SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-----------------------------------------
Commission File Number: 0-22520
AMTEC, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1989122
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
599 Lexington Avenue, 44th Floor
New York, New York 10022
(Address of principal executive offices)
(212) 319-9160
(Registrant's telephone number)
Check whether the registrant (1) has 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 (2) has been subject to such filing requirements
for the past 90 days. Yes x No ____
Class Outstanding as of August 13, 1999
Common Stock, par value $.001 per share 32,113,668
Transitional Small Business Format (Check one): Yes No x .
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995.
Except for the historical information contained herein, the
matters discussed in this Quarterly 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 Company's Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on
July 14, 1999.
PAGE
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and
March 31, 1999 4
Consolidated Statement of Operations for the three 5
months ended June 30, 1999 and 1998
Consolidated Statement of Cash Flows for the three 6
months ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial 12
Condition and Result of Operations
PART II. OTHER INFORMATION 19
Item 1 Legal Proceedings 19
Item 2 Changes in Securities and Use of Proceeds 19
Item 3 Defaults upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 20
<TABLE>
<CAPTION>
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------
June 30, 1999 March 31, 1999
------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 989,815 $ 2,093,141
Prepaid expenses and other current assets 70,056 38,805
------------ -----------
Total current assets 1,059,871 2,131,946
Investments in and advances to unconsolidated subsidiary 2,462,607 2,496,480
Property, plant and equipment, net 84,533 96,926
Loans receivable 175,000 -
Office lease deposit 55,733 55,733
------------ ------------
TOTAL ASSETS $ 3,837,744 $ 4,781,085
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 481,955 $ 439,195
Accrued expenses 353,774 528,548
------------ -------------
TOTAL LIABILITIES 835,729 967,743
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock: authorized 10,000,000 shares:
Series E Convertible Preferred Stock: $.001 par value; 74 shares
issued, 19.4 and 29.8 shares outstanding at June 30, 1999 and
March 31, 1999, respectively 1 1
Series G Convertible Preferred Stock: $.001 par value; 20
shares issued and outstanding at June 30, 1999 and March 31,
1999, respectively 1 1
Common stock: $.001 par value, authorized 100,000,000 shares;
32,015,468 and 30,736,721 issued and outstanding at June 30,
1999 and March 31,1999, respectively 32,015 30,737
Additional paid-in capital 37,067,550 36,947,244
Accumulated deficit (34,579,402) (33,646,491)
Warrants 481,850 481,850
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 3,002,015 3,813,342
------------ --------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 3,837,744 $ 4,781,085
============ ============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended June 30
------------------------------------
1999 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $ - $ -
----------- ------------
EXPENSES
Selling, general and administrative 835,135 1,049,422
----------- ------------
LOSS FROM OPERATIONS (835,135) (1,049,422)
----------- -------------
OTHER (EXPENSE) INCOME:
Amortization of stock options granted to non-employees - (229,688)
Other - net 28,207 4,810
----------- ------------
Total other expense 28,207 (224,878)
----------- ------------
LOSS BEFORE EQUITY IN LOSSES OF
UNCONSOLIDATED SUBSIDIARY (806,928) (1,274,300)
Equity in losses of unconsolidated subsidiary (33,873) (167,563)
----------- ------------
NET LOSS (840,801) (1,441,863)
PREFERRED STOCK DIVIDEND 92,110 402,421
----------- -----------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (932,911) $(1,844,284)
=========== ============
BASIC LOSS PER COMMON SHARE $ (0.03) $ (0.06)
============ =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 31,744,642 30,382,177
========== ===========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended June 30
-----------------------------
1999 1998
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (840,801) $ (1,441,863)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred option cost - 229,687
Depreciation 11,386 11,072
Loss on disposal of fixed assets 508 -
Equity in losses of unconsolidated subsidiary 33,873 167,563
(Increase) decrease in:
Accounts receivable - (3,594)
Prepaid expenses and other current assets (31,251) 65,197
Office lease deposit - 55,186
Increase (decrease) in:
Accounts payable and accrued expenses (62,017) 30,019
-------- --------
Net cash used in operations (888,302) (886,733)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property and equipment 500 (8,123)
Loans receivable (175,000) -
--------- --------
Net cash used in investing activities (174,500) (8,123)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock buy back (65,024) -
Proceeds from exercise of employee stock options 24,500 -
-------- -------
Net cash used in financing activities (40,524) -
--------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,103,326) (894,856)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,093,141 2,134,662
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 989,815 $ 1,239,806
========== ===========
See notes to consolidated financial statements.
</TABLE>
AMTEC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- ---------------------------------------------------------------------------
SUPPLEMENTAL CASH INFORMATION:
No interest or income taxes were paid during the first three months of
fiscal 1999 or 1998.
NON CASH FINANCING ACTIVITIES:
Quarter ended June 30, 1999
10.36 shares of Series E Convertible Preferred Stock were converted into
1,178,747 shares of common stock.
A total of 80,000 shares of Common Stock were issued to officers of the
Company as stock awards pursuant to their employment agreements.
Quarter ended June 30, 1998
Shareholder loans payable of $1,452,553 and related accrued interest of
$906,488 were credited to Additional paid-in capital.
5 shares of Series E Convertible Preferred Stock were converted into
450,556 shares of common stock.
Warrants valued at $222,500 were cancelled and credited to Additional
paid-in capital.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements at June 30, 1999 are
unaudited and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial
position and operating results for the interim period. All of the
adjustments are of a normal recurring nature. The consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto together with
management's discussion and analysis of financial condition and
results of operations, contained in the Annual Report on Form 10-K
filed by the Company on July 14, 1999 for the Company's fiscal
year ended March 31, 1999. The results of operations for the three
months ended June 30, 1999 are not necessarily indicative of the
results for the entire year ending March 31, 2000.
Basis of Presentation - The accompanying financial statements have
been prepared in conformity with generally accepted accounting
principles. Realization of a major portion of the assets in the
accompanying balance sheet is dependent upon the Company's
existing projects developing profitable operations.
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND EQUITY METHOD OF ACCOUNTING
Consolidation - The consolidated financial statements include the
Company's wholly- owned subsidiary, ITV Communications, Inc. All
significant intercompany accounts and transactions are eliminated
in consolidation.
Equity Method of Accounting - The Company accounts for its
subsidiary Hebei United Telecommunications Equipment Co., Ltd. and
subsidiary ("Hebei Equipment") (a limited life Sino-foreign joint
venture) using the equity method of accounting, as minority
shareholders of Hebei Equipment have substantive participating
rights under the joint venture contract. The Company reports its
investment in Hebei Equipment under the caption Investment in and
advances to unconsolidated subsidiary. Under the equity method,
the investment is carried at cost of acquisition, plus the
Company's equity in undistributed earnings or losses since
acquisition. Equity in the losses of the unconsolidated subsidiary
is recognized according to the Company's percentage ownership in
the unconsolidated subsidiary until the Company's contributed
capital has been fully depleted. Reserves are provided where
management determines that the investment or equity in earnings is
not realizable. For the period ended March 31, 1999, the Company
used an ownership percentage of 70% for purposes of calculating
the share of earnings of its unconsolidated subsidiary, Hebei
Equipment. Hebei Equipment owns 51% of Hebei United
Telecommunications Engineering Company, Ltd. ("Hebei
Engineering"). Hebei Equipment also accounts for its investment in
Hebei Engineering by using equity method of accounting as minority
shareholders of Hebei Engineering have substantive participating
rights under the joint venture contract.
Included in the financial statements are the financial statements
of the Company for the three months ended June 30, 1999 and 1998.
The Company's share of equity in losses of Hebei Equipment
included in the consolidated financial statements are as of and
for the quarter ended March 31, 1999 and 1998. By doing that, the
Company can ensure that delays in receiving information from China
would not cause problems for the Company in meeting its reporting
deadlines. However, the Company does monitor events in the lag
period and, where appropriate, would disclose the occurrence of
any significant event during such lag period. The summary
financial information of Hebei Equipment and Hebei Engineering
were included in Note 6 to the financial statements.
NOTE 3 - ASSETS
The consolidated balance sheet includes total current assets of
approximately $1.1 million and total assets of approximately $3.8
million. Of these amounts, approximately $1.0 million of cash is
planned for parent company operations, approximately $2.5 million
represents an investment in and advance to Hebei Equipment and
approximately $0.2 million represents a loan receivable from
IXS.NET, a private IP fax service provider, for the development of
IP fax services in Asia.
NOTE 4 - LIABILITIES
The consolidated balance sheet includes total liabilities of
approximately $0.8 million. Approximately $0.5 million were
accounts payable which are mainly legal and professional fees
payable. Other liabilities were approximately $0.3 million accrued
expenses which are primarily provisions made in the prior quarter
for settling a complaint by a stockholder and accrued compensation
expenses for stock awards given to some officers pursuant to
service agreements.
NOTE 5 - CHANGES TO EQUITY
The decrease in Stockholders' Equity of approximately $0.8 million
for the quarter ended June 30, 1998 was primarily the result of a
loss for the quarter of approximately $0.9 million.
During the quarter ended June 30, 1999, the Company issued
1,178,747 shares of its Common Stock upon the conversion of 10.36
shares of its Series E Convertible Preferred Stock.
On September 14, 1998 the Company announced its intention to
purchase up to $1 million of its common stock on the open market.
During the quarter ended June 30, 1999, the Company purchased
50,000 shares under this program for a total cost of approximately
$65,000. All the common stock repurchased was cancelled as of June
30,1999.
During the quarter ended June 30, 1999, the Company issued 70,000
shares of its Common Stock upon the exercise of stock options by a
former employee. The Company also issued 80,000 of its Common
Stock as stock awards to some of its officers pursuant to their
employment agreements.
NOTE 6 - UNCONSOLIDATED SUBSIDIARIES
The following tables represent summary financial information of
the Company's subsidiary, Hebei Equipment, and its indirect
subsidiary, Hebei Engineering, for the Company's quarters ended
June 30, 1999 and 1998:
QUARTER ENDED QUARTER ENDED
JUNE 30, 1999 JUNE 30, 1998
UNAUDITED UNAUDITED
HEBEI EQUIPMENT
Revenues $ - $ -
========= ===========
Net loss $ (48,389) $ (239,376)
========== ===========
HEBEI ENGINEERING
Revenues $ 338,313 $ 198,623
========= ==========
Net loss $ (316,100) $ (429,428)
=========== ===========
NOTE 7 - SIGNIFICANT TRANSACTIONS
On August 27, 1998 the Company signed an agreement with a
subsidiary of Global TeleSystems, Inc. ("GTS"), under which a
subsidiary of GTS will acquire approximately 5.9 million shares of
the Company's common stock and the Company, through a subsidiary,
will acquire GTS's 75% interest in a Shanghai-based joint venture.
This joint venture hold the rights to a majority share of the cash
flow generated by Shanghai VSAT Network Systems (SVC), the premier
satellite-based telecommunications network operator in China.
The consummation of this transaction with GTS is subject to
various conditions, including receipt of necessary governmental
approvals and other customary closing conditions. In addition,
under the American Stock Exchange guidelines the Company will be
required to obtain shareholder approval for the number of shares
related to this issuance that are in excess of 19.9% of the Common
Stock outstanding on the date of issuance. Once all of the
conditions in China necessary for the consummation of the
transaction are completed, the Company's shareholders will be
asked to approve the necessary increase in the shares to be issued
for such transaction. At present, GTS is working to complete the
pre-closing conditions in China, including obtaining the necessary
governmental approvals. The successful completion of this merger
is subject to final due diligence and shareholder approval, among
other conditions.
On December 23, 1998, the company signed an agreement with UIHH,
an indirect subsidiary of United International Holdings, Inc.,
under which AmTec will issue to UIHH's direct parent company $12
million of convertible preferred stock ("Series F Shares") in
exchange for 100% of the common stock of UIHH. UIHH holds a 49%
interest in a Sino-foreign joint venture with the Broadcasting
Bureau of Hunan, the monopoly cable television operator in Hunan
Province, People's Republic of China.
The consummation of this transaction with UIHH is subject to
various conditions, including receipt of necessary governmental
approvals and other customary closing conditions. In addition,
under the American Stock Exchange guidelines the Company will be
required to obtain shareholder approval for the number of Common
Stock related to this issuance that are in excess of 19.9% of the
Common Stock outstanding on the date of issuance. Once all of the
conditions in China necessary for the consummation of the
transaction are completed, the Company's shareholders will be
asked to approve the necessary increase in the shares to be issued
for the transaction. At present, UIH is working to complete the
pre-closing conditions in China, including necessary governmental
approvals. The successful completion of this merger is subject to
final due diligence and shareholder approval, among other
conditions.
NOTE 8 - NEW ACCOUNTING STANDARD NOT YET ADOPTED
The Financial Accounting Standards Board has issued a new standard
SFAS No. 133 "Derivative Instruments and Hedging Activities",
which is effective for fiscal years beginning after July 1, 2000.
Management has not yet completed the analysis of the impact this
would have on the financial statements of the Company and has not
adopted this standard.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
AmTec, Inc. ("AmTec" or "the Company") is a company that provides
value-added telecommunications services to and from the Far East and has
telecommunications investments in the People's Republic of China (the "PRC"
or "China"). The Company initially focused its business on China because of
that country's large and rapidly growing need for telecommunications
services, requirement for foreign capital and technology to meet that need,
and the opportunity to obtain cash flow sharing and technical services
agreements with operators who hold exclusive or semi-exclusive
communications licenses.
In their first three years, the Company's joint venture operations have
launched six cellular telephone networks with 38,000 subscribers in the
northeastern province of Hebei, which has a population of approximately 65
million people. The Company is using its presence in China to expand to
other telecom services and other international markets. It has formed a
joint venture, IP.TEL, with Fusion Telecommunications International which
provide telecom services, both voice and data, to and from Asia; it has
convertible debt investment in and partnered with IXS.NET, Inc. to provide
fax services over the Internet, prepaid credit cards and other Internet
Protocol ("IP") based services to worldwide markets including Asia, South
America, Europe and the United States of America; and it is expanding its
joint ventures in China to provide IP fax, voice and other services which
can be transmitted over digital telephone lines or the Internet. Expansion
via joint ventures in voice and data telecommunications services and the
internet in international markets are the key components of the Company's
future business strategy.
JOINT VENTURES
AmTec holds a 70% interest in Hebei United Telecommunications Equipment
Company Limited ("Hebei Equipment"), a Sino-foreign joint venture with a
wholly-owned subsidiary of the Electronics Industry Department of Hebei
Province. Hebei Equipment, in turn, holds a 51% interest in Hebei United
Telecommunications Engineering Company Limited ("Hebei Engineering"), a
joint venture with NTT International ("NTTI") and Itochu Corp. Both Hebei
Equipment and Hebei Engineering are organized as Sino-foreign equity joint
ventures under the laws of China and are headquartered in Shijiazhuang, the
capital of Hebei Province. In addition to developing cellular networks in
Hebei Province, these joint venture operations will provide
telecommunications services over the Internet in Sichuan Province (with a
population of over 110 million) and are in the process of expanding to
other markets.
AmTec holds a 50% interest in IP.TEL, LLC, ("IP.TEL") a joint venture with
Fusion Telecommunications International, Inc. ("Fusion"), a private
facilities-based, multinational long-distance company. Fusion's current
service offerings include voice and data, switched and dedicated, domestic
and international long-distance and domestic and international prepaid
calling cards, provided through a network of owned and leased facilities,
leased lines and resale agreements. IP.TEL will provide value-added
telecommunication services, including telephony and data, to and from Asia.
Utilizing the Company's established presence in China and Fusion's
telecommunication franchise, the companies plan to expand the service
offerings of IP.TEL to include a fully integrated Internet protocol based
network to provide voice and fax services. The joint venture agreement
includes language that gives both parties the right of first refusal
regarding projects in China within the scope of IP.TEL, LLC's business
proposition.
During May 1999, the Company formed a three-way alliance with Fusion and
IXS.NET, a private IP fax service provider, to develop IP fax services in
Asia. The Company and Fusion agreed to make an equal convertible debt
investment into IXS.NET and the Company has an option to acquire up to 50%
of IXS.NET. The Company has invested $175,000 under a loan agreement to
IXS.NET and has entered into an eighteen month convertible debt agreement.
The convertible debt agreement allows for the Company to advance up to
$575,000 over the eighteen months period, subject to certain terms and
conditions. The business is in the process of starting up in Hebei Province
as per an arrangement with Hebei Equipment. During the next quarter, the
Company anticipates obtaining licenses to expand the service in Sichuan,
Beijing, Tanjin and other provinces in China.
The IXS.NET business equips a local business with a modem that transfers
international fax calls through a local phone call on the PSTN to an
Internet node in the city of origin, then transmits the fax on the Internet
internationally to the city of destination, converts the fax call to a
local telephone call in the city of destination on city's PSTN which is
transmitted to the destination fax telephone number. This model saves the
standard international telephone phone call charges, which are very
expensive to and from China. This business model can result in a
significant savings to any business that faxes internationally on a regular
basis. There are other competitors offering similar or essentially the same
service in China and there can be no assurance that the Hebei
Equipment-IXS.NET joint venture will be profitable.
According to the International Data Corporation, the Asia/Pacific Rim will
lead the global Internet fax market with a 169% compound annual growth
rate, boosting regional volume from approximately 350 million minutes in
1999 to an estimated 4.3 billion minutes in 2002. In the Internet Fax
arena, China is already the leading national market and is forecasted to
supplant Japan as the new leader in overall Asian fax traffic. Traditional
faxing remains very expensive because deregulation and competition has yet
to eliminate high long-distance phone rates. The IXS.NET joint venture
allows the Company to capitalize on this opportunity.
CELLULAR TELEPHONE NETWORKS
Currently, legal restrictions in China prohibit foreign participation in
the operation and ownership of communications networks. Therefore, the
Company has established majority ownership in joint ventures with Chinese
and other partners to provide financing, network construction and
operational consulting services to licensed Chinese network operators.
Substantially all of the Company's revenues are derived from contractual
arrangements for the sharing of cash flow generated from network operations
rather than from ownership or operation of the networks. Until regulations
in China change to permit direct foreign ownership and operations of
communications networks, all future revenues of the Company will continue
to be derived from these contractual arrangements.
Through Hebei Engineering, an indirect equity investee of the Company,
AmTec entered into an agreement (the "Unicom Agreement") on February 9,
1996 with China United Communications Company ("Unicom") to (i) finance and
assist Unicom in the construction of cellular networks (the "GSM Networks"
or "GSM Project") in the ten largest cities in Hebei Province and (ii)
provide consulting and management support services to Unicom in its
operation of the GSM Networks in the 10 largest cities of Hebei Province.
This GSM Project will have a capacity of up to 70,000 subscribers. Hebei
Engineering has been entitled to 78% of the distributable cash flow
(defined as activation charges plus depreciation plus net income) from the
GSM Networks for a 15-year period commencing February 9, 1996.
The construction and operational plan for the GSM Networks consists of a
"roll-out" across Hebei Province on a city-by-city basis. As of June 20,
1999 six cities, were providing commercial service, with approximately
38,000 subscribers; construction in one additional city was substantially
completed, with a commercial launch date scheduled during 1999.
As of June 30, 1999, construction of the GSM Networks had been financed by
Hebei Engineering with $3 million of equity capital, approximately $11
million of vendor financing guaranteed by NTTI, and a $21.5 million Term
Loan facility from Bank of Tokyo Mitsubishi also guaranteed by NTTI and Ito
Chu.
Achievement of the Company's business objectives is dependent upon Unicom's
operation of the GSM Networks, among other factors. The implementation of
the GSM Networks involves systems design, site procurement, construction,
electronics installation, initial systems optimization and receipt of
necessary permits and business licenses prior to commencing commercial
service. While no major difficulties have been encountered to date in
launching the six networks now operating, absence of difficulties in
launching additional networks can not be assured.
LEGAL & REGULATORY RISKS
The PRC's legal system is a civil law system based on written statutes and
is a system in which decided legal cases have little precedential value.
The PRC Government began to promulgate a comprehensive system of laws in
1979. Many laws and regulations governing economic matters in general have
been promulgated. The general effect of this legislation has been to
enhance the protection afforded to foreign invested enterprises in the PRC.
However, as these laws and regulations are relatively new, their
interpretation and enforcement involve significant uncertainty.
The current PRC regulations prohibit foreign investors and foreign invested
enterprises from operating or participating in the operation of
telecommunications networks in China. The relevant PRC laws and regulations
do not define what constitutes foreign operations or participation in
operations, and it is not clear what rights or actions would violate such
laws and regulations. Based on advice of its Chinese legal counsel,the
Company has structured its investments in China by establishing
Chinese-foreign joint ventures in the PRC to provide financing and
consultancy services to licensed telecommunications operators, i.e.,
utilizing the commonly-known Chinese-Chinese-Foreign ("CCF") structure. The
PRC Government is currently undertaking a review of the CCF structure used
by Unicom. It has been reported that Unicom has been instructed by the PRC
Government not to use the CCF structure in the future and that the PRC
Government is examining and evaluating the existing CCF contracts. It is
unclear if, and to what extent, the existing CCF contracts entered into by
Unicom will be required to be amended. It is also unclear whether foreign
entities involved in the CCF structures will be required to divest
themselves of all or part of their respective interests in the
Chinese-foreign joint venture companies. The evaluation of the CCF
structure by the PRC Government may have a material adverse impact on the
contracts entered into by Hebei Engineering and by the Company which
utilize the CCF structure and may have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is aware that there have been press reports about China Unicom
attempting an initial public offering of stock and that it has been
delayed. In addition, and possibly related to the China Unicom initial
public offering, press reports indicate that some foreign investors in
Chinese-Chinese-Foreign Joint Ventures have received letters indicating
that their continued investment in such joint ventures would be terminated
and that their investment plus a calculated return on the investment would
be returned. The Company understands that there are approximately forty
Unicom joint ventures with foreigners. The Company does not know the nature
of each of these investments, nor whether the few that have reported they
have received notices of termination were distinguishable in any way from
the others.
The Company's joint ventures have received no termination notice at this
time. If the Company were to receive such a notice it could have a material
adverse affect on the Company's Hebei Engineering joint venture
investment's future profitability from the cellular telephone networks. By
contrast, as of August 20, 1999 the Company and its Chinese Partner, Hebei
Development Corporation, who own Hebei Equipment were in preliminary
conversations to increase their percentage of equity ownership in Hebei
Engineering by purchasing the ownership interests of NTTI and Itochu, and
to obtain bank financing to acquire this additional percentage.. There can
be no certainty that these conversations will lead to an increase in the
Hebei Equipment `s ownership of Hebei Engineering or the timing of such a
possible increase, the certainty of bank financing or the final structure
or timing of the possible transaction. These negotiations are ongoing at
the present time.
Alternatively, were the Company to receive a notice that it's joint venture
were being terminated and its investment returned plus a rate of return,
the Company would attempt to negotiate the highest possible cash settlement
for the buy out. This would result in a return of AmTec cash currently held
in Chinese banks and eventual payment of cash compensation to AmTec. There
would not be a material change to the Company's balance sheet because its
investments were shown on the equity method of accounting. If this were to
happen, the Company would reinvest the cash received into its IP.TEL and
IXS.NET international telephone services business. This may provide working
capital and lessen the Company's needs to externally finance these
businesses, which are the most rapidly growing segments of its businesses.
There can be no assurance that cash compensation from the termination of
Hebei Engineering will be forthcoming and the amount of the cash the
Company would receive due to such termination and the timing of such an
occurence is not known at this time.
In order to provide a uniform regulatory framework to encourage the orderly
development of the PRC telecommunications industry, the PRC authorities are
currently preparing a draft Telecommunications Law. Once formulated, the
draft law will be submitted to the National People's Congress for review
and adoption. It is unclear if and when the Telecommunications Law will be
adopted. The nature and the scope of the regulation envisaged by the
Telecommunications Law is not fully known but the Company believes that, if
adopted, the Telecommunications Law will have a positive effect on the
overall development of the telecommunications industry in the PRC. However,
the Telecommunications Law, if adopted, may have an adverse effect on the
Company's business, financial condition or results of operations.
The Chinese laws and regulations governing the telecommunications industry
may also be changed or applied in a manner which would have a material
adverse effect on the business, financial condition and results of
operations of the Company.
During the Spring of 1999, the PRC started negotiating accession to the
World Trade Organization ("WTO"). While there is no assurance that China
will join the World Trade Organization, all parties have publicly expressed
the intention of attempting to negotiate an agreement to be concluded
before the WTO ministerial in December 1999. The PRC has confirmed that its
proposed concessions to gain admission that were published in the press
were accurate. If the PRC were to join the WTO, the Telecommunication
Protocol of the WTO Agreement assures certain national treatment of foreign
investors in the telecommunications sector, including minimum direct
ownership percentages in licensed telecommunication operators.
The PRC's pending application to the WTO, the evaluation of the CCF
structure by the government, the draft Telecommunications Law, which may be
substantially affected by a PRC agreement to join the WTO, plus the
procedural issues relating to the establishment of Hebei Equipment and its
investment in Hebei Engineering, create uncertainty. Resolution of these
matters may materially adversely affect the Company's current or future
investments in China and its provision of telecommunication services to
China. The Company believes that most, if not all, foreign
telecommunications investors in the CCF structure face similar
uncertainties at this time, and are awaiting resolution of these questions.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AS COMPARED
TO THE THREE MONTHS ENDED JUNE 30, 1998.
The Company's indirect subsidiary, Hebei Engineering, recorded revenues of
RmB 2,808,000 (approximately $338,000) for the three months ended June 30,
1999, and RmB 1,648,000 (approximately $198,000) for the three months ended
June 30, 1998. The Company has no revenues on its consolidated financial
statements because the results of operations of the Company's subsidiary
Hebei Equipment were accounted for under the equity method of accounting.
The Company recorded only its share of losses of its unconsolidated
subsidiary according to the percentage of its equity interest. The Company
had net losses of $840,801 and $1,441,863 during the quarters ended June
30, 1999 and 1998, respectively.
Selling, general and administrative expenses decreased from approximately
$1.0 million during the three months ended June 30, 1998 to approximately
$0.8 million during the three months ended June 30, 1999. The decrease
primarily attributed to a reduction in legal and professional fee related
to the GTS and UIHH merger transactions during the three months ended June
30, 1999.
The Company reported assets of approximately $3.8 million at June 30, 1999,
a decrease of approximately $0.9 million from March 31, 1999. This decrease
primarily related to the funding of current operations using cash and the
cash payment made for existing accounts payable.
The consolidated balance sheet of the Company included total liabilities of
approximately $0.8 million as of June 30, 1999 compared to approximately
$1.0 million as of March 31, 1999. The decrease in liabilities primarily
relates to additional payment made during the quarter on some accrued
expenses and the reversal of some accrued compensation expenses upon the
issuance of stock awards in June 1999.
The Company's loss before preferred stock dividends decreased from
approximately $1.4 million during the three months ended June 30, 1998 to
approximately $0.8 million during the three months ended June 30, 1998. The
decrease in net loss primarily relates to a decrease in general and
administrative expenses of approximately $0.2 million, a decrease of
approximately $0.2 million amortization of Non-employee deferred option
costs and a decrease of approximately $0.1 million in equity in losses of
unconsolidated subsidiary.
Stockholders' Equity decreased by approximately $0.8 million from March 31,
1999 to June 30, 1999, as a result of a loss for the quarter of
approximately $0.9 million and an increase in Additional paid-in capital of
approximately $0.1 million related to issuance of AmTec's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company had an operating loss of approximately $0.8 million and a loss
applicable to common shares of $0.9 million during this period. While the
Company expects to achieve profitable operations within several years,
there can be no assurances that the Company will achieve this goal. The
Company has financed its current activities primarily through private
equity placements.
During the three months ended June 30, 1999, the Company's cash decreased
by approximately $1.1 million, primarily due to cash used to fund current
operations and loans to IXS.NET. The Company is expecting repayment of some
of its advances to its subsidiary during the next quarter. The Company also
expects receipts of equity income distributons from its joint venture with
Fusion during the current fiscal year. The Company's direct cash position
is expected to be sufficient to support operations of the Company through
April 1, 2000.
EQUITY ISSUANCE
The Company issued 1,178,747 shares of its Common Stock during its first
three months upon conversion of 10.36 shares of the Company's Series E
Convertible Preferred by certain holders of the Series E Shares. In
addition, the Company issued 70,000 shares of its Common Stock during the
same period upon the exercise of stock options by a former employee. The
Company also issued 80,000 shares of its Common Stock during the same
period as stock awards granted to some of its officers pursuant to their
employment agreements.
IMPACT OF THE YEAR 2000
The "Year 2000" problem is the result of computer programs being written
using two digits, rather than four digits, to define the applicable year.
Any of the programs used in the Company's operations that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Company has previously instituted a thorough
program to identify these computer programs and modify or replace its key
financial information and operational systems so that they will function
properly in the year 2000. Remaining financial and operational systems have
been assessed, and detailed plans have been developed and are being
implemented to make the necessary modifications to ensure Year 2000
compliance. The financial impact of making the required system changes for
Year 2000 compliance are not expected to have any material effect on the
Company's financial statements.
However, even as the Company's assessment is completed without identifying
any material non-compliant systems operated by, or in the control of, the
Company, or of third parties, the most reasonable likely worse case
scenario would be a systems failure beyond the control of the Company to
remedy. Such a failure could materially prevent the Company from operating
its business. The Company believes that such a failure could lead to lost
revenues, increased operating cost, or other business interruptions of a
material nature.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the
Quarter ended June 30, 1999.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the Quarter
ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: August 23, 1999 AmTec, Inc.
By: /s/ Joseph R. Wright, Jr.
---------------------------
Joseph R. Wright, Jr.
Chief Executive Officer
By: /s/ Wilfred Chow
---------------------------
Wilfred Chow
Principal Financial and
Accounting Officer
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<PERIOD-END> JUN-30-1999
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