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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
Commission file number 0-22520
AMTEC, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1989122
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
599 Lexington Avenue, 44th Floor, New York, New York 10022
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(Address of principal executive offices, including zip code)
212-319-9160
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(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Name of Each Exchange
Class so Registered On Which Registered
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Common Stock, $0.001 par value per share American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Check whether the registrant: (i) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. Yes X No
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[X]
The issuer's revenues for the fiscal year ended March 31, 1997 were $0.
The number of shares outstanding of the registrant's common stock as of July 8,
1997 was 31,312,065 shares. The aggregate market value of the common stock
(18,229,756 shares) held by non-affiliates, based on the closing price ($3.125)
of the common stock as of July 8, 1997 was approximately $57.0 million.
Transitional Small Business Disclosure Format: Yes No X
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ARE FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO ECONOMIC, COMPETITIVE,
GOVERNMENTAL, INTERNATIONAL AND TECHNOLOGICAL FACTORS AFFECTING THE COMPANY'S
REVENUES, JOINT VENTURES, OPERATIONS, MARKETS AND PRICES, AND OTHER FACTORS
DISCUSSED IN THE SECTION ENTITLED "RISK FACTORS" ON PAGES 7 THROUGH 11 OF THIS
ANNUAL REPORT.
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PART I
Item 1. BUSINESS
AmTec, Inc. (the "Company") develops and finances communications
networks in the People's Republic of China ("PRC"). The Company's Chinese
communications networks include a Global Service Mobile system ("GSM") and a
multimedia network, both in the northern province of Hebei, PRC. The Company
holds these interests through Sino-foreign joint ventures ("SFJVs"), which
are the legally authorized vehicle for foreign investment in China.
Consistent with PRC laws and regulations, the Company's SFJVs have entered
into contracts with authorized network operators in the PRC to build networks
and sell the assets of such networks to the operators for a portion of the
cash-flow generated by operations of the networks. On July 8, 1997, the
Company changed its name to "AmTec, Inc." from "AVIC Group International,
Inc."
JOINT VENTURES IN THE PEOPLE'S REPUBLIC OF CHINA
Each of the Company's joint ventures, Hebei United Communications Equipment
Company Limited ("Hebei Equipment") and Hebei United Telecommunications
Engineering Company Limited ("Hebei Engineering"), is organized under the laws
of the PRC as a Sino-foreign equity joint venture enterprise, a distinct legal
entity with limited liability. Such entities are governed by the Law of the
People's Republic of China on Joint Ventures Using Chinese and Foreign
Investments, and implementing regulations related thereto (the "Equity Joint
Venture Law"). The parties to the joint ventures have contractual rights to the
financial returns of the joint venture in proportion to the joint venture
interests that they hold. The transfer or increase of an interest in a
Sino-foreign equity joint venture enterprise requires agreement among the
parties to the venture and is effective upon approval of relevant government
agencies. For a discussion of the risks associated with PRC laws, regulations
and policies, see "Risk Factors -- Risks Relating to Doing Business in the PRC
- - - -- PRC Laws; Evolving Regulations and Policies."
JOINT VENTURE NETWORKS
In March 1996, the Company formed a joint venture with a 60.8% equity
interest in Hebei Equipment. As a result, Hebei Equipment was converted from a
PRC enterprise into a Sino-foreign joint venture company. On April 15, 1997,
all PRC governmental approvals were finalized for the conversion of Hebei
Equipment to a Sino-foreign joint venture company. See "Certain Relationships
and Related Transactions."
The Company, through Hebei Equipment, is currently involved in the
development of two communications networks in Hebei Province: a digital
cellular telephone network (the "GSM Network") and a province-wide multimedia
network (the "Hebei Multimedia Network"). The GSM Network is being constructed
by Hebei Engineering, which is a 51%-owned subsidiary of Hebei Equipment and is
49%-owned by Nippon Telegraph and Telephone International ("NTTI"), a subsidiary
of Nippon Telegraph & Telephone Corporation. The Hebei Multimedia Network,
which will link existing cable television systems in Hebei Province, is being
constructed by Hebei Equipment.
GSM NETWORK IN HEBEI PROVINCE
Hebei Engineering is constructing the GSM Network pursuant to a 15-year
agreement (the "UNICOM Agreement"), dated February 9, 1996, with China United
Communications Co. ("UNICOM"). UNICOM holds one of two licenses to operate
cellular telephone networks in the PRC. Under the terms of the UNICOM
Agreement, Hebei Engineering will build the GSM Network and sell ownership of
the GSM Network over the life of the agreement to UNICOM in exchange for a
majority share of cash flow generated by UNICOM from UNICOM's operation of the
GSM Network. Hebei Engineering will also provide consulting assistance to
UNICOM in the operation of the GSM Network. Hebei Engineering will receive
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78% of up front connection fees paid by new subscribers to connect to the GSM
Network, 78% of depreciation of fixed assets and 78% of net income generated by
UNICOM from operation of the GSM Network until February 9, 2011. Through the
Company's 60.8% interest in Hebei Equipment and Hebei Equipment's 51% interest
in Hebei Engineering, the Company holds an indirect 31% interest in Hebei
Engineering.
Under the UNICOM Agreement, the GSM Network will provide cellular telephone
service, using the Global Service for Mobile Telecommunications technology, in
the eleven major cities of Hebei Province, which have a total population,
including surrounding metropolitan areas, of approximately 50 million, or
approximately 78% of Hebei Province's total population of 64 million. In the
first phase of construction, the GSM Network will be built in 7 major cities,
and have a subscriber capacity of 40,000. In the second phase of construction,
the GSM Network will be built in the remaining four major cities of Hebei
Province, thereby expanding the total network capacity to 70,000. Based on
market demand, management believes the capacity of the GSM network may be
expanded in the future beyond 70,000 subscribers. In February 1997, the GSM
Network commenced commercial operations in Shijiazhuang, the capital of Hebei
Province. Six additional cities are anticipated to commence commercial
operation before the end of 1997. Construction in the remaining four major
cities of Hebei Province is anticipated to commence during the first half of
1998. See "Risk Factors -- Risks Relating to the Company's Joint Venture
Operations."
As of July 8, 1997, construction of the first phase of the GSM Network had
been financed with a $3 million equity investment from Hebei Equipment and NTTI,
and vendor financing guaranteed by NTTI and a $20 million Term Loan facility
from Bank of Tokyo Mitsubishi guaranteed by NTTI. Of these amounts, the Company
has provided $1.17 million of equity funding to Hebei Engineering through the
Company's investment in Hebei Equipment. At present, all funding required for
completion of the first phase of construction has been obtained by Hebei
Engineering.
HEBEI MULTIMEDIA NETWORK
On April 8, 1997, Hebei Equipment entered into a 20-year agreement (the
"Hebei Multimedia Agreement") with Hebei Cable Television Station, the
monopoly provider of cable television service in Hebei Province, pursuant to
which Hebei Equipment will (i) build a fiber-optic and microwave network to
connect the existing cable television systems in the eleven major cities in
Hebei Province, (ii) upgrade one city on a trial basis to a hybrid fiber
coaxial network ("HFC"), and (iii) hold the option to upgrade the network to
an HFC network. Under the Hebei Multimedia Agreement, Hebei Equipment will
sell ownership of the Hebei Multimedia Network to Hebei Cable Television
Station in exchange for a majority share of cash flow generated by Hebei
Cable Television Station from operation of the Hebei Multimedia Network.
Hebei Equipment will also provide operating personnel and assistance to Hebei
Cable Television Station in the operation of the Hebei Multimedia Network.
Until Hebei Equipment has recovered its investment, Hebei Equipment will
receive 80% of depreciation of fixed assets and 80% of net income generated
by Hebei Cable Television Station from operation of the Hebei Multimedia
Network. Thereafter, for the balance of 20 years from the commencement date
of formal commercial operations, Hebei Equipment will receive 30% of
depreciation of fixed assets and 30% of net income generated by Hebei Cable
Television Station from operation of the Hebei Multimedia Network. Hebei
Cable Television Station is a subsidiary enterprise of the Hebei Radio and
Television Department, under the jurisdiction of the Ministry of Radio, Film
and Television in the PRC.
The current funding requirement for the Hebei Multimedia Network is
estimated at approximately $23 million to link cable systems in the eleven
largest cities in Hebei Province. As of July 8, 1997, the Company had invested
approximately $1.0 million in Hebei Equipment for purposes of investment in the
Hebei Multimedia Network. The Company anticipates that the balance of required
funding will be provided in the form of equity and debt investments in Hebei
Equipment and additional joint venture entities that may be established with
strategic partners. See "Risk Factors -- Risks Relating to the Company's Joint
Venture Operations."
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OTHER TELECOMMUNICATION PROJECTS
In addition to the UNICOM Agreement and the Hebei Multimedia Agreement, the
Company has entered into a number of letters of intent and preliminary
agreements relating to the development of (i) a fixed wire telephone network in
Hebei Province, (ii) a GSM Network in Sichuan Province, (iii) a nationwide
paging network with Beijing CATCH Communications Group Co. ("Beijing CATCH") and
(iv) an enhanced specialized mobile radio network in Beijing with Beijing CATCH.
All of these letters of intent and preliminary agreements are non-binding in
nature, and management will determine over the course of the next fiscal year
whether to pursue these opportunities. There can be no assurance that any
definitive agreements relating to these networks will ever be entered into by
the Company or its subsidiaries.
HISTORY OF THE COMPANY 1996-1997
In November 1996, the Company was listed on the American Stock Exchange.
Prior to that, from March 1996 through November 1996, the Company's Common Stock
was traded on the Over-the-Counter Market of NASDAQ.
On January 16, 1996, pursuant to an Agreement for Sale of Assets, dated as
of January 11, 1996 (the "Asset Sale Agreement"), between ITV Communications,
Inc. ("ITV") and Netmatics, Inc. ("Netmatics"), ITV, the former primary
operating subsidiary of the Company, sold substantially all of its assets to
Netmatics and Netmatics assumed certain of ITV's liabilities and obligations in
consideration for an aggregate purchase price of $2,500,000 in cash and notes
and common stock of Netmatics equal to 33.0% of the issued and outstanding
shares of Netmatics at the time of the sale. Although $250,000 in cash has been
received by the Company, the balance of the consideration is unlikely to be
received by the Company.
REINCORPORATION TO DELAWARE AND NAME CHANGE
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 the 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 Delaware subsidiary of the Company.
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
the Company's Delaware subsidiary. The Delaware subsidiary succeeded to all of
the assets, liabilities and business of the Company and possesses all of the
rights and powers of the Company.
On July 8, 1997, the Company changed its name to "AmTec, Inc." from "AVIC
Group International, Inc." by way of a merger of the Company with and into a
wholly-owned Delaware subsidiary of the Company.
HISTORY OF THE COMPANY 1982-1996
The Company was originally 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 of developing
telecommunications networks in the PRC. From January 1992 through September
1994, the Company was operationally dormant.
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On September 2, 1994, the Company entered into an Agreement and Plan of
Reorganization, as amended by an agreement dated December 28, 1994 (the
"Reorganization Agreement") with ITV Communications, Inc. 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 and options to purchase shares of
the Company's Common Stock equal to approximately 91% of the issued and
outstanding shares of the 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." Since April 1995, the Company has been
engaged in the business of developing telecommunications networks in the PRC.
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.
EMPLOYEES
As of July 8, 1997, the Company had twelve full time employees, consisting
of six executive personnel, three financial personnel and three clerical
employees. The Company intends to hire additional personnel as the development
of the Company's business continues and makes such action appropriate. The
Company's employees are not represented by a labor union and are not covered by
a collective bargaining agreement. The Company believes that its relations with
its employees are good.
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RISK FACTORS
AN INVESTMENT IN SECURITIES OF THE COMPANY IS SPECULATIVE IN NATURE,
INVOLVES A HIGH DEGREE OF RISK, AND SHOULD NOT BE UNDERTAKEN BY ANY INVESTOR WHO
CANNOT AFFORD THE LOSS OF HIS ENTIRE INVESTMENT. PERSONS WHO MAY OWN OR INTEND
TO PURCHASE SECURITIES OF THE COMPANY SHOULD CAREFULLY CONSIDER, ALONG WITH
OTHER MATTERS DISCUSSED IN THIS ANNUAL REPORT, THE FOLLOWING RISK FACTORS:
COMPANY AND FINANCIAL RISKS
PRIOR AND ANTICIPATED LOSSES. To date, the Company has not generated
revenue and has experienced net losses of $4,064,885 and $5,281,730 during the
fiscal years ended March 31, 1997 and 1996, respectively. The Company does not
expect to achieve profitability during the current fiscal year. The ability of
the Company to achieve profitability is dependent upon numerous factors,
including the operations of the Company's joint venture projects and its ability
to finance, develop and implement its PRC telecommunications projects. There
can be no assurance that the Company will achieve profitability in any future
period.
HOLDING COMPANY. The Company is a holding company. The Company's
operating assets and only source of income and operational cash flow are its
interests in its existing subsidiaries. The ability of the Company to pay any
dividends on its capital stock is entirely dependent on the Company's ability to
receive distributions from its subsidiaries. See "Risk Factors -- Risks
Relating to the Company's Joint Venture Operations" and "-- Risks Relating to
Doing Business in the PRC."
EARLY STAGE PROJECTS. The telecommunications projects which constitute the
Company's entire business are in the early stages, and are subject to all of the
risks inherent in the establishment of new telecommunications projects. The
likelihood of the success of the Company's PRC telecommunications operations
must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with the
construction and operation of a new telecommunications network. There can be no
assurance that the Company's existing or future PRC telecommunications
operations will be successfully implemented or that any of them will generate
any revenue for the Company.
POSSIBLE NEED FOR ADDITIONAL CAPITAL. The Company's future capital
requirements will depend on many factors, including, but not limited to, the
financial success of the Company's PRC telecommunications operations, future
capital requirements of the Company's operations and capital requirements
arising out of participation in other telecommunications networks in the future.
At present, the Company's only contractual obligation is for the Hebei
Multimedia Network. To the extent that existing funds are insufficient to fund
the Company's activities, the Company may need to raise additional capital
through public or private financing. If additional funds are raised through the
issuance of equity securities, the percentage ownership of existing shareholders
of the Company will be reduced, and such equity securities may have rights,
preferences, or privileges senior to those of the holders of the existing
securities. No assurance can be given that additional financing will be
available or that, if available, it can be obtained on terms favorable to the
Company and its shareholders. If adequate funds are not available, the Company
may default on commitments for existing projects, which may have a material
adverse effect on the business and financial condition of the Company.
COMPETITION. The opportunity to profit from growth in the PRC's
telecommunications sector has attracted participants from around the world.
Many such competitors have greater marketing resources and technological
capability as well as greater financial resources than the Company.
Accordingly, there can be no assurance that the Company will be successful in
securing roles in additional PRC telecommunications networks or, if able to do
so, will be able to negotiate favorable terms.
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
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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 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.
CONTROL BY PRINCIPAL STOCKHOLDERS. Tweedia International Limited
("Tweedia") is the Company's principal stockholder and has the beneficial
ownership of approximately 43.9% of the outstanding Common Stock. As a result
of such Common Stock ownership, Tweedia is in a position to exercise significant
control with respect to the affairs of the Company and the election of the
Company's directors. In addition, a potential buyer might be deterred from an
effort to acquire the Company, absent the consent of Tweedia or its
participation in the transaction.
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 business
operations of the joint ventures in which the Company participates.
SECURITIES RISKS
LACK OF DIVIDENDS ON COMMON 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, which can be paid in common stock to holders of the Series C and
D Preferred Shares. Except for dividends which may be payable on the shares of
issued and outstanding preferred stock and other preferred stock that may be
issued from time to time in the future that require such dividends, the Company
intends to retain earnings, if any, to provide funds for the expansion of the
Company's business.
ISSUANCE OF ADDITIONAL SHARES; SHARES ELIGIBLE FOR FUTURE SALE. Future
sales of shares of Common Stock by the Company and its stockholders could
adversely affect the prevailing market price of the Common Stock. Pursuant to
its Certificate of Incorporation, the Company has the authority to issue
68,687,935 additional shares of Common Stock and 8,475,322 additional shares of
preferred stock. The issuance of such shares could result in the dilution of
the voting power and other rights of the currently issued and outstanding shares
of Common Stock. As of May 1, 1997, certain investors who have held an
aggregate of approximately 8.7 million shares of restricted Common Stock may
sell such shares without restriction. Such sales may have a materially adverse
effect on the prevailing market price of the Common Stock. The extent of such
adverse effect, if any, cannot be predicted, but based on the volume of trading
in the market and on the number of shares that could be sold thereunder, such
adverse effect may be material.
FUTURE ISSUANCE'S OF PREFERRED STOCK. The Company's Certificate of
Incorporation authorizes the issuance of up to 10,000,000 shares of preferred
stock with such designation, powers, 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, such
preferred stock could have voting, liquidation, dividend and other rights
superior to the rights of the outstanding stock of the Company and, in addition,
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company.
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RISKS RELATING TO THE COMPANY'S JOINT VENTURE OPERATIONS
CONSTRUCTION AND OPERATION OF PROPOSED TELECOMMUNICATIONS NETWORKS. The
telecommunications networks in the PRC which the Company's joint ventures are
currently engaged in developing may experience difficulties and delays relating
to the construction and operation of such networks. While the Company's joint
ventures have undertaken to obtain the technical capability, personnel or
resources to build, service and maintain a telecommunications network in the
PRC, the performance of all or any of the Company's joint venture obligations
under its agreements relating to PRC telecommunications networks may require the
cooperation and participation of third parties. Such third parties may be
parties to or independent contractors with the Company's Sino-foreign joint
ventures, for the purpose of building, servicing or maintaining any such
telecommunications network. There can be no assurance that the Company's joint
ventures will be able to obtain such cooperation, if required, with respect to
its PRC telecommunications networks. Moreover, there can be no assurance 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 by the
joint ventures to achieve these goals, or any difficulties or delays, may have a
material adverse effect on the Company's business, financial condition and
results of operations.
SIGNIFICANT ADDITIONAL FUNDING OF JOINT VENTURE PROJECTS REQUIRED. The
aggregate funding required from joint venture partners for the first phase of
construction for the Hebei Multimedia Network is approximately $23 million of
which, to date, $1.0 million has been invested by the Company into Hebei
Equipment. While the Company and Hebei Equipment currently have approximately
$4 million of cash on hand and the Company has entered into a $25 million Common
Stock Investment Agreement, material limitations exist on the Company's right to
access funds under such agreement. At present there can be no assurance that
the Company will meet its funding requirement for the Hebei Multimedia Network.
Beyond this expansion phase, future capital requirements for the GSM Network
will depend on the rate of network capacity growth which, in turn, will depend
on the market acceptance of the GSM cellular service, among other factors.
There can be no assurance that the Company's joint venture partners will meet
their funding commitments under the joint venture contracts. It is anticipated
that debt or equity contributions made by the Company and its partners to the
joint ventures, as well as additional loans made by third parties, will be used
to develop the GSM Network and the Hebei Multimedia Network. However, there can
be no assurance that the equity contributions and loans made, or to be made, to
the joint ventures by their respective partners will be sufficient to meet the
capital needs of either the GSM Network or the Hebei Multimedia Network, or to
successfully complete or support the competitive position of either project.
The Company may elect to make additional equity contributions or loans to either
joint venture to fund such additional capital needs, thus creating an additional
demand on the Company's capital, or may elect not to make such payments, which
may negatively affect the successful implementation of the networks. Securing
alternative sources of funds may dilute the Company's ownership
ROLE IN FUTURE EXPANSION OF THE HEBEI GSM NETWORK. Further expansion of
the GSM Network is anticipated beyond Phase II of the Hebei GSM Network, but the
joint venture partners, timing and amount of investment have not been finally
determined. In the event of such expansion, UNICOM is to give preferential
consideration, in securing new investment, to investments from the Company and
its joint venture partners on the same terms as their prior investments.
However, at present there can be no assurance that further expansion of the GSM
Network will occur, or that the Company will be allowed to participate in later
stages of the Hebei GSM project.
COMPETITION WITH THE MINISTRY OF POSTS AND TELECOMMUNICATIONS AND OTHERS.
The two primary providers of telecommunications services in China, the Ministry
of Posts and Telecommunications (the "MPT") (through its operating subsidiary
China Telecom) and UNICOM, compete intensely. UNICOM has entered into a
contract with a subsidiary of the Company with respect to the GSM Network, and,
therefore, the Company indirectly competes with the MPT in certain of its
activities. The MPT has a dominant market share in all sectors of
telecommunications in China, and already has established a fixed-wire network in
the
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country. Moreover the MPT regulates and licenses all public telephone service
projects in China, including network access, and maintains the ability to make
important regulatory decisions with respect to its competitors, including the
Hebei GSM project. The Company's joint venture may also have to compete with
other telecommunications services providers, some of which may have greater
marketing and development budgets and greater capital resources than the
Company's joint ventures. Accordingly, there can be no assurance that the
Company will be able to achieve and maintain a competitive position in the PRC
telecommunications industry. In addition, new competitors may be entering the
market, including the People's Liberation Army through it's Great Wall
Communications Group.
GOVERNMENT APPROVAL FOR JOINT VENTURE PROJECTS. All the Company's joint
venture contracts will require approval at some level of the provincial or
related government in China. There can be no assurance that in the future all
necessary governmental approvals will be obtained for joint venture projects
that the Company may enter in the future.
RISKS RELATING TO DOING BUSINESS IN THE PRC
INTERNAL POLITICAL RISKS. The Company's business operations may be
adversely affected by the political environment in the PRC. The PRC has been a
socialist state since 1949 and is controlled by the Communist Party of China.
Changes in the political leadership of the PRC may have a significant effect on
laws and policies related to the current economic reforms program, other
policies affecting business and the general political, economic and social
environment in the PRC, including the introduction of measures to control
inflation, changes in the rate or method of taxation and imposition of
additional restrictions on currency conversion and remittances abroad and
foreign investment. These effects could substantially impair the Company's
business, profits or prospects in China. Moreover, economic reforms and growth
in the PRC have been more successful in certain provinces than in others, and
the continuation or increases 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, and could require the
Company to divest the interests it then holds in Chinese properties or joint
ventures. Any such developments could have a material adverse effect on the
business prospects of the Company.
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. While inflation has moderated since
1995, high inflation may in the future cause the PRC government to impose
controls on credit and/or 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
potential 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 liquidity
and business operations.
RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE. The Renminbi is not a freely
convertible currency at present. The Company's joint ventures will receive
nearly all of their revenue in Renminbi, which will need to be converted to
other currencies, primarily U.S. dollars, and remitted outside of the PRC.
Effective July 1, 1996, foreign currency "current account" transactions by
foreign investment enterprises, including Sino-foreign joint ventures, are no
longer subject to the approval of State Administration of Foreign Exchange
("SAFE", formerly, "State Administration of Exchange Control"), but need only a
ministerial review,
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according to the ADMINISTRATION OF THE SETTLEMENT, SALE AND PAYMENT OF FOREIGN
EXCHANGE PROVISIONS promulgated in 1996 (the "FX regulations"). "Current
account" items include international commercial transactions which occur on a
regular basis, such as those relating to trade and provision of services.
Distributions to joint venture parties also are considered a "current account
transaction." Other non-current account items, known as "capital account" items,
remain subject to SAFE approval.
EXCHANGE RATES LOSSES. Until 1994, the Renminbi had experienced a gradual
but significant devaluation against most major currencies, including U.S.
dollars, and there was a significant devaluation of the Renminbi on January 1,
1994 in connection with the replacement of the dual exchange rate system with a
unified managed floating rate foreign exchange system. Since 1994, the value of
the Renminbi relative to the U.S. dollar has remained stable. However, if
devaluation of the Renminbi were to occur in the future, the Company's returns
on its operations in China, which are expected to be in the form of Renminbi,
will be negatively affected upon conversion to U.S. dollars.
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, and may be subject to influence by external forces
unrelated to the legal merits of a particular matter. China's regulations and
policies with respect to foreign investments are evolving. Definitive
regulations and polices 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. There can be no assurance that the Company will be able to enforce
any legal rights it may have under its joint venture contracts or otherwise.
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 current or prospective business
operations of the Company.
RELIANCE ON STATISTICS. Statistics relating to economic, demographic, and
general business data are not widely disseminated within or outside of the PRC.
Further, certain PRC statistics may not be compiled in accordance with, or may
not be subject to, Western standards of accuracy. The resultant imperfect
information naturally hinders the performance of the Company's business
planning or investment analysis and introduces risks in conducting business in
the PRC.
ITEM 2. PROPERTIES
The Company leases a 7,600 square foot office located at 599 Lexington
Avenue, 44th Floor, New York, New York 10022. The facility serves as the
Company's principle executive offices. The Company pays an annual rent of
$334,400 on a lease which expires in May 2000. The Company has obtained an
option to extend the lease for an additional five year term based on the fair
market value of the leased premises at or about the time of the expiration of
the initial term of the lease.
ITEM 3. LEGAL PROCEEDINGS
A first amended complaint, dated April 15, 1996, was filed against the
Company, ITV, and other parties, including certain of the Company's officers,
directors and principal stockholders, by Jacqueline Brandwynne, a stockholder of
the Company, in a matter captioned "Jacqueline B. Brandwynne vs. AVIC Group
International, Inc., et al," civil action number BC145036. The complaint, filed
in the Superior Court
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of California, County of Los Angeles, 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 these claims are without merit, that there are valid
defenses to each claim and is in the process of vigorously defending the matter.
The matter is in the discovery phase and it is not possible to predict with any
degree of certainty the likely outcome. The Company is represented by the law
firm of Matthias & Berg LLP, 515 South Flower Street, Seventh Floor, Los
Angeles, California 90071, on this matter.
The lessor of certain property formerly leased by ITV in Canoga Park,
California brought a lawsuit against the Company, ITV and other parties,
captioned "6800 Owensmouth, Inc. vs. ITV Communications, Inc., et al," civil
action number BC146964, with respect to the premises in March 1996. The
complaint, filed in the Superior Court of California, County of Los Angeles,
alleged 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, and the amount of rent abated during the first six months of the
lease, in the aggregate principal amount of approximately $82,000. The lessor
also sought approximately $760,500 which was the amount of rent payment due
under the lease for its full term ending in 1999. The Company and the lessor of
the property agreed to a settlement of the claims of abandonment and failure to
pay rent on March 18, 1997, whereby the Company agreed to pay to the lessor the
amount of $75,000 in cash and 25,000 shares of the Company's Common Stock, with
a then market value of $112,500. The 25,000 shares of Common Stock issued had
certain demand and "piggy-back" registration rights. Further, if at the time of
registration, the share price of the Company has increased or decreased by 20%
or more, the Company shall issue, or the lessor shall return, as the case may
be, a number of shares to restore the value of the Common Stock so issued to
$112,500.
Except as set forth above, the Company is not aware of any pending
litigation that could have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the quarter
ended March 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of July 8, 1997, the authorized capital stock of the Company consisted
of 100,000,000 shares of Common Stock and 10,000,000 shares of preferred stock,
par value $0.001 per share (the "Preferred Stock"). As of July 8, 1997, there
were issued and outstanding 31,257,921 shares of Common Stock, options to
purchase 8,543,284 shares of Common Stock, 1,524,178 shares of Series A
Convertible Preferred Stock, 250 shares of Series C Convertible Preferred Stock
and 150 shares of Series D Convertible Preferred Stock. All shares of the
Series B Convertible Preferred Stock have been converted into 1,507,477 Common
Shares as of July 8, 1997. Further, there were issued and outstanding warrants
to purchase 2,345,000 shares of Common Stock. As of July 8, 1997, there were
approximately 1620 holders of record of the Common Stock.
The Company's Common Stock was originally listed for trading in the
over-the-counter market on March 4, 1996 and was quoted on the NASDAQ Bulletin
Board or in the "pink sheets" maintained by the National Quotation Bureau, Inc.
under the symbol "AVIC." The Company changed its listing on November 20, 1996,
when its Common Stock was approved for listing on the American Stock Exchange,
where it currently trades under the symbol "AV." In connection with the name
change of the Company from "AVIC Group International, Inc." to "AmTec, Inc.,"
the Company changed its trading symbol on the American Stock Exchange to "ATC"
on July 14, 1997. The high and low sales prices of the Common Stock, as quoted
on the American Stock Exchange, on July 7 1997 were approximately $3.00 and
$3.125, respectively.
No dividend has been declared or paid by the Company on its shares of
Common Stock since its inception. The payment of dividends by the Company on
its shares of Common Stock is within the discretion of the Company's Board of
Directors and will depend on the earnings, capital requirements, restrictions in
any future credit agreements and operating and financial condition of the
Company, among other factors. The Company has certain obligations to pay
dividends on issued and outstanding shares of certain Preferred Stock. Except
for dividends which may be payable on and according to the terms of shares of
Preferred Stock, the Company does not anticipate that any dividends will be
declared or paid in the future. There can be no assurance that the Company will
ever pay a dividend on its shares of Common Stock. See "Risk Factors -- Lack of
Dividends on Common Stock."
The following table sets forth for the period indicated before November 20,
1996, the high and low bid information of the Company's Common Stock as quoted
on the NASDAQ Bulletin Board, and for the period indicated on or after November
20, 1996, the high and low sales price of the Company's Common Stock as reported
on the American Stock Exchange. Quotations on the NASDAQ Bulletin Board reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may
not represent actual transactions.
Fiscal Year Ending March 31
-----------------------------------------------------------
1996 1997
------ -------------------------------------------------
4th Q 1st Q 2nd Q 3rd Q 4th Q
------ ------ ------ ------------------- ------
COMMON STOCK PRICE
High $8.500 $9.125 $5.000 $3.875(1)/$4.125(2) $6.250
Low $8.250 $3.250 $1.125 $1.438(1)/$1.625(2) $2.125
_______________
(1) High and low bid information as quoted on the NASDAQ Bulletin Board for the
period from October 1, 1996 to November 19, 1996.
(2) High and low sales price as reported on the on the American Stock Exchange
for the period from November 20, 1996 to December 31, 1996.
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The transfer agent for the Company is Chasemellon Shareholder Services,
LLC, 450 West 33rd Street, New York, New York, 10001. Its telephone number is
(800) 851-9677.
CERTAIN SALES OF UNREGISTERED SECURITIES
OFFERING OF SERIES B CONVERTIBLE PREFERRED STOCK. On June 12, 1996, the
Company issued 100 shares of its Series B Convertible Preferred Stock (the
"Series B Preferred Shares") to six institutional investors, at a purchase price
of $25,000 per share for a total consideration of $2,500,000. Each of the
Series B Preferred Shares was convertible into shares of Common Stock based on a
conversion formula. Pursuant to the purchase arrangement, the Company agreed to
issue warrants to the holders of the Series B Preferred Shares to purchase
additional shares of the Company's Common Stock, based on the number of shares
of Common Stock into which the corresponding number of Series B Preferred Shares
are convertible. The Series B Preferred Shares and warrants were issued
pursuant to an exempt transaction under Regulation S promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
During the period from September 1996 to February 1997, all of the Series B
Preferred Shares were converted into an aggregate of 1,507,477 shares of Common
Stock, and warrants to purchase an aggregate of 1,507,477 shares of the
Company's Common Stock were issued to the investors. The warrants are currently
exercisable at the exercise price of $3.19 per share and have terms of five
years.
In connection with the issuance of the Series B Preferred Shares, the
Company paid fees and expenses to the placement agent in the aggregate amount of
$200,000 and issued warrants to purchase 120,599 shares of Common Stock at an
exercise price equal to $3.19 per share. Further, the Company agreed to provide
the placement agent with the right to raise up to an additional $12,500,000 on
behalf of the Company until August 13, 1997, subject to certain terms and
conditions satisfactory to the Company. In addition, in connection with the
issuance of the Series B Preferred Shares, the Company issued warrants to
purchase 33,670, 16,800 and 16,633 shares of Common Stock to Regal International
Capital, Inc., Heracles Fund and Charles Kreusen, respectively, with an exercise
price of $3.31 per share in consideration for certain investment advisory
services provided by them.
OFFERING OF SERIES D CONVERTIBLE PREFERRED STOCK. On March 6, 1997, the
Company issued to a single investor 150 shares of the Company's Series D
Convertible Preferred Stock, par value $.001 per share (the "Series D Preferred
Shares"), at a price of $10,000 per share for a total consideration of
$1,500,000.
The holder of the Series D Preferred Shares is entitled to receive, when,
as and if declared by the Board of Directors of the Company out of funds legally
available therefor, cumulative dividends at the annual rate of 8% per annum per
share, payable quarterly (i) in shares of Common Stock, or (ii) in cash in
connection with any payment pursuant to a Series D Conversion Default (as
defined below) at the election of the Company's Board of Directors. The holder
of Series D Preferred Shares has certain preferential rights over the holders of
Common Stock in the event of the liquidation, dissolution or winding-up of the
Company or a disposition of the Company's assets. The holder of the Series D
Preferred Shares also has certain registration rights and certain rights to
participate in exempt equity offerings by the Company until March 6, 1999.
The Series D Preferred Shares are convertible by the holder into the number
of shares of Common Stock which may be purchased at the lowest trading price
during the 30 business days immediately preceding each conversion date (the
"Lowest Trading Price") for the Series D Preferred Shares. In addition, under
certain circumstances, the holder of the Series D Preferred Shares may be
obligated to purchase additional shares of Common Stock for cash. In the event
the Company issues or sells any shares of Common Stock or shares of securities
convertible into or exchangeable for Common Stock (other than shares of Common
Stock or options to purchase Common Stock issued pursuant to stock option plans
or are otherwise currently issued and outstanding) at an effective purchase
price per share of less than $5.00, then at the time the Series D Preferred
Shares are submitted for conversion, the Company shall cause the effective
market price on the
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conversion date of such shares of Common Stock to be equal to the lesser of (i)
the Lowest Trading Price, or (ii) the effective price at which such securities
are issued.
If the Company does not have sufficient shares available to satisfy its
obligations to the holder of Series D Preferred Shares upon receipt of a
conversion notice, or otherwise fails or refuses to perfect conversion of any
Series D Preferred Shares (a "Series D Conversion Default"), the holder of the
Series D Preferred Shares has the right to put the Series D Preferred Shares to
the Company at a price equal to 125% of the purchase price, plus all accrued and
unpaid dividends.
The holder of the Series D Preferred Shares may not convert such shares
prior to May 5, 1997 and may convert subsequent to such date as follows: (i) 30
shares after May 6, 1997; (ii) 60 shares after June 5, 1997; (iii) 90 shares
after July 5, 1997; (iv) 120 shares after August 4, 1997; and (v) 150 shares
after September 2, 1997.
As of June 20, 1997, there were 150 Series D Preferred Shares outstanding
and held of record. The holder of the Series D Preferred Shares has no voting
rights, except with respect to certain matters that affect the rights of the
Series D Preferred Shares.
OFFERING OF SERIES C CONVERTIBLE PREFERRED STOCK. On June 13, 1997, the
Company issued to ten accredited investors 250 shares of the Company's Series C
Convertible Preferred Stock, par value $.001 per share (the "Series C Preferred
Shares"), at a price of $10,000 per share pursuant to an exempt transaction
under Regulation D promulgated under the Securities Act.
The holders of the Series C Preferred Shares are entitled to receive, when,
as and if declared by the board of directors of the Company out of funds legally
available therefor, cumulative dividends at the annual rate of 8% per annum per
share, payable quarterly (i) in shares of Common Stock, or (ii) in cash in
connection with any payment pursuant to a Series C Conversion Default (as
defined below). The holders of Series C Preferred Shares have certain
preferential rights over the holders of Common Stock in the event of the
liquidation, dissolution or winding-up of the Company or a disposition of the
Company's assets. The holders of the Series C Preferred Shares also have
certain registration rights and certain rights to participate in exempt equity
offerings by the Company until June 12, 1999.
The Series C Preferred Shares are convertible by the holders into the
number of shares of Common Stock which may be purchased at the lowest trading
price during the 30 business days immediately preceding each conversion date
(the "Lowest Trading Price") for the Series C Preferred Shares. In addition,
under certain circumstances, the holders of the Series C Preferred Shares may be
obligated to purchase additional shares of Common Stock for cash. In the event
the Company issues or sells any shares of Common Stock or shares of securities
convertible into or exchangeable for Common Stock (other than shares of Common
Stock or options to purchase Common Stock issued pursuant to stock option plans
or are otherwise issued as compensation to employees or directors or shares of
Common Stock issued upon exercise of options, warrants or rights outstanding as
of June 13, 1997 or shares of Common Stock or options to purchase Common Stock
issued in consideration for business acquisitions or combinations made by the
Company) at an effective purchase price per share of less than $5.00, then at
the time the Series C Preferred Shares are submitted for conversion, the Company
shall cause the effective market price on the conversion date of such shares of
Common Stock to be equal to the lesser of (i) the Lowest Trading Price, or (ii)
the effective price at which such securities are issued.
If the Company does not have sufficient shares available to satisfy its
obligations to the holders of Series C Preferred Shares upon receipt of a
conversion notice, or otherwise fails or refuses to perfect conversion of any
Series C Preferred Shares (a "Series C Conversion Default"), the holders of the
Series C Preferred Shares have the right to put the Series C Preferred Shares to
the Company at a price equal to 125% of the purchase price, plus all accrued and
unpaid dividends.
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The holders of the Series C Preferred Shares may not convert such shares
prior to August 12, 1997 and may convert subsequent to such date as follows: (i)
60 shares after August 13, 1997; (ii) 120 shares after September 12, 1997; (iii)
180 shares after October 12 1997; (iv) 240 shares after November 11, 1997; and
(v) 300 shares after December 10, 1997.
As of July 8, 1997, there were 250 Series C Preferred Shares outstanding
and held of record. The holders of the Series C Preferred Shares have no voting
rights, except with respect to certain matters that affect the rights of the
Series C Preferred Shares.
THE PROMETHEAN COMMON STOCK INVESTMENT AGREEMENT. On March 31, 1997, the
Company entered into a Common Stock Investment Agreement with Promethean
Investment Group L.L.C. ("Promethean") pursuant to which Promethean will provide
$10 million in equity funding to the Company. The Company has agreed to issue a
minimum of $4,000,000 in Common Stock, at a 10% discount to market price, to
Promethean within two years following the effective date of a registration
statement covering the shares to be sold pursuant to the Common Stock Investment
Agreement. On April 29, 1997, the Company and Promethean agreed to increase the
equity funding commitment from $10 million to $25 million.
OTHER SALES OF UNREGISTERED SECURITIES. On December 10, 1996, the Company
issued 5,000 shares of the Company's Common Stock to Westergaard and Company as
consideration for certain consulting services provided to the Company.
On March 31, 1997, the Company issued 25,000 shares of its Common Stock,
with a then market value of $112,500, to a lessor of certain property formerly
leased by ITV in connection with a settlement of a lawsuit involving the lease
of such property. The shares of Common Stock issued had certain demand and
"piggy-back" registration rights. Further, if at the time of registration, the
share price of the Company has increased or decreased by 20% or more, the
Company shall issue, or the lessor shall return, as the case may be, a number of
shares to restore the value of the Common Stock so issued to $112,500.
On September 6, 1996, the Company issued options to purchase 20,000 shares
of the Company's Common Stock as compensation to two employees. For a
discussion of the issuance of securities as compensation to the directors and
executive officers of the company, see "Executive Compensation."
Except as otherwise provided above, the Company believes that the issuances
of securities pursuant to the foregoing transactions were exempt from
registration under the Securities Act by virtue of section 4(2) thereof as
transactions not involving public offerings.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company devotes substantially all of its efforts to financing and
developing Sino-foreign joint ventures to establish telecommunications networks
in the PRC. In January 1996, the Company completed the sale of the assets of
its ITV subsidiary. As such, research and development, marketing, and sales of
products from its ITV subsidiary have ceased.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through equity
investments and loans from its founding stockholders.
Approximately $3,558,000 of cash was provided by the Company's operations
for the fiscal year ended March 31, 1997, compared to the use of approximately
$2,887,000 of cash for the year ended March 31, 1996. The cash flow from
operating activities relates to the increase in prepaid expenses and other
current assets reflected in the Company's financial statements as a result of
the consolidation of its joint venture subsidiaries in the PRC. The use of cash
from operations for the year ended March 31, 1996
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reflects increases in accounts payable and accrued expenses, including accrued
interest, of approximately $1,400,000. During the fiscal year ended March 31,
1995 the Company used approximately $4,399,000 in its operating activities. The
decrease in cash used in the Company's operating activities from the year ended
March 31, 1995 to the year ended March 31, 1996 reflects a greater net loss in
1995, and an increase in accounts payables and accrued expenses in 1996.
The Company used approximately $15,715,000 in its investing activities in
the year ended March 31, 1997, compared to approximately $1,040,000 in the year
ended March 31, 1996. This increase reflects the Company's joint venture
funding during the year ended March 31, 1997, as well as construction costs of
approximately $21,881,000 in the Company's GSM Network in Hebei Province. The
Company further reported approximately $6,550,000 of net liabilities assumed
through consolidation of its joint venture subsidiaries in the PRC. Net cash
used in the Company's investing activities for the year ended March 31, 1995 was
approximately $861,000, which reflects development expenses related to research
and development of its ITV subsidiary prior to the sale of ITV to Netmatics.
The cash inflows from financing activities during the year ended March 31,
1997 were generated from the following sources: (i) approximately $11,521,000 in
loans from Mitsubishi Bank and vendor provided financing for the development of
the Hebei GSM Network, which the Company has reported through the consolidation
of its PRC joint ventures, (ii) the receipt of additional Common Stock
subscriptions of $2,000,000 and (iii) the receipt of $3,841,219 in Preferred
Stock subscriptions. 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 a number of warrants equal to the number of common shares into
which the Series B Preferred Shares were converted in consideration of
$2,500,000, of which the Company received $2,341,219 after placement agent's
fees. In addition, on March 31, 1997, the Company issued 150 shares of the
Company's Series D Convertible Preferred Stock at a purchase price of $10,000
per share in consideration of $ 1,500,000.
During the years ended March 31, 1996 and March 31, 1995, the Company
received approximately $2,934,000 and $6,387,000 from its financing activities,
respectively. The sources of these amounts were from: (i) the sale of
approximately $2,194,000 and $2,605,000 in Common Stock during the years ended
March 31, 1996 and March 31, 1995, respectively, (ii) the receipt of
approximately $1,536,000 in Common Stock subscriptions in the year ended March
31, 1995, and (iii) the receipt of shareholder loans of approximately $740,000
during the year ended March 31, 1996 and $2,245,000 during the year ended March
31,1995.
On December 15, 1995, the Company also agreed to issue 1,524,178 shares of
the Company's Series A Convertible Preferred Stock (the "Series A 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. The deposit has been reflected in the
financial statements as a deduction of stockholders' equity, as it is currently
the view of management that this deposit may be forfeited and such Series A
Preferred Shares will be canceled.
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 shareholder of the Company, pursuant to the terms of a Master
Agreement and Right of First Refusal, dated December 21, 1995, between Beijing
CATCH, Tweedia and the Company (the "Master Agreement"). As of July 8, 1997,
the Company has not issued any shares pursuant to the Master Agreement, and has
not entered into, and management has no current intent of entering into, any
Sino-foreign joint ventures with Beijing CATCH under the terms of the Master
Agreement. As a result, no obligation for future issuances of Common Stock to
Beijing CATCH under the Master Agreement exists or are contemplated. See
"Certain Relationships and Related Transactions."
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The current funding requirement for the Hebei Multimedia Network is
estimated at approximately $23 million to link cable systems in the eleven
largest cities in Hebei Province. As of June 20, 1997, the Company had invested
approximately $1.0 million in Hebei Equipment for purposes of investment in the
Hebei Multimedia Network. The Company anticipates that the balance of required
funding will be provided in the form of equity and debt investments in Hebei
Equipment and additional joint venture entities that may be established with
strategic partners. See "Risk Factors -- Significant Additional Funding of
Joint Venture Projects Required."
The Company's ability to obtain profitable operations is dependent in part
on the successful development, implementation and marketing of the PRC joint
ventures' products and services. The Company will continue to seek funds in the
form of lines of credit and/or equity and debt offerings to third parties as
well as its existing shareholders. See "Risk Factors -- Possible Need for
Additional Capital."
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 December 1997, based
on its current operating expenditures. There can be no assurances 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.
EQUITY ISSUANCE AND SERVICE AGREEMENTS
As the Company's entire business consists of the financing and development
of telecommunications networks in the PRC, and the Sino-foreign joint ventures
for such projects are in their development stage, the Company had no cash flow
from such ventures during the fiscal year ended March 31, 1997. Since inception
of its current business in February 1995, the Company has financed its
participation in the Sino-foreign joint ventures through private equity
investments and loans from its founding stockholders. The following is a
discussion of arrangements entered into by the Company for certain financial,
legal and consulting services.
On July 30, 1996, the Company entered into an agreement with Merrill Lynch
(Asia Pacific) Limited ("Merrill Lynch") pursuant to which Merrill Lynch will
act as a financial advisor to the Company and will assist the Company with
strategic financing alternatives with respect to the Company's PRC projects.
The Company was required to pay Merrill Lynch a retainer of $50,000 upon the
execution of the agreement and three installments of $150,000 each payable every
120 days thereafter, none of which has been paid by the Company to date.
Additional fees may be paid to Merrill Lynch if Merrill Lynch successfully
assists the Company in raising capital for the Company and the Company's
Sino-foreign joint ventures.
In October 1996, the Company entered into an agreement with two of its law
firms, to settle a portion of their accrued fees through the issuance of stock
options. With this transaction, the Company converted accrued legal fees in the
aggregate of approximately $98,000 into options to purchase an aggregate of
65,064 shares of the Company's Common Stock at an exercise price of $1.50 per
share, the market value of the Company's common stock at that time. A portion
of the accrued legal fees were credited against gains made by actual resale
price. In addition, one firm continues to hold options to purchase 10,102
additional shares of Common Stock against future legal fees. The Company also
agreed to register the underlying shares with the Commission on Form S-8. The
registration statement relating to these shares was filed with the Commission on
or about November 11, 1996.
On October 15, 1996, the Company agreed to issue warrants to David
Rubenstein to purchase 200,000 shares of the Company's Common Stock. These
warrants were issued for Mr. Rubenstein's services related to advising the
Company with respect to its Sino-foreign joint ventures and marketing activities
in
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the PRC. The warrants issued have a three year term and an exercise price of
$1.50, which was the market value of the Company's Common Stock at the time of
issuance of the warrants.
On December 10, 1996, the Company agreed to issue to E. Pendelton James
5,000 shares of the Company's Common Stock with a market value of $18,125 (based
on the fair market value at the time of issuance), in addition to 5,000 shares
issued to him in May 1996 which had a market value of $45,625 (based on the fair
market value at the time of issuance), for professional executive search
consulting services he has been providing to the Company in developing the
composition of its management and Board of Directors.
The Company agreed to register shares of Common Stock underlying warrants
issued to David Rubenstein and shares of Common Stock issued to E. Pendelton
James for consulting services, and certain shares of Common Stock issued to
Joseph R. Wright, Jr. in lieu of cash compensation with the Commission. On or
about December 31, 1996, the Company filed a registration statement on Form S-8
with the Commission. The total number of shares covered by the registration
statement was 397,500.
On or about October 19, 1996, the Company entered into a twelve month
financial advisory services agreement with an investment bank. The services
provided under this agreement relate to financial advisory services, including,
but not limited to, the development of a financing strategy for the Company and
the Company's projects in the PRC. The agreement calls for a $50,000 retainer
and the payment of success fees for raising capital for the Company and its
projects. In addition, the Company has agreed to issue a warrant to purchase up
to 600,000 shares of the Company's Common Stock to the investment bank. This
warrant has an exercise price of $2.00 per share, which was the market value of
the Company's Common Stock at the time of the issuance of the warrants. 300,000
of the warrants vest immediately, and the additional 300,000 warrants will vest
only when the investment bank has raised a minimum of ten million dollars in any
form of financing for the Company.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1997 AND MARCH 31, 1996
Following the ITV Asset Sale in January 1996, the Company has focused its
business solely on establishing Sino-foreign joint ventures to develop
telecommunications networks in the PRC. As a result of the ITV Asset Sale, the
Company does not currently generate sales or market any products. Management
expects to begin reporting sales during fiscal year 1998 from Hebei Equipment's
interest in the GSM Network, which commenced operations in the fourth quarter of
fiscal year 1997. In light of this change in operations, net sales decreased
from $683,733 during the year ended March 31, 1996 to $0 during the year ended
March 31, 1997. Net sales during the year ended March 31, 1996 reflected the
former operations of ITV and 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, as well as filed testing of the Company's products. The
decrease in net sales during the year ended March 31, 1997 is attributable to
cessation of operations of the Company's ITV subsidiary after the Asset Sale of
ITV.
Selling, general and administrative expenses increased 25% from $3,207,570
during the year ended March 31, 1996 to $3,996,151 during the year ended March
31, 1997 due to increased levels of salaries paid to employees and legal and
professional expenses incurred over the past year.
Net research and development expenses decreased from $1,287,629 during the
year ended March 31, 1996 to $0 during the year ended March 31, 1997. 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 through its ITV subsidiary to establishing Sino-foreign
joint ventures with entities in the PRC involved in telecommunications through
its PRC subsidiary. As a result of the closing of the Asset Sale Agreement in
January 1996, the Company ceased all activities related to research and
development.
19.
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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. Through a series of secured debentures
issued by Netmatics to its shareholders, and the conversion of a note in the
amount of 2,250,000 to equity, the Company's ownership in Netmatics increased to
39%. Further, the Company has written off $198,538 of investments it has made
in Netmatics.
Interest expense during the year ended March 31, 1997 decreased to
approximately $130,000 from approximately $241,856 during the year ended March
31, 1996 due to a reduction in outstanding balance of shareholder loans payable
during the year ended March 31, 1997.
The loss from abandoned assets of $130,840 recorded during the year ended
March 31, 1996 represents a non-recurring "write-off" of certain remaining
assets of ITV that were not sold in the ITV Asset Sale.
The Company's net loss decreased 23% from $5,281,730 during the year ended
March 31, 1996 to $4,064,885 during the year ended March 31, 1997. This
decrease in net loss was due to reductions in losses and "write-offs" associated
with the operations of ITV, which were terminated following the ITV Asset Sale.
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 is
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. 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 is 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 in 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 $150,000 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.
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 shareholder loans
payable during the year ended March 31, 1996.
20.
<PAGE>
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.
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 SG&A 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this Item 7 are attached hereto as
"Exhibit (a)(1)" and incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported.
21.
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors of the Company currently have terms which will end at the
next annual meeting of the stockholders of the Company or until their successors
are elected and qualified, subject to their prior death, resignation or removal.
Officers are appointed by and serve at the discretion of the Board of Directors,
subject to the rights of the officers under their respective employment
agreements. There are no family relationships among any of the Company's
directors and executive officers.
NAME AGE POSITION
- - - --------------------- --- --------------------------------------------------
Joseph R. Wright, Jr. 58 Chairman of the Board of Directors, Chief
Executive Officer and President
Richard T. McNamar 58 Vice Chairman of the Board of Directors
Xiao Jun 40 Executive Vice President - AVIC China and Director
James R. Lilley 69 Director
Michael H. Wilson 59 Director
Drew Lewis 65 Director
Ju Feng 50 Director
Teoh Set Seng 45 Director
Albert G. Pastino 55 Senior Vice President and Chief Financial Officer
James F. O'Brien 51 Senior Vice President and General Counsel
Michael J. Lim 33 Executive Vice President - Operations
Timothy P. F. Crowley 25 Corporate Secretary
JOSEPH R. WRIGHT, JR. has served as the Company's Chairman of the Board of
Directors since May 1995, Chief Executive Officer since March 1996 and President
since May 1996. Mr. Wright also serves as Chairman and member of the Board of
GRC International, Inc. a U.S. public company that provides technical support to
government and private entities, Co-Chairman of Baker & Taylor Holdings, Inc.,
an international book and video distribution company, Vice Chairman of The
Jefferson Group, a member of the Board of Travelers Group, a public company,
PanAm Sat, a public company, and Deswell Industries, a public company. From
1989 to 1994, Mr. Wright served in various executive capacities for W. R. Grace
& Co., an international chemicals and health care company, and its associated
companies, including Executive Vice President and Vice Chairman of W. R. Grace &
Co., President of Grace Energy Corporation and Chairman of Grace Environmental
Company. From 1982 to 1989, Mr. Wright held the positions of Director and
Deputy Director of the Office of Management and Budget, The White House, and was
a member of President Reagan's cabinet. Prior to 1982, he served as Deputy
Secretary, United States Department of Commerce, President of Citicorp Retail
Services and Retail Consumer Services, held posts in the United States
Department of Agriculture, the United States Census Bureau and the United States
Department of Commerce, and was Vice President and Partner of Booz. Allen &
Hamilton, a management consulting firm. He is also currently a member of the
Board of Advisors of Barington Capital Corporation and Great Lakes Pulp and
Fiber Corporation, and a Trustee of Hampton University.
RICHARD T. MCNAMAR has served as the Company's Vice Chairman of the Board
of Directors since September 1996. He was the founder and Chairman of
International Franchise, Inc., a firm that specialized in international
financial transactions, from 1995 to 1997. He was a Managing Director of
Oppenheimer & Co. from 1991 to 1994. Formerly, he was the Vice-Chairman of The
Bank of New England Corporation and subsidiaries from 1990 to 1991. Mr. McNamar
served as Deputy Secretary of the United States
22.
<PAGE>
Treasury from 1981 to 1985. He served in the Nixon and Ford Administrations
from 1972 to 1977, where he served as the Executive Director of the Federal
Trade Commission from 1973 through 1977. Mr. McNamar is also currently a member
of the Executive Board of the Bretton Woods Committee, the Board of the
Institute of the Americas and the Advisory Committee of the World Economic
Forum.
XIAO JUN has served as a Director of the Company since February 1995 and
Executive Vice President - AVIC China since December 1995. He also served as
the Company's Secretary from February 1995 to January 1996 and as Chief
Financial Officer from June 1995 to May 1996. He has been the President of Xiao
Hua International, Inc., an international steel trading business based in
California since June 1993. He served as the Vice President of ITV from
December 1994 to January 1996. From March 1990 to May 1993, Mr. Xiao was the
Vice President of Chong Qing Special Metals Industry Co. From 1985 to 1990, Mr.
Xiao served as an engineer and project manager at the representative office of
IBM China/HK Corp. (Beijing). Mr. Xiao received a bachelor's degree in physics
from the Beijing Polytechnic University in 1982.
JAMES R. LILLEY has served as a Director of the Company since May 1997.
Ambassador Lilley is currently the Director of Asian Studies at the American
Enterprise Institute ("AEI") which he joined in January 1993, and directs the
Institute for Global Chinese Affairs at the University of Maryland. Prior to
his joining AEI, Ambassador Lilley served in President Bush's Administration as
the Assistant Secretary of Defense for International Security Affairs from
November 1991 to January 1993. Ambassador Lilley was U.S. Ambassador to the
People's Republic of China from April 1989 to May 1991, and to the Republic of
Korea from 1986 to 1989. Ambassador Lilley is the co-editor of BEYOND MFN:
TRADE WITH CHINA AND AMERICAN INTERESTS and is the author of the forward for the
AEI publication, CHINESE MILITARY MODERNIZATION. He has represented Hunt Oil of
Texas and United Technologies of Hartford, Connecticut in 1979 to 1980.
Ambassador Lilley worked for Archer-Daniels-Midland Co. and Westinghouse as a
business consultant.
MICHAEL H. WILSON has served as a Director of the Company since May 1997.
He has been Vice-Chairman of RBC Dominion Securities, Inc. in Toronto, Canada
since 1995. Prior to 1994, Mr. Wilson held senior Federal Cabinet posts with
the Government of Canada in Finance, Industry, Science and Technology and
International Trade. Prior to his career in public service, Mr. Wilson was
Executive Vice-President of Dominion Securities Limited. Mr. Wilson also serves
on the Board of Directors of Manulife Financial, a mutual insurance company,
Amoco Corporation, a publicly held company, and Rio Algom Limited, a publicly
held company. He is also active in a number of professional and community
organizations, including The Clarke Institute of Psychiatry, The Aspen Institute
and The Institute of the Americas.
DREW LEWIS has served as a Director of the Company since May 1997. Mr.
Lewis served as Chairman and Chief Executive Officer of Union Pacific
Corporation from October 1987 to January 1997, and served as the Chief Operating
Officer of Union Pacific Corporation from April 1986 to October 1987. Prior to
his positions with Union Pacific Corporation, Mr. Lewis served as Chairman and
Chief Executive Officer of Union Pacific Railroad Company from April to October
1986. From 1983 to 1986, Mr. Lewis was Chairman and Chief Executive Officer of
Warner Amex Cable Communications. He served in the Reagan Administration from
January 1981 to February 1983 as U.S. Secretary of Transportation. Mr. Lewis
also serves as a director to American Express Company, FPL Group, Inc., Gannett
Co., Inc., Gulfstream Aerospace Corporation, Lucent Technologies, Union Pacific
Resources Group, Inc. and Dal-Tile International, all of which are publicly held
companies.
JU FENG has served as a Director of the Company since February 1995. He
has been the Vice President and Chief Technical Officer of Beijing CATCH since
1990. Mr. Ju also serves as the Chairman of Hebei Equipment. 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 1990, 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
23.
<PAGE>
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 served as a Director of the Company since July 1994 and
served as the Secretary of the Company from July 1994 to February 1995. She has
also served as an internal auditor for Villa Genting Development SDN BHD since
June 1993. From 1983 to June 1993, Ms. Teoh served as a manager for Planglobal
Insurance SDN based in Malaysia.
ALBERT G. PASTINO was appointed in June 1997 to serve as a Senior Vice
President and Chief Financial Officer of the Company, subject to ratification of
such appointment by the Board of Directors. From 1993 to 1997, Mr. Pastino
served as the President of Kisco Capital Company, Inc., an affiliate of Kohlberg
& Company, a private equity investment company, where he was involved in a
number of equity transactions. He also served on the boards of directors of a
number of Kohlberg & Company's portfolio companies and currently serves on the
board of four such portfolio companies. From 1989 through 1992, Mr. Pastino
served as Senior Vice President and Chief Operating Officer of Fortis Private
Capital, Inc., a private equity investment company investing in expansion
financing and management buyouts. Mr. Pastino began his business career at
Deloitte & Touche LLP where he served as senior partner, and gained his
investment banking experience at Alex Brown & Sons, Incorporated. Mr. Pastino
received an M.B.A. from Fairleigh Dikinson University and a B.S. from St.
Joseph's University and completed the Harvard University Graduate School of
Business SCMP Program.
JAMES F. O'BRIEN was appointed in June 1997 to serve as a Senior Vice
President and General Counsel of the Company, subject to ratification of such
appointment by the Board of Directors. Mr. O'Brien was a senior litigation
partner at the law firm of Goulston and Storrs in Boston, Massachusetts where he
founded the litigation practice in 1978 and specialized in complex financial
transactions. Prior to that, Mr. O'Brien was an associate with the firm of
Bingham, Dana & Gould. He has served as an advisor to U.S. corporations seeking
business opportunities in Southeast Asia. Mr. O'Brien received a J.D. from
Boston College Law School and an A.B. from St. John's Seminary in Boston.
MICHAEL J. LIM has served as the Executive Vice President - Operations of
the Company since November 1995 and as the Chief Financial Officer from May 1996
through June 1997. He also served as a Director of the Company from December
1996 to April 1997. Prior to his joining the Company, Mr. Lim was an investment
banker with Bear, Stearns & Co., Inc. from 1986 to 1988 and from 1991 to 1995.
During the two and a half years prior to his joining the Company, Mr. Lim served
as Vice President of Bear Stearns Asia Limited, where he advised Asian
enterprises on a wide variety of financing transactions, with particular focus
on telecommunications and infrastructure financings. Mr. Lim also worked as an
investment banker with the Chase Manhattan Bank from 1990 to 1991. Mr. Lim
received his A.B. from Harvard College in English Literature in 1985 and his
M.B.A. from the Amos Tuck School of Business Administration at Dartmouth in
1990.
TIMOTHY P. F. CROWLEY joined the Company in May 1995 and has served as the
Secretary of the Company since January 1996. Prior to joining the Company. Mr.
Crowley worked in Corporate Administration at Travelers Group. Mr. Crowley
received his B.A. from Connecticut College in Anthropology and Art History, 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.
There are currently no members appointed to the Audit Committee of the
Board of Directors. During the fiscal year ended March 31, 1997, William H.
Davidson was the sole member of such committee until his resignation from the
Board in March 1997.
In May 1997 Klaus Schwab, the President and Founder of the World Economic
Forum in Geneva, Switzerland was appointed by the Board of Directors to serve as
a member of the Board of Directors of the Company. At the request of the World
Economic Forum's directors that Mr. Schwab reduce his involvement
24.
<PAGE>
in outside for-profit activities, Mr. Schwab resigned from the Company's Board
of Directors in June 1997. He resigned from a European corporation's board of
directors at approximately the same time. No Board meetings were held while he
was a Director.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of
the Securities Exchange Act of 1934, as amended, requires the Company's
directors and executive officers and beneficial holders of more than 10% of any
class of the Company's equity securities to file with the Commission initial
reports of ownership and reports of changes in ownership of such equity
securities of the Company. Based solely upon a review of such forms furnished
to the Company, and on written representations from certain reporting persons
that no other reports were required for such persons, the Company believes that
all reports required pursuant to Section 16(a) with respect to its executive
officers, directors and 10% beneficial stockholders for the fiscal year ended
March 31, 1997 were timely filed.
25.
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ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The Following tables set forth certain information concerning compensation
for the fiscal years ended March 31, 1997, 1996 and 1995 of certain of the
Company's executive officers, including the Company's Chief Executive Officer
and all executive officers whose total annual salary and bonus exceeded
$100,000, for the fiscal year ended March 31, 1997 (the "Named Executive
Offices").
<TABLE>
<CAPTION>
Long Term
Compensation
-------------------------
Annual Compensation Awards
---------------------------------------- -------------------------
Name and Other Annual Stock Options/
Principal Position Year Salary ($) Bonus ($) Compensation Awards ($) SARS (#)
- - - ------------------ ---- ---------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Joseph R. Wright 1997 $256,250 0 (2)$30,000 $281,250 3,000,000
Chief Executive 1996 143,750 0 (2)$30,000 3,000,000
Officer(1)
Xiao Jun 1997 123,958 0 0
Executive Vice 1996 57,990 0 400,000
President-AVIC 1995 42,250 0 125,000
China
Michael J. Lim 1997 167,333 0 0
Chief Financial 1996 79,615 0 1,000,000
Officer(3)
</TABLE>
_________________
(1) Mr. Wright has served as the Company's Chief Executive Officer since March
14, 1996. He joined the Company as the Chairman of the Board of Directors
on May 1, 1995.
(2) During fiscal 1996 and 1997, the Company paid approximately $30,000 per
year on behalf of Mr. Wright for certain personal tax and accounting
services rendered by third parties for Mr. Wright.
(3) Mr. Lim joined the Company as the Executive Vice President - Operations on
November 7, 1995 and served as the Company's Chief Financial Officer from
May 1996 through June 15, 1997.
26.
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OPTION AND SAR GRANTS DURING LAST FISCAL YEAR
The Company did not grant any stock options or SARs to its Named Executive
Officers during the fiscal year ended March 31, 1997.
OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding option
exercises by the Named Executive Officers during the fiscal year 1997 and
options held by such Named Executive Officers on March 31, 1997:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year End at Fiscal Year End(1)
Acquired on Value -------------------------- ---------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph R. Wright. . . 4,500,000 1,500,000 $10,800,000 3,600,000
Xiao Jun. . . . . . . 10,000 $78,950 415,000 100,000 995,425 240,000
Michael J. Lim. . . . 750,000 250,000 1,800,000 600,000
</TABLE>
________________
(1) Based on a per share price of $2.750, the closing price of the Common Stock
as reported on the American Stock Exchange, minus the exercise price of the
option, multiplied by the number of shares underlying the Option.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with six of its
executive officers, Messrs. Joseph R. Wright, Jr., Richard T. McNamar, Albert G.
Pastino, James F. O'Brien, Xiao Jun and Michael J. Lim.
The Company entered into a five year employment agreement dated as of April
15, 1995, and as amended on November 21, 1995 and September 6, 1996, with Joseph
R. Wright, Jr., pursuant to which Mr. Wright agreed to serve as the Company's
Chairman of the Board of Directors, Chief Executive Officer and President and to
operate out of the Company's executive offices located in New York, New York.
The employment agreement initially provided for an annual base salary of $50,000
during the year commencing April 15, 1995 and $300,000 during the year
thereafter. The September 6, 1996 amendment to the employment agreement
provides for the issuance of shares of Common Stock in lieu of cash compensation
as payment for the salary that Mr. Wright had accrued from June 1995 through
August 1996, at $1.50 per share, the market price of the Common Stock on
September 6, 1996. Further, the amendment offers Mr. Wright an automatic
extension of his contract of one year on each April 14, unless the Board of
Directors notifies Mr. Wright 90 days prior to such date that such extension
will not be made. The Board of Directors also approved revising his salary for
the first year commencing on April 15, 1997 to $150,000, revising his salary for
the second year to $300,000, and increasing his salary in each year thereafter
by $100,000. The Board of Directors of the Company also approved the issuance
of an additional three million options to Mr. Wright on September 12, 1996.
These options have an exercise price of $3.00 per share, the fair market value
on the date of grant, and vest with respect to fifty percent of said options on
each April 15, 1997 and April 15, 1998.
In September 1996 the Company approved the issuance of 187,500 shares of
the Company's Common Stock to Mr. Wright, paid in lieu of a portion of cash
compensation Mr. Wright had been accruing from June 1995 through October 15,
1996. The amount of salary accrued through October 15, 1996 was $281,250. The
Common Stock was issued at $1.50 per share, the fair market value of such shares
at the time of the grant.
27.
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Pursuant to the employment agreement, Mr. Wright was granted an option to
acquire 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 were granted on September 6, 1996. The option has vested with respect to
the 3,000,000 shares which have an exercise price of $0.35 per share, and with
respect to 1,500,000 shares which have an exercise price of $3.00 per share.
The balance of the option with respect to 1,500,000 shares which have an
exercise price of $3.00 per share will vest on April 15, 1998. The options
issued to Mr. Wright have been issued pursuant to the Company's 1996 Stock
Option Plan and were based on the market value of the Common Stock on the date
of grant.
On September 6, 1996, the Company entered into a one year verbal employment
agreement with Richard T. McNamar pursuant to which Mr. McNamar will serve as
Vice Chairman of the Company. He received 25,000 shares of the Company's Common
Stock upon commencing employment. Initially, Mr. McNamar was part time, and was
arranged to receive a contingent success fee for financings he introduced or
arranged for the Company. On October 1, 1996 Mr. McNamar became a full time
employee and waived his rights to any success fees. In his full time capacity,
Mr. McNamar will be paid $200,000 annual base salary. Mr. McNamar was issued an
option to purchase 250,000 shares of the Company's Common Stock at an exercise
price of $1.50 per share on September 6, 1996. He received an additional option
for 250,000 shares at an exercise price of $1.50 per share when he became a full
time employee on October 1, 1996. The exercise price of the options were based
on the market value of the Common Stock on the date of grant. The Company and
Mr. NcNamar intend to sign an employment agreement during the current fiscal
year.
On June 16, 1997, the Company entered into two year employment agreements
with each of Albert G. Pastino and James F. O'Brien, which agreements are
subject to ratification by the Board of Directors of the Company. Mr. Pastino
will serve as a Senior Vice President and Chief Financial Officer of the Company
and will receive an annual base salary of $100,000 for the first year and stock
options to acquire 400,000 shares of Common Stock at an exercise price of $3.00
per share. Mr. O'Brien will serve as a Senior Vice President and General
Counsel of the Company and will receive an annual base salary of $100,000 for
the first year and stock options to acquire 400,000 shares of Common Stock at an
exercise price of $3.00 per share.
The Company entered into a two year employment agreement, effective as of
November 6, 1995, with Michael J. Lim, pursuant to which he will serve as the
Company's Executive Vice President - Operations at an annual base salary of
$200,000. Mr. Lim also acted as the Company's Chief Financial Officer from May
1996 through June 15, 1997.
The Company entered into a two year employment agreement, effective as of
January 1, 1996, with Xiao Jun, pursuant to which he will serve as the
Company's Executive Vice President - AVIC China, at an annual base salary of
$175,000.
In connection with these employment agreements, the Company has agreed to
issue, to Messrs. Lim and Xiao, options to purchase up to 1,000,000 and 400,000
shares, respectively, of the Company's Common Stock, with 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. Lim and Xiao expire on November 6, 2005 and December 31,
2005, respectively, and were based on the market value of the Common Stock on
the date of grant.
The Company has also granted Mr. Xiao a five year option to acquire 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 "Stock Option Plans."
28.
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CONSULTANTS
The Company has entered into a consulting agreement with David Rubenstein
pursuant to which Mr. Rubenstein will provide to the Company advise on marketing
strategies and joint venture structures in the PRC. Mr. Rubenstein was granted
warrants to purchase 200,000 shares of Common Stock of the Company at an
exercise price of $1.50 per share, the market value of the Common Stock on the
date of the grant.
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 8,040,000 shares of Common Stock under the 1996 Stock Option Plan. Of the
8,040,000 options granted as of the date of this Report, 5,660,000 options have
vested, and the remaining 2,380,000 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's Stock Option Plan and does not purport to be complete.
ADMINISTRATION OF AND ELIGIBILITY UNDER STOCK OPTION PLANS. Each of the
Stock Option Plans, as adopted, provides for the issuance of options to purchase
shares of Common Stock to officers, directors, employees, independent
contractors and consultants of the Company and its subsidiaries. The Stock
Option Plans authorize the issuance of incentive stock options ("ISOs"), and
non-qualified stock options ("NSOs") and stock appreciation rights ("SARs") to
be granted by a committee (the "Committee") to be established by the Board of
Directors to administer the Stock Option Plans.
Subject to the terms and conditions of the Stock Option Plans, the
Committee will have the sole authority to determine: (a) the persons
("optionees") to whom options to purchase shares of Common Stock and SARs will
be granted, (b) the number of options and SARs to be granted to each such
optionee, (c) the price to be paid for each share of Common Stock upon the
exercise of such option, (d) the period within which each option and SAR will be
exercised and any extensions thereof, and (e) the terms and conditions of each
such stock option agreement and SAR agreement which may be entered into between
the Company and any such optionee.
All officers, directors and employees of the Company and its subsidiaries
and certain consultants and other persons providing significant services to the
Company and its subsidiaries will be eligible to receive grants of options and
SARs under the Stock Option Plans. However, only employees of the Company and
its subsidiaries are eligible to be granted ISOs.
STOCK OPTION AGREEMENTS. All options granted under the Stock Option Plans
will be evidenced by an option agreement or SAR agreement between the Company
and the optionee receiving such option or SAR. Provisions of such agreements
entered into under the Stock Option Plans need not be identical and
29.
<PAGE>
may include any term or condition which is not inconsistent with the respective
Stock Option Plan and which the Committee deems appropriate for inclusion.
INCENTIVE STOCK OPTIONS. Except for ISOs granted to stockholders
possessing more than ten percent (10%) of the total combined voting power of all
classes of the securities of the Company or its subsidiaries to whom such
ownership is attributed on the date of grant ("Ten Percent Stockholders"), the
exercise price of each ISO must be at least 100% of the fair market value of the
Company's Common Stock as determined on the date of grant. ISOs granted to Ten
Percent Shareholders must be at an exercise price of not less than 110% of such
fair market value.
Each ISO must be exercised, if at all, within ten (10) years from the date
of grant, but, within five (5) years of the date of grant in the case of ISOs
granted to Ten Percent Stockholders.
An optionee of an ISO may not exercise an ISO granted under the Stock
Option Plans so long as such person holds a previously granted and unexercised
ISO.
The aggregate fair market value (determined as of time of the grant of the
ISO) of the Common Stock with respect to which the ISOs are exercisable for the
first time by the optionee during any calendar year shall not exceed $100,000.
As of the date of this Report, ISOs have been granted under the 1995 Stock
Option Plan, subject to certain vesting schedules, to purchase up to 300,000
shares of Common Stock, 160,000 of which have been exercised. The 300,000 ISOs
have an exercise price of $0.3555 per share.
Further, as of the date of the Report, ISOs have been granted under the
1996 Stock Option Plan, subject to certain vesting schedules, to purchase up to
362,380 shares of Common Stock. These options have the following per share
exercise prices: 285,714 shares ($0.35), 66,666 shares ($3.00) and 10,000 shares
($1.50).
NON-QUALIFIED STOCK OPTIONS. The exercise price of each NSO will be
determined by the Committee on the date of grant. However, the exercise price
for the NSOs under the 1995 Stock Option Plan will in no event be less than 85%
of the fair market value of the Common Stock on the date the option is granted,
or not less than 110% of the fair market value of the Common Stock on the date
such option is granted in the case of an option granted to a Ten Percent
Stockholder. No such restriction exists with respect to the exercise prices of
NSOs granted under the 1996 Stock Option Plan.
The exercise price for each NSO will be determined by the Committee at the
time such option is granted, but in no event will such exercise period exceed
ten (10) years from the date of the grant.
As of the date of this Report, NSOs have been granted under the 1995 Stock
Option Plan, subject to certain vesting schedules, to purchase up to 20,000
shares of the 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 10,227,620 shares of Common Stock, subject to
certain vesting schedules. These options have the following per share exercise
prices: 3,733,334 shares ($3.00), 260,000 shares ($1.50) and 6,234,286 shares
($0.35).
STOCK APPRECIATION RIGHTS. Each SAR granted under the Stock Option Plans
will entitle the holder thereof, upon exercise of the SAR, to receive from the
Company, in exchange therefor, an amount equal in value to the excess of the
fair market value on the date of exercise of one share of Common Stock over its
fair market value on the date of 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
30.
<PAGE>
of one share of Common Stock at the time of exercise over the option exercise
price per share under the option to which the SAR relates), multiplied by the
number of shares of Common Stock covered by the SAR or the option, or portion
thereof, that is surrendered.
SARs will be exercisable only at the time or times established by the
Committee. If an SAR is granted in connection with an option, the SAR will be
exercisable only to the extent and on the same conditions that the related
option could be exercised. The Committee may withdraw any SAR granted under the
Stock Option Plans at any time and may impose any conditions upon the exercise
of an SAR or adopt rules and regulations from time to time affecting the rights
of holders of SARs.
As of the date of this Report, no SARs have been granted pursuant to the
1995 Stock Option Plan, 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 or SARs granted under the Stock Option Plans will terminate: (a) in the
event of death or disability, pursuant to the terms of the option agreement or
SAR agreement, but not less than six (6) months or more than twelve (12) months
after the applicable date of such event, (b) in the event of retirement,
pursuant to the terms of the option agreement or SAR agreement, but no less than
thirty (30) days or more than three (3) months after such retirement date, or
(c) in the event of termination of such person other than for death, disability
or retirement, until thirty (30) days after the date of such termination.
However, the Committee may in its sole discretion accelerate the exercisability
of any or all options or SARs upon termination of employment or cessation of
services.
The options and SARs granted under the Stock Option Plans generally will be
non-transferable, except by will or the laws of descent and distribution.
ADJUSTMENTS RESULTING FROM CHANGES IN CAPITALIZATION. The number of shares
of Common Stock reserved under the Stock Option Plans and the number and price
of Common Stock covered by each outstanding option or SAR under the Stock Option
Plans will be proportionately adjusted by the Committee for any increase or
decrease in the number of issued and outstanding shares of Common Stock
resulting form any stock dividends, split-ups. Consolidations,
recapitalizations, reorganizations or like event.
AMENDMENT OR DISCONTINUANCE OF STOCK OPTION PLAN. The Board of Directors
has the right to amend, suspend or terminate the Stock Option Plans at any time.
Unless sooner terminated by the Board of Directors, the 1995 Stock Option Plan
and the 1996 Stock Option Plan will terminate on February 8, 2005 and May 7,
2006, respectively, the tenth anniversary date of the effectiveness of each such
Stock Option Plan.
COMPENSATION OF DIRECTORS. The Company does not currently compensate its
Directors for services provided as Directors of the Company. Except for two
non-employee directors who each received 5,000 shares of Common Stock for a
value totaling $90,000 (based on market value) in April 1996, no compensation
was paid to non-employee Directors for services performed as Directors of the
Company during the fiscal year ended March 31, 1997.
DIRECTORS AND OFFICERS LIABILITY INSURANCE. The Company has obtained
directors' and officers' liability insurance with an aggregate liability for the
policy year, inclusive of costs of defense, in the amount of $3,000,000. The
insurance policy ending April 3, 1997, was renewed April 1, 1997 and will expire
April 3, 1998.
INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Company's Certificate of
Incorporation and Bylaws designate the relative duties and responsibilities of
the Company's officers, establish procedures for actions by directors and
stockholders and other items. The Company's Certificate of Incorporation and
Bylaws also contain extensive indemnification provisions that will permit the
Company to indemnify its officers and directors to the maximum extent provided
by Delaware law.
31.
<PAGE>
In addition, the Company has adopted a form of indemnification agreement
(the "Indemnification Agreement") which provides the indemnitee with the maximum
indemnification allowed under applicable law. The Company has not entered into
Indemnification Agreements with any of its directors, executives, employees or
consultants as of the date of this Report. Since the Delaware statute is
non-exclusive, it is possible that certain claims beyond the scope of the
statute may be indemnifiable. The Indemnification Agreements provide a scheme
of indemnification which may be broader than that specifically provided by
Delaware law. It has not yet been determined, however, to what extent the
indemnification expressly permitted by Delaware law may be expanded, and
therefore the scope of indemnification provided by the Indemnification
Agreements may be subject to future judicial interpretation.
The Indemnification Agreement provides, in pertinent part, that the Company
shall indemnify an indemnitee who is or was a party or is threatened, pending or
completed action or proceeding whether civil, criminal, administrative or
investigative by reason of the fact that the indemnitee is or was a director,
officer, key employee or agent of the Company or any subsidiary of the Company.
The Company shall advance all expenses, judgments, fines, penalties and amounts
paid in settlement (including taxes imposed on indemnitee on account of receipt
of such payouts) incurred by the indemnitee in connection with the
investigation, defense, settlement or appeal of any civil or criminal action or
proceeding as described above. The indemnitee shall repay such amounts advanced
only if it shall be ultimately determined that he or she is not entitled to be
indemnified by the Company. The advances paid to the indemnitee by the Company
shall be delivered within 20 days following a written request by the indemnitee.
Any award of indemnification to an indemnitee, if not covered by insurance,
would come directly from assets of the Company, thereby affecting a
stockholder's investment.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS. Except as set
forth in employment agreements 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.
32.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as
of July 8, 1997 by: (i) each person known by the Company to beneficially own 5%
or more of the outstanding shares of Common Stock, (ii) each director of the
Company, (iii) each Named Executive Officer of the Company and (iv) all
directors and executive officers of the Company as a group. Unless otherwise
indicated below, to the knowledge of the Company, all persons listed below have
sole voting and investment power with respect to their shares of Common Stock,
except to the extent authority is shared by spouses under applicable law. The
information set forth in the table and accompanying footnotes has been furnished
by the named beneficial owners:
NAME OF NO. OF
BENEFICIAL OWNER SHARES(1) PERCENT(1)
---------------- ---------- ----------
Tweedia International Limited(2). . . . 14,570,269 43.9
Max Chian Yi Sun(3) . . . . . . . . . . 2,798,191 9.0
Joseph R. Wright, Jr.(4). . . . . . . . 4,802,500 13.4
Richard T. McNamar(5) . . . . . . . . . 150,000 *
Xiao Jun(6) . . . . . . . . . . . . . . 425,000 1.3
James R. Lilley . . . . . . . . . . . . 0 -
Michael H. Wilson . . . . . . . . . . . 0 -
Drew Lewis. . . . . . . . . . . . . . . 10,000 *
Ju Feng(7). . . . . . . . . . . . . . . 14,575,269 43.9
Teoh Set Seng . . . . . . . . . . . . . 0 -
Michael J. Lim(8) . . . . . . . . . . . 756,900 2.4
All executive officers and
directors as a group. . . . . . . . . 21,469,669 54.1
______________
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options currently exercisable, or exercisable within 60 days of
July 8, 1997, are deemed outstanding for computing the percentage of the
person holding such options but are not deemed outstanding for computing
the percentage of any other person.
(2) Includes 1,524,178 shares of Series A Convertible Preferred Stock which are
convertible into an equivalent number of shares of Common Stock and options
to purchase 318,182 shares of Common Stock. Beijing CATCH is the
beneficial owner of all of the outstanding stock 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. The address of Tweedia is
Columbus Centre Building, Wickhams Cay, Road Town Tortola, British Virgin
Islands.
(3) Includes 2,797,691 shares of Common Stock held of record by Occidental
Worldwide Corporation of which Mr. Sun has sole voting and investment
power. The address of Mr. Sun is 126 JLN DEDAP, Taman Ampang Jaya, Trima
Jaya, 68000 Ampang, Selangor, Malyasia.
(4) Includes options to purchase 4,500,000 shares of Common Stock. The address
of Mr. Wright is c/o AmTec, Inc., 599 Lexington Avenue, 44th Floor, New
York, New York 10022.
(5) Includes options to purchase 125,000 shares of Common Stock.
(6) Includes options to purchase 415,000 shares of Common Stock.
(7) Includes shares beneficially owned by Tweedia. Mr. Ju is an officer and
director of Beijing CATCH which has an option to acquire Tweedia. Mr. Ju
is the record holder of 5,000 shares of Common
33.
<PAGE>
Stock. The address for Mr. Ju is Jing Ming Building, No. 10 Hua Yan Road,
Chaoyang District, Beijing, PRC, 100029.
(8) Includes options to purchase 750,000 shares of Common Stock.
34.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1995, pursuant to the Reorganization Agreement, Tweedia became
the owner of approximately 12,727,000 shares, or approximately 41%, of the
Company's issued and outstanding Common Stock. Beijing CATCH Communications
Group Co., a Chinese paging company under the jurisdiction of the Beijing
Municipal Government, has an option to acquire 100% of the outstanding capital
stock of Tweedia. However, this option may not be exercised without the receipt
by Beijing CATCH of all PRC regulatory approvals applicable to such exercise.
After discussions with PRC counsel, management believes that these approvals to
own securities listed on non-PRC stock exchanges are substantive in nature and
are not readily obtained in the PRC except by corporations or banks that are
specifically authorized to own foreign securities.
As of December 21, 1995, pursuant to the terms of the Master Agreement,
Beijing CATCH 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 construction, operation or acquisition of any type of
telephony, telecommunications equipment, paging equipment or related forms of
communication equipment or service in the PRC. As consideration for this right
of first refusal, the Company agreed to issue up to 50,000,000 shares of Common
Stock to Tweedia based on the receipt of certain agreed upon amounts of net
income by the Company relating to prospective Sino-foreign joint ventures
involving the Company and Beijing CATCH. The Master Agreement supersedes
certain terms of other prior agreements between the Company and Beijing CATCH
concerning cooperation on telecommunications projects. As of July 8, 1997, the
Company has not entered into, and management has no current intent of entering
into, any Sino-foreign joint ventures with Beijing CATCH under the terms of the
Master Agreement. As a result, no obligation for future issuances of Common
Stock to Beijing CATCH under the Master Agreement exists or are contemplated.
Beijing CATCH is in the process of being acquired by Hainan Minyuan Modern
Agriculture Company ("Hainan Minyuan"), a publicly listed company in the PRC
primarily engaged in real estate development and agriculture production in
Hainan Province of the PRC. In late 1996, Hainan Minyuan proposed to acquire
Beijing CATCH, and the acquisition was approved by the shareholders of both
companies. As of May 1997, Hainan Minyuan's proposed acquisition of Beijing
CATCH was awaiting final approval by the Chinese governmental authorities. If
the acquisition receives final approval by the necessary Chinese governmental
authorities, Hainan Minyuan will in turn hold the option to acquire control of
Tweedia and a proxy to vote the shares of Tweedia. This option may not be
exercised until all applicable PRC approvals are obtained. Hence at this time
the control of Tweedia by Hainan Minyuan and its indirect ability to
substantially influence the Company is uncertain.
At the time of the Company's acquisition of the majority stake in Hebei
Equipment, Hebei United Telecommunications Development Co. ("Hebei Development")
held a 30% ownership of Hebei Equipment and Beijing CATCH held subscription
rights to 9.2% ownership of Hebei Equipment. Subsequent to Hebei Equipment's
conversion to a Sino-foreign joint venture company, Beijing CATCH defaulted on
its required capital contribution of 2 million Renminbi (1 U.S. dollar equals
approximately 8.35 Renminbi). On April 22, 1997, the Board of Directors of
Hebei Equipment resolved to terminate Beijing CATCH's ownership participation in
Hebei Equipment, and the Company and Hebei Development agreed to provide to
Hebei Equipment the 2 million Renminbi defaulted on by Beijing CATCH. The
allocation of (i) the 2 million Renminbi investment required from the Company
and Hebei Development and (ii) the 9.2% ownership previously held by Beijing
CATCH are currently under discussions between the Company and Hebei Development.
35.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) EXHIBITS
The following exhibits, which are furnished with this Annual Report or
incorporated herein by reference, are filed as part of this Annual Report:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
2.1 Agreement for Sale of Assets by and between ITV Communications, Inc.
and Netmatics, Inc., dated January 11, 1996, and Promissory Note and
Security Agreement dated January 16, 1996(1)
2.2 Agreement of Merger between AVIC Group International, Inc., a Colorado
corporation, with and into AVIC Group International, Inc., a Delaware
corporation dated July 10, 1996(8)
3.1 Amendments to Articles of Incorporation of the Company dated June 7,
1996 and June 10, 1996(5)
3.2 Restated Certificate of Incorporation of the Company(7)
3.3 Certificate of Ownership and Merger Merging China Telecommunications
and Technologies, Inc. into the Company
3.4 Certificate of Designations of Preferences of Series C Convertible
Preferred Stock of the Company
3.5 Certificate of Designations of Preferences of Series D Convertible
Preferred Stock of the Company(7)
3.6 Restated Bylaws of the Company(8)
4.1 Specimen Common Stock Certificate
10.1 1995 Stock Option Plan(2)
10.2 1996 Stock Option Plan(2)
10.3 Real Property lease between Lexreal Associates and the Company dated
May 8, 1995(2)
10.4 Employment Agreement between Joseph R. Wright, Jr. and the Company
dated as of April 15, 1995(3), and amendments thereto dated as of
November 21 1995(4) and September 12, 1996(6)
10.5 Employment Agreement between Michael J. Lim and the Company dated as
of November 6, 1995(4)
10.6 Employment Agreement between Xiao Jun and the Company dated as of
January 1, 1996(4)
10.7 Employment Agreement between Albert G. Pastino and the Company dated
as of June 16, 1997
10.8 Employment Agreement between James F. O'Brien and the Company dated as
of June 16, 1997
10.9 Form of Indemnification Agreement for directors and officers of the
Company(8)
10.10 Consulting Agreement between American CATCH Communications Group Co.
and the Company dated November 30, 1995(4)
10.11 Consulting Agreement between Michael Markow and the Company dated
December 15, 1995(4)
10.12 Consulting Agreement between David Rubenstein and the Company dated
October 15, 1996(6)
10.13 Consulting Agreement between E. Pendleton James and the Company dated
March 22, 1995, and amendment thereto dated January 8, 1997(6)
36.
<PAGE>
10.14 Common Stock Investment Agreement between Promethean Investment Group
L.L.C. and the Company dated March 31, 1997, as amended on April 29,
1997
10.15 China Paging Networks Preliminary Agreement between Beijing CATCH
Communications Group Co. and the Company dated April 1995(3)
10.16 Mobile Telephone Network Preliminary Agreement between Beijing CATCH
Communications Group Co. and the Company dated April 27, 1995(3)
10.17 Cellular Telephone Network Preliminary Agreement between Beijing CATCH
Communications Group Co., Tweedia International Limited and the
Company dated April 1995(3)
10.18 Memorandum of Understanding between Hebei United Communications
Equipment Company and the Company dated May 1, 1995(3)
10.19 Master Agreement and Right of First Refusal between Beijing CATCH
Communications Group Co., Tweedia International Limited and the
Company dated December 21, 1995(4)
10.20 Letter of Intent between Hebei United Communications Equipment Company
and the Company dated October 10, 1995(4)
10.21 Joint Venture Contract between Beijing CATCH Communications Group Co.
and the Company dated June 11, 1996(5)
10.22 Joint Venture Contract between Hebei United Communications Equipment
Company and NTTI dated December 22, 1995(5)
10.23 Agreement between Hebei United Communications Equipment Company and
the Company dated March 22, 1996(5)
10.24 Joint Venture Contract between Hebei United Telecommunications
Development Company, Beijing CATCH Communications Group Co. and the
Company dated September 20, 1996
10.25 Project Cooperation Contract between China United Telecommunications
Co. and Hebei United Telecommunications Engineering Company Limited
dated February 9, 1996
10.26 Term Loan Agreement between Hebei United Telecommunications
Engineering Company Limited and Bank of Tokyo-Mitsubishi, Ltd. dated
August 5, 1996
10.27 Project Cooperation Contract between Hebei Cable Television Station
and Hebei United Communications Equipment Company Limited dated April
8, 1997
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP
27 Financial Data Schedule
_______________
(1) Previously filed as part of the Company's Current Report on Form 8-K
dated January 19, 1996.
(2) Previously filed as part of the Company's Transition Report on Form
10-KSB for the transition period from October 1, 1994 to March 31, 1995.
(3) Previously filed as part of the Company's Current Report on Form 8-K
dated May 1, 1995.
(4) Previously filed as part of the Company's Current Report on Form 8-K
dated December 22, 1995.
(5) Previously filed as part of the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1996.
(6) Previously filed as part of the Company's Registration Statement on Form
S-8 filed on January 31, 1997.
(7) Previously filed as part of the Company's Current Report on Form 8-K
dated March 6, 1997.
(8) Previously filed as part of the Company's Definitive Proxy Statement
dated April 18, 1996.
(b) REPORTS ON FORM 8-K:
During the quarter ended March 31, 1997, the Company filed a report on Form
8-K dated March 6, 1997 covering Items 7 and 9 under that Form relating to the
issuance of shares of the Company's Series D Convertible Preferred Stock.
37.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMTEC, INC.
By /s/ Joseph R. Wright, Jr.
----------------------------------------
Joseph R. Wright, Jr.
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Date: July 14, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Joseph R. Wright, Jr. Chairman of the Board of Directors, July 14, 1997
- - - ------------------------- Chief Executive Officer and President
Joseph R. Wright, Jr. (Principal Executive Officer)
/s/ Richard T. McNamar Vice Chairman of the Board of July 14, 1997
- - - ------------------------- Directors
Richard T. McNamar
/s/ Xiao Jun Executive Vice President - AVIC July 14, 1997
- - - ------------------------- China and Director
Xiao Jun
/s/ James R. Lilley Director July 14, 1997
- - - -------------------------
James R. Lilley
/s/ Michael H. Wilson Director July 14, 1997
- - - -------------------------
Michael H. Wilson
/s/ Drew Lewis Director July 14, 1997
- - - -------------------------
Drew Lewis
Director July 14, 1997
- - - -------------------------
Ju Feng
Director July 14, 1997
- - - -------------------------
Teoh Set Seng
/s/ Michael J. Lim Executive Vice President - Operations July 14, 1997
- - - ------------------------- (Principal Financial and Accounting
Michael J. Lim Officer)
38.
<PAGE>
AMTEC INC. AND SUBSIDIARIES
(FORMERLY AVIC GROUP INTERNATIONAL
INC. AND SUBSIDIARIES)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997
AND 1996, AND INDEPENDENT AUDITORS'
REPORT
F-1
<PAGE>
AMTEC INC. AND SUBSIDIARIES (FORMERLY AVIC GROUP INTERNATIONAL INC. AND
SUBSIDIARIES)
TABLE OF CONTENTS
- - - --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORT F-3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-4
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED MARCH 31, 1997 AND 1996:
Consolidated Balance Sheets F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10 - F-24
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
AmTec Inc. and Subsidiaries (formerly AVIC
Group International Inc. and Subsidiaries)
We have audited the accompanying consolidated balance sheet of AmTec Inc. and
Subsidiaries (formerly AVIC Group International, Inc. and Subsidiaries) as of
March 31, 1997, and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the March 31, 1997 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
March 31, 1997, and the results of its operations and its cash flows for the
year then ended, 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. The Company is engaged in
developing telecommunications networks in the People's Republic of China. As
discussed in Note 1 to the financial statements, the Company's substantial
capital requirements and the Company's operating losses since inception raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
New York, New York
June 20, 1997
July 8, 1997 (as to Note 16)
F-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
AVIC Group International, Inc.
We have audited the accompanying consolidated balance sheet of AmTec, Inc.
and Subsidiaries (formerly AVIC Group International, Inc. and Subsidiaries)
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. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 AmTec, Inc.
and Subsidiaries (formerly AVIC Group International, Inc. and Subsidiaries) 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, 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. 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.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
June 18, 1996
F-4
<PAGE>
AMTEC INC. AND SUBSIDIARIES
(FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash $ 5,390,871 $ 185,889
Prepaid expenses and other current assets 182,090 60,678
------------- ------------
Total current assets 5,572,961 246,567
Property and equipment, net 518,020 76,233
GSM construction costs 22,017,869 -
Joint venture deposits - 1,170,000
Additional investment in joint venture 1,192,000 -
Office lease deposit 111,500 167,200
Deferred expenses 5,853 -
------------- ------------
Total assets $ 29,418,203 $ 1,660,000
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 991,194 $ 866,990
Accrued interest 780,902 651,063
Loans payable - stockholders 2,413,553 2,563,553
Current portion of other payables 450,685 -
------------- ------------
Total current liabilities 4,636,334 4,081,606
------------- ------------
Loans payable 11,956,486 -
------------- ------------
Other payables 10,290,128 -
------------- ------------
Minority interest 1,987,167 -
------------- ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY/(DEFICIT):
Series A Convertible Preferred Stock:
$.001 par value, authorized 10,000,000 shares; 1,524,178
shares issued and outstanding in 1997 and 1996 1,524 1,524
Series D Convertible Preferred Stock:
$.001 par value, authorized 10,000,000 shares; 150 and 0 shares
issued and outstanding in 1997 and 1996, respectively. 1 -
Common stock: $.001 par value, authorized 100,000,000 shares;
31,257,921 and 28,436,952 issued and outstanding in 1997
and 1996, respectively 31,258 28,437
Additional paid-in capital 25,202,108 18,648,620
Accumulated deficit (20,592,536) (16,527,651)
Cumulative foreign currency exchange gain (1,231) -
Non-refundable equipment purchase deposit (4,572,536) (4,572,536)
Warrants 479,500 -
------------- ------------
Total stockholders' equity/(deficit) 548,088 (2,421,606)
------------- ------------
$ 29,418,203 $ 1,660,000
------------- ------------
------------- ------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AMTEC INC. AND SUBSIDIARIES
(FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net sales $ - $ 683,733 $ 345,276
------------ ------------- -------------
Expenses:
Cost of sales - 637,065 330,981
Selling, general and administrative 3,996,151 3,207,570 3,513,567
Research and development - 1,287,629 2,086,324
------------ ------------- -------------
Total expenses 3,996,151 5,132,264 5,930,872
------------ ------------- -------------
Loss from operations (3,996,151) (4,448,531) (5,585,596)
------------ ------------- -------------
Other income (expense):
Consulting income - - 150,000
Rental income 42,420 - -
Interest income 152,824 - -
Gain from sale of assets - 31,880 -
Loss from abandoned assets - (130,840) -
Equity in losses of unconsolidated
subsidiary - (500,000) -
Interest expense (129,039) (241,856) (117,533)
Exchange loss (19,490) - -
Other - net - 7,617 14,826
Write off of investment in
Netmatics (198,538) - -
------------ ------------- -------------
Total other income (expense) (151,823) (833,199) 47,293
------------ ------------- -------------
Loss before minority interest (4,147,974) (5,281,730) (5,538,303)
Minority interest in loss of subsidiaries 83,089 - -
------------ ------------- -------------
Net loss $ (4,064,885) $ (5,281,730) $ (5,538,303)
------------ ------------- -------------
------------ ------------- -------------
Preferred stock dividend requirement $ 10,000 $ - $ -
------------ ------------- -------------
Loss applicable to common shares $ (4,074,885) $ - $ -
------------ ------------- -------------
------------ ------------- -------------
Net loss per common share $ (0.14) $ (0.21) $ (0.32)
------------ ------------- -------------
------------ ------------- -------------
Weighted average common
shares outstanding 29,102,347 25,651,045 17,173,262
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
AMTEC INC. AND SUBSIDIARIES
(FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES D
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
--------------------- -------------------- ---------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- --------- --------- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1994 10,000,500 $ 10,001 - $ - - $ - - $ -
Sale of common stock for cash 12,742,909 12,743 - - - - - -
Forgiveness of stockholder accrued
expenses, September 1994 - - - - - - - -
Issuance of common stock for merger,
February 1995 2,500,000 2,500 - - - - - -
Net loss - - - - - - - -
---------- --------- --------- -------- ------ ------ ------ ------
BALANCE, March 31, 1995 25,243,409 25,244 - - - - - -
Issuance of Series A preferred stock for
interest in deposit, December 1995 - - 1,524,178 1,524 - - - -
Sale of common stock for cash 1,302,020 1,302 - - - - - -
Conversion of stockholders' loans to
common stock, February 1996 1,891,553 1,891 - - - - - -
Exercise of options, February 1996 - - - - - - - -
Equipment purchase deposit - - - - - - - -
Net loss - - - - - - - -
---------- --------- --------- -------- ------ ------ ------ ------
BALANCE, March 31, 1996 28,436,982 28,437 1,524,178 1,524 - - - -
Issuances of Series B preferred stock - - - - 100 1 -
Conversion of Series B shares 1,507,477 1,507 - - (100) (1) -
Issuance of Series D preferred stock - - - - - - 150 1
Common shares issued for services rendered 90,962 91 - - - - - -
Common shares issued to employees
as compensation 212,500 213 - - - - - -
Common shares issued for directors fees 10,000 10 - - - - - -
Sale of common shares 1,000,000 1,000 - - - - - -
Preferred dividends - - - - - - - -
Warrants - - - - - - - -
Cumulative foreign exchange loss - - - - - - - -
Net loss - - - - - - - -
---------- --------- --------- -------- ------ ------ ------ ------
BALANCE, March 31, 1997 31,257,921 $ 31,258 1,524,178 $ 1,524 - $ - 150 $ 1
---------- --------- --------- -------- ------ ------ ------ ------
---------- --------- --------- -------- ------ ------ ------ ------
<CAPTION>
CUMULATIVE
FOREIGN EQUIPMENT
ADDITIONAL EXCHANGE PURCHASE
PAID-IN ACCUMULATED GAIN (LOSS) DEPOSIT
WARRANTS CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1994 $ - $ 7,100,149 $ (5,707,618) $ - $ - $ 1,402,532
Sale of common stock for cash - 2,592,589 - - - 2,605,332
Forgiveness of stockholder accrued
expenses, September 1994 - 305,027 - - - 305,027
Issuance of common stock for merger,
February 1995 - (2,500) - - - -
Net loss - - (5,538,303) - - (5,538,303)
---------- ------------ ------------ --------- ------------ ----------
BALANCE, March 31, 1995 - 9,995,265 (11,245,921) - - (1,255,412)
Issuance of Series A preferred stock for
interest in deposit, December 1995 - 4,571,012 - - - 4,572,536
Sale of common stock for cash - 2,192,681 - - - 2,193,983
Conversion of stockholders' loans to
common stock, February 1996 - 1,889,662 - - - 1,891,553
Exercise of options, February 1996 - - - - - -
Equipment purchase deposit - - - - (4,572,536) (4,572,536)
Net loss - - (5,281,730) - - (5,281,730)
---------- ------------ ------------ --------- ------------ ----------
BALANCE, March 31, 1996 - 18,648,620 (16,527,651) - (4,572,536) (2,421,606)
Issuances of Series B preferred stock - 2,341,218 - - - 2,341,219
Conversion of Series B shares - (1,506) - - - -
Issuance of Series D preferred stock - 1,499,999 - - - 1,500,000
Common shares issued for services rendered - 316,249 - - - 316,340
Common shares issued to employees
as compensation - 318,538 - - - 318,751
Common shares issued for directors fees - 89,990 - - - 90,000
Sale of common shares - 1,999,000 - - - 2,000,000
Preferred dividends (10,000) - - (10,000)
Warrants 479,500 - - - - 479,500
Cumulative foreign exchange loss - - - (1,231) - (1,231)
Net loss - - (4,064,885) - - (4,064,885)
---------- ------------ ------------ --------- ------------ ----------
BALANCE, March 31, 1997 $ 479,500 $ 25,202,108 $(20,592,536) $ (1,231) $ (4,572,536) $ 548,088
---------- ------------ ------------ --------- ------------ ----------
---------- ------------ ------------ --------- ------------ ----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
AMTEC INC. AND SUBSIDIARIES
(FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,064,885) $ (5,281,730) $ (5,538,303)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of capitalized software
development costs - 281,250 168,750
Depreciation 43,193 346,005 344,611
Loss from abandoned assets - 130,840 -
Gain from sale of assets - (31,880) -
Minority interest in net loss 83,089 - -
Issuance of warrants for services rendered 479,500 - -
Issuance of common stock for compensation, directors'
fees and services rendered 725,091 - -
Equity in losses of unconsolidated subsidiary - 500,000 -
(Increase) decrease in:
Accounts receivable - 98,895 (96,614)
Inventories - (96,091) (110,154)
Prepaid expenses and other current assets 5,948,801 (91,200) (12,258)
Office lease deposit 55,700 - 850,000
Other assets - (131,887) (16,453)
Deferred expenses 59,412 - -
Increase (decrease) in:
Accounts payable and accrued expenses 98,221 1,251,464 (103,086)
Accrued interest 129,839 136,982 114,293
------------ ---------- ------------
Net cash provided by (used in)
operating activities 3,557,961 (2,887,352) (4,399,214)
------------ ---------- ------------
Cash flows from investing activities:
Purchase of property and equipment (362,417) (119,592) (527,725)
Joint venture deposit 1,170,000 (1,170,000) -
Proceeds from sale of assets - 250,000 -
Increase in capitalized computer software
development costs - - (333,767)
GSM construction costs (21,880,584) - -
Joint Venture's Net liabilities assumed 6,549,703 - -
Increase in Investment in joint venture (1,192,000) - -
------------ ---------- ------------
Net cash used in investing activities (15,715,298) (1,039,592) (861,492)
------------ ---------- ------------
Cash flows from financing activities:
Borrowings 11,521,100 739,952 2,245,227
Receipt of common stock subscription receivable - - 1,536,303
Proceeds from sale of common stock 2,000,000 2,193,983 2,605,200
Proceeds from sale of Series B Convertible Preferred Stock 2,341,219 - -
Proceeds from sale of Series D Convertible Preferred Stock 1,500,000 - -
------------ ---------- ------------
Net cash provided by financing activities 17,362,319 2,933,935 6,386,730
------------ ---------- ------------
Net increase (decrease) in cash and cash equivalents 5,204,982 (993,009) 1,126,024
Cash and cash equivalents, beginning of period 185,889 1,178,898 52,874
------------ ---------- ------------
Cash and cash equivalents, end of period $ 5,390,871 $ 185,889 $ 1,178,898
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
(Continued)
F-8
<PAGE>
AMTEC INC. AND SUBSIDIARIES
(FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - --------------------------------------------------------------------------------
Supplemental Cash Information:
No interest or income taxes were paid during fiscal 1997, 1996 and 1995.
Non Cash Financing Activities:
In fiscal 1997, 100 shares of Series B Preferred stock were converted into
1,507,477 shares of common stock.
In fiscal 1996, loans from stockholders of $1,891,553 were converted into
1,891,553 shares of common stock.
In fiscal 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 fiscal 1996, a deposit from a stockholder of $850,000 was converted to a note
payable.
In fiscal 1995, accrued expenses to a stockholder of $305,159 was forgiven and
additional paid-in capital was increased by $305,159.
See notes to consolidated financial statements.
(Concluded)
F-9
<PAGE>
AMTEC INC. AND SUBSIDIARIES
(FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
- - - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE OF BUSINESS - AmTec, Inc. (the "Company" or "AmTec")
was incorporated in Colorado on May 10, 1982. In February 1995, AmTec
acquired all of the outstanding stock of ITV Communications, Inc. ("ITV").
For accounting purposes, the acquisition has been treated as a reverse
acquisition with ITV as the acquirer. The historical financial statements
prior to February 1995 are those of ITV. AmTec had no assets at the date
of the acquisition and, therefore, no proforma information is being
presented. The Company is currently devoting substantially all of its
efforts with its majority-owned subsidiary in the People's Republic of
China ("PRC") which is involved in providing financing and building
telecommunications networks for third parties in the PRC. The Company,
through its wholly-owned subsidiary, ITV was engaged in the design,
manufacture and sale of technologically advanced communication devices. In
January 1996, the Company sold all of the business and operating assets of
ITV and is no longer involved in the business that ITV was engaged in. The
Company (including its subsidiaries) currently does not generate sales or
market any products.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the Company, its 60.8% owned subsidiary Hebei United Communications
Equipment Co., Ltd. and subsidiary ("Hebei Equipment") (a limited life
Sino-foreign joint venture) and its wholly-owned subsidiary, ITV
Communications, Inc. All significant intercompany accounts and
transactions are eliminated in consolidation. Hebei Equipment owns 51% of
Hebei United Telecommunications Engineering Company, Ltd. ("Hebei
Engineering").
The financial statements of Hebei Equipment included in the consolidated
financial statements are as of and for the period ended December 31, 1996,
Hebei Equipment's year-end. In the period January 1, 1997 to the Company's
fiscal year end, an additional $1,192,000 has been invested by the Company
in Hebei Engineering. Such amount will not eliminate on consolidation due
to the different year-end dates. As such, the amount has been included in
the balance sheet at March 31, 1997 as Additional investment in joint
venture.
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. During the
years ended March 31, 1997, 1996 and 1995, the Company experienced net
losses of $4,064,885, $5,281,730 and $5,538,303, respectively. In view of
these matters, realization of the assets in the accompanying balance sheet
is dependent upon the Company's ability to raise capital, to meet its
financing and operating requirements and the success of its majority owned
subsidiary in the PRC to complete its projects and to obtain profitable
operations. In response, management is pursuing investor opportunities and
joint ventures to provide funds needed for such existing and future
projects.
MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the
F-10
<PAGE>
financial statements and the reported amounts of revenues and expense
during the reporting period. Actual results could differ from those
estimates.
CASH EQUIVALENTS - For purposes of the statements of cash flows, the
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is provided using the straight line method, to write off the
cost of property and equipment over their estimated useful lives, after
deducting the estimated salvage value of 10% of cost, as follows:
Land and buildings 20 years
Furniture, fixtures and equipment 5 years
Motor vehicles 5 years
Leasehold improvements 5 years
Computer equipment 3 years
REVENUE RECOGNITION - Revenue related to the Company's former operations of
ITV was derived primarily from product sales, and was recognized upon
shipment of the products. (See Note 3 as to current projects).
RESEARCH AND DEVELOPMENT COSTS - Research and development costs of ITV 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."
FOREIGN CURRENCY TRANSLATION - The functional currency for the Company's
foreign operations is the applicable local currency. The translation of
the applicable foreign currency into U.S. dollars is performed for the
balance sheet accounts using current exchange rates in effect at the
balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. The gains and losses, net of
applicable deferred income taxes if any, resulting from such translation
are included in stockholders' equity.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount
reported in the balance sheets for cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates fair value
because of the immediate short-term maturity of these financial
instruments.
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.
RECLASSIFICATION - Certain amounts for the fiscal year ended March 31, 1996
have been reclassified to conform to the current year's presentation.
NEW ACCOUNTING PRONOUNCEMENTS - In 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share," which is effective for financial statements ending after
December 15, 1997. This statement supersedes Accounting Principles Board
No. 15 and replaces the presentation of primary EPS on the face of the
income statement for all
F-11
<PAGE>
entities with complex capital structures, and provides guidance on other
computational changes. Had the provisions of the statement been effective
for the current year, the following proforma EPS amounts would have been
disclosed:
Basic EPS $ (0.14)
---------
---------
No disclosure of Diluted EPS would be required due to the anti-dilutive
effects of the Company's warrants, options and convertible securities.
2. CONSOLIDATION OF MAJORITY OWNED SUBSIDIARY
In establishing its activities in the PRC, the Company determined to form a
Sino Foreign Joint Venture ("SFJV") as its investment vehicle. In March
1996, the Company invested $1,170,000 in a PRC joint venture company and
requested approval for conversion of such company to an SFJV from the Hebei
Province government. In September 1996, preliminary regulatory approval
for Hebei Equipment was granted and the SFJV was formed with the Company
holding a 60.8% interest in the entity. In April 1997, the Company
received final PRC regulatory approval for the SFJV. Hebei Equipment was
established to hold a 51% interest in Hebei Engineering which is developing
a GSM network in Hebei Province, PRC. Nippon Telegraph and Telephone
International, Inc. ("NTTI") holds the remaining 49% of Hebei Engineering.
The Company's investment was previously accounted for as a joint venture
deposit totaling $1,170,000.
3. INVESTMENT IN GSM PROJECT
Hebei Equipment, through its 51%-owned subsidiary, Hebei Engineering has
invested approximately $22,000,000 in the construction of a GSM
telecommunications network (the "GSM network") in Hebei Province of the
PRC. The GSM network is being built pursuant to a 15-year agreement with
China United Telecommunication Company ("UNICOM"). Terms of the agreement
include the following:
- Initially, UNICOM will own 30% of the assets while Hebei
Engineering will own 70% of the assets.
- Both parties agree to distribute the profit according to the
"Distributable Cash Flow" (as defined) with 22% going to UNICOM
and 78% going to Hebei Engineering.
- Each year, Hebei Engineering will transfer assets equal in value
to the Distributable Cash Flow received up to 60% of the assets.
- The remaining 10% shall be assigned to UNICOM without any
consideration upon the termination of the contract.
- Hebei Engineering will continue to receive 78% of the
Distributable Cash Flow after transfer of all the assets for the
remainder of the 15 year period.
Under PRC law, foreign entities, such as Hebei Engineering, are not
permitted to own telecommunications networks. As such, the Company has
recorded its investment (GSM Construction costs) at cost and will amortize
it over the life of the project. Income will be recognized on receipt of
distributable cash flow. Management's current cash flow projections
indicate the investment is fully realizable. UNICOM commenced operation of
the GSM network in February 1997.
F-12
<PAGE>
4. INVESTMENT IN NETMATICS
The Company held a 39% (as of March 31, 1997) investment interest 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 was engaged in the design, manufacture, and sale of
technologically advanced communication devices. In fiscal 1996, the
Company suspended the equity method of accounting for its investment in
Netmatics when the Company's share of losses equaled the carrying amount of
the investment. In fiscal 1996, the Company's share of Netmatics' loss
charged to operations was $500,000. During fiscal 1997, the Company
advanced $12,000 to and purchased $186,538 of debentures from Netmatics.
Such amounts were written-off as of March 31, 1997.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1997 1996
Land and buildings $ 195,350 $ -
Furniture, fixtures and equipment 249,268 70,936
Motor vehicles 111,298 -
Computer software 12,273 12,273
Leasehold improvements 12,580 12,580
---------- ---------
580,769 95,789
Less accumulated depreciation 62,749 19,556
---------- ---------
$ 518,020 $ 76,233
---------- ---------
---------- ---------
Depreciation expense for fiscal 1997, 1996, and 1995 was $43,193, $346,005
and $344,611 respectively.
6. DEPOSITS
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 International Limited ("Tweedia"), in
exchange for a $4,572,536 non-refundable deposit which Tweedia held with a
vendor. The deposit is in connection with the purchase of equipment. If
the deposit is not utilized, Tweedia has agreed to return the Convertible
Preferred Shares to the Company for cancellation. As the preferred shares
were issued in connection with acquiring the deposit, and the utilization
of such deposit is in doubt, the deposit is reflected in the financial
statements as a deduction of stockholders' equity.
7. OTHER PAYABLES
The Company is financing equipment purchases related to construction of the
GSM network through vendor financing under deferred payment terms with
final installment repayable in 2001 and 1998, respectively. All of the
repayment of the liabilities were guaranteed by NTTI. Liabilities will be
payable as follows:
F-13
<PAGE>
LIABILITY REPAYABLE
Current $ 450,685
1998 8,938,073
1999 450,685
2000 450,685
2001 450,685
-------------
Total 10,740,813
Less: current portion 450,685
-------------
$ 10,290,128
-------------
-------------
8. LOANS PAYABLE
Loans payable consists of the following:
MARCH 31,
1997 1996
Amounts due to shareholders (1) $ 2,413,553 $ 2,563,553
Bank loan (2) 11,956,486 -
------------- ------------
14,370,039 2,563,553
Less - current maturities 2,413,553 2,563,553
------------- ------------
$ 11,956,486 $ -
------------- ------------
------------- ------------
(1) The amounts are payable on demand with a 8.5% interest rate. The above
amounts include a non-interest bearing note of $850,000 due to Beijing
CATCH, a related party.
(2) On August 5, 1996, the SFJV obtained a loan facility of $20,000,000 from
the Bank of Tokyo - Mitsubishi, Ltd. Beijing Branch at an annual rate of
6.82%, of which approximately $12,000,000 was borrowed as of December 31,
1996. The obligation of the borrower under the agreement was guaranteed by
NTTI. The principal of the loan shall be repaid in five equal,
consecutive, semi-annual installments, each in an amount equal to one-fifth
of the principal amount of the loan outstanding on the third anniversary of
the date of the agreement with subsequent installments on the last day of
each of the next four six-month periods thereafter, provided, however, that
the last such installment shall be in the amount necessary to repay in full
the unpaid principal amount of the loan. This amount is repayable as
follows:
F-14
<PAGE>
YEAR ENDING
MARCH 31,
1998 $ -
1999 -
2000 2,400,000
2001 2,400,000
2002 2,400,000
Thereafter 4,756,486
-------------
$ 11,956,486
-------------
-------------
9. 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,
1998 $ 372,327
1999 372,327
2000 343,582
2001 55,667
------------
$ 1,143,903
------------
------------
Rent expense for fiscal 1997, 1996 and 1995 was $369,969, $399,992 and
$340,918, respectively.
EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements
with officers expiring through April 2000 with aggregate annual salaries of
$1,125,000.
LITIGATION - The Company and its subsidiaries are involved in litigation
matters which involve certain claims which arise in the normal course of
business, none of which, in the opinion of management, is expected to have
a materially adverse effect on the Company's consolidated financial
statements.
FINANCIAL SERVICES - The Company entered into a financial advisory services
agreement with an investment banking firm. The agreement calls for a
$50,000 retainer and the payment of success fees for raising capital for
the Company and its projects. In addition, the Company has agreed to issue
a warrant to purchase up to 600,000 shares of the Company's Common Stock to
such investment banking firm. This warrant has an exercise price of $2.00
per share, which was the market value of the Company's Common Stock at the
time of the issuance of the warrants. 300,000 of the warrants vest
immediately, and the additional 300,000 warrants will vest only when such
investment banking firm has raised a minimum of ten million dollars in any
form of financing for the Company. (See Note 10)
REGULATION - Each of the Company's joint ventures, Hebei Equipment and
Hebei Engineering, is organized under the laws of the PRC as a Sino-foreign
equity joint venture enterprise, a distinct legal entity with limited
liability. Such entities are governed by the Law of the PRC on Joint
Ventures Using Chinese and Foreign Investments, and implementing
regulations related thereto. The parties to an equity joint venture have
rights to the financial returns of the joint venture in proportion to the
joint
F-15
<PAGE>
venture interests that they hold. The operation of equity joint ventures
is subject to an extensive body of law governing such matters as formation
registration, capital contribution, capital distributions, accounting,
taxation, foreign exchange, labor and liquidation. The transfer or
increase of an interest in a Sino-foreign equity joint venture enterprise
requires agreement among the parties to the venture and is effective upon
approval of relevant government agencies.
RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE - The Renminbi Chinese currency
is not a freely convertible currency at present. The Company's joint
ventures will receive nearly all of their revenue in Renminbi, which will
need to be converted to other currencies, primarily U.S. dollars, and
remitted outside of the PRC. Effective July 1, 1996, foreign currency
"current account" transactions by foreign investment enterprises, including
Sino-foreign joint ventures, are no longer subject to the approval of State
Administration of Foreign Exchange ("SAFE", formerly, "State Administration
of Exchange Control"), but need only a ministerial review, according to the
ADMINISTRATION OF THE SETTLEMENT, SALE AND PAYMENT OF FOREIGN EXCHANGE
PROVISIONS promulgated in 1996. "Current account" items include
international commercial transactions which occur on a regular basis, such
as those relating to trade and provision of services. Distributions to
joint venture parties also are considered a "current account transaction."
Other non-current account items, known as "capital account" items, remain
subject to SAFE approval.
CAPITAL COMMITMENTS - The Company's 60.8% owned subsidiary Hebei Equipment
has entered into a 15-year agreement with UNICOM which defines terms
relating to the construction of a telecommunications network in Hebei
Province in China. The total investment is approximately $72,000,000, of
which approximately $22,000,000 had been paid in 1996.
EMPLOYEE RETIREMENT BENEFITS AND POST-RETIREMENT BENEFIT - The Company's
Chinese employees in the PRC are entitled to a retirement pension
calculated with reference to their basic salaries on retirement and their
length of services in accordance with a government managed pension plan.
The PRC government is responsible for the pension liability to these
retired staff. The Company is required to make contributions to the state
retirement plan at 18% of the adjusted monthly basic salaries of the
current employees. The Company is not obligated under any other
post-retirement plans and post-employment benefits are not material.
10. 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
approximately $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. 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 (based on other market sales at the time).
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.
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.
F-16
<PAGE>
In November 1996, the Company sold 1,000,000 shares of the Company's common
stock through subscription agreements. The Company received $2 million in
proceeds with respect to these subscriptions based on the quoted market
value of the common shares at the time of the transactions.
FORGIVENESS OF STOCKHOLDERS ACCRUED EXPENSES - In September 1994, a
stockholder forgave $305,027 of accrued consulting fees owed by the
Company. This amount has been charged to expense and included 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. As such, the deposit and the Series A Preferred have
been reflected in the financial statements as separate components of
stockholders' equity. See Note 6.
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.
SERIES B CONVERTIBLE PREFERRED STOCK - In June 1996, the Company completed
a $2,500,000 offering of its Series B Convertible Preferred Stock ("Series
B Preferred"). The 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. During fiscal 1997 all outstanding Series B shares
were converted to 1,507,477 common shares (priced at $3.19 per share based
on fair market value at the time of conversion). No additional shares of
Series B Convertible Preferred stock are authorized.
SERIES D CONVERTIBLE PREFERRED STOCK - On March 6, 1997, the Company issued
to a single investor 150 shares of the Company's Series D Convertible
Preferred Stock, par value $.001 per share (the "Series D Preferred
Shares") at a price of $10,000 per share. The holder of Series D Preferred
Stock has no voting rights except with respect to certain matters that
affect the rights of the Series D Preferred Stock.
The holder of the Series D Preferred Shares is entitled to receive
cumulative dividends at the annual rate of 8% per annum per share, payable
quarterly (i) in shares of Common Stock or, (ii) in cash in connection with
any payment pursuant to a Conversion Default (as defined below) at the
election of the Company's board of directors. As of March 31, 1997,
$10,000 of cumulative dividends were in arrears. The holders of Series D
Preferred Shares have certain preferential rights over the holders of
Common Stock in the event of the liquidation, dissolution or winding-up of
the Company or a disposition of the Company's assets. The holder of the
Series D Preferred Shares also has certain registration rights and certain
rights to participate in exempt equity offerings by the Company until March
6, 1999.
The Series D Preferred Shares are convertible by the holder into the number
of shares of Common Stock which may be purchased at the lowest trading
price during the 30 business days immediately preceding each conversion
date (the "Lowest Trading Price") for the Series D Preferred Shares. In
addition, under certain circumstances, the holder of the Series D Preferred
Shares may be obligated to
F-17
<PAGE>
purchase additional shares of Common Stock for cash. If the Company does
not have sufficient shares available to satisfy its obligations to the
holder of Series D Preferred Shares upon receipt of a conversion notice,
or otherwise fails or refuses to perfect conversion of any conversion of
any Series D Preferred Shares (a "Series D Conversion Default"), the holder
of the Series D Preferred Shares has the right to put the Series D
Preferred Shares to the Company at a price equal to 125% of the purchase
price, plus all accrued and unpaid dividends.
The holder of the Series D Preferred Shares may not convert such shares
prior to May 5, 1997 and may convert subsequent to such date as follows:
(i) 30 shares after May 6, 1997; (ii) 60 shares after June 5, 1997; (iii)
90 shares after July 5, 1997; (iv) 120 shares after August 4, 1997; and
(v) 150 shares after September 2, 1997.
STOCK WARRANTS - During fiscal 1996, the Company issued warrants to
purchase 150,000 shares of common stock at a price 10% above quoted market
value. The warrants have a 5 year term and "piggy-back" registration
rights.
During fiscal 1997, the Company issued 187,702 warrants to purchase the
Company's common stock at a conversion price of 110% of the quoted market
value at the time of grant. The warrants were issued in connection with
the Company's issuance of Series B Preferred Shares (see above).
On July 17, 1996, the Company entered into an agreement with an investment
banking firm in which such firm will act as a financial consultant to the
Company relating to corporate finance and other financial matters through
July 31, 1999. As compensation for this engagement, such firm received a
five year warrant to purchase 200,000 shares of the Company's common stock
at $2.50 per share (the market price at the time of issuing the warrant).
In connection with this agreement, the Company has recorded $147,000 in
professional fees. Such amount was based on the fair value of the warrants
as determined by the Black-Scholes model utilizing the following
assumptions; dividend yield - 0%, expected volatility - 45%, risk free
interest rate - 5.99% and expected life of the warrant 2 years.
On October 15, 1996, the Company agreed to issue warrants to David
Rubenstein to purchase 200,000 shares of the Company's Common Stock. These
warrants were issued for Mr. Rubenstein's services related to advising the
Company with respect to its Sino-foreign joint ventures and marketing
activities in the PRC. The warrants issued have a three year term and an
exercise price of $1.50, which was the market value of the Company's Common
Stock at the time of issuance of the warrants. In connection with this
agreement, the company has recorded $110,000 in professional fees. Such
amount was based on the fair value of the warrants as determined by the
Black-Scholes model utilizing the following assumptions; dividend yield -
0%, expected volatility - 45%, risk free interest rate - 6.14% and expected
life of the warrant 3 years.
In connection with the financial services agreement described in note 9,
the Company issued 600,000 warrants to an investment banking firm, 300,000
which vest immediately and 300,000 which vest when such firm has raised a
minimum of $10 million. With respect to the immediately vested 300,000
warrants, the Company has recorded $222,500 in professional fees. Such
amount was based on the fair value of the warrants as determined by the
Black-Scholes model utilizing the following assumptions; dividend yield -
0%, expected volatility - 45%, risk free interest rate - 6.50% and expected
life of the warrant 3 years.
ISSUANCE OF COMMON STOCK AND OPTIONS FOR SERVICES - In April 1996, two
outside directors each received 5,000 shares of common stock for a value
totaling $90,000 which has been recorded as
F-18
<PAGE>
compensation expense. The number of shares issued was based on the quoted
market value at such time.
In May 1996, 5,000 shares of the Company's common stock were issued in
connection with services provided for a value totaling $45,625. In
December 1996, 5,000 shares of the Company's common stock were issued in
connection with services provided for a value totaling $18,125. Both
issuances have been recorded as professional fees based on the quoted
market value at the time of the transaction.
In October 1996, the Company entered into agreements to settle $98,000 of
outstanding professional fees through the issuance of options to purchase
65,064 common shares. The number of shares was determined based on the
quoted market value of the shares at the time of issuance.
THE PROMETHEAN COMMON STOCK EQUITY AGREEMENT - On March 31, 1997, the
Company entered into a Common Stock Investment Agreement with Promethean
Investment Group L.L.C. ("Promethean") pursuant to which Promethean will
provide $10 million in equity funding to the Company. The Company has
agreed to issue a minimum of $4,000,000 in Common Stock, at a 10% discount
to market price, to Promethean within two years following the effective
date of a registration statement covering the shares to be sold pursuant to
the Common Stock Investment Agreement. On April 29, 1997, the Company and
Promethean agreed to increase the equity funding commitment from $10 million
to $25 million.
STOCK OPTIONS - The Company has adopted two stock option plans (the AmTec,
Inc. 1995 Stock Plan and the AmTec, Inc. 1996 Stock Option Plan).
Incentive and nonqualified options and stock appreciation rights may be
granted to employees, officers, directors, and consultants of the Company.
There are 12,500,000 shares of common stock reserved for issuance under
these plans. The exercise price of the options are determined by the board
of directors, but in the case of an incentive stock option, the exercise
price may not be less than 100% of the fair market value on the date of
grant. Options vest over periods not to exceed ten years.
F-19
<PAGE>
A summary of the status of the Company's stock options issued to employees
as of March 31, 1997, 1996 and 1995 and changes during the years then ended
is presented below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 7,635,000 $ 1.39 350,000 $ 0.36 - $ -
Granted 280,000 1.74 7,520,000 1.41 350,000 0.36
Exercised - - (185,000) 0.36 - -
Cancelled (10,000) 8.25 - - - -
Forefeited - - (50,000) 0.36 - -
Expired - - - - - -
--------- ------- --------- ------- ------- -------
Outstanding at
end of year 7,905,000 $ 1.40 7,635,000 $ 1.39 350,000 $ 0.36
--------- ------- --------- ------- ------- -------
--------- ------- --------- ------- ------- -------
Options Exercisable
at end of year 4,155,000 $ 0.42 3,135,000 $ 0.35 350,000 $ 0.36
--------- ------- --------- ------- ------- -------
--------- ------- --------- ------- ------- -------
Weighted Average
fair value of options
granted during
the year $ 0.69 $ 0.44 $ 0.09
--------- -------- -------
--------- -------- -------
</TABLE>
The fair value of each option granted during 1997 and 1996 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
Dividend yield 0.00%
Expected volatility 45.00%
Risk Free Interest Rate 6.25%
Expected Life 5 years
The following table summarizes information about options outstanding at
March 31, 1997:
WEIGHTED
AVERAGE
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXCERSISABLE EXERCISE
PRICES AT 3/31/97 LIFE (YEARS) PRICE AT 3/31/97 PRICE
- - - ------------ ----------- ------------ ---------- ------------ --------
$.350 - .355 4,635,000 9 $ 0.35 3,885,000 $ 0.35
1.50 20,000 10 1.50 20,000 1.50
3.00 3,000,000 9 3.00
--------- -----------
7,655,000 3,905,000
--------- -----------
--------- -----------
F-20
<PAGE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized with respect to the plans. Had compensation cost for the
Company's stock option plans been determined consistent with Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's net earnings and earnings per
share would have approximated the pro forma amounts indicated below:
1997 1996
Net earnings - as reported $ (4,064,885) $ (5,281,730)
-------------- --------------
-------------- --------------
Net earnings - pro forma $ (4,258,970) (8,592,261)
-------------- --------------
-------------- --------------
Earnings per share - as reported $ (0.14) $ (0.21)
-------------- --------------
-------------- --------------
Earnings per share - pro forma $ (0.15) $ (0.33)
-------------- --------------
-------------- --------------
11. MAJOR CUSTOMERS
During the years ended March 31, 1996 and 1995, the Company's wholly owned
subsidiary, ITV, 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.
12. SALE OF BUSINESS
In January 1996, the Company sold the business and the related operating
assets in which its wholly owned subsidiary, ITV, was engaged. 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 an equity
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. See note 4 as to
write-off of Netmatics balance.
F-21
<PAGE>
13. INCOME TAXES
The Company had net losses for 1997, 1996 and 1995 and, therefore, no
income taxes have been provided.
As of March 31, 1997, the Company has federal net operating loss
carryforwards of approximately $11,000,000 through 2012.
Significant components of the Company's deferred tax liabilities and assets
for federal income taxes consist of the following:
1997 1996
Deferred tax assets
Net operating loss carryforwards $ 5,085,404 $ 3,310,000
Start-up and other costs 2,360,307 1,786,000
Research credit 266,000 266,000
------------ ------------
Total deferred tax assets 7,711,711 5,362,000
Valuation allowance for deferred tax assets (7,711,711) (4,462,000)
Deferred tax liabilities
Note receivable on sale of ITV - (900,000)
------------ ------------
Net deferred tax liability $ - $ -
------------ ------------
------------ ------------
The net change in the valuation allowance for the year ended March 31, 1997
and 1996 was an increase of $3,249,711 and $156,000, respectively.
14. RELATED PARTY TRANSACTIONS
GENERAL - In February 1995, pursuant to the Reorganization Agreement,
Tweedia, became the owner of approximately 12,727,000 shares, or 41%, of
the Company's issued and outstanding Common Stock. Beijing CATCH
Communications Group Co. ("Beijing CATCH") has an option to acquire 100% of
the outstanding capital stock of Tweedia. However, this option may not be
exercised without the receipt by Beijing CATCH of all PRC regulatory
approvals applicable to such exercise. After discussions with PRC counsel,
management believes that these approvals to own securities listed on
non-PRC stock exchanges are substantive in nature and are not normally
readily obtained in the PRC except by corporations or banks that are
specifically authorized to own foreign securities.
As of December 21, 1995, pursuant to the terms of a Master Agreement and
Right of First Refusal (the "Master Agreement"), Beijing CATCH 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
construction, operation or acquisition of any type of telephony,
telecommunications, equipment, paging equipment or related forms of
communication in the PRC. As consideration for this right of first
refusal, the Company agreed to issue up to 50,000,000 shares of Common
Stock to Tweedia based on the receipt of certain agreed upon amounts of net
income by the Company relating to prospective Sino-foreign joint ventures
involving the Company and Beijing
F-22
<PAGE>
CATCH. The Master Agreement supersedes certain terms of other prior
agreements between the Company and Beijing CATCH concerning cooperation on
telecommunications projects. As of June 20, 1997, the Company has not
entered into, and management has no current intent of entering into, any
Sino-foreign joint ventures with Beijing CATCH under the terms of the
Master Agreement. As a result, no obligation for future issuances of
Common Stock to Beijing CATCH under the Master Agreement exist or are
contemplated.
Beijing CATCH is in the process of being acquired by Hainan Minyuan Modern
Agriculture Company ("Hainan Minyuan"), a publicly listed company in the
PRC primarily engaged in real estate development and agriculture production
in Hainan Province of the PRC. In late 1996, Hainan Minyuan proposed to
acquire Beijing CATCH, and the acquisition was approved by the shareholders
of both companies. As of May 1997, Hainan Minyuan's proposed acquisition
of Beijing CATCH was awaiting final approval by the Chinese governmental
authorities. If the acquisition receives final approval by the necessary
Chinese governmental authorities, Hainan Minyuan will in turn hold an
option to acquire control of Tweedia and a proxy to vote the Tweedia share.
This option may not be exercised until all applicable PRC approvals are
obtained. Hence at this time the control of Tweedia by Hainan Minyuan and
its indirect ability to substantially influence AmTec is uncertain.
At the time of the Company's acquisition of the majority stake Hebei
Development held a 30% ownership of Hebei Equipment and Beijing CATCH held
subscription rights to 9.2% ownership of Hebei Equipment. Subsequent to
Hebei Equipment's conversion to a Sino-Foreign joint venture company,
Beijing CATCH defaulted on its required capital contribution of 2 million
Renminbi (1 U.S. dollar equals approximately 8.35 Renminbi). On April 22,
1997, the Board of Directors of Hebei Equipment resolved to terminate
Beijing CATCH's ownership participation in Hebei Equipment, and the Company
and Hebei Development agreed to provide to Hebei Equipment the 2 million
Renminbi defaulted on by Beijing CATCH. The allocation of (i) the 2
million Renminbi investment required from the Company and Hebei Development
and (ii) the 9.2% ownership previously held by Beijing CATCH are currently
under discussions between the Company and Hebei Development.
15 POST BALANCE SHEET EVENTS
CONTRACTUAL COMMITMENTS - On April 8, 1997, Hebei Equipment entered into a
20-year agreement (the "Hebei Multimedia Agreement") with Hebei Cable
Television Station, the monopoly provider of cable television service in
Hebei Province, to build a multimedia network, which will connect the
existing cable television systems in the eleven major cities of Hebei
Province. The Hebei Multimedia Agreement grants Hebei Equipment the
option to upgrade the systems to hybrid fiber coaxial networks ("HFC").
Under the Hebei Multimedia Agreement, Hebei Equipment will build the Hebei
Multimedia Network, sell ownership of the Hebei Multimedia Network to Hebei
Cable Television Station in exchange for a majority share of cash flow
generated by Hebei Cable Television Station from operation of the Hebei
Multimedia Network. Hebei Equipment will also provide operating personnel
and assistance to Hebei Cable Television Station in the operation of the
Hebei Multimedia Network. Until Hebei Equipment has recovered its
investment, Hebei Equipment will receive 80% of depreciation of fixed
assets and 80% of net income generated by Hebei Cable Television Station
from operation of the Hebei Multimedia Network. Thereafter, for the balance
of 20 years from the commencement date of formal commercial operations,
Hebei Equipment will receive 30% of depreciation of fixed assets and 30% of
net income generated by Hebei Cable Television Station from operation of
the Hebei Multimedia Network. Hebei Cable Television Station is a
subsidiary enterprise of the Hebei Radio and Television Department, under
the jurisdiction of the Ministry of Radio, Film and Television in the PRC.
F-23
<PAGE>
Under the Hebei Multimedia Agreement, Hebei Equipment will (i) build a
fiber-optic and microwave network to connect the existing cable television
systems in the eleven major cities in Hebei Province, (ii) upgrade one city
on a trial basis to an HFC network, and (iii) hold the option to upgrade
the network to an HFC network.
The current funding requirement for the Hebei Multimedia Network is
estimated at approximately $23 million to link cable systems in the eleven
largest cities in Hebei Province. As of June 20, 1997, the Company had
invested approximately $1.0 million in Hebei Equipment for purposes of
investment in the Hebei Multimedia Network. The Company anticipates that
the balance of required funding will be provided in the form of equity and
debt investments in Hebei Equipment and additional joint venture entities
that may be established with strategic partners.
16 SUBSEQUENT EVENTS
On July 8, 1997, the Company changed its name to AmTec, Inc. from AVIC Group
International, Inc.
******
F-24
<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
CHINA TELECOMMUNICATIONS AND TECHNOLOGIES, INC.
INTO
AVIC GROUP INTERNATIONAL, INC.
AVIC Group International, Inc. ("Avic" or "Corporation"), a
corporation organized and existing under the laws of Delaware, DOES HEREBY
CERTIFY:
FIRST: That this Corporation was incorporated on the 20th day of June,
1996, pursuant to the General Corporation Law of the State of Delaware.
SECOND: That this Corporation owns all of the outstanding shares of the
stock of China Telecommunications and Technologies, Inc. ("China"), a
corporation incorporated on the 13th day of May, 1997, pursuant to the
General Corporation Law of the State of Delaware.
THIRD: That this Corporation, by the following resolutions of its Board
of Directors, duly adopted at a meeting held on the 26th day of February,
1997, determined to merge into itself said China:
RESOLVED: That AVIC merge, and it hereby does merge into itself
said China and assumes all of its obligations; and it is
RESOLVED FURTHER: That the merger shall become effective upon
filing with the Delaware Secretary of State; and it is
RESOLVED FURTHER: That the proper officer of this Corporation be
and he or she is hereby directed to make and execute a Certificate
of Ownership and Merger setting forth a copy of the resolutions to
merge China and assume its liabilities and obligations, and the
date of adoption thereof, and to cause the same to be filed with
the Secretary of State and to do all acts and things whatsoever,
whether within or without the State of Delaware, which may be in
anywise necessary or proper to effect said merger, and it is
RESOLVED FURTHER: That this Corporation change its corporate name
in connection with the merger, by amending Article FIRST of the
Restated Certificate of Incorporation of this Corporation to read
as follows:
"FIRST: The name of the corporation is AmTec, Inc."
FOURTH: Anything herein or elsewhere to the contrary notwithstanding,
this merger may be amended or terminated and abandoned by the Board of
Directors of AVIC at any time prior to the date of filing the merger with the
Secretary of State.
<PAGE>
IN WITNESS WHEREOF, said AVIC has caused this Certificate to be signed
by Joseph R. Wright, Jr., its Chairman, Chief Executive Officer and
President, this 14th day of May, 1997.
AVIC GROUP INTERNATIONAL, INC.
By /s/ Joseph B. Wright, Jr.
---------------------------------
Joseph B. Wright, Jr.,
Chairman, Chief Executive Officer
and President
<PAGE>
AVIC GROUP INTERNATIONAL, INC.
Certificate of Designations of Preferences of Series C
Convertible Preferred Stock of Avic Group International, Inc.
Joseph R. Wright and Timothy P.F. Crowley hereby certify that:
(1) They are the President and Secretary, respectively of Avic Group
International, Inc., a Delaware corporation (the "Corporation").
(2) Pursuant to the authority granted under the Corporation's Certificate
of Incorporation, the Board of Directors of said Corporation has duly adopted
the following recitals and resolutions:
WHEREAS, this Corporation is authorized by its Certificate of
Incorporation to issue Ten Million (10,000,000) shares of Preferred Stock
(the "Preferred Stock"); and
WHEREAS, the Board of Directors of this Corporation is authorized, as
to the Preferred Stock, within the limitations and restrictions stated in
the Certificate of Incorporation, to fix by resolution or resolutions the
designation of each Series of Preferred Stock and the powers, preferences
and relative participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including, without
limitation, such provisions as may be desired concerning dividends,
redemption, voting, dissolution or the distribution of assets, conversion
or exchange, and such other subjects or matters as may be fixed by
resolution or resolutions of the Board of Directors; and
WHEREAS, 1,524,328 shares of such Preferred Stock are issued and
outstanding and the Board of Directors of this Corporation desires,
Pursuant to its authority granted under the Certificate of Incorporation,
to determine and fix the rights, preferences, privileges and restrictions
relating to a Series C of said Preferred Stock, and to fix the number of
shares constituting and the designation of such Series;
NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized a Series C
of Preferred Stock on the terms and with the provisions herein set forth:
<PAGE>
-2-
1. DEFINITIONS. For purposes hereof the following Definitions shall
apply:
"AVERAGE STOCK PRICE" shall mean the lowest Market Price for Shares of
Common Stock during the thirty (30) business days immediately preceding each
Holder Conversion Date.
"BOARD" shall mean the Board of Directors of the Company.
"CLOSING DATE" shall mean the date of original issuance of the Series C
Preferred Stock.
"COMMON STOCK" shall mean the Common Stock, $0.001 par value of the
Company.
"COMPANY" shall mean this corporation.
"CONVERSION DATE MARKET PRICE" shall mean an amount that is equal to the
Average Stock Price, subject however to adjustment as provided in Section 7 and
8 of this Certificate of Designations and in Section 7 of the Registration
Rights Agreement executed by the Company in favor of the holders of the Series C
Preferred Stock as of the date of issuance of the Series C Preferred Stock,
which provisions are hereafter incorporated herein.
"CONVERSION DEFAULT" shall have the meaning set forth in Paragraph 10(b).
"CONVERSION NOTICE" shall have the meaning set forth in Paragraph 7(c).
"CONVERSION RATE" shall have the meaning set forth in Paragraph 7(b).
"DESIGNATED PRICE" shall mean $10,000 per share plus all accrued and unpaid
dividends.
"HOLDER CONVERSION DATE" shall have the meaning set forth in Paragraph
7(c).
"JUNIOR STOCK" shall mean the Common Stock and all other shares of the
Company's capital stock, whether presently outstanding or hereafter issued,
other than the Series A, Series C, and Series D Preferred Stock;
<PAGE>
-3-
PROVIDED, HOWEVER, the Company may from time to time, without the consent of the
holders of the outstanding shares of the Series C Preferred Stock, issue
additional series of its presently authorized and unissued Preferred Stock which
rank pari passu to or do not have preference over the Series C Preferred Stock
in dividends, distribution upon liquidation or other respects.
"MARKET PRICE FOR SHARES OF COMMON STOCK" shall mean the price of one share
of Common Stock determined as follows:
(i) If the Common Stock is listed on NASDAQ, the daily low trading
price on the date of valuation;
(ii) If the Common Stock is listed on a national securities exchange,
the daily low trading price on the date of valuation;
(iii) If neither (i) or (ii) apply but the Common Stock is quoted in
the over-the-counter market on the pink sheets or bulletin board, the lowest
"bid" price thereof on the date of valuation; and
(iv) If neither clause (i), (ii) or (iii) above applies, the market
value as determined by a nationally recognized investment banking firm or other
nationally recognized financial advisor retained by the Company for such
purpose, taking into consideration, among other factors, the earnings history
book value and prospects for the Company, and the prices at which shares of
Common Stock recently have been traded. Such determination shall be conclusive
and binding on all persons.
"PARAGRAPH 5 TRANSACTION" shall mean a merger, consolidation or other
transaction referred to in Paragraph 5.
"SERIES C PREFERRED STOCK" shall mean the Series C Convertible Preferred
Stock of the Company $0.001 par value.
2. DESIGNATION AND NUMBER. The designation of the shares of Preferred
Stock authorized by these resolutions shall be "Series C Convertible Preferred
Stock" (the "Series C Preferred Stock"). The authorized number of shares
constituting the Series C Preferred Stock shall be 250 shares and each share of
Series C Preferred Stock shall rank equally in all respects.
3. DIVIDENDS. The holders of the then outstanding Series C Preferred
Stock shall be entitled to receive cumulative dividends at the annual rate of 8%
per annum per share, payable quarterly (i) in shares of
<PAGE>
-4-
Common Stock at the time of Conversion (as provided in Paragraph 7 hereof) or
(ii) in cash in connection with any payment pursuant to Paragraph 10(b).
Dividends on the Series C Preferred Stock shall accumulate and accrue from the
date of its original issue and shall accrue from day to day thereafter, whether
or not earned or declared. The Series C Preferred Stock shall participate on an
"as converted basis" in cash dividends paid on Junior Stock and in other
dividends on Common Stock as provided in Section 8(b) below.
4. LIQUIDATION RIGHTS OF SERIES C PREFERRED STOCK.
(a) PREFERENCE. In the event of any liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary, or a sale or other
disposition of all or substantially all of the assets of the Company which shall
be deemed to be a liquidation, dissolution or winding up of the Company, the
holders of the Series C Preferred Stock then outstanding shall be pari passu
with the holders of Series D Preferred Stock and shall be entitled to be paid
out of the assets of the Company available for distribution to its stockholders,
whether such assets are capital, surplus, or earnings, before any payment or
declaration and setting apart for payment of any amount shall be made in respect
of any Junior Stock, an amount equal to the Designated Price, and no more. If
upon any actual or deemed liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the assets to be distributed to the holders of
the Series C Preferred Stock shall be insufficient to permit the payment to such
stockholders of the full preferential amounts aforesaid, then all of the assets
of the Company to be distributed shall be distributed ratably to the holders of
the Series C Preferred Stock and to any holders of any series of Preferred Stock
that ranks PARI PASSU with the Series C Preferred Stock (including Series D
Preferred Stock), on the basis of the number of shares of Preferred Stock held.
The Company shall promptly mail written notice of such liquidation, dissolution
or winding up (with a copy sent by facsimile), but in any event such notice
shall not be given less than thirty (30) days prior to the effective date stated
therein to each record holder of the Series C Preferred Stock. If the Company
determines to effect a liquidation, dissolution or winding up of the Company,
then, notwithstanding the limitations set forth in Paragraph 7, the Series C
Preferred Stock shall thereupon, at the option of a holder thereof, be
convertible in full.
(b) REMAINING ASSETS. After the payment or distribution to the holders of
the Series C Preferred Stock of the full preferential amounts aforesaid, the
holders of the Junior Stock then outstanding shall be entitled to receive all
remaining assets of the Company to be distributed.
<PAGE>
-5-
5. MERGER, CONSOLIDATION. If at any time there occurs any consolidation
or merger of the Company with or into any other corporation or other entity or
person (whether or not the Company is the surviving corporation), or any other
corporate reorganization or transaction or series of related transactions in
which in excess of 50% of the Company's voting power is transferred (a
"Paragraph 5 Transaction"), the holders of the Series C Preferred Stock then
outstanding shall have the right in their sole discretion to participate in any
such transaction as a class with common stockholders on the same basis as if the
Preferred Stock had been converted one day prior to the record date or effective
date of such transactions, as applicable.
6. VOTING RIGHTS. The holders of the Series C Preferred Stock will not
have any voting rights except as set forth below or as otherwise from time to
time required by law.
The affirmative approval (by vote or written consent as permitted by
applicable law) of the holders of at least 66 2/3% of the outstanding shares of
the Series C Preferred Stock, voting separately as a class, will be required for
(i) any amendment, alteration or repeal of the Company's Restated Certificate of
Incorporation (including any Certificate of Designations, Rights and
Preferences) if the amendment, alteration or repeal adversely affects the
powers, preferences or rights of the Series C Preferred Stock (including,
without limitation, by creating any class or series of equity securities having
a preference over the Series C Preferred Stock with respect to dividends,
distribution upon liquidation or in any other respect, but excluding the
issuance, of a series of Preferred Stock that ranks PARI PASSU with the Series C
Preferred Stock), or (ii) any amendment to or waiver of the terms of the Series
C Preferred Stock or this Certificate.
To the extent that under Delaware law the approval of the holders of
the Series C Preferred Stock, voting separately as a class, is required to
authorize a given action of the Company, the affirmative approval (by vote or
written consent as permitted by applicable law) of the holders of a majority of
the outstanding shares of the Series C Preferred Stock shall constitute the
approval of such action by the class. To the extent that under Delaware law the
holders of the Series C Preferred Stock are entitled to vote on a matter with
holders of the Common Stock, voting together as one class, each share of Series
C Preferred Stock shall be entitled to that number of votes as shall be equal to
the number of shares of Common Stock into which such shares of Series C
Preferred Stock could have been converted on the record date for any meeting of
stockholders or
<PAGE>
-6-
on the date of any written consent of stockholders as applicable. Holders of
the Series C Preferred Stock shall be entitled to notice of all shareholder
meetings or written consents (whether or not they are entitled to vote thereat),
which notice will be provided pursuant to the Company's by-laws and applicable
statutes.
7. CONVERSION. The holders of Series C Preferred Stock shall have the
following conversion rights.
(a) HOLDER'S RIGHT TO CONVERT. Each share of Series C Preferred Stock
shall be convertible, at the option of the holder thereof, into fully paid and
nonassessable shares of Common Stock.
(b) CONVERSION PRICE FOR HOLDER CONVERTED SHARES. Each share of the
Series C Preferred Stock, valued at the Designated Price, that is converted into
shares of Common Stock at the option of the holder shall be convertible into the
number of shares of Common Stock which may be purchased at the Conversion Date
Market Price.
The number of shares of Common Stock into which each share of Series C
Preferred Stock may be converted pursuant to this paragraph hereof is hereafter
referred to as the "Conversion Rate" for such Series C Preferred Stock.
(c) MECHANICS OF CONVERSION. In order to convert any or all shares of
Series C 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 principal office of the Company or of
any transfer agent for the Series C Preferred Stock, and shall give written
notice (the "Conversion Notice") together with the holder's calculation of the
Conversion Rate by facsimile (with the original of such notice forwarded with
the foregoing courier) to the Company at such office that he elects to convert
the number of shares (specified therein, which such notice and election shall be
irrevocable by the holder; PROVIDED, HOWEVER, that the Company shall not be
obligated to issue certificates evidencing the shares of the Common Stock
issuable upon such conversion unless either the certificates evidencing the
shares of Series C Preferred Stock are delivered to the Company or its transfer
Agent as provided above, or the holder notifies the Company that such
certificates have been lost, stolen or destroyed and promptly executes an
agreement reasonably satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with the loss of such certificates.
<PAGE>
-7-
Immediately on receipt of the Conversion Notice, the Company shall verify
the holder's calculation of the Conversion Rate as calculated by the holder or,
if the Company disagrees with the holder's calculation of the Conversion Rate,
deliver the Company's calculation of the Conversion Rate to the holder. If the
holder and the Company cannot agree on the Conversion Rate within two (2)
business days, the Company shall, without delay, issue a certificate or
certificates for the number of shares of Common Stock to which the holder is
entitled according to the Company's calculation of the Conversion Rate and in
accordance with the procedures set forth in this subparagraph (c). The
disagreement as to the Conversion Rate shall be submitted to a single arbitrator
agreeable to the Company and the holder within five (5) business days and shall
be decided by said arbitrator within two (2) business days of submission of the
dispute to such arbitrator. The decision of the arbitrator shall be conclusive
on the Company and the holder. If there is no dispute with respect to the
Conversion Rate, the Company shall use its best efforts to issue and deliver
within three (3) business days after delivery to the Company of the Conversion
Notice, to such holder of Series C Preferred Stock at the address of the holder
on the stock books of the Company, or to its designee, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid, together with a certificate or certificates for the
number of Series C Preferred Stock not submitted for conversion. The date on
which the Conversion Notice is given (the "Holder Conversion Date") shall be
deemed to be the date the Company received by facsimile the Conversion Notice,
provided that the original shares of Series C Preferred Stock to be converted,
or the aforesaid notice of lost, stolen or destroyed certificates, are received
by the Company or any transfer agent for the Series C Preferred Stock within
five business days thereafter, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date. If the original certificates or the aforesaid notice of lost, stolen or
destroyed certificates, are not received by the Company or any transfer agent
for the Series C Preferred Stock within five business days after the Holder
Conversion Date, the Conversion Notice shall become null and void.
(d) ADDITIONAL SHARES OF COMMON STOCK. If the Conversion Date Market
Price on a Holder Conversion Date shall be $5.00 (the "Minimum Additional Share
Price"), as the Minimum Additional Share Price may be adjusted as hereinafter
provided, or more, then, in addition to and not in lieu of the shares of Common
Stock issuable by reason of the conversion notice given on such Conversion Date,
the Company shall issue and sell to the Holder giving such conversion notice and
such Holder shall purchase
<PAGE>
-8-
from the Company, at a price per share equal to such Conversion Date Market
Price on such Conversion Date, one (1) share of Common Stock (each an
"Additional Share" and, collectively with all such other shares so purchased and
sold hereunder, "Additional Shares") for each share of Common Stock issuable to
such Holder by reason of such conversion of Series C Preferred Stock pursuant to
such conversion notice. If the Conversion Date Market Price on a Holder
Conversion Date shall be less than the Minimum Additional Share Price, upon the
conversion of shares of Series C Preferred Stock on such Holder Conversion Date,
any rights to purchase Additional Shares with respect to such shares of Series C
Preferred Stock so converted on such Holder Conversion Date shall terminate.
The total price for such Additional Shares so to be purchased and sold incident
to such a conversion notice shall be paid by such Holder upon issuance of the
certificate or certificates therefor pursuant to subparagraph 7(c) hereof by
wire transfer of immediately available federal funds to such account as the
Company shall specify in writing to such Holder following receipt by the Company
of such conversion notice. The Minimum Additional Share Price shall be
appropriately adjusted upon any stock dividend, stock split, combination,
recapitalization, or other reorganization affecting the Common Stock
outstanding.
(e) In the event the Company issues or sells any shares of its Common
Stock or any of its securities which are convertible into or exchangeable for
its Common Stock or any convertible security, or any warrants or other rights
subscribed for or to purchase any options for the purchase of its Common Stock
or other securities in a transaction other than a Qualified Transaction (as
hereinafter defined), then the Minimum Additional Share Price for any remaining
and unconverted shares of Series C Preferred Stock shall be adjusted, at the
sole option of the Subscriber, to the closing market price of the Company's
Common Stock on the date of such transaction. Qualified Transactions are
defined as the following: any of (i) the issuance of Equity Securities which
result in the issuance of the Company's Common Stock at an effective purchase
price greater than or equal to $5.00 per share, (ii) shares or options issued or
which may be issued pursuant to the Company's employee or director option plans
or otherwise issued as compensation to employees or directors, or shares issued
upon exercise of options, warrants, or rights outstanding on the Closing date
listed in the Exchange Act Reports, (iii) any public offering of the Company's
securities underwritten by one of the following underwriters which, together
with their affiliates, are generally known as: Goldman Sachs, Merrill Lynch,
Morgan Stanley, Credit Suisse First Boston, Lehman Brothers, Salomon Brothers,
Bear Stearns, J.P. Morgan, Donaldson, Lufkin & Jenrette, or Smith Barney, or
(iv) Equity Securities issued whose shares or underlying shares of Common Stock
are
<PAGE>
-9-
restricted from resale on any national market system or any public stock market
before March 1,1998.
(f) MANDATORY CONVERSION. On the third anniversary of the first date on
which the Company issues any shares of Series C Convertible Preferred Stock,
each outstanding share of Series C Convertible Preferred Stock shall be
converted automatically and without further action into fully paid and
nonassessable shares of Common Stock (as such shares of Common Stock may be
constituted on the Holder Conversion Date) at the rate specified in Section 7(b)
hereof, subject to adjustment in accordance with Section 8 hereof, and a
Conversion Notice shall be deemed to have been given by the holder of each such
outstanding share of Series C Convertible Preferred Stock on such date.
8. ADJUSTMENTS; REORGANIZATIONS.
(a) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. In the
event that at any time or from time to time after the Closing Date, the Common
Stock issuable upon the conversion of the Series C Preferred Stock is changed
into the same or a different number of shares of any class or classes of stock,
whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend or reorganization
provided for elsewhere in this Paragraph 8 or a merger or consolidation,
provided for in Paragraph 5), then and in each such event each holder of Series
C Preferred Stock shall have the right thereafter to convert such stock into the
kind of stock receivable upon such recapitalization, reclassification or other
change by Holders of shares of Common Stock, all subject to further adjustment
as provided herein. In such event, the formulae set forth herein for conversion
and redemption shall be equitably adjusted to reflect such change in number of
shares or, if shares of a class of stock are issued to reflect the market price
of the class or classes of stock (applying the same factors used in determining
the Market Price for Shares of Common Stock) issued in connection with the above
described transaction.
(b) ADJUSTMENTS FOR STOCK SPLITS, COMBINATIONS, DIVIDENDS, DISTRIBUTIONS
OR REORGANIZATION. If at any time or from time to time after the Closing Date,
the Company (i) effects a subdivision of the outstanding Common Stock, (ii)
combines the outstanding shares of Common Stock into a smaller number of shares
(i.e., by reverse stock split or otherwise), (iii) makes or fixes a record date
for the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock, (iv) makes
or fixes a record date for the determination of holders of Common Stock entitled
to receive a
<PAGE>
-10-
dividend or other distribution payable in securities of the Company other than
shares of Common Stock, or (v) there is a capital reorganization of the Common
Stock (other than as set forth in (i)-(iv), above) then, as a part of such
dividend or distribution, provision shall be made so that the holders of the
Series C Preferred Stock shall thereafter be entitled (A) to receive when paid
to other holders of Common Stock, on an "as converted" basis, the number of
shares of stock (other than Common Stock) or other securities or property to
which a holder of the number of shares of Common Stock deliverable would have
been entitled on such event and (B) to receive, to the extent that the dividend
or distribution is made within thirty days prior to a conversion event, payable
in Common Stock, upon conversion of the Series C Preferred Stock, that number of
shares of additional Common Stock to which they would have been entitled if they
were holding Common Stock on the relevant date. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Paragraph
8 with respect to the rights of the holders of the Series C Preferred Stock
after such event to the end that the provisions of this Paragraph 8 shall be
applicable after that event and be as nearly equivalent as may be practicable,
including, by way of illustration and not limitation, by equitably adjusting the
formulae set forth herein for conversion and redemption to reflect the market
price of the securities or property (applying the same factors used in
determining the Market Price for Shares of Common Stock) issued in connection
with the above described transaction.
(c) CONVERSION DATE MARKET PRICE ADJUSTMENT. In the event that the Company
issues or sells any shares of its Common Stock or any of its securities which
are convertible into or exchangeable for its Common Stock or any convertible
security, or any warrants or other rights subscribed for or to purchase any
options for the purchase of its Common Stock or other securities (other than
shares or options issued or which may be issued pursuant to the Company's
employee or director option plans or otherwise issued as compensation to
employees or directors, or shares issued upon exercise of options, warrants or
rights outstanding on the Closing Date listed in the Exchange Act Reports or
shares or options issued in consideration for business acquisitions or
combinations made by the Company) (the "Equity Securities") at an effective
purchase price per share of Common Stock which is less than $5.00, then at the
time the Series C Preferred Stock is submitted for conversion, upon such
conversion, the Company shall issue to the Holder or any assignee of Holder's
rights hereunder such number of shares of Common Stock as will cause the
effective Conversion Date Market Price of such shares of Common Stock to be
equal to the lesser of (i) the Average Stock Price or (ii) the effective
issuance price at which such Equity Securities are issued.
<PAGE>
-11-
9. FRACTIONAL SHARES. No fractional shares of Common Stock or scrip
representing fractional shares of Common Stock shall be issuable hereunder. The
number of shares of Common Stock that are issuable upon any conversion shall be
rounded up or down to the nearest whole share.
10. RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
(a) RESERVATION REQUIREMENT. The Company has reserved and the Company
shall continue to reserve and keep available at all times, free of preemptive
rights, shares of Common Stock for the purpose of enabling the Company to
satisfy any obligation to issue shares of its Common Stock upon conversion of
the Series C Preferred Stock provided, however, that the number of shares so
reserved shall at all times be at least equal to 150% of the number of shares
necessary for the Company to satisfy any obligation to issue shares of its
Common Stock (and Additional Shares, if any) incident to the conversion of
Series C Preferred Stock. The number of shares so reserved may be reduced by
the number of shares actually delivered pursuant to conversion of Series C
Preferred Stock; provided that in no event shall the number of shares so
reserved be less than 150% of the number of shares required to satisfy remaining
conversion rights on the unconverted Series C Preferred Stock and the number of
shares so reserved shall be increased to reflect stock splits and stock
dividends and distributions.
(b) DEFAULT. If the Company does not have a sufficient number of shares
of Common Stock available to satisfy the Company's obligations to a holder of
Series C Preferred Stock upon receipt of a Conversion Notice, or otherwise fails
or refuses to perfect conversion of any Series C Preferred Stock, with respect
to the Series C Preferred Stock as to which conversion is not perfected by the
Company through the delivery of certificates representing the shares of Common
Stock issuable upon such conversion (including Additional Shares, if any) (a
"Conversion Default") the holder of the Series C Preferred Stock shall have the
right to put the Preferred Stock to the Company at a price which shall be equal
to 125% of the Designated Price.
11. NO REISSUANCE OF SERIES C PREFERRED STOCK. No share or shares of
Series C Preferred Stock acquired by the Company by reason of redemption,
purchase, conversion or otherwise shall be reissued as Series C Preferred Stock,
and all such shares shall be retired and shall return to the status of
authorized, unissued and retired and undesignated shares of Preferred Stock. No
additional shares of Series C Preferred Stock shall be
<PAGE>
-12-
authorized or issued without the consent of at least 66 2/3% in interest of the
holders of Series C Preferred Stock outstanding immediately prior thereto.
12. NO IMPAIRMENT. The Company shall not intentionally take any action
which would impair the rights and privileges of the shares of Series C Preferred
Stock set forth herein.
13. HOLDER'S RIGHTS IF SHARES ARE DELISTED OR IF TRADING IN COMMON STOCK
IS SUSPENDED. In the event that at any time on or after the date hereof and
prior to the third anniversary of the Closing Date, trading in the shares of the
Company's Common Stock is suspended on the principal market or exchange for such
shares (including the NASDAQ Stock Market), for a period of five consecutive
trading days, other than as a result of the suspension of trading in securities
in general, or if such shares are delisted, then, at holder's option, the
Company shall redeem such holder's shares of Series C Preferred Stock at a
redemption date designated by such holder and at the price which is the greater
of (a) the product of the Conversion Rate and the Closing Market Price of the
Company's Common Stock on the date of Redemption Notice and (b) 125% of the
Designated Price of the Preferred Stock.
14. LIMITATIONS ON HOLDER'S RIGHT TO CONVERT.
Holders of Series C Preferred Stock may not convert any of the Series C
Preferred Stock within the first 60 calendar days following the date of issuance
of the Series C Preferred Stock. Thereafter, Holders of Series C Preferred
Stock may convert the Series C Preferred Stock as follows:
Calendar Days from Issuance Shares Convertible
61 60
91 120
121 180
151 250
Notwithstanding anything to the contrary contained herein, each Conversion
Notice shall contain a representation that the number of shares of the Company's
Common Stock that the holder is then entitled to receive upon the conversion of
such number of Shares of Series C Preferred Stock as is then being submitted for
conversion, together with any other shares of Common Stock
<PAGE>
-13-
deemed beneficially owned by such holder, together with all shares of the
Company's Common Stock deemed beneficially owned by the holder's "affiliates" as
defined in Rule 144 of the Act will not exceed 4.9% of the total issued and
outstanding shares of the Company's Common Stock, after giving effect to the
shares of Common Stock to be issued pursuant to such conversion notice.
15. The authorized number of shares of Preferred Stock of this Corporation
is 10,000,000 shares and the number of shares constituting the Series C
Convertible Preferred Stock, none of which has been issued, is 250 shares.
<PAGE>
-14-
IN WITNESS WHEREOF the undersigned have executed this Certificate of
Designations of Preferences at the City of New York, State of New York, on
this 12th day of June, 1997.
/s/ Joseph R. Wright
---------------------------------
Joseph R. Wright, President
/s/ Timothy P.F. Crowley
---------------------------------
Timothy P.F. Crowley, Secretary
The undersigned declare under the penalty of perjury that the matters
set forth in the foregoing Certificate are true of their own knowledge.
Executed at New York, New York, on the 12th day of June, 1997.
/s/ Joseph R. Wright
---------------------------------
Joseph R. Wright, President
/s/ Timothy P.F. Crowley
---------------------------------
Timothy P.F. Crowley, Secretary
<PAGE>
NUMBER SHARES
NY-
COMMON STOCK [LOGO] AVIC GROUP INTERNATIONAL, INC. COMMON STOCK
A DELAWARE CORPORATION
INCORPORATED UNDER THE CUSIP 002348 10 0
LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
THOMAS DELARUE
IS THE RECORD HOLDER OF SPECIMEN
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE, OF
------------------------AVIC GROUP INTERNATIONAL, INC.----------------------
TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON
OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY
ENDORSED.
THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER AGENT
AND REGISTRAR.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE
SIGNATURES OF ITS DULY AUTHORIZED OFFICERS.
DATED:
/s/ Timothy P.F. Crowley [seal] /s/ Joseph R. Wright, Jr.
------------------------ -------------------------
SECRETARY SPECIMEN
PRESIDENT
Countersigned and Registered
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
Transfer Agent and Registrar
BY:
AUTHORIZED SIGNATURE
<PAGE>
AVIC GROUP INTERNATIONAL, INC.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT --______Custodian_______
(Cust) (Minor)
TEN ENT -- as tenants by the entireties under Uniform Gifts to Minors
JT TEN -- as joint tenants with right Act ____________________________
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - - --------------------
- - - -----------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
- - - -----------------------------------------------------------------------------
- - - ---------------------------------------------------------------------- SHARES
OF THE COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT ________________________________ ATTORNEY
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED:
------------------------
----------------------------------
SIGNATURE
NOTICE: THE SIGNATURE OF THIS
ASSIGNMENT MUST CORRESPOND WITH
NAME(S) AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature
Guaranteed By:
----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION, GENERALLY,
BANKS, STOCK BROKERS, SAVINGS INSTITUTIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM.
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement dated as of the 16th day of June 1997, between
AVIC Group International, Inc., a Delaware Corporation ("Employer"), and Albert
G. Pastino ("Executive").
W I T N E S S E T H :
1. TERM. Employer hereby employs Executive and Executive hereby accepts
employment on the terms and conditions hereinafter set forth. Subject to the
provisions of Section 7 and 8 hereof, the term of this Agreement shall commence
on the date hereof and shall terminate on June15, 1999.
2. DUTIES.
A. Executive agrees to serve Employer as Senior Vice President and Chief
Financial Officer and in such capacity Executive agrees to render his services
to the best of his ability. Executive will report to the Chairman of the Board
of the Company and the Chief Executive Officer of the Company. During the term
of this Agreement, subject to Paragraph B below, Executive will devote
substantially all of his working time and attention to, but no less than four
days per week, and use his best efforts to advance the business and welfare of
Employer, subject to the direction and control of the Board of Directors.
B. Nothing herein shall prevent Executive from meeting certain business
obligations (described generally in Exhibit "A" attached hereto) and such
additional obligations which may be approved hereafter by the Chairman of the
Board of Directors of the Company, provided that he will do so as long as such
obligations do not impair his ability to fulfill effectively his duties to the
Company.
3. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE.
(a) Executive hereby agrees that, during the term of this Agreement and
thereafter, he will not disclose to any person, or otherwise use or exploit any
of the proprietary or confidential information or knowledge, including without
limitation, trade secrets, processes, records of research, proposals, reports,
methods, processes, techniques, computer software or programming, or budgets or
other non-public financial information, regarding Employer, its business,
properties or affairs obtained by him at any time prior to or subsequent to the
execution of this Agreement, except in the furtherance of the interests of
Employer in the execution of Executive's duties hereunder or as may be required
pursuant to a lawful order of a judicial tribunal or legislative body of
competent jurisdiction.
(b) Upon termination of employment Executive will deliver to Employer all
processes, records of research, proposals, reports, memoranda, computer software
and programming, budgets and other financial information, and other non-public
materials or
<PAGE>
records or writings of any other type (including any copies thereof) made, used
or obtained by Executive in connection with his employment by Employer.
(c) During the term of this Agreement, Executive agrees that he will not
(i) authorize his name to be used by, (ii) or engage in or carry on, directly or
indirectly, for himself as a member of a partnership or as a stockholder (other
than as a stockholder of less than five percent (5%) of the issued and
outstanding stock of a publicly held corporation having assets in excess of
$10,000,000), investor, officer, or director of a corporation (other than
Employer, or any parent, subsidiary, affiliate or successor of Employer), or as
an employee, agent, associate, or consultant of any person, partnership,
corporation or other business entity, in competition with any business carried
on, directly or indirectly, by Employer prior to the date hereof or hereafter
conducted, directly or indirectly, by Employer during the term of this
Agreement, in any county where business is then carried on or conducted by
Employer, subject to paragraph 2B hereof.
(d) Executive agrees that the remedy at law for any breach by him of any
of the covenants and agreements set forth in this Section 3 will be inadequate
and that in the event of any such breach, Employer may, in addition to the other
remedies which may be available to it at law, obtain injunctive relief
prohibiting him (together with all those persons associated with him) from the
breach of such covenants and agreements.
(f) The parties hereto intent that the covenants and agreements contained
in this Section 3 shall be deemed to include a series of separate covenants and
agreements. If, in any judicial proceeding, a court shall refuse to enforce all
of the separate covenants deemed included in such action, then such
unenforceable covenants shall be deemed eliminated from the provisions hereof
for the purposes of such proceeding to the extent necessary to permit the
remaining separate covenants to be enforced in such proceeding.
4. COMPENSATION.
4.1 SALARY. For the services to be rendered by Executive during the
first year of the term of this Agreement, Employer shall pay Executive an annual
salary of One Hundred Thousand Dollars ($100,000), payable semi-monthly and
subject to income tax withholdings and other payroll deductions as customary in
respect of Employer's salaried employees in general. The base salary of
Executive for the second year of this Agreement will be determined by the
Compensation Committee of the Board of Directors, but will be no less than One
Hundred Twenty Thousand Dollars ($120,000).
4.2 BONUS. Executive shall be entitled to participate in such bonus
plans of Employer applicable to senior executives of Employer as determined by
the Board of Directors of Employer in its sole discretion. Notwithstanding the
foregoing, it is the intention of the Employer to pay Executive a bonus greater
than One Hundred Thousand Dollars ($100,000) for each year of the term of this
Agreement, within thirty days of the end of each year of employment hereunder.
Criteria for the determination of the amount of said bonus will be as agreed
upon by the Executive and the Chairman of the Board within forty-five days of
the date of this Agreement.
<PAGE>
4.3 VACATION. Executive shall be entitled to four weeks' paid
vacation for each year during the term of this Agreement.
4.4 MEDICAL INSURANCE. During the term of this Agreement Employer
shall furnish Executive with the same medical and hospital insurance furnished
to other executive employees of Employer.
4.5 STOCK OPTIONS. Upon the execution of this agreement, Employer
shall grant stock options to Executive covering 400,000 shares of Common Stock
of Employer. Such options shall be exercisable at a price of $3.00 per share,
and shall have a 10 year term. The options shall vest as follows: 62,500
options on June 16, 1997, September 16, 1997, December 16, 1997 and March 16,
1998, provided that the Executive is still employed by Employer at each date of
vesting. The remaining 150,000 options shall vest with respect to 37,500 shares
on the following dates: June 16, 1998, September 16, 1998, December 16, 1998 and
March 16, 1999, provided that the Executive is still employed by Employer at
each date of vesting. In the event Executive is terminated without cause, all
of such stock options shall immediately vest. The shares covered by these
options are the subject of a S-8 Registration Statement currently on file with
the Securities and Exchange Commission.
5. EXPENSES. Employer will pay or reimburse Executive for such
reasonable travel, entertainment, or other expenses as he may incur at the
request of Employer during the term of this agreement in connection with the
performance of his duties hereunder. Executive shall comply with such expense
reporting requirements as may be generally applicable to executive officers and
employees of the Company.
6. DEATH OR TOTAL DISABILITY OF EXECUTIVE. If Executive dies, or becomes
totally disabled (for a period of more than six (6) consecutive weeks), during
the term of this Agreement, Executive's employment under this Agreement shall
automatically terminate and all of Executive's benefits and all payments to
Executive under this Agreement shall immediately terminate.
7. TERMINATION FOR CAUSE. Executive's employment under this Agreement
may be terminated by Employer for "good cause." The term "good cause" is
defined as any one or more of the following occurrences:
(a) Executive's breach of any of the covenants contained in Section 3
of this Agreement;
(b) Executive's conviction by, or entry of a plea of guilty or nolo
contendere TO A FELONY;
(c) Executive's commission of a knowing act of fraud, whether prior
to or subsequent to the date hereof upon, Employer;
(d) Executive's continuing failure or refusal to perform his duties
as required by this Agreement;
<PAGE>
(e) Executive's gross negligence, insubordination, material violation
of any duty or loyalty to Employer or any other material misconduct relating to
the business or good will of Employer.
8. MISCELLANEOUS.
8.1 MODIFICATION AND WAIVER OF BREACH. No waiver or modification of
this Agreement shall be binding unless it is in writing signed by the parties
hereto. No waiver of a breach hereof shall be deemed to constitute a waiver of
a future breach, whether of a similar or dissimilar nature.
8.2 COMPLETE AGREEMENT. The Agreement contains the entire
agreement between the parties hereto with respect to the transactions
contemplated by this Agreement and supersedes all previous oral and written and
all contemporaneous negotiations, commitments, writings, and understandings and
is and shall be binding upon and inure to the benefit of Employer, its
successors and permitted assigns and Executive, his heirs, executors and
administrators.
8.3 LEGAL FEES. If any legal action, arbitration or other
proceeding is brought for the enforcement of this Agreement, or because of any
alleged dispute, breach, default or misrepresentation in connection with this
Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorneys' fees and other costs it incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
8.4 ASSIGNMENT. This Agreement may not be assigned in any manner
whatsoever.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the day
and year first above written.
EXECUTIVE: EMPLOYER:
AVIC GROUP INTERNATIONAL, INC.
/s/ Albert G. Pastino
- - - -------------------------
Albert G. Pastino
Address of Executive: 6 South Road
Chester, NJ 07930 By: /s/ Joseph R. Wright, Jr.
--------------------------
Chairman
<PAGE>
EXHIBIT "A"
OUTSIDE DIRECTORSHIPS OF
ALBERT G. PASTINO
COMPANY OWNERSHIP INDUSTRY ANNUAL DAYS
Northwestern Steel and
Wire Company Public Steel 5
B. Manischwitz Kohlberg Food Mfg. 5
Bay Area Foods Kohlberg Food Retail 2
Magnavision Kohlberg/Public Pvt. Cable 12
Satellite
Ithaco/Space Sciences Kohlberg Components 5
Shrine of St. Joseph Not-for-Profit 6
National NF Foundation Not-for-Profit 2
St. Joseph's University Not-for-Profit 5
Square Earth, Inc. Private Internet 2
TOTAL 44
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement dated as of the 16th day of June 1997, between
AVIC Group International, Inc., a Delaware Corporation ("Employer"), and James
F. O'Brien ("Executive").
W I T N E S S E T H :
1. TERM. Employer hereby employs Executive and Executive hereby accepts
employment on the terms and conditions hereinafter set forth. Subject to the
provisions of Section 7 and 8 hereof, the term of this Agreement shall commence
on the date hereof and shall terminate on June15, 1999.
2. DUTIES. Executive agrees to serve Employer as Senior Vice President
and General Counsel and in such capacity Executive agrees to render his services
to the best of his ability. Executive will report to the Chairman of the Board
of the Company and the Chief Executive Officer of the Company. During the term
of this Agreement, Executive will devote substantially all of his time and
attention to, but no less than four days per week, and use his best efforts to
advance the business and welfare of Employer, subject to the direction and
control of the Board of Directors.
3. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE.
(a) Employer acknowledges that Executive has certain professional
obligations to third parties described in Exhibit "A" hereto and that Executive
will continue to perform those obligations. With respect to such of those
professional obligations as may or may appear to constitute a conflict between
the interests of Employer and the interests of such third parties, Employer and
Executive agree that Executive shall not provide services to Employer or such
third parties in connection with any matters now existing or hereafter arising
in which the interests of Employer and such third parties are adverse or have
the potential to be adverse.
(b) Executive hereby agrees that, during the term of this Agreement and
thereafter, he will not disclose to any person, or otherwise use or exploit any
of the proprietary or confidential information or knowledge, including without
limitation, trade secrets, processes, records of research, proposals, reports,
methods, processes, techniques, computer software or programming, or budgets or
other financial information, regarding Employer, its business, properties or
affairs obtained by him at any time prior to or subsequent to the execution of
this Agreement, except in the furtherance of the interests of Employer in the
execution of Executive's duties hereunder or as may be required pursuant to a
lawful order of a judicial tribunal or legislative body of competent
jurisdiction.
<PAGE>
(c) Upon termination of employment Executive will deliver to Employer
all processes, records of research, proposals, reports, memoranda, computer
software and programming, budgets and other financial information, and other
materials or records or writings of any other type (including any copies
thereof) made, used or obtained by Executive in connection with his employment
by Employer.
(d) During the term of this Agreement, Executive agrees that he will:
(i) neither authorize his name to be used by, (ii) nor engage in or carry on,
directly or indirectly, for himself as a member of a partnership or as a
stockholder (other than as a stockholder of less than five percent (5%) of the
issued and outstanding stock of a publicly held corporation having assets in
excess of $10,000,000), investor, officer, or director of a corporation (other
than Employer, or any parent, subsidiary, affiliate or successor of Employer),
or as an employee, agent, associate, or consultant of any person, partnership,
corporation or other business entity, in competition with any business carried
on, directly or indirectly, by Employer prior to the date hereof or hereafter
conducted, directly or indirectly, by Employer during the term of this
Agreement, in any county were business is then carried on or conducted by
Employer.
(e) Executive agrees that the remedy at law for any breach by him of any
of the covenants and agreements set forth in this Section 3 will be inadequate
and that in the event of any such breach, Employer may, in addition to the other
remedies which may be available to it at law, obtain injunctive relief
prohibiting him (together with all those persons associated with him) from the
breach of such covenants and agreements.
(f) The parties hereto intent that the covenants and agreements contained
in this Section 3 shall be deemed to include a series of separate covenants and
agreements. If, in any judicial proceeding, a court shall refuse to enforce all
of the separate covenants deemed included in such action, then such
unenforceable covenants shall be deemed eliminated from the provisions hereof
for the purposes of such proceeding to the extent necessary to permit the
remaining separate covenants to be enforced in such proceeding.
4. COMPENSATION.
4.1 SALARY. For the services to be rendered by Executive during the
first year of the term of this Agreement, Employer shall pay Executive an annual
salary of One Hundred Thousand Dollars ($100,000), payable semi-monthly and
subject to income tax withholdings and other payroll deductions as customary in
respect of Employer's salaried employees in general. The base salary of
Executive for the second year of this Agreement will be determined by the
Compensation Committee of the Board of Directors, but will be no less than One
Hundred Twenty Thousand Dollars ($120,000).
<PAGE>
4.2 BONUS. Executive shall be entitled to participate in such bonus
plans of Employer applicable to senior executives of Employer as determined by
the Board of Directors of Employer in its sole discretion. Notwithstanding the
foregoing, it is the intention of the Employer to pay Executive a bonus greater
than One Hundred Thousand Dollars ($100,000) for each complete, but not partial,
year of the term of this Agreement, within thirty days of the end of each year
of employment hereunder. Criteria for the determination of the amount of said
bonus will be as agreed upon by the Executive and the Chairman of the Board
within forty-five days of the date of this Agreement.
4.3 VACATION. Executive shall be entitled to four weeks' paid
vacation for each year during the term of this Agreement.
4.4 MEDICAL INSURANCE. During the term of this Agreement Employer
shall furnish Executive with the same medical and hospital insurance furnished
to other employees of Employer.
4.5 STOCK OPTIONS. Upon the execution of this agreement, Employer
shall grant stock options to Executive covering 400,000 shares of Common Stock
of Employer. Such options shall be exercisable at a price of $3.00 per share,
and shall have a 10 year term. 250,000 options shall vest 25% on each of the
following dates: June 16, 1997, September 16, 1997, December 16, 1997 and March
16, 1998, provided that the Executive is still employed by Employer at each date
of vesting. The remaining 150,000 options shall vest 25% on each of the
following dates: June 16, 1998, September 16, 1998, December 16, 1998 and March
16, 1999, provided that the Executive is still employed by Employer at each date
of vesting. In the event Executive is terminated by the Company pursuant to
Paragraph 8, or the Executive is terminated without good cause pursuant to
Paragraph 7, all of such stock options shall immediately vest.
5. EXPENSES. Employer will pay or reimburse Executive for such
reasonable travel, entertainment, or other expenses as he may incur at the
request of Employer during the term of this agreement in connection with the
performance of his duties hereunder. Executive shall furnish Employer with such
evidence that such expenses were incurred as Employer may from time to time
require or request.
6. DEATH OR TOTAL DISABILITY OF EXECUTIVE. If Executive dies, or becomes
totally disabled (for a period of more than six (6) consecutive weeks), during
the term of this Agreement, Executive's employment under this Agreement shall
automatically terminate and all of Executive's benefits and all payments to
Executive under this Agreement shall immediately terminate.
<PAGE>
7. TERMINATION FOR CAUSE. Executive's employment under this Agreement
may be terminated by Employer for "good cause." The term "good cause" is
defined as any one or more of the following occurrences:
(a) Executive's breach of any of the covenants contained in Section 3
of this Agreement;
(b) Executive's conviction by, or entry of a plea of guilty or nolo
contendere to a felony;
(c) Executive's commission of an act of fraud, whether prior to or
subsequent to the date hereof upon, Employer;
(d) Executive's continuing failure or refusal to perform his duties
as required by this Agreement;
(e) Executive's gross negligence, insubordination, material violation
of any duty or loyalty to Employer or any other material misconduct relating to
the business or good will of Employer.
8. EARLY TERMINATION. Subject to Section 7, above, either of Employer or
Executive may terminate Executive's employment hereunder upon thirty days prior
written notice.
9. MISCELLANEOUS.
9.1 MODIFICATION AND WAIVER OF BREACH. No waiver or modification of
this Agreement shall be binding unless it is in writing signed by the parties
hereto. No waiver of a breach hereof shall be deemed to constitute a waiver of
a future breach, whether of a similar or dissimilar nature.
9.2 COMPLETE AGREEMENT. The Agreement contains the entire agreement
between the parties hereto with respect to the transactions contemplated by this
Agreement and supersedes all previous oral and written and all contemporaneous
negotiations, commitments, writings, and understandings and is and shall be
binding upon and inure to the benefit of Employer, its successors and permitted
assigns and Executive, his heirs, executors and administrators.
9.3 LEGAL FEES. If any legal action, arbitration or other
proceeding is brought for the enforcement of this Agreement, or because of any
alleged dispute, breach, default or misrepresentation in connection with this
Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorneys' fees and other
<PAGE>
costs it incurred in that action or proceeding, in addition to any other relief
to which it may be entitled.
9.4 ASSIGNMENT. This Agreement may not be assigned in any manner
whatsoever.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the day
and year first above written.
EXECUTIVE: EMPLOYER:
AVIC GROUP
INTERNATIONAL, INC.
/s/ James F. O'Brien
- - - -----------------------------
James F. O'Brien
Address of Executive:
23 Ketch Lane By: /s/ Joseph R. Wright, Jr.
Quincy, MA 02171 ------------------------------
Chairman
<PAGE>
EXHIBIT "A"
PROFESSIONAL OBLIGATIONS OF JAMES F. O'BRIEN
Promethean Investment Group, L.L.C. Counsel
Promethean Investment Group, Inc. Counsel
Themis Partners, L. P. Counsel
Heracles Fund Counsel and Member of the Board of
Directors
(The above entities are subject to Paragraph 3(a) of the Employment Agreement.)
The Jetty Fund Counsel
The Longshore Fund Counsel
Goulston & Storrs, P.C. Co-Counsel
(Involves representations of two clients of Goulston & Storrs in litigation
matters pending in the Superior Court and the Land Court of the Commonwealth of
Massachusetts.)
<PAGE>
PROPRIETARY AND CONFIDENTIAL
COMMON STOCK
INVESTMENT AGREEMENT
Between
Promethean Investment Group L.L.C.
And
Avic Group International, Inc.
Dated as of March 31, 1997
<PAGE>
INVESTMENT AGREEMENT dated as of March 31, 1997 between Promethean
Investment Group L.L.C. (together with its successors in interest and assigns,
the "Investor"), and Avic Group International, Inc., a corporation duly
organized and existing under the laws of the State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Investor shall invest up to $10,000,000 in
shares (the "Shares") of the Company's common stock, par value $0.001 per share
(the "Common Stock"),
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Terms used herein which are not defined herein but are defined in the
Registration Rights Exhibit, which is annexed hereto, incorporated herein and
hereby made an integral part hereof shall have the same meaning herein as
therein.
ARTICLE II
PURCHASE AND SALE OF COMMON STOCK
Section 2.1. PURCHASE AND SALE OF COMMON STOCK. Upon the terms and conditions
set forth herein, the Company shall issue and sell to the Investor, and the
Investor shall purchase from the Company up to $10,000,000 of the Common Stock.
Section 2.2. DELIVERY OF PUT NOTICES,
(a) At any time and from time to time during the period beginning on
the calendar day following the initial effective date of the Registration
Statement and ending on the earlier of (i) the date two years after the initial
effective date of the Registration Statement day and (ii) termination of this
Agreement in accordance with Article VIII (the "Open Period"), the Company may
deliver written notices to the Investor (each such notice hereinafter referred
to as a "Put Notice") stating a dollar amount (the "Dollar Amount") of Common
Stock which the Company intends to sell to the Investor within the thirteen
business days (the "Purchase Period") following the date (the "Put Notice Date")
on which the Put Notice is given to the Investor by the Company in accordance
with this Agreement. "Business Day" shall mean any day on which the
<PAGE>
-2-
Company's Principal Market is open for trading. The Dollar Amount designated by
the Company in any given Put Notice shall be in increments of $250,000.
Notwithstanding anything herein to the contrary, (A) the Investor shall not be
required to purchase during the Purchase Period following a Put Notice Date a
dollar amount of Common Stock (the "Required Dollar Amount") which exceeds the
lesser of (i) $1,500,000, subject to reduction during the Purchase Period as
hereinafter provided, or (ii) ten percent of the Trading Dollar Value
(hereinafter defined) during those of the first ten trading days of the Purchase
Period during which the average per share Trading Dollar Value is $2.50 or more,
but (B) the Investor may, at its election and pursuant to its Purchase Notices
(hereinafter defined), purchase during any such Purchase Period up to one
hundred thirty percent of the Required Dollar Amount; provided that (x) the
Investor may not, pursuant to clause (B) of this Section, invest all or any
portion of any amount in excess of a Required Dollar Amount if the investment
thereof by the Investor, and (y) a Required Dollar Amount may not in any event
include an amount which, if invested by the Investor hereunder, would result, in
the case of either (x) or (y), in the Investor purchasing, during a Purchase
Period, shares of Common Stock at a price determined in accordance with Section
2.3 hereof which, when aggregated with all other shares of Common Stock acquired
by the Investor pursuant to this Agreement in the 90 calendar days preceding
such Purchase Period, would result in the Investor having purchased pursuant to
this Agreement, during such Purchase Period and such period of 90 calendar days,
shares of Common Stock totalling more than 4.9% of the Common Stock outstanding
on the Put Notice Date for such Purchase Period, as determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the regulations promulgated thereunder. The Put Notice
shall include a representation of the Company as to the Common Stock outstanding
on the Put Notice Date as determined in accordance with Section 13(d) of the
Exchange Act. In the event that the amount of Common Stock outstanding is
determined in accordance with Section 13(d) of the Exchange Act and the
regulations promulgated thereunder is different on any date during a Purchase
Period than on the Put Notice Date associated with such Purchase Period, the
amount of Common Stock outstanding on such date during such Purchase Period
shall govern for purposes of determining whether the Investor, when aggregating
all purchases of Common Stock made pursuant to this Agreement in the 90 calendar
days preceding such date, would have acquired more than 4.9% of the Common Stock
during such period. The amount provided in clause (i) of this Section 2.2(a)
shall be in effect at the beginning of each Purchase Period but shall be reduced
during such Purchase Period by $150,000 for each trading day during the Purchase
Period on which the
<PAGE>
-3-
average per share Trading Dollar Value is less than $2.50 per share. For
purposes hereof "Trading Dollar Value" shall mean the dollar value of the Common
Stock traded on the Principal Market for the applicable day or period, provided
that individual trades of 15,000 shares or more on any trading day shall, for
this purpose, be treated as a trade of 5,000 shares at the average per share
price at which such trades of 15,000 shares or more were actually made.
(b) Notwithstanding any of the foregoing, the Company may not deliver
a Put Notice (i) if the Applicable Trading Price (hereinafter defined) on the
day prior to delivery of such Put Notice was less than $2.50 per share or (ii)
if trading of the Common Stock on the Principal Market is suspended or the
Common Stock is delisted from the Principal Market, or (iii) if the Common Stock
is not registered under the Exchange Act or if the Registration Statement is no
longer effective or is subject to a stop order or its use or the use of the
prospectus which is a part thereof is otherwise suspended. If (a) the
Applicable Trading Price on any trading day during the Purchase Period
associated with an effective Put Notice shall be less than $2.50 per share or
(b) any of the events described in clauses (ii) and (iii) above occurs after an
effective Put Notice is so delivered, and if any such circumstance described in
(a) or (b) above so occurs before the entire Required Dollar Amount of Common
Stock covered by such Put Notice shall have been purchased during the Purchase
Period, then the Investor shall have no further obligation to purchase the
balance of such Required Dollar Amount of Common Stock during such Purchase
Period; PROVIDED, HOWEVER, that on any day during the balance of such Purchase
Period upon which such events described in clauses (ii) and (iii) above do not
exist or which follows a trading day upon which the Applicable Trading Price
shall be $2.50 per share or more, the Investor may in its sole discretion but
shall not be required to give the Company one or more Purchase Notices covering
some or all of such balance of the Required Dollar Amount, as well as some or
all of the additional amounts of Common Stock which the Investor may elect to
purchase during such Purchase Period pursuant to Section 2.2(a)(B) above. For
purposes of this Section 2.2(b), the "Applicable Trading Price" on any day shall
mean the closing trading price of the Common Stock on the Principal Market on
such day, as reported by the Principal Market, unless the closing trade on such
day was made by or on behalf of the Investor or an affiliate of the Investor, in
which case the Applicable Trading Price for such day shall mean the trading
price of the last trade made on such day by other than the Investor or any
affiliate.
<PAGE>
-4-
(c) During the Open Period the Company shall deliver Put Notices to
the Investor having a total, aggregate Dollar Amount not less than $4,000,000.
(d) During the Open Period Put Notices may be delivered no more
frequently than once in each period of thirteen consecutive business days, such
that Put Notices and associated Purchase Periods not overlap each other.
(e) The Investor shall not in any event be required to invest more
than $10,000,000 in the aggregate (excluding additional purchases which may be
made at the election or option of the Investor pursuant to Section 2.2(a)),
under or pursuant to Put Notices given hereunder.
Section 2.3. DETERMINATION OF PRICE PER SHARE. The prices (each, a
"Purchase Period Price Per Share") at which shares that the Company shall be
obligated to issue and sell and the Investor shall be obligated to purchase in
connection with a Put Notice (including, without limitations any such additional
purchases pursuant to Section 2.2(a)(B)) shall be 90% (the "Common Stock
Investment Percentage") of the lowest of the daily low trading prices of the
Common Stock on the Principal Market on each of the three days next preceding a
Purchase Notice Date (hereinafter defined) upon which shares of the Common Stock
were traded on the Principal Market (the "Average Stock Price"); provided,
however, that if a sale of Common Stock shall have been made by the Investor or
an affiliate of the Investor at the low trading price on any such trading day,
such trade shall be disregarded for purposes of the foregoing. The number of
shares so to be purchased pursuant to each Purchase Notice shall be rounded to
the nearest whole number so as to avoid the issuance of fractional shares.
Section 2.4. PURCHASE CLOSINGS.
(a) Purchases of Common Stock by the Investor during a Purchase
Period may be made at any time and from time to time during the Purchase Period
pursuant to one or more "Purchase Notices" given by the Investor to the Company
during the Purchase Period, each specifying the dollar amount to be invested by
the Investor pursuant to such Purchase Notice and the Purchase Period Price Per
Share at which Common Stock is to be so purchased pursuant to such Purchase
Notice. If the entire Required Dollar Amount of Common Stock required to be
purchased during such Period shall not have been covered by Purchase Notices
before the last day of the Purchase Period, the Investor shall be deemed so to
have given the Company a Purchase Notice on the last day
<PAGE>
-5-
of the Purchase Period specifying therein the balance of such Required Dollar
Amount of Common Stock so to be purchased during such Period and the Purchase
Period Price Per Share applicable to such purchase. Each date upon which a
Purchase Notice is or is deemed so to have been given is herein referred to
as a "Purchase Notice Date."
(b) Each purchase and sale of Common Stock pursuant to a Purchase
Notice (a "Closing") shall take place on the third business day following the
giving of the Purchase Notice to which such Closing relates, or the earliest
date thereafter on which all conditions to Closing have been satisfied. Each
date on which a Closing occurs is referred to herein as a "Closing Date."
(c) (i) On each Closing Date, the Company shall deliver to the
Investor certificates representing the shares of Common Stock to be issued
and sold to the Investor on such date and registered in the name of the
Investor or deposit such shares into the accounts designated by the Investor
for the benefit of the Investor and (ii) on each Closing Date, the Investor
shall deliver to the Company the price to be paid for such shares, determined
as aforesaid, by cashier's check or wire transfer in immediately available
funds to such account as shall be designated in writing by the Company. In
addition, each of the Company and the Investor shall deliver all documents,
instruments and writings required to be delivered by either of them pursuant
to this Agreement at or prior to each Closing.
Section 2.5. CERTAIN ADJUSTMENTS. Average Stock Prices, Purchase Period
Prices Per Share, the Maximum Common Stock Issuance (hereinafter defined) the
$2.50 amounts provided in Sections 2.2(a) and 2.2(b) hereof and the $3.33
amounts provided in Section 5.2 shall be adjusted appropriately to reflect stock
splits, stock dividends, combinations and like transactions affecting the Common
Stock.
Section 2.6. DELISTING/DEREGISTRATION/SUSPENSION. If at any time
during the Open Period or within thirty days after the end of the Open
Period, (i) the Common Stock is delisted from the Principal Market or (ii)
the Common Stock is not registered under the Exchange Act or (iii) trading of
the Common Stock on the Principal Market is suspended for more than two
consecutive full trading days or for any cause(s) or reason(s) which have or
are likely to have, individually or in the aggregate, an effect on the
business, operations, properties, prospects, or financial condition of the
Company and any other entities controlled by the Company, taken as a whole,
which is material and adverse to it or them, as the case may be, or (iv) if
any registration statement with
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respect to the Common Stock issued or issuable hereunder including the
Registration Statement) is no longer effective or subject to a stop order or
otherwise suspended by the Company or as a result of action or inaction by the
Company, and if, in the case of the circumstances described in clause (iv) of
this Section 2.6, such circumstances shall exist for periods in excess of those
provided in Section 8 of the Registration Rights Exhibit with respect thereto,
the Investor shall have the right, at its option in its sole discretion, which
right shall be exercised within thirty days of such event or occurrence, to sell
to the Company, and the Company agrees to buy, promptly upon the exercise of
such right by the Investor and subject to the limitations imposed by the
Delaware General Corporation Law, all or any part of the Common Stock issued to
the Investor and then held by the Investor at a price per share equal to the
Average Stock Price at the time such share was purchased or at the time such
right pursuant to this Section 2.6 is exercised by the Investor, whichever is
greater; PROVIDED, HOWEVER, that the number of Shares of Common Stock subject to
the Investor's option hereunder shall in no event exceed the number of such
Shares acquired by the Investor hereunder during the 60 trading days preceding
the Investor's exercise of the option provided to it in this Section 2.6 and
during no part of which any of the circumstances described in clause (i) through
(iv) of this Section 2.6 existed; and provided further that the Company's
obligation so to buy said Common Stock from the Investor shall be subordinated
to certain Senior Indebtedness.
Section 2.7. OVERALL LIMIT ON COMMON STOCK ISSUABLE; MINIMUM DOLLAR
AMOUNT. Notwithstanding anything herein contained to the contrary, the number
of shares of Common Stock issuable by the Company hereunder shall not exceed
twenty percent of all authorized Common Stock of the Company, subject to
appropriate adjustment for stock splits, stock dividends, combinations or other
similar recapitalization affecting the Common Stock, (the "Maximum Common Stock
Issuance"), unless the issuance of Common Stock hereunder excess of the Maximum
Common Stock Issuance shall first be approved by the Company's stockholders in
accordance with applicable law and the by-laws of the Company. In the event
that the foregoing limitation provided in this Section 2.7 shall prevent the
Investor's purchase of Common Stock pursuant to this Article II as and when the
obligations, right or option to make such purchase is or would arise or be
elected or exercised by the Investor according to the terms hereof or if the
Company has not delivered Put Notices in the minimum Dollar Amount established
in Section 2.2(c) above, then, at the election of the Investor, the Company
shall, to the extent permissible by Delaware law, offer to sell to the Holders
stock or other securities having rights substantially similar to those contained
in the Company's Series D
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preferred stock in an amount equal to the shortfall. Notwithstanding
anything herein to the contrary, the Company will use its best efforts and
all due diligence to obtain its shareholders' approval of the issuance and
sale of the Common Stock or the substitute securities and all transactions
relating or pertaining thereto, as contemplated by this Agreement. Without
limiting the generality of the foregoing, such shareholders' approval will
duly authorize the issuance by the Company of shares of Common Stock
totalling twenty percent or more of the Company's Common Stock outstanding on
the date hereof. The parties understand and agree that the Company's failure
to obtain such approval shall in no way adversely affect the validity and due
authorization, as provided in Sections 4.4 and 4.6 hereof of the issuance and
sale of Common Stock hereunder, and that such approval pertains only to the
applicability of the Maximum Common Stock Issuance Limitation provided in
this Section 2.7.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that:
Section 3.1. INTENT. The Investor will be purchasing the Common Stock
to be purchased by it hereunder for its own account and the Investor has no
present arrangement (whether or not legally binding) at any time to sell any
such Common Stock to or through any person or entity; PROVIDED, HOWEVER, that
by making the representations herein, the Investor does not agree to hold
such Common Stock for any minimum or other specific term and reserves the
right to dispose of such Common Stock at any time in accordance with federal
and state securities laws applicable to such disposition. The Investor
understands that such Common Stock must be held indefinitely unless such
Common Stock is, either at the time of purchase or subsequently, registered
under the Securities Act or an exemption from registration is available. The
Investor has been advised or is aware of the provisions of Rule 144
promulgated under the Securities Act.
Section 3.2. SOPHISTICATED INVESTOR. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D promulgated
under the Securities Act ("Regulation D")) and an accredited investor (as
defined in Rule 501 of Regulation D), and the Investor has such experience in
business and financial matters that it is capable of evaluating the merits
and risks of an investment in such Common Stock. The Investor acknowledges
that an investment in the Common Stock is speculative and involves a high
degree of risk.
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Section 3.3. AUTHORITY. The Investor has full power and authority to
enter into and to perform this Agreement in accordance with its terms. This
Agreement has been duly authorized and validly executed and delivered by the
Investor and is a valid and binding agreement of the Investor enforceable
against it in accordance with its terms, subject to bankruptcy, insolvency or
similar laws relating to, or affecting generally the enforcement of creditors'
rights and remedies, and subject also to other equitable principles of general
application.
Section 3.4. NO BROKERS. The Investor has taken no action which would
give rise to any claim by any person for brokerage commission, finder fees, or
similar payments relating to this Agreement or the transactions contemplated
hereby.
Section 3.5. NOT AN AFFILIATE. The Investor is not an officer, director
or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company.
Section 3.6. ORGANIZATION AND STANDING. The Investor is duly organized,
validly existing, and in good standing under the laws of the place of its
organization set forth at the beginning of this Agreement. The Investor, if a
corporation, partnership or trust, has not been organized, reorganized or
recapitalized specifically for the purpose of investing in the Company.
Section 3.7. ABSENCE OF CONFLICTS. The execution and delivery of this
Investment and any other documents or instruments executed in connection
herewith, and the consummation of the transactions contemplated hereby and
thereby, and compliance with the requirements thereof, will not violate any
law, rule, regulation, order, writ, judgment, injunction, decree or award
applicable to the Investor, or the provision of any indenture, instrument or
agreement to which the Investor is a party or is subject, or by which the
Investor or any of its assets is bound, or conflict with or constitute a
material default thereunder, or result in the creation or imposition of any
lien pursuant to the terms of any such indenture, instrument or agreement, or
constitute a breach of any fiduciary duty owed by the Investor to any third
party, or require the approval of any third party pursuant to any material
contract, agreement, instrument, relationship or legal obligation to which
the Investor is subject or to which any of its assets, operations or
management may be subject.
Section 3.8. DISCLOSURE, ACCESS TO INFORMATION. The Investor has
received all documents, records, books and other information pertaining to
Investor's Common Stock investment in the Company that have been
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requested by the Investor. The Investor further acknowledges that it
understands that the Company is subject to the periodic reporting requirements
of the Exchange Act, and the Investor has reviewed or received copies of any
such reports that have been requested by it. The Investor has carefully
reviewed the representations concerning the Company contained in this Agreement
and has made inquiry concerning the Company, its business and its personnel; the
officers of the Company have made available to the Investor any and all written
information which it has requested and have answered all inquiries made by the
Investor; and the Investor has sufficient knowledge and experience in investing
in companies similar to the Company so as to be able to evaluate the risks and
merits of its investment in the Company and is able financially to bear the
risks thereof.
Section 3.9. MANNER OF SALE. At no time was the Investor presented with
or solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising with
respect to Investor's Common Stock investment.
Section 3.10. RELIANCE ON COMPANY. The Investor acknowledges that it has
had the opportunity to review this Agreement and the transactions contemplated
by this Agreement with its own legal counsel and tax advisors. Except for any
statements or representations of the Company made in this Agreement and the SEC
Documents (as defined below), the Investor is not relying on any other
statements or representations of the Company or any of its representatives or
agents with respect to such investment.
Section 3.11. HART-SCOTT-RODINO. (A) The Person (as that term is defined
in 16 C.F.R. Section 801.1(a)(I)) of which the Investor is a part does not have
total assets or annual net sales of $100,000,000 or more, as measured under the
applicable rules and regulations interpreting the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, ("HSR"), and/or (B) for purposes of
Section 802.9 of HSR, the Investor's acquisition of Common Stock will be made
solely for the purposes of investment and, as a result of such acquisition and
any such conversion or exercise, the Investor will hold ten percent or less of
the voting securities of the Company outstanding on the date hereof, and/or (C)
as a result of such acquisition and any such conversion or exercise, the
Investor will not hold assets or voting securities of the Company valued at more
than $1,500,000, and/or (D) the Investor is an Institutional Investor for
purposes of Section 802.64 of HSR, such voting securities of the Company will be
acquired directly by the Investor in the ordinary course of its business and
solely for the purpose of investment (for purposes of such Section 802.64) and,
as
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a result of any such acquisition the Investor will hold fifteen percent or less
of the voting securities of the Company outstanding on the date hereof or voting
securities of the issuer valued at $25,000,000 or less.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that:
Section 4.1. COMPANY STATUS. The Company has registered its Common Stock
pursuant to Section 12(b) or 12(g) of the Exchange Act, is in compliance in all
material respects with all reporting requirements of the Exchange Act, and the
Company has maintained all requirements for the continued listing of its Common
Stock, and such Common Stock is currently listed on the Principal Market. As of
the date hereof the Company's Principal Market is the American Stock Exchange.
Section 4.2. CURRENT PUBLIC INFORMATION. The Company has furnished the
Investor with true and correct copies of the Company's latest proxy statement
and Annual Report on Form 10-K and all reports and other documents filed with
the SEC by the Company since January 24, 1996, pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act (collectively, the "SEC Documents")
Section 4.3. GENERAL SOLICITATION IN REGARD TO THIS TRANSACTION. Neither
the Company nor any of its affiliates nor any distributor or any person acting
on its or their behalf has conducted any "directed selling efforts" (as that
term is defined in Rule 902(b) of Regulation S under the Securities Act) with
respect to the Common Stock which may be acquired hereunder, nor has the Company
conducted any general solicitation (as that term is used in Rule 502(c) of
Regulation D) with respect to any of such Common Stock, nor have they made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would require registration of such Common Stock under
the Securities Act.
Section 4.4. CAPITALIZATION AND VALID ISSUANCE OF STOCK. As of the date
hereof, the Company has an authorized capitalization consisting of 100,000,000
shares of Common Stock, par value $0.001, and 10,000,000 shares of Preferred
Stock, par value $0.001. As of the date hereof, the Company has issued and
outstanding 31,232,921 shares of Common Stock and 1,524,328 shares of Preferred
Stock. All such options and warrants to acquire shares of Company's Common
Stock, which were outstanding as of December 31, 1996 or which the Company was
obligated to issue as of
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December 31, 1996, are described as required in the SEC Documents. As of the
date hereof, the Company has outstanding stock options and warrants to
acquire a total of 8,543,284 and 2,859,082 shares, respectively, of the
Company's Common Stock, which outstanding options and warrants, to the extent
issued or granted prior to December 31, 1996, are otherwise as so described
in the SEC Documents and, to the extent granted since December 31, 1996, are
upon terms which are not materially different from the terms of those options
and warrants as have been issued or granted on or before December 31, 1996.
The Company has not issued or granted and there are not now outstanding, nor
has the company undertaken or become obligated to issue or grant, any
convertible securities or, apart from such stock options and warrants
outstanding on the date hereof, any options, warrants or other rights to
acquire Common Stock, other than the Company's Series C Preferred Stock
offering which is currently being undertaken by Patricof & Co. All of the
issued shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable; the Common Stock
issuable pursuant to this Agreement, when issued, sold and delivered against
payment therefor in accordance with the terms of this Agreement, will be duly
and validly issued, fully paid and nonassessable; and the holders of
outstanding Common Stock of the Company are not and shall not be entitled to
preemptive or other rights afforded by the Company to subscribe for the
capital stock or other securities of the Company as a result of the sale of
the Common Stock to the Investor hereunder.
Section 4.5. ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly incorporated and existing in good standing under the laws of
the State of Delaware and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company
does not have any subsidiaries, except for those listed in the SEC Documents.
The Company and each such subsidiary, if any, is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect. "Material Adverse Effect" means any
effect on the business, operations, properties, prospects, or financial
condition of the entity with respect to which such term is used and which is
material and adverse to such entity and other entities controlling or controlled
by such entity, taken as A whole, and/or any condition or situation which would
prohibit or otherwise interfere with the ability of the entity with respect to
which said term is used to enter into and perform its obligations under this
Agreement, including the Registration Rights Exhibit.
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Section 4.6. AUTHORIZATION, ENFORCEMENT. (i) The Company has the
requisite corporate power and authority to enter into and perform the Agreements
and to issue the Common Stock pursuant to this Agreement, all in accordance with
the terms hereof, (ii) the execution and delivery of this Agreement and the
issuance of such Common Stock by the Company and the consummation by the Company
of the transactions contemplated hereby to be performed and observed by the
Company have been duly authorized by all necessary corporate action, and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required, (iii) this Agreement has been duly executed and
delivered by the Company, and (iv) this Agreement constitutes the valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable principles
of general application.
Section 4.7. CORPORATE DOCUMENTS. The Company has furnished or made
available to the Investors true and correct copies of the Company's Certificate
of Incorporation, as amended and in effect on the date hereof (the
"Certificate"), and the Company's By-Laws, as amended and in effect on the date
hereof (the "By-Laws").
Section 4.8. NO CONFLICTS. The execution, delivery and performance of
the Agreements by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby, including without limitation the
issuance of such Common Stock, do not and will not (i) result in a violation of
the Company's Certificate of Incorporation or By-Laws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of any material agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, or (iii)
result in a violation of any federal, state, local or foreign law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries is bound
or affected (except in the case of any of clause (i), (ii) or (iii) for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect). The business of the Company is not being conducted in
violation of any law, ordinance or regulation of any governmental entity, except
for possible violations which either singly or in the aggregate do not and will
not have a Material Adverse Effect. The
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Company is not required under federal, state, local or foreign law, rule or
regulation to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it
to execute, deliver or perform any of its obligations under this Agreement or
issue and/or sell such Common Stock in accordance with the terms hereof
(other than any SEC, NASD or state securities filings which may be required
or permitted to be made by the Company subsequent to this date hereof, and
any registration statement which may be filed incident to this Agreement),
provided that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investors herein. For purposes of the
Company's representations and warranties as to foreign law, rule or
regulation made in clause (iii) above and in the next preceding sentence of
this Section 4.8, such representations and warranties are made only to the
best of the Company's knowledge insofar as the execution, delivery and
performance of this Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby are or may be
affected by the status of the Investor under or pursuant to any such foreign
law, rule or regulation.
Section 4.9. SEC DOCUMENTS. The Company has delivered or made
available to the Investors true and complete copies of the SEC Documents
(including, without limitation, proxy information and solicitation
materials). The Company has not provided to the Investors any information
which, according to applicable law, rule or regulation, should have been
disclosed publicly prior to the date hereof by the Company but which has not
been so disclosed. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Exchange Act and rules
and regulations of the SEC promulgated thereunder, and none of the SEC
Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in fight of the circumstances under which they
were made, not misleading. The financial statements of the Company included
in the SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed or summary statements or to the extent they are subject to normal
year-end audit adjustments) and fairly present in all material
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respects the financial position of the Company as of the dates thereof and
the results of operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments).
Section 4.10. NO MATERIAL ADVERSE CHANGE. Since December 31, 1996, no
event which had or is likely to have a Material Adverse Effect has occurred
or exists.
Section 4.11. NO UNDISCLOSED LIABILITIES. The Company and its
subsidiaries have no liabilities or obligations which are material,
individually or in the aggregate, and which are not disclosed in the SEC
Documents, other than those incurred in the ordinary course of the Company's
or its subsidiaries' respective businesses since December 31, 1996, and
which, individually or in the aggregate, have had or are likely to have a
Material Adverse Effect on the Company and upon any of its subsidiaries.
Section 4.12. NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. No event or
circumstance has occurred or exists with respect to the Company or its
subsidiaries or their respective businesses, properties, prospects,
operations or financial condition, which, under applicable law, rule or
regulation, requires public disclosure or announcement prior to the date
hereof by the Company but which has not been so publicly announced or
disclosed.
Section 4.13. NO INTEGRATED OFFERING. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers
to buy any security, other than pursuant to this Agreement, under
circumstances that would require registration under the Securities Act of the
Common Stock issuable hereunder.
Section 4.14. NO BROKERS. The Company has taken no action which would
give rise to any claim by any person for brokerage commissions, finder's fees
or similar payments by the Investor relating to the Agreements or the
transactions contemplated hereby and thereby.
Section 4.15. LITIGATION AND OTHER PROCEEDINGS. Except as may be set
forth in the SEC Documents, there are no lawsuits or proceedings pending or
to the best knowledge of the Company threatened, against the Company, nor has
the Company received any written or oral notice of any such action, suit,
proceeding or investigation, which, if decided adversely, is reasonably
expected to have a Material Adverse Effect on the Company or which might
materially adversely affect this Agreement or the
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transactions contemplated by this Agreement. Except as set forth in the SEC
Documents, no judgment, order, writ, injunction or decree or award has been
issued by or, so far as is known by the Company, requested of any court,
arbitrator or governmental agency which is reasonably expected to result in a
Material Adverse Effect on the Company or which might materially adversely
affect the transactions contemplated by this Agreement.
ARTICLE V
COVENANTS OF THE COMPANY
Section 5.1. REGISTRATION RIGHTS. The Registration Rights Exhibit is
hereby incorporated herein by reference and is hereby made an integral part
hereof as though fully set forth herein.
Section 5.2. RESERVATION OF COMMON STOCK. As of the date hereof, the
Company has reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue shares of
its Common Stock hereunder; provided, however, that the number of shares of
Common Stock initially so reserved on the date hereof shall not be less than
1,333,333 and provided further that in no event shall the number of shares so
reserved be less the number which might thereafter be issued if the Average
Stock Price of the Common Stock on the Principal Market remained at $3.33 per
share. The number of shares so reserved from time to time, as theretofore
increased or reduced as hereinafter provided, may be reduced by the number of
shares of Common Stock actually delivered hereunder and the number of shares so
reserved shall be increased to reflect stock splits and stock dividends and
distributions and like transactions with respect to Common Stock. In the event
that, notwithstanding the foregoing, the Company determines that it does not
have a sufficient number of authorized shares of Common Stock to reserve and
keep available for issuance as described in this Section 5.2, the Company shall
use its best efforts to increase the number of authorized shares of Common Stock
by seeking stockholder approval for the authorization of such additional shares.
Section 5.3. LISTING OF SHARES. The Company hereby agrees, promptly
following the date hereof, to take such action, if any, or may be required to
cause all of the Common Stock which may be or become issuable hereunder to be
listed on the Principal Market as promptly as possible but no later than one
hundred fifty (150) days following the date hereof. The Company further agrees,
if the Company applies to have the
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Common Stock traded on any other Principal Market, it will include in such
application all of the Common Stock so issuable and will take such other
action as is necessary or desirable to cause the Common Stock to be listed on
such other Principal Market as promptly as possible.
Section 5.4. EXCHANGE ACT REGISTRATION. The Company will cause its
Common Stock to continue to be registered under Section 12(b) or 12(g) of the
Exchange Act, will comply in all material respects with its reporting and
filing obligations under said Act, and will not take any action or file any
document (whether or not permitted by said Act or the rules thereunder) to
terminate or suspend such registration or to terminate or suspend its
reporting and filing obligations under said Act. The Company will take all
reasonable action necessary to continue the listing and trading of its Common
Stock on the Principal Market and will comply in all material respects with
the Company's reporting, filing and other obligations under the bylaws or
rules of the NASD and the Principal Market.
Section 5.5. A. LEGENDS. Except as hereinafter provided, certificates
evidencing any Common Stock issued hereunder will bear the following legend
(the "Legend").
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES
UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS UNLESS AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT
REGISTRATION UNDER SAID ACT IS NOT REQUIRED.
Prior to the Closing, the Company will issue to the transfer agent for
its Common Stock (and to any substitute or replacement transfer agent for its
Common Stock coterminous with the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the
form and substance of the Transfer Agent Irrevocable Instruction Exhibit
which is annexed hereto and hereby made a part hereof. Such instructions
shall be irrevocable by the Company from and after the date hereof or from
and after the issuance thereof to any such substitute or replacement transfer
agent, as the case may be, except as otherwise expressly provided in the
Registration Rights Exhibit. Notwithstanding the foregoing, such Exhibit may
be revoked if required by a change in law, as determined mutually by counsel
to the Company
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and counsel to the Investor or the successors and assigns of the Investor.
It is the intent and purpose of such instructions, as provided therein, to
require the transfer agent for the Common Stock from time to time to issue
certificates evidencing Common Stock free of the Legend during the following
periods and under the following circumstances and without consultation by the
transfer agent with the Company or its counsel and without the need for any
further advice or instruction to the transfer agent by or from the Company or
its counsel:
(a) For so long as the Registration Statement remains effective,
other than during any period of time (a "Black-Out Period") during which the
Registration Statement is not effective, for any reason or no reason, or
during which the Company has suspended the use of the Registration Statement
pursuant to Section 8 of the Registration Rights Exhibit,
(i) incident to the issuance of Common Stock hereunder by the
Company; and
(ii) upon any surrender of one or more certificates evidencing
Common Stock and which bear the Legend;
provided that in connection with such event, a notice is provided to the
transfer agent representing that (i) the holder of or the person or entity
acquiring such shares of Common Stock has sold or intends promptly to sell
such shares pursuant to and in accordance with the Registration Statement,
including the prospectus delivery requirements applicable thereto, and that
(ii) to the Holder's knowledge, which has been confirmed in writing by the
Company, the Registration Statement was or will be effective, on the date of
the sale and the sale did not occur or will not occur during a Black-Out
Period, and requesting that certificates for the shares sold or to be sold be
issued free of the Legend to the transferee of the holder or to the Holder,
as the case may be; and provided further that if, in the event of any such
representation in accordance with Clause (i) of the preceding proviso, such
certificate evidencing the Common Stock so sold or to be sold is not
delivered incident to or for purposes of the completion of such sale within
ten (10) trading days after the receipt of such certificate by the Holder or
by the Holder's designee, the Holder will return such certificate to the
transfer agent for the purpose of enabling the transfer agent to add the
Legend to such Certificate and then return the legended certificate to the
Holder.
(b) At any time from and after the Closing Date, upon any surrender
of one or more certificates evidencing Common Stock and which
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bear the Legend, to the extent accompanied by a notice requesting the
issuance of new certificates free of the Legend to replace those surrendered
and containing or also accompanied by an opinion of counsel satisfactory to
the Company that (i) the then Holder thereof is permitted to dispose thereof
pursuant to Rule 144(k) under the Securities Act or (ii) such Holder intends
to effect the sale or other disposition of such stock, whether or not
pursuant to the Registration Statement, to a purchaser or purchasers who will
not be subject to the registration requirements of the Act, or (iii) such
holder or the disposition of such Common Stock is not then subject to such
requirements.
B. NO OTHER LEGEND OR STOCK TRANSFER RESTRICTIONS. No Legend has
been or shall be placed on the share certificates representing such Common
Stock and no instructions or "stop transfers," so called, "stock transfer
restrictions," so called, or other restrictions have been or shall be given
to the Company's transfer agent with respect thereto, other than as expressly
set forth in Section 5.5 A. hereof.
C. INVESTOR'S COMPLIANCE. Nothing in this Section 5.5 shall
affect in any way each Holder's obligations under and agreement to comply
with all applicable securities laws upon resale of such Common Stock.
Section 5.6. CORPORATE EXISTENCE. The Company will take all steps
reasonably necessary to preserve and continue the corporate existence of the
Company.
Section 5.7. ADDITIONAL SEC DOCUMENTS. The Company will furnish to the
Investors, promptly after the originals thereof are submitted to the SEC for
filing, copies of all SEC Documents so furnished or submitted to the SEC.
ARTICLE VI
PRELIMINARY PUT NOTICE
In order to provide the Investor's designated representatives adequate
opportunity to conduct appropriate due diligence in connection with each Put
Notice, the Company shall deliver to the Investor, at least seventeen
calendar days prior to the delivery of each Put Notice, a Preliminary Put
Notice, which Notice shall state that the Company is considering delivery of
a Put Notice to the Investor ten (10) or more calendar days following
delivery of the Preliminary Put Notice. In no event shall delivery of a
Preliminary Put Notice to the Investor obligate the Company to deliver any
Put Notice to the Investor, PROVIDED, HOWEVER, that if the Company fails on
more than two occasions in any twelve month
<PAGE>
-19-
period to deliver a Put Notice within thirty days of delivery of a
Preliminary Put Notice, then the Company shall pay the reasonable due
diligence costs of the Investor with respect to each subsequent Preliminary
Put Notice delivered during such twelve month period, not to exceed $15,000
in each such case.
ARTICLE VII
CONDITIONS
Section 7.1. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO
SELL SHARES. The obligation hereunder of the Company to issue and/or sell
the Shares to the Investor is further subject to the satisfaction, at or
before the respective issuances and deliveries thereof, of each of the
following conditions set forth below. These conditions are for the Company's
sole benefit and may be waived by the Company at any time in its sole
discretion.
(a) ACCURACY OF THE INVESTOR REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Investor shall be true and correct in
all material respects as of the date when made and as of the date of such
issuance and delivery as though made at that time.
(b) PERFORMANCE BY THE INVESTOR. The Investor shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Investor at or prior to such
date.
(c) NO INJUNCTION. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
Section 7.2. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE INVESTOR TO
PURCHASE ANY SHARES. The obligation of the Investor hereunder to acquire and
pay for Shares is subject to the satisfaction, at or before each Closing, of
each of the following conditions set forth below. These conditions are for
the Investor's sole benefit and may be waived by the Investor at any time in
its sole discretion.
(a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company shall be true and correct in all
material respects as of the date when made and as
<PAGE>
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of each Closing Date, as though made at that time (except for representations
and warranties that speak as of a particular date or refer to a particular
point in time).
(b) PERFORMANCE BY THE COMPANY. The Company shall have performed,
satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the Company at or prior to such Closing.
(c) PRINCIPAL MARKET. From the date hereof to each Closing Date,
as to the Shares to be issued and delivered on such Closing Date, trading in
the Company's Common Stock shall not have been suspended by the SEC or the
Principal Market, (except for any suspension of trading of limited duration
agreed to between the Company and the Principal Market, solely to permit
dissemination of material information regarding the Company), and trading in
securities generally as reported by the Principal Market, shall not have been
suspended or limited or minimum prices shall not have been established on
securities whose trades are reported by the Principal Market.
(d) NO INJUNCTION. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction
which prohibits the consummation of any of the transactions contemplated by
this Agreement.
(e) OPINION OF COUNSEL, ETC. At each Closing the Investor shall
have received an opinion of counsel to the Company, satisfactory to the
Investor in form and substance, dated the effective date of such Closing, and
such other certificates, opinions of other counsel and documents as the
Investor or its counsel shall reasonably require incident to such Closing;
PROVIDED, HOWEVER, that if the Investor shall have received such an opinion
incident to a Closing which occurred no more than thirty days earlier, a new
opinion shall not be required of such counsel, other than updates of the
earlier opinion provided pursuant to counsel's undertaking therein to provide
the same, and for all purposes of the current Closing, the Investor may rely
upon such earlier opinion as the same may have been modified by such updates.
(f) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement shall be effective at the time of each Closing and no stop order
suspending the effectiveness of the Registration Statement shall have been
instituted or shall be pending.
<PAGE>
-21-
(g) ACCURACY OF REGISTRATION STATEMENT. At the time of each Closing,
the Registration Statement (including information or documents incorporated by
reference therein) and any amendments or supplements thereto shall not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(h) AUDITOR'S LETTER. Investor shall have received a letter of the
type, in the form and with the substance of the letter described in Section
2(b)(iii) of the Registration Rights Exhibit; provided, however, that if the
Investor shall have received such a letter incident to a Closing which occurred
no more than thirty days earlier, a new letter shall not be required of such
auditors, other than updates of the earlier letter provided pursuant to such
auditor's undertaking therein to provide the same, and for all purposes of the
current Closing, the Investor may rely upon such earlier letter as the same may
have been modified by such updates.
(i) OFFICER'S CERTIFICATE. At each Closing the Investor shall have
received a certificate(s) from the CEO and/or CFO of the Company relating to the
representations and warranties of the Company herein which shall be satisfactory
to the Investor in form and substance.
(j) NO BANKRUPTCY FILING. There shall have been no filing of a
petition in bankruptcy, either voluntarily or involuntarily with respect to the
Company and there shall not have been commenced any proceedings under any
bankruptcy or insolvency laws, or any laws relating to the relief of debtors,
readjustment of indebtedness or reorganization of debtors, and there shall have
been no calling of a meeting of creditors of the Company or appointment of a
committee of creditors or liquidating agents or offering of a composition or
extension to creditors by, for, with or without the consent or acquiescence of
the Company.
(k) NO ADVERSE OPINION OF COUNSEL. During the seventeen calendar day
period following a Preliminary Put Notice, the Investor's counsel shall not have
delivered to the Company a copy of an opinion addressed to the Investor stating
Investor's counsel's belief that there is a reasonable likelihood that the
Registration Statement contains an untrue statement of material fact or omits a
material fact required to make the statements contained therein, in light of the
circumstances in which they were made, not misleading. If any such opinion is
delivered, copies of the same shall be delivered to the Company's counsel and
Investor's counsel shall communicate the basis for such opinion to the Company's
counsel
<PAGE>
-22-
promptly after rendering such opinion to Investor. The Company shall have no
right or claim against Investor's counsel with respect to any such opinion. In
the event that the Company's counsel and the Investor's Counsel are unable,
within four business days of such delivery of such opinion of Investor's
counsel, to agree upon the appropriate resolution of such belief expressed by
Investor's counsel in order that this condition (k) may be satisfied, either
counsel may refer the matter to the Neutral Lawyer in accordance with Section
2(d) of the Registration Rights Exhibit. Pending resolution of such belief in
accordance with such Section 2(d), the Company shall not deliver any new Put
Notices to the Investor and, at the Investor's election, purchases of Common
Stock pursuant to Put Notices outstanding and under which the Required Dollar
Amount of Common Stock shall not have been fully purchased at the time any such
opinion of Investor's counsel shall have been delivered, shall be suspended and
the Purchase Period applicable thereto extended by fifteen days for each day
from delivery of such opinion to the date upon which such resolution has been
obtained and implemented.
ARTICLE VIII
TERMINATION
Section 8.1. OPTIONAL TERMINATION. This Agreement may be terminated at
any time by the mutual consent of the Company and the Investor, or at any
time upon written notice delivered to the Investor by the Company, provided
that the representations, warranties and covenants contained in or
incorporated into this Agreement, insofar as applicable to the transactions
consummated hereunder prior to such termination, shall survive its
termination for the period of any applicable statute of limitations.
Section 8.2. AUTOMATIC TERMINATION. This Agreement shall automatically
terminate without any further action of either party hereto when (a) the
Investor has invested an aggregate of $10,000,000 in the Common Stock of the
Company pursuant to this Agreement, apart from additional amounts which may be
invested pursuant to Section 2.2(a)(B), provided that the representations,
warranties and covenants contained in this Agreement insofar as applicable to
the transactions consummated hereunder prior to such termination, shall survive
the termination of this Agreement for the period of any applicable statute of
limitations or (b) the Open Period has ended.
All representations, warranties and covenants shall survive each Closing
and for six months after termination of this Agreement.
<PAGE>
-23-
Section 8.3. CHANGE IN CONTROL. From and after the date hereof upon
any Change of Control (as defined below), the Company shall no longer have
the right to deliver any Put Notice to the Investor, unless otherwise agreed
by the Investor. A "Change of Control" shall mean any transaction or series
of transactions which results in any person or affiliated group of persons
becoming the beneficial owner of 50% or more of the voting stock of the
Company or constituting 50% or more of the Company's board of directors.
ARTICLE IX
MISCELLANEOUS
Section 9.1. FEES AND EXPENSES. Each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. Any
attorneys' fees and expenses incurred by either the Company or by any Holder
in connection with the preparation, negotiation, execution and delivery of
any amendments to this Agreement or relating to the enforcement of the rights
of any party, after the occurrence of any breach of the terms of this
Agreement by another party or any default by another party in respect of the
transactions contemplated hereunder, shall be paid on demand by the party
which breached the Agreement and/or defaulted, as the case may be. The
Company shall pay all stamp and other taxes and duties levied in connection
with the issuance of any Shares issued pursuant hereto.
Section 9.2. SPECIFIC ENFORCEMENT; CONSENT TO JURISDICTION.
(a) The Company and the Investor acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent or cure breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to which either
of them may be entitled by law or equity.
(b) Each of the Company and the Investor (i) hereby irrevocably
submits to the exclusive jurisdiction of the United States District Court and
other courts of the United States sitting in New York City for the purposes
of any suit, action or proceeding arising out of or relating to this
Agreement and, if such court or courts shall lack or deny
<PAGE>
-24-
jurisdiction thereof, of the courts of the State of New York sitting in New
York City and having jurisdiction thereof and (ii) hereby waives, and agrees
not to assert in any such suit, action or proceeding, any claim that it is
not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. Each of the Company and the
Investor consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect
for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof Nothing
in this paragraph shall affect or limit any right to serve process in any
other manner permitted by law.
Section 9.3. ENTIRE AGREEMENT; AMENDMENTS. Other than with respect to
matters described in the Registration Rights Exhibit and documents and
agreements relating thereto and hereto, this Agreement contains the entire
understanding of the parties with respect to the transactions contemplated
hereby and, except as specifically set forth herein, neither the Company nor
the Investor makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or
amended other than by a written instrument signed by the party against whom
enforcement of any such amendment or waiver is sought.
Section 9.4. NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective
upon hand delivery or delivery by facsimile at the address or number
designated below (if delivered on a business day during normal business hours
where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal
business hours where such notice is to be received). The addresses for such
communications shall be:
to the Company: Avic Group International, Inc.
599 Lexington Avenue, 44th Floor
New York, New York 10022
Attn: Tim Crowley, Corporate Secretary
Fax: 212-319-9288
to the Investor: Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520
New York, New York 10019
Attn:James F. O'Brien, Jr., President
Fax: 212-698-0505
<PAGE>
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with copies to:
Bingham, Dana & Gould LLP
150 Federal Street
Boston, Massachusetts 02110
Attn: James C. Stokes, Esq.
Fax: 617-951-8736
Any of the foregoing may from time to time change its address for notices
under this Section 9.4 by giving written notice of such changed address to
the other party hereto.
Section 9.5. WAIVERS. No waiver by either party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter. The parties hereto
waive any and all rights to a jury trial in connection with any action or
proceeding arising under this Agreement or transactions contemplated hereby
or thereby.
Section 9.6. HEADINGS. The headings herein are for convenience only,
do not constitute a part of this Agreement and shall not be deemed to limit
or affect any of the provisions hereof.
Section 9.7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and
assigns. The parties hereto may amend this Agreement without notice to or the
consent of any third party. Neither the Company nor the Investor shall
assign this Agreement or any rights or obligations hereunder without the
prior written consent of the other (which consent may be withheld for any
reason in the sole discretion of the party from whom consent is sought);
PROVIDED, HOWEVER, that the Company may assign its rights and obligations
hereunder to any acquirer of substantially all of the assets or a controlling
equity interest of the Company provided that such assignment shall be subject
to (i) the Change of Control provisions contained in Section 8.3 above, (ii)
Investor's prior written consent which consent may not be unreasonably
withheld; and PROVIDED FURTHER that the Investor may assign its rights and
obligations hereunder to any person or entity, (iii) either controlled by the
Investor or whose portfolio investments are made through accounts over which
the Investor has discretionary authority without the Company's consent, and
(iv) other than those described in the immediately preceding clause, with the
Company's prior written consent, which consent may not be
<PAGE>
-26-
unreasonably withheld. The assignment by a party of this Agreement or any
rights hereunder shall not affect the obligations of such party under this
Agreement.
Section 9.8. NO THIRD PARTY BENEFICIARIES. This Agreement is intended
for the benefit of the parties hereto and their respective permitted
successors and assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.
Section 9.9. GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflict of laws.
Section 9.10. EXECUTION. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart. In the event any signature is delivered by
facsimile transmission, the party using such means of delivery shall cause
four additional executed signature pages to be physically delivered to the
other party within five days of the execution and delivery hereof.
Section 9.11. PUBLICITY. The Company and the Investor shall consult
and cooperate with each other in issuing any press releases or otherwise
making public statements with respect to the transactions contemplated
hereby, provided the foregoing shall not interfere with the legal obligations
of either party with respect to public disclosure; and provided further, that
neither the Company nor the Investor shall be required to consult with the
other if any such press release or public statement does not specifically
name the other.
<PAGE>
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date hereof.
AVIC GROUP INTERNATIONAL, INC.
By: /s/ Michael J. Lim
-------------------------
Name: Michael J. Lim
Its CFO
PROMETHEAN INVESTMENT GROUP L.L.C.
By: /s/ James F. O'Brien, Jr.
-------------------------
James F. O'Brien, Jr.
President
<PAGE>
REGISTRATION RIGHTS EXHIBIT
(to Common Stock Investment Agreement
dated March 31, 1997)
THIS IS THE REGISTRATION RIGHTS EXHIBIT referred to in and incorporated
into and made an integral part of that certain Common Stock Investment Agreement
(the "Common Stock Investment Agreement") dated March 31, 1997, between Avic
Group International, Inc. (the "Company") and Promethean Investment Group L.L.C.
(the "Investor").
1. CERTAIN DEFINITIONS. As used in this Exhibit, the following terms
shall have the following respective meanings. Other terms used herein which are
defined in the Common Stock Investment Agreement or in the agreements and other
documents referred to in the Common Stock Investment Agreement shall have the
same meanings herein as they do therein.
"Commission" or "SEC" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
"Holders" shall include the Investor and any transferee of Registrable
Securities which have not been sold pursuant to the Registration Statement to
whom the registration rights conferred by this Exhibit have been transferred in
compliance with Section 13 of this Exhibit.
"Principal Market" shall mean the American Stock Exchange.
"Registrable Securities" shall mean:
(i) the shares of Common Stock issued or issuable under or
pursuant to the Common Stock Investment Agreement; and
(ii) any other shares of Common Stock of the Company issued in
respect of such shares (because of stock splits, stock
dividends, reclassifications, recapitalizations or similar
events);
<PAGE>
-2-
provided, however, that shares of Common Stock which are Registrable Securities
shall cease to be Registrable Securities upon (a) any sale pursuant to a
Registration Statement, Section 4 of the Securities Act or Rule 144 under the
Securities Act, (b) any sale in any manner to a person or entity which, by
virtue of Section 13 of this Exhibit, is not entitled to the rights provided by
this Exhibit, or (c) the date on which such shares become eligible for resale
under Rule 144(k) under the Securities Act.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"Registration Expenses" shall mean all expenses to be incurred by the
Company in connection with the Holders' exercise of registration rights under
this Exhibit other than Selling Expenses, including, without limitation, all
registration and filing, fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company, which shall be paid in any
event by the Company).
"Registration Effective Date" shall mean the date upon which the
Registration Statement becomes effective as contemplated herein.
"Registration Statement" shall have the meaning set forth in Section
2(a) herein.
"Regulation D" shall mean Regulation D as promulgated pursuant to the
Securities Act, and as subsequently amended.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions, if any, applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for Holder not included within "Registration
Expenses."
2. THE REGISTRATION REQUIREMENTS. The Company shall, promptly after the
date hereof, file and use its best efforts to cause to become effective, as
promptly as possible and in any event by the one hundred fiftieth (150th)
calendar day after such filing date, a registration
<PAGE>
-3-
statement (a "Registration Statement") on Form S-3 under the Securities Act or,
if Form S-3 is not then available, another appropriate form covering the resale
of all Registrable Securities including, without limitation, all of the Common
Stock reserved for issuance from time to time pursuant to the Common Stock
Investment Agreement. The Company warrants and represents to the Holders that,
to the best of its knowledge and belief and notwithstanding anything herein to
the contrary, Form S-3 became available for purposes of such registration on or
before March 1, 1997. The Company shall use its diligent best efforts to effect
the registration contemplated by the foregoing (including, without limitation,
the preparation and filing of any and all amendments and post-effective
amendments and supplements as may be necessary or appropriate so to effect such
registration, appropriate qualification under and compliance with applicable
blue sky or other state securities laws and appropriate compliance with
applicable regulations issued under the Securities Act) and as would permit or
facilitate the sale and distribution of all the Registrable Securities in all
states reasonably requested by the Holders for purposes of maximizing the
proceeds realizable by the Holder from such sale and distribution. Such best
efforts by the Company shall include, without limitation, the following:
(a) The Company shall prepare and file (i) as aforesaid, a registration
statement with the Commission pursuant to applicable rules and regulations under
the Securities Act, on Form S-3 under the Securities Act, and the Company shall
use its best efforts to qualify for the use of such Form (or in the event that
the Company is ineligible to use such form, such other form as the Company is
eligible to use under the Securities Act) covering the Registrable Securities so
to be registered (the "Registration Statement"); (ii) such blue sky filings as
shall be reasonably requested to permit sales of Registrable Securities included
in the Registration Statement, PROVIDED, HOWEVER, that the Company shall not be
required to register the Registrable Securities in any jurisdiction that would
subject it to general service of process in any such jurisdiction where it is
not then so subject or subject the Company to any tax in any such jurisdiction
where it is not then so subject or require the Company to qualify to do business
in any jurisdiction where it is not then so qualified; and (iii) any required
filings with the National Association of Securities Dealers, Inc. ("NASD") or
the Principal Market; all as soon as reasonably practicable after the date
hereof the Company shall use its best efforts to have the Registration Statement
and other filings declared effective as soon thereafter as may be practicable
and, in any event, within the one hundred fiftieth (150) day period hereinabove
provided; PROVIDED, HOWEVER, that such one hundred fiftieth (150) day period
may, at the Company's option, be extended for up to 14 calendar days if and to
the
<PAGE>
-4-
extent such extension would enable the Registration Statement to include or
incorporate, directly or by reference to other SEC Documents, when the same
becomes effective, the Company's audited financial statements for its fiscal
year ending March 31, 1997. The Investor agrees to cooperate reasonably and in
good faith with the Company so to effect such registration and other filings.
(b) The Company shall enter into such customary agreements (including a
customary underwriting agreement with the underwriter or underwriters, if any)
and take all such other reasonable actions in connection therewith in order to
expedite or facilitate the disposition of such Registrable Securities and in
such connection, in addition to and not in lieu or limitation of the covenants
and conditions provided in the Common Stock Investment Agreement and whether or
not the Registrable Securities are to be sold in an underwritten offering, the
Company shall, at or incident to each such disposition or closing thereof:
(i) make such representations and warranties to the Holder and the
underwriter or underwriters, if any, in form and substance and scope as are
customarily made by issuers to underwriters in secondary underwritten offerings;
(ii) cause to be delivered to the sellers of Registrable Securities
and the underwriter or underwriters, if any, opinions of counsel to the Company,
dated the effective day (or in the case of an underwritten offering, dated the
date of delivery of any Registrable Securities sold pursuant thereto) of the
applicable. registration statement, which counsel and opinions (in form, scope
and substance), shall be reasonably satisfactory to the managing underwriter or
underwriters, if any, and the appointed representative or counsel of the Holder,
addressed to the Holder and each underwriter, if any, covering the matters
customarily covered in opinions requested in secondary underwritten offerings,
in the case of any underwritten offering, and such other matters as may be
reasonably requested by the Holder;
(iii) cause to be delivered, immediately prior to the
effectiveness of the Registration Statement (and, in the case of an underwritten
offering, at the time of delivery of any Registrable Securities sold pursuant
thereto), letters from the Company's independent certified public accountants
addressed to the Holders and each underwriter, if any, stating that such
accountants are independent public accountants within the meaning of the
Securities Act and the applicable published rules and regulations thereunder,
and otherwise (x) in customary form and covering such financial and accounting
matters as are customarily covered by
<PAGE>
-5-
letters of independent certified public accountants delivered to underwriters in
connection with secondary underwritten public offerings, in the case of such
letters to such underwriters, if any, and (y) in the case of such letters to the
Holders, they shall be in the same form and substance as such letters to such
underwriters are or would be if and to the extent permitted and authorized by
applicable auditing standards and otherwise in the form and substance of
so-called "agreed upon procedures" letters;
(iv) if an underwriting agreement is entered into, cause the same to
set forth indemnification and contribution provisions and procedures which are
customarily included in underwriting agreements used in secondary underwritten
offerings but which are no less favorable to the Holder and the Company than
those contemplated by Sections 9 and 10 hereof with respect to all parties to be
indemnified pursuant to such Sections; and
(v) deliver such other documents and certificates as may be
reasonably requested by the Holders of the Registrable Securities being sold or
the managing underwriter or underwriters, if any, including, without limitation,
to evidence compliance with clause (i) above and with any customary conditions
confined in the underwriting agreement, if any, or other agreement entered into
by the Company.
(c) The Company shall, as expeditiously as reasonably possible after the
filing of the Registration Statement:
(i) furnish to the Holders such reasonable numbers of copies of the
definitive prospectus, in conformity with the requirements of the Securities
Act, and such other documents as the Holders may reasonably request in order to
facilitate the disposition of Common Stock sold by such Holders;
(ii) notify the Holders promptly after becoming aware of the happening
of any event or the existence of any circumstance (without any obligation to
disclose the specific actual event or circumstance) as a result of which the
prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances then existing and, as soon as may be practicable
and subject to Section 8 hereof, prepare and file with the SEC such amendments
and supplements to such Registration Statement and prospectus used in connection
therewith as may be necessary to eliminate or correct such untrue statement or
omission and otherwise to cause such Registration
<PAGE>
-6-
Statement and prospectus to remain current and useable for the purposes intended
hereunder. Upon notification of such event or circumstance, the Holders shall
immediately cease making offers of or selling Registrable Securities and shall
return all prospectuses held by them to the Company until such time as the
prospectus has been amended or supplemented. Following the receipt of revised
prospectuses, the Holders shall be free to resume making offers of or selling
the Registrable Securities.
(d) The Company shall make available for inspection and review by the
Holders, advisors to and representatives of the Holders (who or which may or may
not otherwise be affiliated with the Holders and are reasonably acceptable to
the Company), any underwriter participating in any disposition pursuant to the
Registration Statement, and any attorney or accountant retained by such Holders,
advisor, representative or underwriter, any such registration statement or
amendment or supplement or any blue sky, NASD or other filing, all financial and
other records, all SEC documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be reasonably necessary
for the purpose of such review, and cause the Company's officers, directors and
employees to supply all such information reasonably requested by the Holders or
any such representative, advisor, underwriter, attorney or accountant in
connection with such Registration Statement (including without limitation in
response to all questions and other inquiries reasonably made or submitted by
any of them), all prior to and from time to time after the filing and becoming
effective of the Registration Statement and all for the sole purpose of enabling
the Holders and such representatives, advisors and underwriters and their
respective accountants and attorneys to conduct initial and ongoing and
reasonably appropriate due diligence of and with respect to the Company;
PROVIDED, HOWEVER, that any information that is reasonably and in good faith
designated by the Company in writing as confidential at the time of delivery of
such information or is designated in writing as confidential within 15 days of
disclosure of such information (and shall not have previously been disclosed by
any of the Holders prior to any such designation by the Company) shall be kept
confidential by the Holders and the Holders will use reasonable efforts to cause
its representatives and such other persons so to keep such information
confidential, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities, (ii) disclosure of such information is required by law (including
any, disclosure requirements pursuant to federal securities laws in connection
with the filing of any Registration Statement or the use of any prospectus
referred to in this Exhibit), (iii) such information becomes generally available
to the public other than as a result of a disclosure or failure to
<PAGE>
-7-
safeguard by any such person, (iv) such information becomes available to any
such person from a source other than the Company and such source, to the
knowledge of such persons, is not bound to maintain the confidentiality of such
information, or (v) such information was known to or is developed by such
persons without reference to such confidential information of the Company.
Nothing herein shall require the Company to disclose non-public information
to the Holder, and the Company represents that it does not disseminate material
non-public information to any investors who purchase stock in the Company in a
public offering, to money managers or to securities analysts, PROVIDED, HOWEVER,
that notwithstanding anything herein to the contrary, the Company will, as
hereinabove provided, immediately notify the advisors and representatives of
each Holder and, if any, underwriters of any event or the existence of any
circumstance (without any obligation to disclose the specific event or
circumstance) of which it becomes aware constituting non-public information
(whether or not requested of the Company specifically or generally during the
course of due diligence by such persons or entities) which, if not disclosed in
the prospectus included in the Registration Statement would cause such
prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements therein, in light
of the circumstances in which they were made, not misleading. Nothing contained
in this paragraph 2(d) shall be construed to mean that such persons or entities
may not obtain material non-public information in the course of conducting due
diligence in accordance with the terms of this Exhibit and nothing herein shall
prevent the Holder or any of such other persons from notifying the Company that
the Holder or such person believes, because of the unavailability of material
non-public information, that it has been unable to conduct a satisfactory due
diligence investigation, or that based on such due diligence by such persons or
entities, that the Registration Statement contains an untrue statement of a
material fact or omits a material fact required to be stated in the Registration
Statement or necessary to make the statements contained therein, in light of the
circumstances in which they were made, not misleading; PROVIDED, HOWEVER, that
in no event shall the Holder's advisors or representatives disclose to the
Holder the nature of the specific event or circumstance constituting any
material nonpublic information discovered by such advisors or representatives in
the course of their due diligence. The Holder's, advisors or representatives
shall, make complete disclosure to the Holder's independent counsel of all
events or circumstances, including any nonpublic information, discovered by such
advisors or representatives in the course of their due diligence and upon which
such advisors or representatives form the opinion that the
<PAGE>
-8-
Registration Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading. Upon receipt of such disclosure, the Holder's
independent counsel shall communicate with the Company's independent counsel,
requesting that such material misstatement or omission be corrected in the
Registration Statement. If the Company disputes the existence of any such
material misstatement or omission, the Holder's independent counsel or the
Company's independent counsel or both may submit the dispute to a lawyer
mutually agreed upon by the Company and the then Holders within four business
days of a request by either party (the "Neutral Lawyer"). If the parties are
unable to agree upon a Neutral Lawyer who is willing to serve within such four
business day period, then the Neutral Lawyer shall be appointed by the Boston,
Massachusetts office of the American Arbitration Association at the request of
either party. The Neutral Lawyer shall be a partner at a major New York or
Boston law firm with at least ten years of experience in securities law matters.
Such counsel and the Neutral Lawyer shall use their reasonable best efforts to
resolve such dispute within no more than four business days. After conferring
with such counsel and performing such further review as he or she deems
necessary or appropriate for this purpose (within such four business day
period), the Neutral Lawyer shall advise both counsel in writing of his or her
determination as to whether and the extent to which he or she believes that the
Registration Statement contains a material misstatement or omission. The
Company shall, in accordance with the applicable provisions of this Registration
Rights Exhibit, promptly make such revisions to the Registration Statement as
are necessary or appropriate, if any, to reflect fully and accurately such
determination of the Neutral Lawyer.
3. UNDERWRITTEN DISTRIBUTION. If the Holders intend to distribute the
Registrable Securities covered by a Registration Statement by means of an
underwriting, the Holders shall so advise the Company and, within 15 days of the
date thereof and without limiting the generality of other provisions hereof, the
Company will prepare and file such amendment or amendments to the Registration
Statement and make such other filings as may be necessary or appropriate to
effect any such underwritten distribution.
4. MULTIPLE HOLDERS. If there is more than one Holder, such Holders
shall act with respect to their rights under this Exhibit according to the vote
of a majority-in-interest.
<PAGE>
-9-
5. EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration. qualification or compliance pursuant to this
Exhibit shall be borne by the Company, and all Selling Expenses shall be borne
by the Holders.
6. REGISTRATION DELAY OR FAILURE. The Company acknowledges that its
failure to register the Registrable Securities in accordance with the Common
Stock Investment Agreement and this Exhibit will cause the Holders to suffer
damages and undertake risks in amounts that will be difficult ascertain and
were not anticipated in negotiating the terms hereof or of the Common Stock
Investment Agreement. Accordingly, the parties agree that it is appropriate
to include herein a provision for liquidated damages and to compensate the
Holders fairly for the additional risk undertaken by the Holders resulting
from the Company's delay or failure to effect such registration, and the
Holders agree that the provisions set forth in this Section 6 shall be its
sole and exclusive remedy with respect to the Company's failure to register
the Registrable Securities in accordance with this Exhibit. The parties
acknowledge and agree that the provisions hereinafter set forth in this
Section 6 represent the parties' good faith effort to quantify such damages
and to compensate for such additional risk and, as such, agree that the form
and amount of damages and risk compensation are reasonable and will not
constitute a penalty.
If the Registration Statement shall not have become effective within 150
calendar days (as such period may be extended pursuant to paragraph 2(a) hereof)
after March 31, 1997, as contemplated herein, then, the Common Stock Investment
Percentage shall be reduced by one (1) percentage point for each successive 30
day period or portion thereof following such 150th day (or later date to which
such 150th day may be so extended) during which the Registration Statement shall
not have become effective. If, for example, the Registration Statement shall
not be effective during any part of the first such 30 day period, the Common
Stock Investment Percentage shall be reduced by one (1) percentage point, from
90% to 89%. If, by way of further example, the Registration Statement still has
not become effective during any part of the second such 30 day period, the
Common Stock Investment Percentage shall be reduced by another one (1)
percentage point from 89% to 88%.
7. REGISTRATION PROCEDURES. The Company will keep the Holders reasonably
well advised as to initiation of the registration, progress in the preparation
and filing of the Registration Statement and any and all amendments and
supplements thereto, and as to the completion and becoming effective thereof.
At its expense, the Company will use its best
<PAGE>
-10-
efforts to keep such registration effective for the period ending upon the first
to occur of (i) the Registration Statement having been effective for resales of
Registrable Securities for thirty-six (36) months in the aggregate, exclusive of
periods of suspension of such use pursuant to Section 8 hereof or otherwise,
(ii) when the Holders have completed the distribution of the Registrable
Securities described in the Registration Statement relating thereto, or (iii)
the date on which the Registrable Securities are distributed to the public
pursuant to Rule 144 or are saleable pursuant to Rule 144(k) promulgated under
the Securities Act.
8. SUSPENSION OF USE OF REGISTRATION STATEMENT. The Holders agree that,
upon receipt of any notice from the Company (A) of the happening of any event
which makes any statements made in the Registration Statement(s) or related
prospectus(es) filed pursuant to this Registration Rights Exhibit, or any
document incorporated or deemed to be incorporated therein by reference, untrue
in any material respect or which requires the making of any changes in such
Registration Statement(s) or prospectus(es) so that, in the case of such
Registration Statement(s), it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstance under
which they were made, not misleading or (B) that, in the judgment of the
Company's Board of Directors, it is advisable to suspend use of the
prospectus(es) for a discrete period of time due to pending corporate
developments which are or may be material to the Company but have not been
disclosed in the Registration Statement(s) or in relevant public filings with
the SEC, or (C) that the SEC has issued a stop order suspending the
effectiveness of the Registration Statement(s), or (D) that the Company is
engaged in a public offering of its Common Stock by the Company through a
"bulge-bracket" (hereinafter defined) underwriter or (E) of the filing by the
Company of a post-effective amendment to the Registration Statement made in
order (i) to comply with the regulations under the Securities Act relating to
shelf registrations on Form S-3, including without limitation to file audited
financial statements or (ii) to reflect any changes to the Registration
Statement requested by the Holders, including without limitation changes to the
description of the method of distribution of the Registrable Securities or to
the information in the Registration Statement relating to the Holders, and the
filing of which post-effective amendment requires, under applicable law, rule or
regulation, The suspension of use of the Registration Statement or the
prospectus therein for the disposition of Registration Securities; the Holders
will forthwith discontinue the disposition in accordance with the Registration
Statement or prospectus(es) of such Shares covered by such Registration
Statement(s) or prospectus(es) until it is advised in writing
<PAGE>
-11-
by the Company that use of the applicable prospectus may be resumed, and has
received copies of any additional or supplemented filings that are incorporated
or deemed to be incorporated by reference in such prospectuses). Such notice
shall not be required to disclose the reason for the suspension beyond noting
under which clause of Section 8 the notice is given. The Company shall use
reasonable best efforts to insure that the use of the prospectus(es) may be
resumed as soon as practicable, and in any event shall not be entitled to
require the Holders to suspend use of the prospectus(es) pursuant to the
foregoing (i) in the case of notices from the Company relating to clauses (A),
(B), (C) or (E) above, for more than an aggregate of twenty (20) calendar days
in any 24-month period for purposes of all such notices given during such
period, and (ii) in the case of a notice relating to clause (D) above, for more
than sixty (60) calendar days on one occasion in any 24-month period; provided
that on one additional occasion during such 24-month period, upon notice from
the Company pursuant to clause (D) above, the Holder shall be permitted to
continue to dispose of such shares, but shall not dispose of such shares
pursuant to an underwritten offering during such period, For purposes hereof, a
"bulge-bracket" underwriter shall mean Goldman Sachs, Morgan Stanley, JP Morgan,
Salomon Bros., Credit Suisse First Boston, Smith Barney, Merrill Lynch, Lehman
Bros., Bear Steams and Paine Webber.
9. INDEMNIFICATION.
(a) COMPANY INDEMNITY. The Company will indemnify the Holders, each of
its officers, directors, partners and attorneys, and each person controlling the
Holders within the meaning of Section 15 of the Securities Act and the rules and
regulations thereunder with respect to which registration, qualification or
compliance has been effected pursuant to this Exhibit, and each underwriter, if
any, and each person who controls, within the meaning of Section 15 of the
Securities Act and the rules and regulations thereunder, any underwriter,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based an any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering circular or
other document (including any related registration statement, notification or
the like) incident to any such registration, qualification or compliance or
arising out of or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the Securities Act or
any state securities law or in either case, any rule or regulation thereunder
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, qualification or compliance,
and will reimburse the Holders,
<PAGE>
-12-
each of its officers, directors and partners, and each person controlling such
Holders, each such underwriter and each person who controls any such underwriter
for any legal and any other expenses reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
(i) any untrue statement or omission (or alleged untrue statement or omission)
made in such Registration Statement or prospectus based upon written information
furnished to the Company by or on behalf of Holders or any underwriter and
stated to be specifically for use therein, (ii) any offer or sale by the Holder
during a suspension period permitted or required pursuant to Section 8 hereof,
or (iii) the failure of the Holder to comply with applicable prospectus delivery
requirements. The Indemnity agreement contained in this Section 9(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Company
(which consent will not be unreasonably withheld).
(b) HOLDERS INDEMNITY. Each Holder will, if Registrable Securities held
by it are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors, officers, partners and attorneys, and each underwriter, if any,
of the Company's securities covered by such a Registration Statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act and the rules and regulations thereunder, each
other Holder (if any), and each of their officers, directors and partners, and
each person controlling such other Holder against all claims, losses, damages
and liabilities (or actions in respect thereof arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement. prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, and will reimburse the Company and such other Holders and their
directors, officers, and partners, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by the Holder
and stated to be specifically for use therein; provided, however, that the
obligations of the
<PAGE>
-13-
Holder shall not apply to amounts paid in settlement of any such claims, losses,
damages or liabilities if such settlement is effected without the consent of
Holder (which consent shall not be unreasonably withheld), and provided further
that the liability of the Holder hereunder shall not exceed the net proceeds
received by the Holder from the sale of Registrable Securities pursuant to the
Registration Statement.
(c) PROCEDURE. Each party entitled to indemnification under this Section
9 (the "Indemnified Party") shall give written notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Patty has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim in any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this section
except to the extent that the Indemnifying Party is actually prejudiced by such
failure to provide notice. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with the defense of such claim and litigation resulting therefrom.
10. CONTRIBUTION. If the indemnification provided for in Section 9 herein
is unavailable to the Indemnified Parties in respect of any losses, claims,
damages or liabilities referred to herein, then each such Indemnifying Party, in
lieu of indemnifying such Indemnified Party, shall contribute to the amount paid
or payable by such Indemnified Party as a result of such losses, claims, damages
or liabilities as between the Company on the one hand and the Indemnified
Parties on the other, in such proportion as is appropriate to reflect the
relative fault of the Company on the one hand and of the Indemnified Parties, as
the case may be, on the other, in connection with the statements or omissions or
other actions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations.
<PAGE>
-14-
The relative fault of Company on the one hand and of the Holders or
underwriters, as the case may be, on the other shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or omission to state a material fact relates to information
supplied by the Company, by the Holders or by the underwriters.
In no event shall the obligation of any Indemnifying Party to contribute
under this Section 10 exceed the amount that such Indemnifying Party would have
been obligated to pay by way of indemnification if the indemnification provided
for under Section 9(a) or 9(b) hereof had been available under the
circumstances.
The Company and the Holders agree that it would not be just and equitable
if contribution pursuant to this Section 10 were determined by pro rata
allocation (even if the Indemnified Parties were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraphs.
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraphs shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this section, no Indemnified Party shall be
required to contribute any amount in excess of the amount by which (i) in the
case of the Holders, the net proceeds received by the Holders from the sale of
Registrable Securities or (ii) in the case of an underwriter, the total price at
which the Registrable Securities purchased by it and distributed to the public
were offered to the public exceeds, in any such case, the amount of any damages
that the Holders or underwriter have otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
11. SURVIVAL. The indemnity and contribution agreements contained in
Sections 9 and 10 hereof and the representations and warranties of the Company
referred to in Section 2(b)(i) hereof shall remain operative and in full force
and effect regardless of (i) any termination of this Registration Rights Exhibit
or any underwriting agreement, (ii) any investigation made by or on behalf of
any Indemnified
<PAGE>
-15-
Party or by or on behalf of the Company and (iii) the consummation of the sale
or successive resales of the Registrable Securities.
12. INFORMATION BY HOLDERS AND ANY UNDERWRITERS. The Holders and the
underwriters, if any, shall furnish to the Company, within 20 business days of
the Company's request therefor, such information regarding such Holders or
underwriters, as the case may be, and the distribution proposed by such Holders
or underwriters as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Exhibit.
13. TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights, granted to
Holders by the Company under this Registration Rights Exhibit, to cause the
Company to register Registrable Securities, may be transferred or assigned to
another Holder, any affiliate of such Holder or to any person acquiring at least
10,000 Registrable Securities (such number being subject to adjustment for any
stock dividend, stock split, subdivision, combination or other recapitalization
of the Common Stock of the Company); provided that (i) the Company is given
written notice by the transferor at the time of such transfer stating the name
and address of the transferee and identifying the securities with respect to
which such rights are being assigned, and (ii) such transferee (other than an
existing Holder) shall, as a condition to such transfer, deliver to the Company
a written instrument by which such transferee agrees to be bound by the
obligations imposed on Holders pursuant to this Exhibit to the same extent as if
such transferee were an original Holder hereunder.
END OF EXHIBIT
<PAGE>
As of April 29, 1997
James F. O'Brien, Jr.
Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520
New York, NY 10019
Dear Jamie:
This letter is to amend the Common Stock Investment Agreement between Promethean
Investment Group, L.L.C. ("Promethean") and AVIC Group International, Inc. (the
"Company") dated as of March 31, 1997. By signing this amendment, Promethean
and the Company agree to amend paragraph 2.1 with respect to the maximum Common
Stock Investment, and to increase such amount from ten million dollars to
twenty-five million dollars.
Agreed to and Accepted As of April 29, 1997
By: AVIC Group International, Inc. By: Promethean Investment Group, L.L.C.
/s/ Joseph R. Wright, Jr. /s/ James F. O'Brien, Jr.
- - - --------------------------------- -----------------------------------
Joseph R. Wright, Jr. James F. O'Brien, Jr.
Chairman and CEO President
<PAGE>
THE JOINT VENTURE CONTRACT
(AVIC GROUP INTERNATIONAL, INC.,
HEBEI UNITED TELECOMMUNICATIONS
DEVELOPMENT CO. AND BEIJING
CATCH COMMUNICATION GROUP CO.)
1
<PAGE>
CHAPTER 1: PRINCIPLE
Hebei United Telecommunications Equipment Company is a domestic Joint Venture
Company formed by Hebei United Telecommunications Development Company and
Beijing CATCH Communication Group Co. Its address is 2 Jichang Road,
Shijiazhuang, Hebei Province. The total registered capital is RMB 5 million, in
which Hebei United Development Company invests RMB 0.75 million (15%) and
Beijing CATCH invests RMB 4.25 million (85%).
AVIC Group International, Inc., ("Party A"), Hebei United Telecommunications
Development Company ("Party B" and Beijing CATCH Communication Group, Co.
("Party C") wants to jointly set up a Sino-foreign Joint Venture Company.
Therefore, 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, the above three parties agree to jointly set up a
Sino-Foreign Joint Venture Company in Shijiazhuang, Hebei Province. The
contract has been signed on _________, 1996 in Shijiazhuang.
CHAPTER 2: JOINT VENTURE PARTIES
1. THE JOINT VENTURE PARTIES
1.1 Party A:
Name: AVIC Group International, Inc.
Organization: A public company incorporated in the
State of Colorado of United States
Address: 599 Lexington Avenue, 44th Floor
New York, NY 10022
U. S. A.
Legal Representative: Joseph R. Wright, Jr.
Position: Chairman, Chief Executive Officer and
President
Nationality: American
Party B:
Name: Hebei United Telecommunications
Development Co. Ltd.
Organization: A limited liability corporation
established in People's Republic of
2
<PAGE>
China in accordance with the Chinese Laws
Address: 2 Jichang Road
Shijiazhuang, Hebei Province
The People's Republic of China
Legal Representative: Ye Yunyun
Position: Chairman
Nationality: Chinese
Party C:
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, Hia Dian District
Beijing
The People's Republic of China
Legal Representative: Ma Yuhe
Position: Chairman
Nationality: Chinese
2. LEGAL ABILITY
2.1 Party A, B and C guarantee the following:
(1). Party A is legally formed in New York, U. S. A. Party B is
legally established in Hebei Province, the People's Republic of
China. Party C is legally established in Beijing, the People's
Republic of China
(2). Party A, B and C have the complete right to negotiate and
fulfill the responsibilities and obligations set out in this
Contract.
(3). The signatories of Party A, B and C 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, B and C agree to form and incorporate a Sino-Foreign
Joint Venture Company with limited liability ("The Joint Venture
Company") in the PRC
3
<PAGE>
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 Hebei United Telecommunications Engineering Co.
Limited. The legal location of the Joint Venture Company is 80
Hongqi Street, Shijiazhuang, Hebei Province, PRC.
The Joint Venture Company must be registered at Industry and
Commerce Administration and Management Bureau.
4.2 None Joint Venture party can use its parent company and other
related company's trademark and logo without a written agreement
from other Joint Venture parties.
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. All parties shall
undertake the liability of the Joint Venture Company subject
to its investment amount. All 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.
4
<PAGE>
CHAPTER 4: BUSINESS OBJECTIVE AND SCOPE
7. BUSINESS OBJECTIVE OF THE JOINT VENTURE COMPANY
7.1 All parties agree that the business objectives of the Joint Venture
Company are to participate in the construction and installation of
Hebei GSM digital telecommunications project and other post and
telecommunications projects; 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 and installation of the telecommunications
projects; upgrade technology of existing systems and other related
network projects; providing technical consultation, maintenance,
services 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
US$ 6 million.
9.2 The registered capital of the Joint Venture Company will be US$3
million.
10. SHARE RATIO
Party A, B and C will provide US$ 3 million as the Joint Venture Company's
registered capital, in which:
10.1 Party A will contribute US$1.824 million (60.8%). Party B will
invest US$0.90 million (30%)and Party C will invest US$0.276 million
(9.2%).
5
<PAGE>
The capital payment responsibility of each Joint Venture party will
be equal to their capital contribution.
11. THE AMOUNT AND TERM OF THE CAPITAL PAYMENT
11.1 All 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 A: US$930,000.00 shall be wired to the Joint Venture
account within 30 days after getting the business
license. The rest (US$894,000.00) shall be wired to
the account within 3-6 months after getting the
business license.
Party B: The total amount shall be wired to the account within
30 days after getting the business license.
Party C: The total amount shall be wired to the account within
30 days after getting the business license.
11.2 The investment amount shall be wired to the Joint Venture bank
account according to clause 42 listed in this contract.
12. CERTIFICATE OF INVESTMENT
12.1 The investment payment from Party A, B and C 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, B and C.
13. THE USAGE OF THE INVESTMENT
13.1 None of Party A, Party B, Party C 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
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will be used during the Joint Venture preparation period shall be
paid by the Joint Venture Company subject to the approvals from all
Parties.
14. TRANSFER OF CAPITAL
14.1 Except for Clause 14.3, Party A, B or C may, as either Party wishes
transfer, in whole or part, its shares of the Joint Venture
Company to other Party with prior written notice to the other
Parties and approval from the relevant authorities. Party A, B or C
shall make the decision within 90 days of receiving the written
notice.
14.2 If either Party A, B or C 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 All Parties may transfer its whole or partial shareholding to
their parent companies or their subsidiaries 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 Parties
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
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from time to time subject to approval of the Board of Directors of
the Joint Venture Company. The contribution from all 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, B
and C have the right to ask the other 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, B and C shall not use their portion of the Joint
Venture Company's investment capital as any kind of mortgage or
guarantee.
CHAPTER 6: RESPONSIBILITIES OF ALL PARTIES
17. RESPONSIBILITIES OF PARTY A, B AND C:
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 B and C 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
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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 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,
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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 A 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 all parties of 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 A to the Joint Venture
Company 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 A and agreed by all
Parties.
(5). Assist the Joint Venture Company with
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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 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 A.
(10).Handle all other matters appointed by the Joint Venture
Company and agreed by Party A.
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 A or any other
Parties based on the agreement of all parties.
19. CONFIDENTIALITY
19.1 It is agreed that all information generated
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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, B and C 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 A has to purchase equipment abroad for the Joint Venture
Company, Party B and C 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 (7) members,
one (1) Chairman and one (1) Vice Chairman. Four (4) Directors will
be appointed by Party A, and three (3) Directors will be appointed by
Party B. The Chairman of the Board
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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 three 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.
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
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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 more than two 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.
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
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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.
(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,
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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 Articles of
Incorporation.
(2). Any increase or decrease in the 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.
(5). Setting up the asset mortgage right of the Joint Venture
Company.
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
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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
Presidents. 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 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.
(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.
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(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.
(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
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30.1 President, 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 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 A shall be decided based on the
Sino-foreign Joint Venture foreign employee's basic standard.
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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.
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
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"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. 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, C and other relevant authorities for their
approval. The financing model can also be translated into Chinese
and submit to Party A 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, B and C have the right to invite an
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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.
(3). To pay the expenses of technical service from abroad.
(4). To pay the possible distributable profit.
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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 A; 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:
(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 once a year within 90 days
after the end of the fiscal year. Such profit will be shared
by Party A, B and C in the following ratio:
Party A: 60.8%
Party B: 30%
Party C: 9.2%
(4). The Joint Venture Company shall assist Party A 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
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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
48.1 If one of the following events occurs, Party A, B and C 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, B or C 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.
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(6). If all parties agree that the Joint Venture Company can not
achieve its original goal due to some other reasons.
(7). All 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 all 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 to sell the Joint Venture Company at its highest price
in China or abroad in foreign currency if possible.
50. DISMISSAL AND CLEARANCE
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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 all 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 A 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 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, B or C, 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, B or C shall not be responsible for the expected profit,
indirect lose and deriving lose caused by one of the other Parties.
52.3 Subject to Clause 11 of this Contract, if Party
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A, B or C 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, B
and C 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 all 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
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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 All 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 the
United States or other causes beyond its reasonable control, Party
A, B and C 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 B and C initiates an action, Party A will appoint Beijing
China International Economic Trade Committee for arbitration, and
when Party B initiates an action,
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Party A will appoint the arbitration association selected by Party A
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 All Parties shall pay their cost of arbitration separately except
for the special requirement written in the final arbitration
decision. The cost paid to the arbitration organization shall be
shared by all 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 eight 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
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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, B and C 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 ALL PARTIES
64.1 Party A, B and C 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 on ______________, 1996 in __________, PRC, by
the representatives from Party A, B and C.
Party A: AVIC Group International, Inc.
By: /s/ Xiao Jun
Name: Xiao Jun
Title: Executive Vice President - AVIC China
Date: December 18, 1996
Party B: Hebei United Telecommunications Development Co.
By: /s/ Ye Yunyun
Name: Ye Yunyun
Title: Chairman
Date: September 20, 1996
Party C: Beijing CATCH Communication Group Co.
By: /s/ Ju Feng
Name: Ju Feng
Title: President
Date: September 20, 1996
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PROJECT COOPERATION CONTRACT
CHINA UNICOM'S HEBEI GLOBAL SERVICE FOR MOBILE
TELECOMMUNICATIONS (GSM) NETWORK PROJECT
CHINA UNITED TELECOMMUNICATIONS CO.
AND
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING COMPANY LIMITED
FEBRUARY 9, 1996
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CONTENTS
Article I Definitions and Interpretation
Article II Representations and Warranties
Article III Covenants of Both Parties
Article IV Contract and Its Attachment
Article V Basic Content of the Contract
Article VI Content Outline of the Project
Article VII Providing Construction and Operating Capital
Article VIII Project Construction
Article IX Project Operation
Article X Project Asset Ownership
Article XI Rights and Obligations
Article XII Working Group
Article XIII Profit Distribution
Article XIV Project Expansion
Article XV Asset Transfer & Grant
Article XVI Insurance
Article XVII Confidentiality
Article XVIII Force Majeure
Article XIX Violation of the Contract
Article XX Termination of the Contract
Article XXI Governing Law
Article XXII Dispute Settlement
Article XXIII Term and Effective Date of the Contract
Article XXIV Fulfillment of the Responsibilities After Termination of the
Contract
Article XXV Transfer and Change of the Contract
Article XXVI Complete Contract
Article XXVII Miscellaneous
Attachment 1 Financial Implementation Details
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Party A: China United Telecommunications Co. ("Party A")
Address: 15 Yang Fang Dian Road, Fu Wai Street, Beijing, PRC
Zip Code:
Legal Representative: Zhao Weichen
Position: Chairman
Telephone:
Fax:
Party B: Hebei United Telecommunications Engineering Company Limited
("Party B")
Address: 11 Zhong Shan Xi Road, Shijiazhuang, Hebei Province
Zip Code:
Legal Representative: Ye Yunyun
Position: Chairman
Telephone:
Fax:
Pursuant to PRC laws and regulations, subject to the principles of fair profit
sharing, sincere cooperation, and, after amicable negotiations, both Party A and
B have agreed to enter into the following contract to develop the China UNICOM's
Hebei Global Service for Mobile Telecommunications (GSM) Network Project.
ARTICLE I
DEFINITIONS:
1. Unless the context, including the recitals, in this contract require
otherwise, the following words and expressions shall have the meanings
shown below:
(1). "THE PROJECT" indicates the China UNICOM's Hebei Global Service for
Mobile Telecommunications (GSM) Network Project which will cover 10
cities or prefectures with 70,000 subscribers.
(2). "THE CONTRACT" means the contract and all attachments signed by Party
A and B regarding the China UNICOM's Hebei Global Service for Mobile
Telecommunications (GSM) Network Project. It is also called the
"Master Contract".
(3). "ATTACHMENT" means attachment 1 of the Master Contract. It is part
of the contract and can not be separated. When mentioning "the
Contract", the attachment shall be included.
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(4). "UPFRONT NETWORK CONNECTION FEE" indicates the special fund which will
be used in the construction of telecommunications projects in
accordance with the regulations issued by the relevant state
authority.
(5). "OPERATING REVENUES" mean the total revenues obtained through the
operation of the project, including airtime revenues, monthly leasing
revenues, handset sales revenues, SIM Card revenues, service revenues,
etc.
(6), "OPERATING COSTS AND EXPENSES" mean the costs and expenses occurred
during project operation, including special network resource leasing
expenses, postal and telecommunications public network calculation
fees, depreciation, spare parts fees, power and fuel expenses, network
maintenance and repair expenses, labor expenses (including salary,
welfare, bonus and other compensation, etc.), business expenses,
handset expenses, financial expenses, management expenses, sales
expenses, business taxes and other various operating expenses.
(7). "PROJECT CAPITAL" means all required capital for project construction
and operation provided by Party B pursuant to the Contract
(8). "PROJECT ASSETS" means total assets provided by Project Capital
invested by Party B.
(9). "CHINA UNICOM" indicates China United Telecommunications Co.
2. The title of each article in the contract shall not be considered part of
the contract, and shall not restrict, modify or affect the meaning of the
contract.
ARTICLE II
REPRESENTATIONS AND WARRANTS:
Both parties, or either party, upon execution of the Contract and thereafter,
represents and warrants that:
1. Both entities are corporations duly incorporated and existing in good
standing under the laws of the PRC, and have obtained the necessary
business license from the Industry and Commerce Administration Department.
Each party has its own company regulations and has maintained a good
reputation in its own business field. Both parties have the right to
execute the contract, and the execution and fulfillment of this contract
will not violate their respective corporate regulations.
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2. Party B warrants that the execution and fulfillment of this contract will
not be in conflict with any other contracts, agreements or letters of
guarantee which have binding force on Party B or its assets.
3. Party B warrants that, pursuant to its current financial and business
situation, it has full power and authority to enter into and to perform
under the Contract in accordance with its terms. Further, it is possible
and feasible for Party B to fulfill its responsibilities to provide the
required capital for the construction and operation of the Project.
ARTICLE III
COVENANTS OF BOTH PARTIES:
Party A and B guarantee the following upon the execution of the contract:
1. Party B guarantees to provide all required capital for the construction and
operation of the project pursuant to the schedule, method, and sub-amounts
listed in the Contract.
2. Party A guarantees to pay all payments due to Party B in accordance with
the terms of the Contract.
3. Both parties guarantee to fulfill all regulations issued by the Chinese
government relating to the Contract.
ARTICLE IV
CONTRACT AND ITS ATTACHMENTS:
The Contract and its attachments shall be deemed as a complete legal document of
this project upon execution by both parties.
ARTICLE V
BASIC CONTENT OF THE CONTRACT:
Both parties agree that the contract shall include the following items:
1. All contents described in the Contract shall be confirmed and agreed by
both parties.
2. Based on this contract, both parties will be responsible for the
construction of the project while Party A will be responsible for project
operation.
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3. Party B will provide all required capital for the construction and
operation of the project pursuant to the schedule, method, and sub-amounts
listed in the Contract.
4. Party A will pay all payments due to Party B in accordance with the terms
of the Contract.
5. Party B will be involved in the project construction through its Working
Group pursuant to the Contract, and will supervise the operation of the
project.
ARTICLE VI
CONTENT OUTLINE OF THE PROJECT:
The Project includes, but is not limited to, the following contents:
1. LOCATION OF THE PROJECT:
The location of the Project will be Hebei Province, the People's Republic
of China.
2. SIZE OF THE PROJECT:
(1). SIZE OF THE PROJECT:
The total capacity which ensures the normal operation of the GSM
network is 70,000 subscribers. The initial phase will cover 7 cities
with 40,000 subscribers and phase two will be increased to 70,000
subscribers from the initial phase.
(2). AMOUNT OF PROJECT CAPITAL:
A. The initial phase of the project requires an estimated investment
of RMB 320 million. The actual investment amount invested will
be determined in the financial closing documents of the project
approved by Party A.
B. Phase two of the Project requires an estimated investment of RMB
280 million. The actual investment amount invested will be
determined in the financial closing documents of the project
approved by Party A.
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(3). Once the Contract becomes effective, both parties shall further
negotiate a technical proposal. When approved, this proposal shall be
signed by both parties and shall be included as an Attachment to this
Contract.
ARTICLE VII
PROVIDING CONSTRUCTION AND OPERATING CAPITAL:
Party B agrees that:
1. Once the Contract becomes effective, Party B shall provide RMB 25 million
start-up capital to begin the construction of the Project within 15 days.
After the Contract becomes effective, Party A shall submit a funding usage
plan to the Working Group within 10 days, and shall guarantee that such
funds will be used in accordance with the preliminary design and estimation
of the project.
2. Party B shall fulfill its obligation to pay all expenses required to
purchase any imported equipment and domestic corollary equipment,
including, but not limited to, issuing the Letters of Credit pursuant to
Article VIII of this Contract.
3. Party A shall formulate (Party B will be involved if Party A requires) a
fund usage plan for the construction of this Project based on the
preliminary design agreed upon by the Working Group and approved by China
UNICOM. Such plan shall be examined by the Working Group and shall be
approved by Party A. Party B shall provide the required capital pursuant
to this fund usage plan.
ARTICLE VIII
PROJECT CONSTRUCTION
1. Both parties agree to complete this project in accordance with the
following documents: (1) the preliminary design and construction design of
this Project approved by China UNICOM; (2) the Contract; (3) Certain
regulations regarding the management of GSM construction issued by China
UNICOM.
2. Both parties agree that project construction includes, but is not limited
to, the following:
(1). The Working Group will appoint a qualified Chinese design institute to
be responsible for related designs of project construction through a
public auction. The design shall be examined and approved by China
UNICOM
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pursuant to construction standards and procedures issued by the state
authority and China UNICOM.
(2). Construction and installation for the sub-projects, including building
construction, pipeline and network construction, switchboard
installation, accessory equipment installation, etc., and other
construction work which must be done before formal operation.
(3). Once construction is completed, the Working Group shall conduct
initial testing and acceptance. Party A shall arrange for testing and
acceptance once approved by the Working Group.
(4). After testing and acceptance of project construction, Party A shall be
responsible for formulating the financial closing documents of this
project. These documents shall be examined by the Working Group
first, and then submitted to China UNICOM for examination and
approval.
3. Party A shall be responsible for selecting imported equipment required by
construction of this project through a public aucction, and Party B shall
participate in this activity. The equipment suppliers shall be determined
by both parties.
4. Party B approves any construction work completed by Party A before the
execution of this Contract as long as such construction work is within the
scope of the preliminary design and cost estimation.
ARTICLE IX
PROJECT OPERATION:
1. When Party A commences operation of the network, Party A immediately
obtains the right for project operation, management, and maintenance, and
the right to receive revenues through network operation.
2. Party A shall operate, manage and maintain the Project pursuant to China
UNICOM's requirements regarding operation, management and maintenance of
the Project and the related items listed in the Contract. Party A shall
also operate the network appropriately and reasonably in order to obtain
the best benefit through this Project.
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ARTICLE X
PROJECT ASSET OWNERSHIP
1. Pursuant to the financial closing documents, Party A owns 30% of the
Project Assets and Party B owns 70% of the Project Assets. 60% of the
Project Assets owned by Party B will be transferred to Party A year by year
through the method of paying Party B the "Distributable Cash Flow" from
Party A in accordance with the regulations listed in Attachment 1 of this
Contract. Each year, the Project Assets transferred from Party B to party
A shall be equal to the amount of the "Distributable Cash Flow" paid to
Party B by Party A at that year. Once the Project Assets transferred by
Party B year after year accumulate to 60% of the entire Project Assets,
such transfer shall be terminated. The remaining 10% of the Project Assets
owned by Party B shall be transferred to Party A without any condition
after the Contract expires.
2. The exercise of the asset ownership right by both parties shall not be in
conflict with the following:
(1). Asset transfer shall be in accordance with the terms of the Contract.
(2). Any Party who obtains the asset from the other Party shall be entitled
to the asset ownership on the part transferred.
(3). Any Party will be able to exercise its right as listed in the
Contract.
ARTICLE XI
RIGHTS AND OBLIGATIONS:
Unless otherwise specified in the Contract, both parties shall be entitled to
the following rights and shall undertake the following obligations:
1. Party A:
(1). Shall be the owner of this Project and shall be responsible for
project construction and operation.
(2). Shall make all payments due to Party B in accordance with the terms of
the Contract.
(3). Shall obtain all approvals and permits required for the operation of
the project, including the approvals from the State Radio Regulatory
Department and Management Department of Telecommunications Industry.
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(4). Shall obtain all import permits for purchasing imported equipment and
other materials as well as network connection permits.
(5). Shall obtain the frequency and number resources required by this
project and handle other related matters regarding the interconnection
between this Project and the post and telecommunications network.
(6). Shall cooperate with the Working Group to develop this project
pursuant to the terms of this Contract.
2. Party B:
(1). Shall provide the required capital pursuant to the regulations of this
Contract.
(2). Shall be involved in the purchase of the main equipment for this
Project.
(3). Shall participate in the Project construction, and shall supervise the
operation and management of this Project through the Working Group.
(4). Shall provide consulting services for project construction and
operation.
(5). Shall examine the project's preliminary design (including a budget
estimate), the financial closing documents, the annual project budget
and financial closing documents through the Working Group.
(6). Shall cooperate with the Working Group to develop this project
pursuant to the terms of this Contract.
3. Each Party shall fulfill its own responsibilities on a timely basis to
ensure that the construction and operation of the project proceed smoothly.
ARTICLE XII
WORKING GROUP:
1. In order to settle any problems promptly during the construction and
operation of the Project, both parties shall jointly establish a Working
Group (hereafter referred to as the "Working Group"). Party B shall
participate in the construction of the Project through the Working Group
pursuant to Item 3 of this Article as well as supervise the operation of
this Project.
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2. Both parties will appoint 3 representatives to the Working Group. These 6
representatives shall be the formal members of the Working Group. During
the construction period, the Director of the Working Group shall be
appointed by Party B and the Deputy Director shall be appointed by Party A.
During the operation period, the Director of the Working Group shall be
appointed by Party A and Deputy Director shall be appointed by Party B.
3. Party B shall conduct its business within the following areas through the
Working Group:
(1). It shall examine the Project's preliminary design and construction
design (including budget estimate). It shall also participate in the
formulation of the Project capital usage plan required by Party A and
supervise Party A's implementation of this fund usage plan.
(2). It shall participate in the initial testing and acceptance of the
Project construction.
(3). It shall examine the financial closing documents of the Project.
(4). It shall examine the annual project budget and financial closing
documents of the Project.
(5). It shall resolve any major issues arising during Project construction,
such as the changes of design, budget estimation, etc.
(6). It shall be responsible for any other tasks assigned by both parties.
Other than the above described responsibilities, it shall also examine and
supervise all issues deemed necessary by both parties.
4. The time, location, subject and agenda of the Working Group meetings shall
be decided by the Director and Deputy Director of the Working Group.
5. Both parties shall submit a list of the candidates who will participate in
the Working Group respectively to the other Party within 7 days after this
Contract becomes effective.
6. The first Working Group meeting shall be held within 10 days after this
Contract becomes effective.
7. If 2/3 of the 6 members of the Working Group attend the meeting, such
meeting shall be deemed effective. Any resolutions passed by at least 2/3
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of the 6 members of the Working Group shall be deemed effective. If any
member can not attend a meeting for any reason, he is allowed to appoint a
representative to attend the meeting with a written notice. His
representative shall be entitled to have the same rights as other formal
members of the Working Group.
8. The Working Group may formulate its own working procedures, systems and
other working contents if required. However, these "self-made regulations"
shall not be in conflict with PRC laws, regulations and policies regarding
construction and operation of this Project.
ARTICLE III
PROFIT DISTRIBUTION
1. Both parties agree to distribute the "Distributable Cash Flow" generated by
this Project pursuant to Attachment 1 of this Contract. The distribution
proportion will be: Party A gets 22% and Party B gets 78%.
2. Party A shall pay all payments due to Party B pursuant to Attachment 1 of
this Contract.
ARTICLE XIV
PROJECT EXPANSION:
If the market demand is greater than the capacity mentioned in Article VI, Item
2, and Party A decides to expand the project which will require additional
investment, party B shall have priority to invest in the Project under the same
condition.
ARTICLE XV
ASSET TRANSFER AND GRANT:
During the term of the Contract, neither party shall transfer, present or sell
the assets to a third party without getting written approval from the other
party.
ARTICLE XVI
INSURANCE:
1. Both parties shall select the appropriate type of insurance, insurance
amounts and insurance clauses for project equipment. The insurance
premium shall be accounted for as part of construction and operating
expenses. The insurance beneficiary shall be identified in the insurance
contract.
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2. Party A or Party B (which shall be decided according to the requirements of
the insurance organizations. If both parties can be the policyholders,
Party A shall purchase insurance) shall purchase insurance from insurance
companies in China to insure the equipment or assets of this project for
the full amount based on the type of insurance, insurance amount and
insurance clauses selected by both parties. During the construction of
this project, Party B shall be the policyholder and shall pay for the
insurance premium, and the amount shall be regarded as part of its
investment. When Party A formally starts to operate the network, Party A
shall be the policyholder and shall pay for the insurance premium, and the
amount shall be regarded as part of Operating Costs and Expenses.
ARTICLE XVII
CONFIDENTIALITY:
1. During the term of the Contract and three years after the termination of
the Contract, both parties shall not disclose, release, or provide any
information to a third party, which includes financial, business related,
technological, managerial and other related documents and information
obtained from the other party (either orally or in writing).
2. The above confidential responsibilities shall exclude the following:
(1). Information already known to the recipient of the Contract before the
information is delivered by the other party of the Contract.
(2). Any confidential information already in the public domain, or the
release of information is not a mistake caused by the recipient of the
Contract.
(3). Information received from a third party outside of the Contract.
Since no third party has responsibility to keep the information
confidential, it may disclose or release this information to the
recipient of the Contract.
(4). The confidential information was developed alone by the recipient of
the Contract.
(5). One party of the Contract has obtained a written agreement from
another party of the Contract to disclose or release any confidential
information to a third party outside of the Contract.
3. Disclosing, releasing or providing confidential information shall be
permitted in the following situations:
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(1). It is required by documents issued by the government authority which
is based on laws and regulations.
(2). It is required to source orders, or to fulfill equipment purchase
contracts or service contracts.
(3). Confidential information has become public information through other
methods without violating the confidentiality provisions.
(4). Either party of the Contract may disclose certain confidential
information to its technical consultants who are also subject to the
same confidentiality provisions.
4. Either party of the Contract may disclose certain confidential information
to employees or contractors if required. However, the employees or
contractors shall be restrained by the same confidentiality provisions.
ARTICLE XVIII
FORCE MAJEURE:
1. During the term of the Contract, if the performance of the Contract is
prevented by any cause beyond its reasonable control including acts of
earthquake, storms, war, fires, floods, strikes, riots, government martial
law or other natural disaster and any other event which that party could
not foresee at the time of executing this contract, both parties shall
handle such matters pursuant to relevant Chinese regulations.
2. The obligations of a party shall be terminated, in whole or in part, if its
power to perform the terms of the Contract is prevented by any course
beyond its natural control.
3. The party whose obligations are terminated by reasons of any such event
shall notify the other party of the Contract of such event by telex or fax.
In addition, it shall submit effective documents issued by government
agencies related to such event within 30 days, stating the nature of the
event, the reasons for the party's inability to fulfill its
responsibilities or to delay the fulfillment of its responsibilities. Both
parties shall immediately resolve the situation to minimize all losses that
may be incurred by such event.
ARTICLE XIX
VIOLATION OF THE CONTRACT:
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1. If the Contract or part of the Contract cannot be fulfilled due to one
party's violation of the Contract, the violating party shall be responsible
for compensating any direct losses. If both parties violate the Contract,
both parties shall pay for any compensation in accordance to the party's
responsibilities based on the specific situation.
2. Both parties agree that neither party has the right to terminate the
Contract except for causes beyond its reasonable control, or due to severe
violations of the Contract performed by both parties which result in the
inability to fulfill the Contract.
ARTICLE XX
TERMINATION OF THE CONTRACT:
1. The contract may be terminated under the following situations, and with the
consents of both parties:
(1). If the normal operation of the Project is prevented by any of the
force majeure events.
(2). If the normal operation of the Project is prevented due to
non-performance or violations of the Contract by Party A or Party B.
(3). If the normal operation of the Project is prevented due to other
reasons. And both parties agree that there is not a future for
further project development.
2. If the time of termination is during the investment repayments period, the
following method shall be applied:
At the time of termination agreed by both parties, if the accumulative
amount of project construction fees, consultant fees and service fees made
by Party A to Party B is less than the Project Capital, then party A shall
pay to Party B an amount of money within 60 days after the termination of
the contract in accordance with the following calculation:
Due payment amount = (Project Capital - Paid Project Construction Fees,
Consultant Fees and Service Fees) + (Project Capital - Paid Project
Construction Fees, Consultant Fees and Service Fees) x (bank deposit
interest/day) x (number of days from the termination date of this contract
to the date of paying such Due payment amount to Party B)
ARTICLE XXI
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GOVERNING LAW:
This contract shall be governed by and interpreted in accordance with the laws
of the PRC.
ARTICLE XXII
DISPUTE SETTLEMENT:
1. Any disputes, differences in opinion, or conflicts arising out of the
Contract during the fulfillment of the Contract shall, to the fullest
extent possible, shall be settled amicably by negotiation and discussion
between the parties.
2. If such disputes, differences in opinion, or conflicts can not be settled
by amicable agreement within 60 days of one party submitting a written
notice to the other party, it shall be submitted to the Beijing Arbitration
Committee for arbitration.
3. The arbitration shall be conducted under "PRC Arbitration Law".
4. Any decision taken by the arbitrators will be final, binding and
conclusive.
5. The arbitration fee shall be paid by the party who loses the case.
6. During the process of arbitration, both parties shall continue to operate
the Project in accordance with the Contract, except for the part currently
under arbitration.
ARTICLE XXIII
TERM OF THE CONTRACT
1. The Contract shall be deemed effective upon execution of the Contract by
Party A and Party B.
2. The term of this contract commences on the effective day, and terminates 15
years from the date of formal operation of the project.
ARTICLE XXIV
FULFILLMENT OF THE RESPONSIBILITIES AFTER TERMINATION OF THE CONTRACT:
1. Upon termination of the Contract and pursuant to the terms of the Contract,
if there are unfulfilled responsibilities according to the Contract by
either party, such party shall fulfill any remaining obligations (including
payments owed by Party A to Party B during the term of the Contract).
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2. Before one party has completely fulfilled its obligations, the other party
still has the binding right toward that party on any unfinished
obligations.
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ARTICLE XXV
TRANSFER AND CHANGE OF THE CONTRACT
Neither Party A nor Party B shall transfer the Contract, any portion of the
Contract, any right, profit or obligations specified by the Contract to a third
party without prior written consent from the other Joint Venture party.
ARTICLE XXVI
COMPLETE CONTRACT
The Contract and its Attachments are the only contract regarding this project
signed by Party A and Party B.
ARTICLE XXVII
MISCELLANEOUS
1. Any amendments to the Contract shall only become effective after such
amendments are signed by authorized persons from both parties.
2. Further negotiations regarding the Contract's technical attachment shall be
proceeded by both parties once the Contract has been signed and becomes
effective, and it shall be executed upon mutual agreements. This technical
attachment shall be one of the attachments of this Contract once it has
been signed. Both parties shall fulfill their responsibilities pursuant to
this Contract prior to the execution of this technical attachment.
3. Any notice, request, or communications to be given under this contract
shall be sent by registered mail, and shall be written in Chinese.
Telegram, telex and fax are acceptable. However, the original copy shall
be sent by registered post to each party. Any telex, telegram, fax and
registered mail shall be sent to the following address:
Party A: China United Telecommunications Co.
Address: 15 Yang Fang Dian Road, Fu Wai Street, Beijing, PRC
Zip Code: 100038
Receiver: General Manager
Fax: 010-3242879
Party B: Hebei United Communications Engineering Company Limited
Address: 248 He Ping Xi Road, Shijiazhuang, Hebei, PRC
Zip Code: 050071
Receiver: General Manager
Fax: 0311-7044228
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4. The notice shall be effective from the date of receipt of such post.
5. This contract is written in Chinese and has two copies. Each party holds
one copy, and each copy has equal legal force.
6. This contract has been signed on February 9, 1996 by representatives of
Party A and party B at Beijing, the People's Republic of China.
Party A: China United Telecommunications Co.
Representative: Guo Huanmin
Party B: Hebei United Telecommunications Engineering Company Limited
Representative: Ye Yunyun
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FACILITY LETTER
BANKING FACILITY OF
U.S. DOLLARS 20 MILLION
DATED: AUGUST 5, 1996
BETWEEN
THE BANK OF TOKYO-MITSUBISHI, LTD.
BEIJING BRANCH
AS LENDER
AND
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
AS BORROWER
<PAGE>
TERM LOAN AGREEMENT
TERM LOAN AGREEMENT dated as of August 5, 1996 between Hebei United
Telecommunications Engineering Co. Ltd., a legal person organized under the
laws of the People's Republic of China (the "Borrower"), and The Bank of
Tokyo-Mitsubishi, Ltd. (the "Bank") through its Beijing Branch (the "Bank's
Office"). The parties hereto hereby agree as follows:
Article I
AMOUNT AND TERMS OF THE LOAN
Section 1.01. TERM LOAN; DRAWDOWN PERIOD. The Bank agrees on the terms
and conditions hereinafter set forth to make advances in minimum amounts of Five
Hundred Thousand Dollars (US$500,000.00) each to the Borrower (in the aggregate,
the "Loan") from the date of this Agreement until the first anniversary of
the date of this Agreement up to the principal amount of Twenty
Million United States Dollars (US$20,000,000.00).
Section 1.02. NOTICE AND MANNER OF BORROWING. The Borrower shall give
the Bank at least three (3) days' prior notice of any request for an advance
under this Agreement, specifying the date and amount thereof. Not later than 10
A.M. on the date of such advance and upon fulfillment of the applicable
conditions set forth in Article II, the Bank will make such advance available to
the Borrower in immediately available funds by crediting the amount thereof to
the Borrower's account with the Bank.
Section 1.03. INTEREST. The Borrower shall pay interest to the Bank on the
outstanding and unpaid principal amount of the Loan at a rate per annum equal to
_____ percent (6.82%). Interest shall be calculated on the basis of a year of
three hundred and sixty (360) days for the actual number of days elapsed.
Interest shall be paid immediately available funds six months after the date of
this Agreement, every six months thereafter, and at maturity at the Bank's
Office. Any principal amount not paid when due (at maturity, by acceleration,
or otherwise) shall bear interest thereafter until paid in full, payable upon
demand, at a rate which shall be 15 percent (15%) per annum.
<PAGE>
Section 1.04. TERM. The principal of the Loan shall be repaid in five
(5) equal, consecutive, semi-annual installments, each in an amount equal to
one-fifth (1/5) of the principal amount of the Loan outstanding on the third
anniversary of the date of this Agreement with subsequent installments on the
last day of each of the next four six-month periods thereafter, provided,
however, that the last such installment shall be in the amount necessary to
repay in full the unpaid principal amount of the Loan.
Section 1.05. PREPAYMENTS. There shall be no prepayment of the advances
made under this Agreement.
Section 1.06. METHOD OF PAYMENT. The Borrower shall make each payment
under this Agreement not later than 1 P.M. on the date when due in lawful money
of the United States to the Bank at the Bank's Office in immediately available
funds. Whenever any payment to be made under this Agreement shall be stated to
be due on a day other than a day on which the Bank's Office is open for
business, such payment shall be made on the next succeeding day on which it is
open, and such reduction of time shall in such case be included in the
computation of payment of interest. All payments hereunder shall be free and
clear of and without deduction of any tax, stamp duty, set-off or counterclaim.
If the Borrower is prohibited by the operation of law from making payments
without deduction, the payments due to the Bank shall be increased to equal
the amounts which would have been received as if such deduction or withholding
was not required.
Section 1.07. USE OF PROCEEDS. The proceeds of the Loan hereunder shall
be used by the Borrower to make payments to its local and foreign suppliers and
contractors for the purchase, leasing, construction, installation and
acquisition by other means of telecommunications equipment and facilities for
use in providing telecommunications related services in Hebei Province.
Article II
CONDITIONS PRECEDENT
Section 2.01. CONDITIONS PRECEDENT TO THE LOAN. The obligations of the Bank
hereunder are subject to the conditions precedent that the Bank shall have
received on or before the day of:
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(a) the first advance under this Agreement, in form and substance satisfactory
to the Bank, a guaranty of all of the obligations of the Borrower under this
Agreement by NTT International Corporation; and
(b) the first and every advance under this Agreement, upon request by the Bank,
evidence satisfactory to the Bank that the Borrower has obtained all
authorizations, consents, approvals and registrations, including but not limited
to a copy of the State Administration of Exchange Control ("SAEC") Registration
issued to the Borrower, following the Borrower's presentation to SAEC officials
a copy of this Agreement and its Chinese translation within fifteen (15) days of
signing this Agreement.
Article III
EVENTS OF DEFAULT
Section 3.01. EVENTS OF DEFAULT. If the Borrower fails either to pay the
principal of, or interest on, the Loan, as and when due and payable, or, upon
request by the Bank, provide to the Bank evidence satisfactory to the Bank that
the Borrower has obtained all those authorizations, consents, approvals and
registrations required from any governmental authority, as more specifically
described in Section 2.01(b) above, the Bank may by notice to the Borrower,
declare the Loan and all interest thereon to be immediately due and payable,
whereupon the Loan and all such interest shall become and be forthwith due and
payable.
Article IV
COMMITMENT FEE
Section 4.01. COMMITMENT FEE. The Borrower shall pay the Bank a
commitment fee calculated from and including the execution date of this
Agreement to the first anniversary thereof at a rate of one-eighth percent
(1/8%) per annum on the undrawn portion of the facility. Such commitment fee
shall accrue from day to day and be computed on the basis of a year of three
hundred and sixty (360) days and the actual number of days elapsed and shall be
paid in arrears on the first anniversary of the date of this Agreement.
3
<PAGE>
Article V
CHANGE IN CIRCUMSTANCES
Section 5.01. CHANGE IN CIRCUMSTANCES. If any change in the applicable
laws, ordinances, rules and regulations of the People's Republic of China
makes it unlawful for the Bank to continue its obligations under this
Agreement, those obligations shall terminate immediately, and the Borrower,
on demand from the Bank, shall repay the amount of total advances outstanding
under this Agreement plus any accrued interest. If under the applicable laws
of the People's Republic of China, the Borrower can not lawfully repay those
amounts, the Bank and the Borrower shall negotiate in good faith toward a
solution restoring those amounts to the Bank.
Article VI
MISCELLANEOUS
Section 6.01. COSTS, EXPENSES, AND TAXES. The Borrower agrees to pay on
demand all costs incurred by the Bank in connection with the preparation and
administration of this Agreement, and of any amendment, modification or
supplement to it, including, without limitation, reasonable fees and
out-of-pocket expenses of counsel for the Bank incurred in connection with
preparation of this Agreement. The Borrower also agrees to pay all such costs,
including arbitration and court costs, incurred in connection with enforcement
of this Agreement, or any amendment, modification of supplement thereto, whether
by negotiations, legal proceedings or otherwise. In addition, the borrower
shall pay any and all stamp and other taxes and fees payable or determined to be
payable in connection with the execution, delivery, filing and recording of this
Loan Agreement, and agrees to hold the Bank harmless from and against any and
all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes and fees. This provision shall survive termination
of this Agreement.
Section 6.02. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of Japan.
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<PAGE>
Section 6.03. ARBITRATION. Any dispute arising out of this Agreement,
including any question regarding its existence or validity, shall be finally
resolved in Tokyo, Japan by arbitration under the arbitration rules of the
Japanese Commercial Arbitration Association as at present in force.
Article VII
GUARANTY
Section 7.01. GUARANTY. The Bank shall have received a guaranty of all of the
obligations of the Borrower under this Agreement by NTT International
Corporation.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as
of the date first above written.
HEBEI UNITED TELECOMMUNICATIONS
ENGINEERING CO.
By: /s/ [illegible]
----------------------
Title: [illegible]
[SEAL][SEAL]
THE BANK OF TOKYO-MITSUBISHI, LTD.
By: /s/ [illegible]
----------------------
Title:
5
<PAGE>
APPENDIX I
FORM OF NOTICE OF DRAWING
To: The Bank of Tokyo-Mitsubishi, Ltd.
Beijing Branch
Beijing Fortune Building
No. 5 Dong San Huan Bei Lu
Chaoyang District, Beijing, China
Ann: Loan Department
Dear Sirs:
RE: U.S. Dollar 20 Million
Facility Letter dated August 5, 1996
------------------------------------
We refer to the above Facility Letter between you and us. Terms defined in the
Facility Letter have the same meaning herein.
We hereby give you notice that we wish to borrow a principal amount of
__________ from ____________ to ___________ or, if any such date is not a
Banking Day, on the next succeeding Banking Day, provided, however, that such
period shall not end after the Maturity Date. Such amount should be credited to
our account number [ ] at [ ].
We confirm that:
no Event of Default or other event which, with the passing of time or
giving of notice or both, would constitute an Event of Default has occurred
which remains unwaived or unremedied.
For and on behalf of
Hebei United Telecommunications Engineering Co., Ltd.
By: Dated:
-------------------- ---------------------
<PAGE>
PROJECT COOPERATION CONTRACT
(HEBEI PROVINCIAL MULTI-MEDIA NETWORK)
HEBEI CABLE TELEVISION STATION
AND
HEBEI UNITED TELECOMMUNICATIONS
EQUIPMENT COMPANY LIMITED
APRIL 8, 1997
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CONTENTS
Article I Definitions & Interpretation
Article II Representations and Warranties
Article III Covenants of Both Parties
Article IV Contract and Its Attachment
Article V Basic Content of the Contract
Article VI Content Outline of the Project
Article VII Providing Construction Capital
Article VIII Project Construction
Article IX Project Operation
Article X Investment Repayments and Profit Distributions
Article XI Project Asset Ownership
Article XII Rights and Obligations
Article XIII Advisory Board
Article XIV Project Expansion
Article XV Asset Transfer & Grant
Article XVI Insurance
Article XVII Confidentiality
Article XVIII Force Majeure
Article XIX Violation of the Contract
Article XX Termination of the Contract
Article XXI Governing Law
Article XXII Dispute Settlement
Article XXIII Term of the Contract
Article XXIV Fulfillment of the Responsibilities After Termination
of the Contract
Article XXV Transfer and Change of the Contract
Article XXVI Complete Contract
Article XXVII Miscellaneous
Attachment 1 Financial Implementation Details
Attachment 2 Technical Plan
Attachment 3 Project Asset Ownership
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<PAGE>
Party A: Hebei Cable Television Station
Address: 100 Jianhua South Street, Shijiazhuang, Hebei Province
Zip Code: 050031
Legal Representative: Yang Xingsheng
Position: Deputy Director
Telephone: 0311-5078985
Fax: 0311-5060184
Party B: Hebei United Telecommunications Equipment Company Limited
Address: 11th Floor, 288 Songbiandian Building, Xinhua Road, Shijiazhuang
Hebei Province
Zip Code: 050051
Legal Representative: Liang Jiangli
Position: Chairman
Telephone: 0311-7086142
Fax: 0311-7086143
Pursuant to PRC laws and regulations, subject to the principles of fair
profit sharing, sincere cooperation, and, after amicable negotiations, both
Party A and B have agreed to enter into the following contract to develop the
Hebei Provincial Multi-Media Network:
ARTICLE I
DEFINITIONS:
1. Unless the context, including the recitals, in this contract require
otherwise, the following words and expressions shall have the meanings
shown below:
(1). "THE PROJECT" indicates the Hebei Provincial Multi-media Network
Project which will cover 11 cities in Hebei Province. This
network will not only transmit radio and television programs, but
will also be developed to offer various forms of information
services and provide information channels to different businesses.
(2). "THE CONTRACT" means the contract and its attachments signed by
Party A and B regarding the Hebei Provincial Multi-Media Network
Project ("Master Contract"). "ATTACHMENTS" means attachment 1, 2
and 3 of the Contract. Attachments are part of the contract and
can not be separated. When mentioning "the Contract", attachments
shall be included.
(3). "OPERATING REVENUES" mean the total revenues obtained through the
operation of the project, including cable TV subscription revenues,
line leasing revenues, advertising revenues, information service
revenues, etc.
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(4), "OPERATING COSTS AND EXPENSES" mean costs and expenses occurred
during project operation, including equipment maintenance expenses
(water, electricity, equipment, instrument, transportation
maintenance and other maintenance expenses), management expenses,
program expenses, and taxes (5% revenue tax and 3% income tax
according to the tax law issued by the state authority).
(5). "PROJECT CAPITAL" means all required capital to construct the
Project provided by Party B pursuant to the Contract (including
interest incurred during the construction phase. The interest
shall be calculated based on the loan interest rate issued by the
Bank of China at the time the amount of capital has been remitted).
(7). "PROJECT ASSETS" mean total of all fixed assets, intangible assets,
and deferred assets which is not considered fixed assets provided
by Project Capital invested by Party B.
2. The title of each article in the contract shall not be considered part of
the contract, and shall not restrict, modify or affect the meaning of the
contract.
ARTICLE II
REPRESENTATIONS AND WARRANTIES:
Both parties, or either party, upon execution of the Contract and thereafter,
represents and warrants that:
1. Both entities are corporations duly incorporated and existing in good
standing under the laws of the PRC, and have obtained the necessary
business license from the Industry and Commerce Administration Department.
Each party has its own company regulations and has maintained a good
reputation in its own business field. Both parties have the right to
execute the contract, and the execution and fulfillment of this contract
will not violate their respective corporate regulations.
2. Party B warrants that the execution and fulfillment of this contract will
not be in conflict with any other contracts, agreements or letters of
guarantee which have binding force on Party B or its assets.
3. Party B warrants that, pursuant to its current financial and business
situation, it has full power and authority to enter into and to perform
under the Contract in accordance with its terms. Further, it is possible
and feasible for Party B to fulfill its project construction
responsibilities.
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ARTICLE III
COVENANTS OF BOTH PARTIES:
Party A and B guarantee the following upon the execution of the contract:
1. Party A guarantees to pay all payments due to Party B in accordance with
the terms of the Contract.
2. Party A and Party B guarantee to fulfill all regulations issued by the
Chinese government relating to the Contract.
3. Party B guarantees to provide all required Project Capital pursuant to the
schedule, method, and sub-amounts required pursuant to the Contract.
ARTICLE IV
CONTRACT AND ITS ATTACHMENTS:
The Contract and its attachments shall be deemed as a complete legal document of
this project upon execution by Party A and Party B.
ARTICLE V
BASIC CONTENT OF THE CONTRACT:
Both parties agree that the contract shall include the following items:
1. All contents described in the Contract shall be confirmed and agreed by
both parties.
2. Based on this contract, Party B will have primary responsibility during the
construction period while Party A will be responsible for project
operation.
3. All equipment procurements, engineering designs and construction shall be
settled through a bid process in which both parties are involved.
4. Based on the technical plan, finalized by both parties, Party B shall be
responsible for raising the capital and shall control the use of such
funds raised.
5. Party A shall be responsible for the actual construction process. Upon
completion of project construction, both parties shall be responsible for
network testing and acceptance.
5
<PAGE>
6. Party A and Party B shall supervise and manage the operation of the
Project.
7. Party A and Party B shall set forth the employment and billing structures
for the Project. The structures will be implemented after they are
approved by the Provincial Employment Planning Commission and Pricing
Bureau
ARTICLE VI
CONTENT OUTLINE OF THE PROJECT:
The Project includes, but is not limited to, the following contents:
1. LOCATION OF THE PROJECT:
The location of the Project will be Hebei Province, the People's Republic
of China.
2. SIZE OF THE PROJECT:
(1). SIZE OF THE PROJECT:
A. To complete the network connection in 11 provincially administered
cities.
- To complete a self-healing loop network from Shijiazhuang,
Baoding, Langfang, Cangzhou, Hengshui and to Shijiazhang.
- To complete bus-organized transmission construction from
Shijiazhuang, Xingtai to Handan.
- To complete a digital microwave transmission network in the
northeast (from Langfang, Tangshan to Qinghuangdao)
- To complete the upgrade of microwave network digitization
from Yutian to Xinglong and Chengde in northern Hebei.
- To complete the upgrade of microwave network digitization
from Guan to Hengling, Xiahuayuan and Zhangjiakou.
- To complete the HFC upgrade in at least one city.
B. Construction Period: the construction will be finished one and a
half years after the Contract has been executed.
(2). AMOUNT OF PROJECT CAPITAL:
Phase one of the project requires an estimated investment of RMB 190
million. The actual investment amount invested will be determined in
the financial closing documents of the project approved by both
parties.
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(3). Once the Master Contract becomes effective, both parties shall
further negotiate a technical proposal. When approved, this
proposal shall be signed by both parties and shall be included
as Attachment 2.
ARTICLE VII
PROVIDING CONSTRUCTION CAPITAL:
Both parties agree that:
1. Once the Contract becomes effective, Party A shall submit a funding usage
plan to Party B one month before using such funds, and shall guarantee
that such funds will be used in accordance with the preliminary design of
the project as approved by both parties.
2. Party A shall formulate a funding usage plan for the construction of the
project based on the preliminary design approved by both parties. Such
plan shall be approved by Party B. Then Party B shall provide required
capital pursuant to the related construction development contracts.
3. Both parties shall fulfill their obligations to pay all expenses required
to purchase any imported equipment and domestic corollary equipment,
including, but not limited to, issuing the Letters of Credit pursuant to
Article VIII of the Contract.
4. Investment currency and foreign exchange rate: both parties agree that
mainly RMB will be invested for the construction and operation of the
Project, except for the purchase of imported equipment. When investing in
US dollars, the exchange rate shall be based on the average of the buying
and selling prices of the PRC's exchange rate. Party B shall be
responsible for handling all required procedures and related currency
exchange service charge.
ARTICLE VIII
PROJECT CONSTRUCTION:
1. Both parties agree to complete this project in accordance with the
following documents: (1) the approved preliminary design and construction
design of this project; (2) the Contract.
2. Both parties agree that the project construction includes, but is not
limited to, the following:
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(1). Both parties will appoint a qualified institute to be responsible for
the related designs. The designs shall be examined and approved by
both parties pursuant to the construction standards and procedures
issued by the State authority or Ministry of Radio, Film and
Television.
(2). Both parties are responsible for network testing and acceptance upon
network completion.
(3). After the testing and acceptance of the project construction, Party B
shall be responsible to draft the financial closing documents of this
project which need to be approved by both parties.
3. Both parties shall be responsible for selecting imported equipment and
domestic corollary equipment required by the construction of the project
through a public bid.
ARTICLE IX
PROJECT OPERATION:
1. When Party A starts to operate the network, Party A immediately obtains
the right for project operation, management, and maintenance, and the
right to receive revenues through network operation. Party B then
immediately obtains the right to supervise project operation and management
(see attachment 1 for operation structure) .
2. In order to fully utilize the initiative of both parties and improve the
efficiency of the operation, both parties shall establish an Advisory
Board. The Advisory Board will have financial report meetings and Board
meetings on a regular basis.
3. Party B shall only be responsible for the operating expenses pursuant to
the basic content of the project described in the Contract. Party A shall
be responsible for operating expenses not included in the Project.
4. Party B shall be able to participate in the project operation through
financial management at a minimum. Party B is allowed to appoint a PRC
representative to be jointly in charge of and to supervise financial
management and operation with Hebei Cable Television Station.
ARTICLE X
INVESTMENT REPAYMENTS AND PROFIT DISTRIBUTIONS
8
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1. Both parties have agreed on the form of the project operation in which the
project shall keep separate accounting and assume sole responsibility for
its profits and losses. All revenues generated by the Project, less all
expenses incurred during the process of generating such revenues, shall be
distributed. The method of asset amortization shall be handled based on
attachment 1 ("Financial Implementation Details").
2. DEPRECIATION: Before Party A obtains ownership of the assets of the
Project, ownership of all equipment of the Project shall be notarized with
a notary agency, and be temporarily recorded on Party A's account.
Depreciation shall then be accounted for as part of Party A's cost.
Depreciation shall be drawn from the revenue after operating tax has been
paid but before income tax is paid and shall be distributed between Party A
and Party B in accordance with their pro rata ownership of the project
assets. The profit retained after paying income tax shall then be
distributed on a 2:8 ratio (Party A 20% and Party B 80%).
3. INVESTMENT REPAYMENTS: During the period of investment repayments (the
period to repay all investment principle and interest incurred during the
construction phase), Operating Revenues, less Operating Costs and Expenses,
shall be distributed to Party A and Party B in the ratio of 20% and 80%,
respectively. After the period of investment repayments, the profit
distribution ratio shall be 70% to Party A and 30% to Party B until the
cooperation term is satisfied.
4. Operating expenses shall be confirmed by both parties.
5. Investment repayments and profit distributions shall be made on a quarterly
basis, but financial statements shall be prepared every 6 months.
ARTICLE XI
PROJECT ASSET OWNERSHIP (SEE ATTACHMENT 3)
ARTICLE XII
RIGHTS AND OBLIGATIONS:
Unless otherwise specified in the Contract, both parties shall be entitled to
the following rights and shall undertake the following obligations:
1. Party A:
(1). Shall participate in project construction and shall be responsible for
project operation.
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(2). Shall make all payments due to Party B in accordance with the terms of
the Contract.
(3). Shall obtain all approvals and permits required for the operation of
the project.
(4). Shall obtain all import permits for purchasing equipment and other
materials abroad.
(5). Shall develop this project pursuant to the terms of this Contract.
(6). Shall approve the financial closing documents of the project.
2. Party B:
(1). Shall be responsible for project construction, for raising project
construction capital, and for controlling the use of funds.
(2). Shall participate in the management of the project operation.
(3). Shall provide consulting services for project operation.
(4). Shall examine and approve the project's preliminary design (including
a budget estimate), and construction budget plans. In addition, Party
B shall submit the financial closing documents of the project. It
shall also examine and approve the annual project budget and annual
financial documents.
(5). Shall directly supervise the project's financial status during project
operation.
(6). Shall appoint management to participate in network operation and
financial management.
(7). Shall develop the Project pursuant to the terms of the Contract.
3. Each party shall fulfill its own responsibilities on a timely basis to
ensure that the construction and operation of the project proceed
smoothly.
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ARTICLE XIII
ADVISORY BOARD:
1. In order to settle any problems promptly during the operation of the
Project, both parties shall jointly establish an Advisory Board after the
network testing and acceptance (hereafter referred to as the "Advisory
Board").
2. Both parties will appoint 4 representatives to the Advisory Board. These 8
representatives shall be the formal members of such Advisory Board. The
Chairman of the Advisory Board shall be appointed by Party A and the Vice
Chairman shall be appointed by Party B.
3. The Advisory Board shall have the following responsibilities:
(1). It shall examine and approve the annual project budget plan and annual
financial documents.
(2). It shall resolve any major issues arising during project operation.
It shall also check and ratify operating expenses, billing structure,
and employment structure.
(3). It shall be responsible for any other tasks assigned by both parties.
Other than the above described responsibilities, it shall also examine,
approve and supervise all issues deemed necessary by both parties.
4. The time, location, subject and agenda of the Advisory Board meetings shall
be decided by the Chairman and Vice Chairman.
5. If 2/3 of the 8 members of the Advisory Board members attend the meeting,
such meeting shall be deemed effective. Any resolutions passed by at least
2/3 of the 8 members of the Advisory Board shall be deemed effective. If
any member can not attend a meeting for any reason, he is allowed to
appoint a representative to attend the meeting with a written notice. His
representative shall be entitled to have the same rights as other formal
members on the board.
ARTICLE XIV
PROJECT EXPANSION:
Party A shall determine any expansion of the project according to market demand.
When additional investment is required, Party B shall provide any required
capital if it decides not to give up its right of investment.
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1. SIZE OF PROJECT EXPANSION:
A. To upgrade the networks in certain cities.
B. To connect 40 counties to the provincial network.
2. The estimated investment amount will be RMB 210 million.
ARTICLE XV
ASSET TRANSFER AND PRESENT:
During the term of the Contract, neither party shall transfer, present or sell
the assets to a third party without getting written approval from the other
party.
ARTICLE XVI
INSURANCE:
1. Both parties shall select the appropriate type of insurance, insurance
amounts and insurance clauses for project equipment. The insurance
premium shall be accounted for as part of construction and operating
expenses. The insurance beneficiary shall be identified in the insurance
contract.
2. Party A or Party B (During the construction period, Party B shall be the
policyholder. During the operation period, Party A shall be the
policyholder) shall purchase insurance from the insurance companies in
China to insure the equipment or assets of this project for the full amount
based on the type of insurance, insurance amount and insurance clauses
selected by both parties. During the construction of this project, Party
B shall be the policyholder and shall pay for the insurance premium, and
the amount shall be regarded as part of its investments. When Party A
formally starts to operate the network, Party A shall be the policyholder
and shall pay for the insurance premium, and the amount shall be regarded
as part of Operating Costs and Expenses.
ARTICLE XVII
CONFIDENTIALITY:
1. During the term of the Contract and three years after the termination of
the Contract, both parties shall not disclose, release, or provide any
information to a third party, which includes financial, business related,
technological, managerial and other related documents and information
obtained from the other party (either orally or in writing).
2. The above confidential responsibilities shall exclude the following:
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<PAGE>
(1). Information already known to the recipient of the Contract before the
information is delivered by the other party of the Contract.
(2). Any confidential information already in the public domain, or the
release of information is not a mistake caused by the recipient of the
Contract.
(3). Information received from a third party outside of the Contract.
Since no third party has responsibility to keep the information
confidential, it may disclose or release this information to the
recipient of the Contract.
(4). The confidential information was developed alone by the recipient of
the Contract.
(5). One party of the Contract has obtained a written agreement from
another party of the Contract to disclose or release any confidential
information to a third party outside of the Contract.
3. Disclosing, releasing or providing confidential information shall be
permitted in the following situations:
(1). It is required by documents issued by the government authority which
is based on laws and regulations.
(2). It is required to source orders, or to fulfill equipment purchase
contracts or service contracts.
(3). Confidential information has become public information through other
methods without violating the confidentiality provisions.
(4). Either party of the Contract may disclose certain confidential
information to its technical consultants who are also subject to the
same confidentiality provisions.
4. Either party of the Contract may disclose certain confidential information
to employees or contractors if required. However, the employees or
contractors shall be restrained by the same confidentiality provisions.
ARTICLE XVIII
FORCE MAJEURE:
13
<PAGE>
1. During the term of the Contract, if the performance of the Contract is
prevented by any cause beyond its reasonable control including acts of
earthquake, storms, war, fires, floods, strikes, riots, government martial
law or other natural disaster and any other event which that party could
not foresee at the time of executing this contract, both parties shall
handle such matters pursuant to relevant Chinese regulations.
2. The obligations of a party shall be terminated, in whole or in part, if its
power to perform the terms of the Contract is prevented by any course
beyond its natural control.
3. The party whose obligations are terminated by reasons of any such event
shall notify the other party of the Contract of such event by telex or fax.
In addition, it shall submit effective documents issued by government
agencies related to such event within 30 days, stating the nature of the
event, the reasons for the party's inability to fulfill its
responsibilities or to delay the fulfillment of its responsibilities. Both
parties shall immediately resolve the situation to minimize all losses that
may be incurred by such event.
ARTICLE XIX
VIOLATION OF THE CONTRACT:
1. If the Contract or part of the Contract cannot be fulfilled due to one
party's violation of the Contract, the violating party shall be responsible
for compensating any direct losses. If both parties violate the Contract,
both parties shall pay for any compensation in accordance to the party's
responsibilities based on the specific situation.
2. Both parties agree that neither party has the right to terminate the
Contract except for causes beyond its reasonable control, or due to severe
violations of the Contract performed by both parties which result in the
inability to fulfill the Contract.
ARTICLE XX
TERMINATION OF THE CONTRACT:
1. The contract may be terminated under the following situations, and with the
consents of both parties:
(1). If the normal operation of the Project is prevented by any of the
force majeure events.
14
<PAGE>
(2). If the normal operation of the Project is prevented due to
non-performance or violations of the Contract by Party A or Party B.
(3). If the normal operation of the Project is prevented due to other
reasons. And both parties agree that there is not a future for
further project development.
2. If the time of termination is during the investment repayments period, the
following method shall be applied:
At the time of termination agreed by both parties, if the total investment
repayments made by Party A to Party B is less than the Project Capital,
then party A shall pay to Party B an amount of money within 60 days after
the termination of the contract in accordance with the following
calculation:
Due payment amount = (Project Capital - Paid Investment Repayments) +
(Project Capital - Paid Investment Repayments) x (bank deposit
interest/day) x (number of days from the termination date of this contract
to the date of paying such Due payment amount to Party B)
3. If the time of termination is after the investment repayments period, the
following method shall be applied:
Due payment amount = (Operating Revenues - Operating Costs and Expenses) of
the previous year of the Contract termination date/365 x 30% x (20 x 365 -
the actual cooperation date before the termination of this contract).
ARTICLE XXI
GOVERNING LAW:
This contract shall be governed by and interpreted in accordance with the laws
of the PRC.
ARTICLE XXII
DISPUTE SETTLEMENT:
1. Any disputes, differences in opinion, or conflicts arising out of the
Contract during the fulfillment of the Contract shall, to the fullest
extent possible, shall be settled amicably by negotiation and discussion
between the parties.
2. If such disputes, differences in opinion, or conflicts can not be settled
by amicable agreement within 60 days of one party submitting a written
notice
15
<PAGE>
to the other party, it shall be submitted to the Hebei Arbitration
Committee for arbitration.
3. The arbitration shall be conducted under "PRC Arbitration Law".
4. Any decision taken by the arbitrators will be final, binding and
conclusive.
5. The arbitration fee shall be paid by the party who loses the case.
6. During the process of arbitration, both parties shall continue to operate
the Project in accordance with the Contract, except for the part currently
under arbitration.
ARTICLE XXIII
TERM OF THE CONTRACT
1. The Contract shall be deemed effective upon execution of the Contract by
Party A and B (Master contract and all attachments will become effective
simultaneously upon execution of the Contract by both parties).
2. The term of this contract commences on the effective day, and terminates 20
years from the date of formal operation of the project (the same date 20
years after the date of formal operation).
ARTICLE XXIV
FULFILLMENT OF THE RESPONSIBILITIES AFTER TERMINATION OF THE CONTRACT:
1. Upon termination of the Contract and pursuant to the terms of the Contract,
if there are unfulfilled responsibilities according to the Contract by
either party, such party shall fulfill any remaining obligations (including
payment owed by Party A to Party B during the term of the Contract).
2. Before one party has completely fulfilled its obligations, the other party
still has the binding right toward that party on any unfinished
obligations.
ARTICLE XXV
TRANSFER AND CHANGE OF THE CONTRACT
Neither Party A nor Party B shall transfer the Contract, any portion of the
Contract, any right, profit or obligations specified by the Contract to a third
party without prior written consent from the other Joint Venture party.
ARTICLE XXVI
16
<PAGE>
COMPLETE CONTRACT
The Contract and its Attachments are the only contract regarding this project
signed by Party A and Party B.
17
<PAGE>
ARTICLE XXVII
MISCELLANEOUS
1. Any amendments to the Contract shall only become effective after such
amendments are signed by authorized persons from both parties.
2. Any notice, request, or communications to be given under this contract
shall be sent by registered mail, and shall be written in Chinese.
Telegram, telex and fax shall are acceptable. However, the original copy
shall be sent by registered post to each party. Any telex, telegram, fax
and registered mail shall be sent to the following address:
Party A: Hebei Cable Television Station of the PRC
Address: 100 Jianhua South Street, Shijiazhuang, Hebei Province
Zip Code: 050031
Receiver: Wang Hui
Fax: 0311-5060184
Party B: Hebei United Communications Equipment Company Limited
Address: 288 Xinhua West Road, Shijiazhuang, Hebei Province
Zip Code: 050051
Receiver: Xiao Jun
Fax: 0311-7086143
3. The notice shall be effective from the date of receipt of such post.
4. This contract is written in Chinese and has two copies. Each party holds
one copy, and each copy has equal legal force.
5. This contract has been signed on April 8 ,1997 by representatives of Party
A and B at Shijiazhuang, the People's Republic of China.
Party A: Hebei Cable Television Station
Representative: Yang Xingsheng
Position: Deputy Director of Radio and Television Department of
Hebei Province
Party B: Hebei United Telecommunications Equipment Company Limited
Representative: Xiao Jun
Position:
18
<PAGE>
Subsidiaries of the Company:
ITV Communications, Inc., California
Hebei United Communications Equipment Company Limited,
People's Republic of China, and its subsidiary,
Hebei United Telecommunications Engineering Company Limited,
People's Republic of China.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 333-15925, No. 333-26435 and No. 333-20839 of AmTec, Inc, (formerly AVIC
Group International, Inc.) all on Form S-8 of our report dated June 20, 1997,
appearing in this Annual Report on Form 10-KSB of AmTec, Inc. (formerly AVIC
Group International, Inc.) for the year ended March 31, 1997.
DELOITTE & TOUCHE LLP
New York, New York
June 20, 1997
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated June 18, 1996, accompanying the consolidated
financial statements included in the Annual Report of AmTec, Inc. (formerly AVIC
Group International, Inc.) on Form 10-KSB for the year ended March 31, 1997. We
hereby consent to the incorporation by reference of said report in the
Registration Statements of AmTec, Inc. (formerly AVIC Group International, Inc.)
on Forms S-8 (File nos. 333-15925, 333-20839, and 333-26435).
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMTEC,
INC.'S FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 1997. IT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 5,390,871
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,572,961
<PP&E> 182,090
<DEPRECIATION> 62,749
<TOTAL-ASSETS> 29,418,203
<CURRENT-LIABILITIES> 4,636,334
<BONDS> 0
0
1,525
<COMMON> 31,258
<OTHER-SE> 515,305
<TOTAL-LIABILITY-AND-EQUITY> 29,418,203
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<CGS> 0
<TOTAL-COSTS> 3,996,151
<OTHER-EXPENSES> 175,754
<LOSS-PROVISION> 198,538
<INTEREST-EXPENSE> 129,039
<INCOME-PRETAX> (4,147,974)
<INCOME-TAX> 0
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<NET-INCOME> (4,064,885)
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