<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission file number: 0-22520
AVIC GROUP INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-0873124
-------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
599 Lexington Avenue, 44TH Floor, New York, New York 10022
----------------------------------------------------------
(Address of principal executive offices)
212-319-9160
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the 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 Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (ii) has been subject to such filing requirements for the
past 90 days. Yes X No
----- -----
The number of shares outstanding of the issuer's common stock as of August
13, 1996 was 28,451,982.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
PART ONE
FINANCIAL INFORMATION
ITEM 1. Financial Statements
2
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements at June 30, 1996 and for
the three months then ended are unaudited and reflect all adjustments
which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the
interim period. All of the adjustments are of a normal recurring nature.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
together with management's discussion and analysis of financial
condition and results of operations, contained in the Form 10-KSB filed
by the Company on July 15, 1996. The results of operations for the
three months ended June 30, 1996 are not necessarily indicative of the
results for the entire year ending March 31, 1997.
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.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with general accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, during the
three months ended June 30, 1996, the Company experienced a net loss of
$785,397. In view of this matter, 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 plans
to establish Sino-foreign joint ventures to develop telecommunications
networks in the People's Republic of China.
3
<PAGE>
AVIC GROUP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
A Development Stage Company
(Unaudited)
<TABLE>
<CAPTION>
June 30 March 31
1996 1996
------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 407,962 $ 185,889
Subscription receivable (Note 1) 1,750,000
Accounts receivable 14,250
Prepaid expenses and other current assets 8,080 60,678
------------ ------------
Total Current assets 2,180,292 246,567
Equipment, net of accumulated depreciation 76,486 76,233
Joint venture deposit 1,170,000 1,170,000
Non-refundable equipment purchase deposit 4,572,536 4,572,536
Other assets 170,580 167,200
------------ ------------
TOTAL ASSETS $ 8,169,894 $ 6,232,536
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 889,510 $ 866,990
Accrued interest 683,522 651,063
Loans payable - stockholders (unsecured, interest
at 8.5% per annum) 2,613,553 2,563,553
------------ ------------
Total current liabilities 4,186,585 4,081,606
STOCKHOLDER'S EQUITY
Preferred stock: $.001 par value, authorized 10,000,000
shares; issued and outstanding 1,524,178 1,524 1,524
Preferred stock: $.001 par value, authorized 10,000,000
shares; issued and outstanding 100 1
Common stock: $.001 par value, authorized 100,000,000
shares; issued and outstanding 28,451,982
and 28,436,982 June 30 and March 31, 1996 28,453 28,437
Additional paid-in capital 21,266,380 18,648,620
Deficit accumulated during the development stage (17,313,049) (16,527,651)
------------ ------------
Total stockholders' equity 3,983,309 2,150,930
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 8,169,894 $ 6,232,536
------------ ------------
------------ ------------
</TABLE>
Note 1: The funds held in escrow from the sale of the Company's Preferred
Series B Stock were released to the Company on August 14, 1996.
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
AVIC GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
A Development Stage Company
(Unaudited)
<TABLE>
<CAPTION>
March 27,1992
(Inception) to
Three months ended June 30, June 30,
1996 1995 1996
---- ---- --------------
<S> <C> <C> <C>
REVENUE
Net sales $ 213,614 $ 1,223,894
EXPENSES
Cost of sales 118,728 1,061,435
Selling, general, and administrative $ 751,109 974,658 10,513,723
Research and development 523,662 5,731,612
----------- ----------- ------------
Total expenses 751,109 1,617,048 17,306,770
----------- ----------- ------------
Loss from operations ($751,109) ($1,403,434) ($16,082,876)
----------- ----------- ------------
OTHER INCOME (EXPENSE)
Consulting income 150,000
Gain from sale of assets 31,880
Loss from abandoned assets (130,840)
Interest expense ($32,459) (60,355) (797,045)
Equity in losses of unconsolidated
subsidiary (500,000)
Other 1,428 17,662
Income taxes ($1,829) ($1,600) ($1,829)
----------- ----------- ------------
NET LOSS ($785,397) ($1,463,961) ($17,313,048)
----------- ----------- ------------
----------- ----------- ------------
NET LOSS PER SHARE ($0.03) ($0.06) ($1.46)
----------- ----------- ------------
----------- ----------- ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 28,436,982 25,243,409 11,828,506
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
AVIC GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
A Development Stage Company
(Unaudited)
<TABLE>
<CAPTION>
March 27,
1992
(Inception) to Three months ended
June 30, June 30,
1996 1996 1995
--------------- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($17,313,049) ($785,398) ($1,463,961)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services 117,775 117,775
Amortization of capitalized software development
costs 450,000 84,375
Depreciation 867,902 5,905 97,371
Loss from abandoned assets 130,840
Gain from sale of assets (31,880)
Equity in losses of unconsolidated subsidiary 500,000
(Increase) decrease in:
Accounts receivable (17,969) (14,250) (91,772)
Inventories (564,451) 0 (32,632)
Prepaid expenses and other current assets (64,638) 52,598 (33,545)
Other assets (170,580) (3,380) (169,372)
Increase (decrease) in:
Accounts payable and accrued expenses 1,842,812 22,522 201,656
Accrued interest 683,522 32,459 60,355
Deposit 850,000 0 0
----------- --------- -----------
Net cash used in operating activities (12,719,716) (571,768) (1,347,525)
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of machinery and equipment (1,591,759) (6,158) (102,332)
Joint venture deposit (1,170,000)
Proceeds from sale of assets 250,000
Increase in capitalized computer software development
costs (675,000)
----------- --------- -----------
Net cash used in investing activities (3,186,759) (6,158) (102,332)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in loans payable-stockholders, net 9,228,801 50,000 361,104
Receipt of common stock subscription receivable 1,536,303 (50,000)
Sale of preferred stock 750,000 750,000
Sale of common stock 4,799,333
----------- --------- -----------
Net cash provided by financing activities 16,314,437 800,000 311,104
----------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 407,962 222,073 (1,138,753)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 0 185,889 1,178,898
----------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 407,962 $ 407,962 $ 40,145
----------- --------- -----------
----------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
7
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1995.
Net sales decreased from $213,614 during the three months ended June 30, 1995
to $0 during the three months ended June 30, 1996. Net sales during the three
months ended June 30, 1995 reflect the former operations of the Company's
subsidiary, ITV Communications, Inc. ("ITV"). However, since the asset sale
of ITV in January 1996, the Company has focused its business strictly on
establishing Sino-foreign joint ventures ("SFJVs") to build, transfer
ownership of, service, and maintain telecommunications networks in the
People's Republic of China ("PRC"). The Company does not currently generate
sales or market any products.
Selling, general and administrative expenses decreased 23% from $974,658
during the three months ended June 30, 1995 to $751,109 during the three
months ended June 30, 1996. The decrease primarily related to a decrease in
operations related to the asset sale of ITV as well as a reduction in
professional fees paid out during the period.
Net research and development expenses decreased by 100% from $523,662 during
the three months ended June 30, 1995 to $0 during the three months ended June
30, 1996. The decrease in research and development expenses related to the
cessation of the Company's ITV operations.
The Company's net loss decreased from $1,463,961 during the three months
ended June 30, 1995 to $785,397 during the three months ended June 30, 1996.
The decrease in net loss primarily relates to the Company's reduction in
professional fees paid out during the period, as well as the asset sale of
ITV and the cessation of the operations of ITV and its marketing and research
and development activities. Further, the Company's interest expense
decreased due to a conversion of $1,891,553 debt to 1,891,553 shares of the
Company's common stock in December 1995.
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 through equity investments and loans from its
founding stockholders.
The Company generated sales of $1,223,894 from March 1992 (inception) through
June 30, 1996. All of these sales occurred from March 31, 1993 through March
31, 1996. However, the Company has generated losses of $16,082,876 from
operations from March 1992 through June 30, 1996 and net losses of
$17,313,048 since inception. There can be no assurances that the Company
will ever achieve profitable operations.
8
<PAGE>
Upon the completion of the asset sale of ITV in January 1996, the Company
ceased research and development, marketing, and sales of products from its
ITV subsidiary and devoted substantially all of its efforts in developing
Sino-foreign joint ventures to establish telecommunications networks in the
PRC.
From its inception in March, 1992 through June 30, 1996, the Company has used
$12,822,941 of cash from its operating activities. This use of cash was
primarily the result of the net loss of $17,313,048 since inception.
Further, the Company used approximately $3,187,000 of cash from investing
activities during this period. This amount resulted from approximately
$1,592,000 used for the purchase of machinery and equipment and $675,000
expended for capitalized computer software development costs used in research
and development in the Company's former business operations, and $1,170,000
used as a deposit for the Company's proposed investment in a GSM network in
Hebei Province, PRC.
On June 12, 1996, the Company entered into an agreement to form a
Sino-foreign joint venture with Beijing CATCH to develop a paging network in
the PRC. The Company has agreed to contribute the capital needed to build
this paging network in exchange for a seventy percent (70%) equity interest
in the joint venture (See "Subsequent Events").
On June 12, 1996, the Company issued 100 shares of the Company's Series B
Convertible Preferred Stock at a purchase price of $25,000 per share, and
warrants were issued to purchase a number of shares of the Company's Common
Stock equal to the number of shares of common stock underlying the Series B
Convertible Preferred 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
post-closing 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 System Joint
Venture with Beijing CATCH. The Company fulfilled its requirements relating
to the release of this post-closing escrow on August 8, 1996 (See "Subsequent
Events").
Certain of the Company's agreements related to Sino-foreign joint ventures
that will engage in telecommunications business in the PRC are preliminary in
nature and are subject to the receipt of significant approvals and permits
from various governmental agencies in the PRC and, in certain cases, the
execution of more definitive agreements. There can be no assurances that, in
connection with those joint ventures that require more definitive agreements
and further approvals, 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
9
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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 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 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 it's economy and foreign currency exchange and 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 resources 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 it's 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 January 31, 1997, based
on its current operating expenditures,
10
<PAGE>
giving effect to the closing of the $2,500,000 private placement in August
1996. There can be no assurances that any additional 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 additional financing or generate profitable operations,
management's options will be to suspend or discontinue its business activity
in its present form.
SUBSEQUENT EVENTS
On July 11, 1996 the Company entered into an agreement with Wasserstein
Perella & Company ("Wasserstein") where Wasserstein will act as a financial
advisor to the Company with respect to strategic investors for the Company's
paging and GSM cellular projects in the PRC. The terms of the engagement
call for an annual retainer fee of $150,000 payable in three monthly
installments, with $50,000 payable upon the signing of the engagement, and
$50,000 payable the ninth day of the two following months. In addition,
Wasserstein will receive four percent (4%) of the gross proceeds from any
debt or equity financing or investment arising from the engagement.
On July 17, 1996 the Company entered into an agreement with Barington Capital
Group, L.P. ("Barington") in which Barington will act as a financial
consultant to the Company relating to corporate finance and other financial
matters though July 31, 1999. As compensation for this engagement, Barington
will receive a five-year warrant to purchase 400,000 shares of the Company's
common stock at an exercise price equal to $4.17 per share. Further,
Barington will receive four percent (4%) of the gross proceeds of any equity
or debt financing provided to the Company from sources introduced to the
Company by Barington.
The Company also signed a retainer with Merrill Lynch (Asia Pacific) Limited
("Merrill Lynch") on July 31, 1996. Merrill Lynch will act as financial
advisor to the Company and will assist the Company with strategic financing
alternatives with respect to the Company's PRC projects. The Company is
required to pay Merrill Lynch a retainer of $500,000, of which $50,000 was
paid upon execution of the agreement, and an additional three installments of
$150,000 will be payable every 120 days following the execution of the
agreement. Additional fees may be paid to Merrill Lynch if Merrill Lynch
successfully assists the Company in raising funding for the Company and the
Company's Sino-foreign joint ventures.
On July 30, 1996, the Company, Beijing CATCH, and Hebei United
Telecommunications Development Corporation ("Hebei United") obtained approval
from the Commission of Foreign Trade and Economic Cooperation of Hebei
Province, PRC to establish a Sino-foreign joint venture to develop a paging
network in the PRC (the "PRC Paging Joint Venture"). The Company, Beijing
CATCH, and Hebei United will have a seventy percent (70%), twenty-five
percent (25%), and five percent (5%) interest in this sino-foreign joint
venture, respectively.
11
<PAGE>
On August 8, 1996 the Company fulfilled its obligations relating to the sale
of its Preferred Shares B and the closing of the post-closing escrow. On
August 14, 1996, the Company received the remaining gross proceeds of
$1,750,000 from the sale of its securities which were held in escrow. These
funds will be used for operating capital, and for the capital contribution to
the joint venture company. The Company paid $230,000 as selling agent's fees
in connection with the transaction.
12
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SIGNATURES
In accordance with the requirements of the Securities and Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 14, 1996 AVIC GROUP INTERNATIONAL, INC.
By:/S/ Joseph R. Wright, Jr.
------------------------------
Joseph R. Wright, Jr.
Chief Executive Officer
By:/S/ Michael J. Lim
------------------------------
Michael J. Lim
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 407,962
<SECURITIES> 0
<RECEIVABLES> 14,250
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,180,292
<PP&E> 101,948
<DEPRECIATION> 25,462
<TOTAL-ASSETS> 8,169,894
<CURRENT-LIABILITIES> 4,186,583
<BONDS> 0
0
1,525
<COMMON> 28,453
<OTHER-SE> 3,953,331
<TOTAL-LIABILITY-AND-EQUITY> 8,169,894
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 751,109
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,459
<INCOME-PRETAX> (783,568)
<INCOME-TAX> 1,829
<INCOME-CONTINUING> (785,397)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (785,397)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
