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, 1999
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.)
1 Brickell Square 801 Brickell Avenue, Suite 900, Miami, Florida 33131
(Address of Principal Executive Offices) (Zip Code)
1 Brickell Square
801 Brickell Avenue, Suite 900
Miami, Florida 33131
(305) 371-0056
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
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 [ ] No [X]
<PAGE>
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: $4,607,538.
State the aggregate market value of the voting stock held by
non-affiliates of the registrant on October 30, 2000, computed by reference to
the price at which the stock was sold on that date: $705,025.
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, $.0001 par value, as of December 31,
1999.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
ANDEAN DEVELOPMENT CORPORATION
Report on Form 10KSB
For the Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of the Business...................................... 1
Item 2. Description of the Property...................................... 11
Item 3. Legal Proceedings................................................ 11
Item 4. Submission of Matters to Vote of Security Holders................ 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters......... 13
Item 6. Management's Discussion and Analysis............................. 14
Item 7. Financial Statements............................................. 18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons..... 19
Item 10. Executive Compensation........................................... 21
Item 11. Security Ownership of Certain Beneficial Owners And Management... 23
Item 12. Certain Relationships and Related Transactions................... 24
PART IV
Item 13. Exhibits and Reports on Form 8-K................................. 26
Signatures ................................................................. 28
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
GENERAL
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 Errazuriz y Asociados Ingenieros S.A
("E&A") and Igenor Andina S.A ("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 Int. A.S a worldwide engineering
consulting company based in Oslo, Norway ("Norconsult") and Errazuriz y
Asociados Arquitectos S.A. ("EAA"), a principal shareholder of the Company. See
"Principal Shareholders." Norconsult subsequently sold its participation to
Igenor Ingenierie et Gestion, S.A., a Swiss corporation ("Igenor"), which is
also a principal 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."
The following is a list of the Company's subsidiaries, domicile and percentage
ownership.
<TABLE>
<CAPTION>
Ownership
Subsidiary Domicile Percentage
---------- -------- ----------
<S> <C> <C>
Andean Engineering and Finance Company ("AEFC") U.S. Company 100%
Errazuriz y Asociados Ingenieros, S. A. ("EAI") Chilean Corporation 100%
Errazuriz y Asociados Division Comercial ("EADC") Chilean Corporation 99%
</TABLE>
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<TABLE>
<CAPTION>
Ownership
Subsidiary Domicile Percentage
---------- -------- ----------
<S> <C> <C>
Aguas y Ecologia, S.A. ("A&E") Chilean Corporation 67.5%
Igenor Andina, S. A. ("IA") Chilean Corporation 100%
ADC Andean, S. A. ("ADCN") Swiss Corporation 100%
Negociaciones y Servidumbre, S. A. ("NYSA") Chilean Corporation 50%
Nysacar, S. A. ("NYSACA") Chilean Corporation 50%
Ingesis, S. A. ("INGESIS") Chilean Corporation 100%
Bodegas Garcia Errazuriz SA ("BODEGAS") Chilean Vineyard 98%
Consonni, USA, Inc. ("CONUSA") Factory, Bilbao, Spain 61%
</TABLE>
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.
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, prior to the acquisition of a majority interest in CONUSA, 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
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(Cooperative Regional Electrica 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 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 Advisory on financing (expertise in local and foreign loans)
o Advisory on packaging with other manufacturers
o Knowledge of the decision making procedures and the scheduling
of projects
2. In addition, E&A provides the following services:
o Local engineering support (by the Company's employees or
through subcontractors)
o Procurement of local materials and products
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o Limited construction and plant erection capabilities
o Project managing capabilities
o Coordination with customer and customer engineering
While E&A charges only success fees for the services described in item
1 above and must fund 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 usually assists 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. Generally, one or two electric 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 services 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
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 Chile since 1985, as well as other major
electro-mechanical projects. A major part of the Company's expertise is its
understanding of a customer's needs and 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. The Company has obtained
this knowledge by working with the major companies in Chile (both private and
public) who request these bids.
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Certain Major Representations (Exclusive)
NAME OF COMPANY COUNTRY OF ORIGIN SECTOR
Consonni S.A Spain Energy and electricity
Kvaerner Turbin A.B. Sweden Mech. Equip. for energy
Norconsult Int. A.S Norway Engineering
Selected Special Sales Representations (Non-Exclusive)
NAME OF COMPANY COUNTRY OF ORIGIN SECTOR
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 Cranes Ventanas Port
Babcock &Wilcox Espanola, S.A Spain Mejillones Power Plant
Boetticher & 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
Mitsubishi Corp. Japan San Isidro & Costanera
National Drying Machinery Co. U.S.A. Invertec
Siemens A.G Germany Mejillones Th Power Plant
Loma Alta Hydroelectric Germany Mejillones Th Power Plant
Sumitomo Corp. Japan Submarine Cables
Westinghouse Electric Co. U.S.A. Turbines/Edegel, Peru
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 related products and the efforts of the Chilean government
to take actions concerning 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 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.
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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.
PRIDESA
In September 1997, the Company entered into an agreement with Pridesa,
a medium size Spanish company engaged in developing waste water treatment and
desalinization plants. Recently, under the terms of this agreement, the Company
and Pridesa bid for the Antofagasta Desalting Plant in Chile. There can be no
assurances that the Company will be successful in this bid.
NYSA
Negociaciones y Servidumbre, S.A. ("NYSA"), a Chilean corporation, was
organized to advise the largest private utilities and the Minister of Public
Works of Chile 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). In 1998, the Company acquired a 50% equity interest in NYSA.
INGESIS
In 1998, the Company acquired a 100% interest in Ingesis, S.A.
("Ingesis"). 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
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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.
VINEDOS VALLE DEL ITATA S.A
Vinedos 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 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.
VINA "BODEGAS GARCIA ERRAZURIZ"
In November 1997, the Company purchased 670 acres near Chillan, Chile.
During 1997, the Company commenced a program to plant 430 acres of vineyard. 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.
CONUSA: CONSONNI/ECESA
In May 1997, Mr. Pedro P. 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 an interest 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%. 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. Subsequently, during August 1997, Mr. Pedro P. Errazuriz and the
Company jointly 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).
On June 30, 1999, the Company acquired 1,332,600 shares of common stock
of CONUSA representing 50% of the issued and outstanding common stock of CONUSA
from
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Mr. Pedro P. Errazuriz, CONUSA's controlling shareholder. The Company acquired
the CONUSA common stock in exchange for certain assets, including certain real
property located in Chile, as well as the forgiveness of debt in the sum of
approximately $125,000 due from Mr. Pedro P. Errazuriz.
On February 29, 2000 the Company executed a plan of merger with CONUSA
to acquire the remaining equity interest in CONUSA through a merger with a
wholly owned subsidiary. Under the terms of the plan of merger, each outstanding
share of the common stock of CONUSA, not owned by the Company will be converted
into and exchanged for the equivalent of the common stock of the Company having
a value of $2.00 per share, provided the following conditions are satisfied: (i)
the holders of not more than 5% of the shares of common stock of CONUSA exercise
their dissenters rights under the Florida Business Corporation Act; (ii) the
value of the Company common stock to be exchanged for CONUSA common stock on the
effective date of the merger shall be no less than $2.00 per share; and (iii)
the shares of Company common stock to be exchanged for CONUSA common stock shall
be registered on a Form S-4 Registration Statement declared effective by the
Securities and Exchange Commission. As of November 13, 2000, the above
conditions have not been satisfied and the merger has not been consummated. No
assurances can be given that the merger will ever be consummated.
History
Consonni/ECESA experienced significant operating losses 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.
This reduction of debt was approved.
Consonni was incorporated on July 21st, 1972 to manufacture high
quality electrical controls and substations in low and medium voltage. These
products had an immediate acceptance in the market and the company grew beyond
its financial capacity, up to a level of sales of approximately US$12 million a
year (all figures of this report are subject to the fluctuation of the US$ to
the Pesetas). With a very limited financing capacity, Consonni developed a
substantial debt with the governmental institutions, namely the Basque
Government, the Internal Revenue Service and others, which totaled, at the end
of 1995, more than US$10 million, including interest.
Consonni avoided immediate liability for the debt through the legal
declaration of a stop of payment situation, which permitted the authorities to
reduce the outstanding debt to half. Simultaneously, Consonni acquired a
subsidiary, a trader called ECESA, with the intention of using in full the
prestige and the sales capacity of Consonni to sell other products and increase
revenues.
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Consonni manufactures control equipment of a very high standard, all of
them explosion proof and certified ISO 9001. They are accepted by all major
international manufacturers, like ABB, Kvaerner A.S., Babcock Wilcox, etc., as
equivalent or better than the ones that such manufacturers produce, while less
expensive. Often, Consonni will include their products in the big turnkey
packages presented to different customers in order to reduce their total
offering price and present a more competitive bid.
Consonni, with its productive engineering department, also has the
unique capacity of producing custom made equipment to satisfy difficult
requirements in specific cases and to produce retrofits, generally unavailable
from the larger companies. Consonni also intends to use the design and
supervision capacity to manufacture a portion of the equipment outdoors as a
partial outsourcing directed to less expensive little shops.
The main customers of Consonni are: (i) the main utilities (Endesa and
Iberdrola in Spain, Endesa and Gener of Chile, Edegel of Peru, Dock Sud of the
Perez Companc Group in Argentina, etc.); (ii) the large equipment manufacturers
like Siemens, ABB, Kvaerner, Escher Wyss-Sulzer, etc.; (iii) oil and chemical
companies like REPSOL, ENAP, Petronor, Martorell and other top chemical and
petrochemical industries in Spain.
Consonni reported revenues of just below US$10 million in 1999 and has
approximately 100 employees. In February 2000 Consonni opened a manufacturing
facility in Lima, Peru in partnership with Elecin, a major manufacturer of
electrical equipment. This joint venture will be directed at serving the large
multimillion-dollar market demand for control equipment in Latin America.
ARRIETA S.A.
The Company has recently signed a letter of intent to acquire a
majority interest in Arrieta S.A. ("Arrieta"), a major manufacturer of
automotive parts and components based in Basque Country, Spain, which reported
fiscal 1999 revenues of approximately US$12 million. Arrieta S.A.'s major
customers are Bosch, Hella, Valeso, Tenneco, and Delphi, a division of General
Motors. The Company proposes to invest US$2 million in Arrieta in return for a
majority equity position, with such funds to be used to pay down certain debt
and expand Arrieta international manufacturing facilities in order to meet the
growing demand for Arrieta's products. The transaction is contingent upon the
signing of a definitive agreement, which is expected to occur in late 2000 as
well as a reduction of debt owed by Arrieta to certain governmental authorities.
The Company intends to create a sole operating and manufacturing facility in
Spain utilizing the synergies between Arrieta and Consonni S.A. operations,
which will address rapidly growing international market opportunities. The
combined groups will have a total annual projected sales in Spain and Europe of
approximately US$24 million a year and will have approximately 200 employees.
The Company is currently conducting a due diligence review of Arrieta.
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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. No assurances can be given that this
acquisition will ever be consummated.
COMPETITION
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. A number of the Company's competitors are better
capitalized, have more experienced management and may have greater access to
resources. 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 Consonni/ECESA holds a 16.6% market share in
Spain. The primary competitors are Abengoa S.A., MESA S.A. (a Spanish subsidiary
of Schneider S.A. of France), and CIMI S.A. (a subsidiary of Dragados y
Construcciones S.A.), as well as a number of smaller competitors.
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 and Spain, including labor laws, social security laws, public health,
environmental laws, securities laws and anti-trust laws.
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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 laws 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 Chilean regulation, 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 24 years, and there
is no example of a unilateral breach of an investment contract by the
Government, 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.
FOREIGN CORRUPT PRACTICES ACT
Substantially all of the Company's operations are transacted in South
America and through Consonni in Spain. 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 or 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.
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EMPLOYEES
As of December 31, 1999, the Company, exclusive of Consonni, employed
43 full-time employees, eight of whom are managers/engineers and 35 of whom are
administrative or workers. Consonni has approximately 100 employees. Employees
of the Company and Consonni are not represented by labor unions. The Company
considers its relationship with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
Facilities
The Company leases approximately 4,300 square feet of office in Santiago, Chile.
The lease commenced on November 1, 1997 and will terminate on October 30, 2005.
Monthly rental payments were approximately $6,700 and $9,100 during 1999 and
1998, respectively. Rent expense for the years ended December 31, 1999 and 1998
totaled approximately $80,000 and $107,000, respectively.
Future minimum rental payments under the lease are as follows:
Year Ending Annual
December 31, Payments
------------ -----------
2000 $ 80,400
2001 80,400
2002 80,400
2003 80,400
2004 80,400
2005 and thereafter 40,200
-----------
$ 442,200
The Company leases a common space in Miami, Florida at a monthly rate
of $900. The lease commenced on June, 2000 and will terminate on June, 2001.
In November 1997, the Company purchased 670 acres near Chillan, Chile.
See Investments in Companies - Vina "Bodegas Garcia Errazuriz".
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.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Following 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 were
traded principally on the National Association of Security Dealers Automatic
Quotation - Small Cap Market System under the symbols "ADCC" and "ADCCW",
respectively. On March 15, 2000, the Nasdaq Listing Qualifications Panel
delisted the Company's securities from the Nasdaq SmallCap Market. The
securities were then listed on the over-the-counter Bulletin Board until May 15,
2000. On May 15, 2000, the securities were delisted from the over-the-counter
Bulletin Board and the securities currently are listed on the "pink sheets."
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.
Common Stock Warrants
-------------- ------------------
Period High Low High(1) Low(1)
------ ---- --- ------- ------
Quarter ended on:
March 31, 1998 5-3/4 4-1/8 1-2/3 7/8
June 30, 1998 4-7/8 3 1-3/16 9/16
September 30, 1998 4-1/4 2-7/8 1-10/29 3/8
December 31, 1998 4 2-7/8 1 1/4
March 31, 1999 2-7/8 1-1/2 9/16 3/16
June 30, 1999 1-6/16 1-1/32 5/16 5/32
September 30, 1999 1-5/16 3/4 3/16 1/16
December 31, 1999 1-1/2 6/16 5/16 1/32
On December 31, 1999, the closing bid price for the Common Stock was
1-7/16, and for the Warrants was 1/16.
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. Also during 1998, the
Company declared dividends of $.20 per share to be paid in four installments on
dates to be determined by the Board of Directors of the Company. During July
1999, the first installment was paid ($.05 per share) and the balance is
pending.
14
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Management's Discussion and Analysis 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.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included in Part II, Item 7 of this Report.
Results of Operations (1999 compared to 1998)
Gross Revenues, Costs of Operations and Gross Profit
Gross revenues. Gross revenues increased from $2,630,429 in 1998 to $4,607,538
in 1999, an increase of $1,977,109 or 75%. However, the Core Business Gross
Revenues were reduced from $2,630,429 to $ 617,159 (a decrease of 76.5%). This
significant decrease in Core Business Gross Revenues was due to the decline in
the number energy projects in Latin America during 1999. The increase in gross
revenues is due to the impact of the manufacturing facility in Spain (Consonni),
which produces revenues of between approximately $600,000 to $700.000 per month.
Cost of Operations. Cost of Operations increased from $727,022 in 1998 to
$3,240,902 in 1999, an increase of $2,513,880 or 346%. This increase comes
primarily from Consonni operational costs (Core Business cost of Operations was
only $476,219, or a decrease of 34.5%) and is directly related to the increase
in gross revenue from products sales.
Selling and Administrative Expenses, Incomes from Operations and Other Income
(Expenses)
Selling and Administrative Expenses. Selling and Administrative Expenses
increased from $1,170,042 in 1998 to $2,002,628 in 1999, an increase of $832,586
or 71%. This increase is a
15
<PAGE>
result of the increased expenses of the operation of Consonni. Selling and
Administration Expenses in the Core Business was $834,905, a decrease of
$334,137 or 29%, while the Consonni operations accounted for the $1,167,723 in
extra costs.
Income from Operations. Income from Operations decreased from $733,365 in 1998
to a loss of $635,992, primarily from losses generated by the Core Business; an
operational profit of $58,063 was generated by Consonni.
Other Income (Expenses). Other Income (Expenses) decreased from $71,771 in 1998
to a loss of $2,215,452. See "Profit (Losses) Origin" below.
Profit (losses) Origin
Of the total losses of the year, amounting to $2,961,591, the losses arising
from the Core Business were $2,700,370, of which $694,055 were operational
losses and $289,898 attributable to expenses for auditing, legal fees, public
relations, etc. The remaining losses from the Core Business, totaling
$1,760,260, are the result of a write-off of approximately $950,000 in
uncollectable amounts, including accounts receivables from certain long term
projects, as well as the write-off of certain acquisition costs and other
deferred charges. The losses of Consonni come mainly from the amortization and
depreciation of the factory and equipment.
Net Income and Income Tax. Income taxes decreased from $124,214 in 1998 to
$13,412 in 1999, as a consequence of the lower level of Income before Taxes,
decreasing from $805,136 in 1998 to a loss of $2,851,444 in 1999. Net Income
decreased from $635,360 for 1998 to a loss of $2,961,591 in 1999, as a result of
the decrease in revenues and the write down, depreciation and amortization set
forth above.
Liquidity and Capital Resources -
The Company has financed its operations and other working capital
requirements principally from operating cash flow.
Current Assets
Cash and Short Term Investments. As of December 31, 1999, the Company had
$125,163 in cash as compared to $65,036 as of December 31, 1998, an increase of
$60,127. As of December 31, 1999, the Company had $145,794 in short-term
investments as compared to $23,483 as of December 31, 1998, an increase of
$122,311.
Accounts receivable. Accounts receivable increased from $2,176,462 at December
31, 1998 to $4,243,673 at December 31, 1999. This was due to the increase in
revenues during 1999 and the addition of Consonni receivables.
Inventory and other current assets. As of December 31, 1999, the Company had
$923,393 in inventory as compared to none as of December 31, 1998, an increase
of $923,393, due to the acquisition of CONUSA. As of December 31, 1999, the
Company had $305,859 in other assets as compared to $230,218 as of December 31,
1998, an increase of $75,641.
16
<PAGE>
Total Current Assets. As of December 31, 1999, the Company had $5,743,882 in
total assets as compared to $2,495,199 as of December 31, 1998, an increase of
$3,248,683. This was primarily due to the acquisition of CONUSA during 1999.
Property, plant and equipment. Property, plant and equipment increased from
$1,689,410 at December 31, 1998 to $3,362,741 at December 31, 1999, an increase
of $1,673,331, primarily due to the addition of the assets of Consonni.
Other assets. Other assets have decreased from $6,304,267 at December 31, 1998
to $4,890,084 at December 31, 1999, a decrease of $1,414,183. This decrease
corresponds to decrease in investments in subsidiaries in 1999 and a sale of
certain long term assets.
Liabilities
Current liabilities. Current liabilities increased from $1,297,744 at December
31, 1998 to $4,695,542 at December 31, 1999, an increase of $3,677,798 as a
result of the consolidation of the liabilities of CONUSA, which amounted to
$3,617,525.
Long-term liabilities. Long-term liabilities increased from $618,656 at December
31, 1998 to 3,037,940 at December 31, 1999, an increase of $2,419,284. This
increase is due to the consolidation of the debt of Consonni (consolidated in
CONUSA) with the government entities in Spain.
The Company anticipates that its cash requirements will continue to increase as
it continues to expend substantial resources to build its infrastructure,
develop its modified business plan establish its sales and marketing, network
operations, customer support and administrative organizations. The Company
currently anticipates that its available cash resources and cash generated from
operations will be sufficient to meet its presently anticipated working capital
and capital expenditure requirements for the next twelve months. As of December
31, 1999, there were no commitments for long term capital expenditures. If the
Company is unable to maintain profitability, or seeks further expansion,
additional funding will become necessary. No assurances can be given that either
equity or debt financing will be available.
Results of Operations (1998 compared to 1997)
Gross Revenues, Costs of Operations and Gross Profit
Gross revenues. 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 was
due to the postponement of a number of projects scheduled to commence from 1998
to 1999.
Cost of Operations. 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 was directly
related to the decrease in gross revenues. In addition, the Company 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.
17
<PAGE>
Selling and Administrative Expenses, Incomes from Operations and Other Income
(Expenses)
Selling and Administrative 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 was 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. Income from Operations, decreased from
$1,052,676 in 1997 to $733,365 in 1998, a decrease of $319,311 or 30%.
Other Income (Expenses). Other Income (Expenses) increased from $27,364 in 1997
to $71,771 in 1998, which was due to the equity in earnings from unconsolidated
subsidiaries acquired during 1998.
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% as a result of the decrease in revenues.
Liquidity and Capital Resources
Accounts receivable. 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, plant and equipment. Property, plant and equipment increased from
$672,875 at December 31, 1997 to $1,689,410 at December 31, 1998, primarily due
to the acquisition of a vineyard in Chile.
Other assets. Other assets 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. Current liabilities decreased from $1,844,578 at December
30, 1997 to $1,297,744 at December 31, 1998, as a result of payments on lines of
credit, accounts payable and income taxes due to increased reductions in
accounts receivable.
Long-term liabilities. Long-term liabilities increased from $206,071 at December
31, 1997 to $618,656 at December 31, 1998. This increase was due to the mortgage
financing assumed with the purchase of the vineyard.
Working capital. 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.
18
<PAGE>
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 AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On March 7, 2000, the Company engaged PricewaterhouseCoopers to act as
the Company's independent certified public accountant. PricewaterhouseCoopers
replaced Spear, Safer, Harmon & Co. There have been no disagreements with Spear,
Safer, Harmon & Co. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure or any reportable
events.
On June 13, 2000, the Company engaged Spear, Safer, Harmon & Co., to
act as the Company's independent certified public accountant. Spear, Safer,
Harmon & Co. replaced PricewaterhouseCoopers. There were no Auditors Reports on
the financial statements for the Company prepared by PricewaterhouseCoopers and
there was no adverse opinion or a disclaimer of opinion. There have been no
disagreements with PricewaterhouseCoopers on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure or
any reportable events.
19
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers are as follows:
NAME AGE POSITION
---- --- --------
Pedro Pablo Errazuriz 64 Chairman of the Board, Chief
Executive Officer
Jose Luis Yrarrazaval 61 Vice Chairman of the board/Chief
Financial Officer/Secretary Director
Alberto Coddou 62 Director
Sergio Jimenez 64 Director
Claude Mermier 65 Director
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 and sole Director of
Andean Export Corporation since February 9, 1995, and as Director of Andean
Engineering & Finance Corp. since its inception in July 1997. Mr. Errazuriz has
also served as Chairman of the Board of Directors 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.
JOSE LUIS YRARRAZAVAL has been a member of the Board of Directors of the Company
since March 20, 1995 and has served as Chief Financial Officer from March 20,
1995. In January, 1998, he was appointed Vice Chairman of the Board of Directors
of the Company. 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 served as the General Manager of both E&A and INA, which
responsibilities included all financial matters and personnel management.
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 of
20
<PAGE>
Directors 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 the Company since March
20, 1995. Through June 1997 he was the President of the Santiago Water and
Sewage Company "EMOS". In June 1995, Mr. Jimenez was appointed as a member of
the Board of Directors of ENAP (Empresa Nacional del Petroleo), the Chilean oil
company owned by the government. 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.
CLAUDE MERMIER has served on the Board of Directors of the Company since March
20, 1995. Mr. Mermier has served as the Chairman of the Board of Directors 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.
BOARD OF DIRECTORS
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.
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, 1999, the members of
these committees consisted of 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
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<PAGE>
Stock Option Plan and the Directors Stock Option Plan and is authorized to grant
options pursuant to the terms of these plans.
During the year ended December 31, 1999, the Company's Board of
Directors held four meetings. All of the directors attended this meeting. During
the year ended December 31, 1999 the Investment and the Compensation Committee
met two times. The functions of the other committees were performed by the
entire Board of Directors during 1999.
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, 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, 1999, all of the Section 16(a) filing requirements applicable to
its officers, directors and greater than 10% beneficial owners have been
satisfied.
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ------ ----------- ---------- -------------
<S> <C> <C> <C> <C>
Pedro P. Errazuriz 1999 $ 0.00 $ 0.00 $ 0.00
President Chief Executive Officer 1998 $ 0.00 $ 0.00 $ 0.00
Chairman 1997 $ 178,130 $ 70,705 $ 20,000(1)
</TABLE>
(1) This is allocated to an annual automobile allowance.
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
22
<PAGE>
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.
No options have been issued under either plans.
23
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1999, 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, 1999, there were 2,820,100 shares issued
and outstanding.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) OF CLASS(3)
----------------------------------------------- --------- --------
Alberto Coddou(4) .................................. 0 0%
Pedro P. Errazuriz(5)(8) ........................... 926,500 32.9%
Sergio Jimenez ..................................... 0 0%
Claude Mermier(6) .................................. 2,250 *
Jose Luis Yrarrazaval .............................. 11,450 *
All directors and executive officers as a group
(6 persons) ...................................... 940,200 33.3%
Igenor, Ingenierie et Gestion, S. A.(7) ............ 900,000 31.9%
Errazuriz y Asociados Arquitectos, Limitada(8) ..... 525,000 18.6%
Berta Dominguez(7)(9) .............................. 1,425,000 50.5%
---------------------
* Less than one percent.
(1) Unless otherwise indicated, the address of each beneficial owner is
Avenida Americo Vespucio Sur #100, Piso 16, Las Condes 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.
(3) Based on 2,820,100 shares issued and outstanding as of the date hereof.
(4) Mr. Coddou's address is Santa Lucia 280-OF.12, Santiago, Chile.
(5) Includes 900,000 shares of Common Stock owned by Igenor, Ingenierie et
Gestion, S.A., a Swiss corporation ("Igenor") of which Mr. Pedro P.
Errazuriz owns 50% the outstanding capital stock. Also includes 26,500
shares of Common Stock owned directly by Mr. Pedro P. Errazuriz.
24
<PAGE>
(6) Mr. Mermier owns a 0.25% interest in Igenor. Mr. Mermier's address is
c/o Etude Montavan-Mermier, 22, rue Etienne Dumont, 1211 Geneve 3,
Switzerland.
(7) The principal shareholders of Igenor are Mr. Pedro P. Errazuriz (50%),
the Chairman of the Company's Board of Directors; Mrs. Berta Dominguez
(49.25%), the wife of Mr. Pedro P. Errazuriz; Mr. Pedro Pablo Errazuriz
Dominguez, a son of Mr. Pedro P. Errazuriz and Mrs. Berta Dominguez
(0.25%); Mr. Claude Mermier (0.25%), a director of the Company; and
Pierre Yves Montavon (0.25%), an unrelated third party. The address for
this company is c/o Etude Montavan-Mermier, 22, rue Etienne Dumont,
1211 Geneve 3, Switzerland.
(8) Errazuriz y Asociados Arquitectos, Limitada, is a Chilean limited
partnership. The partners of this entity are Mrs. Berta Dominguez, who
owns a 58% interest, and the six children of Mr. Pedro P. Errazuriz and
Mrs. Berta Dominguez, who each own 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.
The terms of the partnership agreement provide that any four partners,
acting in concert, have the authority to manage the partnership, which
includes the right to purchase and sell securities of other entities.
The partners have appointed Mr. Pedro Pablo Errazuriz as the General
Manger of the partnership. In his capacity, Mr. Pedro Pablo Errazuriz
has the authority to take certain actions on behalf of the partnership,
including, when acting together with one other partner, to purchase and
sell securities of other entities.
(9) Consists of 900,000 shares of Common Stock owned by Igenor, of which
Mrs. Berta Dominguez owns 49.25% of the outstanding capital stock and
525,000 shares of Common Stock owned by Errazuriz y Asociados
Arquitectos Limitada of which Mrs. Berta Dominguez, owns a 58%
interest. Mrs. Berta Dominguez is the wife of Mr. Pedro P. Errazuriz,
the Company's Chairman of the Board of Directors.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions Between the Company and its Officers, Directors and Affiliates
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, 1999, the balance amounted to approximately $214,000
(including interest).
Income received from entities affiliated with Mr. Errazuriz for
consulting services totaled $945,680 for the year ended December 31, 1998. In
addition, fees charged to the Company for consulting services performed by Mr.
Errazuriz and his immediate family totaled $71,062, for the year ended December
31, 1998. There was no income received from or funds paid to these affiliated
entities during 1999.
25
<PAGE>
On June 30, 1999, the Company acquired 1,332,600 shares of common stock
of CONUSA, representing 50% of the issued and outstanding common stock of
CONUSA, from Mr. Errazuriz, CONUSA's controlling shareholder. The Company
acquired the CONUSA common stock in exchange for certain assets, including
certain real property located in Chile, as well as the forgiveness of debt in
the sum of approximately $125,000 due from Mr. Errazuriz.
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.
26
<PAGE>
ITEM 13. 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
3.1 Company's Amended and Restated Articles of Incorporation(1)
3.2 Company's Revised Amended and Restated Bylaws(1)
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)
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)
10.4 Agreement between ESSAN and Bayesa for the Final Disposal of the
Antofagasta Sewage (New translation with Appendices No. 1-5 but without
maps)(1)
10.19 Letter from Westinghouse Electric Corporation to the Company, 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, dated July 19,
1995.(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. The Company did not file any Reports on Form 8-K
during the fourth quarter of the year ended December 31, 1999
27
<PAGE>
SIGNATURES
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/ Pedro P. Errazuriz
-----------------------------
Pedro P. Errazuriz, 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.
Dated: November 13, 2000 By: /S/ Pedro P. Errazuriz
------------------------------------------
Pedro P. Errazuriz, President, Chief
Executive Officer and Chairman of the
Board of Directors (Principal executive
officer)
Dated: November 13, 2000 By: /S/ Jose Luis Yrarrazaval
------------------------------------------
Jose Luis Yrarrazaval, Chief Financial
Officer, Secretary and Director (Principal
financial and accounting officer)
Dated: November 13, 2000 By: /S/ Alberto Coddou
------------------------------------------
Alberto Coddou, Director
Dated: November 13, 2000 By: /S/ Alberto Coddou
------------------------------------------
Alberto Coddou, Director
Dated: November 13, 2000 By: /S/ Sergio Jimenez
------------------------------------------
Sergio Jimenez, Director
28
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Page
----
Independent Auditors' Report.....................................F-2
Consolidated Balance Sheets......................................F-3
Consolidated Statements of Operations............................F-5
Consolidated Statements of Shareholders' Equity..................F-6
Consolidated Statements of Cash Flows............................F-7
Notes to Consolidated Financial Statements.......................F-9
F-1
<PAGE>
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, 1999
and 1998 and the related consolidated statements of operations, 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 and Subsidiaries as of December 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Miami, Florida
August 9, 2000
F-2
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
A S S E T S
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Current Assets:
Cash $ 125,163 $ 65,036
Short-term investments 145,794 23,483
Accounts receivable 4,243,673 2,176,462
Inventory 923,393 -
Other current assets 305,859 230,218
---------------- ----------------
Total Current Assets 5,743,882 2,495,199
---------------- ----------------
Property, Plant and Equipment, net 3,362,741 1,689,410
---------------- ----------------
Other Assets:
Real estate held for investment 96,872 1,147,389
Goodwill 2,631,359 -
Due from related parties 197,183 875,550
Note receivable from related party 213,750 531,793
Note receivable - other 890,000 1,411,900
Investment in unconsolidated
subsidiaries 392,435 1,772,569
Deferred charges 138,984 482,934
Deposits and other 329,501 82,132
---------------- ----------------
4,890,084 6,304,267
---------------- ----------------
$ 13,996,707 $ 10,488,876
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
December 31, 1999 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Current Liabilities:
Obligations with banks $ 441,553 $ 157,659
Current portion of long-term debt 603,628 57,223
Accounts payable 1,843,189 181,293
Due to related parties 114,304 138,751
Current portion of due to public entities 760,881 -
Income taxes payable 8,610 117,525
Accrued expenses and withholdings 223,924 57,319
Current portion of staff severance
indemnities 34,946 23,954
Dividends payable 423,018 564,020
Deferred revenue 511,489 -
---------------- ----------------
Total Current Liabilities 4,965,542 1,297,744
---------------- ----------------
Long-Term Liabilities:
Long-term debt, excluding current portion 404,846 553,563
Staff severance indemnities, excluding
current portion 66,685 65,093
Due to public entities 2,566,409 -
---------------- ----------------
3,037,940 618,656
---------------- ----------------
Minority interest 540,442 62,500
---------------- ----------------
Shareholders' Equity:
Preferred stock, $.0001 par value, 5,000,000
shares authorized, no 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 (accumulated deficit) (36,268) 2,925,323
Cumulative translation adjustment (235,551) (139,949)
---------------- ----------------
Total Shareholders' Equity 5,452,783 8,509,976
---------------- ----------------
$ 13,996,707 $ 10,488,876
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues $ 4,607,538 $ 2,630,429
Cost of Operations 3,240,902 727,022
---------------- ----------------
Gross Profit 1,366,636 1,903,407
Selling and Administrative Expenses 2,002,628 1,170,042
---------------- ----------------
(635,992) 733,365
---------------- ----------------
Other Income (Expenses):
Interest income 97,175 143,402
Interest expense (178,152) (107,488)
Equity in earnings from unconsolidated
subsidiaries 60,092 157,545
Other income 178,686 62,591
Provision for uncollectible accounts (955,417) -
Depreciation and amortization (1,417,836) (184,279)
---------------- ----------------
(2,215,452) 71,771
---------------- ----------------
(Loss) Income Before Income Taxes and
Minority Interest (2,851,444) 805,136
Income Taxes 13,412 124,214
---------------- ----------------
(Loss) Income Before Minority Interest (2,864,856) 680,922
Minority Interest 96,735 45,292
---------------- ----------------
Net (Loss) Income (2,961,591) 635,360
Other Comprehensive Income:
Cumulative Translation Adjustment (95,602) 35,999
---------------- ----------------
Comprehensive (Loss) Income $ (3,057,193) $ 599,361
================ ================
Net (Loss) Income per Common Share $(1.05) $ .23
====== =====
Weighted Average Shares Outstanding 2,820,100 2,820,100
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Retained Earnings Cumulative Total
Common Additional (Accumulated Translation Shareholders'
Stock Paid-In Capital Deficit) Adjustment Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
Net loss -- -- (2,961,591) -- (2,961,591)
Translation adjustment -- -- -- (95,602) (95,602)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 $ 282 $ 5,724,320 $ (36,268) $ (235,551) $ 5,452,783
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (2,961,591) $ 635,360
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,417,836 184,279
Provision for uncollectible accounts 955,417 -
Minority interest 96,735 62,500
Equity in earnings from unconsolidated subsidiaries 60,092 157,545
Translation adjustment (95,602) (35,999)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 2,068,405 1,058,255
Inventory 313,532 -
Other current assets 456,971 (6,097)
Note receivable (1,445,206) 2,104
Note receivable from related party 318,043 -
Deferred charges - (333,977)
Deposits and other (226,568) 321,484
Increase (decrease) in:
Accounts payable (456,849) (595,841)
Deferred revenue 511,489 -
Provision for severance indemnity 12,584 (19,800)
Accrued expenses and withholdings (190,280) (43,111)
Income taxes payable (108,915) (89,843)
---------------- ----------------
Net Cash Provided by Operating Activities 726,093 1,296,859
---------------- ----------------
Cash Flows from Investing Activities:
Purchase of fixed assets (428,341) (15,685)
Purchase of real estate held for investment 261,070 (357,942)
Investment in consolidated subsidiaries - (360,787)
Investment in unconsolidated subsidiaries - (142,571)
(Payments) proceeds to from short-term investments (92,671) 505,092
---------------- ----------------
Net Cash (Used in) Investing Activities (259,942) (371,893)
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (2,961,591) $ 635,360
Cash Flows from Financing Activities:
Net proceeds (payments) from related parties $ 562,335 $ (415,691)
Net proceeds (payments) from obligations with bank 283,894 (450,351)
Principal payments on long-term debt (1,111,251) (34,195)
Principal borrowings on long-term debt - 147,751
Dividends paid (141,002) (432,000)
----------------- ----------------
Net Cash (Used in) Financing Activities (406,024) (1,184,486)
----------------- ----------------
Net Increase (Decrease) in Cash 60,127 (259,520)
Cash at Beginning of Year 65,036 324,556
----------------- ----------------
Cash at End of Year $ 125,163 $ 65,036
================= ================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 178,152 $ 107,488
Cash paid during the year for taxes - 141,899
Supplemental Disclosure of Non-Cash Investing Activities:
Net assets acquired from consolidated subsidiaries:
Short-term investments 29,640 -
Accounts receivable 4,730,401 29,332
Inventory 1,236,925 -
Due from related parties 35,928 133,584
Property, plant and equipment 1,466,734 1,113,425
Other current assets 532,612 106,083
Other assets 20,801 377,484
Obligations with banks - (31,254)
Accounts payable (2,118,745) (9,979)
Income taxes payable - (10,346)
Accrued expenses (356,885) (22,899)
Due to public entities (3,327,290) -
Long-term debt (1,508,939) (348,156)
----------------- ----------------
$ 741,182 $ 1,337,274
================= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998
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; owns a vineyard from which the Company
expects to reap its first harvest in February 2002, and
manufactures and sells electrical equipment in Spain.
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 (AEFC) United States 100%
Errazuriz y Asociados Ingenieros, S. A. (EAI) Chile 100%
Errazuriz y Asociados Division Comercial (EADC) Chile 99%
Aguas y Ecologia, S.A. (A & E) Chile 67.5%
Igenor Andina, S. A.(IA) Chile 100%
ADC Andean, S. A (ADCN). Switzerland 100%
Negociaciones y Servidumbre, S. A. (NYSA) Chile 50%
Nysacar, S. A. (NYSACAR) Chile 50%
Ingesis, S. A. (INGESIS) Chile 100%
Bodegas Garcia Errazuriz (BODEGAS) Chile 98%
Consonni, USA, Inc. (CONUSA) Spain 61%
</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
Ingesis and Bodegas as of January 1, 1998. Also, as of March 1998,
a 100% interest was acquired when Errazuriz y Asociados Division
Ingenieria was created.
During 1999, the Company acquired a 50% interest in Nysacar. Also
during 1999 the subsidiary named Errazuriz y Asociados Ingenieros,
S.A. changed its name to Errazuriz y Asociados Division
Commercial. As of June 30, 1999, the Company acquired an
additional 50% of Consonni USA, Inc. The total percentage owned by
the Company as of December 31, 1999 increased to 61% from 11% in
1998. This acquisition has been accounted for under the purchase
method of accounting.
F-9
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In addition, the Company has investments in the following
unconsolidated entity:
<TABLE>
<CAPTION>
Ownership Method
Subsidiary Percentage of Accounting
---------- ---------- --------------
<S> <C> <C>
Vinedos Valle del Itata, S. A. (Vinedos) 31.0 Equity
</TABLE>
During 1998, the Company acquired a 40% interest in Funditec, a
Chilean company, currently in its development stage. Funditec is
in the business of selling, buying and exporting all types of
metal items. The Company's interest in Funditec was sold during
1999.
The Company's proportionate share of income for Vinedos and
Funditec is included in the accompanying consolidated statements
of income.
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 and Spanish pesetas (the functional currencies) 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.
Revenues associated with engineering services are recognized as
services when performed and are based on standard billing rates.
In the case of equipment sales, the Company earns a commission on
the sale of equipment. For turn-key jobs a commission is earned
when the contract is signed and an "Order to Proceed" is issued by
the buyer. At that time the commission has been earned regardless
of any future developments between the supplier and the buyer. In
some instances due to the long terms of payment and changes in the
ultimate realization of commissions earned on the sale of
equipment, the Company has modified its criteria in recognizing
such commissions, which from 1999 and forward, will be recognized
as invoiced and paid, depending on the terms of the respective
contracts. Such changes are not deemed to have a material impact
on the Company's financial statements.
F-10
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. During 1999 and 1998 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, 1999 and 1998.
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 that are required to be paid by
Chilean law to its employees at the end of their employment. 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 and Spain. 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 and
Spanish 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 as income in the period that
includes the enactment date.
F-11
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income tax expense totaled $13,412 and $124,214 for the years
ended December 31, 1999 and 1998, respectively.
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, 1999 and 1998, 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.
Recent Pronouncements in Accounting Standards - 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.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes new accounting and reporting
standards for derivative instruments. Since the Company does not
have such activities, there is no impact to the Company's
financial statements.
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.
NOTE 2 - SHORT-TERM INVESTMENTS
Short-term investments consist of time deposits totaling $145,794
and $23,483 at December 31, 1999 and 1998, respectively, invested
in local Chilean and Spanish 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%.
F-12
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 3 - OTHER CURRENT ASSETS
Other current assets consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Recoverable taxes $ 142,067 $ 126,499
Advances to suppliers 29,943 30,360
Other 133,849 73,359
--------------- ---------------
$ 305,859 $ 230,218
=============== ===============
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Land and building $ 1,113,639 $ 751,373
Vineyard 588,532 315,856
Vehicles 237,356 237,356
Installations and machinery 1,355,173 -
Other installations and
equipment 678,255 -
Office equipment 88,789 88,789
Furniture and fixtures 760,661 100,656
Leasehold improvements 371,796 371,796
Leased property 47,780 47,780
---------------- ---------------
Total furniture and equipment,
at cost 5,241,981 1,913,606
Less accumulated depreciation
and amortization (1,879,240) (224,196)
---------------- ---------------
$ 3,362,741 $ 1,689,410
================ ===============
</TABLE>
F-13
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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). In June 1999, the land
held for investment by the Company in Villarrica, Chile was sold
to the principal shareholder of the Company in exchange for his
shares of common stock of Consonni, USA, Inc. ("CONUSA"). (See
Note 9).
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.
Revenue received from affiliated entities for consulting services
totaled $945,680 for the year ended December 31, 1998. In
addition, fees charged to the Company for consulting services
performed by its principal owners and immediate family totaled
$71,062, for the year ended December 31, 1998. There was no
revenue or fees received from affiliated entities or related party
consulting services during 1999.
The amounts due from the affiliated companies totaled $197,183 and
$875,550 at December 31, 1999 and 1998, respectively. Funds
payable to these entities totaled $114,304 and $138,751 at
December 31, 1999 and 1998, respectively.
NOTE 7 - NOTE RECEIVABLE FROM RELATED PARTY
During 1997, the Company received a note from Mr. Errazuriz, the
Company's Chairman of the Board, in the amount of $606,031,
payable in four annual installments, plus interest at 8 1/2% per
year, commencing January 15, 1998. The note was in exchange for
the purchase of real estate. As of December 31, 1999 and 1998, the
balance of this note approximated $214,000 and $532,000,
respectively.
F-14
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 8 - NOTE RECEIVABLE - OTHER
In June 1997, the Company acted as a consultant relating to the
acquisition of 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. During 1999, this note was transferred
to the Company's Chairman of the Board in exchange for shares of
common stock of CONUSA (See Note 9).
Also during 1999, the company sold land in exchange for a note on
the amount of $890,000. Such amount is payable in four annual
installments commencing June 2000. Generally accepted accounting
principles (GAAP) requires certain criteria to be met before the
gain on such transaction can be recognized. As the buyer does not
have a substantial investment in the property, and therefore GAAP
standards were not met, the gain of $511,000 has been deferred and
is included as deferred revenues in the accompanying consolidated
balance sheet.
NOTE 9 - BUSINESS COMBINATION
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. ("ECESA"). CONSPAIN and ECESA 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
which were resumed in the second quarter of 1999 leading to the
acquisition of an additional 50% of the shares of CONUSA, from the
Chairman of the Board, in exchange for certain notes receivable
and land (See Notes 5 and 8).
The acquisition occurred on June 1999 whereby the Company acquired
from its principal shareholder an additional 50% of the shares of
CONUSA. This acquisition increased the Company's ownership to 61%
and was treated as a purchase for the year 1999 for which the
consolidated financial statements are presented. As part of this
acquisition, the excess purchase price paid, including the
Company's initial 11% investment, over the net assets acquired
approximated $2,600,000. Such amount has been recorded as goodwill
and is being amortized over 40 years.
The operations of CONUSA for the six month period ending December
31, 1999 are included in the consolidated statements of operations
of the Company.
F-15
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 9 - BUSINESS COMBINATION (Continued)
The following represents the summarized unaudited proforma
combined results of operations for the years ended December 31,
1999 and 1998 assuming the acquisition had taken place at the
beginning of those fiscal years. The unaudited proforma results
are not necessarily indicative of future earnings or earnings that
would have been reported had the acquisition been completed when
assumed.
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 12,785,009 $ 11,807,238
================= =================
Net income (loss) $ (3,976,977) $ 818,776
================= =================
Net (loss) income per common share $ (1.4102) $ .291
================= =================
Weighted average shares outstanding $ 2,820,100 $ 2,820,100
================= =================
</TABLE>
NOTE 11 - DEFERRED CHARGES
Deferred charges consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Acquisition costs, net $ - $ 105,450
Intangible assets 51,292 274,307
Covenant not to compete 87,692 103,177
---------------- ----------------
$ 138,984 $ 482,934
================ ================
</TABLE>
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 covenants not to
compete are to be amortized on a straight line basis over 3 to 5
years beginning in 1999.
F-16
<PAGE>
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 and Spanish 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>
1999 1998
--------------- -------------
<S> <C> <C>
Notes payable, collateralized by trade
receivables with interest payable at 6.25%
payable monthly, due on various dates through
December 2000. $ 547,040 $ -
Notes payable under capital leases with interest
between 6% to 10%, payable monthly 50,573 -
Note payable, collateralized by mortgage on the
real estate held for investment, due December
2002 with interest at 8.7%, payable monthly. 94,923 114,879
Note payable, collateralized by mortgage on
real estate held for investment due December
2002 with interest payable at 10%, payable
monthly. - 147,752
Note payable, collateralized by mortgage on
vineyard property, due October 2006 with
interest at 10.4% payable monthly. 315,938 348,155
--------------- --------------
Total notes payable 1,008,474 610,786
Less current portion (603,628) (57,223)
--------------- --------------
Total long-term debt $ 404,846 $ 553,563
=============== ==============
</TABLE>
F-17
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 13 - LONG-TERM DEBT (Continued)
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,
------------
2000 $ 603,628
2001 72,597
2002 64,605
2003 38,292
2004 38,292
2005 and thereafter 191,060
----------------
$ 1,008,474
================
NOTE 14 - DUE TO PUBLIC ENTITIES
During 1997, Consonni, S.A. one of the Spanish Subsidiaries of
CONUSA filed for reorganization under the protection of the
Spanish bankruptcy code. Under these proceedings the Company
obtained a reduction in interest and penalties owed to the various
governmental entities for payroll taxes, and was also relieved of
certain obligations to third party vendors. The total amount of
debt forgiveness approximated $4,400,000, and as of December 31,
1999 the Company's debt to these entities was approximately
$3,328,000 plus interest of 4.5%.
The following table reflects the annual payments due for the next
five year:
Year Ending
December 31,
------------
2000 $ 760,881
2001 349,822
2002 391,073
2003 399,320
2004 440,546
2005 and thereafter 985,648
----------------
$ 3,327,290
================
F-18
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 15 - SHAREHOLDERS' EQUITY
During 1998, the Company declared dividends of $.20 per share to
be paid in four installments on dates to be determined by the
Board. During July 1999, the first installment was paid ($.05 per
share) and the balance of approximately $423,000 was still
outstanding at December 31, 1999.
NOTE 16 - INCOME TAXES
The Company is subject to income taxes in Chile and Spain.
Reconciliations between the statutory income tax rate in these
countries, and the Company's effective income tax rate as a
percentage of income before income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Chilean statutory tax rate 15.0% 15.0%
Other, net .4 .4
---------- -----------
Effective income tax rate 15.4% 15.4%
========== ===========
Spanish effective income tax rate 30.0% -
========== ===========
</TABLE>
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Lease
The Company leases various offices in Santiago, Chile under
various operating leases. Monthly rental payments were
approximately $6,700 and $9,100 during 1999 and 1998,
respectively. Rent expense for the years ended December 31, 1999
and 1998 totaled approximately $80,000 and $107,000, respectively.
F-19
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 17 - COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum rental payments under the lease are as follows:
Year Ending Annual
December 31, Payments
------------ ----------------
2000 $ 80,400
2001 80,400
2002 80,400
2003 80,400
2004 80,400
2005 and thereafter 40,200
----------------
$ 442,200
================
NOTE 18 - MAJOR SEGMENTS OF BUSINESS
During 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company has
10 subsidiaries separated into three reportable segments
(engineering services, vineyard, and manufacturing). Each
reportable segment has separate infrastructures and management and
different products/services.
Engineering Electronics and Related Services - This segment
consists of 8 subsidiaries: Igenor Andina, S.A., Errazuriz y
Asociados Ingenieros, S.A., Errazuriz y Asociados Division
Commercial, S.A., NYSA, Aguas y Ecologia, Ingesis, Andean
Engineering and Finance Company and ADC Andean, S.A. - Suisse -
that provide engineering services and technical assistance in the
development of specialized projects, as well as electronic and
related services.
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.
Manufacturing - This segment consists of the activities of CONUSA,
engaged in the manufacture and sale of low and medium voltage
electrical control equipment.
F-20
<PAGE>
ANDEAN DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 18 - MAJOR SEGMENTS OF BUSINESS (Continued)
The following table reflects the approximated revenue, net income
(loss) and total assets for the previously separate reportable
segments.
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues:
Engineering Services $ 609,000 $ 2,625,000
Vineyard 8,000 5,000
Manufacturing 3,990,000 -
--------------- ---------------
Total Revenues $ 4,607,000 $ 2,630,000
=============== ===============
Net Income (Loss):
Engineering Electronics and Related
Services $ (2,700,000) $ 644,000
Vineyard (8,000) (8,000)
Manufacturing (253,000) -
--------------- ---------------
$ (2,961,000) $ 636,000
=============== ===============
Total Assets:
Engineering Electronics and Related
Services $ 2,325,000 $ 9,013,000
Vineyard 1,303,000 1,476,000
Manufacturing 10,368,000 -
--------------- ---------------
$ 13,996,000 $ 10,489,000
=============== ===============
</TABLE>
NOTE 19 - SUBSEQUENT EVENTS
Subsequent to year end, the Company engaged the advice of market
and operations specialists. Based on the consultants, the Company
decided to concentrate on its core business, a decision that was
presented to and approved at the shareholders' meeting of March
2000.
As a consequence of that decision, the Company sold its interest
in Aguas y Ecologia, S.A., NYSA, Nysacar and Bodegas Garcia
Errazuriz S.A. and merged its Ingesis S.A., Errazuriz y Asociados
Division Ingenieria, Igenor Andina S.A., and Errazuriz y Asociados
Division Comercial subsidiaries into one company called E & A
Ingesis S.A.
The operation in Spain is currently under study to simplify and
enhance its interaction with E & A and Ingesis S.A., and the
Company foresees the possibility of selling a majority interest in
CONUSA to third parties.
F-21
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
23.1 Consent of Independent Auditors(2)
27 Financial Data Schedule(2)
