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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _____________
Commission file number: 0-22520
AVIC GROUP INTERNATIONAL, INC.
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(Name of small business issuer specified in its charter)
Delaware 84-0873124
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(State or other jurisdiction (I.R.S. Employer
of 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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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of Class)
Check whether the issuer: (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days. Yes __X__ No ______
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended March 31, 1996 were $683,733.
The number of shares outstanding of the issuer's common stock as of July 12,
1996 was 28,451,982 shares. The aggregate market value of the common stock
(10,049,615 shares) held by non-affiliates, based on the average of the bid and
asked prices ($3.25) of the common stock as of July 12, 1996 was $32,661,248.
Transactional Small Business Disclosure Format (Check one): Yes _____ No __X__
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DOCUMENTS INCORPORATED BY REFERENCE
The Company is currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied
at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington D.C. 20549; at its New York Regional Office, Room 1400,
7 World Trade Center, New York, New York, 10048; and at its Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2411,
and copies of such materials can be obtained from the Public Reference
Section at prescribed rates. The Company intends to furnish its stockholders
with annual reports containing audited financial statements and such other
periodic reports as the Company may determine to be appropriate or as may be
required by law.
Portions of the following documents filed by the Company with the
Commission are incorporated by reference in Parts I-IV of this Report: (i)
Current Reports on Form 8-K dated as of January 19, 1996, December 22, 1995
and May 4, 1995, and (ii) Transition Report on Form 10-KSB for the Transition
Period from October 1, 1994 to March 31, 1995.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
HISTORY OF THE COMPANY
AVIC Group International, Inc. (the "Company") was incorporated under the
laws of the State of Colorado on May 10, 1982 under the name "Yaak River
Mines, Ltd."
From inception through January, 1992, the Company was engaged in certain
business operations which are not associated with the Company's current
business operations. From approximately January, 1992 through September,
1994, the Company was operationally dormant.
As of September 2, 1994, the Company entered into an Agreement and Plan
of Reorganization, as amended by an agreement dated as of December 28, 1994
(the "Reorganization Agreement") with ITV Communications, Inc., a California
corporation ("ITV"), in connection with which the Company acquired ITV as a
wholly-owned subsidiary in exchange for a number of shares of the Company's
common stock, par value $0.001 per share ("Common Stock") and options to
purchase shares of Common Stock equal to approximately 91% of the number of
the issued and outstanding shares of the Company's Common Stock on a fully
diluted basis after the completion of the transaction. On February 8, 1995,
the Company and ITV completed the transactions contemplated by the
Reorganization Agreement, and the Company changed its name to "AVIC Group
International, Inc." See "Business - Reorganization Agreement with ITV."
On January 16, 1996, ITV closed an Agreement for Sale of Assets, dated as
of January 11, 1996 (the "Asset Sale Agreement"), between ITV and Netmatics,
Inc. ("Netmatics"). Pursuant to the terms of the Asset Sale Agreement, ITV,
the former primary operating subsidiary of the Company, sold substantially
all of ITV's assets and Netmatics assumed certain of ITV's liabilities and
obligations in consideration of an aggregate purchase price of $2,500,000 and
common stock of Netmatics currently equal to 19.4% of the issued and
outstanding shares of Netmatics. See "Agreement for Sale of Assets of ITV
Communications, Inc."
At a meeting of the Company's stockholders on May 7, 1996, the stockholders
adopted a resolution approving a change in the Company's state of incorporation
from Colorado to Delaware. The Company effectuated the reincorporation to
Delaware on July 10, 1996.
BUSINESS OF THE COMPANY
The Company is a development stage company which is engaged principally
in the business of establishing joint ventures ("Sino-foreign joint
ventures") with entities situated in the People's Republic of China ("PRC")
in the telecommunications industry in the PRC. The Company intends to
establish these Sino-foreign joint ventures to develop telecommunications
networks in the PRC in cooperation with authorized telecommunications network
operators in the PRC. In connection with this business plan, the Company has
entered into certain agreements with entities, which are affiliates of
Tweedia International Ltd. ("Tweedia"), the Company's principal stockholder.
These agreements contemplate the Company's participation in distributions
from the authorized operations of Sino-foreign joint ventures for the purpose
of building telecommunications networks, transferring ownership of the
networks to authorized telecommunications network operators in the PRC, and
servicing and maintaining such telecommunications networks ("BTSM").
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As all of the agreements relating to prospective business in the PRC are
preliminary in nature and subject to the fulfillment of significant
conditions, including the completion of substantial financings and the
receipt of approvals and permits from PRC governmental agencies, there can be
no assurances that the Company will ever be able to implement this business
plan.
The Company's auditors have included an explanatory paragraph in their
Report of Independent Certified Public Accountants to the effect that
recovery of the Company's assets are dependent upon future events, the
outcome of which is undeterminable, and that the successful completion of the
Company's development program and its transition, ultimately, to the
attainment of profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of
sales adequate to support the Company's cost structure. There can be no
assurances that such a financing can be completed on terms favorable to the
Company or at all, or that the business of the Company will ever achieve
profitable operations.
PROPOSED BUSINESS OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA
Since approximately April, 1995, the focus of the Company's principal
business operations has been the establishment of Sino-foreign joint ventures
related to the development of telecommunications networks in the PRC on a
BTSM basis.
In March, 1996, the Company entered into certain agreements to obtain a
31% interest in a Sino-foreign joint venture formed between Hebei United
Telecommunications Equipment Company ("Hebei United") and NTT International
Corp. ("NTT") with respect to the creation and operation of a Global Service
Mobile telephone network in Hebei Province, PRC.
In June, 1996, the Company entered into an agreement to form a
Sino-foreign joint venture with Beijing CATCH Communication Group Co.
("Beijing CATCH"), an affiliate of the Company's principal stockholder with
respect to the development of paging stations in the PRC.
In May and October, 1995, the Company entered into a memorandum of
understanding and a letter of intent in connection with the proposed
formation of Sino-foreign joint ventures to develop telecommunications
networks in the PRC on a BTSM basis with Beijing CATCH, including: (i) a
fixed wire telephone network, and (ii) a cellular telephone network. These
preliminary agreements are subject to the execution of more definitive
agreements. See Item 9 -"Directors and Executive Officers" and Item 12 -
"Certain Relationships and Related Transactions."
Each of these agreements is preliminary in nature and is subject to the
receipt of significant approvals and permits from various governmental
agencies in the PRC, and with respect to the memorandum of understanding and
the letter of intent, the execution of more definitive agreements will be
required. There can be no assurances that such definitive agreements will
ever be consummated or that such approvals and permits will be obtained for
the benefit of the Company.
Since the Company does not currently have the technical capability,
personnel or resources to build, service or maintain a telecommunications
network, the consummation of all or any of these transactions may require the
cooperation and participation of third parties, other than PRC governmental
agencies, who may be parties to or independent contractors with any such
proposed Sino-foreign joint ventures. There can be no assurances that the
Company will be able to obtain the requisite cooperation or participation of
any such third parties with respect to the Company's proposed business
operations.
Although each of these agreements sets forth certain understandings as to
the extent of the contributions and interests in these proposed Sino-foreign
joint ventures, there can be no assurances as to the final terms of the
definitive agreements, if any, with respect to these proposed Sino-foreign
joint ventures.
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Further, each of these agreements will require significant financings
necessary to fund the construction of such networks. The Company does not
currently have any commitments for any such financing or sufficient
resources to fund such construction, and there can be no assurances that any
such financing can be obtained on terms favorable to the Company or at all.
In addition, the Company's proposed business operations in the PRC are
subject to significant risks. These risks include, but are not limited to
the limited precedent for the establishment of Sino-foreign joint ventures
for the purpose of engaging in the telecommunications industry in the PRC,
governmental restrictions on foreign business ventures in the PRC, PRC
regulation of its economy and foreign currency exchange and the general
political environment in the PRC. See "Risk Factors."
BUSINESS RELATIONSHIP WITH BEIJING CATCH
The Company's proposed business operations are substantially dependent on
the Company's relationship with and the efforts of Beijing CATCH, an
affiliate of the Company's principal controlling stockholder. Beijing CATCH,
a company formed under the laws of the PRC, is the beneficial owner of all of
the outstanding shares of Tweedia International Ltd., a British Virgin
Islands corporation ("Tweedia"), the principal controlling stockholder of the
Company. Tweedia was incorporated in the British Virgin Islands on July 20,
1994. Tweedia does not currently have any operations, except principally as a
holding company for the Company's securities. Three (3) of the directors of
the Company, Chen Li, Xiao Jun and Ju Feng, are officers of Beijing CATCH and
Chen Li is the sole director of Tweedia. See Item 9 - "Directors and
Executive Officers" and Item 11 - "Security Ownership of Certain Beneficial
Owners and Management."
Beijing CATCH is a subordinate enterprise, formed under the laws of the
PRC, of the Commission on Science and Technology and the Municipal Planning
Commission of the Municipality of Beijing, a political subdivision of the
People's Government of the Municipality of Beijing.
Beijing CATCH is the second largest operator of paging stations in the
PRC. Beijing CATCH is a stockholder in China United Telecommunications
Corporation ("China Unicom"), one of two public network telephone operators
in the PRC created to substantially increase telephone installations
throughout the PRC. See "Global Service Mobile Network Joint Venture."
Beijing CATCH has established a subsidiary in the United States, known as
American Catch, Inc. ("American CATCH"), a California corporation, which is
located in Arcadia, California. American CATCH also has a consulting
agreement with the Company. See Item 10 - "Executive Compensation -
Consultants."
As of December 21, 1995, the Company agreed to issue up to 50,000,000
shares of Common Stock to Tweedia, an affiliate of Beijing CATCH and the
principal stockholder of the Company, pursuant to the terms of a Master
Agreement and Right of First Refusal (the "Master Agreement") based on the
receipt of certain agreed upon amounts of net income to the Company relating
to prospective Sino-foreign joint ventures involving the Company and Beijing
CATCH or its affiliates ("CATCH Joint Ventures"). See Item 12 - "Certain
Relationships and Related Transactions."
In connection with the Master Agreement, Beijing CATCH has agreed to
grant the Company a right of first refusal to participate as a majority
investor and provide financial, operating and technical consulting services
with respect to all rights granted, sold, licensed or otherwise transferred
to Beijing CATCH, directly or indirectly, that relate to the ability to
construct, operate or acquire any form of telephony, telecommunications,
equipment, paging equipment or related forms of communication. This right of
first refusal is subject to the Company's ability to perform under any such
agreements and to participate in any such proposed projects under applicable
PRC law. The Company's right of first refusal will apply to any such rights
obtained by Beijing CATCH in perpetuity. The Company and Beijing CATCH have
agreed to negotiate in
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good faith to implement the terms of any such agreements in order to
implement the Company's right of first refusal.
There can be no assurances that Beijing CATCH will ever be in a position
to offer the Company the right of first refusal with respect to any
additional agreements, other than these offered to the Company to date, or if
so, that the Company will have sufficient resources or be able to satisfy
applicable PRC regulatory requirements in order to exercise a right of first
refusal with respect to any agreement which may be so offered.
There can be no assurances that Beijing CATCH will be able successfully
to assist the Company's proposed business plan or that a change of control in
the Company's capital structure will not have a material adverse effect on
the Company's proposed business operations.
CHINA PAGING NETWORKS JOINT VENTURE. On June 12, 1996, the Company
entered into an agreement to form a joint venture (the "China Paging Networks
Joint Venture") with Beijing CATCH relating to the purchase or construction
of one hundred (100) paging stations (the "China Paging Networks") in the
PRC. The formation of the China Paging Networks Joint Venture is subject to
PRC regulatory approval. There can be no assurances that such regulatory
approval will be obtained.
Beijing CATCH holds certain licenses from the Wireless Communication
Committee and the Provincial Post and Telecommunication Administration of
Hebei and Sichuan Provinces, to develop paging networks in Hebei and Sichuan
Provinces on a BTSM basis, as contemplated by the China Paging Networks Joint
Venture.
The Company has agreed to contribute the sum of $700,000 in exchange for
a seventy percent (70%) equity interest in the China Paging Networks Joint
Venture, which will sell the equipment necessary for the construction of the
China Paging Networks to a subsidiary of Beijing CATCH, and install, service
and maintain such equipment.
Beijing CATCH has agreed to contribute the appropriate licenses to a
subsidiary, which will build and operate the China Paging Networks, and will
enter into contracts with the China Paging Networks Joint Venture in order to
purchase equipment and to obtain servicing and maintenance for the China
Paging Networks.
The China Paging Networks Joint Venture is anticipated to receive: (i)
payments under contracts for installing, servicing and maintaining the China
Paging Networks and (ii) payments of principal and interest relating to the
financing of the equipment for the China Paging Networks, if such financing
is provided.
The Company has set aside $1,000,000 from the June, 1996 offering of
$2,500,000 of Series B Convertible Preferred Stock as the source of the
$700,000 capital contribution, with the balance of the $1,000,000 to be used
for capital expenditures by the China Paging Networks Joint Venture upon its
formation. The closing of such offering is subject to the receipt of certain
legal opinions with respect to the formation of the China Paging Networks
Joint Venture. In the event that regulatory approval of the joint venture is
not obtained and such opinions are not delivered within 60 days of the
closing of the offering, the offering may be cancelled with respect to
$2,000,000 of the gross proceeds, and the Company will not have adequate
sources of capital to make the required $1,000,000 capital contribution.
There can be no assurances that such offering will not be cancelled or that
the Company will be able to obtain alternative sources of financing for the
required capital contribution.
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GLOBAL SERVICE MOBILE NETWORK JOINT VENTURE. On March 22, 1996, the
Company entered into certain agreements to obtain a 31% interest, subject to
the receipt of certain PRC regulatory approvals, in a Sino-foreign joint
venture formed between Hebei United and NTT relating to the creation and
operation of a Global Service Mobile telephone network (the "GSM Network") in
Hebei Province, PRC. There can be no assurance that such regulatory
approvals with respect to the transfer of the 31% interest to the Company
will be obtained.
Hebei United, a joint venture formed between Beijing CATCH and certain
companies controlled by the Hebei Provincial Government, have entered into a
cooperation agreement (the "Cooperation Agreement") with China Unicom, dated
May 20, 1995, pursuant to which Hebei United has obtained the right to build,
service and maintain the GSM Network, after the transfer of ownership of the
GSM Network to China Unicom, and to receive distributions from the operations
of the GSM Network. Beijing CATCH has an 85% ownership interest in Hebei
United.
China Unicom is one of two authorized public telecommunications network
operators in the PRC. Beijing CATCH is a stockholder of China Unicom. Hebei
Unicom is a PRC joint venture formed between Hebei Terminal Equipment Co. and
Hebei Equipment Electronics Industry Group, both state-owned enterprises
under the Hebei Provincial Bureau of Electronic Industry, to participate in
the construction of telecommunications projects in Hebei Province. In
December, 1994, China Unicom approved the request of the Hebei Provincial
Government to establish Hebei Unicom as an independent unit under China
Unicom.
On December 22, 1995, Hebei United entered into an agreement (the "GSM
Network Joint Venture Agreement") with NTT to form a Sino-foreign joint
venture (the "GSM Network Joint Venture") for the purpose of providing Hebei
Province with telecommunications networks, engineering construction and
technology support, both inside and outside of the PRC and with respect to
the construction of the GSM Network in Hebei Province on a BTSM basis. NTT
is an affiliate of Nippon Telephone & Telegraph Corp., the largest network
operator in Japan. The GSM Network Joint Venture was established as a
limited liability company for purposes of the Company Law of the PRC. The
parties have agreed that Hebei United will have a 51% participation interest
and NTT will have a 49% participation interest in the GSM Network Joint
Venture, respectively.
The Company entered into an agreement, dated March 22, 1996, with Hebei
United, to obtain a 31% interest in the GSM Network Joint Venture. The
assignment of the 31% interest is subject to approvals by certain PRC
regulatory authorities. There can be no assurances that such approvals will
be obtained or the terms and conditions on which such approvals may be
obtained, if at all.
Although Hebei United is an affiliate of Beijing CATCH, management
believes that the terms of the March 22, 1996 agreement were negotiated by
members of management of the Company unaffiliated with Beijing CATCH on terms
no less favorable to the Company than could have been obtained from
independent third parties. However, there can be no assurances to this
effect.
By separate agreement between NTT and Ito Chu Corp. ("Ito Chu"), Ito Chu
acquired 40% of NTT's interest in the GSM Network Joint Venture, or a 19.6%
interest in the GSM Network Joint Venture. Ito Chu is a major Japanese
trading firm.
The Company has deposited the sum of $1.17 million with the Electronic
Industry Department of Hebei Government Account with the Bank of
Communications - Shijiazhuang Branch. In the event of PRC regulatory
approval of the transfer to the Company of the 31% interest in the GSM
Network Joint Venture, the Company intends to use this deposit as the source
of payment for the 31% interest in the GSM Network Joint Venture. Hebei
United will be required to assist the GSM Network Joint Venture in obtaining
the necessary permits and approvals from PRC governmental entities with
respect to the development of the GSM Network and certain other issues
related to PRC regulatory matters. NTT will be responsible for providing
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technical assistance to the operation of the GSM Network. Further, NTT will
be responsible for raising the capital (RMB 600 million) for the development
of the GSM Network Joint Venture. The GSM Network Joint Venture will be
required to repay NTT for any loans made by NTT to the GSM Network Joint
Venture within five (5) years of the date of such loans and to pay a 1%
service charge or deposit if a loan is obtained through NTT or NTT's bank.
NTT will be responsible for collecting the required funding for project
construction, although Hebei United retains the right to raise capital for
the GSM Network Joint Venture.
Further, Hebei United has agreed to contribute its interest in the
Cooperation Agreement with China Unicom to the GSM Network Joint Venture and
to be responsible for coordinating the relationship between the GSM Network
Joint Venture and China Unicom and to develop a market for the GSM Network
intended to be constructed by the GSM Network Joint Venture. NTT and Ito Chu
will be responsible for providing any additional financing to the GSM Network
Joint Venture.
As of May 1, 1995, the Company also entered into a Memorandum of
Understanding (the "Memorandum of Understanding") with Hebei United and Hebei
Unicom relating to the creation and operation of an SDH fibre optic
communication line, a 1,600,000 wireline network and a proposed GSM Network
with 200,000 to 400,000 subscribers in Hebei Province, PRC (the "Hebei
Networks").
Pursuant to the terms of the Memorandum of Understanding, Hebei United
has agreed to obtain the necessary approvals in the PRC to permit the
construction and operation of the Hebei Networks throughout Hebei Province.
The Company has agreed to assist in the raising of capital of approximately
$1.5 to $2.0 billion, which the parties anticipate is the cost necessary to
construct the Hebei Networks.
The parties have also agreed to set up a project committee to develop the
Hebei Networks. The Hebei Provincial Government and Hebei Unicom have each
agreed to appoint a person to a project committee to assist in the
development of the GSM Network. Ju Feng, a director of the Company, was one
of the persons appointed to the project committee.
CELLULAR TELEPHONE NETWORK PRELIMINARY AGREEMENT. On April 27, 1995, the
Company entered into a Cellular Telephone Network Preliminary Agreement (the
"Cellular Telephone Network Agreement") with Beijing CATCH and Tweedia
relating to the creation and operation of an approximately 100,000 subscriber
cellular telephone network (the "Cellular Telephone Network") using Enhanced
Specialized Mobile Relay System technology in Beijing and Hebei Province in
the PRC.
Beijing CATCH holds certain licenses from the Beijing Municipal
Government Planning Commission of China with respect to the ownership and
operation of the Cellular Telephone Network.
Pursuant to the terms of the Cellular Telephone Network Agreement, the
Company has negotiated to establish, with Beijing CATCH, a Sino-foreign joint
venture for the purpose of receiving: (i) payments under contracts for
developing the Cellular Telephone Network on a BTSM basis, and (ii) payments
of principal and interest relating to the financing of the equipment for the
Cellular Telephone Network, if such financing is provided, which in the
aggregate are estimated to be approximately ninety percent (90%) of gross
revenues less expenses of operating the Cellular Telephone Network for the
first 25 years after the Cellular Telephone Network has commenced providing
service to a substantial number of users.
In connection with the Cellular Telephone Network Agreement, the Company
intends to form a subsidiary or other joint venture entity, in which the
Company will maintain at least a seventy-five percent (75%) interest, which
in turn will enter into a Sino-foreign joint venture or a contractual joint
venture with Beijing CATCH.
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The Company has agreed to contribute the capital needed to build the
Cellular Telephone Network to the Sino-foreign joint venture in exchange for
a seventy-eight percent (78%) equity interest in the Sino-foreign joint
venture, which will sell the equipment necessary for the establishment of the
Cellular Telephone Network on a BTSM basis to a wholly owned subsidiary of
Beijing CATCH.
Beijing CATCH has agreed to contribute the appropriate licenses to its
subsidiary, which will participate in building the Cellular Telephone
Network, and will enter into contracts with the Sino-foreign joint venture in
order to purchase equipment and to service and maintain the Cellular
Telephone Network.
In connection with the Cellular Telephone Network Agreement, on December
15, 1995, the Company also agreed to issue 1,524,178 shares of the Company's
Series A Convertible Preferred Stock (the "Convertible Preferred Shares") to
Tweedia as consideration for the contribution to the Company by Beijing CATCH
of Beijing CATCH's interest in a $4,572,536 non-refundable deposit paid to
Motorola, Inc. ("Motorola") in connection with an Enhanced Specialized Mobile
Relay System Equipment Purchase Contract #700.0008D, dated December 12, 1993,
and as amended, between Beijing CATCH and Motorola (the "Equipment Purchase
Contract").
The Equipment Purchase Contract obligates Beijing CATCH to purchase up to
a minimum of approximately $49,000,000 of equipment related to an Enhanced
Specialized Mobile Relay System within certain time periods. The failure to
make such purchases may result in the forfeiture of such deposit to Motorola.
However, based on the existing agreements, these deadlines have passed
without Beijing CATCH's timely performance pursuant to the terms of the
Equipment Purchase Contract. Although the Company understands that these
agreements are currently the subject of renegotiation between Beijing CATCH
and Motorola, there can be no assurances that the parties will successfully
renegotiate the Equipment Purchase Contract or, if so, as to the terms of any
such renegotiation and its effect on the Company, which is currently not a
party to the agreement. There can be no assurances that Beijing CATCH will be
able to perform under the Equipment Purchase Contract or that the $4,572,536
deposit will not be forfeited to Motorola. In the event that Beijing CATCH
forfeits the deposit to Motorola, Tweedia has agreed to return the
Convertible Preferred Shares to the Company for cancellation.
REORGANIZATION AGREEMENT WITH ITV
As of September 2, 1994, the Company entered into the Reorganization
Agreement with ITV, pursuant to which the Company acquired one hundred
percent (100%) of the issued and outstanding securities of ITV from the
holders of the securities of ITV, in exchange for a number of shares of
Common Stock and options to purchase shares of Common Stock equal to
approximately 91% of the number of the issued and outstanding shares of the
Company's Common Stock on a fully diluted basis after the completion of the
transaction. On February 8, 1995, the Company and ITV completed the
transactions contemplated by the Reorganization Agreement.
In connection with the Reorganization Agreement, the Company: (a) issued
22,743,409 restricted shares of Common Stock and options to purchase up to
713,182 restricted shares of Common Stock to the holders of the securities of
ITV, (b) effected a forward split of the previously issued and outstanding
105,000 shares of Common Stock into 2,500,000 shares, (c) adopted the
Company's current Articles of Incorporation, Bylaws and 1995 Stock Option
Plan, (d) elected the members of the Company's current Board of Directors,
and (e) changed the Company's name to "AVIC Group International, Inc." See
Item 9 - "Directors and Executive Officers," Item 11 - "Security Ownership of
Certain Beneficial Owners and Management" and Item 12 - "Certain
Relationships and Related Transactions."
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The Reorganization Agreement provides to the holders of the Company's
Common Stock issued in connection with the Reorganization Agreement the
right, upon written request of the holders of at least 35% of the shares of
the Company's Common Stock exchanged to such persons, that the Company will
effect up to five (5) registrations of up to twenty-five percent (25%) of
such exchanged securities under and pursuant to the Securities Act of 1933,
as amended (the "Securities Act"), during the period ending August 31, 1997.
Further, the Company has agreed to provide to such persons certain
"piggy-back" registration rights with respect to such securities. The
Company has agreed to bear the expenses related to the registration of such
securities.
The Reorganization Agreement has been accounted for as a reverse
acquisition or as a recapitalization of ITV, with ITV as the acquiror. The
historical financial statements of the Company prior to the closing of the
Reorganization Agreement are those of ITV.
AGREEMENT FOR SALE OF ASSETS OF ITV COMMUNICATIONS, INC.
On January 16, 1996, ITV closed the Asset Sale Agreement between ITV and
Netmatics. Pursuant to the terms of the Asset Sale Agreement, ITV, the
former primary operating subsidiary of the Company, sold substantially all of
ITV's assets and Netmatics assumed certain of ITV's liabilities and
obligations in consideration of an aggregate purchase price of $2,500,000 and
shares of common stock of Netmatics which are currently equal to
approximately 19.4% of the issued and outstanding shares of Netmatics.
The $2,500,000 purchase price was paid by Netmatics as follows: (i)
$250,000 in cash at closing, and (ii) the issuance by Netmatics of a
non-interest bearing secured promissory note, as revised on June 12, 1996
(the "Netmatics Note") in the principal amount of $2,250,000. The Netmatics
Note is secured by a continuing security interest in all of the assets
transferred to Netmatics in connection with the Asset Sale Agreement. If
Netmatics refinances the purchase debt to ITV, the Netmatics Note will be due
and payable in full.
The Netmatics Note is payable in installments as follows: when Netmatics
achieves "Positive Cash Flow" (as defined below), and each quarter that
Netmatics has Positive Cash Flow, Netmatics has agreed to pay ITV, if
quarterly Positive Cash Flow is more than $100,000, fifty percent (50%) of
that quarter's Positive Cash Flow.
"Cash Flow" for the purposes of the Netmatics Note is defined as gross
revenue less operating expenses plus depreciation and other non-cash
deductions, less taxes, less capital expenditures, less ordinary and
reasonable working capital requirements, and less $100,000, all according to
generally accepted accounting principles applied on a consistent basis.
Prior to the closing of the Asset Sale Agreement, the operations of ITV,
which primarily related to the transferred assets, never achieved "Positive
Cash Flow" at the end of any fiscal year or quarter since ITV's inception in
March, 1992. There can be no assurances that Netmatics will ever achieve
such Positive Cash Flow during any of the relevant periods for purposes of
payment of the Netmatics Note or that Netmatics will be required or be able
to make payments under the Netmatics Note. Further, based on the terms of
the Netmatics Note, the Company has only recognized on the Company's
financial statements the $250,000 cash proceeds from the transaction, and any
portion of the purchase price related to the payment of the Netmatics Note
will be recognized as collected on a cash basis. There can be no assurances
that any portion of the purchase price related to the payment of the
Netmatics Note will ever be collected or recorded in the Company's financial
statements.
Netmatics also agreed to assume certain trade liabilities of ITV in the
amount of approximately $257,000 and certain equipment leases of ITV related
to the operations of the transferred assets. ITV expressly agreed that
certain non-trade liabilities of ITV in the amount of approximately
$2,269,000 were not to be assumed by Netmatics.
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Further, Netmatics issued shares of common stock of Netmatics which are
currently equal to approximately 19.4% of the issued and outstanding shares
of Netmatics.
There is no public market for the shares of Netmatics common stock and
there may never be a market for such securities. The shares of Netmatics
common stock issued to the Company are restricted securities and are not
registered under the Securities Act of 1933, as amended, and may not be
resold unless they are subsequently registered thereunder or an exemption
from registration is available. As a result, the Company may never be able
to liquidate any of such securities. Further, as Netmatics has no
operational history and the transferred assets relate to the prior business
operations of ITV, which never achieved profitability, there can be no
assurances that the Netmatics common stock will ever have any market value.
The transferred assets relate to ITV's business operations in connection
with the design, manufacture and marketing of technologically advanced
communications devices. These assets relate to the primary operational
aspects of the Company's business prior to the closing of the Asset Sale
Agreement.
REINCORPORATION TO DELAWARE
At a meeting of the Company's stockholders on May 7, 1996, the
stockholders adopted a resolution approving a change in the Company's state
of incorporation from Colorado to Delaware. The Company effectuated the
transactions contemplated by this resolution on July 10, 1996 and
reincorporated to Delaware by means of a merger (the "Reincorporation
Merger") of the Company with and into a wholly-owned subsidiary of the
Company in Delaware known as AVIC Group International, Inc. ("AVIC-Delaware").
On the effective date of the Reincorporation Merger, each issued and
outstanding share of Common Stock and Preferred Stock of the Company was
converted into one share of common stock and preferred stock, respectively,
of AVIC-Delaware. AVIC-Delaware has succeeded to all of the assets,
liabilities and business of the Company and possesses all of the rights and
powers of the Company.
CERTAIN ANTI-TAKEOVER PROCEDURAL REQUIREMENTS. The Company's Certificate
of Incorporation adopts certain measures which are intended to protect the
Company's stockholders by rendering it more difficult for a person or persons
to obtain control of the Company without cooperation of the Company's
management. These measures include the potential implementation of certain
supermajority requirements for the amendment of the Company's Certificate of
Incorporation and Bylaws. Such measures are often referred to as
"anti-takeover" provisions.
The inclusion of such "anti-takeover" provisions in the Certificate of
Incorporation may delay, deter or prevent a takeover of the Company which the
stockholders may consider to be in their best interests, thereby possibly
depriving holders of the Company's securities of certain opportunities to
sell or otherwise dispose of their securities at above-market prices, or
limit the ability of stockholders to remove incumbent directors as readily as
the stockholders may consider to be in their best interests.
BUSINESS COMBINATIONS WITH SUBSTANTIAL STOCKHOLDERS. Delaware law
contains a statutory provision which is intended to curb abusive takeovers of
Delaware corporations. Section 203 of the Delaware General Corporation Law
addresses the problem by preventing certain business combinations of the
corporation with interested stockholders within three years after such
stockholders become interested. Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad
range of business combinations with a person or an affiliate, or associate of
such person, who is an "interested stockholder" for a period of three (3)
years from the date that such person became an interested stockholder unless:
(i) the transaction resulting in a person becoming an interested stockholder,
or the business combination, is approved by the Board of Directors of the
corporation before the person becomes an interested stockholder; (ii) the
interested stockholder acquired 85% or more of the outstanding voting stock
of the corporation in the same transaction that makes such person an
interested stockholder (excluding shares owned by persons who are both
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officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by
the corporation's board of directors and by the holders of at least 66-2/3%
of the corporation's outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested stockholder. Under Section
203, an "interested stockholder" is defined as any person who is: (i) the
owner of fifteen percent (15%) or more of the outstanding voting stock of the
corporation or (ii) an affiliate or associate of the corporation and who was
the owner of fifteen percent (15%) or more of the outstanding voting stock of
the corporation at any time within the three (3) year period immediately
prior to the date on which it is sought to be determined whether such person
is an interested stockholder.
SUPERMAJORITY REQUIRED FOR AMENDMENT. In order to insure that the
substantive provisions set forth in the Certificate of Incorporation are not
circumvented by the amendment of such Certificate of Incorporation pursuant
to a vote of a majority of the voting power of the Company's outstanding
shares, the Certificate of Incorporation also provides that any amendment,
change or repeal of the provisions contained in the Certificate of
Incorporation with respect to: (i) the Company's capitalization, (ii)
amendment of the Bylaws, (iii) determination by the Board of the number of
directors, (iv) filling Board vacancies, (v) the requirement that stockholder
action be taken at an annual or special meeting, (vi) requirements with
respect to appraisal rights for stockholders, or (vii) the amendment of the
provision imposing such supermajority requirement for amendment of the
Certificate of Incorporation, shall require the affirmative vote of the
holders of at least 66 2/3% of the voting power of all outstanding shares of
voting stock, including, in any instance where the repeal or amendment is
proposed by an interested stockholder (as such term is defined in Section 203
of the Delaware General Corporation Law) or its affiliate or associate, the
affirmative vote of a majority of the voting power of all outstanding shares
of voting stock held by persons other than such interested stockholder or its
affiliates or associates. However, only the affirmative vote of the majority
of the voting power of all outstanding shares of voting stock is required if
the amendment of any of the foregoing provisions is approved by a majority of
the Continuing Directors (as such term is defined in the Certificate of
Incorporation).
The Certificate of Incorporation permits the Board of Directors to adopt,
amend or repeal any or all of the Company's bylaws without stockholder action
and provide that such bylaws may also be adopted, amended or repealed by its
stockholders, but only if approved by holders of 66 2/3% or more of the
voting power of all outstanding shares of voting stock, including in any
instance in which the alteration is proposed by an interested stockholder or
by affiliates or associate of any interested stockholder, the affirmative
vote of the holders of at least a majority of voting power of all outstanding
shares of voting stock held by persons other than the interested stockholder
who proposed such action. However, the only stockholder vote required if the
modification is approved by a majority of the continuing directors is the
affirmative vote of the majority of the voting power of all outstanding
shares of voting stock.
OFFERING OF SERIES B CONVERTIBLE PREFERRED STOCK
On June 12, 1996, the Company issued 100 shares of the Company's Series B
Convertible Preferred Stock (the "Series B Convertible Preferred Shares"), at
a purchase price of $25,000 per share, and an equal number of warrants were
issued to purchase shares of the Company's Common Stock in consideration of
$2,500,000. The Series B Convertible Preferred Shares and warrants were
issued pursuant to an exempt transaction under Regulation S.
Each of the Series B Convertible Preferred Shares is convertible into a
number of shares of Common Stock equal to the fraction, the numerator of
which is $25,000 + [(0.08) x ($25,000) x (the number of days between the
date funds with respect to the transaction were received in escrow and the
applicable conversion date DIVIDED BY 365)], and the denominator which is the
lesser of: (i) $5.94, (ii) 85% of the average closing bid price of the
Company's Common Stock on each of the five (5) trading days immediately
preceding the applicable conversion date, or (iii) 85% of the average of the
daily low trading price of the Company's Common Stock on each of the five (5)
trading days immediately preceding the applicable conversion date. The
amount set
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forth in paragraph (i) above (the "Fixed Conversion Price") may be further
adjusted in the event that on the 180th day following June 12, 1996, the
average closing bid price for the prior 20-business days has declined to
$4.05 or less, in which event the Fixed Conversion Price shall be adjusted to
110% of such average closing bid price during such 20-business day period.
The Series B Convertible Preferred Shares will bear no dividends and have
no voting rights, except with respect to certain matters which affect the
rights of the Series B Convertible Preferred Shares. Further, the Series B
Convertible Preferred Shares have certain liquidation preferences, and are
subject to redemption by the Company, forced conversion at any time after
June 12, 1997, and automatic conversion on June 7, 1998, under certain
circumstances.
In addition, the Company issued 5-year warrants to the purchasers of the
Series B Convertible Preferred Shares to purchase additional shares of the
Company's Common Stock to such investors, based on the number of shares of
Common Stock into which the corresponding number of Series B Convertible
Preferred Shares are so converted. The warrants are exercisable after 60
days from June 12, 1996 at the Fixed Conversion Price.
In connection with the transaction, $750,000 of the gross proceeds were
released to the Company and $1,750,000 of the gross proceeds were deposited
into a second escrow, subject to release to the Company in the event that
certain legal opinions are delivered to the investors, on or before August
11, 1996, with respect to the formation of the Company's Paging Networks
Joint Venture with Beijing CATCH. In the event that such opinions are not
delivered on or before such date, the transaction may be cancelled with
respect to $2,000,000 of the gross proceeds of the offering.
Further, in connection with such transaction, the Company has agreed to
pay fees and expenses to Regal International Capital, Inc. ("Regal"), the
placement agent, in the aggregate amount of 8% of the gross proceeds of the
offering and to issue warrants to Regal to purchase 8% of the number of
shares of Common Stock into which the Series B Convertible Preferred Shares
may be converted at an exercise price equal to the Fixed Conversion Price.
Further, the Company has agreed to provide Regal with the right to raise up
to an additional $12,500,000 on behalf of the Company, for a period of nine
(9) months following June 12, 1996, as may be agreed between the Company and
Regal, subject to certain terms and conditions.
EMPLOYEES
As of July 12, 1996, the Company had eight (8) full-time employees,
including four (4) executive personnel, two (2) administrative and financial
personnel and two (2) clerical employees.
The Company intends to hire additional personnel as the development of
the Company's business makes such action appropriate. The loss of the
services of key personnel could have a material adverse effect on the
Company's business. Since there is intense competition for qualified
personnel knowledgeable of the Company's industry, no assurance can be given
that the Company will be successful in retaining and recruiting needed key
personnel. The Company does not have key-man life insurance for any of its
employees.
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
employee relations are good.
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RISK FACTORS
THERE IS A LIMITED PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK. PERSONS
WHO MAY OWN OR INTEND TO PURCHASE SHARES OF COMMON STOCK IN ANY MARKET WHERE
THE COMMON STOCK MAY TRADE SHOULD CONSIDER THE FOLLOWING RISK FACTORS,
TOGETHER WITH OTHER INFORMATION CONTAINED ELSEWHERE IN THE COMPANY'S REPORTS,
PROXY STATEMENTS AND OTHER AVAILABLE PUBLIC INFORMATION, AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, PRIOR TO PURCHASING SHARES OF THE COMMON
STOCK:
FINANCIAL RISKS.
DEVELOPMENT STAGE COMPANY. The Company is in the development stage, is
subject to all of the risks inherent in the establishment of a new business,
has generated minimal revenues from operations since inception and has been
engaged primarily in research and development. The likelihood of the success
of the Company must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection
with the formation of a new business. It is anticipated that in the short
term, revenues generated from the Company's operations will not be adequate
to meet the operating expenses related thereto. There can be no assurances
that the Company will ever achieve profitable operations or that revenues
will be adequate to meet the Company's ongoing operating expenses.
LACK OF PROFITABILITY; IMPAIRED FINANCIAL CONDITION. The Company has
generated losses of $5,281,730 and $5,585,596 during the fiscal years ended
March 31, 1996 and March 31, 1995, respectively. There can be no assurances
that the Company will ever achieve profitable operations.
QUALIFIED FINANCIAL STATEMENTS. The Company's auditors have included an
explanatory paragraph in their Report of Independent Certified Public
Accountants to the effect that recovery of the Company's assets are dependent
upon future events, the outcome of which is undeterminable, and that the
successful completion of the Company's development program and its
transition, ultimately, to the attainment of profitable operations is
dependent upon obtaining adequate financing to fulfill its development
activities and achieving a level of sales adequate to support the Company's
cost structure. There can be no assurances that such a financing can be
completed on terms favorable to the Company or at all, or that the business
of the Company will ever achieve profitable operations.
NEED FOR ADDITIONAL CAPITAL. The Company's successful transition from a
development stage company to profitable operations is dependent upon
obtaining adequate financing to fund current operations. In the event the
Company fails to raise additional funds from such financing, and fails to
generate any additional revenues from operations, the Company may not be able
to meet all of its obligations past September, 1996 from cash flow from
operations. Further, up to $1,750,000 of additional funds may be released to
the Company in connection with a private placement of the Company's
securities. However, the release of such funds may be subject to
cancellation in the event that certain conditions are not fulfilled by the
Company. There can be no assurances that such additional funds will be
released to the Company, that any sources of financing will be available from
existing stockholders or external sources on terms favorable to the Company
or at all or that the business of the Company will ever achieve profitable
operations. Further, any additional financing, if necessary, may be senior
to the Common Stock or result in significant dilution to the holders of the
Common Stock. In the event the Company does not receive any such financing
or generate profitable operations, management's options will be to suspend or
discontinue its business activity in its present form.
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SECURITIES RISKS.
LIMITED PUBLIC MARKET FOR COMMON STOCK. There is currently a limited
public market for the Common Stock. Holders of the Company's Common Stock
may, therefore, have difficulty selling their Common Stock, should they
decide to do so. In addition, there can be no assurances that such markets
will continue or that any shares of Common Stock which may be purchased may
be sold without incurring a loss. Any such market price of the Common Stock
may not necessarily bear any relationship to the Company's book value,
assets, past operating results, financial condition or any other established
criteria of value, and may not be indicative of the market price for the
Common Stock in the future. Further, the market price for the Common Stock
may be volatile depending on a number of factors, including business
performance, industry dynamics, news announcements or changes in general
economic conditions.
DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock is
currently listed for trading in the over-the-counter market on the NASD
Electronic Bulletin Board or in the "pink sheets" maintained by the National
Quotation Bureau, Inc., which are generally considered to be less efficient
markets than markets such as NASDAQ or other national exchanges, and which
may cause difficulty in conducting trades and difficulty in obtaining future
financing. Although the Company has applied for the Company's Common Stock
to be listed for trading in the NASDAQ Small-Cap Market, there can be no
assurances that the Common Stock will qualify for listing on such market.
Further, the Company's securities may become subject to the "penny stock
rules" adopted pursuant to Section 15 (g) of the Exchange Act. The penny
stock rules apply to non-NASDAQ companies whose common stock trades at less
than $5.00 per share or which have tangible net worth of less than $5,000,000
($2,000,000 if the company has been operating for three or more years). Such
rules require, among other things, that brokers who trade "penny stock" to
persons other than "established customers" complete certain documentation,
make suitability inquiries of investors and provide investors with certain
information concerning trading in the security, including a risk disclosure
document and quote information under certain circumstances. Many brokers
have decided not to trade "penny stock" because of the requirements of the
penny stock rules and, as a result, the number of broker-dealers willing to
act as market makers in such securities is limited. In the event that the
Company becomes subject to the "penny stock rules" for any significant
period, there may develop an adverse impact on the market, if any, for the
Company's securities.
CERTAIN REGISTRATION RIGHTS. The Company has entered into various
agreements pursuant to which certain holders of the Company's outstanding
Common Stock have been granted the right, under various circumstances, to
have Common Stock that is currently outstanding registered for sale in
accordance with the registration requirements of the Securities Act upon
demand or "piggybacked" to a registration statement which may be filed by the
Company. Of the currently issued and outstanding Common Stock, 26,634,429
shares may be the subject of future registration statements pursuant to the
terms of such agreements. Any such registration statement may have a
material adverse effect on the market price for the Company's Common Stock
resulting from the increased number of free trading shares of Common Stock in
the market. There can be no assurances that such registration rights will
not be enforced or that the enforcement of such registration rights will not
have a material adverse effect on the market price for the Common Stock.
LACK OF DIVIDENDS ON COMMON STOCK; DIVIDENDS PAYABLE TO AFFILIATE ON
PREFERRED STOCK. The Company has paid no dividends on its Common Stock to
date and there are no plans for paying dividends on the Common Stock in the
foreseeable future. The Company has certain obligations to pay dividends to
an affiliate on issued and outstanding shares of Series A Convertible
Preferred Stock. Except for dividends which may be payable on the Series A
Convertible Preferred Stock, the Company intends to retain earnings, if any,
to provide funds for the expansion of the Company's business.
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POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The
Company's Certificate of Incorporation includes certain provisions which are
intended to protect the Company's stockholders by rendering it more difficult
for a person or persons to obtain control of the Company without cooperation
of the Company's management. These provisions include certain super-majority
requirements for the amendment of the Company's Certificate of Incorporation
and Bylaws. Such provisions are often referred to as "anti-takeover"
provisions. The inclusion of such "anti-takeover" provisions in the
Certificate of Incorporation may delay, deter or prevent a takeover of the
Company which the stockholders may consider to be in their best interests,
thereby possibly depriving holders of the Company's securities of certain
opportunities to sell or otherwise dispose of their securities at
above-market prices, or limit the ability of stockholders to remove incumbent
directors as readily as the stockholders may consider to be in their best
interests.
SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES. Future
sales of shares of Common Stock by the Company and its stockholders could
adversely affect the prevailing market price of the Common Stock. There are
currently 2,635,000 shares of Common Stock which are free trading shares or
are eligible to have the restrictive legend removed pursuant to Rule 144(k)
promulgated under the Securities Act. Further, 26,634,429 shares may be the
subject of future registration statements pursuant to the terms of certain
agreements between the Company and certain of its stockholders. Sales of
substantial amounts of Common Stock in the public market, or the perception
that such sales may occur, could have a material adverse effect on the market
price of the Common Stock. Pursuant to its Certificate of Incorporation, the
Company has the authority to issue additional shares of Common Stock and
Preferred Stock. The issuance of such shares could result in the dilution of
the voting power of the currently issued and outstanding Common Stock.
FUTURE ISSUANCES OF PREFERRED STOCK. The Company's Certificate of
Incorporation, as amended, authorize the issuance of preferred stock with
such designation, rights and preferences as may be determined from time to
time by the Board of Directors, without stockholder approval. In the event
of the issuance of additional series of preferred stock, the preferred stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company.
GENERAL BUSINESS OPERATIONS RISKS.
CONTROL BY PRINCIPAL STOCKHOLDER. Tweedia, the Company's principal
stockholder, and an affiliate of certain directors and executive officers of
the Company, has the voting power of approximately 47.5% of the outstanding
Common Stock. As a result of such Common Stock ownership, Tweedia will be in
a position to exercise significant control with respect to the affairs of the
Company and the election of directors.
COMPETITION. The Company directly and indirectly competes with other
businesses, including businesses in the telecommunications business. In many
cases, these competitors are larger and more firmly established than the
Company. In addition, many of such competitors have greater marketing and
development budgets and greater capital resources than the Company.
Accordingly, there can be no assurance that the Company will be able to
achieve and maintain a competitive position in the Company's industry.
EFFECT OF TECHNOLOGICAL CHANGE ON OPERATIONS. The market in the
telecommunications industry is characterized by rapidly changing technology.
There can be no assurance that technologies developed by others will not
render obsolete or otherwise significantly diminish the value of the
Company's business operations.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the skills of
its management team. There is strong competition for qualified personnel in
the telecommunications industry, and the loss of key personnel or an
inability to continue to attract, retain and motivate key personnel could
adversely affect the Company's business. There can be no assurances that the
Company will be able to retain its existing key
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personnel or to attract additional qualified personnel. The Company does not
have key-man life insurance on any employees of the Company.
LIMITATIONS ON DIRECTOR LIABILITY. The Company's Certificate of
Incorporation provides, as permitted by governing Delaware law, that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
with certain exceptions. In addition, the Company's Certificate of
Incorporation and Bylaws provide for mandatory indemnification of directors
and officers to the fullest extend permitted by Delaware law. Further, the
Company has adopted certain forms of indemnification agreements which may be
entered into with the Company's officers and directors. These provisions and
agreements may discourage stockholders from bringing suit against a director
for breach of fiduciary duty and may reduce the likelihood of derivative
litigation brought by stockholders on behalf of the Company against a
director.
PRC BUSINESS OPERATIONS RISKS.
PRELIMINARY NATURE OF AGREEMENTS. The Company has entered into certain
letters of intent and agreements with Beijing CATCH, an affiliate of the
principal stockholder of the Company, related to the Company's prospective
telecommunications business operations in the PRC. Each of these agreements
relate to the proposed construction of telecommunications networks in the
PRC. These agreements are preliminary in nature and are subject to the
receipt of certain approvals and permits from various governmental agencies
in the PRC, and in certain cases, the execution of more definitive agreements
will be required. There can be no assurances that such definitive agreements
will ever be consummated or that such approvals and permits will be obtained
for the benefit of the Company. Since the Company does not have the
technical capability, personnel or resources to build, service or maintain a
telecommunications network, the consummation of all or any of these
transactions may require the cooperation and participation of third parties,
other than PRC governmental agencies, who may be parties to or independent
contractors with any such Sino-foreign joint ventures, for the purpose of
building, servicing or maintaining any such telecommunications network.
There can be no assurances that the Company will be able to obtain the
requisite cooperation or participation of any such third parties with respect
to the Company's proposed business operations. Although each of these
agreements sets forth certain understandings as to the extent of the
contributions and interests in these Sino-foreign joint ventures, there can
be no assurances as to the final terms of the definitive agreements, if any,
with respect to these proposed Sino-foreign joint ventures. Further, each of
these preliminary agreements will require significant financings necessary to
fund the construction of such networks. The Company does not currently have
any commitments for any such financing or sufficient resources to fund such
construction, and there can be no assurances that any such financing can be
obtained on terms favorable to the Company or at all.
CONSTRUCTION AND OPERATION OF PROPOSED TELECOMMUNICATIONS NETWORKS. Even
in the event that the Company obtains all necessary governmental approvals
and financings related to the Company's proposed telecommunications networks
business ventures in the PRC, the Company may experience difficulties and
delays relating to the construction and operation of such networks. There
can be no assurances that such networks will be completed in a timely manner,
if at all, or that any financing which may be completed with respect to any
such network will be sufficient to complete or to operate any proposed
project. The failure to achieve these goals may have a material adverse
effect upon the liquidity, working capital requirements and anticipated
growth of the Company's business operations.
TRANSACTIONS WITH AFFILIATES; CONFLICTS OF INTEREST. The Company has
entered into certain contractual arrangements with Beijing CATCH, an
affiliate of the Company, with respect to the Company's prospective business
operations in the PRC. Beijing CATCH is the controlling stockholder of
Tweedia, a principal stockholder of the Company. Beijing CATCH is also an
affiliate of certain directors and officers of the Company. There can be no
assurances that Beijing CATCH will be able successfully to assist the
Company's
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proposed business plan or that a change of control in the Company's capital
structure will not have a material adverse effect on the Company's proposed
business operations. The Company also has agreed to register certain shares
of Common Stock of the Company's stockholders in connection with the
transactions contemplated by the Reorganization Agreement. The shares of
Common Stock which may be registered will be offered for the benefit of such
stockholders, certain of whom are affiliates of the Company. The Company
will not receive any of the net proceeds of from the sale of any such shares.
Management of the Company believes that these agreements were negotiated at
arms' length. However, the enforcement of these agreements may create
conflicts of interests in the event of a dispute between the Company and any
such parties. Although management of the Company intends to use its best
efforts to mitigate any such conflicts of interests, there can be no
assurances that management of the Company will be able to mitigate such
conflicts of interest successfully.
RISKS PERTAINING TO DOING BUSINESS IN THE PRC.
LIMITED PRECEDENT. Prospective stockholders should be aware of and take
into consideration the limited precedent with which to evaluate the potential
risks and rewards related to the acquisition, development and financing of,
or the establishment of Sino-foreign joint ventures with respect to
telecommunications network business operations, specifically, in the PRC by
foreign entities.
INTERNAL POLITICAL RISKS. The Company's prospective business operations
may be adversely affected by the political environment in the PRC. The PRC
is a socialist state which since 1949 has been, and is expected to continue
to be, controlled by the Communist Party of China. Changes in the political
leadership of the PRC may have a significant adverse effect on policies
related to the current economic reforms program, other policies affecting
business and the general political, economic and social environment in the
PRC. Moreover, economic reforms and growth in the PRC have been more
successful in certain provinces than in others, and the continuation or
increase of such disparities could affect the political or social stability
of the PRC.
GOVERNMENT CONTROL OVER ECONOMY. The PRC only recently has permitted
greater provincial and local economic autonomy and private economic
activities. The government of the PRC has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Accordingly, government actions in
the future, including any decision not to continue to support recent
economic reforms and to return to a more centrally planned economy or
regional or local variations in the implementation of economic policies,
could have a significant effect on economic conditions in the PRC or
particular regions thereof. Any such developments could affect opportunities
for foreign investment, the prospects of private sector enterprises including
the Company's intended business operations in the PRC.
INFLATION AND ANTI-INFLATION POLICIES. In recent years, the Chinese
economy has experienced periods of rapid expansion and high rates of
inflation, which have led to the adoption by the PRC government, from time to
time, of various corrective measures designed to restrict the availability of
credit or regulate growth and contain inflation. High inflation has in the
past and may in the future cause the PRC government to impose controls on
prices, or to take other action which could inhibit economic activity in
China, and, thereby, adversely affect the Company's intended business
operations in the PRC. There can be no assurance that high rates of
inflation and any PRC anti-inflation policies adopted in the future will not
have a material adverse effect on the Company's business operations, in
particular, with respect to the liquidity of the Company.
RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE. The Renminbi, the legal
tender currency of the PRC, is not a freely convertible currency. The PRC
government regulates its external balances through control over foreign trade
and foreign exchange regulation. Both conversion of Renminbi into foreign
currencies and remittance of foreign currencies abroad are subject to PRC
government approval. The Company anticipates that revenues which may be
derived from the Company's proposed business operations through Sino-foreign
joint ventures in the PRC, if any, will be in Renminbi. A portion of such
revenues may have to be converted
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to other currencies to meet foreign currency obligations (such as payment
obligations to potential non-Chinese lenders) or to be remitted to the
Company as return of capital or distributions. The PRC government has
recently issued new regulations with respect to the reform of its foreign
exchange system. However, there can be no assurances as to how foreign
investment enterprises will be treated under this new system or whether the
system will be changed again in the future. As a result, the Company may
encounter difficulty in exchanging revenues from the Company's prospective
business operations in the PRC which may be obtained in Renminbi into foreign
currencies, and thereby adversely affect the Company's ability to make
payments or distributions in foreign currencies.
VOLATILITY OF EXCHANGE RATES. There has been significant volatility in
the exchange rates of Renminbi to U.S. Dollars in recent years. In recent
years, the Renminbi has experienced a gradual but significant devaluation
against most major currencies. There can be no assurances as to the
stability or valuation of exchange rates of the Renminbi or as to the
potential effect of inflation rates on the Company's prospective business
operations.
RESTRICTIONS ON REPATRIATION OF FOREIGN CURRENCY. Foreign investment
enterprises may generally remit out of the PRC profits or dividends derived
from a source within the PRC, subject to the availability of foreign
currency. Except for such profits or dividends, remittance out of the PRC by
foreign investment enterprises of any other amount (including proceeds from a
disposition of an investment in China) is subject to the approval of
governmental regulatory agencies and to the availability of foreign currency.
In addition, if there were to be a deterioration in the PRC's balance of
payments, or for other reasons, the PRC could impose restrictions on foreign
currency remittances abroad. No assurance can be given that the Company will
be able or permitted to remit out of the PRC amounts due to the Company from
any Sino-foreign joint venture with which the Company may engage in business.
PRC LAWS; EVOLVING REGULATIONS AND POLICIES. The PRC's legal system is a
civil law system based on written statutes in which decided legal cases have
little value as precedents, unlike the common law system prevalent in the
United States. The PRC does not have a well-developed, consolidated body of
laws governing foreign investment enterprises. As a result, the
administration of laws and regulations by government agencies may be subject
to considerable discretion and variation. China's regulations and policies
with respect to foreign investment are evolving. Definitive regulations and
policies with respect to such matters as the permissible percentage of
foreign investment and permissible rates of equity returns have not yet been
published, statements regarding these evolving policies have been conflicting
and any such policies, as administered, are likely to be subject to broad
interpretation and discretion and to be modified, perhaps on a case-by-case
basis. The uncertainties regarding such regulations and policies present
risks that the Company will not be able to achieve its investment objectives.
EXPROPRIATION. The PRC government has, in the past, renounced various
debt obligations incurred by predecessor governments, which obligations
remain in default, and expropriated assets without compensation. There can
be no assurance that the PRC government will not in the future expropriate or
nationalize assets which may relate to any prospective business operations of
the Company.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company leases offices located at 599 Lexington Avenue, 44th Floor,
New York, New York 10022. This 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 (5) year term based on the fair market value of
the leased premises at or about the time of the expiration date of the
initial term of the lease.
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ITEM 3. LEGAL PROCEEDINGS.
A complaint, dated March 26, 1996, has been filed against the Company,
ITV and other parties, including certain of the Company's officers, directors
and principal stockholders, with respect to the premises formerly leased by
ITV in Canoga Park, California. The complaint filed by the lessor of the
premises in the Superior Court of California, County of Los Angeles (No.
BC146964), alleges certain claims, including abandonment of the lease and
failure to pay rent plus late charges and other expenses from September, 1995
through October 12, 1995, the date of termination of the lease, and the
amount of rent abated during the first six (6) months of the lease, in the
aggregate principal amount of approximately $82,000. The complaint also
alleges damages at the monthly rental rate of approximately $19,000 from
October 12, 1995 through February 28, 1999, the expiration of the term of the
lease, plus other costs and damages. Further, the complaint alleges claims
against the Company and certain officers, directors and principal
stockholders of the Company under allegations of alter ego, distributions
contrary to law and fraudulent transfer of assets.
A first amended complaint, dated April 15, 1996, has been 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. The complaint, filed in the Superior Court of
California, County of Los Angeles (No. BC145036), alleges fraud,
misrepresentation and breach of contract with respect to the sale of 666,667
shares of ITV for $1,000,000 prior to the completion of the Reorganization
Agreement between the Company and ITV 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 there are valid defenses to each
of these claims and intends to defend each of the actions vigorously, if no
settlement can be reached with the claimants. There can be no assurances as
to the resolution of these matters.
The Company has been notified that a default has been filed against ITV,
on or about December 11, 1995, relating to a complaint filed by National
Electronics Corporation ("NEC") in the Los Angeles, California Municipal
Court (No. 95E10612). The Company understands that the complaint alleges
damages in the principal amount of approximately $10,500 and relates to a
claim for the non-payment for manufacturing parts by ITV. The $10,500
principal obligation owing to NEC was a liability assumed by Netmatics in
connection with the Asset Sale Agreement between ITV and Netmatics. The
Company has been advised by management of Netmatics that an agreement has
been reached for the direct payment by Netmatics to NEC of such obligation.
However, there can be no assurances as to the resolution of this matter.
A former employee of ITV has claimed that ITV wrongfully terminated her
employment in November, 1994. Such former employee has not identified the
damages purportedly suffered as a result of such alleged wrongful
termination. The Company has investigated these allegations and management of
the Company believes that such termination was undertaken in strict adherence
with the Company's policies. As of the date of this Report, such person has
not initiated any legal proceedings against the Company.
Except as set forth above, the Company is not a party to any material
litigation and is not aware of any pending or threatened litigation that
could have a material adverse effect on the Company's business, operating
results or financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a May 7, 1996 meeting of the Company's stockholders, the stockholders
adopted the following resolutions by the votes set forth below:
(1) To approve a change in the Company's state of incorporation from
Colorado to Delaware by means of a merger of the Company with and into
a wholly-owned subsidiary. (15,610,909 shares in favor, none opposed
and 10,483,500 not voting or abstained)
(2) To adopt the Company's 1996 Stock Option Plan and to reserve up to
12,000,000 shares of the Company's Common Stock for issuance under the
1996 Stock Option Plan. (13,238,174 shares in favor, 3,330,195
opposed, and 9,526,040 not voting or abstained)
(3) To approve the form of certain indemnification agreements between the
Company and the members of the Company's Board of Directors.
(15,609,609 shares in favor, 958,460 opposed, and 9,526,340 not voting
or abstained)
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of July 12, 1996, 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 July 12, 1996, there were
issued and outstanding 28,451,982 shares of Common Stock, options to purchase
10,013,183 shares of Common Stock, 1,524,178 shares of Series A Convertible
Preferred Stock and 100 shares of Series B Convertible Preferred Stock.
Further, the Company has issued and outstanding warrants to purchase 183,433
shares of Common Stock and other warrants to purchase a number of shares of
Common Stock based on the conversion rate of the Series B Convertible
Preferred Stock.
The Company's Common Stock has been listed for trading in the
over-the-counter market since March 4, 1996 and is quoted on the NASD
Bulletin Board or in the "pink sheets" maintained by the National Quotation
Bureau, Inc. under the symbol "AVIC." The Company's Common Stock has a very
limited trading history. The bid and asked sales prices of the Common Stock,
as traded in the over-the-counter market, on July 12, 1996, were
approximately $3.00 and $3.50, respectively. These prices are based upon
quotations between dealers, without adjustments for retail mark-ups,
mark-downs or commissions, and therefore may not represent actual
transactions.
The Company has applied for listing of the Company's Common Stock in the
NASDAQ Small-Cap Market. There can be no assurances that a public market
will be sustained for the Common Stock or that the Common Stock will qualify
for listing in the NASDAQ Small-Cap Market.
No dividend has been declared or paid by the Company since inception.
The Company has certain obligations to pay dividends to an affiliate on
issued and outstanding shares of Series A Convertible Preferred Stock.
Except for dividends which may be payable on the Series A Convertible
Preferred Stock, the Company does not anticipate that any dividends will be
declared or paid in the future. See "Item 12 - Certain Relationships and
Related Transactions."
The transfer agent for the Company is Colonial Stock Transfer Company,
Inc., 440 East 400 South, Suite One, Salt Lake City, Utah 84111, (801)
355-5740.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW OF PRESENTATION. On February 8, 1995, the Company completed the
Reorganization Agreement with ITV, pursuant to which the Company acquired one
hundred percent (100%) of the issued and outstanding securities of ITV from
the holders of securities of ITV, in exchange for a number of shares of
Common Stock and options to purchase shares of Common Stock equal to
approximately 91% of the number of issued and outstanding shares of Common
Stock on a fully diluted basis after the completion of the transaction. See
Item 1 - "Business -Reorganization Agreement with ITV."
Since approximately April, 1995, the focus of the Company's principal
business operations has been the establishment of Sino-foreign joint ventures
related to the development of telecommunications networks in the PRC on a
BTSM basis.
On January 16, 1996, ITV closed the Asset Sale Agreement between ITV and
Netmatics. Pursuant to the terms of the Asset Sale Agreement, ITV, the
former primary operating subsidiary of the Company, sold substantially all of
ITV's assets and Netmatics assumed certain of ITV's liabilities and
obligations in consideration of an aggregate purchase price of $2,500,000 and
common stock of Netmatics currently equal to 19.4% of the issued and
outstanding shares of Netmatics.
The financial statements of the Company included in this Report have been
presented, for accounting purposes, as a recapitalization of ITV, with ITV as
the acquiror of the Company. For purposes of clarity in this section, the
term "Company" reflects the financial condition and results of operations of
ITV, which was incorporated in March, 1992, through February 8, 1995, as
described in the preceding paragraph.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1996 AND MARCH 31,
1995. Net sales increased from $345,276 during the year ended March 31, 1995
to $683,733 during the year ended March 31, 1996. Net sales during the year
ended March 31, 1995 related to the sale of prototypes of the Company's
products and miscellaneous services provided to the Company's customers on a
pilot-testing basis. The increase in net sales during the year ended March
31, 1996 was attributable to the development of a tested product line and a
nation-wide sales and marketing program for the distribution of the Company's
products related to the former operations of the Company's ITV subsidiary.
As all of the Company's revenues since inception were generated by ITV, the
Company had no net sales subsequent to the closing of the Asset Sale
Agreement in January, 1996.
Selling, general and administrative expenses decreased nine percent from
$3,513,567 during the year ended March 31, 1995 to $3,207,570 during the year
ended March 31, 1996. This reduction was primarily related to a decrease in
payroll and related expenses associated with the closing of the Asset Sale
Agreement in January, 1996, which led to a reduction in the number of
employees working for the Company.
Net research and development expenses decreased by 38% from $2,086,324
during the year ended March 31, 1995 to $1,287,629 during the year ended
March 31, 1996. The decrease in research and development expenses related to
a shift in the focus of the business of the Company from manufacturing
technologically advanced networking equipment to establishing Sino-foreign
joint ventures with entities in the PRC involved in telecommunications. As a
result of the closing of the Asset Sale Agreement in January, 1996, the
Company ceased all activities related to research and development.
The equity in losses of unconsolidated subsidiary of $500,000 recorded
during the year ended March 31, 1996 represents the Company's share of losses
reported by Netmatics between January 17, 1996 and March 31, 1996, during
which period the Company owned thirty-three percent (33%) of the issued and
outstanding common shares of Netmatics. In 1996, the Company suspended the
equity method of accounting with respect to its investment in Netmatics when
the Company's share of losses equalled the carrying amount of the investment.
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Interest expense during the year ended March 31, 1996 increased to
approximately $242,000 from approximately $118,000 during the year ended
March 31, 1995 due to a higher average outstanding balance of stockholder
loans payable during the year ended March 31, 1996.
The loss from abandoned assets of $130,840 recorded during the year ended
March 31, 1996 represents the write-off of certain remaining assets of ITV
that were not sold in connection with the Asset Sale Agreement.
The Company's net loss decreased from $5,538,303 during the year ended
March 31, 1995 to $5,281,730 during the year ended March 31, 1996. This
decrease in net loss was due to decreases in selling, general and
administrative expenses and research and development expenses that more than
offset the loss from the abandonment of assets and higher interest expenses
incurred during the year ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES. The Company's current cash flow from
operations is not capable of supporting existing business operations in its
present form. Since inception in March, 1992, the Company has financed its
development stage activities primarily through equity investments and loans
from its founding stockholders.
The Company generated sales of $1,223,894 from March, 1992 (inception)
through March 31, 1995. All of these sales occurred from March 31, 1993
through March 31, 1996. However, the Company has generated losses of
$15,331,767 from operations from March, 1992 through March 31, 1996 and net
losses of $16,527,651 since inception. There can be no assurances that the
Company will ever achieve profitable operations.
From its inception in March, 1992 through March 31, 1996, the Company has
used approximately $12,148,000 of cash from its operating activities. This
use of cash was primarily the result of the loss of approximately $16,528,000
since inception.
Further, the Company used approximately $3,181,000 of cash from investing
activities during this period. This amount resulted from approximately
$1,586,000 for the purchase of machinery and equipment used in the Company's
research and development activities, $1,170,000 used as a deposit for the
Company's investment in the GSM Network Joint Venture and approximately
$675,000 expended for capitalized computer software development costs.
The cash outflows from investing activities were generated from the
following sources: (i) approximately $9,179,000 in stockholder loans, of
which $6,735,000 was converted into 9,730,790 shares of the Company's Common
Stock, and (ii) the receipt of additional common stock subscriptions of
approximately $6,735,000. Further, on June 12, 1996, the Company issued 100
shares of the Company's Series B Convertible Preferred Stock (the "Series B
Convertible Preferred Shares"), at a purchase price of $25,000 per share, and
an equal number of warrants were issued to purchase shares of the Company's
Common Stock in consideration of $2,500,000. In connection with the
transaction, $750,000 of the gross proceeds were released to the Company and
$1,750,000 of the gross proceeds were deposited into a second escrow, subject
to release to the Company in the event that certain legal opinions are
delivered to the investors, on or before August 11, 1996, with respect to the
formation of the Company's Paging Networks System Joint Venture with Beijing
CATCH. In the event that such opinions are not delivered on or before such
date, the transaction may be cancelled with respect to $2,000,000 of the
gross proceeds of the offering.
On or about September 16, 1994, ITV and Beijing CATCH entered into an
exclusive five (5) year distributorship agreement pursuant to which ITV
appointed Beijing CATCH as ITV's exclusive distributor for ITV's
communications processor and data/access modules in the PRC. The parties
terminated this agreement on December 20, 1995. In connection with the
termination of this agreement, with respect to a $1,000,000 deposit made by
Beijing CATCH with ITV relating to the agreement, $150,000 of such amount was
credited
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to ITV as payment for consulting services provided to Beijing CATCH and ITV
remains obligated to repay $850,000 to Beijing CATCH.
On December 15, 1995, the Company also agreed to issue 1,524,178 shares
of the Company's Series A Convertible Preferred Stock to Tweedia as
consideration for the contribution to the Company by Beijing CATCH of Beijing
CATCH's interest in a $4,572,536 non-refundable deposit paid to Motorola in
connection with an Enhanced Specialized Mobile Relay System Equipment
Purchase Contract #700.0008D, dated December 12, 1993, and as amended,
between Beijing CATCH and Motorola. In the event that Beijing CATCH forfeits
the deposit to Motorola, Tweedia has agreed to return the Convertible
Preferred Shares to the Company for cancellation.
On January 16, 1996, ITV closed the Asset Sale Agreement between ITV and
Netmatics. Pursuant to the terms of the Asset Sale Agreement, ITV, the
former primary operating subsidiary of the Company, sold substantially all of
ITV's assets and Netmatics assumed certain of ITV's liabilities and
obligations in consideration of an aggregate purchase price of $2,500,000 and
common stock of Netmatics currently equal to 19.4% of the issued and
outstanding shares of Netmatics.
As of December 21, 1995, the Company agreed to issue up to 50,000,000
shares of Common Stock to Tweedia, an affiliate of Beijing CATCH and the
principal stockholder of the Company, pursuant to the terms of a Master
Agreement and Right of First Refusal.
On March 22, 1996, the Company entered into certain agreements to obtain
a 31% interest in a Sino-foreign joint venture formed between Hebei United
and NTT with respect to the development of a Global Service Mobile telephone
network in Hebei Province, PRC. The agreed upon purchase price of this
interest is $1.17 million. These funds are currently on deposit at the Bank
of Communications in Shijiazhuang, Hebei Province PRC in the account of the
Electronics Industry Commission of the Hebei Provincial Government, pending
final PRC governmental approvals for the transfer of this interest to the
Company. If the proper approvals are not received for the transfer of this
interest, the Electronics Industry Commission of the Hebei Provincial
Government will return the $1.17 million to the Company.
On June 12, 1996, the Company entered into an agreement to form a
Sino-foreign joint venture with Beijing CATCH with respect to the purchase or
construction of one hundred (100) paging stations in the PRC. The Company
has agreed to contribute the capital needed to build the China Paging Network
in exchange for a seventy percent (70%) equity interest in the joint venture,
which will sell the equipment necessary for constructing the China Paging
Network to a subsidiary of Beijing CATCH, and install, service and maintain
such equipment. The initial capital contribution required from the Company
for the China Paging Networks Joint Venture will be $700,000. The Company
has set aside $1,000,000 from the June, 1996 offering of $2,500,000 of Series
B Convertible Preferred Stock as the source of the $700,000 capital
contribution, with the balance of the $1,000,000 to be used for capital
expenditures by the China Paging Networks Joint Venture upon its formation.
The closing of such offering is subject to the receipt of certain PRC
regulatory approvals and legal opinions with respect to the formation of the
China Paging Networks Joint Venture. In the event that regulatory approval
of the joint venture is not obtained and such opinions are not delivered
within 60 days of the closing of the offering, the offering may be cancelled
with respect to $2,000,000 of the gross proceeds, and the Company will not
have adequate sources of capital to make the required $1,000,000 capital
contribution. There can be no assurances that such offering will not be
cancelled or that the Company will be able to obtain alternative sources of
financing for the required capital contribution.
Each of these agreements is preliminary in nature and is subject to the
receipt of significant approvals and permits from various governmental
agencies in the PRC. There can be no assurances that such definitive
agreements will ever be consummated or that such approvals and permits will
be obtained for the benefit of the Company.
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Since the Company does not currently have the technical capability,
personnel or resources to build, service or maintain a telecommunications
network, the consummation of all or any of these transactions may require the
cooperation and participation of third parties, other than PRC governmental
agencies, who may be parties to or independent contractors with any such
proposed Sino-foreign joint ventures, for the purpose of building, servicing
or maintaining any such telecommunications network. There can be no
assurances that the Company will be able to obtain the requisite cooperation
or participation of any such third parties with respect to the Company's
proposed business operations.
Although each of these agreements sets forth certain understandings as
to the extent of the contributions and interests in these proposed
Sino-foreign joint ventures, there can be no assurances as to the final terms
of the definitive agreements, if any, with respect to these proposed
Sino-foreign joint ventures.
Further, each of these agreements will require significant financings
necessary to fund the construction of such networks. The Company does not
currently have any commitments for any such financing or sufficient resources
to fund such constructor, and there can be no assurances that any such
financing can be obtained on terms favorable to the Company or at all.
In addition, the Company's proposed business operations in the PRC are
subject to significant risks. These risks include, but are not limited to
the limited precedent for the establishment of Sino-foreign joint ventures
for the purpose of engaging in the telecommunications industry in the PRC,
governmental restrictions on foreign business ventures in the PRC, PRC
regulation of its economy and foreign currency exchange and the general
political environment in the PRC.
The Company's successful transition from a development stage company to
profitable operations is dependent upon obtaining adequate financing to fund
current operations and the development of a market for the Company's
products. The Company will continue to seek funds in the form of lines of
credit and/or equity and debt securities from third party sources as well as
from its existing stockholders.
The Company's auditors have included an explanatory paragraph in their
Report of Independent Certified Public Accountants to the effect that
recovery of the Company's assets are dependent upon future events, the
outcome of which is undeterminable, and that the successful completion of the
Company's development program and its transition, ultimately, to the
attainment of profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of
sales adequate to support the Company's cost structure. There can be no
assurances that such a financing can be completed on terms favorable to the
Company or at all, or that the business of the Company will ever achieve
profitable operations.
In the event the Company fails to raise additional funds from such
financing, and fails to generate any additional revenues from operations, the
Company may not be able to meet all of its obligations past September, 1996
from the $500,000 received from the sale of the Series B Preferred Stock.
Further, if the Company receives the necessary approvals and legal opinions
in relation to its paging joint venture, the balance of the $2.5 million from
the sale of the Series B Preferred Stock will be released to the Company,
which will provide the Company with operating capital through July, 1997,
based on its current operating expenditures. There can be no assurances that
the balance of the offering proceeds will be released to the Company, that
any sources of financing will be available from existing stockholders or
external sources on terms favorable to the Company or at all or that the
business of the Company will ever achieve profitable operations. In the
event the Company does not receive any such financing or generate profitable
operations, management's options will be to suspend or discontinue its
business activity in its present form.
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ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this Item 7 are attached hereto as
Exhibit "A" and incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As of December 27, 1994, the Company's Board of Directors determined to
engage Singer Lewak Greenbaum & Goldstein LLP (successors to the practice of
Shillan Abrams & Company) as the Company's independent certified accountants to
replace Michael B. Johnson & Co., P.C. By letter dated November 4, 1994,
Michael B. Johnson & Co., P.C., Certified Public Accountants, resigned as
independent accountants for the Company, effective as of September 12, 1994.
In connection with the closing of the Reorganization Agreement, the
Company's fiscal year end changed from September 30 to March 31. The former
independent accountants have not issued a report on the Company's financial
statements for either of the past two fiscal years ended March 31, 1996.
Michael B. Johnson & Co., P.C. had issued a report on the Company's financial
statements for the fiscal year ended September 30, 1993, which period is not
covered by the financial statements in this Form 10-KSB. Such report issued by
the former accountants did not include an adverse opinion or disclaimer of
opinion, and has not been modified as to uncertainty, audit scope or accounting
principles. In connection with the audits of the two (2) most recent fiscal
years and during any subsequent interim periods preceding such resignation,
there has not developed any disagreement between such former independent
accountants and management of the Company or other reportable events which have
not been resolved to the former independent accountants' satisfaction.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
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 qualify, subject to their prior death, resignation or removal.
Officers serve at the discretion of the Board of Directors. There are no family
relationships among any of the Company's directors and executive officers.
NAME POSITION AGE
Joseph R. Wright, Jr. Chairman of the Board of
Directors, Chief Executive
Officer and President 57
Chen Li Vice-Chairman of the Board
of Directors 38
Xiao Jun Executive Vice President-
AVIC China and Director 39
Ju Feng Director 49
William H. Davidson Director 42
Teoh Set Seng Director 44
Michael J. Lim Chief Financial Officer and
Executive Vice-President-
Operations 32
Timothy P.F. Crowley Secretary 25
JOSEPH R. WRIGHT, JR. has been the Company's Chairman of the Board of
Directors since May 1, 1995, President since May 7, 1996 and Chief Executive
Officer since March 14, 1996. Mr. Wright is also currently a director of
Travelers Group, Inc., Baker & Taylor Holdings, Inc., GRC International, Inc.
and Deswell Industries, Inc. He served as the Vice Chairman, Executive Vice
President and a director of W.R. Grace & Co. from 1989 to 1994, and as the
Director and Deputy Director of President Reagan's White House Office of
Management and Budget and the Deputy Secretary of the United States Department
of Commerce from 1981 to 1989. He also has formerly served as the President and
Chief Operating Officer of Citicorp Retail Services and Retail Consumer Services
and as a partner and division head of Booz, Allen and Hamilton, Inc. He also
has served as a director or member of numerous other corporations and
organizations, including the National Association of Manufacturers and the
President's Export Council.
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CHEN LI has been a director of the Company since February 8, 1995 and
Vice-Chairman of the Board of Directors since May 1, 1995. He also served as
the Company's Chief Executive Officer from December 5, 1995 until March 14,
1996. He has been the President of Beijing CATCH Communication Group Co., an
affiliate of Tweedia International Ltd., one of the principal stockholders of
the Company, since January, 1993. Mr. Chen is also a director of Tweedia
International Ltd. He also has served as a director of China United
Telecommunications Co. since January, 1993. From 1989 to 1992, he was the
general manager of Beijing CATCH Communication & Broadcasting Technology Co.
From 1982 to 1987, he served as Project Manager with China International Trust
Investment Co. Mr. Chen received an undergraduate degree in mathematics from
the Beijing Institute of Technology in 1982.
XIAO JUN has been a director of the Company since February 8, 1995 and
Executive Vice President - AVIC China, since December 5, 1995. He also served
as the Company's Secretary from February, 1995 to January, 1996 and Chief
Financial Officer from June, 1995 to May 7, 1996. He has been the president of
Xiao Hua International Inc., an international steel trading business based in
California, since June, 1993. He also serves as the Assistant President of
Beijing CATCH Communication Group Co. He has been the Vice President of ITV
Communications, Inc. since December 14, 1994. From March, 1993 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/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.
WILLIAM H. DAVIDSON has been a director of the Company since February 8,
1995. He has been an associate professor of Management and Organization at the
School of Business Administration, University of Southern California, since
1986. Mr. Davidson was formerly an associate professor at the University of
Virginia (1982-1986) and an assistant professor at Dartmouth College (1978 -
1982). He has also been a visiting professor at INSEAD (France), the Fletcher
School of Diplomacy (Tufts University), the Dalian Institute (People's Republic
of China) and the International University of Japan. He has also served as vice
president of the Academy of International Business. Mr. Davidson has written a
series of books on global business and management. He has also been involved in
several United States federal governmental programs, and has served as a
consultant in United States federal governmental projects and as an advisor to
several foreign governments. He also serves as an advisor, investor or
principal in several high technology start-up companies. Mr. Davidson is the
founder and chairman of MESA Research, an organization dedicated to research and
education in contemporary and future management issues, based in Redondo Beach,
California. Mr. Davidson received a bachelor's of arts degree in economics, an
M.B.A. and a Ph.D in International Management, all from Harvard University.
JU FENG has been a director of the Company since February 8, 1995. He has
been the Vice President and Chief Technical Officer of Beijing CATCH
Communication Group Co. since 1990. He also serves as the Chairman of Hebei
United Telecommunications Equipment Company. He was an associate professor and
director of the telecommunications laboratory at the Beijing University of
Aeronautics and Astronautics from 1989 to 1990. From 1987 to 1989, Mr. Ju
served as a visiting scholar on mobile communication at the Department of
Electrical and Electronics Engineering at Liverpool University (United Kingdom).
Mr. Ju received a master's degree from the Department of Electronics Engineering
from the Beijing University of Aeronautics and Astronautics in 1980, and a
bachelor's degree in electrical engineering from Tshinghua University (Beijing,
China) in 1968.
TEOH SET SENG has been a director of the Company since July 25, 1994, and
was the Secretary of the Company from July 25, 1994 until February 8, 1995. She
also has served as an internal auditor for Villa Genting Development SDN BHD
since June, 1993. From approximately 1983 to June, 1993, Ms. Teoh served as a
manager for Planglobal Insurance SDN based in Malaysia.
28
<PAGE>
MICHAEL J. LIM has been the Executive Vice-President - Operations of the
Company since November 7, 1995 and the Chief Financial Officer since May 7,
1996. Prior to his joining the Company, Mr. Lim was an investment banker with
Bear, Stearns & Co. Inc. Mr. Lim worked with Bear Stearns from 1986 to 1988 and
1991 to 1995. During the 2 1/2 years prior to his joining the Company, Mr. Lim
served as a 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. degree from Harvard College in English Literature in 1985 and
his M.B.A. degree from The Amos Tuck School of Business Administration in 1990.
TIMOTHY P.F. CROWLEY joined the Company in May, 1995 and became Secretary
of the Company in January, 1996. Prior to joining the Company, Mr. Crowley
worked in Corporate Administration at Travelers Group, an eight billion dollar
diversified, financial services company. Mr. Crowley received his B.A. from
Connecticut College in 1993, and was enrolled in a graduate program in the
History of Art at New York University's Institute of Fine Arts from 1993 to
1994.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934. Section
16(a) of the Exchange Act requires the Company's directors and executive
officers and beneficial holders of more than 10% of the Company's Common Stock
to file with the Securities and Exchange Commission (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, or on
written representations form 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, 1996 were timely
filed.
29
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. The following table sets forth certain
information concerning compensation 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 $100,000, for the fiscal
years ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
- ----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Other Restricted LTIP All Other
Principal Salary Bonus Compen- Awards Options/ Payouts Compen-
Position Year ($) ($) sation ($) SARs(#) ($) sation ($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph R.
Wright, Jr.(1) 1996 143,750 0 0 0 6,000,000 0 0
Chen Li(2) 1996 50,000 0 0 0 2,000,000 0 0
James L.
Nelson(3) 1996 57,750 0 0 0 0 0 0
1995 135,808 0 0 0 125,000 0 0
Tan Kim
Wah(4) 1995 0 0 0 0 0 0 0
William E.
Simmons(5) 1995 0 0 0 0 0 0 0
Daniel
Poirier 1996 156,346 0 0 0 0 0 0
1995 132,854 0 0 0 50,000 0 0
Max Sun 1996 0 0 0 0 0 0 0
1995 205,167 0 0 0 0 0 0
Michael J. Lim(6) 1996 79,615 0 0 0 1,000,000 0 0
Xiao Jun 1996 57,990 0 0 0 400,000 0 0
1995 42,250 0 0 0 125,000 0 0
</TABLE>
_____________________________
(footnotes on following page)
30
<PAGE>
_____________________________
(footnotes on previous page)
(1) Mr. Wright has been the Company's Chief Executive Officer since March
14, 1996. Of the $143,000 salary listed above, $125,000 is accrued and payable
on such amount.
(2) Mr. Chen served as the Company's Chief Executive Officer from December
5, 1995 until March 14, 1996. The $50,000 listed above reflects amounts accrued
and payable pursuant to a consulting agreement with American CATCH with respect
to services provided to the Company by Mr. Chen.
(3) Mr. Nelson was appointed as the Company's Chief Executive Officer on
or about February 8, 1995 in connection with the completion of the
Reorganization Agreement. He resigned from such capacity on May 1, 1995.
(4) Mr. Tan was elected as the Company's Chief Executive Officer and was
appointed as Chairman of the Board of Directors on or about July 25, 1994. He
resigned from such capacity on or about February 8, 1995.
(5) Mr. Simmons resigned as the Company's Chief Executive Officer on or
about July 25, 1994.
(6) Of the $79,615 listed above, $50,954 is accrued and payable to Mr.
Lim.
31
<PAGE>
OPTION/SAR GRANTS TABLE DURING LAST FISCAL YEAR. The following table sets
forth certain information concerning grants of stock options to 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
$100,000, for the fiscal year ended March 31, 1996:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price Appreciation
Individual Grants For Option Term(1)
- -----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of
Securities Total
Underlying Options/
Options/ SARs Exercise
SARs Granted to or Base
Granted Employees Price Expiration
Name (#) in Fiscal Year ($/Share) Date 5% ($) 10%($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joseph R.
Wright, Jr.(2) 3,000,000 31.5% $0.35 4/14/04 $15,125,447 $23,648,832
3,000,000 31.5% $3.00 4/14/05 $15,881,719 $26,013,715
Chen Li(3) 2,000,000 21.0% $0.35 11/29/05 $10,587,811 $16,859,323
Michael Lim(4) 1,000,000 10.5% $0.35 11/06/05 $ 5,293,903 $ 8,429,659
Xiao Jun(5) 400,000 4.2% $0.35 12/31/05 $2,117,559 $3,371,863
</TABLE>
_____________________________
(footnotes on following page)
32
<PAGE>
______________________________
(footnotes from previous page)
(1) This chart assumes a market price of $3.25 for the Common Stock, the
average of the bid and asked prices for the Company's Common Stock in the over-
the-counter market as of July 12, 1996, as the assumed market price for the
Common Stock with respect to determining the "potential realizable value" of the
shares of Common Stock underlying the options described in the chart, and does
not give effect to any reduction for the payment of the exercise price for such
options. Each of the options reflected in the chart was granted at exercise
prices which the Company believes to have been determined at the fair market
value as of the date of grant. Further, the chart assumes the annual
compounding of such assumed market price over the relevant periods, without
giving effect to commissions or other costs or expenses relating to potential
sales of such securities. The Company's Common Stock has been listed for
trading in the over-the counter market since March 4, 1996 and has a very
limited trading history. These values are not intended to forecast the possible
future appreciation, if any, price or value of the Common Stock. See Item 5 -
"Market Price of Common Equity and Related Stockholder Matters."
(2) Mr. Wright has been granted an option to acquire up to 3,000,000
shares of Common Stock at an exercise price of $0.35 per share and an additional
3,000,000 shares at an exercise price of $3.00 per share. The option has vested
with respect to 2,500,000 shares which have an exercise price of $0.35 per
share, an additional option to purchase up to 500,000 shares which have an
exercise price of $0.35 per share will vest on October 15, 1996, and an
additional option to purchase up to 3,000,000 shares which have an exercise
price of $3.00 per share will vest at the rate of 25% of such remaining
3,000,000 options commencing on April 15, 1997 and at the end of each six (6)
month period thereafter and ending on October 15, 1998. The 3,000,000 options
with an exercise price of $0.35 per share expire on April 14, 2004 and the
3,000,000 options with an exercise price of $3.00 per share expire on April 14,
2005.
(3) American CATCH Communication Group Co. ("American CATCH"), an
affiliate of Beijing CATCH Communication Group Co. and Tweedia International
Ltd., the principal beneficial stockholder of the Company, has been granted a
ten (10) year option to purchase up to 2,000,000 shares of Common Stock at an
exercise price of $0.35 per share pursuant to the terms of a consulting
agreement between American CATCH and the Company. The options vest at the rate
of 666,667 per year on each November 30 commencing November 30, 1996 and ending
November 30, 1999. The options expire on November 29, 2005. The options have
been granted with respect to services to be provided to the Company by Chen Li,
the Vice Chairman of the Board of Directors of the Company and the Chief
Executive Officer of the Company from December 5, 1995 until May 7, 1996.
(4) Mr. Lim has been granted an option to acquire up to 1,000,000 shares
of Common Stock at an exercise price of $0.35 per share. The options vest at
the rate of 25% of the aggregate number of options so granted at the end of each
six (6) month period following November 7, 1996. The options expire on November
6, 2005.
(5) Mr. Xiao has been granted an option to acquire up to 400,000 shares of
Common Stock at an exercise price of $0.35 per share. The options vest at the
rate of 25% of the aggregate number of options so granted at the end of each six
(6) month period following January 1, 1996. The options expire on December 31,
2005.
33
<PAGE>
EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements
with three (3) of its executive officers, Joseph R. Wright, Jr., Xiao Jun and
Michael Lim.
The Company entered into a five year (5) year employment agreement dated as
of April 15, 1995, and as amended on November 21, 1995, with Joseph R. Wright,
Jr., pursuant to which Mr. Wright agreed to serve as the Company's Chairman of
the Board of the Directors and to operate out of the Company's executive offices
located in New York, New York. The employment agreement provides for an annual
base salary of $50,000 during the first year, $300,000 during the second year,
and with an increase thereafter of $100,000 during each of the final (3) years
of the employment agreement.
Mr. Wright has been granted an option to acquire up to 3,000,000 shares of
Common Stock at an exercise price of $0.35 per share and an additional 3,000,000
shares at an exercise price of $3.00 per share. The option has vested with
respect to 2,500,000 shares which have an exercise price of $0.35 per share, an
additional option to purchase up to 500,000 shares which have an exercise price
of $0.35 per share will vest on October 15, 1996, and an additional option to
purchase up to 3,000,000 shares which have an exercise price of $3.00 per share
will vest at the rate of 25% of such remaining 3,000,000 options commencing on
April 15, 1997 and at the end of each six (6) month period thereafter and ending
on October 15, 1998. The 3,000,000 options with an exercise price of $0.35 per
share expire on April 14, 2004 and the 3,000,000 options with an exercise price
of $3.00 per share expire on April 14, 2005. The options have been granted
pursuant to the Company's 1996 Stock Option Plan.
In the event that on or before April 15, 1997, the Company has not been
able to establish a publicly traded security or to obtain sufficient financing
to carry out the Company's intended business plan, unless the independent
members of the Board of Directors determine that the failure to do so is
substantially caused by the action or inaction of Mr. Wright, Mr. Wright shall
have the right to terminate the employment agreement during the thirty (30) day
period thereafter. In the event of such termination, the Company will be
obligated to pay Mr. Wright the sum of $500,000 and all stock options granted to
Mr. Wright will terminate.
The Company has entered into a two (2) year employment agreement, effective
as of January 1, 1996, with Xiao Jun, as the Company's Executive Vice President
- - AVIC China, at an annual base salary of $175,000.
As of November 7, 1995, the Company entered into a two (2) year employment
agreement with Michael Lim, as the Company's Executive Vice President -
Operations, at an annual base salary of $200,000.
In connection with these employment agreements, the Company has agreed to
issue, to Messrs. Xiao and Lim, options to purchase up to 400,000 and 1,000,000
shares, respectively, of the Company's Common Stock, an exercise price of $0.35
per share. The options have been granted pursuant to the Company's 1996 Stock
Option Plan. The options vest at the rate of twenty-five percent (25%) of the
aggregate number of options so granted at the end of each six (6) month period
following the date of each respective employment agreement. The options granted
to Messrs. Xiao and Lim expire on December 31, 2005 and November 6, 2005,
respectively.
The Company has also granted Xiao Jun a five year option to acquire up to
125,000 shares of the Company's Common Stock at an exercise price of $0.3555 per
share pursuant to the Company's 1995 Stock Option Plan, all of which options
vested as of February 8, 1995. See "1995 Stock Option Plan."
CONSULTANTS. The Company has entered into consulting agreements with
Michael Markow and with American CATCH Communication Group Co. ("American
CATCH"), an affiliate of Beijing CATCH.
34
<PAGE>
As of December 15, 1995, the Company entered into a consulting agreement
with Michael Markow. Pursuant to the terms of the consulting agreement, the
Company has agreed to issue to Mr. Markow options to purchase up to 100,000
shares of Common Stock with respect to certain consulting services which may be
provided to the Company. The terms and conditions with respect to the issuance
of these options are currently subject to negotiation between the Company and
Mr. Markow. Further, the Company has reserved the right to issue up to an
additional 100,000 options at the sole discretion of the Company. Each of these
options has an exercise price of $3.00 per share, a five (5) year term and
certain registration rights. Further, the Company has separately agreed to pay
a finder's fee in cash of five percent (5%) of the aggregate equity funding
obtained with respect to the introduction of investors to the Company by Mr.
Markow.
As of November 30, 1995, the Company entered into a two (2) year consulting
agreement with American CATCH, with respect to services to be provided to the
Company by Chen Li, the Vice-Chairman of the Board of Directors, at an annual
base compensation rate of $150,000. Further, the Company has agreed to issue
options to purchase up to 2,000,000 shares of Common Stock to American CATCH at
an exercise price of $0.35 per share. The options have been granted pursuant to
the Company's 1996 Stock Option. The options vest at the rate of 666,667
options per year on each November 30 commencing November 30, 1996 and ending
November 30, 1998, up to the maximum number of options so granted, and remain
exercisable until November 29, 2005.
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 321,800 shares of Common Stock
under the 1995 Stock Option Plan, 135,000 of which have been exercised.
The 1996 Stock Option Plan (the "1996 Stock Option Plan") was adopted by
the Board of Directors on March 14, 1996 and by the Company's stockholders on
May 7, 1996. 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 9,530,000 shares of Common Stock under the 1996 Stock Option Plan. Of the
9,530,000 options granted as of the date of this Report, 2,850,000 options have
vested, and the remaining 6,680,000 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 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 as
an incentive to remain in the employ of or to provide services to the Company
and its subsidiaries. The Stock Option Plans authorize the issuance of
incentive stock options ("ISOs"), 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.
35
<PAGE>
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 each 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 Stock Option Plans 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 ISO's
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 300,000
shares of Common Stock, 135,000 of which have exercised. The 300,000 ISOs have
an exercise price of $0.3555 per share.
Further, as of the date of this Report, ISOs have been granted under the
1996 Stock Option Plan, subject to certain vesting schedules, to purchase up to
329,047 shares of Common Stock. These options have the following per share
exercise prices: 285,714 shares ($0.35), 33,333 shares ($3.00) and 10,000 shares
($8.25).
36
<PAGE>
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 grant.
As of the date of this Report, NSOs have been granted under the 1995 Stock
Option Plan, subject to certain vesting schedules, to purchase up to 20,000
shares of Common Stock at an exercise price of $0.15 per share and up to 1,800
shares of Common Stock at an exercise price of $5.00 per share.
As of the date of this Report, NSOs have been granted under the 1996 Stock
Option Plan to purchase up to 9,200,953 shares of Common Stock, subject to
certain vesting schedules. These options have the following per share exercise
prices: 2,966,667 shares ($3.00) and 6,234,286 shares ($0.35).
STOCK APPRECIATION RIGHTS
Each SAR granted under the Stock Option Plans will entitle the holder
thereof, upon the 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 of the
Common Stock on the date of exercise of one share of Common Stock over its 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 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, SARs have been granted pursuant to the 1995
Stock Option Plan, as part of the issuance of the 20,000 NSOs and no SARs have
been granted under the 1996 Stock Option Plan.
TERMINATION OF OPTION AND TRANSFERABILITY
In general, any unexpired options and 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 that 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.
37
<PAGE>
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 shares 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 (10th)
anniversary date of the effectiveness of each such Stock Option Plan.
COMPENSATION OF DIRECTORS. The Company does not currently compensate
directors for services rendered as directors. However, on March 14, 1996, the
Company issued 5,000 shares of Common Stock to each non-employee member of the
Company's Board of Directors in consideration of services performed by such
persons as directors of the Company.
DIRECTORS AND OFFICERS LIABILITY INSURANCE. The Company has obtained
directors' and officers' liability insurance with an aggregate limit of
liability for the policy year, inclusive of costs of defense, in the amount of
$3,000,000. The insurance policy expires on April 3, 1997.
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 which 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
any Indemnification Agreements with any of its officers or directors 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.
38
<PAGE>
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 the 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 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The Board of
Directors has no standing compensation committee or other board committee
performing equivalent functions.
39
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of July 12, 1996, the Company had issued and outstanding 28,451,982
shares of Common Stock. The following table reflects, as of July 12, 1996, the
beneficial Common Stock ownership of: (a) each director of the Company, (b)
each current executive officer named in the summary compensation table in this
Form 10-KSB, (c) each person known by the Company to be a beneficial owner of
five percent (5%) or more of its Common Stock, and (d) all executive officers
and directors of the Company as a group:
NAME AND ADDRESS NO. OF
OF BENEFICIAL OWNER SHARES# PERCENT
- ------------------- ------- -------
Tweedia International Ltd. 1 13,046,091 45.35
Beijing CATCH Communication
Group Co. 2 13,046,091 45.35
Joseph R. Wright, Jr. 3 2,602,000 8.41
Chen Li 4 13,046,091 45.35
Xiao Jun 4,5 13,271,091 45.79
Ju Feng 4 13,051,091 45.36
William H. Davidson 6 11,465 *
Teoh Set Seng 7 0 *
Max Sun Chian Yi 8 2,798,191 9.83
Jenny Sun 9 2,743,402 9.64
Michael J. Lim 10 254,400 *
All executive officers
and directors as a group
(8 persons)11 16,168,956 50.91
_____________________________
(Footnotes on following page)
40
<PAGE>
_____________________________
(Footnotes from previous page)
# Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table.
* Less than 1%
1. The address for Tweedia International Ltd. ("Tweedia") is Columbus Centre
Building, Wickhams Cay, Road Town Tortola, British Virgin Islands. Tweedia
is the registered owner of 12,727,909 shares of Common Stock and options to
purchase up to 318,182 shares of Common Stock. Further, Tweedia is the
registered owner of 1,524,178 shares of Series A Convertible Preferred
Stock which are convertible into an equivalent number of shares of Common
Stock at any time after January 1, 1997.
2. Beijing CATCH Communication Group Co. ("Beijing CATCH") is the beneficial
owner of all of the outstanding shares of Tweedia. Beijing CATCH is a
wholly-owned subsidiary of the Committee on Science and Technology of the
Municipality of Beijing, a political subdivision of the People's Government
of the Municipality of Beijing. Beijing CATCH's principal offices are
located at 62 South Xueyuan Road, Haidian District, Beijing, the People's
Republic of China.
3. The address for Mr. Wright is 599 Lexington Avenue, 44th Floor, New York,
New York 10022. Mr. Wright is also the beneficial owner of options to
purchase up to 2,500,000 shares of Common Stock. Further, up to an
additional 3,500,000 options to purchase shares of Common Stock may vest
pursuant to the terms of an employment agreement between Mr. Wright and the
Company. Mr. Wright is the Chairman of the Board of Directors, Chief
Executive Officer and President of the Company.
4. The address for each of Messrs. Chen and Ju is 1901 Avenue of the Stars,
Suite 1045, Los Angeles, California 90067. Mr. Ju is the beneficial owner
of 5,000 shares of Common Stock. Further, up to an additional 2,000,000
options to purchase shares of Common Stock may vest pursuant to the terms
of a consulting agreement between American CATCH Communication Group Co.
("American CATCH"), an affiliate of Beijing CATCH, and the Company,
relating to services to be provided by Mr. Chen to the Company. Mr. Chen
is the Vice Chairman of the Board of Directors of the Company and Mr. Ju is
a director of the Company. Each of Messrs. Chen, Xiao and Ju are officers
and directors of Beijing CATCH. Mr. Chen is a director of Tweedia.
5. The address for Mr. Xiao is 1901 Avenue of the Stars, Suite 1045, Los
Angeles, California 90067. Mr. Xiao is the beneficial owner of 10,000
shares of Common Stock and options to purchase up to 215,000 shares of
Common Stock. Further, up to an additional 300,000 options to purchase
shares of Common Stock may vest pursuant to the terms of an employment
agreement between Mr. Xiao and the Company. Mr. Xiao is the Executive Vice
President-AVIC China and a director of the Company.
6. The address for Mr. Davidson is 1720 South Catalina Avenue, Suite 204,
Redondo Beach, California 90288. Mr. Davidson is a director of the
Company.
7. The address for Ms. Teoh is 1Q1 Block G, Jalan 1/118, Taman, Mulia 56000
Kuala Lumpur, Malaysia. Ms. Teoh is a director of the Company.
41
<PAGE>
_____________________________________
(footnotes continued from previous page)
8. The address for Mr. Sun is 126 JLN DEDAP, Taman Ampang Jaya, Trima Jaya,
68000 Ampang, Selangor, Malaysia. Mr. Sun is the beneficial owner of
2,798,191 shares of Common Stock, including 2,797,691 shares registered in
the name of Occidental Worldwide Corporation and 500 shares registered in
his own name.
9. The address for Ms. Sun is P.O. Box 3136, Road Town, Tortola, British
Virgin Islands. Ms. Sun is the beneficial owner of 2,753,402 shares of
Common Stock registered in the name of Polmont Investment Ltd. A third
party has alleged a claim against Ms. Sun with respect to 333,334 shares of
Common Stock beneficially owned by Ms. Sun.
10. The address for Mr. Lim is 599 Lexington Avenue, 44th Floor, New York, New
York 10022. Mr. Lim is the beneficial owner of 4,400 shares of Common
Stock and options to purchase up to 250,000 shares of Common Stock.
Further, up to an additional 750,000 options to purchase shares of Common
Stock may vest pursuant to the terms of an employment agreement between Mr.
Lim and the Company. Mr. Lim is the Chief Financial Officer and Executive
Vice President-Operations of the Company.
11. Includes certain stock options to purchase up to 3,308,182 shares of Common
Stock. Does not include options to purchase up to an additional 6,725,000
shares of Common Stock which may vest pursuant to certain schedules and
1,524,178 shares of Series A Convertible Preferred Stock which are
convertible into an equivalent number of shares of Common Stock at any time
after January 1, 1997.
42
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As of September 2, 1994, the Company entered into the Reorganization
Agreement with ITV, pursuant to which the Company acquired one hundred percent
(100%) of the issued and outstanding securities of ITV from the holders of the
securities of ITV, in exchange for a number of shares of Common Stock and
options to purchase shares of Common Stock equal to approximately 91% of the
number of the issued and outstanding shares of Common Stock on a fully diluted
basis after the completion of the transaction. In February, 1995, the Company
and ITV completed the transactions contemplated by the Reorganization Agreement.
In connection with the Reorganization Agreement, the Company: (a) issued
22,728,409 restricted shares of Common Stock and options to purchase up to
713,182 restricted shares of Common Stock to the holders of the securities of
ITV, (b) effected a forward split of the previously issued and outstanding
105,000 shares of Common Stock into 2,500,000 shares, (c) adopted the Company's
current Articles of Incorporation, Bylaws and 1995 Stock Option Plan, (d)
elected the members of the Company's current Board of Directors, and (e) changed
the Company's name to "AVIC Group International, Inc." The Company issued on
additional 15,000 shares of restricted Common Stock to a former ITV stockholder
as a correction to the number of shares of Common Stock issued by the Company in
connection with the Reorganization Agreement in exchange for the issued and
outstanding securities of ITV.
On or about September 16, 1994, ITV and Beijing CATCH entered into an
exclusive five (5) year distributorship agreement pursuant to which ITV
appointed Beijing CATCH as ITV's exclusive distributor for ITV's communications
processor and data/access modules in the PRC. The parties terminated this
agreement on December 20, 1995. In connection with the termination of this
agreement, with respect to a $1,000,000 deposit made by Beijing CATCH with ITV
relating to the agreement, $150,000 of such amount was credited to ITV as
payment for consulting services provided to Beijing CATCH and ITV remains
obligated to repay $850,000 to Beijing CATCH. The $850,000 obligation has been
classified as a debt of ITV.
In March, 1996, the Company entered into certain agreements to obtain a
31% interest in a Sino-foreign joint venture formed between Hebei United
Telecommunications Equipment Company ("Hebei United") and NTT International
Corp. ("NTT") with respect to the creation and operation of a Global Service
Mobile telephone network in Hebei Province, PRC. In June, 1996, the Company
entered into an agreement to form a Sino-foreign joint venture with Beijing
CATCH Communication Group Co. ("Beijing CATCH"), an affiliate of the Company's
principal stockholder with respect to the development of paging stations in the
PRC. In May and October, 1995, the Company entered into a memorandum of
understanding and a letter of intent, which are subject to the execution of more
definitive agreements, in connection with the proposed formation of Sino-foreign
joint ventures to develop telecommunications networks in the PRC on a BTSM basis
with Beijing CATCH, including: (i) a fixed wire telephone network, and (ii) a
cellular telephone network.
Each of these agreements is preliminary in nature. There can be no
assurances that any such definitive agreements will ever be consummated.
Further, each of these agreements will require significant financings necessary
to fund the construction of such networks. The Company does not currently have
any commitments for any such financing, and there can be no assurances that any
such financing can be obtained on terms favorable to the Company or at all.
As of December 21, 1995, the Company agreed to issue up to 50,000,000
shares of Common Stock to Tweedia, an affiliate of Beijing CATCH and the
principal stockholder of the Company, pursuant to the terms of a Master
Agreement and Right of First Refusal (the "Master Agreement"). In connection
with the Master Agreement, Beijing CATCH has reaffirmed its obligations pursuant
to the terms of three (3) preliminary agreements previously entered into between
the Company and Beijing CATCH.
43
<PAGE>
The Company has agreed to issue to Tweedia a number of shares of Common
Stock based on the Company's portion of the cumulative net income of the CATCH
Joint Ventures in excess of $10,000,000, as follows: (i) at the end of the first
audited fiscal year in which the Company's portion of such cumulative net income
of the CATCH Joint Ventures exceeds $10,000,000 (the "First Year"), the
Company's will issue to Tweedia one share of Common Stock for every $3.00 by
which the Company's portion of such cumulative net income exceeds $10,000,000,
(ii) for the year following the First Year (the "Second Year"), the Company will
issue a number of shares of Common Stock equal to the Company's portion of the
net income of the CATCH Joint Ventures for such year as divided by $3.25, (iii)
for the year following the Second Year (the "Third Year"), the Company will
issue a number of shares of Common Stock equal to the Company's portion of net
income of the CATCH Joint Ventures for such year as divided by $3.66, and (iv)
for the year following the Third Year and for every year thereafter, the Company
will issue a number of shares of Common Stock equal to the Company's portion of
the net income of the CATCH Joint Ventures for such year as divided by $3.75.
However, the Company will not be obligated to issue any shares of Common Stock
to Tweedia with respect to any fiscal year that ends after December 31, 2007.
As of December 15, 1995, the Company issued 1,524,178 shares of the
Company's Series A Convertible Preferred Stock (the "Series A Convertible
Preferred Shares") to Tweedia as consideration for the contribution to the
Company by Beijing CATCH of Beijing CATCH's interest in a $4,572,536 non-
refundable deposit paid to Motorola in connection with an Enhanced Specialized
Mobile Relay System Equipment Purchase Contract #700.0008D, dated December 12,
1993, and as amended, between Beijing CATCH and Motorola. In the event that
Beijing CATCH forfeits the deposit to Motorola, Tweedia has agreed to return the
Series A Convertible Preferred Shares to the Company for cancellation.
Each Series A Convertible Preferred Share bears an annual cumulative
dividend of 6% of the per share purchase price, payable in cash, each December
31, commencing December 31, 1996, in arrears, out of funds legally available
therefor. Each Series A Convertible Preferred Share is convertible into one
share of Common Stock at any time after January 1, 1997 and has voting rights of
one vote per share.
Upon the liquidation of the Company, the holders of the Series A
Convertible Preferred Stock will be entitled to a liquidation preference of
$3.00 per share, plus the amount of all accrued and unpaid dividends, prior to
the payment of any amount to holders of any other current equity security of the
Company. The Series A Convertible Preferred Stock may be redeemed at any time
after January 1, 1997 by the Company prior to conversion upon payment of $3.00
per share, plus the amount of all accrued and unpaid dividends as of the
applicable redemption date. The Series A Convertible Preferred Stock will be
subject to adjustments for reclassification, reorganization, recapitalization
and certain other events.
On January 16, 1996, ITV closed the Asset Sale Agreement between ITV and
Netmatics. Pursuant to the terms of the Asset Sale Agreement, ITV, the former
primary operating subsidiary of the Company, sold substantially all of ITV's
assets and Netmatics assumed certain of ITV's liabilities and obligations in
consideration of an aggregate purchase price of $2,500,000 and shares of common
stock of Netmatics which are currently equal to approximately 19.4% of the
issued and outstanding shares of Netmatics.
As of February 5, 1996, the Company issued an aggregate of 1,891,553 shares
of the Company's restricted Common Stock, in consideration of the cancellation
of debt owing by the Company to certain persons in the aggregate amount of
$1,891,553, including principal and accrued interest thereon as of December 31,
1995, or a $1.00 per share conversion price. The shares of Common Stock issued
in connection with this transaction have certain "piggyback" registration
rights. Of the 1,891,553 shares of Common Stock, the Company issued 293,402
shares to Polmont Investments, Ltd., a principal stockholder of the Company. In
addition, the Company issued an additional 350,000 shares to certain
unaffiliated third parties in consideration of the cancellation of certain debt
owing by the Company, which debt had previously been transferred to such
unaffiliated third partes by Polmont Investments, Ltd. The Company also issued
an
44
<PAGE>
additional 1,248,151 shares to an unaffiliated third party in consideration of
the cancellation of a debt owing by the Company, which debt had previously been
transferred to such third party by Beijing CATCH.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
A. FINANCIAL STATEMENTS
Consolidated balance sheets of AVIC Group International, Inc. and
subsidiary (a development stage company) as of March 31, 1996 and 1995, and
the related statements of operations, stockholders' equity (deficiency) and
cash flows for the years then ended.
B. REPORTS ON FORM 8-K
Current Reports on Form 8-K dated January 16, 1996 and February 5, 1996.
C. OTHER EXHIBITS
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)
3.1 Amendments to Articles of Incorporation dated June 7, 1996 and June
10, 1996
10.1 1996 Stock Option Plan(2)
10.2 Real property lease between Lexreal Associates and AVIC Group
International, Inc. dated May 8, 1995(2)
10.3 Employment Agreement between Joseph R. Wright, Jr., and AVIC Group
International, Inc. dated as of April 15, 1995(3), and amendment
thereto dated as of November 21, 1995(4)
10.4 Employment Agreement between Michael Lim and the Company, dated as
of November 6, 1995(4)
10.5 Employment Agreement between Xiao Jun and the Company, dated as of
January 1, 1996(4)
10.6 Consulting Agreement between American CATCH Communication Group Co.
and the Company, dated November 30, 1995(4)
10.7 Consulting Agreement between Michael Markow and the Company, dated
December 15, 1995(4)
10.8 China Paging Networks Preliminary Agreement between Beijing CATCH
Communication Group Company and the Company dated April, 1995(3)
10.9 Mobile Telephone Network Preliminary Agreement between Beijing
CATCH Communication Group Company and the Company dated April 27,
1995(3)
10.10 Cellular Telephone Network Preliminary Agreement between Beijing
CATCH Communication Group Company, Tweedia International Ltd. and
the Company dated April, 1995(3)
10.11 Memorandum of Understanding between the Company and Hebei United
Telecommunications Equipment Company dated May 1, 1995(3)
10.12 Master Agreement and Right of First Refusal between Beijing CATCH
Communication Group Company and the Company dated December 21,
1995(4)
45
<PAGE>
10.13 Letter of Intent between Hebei United Telecommunications Equipment
Co. and the Company dated October 10, 1995(4)
10.14 Joint Venture Contract between Beijing CATCH Communication Group
Co. and the Company dated June 11, 1996
10.15 Joint Venture Contract between Hebei United Telecommunication
Equipment Company and NTT dated December 22, 1995
10.16 Agreement between Hebei United Telecommunication Equipment Company
and the Company dated March 22, 1996
21.1 List of subsidiaries of the Company
_______________________
1. Filed as part of the Company's Current Report on Form 8-K dated January
19, 1996.
2. 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. Filed as part of the Company's Current Report on Form 8-K dated May 1,
1995.
4. Filed as part of the Company's Current Report on Form 8-K dated December
22, 1995.
46
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Certain documents listed above as exhibits to this Report on Form 10-KSB
are incorporated by reference from other documents previously filed by the
Company with the Commission as follows:
Previous Filing Exhibit Number
Incorporated by Reference in Form 10-KSB
------------------------- --------------
1. Current Report on Form 8-K
dated as of January 19, 1996 2.1
2. Transition Report on Form
10-KSB for the Transition
Period from October 1, 1994
to March 31, 1995 10.1, 10.2
3. Current Report on Form 8-K
dated as of May 4, 1995 10.3,10.8-10.11
4. Current Report on Form 8-K
dated as of December 22, 1995 10.3-10.7,10.12-10.13
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: July 12, 1996 AVIC GROUP INTERNATIONAL, INC.
By: /s/ Joseph R. Wright, Jr.
--------------------------
Joseph R. Wright, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated below.
AVIC GROUP INTERNATIONAL, INC.
Dated: July 12, 1996 By: /s/ Joseph R. Wright, Jr.
--------------------------
Joseph R. Wright, Jr.
Chief Executive Officer
Dated: July 12, 1996 By: /s/ Michael J. Lim
--------------------------
Michael J. Lim
Chief Financial Officer
48
<PAGE>
EXHIBIT A
<PAGE>
AVIC GROUP INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996 and 1995
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
AVIC Group International, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of AVIC Group
International, Inc. and Subsidiary (a Development Stage Company) as of March 31,
1996, and the related consolidated statements of operations, stockholders'
equity (deficiency) and cash flows for each of the two years in the period ended
March 31, 1996 and for the period March 27, 1992 (Inception) to March 31, 1996.
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AVIC Group
International, Inc. and Subsidiary as of March 31, 1996, and the results of
their operations and their cash flows for each of the two years in the period
ended March 31, 1996 and for the period March 27, 1992 (Inception) to March 31,
1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the year ended March
31, 1996, the Company had a net loss of $5,281,730. In addition, the Company is
in the development stage at March 31, 1996. Recovery of the Company's assets is
dependent upon future events, the outcome of which is indeterminable. In
addition, successful completion of the Company's development program and its
transition, ultimately, to the attainment of profitable operations is dependent
upon obtaining adequate financing to fulfill its development activities and
achieving a level of sales adequate to support the Company's cost structure.
These factors, among others, as discussed in Note 1 to the financial statements
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Singer Lewak Greenbaum & Goldstein LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
June 18, 1996
<PAGE>
AVIC Group International, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
March 31, 1996
(See Report of Independent Certified Public Accountants)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash (note 2) $ 185,889
Prepaid expenses and other current assets 60,678
----------
Total current assets 246,567
Machinery and equipment, net (note 3) 76,233
Joint venture deposit (note 4) 1,170,000
Non-refundable equipment purchase deposit (note 4) 4,572,536
Office lease deposit 167,200
----------
$6,232,536
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 866,990
Accrued interest 651,063
Loans payable - stockholders (unsecured, interest
at 8.5% per annum) (notes 6 and 10) 2,563,553
---------
Total current liabilities 4,081,606
Commitments and contingencies (note 5)
Stockholders' equity (notes 4 and 6):
Preferred stock; $.001 par value, authorized 10,000,000
shares; issued and outstanding 1,524,178 1,524
Common stock: $.001 par value, authorized 100,000,000
shares; issued and outstanding 28,436,982 28,437
Additional paid-in capital 18,648,620
Deficit accumulated during the development stage (16,527,651)
-----------
Total stockholders' equity 2,150,930
-----------
$6,232,536
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
AVIC Group International, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(See Report of Independent Certified Public Accountants)
<TABLE>
<CAPTION>
March 27,
1992 Years ended
(Inception) to March 31,
March 31 ---------------------------
1996 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Net sales (note 7) $1,223,894 $ 683,733 $ 345,276
Expenses
Cost of sales 1,061,435 637,065 330,981
Selling, general, and administrative 9,762,614 3,207,570 3,513,567
Research and development 5,731,612 1,287,629 2,086,324
---------- ---------- ----------
Total expenses 16,555,661 5,132,264 5,930,872
---------- ---------- ----------
Loss from operations (15,331,767) (4,448,531) (5,585,596)
Other income (expense)
Consulting income (note 10) 150,000 150,000
Gain from sale of assets (note 8) 31,880 31,880
Loss from abandoned assets (130,840) (130,840)
Equity in losses of unconsolidated
subsidiary (note 8) (500,000) (500,000)
Interest expense (764,586) (241,856) (117,533)
Other - net 17,662 7,617 14,826
---------- ---------- ----------
Total other income (expense) (1,195,884) (833,199) 47,293
---------- ---------- ----------
Net loss $(16,527,651) $(5,281,730) $(5,538,303)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share $ (1.53) $ (.21) $ (.32)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding 10,796,546 25,651,045 17,173,262
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
AVIC Group International, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
March 27, 1992 (Inception) to March 31, 1996
(See Report of Independent Certified Public Accountants)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Preferred Stock Paid-In Development
Shares Amount Shares Amount Capital Stage Total
------------ ---------- ----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 27, 1992
(Inception)
Sale of common stock for cash,
April 1992 500 $ 1 $ 149 $ 150
Net loss $ (1,970,076) (1,970,076)
---------- -------- --------- -------- ----------- ------------ -----------
Balance, March 31, 1993 500 1 149 (1,970,076) (1,969,926)
Conversion of stockholders' loans
to common stock, March 1994 7,839,237 7,839 5,565,858 5,573,697
Common stock subscribed,
March 1994 2,160,763 2,161 1,534,142 1,536,303
Net loss (3,737,542) (3,737,542)
---------- -------- --------- -------- ----------- ------------ -----------
Balance, March 31, 1994 10,000,500 10,001 7,100,149 (5,707,618) 1,402,532
Sale of common stock for cash,
September 1994 (note 6) 12,727,909 12,728 2,587,272 2,600,000
Forgiveness of stockholder
accrued expenses,
September 1994 (note 6) 305,027 305,027
Sale of common stock for
cash, November 1994 15,000 15 5,317 5,332
Issuance of common stock
for merger, February 1995 2,500,000 2,500 (2,500)
Net loss (5,538,303) (5,538,303)
---------- -------- --------- -------- ----------- ------------ -----------
Balance, March 31, 1995 25,243,409 25,244 9,995,265 (11,245,921) (1,225,412)
Issuance of Series A preferred
stock for interest in deposit,
December 1995 (note 6) 1,524,178 $ 1,524 4,571,012 4,572,536
Sale of common stock for cash,
September 1995 (note 6) 60,000 60 59,940 60,000
Sale of common stock for cash,
November 1995 (note 6) 666,000 666 665,334 666,000
Conversion of stockholders'
loans to common stock,
February 1996 (note 6) 1,891,553 1,891 1,889,662 1,891,553
Exercise of options, February
1996 (note 6) 135,000 135 47,848 47,983
Sale of common stock for cash,
February 1996 (note 6) 250,000 250 249,750 250,000
Sale of common stock for cash,
March 1996 (note 6) 191,020 191 1,169,809 1,170,000
Net loss (5,281,73) (5,281,730)
---------- -------- --------- -------- ----------- ------------ -----------
Balance, March 31, 1996 28,436,982 $ 28,437 1,524,178 $ 1,524 $18,648,620 $(16,527,651) $ 2,150,930
---------- -------- --------- -------- ----------- ------------ -----------
---------- -------- --------- -------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
AVIC Group International, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See Report of Independent Certified Public Accountants)
<TABLE>
<CAPTION>
March 27,
1992 Years Ended
(Inception) to March 31,
March 31, ---------------------------
1996 1996 1995
-------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(16,527,651) $(5,281,730) $(5,538,303)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of capitalized software development costs 450,000 281,250 168,750
Depreciation 861,997 346,005 344,611
Loss from abandoned assets 130,840 130,840
Gain from sale of assets (31,880) (31,880)
Equity in losses of unconsolidated subsidiary 500,000 500,000
(Increase) decrease in:
Accounts receivable (3,719) 98,895 (96,614)
Inventories (564,451) (96,091) (110,154)
Prepaid expenses and other current assets (117,236) (91,200) (12,258)
Other assets (167,200) (131,887) (16,453)
Increase (decrease) in:
Accounts payable and accrued expenses 1,820,290 1,251,464 (103,086)
Accrued interest 651,063 136,982 114,293
Deposit 850,000 850,000
-------------- ------------ ------------
Net cash used in operating activities (12,147,947) (2,887,352) (4,399,214)
Cash flows from investing activities:
Purchase of machinery and equipment (1,585,601) (119,592) (527,725)
Joint venture deposit (1,170,000) (1,170,000)
Proceeds from sale of assets 250,000 250,000
Increase in capitalized computer software development costs (675,000) (333,767)
-------------- ------------ ------------
Net cash used in investing activities (3,180,601) (1,039,592) (861,492)
Cash flows from financing activities:
Increase in loans payable-stockholders, net 9,178,801 739,952 2,245,227
Receipt of common stock subscription receivable 1,536,303 1,536,303
Sale of common stock 4,799,333 2,193,983 2,605,200
-------------- ------------ ------------
Net cash provided by financing activities 15,514,437 2,933,935 6,386,730
-------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 185,889 (993,009) 1,126,024
Cash and cash equivalents, beginning of period 0 1,178,898 52,874
-------------- ------------ ------------
Cash and cash equivalents, end of period $ 185,889 $ 185,889 $ 1,178,898
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
AVIC Group International, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(See Report of Independent Certified Public Accountants)
Supplemental Cash Flow Information
No interest or income taxes were paid during 1996 and 1995.
Non Cash Financing Activities
In 1996, loans from stockholders of $1,891,553 were converted into 1,891,553
shares of common stock.
In 1996, 1,524,178 shares of Series A Preferred Stock were issued in exchange
for the rights to a deposit totaling $4,572,536.
In 1996, a deposit to a stockholder of $850,000 was converted to a note
payable.
In 1995, accrued expenses to a stockholder of $305,159 was forgiven and
additional paid-in capital was increased by $305,159.
The accompanying notes are an integral part of these financial statements
6
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE OF BUSINESS
AVIC Group International, Inc. (the Company or AVIC) was incorporated in
Colorado on May 10, 1982. 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 (note 8) and is
no longer involved in the business that ITV was engaged in. The Company is
currently devoting substantially all of its present efforts to establishing
joint ventures with entities located in the People's Republic of China (PRC)
that are involved in the telecommunications industry in the PRC (note 10).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its wholly-
owned subsidiary, ITV Communications, Inc. All significant intercompany
accounts and transactions are eliminated in consolidation.
REVERSE MERGER
In February 1995, AVIC Group International, Inc. acquired all of the
outstanding stock of ITV. For accounting purposes, the acquisition has been
treated as a recapitalization of ITV with ITV as the acquirer (reverse
acquisition). The historical financial statements prior to February 1995 are
those of ITV. AVIC had no assets at the date of the acquisition and,
therefore, no proforma information is being presented.
DEVELOPMENT STAGE COMPANY
The Company is a development stage company as defined in Statement of
Financial Accounting Standards No. 7. The Company is devoting substantially
all of its present efforts to establish a new business and its planned
principal operations have not commenced yet. All losses accumulated since
inception have been considered as part of the Company's development stage
activities.
Net sales to date have primarily been from the sale of prototype software and
hardware products. In January 1996, the Company sold substantially all the
assets related to the design, manufacture and sale of technologically
advanced communication devices.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, during the year ended March 31,
1996, the Company had a net loss of $5,281,730. In addition, the Company is
in the development stage at March 31, 1996. Recovery of the Company's assets
is dependent upon future events, the outcome of which is indeterminable. In
view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon the Company's ability to meet
its financing requirements, and the success of its joint ventures in the PRC.
In response, management is pursuing investor opportunities and joint ventures
to provide funds needed for future operations.
7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION
Revenue was derived primarily from product sales, and was recognized upon
shipment of the products.
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.
MACHINERY AND EQUIPMENT
Machinery and equipment are recorded at cost. Depreciation is provided using
the straight-line method over an estimated useful life of three to five
years.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
The Company owns a 33% (as of March 31, 1996) investment in Netmatics, Inc.
(Netmatics), which it acquired in January 1996 in connection with the sale by
the Company of the ITV business and operating assets. Netmatics is engaged
in the design, manufacture, and sale of technologically advanced
communication devices. In 1996, the Company suspended the equity method of
accounting for its investment in Netmatics when the Company's share of losses
equalled the carrying amount of the investment. In 1996, the Company's share
of Netmatics' loss charged to operations was $500,000.
SOFTWARE DEVELOPMENT COSTS
Software development costs to create propriety software for the Company's
communication devices were capitalized in accordance with Statement of
Financial Accounting Standards No. 86. Capitalization of software
development costs begins upon the establishment of technological feasibility
and is discontinued when the product is available for sale. Amortization of
capitalized software development costs was provided on a product-by-product
basis on the straight-line method over the remaining estimated economic life
of the products (not to exceed two years).
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were charged to expense as incurred. These
costs consist primarily of salaries and consulting fees.
INCOME TAXES
The Company uses the liability method of accounting for income taxes pursuant
to Statement of Financial Accounting Standards, No. 109 "Accounting for
Income Taxes."
8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common and
common equivalent shares outstanding during each year. The shares to be
issued upon exercise of outstanding stock options and warrants are not
included as common stock equivalents as they are antidilutive.
NOTE 2 - CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in two banks located in Southern
California and in New York, respectively. The balances at each bank are
insured by the Federal Deposit Insurance Corporation up to $100,000. As of
March 31, 1996, the uninsured portion of the balances held at these banks
aggregated to $120,899.
NOTE 3 - MACHINERY AND EQUIPMENT
Machinery and equipment consist of the following:
Machinery and equipment $70,936
Computer software 12,273
Leasehold improvements 12,580
-------
95,789
Less accumulated depreciation 19,556
-------
$76,233
-------
-------
NOTE 4 - DEPOSITS
DEPOSIT FOR JOINT VENTURE INVESTMENT
The Company has entered into an agreement to purchase a 31% interest in the
Hebei United Communications Engineering Development Co. (Hebei JV). The
joint venture is being formed to develop, manufacture and sell
telecommunications equipment and electronic information products in China.
As of March 31, 1996, the purchase of the joint venture interest has not been
completed and $1,170,000 is being held in trust by the Hebei Electronic
Commission. Upon finalization and approval of the joint venture agreement,
the $1,170,000 will be transferred to the joint venture for the purchase of
the Company's 31% interest. If the joint venture agreement is not
consummated, the $1,170,000 will be returned to the Company.
9
<PAGE>
NOTE 4 - DEPOSITS (continued)
NON-REFUNDABLE EQUIPMENT PURCHASE DEPOSIT
In December 1995, the Company issued 1,524,178 shares of Series A Convertible
Preferred Stock to its principal stockholder, Tweedia, in exchange for a
$4,572,536 non-refundable deposit. The deposit is in connection with the
purchase of an Enhanced Specialized Mobile Relay System Equipment Purchase
Contract. The contract obligates Beijing CATCH (note 10) to purchase up to a
minimum of approximately $49,000,000 of equipment related to an Enhanced
Specialized Mobile Relay System within certain time periods. The failure to
make such purchases may result in the forfeiture of such deposit. However,
based on the existing agreements, these deadlines have passed without Beijing
CATCH's timely performance pursuant to the terms of the Equipment Purchase
Contract. Although the Company understands that these agreements are
currently the subject of renegotiation between Beijing CATCH and Motorola,
there can be no assurances that the parties will successfully renegotiate the
Equipment Purchase Contract or, if so, as to the terms of any such
renegotiation and its effect on the Company, which is currently not a party
to the agreement. There can be no assurances that Beijing CATCH will be able
to perform under the Equipment Purchase Contract or that the $4,572,536
deposit will not be forfeited to Motorola. In the event that Beijing CATCH
forfeits the deposit to Motorola, Tweedia has agreed to return the
Convertible Preferred Shares to the Company for cancellation.
NOTE 5 - 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:
Year ending
March 31,
-----------
1997 $334,000
1998 334,000
1999 334,000
2000 334,000
2001 167,000
----------
$1,503,000
----------
----------
Rent expense was $399,992 and $340,918 for 1996 and 1995, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with officers expiring
through April 2000 with an aggregate annual salary currently of $675,000.
10
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES (continued)
LITIGATION
On April 15, 1996, a first amended complaint was filed in the Superior Court
for the State of California, County of Los Angeles by Jacqueline B.
Brandwynne ("Brandwynne") against the Company, ITV and others, including
certain of the Company's officers, directors, and stockholders. The
complaint alleges fraud, misrepresentation, and breach of contract with
respect to the sale of stock of ITV and/or the Company to Brandwynne for
$1,000,000 in or about January 1995. The complaint seeks rescission of the
transaction and damages of no less than $1,000,000. It 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 of an exercise price of
$0.35 per share and the right to purchase additional shares at $1.00 per
share, plus other benefits, including salary of no less than $130,000. The
Company has filed a responsive pleading denying liability and asserting
affirmative defenses.
On March 26, 1996, a complaint was filed in the Superior Court for the State
of California, County of Los Angeles by 6800 Owensmouth, Inc. ("Owensmouth")
against the Company, ITV, and others including the Company's officers,
directors, and stockholders with respect to premises leased by ITV in Canoga
Park, California from Owensmouth. The complaint alleges various claims
including abandonment of the lease and failure to pay rent, late charges and
other expenses from September 1995 through October 12, 1995, the date of
termination of the lease, and the amount of rent abated during the first six
months of the lease, in the aggregate amount of approximately $82,000. The
complaint also alleges damages at the monthly rental rate of approximately
$19,000 from October 12, 1995 through February 28, 1999, the expiration of
the lease, plus other costs and damages. Further, the complaint alleges
claims against the Company and certain officers, directors, and stockholders
under allegations of alter ego, distributions contrary to law and fraudulent
transfer of assets.
Management of the Company believes that there are valid defenses to each of
these claims and intends to defend each of the actions vigorously, if no
settlement can be reached with the claimants. There can be no assurances as
to the resolution of these matters.
NOTE 6 - STOCKHOLDERS' EQUITY
STOCK PURCHASE AGREEMENT
On August 31, 1994, the Company entered into a stock purchase agreement to
sell 12,727,909 shares of common stock for $2,600,000. The price per share
of $.051 was determined based on the cash received and the value attributed
to the exclusive distribution agreement (note 10). In connection with this
sale, an option (expiring December 31, 1997) was granted to purchase 318,182
shares of common stock at $.711 per share.
CONVERSION OF LOANS PAYABLE
In December 1995, loans payable and accrued interest in the amount of
$1,891,553 were converted to common stock at a price per share of $1.00.
SALE OF COMMON STOCK
In September and November 1995, and February 1996, the Company sold an
aggregate of 976,000 shares of common stock for $976,000, a price of $1.00
per share.
11
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
In March 1996, the Company entered into a stock purchase agreement to sell
191,020 shares of common stock for $1,170,000, a price of $6.125 per share.
FORGIVENESS OF STOCKHOLDERS ACCRUED EXPENSES
In September 1994, a stockholder forgave $305,159 of accrued consulting fees
owed by the Company. This amount has been charged as an addition to
additional paid-in capital.
ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK
In December 1995, the Company issued 1,524,178 shares of Series A Convertible
Preferred Stock (Series A Preferred) to its principal shareholder as
consideration for the contribution of an interest in a non-refundable deposit
in connection with a purchase contract (note 4).
The holder of Series A Preferred Stock have full voting rights. The holder
of the Series A Preferred is entitled to receive a cumulative preferential
dividend of $0.18 per share per annum, payable in cash on December 31 of each
year, commencing December 31, 1996.
The Series A Preferred have a liquidation preference of $3 per share, plus
the amount of any accrued and unpaid dividends.
The Series A Preferred is convertible at the option of the holder at any time
after January 1, 1997.
STOCK WARRANTS
The Company has issued warrants to purchase common stock in connection with
services provided. As of March 31, 1996, the Company had outstanding
warrants to purchase 150,000 shares of common stock at a price 10% above the
average of the closing bid and asking price of the Company's common stock for
the five trading days immediately prior to April 15, 1996. The warrants have
a five-year term and "piggy-back" registration rights.
STOCK OPTIONS
The Company has adopted two stock option plans (the AVIC Group International,
Inc. 1995 Stock Plan and the AVIC Group International, 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 that 100% of the fair market value on the date of grant.
Options vest over periods not to exceed ten years.
12
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
The following summarizes the Company's stock option transactions under the
stock option plans:
Shares Under Option Price
Option Per Share
------------ --------------
Options outstanding, March 31, 1994 20,000 $ .15
Granted 438,000 .3555 - 5.00
------------
Options outstanding, March 31, 1995 458,000 .15 - 5.00
Granted 9,530,000 .35 - 8.25
Cancelled (121,200) .3555 - 5.00
Exercised (135,000) .3555
------------
Options outstanding, March 31, 1996 9,731,800 $ .15 - 8.25
------------
------------
NOTE 7 - MAJOR CUSTOMERS
During the years ended March 31, 1996 and 1995, the Company conducted
business with two customers whose sales comprised substantially all of the
Company's revenues. In January 1996, the Company sold substantially all of
the assets related to that business.
NOTE 8 - SALE OF BUSINESS
In January 1996, the Company sold the business and the related operating
assets that its wholly owned subsidiary, ITV, was engaged in. The sale price
was $2,500,000 (which consisted of $250,000 in cash and $2,250,000 in the
form of a note receivable), plus the Company received a 33% interest in
Netmatics which was valued at $500,000. Due to the uncertainty of the
collection of the $2,250,000 note receivable, the amount of the note has not
been recognized. The gain associated with the note will be recognized when
the note receivable is collected. The sale of the assets resulted in a gain
from sale of the assets of $31,880.
The note receivable in connection with the sale of the business of ITV is non
interest bearing. The note is receivable in quarterly installments if
Positive Cash Flow is more than $100,000 then 50% of that quarter's cash
flow. The note receivable is secured by certain assets of the maker.
NOTE 9 - INCOME TAXES
The Company had net losses for 1996 and 1995 and, therefore, no income taxes
have been provided.
As of March 31, 1996, the Company has federal net operating loss
carryforwards of approximately $8,400,000 through 2011.
13
<PAGE>
NOTE 9 - INCOME TAXES (continued)
Significant components of the Company's deferred tax liabilities and assets
for federal income taxes consist of the following:
Deferred tax assets
Net operating loss carryforwards $ 3,310,000
Start-up costs 1,786,000
Research credit 266,000
-----------
Total deferred tax assets 5,362,000
Valuation allowance for deferred tax assets (4,462,000)
Deferred tax liabilities
Note receivable on sale of ITV (900,000)
-----------
Net deferred tax liability 0
-----------
-----------
The net change in the valuation allowance for the year ended March 31, 1996
was an increase of $156,000.
NOTE 10 - RELATED PARTY TRANSACTIONS
DISTRIBUTORSHIP AGREEMENT
In September 1994, ITV and Beijing CATCH (CATCH) entered into an exclusive
distributorship agreement (the "agreement") pursuant to which ITV appointed
CATCH as ITV's exclusive distributor for ITV's communications processor and
data/access modules in the People's Republic of China. CATCH is a majority
stockholder through its beneficial ownership of 12,727,909 shares of common
stock. In addition, CATCH has two seats on the board of directors.
In December 1994, the Company received a non-refundable deposit of $1,000,000
in connection with a purchase order for $10,000,000 of the Company's
products. During the year, the Company provided consulting services to CATCH
totalling $150,000 and which was applied against the deposit received. In
December 1995, the agreement was terminated and the remaining non-refundable
deposit of $850,000 was converted to a loan payable.
GENERAL
The Company's proposed business operations are substantially dependent on the
Company's relationship with and the efforts of Beijing CATCH, an affiliate of
the Company's principal controlling stockholder. Beijing CATCH, a company
formed under the laws of the PRC, is the beneficial owner of all of the
outstanding shares of Tweedia International Ltd., a British Virgin Islands
corporation ("Tweedia"), the principal controlling stockholder of the
Company. Tweedia does not currently have any operations, except principally
as a holding company for the company's securities. Three of the directors of
the Company, Chen Li, Xiao Jun and Ju Feng, are officers of Beijing CATCH and
Chen Li is the sole director of Tweedia.
14
<PAGE>
NOTE 10 - RELATED PARTY TRANSACTIONS (continued)
Beijing CATCH is a subordinate enterprise, formed under the laws of the PRC,
of the Commission on Science and Technology and the Municipal Planning
Commission of the Municipality of Beijing, a political subdivision of the
People's Government of the Municipality of Beijing.
Beijing CATCH is the second largest operator of paging stations in the PRC.
Beijing CATCH is a stockholder in China United Telecommunications Corporation
("China Unicom"), one of two public network telephone operators in the PRC
created to substantially increase telephone installations throughout the PRC.
Beijing CATCH has established a subsidiary in the United States, American
Catch, Inc. ("American CATCH"). American CATCH also has a consulting
agreement with the Company.
As of December 21, 1995, the Company agreed to issue up to 50,000,000 shares
of common stock to Tweedia pursuant to the terms of a Master Agreement and
Right of First Refusal (the "Master Agreement") based on the receipt of
certain agreed upon amounts of net income to the Company relating to
prospective Sino-foreign joint ventures involving the Company and Beijing
CATCH or its affiliate ("CATCH Joint Ventures").
In connection with the Master Agreement, Beijing CATCH has agreed to grant
the Company a right of first refusal to participate as a majority investor
and provide financial, operating and technical consulting services with
respect to all rights granted, sold, licensed or otherwise transferred to
Beijing CATCH, directly or indirectly, that relate to the ability to
construct, operate or acquire any form of telephony, telecommunications,
equipment, paging equipment or related forms of communication. This right of
first refusal is subject to the Company's ability to perform under any such
agreements and to participate in any such proposed projects under applicable
PRC law. The Company's right of first refusal will apply to any such rights
obtained by Beijing CATCH in perpetuity. The Company and Beijing CATCH have
agreed to negotiate in good faith to implement the terms of any such
agreements in order to implement the Company's right of first refusal.
On June 12, 1996, the company entered into a joint venture (the "China Paging
Networks Joint Venture") with Beijing CATCH relating to the purchase or
construction of ten paging stations (the "China Paging Networks") in the PRC.
The formation of the joint venture is subject to PRC regulatory approval.
Beijing CATCH holds certain licenses from the Wireless Communication
Committee and the Provincial Post and Telecommunication Administration of
Hebei and Sichuan Provinces to develop paging networks in Hebei and Sichuan
Provinces on a BTSM basis, as contemplated by the China Paging Networks Joint
Venture.
The Company has agreed to contribute the capital needed to build the China
Paging Networks in exchange for a 70% equity interest in the China Paging
Networks Joint Venture, which will sell the equipment necessary for the
construction of the China Paging Networks to a subsidiary of Beijing CATCH,
and install, service and maintain such equipment.
15
<PAGE>
NOTE 10 - RELATED PARTY TRANSACTIONS (continued)
Beijing CATCH has agreed to contribute the appropriate licenses to a
subsidiary, which will build and operate the China Paging Networks, and will
enter into contracts with the China Paging Networks Joint Venture in order to
purchase equipment and to obtain servicing and maintenance for the China
Paging Networks.
The China Paging Networks Joint Venture is anticipated to receive: (i)
payments under contracts for installing, servicing and maintaining the China
Paging Networks and (ii) payments of principal and interest relating to the
financing of the equipment for the China Paging Networks, if such financing
is provided.
Beijing CATCH has also agreed to search for and identify for the Company
opportunities to acquire or construct at least 100 paging stations, which
either are operating or which may be constructed in the PRC. Beijing CATCH
has also agreed to assist in the negotiation for the acquisition of such
networks and to obtain required licenses necessary for the construction of
such networks. In exchange for such services, the parties intend that
Beijing CATCH will receive a percentage interest in any Sino-foreign joint
venture which may be formed in connection with Beijing CATCH's providing such
services.
On April 27, 1995, the Company entered into a Cellular Telephone Network
Preliminary Agreement (the "Cellular Telephone Network Agreement") with
Beijing CATCH and Tweedia relating to the creation and operation of an
approximately 100,000 subscriber cellular telephone network (the "Cellular
Telephone Network") using Enhanced Specialized Mobile Relay System technology
in Beijing and Hebei Province in the PRC.
Beijing CATCH holds certain licenses from the Beijing Municipal Government
Planning Commission of China with respect to the ownership and operation of
the Cellular Telephone Network.
Pursuant to the terms of the Cellular Telephone Network Agreement, the
Company has negotiated to establish, with Beijing CATCH, a Sino-foreign joint
venture for the purpose of receiving: (i) payments under contracts for
developing the Cellular Telephone Network on a BTSM basis, and (ii) payments
of principal and interesting relating to the financing of the equipment for
the Cellular Telephone Network, if such financing is provided, which in the
aggregate are estimated to be approximately 90% of gross revenues less
expenses of operating the Cellular Telephone Network for the first 25 years
after the Cellular Telephone Network has commenced providing service to a
substantial number of users.
In connection with the Cellular Telephone Network Agreement, the Company
intends to form a subsidiary or other joint venture entity, in which the
Company will maintain at least a 75% interest, which in turn will enter into
a Sino-foreign joint venture or a contractual joint venture with Beijing
CATCH.
The Company has agreed to contribute the capital needed to build the Cellular
Telephone Network to the Sino-foreign joint venture in exchange for a 78%
equity interest in the Sino-foreign joint venture, which will sell the
equipment necessary for the establishment of the Cellular Telephone Network
on a BTSM basis to a wholly owned subsidiary of Beijing CATCH.
16
<PAGE>
NOTE 10 - RELATED PARTY TRANSACTIONS (continued)
Beijing CATCH has agreed to contribute the appropriate licenses to its
subsidiary, which will participate in building the Cellular Telephone
Network, and will enter into contracts with the Sino-foreign joint venture in
order to purchase equipment and to service and maintain the Cellular
Telephone Network.
NOTE 11 - SUBSEQUENT EVENTS
SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK
In June 1996, the Company completed a $2,500,000 offering of its Series B
Convertible Redeemable Preferred Stock ("Series B Preferred"). 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 entitles the
holder to purchase one share of common stock at a fixed conversion price. Of
the $2,500,000, the Company received $750,000 of the proceeds and the
remaining $1,750,000 was deposited into an escrow account. The funds in the
escrow account will be released to the Company upon certain legal opinions
being issued to the investors. Of the $750,000 proceeds received by the
Company, $250,000 must be returned to the investors if the legal opinions are
not issued.
The holders of the Series B Preferred have no voting rights and receive no
dividends. Each share of the Series B Preferred is convertible to a number
of common shares based on a conversion rate. Each share of Series B
Preferred outstanding at June 7, 1998 is automatically convertible.
The Series B Preferred have a liquidation preference of $25,000 per share and
an amount equal to 8% of the original Series B Issue Price per annum for the
period that has passed since the date of issuance of any Series B Preferred
Stock prior to the payment of any amount and the holders of the common stock.
ISSUANCE OF COMMON STOCK FOR SERVICES
In April 1996, two outside directors each received 5,000 shares of common
stock for a value totaling $90,000.
In June 1996, 5,000 shares of the Company's common stock were issued in
connection with services provided for a value totaling $28,125.
17
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
AVIC GROUP INTERNATIONAL, INC.
FOR
CERTIFICATE OF DESIGNATIONS OF PREFERENCES
OF
SERIES B CONVERTIBLE PREFERRED STOCK
It is hereby certified by the undersigned, Chief Executive Officer and Secretary
of AVIC Group International, Inc., a Colorado corporation (the "Corporation"),
that the following Articles of Amendment (the "Amendment") to the Articles of
Incorporation of the Company have been duly adopted by the Board of Directors of
the Corporation (the "Board of Directors"), by resolution dated March 14, 1996,
as set forth below, pursuant to the Colorado Business Corporation Act, and in
connection with the adoption of the following Amendment, which shall supersede
in its entirety the "Articles of Amendment to the Articles of Incorporation of
the Company for Certificate of Designations of Preferences of Series B
Convertible Preferred Stock," as filed with the Secretary of State of Colorado
on or about May 30, 1996, hereby further set forth as follows:
1. The Articles of Incorporation of the Corporation authorizes the
issuance of 10,000,000 shares of Preferred Stock of a par value of $0.001 each
and expressly vests in the Board of Directors of the Corporation the authority
provided therein to issue any or all of said shares in one or more series and by
resolution or resolutions to establish the designation, number, full or limited
voting powers, or the denial of voting powers, preferences and relative,
participating, optional, and other special rights and the qualifications,
limitations, restrictions, and other distinguishing characteristics of each
series to be issued.
2. The Board of Directors of the Corporation, pursuant to the
authority expressly vested in it as aforesaid, has adopted the following
resolutions creating a Series B issue of Preferred Stock:
RESOLVED, that one hundred (100) of the ten million (10,000,000)
authorized shares of Preferred Stock of the Corporation shall be designated
Series B Convertible Preferred Stock, $0.001 par value per share, and shall
possess the rights and privileges set forth below:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series B Convertible Preferred Stock" (the "Series B Preferred
Stock") and the number of shares constituting the Series B Preferred Stock shall
be 100. Such number of shares may be increased or decreased by resolution of the
Board of Directors; provided, that no decrease shall reduce the number of shares
of Series B Preferred Stock to a number less than the number of shares then
outstanding plus the number shares reserved for issuance upon the exercise of
1
<PAGE>
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Series B
Preferred Stock.
Section 2. RANK. The Series B Preferred Stock shall rank: (i) prior
to all of the Corporation's Common Stock, par value $0.001 per share ("Common
Stock"); (ii) prior to any class or series of capital stock of the Corporation
hereafter created (collectively, with the Common Stock, "Junior Securities");
(iii) on parity with any class or series of capital stock of the Corporation
hereafter created specifically ranking by its terms on parity with the Series B
Preferred Stock ("Parity Securities") in each case as to dividends, premium,
conversion, redemption, voting rights, and distributions of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary (all such distributions being referred to collectively as
"Distributions"); and (iv) junior to the Series A Preferred Stock ("Senior
Securities") in terms of Distributions.
Section 3. DIVIDENDS. The Series B Preferred Stock will bear no
dividends, and the holders of the Series B Preferred Stock shall not be entitled
to receive dividends on the Series B Preferred Stock.
Section 4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of shares of Series B
Preferred Stock shall be entitled to receive, immediately after any
distributions to Senior Securities required by the Corporation's Articles of
Incorporation or any statement of designation of preferences, and prior and in
preference to any distribution to Junior Securities but in parity with any
distribution of Parity Securities, an amount per share equal to the sum of (i)
$25,000 for each outstanding share of Series B Preferred Stock (the "Original
Series B Issue Price") and (ii) an amount equal to 8% of the Original Series B
Issue Price per annum for the period that has passed since the date of issuance
of any Series B Preferred Stock (such amount being referred to herein as the
"Premium"). If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series B Preferred Stock and Parity
Securities shall be insufficient to permit the payment to such holders of the
full preferential amounts due to the holders of the Series B Preferred Stock and
the Parity Securities, respectively, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed among the
holders of the Series B Preferred Stock and the Parity Securities, pro rata,
based on the respective liquidation amounts to which each such series of stock
is entitled by the Corporation's Articles of Incorporation and any statement(s)
of designation of preferences.
(b) Upon the completion of the distribution required by subsection
4(a), if assets remain in this Corporation, they shall be distributed to holders
of Parity Securities (unless holders of Parity Securities have received
distributions pursuant to subsection (a) above) and Junior Securities in
accordance with the Corporation's Articles of Incorporation including any duly
adopted certificate(s) of designation of preferences.
2
<PAGE>
(c) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or a sale, conveyance or disposition of all
or substantially all of the assets of the Corporation or the effectuation by the
Corporation of a transaction or series of related transactions in which more
than 50% of the voting power of the Corporation is disposed of, shall not be
deemed to be a liquidation, dissolution or winding up within the meaning of this
Section 4, but shall instead be treated pursuant to Section 7 hereof.
Section 5. CONVERSION.
The record holders of the Series B Preferred Stock shall have conversion rights
as follows (the "Conversion Rights"):
(a) Right to Convert. The record holder of the Series B Preferred
Stock shall be entitled, as set forth below, and, subject to the Company's right
of redemption set forth in Section 6(a) and the restrictions on conversion set
forth in Section 5(b) below, at the office of the Company or any transfer agent
for the Series B Preferred Stock, to convert the shares of Series B Preferred
Stock held by such holder into that number of fully-paid and nonassessable
shares of the Company's Common Stock at the Conversion Rate as set forth below.
The number of shares of Common Stock into which this Series B Preferred Stock
may be converted is hereinafter referred to as the "Conversion Rate" for such
Series B Preferred Stock, and is computed as follows:
Number of shares issued upon conversion of one share of Preferred Stock
equals
[(.08)(N/365)(Issue Price)] + Issue Price
-----------------------------------------
Conversion Price
where
*N = the number of days between (i) the date that, in connection with the
consummation of the initial purchase of this Series B Preferred Stock from
the Company, the escrow agent first had in its possession funds
representing full payment for the Series B Preferred Stock for which
conversion is being elected, and (ii) the applicable date of conversion for
the Series B Preferred Stock for which conversion is being elected,
*Issue Price = the Original Series B Issue Price, as defined in Section
4(a), and
*Conversion Price = the lesser of (x) the Fixed Conversion Price, as may be
adjusted pursuant to Section 5(e) below, or (y) the price which is the
lesser of (i) 85% of the average Closing Bid Price of the Company's Common
Stock on each of the five (5) trading days immediately preceding the Date
of Conversion, as defined below, or (ii) 85% of the average of the daily
low trading price of the Company's Common Stock on each of the five (5)
trading days immediately preceding the Date of Conversion, as defined
below.
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<PAGE>
For purposes hereof, (i) the "Fixed Conversion Price" shall equal 110% of
the Index Price, provided, however, that if on the date that is 180
calendar days after the termination of the offering of the Series B
Preferred Stock, the average Closing Bid Price for the prior 20 business
days has declined 25% or more from the Index Price, then the Fixed
Conversion Price shall be reset to equal 110% of that 20-day average
Closing Bid Price, (ii) the "Index Price" shall be $5.40, and (iii) the
term "Closing Bid Price" shall mean the closing bid price of the Company's
Common Stock as reported by NASDAQ (or, if not reported by NASDAQ, as
reported by such other exchange or market where traded) on the applicable
date.
(b) Mechanics of Conversion. No fractional shares of Common Stock shall
be issued upon conversion of this Series B Preferred Stock. In lieu of any
fractional share to which the holder would otherwise be entitled, the number of
shares of Common Stock to be received shall be rounded up to the next whole
number of shares. In the case of a dispute as to the calculation of the
Conversion Rate, the Company's calculation shall be deemed conclusive absent
manifest error. In order to convert Series B Preferred Stock into full shares of
Common Stock, the holder shall surrender the certificate or certificates
therefor, duly endorsed, by either overnight courier or 2-day courier, to the
office of the Company or of any transfer agent for the Series B Preferred Stock,
and shall give written notice ("Notice of Conversion") to the Company at such
office that he elects to convert the same, the number of shares of Series B
Preferred Stock so converted and a calculation of the Conversion Rate (with an
advance copy of the certificate(s) and the notice by facsimile). Once the
Notice of Conversion has been so delivered, the conversion set forth therein
shall be irrevocable, and the certificate(s) indicated for conversion shall be
canceled on the Company's books; provided, however, that the Company shall not
be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless either the certificates evidencing such
Series B Preferred Stock are delivered to the Company or its transfer agent as
provided above, or the holder notifies the Company or its transfer agent that
such certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such certificates.
The Company shall issue and deliver within three (3) business days after
delivery to the Company of such certificates, or after such agreement and
indemnification, to such holder of Series B Preferred Stock at the address of
the holder on the books of the Company, a certificate or certificates for the
number of shares of Common Stock to which the holder shall be entitled as
aforesaid. The date on which conversion occurs (the "Date of Conversion") shall
be deemed to be the date set forth in such Notice of Conversion, provided that
the advance copy of the Notice of Conversion is faxed to the Company before
midnight, New York City time, on the Date of Conversion.
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<PAGE>
(c) Reservation of Stock Issuable Upon Conversion. The Company shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock, solely for the purpose of effecting the conversion of the
Series B Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all then outstanding
shares of Series B Preferred Stock; and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of Series B Preferred Stock, the
Company will take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
(d) Automatic Conversion. Each share of Series B Preferred Stock
outstanding on June 7, 1998 automatically shall be converted into Common Stock
on such date at the Conversion Price then in effect and June 7, 1998 shall be
deemed the Date of Conversion with respect to such Conversion.
(e) Adjustment to Fixed Conversion Price.
In computing the Fixed Conversion Price for purposes of Section 5(a):
(i) If, prior to the conversion of all of the Series B Preferred
Stock, the number of outstanding shares of Common Stock is increased by a stock
split, stock dividend, or other similar event, the Fixed Conversion Price shall
be proportionately reduced, or if the number of outstanding shares of Common
Stock is decreased by a combination or reclassification of shares, or other
similar event, the Fixed Conversion Price shall be proportionately increased.
(ii) If, prior to the conversion of all Series B Preferred Stock,
there shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common
Stock of the Company shall be changed into the same or a different number of
shares of the same or another class or classes of stock or securities of the
Company or another entity, then the holders of Series B Preferred Stock shall
thereafter have the right to purchase and receive upon conversion of Series B
Preferred Stock, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such shares of stock and/or securities as may be
issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore purchasable and receivable upon the
conversion of Series B Preferred Stock held by such holders had such merger,
consolidation, exchange of shares, recapitalization or reorganization not taken
place, and in any such case appropriate provisions shall be made with respect to
the rights and interests of the holders of the Series B Preferred Stock to the
end that the provisions hereof (including, without limitation, provisions for
adjustment of the Fixed Conversion Price and of the number of shares issuable
upon conversion of the Series B Preferred Stock) shall thereafter be applicable,
as nearly as may be practicable in relation to any shares of stock or securities
thereafter deliverable upon the exercise hereof. The Company shall not effect
any transaction described in this subsection 5(e) unless the resulting successor
or acquiring entity (if not the Company) assumes by written instrument the
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<PAGE>
obligation to deliver to the holders of the Series B Preferred Stock such shares
of stock and/or securities as, in accordance with the foregoing provisions, the
holders of the Series B Preferred Stock may be entitled to purchase.
(iii) If any adjustment under this Section 5(e) would create a
fractional share of Common Stock or a right to acquire a fractional share of
Common Stock, such fractional share shall be disregarded and the number of
shares of Common Stock issuable upon conversion shall be the next higher number
of shares.
(f) Forced Conversion Option. At any time after one year from the
termination of the offering of the Series B Preferred Stock, the Company may, at
its option, elect to force conversion of the Series B Preferred Stock into
Common Stock. In order to do so, the Company must give sixty days prior written
notice, delivered by facsimile with hard copy by courier, to the holders of the
Series B Preferred Stock of the Company's election to force conversion. The
notice must state the effective date of the forced conversion. Prior to the
effective date of the forced conversion, the holders of the Series B Preferred
Stock may exercise any rights they may have under this Certificate or applicable
law. In the event of a forced conversion, notwithstanding anything to the
contrary herein, the conversion formula applicable to the shares of Series B
Preferred Stock that are the subject of the forced conversion shall be as
follows:
Number of shares issued upon conversion of one share of Preferred Stock
equals
[(.08 + Forced Conversion Premium)(N/365)(Issue Price)] + Issue Price
-----------------------------------------------------------------------
Conversion Price
where the term "Forced Conversion Premium" means six percent (6% or 0.06) for
the thirteenth month after the Final Closing Date, declining by one-half of one
percent (0.5%) each month thereafter until it equals zero the end of the twenty-
third month after the Final Closing Date, and the terms "N", "Issue Price" and
"Conversion Price" have the meanings set forth in 5(a) above.
Section 6. REDEMPTION BY COMPANY UPON CONVERSION.
(a) In the event the Conversion Price per share shall be less than or
equal to 75% of the Index Price, the Company shall have the right, in its sole
discretion, upon receipt of a Notice of Conversion pursuant to Section 5, to
redeem in whole or in part any Series B Preferred Stock submitted for
conversion, immediately prior to conversion, at the Redemption Price on
Conversion (as defined below). If the Company elects to redeem some, but not
all, of the Series B Preferred Stock submitted for conversion, the Company shall
redeem from among the Series B Preferred Stock submitted by the various
shareholders for conversion on the applicable date, a pro-rata amount from each
shareholder so submitting Series B Preferred Stock for conversion.
6
<PAGE>
(b) Mechanics of Redemption. Any shareholder considering submitting
Preferred Stock for conversion at such time as the Company's right of redemption
under Section 6(a) is or may be in effect may provide notice to the Company of
his possible desire to convert and ask the Company to determine whether or not
the Company would exercise its right of redemption if the Preferred Stock were
submitted for conversion. The Company shall respond within two business days of
the date of that notice, and state whether it would redeem the shares, in whole
or in part, or allow conversion into shares without redemption, which election
will be applicable to conversion by such shareholder within the next five
business days after the date of the Company's response. Failure of the Company
to respond within the two-day period shall be deemed an election by the Company
not to redeem the shares covered by that notice if submitted for conversion
within the next five business days. If the shareholder does not provide advance
notice of intention to convert as contemplated in this section (ii), the
Company shall effect each such redemption of shares submitted for conversion by
giving notice of its election to redeem, by facsimile within 2 business days
following receipt of a Notice of Conversion from a holder, with a copy by 2-day
courier, to (A) the holder of Series B Preferred Stock submitted for conversion
at the address and facsimile number of such holder appearing in the Company's
register for the Series B Preferred Stock and (B) the Company's Transfer Agent.
Such redemption notice shall indicate whether the Company will redeem all or
part of the Series B Preferred Stock submitted for conversion and the applicable
redemption price. The Company shall not be entitled to exercise its right to
redeem shares submitted for conversion under this Section 6(a) unless it has
(x) the full amount of the redemption price, in cash, available in a demand or
other immediately available account in a bank or similar financial institution
or (y) immediately available credit facilities, in the full amount of the
redemption price, with a bank or similar financial institution on the date the
redemption notice is sent to shareholders.
(c) Redemption Price. In the case of a redemption under this Section 6(a),
the redemption price ("Redemption Price on Conversion") shall equal:
= [[(.08)(N/365)(Issue Price)] + Issue Price] [Closing Bid Price]
------------------------------------------------------------------
Conversion Price
where "N," "Issue Price," "Closing Bid Price" and "Conversion Price"
have the meanings set forth in Section 5.
The Redemption Price on Conversion shall be paid to the holder of Series B
Preferred Stock redeemed within 10 business days of the delivery of the notice
of such redemption to such holder; provided, however, that the Company shall not
be obligated to deliver any portion of such Redemption Price on Conversion
unless either the certificates evidencing the Series B Preferred Stock redeemed
are delivered to the Company or its transfer agent as provided in Section 4(b),
or the holder notifies the Company or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Company to indemnify the Company from any loss incurred by it in connection
with such certificates.
7
<PAGE>
Section 7. CORPORATE CHANGE. In the event of a merger,
reorganization, recapitalization or similar event of or with respect to the
Company (a "Corporate Change") (other than a Corporate Change in which or
substantially all of the consideration received by the holders of the Company's
equity securities upon such Corporate Change consists of cash or assets other
than securities issued by the acquiring entity or any affiliate thereof), this
Series B Preferred Stock shall be assumed by the acquiring entity and thereafter
this Series B Preferred Stock shall be convertible into such class and type of
securities as the holder would have received had the holder converted this
Series B Preferred Stock immediately prior to such Corporate Change.
Section 8. PROTECTIVE PROVISIONS. So long as shares of Series B
Preferred Stock are outstanding, the Corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series B
Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
shares of Series B Preferred Stock or any Senior Securities so as to affect
adversely the Series B Preferred Stock;
(b) create any new class or series of stock having a rights
preferential to or equal to those of the Series B Preferred Stock with respect
to conversion, redemption or voting rights or privileges, or with respect to
Distributions (as defined in Section 2 above); or
(c) do any act or thing not authorized or contemplated by this
Designation which would result in taxation of the holders of shares of the
Series B Preferred Stock under Section 305 of the Internal Revenue Code of 1986,
as amended (or any comparable provision of the Internal Revenue Code as
hereafter from time to time amended).
Section 9. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any
shares of Series B Preferred Stock shall be redeemed or converted pursuant to
Section 5 or Section 6 hereof, the shares so converted or redeemed shall be
canceled, shall return to the status of authorized but unissued Preferred Stock
of no designated series, and shall not be issuable by the Corporation as Series
B Preferred Stock.
Section 10. MISCELLANEOUS. As used herein, the term "business day"
means a business day in the City of New York.
FURTHER RESOLVED, that the statements contained in the foregoing
resolutions creating and designating the said Series B Preferred Stock and
fixing the number, powers, preferences and relative, optional, participating,
and other special rights and the qualifications, limitations, restrictions,
and other distinguishing characteristics thereof shall, upon the effective
date of said series, be deemed to be included in and be a part of the
certificate of incorporation of the Corporation pursuant to the laws of the
State of Colorado.
8
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to the Articles of Incorporation to be executed by its Chief Executive Officer
and Secretary as of the date set forth below.
Signed on June 6, 1996. AVIC GROUP INTERNATIONAL, INC.
/s/ Joseph R. Wright, Jr.
------------------------------------
Joseph R. Wright, Jr.
Chief Executive Officer
Attest: /s/ Timothy Crowley
--------------------------------
Timothy Crowley, Secretary
9
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
AVIC GROUP INTERNATIONAL, INC.
FOR
CERTIFICATE OF DESIGNATIONS OF PREFERENCES
OF
SERIES B CONVERTIBLE PREFERRED STOCK
It is hereby certified by the undersigned, Chief Executive Officer and Secretary
of AVIC Group International, Inc., a Colorado corporation (the "Corporation"),
that the following Articles of Amendment (the "Amendment") to the Articles of
Incorporation of the Company have been duly adopted by the Board of Directors of
the Corporation (the "Board of Directors"), by resolution dated March 14, 1996,
as set forth below, pursuant to the Colorado Business Corporation Act, and in
connection with the adoption of the following Amendment, which shall amend the
"Articles of Amendment to the Articles of Incorporation of the Company for
Certificate of Designations of Preferences of Series B Convertible Preferred
Stock," as filed with the Secretary of State of Colorado on or about June 7,
1996 (the "June 7 Amendment"), hereby further set forth as follows:
Section 5(a) of the June 7 Amendment shall be superseded in its entirety
and shall be restated as follows:
Section 5. CONVERSION.
The record holders of the Series B Preferred Stock shall have conversion rights
as follows (the "Conversion Rights"):
(a) Right to Convert. The record holder of the Series B Preferred
Stock shall be entitled, as set forth below, and, subject to the Company's right
of redemption set forth in Section 6(a) and the restrictions on conversion set
forth in Section 5(b) below, at the office of the Company or any transfer agent
for the Series B Preferred Stock, to convert the shares of Series B Preferred
Stock held by such holder into that number of fully-paid and nonassessable
shares of the Company's Common Stock at the Conversion Rate as set forth below.
The number of shares of Common Stock into which this Series B Preferred Stock
may be converted is hereinafter referred to as the "Conversion Rate" for such
Series B Preferred Stock, and is computed as follows:
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<PAGE>
Number of shares issued upon conversion of one share of Preferred Stock
equals
[(.08)(N/365)(Issue Price)] + Issue Price
-----------------------------------------
Conversion Price
where
*N = the number of days between (i) the date that, in connection with the
consummation of the initial purchase of this Series B Preferred Stock from
the Company, the escrow agent first had in its possession funds
representing full payment for the Series B Preferred Stock for which
conversion is being elected, and (ii) the applicable date of conversion for
the Series B Preferred Stock for which conversion is being elected,
*Issue Price = the Original Series B Issue Price, as defined in Section
4(a), and
*Conversion Price = the lesser of (x) the Fixed Conversion Price, as may be
adjusted pursuant to Section 5(e) below, or (y) the price which is the
lesser of (i) 85% of the average Closing Bid Price of the Company's Common
Stock on each of the five (5) trading days immediately preceding the Date
of Conversion, as defined below, or (ii) 85% of the average of the Daily
Low Trading Price of the Company's Common Stock on each of the five (5)
trading days immediately preceding the Date of Conversion, as defined
below.
For purposes hereof, (i) the "Fixed Conversion Price" shall equal 110% of
the Index Price, provided, however, that if on the date that is 180
calendar days after the termination of the offering of the Series B
Preferred Stock, the average Closing Bid Price for the prior 20 business
days has declined 25% or more from the Index Price, then the Fixed
Conversion Price shall be reset to equal 110% of that 20-day average
Closing Bid Price, (ii) the "Index Price" shall be $5.40, and (iii) the
terms "Closing Bid Price" and "Daily Low Trading Price" shall mean the
closing bid price and daily low trading price, respectively, of the
Company's Common Stock as reported by NASDAQ (or, if not reported by
NASDAQ, as reported by such other exchange or market where traded) on the
applicable date.
2
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to the Articles of Incorporation to be executed by its Chief Executive Officer
and Secretary as of the date set forth below.
Signed on June 10, 1996. AVIC GROUP INTERNATIONAL, INC.
/s/ Joseph R. Wright, Jr.
----------------------------------------
Joseph R. Wright, Jr.
Chief Executive Officer
Attest: /s/ Timothy Crowley
--------------------------------
Timothy Crowley, Secretary
3
<PAGE>
THE JOINT VENTURE CONTRACT
(BEIJING CATCH COMMUNICATION GROUP CO.
AND
AVIC GROUP INTERNATIONAL, INC.)
<PAGE>
CHAPTER 1: PRINCIPLE
Subject to the principle of fair profit sharing and cooperation for development,
and pursuant to the Law of PRC on Sino-Foreign Joint Venture ("Joint Venture
Law") and the Implementation Regulation of the PRC on Sino-Foreign Joint
Ventures ("JV Implementation Regulation") and other relevant Chinese regulations
and laws, China Beijing CATCH Communication Group Co. (Party A) and AVIC Group
International, Inc. (Party B) agree to jointly set up a Sino-Foreign Joint
Venture Company in Lang Fang City, Hebei Province. The contract has been signed
on Jun 11, 1996 in New York, the United States.
CHAPTER 2: JOINT VENTURE PARTIES
1. THE JOINT VENTURE PARTIES
Party A:
Name: Beijing CATCH Communication Group Co.
Organization: A corporation owned by the people
established in People's Republic of China
in accordance with the Chinese Laws.
Address: No. 5 Da Ni Wan, Hai Dian District
Beijing
The People's Republic of China
Legal Representative: Chen Li
Position: Chairman
Nationality: P. R. China
Party B:
Name: AVIC Group International, Inc.
Organization: A public company incorporated in the State of Colorado of
United States
Address: 599 Lexington Avenue, 44(th) Floor
New York, NY 10022
U. S. A.
Legal Representative: Joseph R. Wright, Jr.
Position: Chairman, Chief Executive Officer and President
Nationality: American
2. LEGAL ABILITY
2.1 Party A and B both guarantee the following:
(1). Party A is legally established in Beijing,the People's
Republic of China, and Party B is legally formed in New York,
U. S. A.
2
<PAGE>
(2). Party A and B have the complete right to negotiate and
fulfill the responsibilities and obligations set out in this
Contract.
(3). The signatories of Party A and Party B have the right
appointed by both parties to execute this contract.
CHAPTER 3: ESTABLISHMENT OF THE JOINT VENTURE COMPANY
3. ESTABLISHMENT OF THE JOINT VENTURE COMPANY
3.1 Party A and B agree to form and incorporate a Sino-Foreign
Joint Venture Company with limited liability ("The Joint Venture
Company") in the PRC on the terms and conditions approved by certain
authorities. The Joint Venture Company will be established under
the Joint Venture Law and the Joint Venture Implementation
Regulations. All important decisions and documents related to the
Joint Venture business shall be approved by the Joint Venture
Company first before submitting to the relevant authority for
approval.
4. THE JOINT VENTURE COMPANY
4.1 The Name of the Joint Venture Company
The Chinese name of the Joint Venture Company shall
be ____________________________. The English name of the Joint
Venture Company shall be Lang Fang ATCH Telecommunications
Engineering Company Limited. The legal location of the Joint
Venture Company is at Lang Fang, Hebei Province, PRC.
The Joint Venture Company must be registered at Industry and
Commerce Administration and Management Bureau.
4.2 Without a written agreement, both parties can not use their parent
company's trademark and logo at any time.
3
<PAGE>
5. LAW
5.1 The Joint Venture Company's activities in China must fully
comply with all the relevant laws, regulations in China and the
provisions set out in this contract.
6. ORGANIZATION:
6.1 The Joint Venture Company will be a limited liability
company for the purpose of the Company Law of the PRC. Both parties
shall undertake the liability of the Joint Venture Company subject
to its investment amount. Both parties agree that the Joint Venture
Company's investment will be a full risk investment negotiated as
part of a joint business exercise designed to share both risks,
rewards and loses based on its share ownership ratio in the
registered capital between the partners.
CHAPTER 4: BUSINESS OBJECTIVE AND SCOPE
7. BUSINESS OBJECTIVE OF THE JOINT VENTURE COMPANY
Both parties agree that the business objectives of the Joint Venture
Company are to strengthen in business cooperation and technology
development and exchange; to apply advanced telecommunications technology
and efficient management skills; to improve technical standard of
telecommunications industry and relating services; and to reach both
economic and social goals that are satisfactory to all parties.
8. THE SCOPE OF THE JOINT VENTURE COMPANY
8.1 The Joint Venture Company agrees to provide the following
services: construction of the telecommunications projects; upgrade
technology of existing systems and other related network projects;
providing technical consultation, services and other related
businesses.
4
<PAGE>
CHAPTER 5. TOTAL INVESTMENT CAPITAL, REGISTERED CAPITAL, AND SHARE RATIO OF THE
JOINT VENTURE PARTNERS
9. TOTAL INVESTMENT CAPITAL AND REGISTERED CAPITAL
9.1 The total investment capital of the Joint Venture Company will be
US$ 1,400,000.00
9.2 The registered capital of the Joint Venture Company will be
US$1,000,000.00.
10. SHARE RATIO
10.1 The registered capital of the Joint Venture Company will be
US$1,000,000.00, of which Party A will contribute US$300,000.00
(30%) and Party B will contribute US$700,000.00(70%).
11. THE AMOUNT AND TERM OF THE CAPITAL PAYMENT
11.1 Both parties shall infuse capital in accordance with the following
method after obtaining a Joint Venture Company Business License
("Business License") from the state industry and commerce
administration authority:
------------------------------------------------------------------------
Party Amount Time
------------------------------------------------------------------------
A Material objects, technology The total amount
and intangible capital equivalent shall be wired to the
to US$300,000.00 (The foreign account within 30
currency exchange rate shall be days after getting
based on each day's closing rate the business license.
and shall be evaluated by the
certified public accounting agency
and approved by Party B)
------------------------------------------------
B US$ 700,000.00
------------------------------------------------------------------------
11.2 The investment capital shall be wired to the bank
account in accordance to Clause 42 of this Contract.
5
<PAGE>
12. CERTIFICATE OF INVESTMENT
12.1 The investment payment from Party A and B shall be be certified by a
registered public accountant. After receiving a satisfactory
certificate recording such investment, the Joint Venture Company
will issue the Certificate of Investment, including the amount and
share ownership of the registered capital, signed by the Chairman
and Vice Chairman of the Joint Venture Company to Party A and B.
13. THE USAGE OF THE INVESTMENT
13.1 None of Party A, Party B or any other parties have the right to use
the investment capital infused to the bank account according to
Clause 11.2 without the Board's decision of how to use such
investment. However, the funds which will be used during the Joint
Venture preparation period shall be paid by the Joint Venture
Company subject to the approvals from both Parties.
14. TRANSFER OF CAPITAL
14.1 Except for Clause 14.3, Party A and Party B may, as either Party
wishes transfer, in whole or part, its shares of the Joint Venture
Company to a third Party with prior written notice to the other
Parties and approval from the relevant authorities. Party A or B
shall make the decision within 90 days of receiving the written
notice.
14.2 If either Party A or Party B wishes to transfer its whole or
partial shares, such Party shall first offer the share to the other
Party of the Joint Venture Company for purchase. The other Party
shall submit a written notice to declare its decision of purchasing
those shares within 90 days. If the other Party does not submit its
decision within 120 days, or this Party has first offered partial
share to the other Party of the Joint Venture Company, any
unsubscribed shares may then be offered to a third Party at a price
not less than the price offered to the other Joint Venture Party.
14.3 Both Parties may transfer its whole or partial shareholding to their
parent companies or their subsidiaries during the term of this
Contract in
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accordance with Clause 47. However, the relevant government
approvals must be submitted to execute such transfer.
14.4 After the Party transferring its whole or partial shares to a third
Party, such third Party shall abide by the terms of this Contract
and perform and discharge all of its obligations of this Contract
and share its rights as well. In addition, certain provisions in
this contract shall be revised pursuant to the change in the
shareholding ratio.
14.5 The transfer will not be effective if one of the Party violates
any provisions set out in this contract.
15. THE INCREASE OF THE REGISTERED CAPITAL
15.1 The registered capital (Clause 9) may be increased from time to
time subject to approval of the Board of Directors of the Joint
Venture Company. The contribution from both parties to increase the
registered capital pursuant to Clause 10 of this Contract shall be
pro rata in accordance with the share ratio of each Party at the
time of such capital increase. If one Party declines to increase
the registered capital, the other Party then has the priority to
increase the whole or a portion of the amount of the increase in
registered capital which is rejected by the other Party. The
obligations of each Party shall also be adjusted pursuant to the new
share ownership ratio. In addition, Party A and B have the right to
ask a third Party to increase the registered capital upon receipt of
a written agreement between the Joint Venture parties and subject to
obtaining the relevant PRC governmental approvals.
16. MORTGAGE:
16.1 Party A and B shall not use their portion of the Joint Venture
Company's investment capital as any kind of mortgage or
guarantee.
CHAPTER 6: RESPONSIBILITIES OF PARTY A AND B
17. RESPONSIBILITIES OF PARTY A AND B
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17.1 The parties shall contribute, where necessary in accordance with
the Joint Venture Company's Business Plan and upon such terms and
conditions as may be agreed with the Joint Venture Company, to the
general business development of the Joint Venture Company by
fulfilling the following responsibilities:
A. Party A shall:
(1). Provide the registered capital based on the share
ratio pursuant to Clause 11 of this Contract.
(2). Assist the Joint Venture Company in its fund
raising, and to obtain investment capital at favorable
terms and conditions.
(3). Provide necessary assistance to exchange foreign
currency to RMB or to exchange RMB to foreign currency.
(4). Obtain all necessary approvals and permits from the
competent authorities of the PRC, including,
establishment and registration of the Joint Venture
Company, and all other approvals or permits necessary
for the proper conduct of the Joint Venture Company's
business and endeavor to obtain preferential treatment
for the Joint Venture Company.
(5). Assist in the construction of public utilities,
such as water, electricity and gas, the connection of
the telephone and fax lines and provide the material
transportation.
(6). Purchase and rent the required equipment, machinery,
raw material, cars, communication equipment and others
which shall be bought in China in accordance with the
agreement by both parties.
(7). Assist the Joint Venture Company with customs
clearance for import and export of equipment and
products and obtain entry permits, visas, work permits,
travel
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permits and all other approvals for expatriate
personnel of the Joint Venture Company and obtain
suitable accommodation for expatriate personnel.
(8). Provide necessary assistance for recruiting executives,
technicians, workers and other employees in China. In
addition, it shall help its employees to settle their
accommodation if necessary.
(9). Provide the information of China market to the Joint
Venture Company and develop a domestic market for the
Joint Venture Company.
(10). Provide documents and information relating to the
Chinese economy, investment and marketing and also
relevant documents relating to Chinese policy, law,
regulation, tax system, accounting system and others.
(11). Obtain all necessary approvals, registration and
licenses from the competent Chinese authorities
required for the establishment of the Joint Venture
Company.
(12). Obtain the approvals for the Joint Venture Company to
use land from the Land Administration Authority.
(13). Organize the construction and design of the Joint
Venture Company building.
(14). Handle all other matters appointed by the Joint
Venture Company and agreed to by Party A.
B. Party B shall:
(1). Provide the registered capital based on share ratio
according to Clause 11 set up in this Contract.
(2). Assist the fund raising for the
telecommunications projects confirmed and approved by
both parties of the Joint Venture Company outside China
and guarantee
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that the money be transferred to the Joint Venture
account pursuant to the Business Plan. The interest
rate of such fund shall not be too high and loan
provided by Party B to Party A shall not be at usurious
rates.
(3). Obtain all necessary approvals and permits from the
competent authorities in the United States required for
the establishment of the Joint Venture Company.
(4). Purchase and rent the necessary equipment, machines,
materials, cars, communication and office equipment
which shall be purchased abroad by Party B and agreed
by both Parties.
(5). Assist the Joint Venture Company with customs
clearance for import/export of equipment and products
(including all necessary export permits), obtain entry
permits, visas, work permits, travel permits and all
other approvals for expatriate personnel of the Joint
Venture Company and obtain suitable accommodation for
expatriate personnel.
(6). Provide necessary assistance for recruiting foreign
executives, technicians and other employees in a
method agreed by the President.
(7). Provide the documents and information relating to
the American economy, investment and marketing, and
also the relevant documents about American policy, law,
rules, tax system, accounting system, etc.
(8). Provide advanced technology to the Joint Venture
Company and appoint its technicians to support the
Joint VentureCompany's projects.
(9). Provide technical training for the Joint Venture
Company's employees in accordance with the technical
training contract signed by the Joint Venture Company
and Party B.
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(10). Handle all other matters appointed by the Joint Venture
Company and agreed by Party B.
CHAPTER 7: TECHNICAL ASSISTANCE
18. TECHNICAL SERVICE
18.1 When it is necessary, the Joint Venture Company has the right to
enter into a Technology Service Agreement with Party B or any other
third Party based on the agreement of both parties.
19. CONFIDENTIALITY
19.1 It is agreed that all information generated pursuant to the
terms of this Contract is confidential and neither Party shall,
except with the written consent of the other Party, disclose or
release such information to any third Party.
19.2 Party A and B shall ask their executives and all other employees
to understand the importance of confidentiality for the Company.
All employees shall sign the Confidentiality Agreement when they
join the Joint Venture Company.
CHAPTER 8: PURCHASE OF EQUIPMENT AND MATERIAL
20. PURCHASE OF RAW MATERIALS, EQUIPMENT AND MACHINES
20.1 The Joint Venture Company shall determine if the
necessary equipment, materials, fuel, transportation equipment and
office equipment shall be purchased in China or abroad. However, if
the quality, quantity, performance, delivery, and after-sale service
of a foreign product are comparable to a Chinese product, the Joint
Venture shall first consider purchasing the product in China. If
Party B has to purchase equipment abroad for the Joint Venture
Company, Party A shall be involved in such purchasing if necessary.
CHAPTER 9: BOARD OF DIRECTORS
21. OBLIGATIONS OF BOARD OF DIRECTORS
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21.1 The Board of Directors of the Joint Venture Company is the
authoritative organ of the Joint Venture Company and shall be fully
responsible for the entire business of the Joint Venture Company.
22. ESTABLISHMENT OF THE BOARD OF DIRECTORS
22.1 The Joint Venture Company's Board of Directors will be established
on the day a Business License is granted to the Joint Venture
Company.
23. COMPOSITION OF THE BOARD AND THE TERM OF EACH DIRECTOR
23.1 The Board of Directors shall consist initially of 5 members, one
Chairman and one Vice Chairman. 2 Directors will be appointed by
Party A and 3 Directors will be appointed by Party B. The Chairman
of the Board shall be appointed by Party B. The Vice Chairman shall
be appointed by Party A. The term of the Chairman, Vice Chairman
and directors shall be four years and these positions may be re-
appointed consecutively if necessary. The term of the Chairman and
Vice Chairman shall begin from the date a Business License is
granted to the Joint Venture Company to the closing date of the
Board meeting which will discuss the financial statement for the 4th
fiscal year of the Joint Venture Company. During the term of the
directors, if such matters as death, resignation, retirement or
inability to fulfill the job occurs, the Party who appoints such
director shall select a replacement as soon as possible. The
replacement director shall serve out the term of his predecessor.
23.2 If one Party wants to change the director, a written notice
shall be submitted to the BOD meeting within 30 days.
23.3 The Chairman, Vice Chairman and directors will receive no
salary from the Joint Venture Company. If any of the Chairman, Vice
Chairman or directors hold the titles of the President, Executive
Vice President or Vice President of the Joint Venture Company, they
shall receive compensation from the Joint Venture Company for
fulfilling the duties of these executive positions, but no extra
money shall be paid to them for their directorships.
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24. BOARD:
24.1 The Board shall be responsible for formulating and implementing the
general policy of the Joint Venture Company. If any decision of the
Board of Directors is in compliance with applicable Chinese laws,
then no third Party shall be involved in such decision.
24.2 The Chairman is the legal representative of the
Joint Venture Company. If the Chairman can not fulfill his
obligations for some reason, the Vice Chairman or another director
shall temporarily assume his responsibilities.
25. BOARD MEETING
25.1 Board meetings shall be held at the Joint Venture Company's
offices at least once a year and shall be hosted by the Chairman.
Meetings of the Board of Directors may be held at other locations
subject to the agreement of Chairman and the Vice Chairman. If two
or more directors submit a written notice to the Chairman and
suggest the Chairman to issue a written notice for a temporary Board
meeting 30 days before a scheduled Board meeting, the Chairman must
agree to hold such temporary Board meeting. However, any proposals
within 30 days before the Board meeting will be valid upon the
agreement of all directors.
25.2 A written notice with details of agenda and papers supporting the
items on the agenda shall be given to all directors 30 days before
the Board meeting. Upon receipt of the agenda and prior to the
meeting, the directors may consult with each other on any items on
the agenda.
25.3 If 2/3 of the directors attend the Board meeting, such Board
meeting shall be considered as legally effective. If one director
can not be in the meeting for some reason, he can appoint his
representative to attend the meeting with a written notice, and his
representative shall have the same right to vote the decisions of
the Board meeting. If a decision is made at a Board meeting with
insufficient director attendance, such decision shall have no legal
force.
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25.4 All costs associated with attending Board meetings by director,
including travel and accommodations and all costs incurred by
Directors in attending to the business of the Joint Venture Company
shall be reimbursed by the Joint Venture Company.
25.5 All minutes of the meetings of the Board of Directors shall be
prepared and recorded in the English and Chinese languages and shall
be signed by the directors and its representatives who attend the
Board meeting. The original copy shall be kept in the Joint Venture
Company until the Company dismisses. The copy of the minutes shall
be sent to Party A and Party B. If there is any difference between
the two versions, the Chinese version shall be taken as the ruling
version.
26. RESOLUTIONS OF THE BOARD OF DIRECTORS
26.1 Except for clause 26.2 and 26.3, a Board of Directors
resolution will become effective upon receiving approval from 1/2
of the directors present at any meeting.
26.2 The following matters require approval from at least 2/3 of the
directors in attendance at any meeting to become effective:
(1). Approval of the long-term, medium-term and annual business
plan, equipment investment, product sales and employment
arrangements, etc.
(2). Decisions on the changes of annual budget plan, payment of any
expenditure in excess of the amount approved in the budget and
payment of liabilities. However, if the budget amount is less
than RMB1 million and not over 20% of the budget plan, or if
the budget amount is over RMB1 million and not over
RMB500,000, President and Vice President can make the decision
without any restriction but must report to the Board
afterwards.
(3). Approval of the annual business plan, financial report and
annual budget plan.
(4). The declaration or payment of any profits or dividend
distribution to the shareholders.
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(5). Approval to raise investment capital.
(6). The approval of the annual or semi-annual financial
report.
(7). Approval of significant changes in the Joint Venture
Company's management organizational structure.
(8). Any significant changes on the Board's regulation, accounting
system, operation expenses, cash control regulation or any
other Joint Venture internal regulations.
(9). Any changes in Employment Contracts and the Employee's
Handbook.
(10). Any decisions regarding the salary, welfare and reward of the
President, the Vice President, Joint Venture Company
Executives and other employees.
(11). The appointment or dismissal of the Joint Venture Company's
President, Executive Vice President, Vice President or CFO.
(12). Any capital transfer from other business entities.
(13). Manage and transfer of the Joint Venture Company's partial or
total capital. Set up the Joint Venture Company's mortgage
right and guarantee right.
(14). Establishment or dissolution of any branch company, subsidiary
or agency of the Joint Venture Company.
(15). Approval of any investment, loan or guarantee of $100,000 or
greater.
26.3 The following matters require unanimous approval from the Board of
Directors present at any meeting:
(1). Any change in the Joint Venture Company's article of
incorporation.
(2). Any increase or decrease in the registered capital.
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(3). Any merger with other business entities.
(4). Dissolution of the Joint Venture Company except
as set forth in Clause 48 and 51 of this Joint Venture
Contract.
27. WRITTEN RESOLUTIONS OF THE BOARD OF DIRECTORS
27.1 Written resolutions of the Board of Directors shall become
effective if approved by all directors. The directors have the
right to approve, object or abstain from any Board resolution.
CHAPTER 10. MANAGEMENT ADMINISTRATION ORGANIZATION
28. PRESIDENT AND VICE PRESIDENT
28.1 A management administration organization shall be set up under the
supervision of the Board, and such organization shall handle the
day-to-day operation of the Joint Venture Company.
28.2 The management shall consist one President, and one Vice
President. President of the Joint Venture Company shall be
recommended by Party A and Vice President shall be appointed by
Party B. The Board of Directors shall decide the appointment of
President and Vice President of the Joint Venture Company.
28.3 The term of the President and Vice President shall be four years.
Reappointment of each position will be available. If the management
changes during the term of the position, the replacement shall serve
out the term of his predecessor
29. THE OBLIGATION OF PRESIDENT OF THE JOINT VENTURE COMPANY
29.1 In addition to the day-to-day management of the Joint Venture
Company, President shall fulfill the following responsibilities:
(1). To make long-term and annual Business Plan of equipment
investment, product sales and employee arrangement, and submit
such plans to the Board. President shall execute the Board's
resolution on all above-mentioned items.
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(2). President shall be responsible for the presentation of the
Business Plan, Budget Plan and financial review for each
succeeding financial year for approval and adoption by the
Board meeting.
(3). To make capital collection, distribution and investment plan
and submit such plan to the Board meeting.
(4). To make quarterly and yearly financial report and submit it to
the relevant authority upon receiving the approval from Board
meeting. If it is urgent, the Board approval can be received
after submitting to the authority.
(5). To set up management structure and submit to the Board meeting
for approval.
(6). To appoint senior executive positions in the Joint Venture
Company.
(7). To set up the regulations of the Board meeting, accounting
system, expense budget, cash management and all other
internal regulations of the Joint Venture Company, and
submit to the Board meeting for approval.
(8). To make Employment Contract and other regulations regarding
the employment of the Joint Venture Company and submit to the
Board meeting for approval.
(9). To formulate the salary of the Company's executives and
other employees, including welfare and reward, and submit to
the Board meeting for approval.
(10). To appoint and dismiss the employees except for President,
Vice President and CFO.
(11). To set up the plans to establish and dismiss the Joint Venture
Company's branch company, subsidiary and other agency.
(12). To purchase of the property within certain expense limit
approved by the Board meeting.
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(13). To sign the contract with a third Party within his job
responsibilities.
(14). The other responsibilities and obligations appointed by
the Board meeting.
29.2 Vice President can be concurrently the head of each different
department except for its daily job to assist President of the Joint
Venture Company. If President can not fulfill his obligations for
some reason, Vice president shall take his responsibilities
temporarily.
29.3 President and Executive Vice President shall work closely on the
important decisions of the Joint Venture Company. If a disagreement
occurs, President has the right to select the final decision.
30. THE CONCURRENT POSITION OF THE COMPANY EXECUTIVES
30.1 President, Executive Vice President and other senior
executives shall not take the other executive positions in any other
business companies concurrently. In addition, they shall not be
involved in any other activities with any other companies or
organizations which have the similar business.
31. BRIBES, CORRUPTION AND OTHER INAPPROPRIATE ACTIVITIES
31.1 The Board has the right to dismiss President, Vice President
and CFO at any time if their inappropriate activities have been
found. For the Joint Venture Company employees, President has the
right to dismiss them if their inappropriate activities have been
found.
CHAPTER 11. LABOR MANAGEMENT
32. THE MANAGEMENT OF EMPLOYEE AND WORKERS
32.1 The rules concerning employment, recruitment, dismissal of
employees of the Joint Venture Company and their salary, welfare,
benefits, labor insurance, labor protection, labor discipline and
other matters shall be specified by the Board of Directors in
accordance with the "Regulations of
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the PRC Labor Management in Foreign Investment Enterprises" and its
implementation rules.
33. EMPLOYMENT CONTRACT
33.1 The Joint Venture Company shall sign the contract with the Joint
Venture Union and individual employees. The Employment Contract
shall include the salary, welfare, benefit, labor insurance, labor
protection, labor discipline, dismissal, reward and job description,
etc. The copies of such contract shall be submitted to local labor
administration department for file.
33.2 The salary of the Joint Venture employees will be under the
principle of "same position same payment". Under such principle,
the salary and welfare of the foreign employees and the employees
from U. S. appointed by Party B shall be decided based on the Sino-
foreign Joint Venture foreign employee's basic standard.
CHAPTER 12. UNION
34. THE SET UP OF THE JOINT VENTURE COMPANY UNION
34.1 The Joint Venture employees have the right to set up a Union and
hold various activities under the "PRC Union Law".
34.2 The Union's leader shall represent the interest of
the Joint Venture employees. Its responsibilities include: to
protect Joint Venture employees' material benefits and their
democratic rights; to assist the Joint Venture to set up its
welfare fund; to organize various activities for the Joint Venture
employees in the field of politics, business, science, technology,
entertainment, sports, etc.; to train the employees to obey various
employment regulations; and to fulfill various business
responsibilities appointed by the Joint Venture Company.
35. OBLIGATIONS
35.1 The Union's leader shall represent each individual employee to sign
the Employment Contract with the Joint Venture Company. The Union's
leader shall also participate in the Joint Venture's Board
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meeting and bring employees' opinions to the Board.
35.2 To mediate the quarrel between the Joint Venture employees.
36. FEE
36.1 Each employee shall contribute 2% of his/her monthly
salary to the Joint Venture Union. Such fee will be used
under the supervision of relevant Chinese laws and
regulations.
CHAPTER 13. TAX, FINANCE AND AUDITING
37. ACCOUNTING AND TAX
37.1 The Joint Venture's accounting activities shall be conducted under
the relevant Chinese laws and regulations. The financial statement
of the Joint Venture Company shall be made in accordance with "PRC
Foreign Investment Enterprise Accounting System".
37.2 Joint Venture Company shall pay taxes pursuant to the relevant
Chinese regulations. In addition, the Joint Venture employees shall
pay income tax to the State under the "Individual Income Tax Law of
the PRC".
38. CURRENCY
38.1 RMB shall be used as the standard currency for the Joint Venture
Company's daily business and accounting. US dollar will be used to
record the registered capital. The Joint Venture's foreign currency
debt, income and expense shall be recorded pursuant to its actual
currency. The conversion of RMB to foreign currency or from any
foreign currency to RMB shall be conducted based on the exchange
rate on each transaction date issued by China Foreign Currency
Management Bureau.
38.2 The difference of the actual currency amount caused by increase and
decrease of the foreign currency exchange rate shall be recorded in
the Company's annual financial report.
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39. FINANCING MODEL
39.1 The Joint Venture's quarterly and annual asset liability statement
and other annual financial report shall be prepared in Chinese and
submit to Party A, B and other relevant authorities for their
approval. The financing model can also be translated into Chinese
and submit to Party B if required.
40. ACCOUNTING AND AUDITING
40.1 The Company shall allow an independent reputable accounting firm
(registered in China) nominated by the Joint Venture Company, access
to relevant sections of such accounts and records for the sole
purpose of verifying the Joint Venture Company's fee and payment
arrangements. The accounting report shall submit to the Board
meeting for approval.
40.2 Party A and B have the right to invite an accountant to check
the Company's accounting book at any time at its own expenses.
The Joint Venture Company and its employee shall provide the
necessary assistance and convenience for that accountant.
41. FISCAL YEAR
41.1 The fiscal year of the Joint Venture Company shall be from January 1
to December 31. However, the first fiscal year shall start from the
date of obtaining the Business License to Dec, 31. All accounting
reports shall be written in Chinese.
42. BANK ACCOUNT
42.1 After getting the Business License, the Joint Venture Company
shall open its foreign currency bank account and RMB bank account at
Bank of China or other assigned banks under the relevant regulations
and laws of PRC. In addition, the Joint Venture Company can also
open its foreign currency bank account or RMB bank account abroad,
including Hong Kong and Macao subject to the approval from China
Foreign Currency Management Bureau.
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43. FOREIGN CURRENCY LAW
43.1 All Joint Venture Company's activities regarding the foreign
currency business shall comply with and carry out the relevant laws
and regulations issued by Chinese government.
44. THE USAGE OF THE FOREIGN CURRENCY
44.1 The Joint Venture's foreign currency shall be used in the following
activities:
(1). To purchase the import materials for the Joint Venture
Company.
(2). To pay the capital and interest of a foreign currency loan.
(3). To pay the expenses of technical service from abroad.
(4). To pay the possible distributable profit.
45. WIRE TRANSFER OF FOREIGN CURRENCY
45.1 The Joint Venture Company can wire the foreign currency to an
abroad bank account only under the following conditions: to wire the
Company profit to Party B; to pay the expenses of technical service
from abroad; to pay the interest and capital of a foreign currency
loan; to get the approval from China Foreign Currency Management
Bureau.
CHAPTER 14. PROFIT DISTRIBUTION
46. PROFIT DISTRIBUTION
46.1 The parties agree that all of the net after tax profits and
setting up saving fund, employee reward fund or other company
business fund (hereinafter called "distributable profit"), funds
established in accordance with the laws of the PRC shall be
distributed to the parties pursuant to the Board resolution. The
Joint Venture Company's profit shall be handled in accordance with
the following provisions:
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(1). The Joint Venture Company shall not increase the capital to
make up the deficit because of the lose in the first half
year.
(2). Before making up the deficit for the first half year, both
parties can not distribute the Joint Venture Company's profit.
(3). Subject to the Board decision, the Joint Venture shall
distribute the distributable profit at least once a year
within 90 days after the end of the fiscal year. Such profit
will be shared by Party A and B pursuant to Clause 10 set out
in this Contract and subject to the share ownership ratio at
the time of such distribution.
(4). The Joint Venture Company shall assist Party B to exchange the
profit from RMB to the foreign currency. If the Joint Venture
Company is unable to exchange the whole or partial amount of
the profit to foreign currency for some reasons, this amount
of profit can be kept in Joint Venture Company until such
exchange is available. The exchange rate from RMB to foreign
currency shall be based on each day's interest rate issued by
PRC Foreign Currency Administration Bureau.
CHAPTER 15. TERM
47. TERM
47.1 The Parties agree that the Joint Venture Company shall continue
for a term of 20 years from the date of registration of the Joint
Venture Company.
47.2 The Board meeting shall decide the extension or the change of the
term of the Joint Venture Company and shall submit its decision to
the relevant Chinese authority for approval one year before the
termination of the Joint Venture Contract.
CHAPTER 16. TERMINATION
48. TERMINATION
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48.1 If one of the following events occurs, Party A and B shall have the
right to terminate the Joint Venture Contract within 60 days and
shall submit to the Board for approval. Meanwhile, an application
to terminate the contract shall also be provided to the relevant
authority:
(1). The Joint Venture Company has suffered the
serious loses continuously for five years, and still no
important and efficient decision has been made to save such
lose after 60 days receiving the financial report, or after
mutual negotiation, both parties fail to find an efficient way
to continue the operation.
(2). If Party A or B violates the regulations under clause 17 and
19 of this Contract.
(3). If an event of Force Majeure occurs under clause 55 of
this Contract.
(4). To merge the Joint Venture Company with another business
entities, and therefore the Joint Venture Company does not
exist any more.
(5). If one Party goes bankruptcy.
(6). If both parties agree that the Joint Venture Company can not
achieve its original goal due to some other reasons.
(7). Both parties agree to terminate this Contract.
(8). If the Joint Venture Company has to change its contract,
regulations, the technical service contract and other related
important documents unreasonably because of the order from
the government, and such change will obviously prevent the
development of the Joint Venture Company.
48.2 If one of the above-mentioned events occurs, and both parties can
not get a mutual agreement, the Party who agrees to continue the
business shall purchase the registered capital from the other Party
who wants to terminate the Joint Venture Contract.
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48.3 The Board of Directors shall take every possible measures
including to suspend the business if the Joint Venture has not got
the approval from the relevant authority within 90 days under the
condition of Clause 48.1.
49. CLEARING COMMITTEE
49.1 The Board of Directors shall form a Clearing Committee to
handle the termination of the Joint Venture Company business, and
all such activities shall be conducted under relevant Chinese laws
and regulations. The members of the Clearing Committee shall be
selected from the directors. If the director can not take such
responsibilities for some reasons, the Joint Venture Company shall
appoint its accountant or lawyer (registered in China) to be
involved in such activities. The Clearing Committee shall be
responsible to provide a whole set of Joint Venture Company's
capital and liability financial report, and to sell the Joint
Venture Company based on the fair market price. The Clearing
Committee shall also try their best to sell the Joint Venture
Company at its highest price in China or abroad in foreign currency
if possible.
50. DISMISSAL AND CLEARANCE
50.1 Pursuant to the Clause 48 of this contract, the clearance of the
Joint Venture Company shall be conducted under the following
methods: after selling the Joint Venture Company and handling the
other Joint Venture capital matters, the Joint Venture shall pay (a)
the clearance fee, (b) employee's salary, insurance and other
welfare, (c) taxes and (d) the Joint Venture debts. The rest of the
Joint Venture capital shall be distributed to both parties in
accordance with the share ratio under Clause 10 of this contract.
50.2 Under the conditions set out in Clause 50.1, the capital distributed
to Party B shall be in cash, and shall first consider to pay back in
foreign currency. The exchange rate of such amount of foreign
currency shall be based on the rate issued by China Foreign Currency
Management Bureau at the same day.
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CHAPTER 17. VIOLATION OF THE JOINT VENTURE CONTRACT
51. DISMISSAL OF THE CONTRACT
51.1 One Party has the right to apply for the termination of the Joint
Venture Contract from the relevant state authorities if the Joint
Venture Company can not continue its business because of violation
of this Contract caused by Party A or B, and such violation has not
been corrected within 30 days after a written notice has been issued
from other Party.
52. VIOLATION AND LOSE
52.1 If one Party does not fulfill its obligations set out in this
Contract, or if one Party violates some of the provisions of this
Contract, and such violation causes the loses to the other Party,
the other Party then has the right to ask for a compensation.
52.2 Party A or B shall not be responsible for the expect profit,
indirect lose and deriving lose caused by one of the other Parties.
52.3 Subject to Clause 10 of this Contract, if Party A or B has not
infused the capital into the Joint Venture Company, such Party shall
pay the violation fee to the Joint Venture Company based on a 15%
annual interest rate.
52.4 The violation fee mentioned in Clause 52.3 is not related to the
registered capital and share ownership ratio of the Company.
CHAPTER 18. OTHER CONTRACTS
53. OTHER CONTRACTS
53.1 Subject to the requirement of the Joint Venture business, Party
A and B may sign the following contracts with the Joint Venture
Company from the date of obtaining Business License.
(1). The Technical Service Agreement under Clause 18.
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(2). The Technical Training Agreement for the Joint Venture
Employees.
CHAPTER 19. OTHERS
54. CHANGE OF THE JOINT VENTURE CONTRACT
54.1 The change of the Joint Venture contract shall be
effective upon receipt of the signatures from both parties, and
shall submit such changes to the relevant authorities for approval.
54.2 If there is any difference between the Joint Venture Contract
and the Joint Venture's other regulations, this Contract shall be
the only standard.
55. FORCE MAJEURE
55.1 The obligations of a Party shall be suspended if at any time its
performance is prevented by any cause beyond its reasonably control
including acts of war, riots, strikes, labor disputes, fires,
floods, storms, earthquake or other natural disasters and any other
event which that party could not foresee at the time of executing
this Contract and its occurrence and consequences can not be avoided
and can not be overcome. The Party whose obligations are suspended
by reason of any such event shall promptly submit the notarized
certificate or the first class new report stating the nature of the
suspension, the reasons and the expected duration.
55.2 Both parties shall negotiate and decide the termination and
extension of the Joint Venture contract or other related matters
caused by the event of Force Majeure.
56. INSURANCE
56.1 The Joint Venture Company shall select a Chinese Insurance Company
to obtain appropriate insurance cover. The type, price and time of
the insurance shall be decided in accordance with the regulations of
the insurance company in China. If some type of insurance can not
be covered by the insurance company in China, the Joint Venture
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Company may buy it abroad subject to the Board's decision.
57. CHANGE OF THE LAW
57.1 If the performance of the Joint Venture Company has been prevented
by the change of the governing law or government in China and the
United States or other causes beyond its reasonable control, Party A
and B have the right to change or terminate this Contract.
58. GOVERNING LAW
This Contract shall be governed by and interpreted in accordance with the
Laws of PRC.
59. ARBITRATION
59.1 Any dispute and lose compensation arising out of this Contract
shall to the fullest extent possible be settled amicably by
negotiation and discussion between the Parties.
59.2 Any such dispute not settled by amicable agreement shall be
submitted to an Arbitration Organization for arbitration. When
Party A initiates an action, Party A will appoint the arbitration
association selected by Party B, and when Party B initiates an
action, Party B will appoint the arbitration association selected by
Party B for arbitration. The International Business Arbitration
Association shall conduct the arbitration under each party's
regulation of arbitration. There shall be three arbitrators of whom
one each shall be appointed by each Party and the third arbitrator
by each Party's Commission. The third arbitrator can neither be
Chinese nor American. Any decision taken by the arbitrators will be
final, binding and conclusive.
59.3 Both Parties shall pay their cost of arbitration separately. The
cost paid to the arbitration organization shall be shared by both
parties.
59.4 During the process of arbitration, the Joint Venture Company's
daily business shall be operated continuously, except for the
dispute part currently under the arbitration.
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60. THE LANGUAGE OF THE JOINT VENTURE CONTRACT
60.1 The Joint Venture Contract shall have six copies. Each Party
holds one copy. Two copies shall be sent to the relevant authority.
The rest of the copies shall be kept in the Joint Venture's file.
60.2 The Joint Venture Contract is written in both Chinese and
English, and shall take the Chinese version as the standard.
61. EFFECTIVE DATE OF THE CONTRACT
This Joint Venture Contract will be effective from the date of getting the
approval from Foreign Economic and Trade Ministry of PRC.
62. NOTICE
62.1 Any notices or communications to be given under this Contract
shall be sent by either telegram, telex or facsimile transmission.
Any notices or communications relating to the important business on
Joint Venture partner's obligations, profits and responsibilities
shall be sent by registered post. The addresses for service of each
Party shall be those addresses previously notified to the other
Party. The notice shall be effective from the receipt date of such
post.
62.2 Any notices or communications mentioned in Clause 62.1 shall be
written in Chinese or English.
63. OTHER COSTS
63.1 Party A and B shall be responsible to its own cost relating to the
negotiation, preparation and signature of this Contract, including
legal service fee.
63.2 After signing the Joint Venture Contract, any cost relating to the
establishment of the Joint Venture Company can be put into the Joint
Venture Company's preparation budget.
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64. THE RELATIONSHIP OF THE TWO PARTIES
64.1 Party A and B shall fulfill its own obligations and
responsibilities set out in this Contract, and have no right to
represent the other Party to fulfill its obligations.
This Contract has been signed at Avic's Headquarters in New York City, USA, by
the representatives from Party A and B.
Party A: Beijing CATCH Communication Group Co.
By: /s/ Chen Li
------------------------------------
Name: Chen Li
Title: Chairman
Party B: AVIC Group International, Inc.
By: /s/ Michael J. Lim
-------------------------
Name: Michael J. Lim
Title: Executive Vice President - Operations
Chief Financial Officer
June 11, 1996
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THE JOINT VENTURE
CONTRACT
(HEBEI UNITED TELECOMMUNICATION
EQUIPMENT COMPANY AND NTT)
DECEMBER 22, 1995
<PAGE>
CHAPTER 1: PRINCIPLE
Subject to the principle of fair profit sharing and cooperation for development,
and pursuant to the Law of PRC on Sino-Foreign Joint Venture ("Joint Venture
Law") and the Implementation Regulation of the PRC on Sino-Foreign Joint
Ventures ("JV Implementation Regulation") and other relevant Chinese regulations
and laws, China Hebei United Telecommunication Equipment Company and Japan NTT
International Corporation agree to enter into a Joint Venture contract. The
contract have been signed on December 22, 1995 at Shijiazhuang, PRC.
CHAPTER 2: JOINT VENTURE PARTIES
1. THE JOINT VENTURE PARTIES
Party A:
Name: Hebei United Telecommunication Equipment Company
Address: No. 2 Jichang Road
Shijiazhuang, Hebei Province
The People's Republic of China
Organization: A limited liability corporation established
in People's Republic of China in accordance
with the Chinese Laws.
Legal Representative: Ye Yun Yun
Position: Chairman
Nationality: Chinese
Party B:
Name: NTT International Corporation
Organization: A corporation established in Japan
Address: ________________
Legal Representative: __________________
Position: ____________________
Nationality: Japanese
2. LEGAL ABILITY
2.1 Party A and B both guarantee the following:
(1). Party A is legally established in Shijiazhuang, Hebei Province,
the People's Republic of China, and Party B is legally formed in
Tokyo, Japan.
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(2). Party A and B have the complete right to negotiate and fulfill
the responsibilities and obligations set out in this Contract.
(3). The signatories of Party A and Party B have the right appointed by
both parties to execute this contract.
CHAPTER 3: ESTABLISHMENT OF THE JOINT VENTURE COMPANY
3. ESTABLISHMENT OF THE JOINT VENTURE COMPANY
3.1 Party A and B agree to form and incorporate a Sino-Foreign Joint
Venture Company with limited liability ("The Joint Venture Company")
in the PRC on the terms and conditions approved by certain
authorities. The Joint Venture Company will be established under the
Joint Venture Law and the Joint Venture Implementation Regulations.
All important decisions and documents related to the Joint Venture
business shall be approved by the Joint Venture Company first before
submitting to the relevant authority for approval.
4. THE JOINT VENTURE COMPANY
4.1 The Name of the Joint Venture Company
The Chinese name of the Joint Venture Company shall be
____________________________. The Japanese name of the Joint Venture
Company shall be ___________________, and the English name of the
Joint Venture Company shall be Hebei United Telecommunications
Engineering Development Company Ltd. The legal location of the Joint
Venture Company is at Shijiazhuang, Hebei Province, PRC.
The Joint Venture Company must be registered at Industry and Commerce
Administration and Management Bureau.
4.2 Without a written agreement, both parties can not use their parent
company's trademark and logo at any time.
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5. LAW
5.1 The Joint Venture Company's activities in China must fully comply
with all the relevant laws, regulations in China and the provisions
set out in this contract.
6. ORGANIZATION:
6.1 The Joint Venture Company will be a limited liability company for the
purpose of the Company Law of the PRC. Both parties shall undertake
the liability of the Joint Venture Company subject to its investment
amount. Both parties agree that the Joint Venture Company's
investment will be a full business exercise designed to share both
risks, rewards and loses based on its share ownership ratio in the
registered capital between the partners.
CHAPTER 4: BUSINESS OBJECTIVE AND SCOPE
7. BUSINESS OBJECTIVE OF THE JOINT VENTURE COMPANY
Both parties agree that the business objectives of the Joint Venture
Company are to strengthen in business cooperation and technology
development and exchange; to apply advanced telecommunications technology
and efficient management skills; to improve technical standard of
telecommunications industry in order to make competitive products in
Chinese market in both price and quality; and to reach both economic and
social goals that are satisfactory to all parties.
8. THE SCOPE OF THE JOINT VENTURE COMPANY
8.1 The Joint Venture Company agrees to provide the following services:
manufacture, development, sales and services of the telecommunications
equipment and products; construction, consultation and other services
relating to the telecommunications projects and other related
businesses.
CHAPTER 5. TOTAL INVESTMENT CAPITAL, REGISTERED CAPITAL, AND SHARE RATIO OF THE
JOINT VENTURE PARTNERS
9. TOTAL INVESTMENT CAPITAL AND REGISTERED CAPITAL
9.1 The total investment capital of the Joint Venture Company will be
$6MM.
9.2 The registered capital of the Joint Venture Company.
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will be $3MM.
10. SHARE RATIO
10.1 The registered capital of the Joint Venture Company will be $3MM, of
which Party A will contribute $1.53MM and Party B will contribute
$1.47MM. The share ratio of the parties in the Joint Venture Company
shall be 51% owned by Party A and 49% by Party B.
11. THE AMOUNT AND TERM OF THE CAPITAL PAYMENT
11.1 Both parties shall infuse capital in accordancewith the following
method after obtaining a Business License from the state authority:
----------------------------------------------------------------------
Party Amount Time
----------------------------------------------------------------------
A Equivalent to $1.53MM (The foreign 50% of the total amount
currency exchange rate shall be shall be wired to the
based on each day's closing rate account within 15 days
and shall be evaluated by the after getting the
certified public accounting agency business license. The
and approved by Party B) balance shall be wired
within 30 days.
----------------------------------------
B $1.47M
----------------------------------------------------------------------
11.2 The investment capital shall be wired to the bank account in
accordance to Clause 42 of this Contract.
12. CERTIFICATE OF INVESTMENT
12.1 The investment payment from Party A and B shall be certified by a
registered public accountant. After receiving a satisfactory
certificate recording such investment, the Joint Venture Company will
issue the Certificate of Investment, including the amount and share
ownership of the registered capital, signed by the Chairman and Vice
Chairman of the Joint Venture Company to Party A and B.
13. THE USAGE OF THE INVESTMENT
13.1 None of Party A, Party B or any other parties have
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the right to use the investment capital infused to the bank account
according to Clause 11.2 without the Board's decision of how to use
such investment. However, the funds which will be used during the
Joint Venture preparation period shall be paid by the Joint Venture
Company subject to the approvals from both Parties.
14. TRANSFER OF CAPITAL
14.1 Except for Clause 14.3, Party A and Party B may, as either Party
wishes transfer, in whole or part, its shares of the Joint Venture
Company to a third Party with prior written notice to the other
Parties and approval from the relevant authorities. Party A or B
shall make the decision within 90 days of receiving the written
notice.
14.2 If either Party A or Party B wishes to transfer its whole or
partial shares, such Party shall first offer the share to the other
Party of the Joint Venture Company for purchase. The other Party
shall submit a written notice to declare its decision of purchasing
those shares within 90 days. If the other Party does not submit its
decision within 120 days, or this Party has first offered partial
share to the other Party of the Joint Venture Company, any
unsubscribed shares may then be offered to a third Party at a price
not less than the price offered to the other Joint Venture Party.
14.3 Both Parties may transfer its whole or partial shareholding to their
parent companies during the term of this Contract in accordance with
Clause 47. However, the relevant government approvals must be
submitted to execute such transfer.
14.4 After the Party transferring its whole or partial shares to a third
Party, such third Party shall abide by the terms of this Contract and
perform and discharge all of its obligations of this Contract and
share its rights as well. In addition, certain provisions in this
Contract shall be revised pursuant to the change in the shareholding
ratio.
14.5 The transfer will not be effective if one of the Party violates
any provisions set out in this contract.
15. THE INCREASE OF THE REGISTERED CAPITAL
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15.1 The registered capital (Clause 9) may be increased from time to time
subject to approval of the Board of Directors of the Joint Venture
Company. The contribution from both parties to increase the
registered capital pursuant to the initial funding plan shall be pro
rata in accordance with the share ratio of each Party (Clause 10) at
the time of such capital increase. If one Party declines to increase
the registered capital, the other Party then has the priority to
increase the whole or a portion of the amount of the increase in
registered capital which is rejected by the other Party. The
obligations of each Party shall also be adjusted pursuant to the new
share ownership ratio. In addition, Party A and B have the right to
ask a third Party to increase the registered capital upon receipt of a
written agreement between the Joint Venture parties and subject to
obtaining the relevant PRC governmental approvals.
16. MORTGAGE:
16.1 Party A and B shall not use their portion of the Joint
Venture Company's investment capital as any kind of mortgage or
guarantee.
CHAPTER 6: RESPONSIBILITIES OF PARTY A AND B
17. RESPONSIBILITIES OF PARTY A AND B
17.1 The parties shall contribute, where necessary in accordance with the
Joint Venture Company's Business Plan and upon such terms and
conditions as may be agreed with the Joint Venture Company, to the
general business development of the Joint Venture Company by
fulfilling the following responsibilities:
A. Party A shall:
(1). Provide the registered capital based on the share ratio
pursuant to Clause 11 of this Contract.
(2). Assist the Joint Venture Company in its fund raising,
and to obtain investment capital at favorable terms and
conditions.
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(3). Provide necessary assistance to exchange foreign currency to
RMB or to exchange RMB to foreign currency.
(4). Obtain all necessary approvals and permits from the
competent authorities of the PRC, including, but not limited
to, establishment and registration of the Joint Venture
Company, and all other approvals or permits necessary for
the proper conduct of the Joint Venture Company's business
and endeavor to obtain preferential treatment for the Joint
Venture Company.
(5). Assist in the construction of public utilities, such as
water, electricity and gas, the connection of the telephone
and fax lines and provide the material transportation.
(6). Purchase and rent the required equipment, machinery, raw
material, cars, communication equipment and others which
shall be bought in China in accordance with the agreement by
both parties.
(7). Assist the Joint Venture Company with customs clearance for
import and export of equipment and products and obtain entry
permits, visas, work permits, travel permits and all other
approvals for expatriate personnel of the Joint Venture
Company and obtain suitable accommodation for expatriate
personnel.
(8). Provide necessary assistance for recruiting executives,
technicians, workers and other employees in China. In
addition, it shall help its employees to settle their
accommodation if necessary.
(9). Provide the information of China market to the Joint Venture
Company and develop a domestic market for the Joint Venture
Company.
(10). Provide documents and information relating to the Chinese
economy, investment and marketing and also relevant
documents relating to Chinese policy, law, regulation, tax
system, accounting system and others.
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(11). Obtain all necessary approvals, registration and licenses
from the competent Chinese authorities required for the
establishment of the Joint Venture Company.
(12). Obtain the approvals for the Joint Venture Company to use
land from the Land Administration Authority.
(13). Organize the construction and design of the Joint Venture
Company building.
(14). Handle all other matters appointed by the Joint Venture
Company and agreed to by Party A.
B. Party B shall:
(1). Provide the registered capital based on share ratio
according to Clause 11 set up in this Contract.
(2). Assist the fund raising for the Joint Venture Company
outside China and guarantee that the money be transferred to
the Joint Venture account pursuant to the Business Plan. The
interest rate of such fund shall not be too high and loan
provided by Party B to Party A shall not be at usurious
rates.
(3). Obtain all necessary approvals and permits from the
competent Japanese authorities required for the
establishment of the Joint Venture Company.
(4). Purchase and rent the necessary equipment, machines,
materials, cars, communication and office equipment which
shall be purchased abroad by Party B and agreed by both
Parties.
(5). Assist the Joint Venture Company with customs clearance for
import/export of equipment and products (including all
necessary export permits), obtain entry permits, visas, work
permits, travel permits and all other approvals for
expatriate personnel of the Joint Venture
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Company and obtain suitable accommodation for expatriate
personnel.
(6). Provide necessary assistance for recruiting executives,
technicians and other employees in Japan.
(7). Provide the documents and information relating to the
Japanese economy, investment and marketing, and also the
relevant documents about Japanese policy, law, rules, tax
system, accounting system, etc.
(8). Provide advanced technology to the Joint Venture Company
and appoint its technicians to support the Joint Venture
Company's projects.
(9). Provide technical training for the Joint Venture Company's
employees in accordance with the technical training contract
signed by the Joint Venture Company and Party B.
(10). Handle all other matters appointed by the Joint Venture
Company and agreed by Party B.
CHAPTER 7: TECHNICAL ASSISTANCE TO THE JOINT VENTURE COMPANY
18. TECHNICAL SERVICE
18.1 When it is necessary, the Joint Venture Company has the right to
enter into a Technology Service Agreement with Party B or any
other third Party based on the agreement of both parties.
19. CONFIDENTIALITY
19.1 It is agreed that all information generated pursuant to
the terms of this Contract is confidential and neither Party
shall, except with the written consent of the other Party,
disclose or release such information to any third Party.
19.2 Party A and B shall ask their executives and all other
employees to understand the importance of confidentiality for the
Company. All employees shall sign the Confidentiality Agreement
when they join the Joint Venture Company.
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CHAPTER 8: PURCHASE OF EQUIPMENT AND MATERIAL
20. PURCHASE OF RAW MATERIALS, EQUIPMENT AND MACHINES
20.1 The Joint Venture Company shall determine if the necessary
equipment, materials, fuel, transportation equipment and office
equipment shall be purchased in China or abroad. However, if the
quality, quantity, performance, delivery, and after-sale service
of a foreign product are comparable to a Chinese product, the
Joint Venture shall first consider purchasing the product in
China. If Party B has to purchase equipment abroad for the Joint
Venture Company, Party A shall be involved in such purchasing if
necessary.
CHAPTER 9: BOARD OF DIRECTORS
21. OBLIGATIONS OF BOARD OF DIRECTORS
21.1 The Board of Directors of the Joint Venture Company is the
authoritative organ of the Joint Venture Company and shall be fully
responsible for the entire business of the Joint Venture Company.
22. ESTABLISHMENT OF THE BOARD OF DIRECTORS
22.1 The Joint Venture Company's Board of Directors will be established on
the day a Business License is granted to the Joint Venture Company.
23. COMPOSITION OF THE BOARD AND THE TERM OF EACH DIRECTOR
23.1 The Board of Directors shall consist initially of seven members, one
Chairman and one Vice Chairman. Four directors will be appointed by
Party A and three directors will be appointed by Party B. The
Chairman of the Board shall be appointed by Party A. The Vice
Chairman shall be appointed by Party B. The term of Chairman, Vice
Chairman and directors shall be four years and these positions may be
re-appointed consecutively if necessary. The term of the Chairman and
Vice Chairman shall begin from the date a Business License is granted
to the Joint Venture Company to the closing date of the Board meeting
which will discuss the financial statement for the 4th fiscal year of
the Joint Venture Company. During the term of the directors, if such
matters as death, resignation, retirement or inability to fulfill the
job occurs, the Party who appoints such director shall select a
replacement as soon as possible. The replacement director shall serve
out the term of his predecessor.
23.2 If one Party wants to change the director, a written notice shall be
submitted to the BOD meeting within 30 days.
23.3 The Chairman, Vice Chairman and directors will
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receive no salary from the Joint Venture Company. If any of the
Chairman, Vice Chairman or directors hold the titles of the President,
Executive Vice President or Vice President of the Joint Venture
Company, they shall receive compensation from the Joint Venture
Company for fulfilling the duties of these executive positions, but no
extra money shall be paid to them for their directorships.
24. BOARD:
24.1 The Board shall be responsible for formulating and implementing the
general policy of the Joint Venture Company. If any decision of the
Board of Directors is in compliance with applicable Chinese laws, then
no third Party shall be involved in such decision.
24.2 The Chairman is the legal representative of the Joint Venture Company.
If the Chairman can not fulfill his obligations for some reason, the
Vice Chairman or another director shall temporarily assume his
responsibilities.
25. BOARD MEETING
25.1 Board meetings shall be held at the Joint Venture Company's offices at
least twice a year and shall be hosted by the Chairman. Meetings of
the Board of Directors may be held at other locations subject to the
agreement of Chairman and the Vice Chairman. If two or more directors
submit a written notice to the Chairman and suggest the Chairman to
issue a written notice for a temporary Board meeting 30 days before a
scheduled Board meeting, the Chairman must agree to hold such
temporary Board meeting. However, any proposals within 30 days before
the Board meeting will be valid upon the agreement of all directors.
25.2 A written notice with details of agenda and papers supporting the
items on the agenda shall be given to all directors 30 days before the
Board meeting. Upon receipt of the agenda and prior to the meeting,
the directors may consult with each other on any items on the agenda.
25.3 If 2/3 of the directors attend the Board meeting, such Board meeting
shall be considered as legally effective. If one director can not be
in the meeting for some reason, he can appoint his representative to
attend the meeting with a written notice, and his representative shall
have the same right to vote the decisions of the Board meeting. If a
decision is made at a Board meeting with insufficient director
attendance, such decision shall have no legal force.
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25.4 All costs associated with attending Board meetings by director,
including travel and accommodations and all costs incurred by
Directors in attending to the business of the Joint Venture Company
shall be reimbursed by the Joint Venture Company.
25.5 All meetings of the Board shall be conducted in either Japanese or
Chinese provided that adequate translation is made available during
the meeting in other relevant languages. All minutes of the meetings
of the Board of Directors shall be prepared and recorded in the
Japanese and Chinese languages. If there is any difference between
the two versions, the Chinese version shall be taken as the ruling
version.
26. RESOLUTIONS OF THE BOARD OF DIRECTORS
26.1 Except for clause 26.2 and 26.3, a Board of Directors resolution will
become effective upon receiving approval from 1/2 of the directors
present at any meeting.
26.2 The following matters require approval from at least 2/3 of the
directors in attendance at any meeting to become effective:
(1). Approval of the long-term, short-term and annual business plan,
equipment investment, product sales and employment arrangements,
etc.
(2). Decision on the changes of annual budget plan, payment of any
expenditure in excess of the amount approved in the budget and
payment of liabilities. However, if the budget amount is less
than RMB1 million and not over 20% of the budget plan, or if the
budget amount is over RMB1 million and not over RMB500,000,
President and Vice president can make the decision without any
restriction but must report to the Board afterwards.
(3). Approval of the annual business plan, financial report and annual
budget plan.
(4). The declaration or payment of any profits or dividend
distribution to the shareholders.
(5). Approval to raise investment capital.
(6). The approval of the annual or semi-annual financial report.
(7). Approval of significant changes in the Joint Venture Company's
management organizational structure.
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(8). Any significant changes on the Board's regulation, accounting
system, operation expenses, cash control regulation or any other
Joint Venture internal regulations.
(9). Any changes in Employment Contracts and the Employee's Handbook.
(10). Any decisions regarding the salary, welfare and reward of the
President, the Vice President, Joint Venture Company
Executives and other employees.
(11). The appointment or dismissal of the Joint Venture Company's
President, Executive Vice President, Vice President or CFO.
(12). Any capital transfer from other business entities.
(13). Manage and transfer of the Joint Venture Company's partial or
total capital. Set up the Joint Venture Company's mortgage
right and guarantee right.
(14). Establishment or dissolution of any branch company,
subsidiary or agency of the Joint Venture Company.
(15). Approval of any investment, loan or guarantee of $100,000 or
greater.
26.3. The following matters require unanimous approval from the Board of
Directors present at any meeting:
(1). Any change in the Joint Venture Company's article of
incorporation.
(2). Any increase or decrease in registered capital.
(3). Any merger with other business entities.
(4). Dissolution of the Joint Venture Company except as set forth in
Clause 48 and 51 of this Joint Venture Contract.
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27. WRITTEN RESOLUTIONS OF THE BOARD OF DIRECTORS
27.1 Written resolutions of the Board of Directors shall become effective
if approved by all directors. The directors have the right to
approve, object or abstain from any Board resolution.
CHAPTER 10. MANAGEMENT ADMINISTRATION ORGANIZATION
28. PRESIDENT, EXECUTIVE VICE PRESIDENT AND VICE PRESIDENT
28.1 A management administration organization shall be set up under the
supervision of the Board, and such organization shall handle the day-
to-day operation of the Joint Venture Company.
28.2 The management shall consist one President, one Executive Vice
President and one Vice President. President of the Joint Venture
Company shall be recommended by Party A, and Executive Vice President
shall be recommended by Party B. The Board of Directors shall decide
the appointment of President, Executive Vice President and Vice
President of the Joint Venture Company.
28.3 The term of the President, Executive Vice President and Vice President
shall be three years. Reappointment of each position will be
available. If the management changes during the term of the position,
the replacement shall serve out the term of his predecessor.
29. THE OBLIGATION OF PRESIDENT OF THE JOINT VENTURE COMPANY
29.1 In addition to the day-to-day management of the Joint Venture
Company, President shall fulfill the following responsibilities:
(1). To make long-term and annual Business Plan of equipment
investment, product sales and employee arrangement, and submit
such plans to the Board. President shall execute the Board's
resolution on all above-mentioned items.
(2). President shall be responsible for the presentation of the
Business Plan, Budget Plan and financial review for each
succeeding financial year for approval and adoption by the Board
meeting.
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(3). To make capital collection, distribution and investment plan and
submit such plan to the Board meeting.
(4). To make quarterly and yearly financial report and submit it to
the relevant authority upon receiving the approval from Board
meeting. If it is urgent, the Board approval can be received
after submitting to the authority.
(5). To set up management structure and submit to the Board meeting
for approval.
(6). To appoint senior executive positions in the Joint Venture
Company.
(7). To set up the regulations of the Board meeting, accounting
system, expense budget, cash management and all other internal
regulations of the Joint Venture Company, and submit to the Board
meeting for approval.
(8). To make Employment Contract and other regulations regarding the
employment of the Joint Venture Company and submit to the Board
meeting for approval.
(9). To formulate the salary of the Company's executives and other
employees, including welfare and reward, and submit to the Board
meeting for approval.
(10). To appoint and dismiss the employees except for President,
Executive Vice President and CFO.
(11). To set up the plans to establish and dismiss the Joint
Venture Company's branch company, subsidiary and other
agency.
(12). To purchase of the property within certain expense limit
approved by the Board meeting.
(13). To sign the contract with a third Party within his job
responsibilities.
(14). The other responsibilities and obligations appointed by the
Board meeting.
29.2 Executive Vice President and Vice President can be concurrently the
head of each different department except for their daily job to assist
President of
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the Joint Venture Company. If President can not fulfill his
obligations for some reason, Executive Vice president shall take his
responsibilities temporarily.
29.3 President and Executive Vice President shall work closely on the
important decisions of the Joint Venture Company. If a disagreement
occurs, President has the right to select the final decision.
30. THE CONCURRENT POSITION OF THE COMPANY EXECUTIVES
30.1 President, Executive Vice President and other senior executives shall
not take the other executive positions in any other business companies
concurrently. In addition, they shall not be involved in any other
activities with any other companies or organizations which have the
similar business.
31. BRIBES, CORRUPTION AND OTHER INAPPROPRIATE ACTIVITIES
31.1 The Board has the right to dismiss President,Executive Vice President,
Vice President and CFO at any time if their inappropriate activities
have been found. For the Joint Venture Company employees, President
has the right to dismiss them if their inappropriate activities have
been found.
CHAPTER 11. LABOR MANAGEMENT
32. THE MANAGEMENT OF EMPLOYEE AND WORKERS
32.1 The rules concerning employment, recruitment, dismissal of employees
of the Joint Venture Company and their salary, welfare, benefits,
labor insurance, labor protection, labor discipline and other matters
shall be specified by the Board of Directors in accordance with the
"Regulations of the PRC Labor Management in Foreign Investment
Enterprises" and its implementation rules.
33. EMPLOYMENT CONTRACT
33.1 The Joint Venture Company shall sign the contract with the Joint
Venture Union and individual employees. The Employment Contract shall
include the salary, welfare, benefit, labor insurance, labor
protection, labor discipline, dismissal, reward and job description,
etc. The terms and
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provisions of the contract shall be agreed by both Parties.
33.2 The salary of the Joint Venture employees will be under the principle
of "same position same payment". Under such principle, the salary and
welfare of the foreign employees shall be decided based on the
Sino-foreign Joint Venture foreign employee's basic standard.
CHAPTER 12. UNION
34. THE SET UP OF THE JOINT VENTURE COMPANY UNION
34.1 The Joint Venture employees have the right to set up a Union and hold
various activities under the "PRC Union Law".
34.2 The Union's leader shall represent the interest of the Joint Venture
employees. Its responsibilities include: to protect Joint Venture
employees' material benefits and their democratic rights; to assist
the Joint Venture to set up its welfare fund; to organize various
activities for the Joint Venture employees in the field of politics,
business, science, technology, entertainment, sports, etc.; to train
the employees to obey various employment regulations; and to fulfill
various business responsibilities appointed by the Joint Venture
Company.
35. OBLIGATIONS
35.1 The Union's leader shall represent each individual employee to sign
the Employment Contract with the Joint Venture Company. The Union's
leader shall also participate in the Joint Venture's Board meeting and
bring employees' opinions to the Board.
35.2 To mediate the quarrel between the Joint Venture employees.
36. FEE
36.1 Each employee shall contribute 2% of his/her monthly salary to the
Joint Venture Union. Such fee will be used under the supervision of
relevant Chinese laws and regulations.
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CHAPTER 13. TAX, FINANCE AND AUDITING
37. ACCOUNTING AND TAX
37.1 The Joint Venture's accounting activities shall be conducted under the
relevant Chinese laws and regulations. The financial statement of the
Joint Venture Company shall be made in accordance with "PRC Foreign
Investment Enterprise Accounting System".
37.2 Joint Venture Company shall pay taxes pursuant to the relevant Chinese
regulations. In addition, the Joint Venture employees shall pay
income tax to the State under the "Individual Income Tax Law of the
PRC".
38. CURRENCY
38.1 RMB shall be used as the standard currency for the Joint Venture
Company's daily business and accounting. US dollar will be used to
record the registered capital. The Joint Venture's foreign currency
debt, income and expense shall be recorded pursuant to its actual
currency. The conversion of RMB to foreign currency or from any
foreign currency to RMB shall be conducted based on the exchange rate
on each transaction date issued by China Foreign Currency Management
Bureau.
38.2 The difference of the actual currency amount caused by increase and
decrease of the foreign currency exchange rate shall be recorded in
the Company's annual financial report.
39. FINANCIAL CHARTS
39.1 The Joint Venture's quarterly and annual financial charts shall be
prepared in Chinese and submit to Party A, B and other relevant
authorities for their approval. The financial charts can also be
translated into Japanese and submit to Party B if required.
40. ACCOUNTING AND AUDITING
40.1 The Company shall allow an independent reputable accounting firm
(registered in China) nominated by the Joint Venture Company, access
to relevant sections of
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such accounts and records for the sole purpose of verifying the Joint
Venture Company's fee and payment arrangements. The accounting report
shall submit to the Board meeting for approval.
40.2 Party A and B have the right to invite an accountant to check the
Company's accounting book at any time at its own expenses. The Joint
Venture Company and its employee shall provide the necessary
assistance and convenience for that accountant.
41. FISCAL YEAR
41.1 The fiscal year of the Joint Venture Company shall be from January 1
to December 31. However, the first fiscal year shall start from the
date of obtaining the Business License to Dec, 31. All accounting
reports shall be written in Chinese.
42. BANK ACCOUNT
42.1 After getting the Business License, the Joint Venture Company shall
open its foreign currency bank account and RMB bank account at Bank of
China or other assigned banks under the relevant regulations and laws
of PRC. In addition, the Joint Venture Company can also open its
foreign currency bank account or RMB bank account abroad, including
Hong Kong and Macao subject to the approval from China Foreign
Currency Management Bureau.
43. FOREIGN CURRENCY LAW
43.1 All Joint Venture Company's activities regarding the foreign
currency business shall comply with and carry out the relevant laws
and regulations issued by Chinese government.
44. THE USAGE OF THE FOREIGN CURRENCY
44.1 The Joint Venture's foreign currency shall be used in the following
activities:
(1). To purchase the import materials for the Joint Venture Company.
(2). To pay the capital and interest of a foreign currency loan.
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(3). To pay the expenses of technical service from abroad.
(4). To pay the salary of the Joint Venture executives and other
employees appointed by Part B and their living expenses in China.
45. WIRE TRANSFER OF FOREIGN CURRENCY
45.1 The Joint Venture Company can wire the foreign currency to an abroad
bank account only under the following conditions: to wire the Company
profit to Party B; to pay the expenses of technical service from
abroad; to pay the interest and capital of a foreign currency loan; to
get the approval from China Foreign Currency Management Bureau.
CHAPTER 14. PROFIT DISTRIBUTION
46. PROFIT DISTRIBUTION
46.1 The parties agree that all of the net after tax profits and setting up
saving fund, employee reward fund or other company business fund,
funds established in accordance with the laws of the PRC shall be
distributed to the parties pursuant to the Board resolution. The
Joint Venture Company's profit shall be handled in accordance wit the
following provisions:
(1). The Joint Venture Company shall not increase the capital to make
up the deficit because of the lose in the first half year.
(2). Before making up the deficit for the first half year, both
parties can not distribute the Joint Venture Company's profit.
(3). Subject to the Bard decision, the Joint Venture shall distribute
the distributable profit once a year within 90 days after the end
of the fiscal year. Such profit will be shared by Party A and B
pursuant to Clause 10 set out in this Contract and subject to the
share ownership ratio at the time of such distribution.
(4). The Joint Venture Company shall assist Party B
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to exchange the profit from RMB to the foreign currency. If the
Joint Venture Company is unable to exchange the whole or partial
amount of the profit to foreign currency for some reasons, this
amount of profit can be kept in Joint Venture Company until such
exchange is available.
CHAPTER 15. TERM
47. TERM
47.1 The Parties agree that the Joint Venture Company shall continue for a
term of twenty five years from the date of registration of the Joint
Venture Company.
47.2 The Board meeting shall decide the extension or the change of the term
of the Joint Venture Company and shall submit its decision to the
relevant Chinese authority for approval one year before the
termination of the Joint Venture Contract.
CHAPTER 16. TERMINATION
48. TERMINATION
48.1 If one of the following events occurs, Party A and B shall have the
right to terminate the Joint Venture Contract within 60 days and shall
submit to the Board for approval. Meanwhile, an application to
terminate the contract shall also be provided to the relevant
authority:
(1). The Joint Venture Company has suffered the serious loses
continuously for five years, and still no important and efficient
decision has been made to save such lose after 60 days receiving
the financial report, or after mutual negotiation, both parties
fail to find an efficient way to continue the operation.
(2). If Party A or B violates the regulations under clause 17 and 19
of this Contract.
(3). If an event of Force Majeure occurs under clause 55 of this
Contract.
(4). To merge the Joint Venture Company with
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another business entities, and therefore the Joint Venture
Company does not exist any more.
(5). If one Party goes bankruptcy.
(6). If both parties agree that the Joint Venture Company can not
achieve its original goal due to some other reasons.
(7). Both parties agree to terminate this Contract.
(8). If the Joint Venture Company has to change its contract,
regulations, the technical service contract and other related
important documents unreasonably because of the order from the
government, and such change will obviously prevent the
development of the Joint Venture Company.
48.2 If one of the above-mentioned events occurs, and both parties can not
get a mutual agreement, the Party who agrees to continue the business
shall purchase the registered capital from the other Party who wants
to terminate the Joint Venture Contract.
48.3 The Board of Directors shall take every possible measures including to
suspend the business if the Joint Venture has not got the approval
from the relevant authority within 90 days under the condition of
Clause 48.1.
49. CLEARING COMMITTEE
49.1 The Board of Directors shall form a Clearing Committee to handle the
termination of the Joint Venture Company business, and all such
activities shall be conducted under relevant Chinese laws and
regulations. The members of the Clearing Committee shall be selected
from the directors. If the director can not take such
responsibilities for some reasons, the Joint Venture Company shall
appoint its accountant or lawyer (registered in China) to be involved
in such activities. The Clearing Committee shall be responsible to
provide a whole set of Joint Venture Company's capital and liability
financial report, and to sell the Joint Venture Company based on the
fair market price. The Clearing Committee shall also try their best
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to sell the Joint Venture Company at its highest price in China or
abroad.
50. DISMISSAL AND CLEARANCE
50.1 Pursuant to the Clause 48 of this contract, the clearance of the Joint
Venture Company shall be conducted under the following methods: after
selling the Joint Venture Company and handling the other Joint
Venture capital matters, the Joint Venture shall pay (a) the clearance
fee, (b) employee's salary, insurance and other welfare, (c) taxes and
(d) the Joint Venture debts. The rest of the Joint Venture capital
shall be distributed to both parties in accordance with the share
ratio under Clause 10 of this contract.
50.2 Under the conditions set out in Clause 50.1, the capital distributed
to Party B shall be in cash, and shall first consider to pay back in
foreign currency. The exchange rate of such amount of foreign
currency shall be based on the rate issued by China Foreign Currency
Management Bureau at the same day.
CHAPTER 17. VIOLATION OF THE JOINT VENTURE CONTRACT
51. DISMISSAL OF THE CONTRACT
51.1 One Party has the right to apply for the termination of the Joint
Venture Contract if the Joint Venture Company can not continue its
business because of violation of this Contract caused by Party A or B,
and such violation has not been corrected within 30 days after a
written notice has been issued from other Party.
52. VIOLATION AND LOSE
52.1 If one Party does not fulfill its obligations set out in this
Contract, or if one Party violates some of the provisions of this
Contract, and such violation causes the loses to the other Party, the
other Party then has the right to ask for a compensation.
52.2 Party A or B shall not be responsible for the expect profit, indirect
lose and deriving lose caused by one of the other Parties.
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52.3 Subject to Clause 10 of this Contract, if Party A or B has not infused
the capital into the Joint Venture Company, such Party shall pay the
violation fee to the Joint Venture Company based on a 15% annual
interest rate.
52.4 The violation fee mentioned in Clause 52.3 is not related to the
registered capital and share ownership ratio of the Company.
CHAPTER 18. OTHER CONTRACTS
53. OTHER CONTRACTS
53.1 Subject to the requirement of the Joint Venture business, Party A and
B may sign the following contracts with the Joint Venture Company from
the date of obtaining Business License.
(1). The Technical Service Agreement under Clause 18.
(2). The Technical Training Agreement for the Joint Venture Employees.
CHAPTER 19. OTHERS
54. CHANGE OF THE JOINT VENTURE CONTRACT
54.1 The change of the Joint Venture contract shall be effective upon
receipt of the signatures from both parties, and shall submit such
changes to the relevant authorities for approval.
54.2 If there is any difference between the Joint Venture Contract
and the Joint Venture's other regulations, this Contract shall be the
only standard.
55. FORCE MAJEURE
55.1 The obligations of a Party shall be suspended if at any time its
performance is prevented by any cause beyond its reasonably control
including acts of war, riots, strikes, labor disputes, fires, floods,
storms, equthquake or other natural disasters and any other event
which that party could not foresee at the time of executing this
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Contract and its occurrence and consequences can not be avoided and
can not be overcome. The Party whose obligations are suspended by
reason of any such event shall promptly submit the notarized
certificate or the first class new report stating the nature of the
suspension, the reasons and the expected duration.
55.2 Both parties shall negotiate and decide the termination and extension
of the Joint Venture contract or other related matters caused by the
event of Force Majeure.
56. INSURANCE
56.1 The Joint Venture Company shall select a Chinese Insurance Company to
obtain appropriate insurance cover. The type, price and time of the
insurance shall be decided in accordance with the regulations of the
insurance company in China. If some type of insurance can not be
covered by the insurance company in China, the Joint Venture Company
may buy it abroad subject to the Board's decision.
57. CHANGE OF THE LAW
57.1 If the performance of the Joint Venture Company has been prevented by
the change of the governing law or government in China and Japan or
other causes beyond its reasonable control, Party A and B have the
right to change or terminate this Contract.
58. GOVERNING LAW
This Contract shall be governed by and interpreted in accordance with the
Laws of PRC.
59. ARBITRATION
59.1 Any dispute and lose compensation arising out of this Contract shall
to the fullest extent possible be settled amicably by negotiation and
discussion between the Parties.
59.2 Any such dispute not settled by amicable agreement shall be submitted
to the Arbitration Organization. Party A will appoint China
International Economic and Trade Arbitration Commission for
arbitration and Party B will
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will appoint Japan International Business Arbitration Association for
arbitration. There shall be three arbitrators of whom one each shall be
appointed by each Party and the third arbitrator by each Party's Commission.
The third arbitrator can neither be Chinese nor Japanese. Any decision taken by
the arbitrators will be final, binding and conclusive.
59.3 Both Parties shall pay their cost of arbitration separately. The cost
paid to the arbitration organization shall be shared by both parties.
59.4 During the process of arbitration, the Joint Venture Company's daily
business shall be operated continuously, except for the dispute part
currently under the arbitration.
60. THE LANGUAGE OF THE JOINT VENTURE CONTRACT
60.1 The Joint Venture Contract shall have six copies. Each Party holds
one copy. Two copies shall be sent to the relevant authority. The
rest of the copies shall be kept in the Joint Venture's file.
60.2 The Joint Venture Contract is written in both Chinese and Japanese,
and shall take the Chinese version as the standard.
61. EFFECTIVE DATE OF THE CONTRACT
This Joint Venture Contract will be effective from the date of getting the
approval from Foreign Economic and Trade Ministry of PRC.
62. NOTICE
62.1 Any notices or communications to be given under this Contract shall be
sent by either telegram or facsimile transmission. Any notices or
communications relating to the important business on Joint Venture
partner's obligations, profits and responsibilities shall be sent by
registered post. The addresses for service of each Party shall be
those addresses previously notified to the other Party. The notice
shall be effective from the receipt date of such post.
62.2 Any notices or communications mentioned in Clause 62.1 shall be
written in Chinese or Japanese.
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63. OTHER COSTS
63.1 Party A and B shall be responsible to its own cost relating to the
negotiation, preparation and signature of this Contract, including
legal service fee.
63.2 After signing the Joint Venture Contract, any cost relating to the
establishment of the Joint Venture Company can be put into the Joint
Venture Company's preparation budget.
64. THE RELATIONSHIP OF THE TWO PARTIES
64.1 Party A and B shall fulfill its own obligations and responsibilities
set out in this Contract, and have no right to represent the other
Party to fulfill its obligations.
This Contract has been signed at December 22, 1995 in Shijiazhuang, PRC by the
representatives from Party A and B.
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AGREEMENT (1)
--------------
By the consent of all Parties and to perfect the contract signed by both
parties, Hebei United Telecommunication Equipment Company ("Party A") and NTT
("Party B") has further agreed the following provisions:
1. Both Parties agree that the initial deposit of the total capital for the
Hebei GSM project will be RMB 600M.
2. Party B shall be responsible to raise capital for the Joint Venture Company.
The amount of such capital shall be based on the projects selected and
decided by both parties. The initial deposit of the capital shall be
transferred to the joint venture account in 12 days from the date of getting
the Joint Venture Business License.
3. The repayment of Party B's investment shall be no more than 5 years. The
Joint Venture Company shall also be responsible to pay the 1% service charge
or deposit if the loan is obtained through Party B or Party B's bank.
4. Party B shall be responsible to collect all the required funding for the
project construction pursuant to the Joint Venture Contract. However, both
parties agree that Party A shall retain the right to raise the capital, and
the conditions of such a fund raising shall be as same as Party B.
5. Subject to the agreement between both parties, the capital which has already
been infused to Liantong by Party A will be put into Liantong's construction
capital and will be repaid to Party A from the project construction capital
by the Joint Venture Company. The amount of such capital shall be checked
by the Certified Public Accountant.
6. Party B has already wired $1,075,000.00 to the bank account of Hebei
Electronic Commission. Such amount of money will be transferred to the
Joint Venture account as the registered capital after the establishment of
the Joint Venture Company. The registered capital cannot be used as the
project construction capital.
This agreement is the supplement to the Joint Venture contract and will be
effective at the same date of the execution of this contract.
<PAGE>
December 22, 1995 at Shijiazhuang, Hebei Province, PRC.)
Party A: Hebei United Telecommunication Equipment Company signed by Ye Yun Yun
Party B: NTT
signed by _________.
<PAGE>
AGREEMENT (2)
-------------
Party A: Hebei United Telecommunication Equipment Company
Party B: NTT
The total registered capital for the Joint Venture Company
is $3M. Party A will be responsible for 51% of the capital, in which 20% will
be provided by Hebei Municipal Government. Such 20% required capital will be
divided into 2 parts: 8% ($240,000) will be obtained from Party A and the rest
of 12% ($360,000) will be provided by Party B. The conditions are as follows:
1. Party A shall not contact any other companies or negotiate the possibilities
of setting up the joint venture of same kind of business except for Party B.
2. Party B shall not provide any amount of the registered capital to any other
party except the 12% registered capital for Hebei Municipal Government.
3. In addition to the 12% registered capital to Hebei Municipal Government,
Party B will not provide any amount of the registered capital for Party A.
4. The payment to the Municipal Government's share will be negotiated in a
separate agreement.
This agreement will be effective from the date of the execution of the Joint
Venture Contract and is the supplement document to this Contract.
(December 22, 1995 at Shijiazhuang, Hebei Province, PRC.)
<PAGE>
AGREEMENT (3)
-------------
Hebei United Telecommunication Equipment Company ("Party A") and NTT ("Party
B") have agreed to enter into the following agreements:
1. Ito Chu ("Party C") will not participate in any of the responsibilities and
obligations appointed in the Letter of Agreement signed by Party A, B and C
on September 27, 1995. Such responsibilities and obligations will be
transferred to Party B.
2. The Meeting Minutes signed by Party A, B and C on September 27, 1995 will be
ceased from the date of getting Joint Venture Business License.
3. If any provisions in this agreement is not as same as the Joint Venture
Contract, all parties shall use the Joint Venture Contract as the only
standard.
This agreement has been written and signed in Chinese and Japanese, and each
Party gets one copy.
(December 22, 1995 at Shijiazhuang, Hebei Province, PRC)
<PAGE>
AGREEMENT (4)
-------------
Hebei United Telecommunication Equipment Company ("Party A") and NTT ("Party
B") have agreed to enter into the following agreement:
Party B will transfer 40% of the share ownership from its total 49%
share ownership of the Joint Venture Company to Ito Chu (an Osaka
Company), which is equal to 19.6% of the total registered capital.
Party A agrees such transfer.
This agreement will be signed in both Chinese and Japanese, and each Party gets
one copy.
(December 22, 1995 at Shijiazhuang, Hebei Province, PRC)
<PAGE>
AGREEMENT
Party A: Hebei United Telecommunication Equipment Co.
Party B: AVIC Group International, Inc.
Hebei United Telecommunication Equipment Company ("Party A") and AVIC Group
International, Inc. ("Party B") have agreed to enter into the following
agreement:
1. Party A assigned 60.8% (originally owned by CATCH) of its 51% share
ownership of the Joint Venture Company to AVIC Group International, Inc. (a
US subsidiary of Beijing CATCH Communication Group Company), which is equal
to 31% of the total registered capital of the Joint Venture Company.
2. AVIC received 31% of interests in Hebei United Telecommunication
Engineering Development Co. through Party A and paid to Party A the total
amount of US$1.17 million.
3. After receiving its interest, Party B shall agree that the contract signed
between Hebei United Telecommunication Equipment Co. and NTTI shall remain
the same, and Party B shall also abide by the contents of the Joint Venture
contract, as well as the Company Regulation of Hebei United
Telecommunication Engineering Development Co. and other agreements.
4. AVIC Group International, Inc. and Beijing CATCH Communication Group Co.
will work closely with Party A and assist Party A in fulfilling Party A's
responsibilities under the Joint Venture Contract between Party A and Party
B, and AVIC Group International, Inc. and Beijing CATCH Communication Group
Co. will each appoint one director to the Joint Venture Company's Board of
Directors.
This agreement will be signed in Chinese and English, and each Party receives
one copy.
If in the future there is any discrepancy concerning this agreement, the Chinese
version will be the standard.
By signing the above, both Party A and party B indicate their agreement to the
items specified above.
Party A: Hebei United Telecommunications Party B: AVIC Group
Equipment Co. International, Inc.
Signed by: Ye Yun Yun Signed by: Joseph R. Wright, Jr.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE COMPANY
1. ITV Communications, Inc.