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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________.
Commission file number 0-22520
AMTEC, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1989122
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
599 Lexington Avenue, 44th Floor, New York, New York 10022
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(Address of principal executive offices, including zip code)
212-319-9160
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(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Name of Each Exchange
Class so Registered On Which Registered
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Common Stock, $0.001 par value per share American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Indicate by check mark whether the registrant: (i) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The issuer's revenues for the fiscal year ended March 31, 1999 were zero.
The number of shares outstanding of the registrant's common stock as of
June 25, 1999 was 32,015,468 shares. The aggregate market value of the
common stock (14,946,981) shares held by non-affiliates, based on the
closing price ($1.1250) of the common stock as of June 25, 1999 was
approximately $16.8 million.
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995.
Except for the historical information contained herein, the matters
discussed in this Annual Report are forward-looking statements which
involve risks and uncertainties, including but not limited to economic,
competitive, governmental, international and technological factors
affecting the Company's revenues, joint ventures, operations, markets and
prices, and other factors discussed in this Annual Report.
PART I
ITEM 1. BUSINESS
AmTec, Inc. ("AmTec" or "the Company") is a company that provides
value-added telecommunications services to and from the Far East and has
telecommunications investments in the People's Republic of China (the "PRC"
or "China"). The Company initially focused its business on China because of
that country's large and rapidly growing need for telecommunications
services, requirement for foreign capital and technology to meet that need,
and the opportunity to obtain cash flow sharing and technical services
agreements with operators who hold exclusive or semi-exclusive
communications licenses. In its first three years, the Company's joint
venture operations have launched six cellular telephone networks with
38,000 subscribers in the northeastern province of Hebei, which has a
population of approximately 65 million people. The Company is using its
presence in China to expand to other telecom services and other Far East
markets. It has formed a joint venture with Fusion Telecommunictions
International to provide telecom services, both voice and data, to and
from Asia; has invested in IXS.NET, Inc. to provide fax services over the
Internet, prepaid credit cards and other Internet Protocol ("IP") based
services; and is expanding its joint venture in China to provide IP fax,
voice and other services which can be transmitted over digital telephone
lines or the Internet. Developing existing network interests in China and
expanding interests or joint ventures in communications networks in the Far
East are key components of the Company's future business strategy.
CHINA TELECOMMUNICATIONS MARKET
Through the Company's interest in cellular telephone networks in
Hebei Province and relationships that the Company has developed with key
policy makers and decision makers in Chinese governmental agencies, AmTec
has focused its business to capitalize on the growth of the Chinese
telecommunications market, which is among the world's largest, fastest
growing, and most under-serviced telecommunications markets. Due to the
importance of a well-developed communications infrastructure to China's
continuing economic development, the PRC government has targeted
communications network development as a high priority in the country's
economic reform program. It is expected that before the year 2000, China
will surpass the United States as both the largest cellular telephone and
cable television markets in the world, measured by number of users.
Since the establishment of China United Telecommunications,
Incorporated ("UNICOM") in 1994, China has had only two licensed
competitors for cellular, fixed wire and long-distance telephony. The cable
television market in China is a monopoly run by the Ministry of Information
Industry, which also regulates telecommunications in China. The Internet is
established in China and there are a large number of Internet service
providers licensed and operating in China. However, the quality of their
service is slow and while the industry is growing rapidly, it is still in
an early stage of development. While other communications markets in China
have experienced greater competition, most notably paging and value-added
services, communications licenses have generally been limited to a small
number of competitors relative to markets in the United States. The Company
believes that both the overall market size and the environment of limited
competition are attractive aspects of the Chinese communications market.
Although Chinese regulations currently prohibit direct foreign
ownership or operation of communications networks, the regulatory
environment has shown recent indications of continuing a policy of partial
deregulation. And while there can be no assurance that this policy of
partial deregulation will continue, the Company believes that it is
well-positioned to benefit from deregulation permitting direct foreign
ownership and operation of communications networks, if such deregulation
were to occur in the future. Similarly, the Company's announced IP Fax and
Internet telephony businesses are positioned to benefit from deregulation
throughout the Far East.
JOINT VENTURES IN CHINA
AmTec holds a 70% interest in Hebei United Telecommunications
Equipment Company Limited ("Hebei Equipment"), a joint venture with a
wholly-owned subsidiary of the Electronics Industry Department of Hebei
Province. Hebei Equipment, in turn, holds a 51% interest in Hebei United
Telecommunications Engineering Company Limited ("Hebei Engineering"), a
joint venture with NTT International ("NTTI") and Itochu Corp. The
Company's investments in Hebei Equipment and Hebei Engineering are
accounted for under the equity method. Hebei Equipment and Hebei
Engineering are both organized as Sino-foreign equity joint ventures
("SFJVs")under the laws of China and are headquartered in Shijiazhuang, the
capital of Hebei Province.
CELLULAR TELEPHONE NETWORKS
Currently, legal restrictions in China prohibit foreign
participation in the operation and ownership of communications networks.
Therefore, the Company has established majority ownership in joint ventures
with Chinese and other partners to provide financing, network construction
and operational consulting services to licensed Chinese network operators.
Hebei Engineering, entered into an agreement (the "UNICOM
Agreement") on February 9, 1996 with UNICOM to (i) finance and assist
UNICOM in the construction of cellular networks (the "GSM Networks" or "GSM
Project") in the ten largest cities in Hebei Province and (ii) provide
consulting and management support services to UNICOM in its operation of
the GSM Networks in the 10 largest cities of Hebei Province. This GSM
Project will have a capacity of up to 70,000 subscribers. The first of
these networks commenced operations in February 1997. Hebei Engineering has
been and continues to be entitled to 78% of the distributable cash flow
(defined as activation charges plus depreciation plus net income) from the
GSM Networks for a 15-year period commencing February 9, 1996.
The construction and operational plan for the GSM Networks consists
of a "roll-out" across Hebei Province on a city-by-city basis. As of June
20, 1999 six cities, were providing commercial service, with approximately
38,000 subscribers; construction in one additional city was substantially
completed, with a commercial launch date scheduled during 1999.
As of March 31, 1999, construction of the GSM Networks had been
financed by Hebei Engineering with $3 million of equity capital,
approximately $11 million of vendor financing guaranteed by NTTI, and a $20
million Term Loan facility from Bank of Tokyo Mitsubishi also guaranteed by
NTTI and Itochu. Of the $3 million of equity raised by Hebei Engineering,
$1.17 million was contributed by AmTec through its interest in Hebei
Equipment.
Realization of the Company's investment in its SFJVs is dependent
upon UNICOM's operation of the GSM Networks and the payback of outstanding
loans by Hebei Engineering, among other factors. The implementation of the
GSM Networks involves systems design, site procurement, construction,
electronics installation, initial systems optimization and receipt of
necessary permits and business licenses prior to commencing commercial
service. Each stage can involve various risks and contingencies, the
outcome of which cannot be predicted with a high degree of assurance as
interconnection of the GSM Networks with the public switched telephone
network is sometimes difficult and time consuming, and the successful
completion of all planned sites of the GSM Networks will be dependent, to a
significant degree, upon the ability of the parties to lease or acquire
sites for the location of their base station equipment. While no
difficulties have been encountered to date in procuring such sites, future
site acquisition cannot be assured.
COMPETITION
UNICOM currently faces competition from China Telecom, which has
substantially more experience in operating cellular telephone networks,
greater financial resources, scientific and marketing personnel and
facilities. China Telecom is the operating organization of the former
Ministry of Posts and Telecommunications ("MPT"), previously the
telecommunications policy setting and regulatory arm of the Chinese
government.
China Telecom has a dominant market share in all sectors of
telecommunications in China, and already has established a fixed-wire
network in the country. Formerly the MPT regulated and licensed all
telecommunications networks in China, including network access, and the
ability to make important regulatory decisions with respect to China
Telecom's competitors. Although the MPT has been abolished and succeeded by
the Ministry of Information Industry ("MII"), there can be no assurance
that the new regulatory structure for telecommunications operations in
China (i) will be more favorable to UNICOM or the Company or (ii) will not
be adverse to UNICOM's operations in Hebei. In addition, new competitors
may enter the market, including Code Division Multiple Access ("CDMA")
cellular service which has been offered by the People's Liberation Army and
China Telecom through their joint venture, Great Wall Communications Group
("Great Wall"). It is now reported that UNICOM may be licensed to provide
CDMA service some time in the future.
At present there are four small commercial CDMA cellular trial
networks being tested by Great Wall in China. None of these commercial
trial networks are in Hebei, but there can be no assurances in the future
that Great Wall will not enter the Hebei market.
CONSTRUCTION AND OPERATION OF TELECOMMUNICATIONS NETWORKS
The telecommunications networks in the PRC which the Company's joint
ventures are currently engaged in developing may experience difficulties
and delays relating to the construction and operation of such
telecommunications networks. While UNICOM has successfully commenced
commercial operation in six cities in Hebei, and has substantially
completed network construction in an additional city in Hebei, there can be
no assurance that this additional network will be completed and that
commercial operations in the seventh city will commence. Currently, Hebei
Engineering has no reason to believe that this additional network will not
commence commercial operations.
ADDITIONAL FUNDING OF JOINT VENTURE PROJECTS
At present, all network construction for a 40,000 subscriber
capacity network in seven cities in Hebei has been funded. Expansion of
network capacity from 40,000 subscribers to 70,000 subscribers will require
additional capital. Since the UNICOM Agreement contains no specified
deadline for expansion of the GSM Network to 70,000 subscribers, these
future capital requirements for the GSM Network will depend largely on the
market acceptance of the UNICOM GSM Network cellular service, among other
factors. The Company has no mandatory capital requirements to increase the
capacity from 40,000 to 70,000 subscribers. It is anticipated that debt or
equity contributions made by the Company and/or its partners to the joint
ventures, as well as potential investment from third parties, will be used
to increase the capacity of the GSM Network as required beyond 70,000
subscribers. (See LEGAL AND REGULATORY RISKS)
LEGAL & REGULATORY RISKS
The PRC's legal system is a civil law system based on written
statutes and is a system in which decided legal cases have little
precedential value. The PRC Government began to promulgate a comprehensive
system of laws in 1979. Many laws and regulations governing economic
matters in general have been promulgated. The general effect of this
legislation has been to enhance the protection afforded to foreign invested
enterprises in the PRC. However, as these laws and regulations are
relatively new, their interpretation and enforcement involve significant
uncertainty.
The current PRC regulations prohibit foreign investors and foreign
invested enterprises from operating or participating in the operation of
telecommunications networks in China. The relevant PRC laws and regulations
do not define what constitutes foreign operations or participation in
operations, and it is not clear what rights or actions would violate such
laws and regulations. Based on advice of its Chinese legal counsel,the
Company has structured its investments in China by establishing
Chinese-foreign joint ventures in the PRC to provide financing and
consultancy services to licensed telecommunications operators, i.e.,
utilizing the commonly-known Chinese-Chinese-Foreign ("CCF") structure. The
PRC Government is currently undertaking a review of the CCF structure used
by Unicom. It has been reported that Unicom has been instructed by the PRC
Government not to use the CCF structure in the future and that the PRC
Government is examining and evaluating the existing CCF contracts. It is
unclear if, and to what extent, the existing CCF contracts entered into by
Unicom will be required to be amended. It is also unclear whether foreign
entities involved in the CCF structures will be required to divest
themselves of all or part of their respective interests in the
Chinese-foreign joint venture companies. The evaluation of the CCF
structure by the PRC Government may have a material adverse impact on the
contracts entered into by Hebei Engineering and by the Company which
utilize the CCF structure and may have a material adverse effect on the
Company's business, financial condition and results of operations.
In order to provide a uniform regulatory framework to encourage the
orderly development of the PRC telecommunications industry, the PRC
authorities are currently preparing a draft Telecommunications Law. Once
formulated, the draft law will be submitted to the National People's
Congress for review and adoption. It is unclear if and when the
Telecommunications Law will be adopted. The nature and the scope of the
regulation envisaged by the Telecommunications Law is not fully known but
the Company believes that, if adopted, the Telecommunications Law will have
a positive effect on the overall development of the telecommunications
industry in the PRC. However, the Telecommunications Law, if adopted, may
have an adverse effect on the Company's business, financial condition or
results of operations.
The Chinese laws and regulations governing the telecommunications
industry may also be changed or applied in a manner which would have a
material adverse effect on the business, financial condition and results of
operations of the Company.
During the Spring of 1999, the PRC started negotiating accession to
the World Trade Organization ("WTO"). While there is no assurance that
China will join the World Trade Organization, all parties have publicly
expressed the intention of attempting to negotiate an agreement to be
concluded before the WTO ministerial in December 1999. And, the PRC has
confirmed that its proposed concessions to gain admission that were
published in the press were accurate. If the PRC were to join the WTO, the
Telecommunication Protocol of the WTO Agreement assures certain national
treatment of foreign investors in the telecommunications sector, including
minimum direct ownership percentages in licensed telecommunication
operators.
The PRC's pending application to the WTO, the evaluation of the CCF
structure by the government, the draft Telecommunications Law, which may be
substantially affected by a PRC agreement to join the WTO, plus the procedural
issues relating to the establishment of Hebei Equipment and its investment
in Hebei Engineering, create uncertainty. Resolution of these matters may
materially adversely affect the Company's current or future investments in
China and its provision of telecommunication services to China. The Company
believes that most, if not all, foreign telecommunications investors in the
CCF structure face similar uncertainties at this time, and are awaiting
resolution of these questions.
GOVERNMENT CONTROL OF CURRENCY CONVERSION AND EXCHANGE RATE RISKS
The PRC government imposes control over its foreign currency
reserves, in part through direct regulation of the conversion of Renminbi,
the legal tender currency of the PRC, into foreign exchange and through
restrictions on foreign trade.
UNICOM's revenues are denominated in Renminbi. The Company's joint
ventures will consequently receive almost all of their joint venture
distributions in Renminbi, which is freely convertible only for current
accounts. Approval of the State Administration of Foreign Exchange will be
needed under current regulations for conversion of Renminbi for foreign
currencies.
The Company believes that its SFJV will be able to obtain all
required approvals for the conversion and remittance abroad of foreign
currency. However, such approvals do not guarantee the availability of
foreign currency and no assurance can be given that the Company will be
able to convert sufficient amounts of foreign currencies in the PRC's
foreign exchange markets in the future at acceptable rates.
Although the Renminbi to US dollar exchange rate has been relatively
stable since January 1, 1994, there can be no assurance that exchange rates
will not again become volatile or that the Renminbi will not devalue
significantly against the US dollar.
During late 1997 and early 1998, there were a number of currency
devaluations in Asia and unstable and volatile capital markets and foreign
exchange markets. The PRC has not devalued the Renminbi. However, there can
be no assurances that the Renminbi will not be devalued in the future.
OTHER CONTRACTS AND PROJECTS
In addition to the GSM network projects mentioned above, the Company
has entered into other agreements with Hebei Province to develop and
finance telecommunications projects designated for foreign investment. (See
SUBSEQUENT EVENTS)
UIH TRANSACTION
On December 23, 1998, AmTec signed an agreement to acquire 100% of
the common stock of UIH Hunan from UIH China Holdings, a subsidiary of UIH
Asia/Pacific Communications, Inc., a subsidiary of United International
Holdings (doing business as UnitedGlobalCom) for consideration of $12
million, which shall consist of shares of Series F Preferred Stock
convertible into Common Stock at a price equal to the average closing price
of Common Stock during the ten trading days ending three days prior to the
closing of the United International Holdings transaction.
UIH Hunan holds a 49% interest in HITC, a joint venture in Hunan
Province (population 64 million) with a wholly-owned subsidiary of the
Hunan Broadcasting and Television Bureau, the provincial monopoly operator
of cable television in Hunan. HITC holds revenue sharing agreements with
the Hunan Broadcasting and Television Bureau in connection with a microwave
network that is currently transmitting four television channels to 255,000
cable television subscribers in seven cities in Hunan. Revenue sharing
payments made by the Hunan Broadcasting and Television Bureau to HITC are
based on the number of channels transmitted, the number of subscribers
reached and the level of advertising revenues generated.
The consummation of this transaction with UIH China Holdings is
subject to various conditions, including receipt of necessary governmental
approvals and other customary closing conditions. In addition, under the
American Stock Exchange guidelines the Company will be required to obtain
shareholder approval for the number of Common Stock related to this
issuance that is in excess of 19.9% of the Common Stock outstanding on the
date of issuance. Once all of the conditions in China necessary for the
consummation of the transaction are completed, the Company's shareholders
will be asked to approve the necessary increase in the shares to be issued to
UIH Asia/Pacific Communications. At present, UIH is working to complete the
pre-closing conditions in China, including necessary governmental
approvals. The successful completion of this merger is subject to final due
diligence and shareholder approval, among other conditions.
GLOBAL TELESYSTEMS TRANSACTION.
On August 26, 1998, AmTec signed an agreement to acquire a 75%
interest in Shanghai V-Tech Telecom from SFMT-China for consideration of
5,925,357 Shares, valued by AmTec and SFMT-China at $1.35 per Share.
SFMT-China is a subsidiary of Global TeleSystems, Inc. ("GTS").
Shanghai V-Tech Telecom is a joint venture with SSTIC, a Chinese
investment company based in Shanghai. SSTIC holds ownership interest in
numerous telecommunications and technology companies located in Shanghai.
These interests are in networks providing VSAT services, frame relay
services, and data networking for closed user groups not interconnected to
the Publicly Switched Telephone Network ("PSTN"). Shanghai V-Tech Telecom's
revenues will be derived primarily from profit-sharing and revenue-sharing
arrangements.
The consummation of this transaction with GTS is subject to various
conditions, including receipt of necessary governmental approvals and other
customary closing conditions. In addition, under the American Stock
Exchange guidelines the Company will be required to obtain shareholder
approval for the number of shares related to this issuance that is in
excess of 19.9% of the Common Stock outstanding on the date of issuance.
Once all of the conditions in China necessary for the consummation of the
transaction are completed, the Company's shareholders will be asked to
approve the necessary increase in the shares to be issued to SFMT-China. At
present, SFMT-China and GTS are working to complete the pre-closing
conditions in China, including obtaining the necessary governmental
approvals. The successful completion of this merger is subject to final due
diligence and shareholder approval, among other conditions.
OTHER
The Company is also considering several other opportunities in
telecommunications network development and provision of IP based value
added fax and telephony services in China and the Far East. The Company has
begun to focus on these IP service opportunities as the telecommunications
market in China has developed over the last two years. (See SUBSEQUENT
EVENTS.)
EMPLOYEES
As of June 20, 1999, the Company had 13 full time employees in New
York and China.
The Company employs a policy of staffing and managing its
joint-venture subsidiaries and hiring PRC nationals for its China
operations. As of June 20, 1999, the Company's subsidiary Hebei Equipment
had 6 employees. Additionally, Hebei Engineering had 17 employees as of the
same date. It is the intention of the Company to add employees to its
Chinese and Far Eastern subsidiaries and joint ventures for operational
purposes.
The Company's employees are not represented by a labor union and are
not covered by a collective bargaining agreement. The Company believes that
its relations with its employees are good.
SUBSEQUENT EVENTS
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
On April 28, 1999, the Company formed a 50-50% joint venture,
IP.TEL, LLC with Fusion Telecommunications International, Inc. ("Fusion"),
a private facilities-based, multinational long-distance company. Fusion's
current service offerings include voice and data, switched and dedicated,
domestic and international long-distance and domestic and international
prepaid calling cards, provided through a network of owned and leased
facilities, leased lines and resale agreements.
The joint venture will provide value-added telecommunication
services, including telephony and data, to and from Asia. Utilizing the
Company's established presence in China and Fusion's telecommunication
franchise, the companies plan to expand the service offerings of the joint
venture to include a fully integrated Internet protocol based network to
provide voice and fax services. The joint venture agreement includes
language that gives both parties the right of first refusal regarding
projects in China within the scope of IP.TEL, LLC's business proposition.
IXS.NET, INC.
During May 1999, the Company formed a three-way alliance with Fusion
and IXS.NET, a private IP fax service provider, to develop IP fax services in
Asia. The Company and Fusion agreed to make an equal convertible debt
investment into IXS.NET and the Company has an option to acquire up to 50%
of IXS.NET. The Company has invested $175,000 under a loan agreement to
IXS.NET and expects to enter into an eighteen months convertible debt
agreement shortly. The convertible debt agreement will allow for the
Company to advance up to $575,000 over the eighteen months period, subject
to certain terms and conditions. The business is in the process of starting
up in Hebei Province as per an arrangement with Hebei Equipment. During the
next quarter, the Company anticipates obtaining licenses to expand the
service in Sichuan, Beijing, Tanjain and other provinces in China.
The IXS.NET business equips a local business with a modem that
transfers international fax calls through a local phone call on the PSTN to
an Internet node in the city of origin, then transmits the fax on the
Internet internationally to the city of destination, converts the fax call
to a local telephone call in the city of destination on city's PSTN which
is transmitted to the destination fax telephone number. This model saves
the standard international telephone phone call charges, which are very
expensive to and from China. This business model can result in a
significant savings to any business that faxes internationally on a regular
basis. There are other competitors offering similar or essentially the same
service in China and there can be no assurance that the Hebei
Equipment-IXS.NET joint venture will be profitable.
According to the International Data Corporation, the Asia/Pacific
Rim will lead the global Internet fax market with a 169% compound annual
growth rate, boosting regional volume from approximately 350 million
minutes in 1999 to an estimated 4.3 billion minutes in 2002. In the
Internet Fax arena, China is already the leading national market and is
forecasted to supplant Japan as the new leader in overall Asian fax
traffic. Traditional faxing remains very expensive because deregulation and
competition has yet to eliminate high long-distance phone rates. The
IXS.NET joint venture allows the Company to capitalize on this opportunity.
MANAGEMENT
The Company, as of June 30, 1999, promoted R.T. McNamar as President
and Chief Operating Officer and Mr. Wilfred Chow as Controller/Treasurer.
Ms. Karin-Joyce Tjon was promoted to Vice President Finance. Concurrently,
the Company's Chief Financial Officer, Albert G. Pastino, resigned on a
fulltime basis, but will remain involved in the Company's business as a
consultant.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This document contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company's management as well as assumptions made by and information
currently available to the Company's management. When used in this
document, the words "anticipate," "believe," "estimate," "expect," "going
forward" and similar expressions, as they relate to the Company or Company
management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
described in this Form 10-K. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein
as anticipated, believed, estimated or expected. The Company does not
intend to update these forward-looking statements.
ITEM 2. PROPERTIES
The Company leases a 7,600 square foot office located at 599
Lexington Avenue, 44th Floor, New York, New York 10022. The facility serves
as the Company's principal executive offices. The Company pays an annual
rent of $334,400 on a lease which expires in May 2000. The Company has
obtained an option to extend the lease for an additional five year term
based on the fair market value of the leased premises at or about the time
of the expiration of the initial term of the lease.
ITEM 3. LEGAL PROCEEDINGS
A first amended complaint, dated April 15, 1996, was filed against
the Company, ITV Communications, Inc., a subsidiary of the Company ("ITV"),
and other parties, including certain of the Company's officers, directors
and principal stockholders, by Jacqueline Brandwynne, a stockholder of the
Company, in a matter captioned "Jacqueline B. Brandwynne vs. AVIC Group
International, Inc., et al," civil action number BC145036. The complaint,
filed in the Superior Court of California, County of Los Angeles, alleges
fraud, misrepresentation and breach of contract with respect to the sale of
666,667 shares of ITV stock for $1,000,000 prior to the completion of the
Reorganization Agreement between the Company and ITV (the "Reorganization
Agreement") in February 1995, in connection with which the shares of ITV
were exchanged on a two for one basis for shares of the Company. The
complaint alleges that certain misrepresentations were made in connection
with the sale of the 666,667 shares and that the claimant was entitled to
receive 666,667 shares of the Company after the completion of the
Reorganization Agreement. The complaint seeks rescission of the transaction
and damages of no less than $1,000,000. The complaint also alleges a claim
in connection with an alleged oral employment agreement for 125,000 options
to purchase shares of the Company's Common Stock at an exercise price of
$0.35 per share and the right to purchase additional shares of Common Stock
at $1.00 per share, plus other benefits, including a salary of no less than
$130,000. Management of the Company believes that these claims are without
merit, that there are valid defenses to each claim and is in the process of
vigorously defending the matter. The Company is represented by the law firm
of Matthias & Berg LLP, 515 South Flower Street, Seventh Floor, Los
Angeles, California 90071, on this matter.
As of June 18, 1999, the Company and Jacqueline B. Brandwynne have
reached a settlement in principle of the legal proceedings. Subject to
documentation and signing of the final agreement, the parties have agreed
to release each other from all claims. The Company has agreed to pay Ms.
Brandwynne $250,000 in AmTec Common Stock, which includes her claim for
attorney's fees. Such amount has been reserved for as of March 31, 1999.
While the management of the Company believes that these claims are without
merit, and that there are valid defenses to each claim, management believes
it is in the best interest of the Company to settle the litigation,
eliminate any possible liability exposure, and avoid additional legal fees
to defend the litigation.
The Company is not aware of any pending litigation that could have a
material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the
quarter ended March 31, 1999.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 31, 1999, the authorized capital stock of the Company
consisted of 100,000,000 shares of common stock, par value $0.001 per share
(the "Common Stock"), and 10,000,000 shares of preferred stock, par value
$0.001 per share (the "Preferred Stock"). As of March 31, 1999, there were
issued and outstanding 30,736,721 shares of Common Stock, options to
purchase 9,987,602 shares of Common Stock, 29.764 shares of Series E
Convertible Preferred Stock, 20 shares of Series G Convertible Preferred
Stock. Further, there were issued and outstanding warrants to purchase
4,196,514 shares of Common Stock. As of March 31, 1999, there were
approximately 2,362 holders of record of the Common Stock.
The Company's Common Stock was originally listed for trading in the
over-the-counter market on March 4, 1996 under the name AVIC Group
International, Inc. and was quoted on the NASDAQ Bulletin Board or in the
"pink sheets" maintained by the National Quotation Bureau, Inc. under the
symbol "AVIC." The Company changed its listing on November 20, 1996, when
its Common Stock was approved for listing on the American Stock Exchange
under the ticker symbol "AVI." On July 8, 1997, the Company changed its
name to AmTec, Inc. and it currently trades on the American Stock Exchange
under the symbol "ATC". The high and low sales prices of the Common Stock,
as quoted on the American Stock Exchange, on June 25, 1999 were $1.1250 and
$1.0625, respectively.
No dividend has been declared or paid by the Company on its shares
of Common Stock since its inception. The payment of dividends by the
Company on its shares of Common Stock is within the discretion of the
Company's Board of Directors and will depend on the earnings, capital
requirements, restrictions in any future credit agreements and operating
and financial condition of the Company, among other factors. Except for
dividends which may be payable on and according to the terms of shares of
Preferred Stock, which may be issued from time to time, the Company does
not anticipate that any dividends will be declared or paid in the future.
There can be no assurance that the Company will ever pay a dividend on its
shares of Common Stock.
The following table sets forth for the period indicated the high and
low sales price of the Company's Common Stock as reported on the American
Stock Exchange.
1998 1999
COMMON 1ST Q 2ND Q 3RD Q 4TH Q 1ST Q 2ND Q 3RD Q 4TH Q
----- ----- ----- ----- ----- ----- ----- -----
STOCK PRICE
High $5.1875 $3.4375 $2.4375 $1.1875 $2.2500 $1.3750 $1.1250 $1.6250
Low $2.8125 $1.8125 $0.5000 $0.5625 $1.1875 $0.8750 $0.8125 $0.9375
High and low sales price as reported on the American Stock Exchange.
The transfer agent for the Company is Chasemellon Shareholder
Services, LLC, 450 West 33rd Street, New York, New York, 10001. Its
telephone number is (800) 851-9677.
CERTAIN SALES OF UNREGISTERED SECURITIES
On March 16, 1999 the Company completed the sale of 20 shares of its
Series G Convertible Preferred Stock (the "Series G Stock" or "Series G
Shares") for proceeds of $2,000,000.
The Series G Shares were sold pursuant to Reg. D at $100,000 per
share and the holders of the Series G Stock have no rights to cash
dividends but are entitled to an 8% in-kind dividend. Conversion of the
Series G Shares into Common Stock is based on $1.25 (the closing price of
the Company's Common Stock on the last business day immediately preceding
the closing of the transaction). In addition to the shares, warrants were
issued to the Series G Investors to purchase 600,000 shares of the
Company's Common Stock at an exercise price of $1.25. Holders of the Series
G Shares also have a registration right requiring the Company to file a
registration statement covering the Common Stock underlying the Series G
Preferred Shares and related warrants with the Securities and Exchange
Commission (the "SEC") no later than August 2, 1999.
The Series G Shares have a stated liquidation preference value of
$100,000 per share plus an 8% accrued in-kind dividend since the date of
issuance, and is senior to all common stock. The holders of the Series G
Shares have no voting rights except with respect to certain matters that
affect the rights related to the Series G Shares.
ITEM 6. SELECTED FINANCIAL DATA
The Company has focused its business solely on establishing
Sino-foreign joint ventures to develop telecommunications networks in the
PRC, following the sale of the assets of its subsidiary ITV Communications,
Inc. in January 1996. Accordingly, the following historical financial data
is not necessarily indicative of future results of operations. The selected
financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net Sales $ -0- $ -0- $ -0- $ -0- $ 345,276
Loss from continuing
operations (4,649,770) (4,282,613) (3,563,568) (3,380,633) -0-
Loss from discontinued
operations -0- -0- -0- (1,932,977) (5,585,596)
Gain on sale of
discontinued
operations -0- -0- -0- 31,888 -0-
Net Loss (5,579,444) (5,403,368) (4,064,885) (5,281,730) (5,538,303)
Loss from continuing
operation per
common share (0.23) (0.23) (0.14) (0.13) -0-
Loss from discontinued
operation per
common share -0- -0- -0- (0.08) (0.32)
Basic Loss per common
share (0.23) (0.23) (0.14) (0.21) (0.32)
Total Assets 4,781,085 7,683,358 4,004,966 1,660,000 3,267,488
Shareholders' Equity
(Deficit) 3,813,342 4,896,911 548,088 (2,421,606) (1,255,412)
Financial information for the years 1995 and 1996, is not comparable
to the financial information provided for 1997, 1998 and 1999, because
prior to 1997 the Company was not engaged in the development of
telecommunications networks in the PRC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company had previously consolidated the revenues and expenses of
its Sino-foreign joint venture subsidiary Hebei Equipment and its
Sino-foreign joint venture subsidiary Hebei Engineering. The Company is now
accounting for such subsidiaries under the equity method of accounting. The
Company's share of Hebei Equipment's net loss is reported on one line in
its income statement and its investment is reported on one line the balance
sheet as "Investments in and Advances to Unconsolidated Subsidiary". The
Company has filed an amended Form 10-K/A for the year ended March 31, 1998
to reflect this change.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through equity
investments.
Approximately $3,737,000 of cash was used in the Company's
operations for the fiscal year ended March 31, 1999, compared to cash used
of approximately $3,924,000 for the year ended March 31, 1998. The cash
flow from operating activities decreased primarily due to cost control over
selling, general & administrative expenses. During the fiscal year ended
March 31, 1997, the Company used approximately $3,382,000 in its operating
activities.
The Company used approximately $13,000 in its investing activities
in the year ended March 31, 1999, compared to approximately $390,000 in the
year ended March 31, 1998. The decrease in investing activities is related
primarily to the fact that no additional investment was made by the Company
to its subsidiaries in Hebei province, PRC.
The cash inflows from financing activities during the year ended
March 31, 1999 were generated primarily from the repayment of an advance to
Hebei Equipment of $2,200,000 and the offering of 20 shares of Series G
Convertible Preferred Stock for a consideration of $2,000,000.
The Company wrote off its Notes Payable to Shareholders for
approximately $2.3 million, including accrued interest.
During the year ended March 31, 1998, the Company made two offerings
(1) On June 12, 1997, the Company issued 250 shares of Series C Convertible
Preferred Stock at a purchase price of $10,000 per share in consideration
of $2,500,000. Proceeds from this offering were approximately $2,093,900,
which is net of $406,100 of the Series C Shares which were repurchased by
the Company. (2) On October 22, 1997, the Company issued 74 shares of the
Company's Series E Convertible Preferred Stock, at a purchase price of
$100,000 per share, for which the Company received $6,759,000 after
placement agent's fees.
During fiscal year ended March 31, 1997, the Company issued 150
shares of the Company's Series D Convertible Preferred Stock at a purchase
price of $10,000 per share in consideration of $1,500,000.
The Company anticipates that its cash and cash equivalents should be
adequate to finance the Company's operating requirements for the current
fiscal year.
EQUITY ISSUANCE AND SERVICE AGREEMENTS
Common Stock issued in connection with conversion of Preferred Stock:
During fiscal 1999, the Company issued 5,554,424 shares of its
Common Stock upon conversion of 40.356 outstanding shares of the Company's
Series E Convertible Preferred Shares.
Common stock issued in connection with stock option plans and
services performed:
During fiscal 1999 the Company did not issue any common stock in
connection with stock option plans. In connection with services performed,
the Company issued 85,000 options to members of its Board of Directors.
During fiscal 1998 the Company issued (i) 10,000 shares of common
stock to a former employee of the Company, upon the exercise of an option
issued pursuant to the Company's 1996 Stock Option Plan. The option had an
exercise price of $0.35 per share, (ii) 10,000 shares of common stock were
issued to each of its four outside directors as compensation for services.
The shares issued had a combined value of $85,000, which was expensed as
directors compensation, (iii) 8,500 shares of its common stock were issued
at market to its legal firm in lieu of $25,500 of legal billings, and (iv)
14,734 shares issued in connection with other services at a market value of
$41,457.
During fiscal 1998, the Company issued 1,019,465 shares of its
Common Stock, net of cancellation, into escrow for Promethean Investment
Group, LLC ("Promethean") pursuant to a Common Stock Investment Agreement
entered into between the Company and Promethean. The shares would have been
issued to Promethean if the Company drew on funds from Promethean pursuant
to the Common Stock Investment Agreement. This agreement was subsequently
cancelled during fiscal 1999.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1999 AND MARCH 31, 1998
The Company's indirect subsidiary, Hebei Engineering, recorded
revenues of RmB 6,488,482 (approximately $811,000) for the year ended
December 31, 1998, and RmB 1,706,499 (approximately $213,000) for the year
ended December 31, 1997. (See Page F-34). The Company has no revenues on
its consolidated financial statements because the results of operations of
the Company's subsidiary Hebei Equipment were accounted for under the equity
method of accounting. The Company recorded only its share of losses of its
unconsolidated subsidiary according to the percentage of its equity
interest. The Company had net losses of $5,579,444 and $5,403,368 during
the fiscal years ended March 31, 1999 and 1998, respectively.
Selling, general and administrative expenses ("SG&A") increased from
$4,282,613 during the year ended March 31, 1998, to $4,649,770 during the
year ended March 31, 1999, due to increases in salaries, and legal and
professional expenses incurred during the past year.
The equity in losses of the Company's unconsolidated subsidiary of
$606,647 recorded during the year ended March 31, 1998 and $385,139 during
the year ended March 31, 1999 represents the Company's share of losses
reported by Hebei Equipment for the year ended December 31, 1997 and
December 31, 1998, during which period the Company owned a 60.8% and a
70.0% equity interest respectively of Hebei Equipment.
Amortization of stock options granted to non employees was related
to the three million options issued to the Hebei Provincial Government to
purchase an equal number of shares of the Company's Common Stock at a price
of $3.0625 per share. In accordance with Generally Accepted Accounting
Principles, the Company recorded their estimated value of $1,837,500 during
the year ended March 31, 1998, and amortized approximately $459,000 during
each of the years ended March 31, 1998 and 1999. The amortization of these
options is a non-cash expense. The options were cancelled as of December
31, 1998.
Other expense of approximately $85,000 was primarily franchise and
other tax paid during the year ended March 31, 1999. The Company received a
tax refund of approximately $70,000 during the year ended March 31, 1998.
The Company's loss applicable to common shareholders decreased 9%
from $6,802,054 during the year ended March 31, 1998, to $6,251,901 during
the year ended March 31, 1999. This decrease in loss applicable to common
shares was primarily due to a decrease in the recognition of Preferred
Stock Dividends as well as a decrease in the share of equity loss from
Hebei Equipment, offset by increases in selling, general & administrative
expenses.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 31, 1997
The Company has experienced net losses of $5,403,368 and $4,064,885
during the fiscal years ended March 31, 1998 and 1997, respectively.
Selling, general and administrative expenses increased from
$3,563,568 during the year ended March 31, 1997, to $4,282,613 during the
year ended March 31, 1998, due to increased levels of salaries paid to
employees and legal and professional expenses incurred during the past
year.
The equity in losses of the Company's unconsolidated subsidiary of
$140,526 recorded during the year ended March 31, 1997 and $606,647 during
the year ended March 31, 1998 represents the Company's share of losses
reported by Hebei Equipment for the year ended December 31, 1996 and
December 31, 1997, during which period the Company owned a sixty point
eight percent (60.8%) equity interest Hebei Equipment.
The Company issued to the Hebei Provincial Government three million
options to purchase an equal number of shares of the Company's Common Stock
at a price of $3.0625 per share. In accordance with Generally Accepted
Accounting Principles, the Company has recorded their value of $1,837,500
and has amortized approximately $459,000. The issuance of these options is
a non-cash expense.
Loss from abandoned assets relates to the assets of Netmatics which
have been written off for the total amount of $87,441.
Interest expense during the year ended March 31, 1998, decreased to
approximately $125,000 from approximately $129,000 during the year ended
March 31, 1997, due to a reduction in the outstanding balance of
shareholder loans payable.
Other income (net) of approximately $70,000 during the year ending
March 31, 1998 was related to a tax refund previously paid.
The Company's net loss increased 33% from $4,064,885 during the year
ended March 31, 1997, to $5,403,368 during the year ended March 31, 1998.
This increase in net loss was primarily due to the share of equity loss
from Hebei Equipment, amortization of stock options issued to the Hebei
Provincial Government, as well as increases in selling, general &
administrative expenses.
IMPACT OF THE YEAR 2000
The "Year 2000" problem is the result of computer programs being
written using two digits, rather than four digits, to define the applicable
year. Any of the programs used in the Company's operations that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Company has previously instituted a thorough
program to identify these computer programs and modify or replace its key
financial information and operational systems so that they will function
properly in the year 2000. Remaining financial and operational systems have
been assessed, and detailed plans have been developed and are being
implemented to make the necessary modifications to ensure Year 2000
compliance. The financial impact of making the required system changes for
Year 2000 compliance are not expected to have any material effect on the
Company's financial statements.
However, even as the Company's assessment is completed without
identifying any material non-compliant systems operated by, or in the
control of, the Company, or of third parties, the most reasonable likely
worse case scenario would be a systems failure beyond the control of the
Company to remedy. Such a failure could materially prevent the Company from
operating its business. The Company believes that such a failure could lead
to lost revenues, increased operating cost, or other business interruptions
of a material nature.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments and hedging
activities. Generally, it requires that an entity recognizes all derivatives
as either an asset or liability and measures those instruments at fair
value, as well as identifies the conditions for which a derivative may be
specifically designed as a hedge. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. Management is currently addressing the
financial reporting measures that will be needed in order to comply with
this disclosure. The Company has not participated in any hedging activities
in connection with foreign currency exposure.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The Company has not entered into any financial instruments for
trading or hedging purposes.
The Company is not exposed to fluctuations in foreign currencies
relative to the U.S. dollar, as its revenues, costs, assets and liabilities
are, for the most part, denominated in local currencies. The results of
operations of the Company's subsidiaries were as reported in their local
currencies.
The Company's carrying value of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses is a reasonable
approximation of their fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements required by this Item 8 are attached hereto
as "Exhibit (a)(1)".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
The directors of the Company currently have terms which will end at
the next annual meeting of the stockholders of the Company or until their
successors are elected and qualified, subject to their prior death,
resignation or removal. Officers are appointed by and serve at the
discretion of the Board of Directors, subject to the rights of the officers
under their respective employment agreements. There are no family
relationships among any of the Company's directors and executive officers.
NAME AGE POSITION
---- --- --------
Joseph R. Wright, Jr. 60 Chairman of the Board of Directors,
Chief Executive Officer and President
Richard T. McNamar 60 Vice Chairman of the Board of Directors
Richard S. Braddock 57 Director
Marvin S. Rosen 58 Director
James R. Lilley 71 Director
Michael H. Wilson 61 Director
Michael J. Lim 34 Executive Vice President
Albert G. Pastino 56 Senior Vice President, Chief Financial
Officer and Treasurer
James F. O'Brien 52 Senior Vice President, General Counsel
and Corporate Secretary
Xiao Jun 41 Executive Vice President - AVIC China
Joseph R. Wright, Jr. has served as the Company's Chairman of the
Board of Directors since May 1995, Chief Executive Officer since March 1996
and President since May 1996. Mr. Wright also serves as Chairman and member
of the Board of GRC International, Inc. a U.S. public company that provides
technical information technology support to government and private
entities, Co-Chairman of Baker & Taylor Holdings, Inc., an international
book and video distribution company, and a member of the Board of PanAm
Sat, the largest private satellite operator. From 1989 to 1994, Mr. Wright
served as Executive Vice President, Vice Chairman and Director of W. R.
Grace & Co., an international chemicals and health care company, President
of Grace Energy Corporation and Chairman of Grace Environmental Company.
From 1982 to 1989, Mr. Wright held the positions of Director and Deputy
Director of the Office of Management and Budget, The White House, and was a
member of President Reagan's cabinet. Prior to 1982, he served as Deputy
Secretary, United States Department of Commerce, President of Citicorp
Retail Services and Retail Consumer Services, held posts in the United
States Department of Agriculture and the United States Department of
Commerce, and was Vice President and Partner of Booz Allen & Hamilton, a
management consulting firm. He is a former member of the President's Export
Council and a former member of the Board of Directors of Travelers;
Harcourt Brace Janovich; and Hampton University.
Richard T. McNamar, prior to serving as President and Chief Operating
Officer, served as the Company's Vice Chairman of the Board of
Directors since September 1996. He was the founder and Chairman of
International Franchise, Inc., a firm that specialized in international
financial transactions, from 1995 to 1997. He was a Managing Director of
Oppenheimer & Co. from 1991 to 1994. Formerly, he was the Vice-Chairman of
The Bank of New England Corporation and subsidiaries from 1990 to 1991. Mr.
McNamar served as Deputy Secretary of the United States Treasury from 1981
to 1985. He served in the Nixon and Ford Administrations from 1972 to 1977,
where he served as the Executive Director of the Federal Trade Commission
from 1973 through 1977. Mr. McNamar is also currently a member of the
Executive Board of the Bretton Woods Committee, the Board of the Institute
of the Americas, and a member of Home EquiVest, LLC..
Richard S. Braddock has served as a Director of the Company since
August 1997. He is Chairman and Chief Executive Officer of priceline.com, a
position he has held since August of 1998. He has served as the Chairman of
True North Communications, Inc. (a public company) from December 1997 to
January 1999. He has served as a principal of Clayton, Dubilier & Rice,
Inc. from 1994 to 1995 and as the Chief Executive Officer of Medco
Containment Services from January 1993 to December 1993. Mr. Braddock held
various positions at Citicorp from 1973 through 1992 including that of
President and Chief Operating Officer of Citicorp and its principal
subsidiary, Citibank, N.A., from January 1990 to November 1992 and as
sector executive for worldwide consumer activities from 1985 to 1990. Mr.
Braddock served as a director of Citicorp from 1985 to 1992. Mr. Braddock
serves on the Board of Directors of E*Trade Group, Inc., Eastman Kodak
Company, Cadbury Schweppes plc adr, and priceline.com, all publicly-held
companies; and NewSub Services, Inc., Prime Response Ltd. and Walker
Digital, all private companies; and of Lincoln Center for the Performing
Arts. He is a trustee of the Cancer Research Institute. Mr. Braddock
received his bachelors degree from Dartmouth College and his M.B.A from the
Harvard Graduate School of Business Administration.
James R. Lilley has served as a Director of the Company since May
1997. Ambassador Lilley is currently a resident director at the American
Enterprise Institute ("AEI") which he joined in January 1993, and has
directed the Institute for Global Chinese Affairs at the University of
Maryland since 1996. Prior to his joining AEI, Ambassador Lilley served in
President Bush's Administration as the Assistant Secretary of Defense for
International Security Affairs from November 1991 to January 1993.
Ambassador Lilley was U.S. Ambassador to the People's Republic of China
from April 1989 to May 1991, and to the Republic of Korea from 1986 to
1989. Ambassador Lilley is the co-editor of Beyond MFN: Trade with China
and American Interests and is the author of the forward for the AEI
publication, Chinese Military Modernization. He has represented Hunt Oil of
Texas and United Technologies of Hartford, Connecticut in 1979 to 1980.
Ambassador Lilley worked for Archer-Daniels-Midland Co. and Westinghouse as
a business consultant.
Michael H. Wilson has served as a Director of the Company since May
1997. He has been Vice-Chairman of RBC Dominion Securities, Inc. in
Toronto, Canada since 1995. Prior to 1994, Mr. Wilson held senior Federal
Cabinet posts with the Government of Canada in Finance, Industry, Science
and Technology and International Trade. Mr. Wilson serves on the Board of
Directors of BP Amoco plc, Manufacturers Life Insurance Company and Rio
Algom Limited. He is also active in a number of professional and community
organizations in Canada and the United States.
Marvin S. Rosen has served as Director of the Company since March
1999. Mr. Rosen is a Principal Shareholder and Member of the Executive
Committee of Greenberg Traurig, P.A., a national law firm. From September
1995 through January 1997, Mr. Rosen served as the Finance Chairman of the
Democratic National Committee. Mr. Rosen currently serves on the Board of
Directors of the Children's Health Fund (New York City) (since 1994), the
Robert F. Kennedy Memorial (since 1995), Bio-Medical Disposal, Inc. (since
1998) and Fusion Telecommunications International (since 1997), where he
has also been Vice-Chairman since December 1998. Mr. Rosen received his
B.S. in Commerce from the University of Virginia, his LL.B. from Dickinson
School of Law and his LL.M. in Corporations from New York University Law
School.
Michael J. Lim has served as the Executive Vice President of the
Company since November 1995 and as the Chief Financial Officer from May
1996 through June 1997. Prior to his joining the Company, Mr. Lim was an
investment banker with Bear, Stearns & Co., Inc. from 1986 to 1988 and from
1991 to 1995. During the two and a half years prior to his joining the
Company, Mr. Lim served as Vice President of Bear Stearns Asia Limited,
where he advised Asian enterprises on a wide variety of financing
transactions, with particular focus on telecommunications and
infrastructure financings. Mr. Lim also worked as an investment banker with
the Chase Manhattan Bank from 1990 to 1991. Mr. Lim received his A.B. from
Harvard College in English Literature in 1985 and his M.B.A. from the Amos
Tuck School of Business Administration at Dartmouth in 1990. Mr. Lim
resigned from the Company as of June 30, 1999.
Albert G. Pastino was appointed in June 1997 to serve as a Senior
Vice President and Chief Financial Officer of the Company and was appointed
Treasurer of the Company in December 1997. From 1993 to 1997, Mr. Pastino
served as the President of Kisco Capital Company, Inc., an affiliate of
Kohlberg & Company, a private equity investment company. He also served on
the boards of directors of a number of Kohlberg & Company's portfolio
companies. From 1989 through 1992, Mr. Pastino served as Senior Vice
President and Chief Operating Officer of Fortis Private Capital, Inc., a
private equity investment company investing in expansion financing and
management buyouts. Mr. Pastino began his business career at Deloitte &
Touche LLP where he served as partner, and gained his investment banking
experience at Alex Brown & Sons, Incorporated. Mr. Pastino received an
M.B.A. from Fairleigh Dikinson University and a B.S. from St. Joseph's
University. Mr. Pastino resigned from the Company on a fulltime basis as of
June 30, 1999, and will remain a Consultant to the Company.
James F. O'Brien was appointed in June 1997 to serve as a Senior
Vice President and General Counsel of the Company and was appointed
Corporate Secretary of the Company in May 1998. Mr. O'Brien was a senior
litigation partner at the law firm of Goulston and Storrs in Boston,
Massachusetts where he founded the litigation practice in 1978 and
specialized in complex financial transactions. He has served as an advisor
to U.S. corporations seeking business opportunities in Southeast Asia. Mr.
O'Brien received a J.D. from Boston College Law School and an A.B. from St.
John's Seminary in Boston. Mr. O'Brien resigned from the Company as of
March 31, 1999.
Xiao Jun has served as Executive Vice President - AVIC China since
December 1995. He also served as a Director from February 1995 through
October 1997, the Company's Secretary from February 1995 to January 1996
and as Chief Financial Officer from June 1995 to May 1996. He has been the
President of Xiao Hua International, Inc., an international steel trading
business based in California since June 1993. He served as the Vice
President of ITV from December 1994 to January 1996. From March 1990 to May
1993, Mr. Xiao was the Vice President of Chong Qing Special Metals Industry
Co. From 1985 to 1990, Mr. Xiao served as an engineer and project manager
at the representative office of IBM China/HK Corp. (Beijing). Mr. Xiao
received a bachelor's degree in physics from the Beijing Polytechnic
University in 1982.
The Board of Directors currently has an Audit Committee and a
Compensation Committee. The members appointed to the Audit Committee of the
Board of Directors during the fiscal year ended March 31, 1999 were Michael
H. Wilson, Chairman of the Committee, James R. Lilley and Richard T.
McNamar. The members appointed to the Compensation Committee of the Board
of Directors during the fiscal year ended March 31, 1998, as of the most
recent shareholder meeting, were Richard S. Braddock, Chairman of the
Committee, Drew Lewis and Joseph R. Wright, Jr. Mr. Lewis resigned from the
Board of Directors and the Compensation Committee during the quarter ending
December 1998.
Section 16(a) Beneficial Ownership Reporting Compliance. Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers and beneficial holders of more
than 10% of any class of the Company's equity securities to file with the
Commission initial reports of ownership and reports of changes in ownership
of such equity securities of the Company. Based solely upon a review of
such forms furnished to the Company, and on written representations from
certain reporting persons that no other reports were required for such
persons, the Company believes that all reports required pursuant to Section
16(a) with respect to its executive officers, directors and 10% beneficial
stockholders for the fiscal year ended March 31, 1999 were timely filed.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following tables set forth certain information concerning
compensation for the fiscal years ended March 31, 1999, 1998 and 1997 of
certain of the Company's executive officers, including the Company's Chief
Executive Officer and all executive officers whose total annual salary and
bonus exceeded $100,000, for the fiscal year ended March 31, 1998 (the
"Named Executive Offices").
Long Term
Compensation
---------------------
Annual Compensation Awards
--------------------------------------------- ---------------------
Name and Other Annual Stock Options/
Principal Position Year Salary ($) Bonus ($) Compensation Awards ($) SARS (#)
- ------------------ ----- ----------------------- ------------- ----------- ---------
Joseph R. Wright 1999 483,333 (2)$35,000
Chief Executive 1998 392,967 50,000 (2)$30,000
Officer(1) 1997 256,250 (2)$30,000 $281,250 3,000,000
R. T. McNamar 1999 100,000
Vice Chairman (3) 1998 100,000 (4)$37,500
1997 500,000
Michael J. Lim 1999 307,500 50,000
Executive Vice 1998 253,417 75,000 250,000
President (5) 1997 167,333
Albert G, Pastino 1999 205,000 30,000
Senior Vice 1998 125,000 50,000 467,500
President, Chief 1997
Financial Officer &
Treasurer (6)
James F. O'Brien 1999 222,916
Senior Vice 1998 125,000 50,000 467,500
President, General 1997
Counsel & Corporate
Secretary(7)
Xiao Jun 1999 175,000
Executive Vice 1998 175,000
President-AVIC 1997 123,958
China (8)
- -----------------
(1) Mr. Wright has served as the Company's Chief Executive Officer since
March 14, 1996. He joined the Company as the Chairman of the Board
of Directors on May 1, 1995.
(2) During fiscal 1996, 1997 and 1998, the Company paid approximately
$30,000 per year on behalf of Mr. Wright for certain personal tax
and accounting services rendered by third parties for Mr. Wright.
(3) Mr. McNamar joined the Company on September 3, 1996 as Vice
Chairman of the Board of Directors.
(4) Mr. McNamar received 25,000 shares of the Company's Common Stock
pursuant to his terms of employment with the Company, such shares
having a value of $37,500 at the time of issuance in September 1997.
(5) Mr. Lim joined the Company as the Executive Vice President -
Operations on November 7, 1995 and served as the Company's Chief
Financial Officer from May 1996 through June 15, 1997.
(6) Mr. Pastino joined the Company as the Senior Vice President and
Chief Financial Officer on June 16, 1997. He became the Treasurer of
the Company on December 8, 1997.
(7) Mr. O'Brien joined the Company as Senior Vice President and General
Counsel on June 16, 1997. He became the Secretary of the Company on
May 14, 1998.
(8) Mr. Xiao joined the Company in 1995 as the Executive Vice President
of AVIC-China.
OPTION AND SAR GRANTS DURING LAST FISCAL YEAR
The Company issued 375,000 stock options at fair market value and no
SARs to its Named Executive Officers during the fiscal year ended March 31,
1999.
OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding option
exercises by the Named Executive Officers during the fiscal year 1999 and
options held by such Named Executive Officers on March 31, 1999:
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at Fiscal Year End at Fiscal Year End(1)
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Joseph R. Wright - - 6,000,000 200,000 $3,262,500 $112,500
R. T. McNamar - - 500,000 - - -
Michael J. Lim - - 1,125,000 225,000 1,173,438 142,188
Albert G. Pastino - - 430,000 112,500 - 42,188
James F. O'Brien - - 446,875 88,125 - -
Xiao Jun - - 515,000 - 559,488 -
- ----------------
(1) Based on a per share price of $1.4375, the closing price of the
Common Stock as reported on the American Stock Exchange on March 31,
1999, minus the exercise price of the option, multiplied by the
number of shares underlying the Option.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with five of its
executive officers, Messrs. Joseph R. Wright, Jr. which superseded his
earlier agreement, Richard T. McNamar, Michael J. Lim, Albert G. Pastino
and James F. O'Brien.
The Company entered into a two year employment agreement dated as of
January 1, 1999, with Joseph R. Wright, Jr., pursuant to which Mr. Wright
agreed to serve as the Company's Chairman of the Board of Directors, Chief
Executive Officer and President and to operate out of the Company's
executive offices located in New York, New York. The agreement provides for
an annual base salary of $450,000, ten year options to purchase 200,000
shares of Common Stock at an exercise price of $0.875 (the market price at
the date of grant), vesting over a two year period, and a stock award of
100,000 shares of Common Stock.
On September 6, 1996, the Company entered into a one year verbal
employment agreement with Richard T. McNamar pursuant to which Mr. McNamar
will serve as Vice Chairman of the Company. He received 25,000 shares of
the Company's Common Stock upon commencing employment. Initially, Mr.
McNamar was part time, and negotiated to receive a contingent success fee
for financings he introduced or arranged for the Company. On October 1,
1996 Mr. McNamar became a full time employee and waived his rights to any
success fees. In his part time capacity, Mr. McNamar was issued an option
to purchase 250,000 shares of the Company's Common Stock at an exercise
price of $1.50 per share on September 6, 1996. He received an additional
option for 250,000 shares at an exercise price of $1.50 per share when he
became a full time employee on October 1, 1996. The exercise price of the
options were based on the market value of the Common Stock on the date of
grant. The Company and Mr. McNamar signed a three year employment agreement
on June 30, 1999 whereby Mr. McNamar will serve as President and Chief
Operating Officer of the Company. The agreement provides for a base salary
of $150,000 and ten year options to acquire 200,000 shares of the Company's
Common Stock at an exercise price at the fair market value of Company's
Common Stock at the date of grant, vesting over a two year period.
On January 1, 1999, the Company entered into a two year contract
with Michael J. Lim, whereby Mr. Lim will serve as an Executive Vice
President of the Company. The agreement provides for an annual base salary
of $330,000, ten year options to purchase 100,000 shares of Common Stock at
an exercise price of $0.875 (the market price at the date of grant),
vesting over a two year period, and a stock award of 50,000 shares of
Common Stock. Mr. Lim has resigned from the Company as of June 30, 1999.
On January 1, 1999, the Company entered into a two year contract
with Albert G. Pastino, whereby Mr. Pastino will serve as a Senior Vice
President and Chief Financial Officer of the Company. The agreement
provides for an annual base salary of $220,000, ten year options to
purchase 75,000 shares of Common Stock at an exercise price of $0.875 (the
market price at the date of grant), vesting over a two year period, and a
stock award of 30,000 shares of Common Stock. Mr. Pastino resigned from the
Company on a fulltime basis as of June 30, 1999, and will remain a
Consultant to the Company.
On October 15, 1997, the Company entered into a five-year employment
agreement with James F. O'Brien. Mr. O'Brien will serve as a Senior Vice
President and General Counsel of the Company and will receive an annual
base salary of $200,000 for the first year and stock options to acquire
467,500 shares of Common Stock at an exercise price of $2.125 per share.
The exercise price of the options for Mr. O'Brien was based
on the market price of the Company's Common Stock, as reported on the
American Stock Exchange, at the time the grant was made. Mr. O'Brien
resigned from the Company as of March 31, 1999.
EMPLOYEE STOCK OPTION PLANS
As of February 8, 1995, the Company's Board of Directors and
stockholders approved the Company's 1995 Stock Option Plan (the "1995 Stock
Option Plan") in connection with the closing of the transactions
contemplated by the Reorganization Agreement. The Company has reserved up
to 500,000 shares of Common Stock for issuance under the 1995 Stock Option
Plan. The Company has granted options to purchase up to 385,000 shares of
Common Stock under the 1995 Stock Option Plan, 260,000 of which have been
exercised as of June 25, 1999.
The 1996 Stock Option Plan (the "1996 Stock Option Plan" and
together with the 1995 Stock Option Plan, the "Stock Option Plans") was
adopted by the Board of Directors on March 14, 1996 and by the Company's
stockholders on May 7, 1996 and amended on January 1, 1999. The Company has
reserved for issuance thereunder an aggregate of 12,000,000 shares of
Common Stock. The Company has granted options to purchase up to 9,867,602
shares of Common Stock under the 1996 Stock Option Plan, 10,000 of which
have been exercised. Of the 9,867,602 options granted as of the date of
this Report, 9,241,994 options have vested, and the remaining 625,608
options may vest subject to certain schedules. The Board of Directors has
approved a provision in the 1996 Stock Option Plan which will place a
6,000,000 share limit on the number of options that may be granted under
the 1996 Stock Option Plan to an employee in the fiscal year ended March
31, 1996, and a 1,500,000 share limit in each fiscal year thereafter.
A description of each of the Company's Stock Option Plans is set
forth below. The description is intended to be a summary of the material
provisions of the Company's Stock Option Plans and does not purport to be
complete.
Administration of and Eligibility Under Stock Option Plans. Each of
the Stock Option Plans, as adopted, provides for the issuance of options to
purchase shares of Common Stock to officers, directors, employees,
independent contractors and consultants of the Company and its
subsidiaries. The Stock Option Plans authorize the issuance of incentive
stock options ("ISOs"), and non-qualified stock options ("NSOs") and stock
appreciation rights ("SARs") to be granted by a committee (the "Committee")
to be established by the Board of Directors to administer the Stock Option
Plans.
Subject to the terms and conditions of the Stock Option Plans, the
Committee will have the sole authority to determine: (a) the persons
("optionees") to whom options to purchase shares of Common Stock and SARs
will be granted, (b) the number of options and SARs to be granted to each
such optionee, (c) the price to be paid for each share of Common Stock upon
the exercise of such option, (d) the period within which each option and
SAR will be exercised and any extensions thereof, and (e) the terms and
conditions of each such stock option agreement and SAR agreement which may
be entered into between the Company and any such optionee.
All officers, directors and employees of the Company and its
subsidiaries and certain consultants and other persons providing
significant services to the Company and its subsidiaries will be eligible
to receive grants of options and SARs under the Stock Option Plans.
However, only employees of the Company and its subsidiaries are eligible to
be granted ISOs.
Stock Option Agreements. All options granted under the Stock Option
Plans will be evidenced by an option agreement or SAR agreement between the
Company and the optionee receiving such option or SAR. Provisions of such
agreements entered into under the Stock Option Plans need not be identical
and may include any term or condition which is not inconsistent with the
respective Stock Option Plan and which the Committee deems appropriate for
inclusion.
Incentive Stock Options. Except for ISOs granted to stockholders
possessing more than ten percent (10%) of the total combined voting power
of all classes of the securities of the Company or its subsidiaries to whom
such ownership is attributed on the date of grant ("Ten Percent
Stockholders"), the exercise price of each ISO must be at least 100% of the
fair market value of the Company's Common Stock as determined on the date
of grant. ISOs granted to Ten Percent Stockholders must be at an exercise
price of not less than 110% of such fair market value.
Each ISO must be exercised, if at all, within ten (10) years from
the date of grant, but, within five (5) years of the date of grant in the
case of ISOs granted to Ten Percent Stockholders.
An optionee of an ISO may not exercise an ISO granted under the
Stock Option Plans so long as such person holds a previously granted and
unexercised ISO.
The aggregate fair market value (determined as of time of the grant
of the ISO) of the Common Stock with respect to which the ISOs are
exercisable for the first time by the optionee during any calendar year
shall not exceed $100,000.
As of the date of this Report, ISOs have been granted under the 1995
Stock Option Plan, subject to certain vesting schedules, to purchase up to
385,000 shares of Common Stock, 260,000 of which have been exercised.
375,000 ISOs have an exercise price of $0.3555 per share and 10,000 ISOs
have an exercise price of $1.50 per share.
Further, as of the date of the Report, ISOs have been granted under
the 1996 Stock Option Plan, subject to certain vesting schedules, to
purchase up to 372,380 shares of Common Stock. These options have the
following per share exercise prices: 285,714 shares ($0.35), 76,666 shares
($3.00) and 10,000 shares ($1.50).
Non-Qualified Stock Options. The exercise price of each NSO will be
determined by the Committee on the date of grant. However, the exercise
price for the NSOs under the 1995 Stock Option Plan will in no event be
less than 85% of the fair market value of the Common Stock on the date the
option is granted, or not less than 110% of the fair market value of the
Common Stock on the date such option is granted in the case of an option
granted to a Ten Percent Stockholder. No such restriction exists with
respect to the exercise prices of NSOs granted under the 1996 Stock Option
Plan.
The exercise period for each NSO will be determined by the Committee
at the time such option is granted, but in no event will such exercise
period exceed ten (10) years from the date of the grant.
As of the date of this Report, NSOs have been granted under the 1996
Stock Option Plan to purchase up to 9,495,222 shares of Common Stock,
subject to certain vesting schedules. These options have exercise prices
that range from $0.35 to $3.00.
Stock Appreciation Rights. Each SAR granted under the Stock Option
Plans will entitle the holder thereof, upon exercise of the SAR, to receive
from the Company, in exchange therefor, an amount equal in value to the
excess of the fair market value on the date of exercise of one share of
Common Stock over its fair market value on the date of grant (or in the
case of an SAR granted in connection with an option, the excess of the fair
market value of one share of Common Stock at the time of exercise over the
option exercise price per share under the option to which the SAR relates),
multiplied by the number of shares of Common Stock covered by the SAR or
the option, or portion thereof, that is surrendered.
SARs will be exercisable only at the time or times established by
the Committee. If an SAR is granted in connection with an option, the SAR
will be exercisable only to the extent and on the same conditions that the
related option could be exercised. The Committee may withdraw any SAR
granted under the Stock Option Plans at any time and may impose any
conditions upon the exercise of an SAR or adopt rules and regulations from
time to time affecting the rights of holders of SARs.
As of the date of this Report, no SARs have been granted pursuant to
the 1995 Stock Option Plan and no SARs have been granted under the 1996
Stock Option Plan.
Termination of Option and Transferability. In general, any unexpired
options or SARs granted under the Stock Option Plans will terminate: (a) in
the event of death or disability, pursuant to the terms of the option
agreement or SAR agreement, but not less than six (6) months or more than
twelve (12) months after the applicable date of such event, (b) in the
event of retirement, pursuant to the terms of the option agreement or SAR
agreement, but no less than thirty (30) days or more than three (3) months
after such retirement date, or (c) in the event of termination of such
person other than for death, disability or retirement, until thirty (30)
days after the date of such termination. However, the Committee may in its
sole discretion accelerate the exercisability of any or all options or SARs
upon termination of employment or cessation of services.
The options and SARs granted under the Stock Option Plans generally
will be non-transferable, except by will or the laws of descent and
distribution.
Adjustments Resulting from Changes in Capitalization. The number of
shares of Common Stock reserved under the Stock Option Plans and the number
and price of Common Stock covered by each outstanding option or SAR under
the Stock Option Plans will be proportionately adjusted by the Committee
for any increase or decrease in the number of issued and outstanding shares
of Common Stock resulting from any stock dividends, split-ups,
consolidations, recapitalizations, reorganizations or like event.
Amendment or Discontinuance of Stock Option Plan. The Board of
Directors has the right to amend, suspend or terminate the Stock Option
Plans at any time. Unless sooner terminated by the Board of Directors, the
1995 Stock Option Plan and the 1996 Stock Option Plan will terminate on
February 8, 2005 and May 7, 2006, respectively, the tenth anniversary date
of the effectiveness of each such Stock Option Plan.
Directors and Officers Liability Insurance. The Company has obtained
directors' and officers' liability insurance with an aggregate liability
for the policy year, inclusive of costs of defense, in the amount of
$3,000,000. The insurance policy ending April 2, 1999, was renewed as of
April 12, 1999 and will expire March 31, 2000.
Indemnification of Officers and Directors. The Company's Certificate
of Incorporation and Bylaws designate the relative duties and
responsibilities of the Company's officers, establish procedures for
actions by directors and stockholders and other items. The Company's
Certificate of Incorporation and Bylaws also contain extensive
indemnification provisions that will permit the Company to indemnify its
officers and directors to the maximum extent provided by Delaware law.
In addition, the Company has adopted a form of indemnification
agreement (the "Indemnification Agreement") which provides the indemnitee
with the maximum indemnification allowed under applicable law. The Company
has not entered into Indemnification Agreements with any of its directors,
executives, employees or consultants as of the date of this Report. Since
the Delaware statute is non-exclusive, it is possible that certain claims
beyond the scope of the statute may be indemnifiable. The Indemnification
Agreements provide a scheme of indemnification which may be broader than
that specifically provided by Delaware law. It has not yet been determined,
however, to what extent the indemnification expressly permitted by Delaware
law may be expanded, and therefore the scope of indemnification provided by
the Indemnification Agreements may be subject to future judicial
interpretation.
The Indemnification Agreement provides, in pertinent part, that the
Company shall indemnify an indemnitee who is or was a party or is
threatened, pending or completed action or proceeding whether civil,
criminal, administrative or investigative by reason of the fact that the
indemnitee is or was a director, officer, key employee or agent of the
Company or any subsidiary of the Company. The Company shall advance all
expenses, judgments, fines, penalties and amounts paid in settlement
(including taxes imposed on indemnitee on account of receipt of such
payouts) incurred by the indemnitee in connection with the investigation,
defense, settlement or appeal of any civil or criminal action or proceeding
as described above. The indemnitee shall repay such amounts advanced only
if it shall be ultimately determined that he or she is not entitled to be
indemnified by the Company. The advances paid to the indemnitee by the
Company shall be delivered within 20 days following a written request by
the indemnitee. Any award of indemnification to an indemnitee, if not
covered by insurance, would come directly from assets of the Company,
thereby affecting a stockholder's investment.
Termination of Employment and Change of Control Agreements. Except
as set forth in employment agreements and stock option agreements of
certain employees of the Company and its subsidiaries, the Company has no
compensatory plans or arrangements which relate to the resignation,
retirement or any other termination of an executive officer or key employee
with the Company or a change in control of the Company or a change in such
executive officer's or key employee's responsibilities following a change
in control.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common
Stock as of March 31, 1999 by : (i) each person known by the Company to
beneficially own 5% or more of the outstanding Shares, (ii) each director
of the Company, (iii) each Named Executive Officer of the Company, and (iv)
all directors and executive officers of the Company as a group. Unless
otherwise indicated below, to the knowledge of the Company, all persons
listed below have sole voting and investment power with respect to their
Shares, except to the extent authority is shared by spouses under
applicable law. The information set forth in the table and accompanying
footnoes has been furnished by the named beneficial owners:
NAME OF NO. OF
BENEFICIAL OWNER SHARES PERCENT (1)
---------------- ------ -----------
Joseph R. Wright, Jr. (2) 6,515,144 21.13%
Richard T. McNamar (3) 525,000 1.70%
Richard S. Braddock (4) 231,092 *
James R. Lilley (5) 78,574 *
Michael H. Wilson (6) 125,722 *
Marvin S. Rosen (7) 1,276,530 4.14%
Michael J. Lim (8) 1,181,900 3.83%
Albert G. Pastino (9) 621,057 2.01%
James F. O'Brien (10) 446,875 1.45%
Xiao Jun (11) 525,000 1.70%
All executive officers and
directors as a group (12) 11,526,894 37.39%
Jenny Sun (13) 5,541,593 17.98%
Polmont Investments
Limited (14) 5,541,593 17.98%
Occidental Worldwide
Corporation (15) 5,541,593 17.98%
Max Chian Yi Sun (16) 5,541,593 17.98%
- ----------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting
or investment power with respect to securities. Shares subject to
options currently exercisable, or exercisable within 60 days of
March 31, 1999, are deemed outstanding for computing the percentage
of the person holding such options but are not deemed outstanding
for computing the percentage of any other person.
(2) Includes 42,148 Shares held by Austin Trading Partners, LP, of which
Mr. Wright is a limited partner. Also includes options to purchase
6,000,000 Shares. The address of Mr. Wright is c/o AmTec, Inc., 599
Lexington Avenue, 44th Floor, New York, New York 10022.
(3) Includes options to purchase 500,000 Shares.
(4) Includes options to purchase 52,500 Shares.
(5) Includes options to purchase 47,500 Shares.
(6) Includes options to purchase 52,500 Shares.
(7) Includes options to purchase 12,500 Shares.
(8) Includes options to purchase 1,125,000 Shares.
(9) Includes options to purchase 430,000 Shares.
(10) Includes options to purchase 446,875 Shares.
(11) Includes options to purchase 515,000 Shares.
(12) Includes options to purchase 9,201,017 Shares
(13) Includes 2,450,000 Shares held by Polmont Investments Limited and
2,797,691 Shares held by Occidental Worldwide Corporation of which
Ms. Sun has voting power. It also includes 293,402 Shares currently
held by Chian Jeng Sun & Chieh Siong Soon and 500 Shares held by Max
Sun. The address of Ms. Sun is 1052 North Beverly Drive, Beverly
Hills, CA 90210. The Company believes that Ms. Sun is currently out
of compliance with her required filings of Statements of Beneficial
Ownership based on available information related to her ownership of
the Company's securities.
(14) Includes 2,797,691 Shares held by Occidental Worldwide Corporation
and 293,402 Shares currently held by Chian Jeng Sun & Chieh Siong
Soon and 500 Shares held by Max Sun. The address of Polmont
Investments Limited is c/o Havelet Trust Company, P.O. Box 3136,
Road Town, Tortola, British Virgin Islands.
(15) Includes 2,450,000 Shares held by Polmont Investments Limited and
293,402 Shares currently held by Chian Jeng Sun & Chieh Siong Soon
and 500 Shares held by Max Sun. The address of Occidental Worldwide
Corporation is Mr. Vincent Lim, c/o Rabobank, Shell Tower, 1 Raffles
Place, Singapore.
(16) Includes 2,450,000 Shares held by Polmont Investments Limited and
2,797,691 Shares held by Occidental Worldwide Corporation of which
Mr. Sun has voting power. It also includes 293,402 Shares currently
held by Chian Jeng Sun & Chieh Siong Soon. The address of Mr. Sun is
126 JLN DEDAP, Taman Ampang, Selangor, Malaysia. The Company
believes that Mr. Sun is currently out of compliance with his
required filings of Statements of Beneficial Ownership based on
available information related to his ownership of the Company's
securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS: The following financial statements and
supplemental data are filed:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES: All applicable financial statement
schedules have been omitted because the required information is included in
the consolidated financial statements and notes thereto filed as Exhibit
(a) (1).
(b) REPORTS ON FORM 8-K. No Reports on Form 8-K were filed by the Company
during the fourth quarter of the fiscal year ending March 31, 1999.
(c) EXHIBITS
The following exhibits, which are furnished with this Annual Report
or incorporated herein by reference, are filed as part of this Annual
Report:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
2.1 Agreement for Sale of Assets by and between ITV Communications,
Inc. and Netmatics, Inc., dated January 11, 1996, and Promissory
Note and Security Agreement dated January 16, 1996(1)
2.2 Agreement of Merger between AVIC Group International, Inc., a
Colorado corporation, with and into AVIC Group International,
Inc., a Delaware corporation dated July 10, 1996(8)
2.3 Purchase Agreement by and among SFMT-China, Inc., AmTec Hebei
Telecom Holdings, Ltd. and the Company; dated August 26, 1998
2.4 Agreement and Plan of Merger among the Company, AmTec Acquisition
Corporation and UIH Hunan, Inc. dated as of December 23, 1998
3.1 Amendments to Articles of Incorporation of the Company dated June
7, 1996 and June 10, 1996(5)
3.2 Restated Certificate of Incorporation of the Company(7)
3.3 Certificate of Ownership and Merger Merging China
Telecommunications and Technologies, Inc. into the Company(9)
3.4 Restated Bylaws of the Company (13)
4.1 Certificate of Designations of Preferences of Series C
Convertible Preferred Stock of the Company(9)
4.2 Certificate of Designations of Preferences of Series D
Convertible Preferred Stock of the Company(7)
4.3 Certificate of Designations of Preferences of Series E
Convertible Preferred Stock of the Company(10)
4.4 Certificate of Designations of Preferences of Series G
Convertible Preferred Stock of the Company
4.5 Specimen Common Stock Certificate(9)
10.1 1995 Stock Option Plan(2)
10.2 1996 Stock Option Plan(2)
10.3 Real Property lease between Lexreal Associates and the Company
dated May 8, 1995(2)
10.4 Employment Agreement between Joseph R. Wright, Jr. and the
Company dated as of April 15, 1995(3), and amendments thereto
dated as of November 21 1995(4) and September 12, 1996(6)
10.5 Employment Agreement between Michael J. Lim and the Company dated
as of November 6, 1995(4)
10.6 Employment Agreement between Xiao Jun and the Company dated as of
January 1, 1996(4)
10.7 Employment Agreement between Albert G. Pastino and the Company
dated as of October 15, 1997(12)
10.8 Employment Agreement between James F. O'Brien and the Company
dated as of October 15, 1997(12)
10.9 Employment Agreement between Michael J. Lim and the Company dated
January 23, 1998(13)
10.10 Form of Indemnification Agreement for directors and officers of
the Company(8)
10.11 Common Stock Investment Agreement between Promethean Investment
Group L.L.C. and the Company dated March 31, 1997, as amended on
April 29, 1997(9)
10.12 China Paging Networks Preliminary Agreement between Beijing CATCH
Communications Group Co. and the Company dated April 1995(3)
10.13 Mobile Telephone Network Preliminary Agreement between Beijing
CATCH Communications Group Co. and the Company dated April 27,
1995(3)
10.14 Cellular Telephone Network Preliminary Agreement between Beijing
CATCH Communications Group Co., Tweedia International Limited and
the Company dated April 1995(3)
10.15 Memorandum of Understanding between Hebei United Communications
Equipment Company and the Company dated May 1, 1995(3)
10.16 Letter of Intent between Hebei United Communications Equipment
Company and the Company dated October 10, 1995(4)
10.17 Joint Venture Contract between Hebei United Communications
Equipment Company and NTTI dated December 22, 1995(5)
10.18 Agreement between Hebei United Communications Equipment Company
and the Company dated March 22, 1996(5)
10.19 Joint Venture Contract between Hebei United Telecommunications
Development Company, Beijing CATCH Communications Group Co. and
the Company dated September 20, 1996(9)
10.20 Project Cooperation Contract between China United
Telecommunications Co. and Hebei United Telecommunications
Engineering Company Limited dated February 9, 1996(9)
10.21 Term Loan Agreement between Hebei United Telecommunications
Engineering Company Limited and Bank of Tokyo-Mitsubishi, Ltd.
dated August 5, 1996(9)
10.22 Project Cooperation Contract between Hebei Cable Television
Station and Hebei United Communications Equipment Company Limited
dated April 8, 1997(9)
10.23 Employment Agreement between Joseph R. Wright, Jr. and the
Company dated as of January 1, 1999
10.24 Employment Agreement between Michael J. Lim. and the Company
dated as of January 1, 1999
10.25 Employment Agreement between Albert G. Pastino and the Company
dated as of January 1, 1999
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP(13)
27 Financial Data Schedule
- ---------------
(1) Previously filed as part of the Company's Current Report on Form 8-K
dated January 19, 1996.
(2) Previously filed as part of the Company's Transition Report on Form
10-KSB for the transition period from October 1, 1994 to March 31,
1995.
(3) Previously filed as part of the Company's Current Report on Form 8-K
dated May 1, 1995.
(4) Previously filed as part of the Company's Current Report on Form 8-K
dated December 22, 1995.
(5) Previously filed as part of the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1996.
(6) Previously filed as part of the Company's Registration Statement on
Form S-8 filed on January 31, 1997.
(7) Previously filed as part of the Company's Current Report on Form 8-K
dated March 6, 1997.
(8) Previously filed as part of the Company's Definitive Proxy Statement
dated April 18, 1996.
(9) Previously filed as part of the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1997.
(10) Previously filed as part of the Company's Quarterly Report on Form
10-Q/A dated September 30, 1997.
(11) Previously filed as part of the Company's Current Report on Form 8-K
dated December 8, 1997.
(12) Previously filed as part of the Company's Quarterly Report on Form
10-Q dated December 31, 1997.
(13) Previously filed as part of the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMTEC, INC.
By /s/ Joseph R. Wright, Jr.
-----------------------------
Joseph R. Wright, Jr.
Chairman of the Board,
Chief Executive Officer and
President
Date: July 14, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Joseph R. Wright, Jr. Chairman of the Board of July 14, 1999
- ----------------------------- Directors, Chief Executive
Joseph R. Wright, Jr. Officer and President
(Principal Executive Officer)
/s/ Richard T. McNamar Vice Chairman of the Board July 14, 1999
- ----------------------------- of Directors
Richard T. McNamar
/s/ Richard S. Braddock Director July 14, 1999
- -----------------------------
Richard S. Braddock
/s/ Marvin S. Rosen Director July 14, 1999
- -----------------------------
Marvin S. Rosen
/s/ James R. Lilley Director July 14, 1999
- -----------------------------
James R. Lilley
/s/ Michael H. Wilson Director July 14, 1999
- -----------------------------
Michael H. Wilson
/s/ Wilfred Chow Controller and Treasurer July 14, 1999
- ----------------------------- (Principal Accounting
Wilfred Chow Officer)
FINANCIAL STATEMENTS
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
PAGE
AMTEC, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
MARCH 31, 1999, 1998 AND 1997:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-22
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
INDEPENDENT AUDITORS' REPORT F-23
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE PERIOD FROM APRIL 29, 1997, (COMMENCEMENT
OF OPERATIONS) TO DECEMBER 31, 1997
Balance Sheets F-24
Statements of Operations F-25
Statements of Investors' Equity F-26
Statements of Cash Flows F-27
Notes to Financial Statements F-28 - F-33
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
INDEPENDENT AUDITORS' REPORT F-34
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998,
1997 AND PERIOD FROM JANUARY 31, 1996 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER, 1996:
Balance Sheets F-35
Statements of Operations F-36
Statements of Investors' Equity (Deficit) F-37
Statements of Cash Flows F-38
Notes to Financial Statements F-39 - F-46
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
AmTec Inc.
We have audited the accompanying consolidated balance sheets of AmTec Inc.
and subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1999. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of March
31, 1999 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended March 31, 1999, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
June 29, 1999
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
- -----------------------------------------------------------------------------
1999 1998
ASSETS
CURRENT ASSETS:
Cash $ 2,093,141 $ 2,134,662
Accounts receivable -- 114,661
Prepaid expenses and other current assets 38,805 108,082
------------ ------------
Total current assets 2,131,946 2,357,405
Investments in and advances to
unconsolidated subsidiary 2,496,480 5,074,217
Property, plant and equipment, net 96,926 139,136
Office lease deposit 55,733 112,600
------------ ------------
Total assets $ 4,781,085 $ 7,683,358
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 439,195 $ 541,888
Accrued expenses 528,548 792,006
Loans payable - shareholders -- 1,452,553
------------ ------------
Total current liabilities 967,743 2,786,447
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock: authorized 10,000,000
shares:
Series E Convertible Preferred Stock:
$.001 par value; 74 shares issued,
73.2 and 29.8 shares outstanding in
1999 and 1998, respectively 1 1
Series G Convertible Preferred Stock:
$.001 par value; 20 and 0 shares
issued and outstanding in 1999 and 1998,
respectively 1 --
Common Stock: $.001 par value, authorized
100,000,000 shares;
30,736,721 and 26,532,502 issued and
outstanding in 1999 and 1998, respectively 30,737 26,533
Additional Paid-In Capital 36,947,244 33,149,142
Accumulated deficit (33,646,491) (27,394,590)
Nonemployee deferred option cost, net -- (1,378,125)
Warrants 481,850 493,950
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,813,342 4,896,911
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 4,781,085 $ 7,683,358
============ ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- ----------------------------------------------------------------------------------------
1999 1998 1997
REVENUES $ -- $ -- $ --
------------ ------------ ------------
EXPENSES
Selling, general and administrative 4,649,770 4,282,613 3,563,568
------------ ------------ ------------
LOSS FROM OPERATIONS (4,649,770) (4,282,613) (3,563,568)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Amortization of stock options
granted to non-employees (459,374) (459,375) --
Interest expense -- (125,586) (129,039)
Other - net (85,161) 70,853 (33,216)
Write off of investment in affiliate -- -- (198,538)
------------ ------------ ------------
Total other expense (544,535) (514,108) (360,793)
------------ ------------ ------------
LOSS BEFORE EQUITY IN LOSSES OF
UNCONSOLIDATED SUBSIDIARY (5,194,305) (4,796,721) (3,924,361)
Equity in losses of unconsolidated
subsidiary (385,139) (606,647) (140,524)
------------ ------------ ------------
NET LOSS (5,579,444) (5,403,368) (4,064,885)
PREFERRED STOCK DIVIDEND 672,457 1,398,686 10,000
------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (6,251,901) $ (6,802,054) $ (4,074,885)
============ ============ ============
BASIC LOSS PER COMMON SHARE $ (0.23) $ (0.23) $ (0.14)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 27,495,213 29,843,712 29,102,347
============ ============ ============
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
YEARS ENDED MARCH 31, 1999,1998 AND 1997
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIT)
- -------------------------------------------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------------- ------------------- --------------- ---------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
BALANCE, March 31, 1996 28,436,982 $28,437 1,524,178 $1,524 - $ - - $ - - $ -
Issuances of Series B
preferred stock - - - - 100 1 - - - -
Conversion of Series B
shares 1,507,477 1,507 - - (100) (1) - - - -
Issuance of Series D
preferred stock - - - - - - - - 150 1
Common shares issued for
services rendered 90,962 91 - - - - - - - -
Common shares issued to
employees as
compensation 212,500 213 - - - - - - - -
Common shares issued for
directors fees 10,000 10 - - - - - - - -
Sale of common shares 1,000,000 1,000 - - - - - - - -
Cumulative foreign
currency exchange loss - - - - - - - - - -
Preferred dividends - - - - - - - - - -
Warrants - - - - - - - - - -
Net loss - - - - - - - - - -
------------ ------------- ----------- -------- ----- ----- ----- ----- ------ -------
BALANCE, March 31, 1997 31,257,921 $31,258 1,524,178 $1,524 - $ - - $ - 150 $ 1
Exercise of employee
stock options 69,000 69 - - - - - - - -
Issuance of Series C
preferred stock - - - - - - 250 1 - -
Common shares issued for
services rendered 23,233 23 - - - - - - - -
Conversion of Series D
shares to common stock 2,236,507 2,237 - - - - - - (150) (1)
Common stock investment
agreement - net of
cancellation 1,019,465 1,019 - - - - - - - -
Common shares issued for
directors fees 40,000 40 - - - - - - - -
Cancellation of Series A
preferred - - (1,524,178) (1,524) - - - - - -
Cancellation of common
stock (12,727,909) (12,728) - - - - - - - -
Tweedia loan cancellation - - - - - - - - - -
Allocation of
non-refundable deposit
from former affiliate - - - - - - - - - -
Other - - - - - - - - - -
Conversion of Series C
shares to common stock 4,507,639 4,508 - - - - (219) (1) - -
Issuance of Series E
preferred stock - - - - - - - - - -
Conversion of Series E
shares to common stock 106,646 107 - - - - - - - -
Buyback of Series C
preferred stock - - - - - - (31) - - -
Deferred financing costs,
net of amortization - - - - - - - - - -
Stock options issued to
third party - - - - - - - - - -
Cumulative foreign
currency exchange loss - - - - - - - - - -
Advance to joint venture
partner - - - - - - - - - -
Preferred stock dividends - - - - - - - - - -
Cancellation of Warrants - - - - - - - - - -
Net loss - - - - - - - - - -
------------ ------------- ----------- -------- ----- ----- ----- ----- ------ -------
BALANCE, March 31, 1998 26,532,502 $26,533 - $ - - $ - - $ - - $ -
Conversion of Series E
shares to common stock 5,554,484 5,554 - - - - - - - -
Common Shares buyback (330,800) (331) - - - - - - - -
Preferred Shares buyback
- - - - - - - - - -
Cancellation of common
stocks investment
agreement (1,019,465) (1,019) - - - - - - - -
Issuance of Series G
preferred stock - - - - - - - - - -
Issuance of Warrants - - - - - - - - - -
Cancellation of Warrants - - - - - - - - - -
Cancellation of
shareholders loans and
accrual interest - - - - - - - - - -
Cumulative foreign
currency exchange loss - - - - - - - - - -
Preferred stock dividends - - - - - - - - - -
Cancellation of Stock
options issued to third
party - - - - - - - - - -
Options issued for
services rendered - - - - - - - - - -
Net loss - - - - - - - - - -
------------ ------------- ----------- -------- ----- ----- ----- ----- ------ -------
BALANCE, March 31, 1999 30,736,721 $30,737 - $ - - $ - - $ - - $ -
============ ============= =========== ======== ===== ===== ===== ===== ====== =======
See notes to consolidated
financial statements
- ---------------------------------------------------------------------------------------------------------------------------------
SERIES E SERIES G
PREFERRED STOCK PREFERRED STOCK ADDITIONAL EQUIPMENT DEFERRED
-------------- --------------- PAID-IN ACCUMULATED PURCHASE OPTION
SHARES AMOUNT SHARES AMOUNT WARRANTS CAPITAL DEFICIT DEPOSIT COSTS TOTAL
---- --- ------ ------ ------- ----------- ------------ ----------- -------- -----------
BALANCE, March 31, 1996 - $- - $ - $ - $18,648,620 ($16,527,651) ($4,572,536) $ - ($2,421,606)
Issuances of Series B
preferred stock - - - - - 2,341,218 - - - 2,341,219
Conversion of Series B
shares - - - - - (1,506) - - - -
Issuance of Series D
preferred stock - - - - - 1,499,999 - - - 1,500,000
Common shares issued for
services rendered - - - - - 316,249 - - - 316,340
Common shares issued to
employees as
compensation - - - - - 318,538 - - - 318,751
Common shares issued for
directors fees - - - - - 89,990 - - - 90,000
Sale of common shares - - - - - 1,999,000 - - - 2,000,000
Cumulative foreign
currency exchange loss - - - - - (1,231) - - - (1,231)
Preferred dividends - - - - - (10,000) - - - (10,000)
Warrants - - - - 479,500 - - - - 479,500
Net loss - - - - - - (4,064,885) - - (4,064,885)
---- --- ------ ------ ------- ----------- ------------ ------------ -------- ----------
BALANCE, March 31, 1997 - $- - $ - $479,500 $25,200,877 ($20,592,536) ($4,572,536) $ - $ 548,088
Exercise of employee
stock options - - - - - 34,681 - - - 34,750
Issuance of Series C
preferred stock - - - - - 2,499,999 - - - 2,500,000
Common shares issued for
services rendered - - - - - 66,934 - - - 66,958
Conversion of Series D
shares to common stock - - - - - 129,673 - - - 131,909
Common stock investment
agreement - net of
cancellation - - - - - (1,019) - - - 0
Common shares issued for
directors fees - - - - - 84,960 - - - 85,000
Cancellation of Series A
preferred - - - - - (4,571,012) - 4,572,536 - 0
Cancellation of common
stock - - - - - 12,728 - - - 0
Tweedia loan cancellation - - - - - 25,000 - - - 25,000
Allocation of
non-refundable deposit
from former affiliate - - - - - 850,000 - - - 850,000
Other - - - - - (580) - - - (580)
Conversion of Series C
shares to common stock - - - - - (4,508) - - - (1)
Issuance of Series E
preferred stock 74 1 - - - 6,759,000 - - - 6,759,001
Conversion of Series E
shares to common stock (1) - - - - (107) - - - 0
Buyback of Series C
preferred stock - - - - - (406,100) - - - (406,100)
Deferred financing costs,
net of amortization - - - - 161,450 (229,415) - - - (67,965)
Stock options issued to
third party - - - - - 1,837,500 - - (1,378,125) 459,375
Cumulative foreign
currency exchange loss - - - - - 1,844 - - - 1,844
Advance to joint venture
partner - - - - - (540,000) - - - (540,000)
Preferred stock dividends - - - - - 1,398,686 (1,398,686) - - 0
Cancellation of Warrants - - - - (147,000) - - - - (147,000)
Net loss - - - - - - (5,403,368) - - (5,403,368)
---- --- ------ ------ ------- ----------- ------------ --------- ----------- ----------
BALANCE, March 31, 1998 73 $1 - $ - $493,953 $33,149,142 ($27,394,590) $ - ($1,378,125) $4,896,911
Conversion of Series E
shares to common stock (40) - - - - 138,821 - - - 144,375
Common Shares buyback - - - - - (383,052) - - - (383,383)
Preferred Shares buyback (3) - - - - (100,000) - - - (100,000)
Cancellation of common
stocks investment
agreement - - - - - 1,019 - - - 0
Issuance of Series G
preferred stock - - 20 1 - 2,000,000 - - - 2,000,001
Issuance of Warrants - - - - 210,400 (210,400) - - - 0
Cancellation of Warrants - - - - (222,500) 222,500 - - - 0
Cancellation of
shareholders loans and
accrual interest - - - - - 2,359,621 - - - 2,359,621
Cumulative foreign
currency exchange loss - - - - - (613) - - - (613)
Preferred stock dividends - - - - - 672,457 (672,457) - - 0
Cancellation of Stock
options issued to third
party - - - - - (918,751) - - $1,378,125 459,374
Options issued for
services rendered - - - - - 16,500 - - - 16,500
Net loss - - - - - - (5,579,444) - - (5,579,444)
---- --- ------ ------ ------- ----------- ------------ --------- ---------- ----------
BALANCE, March 31, 1999 30 $1 20 $1 $481,850 $36,947,244 ($33,646,491) $ - $ - $3,813,342
==== === ====== ====== ======== =========== ============ ========= ========== ==========
See notes to consolidated
financial statements
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,579,444) $(5,403,368) $(4,064,885)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred option cost 459,375 459,375 --
Depreciation 55,250 43,432 28,905
Loss from abandoned assets -- 87,441 --
Gain from sale of assets 137 -- --
Issuance of warrants for services
rendered -- -- 479,500
Issuance of common stock in connection
with Series E buyback transaction 144,375 -- --
Issuance of common stock and options
for directors' fees and professional
services rendered 16,500 151,957 725,091
Equity in losses of unconsolidated
subsidiary 385,139 606,647 140,524
(Increase) decrease in:
Accounts receivable 114,661 (114,661) --
Prepaid expenses and other current
assets 69,277 63,839 (111,243)
Office lease deposit 56,867 (1,100) 55,700
Increase (decrease) in:
Accounts payable and accrued expenses 540,917 293,027 (485,959)
Loans payable - stockholders -- (111,000) (150,000)
----------- ----------- -----------
Net cash used in operating activities (3,736,946) (3,924,411) (3,382,367)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Netmatics -- (87,441) --
Purchase of property and equipment (13,427) (29,212) (106,028)
Investment in unconsolidated subsidiary -- (276,000) (654,000)
Proceeds from sale of assets 250 -- --
----------- ----------- -----------
Net cash used in investing activities (13,177) (392,653) (760,028)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Warrants issued for services rendered -
net of charges to APIC -- (215,546) --
Buyback common stock (383,383) -- --
Buyback Series E convertible preferred
stock (100,000) -- --
Loans payable to stockholders -- 25,000 --
Repayment from(Advance to) unconsolidated
subsidiary 2,191,985 (3,724,000) (538,000)
Proceeds from sale of common stock -- 166,659 2,000,000
Proceeds from sale of Series B convertible
preferred stock -- -- 2,341,219
Proceeds from sale of Series D convertible
preferred stock -- -- 1,500,000
Proceeds from sale of Series C convertible
preferred stock - net -- 2,093,900 --
Proceeds from sale of Series E convertible
preferred stock -- 6,759,000 --
Proceeds from sale of Series G convertible
preferred stock 2,000,000 -- --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,708,602 5,105,013 5,303,219
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (41,521) 787,949 1,160,824
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,134,662 1,346,713 185,889
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,093,141 $ 2,134,662 $ 1,346,713
=========== =========== ===========
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------
1. SUPPLEMENTAL CASH INFORMATION:
No interest or income taxes were paid during fiscal 1999, 1998 and
1997.
2. NONCASH FINANCING ACTIVITIES:
In fiscal 1999, shareholder loans payable of $1,452,553 and related
accrued interest of $907,068 were cancelled and credited to Additional
Paid-In Capital.
In fiscal 1999, the Company paid a dividend in kind of $210,400 as part
of the issuance of Series G Preferred Stock.
In fiscal 1999, 40.4 shares of Series E Convertible Preferred Stock
were converted into 5,554,424 shares of common stock (inclusive of
conversions of preferred dividends of $462,057).
In fiscal 1999, warrants valued at $222,500 were cancelled and
credited to Additional Paid-In Capital.
In fiscal 1999, the Company cancelled a Common Stock Investment
Agreement, as permitted by the Agreement, with Promethean Investment
Group. 1,019,465 shares previously held in escrow designated for
issuance under terms of the agreement were cancelled.
In fiscal 1999, the option granted to the Hebei Provincial Government
to acquire 3,000,000 shares of the Company's common stock at a price
of $3.0625 per share was cancelled. Unamortized Deferred Option Cost
valued at $918,751 was charged to Additional Paid in Capital.
In fiscal 1998, 150 shares of Series D Convertible Preferred Stock
were converted into 2,236,507 shares of common stock (inclusive of
conversions of preferred dividends and related warrants).
In fiscal 1998, 219 shares of Series C Convertible Preferred Stock
were converted into 4,507,639 shares of common stock.
In fiscal 1998, 0.8 share of Series E Convertible Preferred Stock was
converted into 106,646 shares of common stock.
In fiscal 1998, 12,727,909 shares of common stock were canceled upon
determination that the full purchase price for such shares was not
paid.
In fiscal 1998, $850,000 Notes Payable related to a nonrefundable
deposit received from a former affiliate was credited to Additional
Paid in Capital.
In fiscal 1998, 1,524,178 shares of the Company's Series A Convertible
Preferred Shares were canceled in accordance with the terms of a
subscription agreement.
In fiscal 1998, the Company issued stock options valued at $1,837,500
to the Hebei provincial government in exchange for a long-term
cooperation agreement.
In fiscal 1997, 100 shares of Series B Preferred Stock were converted
into 1,507,477 shares of common stock.
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE OF BUSINESS - AmTec Inc. (the "Company" or
"AmTec") through its majority-owned subsidiary (accounted for under
the equity method of accounting) in the People's Republic of China
("PRC") is involved in providing financing and assistance in building
telecommunications networks for third parties in the PRC. The Company,
through its wholly-owned subsidiary ITV Communications, Inc. ("ITV")
was engaged in the design, manufacture and sale of technologically
advanced communication devices. In January 1996, the Company sold all
of the business and operating assets of ITV and is no longer involved
in the business that ITV was engaged in. ITV remains inactive during
the year ended March 31, 1999.
On July 8, 1997, the Company changed its name from AVIC Group
International, Inc. to AmTec, Inc.
During fiscal 1998 the Company organized two wholly-owned
subsidiaries, one a Bermuda company and the other a British Virgin
Island company. There was no activity in either company during the
years ended March 31, 1999 and 1998.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the Company's wholly- owned subsidiaries, ITV Communications,
Inc, and the Bermuda company and the British Virgin Island company, as
noted above, all dormant companies. All significant intercompany
accounts and transactions are eliminated in consolidation.
EQUITY METHOD OF ACCOUNTING - The Company accounts for its subsidiary
Hebei United Telecommunications Equipment Co., Ltd. ("Hebei
Equipment") (a limited life Sino-foreign joint venture) using the
equity method of accounting as minority shareholders of Hebei
Equipment have substantive participating rights under the joint
venture contracts. The Company reports its investment in Hebei
Equipment under the caption Investments in and advances to
unconsolidated subsidiary. Under the equity method, the investment is
carried at cost of acquisition, plus the Company's equity in
undistributed earnings or losses since acquisition. Equity in the
losses of the unconsolidated subsidiary is recognized according to the
Company's percentage ownership in the unconsolidated subsidiary until
the Company contributed capital has been fully depleted. Reserves are
provided where management determines that the investment or equity in
earnings is not realizable. For the period ending March 31, 1998, the
Company used an ownership percentage of 60.8% for purposes of
calculating the share of losses of its unconsolidated subsidiary since
it did not increase its ownership percentage in Hebei Equipment to 70%
until after the close of Hebei Equipment's fiscal year-end on December
31, 1997. For the year ended March 31, 1999, the Company recognized
70% of losses of its unconsolidated subsidiary. Hebei Equipment owns
51% of Hebei United Telecommunications Engineering Company, Ltd.
("Hebei Engineering"). Hebei Equipment also accounts for its
investment using equity method of accounting as minority shareholders
of Hebei Engineering have substantive participating rights under the
joint venture contracts.
DIFFERENCE IN YEAR END - The Company's share of equity in losses of
Hebei Equipment included in the consolidated financial statements are
as of and for the years ended December 31, 1998 and 1997, Hebei
Equipment's year-end. Since inception the Company has had a March 31
year-end. The Company kept this year-end even though its subsidiaries
have a calendar year-end so that delays in receiving information from
China would not cause problems for the Company in meeting its
reporting deadlines. However, the Company does monitor events in the
lag period and, where appropriate, would disclose the occurrence of
any significant event during such lag period. All companies
established under PRC law are required to have a December 31 fiscal
year-end date. Hebei Equipment and Hebei Engineering are equity joint
venture companies established under PRC law.
MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expense during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS - For purposes of the statements of cash flows, the
Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method, to write off
the cost of property and equipment over their estimated useful lives,
after deducting the estimated salvage value of the assets as follows:
Furniture, fixtures and equipment 5 years
Leasehold improvement 5 years
Computer software 3 years
LONG-LIVED ASSETS - The Company evaluates long-lived assets and
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the net carrying amount may not be
recoverable. When such events occur, the Company measures impairment
by comparing the carrying value of the long-lived asset to the
estimated undiscounted future cash flows expected to result from the
use of the assets and their eventual disposition. If the sum of the
expected undiscounted future cash flows is less than the carrying
amount of the assets, the Company would recognize an impairment loss.
The impairment loss, if determined, would be measured as the amount by
which the carrying amount of the asset exceeds the fair value of the
asset. The Company determined that, as of March 31, 1999 and 1998,
there had been no impairment in the carrying value of the long-lived
assets.
INCOME TAX - Deferred income taxes are provided for using the
liability method. Under the liability method, deferred income taxes
are recognized for all significant temporary differences between the
tax and financial statement bases of assets and liabilities. The tax
consequences of those differences are classified as current or
non-current based upon the classification of the related assets or
liabilities in the financial statements. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of, the
deferred tax assets will not be realized.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying
amount reported in the balance sheets for cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses
approximates fair value because of the immediate short-term maturity
of these financial instruments.
LOSS PER SHARE - Basic loss per common share is based on the weighted
average number of common shares outstanding during the year. The
effect of shares issuable upon exercise of warrants and stock options
is anti-dilutive, therefore diluted earnings per share is not
presented. The Company adopted the provisions of FASB 128 during the
fiscal year ended March 31, 1998. Adoption of such statement did not
have a material effect on results of operations and financial
condition.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" establishes new
rules for reporting and display of comprehensive income and its
components. Other than an insignificant amount of foreign currency
transactions, the Company has no other items of other comprehensive
income and the net loss reported in the statement of operations is
equivalent to the total comprehensive loss.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information"
requires the reporting of profit and loss, specific revenue and
expense items, and assets for reportable segments. It also requires
the reconciliation of total segment revenues, total segment profit or
loss, total segment assets, and other amounts disclosed for segments,
in each case to the corresponding amounts in the general purpose
financial statements. The Company adopted FASB 131 during the year and
since the Company only invested in the Hebei Equipment, no other
reportable segments were reported in the financial statements.
NEW ACCOUNTING STANDARD NOT YET ADOPTED - The Financial Accounting
Standards Board has issued a new standard SFAS No. 133 "Derivative
Instruments and Hedging Activities", which is effective for fiscal
years beginning after June 15, 1999. Management has not yet completed
the analysis of the impact this would have on the financial statements
of the Company and has not adopted this standard.
2. INVESTMENT IN AND ADVANCE TO UNCONSOLIDATED SUBSIDIARY
The Company determined that it should conduct its operations in the
PRC through a Sino Foreign Joint Venture ("SFJV"), Hebei Equipment. In
March 1996, the Company invested $1,170,000 in a PRC joint venture,
advanced $540,000 to its joint venture partner and requested from the
Hebei Provincial government approval for conversion of such company to
an SFJV. In September 1996, preliminary regulatory approval for Hebei
Equipment was granted and the SFJV was formed with the Company holding
a 60.8% interest in the entity. In April 1997, the Company received
final PRC regulatory approval for the SFJV. The Company invested an
additional $276,000 in Hebei Equipment during the fiscal-year ended
March 31, 1998, resulting in an increase in its holding to 70%. An
additional $3,724,000 was advanced as a loan to the joint venture
during the fiscal year March 31, 1998. $ 2,191,985 was repaid by Hebei
Equipment during the fiscal year March 31, 1999.
Hebei Equipment holds a 51% interest in Hebei Engineering, which is
developing GSM networks in the ten largest cities in Hebei Province,
PRC. Nippon Telegraph and Telephone International, Inc. ("NTTI") and
Itochu Corporation hold the remaining 49% interest in Hebei
Engineering.
The Company's investments in the joint venture were accounted for by
the equity method of accounting because minority shareholders of Hebei
Equipment and Hebei Engineering have substantive participating rights
under the provision of the Joint Venture contracts.
The following summarized the major activities of Hebei Equipment and
its subsidiary:
A. HEBEI ENGINEERING'S INVESTMENT IN GSM NETWORKS
Hebei Equipment, through its 51%-owned subsidiary, Hebei Engineering
has funded, up to December 1998, approximately $33,560,000 in the
construction of GSM telecommunications networks (the "GSM networks")
in Hebei Province of the PRC. The GSM networks are being built
pursuant to a 15-year Project Cooperation Contract with China United
Communications Company ("UNICOM"). Terms of the Project Cooperation
contract include the following:
Initially, UNICOM will own 30% of the assets while Hebei Engineering
will own 70% of the assets.
Both parties agree to distribute the profit according to the
"Distributable Cash Flow" (as defined) with 22% going to UNICOM and
78% going to Hebei Engineering.
Each year, Hebei Engineering will transfer ownership of assets to
UNICOM equal in value to the Distributable Cash Flow received up to
60% of the assets in any one year. The maximum amount of assets
transferred will not exceed 90% of the assets until termination of the
Project Cooperation Contract.
Upon the termination of the contract the remaining 10% of the network
assets shall be assigned to UNICOM without any further consideration.
Hebei Engineering will continue to receive 78% of the Distributable
Cash Flow after transfer of all the assets for the remainder of the
15-year period.
Under PRC law, foreign investment entities, such as Hebei Engineering,
are not permitted to own or operate telecommunications networks.
Substantially all of the Hebei Engineering's revenues are derived from
contractual arrangements for the sharing of cash flow from network
operations rather than from ownership or operation of the networks.
Hebei Engineering has recorded its investment as right to future cash
flow (GSM Construction Costs) at cost and is amortizing it over the
remaining life of the project beginning with the fiscal-year ending
March 31, 1998. Income from the GSM Networks is recognized at the time
when Hebei Engineering can estimate or calculate the portion of its
Distributable Cash Flow from the Networks. UNICOM commenced operation
of the GSM Networks in February 1997.
The investment in the GSM Networks is depreciated on a straight-line
basis over the remaining life of the Project Cooperation Contract from
the year the network began to operate. Amortization of the Investment
in GSM Networks for the year ended March 31, 1999 amounted to
approximately $4,600,000.
Net revenue from GSM Networks recognized by Hebei Engineering for the
year ended December 31, 1998 and 1997 was RMB6,488,482 and RMB
1,706,499, respectively.
B. SUMMARY FINANCIAL INFORMATION FOR THE UNCONSOLIDATED SUBSIDIARY
The following tables represent summary financial information for the
Joint Venture (Hebei Equipment) as of and for the years ended December
31, 1998 and 1997:
HEBEI HEBEI
EQUIPMENT EQUIPMENT
1998 1997
RMB RMB
Revenues -- --
=========== ============
Net loss (4,555,098) (10,284,529)
=========== ============
Total assets 22,790,840 45,480,245
=========== ============
Total liabilities 12,707,249 30,841,556
=========== ============
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1999 1998
Furniture, fixtures and equipment $ 208,277 $ 201,258
Leasehold improvements 18,009 17,498
Computer software 15,385 12,273
--------- ---------
241,671 231,029
Less accumulated depreciation 144,745 91,893
--------- ---------
$ 96,926 $ 139,136
========= =========
Depreciation expense for fiscal years ended March 31, 1999, 1998 and
1997 was $55,250, $43,432 and $28,905 respectively.
4. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases a facility for its corporate and
operations offices under a long-term lease agreement. Minimum annual
rental commitments under this lease are as follows:
MARCH 31,
2000 $ 334,400
2001 55,733
---------
$ 390,133
=========
Rent expense for fiscal years ended March 31, 1999, 1998 and 1997 was
$356,357, $337,763 and $369,969 respectively.
EMPLOYMENT AGREEMENTS - The Company has entered into employment
agreements with officers expiring through January 2001 with aggregate
annual salaries of $1,000,000.
LITIGATION - A first amended complaint, dated April 15, 1996, was
filed against the Company, ITV, and other parties, including certain
of the Company's officers, directors and principal stockholders, by
Jacqueline Brandwynne, a stockholder of the Company, in a matter
captioned "Jacqueline B. Brandwynne vs. AVIC Group International,
Inc., et al." The complaint, filed in the Superior Court of
California, County of Los Angeles, alleges fraud, misrepresentation
and breach of contract with respect to the sale of 666,667 shares of
ITV stock for $1,000,000 prior to the completion of the Reorganization
Agreement between the Company and ITV (the "Reorganization Agreement")
in February 1995, in connection with which the shares of ITV were
exchanged on a two for one basis for shares of the Company. The
complaint alleges that certain misrepresentations were made in
connection with the sale of the 666,667 shares and that the claimant
was entitled to receive 666,667 shares of the Company after the
completion of the Reorganization Agreement. The complaint seeks
rescission of the transaction and damages of no less than $1,000,000.
The complaint also alleges a claim in connection with an alleged oral
employment agreement for 125,000 options to purchase shares of the
Company's Common Stock at an exercise price of $0.35 per share and the
right to purchase additional shares of Common Stock at $1.00 per
share, plus other benefits, including a salary of no less than
$130,000. Management of the Company believes that these claims are
without merit, that there are valid defenses to each claim and is in
the process of vigorously defending the matter. (See note 10)
The Company is not aware of any pending litigation that could have a
materially adverse effect on the Company's business, financial
condition or results of operations.
REGULATION - The PRC's legal system is a civil law system based on
written statutes and is a system in which decided legal cases have
little precedential value. The PRC Government began to promulgate a
comprehensive system of laws in 1979. Many laws and regulations
governing economic matters in general have been promulgated. The
general effect of this legislation has been to enhance the protection
afforded to foreign invested enterprises in the PRC. However, as these
laws and regulations are relatively new, their interpretation and
enforcement involve significant uncertainty.
The current PRC regulations prohibit foreign investors and foreign
invested enterprises from operating or participating in the operation
of telecommunications networks in China. The relevant PRC laws and
regulations do not define what constitutes foreign operations or
participation in operations, and it is not clear what rights or
actions would violate such laws and regulations. Based on advice of
its Chinese legal counsel, the Company has structured its investments
in China by establishing Chinese-foreign joint ventures in the PRC to
provide financing and consultancy services to licensed
telecommunications operators, i.e., utilizing the commonly-known
Chinese-Chinese-Foreign ("CCF") structure. The PRC Government is
currently undertaking a review of the CCF structure used by Unicom. It
has been reported that Unicom has been instructed by the PRC
Government not to use the CCF structure in the future and that the PRC
Government is examining and evaluating the existing CCF contracts. It
is unclear if, and to what extent, the existing CCF contracts entered
into by Unicom will be required to be amended. It is also unclear
whether foreign entities involved in the CCF structures will be
required to divest themselves of their respective interests in the
Chinese-foreign joint venture companies. The evaluation of the CCF
structure by the PRC Government may have a material adverse impact on
the contracts entered into by Hebei Engineering and by the Company
which utilize the CCF structure and may have a material adverse effect
on the Company's business, financial condition and results of
operations.
In order to provide a uniform regulatory framework to encourage the
orderly development of the PRC telecommunications industry, the PRC
authorities are currently preparing a draft Telecommunications Law.
Once formulated, the draft law will be submitted to the National
People's Congress for review and adoption. It is unclear if and when
the Telecommunications Law will be adopted. The nature and the scope
of the regulation envisaged by the Telecommunications Law is not fully
known but the Company believes that, if adopted, the
Telecommunications Law will have a positive effect on the overall
development of the telecommunications industry in the PRC. However,
the Telecommunications Law, if adopted, may have an adverse effect on
the Company's business, financial condition or results of operations.
The Chinese laws and regulations governing the telecommunications
industry may also be changed or applied in a manner which would have a
material adverse effect on the business, financial condition and
results of operations of the Company.
Each of the Company's joint ventures, Hebei Equipment and Hebei
Engineering, is organized under the laws of the PRC as a Sino-foreign
equity joint venture enterprise, a distinct legal entity with limited
liability. Such entities are governed by the Law of the PRC on Joint
Ventures Using Chinese and Foreign Investments, and implementing
regulations related thereto. The parties to an equity joint venture
have rights to the financial returns of the joint venture in
proportion to the joint venture interests that they hold. The
operation of equity joint ventures is subject to an extensive body of
law governing such matters as formation registration, capital
contribution, capital distributions, accounting, taxation, foreign
exchange, labor and liquidation. The transfer or increase of an
interest in a Sino-foreign equity joint venture enterprise requires
agreement among the parties to the venture and is effective upon
approval of relevant government agencies.
FOREIGN CURRENCY EXCHANGE - The Company's joint ventures will receive
nearly all of their revenue in Renminbi, which will need to be
converted to other currencies, primarily U.S. dollars, and remitted
outside of the PRC. Although the Renminbi is not a freely convertible
currency at present, effective July 1, 1996, foreign currency "current
account" transactions by foreign investment enterprises, including
Sino-foreign joint ventures, are no longer subject to the approval of
State Administration of Foreign Exchange ("SAFE", formerly, "State
Administration of Exchange Control"). These transactions need only a
ministerial review, according to the Administration of the Settlement,
Sale and Payment of Foreign Exchange Provisions promulgated in 1996.
"Current account" items include international commercial transactions,
which occur on a regular basis, such as those relating to trade and
provision of services. Distributions to joint venture parties also are
considered a "current account transaction." Other noncurrent account
items, known as "capital account" items, remain subject to SAFE
approval.
5. STOCKHOLDERS' EQUITY
CANCELLATION OF LOANS PAYABLE TO SHAREHOLDERS - In fiscal 1999, loans
payable and accrued interest in the amount of $2,359,621 were
cancelled and credited to Additional Paid-In Capital account.
CANCELLATION OF CERTAIN SHARES OF COMMON STOCK - On December 8, 1997,
the Company reduced its outstanding common stock and credited its
Additional Paid in Capital $12,728 as a result of canceling 12,727,909
shares of its common stock and 318,182 options to purchase its common
stock issued to Tweedia International, Ltd. The cancellation was based
on a determination that the full purchase price for the shares was
never paid. The 12,727,909 canceled shares represented approximately
thirty-eight percent of the total number of the Company's common
shares outstanding prior to the cancellation of such shares.
REPURCHASE OF COMMON STOCK - On September 14, 1998 the Company
announced its intention to purchase up to $1 million of its Common
Stock on the open market. As of March 31, 1999, the Company had
purchased 330,800 shares under this program for a total cost of
approximately $383,383. All common stock repurchased was cancelled as
of March 31, 1999.
SALE OF COMMON STOCK - In November 1996, the Company sold 1,000,000
shares of the Company's common stock through subscription agreements.
The Company received $2 million in proceeds with respect to these
subscriptions. The price per share reflected the quoted market value
of the common shares at the time of the transactions.
During fiscal 1998, 69,000 common shares were issued in connection
with the exercise of certain employee stock options. Proceeds from
these issuance aggregated $34,750.
SERIES A CONVERTIBLE PREFERRED STOCK - On August 19, 1997, upon
determination that the entire amount of a nonrefundable deposit had
been forfeited by a former affiliate, the Company canceled all of the
outstanding Series A Convertible Preferred Stock (the "Series A
Shares"). On December 19, 1995, the Company had issued 1,524,178
shares of the Company's Series A Shares in consideration of the
transfer of a $4,572,536 nonrefundable equipment purchase deposit to
the Company from a former affiliate. The Subscription Agreement for
the Series A Convertible Preferred Stock provided that, if all or any
portion of the deposit should be forfeited at any time and for any
reason whatsoever by the former affiliate an equivalent number of the
Series A Shares issued to it would be canceled.
SERIES B CONVERTIBLE PREFERRED STOCK - In June 1996, the Company
completed a $2,500,000 offering of its Series B Convertible Preferred
Stock ("Series B Preferred"). The net proceeds the Company received
were approximately $2,341,000. The offering consisted of 100 shares of
Series B Preferred at $25,000 per share and warrants to purchase
common stock of the Company. Each warrant entitled the holder to
purchase one share of common stock at a fixed conversion price. During
fiscal 1997, all outstanding Series B shares were converted to
1,507,477 common shares.
SERIES D CONVERTIBLE PREFERRED STOCK - In March 1997, the Company
completed a $1,500,000 offering of its Series D Convertible Preferred
Stock ("Series D Preferred"). The offering consisted of 150 shares of
Series D Preferred at $10,000 per share and warrants to purchase
common stock of the Company. The holder was entitled to cumulative
dividends at the annual rate of 8% per annum per share, payable
quarterly in shares of Common Stock or, in cash in connection with any
payment pursuant to a Conversion Default at the election of the
Company's board of directors. During fiscal 1998, the Series D
Preferred was converted into common stock of the Company at a
conversion rate equal to the lowest trading price of the Company's
common stock during the 30 days preceding each conversion date. In
addition, the Series D Preferred shareholders converted their warrants
into common stock at prices aggregating $131,909. Such Series D
Preferred and warrants conversions aggregated 2,236,507 shares. In
connection with the discount for the above conversion, the Company
credited Additional Paid in Capital $48,677 and charged preferred
dividends in an equal amount.
SERIES C CONVERTIBLE PREFERRED STOCK - In June 1997, the Company
completed a $2,500,000 offering of its Series C Convertible Preferred
Stock ("Series C Preferred"). The offering consisted of 250 shares of
Series C Preferred at $10,000 per share and entitled the holder to
cumulative dividends at an annual rate of 8% per annum per share. The
dividends were payable quarterly in shares of Common Stock or, in cash
in connection with any payment pursuant to a Conversion Default at the
election of the Company's board of directors. Such Series C shares
were converted at conversion rates equal to the lowest trading price
of the Company's common stock during the 30 business days immediately
preceding each conversion date. During fiscal 1998, 219 outstanding
Series C shares were converted into 4,507,639 common shares. In
addition, the Company repurchased for consideration of $406,100 and
retired 31 Series C shares. In connection with the discount for the
above conversion, the Company credited Additional Paid in Capital
$260,784 and charged preferred dividends in an equal amount.
SERIES E CONVERTIBLE PREFERRED STOCK - On October 22, 1997, the
Company issued 74 shares of its Series E Convertible Preferred Stock
(the "Series E Preferred"), par value $.001 per share and at a price
of $100,000 per share and paying an 8% in-kind dividends. The net
proceeds the Company received were approximately $6,759,000. The
Series E Preferred has a stated liquidation preference value of
$100,000 per share plus accrued in-kind 8% dividends since the date of
issuance. Such liquidation preference is senior to all common stock
but in parity with other series of preferred stock of the Company. The
holders of Series E Preferred have no voting rights except with
respect to certain matters that affect the rights related to the
Series E Preferred.
Conversion of the Series E Preferred into Common Stock, which are
restricted by certain "lock-up" agreements, is based on the lower of:
(i) the lesser of a 10% premium to the market price of the Company's
Common Stock, as reported on the American Stock Exchange, at the time
of the investment's closing or of a 10% premium to the 10 day average
trading price six months after the close or (ii) a discount to the
lowest trade during the five (5) trading days prior to each
conversion. The discount, which ranges from 15% to 20%, depends upon
the date of the shareholders' conversion of the Series E Preferred,
with the discount increasing as the period the shares are held
increases. Warrants were issued to five of the Series E Investors to
purchase up to 1,236,364 shares of the Company's Common Stock at a
price equal to 120% of the market price of the Company's Common Stock
at the time of the investment's closing. The number of warrants issued
to each investor depended upon the amount invested and the length of
the "lock-up" agreed upon between the Company and investor.
The Company registered 13,832,792 shares of common stock on January
16, 1998, to cover the common stock issuable to the Series E Holders
upon conversion of their Series E shares and exercise of their
warrants. As of March 31, 1999, 41.16 share of the Series E Preferred
Stock was converted into 5,661,070 shares of the Company's common
stock.
On November 10, 1998, 38.5 of the Company's Series E Preferred were
acquired from an investment fund by the Company and investors known to
the Company. As a result of this transaction, the Company bought back
3.08 shares of its Series E Preferred for $100,000. All of the Series
E Preferred repurchased by the Company, which have 53,655 warrants
attached, were retired and cancelled on January 20, 1999. 35.42 of the
Series E Preferred bought by other investors were converted to Common
Stocks on November 11, 1998. In connection to the conversion, the
investors entered into a non-binding agreement to hold the converted
Common Stock for a specified period of time. An additional 141,680
shares of Common Stocks were issued to the investors with respect to
the agreement entered and $144,375 was charged to expenses in the
statement of operations.
SERIES G CONVERTIBLE PREFERRED STOCK - In March 1999, the Company
completed a $2,000,000 offering of its Series G Convertible Preferred
Stock ("Series G Preferred"). The offering consisted of 20 shares of
Series G Preferred at $100,000 per share and warrants to purchase
common stock of the Company. Each warrant entitled the holder to
purchase one share of common stock at a fixed exercise price of $1.25
per share. The Company allocated $210,400 for the warrants issued
using a Black-Scholes model. The value allocated to the Series G
Preferred was $1,789,600. In connection with the warrants on the
Series G Preferred, the Company credited Additional Paid-in Capital
$210,400 and charged preferred dividends in an equal amount.
The Series G Preferred has a stated liquidation preference value of
$100,000 per share plus 8% accrued in-kind dividends since the date of
issuance. Such liquidation preference is senior to all common stock
but in parity with other series of preferred stock of the Company. The
holders of Series G Preferred have no voting rights except with
respect to certain matters that affect the rights related to the
Series G Preferred.
There was no conversion on Series G Preferred up to March 31, 1999.
STOCK WARRANTS - During fiscal 1999, the Company issued 600,000
warrants to purchase the Company's common stock at a fixed exercise
price of $1.25 per share. The warrants were issued in connection with
the Company's issuance of Series G Preferred (see Series G Convertible
Preferred Stock).
During fiscal 1998, the Company issued warrants to purchase 326,171
shares of the Company's Common Stock to the Placement Agent as fees
for services in connection with the placement of the Series E
Preferred described above. These warrants have an exercise price of
$2.475 per share and expire on October 22, 2002. The Company has
assigned a value of $161,450 to these warrants.
During fiscal 1998, the Company rescinded an agreement it entered into
in July 1996 with an investment banking firm in which such firm was to
act as a financial advisor to the Company. As part of this rescission
the Company canceled warrants to purchase 200,000 shares of the
Company's common stock. Professional fees and Warrants were reduced by
$147,000 to reflect this cancellation.
During fiscal 1997, the Company issued 186,111 warrants to purchase
the Company's common stock at a conversion price of 110% of the quoted
market value at the time of grant. The warrants were issued in
connection with the Company's issuance of Series B Preferred (see
Series B Convertible Preferred Stock).
On October 15, 1996, the Company agreed to issue warrants to purchase
200,000 shares of the Company's Common Stock to an advisor for
services related to advising the Company with respect to its
Sino-foreign joint ventures and marketing activities in the PRC. The
warrants issued have a three year term and an exercise price of $1.50,
which was the market value of the Company's Common Stock the warrants
were issued. In connection with this agreement, the Company recorded
$110,000 in professional fees which management determined to be the
fair value of the warrants.
In connection with a financial services agreement which has been
cancelled during 1999, the Company issued 600,000 warrants to an
investment banking firm, 300,000 of which vested at the time the
agreement was entered into and 300,000 which were to vest when such
firm had raised a minimum of $10 million. During fiscal 1997, with
respect to the vested 300,000 warrants, the Company recorded $222,500
in professional fees which management determined to be the fair value
of the warrants. The warrants were not exercised and were subsequently
cancelled during fiscal 1999. The value of such warrants was credited
to Additional Paid-In Capital upon cancellation.
ISSUANCE OF COMMON STOCK FOR SERVICES - During the year ended March
31, 1998 the Company issued shares of its common stock for services
rendered. The number of shares issued in each case was based upon the
quoted market value of the stock at the issue date and the value of
the services rendered. Total shares issued in connection with these
services amounted to 63,233 covering the $151,957 of expenses which
are included in the accompanying financial statements.
In April 1996, two outside directors each received 5,000 shares of
common stock for a total value of $90,000 which was recorded as
compensation expense. The number of shares issued was based on the
quoted market value of the common stock at the time of issuance.
In May 1996, 5,000 shares of the Company's common stock were issued as
payment for $45,625 of services rendered. In December 1996, 5,000
shares of the Company's common stock were issued as payment for
$18,125 for services rendered. Both issuance have been recorded as
professional fees at a value of the quoted market price of the common
stock at the time of the transaction.
In October 1996, the Company entered into agreements to settle $98,000
of outstanding professional fees through the issuance of options to
purchase 44,962 common shares. The number of shares was determined
based upon the quoted market value of the shares at the time of
issuance.
THE PROMETHEAN COMMON STOCK EQUITY AGREEMENT - On March 31, 1997 the
Company entered into a Common Stock Investment Agreement with
Promethean Investment Group L.L.C. ("Promethean") pursuant to which
Promethean would provide a $10 million equity line to the Company. The
agreement was cancelled during fiscal year 1999 by the Company in
accordance with the terms in the agreement.
Initially, 1,570,998 shares were issued into escrow on behalf of
Promethean. During the year ended March 31, 1998, none of the shares
issued under this agreement were released from escrow. During the year
ended March 31, 1999, this agreement was cancelled and all the shares
issued into escrow on behalf of Promethean were cancelled.
STOCK OPTIONS - The Company has adopted two stock option plans (the
AmTec, Inc. 1995 Stock Plan and the AmTec, Inc. 1996 Stock Option
Plan). Incentive and nonqualified options and stock appreciation
rights may be granted to employees, officers, directors, and
consultants of the Company. There are 12,500,000 shares of common
stock reserved for issuance under these plans. The exercise price of
the options are determined by the board of directors, but in the case
of an incentive stock option, the exercise price may not be less than
100% of the fair market value on the date of grant. Options vest over
periods not to exceed ten years.
A summary of the status of all of the Company's stock options issued
as of March 31, 1999, 1998 and 1997 and changes during the years then
ended is presented below:
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997
------------------------- ------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
Outstanding at
beginning of year 12,460,102 $ 1.42 7,905,000 $ 1.40 7,635,000 $ 1.39
Granted 527,500 1.14 4,624,102 2.55 280,000 1.74
Exercised 0 (69,000) 0.35 0
Cancelled (3,000,000) 3.06 0 (10,000) 8.25
----------- ----------- ----------
Outstanding at end
of year 9,987,602 $ 1.43 12,460,102 $ 1.42 7,905,000 $ 1.40
=========== ======== =========== ======== ========== ========
Options exercisable
at end of year 9,111,994 $ 1.46 7,671,102 $ 1.28 4,155,000 $ 0.42
========== ======== =========== ======== ========== ========
Weighted average
fair value of
options granted
during the year $ 0.19 $ 0.53 $ 0.69
=========== =========== ==========
The above options include options granted to the Hebei Provincial
Government during fiscal 1998 to acquire 3,000,000 shares of the
Company's common stock at a price of $3.0625 per share. These options,
which vest 25% every six months from the date of grant, were cancelled
during fiscal 1999. In connection with granting these options,
$1,837,500 was recorded as a charge to Deferred Option Cost and a
corresponding credit was made to Additional Paid in Capital. During
the quarter ended December 31, 1998, the Company cancelled these
option granted. Deferred Option Cost of $918,751 was amortized through
the cancellation date of these options. The unamortized Deferred
Option Cost up to the date of cancellation was charged to Additional
Paid in Capital.
The Company followed the guidelines under SFAS No. 123 to determine
the fair value of options at the date of grant. The value was
determined using an adjusted Black-Scholes option pricing model. The
Black-Scholes model is generally accepted as appropriate primarily for
short-term, exchange-traded options. The Company's management has
determined that the longer term options it has issued do not have the
liquidity of an exchange traded option and where the underlying common
stock is not highly liquid (as is the case with the Company's Common
Stock), the Black-Scholes formula needs to be adjusted, especially in
reference to the volatility measurement used. The Company's stock is
thinly traded, averaging around 100,000 shares per day, and cannot be
considered highly liquid. For the purpose of valuing the Company's
options, which can have up to a ten year life, the following
assumptions were used, where the volatility measurement was based on
management's expectations and judgement:
Risk-free rate 4.69 - 5.64%
Volatility 20-23%
Expected Life 3 - 5 years
Expected Dividends 0%
The following table summarizes information about options outstanding
at March 31, 1999:
WEIGHTED NUMBER
RANGE NUMBER AVERAGE EXERCISABE
OF OUTSTANDING REMAINING AVERAGE OPTIONS AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE AT EXERCISE
PRICES MARCH 31, 1999 LIFE (YEARS) PRICE MARCH 31, 1999 PRICE
$0.35-0.355 4,625,000 7.00 0.350 4,625,000 0.350
0.75 640,000 9.00 0.823 140,000 0.747
1.5 165,000 9.00 1.114 165,000 1.114
2.125 527,602 8.00 1.501 277,602 1.502
3.000 1,012,500 8.00 2.128 886,892 2.128
3.05-3.10 3,017,500 7.00 3.000 3,017,500 3.000
--------- ---------
9,987,602 9,111,994
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its employee plans. Accordingly, no compensation cost
has been recognized with respect to such plans. Had compensation cost
for the Company's stock option plans been determined consistent with
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company's net earnings and
earnings per share would have approximated the pro forma amounts
indicated below:
1999 1998
Net loss applicable to common shares -
as reported $(6,251,901) $(6,802,054)
============ ============
Net loss - pro forma $(6,812,194) $(8,635,367)
============ ============
Loss per common share - as reported $ (0.23) $ (0.23)
============ ============
Loss per common share share - pro forma $ (0.25) $ (0.29)
============ ============
6. NONREFUNDABLE DEPOSIT
On March 31, 1998, the Company reduced notes payable of $850,000
related to a nonrefundable deposit it received from a former
affiliate. Additional Paid-In Capital was credited for an equal
amount.
7. INCOME TAXES
The Company had net losses for 1999, 1998 and 1997 and, therefore, no
income taxes have been provided.
As of March 31, 1999, the Company has federal net operating loss carry
forwards of approximately $8,933,722 through 2014.
Significant components of the Company's deferred assets and tax
liabilities for federal income taxes consist of the following:
1999 1998
Deferred tax assets:
Net operating loss carryforwards 4,125,593 6,394,688
Start-up and other costs 6,623,557 3,027,575
Research credit 266,000 266,000
---------- ----------
Total deferred tax assets 11,015,150 9,688,263
Valuation allowance for deferred tax
assets (11,015,150) (9,688,263)
---------- ----------
Net deferred tax assets $ - $ -
=========== ==========
The net change in the valuation allowance for the years ended March
31, 1999 and 1998 was an increase of $1,326,887 and $1,976,552,
respectively.
8. ITEMS RECORDED IN THE FOURTH QUARTER
The Company recorded the following noncash items in the fourth quarter
of fiscal 1999:
In connection to Series E Preferred conversion, an additional 141,680
shares of Common Stocks were issued to some investors with respect to
a non-binding agreement to hold the converted Common Stock for a
specified period of time and $144,375 was charged to expenses in the
statement of operations.
The Company recorded the following noncash items in the fourth quarter
of fiscal 1998:
Preferred stock dividends payable in the form of common stock of
$1,399,000;
A value of stock options awarded to non employees of $1,837,500 was
recognized and $459,375 of such value was amortized, and
Professional fees were reduced by $147,000 as a result of the
cancellation of 200,000 warrants issued to an investment-banking firm.
9. SIGNIFICANT TRANSACTIONS
On August 27, 1998 the Company signed an agreement with a subsidiary
of Global TeleSystems, Inc. ("GTS"), under which a subsidiary of GTS
will acquire approximately 5.9 million shares of the Company's common
stock and the Company, through a subsidiary, will acquire GTS's 75%
interest in a Shanghai-based joint venture. This joint venture hold
the rights to a majority share of the cash flow generated by Shanghai
VSAT Network Systems (SVC), the premier satellite-based
telecommunications network operator in China.
The consummation of this transaction with GTS is subject to various
conditions, including receipt of necessary governmental approvals and
other customary closing conditions. In addition, under the American
Stock Exchange guidelines the Company will be required to obtain
shareholder approval for the number of shares related to this issuance
that are in excess of 19.9% of the Common Stock outstanding on the
date of issuance. Once all of the conditions in China necessary for
the consummation of the transaction are completed, the Company's
shareholders will be asked to approve the necessary increase in the
shares to be issued for such transaction. At present, GTS is working
to complete the pre-closing conditions in China, including obtaining
the necessary governmental approvals. The successful completion of
this merger is subject to final due diligence and shareholder
approval, among other conditions.
On December 23, 1998, the company signed an agreement with UIHH, an
indirect subsidiary of United International Holdings, Inc., under
which AmTec will issue to UIHH's direct parent company $12 million of
convertible preferred stock ("Series F Shares") in exchange for 100%
of the common stock of UIHH. UIHH holds a 49% interest in a
Sino-foreign joint venture with the Broadcasting Bureau of Hunan, the
monopoly cable television operator in Hunan Province, People's
Republic of China.
The consummation of this transaction with UIHH is subject to various
conditions, including receipt of necessary governmental approvals and
other customary closing conditions. In addition, under the American
Stock Exchange guidelines the Company will be required to obtain
shareholder approval for the number of Common Stock related to this
issuance that are in excess of 19.9% of the Common Stock outstanding
on the date of issuance. Once all of the conditions in China necessary
for the consummation of the transaction are completed, the Company's
shareholders will be asked to approve the necessary increase in the
shares to be issued for the transaction. At present, UIH is working to
complete the pre-closing conditions in China, including necessary
governmental approvals. The successful completion of this merger is
subject to final due diligence and shareholder approval, among other
conditions.
10. SUBSEQUENT EVENTS
On April 28, 1999, the Company formed a 50-50% joint venture, IP.TEL,
LLC with Fusion Telecommunications International, Inc. ("Fusion"), a
private facilities-based, multinational long-distance company.
Fusion's current service offerings include voice and data, switched
and dedicated, domestic and international long-distance and domestic
and international prepaid calling cards, provided through a network of
owned and leased facilities, leased lines and resale agreements.
The joint venture will provide value-added telecommunication services,
including telephony and data, to and from Asia. Utilizing the
Company's established presence in China and Fusion's telecommunications
franchise, the companies plan to expand the service offerings of the
joint venture to include a fully integrated Internet protocol based
network to provide voice and fax services. The joint venture agreement
includes language that gives both parties the right of first refusal
regarding projects in China within the scope of IP.TEL, LLC's business
proposition.
During May 1999, the Company formed a three-way alliance with Fusion
and IXS.NET, a private IP fax service provider, to develop IP fax
services Asia. The Company and Fusion agreed to make an equal
convertible debt investment into IXS.NET and the Company has an option
to acquire up to 50% of IXS.NET. The Company has invested $175,000
under a loan agreement to IXS.NET and expects to enter into an
eighteen months convertible debt agreement shortly. The convertible
debt agreement will allow for the Company to advance up to $575,000
over the eighteen months period, subject to certain terms and
conditions. The business is in the process of starting up in Hebei
Province. During the next quarter, the Company anticipates obtaining
licenses to expand the service in Sichuan, Beijing, Tanjain and other
provinces in China.
With respect to the complaint related to the "Jacqueline B. Brandwynne
vs. AVIC Group International, Inc., et al.", on June 18, 1999, the
Company and Jacqueline B. Brandwynne have reached a settlement in
principle of the legal proceedings. Subject to documentation and
signing of the final agreement, the parties have agreed to release
each other from all claims. The Company has agreed to pay Ms.
Brandwynne $250,000 in AmTec Common Stock, which includes her claim
for attorney's fees. A full provision for the settlement amount was
made during the year ended March 31, 1999. While the management of the
Company believes that these claims are without merit, and that there
are valid defenses to each claim, management believes it is in the
best interest of the Company to settle the litigation, eliminate any
possible liability exposure, and avoid additional legal fees to defend
the litigation.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
We have audited the accompanying balance sheets of Hebei United
Telecommunications Equipment Co., Ltd. as of December 31, 1998 and
1997 and the related statements of operations, investors' equity and
cash flows for the year ended December 31, 1998 and the period April
29, 1997 (commencement of operations) to December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Hebei United
Telecommunications Equipment Co., Ltd. as of December 31, 1998 and
1997 and the results of its operations and its cash flows for the year
ended December 31, 1998 and the period April 29, 1997 (commencement of
operations) to December 31, 1997 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte Touche Tohmatsu
Beijing, People's Republic of China
June 1, 1999
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
December 31, December 31,
1998 1997
-------------- ---------------
RMB RMB
ASSETS
Current Assets:
Cash and cash equivalents 16,232,535 39,500,312
Other receivables 6,169,000 1,102,753
-------------- ---------------
Total current assets 22,401,535 40,603,065
Property and equipment, net 389,305 493,430
Investments in a Joint Venture - 4,383,750
-------------- ---------------
Total Assets 22,790,840 45,480,245
============== ===============
LIABILITIES AND INVESTORS' EQUITY
Current Liabilities:
Amount due to an investor 12,656,909 30,808,631
Other payables 50,340 32,925
-------------- ---------------
Total current liabilities 12,707,249 30,841,556
-------------- ---------------
Total Liabilities 12,707,249 30,841,556
-------------- ---------------
Commitments and Contingencies
Investors' Equity:
Capital contribution 24,923,218 24,923,218
Accumulated deficit (14,839,627) (10,284,529)
-------------- ---------------
Total Investors' Equity 10,083,591 14,638,689
-------------- ---------------
Total Liabilities and Investors' Equity 22,790,840 45,480,245
============== ===============
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD APRIL 29, 1997
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
April 29, 1997
Year ended (commencement of
December 31, operations) to
1998 December 31, 1997
--------------- ------------------
RMB RMB
General and administrative expenses (1,508,326) (758,658)
Other (expense) income:
Operation set up expense - (2,000,000)
Share of losses of investment
in Joint Venture (4,383,750) (8,347,533)
Exchange loss - (24,680)
Interest income 1,336,978 846,342
--------------- -----------------
Net loss (4,555,098) (10,284,529)
=============== ==================
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
STATEMENTS OF INVESTORS' EQUITY
DECEMBER 31, 1998 AND 1997
Capital Accumulated
Contribution Deficit Total
------------ -------------- ------------
RMB RMB RMB
Balance, April 29, 1997 - - -
Capital contribution 24,923,218 - 24,923,218
Net loss - (10,284,529) (10,284,529)
------------ -------------- ------------
Balance, December 31, 1997 24,923,218 (10,284,529) 14,638,689
Net loss - (4,555,098) (4,555,098)
------------ -------------- -------------
Balance, December 31, 1998 24,923,218 (14,839,627) 10,083,591
============ ============== =============
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD APRIL 29, 1997
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
April 29, 1997
(commencement
Year ended of operations)
December 31, to December 31,
1998 1997
------------ --------------
RMB RMB
Cash flows from operating activities:
Net loss (4,555,098) (10,284,529)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 95,981 37,928
Loss on disposal of equipment 10,944 --
Equity in losses of investment in Joint
Venture 4,383,750 8,347,533
Changes in assets and liabilities:
Other receivables (5,066,247) (1,102,753)
Amount due to an investor (18,151,722) 30,808,631
Other payables 17,415 32,925
------------ -------------
Net cash (used in) provided by operating
activities (23,264,977) 27,839,735
------------ -------------
Cash flows from investing activities:
Additions of property and equipment (2,800) (531,358)
------------ -------------
Net cash used in investing activities (2,800) (531,358)
------------ -------------
Cash flow from financing activities:
Capital contribution - 12,191,935
------------ -------------
Net cash provided by financing activities - 12,191,935
------------ -------------
Net (decrease) increase in cash and cash
equivalents (23,267,777) 39,500,312
Cash and cash equivalents, beginning of
period 39,500,312 -
------------ -------------
Cash and cash equivalents, end of period 16,232,535 39,500,312
============ =============
Non-cash transactions:
During the period ended December 31, 1997, DEVELOPMENT CO. and CATCH
contributed their interest in a Joint Venture valued at RMB 12,731,283 into
the Company as capital contribution.
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD APRIL 29, 1997
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
1. ORGANIZATION
Hebei United Telecommunications Equipment Co., Ltd (`the Company")
was established on April 29, 1997 as a limited liability joint
venture company in the People's Republic of China ("PRC"). The
period of operation is twenty years. The registered capital of the
Company was US$3 million, of which 60.8% (US$ 1.824 million) was
contributed by AmTec, Inc. (formerly known as AVIC Group
International, Inc.), 9.2% (US$ 276,000) by CATCH Telecommunication
Co., Ltd. (the "CATCH") and 30% (US$ 900,000) by Hebei United
Telecommunications Development Co., Ltd. (the "DEVELOPMENT CO."). On
November 7, 1997, CATCH agreed to transfer its interest in the
Company to AmTec, Inc. Subsequent to the transfer (which occurred
after December 31, 1997), AmTec, Inc. owns 70% (US$ 2.1 million) and
DEVELOPMENT CO. owns 30% (US$900,000) of the Company's registered
capital. The Company's major activity to date is an investment in a
Chinese joint venture which is mainly engaged in the development and
construction of telecommunication systems, and providing related
technical consulting and repair services.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America ("US
GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the Company, which are required to
be prepared in accordance with the accounting principles and
relevant financial regulations as established by the Ministry of
Finance of the PRC.
The principal adjustments made to conform the statutory financial
statements of the Company to US GAAP included the following:
o Adjustment to write off organization and operation set up
expenses.
o Adjustment to write off exchange loss.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies which have been adopted in
preparing the financial statements set out in this report, and which
conform with accounting principles generally accepted in the United
States of America are as follows:
Cash and cash equivalents - Cash and cash equivalents include cash
on hand, demand deposits and highly liquid instruments with a
maturity of three months or less at the time of purchase.
Property and equipment - Property and equipment is stated at cost
less accumulated depreciation. Depreciation is provided using the
straight-line method to write off the cost of property and
equipment, net of the estimated residual value of 10% of cost, over
their estimated useful lives as follows:
Furniture, fixture and equipment 5 years
Motor vehicles 5 years
Long lived assets - The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that
the net carrying amount may not be recoverable. When such events
occur, the Company measures impairment by comparing the carrying
value of the long-lived asset to the estimated undiscounted future
cash flows expected to result from the use of the assets and their
eventual disposition. If the sum of the expected undiscounted future
cash flows is less than the carrying amount of the assets, the
Company would recognize an impairment loss. The impairment loss, if
determined, would be measured as the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
Investment in Joint Venture - Hebei Equipment owns 51% of Hebei
United Telecommunications Engineering Company, Ltd. ("Hebei
Engineering"). Hebei Equipment accounts for its investment using
equity method of accounting as minority shareholders of Hebei
Engineering have substantive participating rights under the joint
venture contracts. Under the equity method, the investment is
carried at cost of acquisition, plus the Company's equity in
undistributed earnings or losses since acquisition. Equity in the
losses of the unconsolidated subsidiary is recognized according to
the Company's percentage ownership in the unconsolidated subsidiary
until the Company contributed capital has been fully depleted.
Income tax - Deferred income taxes are provided for using the
liability method. Under the liability method, deferred income taxes
are recognized for all significant temporary differences between the
tax and financial statement bases of assets and liabilities. The tax
consequences of those differences are classified as current or
non-current based upon the classification of the related assets or
liabilities in the financial statements. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of, the
deferred tax assets will not be realized.
Foreign currency translation - The Company's financial statements
are prepared using Renminbi as the reporting currency. Foreign
currency transactions are translated at the rates ruling on the
dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated at the rates ruling
on the balance sheet date. Exchange gains and losses are reported in
the statement of operation.
Comprehensive Income - Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" establishes new
rules for reporting and display of comprehensive income and its
components. The Company has no items of other comprehensive income
and the net loss reported in the statement of operations is
equivalent to the total comprehensive loss.
Segments of an Enterprise and Related Information - SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information"
requires the reporting of profit and loss, specific revenue and
expense items, and assets for reportable segments. It also requires
the reconciliation of total segment revenues, total segment profit
or loss, total segment assets, and other amounts disclosed for
segments, in each case to the corresponding amounts in the general
purpose financial statements. The Company adopted FASB 131 during
the year and since the Company only invested in the Hebei
Engineering, no other reportable segments were reported in the
financial statements.
Concentration of credit risk - Financial instruments that
potentially subject the Company to concentrations of credit risk
consists principally of temporary cash investments. The Company
places its temporary cash investments with various financial
institutions in the PRC. The Company believes that no significant
credit risk exists as these investments are made with high-credit,
quality financial institutions.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
recorded amounts of assets and liabilities and disclosures of
contingent assets and liabilities in the financial statements and
recorded amounts of revenue and expenses during the period. Actual
results could differ from these estimates.
Fair value of financial instrument - The carrying values of cash and
cash equivalents, other receivables, other payables, and amount due
to an investor approximate fair value because of the short maturity
of these instruments.
New accounting standard not yet adopted - The Financial Accounting
Standards Board has issued a new standard SFAS No. 133, "Derivative
Instruments and Hedging Activities", which is effective for fiscal
years beginning after June 15, 1999. Management has not yet
completed the analysis of the impact this would have on the
financial statements of the Company and has not yet adopted this
standard.
4. OPERATION SET UP EXPENSE
Amount represents payment to CATCH for services provided in
connection with the formation of the Company.
5. INCOME TAX
The statutory income tax rate of the Company is 33%. There is no
provision for the income taxes during the year ended December 31,
1998 and the period from April 29, 1997 (commencement of operations)
to December 31, 1997 as the Company incurred losses during the
relevant periods.
Deferred tax assets of RMB695,754 and RMB639,209 existed as at the
end of 1998 and 1997, respectively, arising from a temporary
difference. A valuation allowance has been established for the full
amount of the deferred tax assets since it is considered more likely
than not that all of the deferred assets will not be realized.
Deferred tax assets are composed of the following:
December 31,
----------------------------------
1998 1997
--------------- ---------------
RMB RMB
Operation set up expense 660,000 660,000
Organization expenses 20,948 (60,980)
Exchange gain/loss 8,144 8,144
Other 6,662 32,045
Valuation allowance (695,754) (639,209)
--------------- ---------------
- -
=============== ===============
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, December 31,
--------------- ---------------
1998 1997
--------------- ---------------
RMB RMB
At cost:
Furniture, fixtures and equipment 222,358 233,958
Motor vehicles 297,400 297,400
--------------- ---------------
519,758 531,358
Less: Accumulated depreciation 130,453 37,928
--------------- ---------------
389,305 493,430
=============== ===============
All assets are located in the PRC.
7. INVESTMENT IN A JOINT VENTURE
The Company holds a 51% interest in Hebei Engineering, which is
developing GSM networks in the ten largest cities in Hebei Province,
PRC. Nippon Telegraph and Telephone International, Inc. ("NTTI") and
Itochu Corporation hold the remaining 49% interest in Hebei
Engineering.
The Company's investment in the joint venture were accounted for by
the equity method of accounting because minority shareholders of Hebei
Engineering have substantive participating rights under the provision
of the Joint Venture contracts.(See Note 3)
December 31, December 31,
1998 1997
-------------- --------------
RMB RMB
Cost 12,731,283 12,731,283
Less: Share of losses (12,731,283) (8,347,533)
------------- -------------
- 4,383,750
============= =============
Hebei Engineering is a Sino-foreign equity joint venture established
on January 31, 1996 in the PRC. The period of operation is
twenty-five years. The registered capital of the Company is US$ 3
million. The Company is mainly engaged in the development and
construction of telecommunication systems, and providing related
technical consulting services.
The summarized balance sheet of Hebei Engineering as of December 31,
1998 and 1997 and its statement of operations for the years ended
December 31, 1998 and the period April 29, 1997 (commencement of
operations) to December 31, 1997 are as follows:
Balance Sheet
December 31, December 31,
1998 1997
--------------- ---------------
RMB RMB
ASSETS
Current Assets: 31,169,950 30,233,253
Other assets 5,336,274 5,840,362
Investment in GSM networks 240,385,622 235,635,325
--------------- ---------------
Total Assets 276,891,846 271,708,940
=============== ===============
LIABILITIES AND INVESTORS' (DEFICIT) EQUITY
Current liabilities 44,701,454 85,938,393
Long-term Liabilities: 237,826,398 177,052,277
--------------- ---------------
Total Liabilities 282,527,852 262,990,670
--------------- ---------------
Investors' (deficit) equity: (5,636,006) 8,718,270
--------------- ---------------
Total Liabilities and Investors'(deficit)
equity 276,891,846 271,708,940
=============== ===============
Statement of operations
Year ended Year ended
December 31, December 31,
1998 1997
--------------- ----------------
RMB RMB
Net revenue from GSM networks 6,488,482 1,706,499
Total expenses (22,726,394) (20,348,240)
--------------- ----------------
Net loss from operations (16,237,912) (18,641,741)
Total other income, net 1,883,636 2,274,029
--------------- ----------------
Net loss (14,354,276) (16,367,712)
=============== ================
8. AMOUNT DUE TO AN INVESTOR
The amount represents funds advanced to the Company by AmTec, Inc.
These amounts are payable on demand and bear no interest.
9. CAPITAL CONTRIBUTION
December 31, 1998 and 1997
-------------------------------
Ownership RMB
Capital contributed by:
DEVELOPMENT CO. 30% 7,480,150
AmTec Inc. 70% 17,443,068
------------- ---------------
100% 24,923,218
============ ================
10. COMMITMENTS
The Company leases certain buildings under operating leases, which
expire through March 1999. Rental expense under operating leases was
RMB 100,128 and RMB 62,580 in 1998 and 1997 respectively.
The aggregate annual minimum operating lease commitments under all
non-cancellable leases at December 31, 1998 is RMB 16,700 for a
lease expiring during the fiscal year 1999.
11. RETIREMENT BENEFITS
The Company's employees are entitled to a retirement pension
calculated with reference to their basic salaries on retirement and
their length of service in accordance with a government managed
pension plan. The PRC government is responsible for the pension
liability to these retired employees. The Company is required to
make contributions to the state retirement plan at rates ranging
from 18% to 20% of the adjusted monthly basic salaries of the
current employees. The expense of such arrangements to the Company
was insignificant for the periods presented. The Company is not
obligated under any other post-retirement plans and post-employment
benefits are not material.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
We have audited the accompanying balance sheets of Hebei United
Telecommunications Engineering Co., Ltd. as of December 31, 1998 and
1997 and the related statements of operations, investors' equity and
cash flows for the years ended December 31, 1998 and 1997 and the period
from January 31, 1996 (commencement of operations) to December 31,1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Hebei United
Telecommunications Engineering Co., Ltd. as of December 31, 1998 and
1997 and the results of its operations and its cash flows for the year
ended December 31, 1998, 1997 and the period from January 31, 1996
(commencement of operations) to December 31, 1996 in conformity with
accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 13 to
the financial statements, the Company has suffered recurring losses from
operations and has negative working capital that rises substantial doubt
about the ability to continue as a going concern. Management's
explanations in regard to these matters are also described in Note 13.
The financial statements do not include any adjustments that might
result from the outcome of the uncertainty.
Deloitte Touche Tohmatsu
Beijing, People's Republic of China
June 1, 1999
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
December 31
------------------------------
1998 1997
------------- -------------
RMB RMB
ASSETS
Current Assets:
Cash and cash equivalents 23,869,946 29,278,905
Accounts receivable 6,829,981 -
Other receivables 470,023 954,348
------------- -------------
Total current assets 31,169,950 30,233,253
Property and equipment, net 5,273,129 5,783,117
Deferred assets 63,145 57,245
Investment in GSM networks, net 240,385,622 235,635,325
------------- -------------
Total Assets 276,891,846 271,708,940
============= =============
LIABILITIES AND INVESTORS' EQUITY (DEFICIENCY)
Current Liabilities:
Amount due to investors 844,392 997,597
Other payables 10,675,770 84,888,076
Accrued expenses 66,492 52,720
Long-term loan due within 1 year 33,114,800 -
------------- -------------
Total current liabilities 44,701,454 85,938,393
------------- -------------
Long-term Liabilities:
Long-term loans 230,313,434 165,816,800
Other payables 7,512,964 11,235,477
------------- -------------
237,826,398 177,052,277
------------- -------------
Total Liabilities 282,527,852 262,990,670
------------- -------------
Commitments and Contingencies
Investors' equity (deficit):
Capital contribution 24,963,300 24,963,300
Capital reserve (4,800) (4,800)
Accumulated deficit (30,594,506) (16,240,230)
------------- -------------
Total investors' (deficit) equity (5,636,006) 8,718,270
------------- -------------
Total Liabilities and Investors' Equity 276,891,846 271,708,940
============= =============
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD JANUARY 31, 1996
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
January 31, 1996
Year ended Year ended (commencement
December 31, December 31, of operations)
1998 1997 to December
31, 1996
--------------- -------------- ----------------
RMB RMB RMB
Net revenue from GSM networks 6,488,482 1,706,499 -
--------------- -------------- ----------------
Expenses:
General and administrative expenses (2,694,259) (2,222,446) (1,340,568)
Amortization of GSM networks (20,032,135) (18,125,794) -
--------------- -------------- ----------------
Total expenses (22,726,394) (20,348,240) (1,340,568)
--------------- -------------- ----------------
Net loss from operations (16,237,912) (18,641,741) (1,340,568)
--------------- -------------- ----------------
Other income (expense) :
Rental income, net 461,784 736,965 352,724
Other income, net - 250,000 -
Interest income 1,266,668 1,328,727 1,277,390
Exchange (gain) loss 233,713 (41,663) (162,064)
Interest expense (78,529) - -
--------------- -------------- ----------------
Total other income (expense) 1,883,636 2,274,029 1,468,050
--------------- -------------- ----------------
Net (loss) income (14,354,276) (16,367,712) 127,482
=============== ============== ================
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
STATEMENTS OF INVESTORS' EQUITY/ (DEFICIT)
DECEMBER 31, 1998, 1997 AND 1996
Retained
Capital Capital earning/
contribution reserve (Accumulated Total
deficit)
------------- ------------- ---------------- --------------
RMB RMB RMB RMB
Balance, January 31, 1996 - - - -
Capital contribution 24,963,300 - - 24,963,300
Exchange difference on capital
contribution - (4,800) - (4,800)
Net income - - 127,482 127,482
------------- ------------- ---------------- --------------
Balance, December 31, 1996 24,963,300 (4,800) 127,482 25,085,982
Net loss - - (16,367,712) (16,367,712)
------------- ------------- ---------------- --------------
Balance, December 31, 1997 24,963,300 (4,800) (16,240,230) 8,718,270
Net loss - - (14,354,276) (14,354,276)
------------ ------------- ---------------- --------------
Balance, December 31, 1998 24,963,300 (4,800) (30,594,506) (5,636,006)
============= ============= ================ ==============
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM JANUARY 31, 1996
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
January 31, 1996
Year ended Year ended (commencement
December 31, December 31, of operations)
1998 1997 to December
31, 1996
-------------- -------------- ----------------
RMB RMB RMB
Cash flows from operating activities:
Net (loss)/income (14,354,276) (16,367,712) 127,482
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Loss on disposals of equipment 6,043 9,407 -
Depreciation 501,745 358,278 119,003
Amortization of investment in GSM networks 20,032,135 18,125,794 -
Changes in assets and liabilities:
Accounts receivable (6,829,981) - -
Other receivables 484,325 (869,654) (84,694)
Other payables 364,203 369,218 324,892
Accrued expenses 13,772 28,160 24,560
-------------- -------------- ----------------
Net cash provided by operating activities 217,966 1,653,491 511,243
-------------- -------------- ----------------
Cash flows from investing activities:
Short-term investment - 270,300 (270,300)
Additions of property and equipment - (3,113,736) (3,156,070)
Proceeds from disposal of equipment 2,200 - -
Investment in GSM networks (103,234,659) (69,144,541) (88,189,538)
Others (5,900) (8,500) (48,744)
-------------- -------------- ----------------
Net cash used in investing activities (103,238,359) (71,996,477) (91,664,652)
-------------- -------------- ----------------
Cash flow from financing activities:
Proceeds from loans 107,211,434 66,238,400 161,997,650
Repayment of loans (9,600,000) - (62,419,250)
Capital contribution - - 24,958,500
-------------- -------------- ----------------
Net cash provided by financing activities 97,611,434 66,238,400 124,536,900
-------------- -------------- ----------------
(Decrease) increase in cash and cash
equivalents (5,408,959) (4,104,586) 33,383,491
Cash and cash equivalents, beginning of
period 29,278,905 33,383,491 -
-------------- -------------- ----------------
Cash and cash equivalents, end of period 23,869,946 29,278,905 33,383,491
============== ============== ================
Supplemental disclosures of cash
flows information:
Interest paid 20,602,968 8,144,426 -
============== ============== ================
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
Hebei United Telecommunications Engineering Co., Ltd (the "Company")
was established on January 31, 1996 as a limited liability joint
venture company in the People's Republic of China ("PRC"). The
period of operation is twenty-five years. The registered capital of
the Company is US$3 million, of which 51% (US$1.53 million) was
contributed by Hebei United Telecommunications Equipment Co., Ltd.
("Hebei Equipment"), and 49% (US$ 1.47 million) by NTT International
Corporation ("NTT"). On October 18, 1996, NTT agreed to transfer
19.6% of the capital in the Company to Itochu Corporation ("ITOCHU")
with effect from December 27, 1996. Subsequent to the transfer,
Hebei Equipment owns 51% (US$1.53 million), NTT owns 29.4%
(US$882,000) and ITOCHU owns 19.6% (US$588,000) of the Company's
registered capital. The Company is mainly engaged in developing and
assisting in construction of telecommunication systems, and
providing related technical consulting services.
The Company has invested approximately RMB 253 million in the
construction of GSM telecommunications networks (the "GSM networks")
in Hebei Province of the PRC. The GSM networks are being built
pursuant to a 15-year Project Cooperation Contract with China United
Communications Company ("UNICOM"), the operator of the GSM Networks.
Terms of the contract include the following:
Initially, UNICOM will own 30% of the assets while the Company will
own 70% of the assets. Both parties agreed to distribute the profit
according to the "Distributable Cash Flow" (as defined) with 22%
going to UNICOM and 78% going to the Company. Each year, the Company
will transfer ownership of assets to UNICOM equal in value to the
Distributable Cash Flow received up to 60% of the assets. The
maximum amount of assets transferred will not exceed 90% of the
assets until termination of the Project Cooperation Contract. Upon
the termination of the contract the remaining 10% of the network
assets shall be assigned to UNICOM without any further
consideration. The Company will continue to receive 78% of the
Distributable Cash Flow after transfer of all the assets for the
remainder of the 15-year period.
Under PRC law, foreign investment enterprises, such as the Company,
are not permitted to own or operate telecommunications networks.
Substantially all of the Company's revenues are derived from
contractual arrangements for the sharing of cash flow from network
operations rather than from ownership or operation of the networks.
The Company has recorded its investment (GSM Construction Costs) at
cost and is amortizing it over the remaining life of the project.
Income from the GSM networks is recognized at the time when the
Company can estimate or calculate the portion of its Distributable
Cash Flow from the network. UNICOM commenced operation of the GSM
networks in February 1997.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("US GAAP"). This basis of accounting differs from that used
in the statutory financial statements of the Company, which are
required to be prepared in accordance with the accounting principles
and relevant financial regulations as established by the Ministry of
Finance of the PRC.
The principal adjustments made to conform the statutory financial
statements of the Company to US GAAP mainly included the following:
o Adjustment to write off organization expenses.
o Adjustment to write off exchange loss.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies which have been adopted in
preparing the financial statements set out in this report, and which
conform with accounting principles generally accepted in the United
States of America are as follows:
Cash and cash equivalents - Cash and cash equivalents include cash
on hand, demand deposits and highly liquid instruments with a
maturity of three months or less at the time of purchase.
Property and equipment - Property and equipment is stated at cost
less accumulated depreciation. Depreciation is provided using the
straight-line method to write off the cost of property and
equipment, net of the estimated residual value of 10% of cost, over
their estimated useful lives as follows:
Land and buildings 20 years
Furniture, fixtures and equipment 5 years
Motor vehicles 5 years
Long lived assets - The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that
the net carrying amount may not be recoverable. When such events
occur, the Company measures impairment by comparing the carrying
value of the long-lived asset to the estimated undiscounted future
cash flows expected to result from the use of the assets and their
eventual disposition. If the sum of the expected undiscounted future
cash flows is less than the carrying amount of the assets, the
Company would recognize an impairment loss. The impairment loss, if
determined, would be measured as the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
Investment in GSM networks - Investment in GSM networks is stated at
cost less accumulated amortization. The investment in GSM networks
is amortized on a straight-line basis over the remaining life of the
Project Cooperation Contract between the Company and UNICOM.
Capitalization of borrowing costs - Borrowing costs directly
attributable to the acquisition, construction or production of
qualifying assets, i.e. assets that necessarily take a substantial
period of time to get ready for their intended use or sale, are
capitalized as part of the cost of those assets. Capitalization of
such borrowing costs ceases when the assets are substantially ready
for their intended use or sale. Interest capitalized at December 31,
1998 and 1997 was RMB20,524,439 and RMB8,144,426, respectively.
Revenue recognition - Revenue related to the GSM networks is
recognized at the time when the Company can estimate or calculate
the portion of its distributable cash flow from the network.
Income tax - Deferred income taxes are provided for using the
liability method. Under the liability method, deferred income taxes
are recognized for all significant temporary differences between the
tax and financial statement bases of assets and liabilities. The tax
consequences of those differences are classified as current or
non-current based upon the classification of the related assets or
liabilities in the financial statements. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of, the
deferred tax assets will not be realized.
Foreign currency translation - The Company's financial statements
are prepared using Renminbi as the reporting currency. Foreign
currency transactions are translated at the rates ruling on the
dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated at the rates ruling
on the balance sheet date. Exchange gains and losses are taken to
the statement of operations.
Fair value of financial instruments - The carrying values of cash
and cash equivalents, short-term investments, accounts receivable,
other receivables, other payables, and amount due to investors
approximate fair value because of the short maturity of these
instruments.
Concentration of credit risk - Financial instruments which
potentially subject the Company to concentrations of credit risk
consist principally of temporary cash investments and trade accounts
receivable.
The Company places its temporary cash investments with various
financial institutions in the PRC. The Company believes that no
significant credit risk exists as these investments are made with
high-credit, quality financial institutions.
The Company's account receivable represents revenue from GSM
networks due from UNICOM, the operator of the GSM networks. The
Company believes that no significant credit risk exists, as UNICOM
is a high-credit PRC state-owned enterprise.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
recorded amounts of assets and liabilities and disclosures of
contingent assets and liabilities in the financial statements and
recorded amounts of revenue and expenses during the period. Actual
results could differ from these estimates.
Comprehensive Income - Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" establishes new
rules for reporting and display of comprehensive income and its
components. The Company has no items of other comprehensive income
and the net loss reported in the statement of operations is
equivalent to the total comprehensive loss.
Segments of an Enterprise and Related Information - In June 1997,
the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement requires the
reporting of profit and loss, specific revenue and expense items,
and assets for reportable segments. It also requires the
reconciliation of total segment revenues, total segment profit or
loss, total segment assets, and other amounts disclosed for
segments, in each case to the corresponding amounts in the general
purpose financial statements. The Company adopted FASB 131 during
the year and since the Company only invested in the GSM networks, no
other reportable segments were reported in the financial statements.
New accounting standard not yet adopted - The Financial Accounting
Standards Board has issued a new standard SFAS No. 133 "Derivative
Instruments and Hedging Activities", which is effective for fiscal
years beginning after June 15, 1999. Management has not yet
completed the analysis of the impact this would have on the
financial statements of the Company and has not adopted this
standard.
4. INCOME TAX
The statutory income tax rate of the Company is 33%. There is no
provision for income taxes during the year ended December 31, 1998,
1997 and the period from January 31, 1996 (commencement of
operations) to December 31, 1996 as the Company did not have any
assessable income for the relevant periods.
No provision for deferred taxation has been made in the financial
statements for the period from January 31, 1996 (commencement of
operations) to December 31, 1996 as no significant temporary
differences arose during period and no significant deferred tax
assets and liabilities existed at the relevant balance sheet date.
Deferred tax assets of RMB10,096,188 and RMB5,359,276 existed as at
the end of 1998 and 1997 arising from temporary differences. A
valuation allowance has been established for the full amount of the
deferred tax assets since it is considered more likely than not that
all of the deferred assets will not be realized.
Deferred tax assets are composed of the following:
December 31,
---------------------------------
1998 1997
-------------- ---------------
RMB RMB
Amortization of GSM networks 12,592,117 5,981,512
Organization expense 218,310 (126,321)
Exchange (gain)loss (9,895) 67,230
GSM networks revenue (2,704,344) (563,145)
Valuation allowance (10,096,188) (5,359,276)
-------------- ---------------
- -
============== ===============
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
-----------------------------
1998 1997
------------- ------------
RMB RMB
At cost:
Land and buildings 4,629,909 4,629,909
Furniture, fixtures and equipment 641,751 656,751
Motor vehicles 973,738 973,738
------------- ------------
6,245,398 6,260,398
Less: accumulated depreciation (972,269) (477,281)
------------- ------------
5,273,129 5,783,117
============= ============
All assets are located in the PRC.
6. INVESTMENT IN GSM NETWORKS
December 31,
---------------------------
1998 1997
------------- ------------
RMB RMB
Cost of investment 278,543,551 253,761,119
Less: accumulated amortization (38,157,929) (18,125,794)
------------- ------------
240,385,622 235,635,325
============= ============
The investment represents the investment in a GSM telecommunication
networks in Hebei Province, PRC. The GSM networks were built pursuant
to a 15-year agreement with UNICOM commencing in February 1996.
UNICOM commenced operation of the GSM networks in February 1997. The
investment is being amortized on a straight-line basis over the
remaining 13-year life of the agreement commencing from the operation
of the networks.
7. RELATED PARTY TRANSACTIONS
December 31,
---------------------------
Company Name 1998 1997
--------------- ----------- -------------
RMB RMB
Amount due to NTT 512,300 729,014
Amount due to ITOCHU 332,092 268,583
----------- -------------
Total 844,392 997,597
=========== =============
Guarantee fees paid and payable to NTT and ITOCHU are as follows:
Year ended December 31,
Company Name ----------------------------
----------------------------- 1998 1997
------------ -------------
RMB RMB
Amount paid and payable to NTT 1,541,283 2,167,260
Amount paid and payable to ITOCHU 755,081 467,482
------------ -------------
Total 2,296,364 2,634,742
============ =============
8. OTHER PAYABLES
The Company has acquired a digital microwave system and a GSM mobile
phone system under deferred payment terms with the final installment
payable in 2001 and 1998, respectively. The liabilities are
guaranteed by NTT at December 31, 1998 and are payable as follows:
RMB
Liabilities payable:
1998 -
1999 3,756,482
2000 3,756,482
2001 3,756,482
-------------
11,269,446
Less: Liabilities due within one
year (included in other payables) 3,756,482
-------------
Long-term payables 7,512,964
=============
9. LONG-TERM LOANS
Scheduled repayments for the long-term loans are as follows:
December 31,
1998
--------------
RMB
Liabilities payable:
1999 33,114,800
2000 66,229,600
2001 98,218,496
2002 43,281,044
2003 22,584,294
--------------
263,428,234
Less: Liabilities due within
one year 33,114,800
--------------
230,313,434
==============
On August 5, 1996, the Company was granted a long-term loan facility
of US$ 20,000,000 by the Bank of Tokyo-Mitsubishi, Ltd. Beijing
Branch at an annual interest rate of 6.82%. The Company has utilized
US$20,000,000 (RMB165,574,000). Interest shall be paid on the
outstanding balance six months after the date of the agreement, every
six months thereafter, and at maturity.
On July 10, 1998, the Company was granted a long-term loan facility
of US$5,000,000 by the Bank of Tokyo-Mitsubishi, Ltd. Beijing Branch
at an annual interest equal to the bank's funding rate plus 0.625%.
The Company has utilized US$ 5,000,000 (RMB 41,393,500 ) as of
December 31, 1998. Interest shall be paid on the outstanding balance
on February 5, 1999, every six months thereafter, and at maturity.
On September 30, 1998, the Company was granted a long-term loan
facility of US$6,820,000 by the Bank of Tokyo-Mitsubishi, Ltd.
Beijing Branch at an annual interest equal to the bank's funding rate
plus 0.75%. The Company has utilized US$ 6,820,000 (RMB 56,460,824 )
as of December 31, 1998. Interest shall be paid on the outstanding
balance on February 5, 1999, every six months thereafter, and at
maturity.
All the obligations of the Company under the above agreements are
guaranteed 60% by NTT and 40% by Itochu.
10. CAPITAL CONTRIBUTION
December 31, 1998 and 1997
-----------------------------------------
Ownership RMB
---------------- --------------------
Capital contributed by:
EQUIPMENT CO. 51.00% 12,731,283
NTT 29.40% 7,339,210
Itochu 19.60% 4,892,807
---------------- --------------------
100% 24,963,300
================ ====================
11. COMMITMENTS
The Company leases certain buildings under operating leases, which
expire through March 1999. Rental expense under these operating
leases was both RMB 319,200 for the years 1998 and 1997.
The aggregate annual minimum operating lease commitments under all
non-cancellable leases at December 31, 1998 is RMB 79,800 for a lease
expiring during the fiscal year 1999.
The Company has entered into a Project Cooperation Agreement with
UNICOM relating to the construction of a telecommunication network in
Hebei Province, PRC. The total estimated investment under the terms
of this agreement is RMB320 million for the first phase and RMB279
million has been incurred up to December 31, 1998. The term of this
agreement is fifteen years.
12. EMPLOYEE RETIREMENT BENEFITS AND POST-RETIREMENT BENEFIT
The Company's employees are entitled to a retirement pension
calculated with reference to their basic salaries on retirement and
their length of service in accordance with a government managed
pension plan. The PRC government is responsible for the pension
liability to these retired employees. The Company is required to make
contributions to the state retirement plan at rates ranging from 18%
to 20% of the adjusted monthly basic salaries of the current
employees. The expense of such arrangements to the Company was
immaterial in all the periods presented. The Company is not obligated
under any other post-retirement plans and post-employment benefits
are not material.
13. FINANCIAL RESULTS AND LIQUIDITY
The Company has incurred net losses of RMB14,354,276 and
RMB16,367,712 in 1998 and 1997, respectively. As of December 31,
1998, the Company's total liabilities exceeded its total assets by
RMB5,636,006, and its total current liabilities exceeded its total
current assets by RMB13,531,504.
The Company recognized net revenue of RMB6,488,482 and RMB1,706,499
in 1998 and 1997, respectively. Since the business operation of the
Company highly depends on the operation of GSM network run by
UNICOM, which has made substantial progress in broadening its
subscribers bases and its position in the cellular market, the
Company is expecting share of a larger distributable cash flow in
the following years. The Company will also attempt to obtain
additional financing to support its operation in the future if
necessary.