UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment Number 3)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998.
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
------------------- ---------------------
Common Stock, $0.001 par value per share American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Indicate by check mark whether the registrant: (i) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The issuer has no revenue for the fiscal year ended March 31, 1998.
The number of shares outstanding of the registrant's common stock as of
June 26, 1998 was 26,998,076 shares. The aggregate market value of the
common stock (26,346,996 shares) held by non-affiliates, based on the
closing price ($1.3125) of the common stock as of June 26, 1998 was
approximately $34.6 million.
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995.
Except for the historical information contained herein, the matters
discussed in this Annual Report are forward-looking statements which
involve risks and uncertainties, including but not limited to economic,
competitive, governmental, international and technological factors
affecting the Company's revenues, joint ventures, operations, markets and
prices, and other factors discussed in this Annual Report.
INTRODUCTORY NOTE
This Second Amendment to the Company's annual report on Form 10-K
for the fiscal year ended March 31, 1998 amends such report, as amended by
Amendment No. 1 thereto filed on April 7, 1999 and is being filed to
reflect the restatement of the Registrant's Consolidated Balance Sheet,
Statements of Operations and Statement of Cash Flow ("the restatement").
Subsequent to the issuance of the Registrant's financial statements
for the year ended March 31, 1998, the Registrant determined that the sale
of one of its subsidiary's ("ITV") businesses should have been accounted
for using accounting for discontinued operations. Previously, the result of
ITV's business was included in the financial statements as part of
continuing operations for the year ended March 31, 1996. As a result, the
Statement of Operations and Statement of Cash Flow for the year ended March
31, 1996, have been restated to show the effect of such discontinued
operations.
The Registrant also determined that one of its subsidiaries should
have been accounted for under the equity method of accounting, as the
minority shareholders have substantive participating rights under the joint
venture contracts. Previously, its subsidiary had been consolidated. As a
result, the financial statements as of March 31, 1998 and 1997, and for the
two years ended March 31, 1998, have been restated from amounts previously
reported to account for its subsidiary under the equity method of
accounting.
Unless otherwise noted, all information provided in this Annual
Report is current as of June 26, 1998, the original filing date of the Form
10-K. Information regarding recent events at the Registrant can be obtained
from reports filed by the Registrant with respect to its activities during
1998, including the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1998, September 30,1998 and December 31, 1998 and
Note 14, Note 15 and Note 16 to the consolidated financial statements of
the Registrant included herewith.
PART I
ITEM 1. BUSINESS
AmTec, Inc. ("AmTec" or "the Company") is a telecommunications company with
investments in the People's Republic of China ( the "PRC" or "China"). The
Company has focused its investments on China because of China's large and
rapidly growing need for telecommunications services, China's 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. The
Company's joint venture operations primarily consist of a series of
cellular telephone networks in the northeastern province of Hebei, which
has 11 major cities and a population of approximately 65 million people. In
addition, the Company has interests in other projects and networks in
various stages of development, including a multimedia network for cable
television programming transmission. Developing existing network interests
and obtaining additional interests in communications networks in China in
the future are key components of the Company's business strategy.
CHINA TELECOMMUNICATIONS MARKET
Through the Company's interest in cellular telephone networks in Hebei
Province and relationships that the Company has developed with key policy
makers and decision makers in Chinese governmental agencies, AmTec has
focused its business to capitalize on the growth of the Chinese
telecommunications market, which is among the world's largest, fastest
growing, and most under-serviced telecommunications markets. Due to the
importance of a well-developed communications infrastructure to China's
continuing economic development, the PRC government has targeted
communications network development as a high priority in the country's
economic reform program. It is expected that before the year 2000, China
will surpass the United States as both the largest cellular telephone and
cable television markets in the world.
Since the establishment of China United Telecommunications, Incorporated
("UNICOM") in 1994, China has had only two licensed competitors for
cellular, fixed wire and long-distance telephony. The cable television
market in China is a monopoly run by the Ministry of Information Industry,
which also regulates telecommunications in China. While other
communications markets in China have experienced greater competition, most
notably paging and value-added services, communications licenses have
generally been limited to a small number of competitors relative to markets
in the United States. The Company believes that both the overall market
size and the environment of limited competition are attractive aspects of
the Chinese communications market.
Although Chinese regulations currently prohibit direct foreign ownership or
operation of communications networks, the regulatory environment has shown
recent indications of continuing a policy of partial deregulation. And
while there can be no assurance that this policy of partial deregulation
will continue, the Company believes that it is well-positioned to benefit
from deregulation permitting direct foreign ownership and operation of
communications networks, if such deregulation were to occur in the future.
JOINT VENTURES IN CHINA
AmTec holds a 70% interest in Hebei United Telecommunications Equipment
Company Limited ("Hebei Equipment"), a joint venture with a wholly owned
subsidiary of the Electronics Industry Department of Hebei Province. Hebei
Equipment, in turn, holds a 51% interest in Hebei United Telecommunications
Engineering Company Limited ("Hebei Engineering"), a joint venture with NTT
International ("NTTI") and Itochu Corp. Due to certain participating rights
held by the minority partners of each joint venture, the Company accounts
for its investment in Hebei Equipment, and Hebei Equipment accounts for its
investment in Hebei Engineering, by the equity method of accounting. 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.
CELLULAR TELEPHONE NETWORKS
Currently, legal restrictions in China prohibit foreign participation in
the operation and ownership of communications networks. Therefore, the
Company has established majority ownership in joint ventures with Chinese
and other partners to provide financing, network construction and
operational consulting services to licensed Chinese network operators.
Hebei Engineering, entered into an agreement (the "UNICOM Agreement") on
February 9, 1996 with UNICOM to (i) finance and assist UNICOM in the
construction of cellular networks (the "GSM Networks" or "GSM Project") in
the ten largest cities in Hebei Province and (ii) provide consulting and
management support services to UNICOM in its operation of the GSM Networks
in the 10 largest cities of Hebei Province. This GSM Project will have a
capacity of up to 70,000 subscribers. The first of these networks commenced
operations in February 1997. Hebei Engineering is 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 26,
1998 two cities, Shijiazhuang and Tangshan, were providing commercial
service, with approximately 11,000 subscribers; construction in five
additional cities was substantially completed, with commercial launch dates
scheduled during 1998 for these additional five cities.
As of March 31, 1998, construction of the GSM Networks had been financed by
Hebei Engineering with $3 million of equity capital, approximately $11
million of vendor financing guaranteed by NTTI, and a $20 million Term Loan
facility from Bank of Tokyo Mitsubishi also guaranteed by NTTI and ItoChu.
Of the $3 million of equity raised by Hebei Engineering, $1.17 million was
contributed by Hebei Equipment.
Realization of the Company's investment in its SFJVs 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. Each stage can involve various risks and
contingencies, the outcome of which cannot be predicted with a high degree
of assurance as interconnection of the GSM Networks with the public
switched telephone network is sometimes difficult and time consuming, and
the successful completion of all planned sites of the GSM Networks will be
dependent, to a significant degree, upon the ability of the parties to
lease or acquire sites for the location of their base station equipment.
While no difficulties have been encountered to date in procuring such
sites, future site acquisition can not be assured.
COMPETITION
UNICOM currently faces competition from China Telecom, which has
substantially more experience in operating cellular telephone networks,
greater financial resources, scientific and marketing personnel and
facilities. China Telecom is the operating organization of the former
Ministry of Posts and Telecommunications ("MPT"), previously the
telecommunications policy setting and regulatory arm of the Chinese
government.
China Telecom has a dominant market share in all sectors of
telecommunications in China, and already has established a fixed-wire
network in the country. Formerly the MPT regulated and licensed all
telecommunications networks in China, including network access, and the
ability to make important regulatory decisions with respect to China
Telecom's competitors. Although the MPT has been abolished and succeeded by
the Ministry of Information Industry ("MII"), there can be no assurance
that the new regulatory structure for telecommunications operations in
China (i) will be more favorable to UNICOM or the Company or (ii) will not
be adverse to UNICOM's operations in Hebei. In addition, new competitors
may enter the market, including Code Division Multiple Access ("CDMA")
cellular service offered by the People's Liberation Army and China Telecom
through their joint venture, Great Wall Communications Group ("Great
Wall").
At present there are four small commercial CDMA cellular trial networks
being tested by Great Wall in China. None of these commercial trial
networks are in Hebei, but there can be no assurances in the future that
Great Wall will not enter the Hebei market.
CONSTRUCTION AND OPERATION OF TELECOMMUNICATIONS NETWORKS
The telecommunications networks in the PRC which the Company's joint
ventures are currently engaged in developing may experience difficulties
and delays relating to the construction and operation of such
telecommunications networks. While UNICOM has successfully commenced
commercial operation in two cities in Hebei, and although Hebei Engineering
has substantially completed network construction in five additional cities
in Hebei, there can be no assurance that such additional networks will be
completed and that commercial operations in these five cities will
commence. Currently, Hebei Engineering has no reason to believe that such
additional networks will not commence commercial operations.
ADDITIONAL FUNDING OF JOINT VENTURE PROJECTS
At present, all network construction for a 40,000 subscriber capacity
network in seven cities in Hebei has been funded. Expansion of network
capacity from 40,000 subscribers to 70,000 subscribers will require
additional capital. Since the UNICOM Agreement contains no specified
deadline for expansion of the GSM Network to 70,000 subscribers, these
future capital requirements for the GSM Network will depend largely on the
market acceptance of the UNICOM GSM Network cellular service, among other
factors. It is anticipated that debt or equity contributions made by the
Company and its partners to the joint ventures, as well as potential
investment from third parties, will be used to increase the capacity of the
GSM Network as required.
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 their respective interests in the Chinese-foreign joint
venture companies. The evaluation of the CCF structure by the PRC
Government may have a material adverse impact on the contracts entered into
by Hebei Engineering and by the Company which utilize the CCF structure and
may have a material adverse effect on the Company's business, financial
condition and results of operations.
In order to provide a uniform regulatory framework to encourage the
orderly development of the PRC telecommunications industry, the PRC
authorities are currently preparing a draft Telecommunications Law. Once
formulated, the draft law will be submitted to the National People's
Congress for review and adoption. It is unclear if and when the
Telecommunications Law will be adopted. The nature and the scope of the
regulation envisaged by the Telecommunications Law is not fully known but
the Company believes that, if adopted, the Telecommunications Law will have
a positive effect on the overall development of the telecommunications
industry in the PRC. However, the Telecommunications Law, if adopted, may
have an adverse effect on the Company's business, financial condition or
results of operations.
The Chinese laws and regulations governing the telecommunications
industry may also be changed or applied in a manner which would have a
material adverse effect on the business, financial condition and results of
operations of the Company.
GOVERNMENT CONTROL OF CURRENCY CONVERSION AND EXCHANGE RATE RISKS
The PRC government imposes control over its foreign currency reserves, in
part through direct regulation of the conversion of Renminbi, the legal
tender currency of the PRC, into foreign exchange and through restrictions
on foreign trade.
UNICOM's revenues are denominated in Renminbi. The Company's joint ventures
will consequently receive almost all of their joint venture distributions
in Renminbi, which is freely convertible only for current accounts.
Approval of the State Administration of Foreign Exchange will be needed
under current regulations for conversion of Renminbi for foreign
currencies.
The Company believes that its SFJV will be able to obtain all required
approvals for the conversion and remittance abroad of foreign currency.
However, such approvals do not guarantee the availability of foreign
currency and no assurance can be given that the Company will be able to
convert sufficient amounts of foreign currencies in the PRC's foreign
exchange markets in the future at acceptable rates.
Although the Renminbi to US dollar exchange rate has been relatively stable
since January 1, 1994, there can be no assurance that exchange rates will
not again become volatile or that the Renminbi will not devalue
significantly against the US dollar.
During late 1997 and early 1998, there were a number of currency
devaluations in Asia and unstable and volatile capital markets and foreign
exchange markets. The PRC has not devalued the Renminbi. However, there can
be no assurances that the Renminbi will not be devalued in the future.
EMPLOYEES
As of June 26, 1998, the Company had 13 full time employees in New
York and China. The Company intends to hire additional personnel as the
development of the Company's business continues and makes such action
appropriate.
The Company employs a policy of staffing and managing its joint-venture
subsidiaries and hiring PRC nationals for its China operations. As of June
26, 1998, the Company's subsidiaries had 6 employees in Hebei Equipment and
17 employees in Hebei Engineering. It is the intention of the Company to
add employees to its Chinese subsidiaries for operational purposes.
The Company's employees are not represented by a labor union and are not
covered by a collective bargaining agreement. The Company believes that its
relations with its employees are good.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This document contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company's management as well as assumptions made by and information
currently available to the Company's management. When used in this
document, the words "anticipate," "believe," "estimate," "expect," "going
forward" and similar expressions, as they relate to the Company or Company
management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
described in this Form 10-K. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein
as anticipated, believed, estimated or expected. The Company does not
intend to update these forward-looking statements.
ITEM 2. PROPERTIES
The Company leases a 7,600 square foot office located at 599
Lexington Avenue, 44th Floor, New York, New York 10022. The facility serves
as the Company's principal executive offices. The Company pays an annual
rent of $334,400 on a lease which expires in May 2000. The Company has
obtained an option to extend the lease for an additional five year term
based on the fair market value of the leased premises at or about the time
of the expiration of the initial term of the lease.
ITEM 3. LEGAL PROCEEDINGS
A first amended complaint, dated April 15, 1996, was filed against
the Company, ITV Communications, Inc., a subsidiary of the Company ("ITV"),
and other parties, including certain of the Company's officers, directors
and principal stockholders, by Jacqueline Brandwynne, a stockholder of the
Company, in a matter captioned "Jacqueline B. Brandwynne vs. AVIC Group
International, Inc., et al," civil action number BC145036. The complaint,
filed in the Superior Court of California, County of Los Angeles, alleges
fraud, misrepresentation and breach of contract with respect to the sale of
666,667 shares of ITV stock for $1,000,000 prior to the completion of the
Reorganization Agreement between the Company and ITV (the "Reorganization
Agreement") in February 1995, in connection with which the shares of ITV
were exchanged on a two for one basis for shares of the Company. The
complaint alleges that certain misrepresentations were made in connection
with the sale of the 666,667 shares and that the claimant was entitled to
receive 666,667 shares of the Company after the completion of the
Reorganization Agreement. The complaint seeks rescission of the transaction
and damages of no less than $1,000,000. The complaint also alleges a claim
in connection with an alleged oral employment agreement for 125,000 options
to purchase shares of the Company's Common Stock at an exercise price of
$0.35 per share and the right to purchase additional shares of Common Stock
at $1.00 per share, plus other benefits, including a salary of no less than
$130,000. Management of the Company believes that these claims are without
merit, that there are valid defenses to each claim and is in the process of
vigorously defending the matter. The 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 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, 1998.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
As of June 26, 1998, the authorized capital stock of the Company
consisted of 100,000,000 shares of common stock, par value $0.001 per share
(the "Common Stock"), and 10,000,000 shares of preferred stock, par value
$0.001 per share (the "Preferred Stock"). As of June 26, 1998, there were
issued and outstanding 26,998,076 shares of Common Stock, options to
purchase 12,460,102 shares of Common Stock, 69 shares of Series E
Convertible Preferred Stock. Further, there were issued and outstanding
warrants to purchase 4,206,375 shares of Common Stock. As of June 26, 1998,
there were approximately 2,680 holders of record of the Common Stock.
The Company's Common Stock was originally listed for trading in the
over-the-counter market on March 4, 1996 under the name AVIC Group
International, Inc. and was quoted on the NASDAQ Bulletin Board or in the
"pink sheets" maintained by the National Quotation Bureau, Inc. under the
symbol "AVIC." The Company changed its listing on November 20, 1996, when
its Common Stock was approved for listing on the American Stock Exchange
under the ticker symbol "AVI." On July 8, 1997, the Company changed its
name to AmTec, Inc. and it currently trades on the American Stock Exchange
under the symbol "ATC". The high and low sales prices of the Common Stock,
as quoted on the American Stock Exchange, on June 26, 1998 were $1.375 and
$1.250, respectively.
No dividend has been declared or paid by the Company on its shares
of Common Stock since its inception. The payment of dividends by the
Company on its shares of Common Stock is within the discretion of the
Company's Board of Directors and will depend on the earnings, capital
requirements, restrictions in any future credit agreements and operating
and financial condition of the Company, among other factors. Except for
dividends which may be payable on and according to the terms of shares of
Preferred Stock, which may be issued from time to time, the Company does
not anticipate that any dividends will be declared or paid in the future.
There can be no assurance that the Company will ever pay a dividend on its
shares of Common Stock.
The following table sets forth for the period indicated the high
and low sales price of the Company's Common Stock as reported on the
American Stock Exchange.
<TABLE>
<CAPTION>
1997 1998
COMMON 1ST Q 2ND Q 3RD Q 4TH Q 1ST Q 2ND Q 3RD Q 4TH Q
STOCK PRICE ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $10.250 $5.2500 $3.7500 $6.2500 $5.1875 $3.4375 $2.4375 $1.1875
Low $ 3.560 $1.4400 $1.4400 $2.1250 $2.8125 $1.8125 $0.5000 $0.5625
</TABLE>
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(1) High and low sales price as reported on the American Stock Exchange.
The transfer agent for the Company is Chasemellon Shareholder
Services, LLC, 450 West 33rd Street, New York, New York, 10001. Its
telephone number is (800) 851-9677.
CERTAIN SALES OF UNREGISTERED SECURITIES
On October 22, 1997 the Company completed the sale of 74 shares of its
Series E Convertible Preferred Stock (the "Series E Stock" or "Series E
Shares") for gross proceeds of $7,400,000.
The Series E Shares were sold pursuant to Reg. D at $100,000 per share and
the holders of the Series E Stock have no rights to cash dividends but are
entitled to an 8% in-kind dividend. Conversion of the Series E Shares into
Common Stock is based on the lower of (i) a 10% premium to the market price
of the Company's Common Stock, as reported on the American Stock Exchange,
at the time of closing, or of a 10% premium to the 10 day average trading
price six months after the close or (ii) a discount to the lowest trade
during the five (5) trading days prior to the conversion. The discount,
which ranges from 15% to 20%, is based on the date of the shareholder's
conversion of the Series E shares, with the discount increasing as the
period the shares are held increases. The Conversion of the Series E Shares
is restricted by certain "lock-up" agreements between the Company and the
holders of the Series E Stock by which fifty shares of the Series E Shares
could not be converted prior to March 2, 1998, and the remaining twenty
four shares may not be converted prior to the first anniversary of the
close of the offering, October 22, 1998. In addition to the shares,
warrants were issued to five of the Series E Investors to purchase
1,236,346 shares of the Company's Common Stock at a price equal to 120% of
the market price of the Company's Common Stock at the time of closing based
on the amount invested by the shareholders and the length of the "lock-up"
agreed upon between the Company and certain investors. Holders of the
Series E Shares also had a registration right requiring the Company to file
a registration statement covering the Common Stock underlying the Series E
Preferred Shares and related warrants with the Securities and Exchange
Commission (the "SEC") no later than March 2, 1998. The shares were
registered on January 16, 1998.
Of the $7,400,000 gross proceeds from the sale of the Series E Shares,
approximately $641,000 was distributed as fees and expenses to a placement
agent for the offering, and the balance of approximately $6,759,000 was
held by the Company for working capital and possible investment in
additional projects. The Company also issued warrants to purchase 326,171
shares of the Company's Common Stock to the Placement Agent as fees for
services. These Warrants have an exercise price of $2.475 per share.
ITEM 6. SELECTED FINANCIAL DATA
The Company has focused its business solely on establishing
Sino-foreign joint ventures to develop telecommunications networks in the
PRC, following the sale of the assets of its subsidiary ITV Communications,
Inc. in January 1996. Accordingly, the following historical financial data
is not necessarily indicative of future results of operations. The selected
financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
1998 (1) 1997 (1) 1996 (2) 1995 1994
-------- -------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $ -0- $ -0- $ -0- $ 345,276 $ 194,885
(Loss) from continuing
operations (4,282,613) (3,563,568) (3,380,633) -0- -0-
(Loss) from discontinued
operations -0- -0- (1,932,977) (5,585,596) (3,388,833)
Gain on sale of
discontinued operations -0- -0- 31,888 -0- -0-
Net (Loss) (5,403,368) (4,064,885) (5,281,730) (5,538,303) (3,737,542)
Loss from continuing
operation per
common share (0.23) (0.14) (0.13) -0- -0-
Loss from discontinued
operation per common
share -0- -0- (0.08) (0.32) (7,475.08)
Basic Loss per common
share (0.23) (0.14) (0.21) (0.32) (7,475.08)
Total Assets 7,683,358 4,004,966 1,660,000 3,267,488 3,094,157
Shareholders' Equity
(Deficit) 4,896,911 548,088 (2,421,606) (1,255,412) 1,402,532
</TABLE>
(1) As restated, see note 15 of notes to consolidated financial statements.
(2) As restated, see note 14 of notes to consolidated financial statements.
Financial information for the years 1994, 1995 and 1996, is not
comparable to the financial information provided for 1997 and 1998, because
prior to 1997 the Company was not engaged in the development of
telecommunications networks in the PRC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company devotes substantially all of its efforts to financing
and developing Sino-foreign joint ventures to establish telecommunications
networks in the PRC.
Subsequent to the issuance of the Company's financial statements
for the year ended March 31, 1998, the Company's management determined that
the sale of ITV's business should have been accounted for as a discontinued
operations. Previously, the result of ITV's business was included in the
financial statements as continuing operations for the year ended March 31,
1996. As a result, the Statement of Operations and Statement of Cash Flow
for the year ended March 31, 1996, have been restated to show the
discontinued operations.
The Company's management also determined that Hebei Equipment
should have been accounted for under the equity method of accounting, as
the minority shareholders have substantive participating rights under the
joint venture contracts. Previously, Hebei Equipment had been consolidated.
As a result, the financial statements as of March 31, 1998 and 1997, and
for the two years ended March 31, 1998, have been restated from amounts
previously reported to account for its subsidiary under the equity method
of accounting.
INVESTMENT IN JOINT VENTURES
AmTec holds a 70% interest in Hebei United Telecommunications Equipment
Company Limited ("Hebei Equipment"), a joint venture with a wholly owned
subsidiary of the Electronics Industry Department of Hebei Province. Hebei
Equipment, in turn, holds a 51% interest in Hebei United Telecommunications
Engineering Company Limited ("Hebei Engineering"), a joint venture with NTT
International ("NTTI") and Itochu Corp. Due to certain participating rights
held by the minority partners of each joint venture, the Company accounts
for its investment in Hebei Equipment, and Hebei Equipment accounts for its
investment in Hebei Engineering, by the equity method of accounting.
As of March 31, 1998, AmTec's equity interest in Hebei Equipment was
$1,352,217 which included a total investment of $2,100,000 and its share of
equity losses in Hebei Equipment which amounted to $747,783. As of March
31, 1998, Hebei Equipment made a total investment of $1,530,000 in Hebei
Engineering and its share of equity losses in Hebei Engineering amounted to
$1,008,156.
Hebei Equipment, through its 51%-owned subsidiary, Hebei Engineering has
borrowed approximately $30,650,000 to purchase equipment which was
contributed to China United Communications Company ("UNICOM") to construct
the GSM networks in Hebei Province and has received the right to receive
future cash flow. Initially, Hebei Engineering owned 100% of the assets
prior to contributing such assets to UNICOM and once contributed, Heibei
Engineering owned and retained title to a 70% interest in the assets and
UNICOM owned and retained title to a 30% interest in the assets.
Both parties agree to distribute the profit according to the "Distributable
Cash Flow" (as defined) with 22% going to UNICOM and 78% going to Hebei
Engineering. Each year, Hebei Engineering will transfer ownership of assets
to UNICOM equal in value to the Distributable Cash Flow received up to 60%
of the assets. The maximum amount of assets transferred will not exceed 90%
of the assets until termination of the Project Cooperation Contract. Upon
the termination of the contract the remaining 10% of the network assets
shall be assigned to UNICOM without any further consideration. Hebei
Engineering will continue to receive 78% of the Distributable Cash Flow
after transfer of all the assets for the remainder of the 15-year period.
Under PRC law, foreign investment entities, such as Hebei Engineering, are
not permitted to own or operate telecommunications networks. Substantially
all of the Hebei Engineering's revenues are derived from contractual
arrangements for the sharing of cash flow from network operations rather
than from ownership or operation of the networks. Hebei Engineering has
recorded its investment (GSM Construction Costs) as a right to receive
future cash flow at cost and is amortizing the cost of these rights based
upon the greater of the amount computed using (a) the ratio that current
gross revenues from the GSM networks to the total of current and
anticipated future gross revenues from the GSM networks or (b) the
straight-line method over 15 years which was the remaining estimated
economic life of the GSM networks at the inception of this investment.
Amortization of the Investment in GSM Networks for the year ended March 31,
1998 amounted to approximately $2,183,000.
Income from the GSM networks is recognized at the time when Hebei
Engineering can estimate or calculate the portion of its Distributable Cash
Flow from the networks. UNICOM commenced operation of the GSM networks in
February 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through equity
investments.
Approximately $3,924,000 of cash was used in the Company's
operations for the fiscal year ended March 31, 1998, compared to cash used
of approximately $3,382,000 for the year ended March 31, 1997. The cash
flow from operating activities relates to increased as a result of the
increased selling, general & administrative expenses. During the fiscal
year ended March 31, 1996, the Company used approximately $2,887,000 in its
operating activities.
The Company used approximately $393,000 in its investing activities
in the year ended March 31, 1998, compared to approximately $760,000 in the
year ended March 31, 1997. These uses are related primarily to the
investment in the Company's subsidiaries in Hebei province, PRC.
The cash inflows from financing activities during the year ended
March 31, 1998 were generated primarily from the sale of $9,900,000 of
Preferred Stock through two offerings: (1) On June 12, 1997, the Company
issued 250 shares of Series C Convertible Preferred Stock at a purchase
price of $10,000 per share in consideration of $2,500,000. Proceeds from
this offering were approximately $2,093,900, which is net of $406,100 of
the Series C Shares which were repurchased by the Company. (2) On October
22, 1997, the Company issued 74 shares of the Company's Series E
Convertible Preferred Stock, at a purchase price of $100,000 per share, for
which the Company received $6,759,000 after placement agent's fees.
During fiscal year ended March 31, 1997, the Company issued 150
shares of the Company's Series D Convertible Preferred Stock at a purchase
price of $10,000 per share in consideration of $1,500,000.
During fiscal 1996, the Company received approximately $2,934,000
from its financing activities through: (i) the sale of approximately
$2,194,000 in Common Stock, and (ii) the receipt of shareholder loans of
approximately $740,000.
The Company anticipates that its cash and cash equivalents should
be adequate to finance the Company's operating requirements for the current
fiscal year.
EQUITY ISSUANCE AND SERVICE AGREEMENTS
Common Stock issued in connection with conversion of Preferred Stock:
During fiscal 1998, the Company issued 2,236,507 shares of its
Common Stock upon conversion of all outstanding shares of the Company's
Series D Convertible Preferred Shares , 4,507,639 shares of its Common
Stock upon conversion of all shares of its Series C Convertible Preferred
Stock and 106,646 shares of its Common Stock upon conversion of 0.8 share
of the Company's Series E Preferred Stock.
Common stock issued in connection with stock option plans and
services performed:
During fiscal 1998 the Company issued (i) 10,000 shares of common
stock to a former employee of the Company, upon the exercise of an option
issued pursuant to the Company's 1996 Stock Option Plan. The option had an
exercise price of $0.35 per share, (ii) 10,000 shares of common stock to
each of its four outside directors as compensation for services. The shares
issued had a combined value of $85,000, which was expensed as directors
compensation, (iii) 8,500 shares of its common stock, at market, to its
legal firm in lieu of $25,500 of legal billings, and (iv) 14,734 shares in
connection with other services at a market value of $41,457.
During the fiscal year, the Company issued 1,019,465 shares of its
Common Stock, net of cancellation, into escrow for Promethean Investment
Group, LLC ("Promethean") pursuant to a Common Stock Investment Agreement
entered into between the Company and Promethean. The shares will be issued
to Promethean if the Company draws on funds from Promethean pursuant to the
Common Stock Investment Agreement.
On July 30, 1996, the Company entered into an agreement with
Merrill Lynch (Asia Pacific) Limited ("Merrill Lynch") pursuant to which
Merrill Lynch was to act as a financial advisor to the Company and was to
assist the Company with strategic financing alternatives with respect to
the Company's PRC projects. The agreement was terminated in accordance with
its terms in December 1997.
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. Accordingly, 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 an
individual to purchase 200,000 shares of the Company's Common Stock. These
warrants were issued for services related to advising the Company with
respect to its Sino-foreign joint ventures and marketing activities in the
PRC. The warrants issued have a three year term and an exercise price of
$1.50, which was the market value of the Company's Common Stock at the time
of issuance of the warrants.
On December 10, 1996, the Company agreed to issue to a consultant
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 the consultant 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 the consultant 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
the warrants issued to the individual referenced above and shares of Common
Stock issued to the consultant for consulting services, and certain shares
of Common Stock issued to the Company's Chief Executive Officer in lieu of
cash compensation. On or about December 31, 1996, the Company filed a
registration statement on Form S-8. 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 called for a $50,000 retainer and the payment of success fees for
raising capital for the Company and its projects. In addition, the Company
issued 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 warrant. 300,000 of the warrants are vested,
and the additional 300,000 warrants will vest only if the investment bank
has raised a minimum of ten million dollars in any form of financing for
the Company.
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 73,001,924 additional shares of Common Stock and
8,475,248 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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 31, 1997
The Company has a limited operating history and has incurred
cumulative net losses since its inception. To date, the Company has not
generated any income from its subsidiaries telecommunications operations
and it has experienced net losses of $5,403,368 and $4,064,885 during the
fiscal years ended March 31, 1998 and 1997, respectively.
Selling, general and administrative expenses ("SG&A") increased
from $3,563,568 during the year ended March 31, 1997, to $4,282,613 during
the year ended March 31, 1998, due to increased levels of salaries paid to
employees and legal and professional expenses incurred during the past
year.
The equity in losses of the Company's unconsolidated subsidiary of
$140,524 recorded during the year ended March 31, 1997 and $606,647 during
the year ended March 31, 1998 represents the Company's share of losses
reported by Hebei Equipment for the year ended December 31, 1996 and
December 31, 1997, during which period the Company owned a sixty point
eight percent (60.8%) equity interest Hebei Equipment.
The Company issued to the Hebei Provincial Government three million
options to purchase an equal number of shares of the Company's Common Stock
at a price of $3.0625 per share. In accordance with generally accepted
accounting principles, the Company has recorded their value of $1,837,500
and has amortized approximately $459,000. The issuance of these options is
a non-cash expense.
Loss from abandoned assets relates to the assets of Netmatics
which have been written off for the total amount of $87,441.
Interest expense during the year ended March 31, 1998, decreased to
approximately $126,000 from approximately $129,000 during the year ended
March 31, 1997, due to a reduction in the outstanding balance of
shareholder loans payable.
Other income (net) of approximately $158,000 during the year ending
March 31, 1998 was primarily related to a tax refund previously paid.
The Company's net loss increased 33% from $4,064,885 during the
year ended March 31, 1997, to $5,403,368 during the year ended March 31,
1998. This increase in net loss was primarily due to the shares of equity
loss from Hebei Equipment, amortization of stock options issued to the
Hebei Provincial Government, as well as increases in selling, general &
administrative expenses.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1997 AND MARCH 31, 1996
Following the sale by the Company of the assets of its subsidiary
ITV in January 1996 (the "Asset Sale"), the Company has focused its
business solely on establishing Sino-foreign joint ventures to develop
telecommunications networks in the PRC. In light of this change in
operations, the result of operations of ITV up to the Asset Sale was
included in the Statement of Operations as Loss from Discounted Operations
of $1,932,977. No revenue was recorded during the years ended March 31,
1996 and 1997 as the Company has not generated any revenue from its
subsidiaries telecommunications operations at the development stage.
Selling, general and administrative expenses increased from
$2,515,554 during the year ended March 31, 1996 to $3,563,568 during the
year ended March 31, 1997 due primarily to increased levels of salaries
paid to employees and legal and professional expenses incurred over the
past year.
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 $129,000 from approximately $242,000 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 wrote off the $130,840 book value because these assets would not
contribute to the generation of revenues for the Company in the future and
thus were considered impaired assets.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements required by this Item 8 are attached
hereto as "Exhibit (a)(1)".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
The directors of the Company currently have terms which will end at
the next annual meeting of the stockholders of the Company or until their
successors are elected and qualified, subject to their prior death,
resignation or removal. Officers are appointed by and serve at the
discretion of the Board of Directors, subject to the rights of the officers
under their respective employment agreements. There are no family
relationships among any of the Company's directors and executive officers.
NAME AGE POSITION
---------------------- --- --------------------------------------
Joseph R. Wright, Jr. 59 Chairman of the Board of Directors,
Chief Executive Officer and President
Richard T. McNamar 59 Vice Chairman of the Board of Directors
Richard S. Braddock 56 Director
Drew Lewis 66 Director
Liang Jiangli 59 Director
James R. Lilley 70 Director
Michael H. Wilson 60 Director
Michael J. Lim 34 Executive Vice President
Albert G. Pastino 56 Senior Vice President, Chief Financial
Officer and Treasurer
James F. O'Brien 52 Senior Vice President, General Counsel
and Corporate Secretary
Xiao Jun 41 Executive Vice President - AVIC China
Joseph R. Wright, Jr. has served as the Company's Chairman of the
Board of Directors since May 1995, Chief Executive Officer since March 1996
and President since May 1996. Mr. Wright also serves as Chairman and member
of the Board of GRC International, Inc. a U.S. public company that provides
technical support to government and private entities, Co-Chairman of Baker
& Taylor Holdings, Inc., an international book and video distribution
company, a member of the Board of Travelers Group, a public company, and
PanAm Sat, a public company. From 1989 to 1994, Mr. Wright served as
Executive Vice President and Vice Chairman of W. R. Grace & Co., an
international chemicals and health care company, President of Grace Energy
Corporation and Chairman of Grace Environmental Company. From 1982 to 1989,
Mr. Wright held the positions of Director and Deputy Director of the Office
of Management and Budget, The White House, and was a member of President
Reagan's cabinet. Prior to 1982, he served as Deputy Secretary, United
States Department of Commerce, President of Citicorp Retail Services and
Retail Consumer Services, held posts in the United States Department of
Agriculture and the United States Department of Commerce, and was Vice
President and Partner of Booz. Allen & Hamilton, a management consulting
firm. He is 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 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 and the Board of the
Institute of the Americas.
Richard S. Braddock has served as a Director of the Company since
August 1997. He has been the Chairman of True North Communications, Inc. (a
public company) since 1997. He has served as a principal of Clayton,
Dubilier & Rice, Inc. from 1994 to 1995 and as the Chief Executive Officer
of Medco Containment Services from January 1993 to December 1993. Mr.
Braddock held various positions at Citicorp from 1973 through 1992
including that of President and Chief Operating Officer of Citicorp and its
principal subsidiary, Citibank, N.A., from January 1990 to November 1992
and as sector executive for worldwide consumer activities from 1985 to
1990. Mr. Braddock served as a director of Citicorp from 1985 to 1992. Mr.
Braddock serves on the Board of Directors of E*Trade Group, Inc., Eastman
Kodak Company, Cadbury Schweppes plc adr and True North Communications,
Inc., all publicly-held companies, and of Lincoln Center for the Performing
Arts. He is a trustee of the Cancer Research Institute. Mr. Braddock
received his bachelors degree from Dartmouth College and his M.B.A from the
Harvard Graduate School of Business Administration.
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 and Union Pacific Resources
Group, Inc., all of which are publicly held companies.
Liang Jiangli has served as a Director of the Company since October
1997. He has served as the Director of Hebei Electronics Industry
Department since September 1993. Mr. Liang also serves as the Chairman of
the Board of Hebei United Telecommunications Equipment Company Limited, the
joint venture subsidiary of the Company. From 1987 to September 1993, Mr.
Liang served as the Director of Hebei Electronics Bureau and the Deputy
Director of Hebei Machinery and Electronics Industry Department. From 1983
to 1987, Mr. Liang served as the Deputy Director of Hebei Electronics
Industry Bureau. From 1963 to 1983, Mr. Liang worked in a state owned
institute, focusing on technology studies and management. Mr. Liang is a
graduate of the Beijing Post and Telecommunications Institute.
James R. Lilley has served as a Director of the Company since May
1997. Ambassador Lilley is currently a resident director at the American
Enterprise Institute ("AEI") which he joined in January 1993, and has
directed the Institute for Global Chinese Affairs at the University of
Maryland since 1996. Prior to his joining AEI, Ambassador Lilley served in
President Bush's Administration as the Assistant Secretary of Defense for
International Security Affairs from November 1991 to January 1993.
Ambassador Lilley was U.S. Ambassador to the People's Republic of China
from April 1989 to May 1991, and to the Republic of Korea from 1986 to
1989. Ambassador Lilley is the co-editor of Beyond MFN: Trade with China
and American Interests and is the author of the forward for the AEI
publication, Chinese Military Modernization. He has represented Hunt Oil of
Texas and United Technologies of Hartford, Connecticut in 1979 to 1980.
Ambassador Lilley worked for Archer-Daniels-Midland Co. and Westinghouse as
a business consultant.
Michael H. Wilson has served as a Director of the Company since May
1997. He has been Vice-Chairman of RBC Dominion Securities, Inc. in
Toronto, Canada since 1995. Prior to 1994, Mr. Wilson held senior Federal
Cabinet posts with the Government of Canada in Finance, Industry, Science
and Technology and International Trade. 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 Amoco
Corporation and Rio Algom Limited, both publicly held companies. 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.
Michael J. Lim has served as the Executive Vice President of the
Company since November 1995 and as the Chief Financial Officer from May
1996 through June 1997. Prior to his joining the Company, Mr. Lim was an
investment banker with Bear, Stearns & Co., Inc. from 1986 to 1988 and from
1991 to 1995. During the two and a half years prior to his joining the
Company, Mr. Lim served as Vice President of Bear Stearns Asia Limited,
where he advised Asian enterprises on a wide variety of financing
transactions, with particular focus on telecommunications and
infrastructure financings. Mr. Lim also worked as an investment banker with
the Chase Manhattan Bank from 1990 to 1991. Mr. Lim received his A.B. from
Harvard College in English Literature in 1985 and his M.B.A. from the Amos
Tuck School of Business Administration at Dartmouth in 1990.
Albert G. Pastino was appointed in June 1997 to serve as a Senior
Vice President and Chief Financial Officer of the Company and was appointed
Treasurer of the Company in December 1997. From 1993 to 1997, Mr. Pastino
served as the President of Kisco Capital Company, Inc., an affiliate of
Kohlberg & Company, a private equity investment company. He also served on
the boards of directors of a number of Kohlberg & Company's portfolio
companies. From 1989 through 1992, Mr. Pastino served as Senior Vice
President and Chief Operating Officer of Fortis Private Capital, Inc., a
private equity investment company investing in expansion financing and
management buyouts. Mr. Pastino began his business career at Deloitte &
Touche LLP where he served as partner, and gained his investment banking
experience at Alex Brown & Sons, Incorporated. Mr. Pastino received an
M.B.A. from Fairleigh Dikinson University and a B.S. from St. Joseph's
University.
James F. O'Brien was appointed in June 1997 to serve as a Senior
Vice President and General Counsel of the Company and was appointed
Corporate Secretary of the Company in May 1998. Mr. O'Brien was a senior
litigation partner at the law firm of Goulston and Storrs in Boston,
Massachusetts where he founded the litigation practice in 1978 and
specialized in complex financial transactions. He has served as an advisor
to U.S. corporations seeking business opportunities in Southeast Asia. Mr.
O'Brien received a J.D. from Boston College Law School and an A.B. from St.
John's Seminary in Boston.
Xiao Jun has served as Executive Vice President - AVIC China since
December 1995. He also served as a Director from February 1995 through
October 1997, the Company's Secretary from February 1995 to January 1996
and as Chief Financial Officer from June 1995 to May 1996. He has been the
President of Xiao Hua International, Inc., an international steel trading
business based in California since June 1993. He served as the Vice
President of ITV from December 1994 to January 1996. From March 1990 to May
1993, Mr. Xiao was the Vice President of Chong Qing Special Metals Industry
Co. From 1985 to 1990, Mr. Xiao served as an engineer and project manager
at the representative office of IBM China/HK Corp. (Beijing). Mr. Xiao
received a bachelor's degree in physics from the Beijing Polytechnic
University in 1982.
Timothy P. F. Crowley joined the Company in May 1995 and has served
as the Assistant Secretary of the Company since May 1998, and served as the
Secretary of the Company from January 1996 though May 1998. 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.
The Board of Directors currently has an Audit Committee and a
Compensation Committee. The members appointed to the Audit Committee of the
Board of Directors during the fiscal year ended March 31, 1998 were Michael
H. Wilson, Chairman of the Committee, James R. Lilley and Richard T.
McNamar. The members appointed to the Compensation Committee of the Board
of Directors during the fiscal year ended March 31, 1998 were Richard S.
Braddock, Chairman of the Committee, Drew Lewis and Joseph R. Wright, Jr.
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.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following tables set forth certain information concerning
compensation for the fiscal years ended March 31, 1998, 1997 and 1996 of
certain of the Company's executive officers, including the Company's Chief
Executive Officer and all executive officers whose total annual salary and
bonus exceeded $100,000, for the fiscal year ended March 31, 1998 (the
"Named Executive Offices").
<TABLE>
<CAPTION>
Long Term
Compensation
-----------------------
Annual Compensation Awards
---------------------------------------- -----------------------
Name and Other Annual Stock Options/
Principal Position Year Salary ($) Bonus ($) Compensation Awards ($) SARS (#)
- ------------------ ------ ------------ ---------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Joseph R. Wright 1998 392,967 50,000 (2)$30,000
Chief Executive 1997 256,250 (2)$30,000 $281,250 3,000,000
Officer(1) 1996 143,750 (2)$30,000 3,000,000
R. T. McNamar 1998 100,000 (4)$37,500
Vice Chairman (3) 1997 500,000
1996
Michael J. Lim 1998 253,417 75,000 250,000
Executive Vice 1997 167,333
President (5) 1996 79,615 1,000,000
Albert G, Pastino 1998 125,000 50,000 467,500
Senior Vice 1997
President, Chief 1996
Financial Officer &
Treasurer (6)
James F. O'Brien 1998 125,000 50,000 467,500
Senior Vice 1997
President, General 1996
Counsel &
Corporate Secretary (7)
Xiao Jun 1998 175,000
Executive Vice 1997 123,958
President-AVIC 1996 57,990 400,000
China (8)
</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, 1997 and 1998, the Company paid approximately
$30,000 per year on behalf of Mr. Wright for certain personal tax
and accounting services rendered by third parties for Mr. Wright.
(3) Mr. McNamar joined the Company on September 3, 1996 as Vice
Chairman of the Board of Directors.
(4) Mr. McNamar received 25,000 shares of the Company's Common Stock
pursuant to his terms of employment with the Company, such shares
having a value of $37,500 at the time of issuance in September 1997.
(5) Mr. Lim joined the Company as the Executive Vice President -
Operations on November 7, 1995 and served as the Company's Chief
Financial Officer from May 1996 through June 15, 1997.
(6) Mr. Pastino joined the Company as the Senior Vice President and
Chief Financial Officer on June 16, 1997. He became the Treasurer
of the Company on December 8, 1997.
(7) Mr. O'Brien joined the Company as Senior Vice President and General
Counsel on June 16, 1997. He became the Secretary of the Company on
May 14, 1998.
(8) Mr. Xiao joined the Company in 1995 as the Executive Vice President
of AVIC-China.
OPTION AND SAR GRANTS DURING LAST FISCAL YEAR
The Company issued 1,185,000 stock options and no SARs to its Named
Executive Officers during the fiscal year ended March 31, 1998.
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 1998 and
options held by such Named Executive Officers on March 31, 1998:
<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.... 6,000,000 $5,775,000
R. T. McNamar....... 250,000 250,000
Michael J. Lim...... 1,062,500 187,500 997,656 $105,469
Albert G. Pastino... 300,625 166,875
James F. O'Brien.... 300,625 166,875
Xiao Jun............ 515,000 495,113
</TABLE>
- ----------------
(1) Based on a per share price of $1.3125, the closing price of the
Common Stock as reported on the American Stock Exchange on June 26,
1998, 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,
Michael J. Lim, Albert G. Pastino, James F. O'Brien and Xiao Jun.
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.
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 3,000,000 shares which have an exercise
price of $3.00 per share. 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 negotiated to receive a contingent success fee
for financings he introduced or arranged for the Company. On October 1,
1996 Mr. McNamar became a full time employee and waived his rights to any
success fees. In his part time capacity, Mr. McNamar was issued an option
to purchase 250,000 shares of the Company's Common Stock at an exercise
price of $1.50 per share on September 6, 1996. He received an additional
option for 250,000 shares at an exercise price of $1.50 per share when he
became a full time employee on October 1, 1996. The exercise price of the
options were based on the market value of the Common Stock on the date of
grant. The Company and Mr. McNamar intend to sign a more definitive
employment agreement during the current fiscal year.
On January 23, 1998, the Company entered into a five-year contract
with Mr. Lim, whereby Mr. Lim will serve as an Executive Vice President of
the Company. In his first year, Mr. Lim will receive an annual base salary
of $300,000 and stock options to acquire 250,000 shares of Common Stock at
an exercise price of $0.75 per share, the market price of the Company's
Common Stock, as reported on the American Stock Exchange, at the time the
grant was made. The base salary and additional option grants for subsequent
years of the contract will be determined by the Compensation Committee of
the Board of Directors.
On October 15, 1997, the Company entered into five-year employment
agreements with each of Albert G. Pastino and James F. O'Brien. Mr. Pastino
will serve as a Senior Vice President and Chief Financial Officer of the
Company and will receive an annual base salary of $200,000 for the first
year and stock options to acquire 467,500 shares of Common Stock at an
exercise price of $2.125 per share. Mr. O'Brien will serve as a Senior Vice
President and General Counsel of the Company and will receive an annual
base salary of $200,000 for the first year and stock options to acquire
467,500 shares of Common Stock at an exercise price of $2.125 per share.
The exercise price of the options for Mr. Pastino and Mr. O'Brien was based
on the market price of the Company's Common Stock, as reported on the
American Stock Exchange, at the time the grants were made
EMPLOYEE STOCK OPTION PLANS
As of February 8, 1995, the Company's Board of Directors and
stockholders approved the Company's 1995 Stock Option Plan (the "1995 Stock
Option Plan") in connection with the closing of the transactions
contemplated by the Reorganization Agreement. The Company has reserved up
to 500,000 shares of Common Stock for issuance under the 1995 Stock Option
Plan. The Company has granted options to purchase up to 321,800 shares of
Common Stock under the 1995 Stock Option Plan, 185,000 of which have been
exercised as of June 26, 1998.
The 1996 Stock Option Plan (the "1996 Stock Option Plan" and together with
the 1995 Stock Option Plan, the "Stock Option Plans") was adopted by the
Board of Directors on March 14, 1996 and by the Company's stockholders on
May 7, 1996. The Company has reserved for issuance thereunder an aggregate
of 12,000,000 shares of Common Stock. The Company has granted options to
purchase up to 9,350,000 shares of Common Stock under the 1996 Stock Option
Plan, 10,000 of which have been exercised. Of the 9,350,000 options granted
as of the date of this Report, 8,578,750 options have vested, and the
remaining 771,250 options may vest subject to certain schedules. The Board
of Directors has approved a provision in the 1996 Stock Option Plan which
will place a 6,000,000 share limit on the number of options that may be
granted under the 1996 Stock Option Plan to an employee in the fiscal year
ended March 31, 1996, and a 1,500,000 share limit in each fiscal year
thereafter.
A description of each of the Company's Stock Option Plans is set
forth below. The description is intended to be a summary of the material
provisions of the Company's Stock Option Plans and does not purport to be
complete.
Administration of and Eligibility Under Stock Option Plans. Each of
the Stock Option Plans, as adopted, provides for the issuance of options to
purchase shares of Common Stock to officers, directors, employees,
independent contractors and consultants of the Company and its
subsidiaries. The Stock Option Plans authorize the issuance of incentive
stock options ("ISOs"), and non-qualified stock options ("NSOs") and stock
appreciation rights ("SARs") to be granted by a committee (the "Committee")
to be established by the Board of Directors to administer the Stock Option
Plans.
Subject to the terms and conditions of the Stock Option Plans, the
Committee will have the sole authority to determine: (a) the persons
("optionees") to whom options to purchase shares of Common Stock and SARs
will be granted, (b) the number of options and SARs to be granted to each
such optionee, (c) the price to be paid for each share of Common Stock upon
the exercise of such option, (d) the period within which each option and
SAR will be exercised and any extensions thereof, and (e) the terms and
conditions of each such stock option agreement and SAR agreement which may
be entered into between the Company and any such optionee.
All officers, directors and employees of the Company and its
subsidiaries and certain consultants and other persons providing
significant services to the Company and its subsidiaries will be eligible
to receive grants of options and SARs under the Stock Option Plans.
However, only employees of the Company and its subsidiaries are eligible to
be granted ISOs.
Stock Option Agreements. All options granted under the Stock Option
Plans will be evidenced by an option agreement or SAR agreement between the
Company and the optionee receiving such option or SAR. Provisions of such
agreements entered into under the Stock Option Plans need not be identical
and may include any term or condition which is not inconsistent with the
respective Stock Option Plan and which the Committee deems appropriate for
inclusion.
Incentive Stock Options. Except for ISOs granted to stockholders
possessing more than ten percent (10%) of the total combined voting power
of all classes of the securities of the Company or its subsidiaries to whom
such ownership is attributed on the date of grant ("Ten Percent
Stockholders"), the exercise price of each ISO must be at least 100% of the
fair market value of the Company's Common Stock as determined on the date
of grant. ISOs granted to Ten Percent Stockholders must be at an exercise
price of not less than 110% of such fair market value.
Each ISO must be exercised, if at all, within ten (10) years from
the date of grant, but, within five (5) years of the date of grant in the
case of ISOs granted to Ten Percent Stockholders.
An optionee of an ISO may not exercise an ISO granted under the
Stock Option Plans so long as such person holds a previously granted and
unexercised ISO.
The aggregate fair market value (determined as of time of the grant
of the ISO) of the Common Stock with respect to which the ISOs are
exercisable for the first time by the optionee during any calendar year
shall not exceed $100,000.
As of the date of this Report, ISOs have been granted under the
1995 Stock Option Plan, subject to certain vesting schedules, to purchase
up to 300,000 shares of Common Stock, 185,000 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 622,380 shares of Common Stock. These options have the
following per share exercise prices: 285,714 shares ($0.35), 250,000 shares
($0.75), 76,666 shares ($3.00) and 10,000 shares ($1.50).
Non-Qualified Stock Options. The exercise price of each NSO will be
determined by the Committee on the date of grant. However, the exercise
price for the NSOs under the 1995 Stock Option Plan will in no event be
less than 85% of the fair market value of the Common Stock on the date the
option is granted, or not less than 110% of the fair market value of the
Common Stock on the date such option is granted in the case of an option
granted to a Ten Percent Stockholder. No such restriction exists with
respect to the exercise prices of NSOs granted under the 1996 Stock Option
Plan.
The exercise period for each NSO will be determined by the
Committee at the time such option is granted, but in no event will such
exercise period exceed ten (10) years from the date of the grant.
As of the date of this Report, NSOs have been granted under the
1995 Stock Option Plan, subject to certain vesting schedules, to purchase
up to 20,000 shares of Common Stock at an exercise price of $0.15 per share
and up to 1,800 shares of Common Stock at an exercise price of $5.00 per
share.
As of the date of this Report, NSOs have been granted under the
1996 Stock Option Plan to purchase up to 8,727,620 shares of Common Stock,
subject to certain vesting schedules. These options have the following per
share exercise prices: 2,966,667 shares ($3.00), 935,000 shares ($2.125),
515,000 shares ($1.50) and 4,310,953 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 grant (or in the
case of an SAR granted in connection with an option, the excess of the fair
market value of one share of Common Stock at the time of exercise over the
option exercise price per share under the option to which the SAR relates),
multiplied by the number of shares of Common Stock covered by the SAR or
the option, or portion thereof, that is surrendered.
SARs will be exercisable only at the time or times established by
the Committee. If an SAR is granted in connection with an option, the SAR
will be exercisable only to the extent and on the same conditions that the
related option could be exercised. The Committee may withdraw any SAR
granted under the Stock Option Plans at any time and may impose any
conditions upon the exercise of an SAR or adopt rules and regulations from
time to time affecting the rights of holders of SARs.
As of the date of this Report, no SARs have been granted pursuant
to the 1995 Stock Option Plan, 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 from any stock dividends, split-ups,
consolidations, recapitalizations, reorganizations or like event.
Amendment or Discontinuance of Stock Option Plan. The Board of
Directors has the right to amend, suspend or terminate the Stock Option
Plans at any time. Unless sooner terminated by the Board of Directors, the
1995 Stock Option Plan and the 1996 Stock Option Plan will terminate on
February 8, 2005 and May 7, 2006, respectively, the tenth anniversary date
of the effectiveness of each such Stock Option Plan.
Directors and Officers Liability Insurance. The Company has
obtained directors' and officers' liability insurance with an aggregate
liability for the policy year, inclusive of costs of defense, in the amount
of $3,000,000. The insurance policy ending April 3, 1998, was renewed as of
April 4, 1998 and will expire April 3, 1999.
Indemnification of Officers and Directors. The Company's
Certificate of Incorporation and Bylaws designate the relative duties and
responsibilities of the Company's officers, establish procedures for
actions by directors and stockholders and other items. The Company's
Certificate of Incorporation and Bylaws also contain extensive
indemnification provisions that will permit the Company to indemnify its
officers and directors to the maximum extent provided by Delaware law.
In addition, the Company has adopted a form of indemnification
agreement (the "Indemnification Agreement") which provides the indemnitee
with the maximum indemnification allowed under applicable law. The Company
has not entered into Indemnification Agreements with any of its directors,
executives, employees or consultants as of the date of this Report. Since
the Delaware statute is non-exclusive, it is possible that certain claims
beyond the scope of the statute may be indemnifiable. The Indemnification
Agreements provide a scheme of indemnification which may be broader than
that specifically provided by Delaware law. It has not yet been determined,
however, to what extent the indemnification expressly permitted by Delaware
law may be expanded, and therefore the scope of indemnification provided by
the Indemnification Agreements may be subject to future judicial
interpretation.
The Indemnification Agreement provides, in pertinent part, that the
Company shall indemnify an indemnitee who is or was a party or is
threatened, pending or completed action or proceeding whether civil,
criminal, administrative or investigative by reason of the fact that the
indemnitee is or was a director, officer, key employee or agent of the
Company or any subsidiary of the Company. The Company shall advance all
expenses, judgments, fines, penalties and amounts paid in settlement
(including taxes imposed on indemnitee on account of receipt of such
payouts) incurred by the indemnitee in connection with the investigation,
defense, settlement or appeal of any civil or criminal action or proceeding
as described above. The indemnitee shall repay such amounts advanced only
if it shall be ultimately determined that he or she is not entitled to be
indemnified by the Company. The advances paid to the indemnitee by the
Company shall be delivered within 20 days following a written request by
the indemnitee. Any award of indemnification to an indemnitee, if not
covered by insurance, would come directly from assets of the Company,
thereby affecting a stockholder's investment.
Termination of Employment and Change of Control Agreements. Except
as set forth in employment agreements and stock option agreements of
certain employees of the Company and its subsidiaries, the Company has no
compensatory plans or arrangements which relate to the resignation,
retirement or any other termination of an executive officer or key employee
with the Company or a change in control of the Company or a change in such
executive officer's or key employee's responsibilities following a change
in control.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common
Stock as of June 26, 1998 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)
---------------- --------- ----------
Polmont Investments Limited(2) ........ 2,450,000 9.10
Jenny Sun(3) .......................... 2,450,000 9.10
Max Chian Yi Sun(4).................... 2,798,191 10.40
Joseph R. Wright, Jr.(5)............... 6,237,700 18.90
Richard T. McNamar(6).................. 275,000 1.01
Richard S. Braddock(7)................. 208,592 *
Drew Lewis(8).......................... 197,518 *
Liang Jiangli.......................... 0 *
James R. Lilley(9)..................... 61,074 *
Michael H. Wilson(10).................. 103,222 *
Michael J. Lim(11)..................... 1,069,400 3.81
Albert G. Pastino(12) ................. 359,199 1.31
James F. O'Brien(13) .................. 338,125 1.24
Xiao Jun(14)........................... 525,000 1.91
All executive officers and 9,474,830 26.52
Directors as a group (12 persons)(15)
- --------------
* 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 June 26, 1998, 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) The address of Polmont Investments Limited is c/o Havelet Trust
Company, PO Box 3136, Road Town, Tortola, British Virgin Islands.
(3) Includes 2,450,000 shares of Common Stock held by Polmont
Investments Limited, of which Ms. Sun purports to have voting
power. The address of Ms. Sun is 1052 North Beverly Drive, Beverly
Hills, CA, 90210.
(4) Includes 2,797,691 shares of Common Stock held by Occidental
Worldwide Corporation of which Mr. Sun purports to have sole voting
and investment power. The address of Mr. Sun is 126 JLN DEDAP,
Taman Ampang Jaya, Trima Jaya, 68000 Ampang, Selangor, Malyasia.
(5) Includes options to purchase 6,000,000 shares of Common Stock. The
address of Mr. Wright is c/o AmTec, Inc., 599 Lexington Avenue,
44th Floor, New York, New York 10022.
(6) Includes options to purchase 250,000 shares of Common Stock.
(7) Includes options to purchase 30,000 shares of Common Stock.
(8) Includes options to purchase 30,000 shares of Common Stock.
(9) Includes options to purchase 30,000 shares of Common Stock.
(10) Includes options to purchase 30,000 shares of Common Stock.
(11) Includes options to purchase 1,062,500 shares of Common Stock.
(12) Includes options to purchase 338,125 shares of Common Stock.
(13) Includes options to purchase 338,125 shares of Common Stock.
(14) Includes options to purchase 515,000 shares of Common Stock.
(15) Includes options to purchase 8,723,750 shares of Common Stock of
the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Footnote 12 to the Consolidated Financial Statements - "Related Party
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS: The following financial statements and
supplemental data are filed:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES: All applicable financial statement
schedules have been omitted because the required information is included in
the consolidated financial statements and notes thereto filed as Exhibit
(a) (1).
(B) REPORTS ON FORM 8-K. No Reports on Form 8-K were filed by the Company
during the fourth quarter of the fiscal year ending March 31, 1998.
(C) EXHIBITS
The following exhibits, which are furnished with this Annual Report
or incorporated herein by reference, are filed as part of this Annual
Report:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
2.1 Agreement for Sale of Assets by and between ITV Communications,
Inc. and Netmatics, Inc., dated January 11, 1996, and Promissory
Note and Security Agreement dated January 16, 1996(1)
2.2 Agreement of Merger between AVIC Group International, Inc., a
Colorado corporation, with and into AVIC Group International,
Inc., a Delaware corporation dated July 10, 1996(8)
3.1 Amendments to Articles of Incorporation of the Company dated
June 7, 1996 and June 10, 1996(5)
3.2 Restated Certificate of Incorporation of the Company(7)
3.3 Certificate of Ownership and Merger Merging China
Telecommunications and Technologies, Inc. into the Company(9)
3.4 Certificate of Designations of Preferences of Series C Convertible
Preferred Stock of the Company(9)
3.5 Certificate of Designations of Preferences of Series D Convertible
Preferred Stock of the Company(7)
3.6 Certificate of Designations of Preferences of Series E Convertible
Preferred Stock of the Company(10)
3.7 Restated Bylaws of the Company
4.1 Specimen Common Stock Certificate(9)
10.1 1995 Stock Option Plan(2)
10.2 1996 Stock Option Plan(2)
10.3 Real Property lease between Lexreal Associates and the Company
dated May 8, 1995(2)
10.4 Employment Agreement between Joseph R. Wright, Jr. and the
Company dated as of April 15, 1995(3), and amendments thereto
dated as of November 21 1995(4) and September 12, 1996(6)
10.5 Employment Agreement between Michael J. Lim and the Company dated
as of November 6, 1995(4)
10.6 Employment Agreement between Xiao Jun and the Company dated as of
January 1, 1996(4)
10.7 Employment Agreement between Albert G. Pastino and the Company
dated as of October 15, 1997(12)
10.8 Employment Agreement between James F. O'Brien and the Company
dated as of October 15, 1997(12)
10.9 Employment Agreement between Michael J. Lim and the Company dated
January 23, 1998
10.10 Form of Indemnification Agreement for directors and officers of
the Company(8)
10.11 Common Stock Investment Agreement between Promethean Investment
Group L.L.C. and the Company dated March 31, 1997, as amended on
April 29, 1997(9)
10.12 China Paging Networks Preliminary Agreement between Beijing CATCH
Communications Group Co. and the Company dated April 1995(3)
10.13 Mobile Telephone Network Preliminary Agreement between Beijing
CATCH Communications Group Co. and the Company dated April 27,
1995(3)
10.14 Cellular Telephone Network Preliminary Agreement between Beijing
CATCH Communications Group Co., Tweedia International Limited and
the Company dated April 1995(3)
10.15 Memorandum of Understanding between Hebei United Communications
Equipment Company and the Company dated May 1, 1995(3)
10.16 Letter of Intent between Hebei United Communications Equipment
Company and the Company dated October 10, 1995(4)
10.17 Joint Venture Contract between Hebei United Communications
Equipment Company and NTTI dated December 22, 1995(5)
10.18 Agreement between Hebei United Communications Equipment Company
and the Company dated March 22, 1996(5)
10.19 Joint Venture Contract between Hebei United Telecommunications
Development Company, Beijing CATCH Communications Group Co. and
the Company dated September 20, 1996(9)
10.20 Project Cooperation Contract between China United
Telecommunications Co. and Hebei United Telecommunications
Engineering Company Limited dated February 9, 1996(9)
10.21 Term Loan Agreement between Hebei United Telecommunications
Engineering Company Limited and Bank of Tokyo-Mitsubishi, Ltd.
dated August 5, 1996(9)
10.22 Project Cooperation Contract between Hebei Cable Television
Station and Hebei United Communications Equipment Company Limited
dated April 8, 1997(9)
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Singer, Lewak, Greenbaum & Goldstein
27 Financial Data Schedule
- ---------------
(1) Previously filed as part of the Company's Current Report on Form 8-K
dated January 19, 1996.
(2) Previously filed as part of the Company's Transition Report on Form
10-KSB for the transition period from October 1, 1994 to March 31,
1995.
(3) Previously filed as part of the Company's Current Report on Form 8-K
dated May 1, 1995. (4) Previously filed as part of the Company's
Current Report on Form 8-K dated December 22, 1995.
(5) Previously filed as part of the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1996.
(6) Previously filed as part of the Company's Registration Statement on
Form S-8 filed on January 31, 1997.
(7) Previously filed as part of the Company's Current Report on Form 8-K
dated March 6, 1997.
(8) Previously filed as part of the Company's Definitive Proxy Statement
dated April 18, 1996.
(9) Previously filed as part of the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1997.
(10) Previously filed as part of the Company's Quarterly Report on Form
10-Q/A dated September 30, 1997.
(11) Previously filed as part of the Company's Current Report on Form 8-K
dated December 8, 1997.
(12) Previously filed as part of the Company's Quarterly Report on Form
10-Q dated December 31, 1997.
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: August 23, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Joseph R. Wright, Jr. Chairman of the Board of August 23, 1999
- --------------------------- Directors, Chief Executive
Joseph R. Wright, Jr. Officer and President
(Principal Executive Officer)
/s/ Richard T. McNamar Vice Chairman of the Board August 23, 1999
- --------------------------- of Directors
Richard T. McNamar
/s/ Richard S. Braddock Director August 23, 1999
- ---------------------------
Richard S. Braddock
/s/ Drew Lewis Director August 23, 1999
- ---------------------------
Drew Lewis
/s/ Liang Jiangli Director August 23, 1999
- ---------------------------
Liang Jiangli
/s/ James R. Lilley Director August 23, 1999
- ---------------------------
James R. Lilley
/s/ Michael H. Wilson Director August 23, 1999
- ---------------------------
Michael H. Wilson
/s/ Albert G. Pastino Senior Vice President, Chief August 23, 1999
- --------------------------- Financial Officer and
Albert G. Pastino Treasurer (Principal Financial
and Accounting Officer)
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
PAGE
AMTEC, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT F-1
REPORT OF INDEPENDENT CERTIFIED ACCOUNTANTS F-2
FINANCIAL STATEMENTS FOR THE YEARS ENDED
MARCH 31, 1998 (Restated),
1997 (Restated) AND 1996 (Restated):
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of
Stockholders' Equity (Deficiency) F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-29
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
INDEPENDENT AUDITORS' REPORT F-30
FINANCIAL STATEMENTS FOR THE PERIOD
FROM APRIL 29, 1997 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER, 1997:
Balance Sheets F-31
Statement of Operations F-32
Statement of Investors' Equity F-33
Statement of Cash Flows F-34
Notes to Financial Statements F-35 - F-40
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
INDEPENDENT AUDITORS' REPORT F-41
FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND PERIOD FROM
JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER, 1996:
Balance Sheets F-42
statements of Operations F-43
Statements of Investors' Equity F-44
Statements of Cash Flows F-45
Notes to Financial Statements F-46 - F-53
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
AmTec Inc. (formerly AVIC
Group International Inc. and Subsidiaries)
We have audited the accompanying consolidated balance sheets of AmTec Inc.
and subsidiaries (formerly AVIC Group International Inc. and Subsidiaries)
as of March 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of March
31, 1998 and 1997, and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 15, the accompanying 1998 and 1997 financial
statements have been restated.
DELOITTE & TOUCHE LLP
New York, New York
June 11, 1998 (May 25, 1999, as to matters discussed in Note 15)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
AmTec Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of AmTec Inc. and subsidiaries
(formerly AVIC Group International, Inc., and Subsidiaries) for the year
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 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 opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of AmTec Inc. and subsidiaries (formerly AVIC
Group International, Inc., and Subsidiaries) for the year 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 to 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 the uncertainty.
As discussed in Note 14, the accompanying 1996 financial statements have
been restated.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
June 18, 1996 (May 25, 1999, as to matters discussed in Note 14)
<TABLE>
<CAPTION>
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------
1998 1997
ASSETS (AS RESTATED; SEE NOTE 15)
<S> <C> <C>
CURRENT ASSETS:
Cash $2,134,662 $1,346,713
Accounts receivable 114,661 -
Prepaid expenses and other current assets 108,082 171,921
----------- ----------
Total current assets 2,357,405 1,518,634
Investments in and advances to unconsolidated subsidiary 5,074,217 2,221,476
Property, plant and equipment, net 139,136 153,356
Office lease deposit 112,600 111,500
----------- ----------
Total assets $7,683,358 $4,004,966
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 541,888 $ 261,193
Accrued expenses 792,006 782,132
Loans payable - shareholders 1,452,553 2,413,553
----------- ----------
Total current liabilities 2,786,447 3,456,878
----------- ----------
COMMITMENT AND CONTINGENCY
STOCKHOLDERS' EQUITY:
Preferred Stock: authorized 10,000,000 shares:
Series A Convertible Preferred Stock: $.001 par value; 0
and 1,524,178 shares issued and outstanding in 1998 and 1997,
respectively - 1,524
Series D Convertible Preferred Stock: $.001 par value; 0
and 150 shares issued and outstanding in 1998 and 1997,
respectively - 1
Series E Convertible Preferred Stock: $.001 par value; 73
and 0 shares issued and outstanding in 1998 and 1997,
respectively 1 -
Common stock: $.001 par value, authorized 100,000,000
shares; 26,532,502 and 31,257,921 issued and outstanding
in 1998 and 1997, respectively 26,533 31,258
Additional paid-in capital 33,149,142 25,200,877
Accumulated deficit (27,394,590) (20,592,536)
Nonrefundable equipment purchase deposit - (4,572,536)
Nonemployee deferred option cost, net (1,378,125) -
Warrants 493,950 479,500
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 4,896,911 548,088
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $7,683,358 $4,004,966
=========== ==========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
(AS RESTATED;
(AS RESTATED; SEE NOTE15) SEE NOTE 14)
<S> <C> <C> <C>
REVENUES $ - $ - $ -
------------ ------------ ------------
EXPENSES
Selling, general and administrative 4,282,613 3,563,568 2,515,554
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (4,282,613) (3,563,568) (2,515,554)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Amortization of stock options granted
to non employees (459,375) - -
Loss from abandoned assets (87,441) - (130,840)
Interest expense (125,586) (129,039) (241,856)
Other - net 158,294 (33,216) 7,617
Write off of investment in affiliate - (198,538) -
------------ ------------ ------------
Total other expense (514,108) (360,793) (365,079)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE EQUITY IN LOSSES OF
UNCONSOLIDATED SUBSIDIARY (4,796,721) (3,924,361) (2,880,633)
Equity in losses of unconsolidated subsidiary (606,647) (140,524) (500,000)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (5,403,368) (4,064,885) (3,380,633)
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations - - (1,932,977)
Gain on sale of discontinued operations - - 31,880
------------ ------------ ------------
LOSS FROM DISCONTINUED OPERATIONS - - (1,901,097)
------------ ------------ ------------
NET LOSS (5,403,368) (4,064,885) (5,281,730)
PREFERRED STOCK DIVIDEND
1,398,686 10,000 -
------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $(6,802,054) $(4,074,885) $(5,281,730)
============= ============= ============
BASIC LOSS PER SHARE:
Loss from continuing operations $ (0.23) $ (0.14) $ (0.13)
Loss from discontinued operations
- - (0.08)
------------ ------------ ------------
BASIC LOSS PER COMMON SHARE $ (0.23) $ (0.14) $ (0.21)
============ ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 29,843,712 29,102,347 25,651,045
============ ============= =============
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMTEC INC. AND SUBSIDIARIES
YEARS ENDED MARCH 31, 1998,1997 AND 1996
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY)
- -------------------------------------------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------------- ------------------- --------------- ---------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 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 - - - - - - - -
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 - - - - - - - -
Cumulative foreign
currency exchange loss - - - - - - - - - -
Preferred dividends - - - - - - - - - -
Warrants - - - - - - - - - -
Net loss - - - - - - - - - -
---------- -------- --------- -------- ------- ------- -------- ------- ------- -------
BALANCE, March 31, 1997
(As Restated, see
note 15) 31,257,921 31,258 1,524,178 1,524 - - - - 150 1
Exercise of employee
stock options 69,000 69 - - - - - - - -
Issuance of Series C
preferred stock - - - - - - - - - -
Common shares issued
for services rendered 23,233 23 - - - - - - - -
Conversion of Series D
shares to common
stock 2,236,507 2,237 - - - - - - - -
Common stock investment
agreement - net of
cancellation 1,019,465 1,019 - - - - - - - -
Common shares issued
for directors fees 40,000 40 - - - - - - - -
Cancellation of
Series A preferred - - (1,524,178) (1,524) - - - - - -
Cancellation of common
stock (12,727,909) (12,728) - - - - - - - -
Tweedia loan
cancellation - - - - - - - - - -
Allocation of
non-refundable
deposit from former
affiliate - - - - - - - - - -
Other - - - - - - - - - -
Conversion of Series C
shares to common
stock 4,507,639 4,508 - - - - - - - -
Issuance of Series E
preferred stock - - - - - - - - - -
Conversion of Series E
shares to common
stock 106,646 107 - - - - - - - -
Buyback of Series C
preferred stock - - - - - - - - - -
Deferred financing
costs, net of
amortization - - - - - - - - - -
Stock options issued
to third party - - - - - - - - - -
Cumulative foreign
currency exchange
loss - - - - - - - - - -
Advance to joint
venture partner - - - - - - - - - -
Preferred stock
dividends - - - - - - - - - -
Cancellation of
Warrants - - - - - - - - - -
Net loss - - - - - - - - - -
---------- -------- --------- -------- ------- ------- -------- ------- ------- -------
BALANCE, March 31, 1998
(As Restated, see
note 15) 26,532,502 $ 26,533 - $0 - $0 - $0 - $0
========== ======== ========= ======== ======= ======= ======== ======= ======= =======
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SERIES E
PREFERRED STOCK ADDITIONAL EQUIPMENT DEFERRED
-------------------- PAID-IN ACCUMULATED PURCHASE OPTION
SHARES AMOUNT WARRANTS CAPITAL DEFICIT DEPOSIT COSTS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1995 - - - 9,995,265 (11,245,921) - - (1,225,412)
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
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
Cumulative foreign
currency exchange loss - - - (1,231) - - - (1,231)
Preferred dividends - - - (10,000) - - - (10,000)
Warrants - - 479,500 - - - - 479,500
Net loss - - - - (4,064,885) - - (4,064,885)
--------- --------- -------- ----------- ------------ ----------- ------------ -----------
BALANCE, March 31, 1997
(As Restated, see
note 15) - - 479,500 25,200,877 (20,592,536) (4,572,536) - 548,088
Exercise of employee
stock options - - - 34,681 - - - 34,750
Issuance of Series C
preferred stock - - - 2,499,999 - - - 2,500,000
Common shares issued
for services rendered - - - 66,934 - - - 66,958
Conversion of Series D
shares to common
stock - - - 129,673 - - - 131,909
Common stock investment
agreement - net of
cancellation - - - (1,019) - - - 0
Common shares issued
for directors fees - - - 84,960 - - - 85,000
Cancellation of
Series A preferred - - - (4,571,012) - 4,572,536 - 0
Cancellation of common
stock - - - 12,728 - - - 0
Tweedia loan
cancellation - - - 25,000 - - - 25,000
Allocation of
non-refundable
deposit from former
affiliate - - - 850,000 - - - 850,000
Other - - - (580) - - - (580)
Conversion of Series C
shares to common
stock - - - (4,508) - - - (1)
Issuance of Series E
preferred stock 74 1 - 6,759,000 - - - 6,759,001
Conversion of Series E
shares to common
stock (1) - - (107) - - - 0
Buyback of Series C
preferred stock - - - (406,100) - - - (406,100)
Deferred financing
costs, net of
amortization - - 161,450 (229,415) - - - (67,965)
Stock options issued
to third party - - - 1,837,500 - - ($1,378,125) 459,375
Cumulative foreign
currency exchange
loss - - - 1,844 - - - 1,844
Advance to joint
venture partner - - - (540,000) - - - (540,000)
Preferred stock
dividends - - - 1,398,686 (1,398,686) - - 0
Cancellation of
Warrants - - (147,000) - - - - (147,000)
Net loss - - - - (5,403,368) - - (5,403,368)
--------- --------- -------- ----------- ------------ ----------- ------------ -----------
BALANCE, March 31, 1998
(As Restated, see
note 15) 73 $1 $ 493,950 $33,149,142 ($27,394,590) $0 ($ 1,378,125) $ 4,896,911
========= ========= ========= =========== ============= =========== ============= ===========
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996
(AS RESTATED;
(AS RESTATED; SEE NOTE 15) SEE NOTE 14)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (5,403,368) $ (4,064,885) $ (5,281,730)
Less: Loss of discontinued operations - - 1,901,097
------------- -------------- --------------
Loss from continuing operations (5,403,368) (4,064,885) (3,380,633)
Adjustments to reconcile net loss to net cash used in
continuing operating activities:
Amortization of deferred option cost 459,375 - -
Depreciation 43,432 28,905 19,404
Loss from abandoned assets 87,441 - 130,840
Issuance of warrants for services rendered - 479,500 -
Issuance of common stock and options for directors'
fees and professional services rendered 151,957 725,091 -
Equity in losses of unconsolidated subsidiary 606,647 140,524 500,000
(Increase) decrease in:
Accounts receivable (114,661) - -
Inventories - - -
Prepaid expenses and other current assets 63,839 (111,243) (41,813)
Office lease deposit (1,100) 55,700 (167,200)
Increase (decrease) in:
Accounts payable and accrued expenses 293,027 (485,959) 1,251,464
Loans payable - stockholders (111,000) (150,000) 136,982
------------- -------------- --------------
Net cash used in continuing operations (3,924,411) (3,382,367) (1,550,956)
Net cash used in discontinued operations - - (1,336,396)
------------- -------------- --------------
Net cash used in operating activities (3,924,411) (3,382,367) (2,887,352)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Netmatics (87,441) - -
Purchase of property and equipment (29,212) (106,028) (119,592)
Investment in unconsolidated subsidiary (276,000) (654,000) (1,170,000)
Proceeds from sale of assets - - 250,000
------------- -------------- --------------
Net cash used in investing activities (392,653) (760,028) (1,039,592)
------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Warrants issued for services rendered - net of
charges to APIC (215,546) - -
Borrowings - - 739,952
Loans payable to stockholders 25,000 - -
Advance to joint venture partner (3,724,000) (538,000) -
Proceeds from sale of common stock 166,659 2,000,000 2,193,983
Proceeds from sale of Series B convertible preferred stock - 2,341,219 -
Proceeds from sale of Series D convertible preferred stock - 1,500,000 -
Proceeds from sale of Series C convertible preferred
stock - net 2,093,900 - -
Proceeds from sale of Series E convertible preferred stock 6,759,000 - -
------------- -------------- --------------
Net cash provided by financing activities 5,105,013 5,303,219 2,933,935
------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 787,949 1,160,824 (993,009)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,346,713 185,889 1,178,898
------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,134,662 $ 1,346,713 $ 185,889
============= ============== ==============
</TABLE>
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------
1. SUPPLEMENTAL CASH INFORMATION:
No interest or income taxes were paid during fiscal 1998, 1997 and
1996.
2. NONCASH FINANCING ACTIVITIES:
In fiscal 1998, preferred stock dividends of $1,398,686 were paid upon
determination of the first eligible conversion date of the Convertible
Preferred Series C, D, and E.
In fiscal 1998, 150 shares of Series D Convertible Preferred Stock
were converted into 2,236,507 shares of common stock (inclusive of
conversions of preferred dividends and related warrants).
In fiscal 1998, 219 shares of Series C Convertible Preferred Stock
were converted into 4,507,639 shares of common stock.
In fiscal 1998, 0.8 share of Series E Convertible Preferred Stock was
converted into 106,646 shares of common stock.
In fiscal 1998, 12,727,909 shares of common stock were canceled upon
determination that the full purchase price for such shares was not
paid.
In fiscal 1998, $850,000 Loans Payable related to a nonrefundable
deposit received from a former affiliate was credited to Additional
Paid in Capital.
In fiscal 1998, 1,524,178 shares of the Company's Series A Convertible
Preferred Shares were canceled in accordance with the terms of a
subscription agreement.
In fiscal 1998, the Company issued stock options valued at $1,837,500
to the Hebei provincial government in exchange for a long term
cooperation agreement.
In fiscal 1997, 100 shares of Series B Preferred Stock were converted
into 1,507,477 shares of common stock.
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.
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE OF BUSINESS - AmTec Inc. (the "Company" or
"AmTec") through its majority-owned subsidiary (accounted for under
the equity method of accounting) in the People's Republic of China
("PRC") is involved in providing financing and assistance in building
telecommunications networks for third parties in the PRC. The Company,
through its wholly-owned subsidiary ITV Communications, Inc. ("ITV")
was engaged in the design, manufacture and sale of technologically
advanced communication devices. In January 1996, the Company sold all
of the business and operating assets of ITV and is no longer involved
in the business that ITV was engaged in (See Note 14).
On July 8, 1997, the Company changed its name from AVIC Group
International, Inc. to AmTec, Inc.
During fiscal 1998 the Company organized two wholly-owned
subsidiaries, one a Bermuda company and the other a British Virgin
Island company. There was no activity in either company during the
year ended March 31, 1998.
PRINCIPLES OF 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 contracts. 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 contributed capital has been fully depleted. Reserves are
provided where management determines that the investment or equity in
earnings is not realizable. For the period ending March 31, 1998, the
Company used an ownership percentage of 60.8% for purposes of
calculating the share of earnings of its unconsolidated subsidiary
since it did not increase its ownership percentage in Hebei Equipment
to 70% until after the close of Hebei Equipment's fiscal year-end
(December 31, 1997). Hebei Equipment owns 51% of Hebei United
Telecommunications Engineering Company, Ltd. ("Hebei Engineering").
Hebei Equipment also accounts for its investment using equity method
of accounting as minority Shareholders of Hebei Engineering have
substantive participating rights under the joint venture contracts.
DIFFERENCE IN YEAR END - The Company's share of equity in losses of
Hebei Equipment included in the consolidated financial statements are
as of and for the periods ended December 31, 1997 and 1996, Hebei
Equipment's year-end. Since inception the Company has had a March 31
year-end. The Company kept this year-end even though its subsidiaries
have a calendar year-end so that delays in receiving information from
China would not cause problems for the Company in meeting its
reporting deadlines. However, the Company does monitor events in the
lag period and, where appropriate, would disclose the occurrence of
any significant event during the lag period. All companies established
under PRC law are required to have a December 31 fiscal year-end date.
Hebei Equipment and Hebei Engineering are equity joint venture
companies established under PRC law.
MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expense during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS - For purposes of the statements of cash flows, the
Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method, to write off
the cost of property and equipment over their estimated useful lives,
after deducting the estimated salvage value of the assets as follows:
Furniture, fixtures and equipment 5 years
Leasehold improvements 5 years
Computer software 3 years
LONG-LIVED ASSETS - The Company evaluates long-lived assets and
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the net carrying amount may not be
recoverable. When such events occur, the Company measures impairment
by comparing the carrying value of the long-lived asset to the
estimated undiscounted future cash flows expected to result from the
use of the assets and their eventual disposition. If the sum of the
expected undiscounted future cash flows is less than the carrying
amount of the assets, the Company would recognize an impairment loss.
The impairment loss, if determined, would be measured as the amount by
which the carrying amount of the asset exceeds the fair value of the
asset. The Company determined that, as of March 31, 1998 and 1997,
there had been no impairment in the carrying value of the long-lived
assets.
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.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs of ITV
were charged to expense as incurred. These costs consisted primarily
of salaries and consulting fees.
INCOME TAX - Deferred income taxes are provided for using the
liability method. Under the liability method, deferred income taxes
are recognized for all significant temporary differences between the
tax and financial statement bases of assets and liabilities. The tax
consequences of those differences are classified as current or
non-current based upon the classification of the related assets or
liabilities in the financial statements. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of, the
deferred tax assets will not be realized.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying
amount reported in the balance sheets for cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses
approximates fair value because of the immediate short-term maturity
of these financial instruments.
LOSS PER SHARE - Basic loss per common share is based on the weighted
average number of common shares outstanding during the year. The
effect of shares issuable upon exercise of warrants and stock options
is anti-dilutive, therefore diluted earnings per share is not
presented. The Company adopted the provisions of FASB 128 during the
fiscal year ended March 31, 1998. Adoption of such statement did not
have a material effect on results of operations and financial
condition.
RECLASSIFICATION - Certain amounts for the fiscal years ended March
31, 1997 and 1996 have been reclassified to conform to the current
year's presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Comprehensive Income - In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income." This statement is effective for financial statements issued
for periods beginning after December 15, 1997. Management is
evaluating the effect on its financial reporting of the adoption of
this statement.
Segments of an Enterprise and Related Information - In June 1997, the
FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information." This statement is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires the reporting
of profit and loss, specific revenue and expense items, and assets for
reportable segments. It also requires the reconciliation of total
segment revenues, total segment profit or loss, total segment assets,
and other amounts disclosed for segments, in each case to the
corresponding amounts in the general purpose financial statements. The
Company has not yet determined what additional disclosures may be
required in connection with adopting SFAS 131.
Derivative Instruments and Hedging Activities - In June 1998, the FASB
has issued a new standard SFAS No. 133 "Derivative Instruments and
Hedging Activities", which is effective for fiscal years beginning
after June 15, 1999. Management has not yet completed the analysis of
the impact this would have on the financial statements of the Company
and has not adopted this standard.
2. INVESTMENT IN AND ADVANCE TO UNCONSOLIDATED SUBSIDIARY
The Company determined that it should conduct its operations in the
PRC through a Sino Foreign Joint Venture ("SFJV"), Hebei Equipment. In
March 1996, the Company invested $1,170,000 in a PRC joint venture,
advanced $540,000 to its joint venture partner and requested from the
Hebei Provincial government approval for conversion of such company to
an SFJV. On September 24, 1996, preliminary regulatory approval for
Hebei Equipment was granted and the SFJV was formed with the Company
holding a 60.8% interest in the entity. In April 1997, the Company
received final PRC regulatory approval for the SFJV. The Company
invested an additional $276,000 in Hebei Equipment during the
fiscal-year ended March 31, 1998, resulting in an increase in its
holding to 70%. The Company's investments in the joint venture were
accounted for by the equity method of accounting because minority
shareholders of Hebei Equipment and Hebei Engineering have substantive
participating rights under the provision of the Joint Venture
contracts. (See Note 4 and 15)
The following summarizes the total equity investment by the Company in
Hebei Equipment for the year ended March 31, 1998 and 1997:
1998 1997
Investment in
unconsolidated subsidiary $ 1,824,000 $ 2,100,000
Less: Share of equity losses (747,783) (140,524)
-------------- ------------
1,352,217 1,683,476
Add: Advance to
unconsolidated subsidiary 3,722,000 538,000
-------------- ------------
Investment in and advanced to
unconsolidated subsidiary $ 5,074,217 $ 2,221,476
============== ============
Hebei Equipment holds a 51% interest in Hebei Engineering, which is
developing Global System for Mobile Telecommunications networks (the
"GSM networks") in the ten largest cities in Hebei Province, PRC.
Nippon Telegraph and Telephone International, Inc. ("NTTI") and Itochu
Corporation hold the remaining 49% interest in Hebei Engineering. As
of March 31, 1998, Hebei Equipment had a total investment of
$1,530,000 in Hebei Engineering and its share of equity losses in
Hebei Engineering amounted to $1,008,156.
The following summarized the major activities of Hebei Equipment and
its subsidiary:
A. HEBEI ENGINEERING'S INVESTMENT IN GSM NETWORKS
Hebei Equipment, through its 51%-owned subsidiary, Hebei Engineering
has borrowed approximately $30,650,000 to purchase equipment which was
contributed to China United Communications Company ("UNICOM") to
construct the GSM networks in Hebei Province and has received the
right to receive future cash flow. The GSM networks are being built
pursuant to a 15-year Project Cooperation Contract. Terms of the
Project Cooperation contract include the following:
Initially, Hebei Engineering owned 100% of the assets prior to
contributing such assets to UNICOM and once contributed, Hebei
Engineering owned and retained title to a 70% interest in the assets
and UNICOM owned and retained title to a 30% interest in the assets.
Both parties agree to distribute the profit according to the
"Distributable Cash Flow" (as defined) with 22% going to UNICOM and
78% going to Hebei Engineering.
Each year, Hebei Engineering will transfer ownership of assets to
UNICOM equal in value to the Distributable Cash Flow received up to
60% of the assets. The maximum amount of assets transferred will not
exceed 90% of the assets until termination of the Project Cooperation
Contract.
Upon the termination of the contract the remaining 10% of the network
assets shall be assigned to UNICOM without any further consideration.
Hebei Engineering will continue to receive 78% of the Distributable
Cash Flow after transfer of all the assets for the remainder of the
15-year period.
Under PRC law, foreign investment entities, such as Hebei Engineering,
are not permitted to own or operate telecommunications networks.
Substantially all of the Hebei Engineering's revenues are derived from
contractual arrangements for the sharing of cash flow from network
operations rather than from ownership or operation of the networks.
Hebei Engineering has recorded its investment (GSM Construction Costs)
as a right to receive future cash flow at cost and is amortizing the
cost of these right based upon the greater of the amount computed
using (a) the ratio that current gross revenues from the GSM networks
to the total of current and anticipated future gross revenues from the
GSM networks or (b) the straight-line method over 15 years which was
the remaining estimated economic life of the GSM networks at the
inception of this investment. Amortization of the Investment in GSM
Networks for the year ended March 31, 1998 amounted to approximately
$2,183,000.
Income from the GSM networks is recognized at the time when Hebei
Engineering can estimate or calculate the portion of its Distributable
Cash Flow from the networks. UNICOM commenced operation of the GSM
networks in February 1997.
B. SUMMARY FINANCIAL INFORMATION FOR THE UNCONSOLIDATED SUBSIDIARY
For the year ended December 31, 1996, Hebei Equipment did not exist
and the Company recorded its equity of losses in Hebei Engineering
directly. The following tables represent summary financial information
for the Joint Venture (Hebei Equipment) as of and for the years ended
December 31, 1997 and summary financial information for Hebei
Engineering and its related projects in China as of and for the year
ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
HEBEI HEBEI HEBEI
EQUIPMENT ENGINEERING ENGINEERING
1997 1997 1996
<S> <C> <C> <C>
Revenues $ - $ 216,348 $ -
============== ============== ==============
Net (loss) income $ (1,239,100) $ (1,972,013) $ 15,359
============== ============== ==============
Current assets $ 4,891,936 $ 3,642,561 $ 4,064,878
Non-current assets 587,612 29,093,456 22,464,991
-------------- -------------- --------------
Total assets $ 5,479,548 $ 32,736,017 $ 26,529,869
============== ============== ==============
Current liabilities $ 3,715,850 $ 10,354,023 $ 1,184,725
Non-current liabilities - 21,331,600 22,322,737
-------------- -------------- --------------
Total liabilities $ 3,715,850 $ 31,685,623 $ 23,507,462
============== ============== ==============
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1998 1997
Furniture, fixtures and equipment $ 201,258 $ 176,962
Leasehold improvements 17,498 12,581
Computer software 12,273 12,274
--------- -----------
231,029 201,817
Less accumulated depreciation 91,893 48,461
--------- -----------
$ 139,136 $ 153,356
========= ===========
Depreciation expense for fiscal 1998, 1997 and 1996 was $43,432; $28,905
and $19,404, respectively.
4. LOANS PAYABLE - SHAREHOLDERS
Certain shareholders of the Company advanced funds to ITV, a wholly
owned subsidiary of the Company. These amounts are payable on demand
by ITV and bear interest at 8.5% per annum. There is no recourse to
AmTec for these loans.
5. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases a facility for its corporate and
operations offices under a long-term lease agreement. Minimum annual
rental commitments under this lease are as follows:
MARCH 31,
1999 $ 334,400
2000 334,400
2001 55,733
---------
$ 724,533
=========
Rent expense for fiscal 1998, 1997 and 1996 was $337,763, $369,969
and $399,992 respectively.
EMPLOYMENT AGREEMENTS - The Company has entered into employment
agreements with officers expiring through April 2002 with aggregate
annual salaries of $1,475,000.
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.
REGULATION - The PRC's legal system is a civil law system based on
written statutes and is a system in which decided legal cases have
little precedential value. The PRC Government began to promulgate a
comprehensive system of laws in 1979. Many laws and regulations
governing economic matters in general have been promulgated. The
general effect of this legislation has been to enhance the protection
afforded to foreign invested enterprises in the PRC. However, as these
laws and regulations are relatively new, their interpretation and
enforcement involve significant uncertainty.(See Note 17)
FOREIGN CURRENCY EXCHANGE - The Company's joint ventures will receive
nearly all of their revenue in Renminbi, which will need to be
converted to other currencies, primarily U.S. dollars, and remitted
outside of the PRC. Although the Renminbi is not a freely convertible
currency at present, effective July 1, 1996, foreign currency "current
account" transactions by foreign investment enterprises, including
Sino-foreign joint ventures, are no longer subject to the approval of
State Administration of Foreign Exchange ("SAFE", formerly, "State
Administration of Exchange Control"). These transactions need only a
ministerial review, according to the Administration of the Settlement,
Sale and Payment of Foreign Exchange Provisions promulgated in 1996.
"Current account" items include international commercial transactions,
which occur on a regular basis, such as those relating to trade and
provision of services. Distributions to joint venture parties also are
considered a "current account transaction." Other noncurrent account
items, known as "capital account" items, remain subject to SAFE
approval.
6. STOCKHOLDERS' EQUITY
CANCELLATION OF SERIES A CONVERTIBLE PREFERRED STOCK - On August 19,
1997, upon determination that the entire amount of a nonrefundable
deposit had been forfeited by a former affiliate, the Company canceled
all of the outstanding Series A Convertible Preferred Stock (the
"Series A Shares"). On December 19, 1995, the Company had issued
1,524,178 shares of the Company's Series A Shares in consideration of
the transfer of a $4,572,536 nonrefundable equipment purchase deposit
to the Company from a former affiliate. The Subscription Agreement for
the Series A Convertible Preferred Stock provided that, if all or any
portion of the deposit should be forfeited at any time and for any
reason whatsoever by the former affiliate an equivalent number of the
Series A Shares issued to it would be canceled.
CANCELLATION OF CERTAIN SHARES OF COMMON STOCK - On December 8, 1997,
the Company reduced its outstanding common stock and credited its
Additional Paid in Capital $12,728 as a result of canceling 12,727,909
shares of its common stock and 318,182 options to purchase its common
stock issued to Tweedia International, Ltd. The cancellation was based
on a determination that the full purchase price for the shares was
never paid. The 12,727,909 canceled shares represented approximately
thirty-eight percent of the total number of the Company's common
shares outstanding prior to the cancellation of such shares.
In addition, the Company canceled an agreement with a former
affiliate, which gave the Company a right of first refusal on certain
investment opportunities in the Peoples Republic of China. (See Note
12-"Related Party Transactions".)
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. 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.
In November 1996, the Company sold 1,000,000 shares of the Company's
common stock through subscription agreements. The Company received $2
million in proceeds with respect to these subscriptions. The price per
share reflected the quoted market value of the common shares at the
time of the transactions.
During fiscal 1998, 69,000 common shares were sold in connection with
the exercise of certain employee stock options. Proceeds from these
sales aggregated $34,750.
SERIES B CONVERTIBLE PREFERRED STOCK - In June 1996, the Company
completed a $2,500,000 offering of its Series B Convertible Preferred
Stock ("Series B Preferred"). The net proceeds the Company received
were approximately $2,341,000. The offering consisted of 100 shares of
Series B Preferred at $25,000 per share and warrants to purchase
common stock of the Company. Each warrant entitled the holder to
purchase one share of common stock at a fixed conversion price. During
fiscal 1997, all outstanding Series B shares were converted to
1,507,477 common shares.
SERIES D CONVERTIBLE PREFERRED STOCK - In March 1997, the Company
completed a $1,500,000 offering of its Series D Convertible Preferred
Stock ("Series D Preferred"). The offering consisted of 150 shares of
Series D Preferred at $10,000 per share and warrants to purchase
common stock of the Company. The holder was entitled to cumulative
dividends at the annual rate of 8% per annum per share, payable
quarterly in shares of Common Stock or, in cash in connection with any
payment pursuant to a Conversion Default at the election of the
Company's board of directors. During fiscal 1998, the Series D
Preferred was converted into common stock of the Company at a
conversion rate equal to the lowest trading price of the Company's
common stock during the 30 days preceding each conversion date. In
addition, the Series D Preferred shareholders converted their warrants
into common stock at prices aggregating $131,909. Such Series D
Preferred and warrants conversions aggregated 2,236,507 shares. In
connection with the discount for the above conversion, the Company
credited Additional Paid in Capital $48,677 and charged preferred
dividends in an equal amount.
SERIES C CONVERTIBLE PREFERRED STOCK - In June 1997, the Company
completed a $2,500,000 offering of its Series C Convertible Preferred
Stock ("Series C Preferred"). The offering consisted of 250 shares of
Series C Preferred at $10,000 per share and entitled the holder to
cumulative dividends at an annual rate of 8% per annum per share. The
dividends were payable quarterly in shares of Common Stock or, in cash
in connection with any payment pursuant to a Conversion Default at the
election of the Company's board of directors. Such Series C shares
were converted at conversion rates equal to the lowest trading price
of the Company's common stock during the 30 business days immediately
preceding each conversion date. During fiscal 1998, 219 outstanding
Series C shares were converted into 4,507,639 common shares. In
addition, the Company repurchased for consideration of $406,100 and
retired 31 Series C shares. In connection with the discount for the
above conversion, the Company credited Additional Paid in Capital
$260,784 and charged preferred dividends in an equal amount.
SERIES E CONVERTIBLE PREFERRED STOCK - On October 22, 1997, the
Company issued 74 shares of its Series E Convertible Preferred Stock,
par value $.001 per share (the "Series E Preferred Shares") at a price
of $100,000 per share and paying an 8% in-kind dividend. The net
proceeds the Company received were approximately $6,759,000. The
holders of Series E Preferred Stock have no voting rights except with
respect to certain matters that affect the rights related to the
Series E Preferred Stock.
Conversion of the Series E Shares into Common Stock, which are
restricted by certain "lock-up" agreements, is based on the lower of:
(i) the lesser of a 10% premium to the market price of the Company's
Common Stock, as reported on the American Stock Exchange, at the time
of the investment's closing or of a 10% premium to the 10 day average
trading price six months after the close or (ii) a discount to the
lowest trade during the five (5) trading days prior to each
conversion. The discount, which ranges from 15% to 20%, depends upon
the date of the shareholders' conversion of the Series E shares, with
the discount increasing as the period the shares are held increases.
Warrants were issued to five of the Series E Investors to purchase up
to 1,236,364 shares of the Company's Common Stock at a price equal to
120% of the market price of the Company's Common Stock at the time of
the investment's closing. The number of warrants issued to each
investor depended upon the amount invested and the length of the
"lock-up" agreed upon between the Company and investor.
The Company registered 13,832,792 shares of common stock on January
16, 1998, to cover the common stock issuable to the Series E Holders
upon conversion of their Series E shares and exercise of their
warrants. As of March 31, 1998, 0.8 share of the Series E Preferred
Stock was converted into 106,646 shares of the Company's common stock.
In connection with the discount for the above conversion, the Company
credited Additional Paid in Capital $1,089,225 and charged preferred
dividends in an equal amount.
STOCK WARRANTS - During fiscal 1998, the Company issued warrants to
purchase 326,171 shares of the Company's Common Stock to the Placement
Agent as fees for services in connection with the placement of the
Series E Convertible Preferred Stock described above. These warrants,
which are exercisable one year from the closing date, have an exercise
price of $2.475 per share and expire on October 22, 2002. The Company
has assigned a value of $161,450 to these warrants.
During fiscal 1998, the Company rescinded an agreement it entered into
in July 1996 with an investment banking firm in which such firm was to
act as a financial advisor to the Company. As part of this rescission
the Company canceled warrants to purchase 200,000 shares of the
Company's common stock. Professional fees and Warrants were reduced by
$147,000 to reflect this cancellation.
During fiscal 1997, the Company issued 186,111 warrants to purchase
the Company's common stock at a conversion price of 110% of the quoted
market value at the time of grant. The warrants were issued in
connection with the Company's issuance of Series B Preferred Shares
(see Series B Convertible Preferred Stock).
On October 15, 1996, the Company agreed to issue warrants to purchase
200,000 shares of the Company's Common Stock to an advisor for
services related to advising the Company with respect to its
Sino-foreign joint ventures and marketing activities in the PRC. The
warrants issued have a three year term and an exercise price of $1.50,
which was the market value of the Company's Common Stock the warrants
were issued. In connection with this agreement, the Company recorded
$110,000 in professional fees which management determined to be the
fair value of the warrants.
In connection with a financial services agreement which has since been
canceled, the Company issued 600,000 warrants to an investment banking
firm, 300,000 of which vested at the time the agreement was entered
into and 300,000 which were to vest when such firm had raised a
minimum of $10 million. With respect to the vested 300,000 warrants,
the Company recorded $222,500 in professional fees which management
determined to be the fair value of the warrants.
ISSUANCE OF COMMON STOCK FOR SERVICES - During the year ended March
31, 1998 the Company issued shares of its common stock for services
rendered. The number of shares issued in each case was based upon the
quoted market value of the stock at the issue date and the value of
the services rendered. Total shares issued in connection with these
services amounted to 63,233 covering the $151,957 of expenses which
are included in the accompanying financial statements.
In April 1996, two outside directors each received 5,000 shares of
common stock for a total value of $90,000 which was recorded as
compensation expense. The number of shares issued was based on the
quoted market value of the common stock at the time of issuance.
In May 1996, 5,000 shares of the Company's common stock were issued as
payment for $45,625 of services rendered. In December 1996, 5,000
shares of the Company's common stock were issued as payment for
$18,125 for services rendered. Both issuance have been recorded as
professional fees at a value of the quoted market price of the common
stock at the time of the transaction.
In October 1996, the Company entered into agreements to settle $98,000
of outstanding professional fees through the issuance of options to
purchase 44,962 common shares. The number of shares was determined
based upon the quoted market value of the shares at the time of
issuance.
THE PROMETHEAN COMMON STOCK EQUITY AGREEMENT - On March 31, 1997 the
Company entered into a Common Stock Investment Agreement with
Promethean Investment Group L.L.C. ("Promethean") pursuant to which
Promethean will provide a $10 million equity line to the Company. The
agreement, which is cancelable, by either party, was amended on April
29, 1997 to increase the equity line to $25 million. Pursuant to the
Common Stock Investment Agreement, the Company may sell from time to
time shares of Common Stock to Promethean by providing a notice (the
"Put Notice") containing the dollar amount (the "Required Dollar
Amount") of the shares of Common Stock to be sold during the thirteen
business day period commencing after the date of the Put Notice (the
"Purchase Period"). Promethean shall be obligated to purchase the
shares of Common Stock in the Required Dollar Amount specified in the
Put Notice with the election to purchase an additional 30% of the
Required Dollar Amount during the Purchase Period. Each of the shares
of Common Stock covered by the Required Dollar Amount (and any
additional amount of the shares of Common Stock to be sold during the
Purchase Period) shall be sold at 90% of the lowest of the daily low
trading price of the Common Stock, as quoted on the American Stock
Exchange, during the three trading days preceding the date of the Put
Notice. The Required Dollar Amount for each Put Notice shall be in
increments of $250,000 and shall not exceed the lesser of (i)
$1,500,000, subject to reductions of $75,000 for each trading day
during the Purchase Period in which the average per share dollar value
of the Common Stock traded on the American Stock Exchange is less than
$2.50, and (ii) 10% of the dollar value of the Common Stock traded on
the American Stock Exchange during the first ten trading days of the
Purchase Period if the average per share of such dollar value is equal
to or greater than $2.50 (subject to certain adjustment to account for
stock splits, stock dividends and other similar transactions). The
Company may not deliver a Put Notice to sell the shares of Common
Stock if the closing price of the Common Stock on the date prior to
the date of the intended Put Notice as reported on the American Stock
Exchange is less than $2.50 or if certain other conditions exist. The
Company has agreed to provide a minimum of $4,000,000 in Put Notices
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.
Initially, 1,570,998 shares were issued into escrow on behalf of
Promethean. During the year ended March 31, 1998, none of the shares
issued under this agreement were released from escrow. As of March 31,
1998, this agreement has not been utilized, no shares have been issued
and no monies have been received under this agreement. 551,533 of the
shares issued into escrow were canceled.
STOCK OPTIONS - The Company has adopted two stock option plans (the
AmTec, Inc. 1995 Stock Plan and the AmTec, Inc. 1996 Stock Option
Plan). Incentive and nonqualified options and stock appreciation
rights may be granted to employees, officers, directors, and
consultants of the Company. There are 12,500,000 shares of common
stock reserved for issuance under these plans. The exercise price of
the options are determined by the board of directors, but in the case
of an incentive stock option, the exercise price may not be less than
100% of the fair market value on the date of grant. Options vest over
periods not to exceed ten years.
A summary of the status of all of the Company's stock options issued
as of March 31, 1998, 1997 and 1996 and changes during the years then
ended is presented below:
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996
-------------------- ------------------- -------------------
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 7,905,000 $1.40 7,635,000 $1.39 350,000 $0.36
Granted 4,624,102 2.55 280,000 1.74 7,520,000 1.41
Exercised (69,000) (185,000) 0.36
Cancelled (10,000) 8.25
Forefeited (50,000) 0.36
Expired
Outstanding at end ---------- ----- --------- ----- --------- -----
of year 12,460,102 $1.42 7,905,000 $1.40 7,635,000 $1.39
========== ===== ========= ===== ========= =====
Options exercisable
at end of year 7,671,102 $1.28 4,155,000 $0.42 3,135,000 $0.35
========= ===== ========= ===== ========= =====
Weighted average fair
value of options
granted during
the year $ 0.53 $ 0.69 $ 0.44
========== ========= =========
</TABLE>
The above options include options granted to the Hebei Provincial
Government to acquire 3,000,000 shares of the Company's common stock
at a price of $3.0625 per share. These options vest 25% every six
months from the date of grant. In connection with granting these
options, $1,837,500 was recorded as a charge to Deferred Option Cost
and a corresponding credit was made to Additional Paid in Capital.
During fiscal 1998, Deferred Option Cost was amortized by $459,375.
The above options do not include 318,182 options granted and
subsequently canceled to Tweedia, a former affiliate.
The Company followed the guidelines under SFAS No. 123 to determine
the fair value of options at the date of grant. The value was
determined using an adjusted Black-Scholes option pricing model. The
Black-Scholes model is generally accepted as appropriate primarily for
short-term, exchange-traded options. For longer term options that do
not have the liquidity of an exchange traded option or where the
underlying common stock is not highly liquid, the Black-Scholes
formula needs to be adjusted, especially in reference to the
volatility measurement used. The Company's stock is thinly traded,
averaging around 100,000 shares per day, and cannot be considered
highly liquid. For the purpose of valuing the Company's options, which
have a ten year life, the following assumptions were used, where the
volatility measurement was based on management's expectations and
judgement:
Risk-free rate 5.64%
Volatility 20-23%
Expected Life 5 years
Expected Dividends 0%
The following table summarizes information about options outstanding
at March 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED NUMBER
RANGE NUMBER AVERAGE EXERCISABE
OF OUTSTANDING REMAINING AVERAGE OPTIONS AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE AT EXERCISE
PRICES MARCH 31, 1998 LIFE (YEARS) PRICE MARCH 31, 1998 PRICE
<S> <C> <C> <C> <C> <C>
$0.35-0.355 4,625,000 8.11 0.350 4,625,000 0.350
0.75 250,000 10.00 0.750 125,000 0.750
1.5 520,102 9.00 1.500 145,102 1.500
2.125 1,055,000 10.00 2.125 523,500 2.125
3.000 3,010,000 9.00 3.000 1,502,500 3.000
3.05-3.10 3,000,000 9.00 3.0625 750,000 3.063
---------- ---------
12,460,102 7,671,102
========== =========
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net loss applicable to common shares -
as reported $(6,802,054) $(4,074,885)
============== ============
Net loss - pro forma $(8,635,367) $(4,268,970)
============== ============
Loss per common share - as reported $ (0.23) $ (0.14)
============== ============
Loss per common share share - pro forma $ (0.29) $ (0.15)
============== ============
</TABLE>
7. NONREFUNDABLE DEPOSIT
On March 31, 1998, the Company reduced loans payable of $850,000
related to a nonrefundable deposit it received from a former
affiliate. Additional paid in capital was credited for an equal
amount.
8. INCOME TAXES
The Company had net losses for 1998, 1997 and 1996 and, therefore,
no income taxes have been provided.
As of March 31, 1998, the Company has federal net operating loss carry
forwards of approximately $13,848,606 through 2012.
Significant components of the Company's deferred assets and tax
liabilities for federal income taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 6,394,688 $ 5,085,404
Start-up and other costs 3,027,575 2,360,307
Research credit 266,000 266,000
------------- -------------
Total deferred tax assets 9,688,263 7,711,711
Valuation allowance for deferred tax assets (9,688,263) (7,711,711)
------------- -------------
Net deferred tax assets $ - $ -
============= =============
</TABLE>
The net change in the valuation allowance for the years ended March
31, 1998 and 1997 was an increase of $1,976,552 and $3,249,171,
respectively.
9. MAJOR CUSTOMERS
During the year ended March 31, 1996, 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.
10. SALE OF BUSINESS
In January 1996, the Company sold the business and the related
operating assets ("Asset Sale") 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). In
addition, the Company received an equity interest in another company,
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 14)
The Company recorded $130,840 loss from abandoned assets during the
year ended March 31, 1996 which was a non-recurring "write-off" of
certain remaining assets of ITV that were not sold in the ITV Asset
Sale. The Company wrote off the $130,840 book value because these
assets would not contribute to the generation of revenues for the
Company in the future and thus were considered impaired assets.
11. INVESTMENT IN NETMATICS
The Company held a 39% (as of March 31, 1997) ownership 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. 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.
The Company is not required either contractually or otherwise to fund
any additional losses of Netmatics or make any additional capital
investments. In addition, the Company has not guaranteed any of
Netmatics debt. Due to its poor operating results, huge accumulated
losses and lack of financing, Netmatics Inc. ceased operation as of
March 31, 1997. The Company considered its receivable from Netmatics
Inc. not recoverable and wrote off the advance and debentures due from
Netmatics.
12. RELATED PARTY TRANSACTIONS (SEE NOTE 6 REGARDING THE CANCELLATION OF
THE 12,727,909 SHARES OF COMMON STOCK AND THE MASTER AGREEMENT)
GENERAL - In February 1995, pursuant to a Reorganization Agreement,
Tweedia International, Ltd. became the owner of approximately
12,727,909 shares, or 41%, of the Company's issued and outstanding
Common Stock. The Company was informed that 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 nonPRC stock exchanges are substantive in nature
and are not normally readily obtained in the PRC.
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 CATCH. The Master Agreement supersedes certain
terms of other prior agreements between the Company and Beijing CATCH
concerning cooperation on telecommunications projects. 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.
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. 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 amount defaulted
on by Beijing CATCH. (See Note 2 as to the Company's acquisition of
Beijing Catch's interest.)
13. ITEMS RECORDED IN THE FOURTH QUARTER
The Company recorded the following noncash items in the fourth quarter:
Preferred stock dividends payable in the form of common stock
of $1,399,000;
A value of stock options awarded to non employees of $1,837,500 was
recognized and $459,375 of such value was amortized, and
Professional fees were reduced by $147,000 as a result of the
cancellation of 200,000 warrants issued to an investment-banking firm.
14. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEAR 1996
In January 1996, the Company sold all of the business and operating
assets of ITV. Prior to sale, ITV was engaged in the design,
manufacture and sale of technologically advanced communication
devices. Subsequent to the issuance of the Company's financial
statements for the year ended March 31, 1998, the Company's management
determined that the sale of ITV's business should have been accounted
for using accounting for discontinued operations. Previously, the
result of ITV's business was included in the financial statements as
part of continuing operations for the year ended March 31, 1996. As a
result, the Statement of Operations and Statement of Cash Flow for the
year ended March 31, 1996, have been restated to show the discontinued
operations.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEAR ENDED MARCH 31,
1996 1996
---- ----
AS PREVIOUSLY AS
REPORTED RESTATED
<S> <C> <C>
REVENUES $ 683,733 $ -
--------------- ---------------
EXPENSES:
Cost of revenues 637,065 -
Selling, general and administrative 3,207,570 2,515,554
Research and development 1,287,629 -
--------------- ---------------
Total expenses 5,132,264 2,515,554
--------------- ---------------
LOSS FROM CONTINUING OPERATIONS (4,448,531) (2,515,554)
--------------- ---------------
OTHER INCOME (EXPENSE):
Gain from sale of assets 31,880 -
Loss from abandoned assets (130,840) (130,840)
Interest expense (241,856) (241,856)
Other - net 7,617 7,617
--------------- ---------------
Total other expense (333,199) (365,079)
--------------- ---------------
LOSS FROM CONTINUING OPERATIONS
BEFORE EQUITY IN LOSSES OF
UNCONSOLIDATED SUBSIDIARY (4,781,730) (2,880,633)
Equity in losses of unconsolidated subsidiary (500,000) (500,000)
---------------- --------------
LOSS FROM CONTINUING OPERATIONS (5,281,730) (3,380,633)
---------------- ---------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations - (1,932,977)
Gain on sale of discontinued operations - 31,880
--------------- ---------------
LOSS FROM DISCONTINUED OPERATIONS
- (1,901,097)
--------------- ---------------
NET LOSS (5,281,730) (5,281,730)
PREFERRED STOCK DIVIDEND - -
--------------- ---------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (5,281,730) $ (5,281,730)
=============== ===============
BASIC LOSS PER SHARE:
Loss from continuing operations $ (0.21) $ (0.13)
Loss from discontinued operations - (0.08)
--------------- ---------------
BASIC LOSS PER COMMON SHARE $ (0.21) $ (0.21)
=============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 25,651,045 25,651,045
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEAR ENDED MARCH 31,
1996 1996
---- ----
AS PREVIOUSLY AS
REPORTED RESTATED
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,281,730) $ (5,281,730)
Add: Loss from discontinued operations - 1,932,977
Less: Gain from sales of discontiued operations - (31,880)
--------------- ---------------
Net loss from continuing operations (5,281,730) (3,380,633)
Adjustments to reconcile net loss to net cash
used in Continuing operating activities:
Amortization of capitalized software development
cost 281,250 -
Depreciation 346,005 19,404
Loss from abandoned assets 130,840 130,840
Gain from sale of assets (31,880) -
Equity in losses of unconsolidated subsidiary 500,000 500,000
(Increase) decrease in:
Accounts receivable 98,895 -
Inventories (96,091) -
Prepaid expenses and other current assets (91,200) (41,813)
Office lease deposit - (167,200)
Other assets (131,887) -
Increase (decrease) in:
Accounts payable and accrued expenses 1,251,464 1,251,464
Loans payable - stockholders 136,982 136,982
--------------- ---------------
Net cash used in continuing operations (2,887,352) (1,550,956)
Net cash used in discontinued operations - (1,336,396)
--------------- ---------------
Net cash used in operating activities (2,887,352) (2,887,352)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (119,592) (119,592)
Investment in unconsolidated subsidiary (1,170,000) (1,170,000)
Proceeds from sale of assets 250,000 250,000
--------------- ---------------
Net cash used in investing activities (1,039,592) (1,039,592)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 739,952 739,952
Proceeds from sale of common stock 2,193,983 2,193,983
--------------- ---------------
Net cash provided by financing activities 2,933,935 2,933,935
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (993,009) (993,009)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,178,898 1,178,898
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 185,889 $ 185,889
=============== ===============
</TABLE>
15. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEARS 1998
AND 1997
Subsequent to the issuance of the Company's financial statements for
the year ended March 31, 1998, the Company's management determined
that Hebei Equipment, should have been accounted for under the equity
method of accounting, as the minority shareholders have substantive
participating rights under the joint venture contracts. Previously,
Hebei Equipment had been consolidated. As a result, the financial
statements as of March 31, 1998 and 1997, and for the two years ended
March 31, 1998, have been restated from amounts previously reported to
account for Hebei Equipment under the equity method of accounting. A
summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31,
1998 1998 1997 1997
---- ---- ---- ----
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
ASSETS
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash $10,442,334 $2,134,662 $5,390,871 $1,346,713
Accounts receivable 114,661 114,661 - -
Prepaid expenses and other current assets 356,554 108,082 182,090 171,921
----------- ---------- ----------- ---------
TOTAL CURRENT ASSETS 10,913,549 2,357,405 5,572,961 1,518,634
Investment in unconsolidated subsidiary - 5,074,217 1,192,000 2,221,476
Property, plant & equipment, net 897,265 139,136 518,020 153,356
Investment in GSM network, net of amortization 28,461,810 - 22,017,869 -
Office lease deposit 113,180 112,600 111,500 111,500
Deferred expenses 6,916 - 5,853 -
----------- ---------- ----------- ---------
TOTAL ASSETS $40,392,720 $7,683,358 $29,418,203 $4,004,966
=========== ========== ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $551,705 $541,888 $991,194 $261,193
Accrued expenses 798,376 792,006 780,902 782,132
Loans payable - shareholders 1,452,553 1,452,553 2,413,553 2,413,553
Other current payables 10,234,872 - 450,685 -
----------- ---------- ----------- ---------
TOTAL CURRENT LIABILITIES $13,037,506 $2,786,447 4,636,334 $3,456,878
Loans payable 20,028,602 - 11,956,486 -
Other payables 1,487,727 - 10,290,128 -
Minority interest 941,974 - 1,987,167 -
----------- ---------- ----------- ---------
TOTAL LIABILITIES 35,495,809 2,786,447 28,870,115 3,456,878
STOCKHOLDERS' EQUITY
Preferred Stock: authorized 10,000,000 shares:
Series A Convertible Preferred Stock: $.001
par value; 0 and 1,524,178 shares issued and
outstanding in 1998 and 1997, respectively - - 1,524 1,524
Series D Convertible Preferred Stock: $.001
par value; 0 and 150 shares issued
and outstanding in 1998 and 1997, respectively - - 1 1
Series E Convertible Preferred Stock: $.001
par value; 73 and 0 shares issued and outstanding
in 1998 and 1997, respectively 1 1 - -
Common stock: $.001 par value, authorized
100,000,000 shares; 26,532,502 and
31,257,921 issued and outstanding in 1998
and 1997, respectively 26,533 26,533 31,258 31,258
Additional paid-in capital 33,148,529 33,149,142 25,202,108 25,200,877
Accumulated deficit (27,394,590) (27,394,590) (20,592,536) (20,592,536)
Cumulative foreign currency exchange loss 613 - (1,231) -
Non-refundable equipment purchase deposit - - (4,572,536) (4,572,536)
Non employee deferred option cost, net (1,378,125) (1,378,125) - -
Warrants 493,950 493,950 479,500 479,500
----------- ---------- ----------- ---------
TOTAL STOCKHOLDERS' EQUITY
4,896,911 4,896,911 548,088 548,088
----------- ---------- ----------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $40,392,720 $7,683,358 $29,418,203 $4,004,966
=========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31,
1998 1998 1997 1997
---- ---- ---- ----
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
<S> <C> <C> <C> <C>
Revenues $ 216,348 $ - $ - $ -
-------------- ------------- ------------- ---------
Expenses:
Cost of revenues
Selling, general and administrative 4,254,009 4,282,613 3,996,151 3,563,568
Amortization of GSM networks 2,183,068 - - -
-------------- ------------- ------------- ---------
6,437,077 4,282,613 3,996,151 3,563,568
-------------- ------------- ------------- ---------
Loss from operations (6,220,729) (4,282,613) (3,996,151) (3,563,568)
-------------- ------------- ------------- ---------
Other income (expense)
Rental income 95,667 - 42,420 -
Interest income 239,067 - 152,824 -
Amortization stock options granted
non employees (459,375) (459,375) - -
Loss from abandoned assets (87,441) - - -
Interest expense (125,586) (125,586) (129,039) (129,039)
Exchange loss (3,484) - (19,490) -
Other - net 113,320 70,853 - (33,216)
Write off investment in affiliate - - (198,538) (198,538)
-------------- ------------- ------------- ---------
Total other income (expense) (227,832) (514,108) (151,823) (360,793)
-------------- ------------- ------------- ---------
Loss before minority interest and
equity interest (6,448,561) (4,796,721) (4,147,974) (3,924,361)
Equity in losses of unconsolidated
subsidiary - (606,647) - (140,524)
Minority interest in loss of
subsidiaries 1,045,193 - 83,089 -
-------------- ------------- ------------- ---------
Net loss (5,403,368) (5,403,368) (4,064,885) (4,064,885)
Preferred stock dividend 1,398,686 1,398,686 10,000 10,000
-------------- ------------- ------------- ---------
Loss applicable to common shareholders $ (6,802,054) $ (6,802,054) $ (4,074,885) $(4,074,885)
============== ============ ============= ============
Basic loss per common share $ (0.23) $ (0.23) $ (0.14) $ (0.14)
============== ============ ============= ============
Weighted average common shares
outstanding 29,843,712 29,843,712 29,102,347 29,102,347
============== ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEAR ENDED MARCH 31,
1998 1998 1997 1997
---- ---- ---- ----
As previously As As preivously As
Reported Restated Reported Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss $(5,403,368) $(5,403,368) $ (4,064,885) $(4,064,885)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred option cost 459,375 459,375 - -
Depreciation and amortization of GSM investment 2,274,443 43,432 43,193 28,905
Loss from abandoned assets 87,441 87,441 - -
Minority interest in net loss - - 83,089 -
Issuance of warrants for services rendered - - 479,500 479,500
Issuance of common stock and options for directors'
fees and professional services rendered 151,957 151,957 725,091 725,091
Equity in losses of unconsolidated subsidiary - 606,647 - 140,524
(Increase) decrease in:
Accounts receivable (114,661) (114,661) - -
Inventories - - - -
Prepaid expenses and other current assets (174,464) 63,839 5,948,801 (111,243)
Office lease deposit (1,680) (1,100) 55,700 55,700
Other assets - - - -
Deferred expenses (1,063) - 59,412 -
Increase (decrease) in:
Accounts payable and accrued expenses (422,015) 293,027 98,221 (485,959)
Other current payable 9,784,187 - - -
Loans payable - stockholders (111,000) (111,000) 129,839 (150,000)
Minority interest (1,045,193) - - -
------------ ----------- ---------- ---------
Net cash provided by (used in) operating
activities 5,483,959 (3,924,411) 3,557,961 (3,382,367)
------------ ----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Netmatics (87,441) (87,441) - -
Purchase of property and equipment (470,620) (29,212) (362,417) (106,028)
Investment in unconsolidated subsidiary - (276,000) 1,170,000 (654,000)
GSM construction cost (8,627,007) - (21,880,584) -
Joint venture's net liabilities assumed - - 6,549,703 -
Timing reversal of investment in unconsolidated 1,192,000 - (1,192,000) -
------------ ----------- ---------- ---------
Net cash used in investing activities (7,993,068) (392,653) (15,715,298) (760,028)
------------ ----------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Warrants issued for services rendered - net of
charges to APIC Borrowings (215,546) (215,546) - -
Borrowings 8,072,116 - 11,521,100 -
Other long-term payables (8,802,401) - - -
Loans payable to stockholders 25,000 25,000 - -
Advance to joint venture partner (540,000) (3,724,000) - (538,000)
Proceeds from sale of common stock 166,659 166,659 2,000,000 2,000,000
Proceeds from sale of Series B convertible preferred
stock - - 2,341,219 2,341,219
Proceeds from sale of Series D convertible preferred
stock - - 1,500,000 1,500,000
Proceeds from sale of Series C convertible preferred
stock - net 2,093,900 2,093,900 - -
Proceeds from sale of Series E convertible preferred
stock 6,759,000 6,759,000 - -
------------ ----------- ---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,558,728 5,105,013 17,362,319 5,303,219
------------ ----------- ---------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,844 - - -
------------ ----------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,051,463 787,949 5,204,982 1,160,824
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,390,871 1,346,713 185,889 185,889
------------ ----------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $10,442,334 $2,134,662 $5,390,871 $1,346,713
============ =========== ========== ===========
</TABLE>
16. SELECTED QUARTERLY DATA (UNAUDITED)
The following table sets forth selected quarterly financial
information beginning October 1,1996 (the period when AmTec first
started consolidating the operating results of its Hebei Investments)
through March 31, 1998:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1996 March 31, 1997
--------------------------- ---------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Revenue $ - $ - $ - $ -
Expenses 999,947 845,324 1,133,023 1,099,429
Loss from Operations (999,947) (845,324) (1,133,023) (1,099,429)
Other Income(Expense) (504,153) (3,313) 534,164 (230,998)
Equity in Loss of Unconsolidated Subsidiaries (115,061) (347,163) - 226,845
Minority Interest in Loss of Subsidiaries 423,361 - (504,723) -
Net Loss (1,195,800) (1,195,800) (1,103,582) (1,103,582)
Preferred Stock Dividend - - 10,000 10,000
Loss Applicable to Common Share (1,195,800) (1,195,800) (1,113,582) (1,113,582)
Basic Loss per Common Share (0.04) (0.04) (0.04) (0.04)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1997 September 30, 1997
--------------------------- ---------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Revenue $ - $ - $ - $ -
Expenses 2,369,632 1,100,148 553,147 1,279,350
Loss from Operations (2,369,632) (1,100,148) (553,147) (1,279,350)
Other Income(Expense) (21,017) (30,200) (169,484) (118,174)
Equity in Loss of Unconsolidated Subsidiaries - (461,879) - 198,172
Minority Interest in Loss of Subsidiaries 798,422 - (476,721) -
Net Loss (1,592,227) (1,592,227) (1,199,352) (1,199,352)
Preferred Stock Dividend 108,000 108,000 - -
Loss Applicable to Common Share (1,700,227) (1,700,227) (1,199,352) (1,199,352)
Basic Loss per Common Share (0.05) (0.05) (0.04) (0.04)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1997 March 31, 1998
--------------------------- ---------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Revenue $ - $ - $ 216,348 $ -
Expenses 1,207,104 911,314 2,307,194 1,451,176
Loss from Operations (1,207,104) (911,314) (2,090,846) (1,451,176)
Other Income(Expense) 21,339 54,487 (58,670) 39,154
Equity in Loss of Unconsolidated Subsidiaries - (56,567) - (286,374)
Minority Interest in Loss of Subsidiaries 272,371 - 451,120 -
Net Loss (913,394) (913,394) (1,698,396) (1,698,396)
Preferred Stock Dividend 114,891 114,891 1,175,795 1,175,795
Loss Applicable to Common Share (1,028,285) (1,028,285) (2,874,191) (2,874,191)
Basic Loss per Common Share (0.04) (0.04) (0.10) (0.10)
</TABLE>
17. CHINA CONTINGENCY (UNAUDITED)
The current PRC regulations prohibit foreign investors and foreign
invested enterprises from operating or participating in the operation
of telecommunications networks in China. The relevant PRC laws and
regulations do not define what constitutes foreign operations or
participation in operations, and it is not clear what rights or
actions would violate such laws and regulations. Based on advice of
its Chinese legal counsel, the Company has structured its investments
in China by establishing Chinese-foreign joint ventures in the PRC to
provide financing and consultancy services to licensed
telecommunications operators, i.e., utilizing the commonly-known
Chinese-Chinese-Foreign ("CCF") structure. The PRC Government is
currently undertaking a review of the CCF structure used by Unicom. It
has been reported that Unicom has been instructed by the PRC
Government not to use the CCF structure in the future and that the PRC
Government is examining and evaluating the existing CCF contracts. It
is unclear if, and to what extent, the existing CCF contracts entered
into by Unicom will be required to be amended. It is also unclear
whether foreign entities involved in the CCF structures will be
required to divest themselves of their respective interests in the
Chinese-foreign joint venture companies. The evaluation of the CCF
structure by the PRC Government may have a material adverse impact on
the contracts entered into by Hebei Engineering and by the Company
which utilize the CCF structure and may have a material adverse effect
on the Company's business, financial condition and results of
operations.
In order to provide a uniform regulatory framework to encourage the
orderly development of the PRC telecommunications industry, the PRC
authorities are currently preparing a draft Telecommunications Law.
Once formulated, the draft law will be submitted to the National
People's Congress for review and adoption. It is unclear if and when
the Telecommunications Law will be adopted. The nature and the scope
of the regulation envisaged by the Telecommunications Law is not fully
known but the Company believes that, if adopted, the
Telecommunications Law will have a positive effect on the overall
development of the telecommunications industry in the PRC. However,
the Telecommunications Law, if adopted, may have an adverse effect on
the Company's business, financial condition or results of operations.
The Chinese laws and regulations governing the telecommunications
industry may also be changed or applied in a manner which would have a
material adverse effect on the business, financial condition and
results of operations of the Company.
Each of the Company's joint ventures, Hebei Equipment and Hebei
Engineering, is organized under the laws of the PRC as a Sino-foreign
equity joint venture enterprise, a distinct legal entity with limited
liability. Such entities are governed by the Law of the PRC on Joint
Ventures Using Chinese and Foreign Investments, and implementing
regulations related thereto. The parties to an equity joint venture
have rights to the financial returns of the joint venture in
proportion to the joint venture interests that they hold. The
operation of equity joint ventures is subject to an extensive body of
law governing such matters as formation registration, capital
contribution, capital distributions, accounting, taxation, foreign
exchange, labor and liquidation. The transfer or increase of an
interest in a Sino-foreign equity joint venture enterprise requires
agreement among the parties to the venture and is effective upon
approval of relevant government agencies. (See Note 2)
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
We have audited the accompanying balance sheets of Hebei United
Telecommunications Equipment Co., Ltd. as of December 31, 1997 and the
related statements of operations, investors' equity and cash flows for the
period from April 29, 1997 (commencement of operations) to December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hebei United Telecommunications
Equipment Co., Ltd. as of December 31, 1997 and the results of its
operations and its cash flows for the period from April 29, 1997
(commencement of operations) to December 31, 1997 in conformity with
accounting principles generally accepted in the United States of America.
Deloitte Touche Tohmatsu
Beijing, People's Republic of China
June 11, 1998
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
BALANCE SHEET
DECEMBER 31, 1997
December 31,
---------------
1997
---------------
RMB
ASSETS
Current Assets:
Cash and cash equivalents 39,500,312
Other receivables 1,102,753
---------------
Total current assets 40,603,065
Property and equipment, net 493,430
Investment in Joint Venture 4,383,750
---------------
Total Assets 45,480,245
===============
LIABILITIES AND
INVESTORS' EQUITY
Current Liabilities:
Amount due to an investor 30,808,631
Other payables 32,925
---------------
Total current liabilities 30,841,556
---------------
Total Liabilities 30,841,556
---------------
Commitment and Contingency
Investors' equity:
Capital contribution 24,923,218
Accumulated deficit (10,284,529)
---------------
Total Investors' equity 14,638,689
---------------
Total Liabilities and Investors' Equity 45,480,245
===============
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 29, 1997 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1997
April 29, 1997
(commencement of
operation) to
December 31, 1997
------------------
RMB
General and administrative expenses (758,658)
Other (expense) income:
Operation set up expense (2,000,000)
Equity in losses of Joint Venture (8,347,533)
Exchange loss (24,680)
Interest income 846,342
------------------
Net loss (10,284,529)
==================
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
STATEMENTS OF INVESTORS' EQUITY
AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
Capital Accumulated
Contribution Deficit Total
--------------- -------------- -------------
RMB RMB RMB
<S> <C> <C> <C>
Balance, April 29, 1997 - - -
Capital contribution 24,923,218 - 24,923,218
Net loss - (10,284,529) (10,284,529)
--------------- -------------- -------------
Balance, December 31, 1997 24,923,218 (10,284,529) 14,638,689
=============== ============== =============
</TABLE>
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM APRIL 29, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1997
April 29.1997
(commencement
of operations)
to December 31,
1997
-----------------
RMB
Cash flows from operating activities:
Net loss (10,284,529)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 37,928
Equity in losses of Joint Venture 8,347,533
Changes in assets and liabilities:
Other receivables (1,102,753)
Other payables 32,925
-----------------
Net cash provided by operating activities (2,968,896)
-----------------
Cash flows from investing activities:
Additions of property and equipment (531,358)
-----------------
Net cash used in investing activities (531,358)
-----------------
Cash flow from financing activities:
Amount due to an investor 30,808,631
Capital contribution 12,191,935
-----------------
Net cash provided by financing activities 43,000,566
-----------------
Net increase in cash and cash equivalents 39,500,312
Cash and cash equivalents, beginning of period -
-----------------
Cash and cash equivalents, end of period 39,500,312
=================
Non-cash transactions:
During the period ended December 31, 1997, DEVELOPMENT CO. and CATCH
contributed their interest in a Joint Venture valued at RMB 12,731,283 into
the Company as capital contribution.
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
The Company was established on April 29, 1997 as a limited liability
joint venture company in the People's Republic of China ("PRC"). The
period of operation is twenty years. The registered capital of the
Company was US$3 million, of which 60.8% (US$ 1.824 million) was
contributed by AmTec, Inc. (formerly known as AVIC Group
International, Inc.), 9.2% (US$ 276,000) by CATCH Telecommunication
Co., Ltd. (the "CATCH") and 30% (US$ 900,000) by Hebei United
Telecommunications Development Co., Ltd. (the "DEVELOPMENT CO."). On
November 7, 1997, CATCH agreed to transfer its interest in the
Company to AmTec, Inc. Subsequent to the transfer (which occurred
after December 31, 1997), AmTec, Inc. owns 70% (US$ 2.1 million) and
DEVELOPMENT CO. owns 30% (US$900,000) of the Company's registered
capital. The Company's major activity to date is an investment in a
Chinese joint venture which is mainly engaged in the development and
construction of telecommunication systems, and providing related
technical consulting and repair services.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America ("US
GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the Company, which are required to
be prepared in accordance with the accounting principles and
relevant financial regulations as established by the Ministry of
Finance of the PRC.
The principal adjustments made to conform the statutory financial
statements of the Company to US GAAP included the following:
- Adjustment to write off organization and operation set up expenses.
- Adjustment to write off exchange loss.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies which have been adopted in
preparing the financial statements set out in this report, and which
conform with accounting principles generally accepted in the United
States of America are as follows:
Cash and cash equivalents - Cash and cash equivalents include cash
on hand, demand deposits and highly liquid instruments with a
maturity of three months or less at the time of purchase.
Property and equipment - Property and equipment is stated at cost
less accumulated depreciation. Depreciation is provided using the
straight-line method to write off the cost of property and
equipment, net of the estimated residual value of 10% of cost, over
their estimated useful lives as follows:
Furniture, fixture and equipment 5 years
Motor vehicles 5 years
Long lived assets - The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that
the net carrying amount may not be recoverable. When such events
occur, the Company measures impairment by comparing the carrying
value of the long-lived asset to the estimated undiscounted future
cash flows expected to result from the use of the assets and their
eventual disposition. If the sum of the expected undiscounted future
cash flows is less than the carrying amount of the assets, the
Company would recognize an impairment loss. The impairment loss, if
determined, would be measured as the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
Investment in Joint Venture - Hebei Equipment owns 51% of Hebei
United Telecommunications Engineering Company, Ltd. ("Hebei
Engineering"). Hebei Equipment accounts for its investment using
equity method of accounting as minority shareholders of Hebei
Engineering have substantive participating rights under the joint
venture contracts. Under the equity method, the investment is
carried at cost of acquisition, plus Hebei Equipment's equity in
undistributed earnings or losses since acquisition. Equity in the
losses of the unconsolidated subsidiary is recognized according to
the Company's percentage ownership in the unconsolidated subsidiary
until the Company contributed capital has been fully depleted.
Income tax - Deferred income taxes are provided for using the
liability method. Under the liability method, deferred income taxes
are recognized for all significant temporary differences between the
tax and financial statement bases of assets and liabilities. The tax
consequences of those differences are classified as current or
non-current based upon the classification of the related assets or
liabilities in the financial statements. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of, the
deferred tax assets will not be realized.
Foreign currency translation - The Company's financial statements
are prepared using Renminbi as the reporting currency. Foreign
currency transactions are translated at the rates ruling on the
dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated at the rates ruling
on the balance sheet date. Exchange gains and losses are reported in
the statement of operation.
Concentration of credit risk - Financial instruments that
potentially subject the Company to concentrations of credit risk
consist principally of temporary cash investments.
The Company places its temporary cash investments with various
financial institutions in the PRC. The Company believes that no
significant credit risk exists as these investments are made with
high-credit, quality financial institutions.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
recorded amounts of assets and liabilities and disclosures of
contingent assets and liabilities in the financial statements and
recorded amounts of revenue and expenses during the period . Actual
results could differ from these estimates.
Fair value of financial instruments - The carrying values of cash
and cash equivalents, other receivables, other payables, and amount
due to an investor approximate fair value because of the short
maturity of these instruments.
Comprehensive Income - In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income." This statement is effective for financial
statements issued for periods beginning after December 15, 1997.
Management is evaluating the effect on its financial reporting of
the adoption of this statement.
Segments of an Enterprise and Related Information - In June 1997,
the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131
requires the reporting of profit and loss, specific revenue and
expense items, and assets for reportable segments. It also requires
the reconciliation of total segment revenues, total segment profit
or loss, total segment assets, and other amounts disclosed for
segments, in each case to the corresponding amounts in the general
purpose financial statements. The Company has not yet determined
what additional disclosures may be required in connection with
adopting SFAS 131.
New accounting standard not yet adopted - The Financial Accounting
Standards Board has issued a new standard SFAS No. 133 "Derivative
Instruments and Hedging Activities", which is effective for fiscal
years beginning after June 15, 1999. Management has not yet
completed the analysis of the impact this would have on the
financial statements of the Company and has not adopted this
standard.
4. OPERATION SET UP EXPENSE
Amount represents payment to CATCH for services provided in
connection with the formation of the Company.
5. INCOME TAX
The statutory income tax rate of the Company is 33%. There is no
provision for the income taxes during the period from April 29, 1997
(commencement of operation) to December 31, 1997 as the Company
incurred losses during the relevant periods. Deferred tax assets of
RMB639,209 existed as at the end of 1997, arising from a temporary
difference. A valuation allowance has been fully provided against the
deferred tax assets since it is considered more likely than not that
all of the deferred assets will not be realized.
Deferred tax assets are composed of the following:
December 31,
--------------
1997
---------------
RMB
Operation set up expense 660,000
Organization expenses (60,980)
Exchange gain/loss 8,144
Other deferred assets written off 32,045
Valuation allowance (639,209)
---------------
-
===============
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
--------------
1997
---------------
RMB
At cost:
Furniture, fixtures and equipment 233,958
Motor vehicles 297,400
---------------
531,358
Less: Accumulated depreciation 37,928
---------------
493,430
===============
All assets are located in the PRC.
7. INVESTMENT IN A JOINT VENTURE
Hebei Equipment holds a 51% interest in Hebei Engineering, which is
developing GSM networks in the ten largest cities in Hebei Province,
PRC. Nippon Telegraph and Telephone International, Inc. ("NTT") and
Itochu Corporation hold the remaining 49% interest in Hebei
Engineering.
Hebei Equipment's investment in the joint venture were accounted for
by the equity method of accounting because minority shareholders of
Hebei Engineering have substantive participating rights under the
provision of the Joint Venture contracts.(See Note 3)
December 31,
--------------
1997
--------------
RMB
Cost 12,731,283
Less: Share of losses (8,347,533)
---------------
4,383,750
==============
Hebei Engineering is a Sino-foreign equity joint venture established
on January 31, 1996 in the PRC. The period of operation is
twenty-five years. The registered capital of the Company is US$ 3
million. The Company is mainly engaged in the development and
construction of telecommunication systems, and providing related
technical consulting services.
The summarized balance sheet of Hebei Engineering as of December 31,
1997 and its summarized statement of operations for the year ended
December 31, 1997 are as follows:
Balance Sheet
December 31,
1997
---------------
RMB
ASSETS
Current Assets 30,233,253
Other assets 5,840,362
Investment in GSM networks 235,635,325
---------------
Total Assets 271,708,940
===============
LIABILITIES AND INVESTORS' EQUITY
Current liabilities 85,938,393
Long-term Liabilities: 177,052,277
---------------
Total Liabilities 262,990,670
---------------
Investors' equity 8,718,270
---------------
Total Liabilities and Investors' Equity 271,708,940
===============
Statement of operations
Year ended
December 31,
1997
---------------
RMB
Net revenue from GSM networks 1,706,499
Total expenses (20,348,240)
---------------
Net loss from operations (18,641,741)
Total other income, net 2,274,029
---------------
Net loss (16,367,712)
===============
8. AMOUNT DUE TO AN INVESTOR
Amount represents funds advanced to Hebei Equipment by AmTec, Inc.
These amounts are payable on demand and bear no interest.
The guarantee fees paid and payable to NTT and ITOCHU by Hebei
Engineering represent fees payable to them for providing a guarantee
to a GSM supplier and a bank in favor of Hebei Engineering.
9. CAPITAL CONTRIBUTION
December 31, 1997
----------------------------------
Ownership RMB
Capital contributed by:
DEVELOPMENT CO. 30% 7,480,150
AmTec Inc. 70% 17,443,068
--------------- ----------------
100% 24,923,218
=============== ================
10. COMMITMENTS
The Company leases certain buildings under operating leases, which
expire through March 1999. Rental expense under operating leases was
RMB 62,580 in 1997.
The aggregate annual minimum operating lease commitments under all
non-cancellable leases at December 31, 1997 is as follows:
December 31,
---------------
1997
---------------
RMB
1998 100,100
1999 16,700
---------------
116,800
===============
11. RETIREMENT BENEFITS
The Company's retired employees are entitled to a retirement pension
calculated with reference to their basic salaries on retirement and
their length of service in accordance with a government managed
pension plan. The PRC government is responsible for the pension
liability to these retired employees. The Company is required to
make contributions to the state retirement plan at rates ranging
from 18% to 20% of the adjusted monthly basic salaries of the
current employees. The expense of such arrangements to the Company
was insignificant for the period presented. The Company is not
obligated under any other post-retirement plans and post-employment
benefits are not material.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
We have audited the accompanying balance sheets of Hebei United
Telecommunications Engineering Co., Ltd. as of December 31, 1997 and 1996
and the related statements of operations, investors' equity and cash flows
for the years ended December 31, 1997 and the period from January 31, 1996
(commencement of operations) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by the
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hebei United Telecommunications
Engineering Co., Ltd. as of December 31, 1997 and 1996 and the results of
its operations and its cash flows for the year ended December 31, 1997 and
the period from January 31, 1996 (commencement of operations) to December
31, 1996 in conformity with accounting principles generally accepted in the
United States of America.
Deloitte Touche Tohmatsu
Beijing, People's Republic of China
June 11, 1998
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
December 31
------------------------------
1997 1996
------------- -------------
RMB RMB
ASSETS
Current Assets:
Cash and cash equivalents 29,278,905 33,383,491
Short-term investment - 270,300
Other receivables 954,348 84,694
------------- -------------
Total current assets 30,233,253 33,738,485
Property and equipment, net 5,783,117 3,037,067
Deferred assets 57,245 48,744
Investment in GSM networks 235,635,325 183,373,618
------------- -------------
Total Assets 271,708,940 220,197,914
============= =============
LIABILITIES AND INVESTORS' EQUITY
Current Liabilities:
Amount due to investors 997,597 -
Other payables 84,888,076 9,808,654
Accrued expenses 52,720 24,560
------------- -------------
Total current liabilities 85,938,393 9,833,214
------------- -------------
Long-term Liabilities:
Long-term loans 165,816,800 99,578,400
Other payables 11,235,477 85,700,318
------------- -------------
177,052,277 185,278,718
------------- -------------
Total Liabilities 262,990,670 195,111,932
------------- -------------
Commitment and Contingency
Investors' equity:
Capital contribution 24,963,300 24,963,300
Capital reserve (4,800) (4,800)
(Accumulated deficit) retained
earnings (16,240,230) 127,482
------------- -------------
Total investors' equity 8,718,270 25,085,982
------------- -------------
Total Liabilities and Investors' Equity 271,708,940 220,197,914
============= =============
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM JANUARY 31, 1996
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
January 31,
1996
Year ended (commencement
December 31, of operations)
1997 to December
31, 1996
-------------- ----------------
RMB RMB
Net revenue from GSM networks 1,706,499 -
-------------- ----------------
Expenses:
General and administrative expenses (2,222,446) (1,340,568)
Amortization of GSM networks (18,125,794) -
-------------- ----------------
Total expenses (20,348,240) (1,340,568)
-------------- ----------------
Net loss from operations (18,641,741) (1,340,568)
-------------- ----------------
Other income (expense) :
Rental income, net 736,965 352,724
Other income, net 250,000 -
Interest income 1,328,727 1,277,390
Exchange loss (41,663) (162,064)
-------------- ----------------
Total other income (expense) 2,274,029 1,468,050
-------------- ----------------
Net (loss) income (16,367,712) 127,482
============== ================
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
STATEMENTS OF INVESTORS' EQUITY
AT DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
(Accumulated
Capital Capital deficit)
contribution reserve retained Total
earnings
------------- ------------- --------------- ---------------
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Balance, January 31, 1996 - - - -
Capital contribution 24,963,300 - - 24,963,300
Exchange difference on capital
contribution - (4,800) - (4,800)
Net income - - 127,482 127,482
------------- ------------- --------------- ---------------
Balance, December 31, 1996 24,963,300 (4,800) 127,482 25,085,982
Net loss - - (16,367,712) (16,367,712)
------------- ------------- --------------- ---------------
Balance, December 31, 1997 24,963,300 (4,800) (16,240,230) 8,718,270
============= ============= =============== ===============
</TABLE>
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM JANUARY 31, 1996
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
January 31,
1996(commencement
Year ended of
December 31, operations)
1997 to December
31, 1996
-------------- ---------------
RMB RMB
Cash flows from operating activities:
<S> <C> <C>
Net (loss) income (16,367,712) 127,482
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Loss on disposals of equipment 9,407 -
Depreciation 358,278 119,003
Amortization of investment in GSM networks 18,125,794 -
Changes in assets and liabilities:
Other receivables (869,654) (84,694)
Other payables 369,218 324,892
Accrued expenses 28,160 24,560
-------------- ---------------
Net cash provided by operating activities 1,653,491 511,243
-------------- ---------------
Cash flows from investing activities:
Short-term investment 270,300 (270,300)
Additions of property and equipment (3,113,736) (3,156,070)
Increase in deferred assets (8,500) (48,744)
Investment in GSM networks (69,144,541) (88,189,538)
-------------- ---------------
Net cash used in investing activities (71,996,477) (91,664,652)
-------------- ---------------
Cash flow from financing activities:
Proceeds from loans 66,238,400 161,997,650
Repayment of loans - (62,419,250)
Capital contribution - 24,958,500
-------------- ---------------
Net cash provided by financing activities 66,238,400 124,536,900
-------------- ---------------
(Decrease) increase in cash and cash equivalents (4,104,586) 33,383,491
Cash and cash equivalents, beginning of period 33,383,491 -
-------------- ---------------
Cash and cash equivalents, end of period 29,278,905 33,383,491
============== ===============
Supplemental disclosures of cash flow information:
Interest paid 8,144,426 -
============== ===============
</TABLE>
See notes to financial statements
HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The Company was established on January 31, 1996 as a limited
liability joint venture company in the People's Republic of China
("PRC"). The period of operation is twenty-five years. The
registered capital of the Company is US$3 million, of which 51%
(US$1.53 million) was contributed by Hebei United Telecommunications
Equipment Co., Ltd.("EQUIPMENT CO."), and 49% (US$ 1.47 million) by
NTT International, Inc. ("NTT"). On October 18, 1996, NTT agreed to
transfer 19.6% of the capital in the Company to Itochu Corporation
("ITOCHU") with effect from December 27, 1996. Subsequent to the
transfer, EQUIPMENT CO. owns 51% (US$1.53 million), NTT owns 29.4%
(US$882,000) and ITOCHU owns 19.6% (US$588,000) of the Company's
registered capital. The Company is mainly engaged in developing and
assisting in construction of telecommunication systems, and
providing related technical consulting services. Hebei Engineering
was considered a developmental stage entity at December 31, 1996.
Hebei Engineering is no longer a development stage entity.
Hebei Engineering has invested approximately RMB 253 million in the
construction of GSM telecommunications networks (the "GSM networks")
in Hebei Province of the PRC. The GSM networks are being built
pursuant to a 15-year Project Cooperation Contract with China United
Communications Company ("UNICOM"), the operator of the GSM Networks.
Terms of the contract include the following:
Initially, UNICOM will own 30% of the assets while Hebei Engineering
will own 70% of the assets. Both parties agree to distribute the
profit according to the "Distributable Cash Flow" (as defined) with
22% going to UNICOM and 78% going to Hebei Engineering. Each year,
Hebei Engineering will transfer ownership of assets to UNICOM equal
in value to the Distributable Cash Flow received up to 60% of the
assets. The maximum amount of assets transferred will not exceed 90%
of the assets until termination of the Project Cooperation
Contract.. Upon the termination of the contract the remaining 10% of
the network assets shall be assigned to UNICOM without any further
consideration. Hebei Engineering will continue to receive 78% of the
Distributable Cash Flow after transfer of all the assets for the
remainder of the 15-year period.
Under PRC law, foreign investment enterprises, such as Hebei
Engineering, are not permitted to own or operate telecommunications
networks. Substantially all of the Hebei Engineering's revenues are
derived from contractual arrangements for the sharing of cash flow
from network operations rather than from ownership or operation of
the networks. Hebei Engineering has recorded its investment (GSM
Construction Costs) as a right to receive future cash flow at cost
and is amortizing it over the remaining life of the project. Income
from the GSM networks is recognized at the time when Hebei
Engineering can estimate or calculate the portion of its
Distributable Cash Flow from the network. UNICOM commenced operation
of the GSM networks in February 1997.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("US GAAP"). This basis of accounting differs from that used
in the statutory financial statements of the Company, which are
required to be prepared in accordance with the accounting principles
and relevant financial regulations as established by the Ministry of
Finance of the PRC.
The principal adjustments made to conform the statutory financial
statements of the Company to US GAAP mainly included the following:
- Adjustment to write off organization expenses.
- Adjustment to write off exchange loss.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies which have been adopted in
preparing the financial statements set out in this report, and which
conform with accounting principles generally accepted in the United
States of America are as follows:
Cash and cash equivalents - Cash and cash equivalents include cash
on hand, demand deposits and highly liquid instruments with a
maturity of three months or less at the time of purchase.
Property and equipment - Property and equipment is stated at cost
less accumulated depreciation. Depreciation is provided using the
straight-line method to write off the cost of property and
equipment, net of the estimated residual value of 10% of cost, over
their estimated useful lives as follows:
Land and buildings 20 years
Furniture, fixtures and equipment 5 years
Motor vehicles 5 years
Long lived assets - The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that
the net carrying amount may not be recoverable. When such events
occur, the Company measures impairment by comparing the carrying
value of the long-lived asset to the estimated undiscounted future
cash flows expected to result from the use of the assets and their
eventual disposition. If the sum of the expected undiscounted future
cash flows is less than the carrying amount of the assets, the
Company would recognize an impairment loss. The impairment loss, if
determined, would be measured as the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
Investment in GSM networks - Investment in GSM networks is stated at
cost less accumulated amortization. The investment in GSM networks
is amortized on a straight-line basis over the remaining life of the
Project Cooperation Contract between the Company and UNICOM.
Capitalization of borrowing costs - Borrowing costs directly
attributable to the acquisition, construction or production of
qualifying assets, i.e. assets that necessarily take a substantial
period of time to get ready for their intended use or sale, are
capitalized as part of the cost of those assets. Capitalization of
such borrowing costs ceases when the assets are substantially ready
for their intended use or sale. Interest capitalized at December 31,
1997 was RMB8,144,426.
Revenue recognition - Revenue related to the GSM networks is
recognized at the time when the Company can estimate or calculate
the portion of its distributable cash flow from the network.
Income tax - Deferred income taxes are provided for using the
liability method. Under the liability method, deferred income taxes
are recognized for all significant temporary differences between the
tax and financial statement bases of assets and liabilities. The tax
consequences of those differences are classified as current or
non-current based upon the classification of the related assets or
liabilities in the financial statements. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of, the
deferred tax assets will not be realized.
Foreign currency translation - The Company's financial statements
are prepared using Renminbi as the reporting currency. Foreign
currency transactions are translated at the rates ruling on the
dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated at the rates ruling
on the balance sheet date. Exchange gains and losses are taken to
the statement of operations.
Fair value of financial instruments - The carrying values of cash
and cash equivalents, short-term investments, accounts receivable,
other receivables, other payables, and amount due to investors
approximate fair value because of the short maturity of these
instruments.
Concentration of credit risk - Financial instruments which
potentially subject the Company to concentrations of credit risk
consist principally of temporary cash investments and trade accounts
receivable.
The Company places its temporary cash investments with various
financial institutions in the PRC. The Company believes that no
significant credit risk exists as these investments are made with
high-credit, quality financial institutions.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
recorded amounts of assets and liabilities and disclosures of
contingent assets and liabilities in the financial statements and
recorded amounts of revenue and expenses during the period. Actual
results could differ from these estimates.
Comprehensive Income - In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income." This statement is effective for financial
statements issued for periods beginning after December 15, 1997.
Management is evaluating the effect on its financial reporting of
the adoption of
this statement.
Segments of an Enterprise and Related Information - In June 1997,
the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131
requires the reporting of profit and loss, specific revenue and
expense items, and assets for reportable segments. It also requires
the reconciliation of total segment revenues, total segment profit
or loss, total segment assets, and other amounts disclosed for
segments, in each case to the corresponding amounts in the general
purpose financial statements. The Company has not yet determined
what additional disclosures may be required in connection with
adopting SFAS 131.
4. INCOME TAX
The statutory income tax rate of the Company is 33%. There is no
provision for income taxes during the year ended December 31, 1997
and the period from January 31, 1996 (commencement of operations) to
December 31, 1996 as the Company did not have any assessable income
for the relevant periods.
No provision for deferred taxation has been made in the financial
statements for the period from January 31, 1996 (commencement of
operations) to December 31, 1996 as no significant temporary
differences arose during period and no significant deferred tax
assets and liabilities existed at the relevant balance sheet date.
Deferred tax assets of RMB5,359,276 existed as at the end of 1997
arising from temporary differences. A valuation allowance has been
established for the full amount of the deferred tax assets since it
is considered more likely than not that all of the deferred assets
will not be realized.
Deferred tax assets are composed of the following:
December 31,
--------------
1997
---------------
RMB
Amortization of GSM networks 5,981,512
Exchange gain/loss 67,230
Organization expenses (126,321)
GSM networks revenue (563,145)
Valuation allowance (5,359,276)
---------------
-
===============
5. SHORT-TERM INVESTMENT
The short-term investment of RMB 270,300 at December 31, 1996
represents an investment in negotiable Chinese Government bonds which
approximates market value.
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
December 31,
------------------------------
1997 1996
-------------- ------------
RMB RMB
<S> <C> <C>
At cost:
Land and buildings 4,629,909 1,626,952
Furniture, fixtures and equipment 656,751 602,180
Motor vehicles 973,738 926,938
-------------- ------------
6,260,398 3,156,070
Less: accumulated depreciation (477,281) (119,003)
-------------- ------------
5,783,117 3,037,067
============== ============
</TABLE>
All assets are located in the PRC.
7. INVESTMENT IN GSM NETWORKS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------- -------------
RMB RMB
<S> <C> <C>
Cost of investment 253,761,119 183,373,618
Less: accumulated amortization (18,125,794) -
------------- -------------
235,635,325 183,373,618
============= =============
</TABLE>
The investment represents the investment in a GSM telecommunication
networks in Hebei Province, PRC. The GSM networks were built pursuant
to a 15-year agreement with UNICOM commencing in February, 1996.
UNICOM commenced operation of the GSM networks in February 1997. The
investment is being amortized on a straight-line basis over the
remaining 13-year life of the agreement commencing from the operation
of the networks.
8. RELATED PARTY TRANSACTIONS
December 31,
----------------------------
Company Name 1997 1996
------------------------------ ------------ -------------
RMB RMB
Amount due to NTT 729,014 -
Amount due to ITOCHU 268,583 -
------------ -------------
Total 997,597 -
============ =============
Guarantee fees paid and payable to NTT and ITOCHU are as follows:
January 31,
1996
Year ended (commencement
Company Name 1997 of operations) to
December 31,
1996
------------------------------ ------------ --------------
RMB RMB
Amount paid and payable to
NTT 2,167,260 -
Amount paid and payable to
ITOCHU 467,482 -
------------ --------------
Total 2,634,742 -
============ ==============
The guarantee fees paid and payable to NTT and ITOCHU by Hebei
Engineering represent fees payable to them for providing a guarantee
to a GSM supplier and a bank in favor of Hebei Engineering.
9. OTHER PAYABLES
The Company has acquired a digital microwave system and a GSM mobile
phone system under deferred payment terms with the final
installments payable in 2001 and 1998, respectively. The liabilities
are guaranteed by NTT and are payable as follows:
December 31,
----------------------------
1997 1996
------------ -------------
RMB RMB
Liabilities payable:
1997 - 3,753,482
1998 73,619,849 74,439,872
1999 3,745,159 3,753,482
2000 3,745,159 3,753,482
2001 3,745,159 3,753,482
------------ -------------
84,855,326 89,453,800
Less: Liabilities due within one
year (included in other payables) 73,619,849 3,753,482
------------ -------------
Long-term payables 11,235,477 85,700,318
============ =============
10. LONG-TERM LOANS
Scheduled repayments for the long-term loans are as follows:
December 31,
------------------------------
1997 1996
-------------- ------------
RMB RMB
Liabilities payable:
1999 33,163,360 33,192,800
2000 66,326,720 66,385,600
2001 66,326,720 -
-------------- ------------
165,816,800 99,578,400
Less: Liabilities due within
one year - -
-------------- ------------
165,816,800 99,578,400
============== ============
On August 5, 1996, the Company was granted a long-term loan facility
of US$ 20,000,000 by the Bank of Tokyo-Mitsubishi, Ltd. Beijing
Branch at an annual interest rate of 6.82%. Interest is payable on
the outstanding balance six months after the date of the agreement,
every six months thereafter, and at maturity.
All the obligations of the Company under the above agreements are
guaranteed 60% by NTT and 40% by Itochu.
11. CAPITAL CONTRIBUTION
December 31, 1997 and 1996
------------------------------------------
Ownership RMB
----------------- --------------------
Capital contributed by:
EQUIPMENT CO. 51.00% 12,731,283
NTT 29.40% 7,339,210
Itochu 19.60% 4,892,807
----------------- --------------------
100% 24,963,300
================= ====================
12. COMMITMENTS
The Company leases certain buildings under operating leases, which
expire through March 1999. Rental expense under these operating
leases was RMB 319,200 and RMB 267,250 in 1997 and the period from
January 31, 1996 (commencement of operations) to December 31,1996
respectively.
The aggregate annual minimum operating lease commitments under all
non-cancellable leases at December 31, 1997 are as follows:
December 31
---------------
1997
---------------
RMB
1998 319,200
1999 79,800
---------------
399,000
===============
The Company has entered into a Project Cooperation Agreement with
UNICOM relating to the construction of a telecommunication network in
Hebei Province, PRC. The total estimated investment under the terms
of this agreement is RMB320 million for the first phase and RMB254
million has been incurred up to December 31, 1997. The term of this
agreement is fifteen years.
13. EMPLOYEE RETIREMENT BENEFITS AND POST-RETIREMENT BENEFIT
The Company's retired employees are entitled to a retirement pension
calculated with reference to their basic salaries on retirement and
their length of service in accordance with a government managed
pension plan. The PRC government is responsible for the pension
liability to these retired employees. The Company is required to make
contributions to the state retirement plan at rates ranging from 18%
to 20% of the adjusted monthly basic salaries of the current
employees. The expense of such arrangements to the Company was
immaterial in all the periods presented. The Company is not obligated
under any other post-retirement plans and post-employment benefits
are not material.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1997 MAR-31-1998
<PERIOD-START> APR-01-1995 APR-01-1996 APR-01-1997
<PERIOD-END> MAR-31-1996 MAR-31-1997 MAR-31-1998
<CASH> 185,889 1,346,713 2,134,662
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 114,661
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 246,567 1,518,634 2,357,405
<PP&E> 76,233 153,356 139,136
<DEPRECIATION> 19,556 48,461 91,893
<TOTAL-ASSETS> 6,232,536 4,004,966 7,683,358
<CURRENT-LIABILITIES> 4,081,606 3,456,878 2,786,447
<BONDS> 0 0 0
0 0 0
1,524 1,525 1
<COMMON> 28,437 31,258 26,533
<OTHER-SE> 2,120,969 515,305 4,870,377
<TOTAL-LIABILITY-AND-EQUITY> 0 0 0
<SALES> 0 0 0
<TOTAL-REVENUES> 0 0 0
<CGS> 0 0 0
<TOTAL-COSTS> 2,515,554 3,563,568 4,282,613
<OTHER-EXPENSES> 365,079 360,793 514,108
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 241,856 129,039 125,586
<INCOME-PRETAX> (3,380,633) (4,064,885) (5,403,368)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (3,380,633) (4,064,885) (5,403,368)
<DISCONTINUED> (1,901,097) 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (5,281,730) (4,074,885) (6,802,054)
<EPS-BASIC> (0.21) (0.14) (0.23)
<EPS-DILUTED> 0 0 0
</TABLE>
