Retained earnings 2,925,323 3,135,713
Cumulative translation adjustment (139,949) (103,950)
------------ ------------
Total Shareholders' Equity 8,509,976 8,756,365
------------ ------------
$ 10,488,876 $ 10,807,014
============ ============
</TABLE>
The accompanying notes are an integral part these financial statements.
F-4
<PAGE> 45
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 2,630,429 $ 3,879,062
Cost of Operations 727,022 1,773,165
----------- -----------
Gross Profit 1,903,407 2,105,897
Selling and Administrative Expenses 1,170,042 1,053,221
----------- -----------
733,365 1,052,676
----------- -----------
Other Income (Expenses):
Interest income 143,402 121,174
Interest expense (107,488) (32,795)
Equity in earnings from unconsolidated subsidiaries 157,545 --
Other income 62,591 --
Gain on sale of assets -- 6,031
Depreciation and amortization (184,279) (67,046)
----------- -----------
71,771 27,364
----------- -----------
Income Before Income Taxes and Minority Interest 805,136 1,080,040
Income Taxes 124,214 142,137
----------- -----------
Income Before Minority Interest 680,922 937,903
Minority Interest 45,292 --
----------- -----------
Net Income $ 635,360 $ 937,903
=========== ===========
Net Income per Common Share $ .23 $ .33
=========== ===========
Weighted Average Shares Outstanding 2,820,100 2,820,100
=========== ===========
</TABLE>
The accompanying notes are an integral part these financial statements.
F-5
<PAGE> 46
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional Cumulative Total
Common Paid-In Retained Translation Shareholders'
Stock Capital Earnings Adjustment Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 282 $ 5,724,320 $ 2,479,810 $ (44,650) $ 8,159,762
Net income -- -- 937,903 -- 937,903
Dividends declared -- -- (282,000) -- (282,000)
Translation adjustment -- -- -- (59,300) (59,300)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 282 5,724,320 3,135,713 (103,950) 8,756,365
Net income -- -- 635,630 -- 635,630
Dividends declared -- -- (846,020) -- (846,020)
Translation adjustment -- -- -- (35,999) (35,999)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 $ 282 $ 5,724,320 $ 2,925,323 $ (139,949) $ 8,509,976
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part these financial statements.
F-6
<PAGE> 47
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 635,630 $ 937,903
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 184,279 67,046
Deferred taxes -- 10,090
Gain on sale of fixed assets -- (6,031)
Minority interest 62,500 --
Equity in earnings from unconsolidated subsidiaries 157,545 --
Translation adjustment (35,999) (59,300)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,058,255 (292,662)
Other current assets (6,097) 21,972
Note receivable 2,104 (1,339,766)
Deferred charges (333,977) (148,957)
Deposits and other 321,484 (916,485)
Increase (decrease) in:
Accounts payable (595,841) 504,484
Provision for severance indemnity (19,800) 54,196
Accrued expenses and withholdings (43,111) 50,553
Income taxes payable (89,843) 53,571
----------- -----------
Net Cash Provided by (Used in) Operating Activities 1,298,329 (1,063,386)
----------- -----------
Cash Flows from Investing Activities:
Purchase of fixed assets (17,155) (581,961)
Purchase of real estate held for investment (357,942) --
Proceeds from sale of fixed assets -- 13,628
Investment in consolidated subsidiaries (360,787) --
Investment in unconsolidated subsidiaries (142,571) (1,204,748)
Proceeds from short-term investments 505,092 3,070,185
----------- -----------
Net Cash (Used in) Provided by Investing Activities (373,363) 1,297,104
----------- -----------
</TABLE>
The accompanying notes are an integral part these financial statements.
F-7
<PAGE> 48
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Financing Activities:
Advances to related parties, net $ (415,691) (521,815)
Net (payments) proceeds from obligations with bank (450,351) 576,756
Principal payments on long-term debt (34,195) (9,258)
Principal borrowings on long-term debt 147,751 8,999
Dividends paid (432,000) (132,000)
----------- -----------
Net Cash Used in Financing Activities (1,184,486) (77,318)
----------- -----------
Net (Decrease) Increase in Cash (259,520) 156,400
Cash at Beginning of Year 324,556 168,156
----------- -----------
Cash at End of Year $ 65,036 $ 324,556
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 107,488 $ 32,795
Cash paid during the year for taxes 141,899 97,023
Supplemental Disclosure of Non-Cash Investing Activities:
Net assets acquired from consolidated subsidiaries:
Accounts receivable 29,332 --
Due from related parties 133,584 --
Property, plant and equipment 1,113,425 --
Other current assets 106,083 --
Other assets 377,484 --
Obligations with banks (31,254) --
Accounts payable (9,979) --
Income taxes payable (10,346) --
Accrued expenses (22,899) --
Long-term debt (348,156) --
----------- -----------
$ 1,337,274
=========== ===========
</TABLE>
The accompanying notes are an integral part these financial statements.
F-8
<PAGE> 49
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Andean Development Corporation, (the "ADC"), was
incorporated in the State of Florida on October 19, 1994. ADC is in the
business of providing engineering, technical assistance and equipment
in the development of specialized projects throughout the country of
Chile and more recently in Peru and Argentina. In addition, the
Company, through its subsidiaries described below, advises and assists
large private utilities and the Minister of Public Works in obtaining
land easements from private owners for installation of electrical
lines, piping and roads; develops and sells computer software used in
tracking and auditing the collection of "value-added" taxes for the
Chilean Internal Revenue Service; and owns a vineyard which the Company
expects to reap its first harvest in February 2001.
BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of ADC and the following consolidated
subsidiaries:
<TABLE>
<CAPTION>
OWNERSHIP
SUBSIDIARY DOMICILE PERCENTAGE
---------- -------- ----------
<S> <C> <C>
Andean Engineering and Finance Company U.S. Management Company 100%
Errazuriz y Asociados Ingenieros, S. A. Chilean Service Corporation 100%
Igenor Andina, S. A. Chilean Service Corporation 100%
ADC Andean, S. A. Swiss Service Corporation 100%
Negociaciones y Servidumbre, S. A. Chilean Service Corporation 51%
Ingesis, S. A. Chilean Service Corporation 67%
Bodegas Garcia Errazuriz Chilean Vineyard 75%
</TABLE>
ADC and the above subsidiaries are collectively referred to as the
Company. All significant intercompany balances and transactions have
been eliminated in consolidation. The Company acquired Negociaciones y
Servidumbre, S. A., Ingesis, S. A. and Bodegas Garcia Errazuriz as of
January 1, 1998. This acquisition has been accounted for under the
purchase method of accounting.
In addition, the Company has investments in the following
unconsolidated entities:
<TABLE>
<CAPTION>
OWNERSHIP METHOD
SUBSIDIARY PERCENTAGE OF ACCOUNTING
---------- ---------- --------------
<S> <C> <C>
Aguas y Ecologia, S. A. (A & E) 67.5 Equity
Vinedos Valle del Itata, S. A. (Vinedos) 31.0 Equity
Consonni USA, Inc. (Consonni) 11.0 Cost
Funditec, S. A. (Funditec) 40.0 Equity
</TABLE>
F-9
<PAGE> 50
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's proportionate share of income for Aguas y Ecologia, S.A.
and Vinedos is included in the accompanying consolidated statements of
income. However, the Company's proportionate share of income or loss
from Consonni and Funditec is not included in the accompanying
consolidated statements of income as the financial statements are
unavailable and impracticable to produce at this time. Once finalized,
the financial statements of the above are not expected to have a
material impact on these consolidated financial statements.
FUNCTIONAL CURRENCY - The financial statements have been translated in
accordance with the provisions set forth in Statement of Financial
Accounting Standards No. 52, from Chilean pesos (the functional
currency) into US dollars (the reporting currency).
REVENUE RECOGNITION - The Company earns revenue principally from
commissions associated with the sale of major equipment items and the
performance of engineering services.
In the case of equipment sales, the Company earns a commission on the
sale of equipment or turn-key jobs when the contract between the
purchasing company (buyer of the equipment), is signed by both parties
or an "Order of Proceed" is issued by the buyer. At this moment all the
work of the Company has been completed and the commission has been
earned regardless of any future developments between the supplier and
the buyer. The collection of the commissions earned is determined by
the practices of the countries involved. As a result, it is not unusual
for it to take 60 to 180 days for the funds to be transferred.
Revenues associated with engineering services are recognized as
services when performed based on standard billing rates.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of periodic temporary investments of excess cash and trade
receivables. The Company places its cash with high credit quality
financial institutions. A significant portion of the Company's sales
are to several large customers and, as such, the Company is directly
affected by the well-being of those customers. However, the credit risk
associated with trade receivables is minimal due to the Company's
customer base and ongoing control procedures which monitor the credit
worthiness of customers. Historically, the Company has not experienced
losses on trade receivables. Therefore, no allowance for bad debts is
deemed necessary. During 1998 and 1997 respectively, approximately 38%
and 50% of the Company's consolidated accounts receivable was
attributable to one customer.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The fair value of a financial
instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties. The fair value of cash,
short-term investments, accounts receivable, notes receivable, accounts
payable and notes payable approximate the carrying amounts at December
31, 1998 and 1997.
F-10
<PAGE> 51
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
recorded at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, usually five to
seven years.
STAFF SEVERANCE INDEMNITIES - The Company provides for certain lump sum
severance indemnities to its employees at the end of their employment
as required by Chilean law. The obligation is calculated based on the
present value of the vested benefits to which an employee is entitled,
the expected service lives of the employees and current salary levels.
The Company believes that the above calculation is not materially
different from the calculation required by SFAS 87, which would reflect
expected future salary increases.
FOREIGN OPERATIONS - The Company is a holding company for foreign
entities, operating primarily in South America. The potential for both
economic and political change in the business environment is different
from that of the United States and the success of the Company depends
on the success of the Chilean operations and a stable economic and
political environment.
INCOME TAXES - Deferred tax assets and liabilities are recognized for
the future income tax consequences attributable to the differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Additionally, the Company
provides no deferred income taxes on its foreign earnings as the
revenues will not be transferred to the United States; rather such
earnings will be reinvested in foreign operations, thereby eliminating
any deferred tax liability.
Income tax expense totaled $124,214 and $142,137 for the years ended
December 31, 1998 and 1997.
EARNINGS PER COMMON SHARE - Earnings per common share are based on the
weighted average number of shares outstanding of 2,820,100 for the
years ended December 31, 1998 and 1997, respectively, after giving
effect to common stock equivalents which consist of warrants issued
with the initial public offering that would have a dilutive effect on
earnings per share. Warrants issued with exercise prices greater than
the existing market value of the company stock are deemed anti-dilutive
and are not components of earnings per share.
F-11
<PAGE> 52
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS IN ACCOUNTING STANDARDS - In February 1997, the
Financial Accounting Standards board issued Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" and Statement of
Financial Accounting Standards No. 129 "Disclosure of Information about
Capital Structure" which are both effective for fiscal years beginning
after December 15, 1997. SFAS No. 128 simplifies the current required
calculation of earnings per share ("EPS") under APB No. 15, "Earnings
per Share", by replacing the existing calculation of primary EPS with a
basic EPS calculation. It requires a dual presentation for complex
capital structures of basic and diluted EPS on the face of the income
statement and requires a reconciliation of basic EPS factors to diluted
EPS factors. SFAS No. 129 requires disclosure of the Company's capital
structure. There was no material impact to the Company's EPS
calculation or financial statement presentation and disclosure due to
the adoption of SFAS No. 128 and SFAS No. 129.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" which is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general purpose financial statements which requires the Company to (i)
classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. There was
no material impact to the Company's financial reporting or presentation
due to the adoption of SFAS No. 130.
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" which is effective
for fiscal years beginning after December 15, 1997. SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", and amends SFAS No. 94, "Consolidation of All
Majority-Owned Subsidiaries". SFAS No. 131 requires annual financial
statements to disclose information about products and services,
geographic areas, and major customers based on a management approach.
The management approach requires disclosing financial and descriptive
information about an enterprise's reportable operating segments based
on reporting information the way management organizes the segments for
making business decisions and assessing performance. It also eliminates
the requirement to disclose additional information about subsidiaries
that were not consolidated. This new management approach resulted in
more information being disclosed than presently practiced and require
new interim information not previously presented. See Note 17 for the
Company's compliance with SFAS No. 131.
F-12
<PAGE> 53
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 "Employers'
Disclosures About Pensions and Other Postretirement Benefits - an
amendment of FASB Statements No. 87, 88, and 106" which is effective
for fiscal years beginning after December 15, 1997. SFAS No. 132
revises only the employers' disclosures about pension and other
postretirement benefit plans; it does not change the measurement or
recognition of such plans. Since the Company does not have such plans,
there is no impact to the Company's financial reporting or presentation
due to the adoption of SFAS No. 132.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent asset and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
RECLASSIFICATION - Certain accounts in the 1997 consolidated financial
statements have been reclassified for comparative purposes to conform
with the presentation in the 1988 consolidated financial statements.
NOTE 2 - SHORT-TERM INVESTMENTS
Short-term investments consist of time deposits totaling $23,201 and
$37,858 at December 31, 1998 and 1997, respectively, invested in local
Chilean banks with maturity dates ranging from three months to one
year. These investments earn an annual rate of interest ranging from
1.44% to 3.60%. In addition, the Company invested $282 and $490,717 in
money market accounts in a United States bank at December 31, 1998 and
1997, respectively. The account earned interest at an annual rate of
2.5% to 3.0%.
NOTE 3 - OTHER CURRENT ASSETS
Other current assets consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Recoverable taxes $126,499 $ 95,157
Advances to suppliers 30,360 11,523
Other 73,359 11,358
-------- --------
$230,218 $118,038
======== ========
</TABLE>
F-13
<PAGE> 54
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 751,373 $ --
Vineyard 315,856 --
Vehicles 237,356 202,330
Office equipment 88,789 72,387
Furniture and fixtures 100,656 80,533
Leasehold improvements 371,796 371,796
Leased property 47,780 47,780
----------- -----------
Total furniture and equipment, at cost 1,913,606 774,826
Less accumulated depreciation and amortization (224,196) (101,951)
----------- -----------
$ 1,689,410 $ 672,875
=========== ===========
</TABLE>
NOTE 5 - REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment consists of two undeveloped parcels of
land located near Villarrica, Chile and Valle Itata, Chile. The parcels
are used as a guarantee for some of the financial operations of the
Company. The property is being carried at its historical cost (which is
less than its net realizable value based on an independent appraisal).
The Company has no intention to sell the property in the near future
and is treating it as investment property.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company conducts a substantial amount of its business with
companies that are affiliated with shareholders of the Company. As a
result, commissions have been received or paid for both engineering and
consulting services to and from affiliated companies.
Commissions received from affiliated entities by the Company for the
engineering of various projects totaled $-0- and $684,895 for the years
ended December 31, 1998 and 1997, respectively. Income received from
affiliated entities for consulting services totaled $945,680 and
$346,351 for the years ended December 31, 1998 and 1997, respectively.
In addition, fees charged to the Company for consulting services
performed by its principal owners and immediate family totaled $71,062
and $45,665, for the years ended December 31, 1998 and 1997,
respectively.
F-14
<PAGE> 55
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 6 - RELATED PARTY TRANSACTIONS (CONTINUED)
The amounts due from the affiliated companies totaled $875,550 and
$320,000 at December 31, 1998 and 1997, respectively. Funds payable to
these entities totaled $138,751 and $24,264 at December 31, 1998 and
1997, respectively.
In addition, Mr. Errazuriz, CEO, owed the Company $200,000 at December
31, 1997 which was repaid in 1998.
NOTE 7 - NOTE RECEIVABLE FROM RELATED PARTY
The Company holds a note receivable from Mr. Errazuriz, the Company's
Chairman of the Board.
The original note balance amounted to $606,031 payable in four annual
installments with interest at 8-1/2% per year beginning January 15,
1998. As of December 31, 1998, the balance amounted to approximately
$532,000 (including interest).
NOTE 8 - NOTE RECEIVABLE - OTHER
In June 1997, the Company acted as a consultant in an option to
purchase beach front property ("El Peral" project) close to Santiago
resulting in revenues and a note receivable for $1,339,766, payable in
8 annual installments of $167,470 beginning June 1999, accruing
interest at 7%. At December 31, 1998, the balance including accrued
interest amounted to approximately $1,412,000.
NOTE 9 - INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The Company owns 67.5% of the outstanding stock of Aguas y Ecologia,
S.A. (A&E) which owns 10% of the outstanding stock in Bayesa, S.A. a
Chilean investment company. This equates to a 4.5% ownership of Bayesa,
S.A. Financial statements of A&E as prepared in accordance with GAAP
are unavailable and impracticable to produce at this time.
During 1997, the Company purchased 31% of a wine bottling and
processing plant in Chile for approximately $85,000. The wine
processing and bottling plant will commence operations in March 1998.
In the future, the Company's subsidiary, Bodegas Garcia Errazuriz, a
Chilean vineyard, will provide grapes for the wine processing and
bottling plant.
F-15
<PAGE> 56
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 9 - INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
During 1997, the Company acquired 11% of Consonni USA, Inc. ("CONUSA")
and its Spanish subsidiaries, Construcciones Electromecanicas Consonni,
S.A. ("CONSPAIN"), and Equipos de Control Electrico, S.A. ("ECSA").
CONSPAIN and ECSA manufacture low, medium and high voltage motor
control centers and are domiciled in Bilbao, Spain. During 1997, the
Company commenced negotiations to acquire another 77% of CONUSA.
However, in December 1998, the Company's management suspended
negotiations and currently it is uncertain whether or not the remaining
acquisition will take place. As a result, the proforma financial
information presented in the 1997 consolidated statements was not
considered necessary at the time.
During 1998, the Company acquired a 40% interest in Funditec, a Chilean
company, currently in its development stage. Funditec will be in the
business of selling, buying and exporting all types of metal items.
NOTE 10 - DEFERRED CHARGES
Deferred charges consist of the following at December 31:
1998 1997
-------- --------
Acquisition costs, net $105,450 $148,957
Intangible assets 274,307 --
Covenant not to compete 103,177 --
-------- --------
$482,934 $148,957
======== ========
Acquisition costs are being amortized on a straight-line basis over 10
years. Amortization commenced in 1998 and amounted to approximately
$11,700. Intangible assets and covenant not to compete are to be
amortized on a straight line basis over 3 to 5 years beginning in 1999.
NOTE 11 - DEPOSITS AND OTHER
At December 31, 1997, deposits and other include deposits for future
investments amounting to approximately $900,000 that have since been
acquired and consolidated in 1998.
F-16
<PAGE> 57
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 12 - OBLIGATION WITH BANKS
Obligations with banks consist of lines of credit with local Chilean
banks. Interest rates on all of these lines of credit are based on the
Asociacion de Bancos y Entidades Financieras, (T.A.B.) rate, which
represents a daily average of the interest paid by banks on its
deposits. The rate is then adjusted upwards approximately 1.5% for the
banks profit, and then an additional 1.0% - 1.7% reflecting the
individual risk of the bank on the individual loan.
These lines of credit are secured by an assignment of the Company's
term deposits and vehicles owned by the Company.
NOTE 13 - LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Note payable, collateralized by mortgage on the real estate held
for investment, due due December 2002 with interest at 8.7%,
payable monthly. Currency: UF $ 114,879 $ 149,074
Note payable, collateralized by mortgage on real estate held for
investment due December 2002 with interest payable at
10 %, payable monthly. Currency: UF 147,752 --
Note payable, collateralized by mortgage on vineyard property, due
October 2006 with interest at 10.4% payable monthly
Currency: UF 348,155 --
--------- ---------
Total notes payable 610,786 149,074
Less current portion (57,223) (30,320)
--------- ---------
Total long-term debt $ 553,563 $ 118,754
========= =========
</TABLE>
F-17
<PAGE> 58
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 13 - LONG-TERM DEBT (CONTINUED)
The UF is an indexed unit of account expressed in pesos and adjusted
according to inflation (CPI). There are no covenants or restrictions
imposed on the aforementioned obligations with any of the banks
involved.
The following table reflects the annual payments due for the next five
years of the long-term debt.
YEAR ENDING
DECEMBER 31,
------------
1999 $ 57,223
2000 113,563
2001 110,000
2002 110,000
2003 44,000
2004 and thereafter 176,000
---------
$ 610,786
NOTE 14 - SHAREHOLDERS' EQUITY
In 1997, the Company declared dividends of $.10 per share which
approximated $282,000. In December 1997, the Company paid $137,000 of
the $282,000. The balance was paid on January 31, 1998. On March 31,
1998, the Company declared and paid an additional $.10 per share of
dividends. Also, in 1998, the Company declared dividends of $.20 per
share which approximated $564,000 to be paid in five installments
between March and July 1999.
NOTE 15 - INCOME TAXES
The Company is subject to income tax in Chile. Reconciliations between
the statutory income tax rate in Chile, and the Company's effective
income tax rate as a percentage of income before income taxes is as
follows:
1998 1997
----- -----
Chilean statutory tax rate 15.0% 15.0%
Other, net .4 (1.9)
----- -----
Effective income tax rate 15.4% 13.1%
===== =====
F-18
<PAGE> 59
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 16 - COMMITMENTS AND CONTINGENCIES
LEASE
The Company leases various offices in Santiago, Chile under various
operating leases. Monthly rental payments were approximately $9,100
and $7,398 during 1998 and 1997. Rent expense for the years ended
December 31, 1998 and 1997 totaled approximately $107,000 and $90,000,
respectively.
Future minimum rental payments under the lease are as follows:
YEAR ENDING ANNUAL
DECEMBER 31, PAYMENTS
------------ --------
1999 $ 109,800
2000 109,800
2001 109,800
2002 109,800
2003 109,800
2004 and thereafter 219,600
---------
$ 768,600
=========
NOTE 17 - MAJOR SEGMENTS OF BUSINESS
During 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company has
seven subsidiaries separated into three reportable segments
(engineering services, vineyard, and other services). Each reportable
segment has separate infrastructures and management and different
products/services.
ENGINEERING SERVICES - This segment consists of 4 subsidiaries: Igenor
Andina, S.A., Errazuriz y Asociados Ingenieros, S.A., Andean
Engineering and Finance Company and Andean Development Corporation -
Suisse - that provide engineering services and technical assistance in
the development of specialized projects.
VINEYARD - This segment consists of one subsidiary, Bodegas Garcia
Errazuriz - a vineyard that purchases grapes to produce wine and that
is in the process of cultivating its own grapes.
OTHER - This segment consists of two subsidiaries; NYSA and Ingesis,
S.A. - that provide computer and related services.
F-19
<PAGE> 60
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 17 - MAJOR SEGMENTS OF BUSINESS (CONTINUED)
The following table reflects the approximated revenue, net income and
total assets for the previously separate reportable segment.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Engineering Services $ 2,185,000 $ 3,879,000
Vineyard 5,000 --
Other 440,000 --
------------ ------------
Total Revenues $ 2,630,000 $ 3,879,000
============ ============
Net Income (Loss):
Engineering Services $ 552,000 $ 938,000
Vineyard (8,000) --
Other 92,000 --
------------ ------------
$ 636,000 $ 938,000
============ ============
Total Assets:
Engineering Services $ 8,663,000 $ 10,807,000
Vineyard 1,476,000 --
Other 350,000 --
------------ ------------
$ 10,489,000 $ 10,807,000
============ ============
</TABLE>
NOTE 18 - YEAR 2000 ISSUE
Computer programs used by businesses worldwide were written using two
digits rather than four digits to define the applicable year.
Accordingly, these programs recognize the dates "00" and "01" as the
years 1900 and 1901 rather than the years 2000 and 2001. The Company
recognizes the need to ensure its operations will not be adversely
impacted by year 2000 computer program failures arising from program
processes and calculations misinterpreting the year 2000 date. The
Company has evaluated its financial and operational systems to
determine the impact the year 2000 issue will have on its operations.
The Company also plans to communicate with its significant suppliers,
dealers, financial institutions, and others with which it conducts
business to determine the extent the Company may be impacted by third
parties' failure to address the year 2000 issue. Although the Company
plans to be year 2000 compliant prior to December 31, 1999 and expects
no material impact to the Company's operations, there can be no
assurance that the failure of the Company or such third parties to
successfully address their respective year 2000 issues will not have a
material adverse effect on the Company's business, financial condition,
cash flows, and result of operations.
F-20
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Form 10-KSB being filed under the Securities
Exchange Act of 1934 by Andean Development Corporation of our report dated
February 20, 1999, relating to our audits of the consolidated financial
statements of Andean Development Corporation as of December 31, 1998 and 1997
and appearing in the aforementioned Form 10-KSB.
SPEAR, SAFER, HARMON & CO.
Certified Public Accountants
Miami, Florida
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 65,036
<SECURITIES> 0
<RECEIVABLES> 2,176,462
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,495,199
<PP&E> 1,913,606
<DEPRECIATION> (224,196)
<TOTAL-ASSETS> 10,488,876
<CURRENT-LIABILITIES> 1,297,744
<BONDS> 0
0
0
<COMMON> 282
<OTHER-SE> 8,509,694
<TOTAL-LIABILITY-AND-EQUITY> 10,488,876
<SALES> 2,630,429
<TOTAL-REVENUES> 2,630,429
<CGS> 727,022
<TOTAL-COSTS> 1,170,042
<OTHER-EXPENSES> 229,571
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,488
<INCOME-PRETAX> 759,574
<INCOME-TAX> 124,214
<INCOME-CONTINUING> 635,360
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 635,360
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
