-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CDZsskEYrUBbNZrQtT7HG+9qCAQ6PRsCW1hRNWJ05sDYqO8SRFGnxtCGu+Hx1bpZ P8AdJvcQZ9DUAsPzkHl9Rg== 0000912057-96-014702.txt : 19960717 0000912057-96-014702.hdr.sgml : 19960717 ACCESSION NUMBER: 0000912057-96-014702 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960716 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIC GROUP INTERNATIONAL INC/ CENTRAL INDEX KEY: 0000912890 STANDARD INDUSTRIAL CLASSIFICATION: METAL MINING [1000] IRS NUMBER: 840873124 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-22520 FILM NUMBER: 96595169 BUSINESS ADDRESS: STREET 1: 599 LEXINGTON AVE STREET 2: 44TH FL CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2123199160 MAIL ADDRESS: STREET 1: 599 LEXINGTON AVENUE STREET 2: 44TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: YAAK RIVER MINES LTD DATE OF NAME CHANGE: 19931001 10KSB40 1 FORM 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ______________ to _____________ Commission file number: 0-22520 AVIC GROUP INTERNATIONAL, INC. -------------------------------------------------------------- (Name of small business issuer specified in its charter) Delaware 84-0873124 --------------------------------- ------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 599 Lexington Avenue, 44th Floor, New York, New York 10022 ---------------------------------------------------------------- (Address of principal executive offices, including zip code) 212-319-9160 ---------------------------------------------------- (Issuer's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: Name of each exchange Title of each class on which registered ------------------- --------------------- None None Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, $0.001 PAR VALUE PER SHARE (Title of Class) Check whether the issuer: (i) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes __X__ No ______ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer's revenues for the fiscal year ended March 31, 1996 were $683,733. The number of shares outstanding of the issuer's common stock as of July 12, 1996 was 28,451,982 shares. The aggregate market value of the common stock (10,049,615 shares) held by non-affiliates, based on the average of the bid and asked prices ($3.25) of the common stock as of July 12, 1996 was $32,661,248. Transactional Small Business Disclosure Format (Check one): Yes _____ No __X__ DOCUMENTS INCORPORATED BY REFERENCE The Company is currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information may be inspected and copied at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549; at its New York Regional Office, Room 1400, 7 World Trade Center, New York, New York, 10048; and at its Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2411, and copies of such materials can be obtained from the Public Reference Section at prescribed rates. The Company intends to furnish its stockholders with annual reports containing audited financial statements and such other periodic reports as the Company may determine to be appropriate or as may be required by law. Portions of the following documents filed by the Company with the Commission are incorporated by reference in Parts I-IV of this Report: (i) Current Reports on Form 8-K dated as of January 19, 1996, December 22, 1995 and May 4, 1995, and (ii) Transition Report on Form 10-KSB for the Transition Period from October 1, 1994 to March 31, 1995. 2 PART I ITEM 1. DESCRIPTION OF BUSINESS. HISTORY OF THE COMPANY AVIC Group International, Inc. (the "Company") was incorporated under the laws of the State of Colorado on May 10, 1982 under the name "Yaak River Mines, Ltd." From inception through January, 1992, the Company was engaged in certain business operations which are not associated with the Company's current business operations. From approximately January, 1992 through September, 1994, the Company was operationally dormant. As of September 2, 1994, the Company entered into an Agreement and Plan of Reorganization, as amended by an agreement dated as of December 28, 1994 (the "Reorganization Agreement") with ITV Communications, Inc., a California corporation ("ITV"), in connection with which the Company acquired ITV as a wholly-owned subsidiary in exchange for a number of shares of the Company's common stock, par value $0.001 per share ("Common Stock") and options to purchase shares of Common Stock equal to approximately 91% of the number of the issued and outstanding shares of the Company's Common Stock on a fully diluted basis after the completion of the transaction. On February 8, 1995, the Company and ITV completed the transactions contemplated by the Reorganization Agreement, and the Company changed its name to "AVIC Group International, Inc." See "Business - Reorganization Agreement with ITV." On January 16, 1996, ITV closed an Agreement for Sale of Assets, dated as of January 11, 1996 (the "Asset Sale Agreement"), between ITV and Netmatics, Inc. ("Netmatics"). Pursuant to the terms of the Asset Sale Agreement, ITV, the former primary operating subsidiary of the Company, sold substantially all of ITV's assets and Netmatics assumed certain of ITV's liabilities and obligations in consideration of an aggregate purchase price of $2,500,000 and common stock of Netmatics currently equal to 19.4% of the issued and outstanding shares of Netmatics. See "Agreement for Sale of Assets of ITV Communications, Inc." At a meeting of the Company's stockholders on May 7, 1996, the stockholders adopted a resolution approving a change in the Company's state of incorporation from Colorado to Delaware. The Company effectuated the reincorporation to Delaware on July 10, 1996. BUSINESS OF THE COMPANY The Company is a development stage company which is engaged principally in the business of establishing joint ventures ("Sino-foreign joint ventures") with entities situated in the People's Republic of China ("PRC") in the telecommunications industry in the PRC. The Company intends to establish these Sino-foreign joint ventures to develop telecommunications networks in the PRC in cooperation with authorized telecommunications network operators in the PRC. In connection with this business plan, the Company has entered into certain agreements with entities, which are affiliates of Tweedia International Ltd. ("Tweedia"), the Company's principal stockholder. These agreements contemplate the Company's participation in distributions from the authorized operations of Sino-foreign joint ventures for the purpose of building telecommunications networks, transferring ownership of the networks to authorized telecommunications network operators in the PRC, and servicing and maintaining such telecommunications networks ("BTSM"). 3 As all of the agreements relating to prospective business in the PRC are preliminary in nature and subject to the fulfillment of significant conditions, including the completion of substantial financings and the receipt of approvals and permits from PRC governmental agencies, there can be no assurances that the Company will ever be able to implement this business plan. The Company's auditors have included an explanatory paragraph in their Report of Independent Certified Public Accountants to the effect that recovery of the Company's assets are dependent upon future events, the outcome of which is undeterminable, and that the successful completion of the Company's development program and its transition, ultimately, to the attainment of profitable operations is dependent upon obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure. There can be no assurances that such a financing can be completed on terms favorable to the Company or at all, or that the business of the Company will ever achieve profitable operations. PROPOSED BUSINESS OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA Since approximately April, 1995, the focus of the Company's principal business operations has been the establishment of Sino-foreign joint ventures related to the development of telecommunications networks in the PRC on a BTSM basis. In March, 1996, the Company entered into certain agreements to obtain a 31% interest in a Sino-foreign joint venture formed between Hebei United Telecommunications Equipment Company ("Hebei United") and NTT International Corp. ("NTT") with respect to the creation and operation of a Global Service Mobile telephone network in Hebei Province, PRC. In June, 1996, the Company entered into an agreement to form a Sino-foreign joint venture with Beijing CATCH Communication Group Co. ("Beijing CATCH"), an affiliate of the Company's principal stockholder with respect to the development of paging stations in the PRC. In May and October, 1995, the Company entered into a memorandum of understanding and a letter of intent in connection with the proposed formation of Sino-foreign joint ventures to develop telecommunications networks in the PRC on a BTSM basis with Beijing CATCH, including: (i) a fixed wire telephone network, and (ii) a cellular telephone network. These preliminary agreements are subject to the execution of more definitive agreements. See Item 9 -"Directors and Executive Officers" and Item 12 - "Certain Relationships and Related Transactions." Each of these agreements is preliminary in nature and is subject to the receipt of significant approvals and permits from various governmental agencies in the PRC, and with respect to the memorandum of understanding and the letter of intent, the execution of more definitive agreements will be required. There can be no assurances that such definitive agreements will ever be consummated or that such approvals and permits will be obtained for the benefit of the Company. Since the Company does not currently have the technical capability, personnel or resources to build, service or maintain a telecommunications network, the consummation of all or any of these transactions may require the cooperation and participation of third parties, other than PRC governmental agencies, who may be parties to or independent contractors with any such proposed Sino-foreign joint ventures. There can be no assurances that the Company will be able to obtain the requisite cooperation or participation of any such third parties with respect to the Company's proposed business operations. Although each of these agreements sets forth certain understandings as to the extent of the contributions and interests in these proposed Sino-foreign joint ventures, there can be no assurances as to the final terms of the definitive agreements, if any, with respect to these proposed Sino-foreign joint ventures. 4 Further, each of these agreements will require significant financings necessary to fund the construction of such networks. The Company does not currently have any commitments for any such financing or sufficient resources to fund such construction, and there can be no assurances that any such financing can be obtained on terms favorable to the Company or at all. In addition, the Company's proposed business operations in the PRC are subject to significant risks. These risks include, but are not limited to the limited precedent for the establishment of Sino-foreign joint ventures for the purpose of engaging in the telecommunications industry in the PRC, governmental restrictions on foreign business ventures in the PRC, PRC regulation of its economy and foreign currency exchange and the general political environment in the PRC. See "Risk Factors." BUSINESS RELATIONSHIP WITH BEIJING CATCH The Company's proposed business operations are substantially dependent on the Company's relationship with and the efforts of Beijing CATCH, an affiliate of the Company's principal controlling stockholder. Beijing CATCH, a company formed under the laws of the PRC, is the beneficial owner of all of the outstanding shares of Tweedia International Ltd., a British Virgin Islands corporation ("Tweedia"), the principal controlling stockholder of the Company. Tweedia was incorporated in the British Virgin Islands on July 20, 1994. Tweedia does not currently have any operations, except principally as a holding company for the Company's securities. Three (3) of the directors of the Company, Chen Li, Xiao Jun and Ju Feng, are officers of Beijing CATCH and Chen Li is the sole director of Tweedia. See Item 9 - "Directors and Executive Officers" and Item 11 - "Security Ownership of Certain Beneficial Owners and Management." Beijing CATCH is a subordinate enterprise, formed under the laws of the PRC, of the Commission on Science and Technology and the Municipal Planning Commission of the Municipality of Beijing, a political subdivision of the People's Government of the Municipality of Beijing. Beijing CATCH is the second largest operator of paging stations in the PRC. Beijing CATCH is a stockholder in China United Telecommunications Corporation ("China Unicom"), one of two public network telephone operators in the PRC created to substantially increase telephone installations throughout the PRC. See "Global Service Mobile Network Joint Venture." Beijing CATCH has established a subsidiary in the United States, known as American Catch, Inc. ("American CATCH"), a California corporation, which is located in Arcadia, California. American CATCH also has a consulting agreement with the Company. See Item 10 - "Executive Compensation - Consultants." As of December 21, 1995, the Company agreed to issue up to 50,000,000 shares of Common Stock to Tweedia, an affiliate of Beijing CATCH and the principal stockholder of the Company, pursuant to the terms of a Master Agreement and Right of First Refusal (the "Master Agreement") based on the receipt of certain agreed upon amounts of net income to the Company relating to prospective Sino-foreign joint ventures involving the Company and Beijing CATCH or its affiliates ("CATCH Joint Ventures"). See Item 12 - "Certain Relationships and Related Transactions." In connection with the Master Agreement, Beijing CATCH has agreed to grant the Company a right of first refusal to participate as a majority investor and provide financial, operating and technical consulting services with respect to all rights granted, sold, licensed or otherwise transferred to Beijing CATCH, directly or indirectly, that relate to the ability to construct, operate or acquire any form of telephony, telecommunications, equipment, paging equipment or related forms of communication. This right of first refusal is subject to the Company's ability to perform under any such agreements and to participate in any such proposed projects under applicable PRC law. The Company's right of first refusal will apply to any such rights obtained by Beijing CATCH in perpetuity. The Company and Beijing CATCH have agreed to negotiate in 5 good faith to implement the terms of any such agreements in order to implement the Company's right of first refusal. There can be no assurances that Beijing CATCH will ever be in a position to offer the Company the right of first refusal with respect to any additional agreements, other than these offered to the Company to date, or if so, that the Company will have sufficient resources or be able to satisfy applicable PRC regulatory requirements in order to exercise a right of first refusal with respect to any agreement which may be so offered. There can be no assurances that Beijing CATCH will be able successfully to assist the Company's proposed business plan or that a change of control in the Company's capital structure will not have a material adverse effect on the Company's proposed business operations. CHINA PAGING NETWORKS JOINT VENTURE. On June 12, 1996, the Company entered into an agreement to form a joint venture (the "China Paging Networks Joint Venture") with Beijing CATCH relating to the purchase or construction of one hundred (100) paging stations (the "China Paging Networks") in the PRC. The formation of the China Paging Networks Joint Venture is subject to PRC regulatory approval. There can be no assurances that such regulatory approval will be obtained. Beijing CATCH holds certain licenses from the Wireless Communication Committee and the Provincial Post and Telecommunication Administration of Hebei and Sichuan Provinces, to develop paging networks in Hebei and Sichuan Provinces on a BTSM basis, as contemplated by the China Paging Networks Joint Venture. The Company has agreed to contribute the sum of $700,000 in exchange for a seventy percent (70%) equity interest in the China Paging Networks Joint Venture, which will sell the equipment necessary for the construction of the China Paging Networks to a subsidiary of Beijing CATCH, and install, service and maintain such equipment. Beijing CATCH has agreed to contribute the appropriate licenses to a subsidiary, which will build and operate the China Paging Networks, and will enter into contracts with the China Paging Networks Joint Venture in order to purchase equipment and to obtain servicing and maintenance for the China Paging Networks. The China Paging Networks Joint Venture is anticipated to receive: (i) payments under contracts for installing, servicing and maintaining the China Paging Networks and (ii) payments of principal and interest relating to the financing of the equipment for the China Paging Networks, if such financing is provided. The Company has set aside $1,000,000 from the June, 1996 offering of $2,500,000 of Series B Convertible Preferred Stock as the source of the $700,000 capital contribution, with the balance of the $1,000,000 to be used for capital expenditures by the China Paging Networks Joint Venture upon its formation. The closing of such offering is subject to the receipt of certain legal opinions with respect to the formation of the China Paging Networks Joint Venture. In the event that regulatory approval of the joint venture is not obtained and such opinions are not delivered within 60 days of the closing of the offering, the offering may be cancelled with respect to $2,000,000 of the gross proceeds, and the Company will not have adequate sources of capital to make the required $1,000,000 capital contribution. There can be no assurances that such offering will not be cancelled or that the Company will be able to obtain alternative sources of financing for the required capital contribution. 6 GLOBAL SERVICE MOBILE NETWORK JOINT VENTURE. On March 22, 1996, the Company entered into certain agreements to obtain a 31% interest, subject to the receipt of certain PRC regulatory approvals, in a Sino-foreign joint venture formed between Hebei United and NTT relating to the creation and operation of a Global Service Mobile telephone network (the "GSM Network") in Hebei Province, PRC. There can be no assurance that such regulatory approvals with respect to the transfer of the 31% interest to the Company will be obtained. Hebei United, a joint venture formed between Beijing CATCH and certain companies controlled by the Hebei Provincial Government, have entered into a cooperation agreement (the "Cooperation Agreement") with China Unicom, dated May 20, 1995, pursuant to which Hebei United has obtained the right to build, service and maintain the GSM Network, after the transfer of ownership of the GSM Network to China Unicom, and to receive distributions from the operations of the GSM Network. Beijing CATCH has an 85% ownership interest in Hebei United. China Unicom is one of two authorized public telecommunications network operators in the PRC. Beijing CATCH is a stockholder of China Unicom. Hebei Unicom is a PRC joint venture formed between Hebei Terminal Equipment Co. and Hebei Equipment Electronics Industry Group, both state-owned enterprises under the Hebei Provincial Bureau of Electronic Industry, to participate in the construction of telecommunications projects in Hebei Province. In December, 1994, China Unicom approved the request of the Hebei Provincial Government to establish Hebei Unicom as an independent unit under China Unicom. On December 22, 1995, Hebei United entered into an agreement (the "GSM Network Joint Venture Agreement") with NTT to form a Sino-foreign joint venture (the "GSM Network Joint Venture") for the purpose of providing Hebei Province with telecommunications networks, engineering construction and technology support, both inside and outside of the PRC and with respect to the construction of the GSM Network in Hebei Province on a BTSM basis. NTT is an affiliate of Nippon Telephone & Telegraph Corp., the largest network operator in Japan. The GSM Network Joint Venture was established as a limited liability company for purposes of the Company Law of the PRC. The parties have agreed that Hebei United will have a 51% participation interest and NTT will have a 49% participation interest in the GSM Network Joint Venture, respectively. The Company entered into an agreement, dated March 22, 1996, with Hebei United, to obtain a 31% interest in the GSM Network Joint Venture. The assignment of the 31% interest is subject to approvals by certain PRC regulatory authorities. There can be no assurances that such approvals will be obtained or the terms and conditions on which such approvals may be obtained, if at all. Although Hebei United is an affiliate of Beijing CATCH, management believes that the terms of the March 22, 1996 agreement were negotiated by members of management of the Company unaffiliated with Beijing CATCH on terms no less favorable to the Company than could have been obtained from independent third parties. However, there can be no assurances to this effect. By separate agreement between NTT and Ito Chu Corp. ("Ito Chu"), Ito Chu acquired 40% of NTT's interest in the GSM Network Joint Venture, or a 19.6% interest in the GSM Network Joint Venture. Ito Chu is a major Japanese trading firm. The Company has deposited the sum of $1.17 million with the Electronic Industry Department of Hebei Government Account with the Bank of Communications - Shijiazhuang Branch. In the event of PRC regulatory approval of the transfer to the Company of the 31% interest in the GSM Network Joint Venture, the Company intends to use this deposit as the source of payment for the 31% interest in the GSM Network Joint Venture. Hebei United will be required to assist the GSM Network Joint Venture in obtaining the necessary permits and approvals from PRC governmental entities with respect to the development of the GSM Network and certain other issues related to PRC regulatory matters. NTT will be responsible for providing 7 technical assistance to the operation of the GSM Network. Further, NTT will be responsible for raising the capital (RMB 600 million) for the development of the GSM Network Joint Venture. The GSM Network Joint Venture will be required to repay NTT for any loans made by NTT to the GSM Network Joint Venture within five (5) years of the date of such loans and to pay a 1% service charge or deposit if a loan is obtained through NTT or NTT's bank. NTT will be responsible for collecting the required funding for project construction, although Hebei United retains the right to raise capital for the GSM Network Joint Venture. Further, Hebei United has agreed to contribute its interest in the Cooperation Agreement with China Unicom to the GSM Network Joint Venture and to be responsible for coordinating the relationship between the GSM Network Joint Venture and China Unicom and to develop a market for the GSM Network intended to be constructed by the GSM Network Joint Venture. NTT and Ito Chu will be responsible for providing any additional financing to the GSM Network Joint Venture. As of May 1, 1995, the Company also entered into a Memorandum of Understanding (the "Memorandum of Understanding") with Hebei United and Hebei Unicom relating to the creation and operation of an SDH fibre optic communication line, a 1,600,000 wireline network and a proposed GSM Network with 200,000 to 400,000 subscribers in Hebei Province, PRC (the "Hebei Networks"). Pursuant to the terms of the Memorandum of Understanding, Hebei United has agreed to obtain the necessary approvals in the PRC to permit the construction and operation of the Hebei Networks throughout Hebei Province. The Company has agreed to assist in the raising of capital of approximately $1.5 to $2.0 billion, which the parties anticipate is the cost necessary to construct the Hebei Networks. The parties have also agreed to set up a project committee to develop the Hebei Networks. The Hebei Provincial Government and Hebei Unicom have each agreed to appoint a person to a project committee to assist in the development of the GSM Network. Ju Feng, a director of the Company, was one of the persons appointed to the project committee. CELLULAR TELEPHONE NETWORK PRELIMINARY AGREEMENT. On April 27, 1995, the Company entered into a Cellular Telephone Network Preliminary Agreement (the "Cellular Telephone Network Agreement") with Beijing CATCH and Tweedia relating to the creation and operation of an approximately 100,000 subscriber cellular telephone network (the "Cellular Telephone Network") using Enhanced Specialized Mobile Relay System technology in Beijing and Hebei Province in the PRC. Beijing CATCH holds certain licenses from the Beijing Municipal Government Planning Commission of China with respect to the ownership and operation of the Cellular Telephone Network. Pursuant to the terms of the Cellular Telephone Network Agreement, the Company has negotiated to establish, with Beijing CATCH, a Sino-foreign joint venture for the purpose of receiving: (i) payments under contracts for developing the Cellular Telephone Network on a BTSM basis, and (ii) payments of principal and interest relating to the financing of the equipment for the Cellular Telephone Network, if such financing is provided, which in the aggregate are estimated to be approximately ninety percent (90%) of gross revenues less expenses of operating the Cellular Telephone Network for the first 25 years after the Cellular Telephone Network has commenced providing service to a substantial number of users. In connection with the Cellular Telephone Network Agreement, the Company intends to form a subsidiary or other joint venture entity, in which the Company will maintain at least a seventy-five percent (75%) interest, which in turn will enter into a Sino-foreign joint venture or a contractual joint venture with Beijing CATCH. 8 The Company has agreed to contribute the capital needed to build the Cellular Telephone Network to the Sino-foreign joint venture in exchange for a seventy-eight percent (78%) equity interest in the Sino-foreign joint venture, which will sell the equipment necessary for the establishment of the Cellular Telephone Network on a BTSM basis to a wholly owned subsidiary of Beijing CATCH. Beijing CATCH has agreed to contribute the appropriate licenses to its subsidiary, which will participate in building the Cellular Telephone Network, and will enter into contracts with the Sino-foreign joint venture in order to purchase equipment and to service and maintain the Cellular Telephone Network. In connection with the Cellular Telephone Network Agreement, on December 15, 1995, the Company also agreed to issue 1,524,178 shares of the Company's Series A Convertible Preferred Stock (the "Convertible Preferred Shares") to Tweedia as consideration for the contribution to the Company by Beijing CATCH of Beijing CATCH's interest in a $4,572,536 non-refundable deposit paid to Motorola, Inc. ("Motorola") in connection with an Enhanced Specialized Mobile Relay System Equipment Purchase Contract #700.0008D, dated December 12, 1993, and as amended, between Beijing CATCH and Motorola (the "Equipment Purchase Contract"). The Equipment Purchase Contract obligates Beijing CATCH to purchase up to a minimum of approximately $49,000,000 of equipment related to an Enhanced Specialized Mobile Relay System within certain time periods. The failure to make such purchases may result in the forfeiture of such deposit to Motorola. However, based on the existing agreements, these deadlines have passed without Beijing CATCH's timely performance pursuant to the terms of the Equipment Purchase Contract. Although the Company understands that these agreements are currently the subject of renegotiation between Beijing CATCH and Motorola, there can be no assurances that the parties will successfully renegotiate the Equipment Purchase Contract or, if so, as to the terms of any such renegotiation and its effect on the Company, which is currently not a party to the agreement. There can be no assurances that Beijing CATCH will be able to perform under the Equipment Purchase Contract or that the $4,572,536 deposit will not be forfeited to Motorola. In the event that Beijing CATCH forfeits the deposit to Motorola, Tweedia has agreed to return the Convertible Preferred Shares to the Company for cancellation. REORGANIZATION AGREEMENT WITH ITV As of September 2, 1994, the Company entered into the Reorganization Agreement with ITV, pursuant to which the Company acquired one hundred percent (100%) of the issued and outstanding securities of ITV from the holders of the securities of ITV, in exchange for a number of shares of Common Stock and options to purchase shares of Common Stock equal to approximately 91% of the number of the issued and outstanding shares of the Company's Common Stock on a fully diluted basis after the completion of the transaction. On February 8, 1995, the Company and ITV completed the transactions contemplated by the Reorganization Agreement. In connection with the Reorganization Agreement, the Company: (a) issued 22,743,409 restricted shares of Common Stock and options to purchase up to 713,182 restricted shares of Common Stock to the holders of the securities of ITV, (b) effected a forward split of the previously issued and outstanding 105,000 shares of Common Stock into 2,500,000 shares, (c) adopted the Company's current Articles of Incorporation, Bylaws and 1995 Stock Option Plan, (d) elected the members of the Company's current Board of Directors, and (e) changed the Company's name to "AVIC Group International, Inc." See Item 9 - "Directors and Executive Officers," Item 11 - "Security Ownership of Certain Beneficial Owners and Management" and Item 12 - "Certain Relationships and Related Transactions." 9 The Reorganization Agreement provides to the holders of the Company's Common Stock issued in connection with the Reorganization Agreement the right, upon written request of the holders of at least 35% of the shares of the Company's Common Stock exchanged to such persons, that the Company will effect up to five (5) registrations of up to twenty-five percent (25%) of such exchanged securities under and pursuant to the Securities Act of 1933, as amended (the "Securities Act"), during the period ending August 31, 1997. Further, the Company has agreed to provide to such persons certain "piggy-back" registration rights with respect to such securities. The Company has agreed to bear the expenses related to the registration of such securities. The Reorganization Agreement has been accounted for as a reverse acquisition or as a recapitalization of ITV, with ITV as the acquiror. The historical financial statements of the Company prior to the closing of the Reorganization Agreement are those of ITV. AGREEMENT FOR SALE OF ASSETS OF ITV COMMUNICATIONS, INC. On January 16, 1996, ITV closed the Asset Sale Agreement between ITV and Netmatics. Pursuant to the terms of the Asset Sale Agreement, ITV, the former primary operating subsidiary of the Company, sold substantially all of ITV's assets and Netmatics assumed certain of ITV's liabilities and obligations in consideration of an aggregate purchase price of $2,500,000 and shares of common stock of Netmatics which are currently equal to approximately 19.4% of the issued and outstanding shares of Netmatics. The $2,500,000 purchase price was paid by Netmatics as follows: (i) $250,000 in cash at closing, and (ii) the issuance by Netmatics of a non-interest bearing secured promissory note, as revised on June 12, 1996 (the "Netmatics Note") in the principal amount of $2,250,000. The Netmatics Note is secured by a continuing security interest in all of the assets transferred to Netmatics in connection with the Asset Sale Agreement. If Netmatics refinances the purchase debt to ITV, the Netmatics Note will be due and payable in full. The Netmatics Note is payable in installments as follows: when Netmatics achieves "Positive Cash Flow" (as defined below), and each quarter that Netmatics has Positive Cash Flow, Netmatics has agreed to pay ITV, if quarterly Positive Cash Flow is more than $100,000, fifty percent (50%) of that quarter's Positive Cash Flow. "Cash Flow" for the purposes of the Netmatics Note is defined as gross revenue less operating expenses plus depreciation and other non-cash deductions, less taxes, less capital expenditures, less ordinary and reasonable working capital requirements, and less $100,000, all according to generally accepted accounting principles applied on a consistent basis. Prior to the closing of the Asset Sale Agreement, the operations of ITV, which primarily related to the transferred assets, never achieved "Positive Cash Flow" at the end of any fiscal year or quarter since ITV's inception in March, 1992. There can be no assurances that Netmatics will ever achieve such Positive Cash Flow during any of the relevant periods for purposes of payment of the Netmatics Note or that Netmatics will be required or be able to make payments under the Netmatics Note. Further, based on the terms of the Netmatics Note, the Company has only recognized on the Company's financial statements the $250,000 cash proceeds from the transaction, and any portion of the purchase price related to the payment of the Netmatics Note will be recognized as collected on a cash basis. There can be no assurances that any portion of the purchase price related to the payment of the Netmatics Note will ever be collected or recorded in the Company's financial statements. Netmatics also agreed to assume certain trade liabilities of ITV in the amount of approximately $257,000 and certain equipment leases of ITV related to the operations of the transferred assets. ITV expressly agreed that certain non-trade liabilities of ITV in the amount of approximately $2,269,000 were not to be assumed by Netmatics. 10 Further, Netmatics issued shares of common stock of Netmatics which are currently equal to approximately 19.4% of the issued and outstanding shares of Netmatics. There is no public market for the shares of Netmatics common stock and there may never be a market for such securities. The shares of Netmatics common stock issued to the Company are restricted securities and are not registered under the Securities Act of 1933, as amended, and may not be resold unless they are subsequently registered thereunder or an exemption from registration is available. As a result, the Company may never be able to liquidate any of such securities. Further, as Netmatics has no operational history and the transferred assets relate to the prior business operations of ITV, which never achieved profitability, there can be no assurances that the Netmatics common stock will ever have any market value. The transferred assets relate to ITV's business operations in connection with the design, manufacture and marketing of technologically advanced communications devices. These assets relate to the primary operational aspects of the Company's business prior to the closing of the Asset Sale Agreement. REINCORPORATION TO DELAWARE At a meeting of the Company's stockholders on May 7, 1996, the stockholders adopted a resolution approving a change in the Company's state of incorporation from Colorado to Delaware. The Company effectuated the transactions contemplated by this resolution on July 10, 1996 and reincorporated to Delaware by means of a merger (the "Reincorporation Merger") of the Company with and into a wholly-owned subsidiary of the Company in Delaware known as AVIC Group International, Inc. ("AVIC-Delaware"). On the effective date of the Reincorporation Merger, each issued and outstanding share of Common Stock and Preferred Stock of the Company was converted into one share of common stock and preferred stock, respectively, of AVIC-Delaware. AVIC-Delaware has succeeded to all of the assets, liabilities and business of the Company and possesses all of the rights and powers of the Company. CERTAIN ANTI-TAKEOVER PROCEDURAL REQUIREMENTS. The Company's Certificate of Incorporation adopts certain measures which are intended to protect the Company's stockholders by rendering it more difficult for a person or persons to obtain control of the Company without cooperation of the Company's management. These measures include the potential implementation of certain supermajority requirements for the amendment of the Company's Certificate of Incorporation and Bylaws. Such measures are often referred to as "anti-takeover" provisions. The inclusion of such "anti-takeover" provisions in the Certificate of Incorporation may delay, deter or prevent a takeover of the Company which the stockholders may consider to be in their best interests, thereby possibly depriving holders of the Company's securities of certain opportunities to sell or otherwise dispose of their securities at above-market prices, or limit the ability of stockholders to remove incumbent directors as readily as the stockholders may consider to be in their best interests. BUSINESS COMBINATIONS WITH SUBSTANTIAL STOCKHOLDERS. Delaware law contains a statutory provision which is intended to curb abusive takeovers of Delaware corporations. Section 203 of the Delaware General Corporation Law addresses the problem by preventing certain business combinations of the corporation with interested stockholders within three years after such stockholders become interested. Section 203 provides, with certain exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person or an affiliate, or associate of such person, who is an "interested stockholder" for a period of three (3) years from the date that such person became an interested stockholder unless: (i) the transaction resulting in a person becoming an interested stockholder, or the business combination, is approved by the Board of Directors of the corporation before the person becomes an interested stockholder; (ii) the interested stockholder acquired 85% or more of the outstanding voting stock of the corporation in the same transaction that makes such person an interested stockholder (excluding shares owned by persons who are both 11 officers and directors of the corporation, and shares held by certain employee stock ownership plans); or (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation's board of directors and by the holders of at least 66-2/3% of the corporation's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. Under Section 203, an "interested stockholder" is defined as any person who is: (i) the owner of fifteen percent (15%) or more of the outstanding voting stock of the corporation or (ii) an affiliate or associate of the corporation and who was the owner of fifteen percent (15%) or more of the outstanding voting stock of the corporation at any time within the three (3) year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder. SUPERMAJORITY REQUIRED FOR AMENDMENT. In order to insure that the substantive provisions set forth in the Certificate of Incorporation are not circumvented by the amendment of such Certificate of Incorporation pursuant to a vote of a majority of the voting power of the Company's outstanding shares, the Certificate of Incorporation also provides that any amendment, change or repeal of the provisions contained in the Certificate of Incorporation with respect to: (i) the Company's capitalization, (ii) amendment of the Bylaws, (iii) determination by the Board of the number of directors, (iv) filling Board vacancies, (v) the requirement that stockholder action be taken at an annual or special meeting, (vi) requirements with respect to appraisal rights for stockholders, or (vii) the amendment of the provision imposing such supermajority requirement for amendment of the Certificate of Incorporation, shall require the affirmative vote of the holders of at least 66 2/3% of the voting power of all outstanding shares of voting stock, including, in any instance where the repeal or amendment is proposed by an interested stockholder (as such term is defined in Section 203 of the Delaware General Corporation Law) or its affiliate or associate, the affirmative vote of a majority of the voting power of all outstanding shares of voting stock held by persons other than such interested stockholder or its affiliates or associates. However, only the affirmative vote of the majority of the voting power of all outstanding shares of voting stock is required if the amendment of any of the foregoing provisions is approved by a majority of the Continuing Directors (as such term is defined in the Certificate of Incorporation). The Certificate of Incorporation permits the Board of Directors to adopt, amend or repeal any or all of the Company's bylaws without stockholder action and provide that such bylaws may also be adopted, amended or repealed by its stockholders, but only if approved by holders of 66 2/3% or more of the voting power of all outstanding shares of voting stock, including in any instance in which the alteration is proposed by an interested stockholder or by affiliates or associate of any interested stockholder, the affirmative vote of the holders of at least a majority of voting power of all outstanding shares of voting stock held by persons other than the interested stockholder who proposed such action. However, the only stockholder vote required if the modification is approved by a majority of the continuing directors is the affirmative vote of the majority of the voting power of all outstanding shares of voting stock. OFFERING OF SERIES B CONVERTIBLE PREFERRED STOCK On June 12, 1996, the Company issued 100 shares of the Company's Series B Convertible Preferred Stock (the "Series B Convertible Preferred Shares"), at a purchase price of $25,000 per share, and an equal number of warrants were issued to purchase shares of the Company's Common Stock in consideration of $2,500,000. The Series B Convertible Preferred Shares and warrants were issued pursuant to an exempt transaction under Regulation S. Each of the Series B Convertible Preferred Shares is convertible into a number of shares of Common Stock equal to the fraction, the numerator of which is $25,000 + [(0.08) x ($25,000) x (the number of days between the date funds with respect to the transaction were received in escrow and the applicable conversion date DIVIDED BY 365)], and the denominator which is the lesser of: (i) $5.94, (ii) 85% of the average closing bid price of the Company's Common Stock on each of the five (5) trading days immediately preceding the applicable conversion date, or (iii) 85% of the average of the daily low trading price of the Company's Common Stock on each of the five (5) trading days immediately preceding the applicable conversion date. The amount set 12 forth in paragraph (i) above (the "Fixed Conversion Price") may be further adjusted in the event that on the 180th day following June 12, 1996, the average closing bid price for the prior 20-business days has declined to $4.05 or less, in which event the Fixed Conversion Price shall be adjusted to 110% of such average closing bid price during such 20-business day period. The Series B Convertible Preferred Shares will bear no dividends and have no voting rights, except with respect to certain matters which affect the rights of the Series B Convertible Preferred Shares. Further, the Series B Convertible Preferred Shares have certain liquidation preferences, and are subject to redemption by the Company, forced conversion at any time after June 12, 1997, and automatic conversion on June 7, 1998, under certain circumstances. In addition, the Company issued 5-year warrants to the purchasers of the Series B Convertible Preferred Shares to purchase additional shares of the Company's Common Stock to such investors, based on the number of shares of Common Stock into which the corresponding number of Series B Convertible Preferred Shares are so converted. The warrants are exercisable after 60 days from June 12, 1996 at the Fixed Conversion Price. In connection with the transaction, $750,000 of the gross proceeds were released to the Company and $1,750,000 of the gross proceeds were deposited into a second escrow, subject to release to the Company in the event that certain legal opinions are delivered to the investors, on or before August 11, 1996, with respect to the formation of the Company's Paging Networks Joint Venture with Beijing CATCH. In the event that such opinions are not delivered on or before such date, the transaction may be cancelled with respect to $2,000,000 of the gross proceeds of the offering. Further, in connection with such transaction, the Company has agreed to pay fees and expenses to Regal International Capital, Inc. ("Regal"), the placement agent, in the aggregate amount of 8% of the gross proceeds of the offering and to issue warrants to Regal to purchase 8% of the number of shares of Common Stock into which the Series B Convertible Preferred Shares may be converted at an exercise price equal to the Fixed Conversion Price. Further, the Company has agreed to provide Regal with the right to raise up to an additional $12,500,000 on behalf of the Company, for a period of nine (9) months following June 12, 1996, as may be agreed between the Company and Regal, subject to certain terms and conditions. EMPLOYEES As of July 12, 1996, the Company had eight (8) full-time employees, including four (4) executive personnel, two (2) administrative and financial personnel and two (2) clerical employees. The Company intends to hire additional personnel as the development of the Company's business makes such action appropriate. The loss of the services of key personnel could have a material adverse effect on the Company's business. Since there is intense competition for qualified personnel knowledgeable of the Company's industry, no assurance can be given that the Company will be successful in retaining and recruiting needed key personnel. The Company does not have key-man life insurance for any of its employees. The Company's employees are not represented by a labor union and are not covered by a collective bargaining agreement. The Company believes that its employee relations are good. 13 RISK FACTORS THERE IS A LIMITED PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK. PERSONS WHO MAY OWN OR INTEND TO PURCHASE SHARES OF COMMON STOCK IN ANY MARKET WHERE THE COMMON STOCK MAY TRADE SHOULD CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH OTHER INFORMATION CONTAINED ELSEWHERE IN THE COMPANY'S REPORTS, PROXY STATEMENTS AND OTHER AVAILABLE PUBLIC INFORMATION, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, PRIOR TO PURCHASING SHARES OF THE COMMON STOCK: FINANCIAL RISKS. DEVELOPMENT STAGE COMPANY. The Company is in the development stage, is subject to all of the risks inherent in the establishment of a new business, has generated minimal revenues from operations since inception and has been engaged primarily in research and development. The likelihood of the success of the Company must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the formation of a new business. It is anticipated that in the short term, revenues generated from the Company's operations will not be adequate to meet the operating expenses related thereto. There can be no assurances that the Company will ever achieve profitable operations or that revenues will be adequate to meet the Company's ongoing operating expenses. LACK OF PROFITABILITY; IMPAIRED FINANCIAL CONDITION. The Company has generated losses of $5,281,730 and $5,585,596 during the fiscal years ended March 31, 1996 and March 31, 1995, respectively. There can be no assurances that the Company will ever achieve profitable operations. QUALIFIED FINANCIAL STATEMENTS. The Company's auditors have included an explanatory paragraph in their Report of Independent Certified Public Accountants to the effect that recovery of the Company's assets are dependent upon future events, the outcome of which is undeterminable, and that the successful completion of the Company's development program and its transition, ultimately, to the attainment of profitable operations is dependent upon obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure. There can be no assurances that such a financing can be completed on terms favorable to the Company or at all, or that the business of the Company will ever achieve profitable operations. NEED FOR ADDITIONAL CAPITAL. The Company's successful transition from a development stage company to profitable operations is dependent upon obtaining adequate financing to fund current operations. In the event the Company fails to raise additional funds from such financing, and fails to generate any additional revenues from operations, the Company may not be able to meet all of its obligations past September, 1996 from cash flow from operations. Further, up to $1,750,000 of additional funds may be released to the Company in connection with a private placement of the Company's securities. However, the release of such funds may be subject to cancellation in the event that certain conditions are not fulfilled by the Company. There can be no assurances that such additional funds will be released to the Company, that any sources of financing will be available from existing stockholders or external sources on terms favorable to the Company or at all or that the business of the Company will ever achieve profitable operations. Further, any additional financing, if necessary, may be senior to the Common Stock or result in significant dilution to the holders of the Common Stock. In the event the Company does not receive any such financing or generate profitable operations, management's options will be to suspend or discontinue its business activity in its present form. 14 SECURITIES RISKS. LIMITED PUBLIC MARKET FOR COMMON STOCK. There is currently a limited public market for the Common Stock. Holders of the Company's Common Stock may, therefore, have difficulty selling their Common Stock, should they decide to do so. In addition, there can be no assurances that such markets will continue or that any shares of Common Stock which may be purchased may be sold without incurring a loss. Any such market price of the Common Stock may not necessarily bear any relationship to the Company's book value, assets, past operating results, financial condition or any other established criteria of value, and may not be indicative of the market price for the Common Stock in the future. Further, the market price for the Common Stock may be volatile depending on a number of factors, including business performance, industry dynamics, news announcements or changes in general economic conditions. DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock is currently listed for trading in the over-the-counter market on the NASD Electronic Bulletin Board or in the "pink sheets" maintained by the National Quotation Bureau, Inc., which are generally considered to be less efficient markets than markets such as NASDAQ or other national exchanges, and which may cause difficulty in conducting trades and difficulty in obtaining future financing. Although the Company has applied for the Company's Common Stock to be listed for trading in the NASDAQ Small-Cap Market, there can be no assurances that the Common Stock will qualify for listing on such market. Further, the Company's securities may become subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the Exchange Act. The penny stock rules apply to non-NASDAQ companies whose common stock trades at less than $5.00 per share or which have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). Such rules require, among other things, that brokers who trade "penny stock" to persons other than "established customers" complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade "penny stock" because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. In the event that the Company becomes subject to the "penny stock rules" for any significant period, there may develop an adverse impact on the market, if any, for the Company's securities. CERTAIN REGISTRATION RIGHTS. The Company has entered into various agreements pursuant to which certain holders of the Company's outstanding Common Stock have been granted the right, under various circumstances, to have Common Stock that is currently outstanding registered for sale in accordance with the registration requirements of the Securities Act upon demand or "piggybacked" to a registration statement which may be filed by the Company. Of the currently issued and outstanding Common Stock, 26,634,429 shares may be the subject of future registration statements pursuant to the terms of such agreements. Any such registration statement may have a material adverse effect on the market price for the Company's Common Stock resulting from the increased number of free trading shares of Common Stock in the market. There can be no assurances that such registration rights will not be enforced or that the enforcement of such registration rights will not have a material adverse effect on the market price for the Common Stock. LACK OF DIVIDENDS ON COMMON STOCK; DIVIDENDS PAYABLE TO AFFILIATE ON PREFERRED STOCK. The Company has paid no dividends on its Common Stock to date and there are no plans for paying dividends on the Common Stock in the foreseeable future. The Company has certain obligations to pay dividends to an affiliate on issued and outstanding shares of Series A Convertible Preferred Stock. Except for dividends which may be payable on the Series A Convertible Preferred Stock, the Company intends to retain earnings, if any, to provide funds for the expansion of the Company's business. 15 POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Company's Certificate of Incorporation includes certain provisions which are intended to protect the Company's stockholders by rendering it more difficult for a person or persons to obtain control of the Company without cooperation of the Company's management. These provisions include certain super-majority requirements for the amendment of the Company's Certificate of Incorporation and Bylaws. Such provisions are often referred to as "anti-takeover" provisions. The inclusion of such "anti-takeover" provisions in the Certificate of Incorporation may delay, deter or prevent a takeover of the Company which the stockholders may consider to be in their best interests, thereby possibly depriving holders of the Company's securities of certain opportunities to sell or otherwise dispose of their securities at above-market prices, or limit the ability of stockholders to remove incumbent directors as readily as the stockholders may consider to be in their best interests. SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES. Future sales of shares of Common Stock by the Company and its stockholders could adversely affect the prevailing market price of the Common Stock. There are currently 2,635,000 shares of Common Stock which are free trading shares or are eligible to have the restrictive legend removed pursuant to Rule 144(k) promulgated under the Securities Act. Further, 26,634,429 shares may be the subject of future registration statements pursuant to the terms of certain agreements between the Company and certain of its stockholders. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales may occur, could have a material adverse effect on the market price of the Common Stock. Pursuant to its Certificate of Incorporation, the Company has the authority to issue additional shares of Common Stock and Preferred Stock. The issuance of such shares could result in the dilution of the voting power of the currently issued and outstanding Common Stock. FUTURE ISSUANCES OF PREFERRED STOCK. The Company's Certificate of Incorporation, as amended, authorize the issuance of preferred stock with such designation, rights and preferences as may be determined from time to time by the Board of Directors, without stockholder approval. In the event of the issuance of additional series of preferred stock, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. GENERAL BUSINESS OPERATIONS RISKS. CONTROL BY PRINCIPAL STOCKHOLDER. Tweedia, the Company's principal stockholder, and an affiliate of certain directors and executive officers of the Company, has the voting power of approximately 47.5% of the outstanding Common Stock. As a result of such Common Stock ownership, Tweedia will be in a position to exercise significant control with respect to the affairs of the Company and the election of directors. COMPETITION. The Company directly and indirectly competes with other businesses, including businesses in the telecommunications business. In many cases, these competitors are larger and more firmly established than the Company. In addition, many of such competitors have greater marketing and development budgets and greater capital resources than the Company. Accordingly, there can be no assurance that the Company will be able to achieve and maintain a competitive position in the Company's industry. EFFECT OF TECHNOLOGICAL CHANGE ON OPERATIONS. The market in the telecommunications industry is characterized by rapidly changing technology. There can be no assurance that technologies developed by others will not render obsolete or otherwise significantly diminish the value of the Company's business operations. DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the skills of its management team. There is strong competition for qualified personnel in the telecommunications industry, and the loss of key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect the Company's business. There can be no assurances that the Company will be able to retain its existing key 16 personnel or to attract additional qualified personnel. The Company does not have key-man life insurance on any employees of the Company. LIMITATIONS ON DIRECTOR LIABILITY. The Company's Certificate of Incorporation provides, as permitted by governing Delaware law, that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. In addition, the Company's Certificate of Incorporation and Bylaws provide for mandatory indemnification of directors and officers to the fullest extend permitted by Delaware law. Further, the Company has adopted certain forms of indemnification agreements which may be entered into with the Company's officers and directors. These provisions and agreements may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on behalf of the Company against a director. PRC BUSINESS OPERATIONS RISKS. PRELIMINARY NATURE OF AGREEMENTS. The Company has entered into certain letters of intent and agreements with Beijing CATCH, an affiliate of the principal stockholder of the Company, related to the Company's prospective telecommunications business operations in the PRC. Each of these agreements relate to the proposed construction of telecommunications networks in the PRC. These agreements are preliminary in nature and are subject to the receipt of certain approvals and permits from various governmental agencies in the PRC, and in certain cases, the execution of more definitive agreements will be required. There can be no assurances that such definitive agreements will ever be consummated or that such approvals and permits will be obtained for the benefit of the Company. Since the Company does not have the technical capability, personnel or resources to build, service or maintain a telecommunications network, the consummation of all or any of these transactions may require the cooperation and participation of third parties, other than PRC governmental agencies, who may be parties to or independent contractors with any such Sino-foreign joint ventures, for the purpose of building, servicing or maintaining any such telecommunications network. There can be no assurances that the Company will be able to obtain the requisite cooperation or participation of any such third parties with respect to the Company's proposed business operations. Although each of these agreements sets forth certain understandings as to the extent of the contributions and interests in these Sino-foreign joint ventures, there can be no assurances as to the final terms of the definitive agreements, if any, with respect to these proposed Sino-foreign joint ventures. Further, each of these preliminary agreements will require significant financings necessary to fund the construction of such networks. The Company does not currently have any commitments for any such financing or sufficient resources to fund such construction, and there can be no assurances that any such financing can be obtained on terms favorable to the Company or at all. CONSTRUCTION AND OPERATION OF PROPOSED TELECOMMUNICATIONS NETWORKS. Even in the event that the Company obtains all necessary governmental approvals and financings related to the Company's proposed telecommunications networks business ventures in the PRC, the Company may experience difficulties and delays relating to the construction and operation of such networks. There can be no assurances that such networks will be completed in a timely manner, if at all, or that any financing which may be completed with respect to any such network will be sufficient to complete or to operate any proposed project. The failure to achieve these goals may have a material adverse effect upon the liquidity, working capital requirements and anticipated growth of the Company's business operations. TRANSACTIONS WITH AFFILIATES; CONFLICTS OF INTEREST. The Company has entered into certain contractual arrangements with Beijing CATCH, an affiliate of the Company, with respect to the Company's prospective business operations in the PRC. Beijing CATCH is the controlling stockholder of Tweedia, a principal stockholder of the Company. Beijing CATCH is also an affiliate of certain directors and officers of the Company. There can be no assurances that Beijing CATCH will be able successfully to assist the Company's 17 proposed business plan or that a change of control in the Company's capital structure will not have a material adverse effect on the Company's proposed business operations. The Company also has agreed to register certain shares of Common Stock of the Company's stockholders in connection with the transactions contemplated by the Reorganization Agreement. The shares of Common Stock which may be registered will be offered for the benefit of such stockholders, certain of whom are affiliates of the Company. The Company will not receive any of the net proceeds of from the sale of any such shares. Management of the Company believes that these agreements were negotiated at arms' length. However, the enforcement of these agreements may create conflicts of interests in the event of a dispute between the Company and any such parties. Although management of the Company intends to use its best efforts to mitigate any such conflicts of interests, there can be no assurances that management of the Company will be able to mitigate such conflicts of interest successfully. RISKS PERTAINING TO DOING BUSINESS IN THE PRC. LIMITED PRECEDENT. Prospective stockholders should be aware of and take into consideration the limited precedent with which to evaluate the potential risks and rewards related to the acquisition, development and financing of, or the establishment of Sino-foreign joint ventures with respect to telecommunications network business operations, specifically, in the PRC by foreign entities. INTERNAL POLITICAL RISKS. The Company's prospective business operations may be adversely affected by the political environment in the PRC. The PRC is a socialist state which since 1949 has been, and is expected to continue to be, controlled by the Communist Party of China. Changes in the political leadership of the PRC may have a significant adverse effect on policies related to the current economic reforms program, other policies affecting business and the general political, economic and social environment in the PRC. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increase of such disparities could affect the political or social stability of the PRC. GOVERNMENT CONTROL OVER ECONOMY. The PRC only recently has permitted greater provincial and local economic autonomy and private economic activities. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC or particular regions thereof. Any such developments could affect opportunities for foreign investment, the prospects of private sector enterprises including the Company's intended business operations in the PRC. INFLATION AND ANTI-INFLATION POLICIES. In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation, which have led to the adoption by the PRC government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation has in the past and may in the future cause the PRC government to impose controls on prices, or to take other action which could inhibit economic activity in China, and, thereby, adversely affect the Company's intended business operations in the PRC. There can be no assurance that high rates of inflation and any PRC anti-inflation policies adopted in the future will not have a material adverse effect on the Company's business operations, in particular, with respect to the liquidity of the Company. RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE. The Renminbi, the legal tender currency of the PRC, is not a freely convertible currency. The PRC government regulates its external balances through control over foreign trade and foreign exchange regulation. Both conversion of Renminbi into foreign currencies and remittance of foreign currencies abroad are subject to PRC government approval. The Company anticipates that revenues which may be derived from the Company's proposed business operations through Sino-foreign joint ventures in the PRC, if any, will be in Renminbi. A portion of such revenues may have to be converted 18 to other currencies to meet foreign currency obligations (such as payment obligations to potential non-Chinese lenders) or to be remitted to the Company as return of capital or distributions. The PRC government has recently issued new regulations with respect to the reform of its foreign exchange system. However, there can be no assurances as to how foreign investment enterprises will be treated under this new system or whether the system will be changed again in the future. As a result, the Company may encounter difficulty in exchanging revenues from the Company's prospective business operations in the PRC which may be obtained in Renminbi into foreign currencies, and thereby adversely affect the Company's ability to make payments or distributions in foreign currencies. VOLATILITY OF EXCHANGE RATES. There has been significant volatility in the exchange rates of Renminbi to U.S. Dollars in recent years. In recent years, the Renminbi has experienced a gradual but significant devaluation against most major currencies. There can be no assurances as to the stability or valuation of exchange rates of the Renminbi or as to the potential effect of inflation rates on the Company's prospective business operations. RESTRICTIONS ON REPATRIATION OF FOREIGN CURRENCY. Foreign investment enterprises may generally remit out of the PRC profits or dividends derived from a source within the PRC, subject to the availability of foreign currency. Except for such profits or dividends, remittance out of the PRC by foreign investment enterprises of any other amount (including proceeds from a disposition of an investment in China) is subject to the approval of governmental regulatory agencies and to the availability of foreign currency. In addition, if there were to be a deterioration in the PRC's balance of payments, or for other reasons, the PRC could impose restrictions on foreign currency remittances abroad. No assurance can be given that the Company will be able or permitted to remit out of the PRC amounts due to the Company from any Sino-foreign joint venture with which the Company may engage in business. PRC LAWS; EVOLVING REGULATIONS AND POLICIES. The PRC's legal system is a civil law system based on written statutes in which decided legal cases have little value as precedents, unlike the common law system prevalent in the United States. The PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion and variation. China's regulations and policies with respect to foreign investment are evolving. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published, statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks that the Company will not be able to achieve its investment objectives. EXPROPRIATION. The PRC government has, in the past, renounced various debt obligations incurred by predecessor governments, which obligations remain in default, and expropriated assets without compensation. There can be no assurance that the PRC government will not in the future expropriate or nationalize assets which may relate to any prospective business operations of the Company. ITEM 2. DESCRIPTION OF PROPERTIES. The Company leases offices located at 599 Lexington Avenue, 44th Floor, New York, New York 10022. This facility serves as the Company's principal executive offices. The Company pays an annual rent of $334,400 on a lease which expires in May, 2000. The Company has obtained an option to extend the lease for an additional five (5) year term based on the fair market value of the leased premises at or about the time of the expiration date of the initial term of the lease. 19 ITEM 3. LEGAL PROCEEDINGS. A complaint, dated March 26, 1996, has been filed against the Company, ITV and other parties, including certain of the Company's officers, directors and principal stockholders, with respect to the premises formerly leased by ITV in Canoga Park, California. The complaint filed by the lessor of the premises in the Superior Court of California, County of Los Angeles (No. BC146964), alleges certain claims, including abandonment of the lease and failure to pay rent plus late charges and other expenses from September, 1995 through October 12, 1995, the date of termination of the lease, and the amount of rent abated during the first six (6) months of the lease, in the aggregate principal amount of approximately $82,000. The complaint also alleges damages at the monthly rental rate of approximately $19,000 from October 12, 1995 through February 28, 1999, the expiration of the term of the lease, plus other costs and damages. Further, the complaint alleges claims against the Company and certain officers, directors and principal stockholders of the Company under allegations of alter ego, distributions contrary to law and fraudulent transfer of assets. A first amended complaint, dated April 15, 1996, has been filed against the Company, ITV, and other parties, including certain of the Company's officers, directors and principal stockholders, by Jacqueline Brandwynne, a stockholder of the Company. The complaint, filed in the Superior Court of California, County of Los Angeles (No. BC145036), alleges fraud, misrepresentation and breach of contract with respect to the sale of 666,667 shares of ITV for $1,000,000 prior to the completion of the Reorganization Agreement between the Company and ITV in February, 1995, in connection with which the shares of ITV were exchanged on a two for one basis for shares of the Company. The complaint alleges that certain misrepresentations were made in connection with the sale of the 666,667 shares and that the claimant was entitled to receive 666,667 shares of the Company after the completion of the Reorganization Agreement. The complaint seeks rescission of the transaction and damages of no less than $1,000,000. The complaint also alleges a claim in connection with an alleged oral employment agreement for 125,000 options to purchase shares of the Company's Common Stock at an exercise price of $0.35 per share and the right to purchase additional shares of Common Stock at $1.00 per share, plus other benefits, including a salary of no less than $130,000. Management of the Company believes that there are valid defenses to each of these claims and intends to defend each of the actions vigorously, if no settlement can be reached with the claimants. There can be no assurances as to the resolution of these matters. The Company has been notified that a default has been filed against ITV, on or about December 11, 1995, relating to a complaint filed by National Electronics Corporation ("NEC") in the Los Angeles, California Municipal Court (No. 95E10612). The Company understands that the complaint alleges damages in the principal amount of approximately $10,500 and relates to a claim for the non-payment for manufacturing parts by ITV. The $10,500 principal obligation owing to NEC was a liability assumed by Netmatics in connection with the Asset Sale Agreement between ITV and Netmatics. The Company has been advised by management of Netmatics that an agreement has been reached for the direct payment by Netmatics to NEC of such obligation. However, there can be no assurances as to the resolution of this matter. A former employee of ITV has claimed that ITV wrongfully terminated her employment in November, 1994. Such former employee has not identified the damages purportedly suffered as a result of such alleged wrongful termination. The Company has investigated these allegations and management of the Company believes that such termination was undertaken in strict adherence with the Company's policies. As of the date of this Report, such person has not initiated any legal proceedings against the Company. Except as set forth above, the Company is not a party to any material litigation and is not aware of any pending or threatened litigation that could have a material adverse effect on the Company's business, operating results or financial condition. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At a May 7, 1996 meeting of the Company's stockholders, the stockholders adopted the following resolutions by the votes set forth below: (1) To approve a change in the Company's state of incorporation from Colorado to Delaware by means of a merger of the Company with and into a wholly-owned subsidiary. (15,610,909 shares in favor, none opposed and 10,483,500 not voting or abstained) (2) To adopt the Company's 1996 Stock Option Plan and to reserve up to 12,000,000 shares of the Company's Common Stock for issuance under the 1996 Stock Option Plan. (13,238,174 shares in favor, 3,330,195 opposed, and 9,526,040 not voting or abstained) (3) To approve the form of certain indemnification agreements between the Company and the members of the Company's Board of Directors. (15,609,609 shares in favor, 958,460 opposed, and 9,526,340 not voting or abstained) PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. As of July 12, 1996, the authorized capital stock of the Company consisted of 100,000,000 shares of common stock, par value $0.001 per share (the "Common Stock") and 10,000,000 shares of preferred stock, par value $0.001 per share (the "Preferred Stock"). As of July 12, 1996, there were issued and outstanding 28,451,982 shares of Common Stock, options to purchase 10,013,183 shares of Common Stock, 1,524,178 shares of Series A Convertible Preferred Stock and 100 shares of Series B Convertible Preferred Stock. Further, the Company has issued and outstanding warrants to purchase 183,433 shares of Common Stock and other warrants to purchase a number of shares of Common Stock based on the conversion rate of the Series B Convertible Preferred Stock. The Company's Common Stock has been listed for trading in the over-the-counter market since March 4, 1996 and is quoted on the NASD Bulletin Board or in the "pink sheets" maintained by the National Quotation Bureau, Inc. under the symbol "AVIC." The Company's Common Stock has a very limited trading history. The bid and asked sales prices of the Common Stock, as traded in the over-the-counter market, on July 12, 1996, were approximately $3.00 and $3.50, respectively. These prices are based upon quotations between dealers, without adjustments for retail mark-ups, mark-downs or commissions, and therefore may not represent actual transactions. The Company has applied for listing of the Company's Common Stock in the NASDAQ Small-Cap Market. There can be no assurances that a public market will be sustained for the Common Stock or that the Common Stock will qualify for listing in the NASDAQ Small-Cap Market. No dividend has been declared or paid by the Company since inception. The Company has certain obligations to pay dividends to an affiliate on issued and outstanding shares of Series A Convertible Preferred Stock. Except for dividends which may be payable on the Series A Convertible Preferred Stock, the Company does not anticipate that any dividends will be declared or paid in the future. See "Item 12 - Certain Relationships and Related Transactions." The transfer agent for the Company is Colonial Stock Transfer Company, Inc., 440 East 400 South, Suite One, Salt Lake City, Utah 84111, (801) 355-5740. 21 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. OVERVIEW OF PRESENTATION. On February 8, 1995, the Company completed the Reorganization Agreement with ITV, pursuant to which the Company acquired one hundred percent (100%) of the issued and outstanding securities of ITV from the holders of securities of ITV, in exchange for a number of shares of Common Stock and options to purchase shares of Common Stock equal to approximately 91% of the number of issued and outstanding shares of Common Stock on a fully diluted basis after the completion of the transaction. See Item 1 - "Business -Reorganization Agreement with ITV." Since approximately April, 1995, the focus of the Company's principal business operations has been the establishment of Sino-foreign joint ventures related to the development of telecommunications networks in the PRC on a BTSM basis. On January 16, 1996, ITV closed the Asset Sale Agreement between ITV and Netmatics. Pursuant to the terms of the Asset Sale Agreement, ITV, the former primary operating subsidiary of the Company, sold substantially all of ITV's assets and Netmatics assumed certain of ITV's liabilities and obligations in consideration of an aggregate purchase price of $2,500,000 and common stock of Netmatics currently equal to 19.4% of the issued and outstanding shares of Netmatics. The financial statements of the Company included in this Report have been presented, for accounting purposes, as a recapitalization of ITV, with ITV as the acquiror of the Company. For purposes of clarity in this section, the term "Company" reflects the financial condition and results of operations of ITV, which was incorporated in March, 1992, through February 8, 1995, as described in the preceding paragraph. RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1996 AND MARCH 31, 1995. Net sales increased from $345,276 during the year ended March 31, 1995 to $683,733 during the year ended March 31, 1996. Net sales during the year ended March 31, 1995 related to the sale of prototypes of the Company's products and miscellaneous services provided to the Company's customers on a pilot-testing basis. The increase in net sales during the year ended March 31, 1996 was attributable to the development of a tested product line and a nation-wide sales and marketing program for the distribution of the Company's products related to the former operations of the Company's ITV subsidiary. As all of the Company's revenues since inception were generated by ITV, the Company had no net sales subsequent to the closing of the Asset Sale Agreement in January, 1996. Selling, general and administrative expenses decreased nine percent from $3,513,567 during the year ended March 31, 1995 to $3,207,570 during the year ended March 31, 1996. This reduction was primarily related to a decrease in payroll and related expenses associated with the closing of the Asset Sale Agreement in January, 1996, which led to a reduction in the number of employees working for the Company. Net research and development expenses decreased by 38% from $2,086,324 during the year ended March 31, 1995 to $1,287,629 during the year ended March 31, 1996. The decrease in research and development expenses related to a shift in the focus of the business of the Company from manufacturing technologically advanced networking equipment to establishing Sino-foreign joint ventures with entities in the PRC involved in telecommunications. As a result of the closing of the Asset Sale Agreement in January, 1996, the Company ceased all activities related to research and development. The equity in losses of unconsolidated subsidiary of $500,000 recorded during the year ended March 31, 1996 represents the Company's share of losses reported by Netmatics between January 17, 1996 and March 31, 1996, during which period the Company owned thirty-three percent (33%) of the issued and outstanding common shares of Netmatics. In 1996, the Company suspended the equity method of accounting with respect to its investment in Netmatics when the Company's share of losses equalled the carrying amount of the investment. 22 Interest expense during the year ended March 31, 1996 increased to approximately $242,000 from approximately $118,000 during the year ended March 31, 1995 due to a higher average outstanding balance of stockholder loans payable during the year ended March 31, 1996. The loss from abandoned assets of $130,840 recorded during the year ended March 31, 1996 represents the write-off of certain remaining assets of ITV that were not sold in connection with the Asset Sale Agreement. The Company's net loss decreased from $5,538,303 during the year ended March 31, 1995 to $5,281,730 during the year ended March 31, 1996. This decrease in net loss was due to decreases in selling, general and administrative expenses and research and development expenses that more than offset the loss from the abandonment of assets and higher interest expenses incurred during the year ended March 31, 1996. LIQUIDITY AND CAPITAL RESOURCES. The Company's current cash flow from operations is not capable of supporting existing business operations in its present form. Since inception in March, 1992, the Company has financed its development stage activities primarily through equity investments and loans from its founding stockholders. The Company generated sales of $1,223,894 from March, 1992 (inception) through March 31, 1995. All of these sales occurred from March 31, 1993 through March 31, 1996. However, the Company has generated losses of $15,331,767 from operations from March, 1992 through March 31, 1996 and net losses of $16,527,651 since inception. There can be no assurances that the Company will ever achieve profitable operations. From its inception in March, 1992 through March 31, 1996, the Company has used approximately $12,148,000 of cash from its operating activities. This use of cash was primarily the result of the loss of approximately $16,528,000 since inception. Further, the Company used approximately $3,181,000 of cash from investing activities during this period. This amount resulted from approximately $1,586,000 for the purchase of machinery and equipment used in the Company's research and development activities, $1,170,000 used as a deposit for the Company's investment in the GSM Network Joint Venture and approximately $675,000 expended for capitalized computer software development costs. The cash outflows from investing activities were generated from the following sources: (i) approximately $9,179,000 in stockholder loans, of which $6,735,000 was converted into 9,730,790 shares of the Company's Common Stock, and (ii) the receipt of additional common stock subscriptions of approximately $6,735,000. Further, on June 12, 1996, the Company issued 100 shares of the Company's Series B Convertible Preferred Stock (the "Series B Convertible Preferred Shares"), at a purchase price of $25,000 per share, and an equal number of warrants were issued to purchase shares of the Company's Common Stock in consideration of $2,500,000. In connection with the transaction, $750,000 of the gross proceeds were released to the Company and $1,750,000 of the gross proceeds were deposited into a second escrow, subject to release to the Company in the event that certain legal opinions are delivered to the investors, on or before August 11, 1996, with respect to the formation of the Company's Paging Networks System Joint Venture with Beijing CATCH. In the event that such opinions are not delivered on or before such date, the transaction may be cancelled with respect to $2,000,000 of the gross proceeds of the offering. On or about September 16, 1994, ITV and Beijing CATCH entered into an exclusive five (5) year distributorship agreement pursuant to which ITV appointed Beijing CATCH as ITV's exclusive distributor for ITV's communications processor and data/access modules in the PRC. The parties terminated this agreement on December 20, 1995. In connection with the termination of this agreement, with respect to a $1,000,000 deposit made by Beijing CATCH with ITV relating to the agreement, $150,000 of such amount was credited 23 to ITV as payment for consulting services provided to Beijing CATCH and ITV remains obligated to repay $850,000 to Beijing CATCH. On December 15, 1995, the Company also agreed to issue 1,524,178 shares of the Company's Series A Convertible Preferred Stock to Tweedia as consideration for the contribution to the Company by Beijing CATCH of Beijing CATCH's interest in a $4,572,536 non-refundable deposit paid to Motorola in connection with an Enhanced Specialized Mobile Relay System Equipment Purchase Contract #700.0008D, dated December 12, 1993, and as amended, between Beijing CATCH and Motorola. In the event that Beijing CATCH forfeits the deposit to Motorola, Tweedia has agreed to return the Convertible Preferred Shares to the Company for cancellation. On January 16, 1996, ITV closed the Asset Sale Agreement between ITV and Netmatics. Pursuant to the terms of the Asset Sale Agreement, ITV, the former primary operating subsidiary of the Company, sold substantially all of ITV's assets and Netmatics assumed certain of ITV's liabilities and obligations in consideration of an aggregate purchase price of $2,500,000 and common stock of Netmatics currently equal to 19.4% of the issued and outstanding shares of Netmatics. As of December 21, 1995, the Company agreed to issue up to 50,000,000 shares of Common Stock to Tweedia, an affiliate of Beijing CATCH and the principal stockholder of the Company, pursuant to the terms of a Master Agreement and Right of First Refusal. On March 22, 1996, the Company entered into certain agreements to obtain a 31% interest in a Sino-foreign joint venture formed between Hebei United and NTT with respect to the development of a Global Service Mobile telephone network in Hebei Province, PRC. The agreed upon purchase price of this interest is $1.17 million. These funds are currently on deposit at the Bank of Communications in Shijiazhuang, Hebei Province PRC in the account of the Electronics Industry Commission of the Hebei Provincial Government, pending final PRC governmental approvals for the transfer of this interest to the Company. If the proper approvals are not received for the transfer of this interest, the Electronics Industry Commission of the Hebei Provincial Government will return the $1.17 million to the Company. On June 12, 1996, the Company entered into an agreement to form a Sino-foreign joint venture with Beijing CATCH with respect to the purchase or construction of one hundred (100) paging stations in the PRC. The Company has agreed to contribute the capital needed to build the China Paging Network in exchange for a seventy percent (70%) equity interest in the joint venture, which will sell the equipment necessary for constructing the China Paging Network to a subsidiary of Beijing CATCH, and install, service and maintain such equipment. The initial capital contribution required from the Company for the China Paging Networks Joint Venture will be $700,000. The Company has set aside $1,000,000 from the June, 1996 offering of $2,500,000 of Series B Convertible Preferred Stock as the source of the $700,000 capital contribution, with the balance of the $1,000,000 to be used for capital expenditures by the China Paging Networks Joint Venture upon its formation. The closing of such offering is subject to the receipt of certain PRC regulatory approvals and legal opinions with respect to the formation of the China Paging Networks Joint Venture. In the event that regulatory approval of the joint venture is not obtained and such opinions are not delivered within 60 days of the closing of the offering, the offering may be cancelled with respect to $2,000,000 of the gross proceeds, and the Company will not have adequate sources of capital to make the required $1,000,000 capital contribution. There can be no assurances that such offering will not be cancelled or that the Company will be able to obtain alternative sources of financing for the required capital contribution. Each of these agreements is preliminary in nature and is subject to the receipt of significant approvals and permits from various governmental agencies in the PRC. There can be no assurances that such definitive agreements will ever be consummated or that such approvals and permits will be obtained for the benefit of the Company. 24 Since the Company does not currently have the technical capability, personnel or resources to build, service or maintain a telecommunications network, the consummation of all or any of these transactions may require the cooperation and participation of third parties, other than PRC governmental agencies, who may be parties to or independent contractors with any such proposed Sino-foreign joint ventures, for the purpose of building, servicing or maintaining any such telecommunications network. There can be no assurances that the Company will be able to obtain the requisite cooperation or participation of any such third parties with respect to the Company's proposed business operations. Although each of these agreements sets forth certain understandings as to the extent of the contributions and interests in these proposed Sino-foreign joint ventures, there can be no assurances as to the final terms of the definitive agreements, if any, with respect to these proposed Sino-foreign joint ventures. Further, each of these agreements will require significant financings necessary to fund the construction of such networks. The Company does not currently have any commitments for any such financing or sufficient resources to fund such constructor, and there can be no assurances that any such financing can be obtained on terms favorable to the Company or at all. In addition, the Company's proposed business operations in the PRC are subject to significant risks. These risks include, but are not limited to the limited precedent for the establishment of Sino-foreign joint ventures for the purpose of engaging in the telecommunications industry in the PRC, governmental restrictions on foreign business ventures in the PRC, PRC regulation of its economy and foreign currency exchange and the general political environment in the PRC. The Company's successful transition from a development stage company to profitable operations is dependent upon obtaining adequate financing to fund current operations and the development of a market for the Company's products. The Company will continue to seek funds in the form of lines of credit and/or equity and debt securities from third party sources as well as from its existing stockholders. The Company's auditors have included an explanatory paragraph in their Report of Independent Certified Public Accountants to the effect that recovery of the Company's assets are dependent upon future events, the outcome of which is undeterminable, and that the successful completion of the Company's development program and its transition, ultimately, to the attainment of profitable operations is dependent upon obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure. There can be no assurances that such a financing can be completed on terms favorable to the Company or at all, or that the business of the Company will ever achieve profitable operations. In the event the Company fails to raise additional funds from such financing, and fails to generate any additional revenues from operations, the Company may not be able to meet all of its obligations past September, 1996 from the $500,000 received from the sale of the Series B Preferred Stock. Further, if the Company receives the necessary approvals and legal opinions in relation to its paging joint venture, the balance of the $2.5 million from the sale of the Series B Preferred Stock will be released to the Company, which will provide the Company with operating capital through July, 1997, based on its current operating expenditures. There can be no assurances that the balance of the offering proceeds will be released to the Company, that any sources of financing will be available from existing stockholders or external sources on terms favorable to the Company or at all or that the business of the Company will ever achieve profitable operations. In the event the Company does not receive any such financing or generate profitable operations, management's options will be to suspend or discontinue its business activity in its present form. 25 ITEM 7. FINANCIAL STATEMENTS. The financial statements required by this Item 7 are attached hereto as Exhibit "A" and incorporated herein by this reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. As of December 27, 1994, the Company's Board of Directors determined to engage Singer Lewak Greenbaum & Goldstein LLP (successors to the practice of Shillan Abrams & Company) as the Company's independent certified accountants to replace Michael B. Johnson & Co., P.C. By letter dated November 4, 1994, Michael B. Johnson & Co., P.C., Certified Public Accountants, resigned as independent accountants for the Company, effective as of September 12, 1994. In connection with the closing of the Reorganization Agreement, the Company's fiscal year end changed from September 30 to March 31. The former independent accountants have not issued a report on the Company's financial statements for either of the past two fiscal years ended March 31, 1996. Michael B. Johnson & Co., P.C. had issued a report on the Company's financial statements for the fiscal year ended September 30, 1993, which period is not covered by the financial statements in this Form 10-KSB. Such report issued by the former accountants did not include an adverse opinion or disclaimer of opinion, and has not been modified as to uncertainty, audit scope or accounting principles. In connection with the audits of the two (2) most recent fiscal years and during any subsequent interim periods preceding such resignation, there has not developed any disagreement between such former independent accountants and management of the Company or other reportable events which have not been resolved to the former independent accountants' satisfaction. 26 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The directors of the Company currently have terms which will end at the next annual meeting of the stockholders of the Company or until their successors are elected and qualify, subject to their prior death, resignation or removal. Officers serve at the discretion of the Board of Directors. There are no family relationships among any of the Company's directors and executive officers. NAME POSITION AGE Joseph R. Wright, Jr. Chairman of the Board of Directors, Chief Executive Officer and President 57 Chen Li Vice-Chairman of the Board of Directors 38 Xiao Jun Executive Vice President- AVIC China and Director 39 Ju Feng Director 49 William H. Davidson Director 42 Teoh Set Seng Director 44 Michael J. Lim Chief Financial Officer and Executive Vice-President- Operations 32 Timothy P.F. Crowley Secretary 25 JOSEPH R. WRIGHT, JR. has been the Company's Chairman of the Board of Directors since May 1, 1995, President since May 7, 1996 and Chief Executive Officer since March 14, 1996. Mr. Wright is also currently a director of Travelers Group, Inc., Baker & Taylor Holdings, Inc., GRC International, Inc. and Deswell Industries, Inc. He served as the Vice Chairman, Executive Vice President and a director of W.R. Grace & Co. from 1989 to 1994, and as the Director and Deputy Director of President Reagan's White House Office of Management and Budget and the Deputy Secretary of the United States Department of Commerce from 1981 to 1989. He also has formerly served as the President and Chief Operating Officer of Citicorp Retail Services and Retail Consumer Services and as a partner and division head of Booz, Allen and Hamilton, Inc. He also has served as a director or member of numerous other corporations and organizations, including the National Association of Manufacturers and the President's Export Council. 27 CHEN LI has been a director of the Company since February 8, 1995 and Vice-Chairman of the Board of Directors since May 1, 1995. He also served as the Company's Chief Executive Officer from December 5, 1995 until March 14, 1996. He has been the President of Beijing CATCH Communication Group Co., an affiliate of Tweedia International Ltd., one of the principal stockholders of the Company, since January, 1993. Mr. Chen is also a director of Tweedia International Ltd. He also has served as a director of China United Telecommunications Co. since January, 1993. From 1989 to 1992, he was the general manager of Beijing CATCH Communication & Broadcasting Technology Co. From 1982 to 1987, he served as Project Manager with China International Trust Investment Co. Mr. Chen received an undergraduate degree in mathematics from the Beijing Institute of Technology in 1982. XIAO JUN has been a director of the Company since February 8, 1995 and Executive Vice President - AVIC China, since December 5, 1995. He also served as the Company's Secretary from February, 1995 to January, 1996 and Chief Financial Officer from June, 1995 to May 7, 1996. He has been the president of Xiao Hua International Inc., an international steel trading business based in California, since June, 1993. He also serves as the Assistant President of Beijing CATCH Communication Group Co. He has been the Vice President of ITV Communications, Inc. since December 14, 1994. From March, 1993 to May, 1993, Mr. Xiao was the vice-president of Chong Qing Special Metals Industry Co. From 1985 to 1990, Mr. Xiao served as an engineer/project manager at the representative office of IBM China/HK Corp. (Beijing). Mr. Xiao received a bachelor's degree in physics from the Beijing Polytechnic University in 1982. WILLIAM H. DAVIDSON has been a director of the Company since February 8, 1995. He has been an associate professor of Management and Organization at the School of Business Administration, University of Southern California, since 1986. Mr. Davidson was formerly an associate professor at the University of Virginia (1982-1986) and an assistant professor at Dartmouth College (1978 - 1982). He has also been a visiting professor at INSEAD (France), the Fletcher School of Diplomacy (Tufts University), the Dalian Institute (People's Republic of China) and the International University of Japan. He has also served as vice president of the Academy of International Business. Mr. Davidson has written a series of books on global business and management. He has also been involved in several United States federal governmental programs, and has served as a consultant in United States federal governmental projects and as an advisor to several foreign governments. He also serves as an advisor, investor or principal in several high technology start-up companies. Mr. Davidson is the founder and chairman of MESA Research, an organization dedicated to research and education in contemporary and future management issues, based in Redondo Beach, California. Mr. Davidson received a bachelor's of arts degree in economics, an M.B.A. and a Ph.D in International Management, all from Harvard University. JU FENG has been a director of the Company since February 8, 1995. He has been the Vice President and Chief Technical Officer of Beijing CATCH Communication Group Co. since 1990. He also serves as the Chairman of Hebei United Telecommunications Equipment Company. He was an associate professor and director of the telecommunications laboratory at the Beijing University of Aeronautics and Astronautics from 1989 to 1990. From 1987 to 1989, Mr. Ju served as a visiting scholar on mobile communication at the Department of Electrical and Electronics Engineering at Liverpool University (United Kingdom). Mr. Ju received a master's degree from the Department of Electronics Engineering from the Beijing University of Aeronautics and Astronautics in 1980, and a bachelor's degree in electrical engineering from Tshinghua University (Beijing, China) in 1968. TEOH SET SENG has been a director of the Company since July 25, 1994, and was the Secretary of the Company from July 25, 1994 until February 8, 1995. She also has served as an internal auditor for Villa Genting Development SDN BHD since June, 1993. From approximately 1983 to June, 1993, Ms. Teoh served as a manager for Planglobal Insurance SDN based in Malaysia. 28 MICHAEL J. LIM has been the Executive Vice-President - Operations of the Company since November 7, 1995 and the Chief Financial Officer since May 7, 1996. Prior to his joining the Company, Mr. Lim was an investment banker with Bear, Stearns & Co. Inc. Mr. Lim worked with Bear Stearns from 1986 to 1988 and 1991 to 1995. During the 2 1/2 years prior to his joining the Company, Mr. Lim served as a Vice President of Bear Stearns Asia Limited, where he advised Asian enterprises on a wide variety of financing transactions, with particular focus on telecommunications and infrastructure financings. Mr. Lim also worked as an investment banker with The Chase Manhattan Bank from 1990 to 1991. Mr. Lim received his A.B. degree from Harvard College in English Literature in 1985 and his M.B.A. degree from The Amos Tuck School of Business Administration in 1990. TIMOTHY P.F. CROWLEY joined the Company in May, 1995 and became Secretary of the Company in January, 1996. Prior to joining the Company, Mr. Crowley worked in Corporate Administration at Travelers Group, an eight billion dollar diversified, financial services company. Mr. Crowley received his B.A. from Connecticut College in 1993, and was enrolled in a graduate program in the History of Art at New York University's Institute of Fine Arts from 1993 to 1994. COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934. Section 16(a) of the Exchange Act requires the Company's directors and executive officers and beneficial holders of more than 10% of the Company's Common Stock to file with the Securities and Exchange Commission (the "Commission") initial reports of ownership and reports of changes in ownership of such equity securities of the Company. Based solely upon a review of such forms, or on written representations form certain reporting persons that no other reports were required for such persons, the Company believes that all reports required pursuant to Section 16(a) with respect to its executive officers, directors and 10% beneficial stockholders for the fiscal year ended March 31, 1996 were timely filed. 29 ITEM 10. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE. The following table sets forth certain information concerning compensation of certain of the Company's executive officers, including the Company's Chief Executive Officer and all executive officers whose total annual salary and bonus exceeded $100,000, for the fiscal years ended March 31, 1996 and 1995:
Long Term Compensation ------------------------------------------ Annual Compensation Awards Payouts - ---------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Name and Other Restricted LTIP All Other Principal Salary Bonus Compen- Awards Options/ Payouts Compen- Position Year ($) ($) sation ($) SARs(#) ($) sation ($) - ---------------------------------------------------------------------------------------------------------------- Joseph R. Wright, Jr.(1) 1996 143,750 0 0 0 6,000,000 0 0 Chen Li(2) 1996 50,000 0 0 0 2,000,000 0 0 James L. Nelson(3) 1996 57,750 0 0 0 0 0 0 1995 135,808 0 0 0 125,000 0 0 Tan Kim Wah(4) 1995 0 0 0 0 0 0 0 William E. Simmons(5) 1995 0 0 0 0 0 0 0 Daniel Poirier 1996 156,346 0 0 0 0 0 0 1995 132,854 0 0 0 50,000 0 0 Max Sun 1996 0 0 0 0 0 0 0 1995 205,167 0 0 0 0 0 0 Michael J. Lim(6) 1996 79,615 0 0 0 1,000,000 0 0 Xiao Jun 1996 57,990 0 0 0 400,000 0 0 1995 42,250 0 0 0 125,000 0 0
_____________________________ (footnotes on following page) 30 _____________________________ (footnotes on previous page) (1) Mr. Wright has been the Company's Chief Executive Officer since March 14, 1996. Of the $143,000 salary listed above, $125,000 is accrued and payable on such amount. (2) Mr. Chen served as the Company's Chief Executive Officer from December 5, 1995 until March 14, 1996. The $50,000 listed above reflects amounts accrued and payable pursuant to a consulting agreement with American CATCH with respect to services provided to the Company by Mr. Chen. (3) Mr. Nelson was appointed as the Company's Chief Executive Officer on or about February 8, 1995 in connection with the completion of the Reorganization Agreement. He resigned from such capacity on May 1, 1995. (4) Mr. Tan was elected as the Company's Chief Executive Officer and was appointed as Chairman of the Board of Directors on or about July 25, 1994. He resigned from such capacity on or about February 8, 1995. (5) Mr. Simmons resigned as the Company's Chief Executive Officer on or about July 25, 1994. (6) Of the $79,615 listed above, $50,954 is accrued and payable to Mr. Lim. 31 OPTION/SAR GRANTS TABLE DURING LAST FISCAL YEAR. The following table sets forth certain information concerning grants of stock options to certain of the Company's executive officers, including the Company's Chief Executive Officer and all executive officers whose total annual salary and bonus exceeded $100,000, for the fiscal year ended March 31, 1996:
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants For Option Term(1) - ----------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) Number of % of Securities Total Underlying Options/ Options/ SARs Exercise SARs Granted to or Base Granted Employees Price Expiration Name (#) in Fiscal Year ($/Share) Date 5% ($) 10%($) - ----------------------------------------------------------------------------------------------------------------- Joseph R. Wright, Jr.(2) 3,000,000 31.5% $0.35 4/14/04 $15,125,447 $23,648,832 3,000,000 31.5% $3.00 4/14/05 $15,881,719 $26,013,715 Chen Li(3) 2,000,000 21.0% $0.35 11/29/05 $10,587,811 $16,859,323 Michael Lim(4) 1,000,000 10.5% $0.35 11/06/05 $ 5,293,903 $ 8,429,659 Xiao Jun(5) 400,000 4.2% $0.35 12/31/05 $2,117,559 $3,371,863
_____________________________ (footnotes on following page) 32 ______________________________ (footnotes from previous page) (1) This chart assumes a market price of $3.25 for the Common Stock, the average of the bid and asked prices for the Company's Common Stock in the over- the-counter market as of July 12, 1996, as the assumed market price for the Common Stock with respect to determining the "potential realizable value" of the shares of Common Stock underlying the options described in the chart, and does not give effect to any reduction for the payment of the exercise price for such options. Each of the options reflected in the chart was granted at exercise prices which the Company believes to have been determined at the fair market value as of the date of grant. Further, the chart assumes the annual compounding of such assumed market price over the relevant periods, without giving effect to commissions or other costs or expenses relating to potential sales of such securities. The Company's Common Stock has been listed for trading in the over-the counter market since March 4, 1996 and has a very limited trading history. These values are not intended to forecast the possible future appreciation, if any, price or value of the Common Stock. See Item 5 - "Market Price of Common Equity and Related Stockholder Matters." (2) Mr. Wright has been granted an option to acquire up to 3,000,000 shares of Common Stock at an exercise price of $0.35 per share and an additional 3,000,000 shares at an exercise price of $3.00 per share. The option has vested with respect to 2,500,000 shares which have an exercise price of $0.35 per share, an additional option to purchase up to 500,000 shares which have an exercise price of $0.35 per share will vest on October 15, 1996, and an additional option to purchase up to 3,000,000 shares which have an exercise price of $3.00 per share will vest at the rate of 25% of such remaining 3,000,000 options commencing on April 15, 1997 and at the end of each six (6) month period thereafter and ending on October 15, 1998. The 3,000,000 options with an exercise price of $0.35 per share expire on April 14, 2004 and the 3,000,000 options with an exercise price of $3.00 per share expire on April 14, 2005. (3) American CATCH Communication Group Co. ("American CATCH"), an affiliate of Beijing CATCH Communication Group Co. and Tweedia International Ltd., the principal beneficial stockholder of the Company, has been granted a ten (10) year option to purchase up to 2,000,000 shares of Common Stock at an exercise price of $0.35 per share pursuant to the terms of a consulting agreement between American CATCH and the Company. The options vest at the rate of 666,667 per year on each November 30 commencing November 30, 1996 and ending November 30, 1999. The options expire on November 29, 2005. The options have been granted with respect to services to be provided to the Company by Chen Li, the Vice Chairman of the Board of Directors of the Company and the Chief Executive Officer of the Company from December 5, 1995 until May 7, 1996. (4) Mr. Lim has been granted an option to acquire up to 1,000,000 shares of Common Stock at an exercise price of $0.35 per share. The options vest at the rate of 25% of the aggregate number of options so granted at the end of each six (6) month period following November 7, 1996. The options expire on November 6, 2005. (5) Mr. Xiao has been granted an option to acquire up to 400,000 shares of Common Stock at an exercise price of $0.35 per share. The options vest at the rate of 25% of the aggregate number of options so granted at the end of each six (6) month period following January 1, 1996. The options expire on December 31, 2005. 33 EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements with three (3) of its executive officers, Joseph R. Wright, Jr., Xiao Jun and Michael Lim. The Company entered into a five year (5) year employment agreement dated as of April 15, 1995, and as amended on November 21, 1995, with Joseph R. Wright, Jr., pursuant to which Mr. Wright agreed to serve as the Company's Chairman of the Board of the Directors and to operate out of the Company's executive offices located in New York, New York. The employment agreement provides for an annual base salary of $50,000 during the first year, $300,000 during the second year, and with an increase thereafter of $100,000 during each of the final (3) years of the employment agreement. Mr. Wright has been granted an option to acquire up to 3,000,000 shares of Common Stock at an exercise price of $0.35 per share and an additional 3,000,000 shares at an exercise price of $3.00 per share. The option has vested with respect to 2,500,000 shares which have an exercise price of $0.35 per share, an additional option to purchase up to 500,000 shares which have an exercise price of $0.35 per share will vest on October 15, 1996, and an additional option to purchase up to 3,000,000 shares which have an exercise price of $3.00 per share will vest at the rate of 25% of such remaining 3,000,000 options commencing on April 15, 1997 and at the end of each six (6) month period thereafter and ending on October 15, 1998. The 3,000,000 options with an exercise price of $0.35 per share expire on April 14, 2004 and the 3,000,000 options with an exercise price of $3.00 per share expire on April 14, 2005. The options have been granted pursuant to the Company's 1996 Stock Option Plan. In the event that on or before April 15, 1997, the Company has not been able to establish a publicly traded security or to obtain sufficient financing to carry out the Company's intended business plan, unless the independent members of the Board of Directors determine that the failure to do so is substantially caused by the action or inaction of Mr. Wright, Mr. Wright shall have the right to terminate the employment agreement during the thirty (30) day period thereafter. In the event of such termination, the Company will be obligated to pay Mr. Wright the sum of $500,000 and all stock options granted to Mr. Wright will terminate. The Company has entered into a two (2) year employment agreement, effective as of January 1, 1996, with Xiao Jun, as the Company's Executive Vice President - - AVIC China, at an annual base salary of $175,000. As of November 7, 1995, the Company entered into a two (2) year employment agreement with Michael Lim, as the Company's Executive Vice President - Operations, at an annual base salary of $200,000. In connection with these employment agreements, the Company has agreed to issue, to Messrs. Xiao and Lim, options to purchase up to 400,000 and 1,000,000 shares, respectively, of the Company's Common Stock, an exercise price of $0.35 per share. The options have been granted pursuant to the Company's 1996 Stock Option Plan. The options vest at the rate of twenty-five percent (25%) of the aggregate number of options so granted at the end of each six (6) month period following the date of each respective employment agreement. The options granted to Messrs. Xiao and Lim expire on December 31, 2005 and November 6, 2005, respectively. The Company has also granted Xiao Jun a five year option to acquire up to 125,000 shares of the Company's Common Stock at an exercise price of $0.3555 per share pursuant to the Company's 1995 Stock Option Plan, all of which options vested as of February 8, 1995. See "1995 Stock Option Plan." CONSULTANTS. The Company has entered into consulting agreements with Michael Markow and with American CATCH Communication Group Co. ("American CATCH"), an affiliate of Beijing CATCH. 34 As of December 15, 1995, the Company entered into a consulting agreement with Michael Markow. Pursuant to the terms of the consulting agreement, the Company has agreed to issue to Mr. Markow options to purchase up to 100,000 shares of Common Stock with respect to certain consulting services which may be provided to the Company. The terms and conditions with respect to the issuance of these options are currently subject to negotiation between the Company and Mr. Markow. Further, the Company has reserved the right to issue up to an additional 100,000 options at the sole discretion of the Company. Each of these options has an exercise price of $3.00 per share, a five (5) year term and certain registration rights. Further, the Company has separately agreed to pay a finder's fee in cash of five percent (5%) of the aggregate equity funding obtained with respect to the introduction of investors to the Company by Mr. Markow. As of November 30, 1995, the Company entered into a two (2) year consulting agreement with American CATCH, with respect to services to be provided to the Company by Chen Li, the Vice-Chairman of the Board of Directors, at an annual base compensation rate of $150,000. Further, the Company has agreed to issue options to purchase up to 2,000,000 shares of Common Stock to American CATCH at an exercise price of $0.35 per share. The options have been granted pursuant to the Company's 1996 Stock Option. The options vest at the rate of 666,667 options per year on each November 30 commencing November 30, 1996 and ending November 30, 1998, up to the maximum number of options so granted, and remain exercisable until November 29, 2005. STOCK OPTION PLANS. As of February 8, 1995, the Company's Board of Directors and stockholders approved the Company's 1995 Stock Option Plan (the "1995 Stock Option Plan") in connection with the closing of the transactions contemplated by the Reorganization Agreement. The Company has reserved up to 500,000 shares of Common Stock for issuance under the 1995 Stock Option Plan. The Company has granted options to purchase up to 321,800 shares of Common Stock under the 1995 Stock Option Plan, 135,000 of which have been exercised. The 1996 Stock Option Plan (the "1996 Stock Option Plan") was adopted by the Board of Directors on March 14, 1996 and by the Company's stockholders on May 7, 1996. The Company has reserved for issuance thereunder an aggregate of 12,000,000 shares of Common Stock. The Company has granted options to purchase up to 9,530,000 shares of Common Stock under the 1996 Stock Option Plan. Of the 9,530,000 options granted as of the date of this Report, 2,850,000 options have vested, and the remaining 6,680,000 options may vest subject to certain schedules. The Board of Directors has approved a provision in the 1996 Stock Option Plan which will place a 6,000,000 share limit on the number of options that may be granted under the 1996 Stock Option Plan to an employee in the fiscal year ended March 31, 1996, and a 1,500,000 share limit in each fiscal year thereafter. A description of each of the Company's Stock Option Plans is set forth below. The description is intended to be a summary of the material provisions of the Company Stock Option Plans and does not purport to be complete. ADMINISTRATION OF AND ELIGIBILITY UNDER STOCK OPTION PLANS Each of the Stock Option Plans, as adopted, provides for the issuance of options to purchase shares of Common Stock to officers, directors, employees, independent contractors and consultants of the Company and its subsidiaries as an incentive to remain in the employ of or to provide services to the Company and its subsidiaries. The Stock Option Plans authorize the issuance of incentive stock options ("ISOs"), non-qualified stock options ("NSOs") and stock appreciation rights ("SARs") to be granted by a committee (the "Committee") to be established by the Board of Directors to administer the Stock Option Plans. 35 Subject to the terms and conditions of the Stock Option Plans, the Committee will have the sole authority to determine: (a)the persons ("optionees") to whom options to purchase shares of Common Stock and SARs will be granted, (b) the number of options and SARs to be granted to each such optionee, (c) the price to be paid for each share of Common Stock upon the exercise of each option, (d) the period within which each option and SAR will be exercised and any extensions thereof, and (e) the terms and conditions of each such stock option agreement and SAR agreement which may be entered into between the Company and any such optionee. All officers, directors and employees of the Company and its subsidiaries and certain consultants and other persons providing significant services to the Company and its subsidiaries will be eligible to receive grants of options and SARs under the Stock Option Plans. However, only employees of the Company and its subsidiaries are eligible to be granted ISOs. STOCK OPTION AGREEMENTS All options granted under the Stock Option Plans will be evidenced by an option agreement or SAR agreement between the Company and the optionee receiving such option or SAR. Provisions of such agreements entered into under the Stock Option Plans need not be identical and may include any term or condition which is not inconsistent with the Stock Option Plans and which the Committee deems appropriate for inclusion. INCENTIVE STOCK OPTIONS Except for ISOs granted to stockholders possessing more than ten percent (10%) of the total combined voting power of all classes of the securities of the Company or its subsidiaries to whom such ownership is attributed on the date of grant ("Ten Percent Stockholders"), the exercise price of each ISO must be at least 100% of the fair market value of the Company's Common Stock as determined on the date of grant. ISOs granted to Ten Percent Stockholders must be at an exercise price of not less than 110% of such fair market value. Each ISO must be exercised, if at all, within ten (10) years from the date of grant, but, within five (5) years of the date of grant in the case of ISO's granted to Ten Percent Stockholders. An optionee of an ISO may not exercise an ISO granted under the Stock Option Plans so long as such person holds a previously granted and unexercised ISO. The aggregate fair market value (determined as of time of the grant of the ISO) of the Common Stock with respect to which the ISOs are exercisable for the first time by the optionee during any calendar year shall not exceed $100,000. As of the date of this Report, ISOs have been granted under the 1995 Stock Option Plan, subject to certain vesting schedules, to purchase up to 300,000 shares of Common Stock, 135,000 of which have exercised. The 300,000 ISOs have an exercise price of $0.3555 per share. Further, as of the date of this Report, ISOs have been granted under the 1996 Stock Option Plan, subject to certain vesting schedules, to purchase up to 329,047 shares of Common Stock. These options have the following per share exercise prices: 285,714 shares ($0.35), 33,333 shares ($3.00) and 10,000 shares ($8.25). 36 NON-QUALIFIED STOCK OPTIONS The exercise price of each NSO will be determined by the Committee on the date of grant. However, the exercise price for the NSOs under the 1995 Stock Option Plan will in no event be less than 85% of the fair market value of the Common Stock on the date the option is granted, or not less than 110% of the fair market value of the Common Stock on the date such option is granted in the case of an option granted to a Ten Percent Stockholder. No such restriction exists with respect to the exercise prices of NSOs granted under the 1996 Stock Option Plan. The exercise period for each NSO will be determined by the Committee at the time such option is granted, but in no event will such exercise period exceed ten (10) years from the date of grant. As of the date of this Report, NSOs have been granted under the 1995 Stock Option Plan, subject to certain vesting schedules, to purchase up to 20,000 shares of Common Stock at an exercise price of $0.15 per share and up to 1,800 shares of Common Stock at an exercise price of $5.00 per share. As of the date of this Report, NSOs have been granted under the 1996 Stock Option Plan to purchase up to 9,200,953 shares of Common Stock, subject to certain vesting schedules. These options have the following per share exercise prices: 2,966,667 shares ($3.00) and 6,234,286 shares ($0.35). STOCK APPRECIATION RIGHTS Each SAR granted under the Stock Option Plans will entitle the holder thereof, upon the exercise of the SAR, to receive from the Company, in exchange therefor, an amount equal in value to the excess of the fair market value of the Common Stock on the date of exercise of one share of Common Stock over its fair market value on the date of exercise of one share of Common Stock over its fair market value on the date of grant (or in the case of an SAR granted in connection with an option, the excess of the fair market of one share of Common Stock at the time of exercise over the option exercise price per share under the option to which the SAR relates), multiplied by the number of shares of Common Stock covered by the SAR or the option, or portion thereof, that is surrendered. SARs will be exercisable only at the time or times established by the Committee. If an SAR is granted in connection with an option, the SAR will be exercisable only to the extent and on the same conditions that the related option could be exercised. The Committee may withdraw any SAR granted under the Stock Option Plans at any time and may impose any conditions upon the exercise of an SAR or adopt rules and regulations from time to time affecting the rights of holders of SARs. As of the date of this Report, SARs have been granted pursuant to the 1995 Stock Option Plan, as part of the issuance of the 20,000 NSOs and no SARs have been granted under the 1996 Stock Option Plan. TERMINATION OF OPTION AND TRANSFERABILITY In general, any unexpired options and SARs granted under the Stock Option Plans will terminate: (a) in the event of death or disability, pursuant to the terms of the option agreement or SAR agreement, but not less than six (6) months or more than twelve (12) months after the applicable date of such event, (b) in the event of retirement, pursuant to the terms of the option agreement or SAR agreement, but no less that thirty (30) days or more than three (3) months after such retirement date, or (c) in the event of termination of such person other than for death, disability or retirement, until thirty (30) days after the date of such termination. However, the Committee may in its sole discretion accelerate the exercisability of any or all options or SARs upon termination of employment or cessation of services. 37 The options and SARs granted under the Stock Option Plans generally will be non-transferable, except by will or the laws of descent and distribution. ADJUSTMENTS RESULTING FROM CHANGES IN CAPITALIZATION The number of shares of Common Stock reserved under the Stock Option Plans and the number and price of shares of Common Stock covered by each outstanding option or SAR under the Stock Option Plans will be proportionately adjusted by the Committee for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from any stock dividends, split- ups, consolidations, recapitalizations, reorganizations or like event. AMENDMENT OR DISCONTINUANCE OF STOCK OPTION PLAN The Board of Directors has the right to amend, suspend or terminate the Stock Option Plans at any time. Unless sooner terminated by the Board of Directors, the 1995 Stock Option Plan and the 1996 Stock Option Plan will terminate on February 8, 2005 and May 7, 2006, respectively, the tenth (10th) anniversary date of the effectiveness of each such Stock Option Plan. COMPENSATION OF DIRECTORS. The Company does not currently compensate directors for services rendered as directors. However, on March 14, 1996, the Company issued 5,000 shares of Common Stock to each non-employee member of the Company's Board of Directors in consideration of services performed by such persons as directors of the Company. DIRECTORS AND OFFICERS LIABILITY INSURANCE. The Company has obtained directors' and officers' liability insurance with an aggregate limit of liability for the policy year, inclusive of costs of defense, in the amount of $3,000,000. The insurance policy expires on April 3, 1997. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Company's Certificate of Incorporation and Bylaws designate the relative duties and responsibilities of the Company's officers, establish procedures for actions by directors and stockholders and other items. The Company's Certificate of Incorporation and Bylaws also contain extensive indemnification provisions which will permit the Company to indemnify its officers and directors to the maximum extent provided by Delaware law. In addition, the Company has adopted a form of indemnification agreement (the "Indemnification Agreement") which provides the indemnitee with the maximum indemnification allowed under applicable law. The Company has not entered into any Indemnification Agreements with any of its officers or directors as of the date of this Report. Since the Delaware statute is non-exclusive, it is possible that certain claims beyond the scope of the statute may be indemnifiable. The Indemnification Agreements provide a scheme of indemnification which may be broader than that specifically provided by Delaware law. It has not yet been determined, however, to what extent the indemnification expressly permitted by Delaware law may be expanded, and therefore the scope of indemnification provided by the Indemnification Agreements may be subject to future judicial interpretation. 38 The Indemnification Agreement provides, in pertinent part, that the Company shall indemnify an indemnitee who is or was a party or is threatened, pending or completed action or proceeding whether civil, criminal, administrative or investigative by reason of the fact that the indemnitee is or was a director, officer, key employee or agent of the Company or any subsidiary of the Company. The Company shall advance all expenses, judgments, fines, penalties and amounts paid in settlement (including taxes imposed on indemnitee on account of receipt of such payouts) incurred by the indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding as described above. The indemnitee shall repay such amounts advanced only if it shall be ultimately determined that he or she is not entitled to be indemnified by the Company. The advances paid to the indemnitee by the Company shall be delivered within 20 days following a written request by the indemnitee. Any award of indemnification to an indemnitee, if not covered by insurance, would come directly from the assets of the Company, thereby affecting a stockholder's investment. TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS. Except as set forth in employment agreements of certain employees of the Company and its subsidiaries, the Company has no compensatory plans or arrangements which relate to the resignation, retirement or any other termination of an executive officer or key employee with the Company or a change in control of the Company or a change in such executive officer's or key employee's responsibilities following a change in control. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The Board of Directors has no standing compensation committee or other board committee performing equivalent functions. 39 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of July 12, 1996, the Company had issued and outstanding 28,451,982 shares of Common Stock. The following table reflects, as of July 12, 1996, the beneficial Common Stock ownership of: (a) each director of the Company, (b) each current executive officer named in the summary compensation table in this Form 10-KSB, (c) each person known by the Company to be a beneficial owner of five percent (5%) or more of its Common Stock, and (d) all executive officers and directors of the Company as a group: NAME AND ADDRESS NO. OF OF BENEFICIAL OWNER SHARES# PERCENT - ------------------- ------- ------- Tweedia International Ltd. 1 13,046,091 45.35 Beijing CATCH Communication Group Co. 2 13,046,091 45.35 Joseph R. Wright, Jr. 3 2,602,000 8.41 Chen Li 4 13,046,091 45.35 Xiao Jun 4,5 13,271,091 45.79 Ju Feng 4 13,051,091 45.36 William H. Davidson 6 11,465 * Teoh Set Seng 7 0 * Max Sun Chian Yi 8 2,798,191 9.83 Jenny Sun 9 2,743,402 9.64 Michael J. Lim 10 254,400 * All executive officers and directors as a group (8 persons)11 16,168,956 50.91 _____________________________ (Footnotes on following page) 40 _____________________________ (Footnotes from previous page) # Pursuant to the rules of the Securities and Exchange Commission, shares of Common Stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. * Less than 1% 1. The address for Tweedia International Ltd. ("Tweedia") is Columbus Centre Building, Wickhams Cay, Road Town Tortola, British Virgin Islands. Tweedia is the registered owner of 12,727,909 shares of Common Stock and options to purchase up to 318,182 shares of Common Stock. Further, Tweedia is the registered owner of 1,524,178 shares of Series A Convertible Preferred Stock which are convertible into an equivalent number of shares of Common Stock at any time after January 1, 1997. 2. Beijing CATCH Communication Group Co. ("Beijing CATCH") is the beneficial owner of all of the outstanding shares of Tweedia. Beijing CATCH is a wholly-owned subsidiary of the Committee on Science and Technology of the Municipality of Beijing, a political subdivision of the People's Government of the Municipality of Beijing. Beijing CATCH's principal offices are located at 62 South Xueyuan Road, Haidian District, Beijing, the People's Republic of China. 3. The address for Mr. Wright is 599 Lexington Avenue, 44th Floor, New York, New York 10022. Mr. Wright is also the beneficial owner of options to purchase up to 2,500,000 shares of Common Stock. Further, up to an additional 3,500,000 options to purchase shares of Common Stock may vest pursuant to the terms of an employment agreement between Mr. Wright and the Company. Mr. Wright is the Chairman of the Board of Directors, Chief Executive Officer and President of the Company. 4. The address for each of Messrs. Chen and Ju is 1901 Avenue of the Stars, Suite 1045, Los Angeles, California 90067. Mr. Ju is the beneficial owner of 5,000 shares of Common Stock. Further, up to an additional 2,000,000 options to purchase shares of Common Stock may vest pursuant to the terms of a consulting agreement between American CATCH Communication Group Co. ("American CATCH"), an affiliate of Beijing CATCH, and the Company, relating to services to be provided by Mr. Chen to the Company. Mr. Chen is the Vice Chairman of the Board of Directors of the Company and Mr. Ju is a director of the Company. Each of Messrs. Chen, Xiao and Ju are officers and directors of Beijing CATCH. Mr. Chen is a director of Tweedia. 5. The address for Mr. Xiao is 1901 Avenue of the Stars, Suite 1045, Los Angeles, California 90067. Mr. Xiao is the beneficial owner of 10,000 shares of Common Stock and options to purchase up to 215,000 shares of Common Stock. Further, up to an additional 300,000 options to purchase shares of Common Stock may vest pursuant to the terms of an employment agreement between Mr. Xiao and the Company. Mr. Xiao is the Executive Vice President-AVIC China and a director of the Company. 6. The address for Mr. Davidson is 1720 South Catalina Avenue, Suite 204, Redondo Beach, California 90288. Mr. Davidson is a director of the Company. 7. The address for Ms. Teoh is 1Q1 Block G, Jalan 1/118, Taman, Mulia 56000 Kuala Lumpur, Malaysia. Ms. Teoh is a director of the Company. 41 _____________________________________ (footnotes continued from previous page) 8. The address for Mr. Sun is 126 JLN DEDAP, Taman Ampang Jaya, Trima Jaya, 68000 Ampang, Selangor, Malaysia. Mr. Sun is the beneficial owner of 2,798,191 shares of Common Stock, including 2,797,691 shares registered in the name of Occidental Worldwide Corporation and 500 shares registered in his own name. 9. The address for Ms. Sun is P.O. Box 3136, Road Town, Tortola, British Virgin Islands. Ms. Sun is the beneficial owner of 2,753,402 shares of Common Stock registered in the name of Polmont Investment Ltd. A third party has alleged a claim against Ms. Sun with respect to 333,334 shares of Common Stock beneficially owned by Ms. Sun. 10. The address for Mr. Lim is 599 Lexington Avenue, 44th Floor, New York, New York 10022. Mr. Lim is the beneficial owner of 4,400 shares of Common Stock and options to purchase up to 250,000 shares of Common Stock. Further, up to an additional 750,000 options to purchase shares of Common Stock may vest pursuant to the terms of an employment agreement between Mr. Lim and the Company. Mr. Lim is the Chief Financial Officer and Executive Vice President-Operations of the Company. 11. Includes certain stock options to purchase up to 3,308,182 shares of Common Stock. Does not include options to purchase up to an additional 6,725,000 shares of Common Stock which may vest pursuant to certain schedules and 1,524,178 shares of Series A Convertible Preferred Stock which are convertible into an equivalent number of shares of Common Stock at any time after January 1, 1997. 42 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. As of September 2, 1994, the Company entered into the Reorganization Agreement with ITV, pursuant to which the Company acquired one hundred percent (100%) of the issued and outstanding securities of ITV from the holders of the securities of ITV, in exchange for a number of shares of Common Stock and options to purchase shares of Common Stock equal to approximately 91% of the number of the issued and outstanding shares of Common Stock on a fully diluted basis after the completion of the transaction. In February, 1995, the Company and ITV completed the transactions contemplated by the Reorganization Agreement. In connection with the Reorganization Agreement, the Company: (a) issued 22,728,409 restricted shares of Common Stock and options to purchase up to 713,182 restricted shares of Common Stock to the holders of the securities of ITV, (b) effected a forward split of the previously issued and outstanding 105,000 shares of Common Stock into 2,500,000 shares, (c) adopted the Company's current Articles of Incorporation, Bylaws and 1995 Stock Option Plan, (d) elected the members of the Company's current Board of Directors, and (e) changed the Company's name to "AVIC Group International, Inc." The Company issued on additional 15,000 shares of restricted Common Stock to a former ITV stockholder as a correction to the number of shares of Common Stock issued by the Company in connection with the Reorganization Agreement in exchange for the issued and outstanding securities of ITV. On or about September 16, 1994, ITV and Beijing CATCH entered into an exclusive five (5) year distributorship agreement pursuant to which ITV appointed Beijing CATCH as ITV's exclusive distributor for ITV's communications processor and data/access modules in the PRC. The parties terminated this agreement on December 20, 1995. In connection with the termination of this agreement, with respect to a $1,000,000 deposit made by Beijing CATCH with ITV relating to the agreement, $150,000 of such amount was credited to ITV as payment for consulting services provided to Beijing CATCH and ITV remains obligated to repay $850,000 to Beijing CATCH. The $850,000 obligation has been classified as a debt of ITV. In March, 1996, the Company entered into certain agreements to obtain a 31% interest in a Sino-foreign joint venture formed between Hebei United Telecommunications Equipment Company ("Hebei United") and NTT International Corp. ("NTT") with respect to the creation and operation of a Global Service Mobile telephone network in Hebei Province, PRC. In June, 1996, the Company entered into an agreement to form a Sino-foreign joint venture with Beijing CATCH Communication Group Co. ("Beijing CATCH"), an affiliate of the Company's principal stockholder with respect to the development of paging stations in the PRC. In May and October, 1995, the Company entered into a memorandum of understanding and a letter of intent, which are subject to the execution of more definitive agreements, in connection with the proposed formation of Sino-foreign joint ventures to develop telecommunications networks in the PRC on a BTSM basis with Beijing CATCH, including: (i) a fixed wire telephone network, and (ii) a cellular telephone network. Each of these agreements is preliminary in nature. There can be no assurances that any such definitive agreements will ever be consummated. Further, each of these agreements will require significant financings necessary to fund the construction of such networks. The Company does not currently have any commitments for any such financing, and there can be no assurances that any such financing can be obtained on terms favorable to the Company or at all. As of December 21, 1995, the Company agreed to issue up to 50,000,000 shares of Common Stock to Tweedia, an affiliate of Beijing CATCH and the principal stockholder of the Company, pursuant to the terms of a Master Agreement and Right of First Refusal (the "Master Agreement"). In connection with the Master Agreement, Beijing CATCH has reaffirmed its obligations pursuant to the terms of three (3) preliminary agreements previously entered into between the Company and Beijing CATCH. 43 The Company has agreed to issue to Tweedia a number of shares of Common Stock based on the Company's portion of the cumulative net income of the CATCH Joint Ventures in excess of $10,000,000, as follows: (i) at the end of the first audited fiscal year in which the Company's portion of such cumulative net income of the CATCH Joint Ventures exceeds $10,000,000 (the "First Year"), the Company's will issue to Tweedia one share of Common Stock for every $3.00 by which the Company's portion of such cumulative net income exceeds $10,000,000, (ii) for the year following the First Year (the "Second Year"), the Company will issue a number of shares of Common Stock equal to the Company's portion of the net income of the CATCH Joint Ventures for such year as divided by $3.25, (iii) for the year following the Second Year (the "Third Year"), the Company will issue a number of shares of Common Stock equal to the Company's portion of net income of the CATCH Joint Ventures for such year as divided by $3.66, and (iv) for the year following the Third Year and for every year thereafter, the Company will issue a number of shares of Common Stock equal to the Company's portion of the net income of the CATCH Joint Ventures for such year as divided by $3.75. However, the Company will not be obligated to issue any shares of Common Stock to Tweedia with respect to any fiscal year that ends after December 31, 2007. As of December 15, 1995, the Company issued 1,524,178 shares of the Company's Series A Convertible Preferred Stock (the "Series A Convertible Preferred Shares") to Tweedia as consideration for the contribution to the Company by Beijing CATCH of Beijing CATCH's interest in a $4,572,536 non- refundable deposit paid to Motorola in connection with an Enhanced Specialized Mobile Relay System Equipment Purchase Contract #700.0008D, dated December 12, 1993, and as amended, between Beijing CATCH and Motorola. In the event that Beijing CATCH forfeits the deposit to Motorola, Tweedia has agreed to return the Series A Convertible Preferred Shares to the Company for cancellation. Each Series A Convertible Preferred Share bears an annual cumulative dividend of 6% of the per share purchase price, payable in cash, each December 31, commencing December 31, 1996, in arrears, out of funds legally available therefor. Each Series A Convertible Preferred Share is convertible into one share of Common Stock at any time after January 1, 1997 and has voting rights of one vote per share. Upon the liquidation of the Company, the holders of the Series A Convertible Preferred Stock will be entitled to a liquidation preference of $3.00 per share, plus the amount of all accrued and unpaid dividends, prior to the payment of any amount to holders of any other current equity security of the Company. The Series A Convertible Preferred Stock may be redeemed at any time after January 1, 1997 by the Company prior to conversion upon payment of $3.00 per share, plus the amount of all accrued and unpaid dividends as of the applicable redemption date. The Series A Convertible Preferred Stock will be subject to adjustments for reclassification, reorganization, recapitalization and certain other events. On January 16, 1996, ITV closed the Asset Sale Agreement between ITV and Netmatics. Pursuant to the terms of the Asset Sale Agreement, ITV, the former primary operating subsidiary of the Company, sold substantially all of ITV's assets and Netmatics assumed certain of ITV's liabilities and obligations in consideration of an aggregate purchase price of $2,500,000 and shares of common stock of Netmatics which are currently equal to approximately 19.4% of the issued and outstanding shares of Netmatics. As of February 5, 1996, the Company issued an aggregate of 1,891,553 shares of the Company's restricted Common Stock, in consideration of the cancellation of debt owing by the Company to certain persons in the aggregate amount of $1,891,553, including principal and accrued interest thereon as of December 31, 1995, or a $1.00 per share conversion price. The shares of Common Stock issued in connection with this transaction have certain "piggyback" registration rights. Of the 1,891,553 shares of Common Stock, the Company issued 293,402 shares to Polmont Investments, Ltd., a principal stockholder of the Company. In addition, the Company issued an additional 350,000 shares to certain unaffiliated third parties in consideration of the cancellation of certain debt owing by the Company, which debt had previously been transferred to such unaffiliated third partes by Polmont Investments, Ltd. The Company also issued an 44 additional 1,248,151 shares to an unaffiliated third party in consideration of the cancellation of a debt owing by the Company, which debt had previously been transferred to such third party by Beijing CATCH. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. A. FINANCIAL STATEMENTS Consolidated balance sheets of AVIC Group International, Inc. and subsidiary (a development stage company) as of March 31, 1996 and 1995, and the related statements of operations, stockholders' equity (deficiency) and cash flows for the years then ended. B. REPORTS ON FORM 8-K Current Reports on Form 8-K dated January 16, 1996 and February 5, 1996. C. OTHER EXHIBITS 2.1 Agreement for Sale of Assets by and between ITV Communications, Inc. and Netmatics, Inc., dated January 11, 1996, and Promissory Note and Security Agreement dated January 16, 1996(1) 3.1 Amendments to Articles of Incorporation dated June 7, 1996 and June 10, 1996 10.1 1996 Stock Option Plan(2) 10.2 Real property lease between Lexreal Associates and AVIC Group International, Inc. dated May 8, 1995(2) 10.3 Employment Agreement between Joseph R. Wright, Jr., and AVIC Group International, Inc. dated as of April 15, 1995(3), and amendment thereto dated as of November 21, 1995(4) 10.4 Employment Agreement between Michael Lim and the Company, dated as of November 6, 1995(4) 10.5 Employment Agreement between Xiao Jun and the Company, dated as of January 1, 1996(4) 10.6 Consulting Agreement between American CATCH Communication Group Co. and the Company, dated November 30, 1995(4) 10.7 Consulting Agreement between Michael Markow and the Company, dated December 15, 1995(4) 10.8 China Paging Networks Preliminary Agreement between Beijing CATCH Communication Group Company and the Company dated April, 1995(3) 10.9 Mobile Telephone Network Preliminary Agreement between Beijing CATCH Communication Group Company and the Company dated April 27, 1995(3) 10.10 Cellular Telephone Network Preliminary Agreement between Beijing CATCH Communication Group Company, Tweedia International Ltd. and the Company dated April, 1995(3) 10.11 Memorandum of Understanding between the Company and Hebei United Telecommunications Equipment Company dated May 1, 1995(3) 10.12 Master Agreement and Right of First Refusal between Beijing CATCH Communication Group Company and the Company dated December 21, 1995(4) 45 10.13 Letter of Intent between Hebei United Telecommunications Equipment Co. and the Company dated October 10, 1995(4) 10.14 Joint Venture Contract between Beijing CATCH Communication Group Co. and the Company dated June 11, 1996 10.15 Joint Venture Contract between Hebei United Telecommunication Equipment Company and NTT dated December 22, 1995 10.16 Agreement between Hebei United Telecommunication Equipment Company and the Company dated March 22, 1996 21.1 List of subsidiaries of the Company _______________________ 1. Filed as part of the Company's Current Report on Form 8-K dated January 19, 1996. 2. Filed as part of the Company's Transition Report on Form 10-KSB for the Transition Period from October 1, 1994 to March 31, 1995. 3. Filed as part of the Company's Current Report on Form 8-K dated May 1, 1995. 4. Filed as part of the Company's Current Report on Form 8-K dated December 22, 1995. 46 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE Certain documents listed above as exhibits to this Report on Form 10-KSB are incorporated by reference from other documents previously filed by the Company with the Commission as follows: Previous Filing Exhibit Number Incorporated by Reference in Form 10-KSB ------------------------- -------------- 1. Current Report on Form 8-K dated as of January 19, 1996 2.1 2. Transition Report on Form 10-KSB for the Transition Period from October 1, 1994 to March 31, 1995 10.1, 10.2 3. Current Report on Form 8-K dated as of May 4, 1995 10.3,10.8-10.11 4. Current Report on Form 8-K dated as of December 22, 1995 10.3-10.7,10.12-10.13 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 12, 1996 AVIC GROUP INTERNATIONAL, INC. By: /s/ Joseph R. Wright, Jr. -------------------------- Joseph R. Wright, Jr. Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated below. AVIC GROUP INTERNATIONAL, INC. Dated: July 12, 1996 By: /s/ Joseph R. Wright, Jr. -------------------------- Joseph R. Wright, Jr. Chief Executive Officer Dated: July 12, 1996 By: /s/ Michael J. Lim -------------------------- Michael J. Lim Chief Financial Officer 48 EXHIBIT A AVIC GROUP INTERNATIONAL, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1996 and 1995 [LETTERHEAD] REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders AVIC Group International, Inc. and Subsidiary We have audited the accompanying consolidated balance sheet of AVIC Group International, Inc. and Subsidiary (a Development Stage Company) as of March 31, 1996, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for each of the two years in the period ended March 31, 1996 and for the period March 27, 1992 (Inception) to March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AVIC Group International, Inc. and Subsidiary as of March 31, 1996, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 1996 and for the period March 27, 1992 (Inception) to March 31, 1996 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the year ended March 31, 1996, the Company had a net loss of $5,281,730. In addition, the Company is in the development stage at March 31, 1996. Recovery of the Company's assets is dependent upon future events, the outcome of which is indeterminable. In addition, successful completion of the Company's development program and its transition, ultimately, to the attainment of profitable operations is dependent upon obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure. These factors, among others, as discussed in Note 1 to the financial statements raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Singer Lewak Greenbaum & Goldstein LLP SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California June 18, 1996 AVIC Group International, Inc. and Subsidiary (A Development Stage Company) CONSOLIDATED BALANCE SHEET March 31, 1996 (See Report of Independent Certified Public Accountants)
ASSETS Current assets: Cash (note 2) $ 185,889 Prepaid expenses and other current assets 60,678 ---------- Total current assets 246,567 Machinery and equipment, net (note 3) 76,233 Joint venture deposit (note 4) 1,170,000 Non-refundable equipment purchase deposit (note 4) 4,572,536 Office lease deposit 167,200 ---------- $6,232,536 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 866,990 Accrued interest 651,063 Loans payable - stockholders (unsecured, interest at 8.5% per annum) (notes 6 and 10) 2,563,553 --------- Total current liabilities 4,081,606 Commitments and contingencies (note 5) Stockholders' equity (notes 4 and 6): Preferred stock; $.001 par value, authorized 10,000,000 shares; issued and outstanding 1,524,178 1,524 Common stock: $.001 par value, authorized 100,000,000 shares; issued and outstanding 28,436,982 28,437 Additional paid-in capital 18,648,620 Deficit accumulated during the development stage (16,527,651) ----------- Total stockholders' equity 2,150,930 ----------- $6,232,536 ---------- ----------
The accompanying notes are an integral part of these financial statements 2 AVIC Group International, Inc. (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS (See Report of Independent Certified Public Accountants)
March 27, 1992 Years ended (Inception) to March 31, March 31 --------------------------- 1996 1996 1995 ----------- ------------ ----------- Net sales (note 7) $1,223,894 $ 683,733 $ 345,276 Expenses Cost of sales 1,061,435 637,065 330,981 Selling, general, and administrative 9,762,614 3,207,570 3,513,567 Research and development 5,731,612 1,287,629 2,086,324 ---------- ---------- ---------- Total expenses 16,555,661 5,132,264 5,930,872 ---------- ---------- ---------- Loss from operations (15,331,767) (4,448,531) (5,585,596) Other income (expense) Consulting income (note 10) 150,000 150,000 Gain from sale of assets (note 8) 31,880 31,880 Loss from abandoned assets (130,840) (130,840) Equity in losses of unconsolidated subsidiary (note 8) (500,000) (500,000) Interest expense (764,586) (241,856) (117,533) Other - net 17,662 7,617 14,826 ---------- ---------- ---------- Total other income (expense) (1,195,884) (833,199) 47,293 ---------- ---------- ---------- Net loss $(16,527,651) $(5,281,730) $(5,538,303) ---------- ---------- ---------- ---------- ---------- ---------- Net loss per share $ (1.53) $ (.21) $ (.32) ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding 10,796,546 25,651,045 17,173,262 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements 3 AVIC Group International, Inc. (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) March 27, 1992 (Inception) to March 31, 1996 (See Report of Independent Certified Public Accountants)
Deficit Accumulated Additional During the Common Stock Preferred Stock Paid-In Development Shares Amount Shares Amount Capital Stage Total ------------ ---------- ----------- ---------- ----------- ------------ ------------ Balance, March 27, 1992 (Inception) Sale of common stock for cash, April 1992 500 $ 1 $ 149 $ 150 Net loss $ (1,970,076) (1,970,076) ---------- -------- --------- -------- ----------- ------------ ----------- Balance, March 31, 1993 500 1 149 (1,970,076) (1,969,926) Conversion of stockholders' loans to common stock, March 1994 7,839,237 7,839 5,565,858 5,573,697 Common stock subscribed, March 1994 2,160,763 2,161 1,534,142 1,536,303 Net loss (3,737,542) (3,737,542) ---------- -------- --------- -------- ----------- ------------ ----------- Balance, March 31, 1994 10,000,500 10,001 7,100,149 (5,707,618) 1,402,532 Sale of common stock for cash, September 1994 (note 6) 12,727,909 12,728 2,587,272 2,600,000 Forgiveness of stockholder accrued expenses, September 1994 (note 6) 305,027 305,027 Sale of common stock for cash, November 1994 15,000 15 5,317 5,332 Issuance of common stock for merger, February 1995 2,500,000 2,500 (2,500) Net loss (5,538,303) (5,538,303) ---------- -------- --------- -------- ----------- ------------ ----------- Balance, March 31, 1995 25,243,409 25,244 9,995,265 (11,245,921) (1,225,412) Issuance of Series A preferred stock for interest in deposit, December 1995 (note 6) 1,524,178 $ 1,524 4,571,012 4,572,536 Sale of common stock for cash, September 1995 (note 6) 60,000 60 59,940 60,000 Sale of common stock for cash, November 1995 (note 6) 666,000 666 665,334 666,000 Conversion of stockholders' loans to common stock, February 1996 (note 6) 1,891,553 1,891 1,889,662 1,891,553 Exercise of options, February 1996 (note 6) 135,000 135 47,848 47,983 Sale of common stock for cash, February 1996 (note 6) 250,000 250 249,750 250,000 Sale of common stock for cash, March 1996 (note 6) 191,020 191 1,169,809 1,170,000 Net loss (5,281,73) (5,281,730) ---------- -------- --------- -------- ----------- ------------ ----------- Balance, March 31, 1996 28,436,982 $ 28,437 1,524,178 $ 1,524 $18,648,620 $(16,527,651) $ 2,150,930 ---------- -------- --------- -------- ----------- ------------ ----------- ---------- -------- --------- -------- ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements 4 AVIC Group International, Inc. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS (See Report of Independent Certified Public Accountants)
March 27, 1992 Years Ended (Inception) to March 31, March 31, --------------------------- 1996 1996 1995 -------------- ------------ ------------ Cash flows from operating activities: Net loss $(16,527,651) $(5,281,730) $(5,538,303) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of capitalized software development costs 450,000 281,250 168,750 Depreciation 861,997 346,005 344,611 Loss from abandoned assets 130,840 130,840 Gain from sale of assets (31,880) (31,880) Equity in losses of unconsolidated subsidiary 500,000 500,000 (Increase) decrease in: Accounts receivable (3,719) 98,895 (96,614) Inventories (564,451) (96,091) (110,154) Prepaid expenses and other current assets (117,236) (91,200) (12,258) Other assets (167,200) (131,887) (16,453) Increase (decrease) in: Accounts payable and accrued expenses 1,820,290 1,251,464 (103,086) Accrued interest 651,063 136,982 114,293 Deposit 850,000 850,000 -------------- ------------ ------------ Net cash used in operating activities (12,147,947) (2,887,352) (4,399,214) Cash flows from investing activities: Purchase of machinery and equipment (1,585,601) (119,592) (527,725) Joint venture deposit (1,170,000) (1,170,000) Proceeds from sale of assets 250,000 250,000 Increase in capitalized computer software development costs (675,000) (333,767) -------------- ------------ ------------ Net cash used in investing activities (3,180,601) (1,039,592) (861,492) Cash flows from financing activities: Increase in loans payable-stockholders, net 9,178,801 739,952 2,245,227 Receipt of common stock subscription receivable 1,536,303 1,536,303 Sale of common stock 4,799,333 2,193,983 2,605,200 -------------- ------------ ------------ Net cash provided by financing activities 15,514,437 2,933,935 6,386,730 -------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents 185,889 (993,009) 1,126,024 Cash and cash equivalents, beginning of period 0 1,178,898 52,874 -------------- ------------ ------------ Cash and cash equivalents, end of period $ 185,889 $ 185,889 $ 1,178,898 -------------- ------------ ------------ -------------- ------------ ------------
The accompanying notes are an integral part of these financial statements 5 AVIC Group International, Inc. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (See Report of Independent Certified Public Accountants) Supplemental Cash Flow Information No interest or income taxes were paid during 1996 and 1995. Non Cash Financing Activities In 1996, loans from stockholders of $1,891,553 were converted into 1,891,553 shares of common stock. In 1996, 1,524,178 shares of Series A Preferred Stock were issued in exchange for the rights to a deposit totaling $4,572,536. In 1996, a deposit to a stockholder of $850,000 was converted to a note payable. In 1995, accrued expenses to a stockholder of $305,159 was forgiven and additional paid-in capital was increased by $305,159. The accompanying notes are an integral part of these financial statements 6 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND LINE OF BUSINESS AVIC Group International, Inc. (the Company or AVIC) was incorporated in Colorado on May 10, 1982. The Company, through its wholly owned subsidiary, ITV Communications, Inc. (ITV) was engaged in the design, manufacture, and sale of technologically advanced communication devices. In January 1996, the Company sold all of the business and operating assets of ITV (note 8) and is no longer involved in the business that ITV was engaged in. The Company is currently devoting substantially all of its present efforts to establishing joint ventures with entities located in the People's Republic of China (PRC) that are involved in the telecommunications industry in the PRC (note 10). PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the Company and its wholly- owned subsidiary, ITV Communications, Inc. All significant intercompany accounts and transactions are eliminated in consolidation. REVERSE MERGER In February 1995, AVIC Group International, Inc. acquired all of the outstanding stock of ITV. For accounting purposes, the acquisition has been treated as a recapitalization of ITV with ITV as the acquirer (reverse acquisition). The historical financial statements prior to February 1995 are those of ITV. AVIC had no assets at the date of the acquisition and, therefore, no proforma information is being presented. DEVELOPMENT STAGE COMPANY The Company is a development stage company as defined in Statement of Financial Accounting Standards No. 7. The Company is devoting substantially all of its present efforts to establish a new business and its planned principal operations have not commenced yet. All losses accumulated since inception have been considered as part of the Company's development stage activities. Net sales to date have primarily been from the sale of prototype software and hardware products. In January 1996, the Company sold substantially all the assets related to the design, manufacture and sale of technologically advanced communication devices. BASIS OF PRESENTATION The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, during the year ended March 31, 1996, the Company had a net loss of $5,281,730. In addition, the Company is in the development stage at March 31, 1996. Recovery of the Company's assets is dependent upon future events, the outcome of which is indeterminable. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon the Company's ability to meet its financing requirements, and the success of its joint ventures in the PRC. In response, management is pursuing investor opportunities and joint ventures to provide funds needed for future operations. 7 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) REVENUE RECOGNITION Revenue was derived primarily from product sales, and was recognized upon shipment of the products. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. MACHINERY AND EQUIPMENT Machinery and equipment are recorded at cost. Depreciation is provided using the straight-line method over an estimated useful life of three to five years. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY The Company owns a 33% (as of March 31, 1996) investment in Netmatics, Inc. (Netmatics), which it acquired in January 1996 in connection with the sale by the Company of the ITV business and operating assets. Netmatics is engaged in the design, manufacture, and sale of technologically advanced communication devices. In 1996, the Company suspended the equity method of accounting for its investment in Netmatics when the Company's share of losses equalled the carrying amount of the investment. In 1996, the Company's share of Netmatics' loss charged to operations was $500,000. SOFTWARE DEVELOPMENT COSTS Software development costs to create propriety software for the Company's communication devices were capitalized in accordance with Statement of Financial Accounting Standards No. 86. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. Amortization of capitalized software development costs was provided on a product-by-product basis on the straight-line method over the remaining estimated economic life of the products (not to exceed two years). RESEARCH AND DEVELOPMENT COSTS Research and development costs were charged to expense as incurred. These costs consist primarily of salaries and consulting fees. INCOME TAXES The Company uses the liability method of accounting for income taxes pursuant to Statement of Financial Accounting Standards, No. 109 "Accounting for Income Taxes." 8 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) NET LOSS PER SHARE Net loss per share is based on the weighted average number of common and common equivalent shares outstanding during each year. The shares to be issued upon exercise of outstanding stock options and warrants are not included as common stock equivalents as they are antidilutive. NOTE 2 - CONCENTRATION OF CREDIT RISK The Company maintains its cash balances in two banks located in Southern California and in New York, respectively. The balances at each bank are insured by the Federal Deposit Insurance Corporation up to $100,000. As of March 31, 1996, the uninsured portion of the balances held at these banks aggregated to $120,899. NOTE 3 - MACHINERY AND EQUIPMENT Machinery and equipment consist of the following: Machinery and equipment $70,936 Computer software 12,273 Leasehold improvements 12,580 ------- 95,789 Less accumulated depreciation 19,556 ------- $76,233 ------- ------- NOTE 4 - DEPOSITS DEPOSIT FOR JOINT VENTURE INVESTMENT The Company has entered into an agreement to purchase a 31% interest in the Hebei United Communications Engineering Development Co. (Hebei JV). The joint venture is being formed to develop, manufacture and sell telecommunications equipment and electronic information products in China. As of March 31, 1996, the purchase of the joint venture interest has not been completed and $1,170,000 is being held in trust by the Hebei Electronic Commission. Upon finalization and approval of the joint venture agreement, the $1,170,000 will be transferred to the joint venture for the purchase of the Company's 31% interest. If the joint venture agreement is not consummated, the $1,170,000 will be returned to the Company. 9 NOTE 4 - DEPOSITS (continued) NON-REFUNDABLE EQUIPMENT PURCHASE DEPOSIT In December 1995, the Company issued 1,524,178 shares of Series A Convertible Preferred Stock to its principal stockholder, Tweedia, in exchange for a $4,572,536 non-refundable deposit. The deposit is in connection with the purchase of an Enhanced Specialized Mobile Relay System Equipment Purchase Contract. The contract obligates Beijing CATCH (note 10) to purchase up to a minimum of approximately $49,000,000 of equipment related to an Enhanced Specialized Mobile Relay System within certain time periods. The failure to make such purchases may result in the forfeiture of such deposit. However, based on the existing agreements, these deadlines have passed without Beijing CATCH's timely performance pursuant to the terms of the Equipment Purchase Contract. Although the Company understands that these agreements are currently the subject of renegotiation between Beijing CATCH and Motorola, there can be no assurances that the parties will successfully renegotiate the Equipment Purchase Contract or, if so, as to the terms of any such renegotiation and its effect on the Company, which is currently not a party to the agreement. There can be no assurances that Beijing CATCH will be able to perform under the Equipment Purchase Contract or that the $4,572,536 deposit will not be forfeited to Motorola. In the event that Beijing CATCH forfeits the deposit to Motorola, Tweedia has agreed to return the Convertible Preferred Shares to the Company for cancellation. NOTE 5 - COMMITMENTS AND CONTINGENCIES LEASES The Company leases a facility for its corporate and operations offices under a long-term lease agreement. Minimum annual rental commitments under this lease are as follows: Year ending March 31, ----------- 1997 $334,000 1998 334,000 1999 334,000 2000 334,000 2001 167,000 ---------- $1,503,000 ---------- ---------- Rent expense was $399,992 and $340,918 for 1996 and 1995, respectively. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with officers expiring through April 2000 with an aggregate annual salary currently of $675,000. 10 NOTE 5 - COMMITMENTS AND CONTINGENCIES (continued) LITIGATION On April 15, 1996, a first amended complaint was filed in the Superior Court for the State of California, County of Los Angeles by Jacqueline B. Brandwynne ("Brandwynne") against the Company, ITV and others, including certain of the Company's officers, directors, and stockholders. The complaint alleges fraud, misrepresentation, and breach of contract with respect to the sale of stock of ITV and/or the Company to Brandwynne for $1,000,000 in or about January 1995. The complaint seeks rescission of the transaction and damages of no less than $1,000,000. It also alleges a claim in connection with an alleged oral employment agreement for 125,000 options to purchase shares of the Company's common stock of an exercise price of $0.35 per share and the right to purchase additional shares at $1.00 per share, plus other benefits, including salary of no less than $130,000. The Company has filed a responsive pleading denying liability and asserting affirmative defenses. On March 26, 1996, a complaint was filed in the Superior Court for the State of California, County of Los Angeles by 6800 Owensmouth, Inc. ("Owensmouth") against the Company, ITV, and others including the Company's officers, directors, and stockholders with respect to premises leased by ITV in Canoga Park, California from Owensmouth. The complaint alleges various claims including abandonment of the lease and failure to pay rent, late charges and other expenses from September 1995 through October 12, 1995, the date of termination of the lease, and the amount of rent abated during the first six months of the lease, in the aggregate amount of approximately $82,000. The complaint also alleges damages at the monthly rental rate of approximately $19,000 from October 12, 1995 through February 28, 1999, the expiration of the lease, plus other costs and damages. Further, the complaint alleges claims against the Company and certain officers, directors, and stockholders under allegations of alter ego, distributions contrary to law and fraudulent transfer of assets. Management of the Company believes that there are valid defenses to each of these claims and intends to defend each of the actions vigorously, if no settlement can be reached with the claimants. There can be no assurances as to the resolution of these matters. NOTE 6 - STOCKHOLDERS' EQUITY STOCK PURCHASE AGREEMENT On August 31, 1994, the Company entered into a stock purchase agreement to sell 12,727,909 shares of common stock for $2,600,000. The price per share of $.051 was determined based on the cash received and the value attributed to the exclusive distribution agreement (note 10). In connection with this sale, an option (expiring December 31, 1997) was granted to purchase 318,182 shares of common stock at $.711 per share. CONVERSION OF LOANS PAYABLE In December 1995, loans payable and accrued interest in the amount of $1,891,553 were converted to common stock at a price per share of $1.00. SALE OF COMMON STOCK In September and November 1995, and February 1996, the Company sold an aggregate of 976,000 shares of common stock for $976,000, a price of $1.00 per share. 11 NOTE 6 - STOCKHOLDERS' EQUITY (continued) In March 1996, the Company entered into a stock purchase agreement to sell 191,020 shares of common stock for $1,170,000, a price of $6.125 per share. FORGIVENESS OF STOCKHOLDERS ACCRUED EXPENSES In September 1994, a stockholder forgave $305,159 of accrued consulting fees owed by the Company. This amount has been charged as an addition to additional paid-in capital. ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK In December 1995, the Company issued 1,524,178 shares of Series A Convertible Preferred Stock (Series A Preferred) to its principal shareholder as consideration for the contribution of an interest in a non-refundable deposit in connection with a purchase contract (note 4). The holder of Series A Preferred Stock have full voting rights. The holder of the Series A Preferred is entitled to receive a cumulative preferential dividend of $0.18 per share per annum, payable in cash on December 31 of each year, commencing December 31, 1996. The Series A Preferred have a liquidation preference of $3 per share, plus the amount of any accrued and unpaid dividends. The Series A Preferred is convertible at the option of the holder at any time after January 1, 1997. STOCK WARRANTS The Company has issued warrants to purchase common stock in connection with services provided. As of March 31, 1996, the Company had outstanding warrants to purchase 150,000 shares of common stock at a price 10% above the average of the closing bid and asking price of the Company's common stock for the five trading days immediately prior to April 15, 1996. The warrants have a five-year term and "piggy-back" registration rights. STOCK OPTIONS The Company has adopted two stock option plans (the AVIC Group International, Inc. 1995 Stock Plan and the AVIC Group International, Inc. 1996 Stock Option Plan). Incentive and nonqualified options and stock appreciation rights may be granted to employees, officers, directors, and consultants of the Company. There are 12,500,000 shares of common stock reserved for issuance under these plans. The exercise price of the options are determined by the board of directors, but in the case of an incentive stock option, the exercise price may not be less that 100% of the fair market value on the date of grant. Options vest over periods not to exceed ten years. 12 NOTE 6 - STOCKHOLDERS' EQUITY (continued) The following summarizes the Company's stock option transactions under the stock option plans: Shares Under Option Price Option Per Share ------------ -------------- Options outstanding, March 31, 1994 20,000 $ .15 Granted 438,000 .3555 - 5.00 ------------ Options outstanding, March 31, 1995 458,000 .15 - 5.00 Granted 9,530,000 .35 - 8.25 Cancelled (121,200) .3555 - 5.00 Exercised (135,000) .3555 ------------ Options outstanding, March 31, 1996 9,731,800 $ .15 - 8.25 ------------ ------------ NOTE 7 - MAJOR CUSTOMERS During the years ended March 31, 1996 and 1995, the Company conducted business with two customers whose sales comprised substantially all of the Company's revenues. In January 1996, the Company sold substantially all of the assets related to that business. NOTE 8 - SALE OF BUSINESS In January 1996, the Company sold the business and the related operating assets that its wholly owned subsidiary, ITV, was engaged in. The sale price was $2,500,000 (which consisted of $250,000 in cash and $2,250,000 in the form of a note receivable), plus the Company received a 33% interest in Netmatics which was valued at $500,000. Due to the uncertainty of the collection of the $2,250,000 note receivable, the amount of the note has not been recognized. The gain associated with the note will be recognized when the note receivable is collected. The sale of the assets resulted in a gain from sale of the assets of $31,880. The note receivable in connection with the sale of the business of ITV is non interest bearing. The note is receivable in quarterly installments if Positive Cash Flow is more than $100,000 then 50% of that quarter's cash flow. The note receivable is secured by certain assets of the maker. NOTE 9 - INCOME TAXES The Company had net losses for 1996 and 1995 and, therefore, no income taxes have been provided. As of March 31, 1996, the Company has federal net operating loss carryforwards of approximately $8,400,000 through 2011. 13 NOTE 9 - INCOME TAXES (continued) Significant components of the Company's deferred tax liabilities and assets for federal income taxes consist of the following: Deferred tax assets Net operating loss carryforwards $ 3,310,000 Start-up costs 1,786,000 Research credit 266,000 ----------- Total deferred tax assets 5,362,000 Valuation allowance for deferred tax assets (4,462,000) Deferred tax liabilities Note receivable on sale of ITV (900,000) ----------- Net deferred tax liability 0 ----------- ----------- The net change in the valuation allowance for the year ended March 31, 1996 was an increase of $156,000. NOTE 10 - RELATED PARTY TRANSACTIONS DISTRIBUTORSHIP AGREEMENT In September 1994, ITV and Beijing CATCH (CATCH) entered into an exclusive distributorship agreement (the "agreement") pursuant to which ITV appointed CATCH as ITV's exclusive distributor for ITV's communications processor and data/access modules in the People's Republic of China. CATCH is a majority stockholder through its beneficial ownership of 12,727,909 shares of common stock. In addition, CATCH has two seats on the board of directors. In December 1994, the Company received a non-refundable deposit of $1,000,000 in connection with a purchase order for $10,000,000 of the Company's products. During the year, the Company provided consulting services to CATCH totalling $150,000 and which was applied against the deposit received. In December 1995, the agreement was terminated and the remaining non-refundable deposit of $850,000 was converted to a loan payable. GENERAL The Company's proposed business operations are substantially dependent on the Company's relationship with and the efforts of Beijing CATCH, an affiliate of the Company's principal controlling stockholder. Beijing CATCH, a company formed under the laws of the PRC, is the beneficial owner of all of the outstanding shares of Tweedia International Ltd., a British Virgin Islands corporation ("Tweedia"), the principal controlling stockholder of the Company. Tweedia does not currently have any operations, except principally as a holding company for the company's securities. Three of the directors of the Company, Chen Li, Xiao Jun and Ju Feng, are officers of Beijing CATCH and Chen Li is the sole director of Tweedia. 14 NOTE 10 - RELATED PARTY TRANSACTIONS (continued) Beijing CATCH is a subordinate enterprise, formed under the laws of the PRC, of the Commission on Science and Technology and the Municipal Planning Commission of the Municipality of Beijing, a political subdivision of the People's Government of the Municipality of Beijing. Beijing CATCH is the second largest operator of paging stations in the PRC. Beijing CATCH is a stockholder in China United Telecommunications Corporation ("China Unicom"), one of two public network telephone operators in the PRC created to substantially increase telephone installations throughout the PRC. Beijing CATCH has established a subsidiary in the United States, American Catch, Inc. ("American CATCH"). American CATCH also has a consulting agreement with the Company. As of December 21, 1995, the Company agreed to issue up to 50,000,000 shares of common stock to Tweedia pursuant to the terms of a Master Agreement and Right of First Refusal (the "Master Agreement") based on the receipt of certain agreed upon amounts of net income to the Company relating to prospective Sino-foreign joint ventures involving the Company and Beijing CATCH or its affiliate ("CATCH Joint Ventures"). In connection with the Master Agreement, Beijing CATCH has agreed to grant the Company a right of first refusal to participate as a majority investor and provide financial, operating and technical consulting services with respect to all rights granted, sold, licensed or otherwise transferred to Beijing CATCH, directly or indirectly, that relate to the ability to construct, operate or acquire any form of telephony, telecommunications, equipment, paging equipment or related forms of communication. This right of first refusal is subject to the Company's ability to perform under any such agreements and to participate in any such proposed projects under applicable PRC law. The Company's right of first refusal will apply to any such rights obtained by Beijing CATCH in perpetuity. The Company and Beijing CATCH have agreed to negotiate in good faith to implement the terms of any such agreements in order to implement the Company's right of first refusal. On June 12, 1996, the company entered into a joint venture (the "China Paging Networks Joint Venture") with Beijing CATCH relating to the purchase or construction of ten paging stations (the "China Paging Networks") in the PRC. The formation of the joint venture is subject to PRC regulatory approval. Beijing CATCH holds certain licenses from the Wireless Communication Committee and the Provincial Post and Telecommunication Administration of Hebei and Sichuan Provinces to develop paging networks in Hebei and Sichuan Provinces on a BTSM basis, as contemplated by the China Paging Networks Joint Venture. The Company has agreed to contribute the capital needed to build the China Paging Networks in exchange for a 70% equity interest in the China Paging Networks Joint Venture, which will sell the equipment necessary for the construction of the China Paging Networks to a subsidiary of Beijing CATCH, and install, service and maintain such equipment. 15 NOTE 10 - RELATED PARTY TRANSACTIONS (continued) Beijing CATCH has agreed to contribute the appropriate licenses to a subsidiary, which will build and operate the China Paging Networks, and will enter into contracts with the China Paging Networks Joint Venture in order to purchase equipment and to obtain servicing and maintenance for the China Paging Networks. The China Paging Networks Joint Venture is anticipated to receive: (i) payments under contracts for installing, servicing and maintaining the China Paging Networks and (ii) payments of principal and interest relating to the financing of the equipment for the China Paging Networks, if such financing is provided. Beijing CATCH has also agreed to search for and identify for the Company opportunities to acquire or construct at least 100 paging stations, which either are operating or which may be constructed in the PRC. Beijing CATCH has also agreed to assist in the negotiation for the acquisition of such networks and to obtain required licenses necessary for the construction of such networks. In exchange for such services, the parties intend that Beijing CATCH will receive a percentage interest in any Sino-foreign joint venture which may be formed in connection with Beijing CATCH's providing such services. On April 27, 1995, the Company entered into a Cellular Telephone Network Preliminary Agreement (the "Cellular Telephone Network Agreement") with Beijing CATCH and Tweedia relating to the creation and operation of an approximately 100,000 subscriber cellular telephone network (the "Cellular Telephone Network") using Enhanced Specialized Mobile Relay System technology in Beijing and Hebei Province in the PRC. Beijing CATCH holds certain licenses from the Beijing Municipal Government Planning Commission of China with respect to the ownership and operation of the Cellular Telephone Network. Pursuant to the terms of the Cellular Telephone Network Agreement, the Company has negotiated to establish, with Beijing CATCH, a Sino-foreign joint venture for the purpose of receiving: (i) payments under contracts for developing the Cellular Telephone Network on a BTSM basis, and (ii) payments of principal and interesting relating to the financing of the equipment for the Cellular Telephone Network, if such financing is provided, which in the aggregate are estimated to be approximately 90% of gross revenues less expenses of operating the Cellular Telephone Network for the first 25 years after the Cellular Telephone Network has commenced providing service to a substantial number of users. In connection with the Cellular Telephone Network Agreement, the Company intends to form a subsidiary or other joint venture entity, in which the Company will maintain at least a 75% interest, which in turn will enter into a Sino-foreign joint venture or a contractual joint venture with Beijing CATCH. The Company has agreed to contribute the capital needed to build the Cellular Telephone Network to the Sino-foreign joint venture in exchange for a 78% equity interest in the Sino-foreign joint venture, which will sell the equipment necessary for the establishment of the Cellular Telephone Network on a BTSM basis to a wholly owned subsidiary of Beijing CATCH. 16 NOTE 10 - RELATED PARTY TRANSACTIONS (continued) Beijing CATCH has agreed to contribute the appropriate licenses to its subsidiary, which will participate in building the Cellular Telephone Network, and will enter into contracts with the Sino-foreign joint venture in order to purchase equipment and to service and maintain the Cellular Telephone Network. NOTE 11 - SUBSEQUENT EVENTS SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK In June 1996, the Company completed a $2,500,000 offering of its Series B Convertible Redeemable Preferred Stock ("Series B Preferred"). The offering consisted of 100 shares of Series B Preferred at $25,000 per share and warrants to purchase common stock of the Company. Each warrant entitles the holder to purchase one share of common stock at a fixed conversion price. Of the $2,500,000, the Company received $750,000 of the proceeds and the remaining $1,750,000 was deposited into an escrow account. The funds in the escrow account will be released to the Company upon certain legal opinions being issued to the investors. Of the $750,000 proceeds received by the Company, $250,000 must be returned to the investors if the legal opinions are not issued. The holders of the Series B Preferred have no voting rights and receive no dividends. Each share of the Series B Preferred is convertible to a number of common shares based on a conversion rate. Each share of Series B Preferred outstanding at June 7, 1998 is automatically convertible. The Series B Preferred have a liquidation preference of $25,000 per share and an amount equal to 8% of the original Series B Issue Price per annum for the period that has passed since the date of issuance of any Series B Preferred Stock prior to the payment of any amount and the holders of the common stock. ISSUANCE OF COMMON STOCK FOR SERVICES In April 1996, two outside directors each received 5,000 shares of common stock for a value totaling $90,000. In June 1996, 5,000 shares of the Company's common stock were issued in connection with services provided for a value totaling $28,125. 17 EX-3.1 2 EXHIBIT 3.1 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF AVIC GROUP INTERNATIONAL, INC. FOR CERTIFICATE OF DESIGNATIONS OF PREFERENCES OF SERIES B CONVERTIBLE PREFERRED STOCK It is hereby certified by the undersigned, Chief Executive Officer and Secretary of AVIC Group International, Inc., a Colorado corporation (the "Corporation"), that the following Articles of Amendment (the "Amendment") to the Articles of Incorporation of the Company have been duly adopted by the Board of Directors of the Corporation (the "Board of Directors"), by resolution dated March 14, 1996, as set forth below, pursuant to the Colorado Business Corporation Act, and in connection with the adoption of the following Amendment, which shall supersede in its entirety the "Articles of Amendment to the Articles of Incorporation of the Company for Certificate of Designations of Preferences of Series B Convertible Preferred Stock," as filed with the Secretary of State of Colorado on or about May 30, 1996, hereby further set forth as follows: 1. The Articles of Incorporation of the Corporation authorizes the issuance of 10,000,000 shares of Preferred Stock of a par value of $0.001 each and expressly vests in the Board of Directors of the Corporation the authority provided therein to issue any or all of said shares in one or more series and by resolution or resolutions to establish the designation, number, full or limited voting powers, or the denial of voting powers, preferences and relative, participating, optional, and other special rights and the qualifications, limitations, restrictions, and other distinguishing characteristics of each series to be issued. 2. The Board of Directors of the Corporation, pursuant to the authority expressly vested in it as aforesaid, has adopted the following resolutions creating a Series B issue of Preferred Stock: RESOLVED, that one hundred (100) of the ten million (10,000,000) authorized shares of Preferred Stock of the Corporation shall be designated Series B Convertible Preferred Stock, $0.001 par value per share, and shall possess the rights and privileges set forth below: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series B Convertible Preferred Stock" (the "Series B Preferred Stock") and the number of shares constituting the Series B Preferred Stock shall be 100. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series B Preferred Stock to a number less than the number of shares then outstanding plus the number shares reserved for issuance upon the exercise of 1 outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series B Preferred Stock. Section 2. RANK. The Series B Preferred Stock shall rank: (i) prior to all of the Corporation's Common Stock, par value $0.001 per share ("Common Stock"); (ii) prior to any class or series of capital stock of the Corporation hereafter created (collectively, with the Common Stock, "Junior Securities"); (iii) on parity with any class or series of capital stock of the Corporation hereafter created specifically ranking by its terms on parity with the Series B Preferred Stock ("Parity Securities") in each case as to dividends, premium, conversion, redemption, voting rights, and distributions of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"); and (iv) junior to the Series A Preferred Stock ("Senior Securities") in terms of Distributions. Section 3. DIVIDENDS. The Series B Preferred Stock will bear no dividends, and the holders of the Series B Preferred Stock shall not be entitled to receive dividends on the Series B Preferred Stock. Section 4. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of shares of Series B Preferred Stock shall be entitled to receive, immediately after any distributions to Senior Securities required by the Corporation's Articles of Incorporation or any statement of designation of preferences, and prior and in preference to any distribution to Junior Securities but in parity with any distribution of Parity Securities, an amount per share equal to the sum of (i) $25,000 for each outstanding share of Series B Preferred Stock (the "Original Series B Issue Price") and (ii) an amount equal to 8% of the Original Series B Issue Price per annum for the period that has passed since the date of issuance of any Series B Preferred Stock (such amount being referred to herein as the "Premium"). If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series B Preferred Stock and Parity Securities shall be insufficient to permit the payment to such holders of the full preferential amounts due to the holders of the Series B Preferred Stock and the Parity Securities, respectively, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series B Preferred Stock and the Parity Securities, pro rata, based on the respective liquidation amounts to which each such series of stock is entitled by the Corporation's Articles of Incorporation and any statement(s) of designation of preferences. (b) Upon the completion of the distribution required by subsection 4(a), if assets remain in this Corporation, they shall be distributed to holders of Parity Securities (unless holders of Parity Securities have received distributions pursuant to subsection (a) above) and Junior Securities in accordance with the Corporation's Articles of Incorporation including any duly adopted certificate(s) of designation of preferences. 2 (c) A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of the Corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 4, but shall instead be treated pursuant to Section 7 hereof. Section 5. CONVERSION. The record holders of the Series B Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. The record holder of the Series B Preferred Stock shall be entitled, as set forth below, and, subject to the Company's right of redemption set forth in Section 6(a) and the restrictions on conversion set forth in Section 5(b) below, at the office of the Company or any transfer agent for the Series B Preferred Stock, to convert the shares of Series B Preferred Stock held by such holder into that number of fully-paid and nonassessable shares of the Company's Common Stock at the Conversion Rate as set forth below. The number of shares of Common Stock into which this Series B Preferred Stock may be converted is hereinafter referred to as the "Conversion Rate" for such Series B Preferred Stock, and is computed as follows: Number of shares issued upon conversion of one share of Preferred Stock equals [(.08)(N/365)(Issue Price)] + Issue Price ----------------------------------------- Conversion Price where *N = the number of days between (i) the date that, in connection with the consummation of the initial purchase of this Series B Preferred Stock from the Company, the escrow agent first had in its possession funds representing full payment for the Series B Preferred Stock for which conversion is being elected, and (ii) the applicable date of conversion for the Series B Preferred Stock for which conversion is being elected, *Issue Price = the Original Series B Issue Price, as defined in Section 4(a), and *Conversion Price = the lesser of (x) the Fixed Conversion Price, as may be adjusted pursuant to Section 5(e) below, or (y) the price which is the lesser of (i) 85% of the average Closing Bid Price of the Company's Common Stock on each of the five (5) trading days immediately preceding the Date of Conversion, as defined below, or (ii) 85% of the average of the daily low trading price of the Company's Common Stock on each of the five (5) trading days immediately preceding the Date of Conversion, as defined below. 3 For purposes hereof, (i) the "Fixed Conversion Price" shall equal 110% of the Index Price, provided, however, that if on the date that is 180 calendar days after the termination of the offering of the Series B Preferred Stock, the average Closing Bid Price for the prior 20 business days has declined 25% or more from the Index Price, then the Fixed Conversion Price shall be reset to equal 110% of that 20-day average Closing Bid Price, (ii) the "Index Price" shall be $5.40, and (iii) the term "Closing Bid Price" shall mean the closing bid price of the Company's Common Stock as reported by NASDAQ (or, if not reported by NASDAQ, as reported by such other exchange or market where traded) on the applicable date. (b) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of this Series B Preferred Stock. In lieu of any fractional share to which the holder would otherwise be entitled, the number of shares of Common Stock to be received shall be rounded up to the next whole number of shares. In the case of a dispute as to the calculation of the Conversion Rate, the Company's calculation shall be deemed conclusive absent manifest error. In order to convert Series B Preferred Stock into full shares of Common Stock, the holder shall surrender the certificate or certificates therefor, duly endorsed, by either overnight courier or 2-day courier, to the office of the Company or of any transfer agent for the Series B Preferred Stock, and shall give written notice ("Notice of Conversion") to the Company at such office that he elects to convert the same, the number of shares of Series B Preferred Stock so converted and a calculation of the Conversion Rate (with an advance copy of the certificate(s) and the notice by facsimile). Once the Notice of Conversion has been so delivered, the conversion set forth therein shall be irrevocable, and the certificate(s) indicated for conversion shall be canceled on the Company's books; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless either the certificates evidencing such Series B Preferred Stock are delivered to the Company or its transfer agent as provided above, or the holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such certificates. The Company shall issue and deliver within three (3) business days after delivery to the Company of such certificates, or after such agreement and indemnification, to such holder of Series B Preferred Stock at the address of the holder on the books of the Company, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled as aforesaid. The date on which conversion occurs (the "Date of Conversion") shall be deemed to be the date set forth in such Notice of Conversion, provided that the advance copy of the Notice of Conversion is faxed to the Company before midnight, New York City time, on the Date of Conversion. 4 (c) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Series B Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of Series B Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series B Preferred Stock, the Company will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (d) Automatic Conversion. Each share of Series B Preferred Stock outstanding on June 7, 1998 automatically shall be converted into Common Stock on such date at the Conversion Price then in effect and June 7, 1998 shall be deemed the Date of Conversion with respect to such Conversion. (e) Adjustment to Fixed Conversion Price. In computing the Fixed Conversion Price for purposes of Section 5(a): (i) If, prior to the conversion of all of the Series B Preferred Stock, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, or other similar event, the Fixed Conversion Price shall be proportionately reduced, or if the number of outstanding shares of Common Stock is decreased by a combination or reclassification of shares, or other similar event, the Fixed Conversion Price shall be proportionately increased. (ii) If, prior to the conversion of all Series B Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, then the holders of Series B Preferred Stock shall thereafter have the right to purchase and receive upon conversion of Series B Preferred Stock, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such shares of stock and/or securities as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore purchasable and receivable upon the conversion of Series B Preferred Stock held by such holders had such merger, consolidation, exchange of shares, recapitalization or reorganization not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders of the Series B Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Fixed Conversion Price and of the number of shares issuable upon conversion of the Series B Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any shares of stock or securities thereafter deliverable upon the exercise hereof. The Company shall not effect any transaction described in this subsection 5(e) unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the 5 obligation to deliver to the holders of the Series B Preferred Stock such shares of stock and/or securities as, in accordance with the foregoing provisions, the holders of the Series B Preferred Stock may be entitled to purchase. (iii) If any adjustment under this Section 5(e) would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion shall be the next higher number of shares. (f) Forced Conversion Option. At any time after one year from the termination of the offering of the Series B Preferred Stock, the Company may, at its option, elect to force conversion of the Series B Preferred Stock into Common Stock. In order to do so, the Company must give sixty days prior written notice, delivered by facsimile with hard copy by courier, to the holders of the Series B Preferred Stock of the Company's election to force conversion. The notice must state the effective date of the forced conversion. Prior to the effective date of the forced conversion, the holders of the Series B Preferred Stock may exercise any rights they may have under this Certificate or applicable law. In the event of a forced conversion, notwithstanding anything to the contrary herein, the conversion formula applicable to the shares of Series B Preferred Stock that are the subject of the forced conversion shall be as follows: Number of shares issued upon conversion of one share of Preferred Stock equals [(.08 + Forced Conversion Premium)(N/365)(Issue Price)] + Issue Price ----------------------------------------------------------------------- Conversion Price where the term "Forced Conversion Premium" means six percent (6% or 0.06) for the thirteenth month after the Final Closing Date, declining by one-half of one percent (0.5%) each month thereafter until it equals zero the end of the twenty- third month after the Final Closing Date, and the terms "N", "Issue Price" and "Conversion Price" have the meanings set forth in 5(a) above. Section 6. REDEMPTION BY COMPANY UPON CONVERSION. (a) In the event the Conversion Price per share shall be less than or equal to 75% of the Index Price, the Company shall have the right, in its sole discretion, upon receipt of a Notice of Conversion pursuant to Section 5, to redeem in whole or in part any Series B Preferred Stock submitted for conversion, immediately prior to conversion, at the Redemption Price on Conversion (as defined below). If the Company elects to redeem some, but not all, of the Series B Preferred Stock submitted for conversion, the Company shall redeem from among the Series B Preferred Stock submitted by the various shareholders for conversion on the applicable date, a pro-rata amount from each shareholder so submitting Series B Preferred Stock for conversion. 6 (b) Mechanics of Redemption. Any shareholder considering submitting Preferred Stock for conversion at such time as the Company's right of redemption under Section 6(a) is or may be in effect may provide notice to the Company of his possible desire to convert and ask the Company to determine whether or not the Company would exercise its right of redemption if the Preferred Stock were submitted for conversion. The Company shall respond within two business days of the date of that notice, and state whether it would redeem the shares, in whole or in part, or allow conversion into shares without redemption, which election will be applicable to conversion by such shareholder within the next five business days after the date of the Company's response. Failure of the Company to respond within the two-day period shall be deemed an election by the Company not to redeem the shares covered by that notice if submitted for conversion within the next five business days. If the shareholder does not provide advance notice of intention to convert as contemplated in this section (ii), the Company shall effect each such redemption of shares submitted for conversion by giving notice of its election to redeem, by facsimile within 2 business days following receipt of a Notice of Conversion from a holder, with a copy by 2-day courier, to (A) the holder of Series B Preferred Stock submitted for conversion at the address and facsimile number of such holder appearing in the Company's register for the Series B Preferred Stock and (B) the Company's Transfer Agent. Such redemption notice shall indicate whether the Company will redeem all or part of the Series B Preferred Stock submitted for conversion and the applicable redemption price. The Company shall not be entitled to exercise its right to redeem shares submitted for conversion under this Section 6(a) unless it has (x) the full amount of the redemption price, in cash, available in a demand or other immediately available account in a bank or similar financial institution or (y) immediately available credit facilities, in the full amount of the redemption price, with a bank or similar financial institution on the date the redemption notice is sent to shareholders. (c) Redemption Price. In the case of a redemption under this Section 6(a), the redemption price ("Redemption Price on Conversion") shall equal: = [[(.08)(N/365)(Issue Price)] + Issue Price] [Closing Bid Price] ------------------------------------------------------------------ Conversion Price where "N," "Issue Price," "Closing Bid Price" and "Conversion Price" have the meanings set forth in Section 5. The Redemption Price on Conversion shall be paid to the holder of Series B Preferred Stock redeemed within 10 business days of the delivery of the notice of such redemption to such holder; provided, however, that the Company shall not be obligated to deliver any portion of such Redemption Price on Conversion unless either the certificates evidencing the Series B Preferred Stock redeemed are delivered to the Company or its transfer agent as provided in Section 4(b), or the holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such certificates. 7 Section 7. CORPORATE CHANGE. In the event of a merger, reorganization, recapitalization or similar event of or with respect to the Company (a "Corporate Change") (other than a Corporate Change in which or substantially all of the consideration received by the holders of the Company's equity securities upon such Corporate Change consists of cash or assets other than securities issued by the acquiring entity or any affiliate thereof), this Series B Preferred Stock shall be assumed by the acquiring entity and thereafter this Series B Preferred Stock shall be convertible into such class and type of securities as the holder would have received had the holder converted this Series B Preferred Stock immediately prior to such Corporate Change. Section 8. PROTECTIVE PROVISIONS. So long as shares of Series B Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock: (a) alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock or any Senior Securities so as to affect adversely the Series B Preferred Stock; (b) create any new class or series of stock having a rights preferential to or equal to those of the Series B Preferred Stock with respect to conversion, redemption or voting rights or privileges, or with respect to Distributions (as defined in Section 2 above); or (c) do any act or thing not authorized or contemplated by this Designation which would result in taxation of the holders of shares of the Series B Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). Section 9. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any shares of Series B Preferred Stock shall be redeemed or converted pursuant to Section 5 or Section 6 hereof, the shares so converted or redeemed shall be canceled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be issuable by the Corporation as Series B Preferred Stock. Section 10. MISCELLANEOUS. As used herein, the term "business day" means a business day in the City of New York. FURTHER RESOLVED, that the statements contained in the foregoing resolutions creating and designating the said Series B Preferred Stock and fixing the number, powers, preferences and relative, optional, participating, and other special rights and the qualifications, limitations, restrictions, and other distinguishing characteristics thereof shall, upon the effective date of said series, be deemed to be included in and be a part of the certificate of incorporation of the Corporation pursuant to the laws of the State of Colorado. 8 IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to the Articles of Incorporation to be executed by its Chief Executive Officer and Secretary as of the date set forth below. Signed on June 6, 1996. AVIC GROUP INTERNATIONAL, INC. /s/ Joseph R. Wright, Jr. ------------------------------------ Joseph R. Wright, Jr. Chief Executive Officer Attest: /s/ Timothy Crowley -------------------------------- Timothy Crowley, Secretary 9 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF AVIC GROUP INTERNATIONAL, INC. FOR CERTIFICATE OF DESIGNATIONS OF PREFERENCES OF SERIES B CONVERTIBLE PREFERRED STOCK It is hereby certified by the undersigned, Chief Executive Officer and Secretary of AVIC Group International, Inc., a Colorado corporation (the "Corporation"), that the following Articles of Amendment (the "Amendment") to the Articles of Incorporation of the Company have been duly adopted by the Board of Directors of the Corporation (the "Board of Directors"), by resolution dated March 14, 1996, as set forth below, pursuant to the Colorado Business Corporation Act, and in connection with the adoption of the following Amendment, which shall amend the "Articles of Amendment to the Articles of Incorporation of the Company for Certificate of Designations of Preferences of Series B Convertible Preferred Stock," as filed with the Secretary of State of Colorado on or about June 7, 1996 (the "June 7 Amendment"), hereby further set forth as follows: Section 5(a) of the June 7 Amendment shall be superseded in its entirety and shall be restated as follows: Section 5. CONVERSION. The record holders of the Series B Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. The record holder of the Series B Preferred Stock shall be entitled, as set forth below, and, subject to the Company's right of redemption set forth in Section 6(a) and the restrictions on conversion set forth in Section 5(b) below, at the office of the Company or any transfer agent for the Series B Preferred Stock, to convert the shares of Series B Preferred Stock held by such holder into that number of fully-paid and nonassessable shares of the Company's Common Stock at the Conversion Rate as set forth below. The number of shares of Common Stock into which this Series B Preferred Stock may be converted is hereinafter referred to as the "Conversion Rate" for such Series B Preferred Stock, and is computed as follows: 1 Number of shares issued upon conversion of one share of Preferred Stock equals [(.08)(N/365)(Issue Price)] + Issue Price ----------------------------------------- Conversion Price where *N = the number of days between (i) the date that, in connection with the consummation of the initial purchase of this Series B Preferred Stock from the Company, the escrow agent first had in its possession funds representing full payment for the Series B Preferred Stock for which conversion is being elected, and (ii) the applicable date of conversion for the Series B Preferred Stock for which conversion is being elected, *Issue Price = the Original Series B Issue Price, as defined in Section 4(a), and *Conversion Price = the lesser of (x) the Fixed Conversion Price, as may be adjusted pursuant to Section 5(e) below, or (y) the price which is the lesser of (i) 85% of the average Closing Bid Price of the Company's Common Stock on each of the five (5) trading days immediately preceding the Date of Conversion, as defined below, or (ii) 85% of the average of the Daily Low Trading Price of the Company's Common Stock on each of the five (5) trading days immediately preceding the Date of Conversion, as defined below. For purposes hereof, (i) the "Fixed Conversion Price" shall equal 110% of the Index Price, provided, however, that if on the date that is 180 calendar days after the termination of the offering of the Series B Preferred Stock, the average Closing Bid Price for the prior 20 business days has declined 25% or more from the Index Price, then the Fixed Conversion Price shall be reset to equal 110% of that 20-day average Closing Bid Price, (ii) the "Index Price" shall be $5.40, and (iii) the terms "Closing Bid Price" and "Daily Low Trading Price" shall mean the closing bid price and daily low trading price, respectively, of the Company's Common Stock as reported by NASDAQ (or, if not reported by NASDAQ, as reported by such other exchange or market where traded) on the applicable date. 2 IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to the Articles of Incorporation to be executed by its Chief Executive Officer and Secretary as of the date set forth below. Signed on June 10, 1996. AVIC GROUP INTERNATIONAL, INC. /s/ Joseph R. Wright, Jr. ---------------------------------------- Joseph R. Wright, Jr. Chief Executive Officer Attest: /s/ Timothy Crowley -------------------------------- Timothy Crowley, Secretary 3 EX-10.14 3 EXHIBIT 10.14 THE JOINT VENTURE CONTRACT (BEIJING CATCH COMMUNICATION GROUP CO. AND AVIC GROUP INTERNATIONAL, INC.) CHAPTER 1: PRINCIPLE Subject to the principle of fair profit sharing and cooperation for development, and pursuant to the Law of PRC on Sino-Foreign Joint Venture ("Joint Venture Law") and the Implementation Regulation of the PRC on Sino-Foreign Joint Ventures ("JV Implementation Regulation") and other relevant Chinese regulations and laws, China Beijing CATCH Communication Group Co. (Party A) and AVIC Group International, Inc. (Party B) agree to jointly set up a Sino-Foreign Joint Venture Company in Lang Fang City, Hebei Province. The contract has been signed on Jun 11, 1996 in New York, the United States. CHAPTER 2: JOINT VENTURE PARTIES 1. THE JOINT VENTURE PARTIES Party A: Name: Beijing CATCH Communication Group Co. Organization: A corporation owned by the people established in People's Republic of China in accordance with the Chinese Laws. Address: No. 5 Da Ni Wan, Hai Dian District Beijing The People's Republic of China Legal Representative: Chen Li Position: Chairman Nationality: P. R. China Party B: Name: AVIC Group International, Inc. Organization: A public company incorporated in the State of Colorado of United States Address: 599 Lexington Avenue, 44(th) Floor New York, NY 10022 U. S. A. Legal Representative: Joseph R. Wright, Jr. Position: Chairman, Chief Executive Officer and President Nationality: American 2. LEGAL ABILITY 2.1 Party A and B both guarantee the following: (1). Party A is legally established in Beijing,the People's Republic of China, and Party B is legally formed in New York, U. S. A. 2 (2). Party A and B have the complete right to negotiate and fulfill the responsibilities and obligations set out in this Contract. (3). The signatories of Party A and Party B have the right appointed by both parties to execute this contract. CHAPTER 3: ESTABLISHMENT OF THE JOINT VENTURE COMPANY 3. ESTABLISHMENT OF THE JOINT VENTURE COMPANY 3.1 Party A and B agree to form and incorporate a Sino-Foreign Joint Venture Company with limited liability ("The Joint Venture Company") in the PRC on the terms and conditions approved by certain authorities. The Joint Venture Company will be established under the Joint Venture Law and the Joint Venture Implementation Regulations. All important decisions and documents related to the Joint Venture business shall be approved by the Joint Venture Company first before submitting to the relevant authority for approval. 4. THE JOINT VENTURE COMPANY 4.1 The Name of the Joint Venture Company The Chinese name of the Joint Venture Company shall be ____________________________. The English name of the Joint Venture Company shall be Lang Fang ATCH Telecommunications Engineering Company Limited. The legal location of the Joint Venture Company is at Lang Fang, Hebei Province, PRC. The Joint Venture Company must be registered at Industry and Commerce Administration and Management Bureau. 4.2 Without a written agreement, both parties can not use their parent company's trademark and logo at any time. 3 5. LAW 5.1 The Joint Venture Company's activities in China must fully comply with all the relevant laws, regulations in China and the provisions set out in this contract. 6. ORGANIZATION: 6.1 The Joint Venture Company will be a limited liability company for the purpose of the Company Law of the PRC. Both parties shall undertake the liability of the Joint Venture Company subject to its investment amount. Both parties agree that the Joint Venture Company's investment will be a full risk investment negotiated as part of a joint business exercise designed to share both risks, rewards and loses based on its share ownership ratio in the registered capital between the partners. CHAPTER 4: BUSINESS OBJECTIVE AND SCOPE 7. BUSINESS OBJECTIVE OF THE JOINT VENTURE COMPANY Both parties agree that the business objectives of the Joint Venture Company are to strengthen in business cooperation and technology development and exchange; to apply advanced telecommunications technology and efficient management skills; to improve technical standard of telecommunications industry and relating services; and to reach both economic and social goals that are satisfactory to all parties. 8. THE SCOPE OF THE JOINT VENTURE COMPANY 8.1 The Joint Venture Company agrees to provide the following services: construction of the telecommunications projects; upgrade technology of existing systems and other related network projects; providing technical consultation, services and other related businesses. 4 CHAPTER 5. TOTAL INVESTMENT CAPITAL, REGISTERED CAPITAL, AND SHARE RATIO OF THE JOINT VENTURE PARTNERS 9. TOTAL INVESTMENT CAPITAL AND REGISTERED CAPITAL 9.1 The total investment capital of the Joint Venture Company will be US$ 1,400,000.00 9.2 The registered capital of the Joint Venture Company will be US$1,000,000.00. 10. SHARE RATIO 10.1 The registered capital of the Joint Venture Company will be US$1,000,000.00, of which Party A will contribute US$300,000.00 (30%) and Party B will contribute US$700,000.00(70%). 11. THE AMOUNT AND TERM OF THE CAPITAL PAYMENT 11.1 Both parties shall infuse capital in accordance with the following method after obtaining a Joint Venture Company Business License ("Business License") from the state industry and commerce administration authority: ------------------------------------------------------------------------ Party Amount Time ------------------------------------------------------------------------ A Material objects, technology The total amount and intangible capital equivalent shall be wired to the to US$300,000.00 (The foreign account within 30 currency exchange rate shall be days after getting based on each day's closing rate the business license. and shall be evaluated by the certified public accounting agency and approved by Party B) ------------------------------------------------ B US$ 700,000.00 ------------------------------------------------------------------------ 11.2 The investment capital shall be wired to the bank account in accordance to Clause 42 of this Contract. 5 12. CERTIFICATE OF INVESTMENT 12.1 The investment payment from Party A and B shall be be certified by a registered public accountant. After receiving a satisfactory certificate recording such investment, the Joint Venture Company will issue the Certificate of Investment, including the amount and share ownership of the registered capital, signed by the Chairman and Vice Chairman of the Joint Venture Company to Party A and B. 13. THE USAGE OF THE INVESTMENT 13.1 None of Party A, Party B or any other parties have the right to use the investment capital infused to the bank account according to Clause 11.2 without the Board's decision of how to use such investment. However, the funds which will be used during the Joint Venture preparation period shall be paid by the Joint Venture Company subject to the approvals from both Parties. 14. TRANSFER OF CAPITAL 14.1 Except for Clause 14.3, Party A and Party B may, as either Party wishes transfer, in whole or part, its shares of the Joint Venture Company to a third Party with prior written notice to the other Parties and approval from the relevant authorities. Party A or B shall make the decision within 90 days of receiving the written notice. 14.2 If either Party A or Party B wishes to transfer its whole or partial shares, such Party shall first offer the share to the other Party of the Joint Venture Company for purchase. The other Party shall submit a written notice to declare its decision of purchasing those shares within 90 days. If the other Party does not submit its decision within 120 days, or this Party has first offered partial share to the other Party of the Joint Venture Company, any unsubscribed shares may then be offered to a third Party at a price not less than the price offered to the other Joint Venture Party. 14.3 Both Parties may transfer its whole or partial shareholding to their parent companies or their subsidiaries during the term of this Contract in 6 accordance with Clause 47. However, the relevant government approvals must be submitted to execute such transfer. 14.4 After the Party transferring its whole or partial shares to a third Party, such third Party shall abide by the terms of this Contract and perform and discharge all of its obligations of this Contract and share its rights as well. In addition, certain provisions in this contract shall be revised pursuant to the change in the shareholding ratio. 14.5 The transfer will not be effective if one of the Party violates any provisions set out in this contract. 15. THE INCREASE OF THE REGISTERED CAPITAL 15.1 The registered capital (Clause 9) may be increased from time to time subject to approval of the Board of Directors of the Joint Venture Company. The contribution from both parties to increase the registered capital pursuant to Clause 10 of this Contract shall be pro rata in accordance with the share ratio of each Party at the time of such capital increase. If one Party declines to increase the registered capital, the other Party then has the priority to increase the whole or a portion of the amount of the increase in registered capital which is rejected by the other Party. The obligations of each Party shall also be adjusted pursuant to the new share ownership ratio. In addition, Party A and B have the right to ask a third Party to increase the registered capital upon receipt of a written agreement between the Joint Venture parties and subject to obtaining the relevant PRC governmental approvals. 16. MORTGAGE: 16.1 Party A and B shall not use their portion of the Joint Venture Company's investment capital as any kind of mortgage or guarantee. CHAPTER 6: RESPONSIBILITIES OF PARTY A AND B 17. RESPONSIBILITIES OF PARTY A AND B 7 17.1 The parties shall contribute, where necessary in accordance with the Joint Venture Company's Business Plan and upon such terms and conditions as may be agreed with the Joint Venture Company, to the general business development of the Joint Venture Company by fulfilling the following responsibilities: A. Party A shall: (1). Provide the registered capital based on the share ratio pursuant to Clause 11 of this Contract. (2). Assist the Joint Venture Company in its fund raising, and to obtain investment capital at favorable terms and conditions. (3). Provide necessary assistance to exchange foreign currency to RMB or to exchange RMB to foreign currency. (4). Obtain all necessary approvals and permits from the competent authorities of the PRC, including, establishment and registration of the Joint Venture Company, and all other approvals or permits necessary for the proper conduct of the Joint Venture Company's business and endeavor to obtain preferential treatment for the Joint Venture Company. (5). Assist in the construction of public utilities, such as water, electricity and gas, the connection of the telephone and fax lines and provide the material transportation. (6). Purchase and rent the required equipment, machinery, raw material, cars, communication equipment and others which shall be bought in China in accordance with the agreement by both parties. (7). Assist the Joint Venture Company with customs clearance for import and export of equipment and products and obtain entry permits, visas, work permits, travel 8 permits and all other approvals for expatriate personnel of the Joint Venture Company and obtain suitable accommodation for expatriate personnel. (8). Provide necessary assistance for recruiting executives, technicians, workers and other employees in China. In addition, it shall help its employees to settle their accommodation if necessary. (9). Provide the information of China market to the Joint Venture Company and develop a domestic market for the Joint Venture Company. (10). Provide documents and information relating to the Chinese economy, investment and marketing and also relevant documents relating to Chinese policy, law, regulation, tax system, accounting system and others. (11). Obtain all necessary approvals, registration and licenses from the competent Chinese authorities required for the establishment of the Joint Venture Company. (12). Obtain the approvals for the Joint Venture Company to use land from the Land Administration Authority. (13). Organize the construction and design of the Joint Venture Company building. (14). Handle all other matters appointed by the Joint Venture Company and agreed to by Party A. B. Party B shall: (1). Provide the registered capital based on share ratio according to Clause 11 set up in this Contract. (2). Assist the fund raising for the telecommunications projects confirmed and approved by both parties of the Joint Venture Company outside China and guarantee 9 that the money be transferred to the Joint Venture account pursuant to the Business Plan. The interest rate of such fund shall not be too high and loan provided by Party B to Party A shall not be at usurious rates. (3). Obtain all necessary approvals and permits from the competent authorities in the United States required for the establishment of the Joint Venture Company. (4). Purchase and rent the necessary equipment, machines, materials, cars, communication and office equipment which shall be purchased abroad by Party B and agreed by both Parties. (5). Assist the Joint Venture Company with customs clearance for import/export of equipment and products (including all necessary export permits), obtain entry permits, visas, work permits, travel permits and all other approvals for expatriate personnel of the Joint Venture Company and obtain suitable accommodation for expatriate personnel. (6). Provide necessary assistance for recruiting foreign executives, technicians and other employees in a method agreed by the President. (7). Provide the documents and information relating to the American economy, investment and marketing, and also the relevant documents about American policy, law, rules, tax system, accounting system, etc. (8). Provide advanced technology to the Joint Venture Company and appoint its technicians to support the Joint VentureCompany's projects. (9). Provide technical training for the Joint Venture Company's employees in accordance with the technical training contract signed by the Joint Venture Company and Party B. 10 (10). Handle all other matters appointed by the Joint Venture Company and agreed by Party B. CHAPTER 7: TECHNICAL ASSISTANCE 18. TECHNICAL SERVICE 18.1 When it is necessary, the Joint Venture Company has the right to enter into a Technology Service Agreement with Party B or any other third Party based on the agreement of both parties. 19. CONFIDENTIALITY 19.1 It is agreed that all information generated pursuant to the terms of this Contract is confidential and neither Party shall, except with the written consent of the other Party, disclose or release such information to any third Party. 19.2 Party A and B shall ask their executives and all other employees to understand the importance of confidentiality for the Company. All employees shall sign the Confidentiality Agreement when they join the Joint Venture Company. CHAPTER 8: PURCHASE OF EQUIPMENT AND MATERIAL 20. PURCHASE OF RAW MATERIALS, EQUIPMENT AND MACHINES 20.1 The Joint Venture Company shall determine if the necessary equipment, materials, fuel, transportation equipment and office equipment shall be purchased in China or abroad. However, if the quality, quantity, performance, delivery, and after-sale service of a foreign product are comparable to a Chinese product, the Joint Venture shall first consider purchasing the product in China. If Party B has to purchase equipment abroad for the Joint Venture Company, Party A shall be involved in such purchasing if necessary. CHAPTER 9: BOARD OF DIRECTORS 21. OBLIGATIONS OF BOARD OF DIRECTORS 11 21.1 The Board of Directors of the Joint Venture Company is the authoritative organ of the Joint Venture Company and shall be fully responsible for the entire business of the Joint Venture Company. 22. ESTABLISHMENT OF THE BOARD OF DIRECTORS 22.1 The Joint Venture Company's Board of Directors will be established on the day a Business License is granted to the Joint Venture Company. 23. COMPOSITION OF THE BOARD AND THE TERM OF EACH DIRECTOR 23.1 The Board of Directors shall consist initially of 5 members, one Chairman and one Vice Chairman. 2 Directors will be appointed by Party A and 3 Directors will be appointed by Party B. The Chairman of the Board shall be appointed by Party B. The Vice Chairman shall be appointed by Party A. The term of the Chairman, Vice Chairman and directors shall be four years and these positions may be re- appointed consecutively if necessary. The term of the Chairman and Vice Chairman shall begin from the date a Business License is granted to the Joint Venture Company to the closing date of the Board meeting which will discuss the financial statement for the 4th fiscal year of the Joint Venture Company. During the term of the directors, if such matters as death, resignation, retirement or inability to fulfill the job occurs, the Party who appoints such director shall select a replacement as soon as possible. The replacement director shall serve out the term of his predecessor. 23.2 If one Party wants to change the director, a written notice shall be submitted to the BOD meeting within 30 days. 23.3 The Chairman, Vice Chairman and directors will receive no salary from the Joint Venture Company. If any of the Chairman, Vice Chairman or directors hold the titles of the President, Executive Vice President or Vice President of the Joint Venture Company, they shall receive compensation from the Joint Venture Company for fulfilling the duties of these executive positions, but no extra money shall be paid to them for their directorships. 12 24. BOARD: 24.1 The Board shall be responsible for formulating and implementing the general policy of the Joint Venture Company. If any decision of the Board of Directors is in compliance with applicable Chinese laws, then no third Party shall be involved in such decision. 24.2 The Chairman is the legal representative of the Joint Venture Company. If the Chairman can not fulfill his obligations for some reason, the Vice Chairman or another director shall temporarily assume his responsibilities. 25. BOARD MEETING 25.1 Board meetings shall be held at the Joint Venture Company's offices at least once a year and shall be hosted by the Chairman. Meetings of the Board of Directors may be held at other locations subject to the agreement of Chairman and the Vice Chairman. If two or more directors submit a written notice to the Chairman and suggest the Chairman to issue a written notice for a temporary Board meeting 30 days before a scheduled Board meeting, the Chairman must agree to hold such temporary Board meeting. However, any proposals within 30 days before the Board meeting will be valid upon the agreement of all directors. 25.2 A written notice with details of agenda and papers supporting the items on the agenda shall be given to all directors 30 days before the Board meeting. Upon receipt of the agenda and prior to the meeting, the directors may consult with each other on any items on the agenda. 25.3 If 2/3 of the directors attend the Board meeting, such Board meeting shall be considered as legally effective. If one director can not be in the meeting for some reason, he can appoint his representative to attend the meeting with a written notice, and his representative shall have the same right to vote the decisions of the Board meeting. If a decision is made at a Board meeting with insufficient director attendance, such decision shall have no legal force. 13 25.4 All costs associated with attending Board meetings by director, including travel and accommodations and all costs incurred by Directors in attending to the business of the Joint Venture Company shall be reimbursed by the Joint Venture Company. 25.5 All minutes of the meetings of the Board of Directors shall be prepared and recorded in the English and Chinese languages and shall be signed by the directors and its representatives who attend the Board meeting. The original copy shall be kept in the Joint Venture Company until the Company dismisses. The copy of the minutes shall be sent to Party A and Party B. If there is any difference between the two versions, the Chinese version shall be taken as the ruling version. 26. RESOLUTIONS OF THE BOARD OF DIRECTORS 26.1 Except for clause 26.2 and 26.3, a Board of Directors resolution will become effective upon receiving approval from 1/2 of the directors present at any meeting. 26.2 The following matters require approval from at least 2/3 of the directors in attendance at any meeting to become effective: (1). Approval of the long-term, medium-term and annual business plan, equipment investment, product sales and employment arrangements, etc. (2). Decisions on the changes of annual budget plan, payment of any expenditure in excess of the amount approved in the budget and payment of liabilities. However, if the budget amount is less than RMB1 million and not over 20% of the budget plan, or if the budget amount is over RMB1 million and not over RMB500,000, President and Vice President can make the decision without any restriction but must report to the Board afterwards. (3). Approval of the annual business plan, financial report and annual budget plan. (4). The declaration or payment of any profits or dividend distribution to the shareholders. 14 (5). Approval to raise investment capital. (6). The approval of the annual or semi-annual financial report. (7). Approval of significant changes in the Joint Venture Company's management organizational structure. (8). Any significant changes on the Board's regulation, accounting system, operation expenses, cash control regulation or any other Joint Venture internal regulations. (9). Any changes in Employment Contracts and the Employee's Handbook. (10). Any decisions regarding the salary, welfare and reward of the President, the Vice President, Joint Venture Company Executives and other employees. (11). The appointment or dismissal of the Joint Venture Company's President, Executive Vice President, Vice President or CFO. (12). Any capital transfer from other business entities. (13). Manage and transfer of the Joint Venture Company's partial or total capital. Set up the Joint Venture Company's mortgage right and guarantee right. (14). Establishment or dissolution of any branch company, subsidiary or agency of the Joint Venture Company. (15). Approval of any investment, loan or guarantee of $100,000 or greater. 26.3 The following matters require unanimous approval from the Board of Directors present at any meeting: (1). Any change in the Joint Venture Company's article of incorporation. (2). Any increase or decrease in the registered capital. 15 (3). Any merger with other business entities. (4). Dissolution of the Joint Venture Company except as set forth in Clause 48 and 51 of this Joint Venture Contract. 27. WRITTEN RESOLUTIONS OF THE BOARD OF DIRECTORS 27.1 Written resolutions of the Board of Directors shall become effective if approved by all directors. The directors have the right to approve, object or abstain from any Board resolution. CHAPTER 10. MANAGEMENT ADMINISTRATION ORGANIZATION 28. PRESIDENT AND VICE PRESIDENT 28.1 A management administration organization shall be set up under the supervision of the Board, and such organization shall handle the day-to-day operation of the Joint Venture Company. 28.2 The management shall consist one President, and one Vice President. President of the Joint Venture Company shall be recommended by Party A and Vice President shall be appointed by Party B. The Board of Directors shall decide the appointment of President and Vice President of the Joint Venture Company. 28.3 The term of the President and Vice President shall be four years. Reappointment of each position will be available. If the management changes during the term of the position, the replacement shall serve out the term of his predecessor 29. THE OBLIGATION OF PRESIDENT OF THE JOINT VENTURE COMPANY 29.1 In addition to the day-to-day management of the Joint Venture Company, President shall fulfill the following responsibilities: (1). To make long-term and annual Business Plan of equipment investment, product sales and employee arrangement, and submit such plans to the Board. President shall execute the Board's resolution on all above-mentioned items. 16 (2). President shall be responsible for the presentation of the Business Plan, Budget Plan and financial review for each succeeding financial year for approval and adoption by the Board meeting. (3). To make capital collection, distribution and investment plan and submit such plan to the Board meeting. (4). To make quarterly and yearly financial report and submit it to the relevant authority upon receiving the approval from Board meeting. If it is urgent, the Board approval can be received after submitting to the authority. (5). To set up management structure and submit to the Board meeting for approval. (6). To appoint senior executive positions in the Joint Venture Company. (7). To set up the regulations of the Board meeting, accounting system, expense budget, cash management and all other internal regulations of the Joint Venture Company, and submit to the Board meeting for approval. (8). To make Employment Contract and other regulations regarding the employment of the Joint Venture Company and submit to the Board meeting for approval. (9). To formulate the salary of the Company's executives and other employees, including welfare and reward, and submit to the Board meeting for approval. (10). To appoint and dismiss the employees except for President, Vice President and CFO. (11). To set up the plans to establish and dismiss the Joint Venture Company's branch company, subsidiary and other agency. (12). To purchase of the property within certain expense limit approved by the Board meeting. 17 (13). To sign the contract with a third Party within his job responsibilities. (14). The other responsibilities and obligations appointed by the Board meeting. 29.2 Vice President can be concurrently the head of each different department except for its daily job to assist President of the Joint Venture Company. If President can not fulfill his obligations for some reason, Vice president shall take his responsibilities temporarily. 29.3 President and Executive Vice President shall work closely on the important decisions of the Joint Venture Company. If a disagreement occurs, President has the right to select the final decision. 30. THE CONCURRENT POSITION OF THE COMPANY EXECUTIVES 30.1 President, Executive Vice President and other senior executives shall not take the other executive positions in any other business companies concurrently. In addition, they shall not be involved in any other activities with any other companies or organizations which have the similar business. 31. BRIBES, CORRUPTION AND OTHER INAPPROPRIATE ACTIVITIES 31.1 The Board has the right to dismiss President, Vice President and CFO at any time if their inappropriate activities have been found. For the Joint Venture Company employees, President has the right to dismiss them if their inappropriate activities have been found. CHAPTER 11. LABOR MANAGEMENT 32. THE MANAGEMENT OF EMPLOYEE AND WORKERS 32.1 The rules concerning employment, recruitment, dismissal of employees of the Joint Venture Company and their salary, welfare, benefits, labor insurance, labor protection, labor discipline and other matters shall be specified by the Board of Directors in accordance with the "Regulations of 18 the PRC Labor Management in Foreign Investment Enterprises" and its implementation rules. 33. EMPLOYMENT CONTRACT 33.1 The Joint Venture Company shall sign the contract with the Joint Venture Union and individual employees. The Employment Contract shall include the salary, welfare, benefit, labor insurance, labor protection, labor discipline, dismissal, reward and job description, etc. The copies of such contract shall be submitted to local labor administration department for file. 33.2 The salary of the Joint Venture employees will be under the principle of "same position same payment". Under such principle, the salary and welfare of the foreign employees and the employees from U. S. appointed by Party B shall be decided based on the Sino- foreign Joint Venture foreign employee's basic standard. CHAPTER 12. UNION 34. THE SET UP OF THE JOINT VENTURE COMPANY UNION 34.1 The Joint Venture employees have the right to set up a Union and hold various activities under the "PRC Union Law". 34.2 The Union's leader shall represent the interest of the Joint Venture employees. Its responsibilities include: to protect Joint Venture employees' material benefits and their democratic rights; to assist the Joint Venture to set up its welfare fund; to organize various activities for the Joint Venture employees in the field of politics, business, science, technology, entertainment, sports, etc.; to train the employees to obey various employment regulations; and to fulfill various business responsibilities appointed by the Joint Venture Company. 35. OBLIGATIONS 35.1 The Union's leader shall represent each individual employee to sign the Employment Contract with the Joint Venture Company. The Union's leader shall also participate in the Joint Venture's Board 19 meeting and bring employees' opinions to the Board. 35.2 To mediate the quarrel between the Joint Venture employees. 36. FEE 36.1 Each employee shall contribute 2% of his/her monthly salary to the Joint Venture Union. Such fee will be used under the supervision of relevant Chinese laws and regulations. CHAPTER 13. TAX, FINANCE AND AUDITING 37. ACCOUNTING AND TAX 37.1 The Joint Venture's accounting activities shall be conducted under the relevant Chinese laws and regulations. The financial statement of the Joint Venture Company shall be made in accordance with "PRC Foreign Investment Enterprise Accounting System". 37.2 Joint Venture Company shall pay taxes pursuant to the relevant Chinese regulations. In addition, the Joint Venture employees shall pay income tax to the State under the "Individual Income Tax Law of the PRC". 38. CURRENCY 38.1 RMB shall be used as the standard currency for the Joint Venture Company's daily business and accounting. US dollar will be used to record the registered capital. The Joint Venture's foreign currency debt, income and expense shall be recorded pursuant to its actual currency. The conversion of RMB to foreign currency or from any foreign currency to RMB shall be conducted based on the exchange rate on each transaction date issued by China Foreign Currency Management Bureau. 38.2 The difference of the actual currency amount caused by increase and decrease of the foreign currency exchange rate shall be recorded in the Company's annual financial report. 20 39. FINANCING MODEL 39.1 The Joint Venture's quarterly and annual asset liability statement and other annual financial report shall be prepared in Chinese and submit to Party A, B and other relevant authorities for their approval. The financing model can also be translated into Chinese and submit to Party B if required. 40. ACCOUNTING AND AUDITING 40.1 The Company shall allow an independent reputable accounting firm (registered in China) nominated by the Joint Venture Company, access to relevant sections of such accounts and records for the sole purpose of verifying the Joint Venture Company's fee and payment arrangements. The accounting report shall submit to the Board meeting for approval. 40.2 Party A and B have the right to invite an accountant to check the Company's accounting book at any time at its own expenses. The Joint Venture Company and its employee shall provide the necessary assistance and convenience for that accountant. 41. FISCAL YEAR 41.1 The fiscal year of the Joint Venture Company shall be from January 1 to December 31. However, the first fiscal year shall start from the date of obtaining the Business License to Dec, 31. All accounting reports shall be written in Chinese. 42. BANK ACCOUNT 42.1 After getting the Business License, the Joint Venture Company shall open its foreign currency bank account and RMB bank account at Bank of China or other assigned banks under the relevant regulations and laws of PRC. In addition, the Joint Venture Company can also open its foreign currency bank account or RMB bank account abroad, including Hong Kong and Macao subject to the approval from China Foreign Currency Management Bureau. 21 43. FOREIGN CURRENCY LAW 43.1 All Joint Venture Company's activities regarding the foreign currency business shall comply with and carry out the relevant laws and regulations issued by Chinese government. 44. THE USAGE OF THE FOREIGN CURRENCY 44.1 The Joint Venture's foreign currency shall be used in the following activities: (1). To purchase the import materials for the Joint Venture Company. (2). To pay the capital and interest of a foreign currency loan. (3). To pay the expenses of technical service from abroad. (4). To pay the possible distributable profit. 45. WIRE TRANSFER OF FOREIGN CURRENCY 45.1 The Joint Venture Company can wire the foreign currency to an abroad bank account only under the following conditions: to wire the Company profit to Party B; to pay the expenses of technical service from abroad; to pay the interest and capital of a foreign currency loan; to get the approval from China Foreign Currency Management Bureau. CHAPTER 14. PROFIT DISTRIBUTION 46. PROFIT DISTRIBUTION 46.1 The parties agree that all of the net after tax profits and setting up saving fund, employee reward fund or other company business fund (hereinafter called "distributable profit"), funds established in accordance with the laws of the PRC shall be distributed to the parties pursuant to the Board resolution. The Joint Venture Company's profit shall be handled in accordance with the following provisions: 22 (1). The Joint Venture Company shall not increase the capital to make up the deficit because of the lose in the first half year. (2). Before making up the deficit for the first half year, both parties can not distribute the Joint Venture Company's profit. (3). Subject to the Board decision, the Joint Venture shall distribute the distributable profit at least once a year within 90 days after the end of the fiscal year. Such profit will be shared by Party A and B pursuant to Clause 10 set out in this Contract and subject to the share ownership ratio at the time of such distribution. (4). The Joint Venture Company shall assist Party B to exchange the profit from RMB to the foreign currency. If the Joint Venture Company is unable to exchange the whole or partial amount of the profit to foreign currency for some reasons, this amount of profit can be kept in Joint Venture Company until such exchange is available. The exchange rate from RMB to foreign currency shall be based on each day's interest rate issued by PRC Foreign Currency Administration Bureau. CHAPTER 15. TERM 47. TERM 47.1 The Parties agree that the Joint Venture Company shall continue for a term of 20 years from the date of registration of the Joint Venture Company. 47.2 The Board meeting shall decide the extension or the change of the term of the Joint Venture Company and shall submit its decision to the relevant Chinese authority for approval one year before the termination of the Joint Venture Contract. CHAPTER 16. TERMINATION 48. TERMINATION 23 48.1 If one of the following events occurs, Party A and B shall have the right to terminate the Joint Venture Contract within 60 days and shall submit to the Board for approval. Meanwhile, an application to terminate the contract shall also be provided to the relevant authority: (1). The Joint Venture Company has suffered the serious loses continuously for five years, and still no important and efficient decision has been made to save such lose after 60 days receiving the financial report, or after mutual negotiation, both parties fail to find an efficient way to continue the operation. (2). If Party A or B violates the regulations under clause 17 and 19 of this Contract. (3). If an event of Force Majeure occurs under clause 55 of this Contract. (4). To merge the Joint Venture Company with another business entities, and therefore the Joint Venture Company does not exist any more. (5). If one Party goes bankruptcy. (6). If both parties agree that the Joint Venture Company can not achieve its original goal due to some other reasons. (7). Both parties agree to terminate this Contract. (8). If the Joint Venture Company has to change its contract, regulations, the technical service contract and other related important documents unreasonably because of the order from the government, and such change will obviously prevent the development of the Joint Venture Company. 48.2 If one of the above-mentioned events occurs, and both parties can not get a mutual agreement, the Party who agrees to continue the business shall purchase the registered capital from the other Party who wants to terminate the Joint Venture Contract. 24 48.3 The Board of Directors shall take every possible measures including to suspend the business if the Joint Venture has not got the approval from the relevant authority within 90 days under the condition of Clause 48.1. 49. CLEARING COMMITTEE 49.1 The Board of Directors shall form a Clearing Committee to handle the termination of the Joint Venture Company business, and all such activities shall be conducted under relevant Chinese laws and regulations. The members of the Clearing Committee shall be selected from the directors. If the director can not take such responsibilities for some reasons, the Joint Venture Company shall appoint its accountant or lawyer (registered in China) to be involved in such activities. The Clearing Committee shall be responsible to provide a whole set of Joint Venture Company's capital and liability financial report, and to sell the Joint Venture Company based on the fair market price. The Clearing Committee shall also try their best to sell the Joint Venture Company at its highest price in China or abroad in foreign currency if possible. 50. DISMISSAL AND CLEARANCE 50.1 Pursuant to the Clause 48 of this contract, the clearance of the Joint Venture Company shall be conducted under the following methods: after selling the Joint Venture Company and handling the other Joint Venture capital matters, the Joint Venture shall pay (a) the clearance fee, (b) employee's salary, insurance and other welfare, (c) taxes and (d) the Joint Venture debts. The rest of the Joint Venture capital shall be distributed to both parties in accordance with the share ratio under Clause 10 of this contract. 50.2 Under the conditions set out in Clause 50.1, the capital distributed to Party B shall be in cash, and shall first consider to pay back in foreign currency. The exchange rate of such amount of foreign currency shall be based on the rate issued by China Foreign Currency Management Bureau at the same day. 25 CHAPTER 17. VIOLATION OF THE JOINT VENTURE CONTRACT 51. DISMISSAL OF THE CONTRACT 51.1 One Party has the right to apply for the termination of the Joint Venture Contract from the relevant state authorities if the Joint Venture Company can not continue its business because of violation of this Contract caused by Party A or B, and such violation has not been corrected within 30 days after a written notice has been issued from other Party. 52. VIOLATION AND LOSE 52.1 If one Party does not fulfill its obligations set out in this Contract, or if one Party violates some of the provisions of this Contract, and such violation causes the loses to the other Party, the other Party then has the right to ask for a compensation. 52.2 Party A or B shall not be responsible for the expect profit, indirect lose and deriving lose caused by one of the other Parties. 52.3 Subject to Clause 10 of this Contract, if Party A or B has not infused the capital into the Joint Venture Company, such Party shall pay the violation fee to the Joint Venture Company based on a 15% annual interest rate. 52.4 The violation fee mentioned in Clause 52.3 is not related to the registered capital and share ownership ratio of the Company. CHAPTER 18. OTHER CONTRACTS 53. OTHER CONTRACTS 53.1 Subject to the requirement of the Joint Venture business, Party A and B may sign the following contracts with the Joint Venture Company from the date of obtaining Business License. (1). The Technical Service Agreement under Clause 18. 26 (2). The Technical Training Agreement for the Joint Venture Employees. CHAPTER 19. OTHERS 54. CHANGE OF THE JOINT VENTURE CONTRACT 54.1 The change of the Joint Venture contract shall be effective upon receipt of the signatures from both parties, and shall submit such changes to the relevant authorities for approval. 54.2 If there is any difference between the Joint Venture Contract and the Joint Venture's other regulations, this Contract shall be the only standard. 55. FORCE MAJEURE 55.1 The obligations of a Party shall be suspended if at any time its performance is prevented by any cause beyond its reasonably control including acts of war, riots, strikes, labor disputes, fires, floods, storms, earthquake or other natural disasters and any other event which that party could not foresee at the time of executing this Contract and its occurrence and consequences can not be avoided and can not be overcome. The Party whose obligations are suspended by reason of any such event shall promptly submit the notarized certificate or the first class new report stating the nature of the suspension, the reasons and the expected duration. 55.2 Both parties shall negotiate and decide the termination and extension of the Joint Venture contract or other related matters caused by the event of Force Majeure. 56. INSURANCE 56.1 The Joint Venture Company shall select a Chinese Insurance Company to obtain appropriate insurance cover. The type, price and time of the insurance shall be decided in accordance with the regulations of the insurance company in China. If some type of insurance can not be covered by the insurance company in China, the Joint Venture 27 Company may buy it abroad subject to the Board's decision. 57. CHANGE OF THE LAW 57.1 If the performance of the Joint Venture Company has been prevented by the change of the governing law or government in China and the United States or other causes beyond its reasonable control, Party A and B have the right to change or terminate this Contract. 58. GOVERNING LAW This Contract shall be governed by and interpreted in accordance with the Laws of PRC. 59. ARBITRATION 59.1 Any dispute and lose compensation arising out of this Contract shall to the fullest extent possible be settled amicably by negotiation and discussion between the Parties. 59.2 Any such dispute not settled by amicable agreement shall be submitted to an Arbitration Organization for arbitration. When Party A initiates an action, Party A will appoint the arbitration association selected by Party B, and when Party B initiates an action, Party B will appoint the arbitration association selected by Party B for arbitration. The International Business Arbitration Association shall conduct the arbitration under each party's regulation of arbitration. There shall be three arbitrators of whom one each shall be appointed by each Party and the third arbitrator by each Party's Commission. The third arbitrator can neither be Chinese nor American. Any decision taken by the arbitrators will be final, binding and conclusive. 59.3 Both Parties shall pay their cost of arbitration separately. The cost paid to the arbitration organization shall be shared by both parties. 59.4 During the process of arbitration, the Joint Venture Company's daily business shall be operated continuously, except for the dispute part currently under the arbitration. 28 60. THE LANGUAGE OF THE JOINT VENTURE CONTRACT 60.1 The Joint Venture Contract shall have six copies. Each Party holds one copy. Two copies shall be sent to the relevant authority. The rest of the copies shall be kept in the Joint Venture's file. 60.2 The Joint Venture Contract is written in both Chinese and English, and shall take the Chinese version as the standard. 61. EFFECTIVE DATE OF THE CONTRACT This Joint Venture Contract will be effective from the date of getting the approval from Foreign Economic and Trade Ministry of PRC. 62. NOTICE 62.1 Any notices or communications to be given under this Contract shall be sent by either telegram, telex or facsimile transmission. Any notices or communications relating to the important business on Joint Venture partner's obligations, profits and responsibilities shall be sent by registered post. The addresses for service of each Party shall be those addresses previously notified to the other Party. The notice shall be effective from the receipt date of such post. 62.2 Any notices or communications mentioned in Clause 62.1 shall be written in Chinese or English. 63. OTHER COSTS 63.1 Party A and B shall be responsible to its own cost relating to the negotiation, preparation and signature of this Contract, including legal service fee. 63.2 After signing the Joint Venture Contract, any cost relating to the establishment of the Joint Venture Company can be put into the Joint Venture Company's preparation budget. 29 64. THE RELATIONSHIP OF THE TWO PARTIES 64.1 Party A and B shall fulfill its own obligations and responsibilities set out in this Contract, and have no right to represent the other Party to fulfill its obligations. This Contract has been signed at Avic's Headquarters in New York City, USA, by the representatives from Party A and B. Party A: Beijing CATCH Communication Group Co. By: /s/ Chen Li ------------------------------------ Name: Chen Li Title: Chairman Party B: AVIC Group International, Inc. By: /s/ Michael J. Lim ------------------------- Name: Michael J. Lim Title: Executive Vice President - Operations Chief Financial Officer June 11, 1996 30 EX-10.15 4 EXHIBIT 10.15 THE JOINT VENTURE CONTRACT (HEBEI UNITED TELECOMMUNICATION EQUIPMENT COMPANY AND NTT) DECEMBER 22, 1995 CHAPTER 1: PRINCIPLE Subject to the principle of fair profit sharing and cooperation for development, and pursuant to the Law of PRC on Sino-Foreign Joint Venture ("Joint Venture Law") and the Implementation Regulation of the PRC on Sino-Foreign Joint Ventures ("JV Implementation Regulation") and other relevant Chinese regulations and laws, China Hebei United Telecommunication Equipment Company and Japan NTT International Corporation agree to enter into a Joint Venture contract. The contract have been signed on December 22, 1995 at Shijiazhuang, PRC. CHAPTER 2: JOINT VENTURE PARTIES 1. THE JOINT VENTURE PARTIES Party A: Name: Hebei United Telecommunication Equipment Company Address: No. 2 Jichang Road Shijiazhuang, Hebei Province The People's Republic of China Organization: A limited liability corporation established in People's Republic of China in accordance with the Chinese Laws. Legal Representative: Ye Yun Yun Position: Chairman Nationality: Chinese Party B: Name: NTT International Corporation Organization: A corporation established in Japan Address: ________________ Legal Representative: __________________ Position: ____________________ Nationality: Japanese 2. LEGAL ABILITY 2.1 Party A and B both guarantee the following: (1). Party A is legally established in Shijiazhuang, Hebei Province, the People's Republic of China, and Party B is legally formed in Tokyo, Japan. 2 (2). Party A and B have the complete right to negotiate and fulfill the responsibilities and obligations set out in this Contract. (3). The signatories of Party A and Party B have the right appointed by both parties to execute this contract. CHAPTER 3: ESTABLISHMENT OF THE JOINT VENTURE COMPANY 3. ESTABLISHMENT OF THE JOINT VENTURE COMPANY 3.1 Party A and B agree to form and incorporate a Sino-Foreign Joint Venture Company with limited liability ("The Joint Venture Company") in the PRC on the terms and conditions approved by certain authorities. The Joint Venture Company will be established under the Joint Venture Law and the Joint Venture Implementation Regulations. All important decisions and documents related to the Joint Venture business shall be approved by the Joint Venture Company first before submitting to the relevant authority for approval. 4. THE JOINT VENTURE COMPANY 4.1 The Name of the Joint Venture Company The Chinese name of the Joint Venture Company shall be ____________________________. The Japanese name of the Joint Venture Company shall be ___________________, and the English name of the Joint Venture Company shall be Hebei United Telecommunications Engineering Development Company Ltd. The legal location of the Joint Venture Company is at Shijiazhuang, Hebei Province, PRC. The Joint Venture Company must be registered at Industry and Commerce Administration and Management Bureau. 4.2 Without a written agreement, both parties can not use their parent company's trademark and logo at any time. 3 5. LAW 5.1 The Joint Venture Company's activities in China must fully comply with all the relevant laws, regulations in China and the provisions set out in this contract. 6. ORGANIZATION: 6.1 The Joint Venture Company will be a limited liability company for the purpose of the Company Law of the PRC. Both parties shall undertake the liability of the Joint Venture Company subject to its investment amount. Both parties agree that the Joint Venture Company's investment will be a full business exercise designed to share both risks, rewards and loses based on its share ownership ratio in the registered capital between the partners. CHAPTER 4: BUSINESS OBJECTIVE AND SCOPE 7. BUSINESS OBJECTIVE OF THE JOINT VENTURE COMPANY Both parties agree that the business objectives of the Joint Venture Company are to strengthen in business cooperation and technology development and exchange; to apply advanced telecommunications technology and efficient management skills; to improve technical standard of telecommunications industry in order to make competitive products in Chinese market in both price and quality; and to reach both economic and social goals that are satisfactory to all parties. 8. THE SCOPE OF THE JOINT VENTURE COMPANY 8.1 The Joint Venture Company agrees to provide the following services: manufacture, development, sales and services of the telecommunications equipment and products; construction, consultation and other services relating to the telecommunications projects and other related businesses. CHAPTER 5. TOTAL INVESTMENT CAPITAL, REGISTERED CAPITAL, AND SHARE RATIO OF THE JOINT VENTURE PARTNERS 9. TOTAL INVESTMENT CAPITAL AND REGISTERED CAPITAL 9.1 The total investment capital of the Joint Venture Company will be $6MM. 9.2 The registered capital of the Joint Venture Company. 4 will be $3MM. 10. SHARE RATIO 10.1 The registered capital of the Joint Venture Company will be $3MM, of which Party A will contribute $1.53MM and Party B will contribute $1.47MM. The share ratio of the parties in the Joint Venture Company shall be 51% owned by Party A and 49% by Party B. 11. THE AMOUNT AND TERM OF THE CAPITAL PAYMENT 11.1 Both parties shall infuse capital in accordancewith the following method after obtaining a Business License from the state authority: ---------------------------------------------------------------------- Party Amount Time ---------------------------------------------------------------------- A Equivalent to $1.53MM (The foreign 50% of the total amount currency exchange rate shall be shall be wired to the based on each day's closing rate account within 15 days and shall be evaluated by the after getting the certified public accounting agency business license. The and approved by Party B) balance shall be wired within 30 days. ---------------------------------------- B $1.47M ---------------------------------------------------------------------- 11.2 The investment capital shall be wired to the bank account in accordance to Clause 42 of this Contract. 12. CERTIFICATE OF INVESTMENT 12.1 The investment payment from Party A and B shall be certified by a registered public accountant. After receiving a satisfactory certificate recording such investment, the Joint Venture Company will issue the Certificate of Investment, including the amount and share ownership of the registered capital, signed by the Chairman and Vice Chairman of the Joint Venture Company to Party A and B. 13. THE USAGE OF THE INVESTMENT 13.1 None of Party A, Party B or any other parties have 5 the right to use the investment capital infused to the bank account according to Clause 11.2 without the Board's decision of how to use such investment. However, the funds which will be used during the Joint Venture preparation period shall be paid by the Joint Venture Company subject to the approvals from both Parties. 14. TRANSFER OF CAPITAL 14.1 Except for Clause 14.3, Party A and Party B may, as either Party wishes transfer, in whole or part, its shares of the Joint Venture Company to a third Party with prior written notice to the other Parties and approval from the relevant authorities. Party A or B shall make the decision within 90 days of receiving the written notice. 14.2 If either Party A or Party B wishes to transfer its whole or partial shares, such Party shall first offer the share to the other Party of the Joint Venture Company for purchase. The other Party shall submit a written notice to declare its decision of purchasing those shares within 90 days. If the other Party does not submit its decision within 120 days, or this Party has first offered partial share to the other Party of the Joint Venture Company, any unsubscribed shares may then be offered to a third Party at a price not less than the price offered to the other Joint Venture Party. 14.3 Both Parties may transfer its whole or partial shareholding to their parent companies during the term of this Contract in accordance with Clause 47. However, the relevant government approvals must be submitted to execute such transfer. 14.4 After the Party transferring its whole or partial shares to a third Party, such third Party shall abide by the terms of this Contract and perform and discharge all of its obligations of this Contract and share its rights as well. In addition, certain provisions in this Contract shall be revised pursuant to the change in the shareholding ratio. 14.5 The transfer will not be effective if one of the Party violates any provisions set out in this contract. 15. THE INCREASE OF THE REGISTERED CAPITAL 6 15.1 The registered capital (Clause 9) may be increased from time to time subject to approval of the Board of Directors of the Joint Venture Company. The contribution from both parties to increase the registered capital pursuant to the initial funding plan shall be pro rata in accordance with the share ratio of each Party (Clause 10) at the time of such capital increase. If one Party declines to increase the registered capital, the other Party then has the priority to increase the whole or a portion of the amount of the increase in registered capital which is rejected by the other Party. The obligations of each Party shall also be adjusted pursuant to the new share ownership ratio. In addition, Party A and B have the right to ask a third Party to increase the registered capital upon receipt of a written agreement between the Joint Venture parties and subject to obtaining the relevant PRC governmental approvals. 16. MORTGAGE: 16.1 Party A and B shall not use their portion of the Joint Venture Company's investment capital as any kind of mortgage or guarantee. CHAPTER 6: RESPONSIBILITIES OF PARTY A AND B 17. RESPONSIBILITIES OF PARTY A AND B 17.1 The parties shall contribute, where necessary in accordance with the Joint Venture Company's Business Plan and upon such terms and conditions as may be agreed with the Joint Venture Company, to the general business development of the Joint Venture Company by fulfilling the following responsibilities: A. Party A shall: (1). Provide the registered capital based on the share ratio pursuant to Clause 11 of this Contract. (2). Assist the Joint Venture Company in its fund raising, and to obtain investment capital at favorable terms and conditions. 7 (3). Provide necessary assistance to exchange foreign currency to RMB or to exchange RMB to foreign currency. (4). Obtain all necessary approvals and permits from the competent authorities of the PRC, including, but not limited to, establishment and registration of the Joint Venture Company, and all other approvals or permits necessary for the proper conduct of the Joint Venture Company's business and endeavor to obtain preferential treatment for the Joint Venture Company. (5). Assist in the construction of public utilities, such as water, electricity and gas, the connection of the telephone and fax lines and provide the material transportation. (6). Purchase and rent the required equipment, machinery, raw material, cars, communication equipment and others which shall be bought in China in accordance with the agreement by both parties. (7). Assist the Joint Venture Company with customs clearance for import and export of equipment and products and obtain entry permits, visas, work permits, travel permits and all other approvals for expatriate personnel of the Joint Venture Company and obtain suitable accommodation for expatriate personnel. (8). Provide necessary assistance for recruiting executives, technicians, workers and other employees in China. In addition, it shall help its employees to settle their accommodation if necessary. (9). Provide the information of China market to the Joint Venture Company and develop a domestic market for the Joint Venture Company. (10). Provide documents and information relating to the Chinese economy, investment and marketing and also relevant documents relating to Chinese policy, law, regulation, tax system, accounting system and others. 8 (11). Obtain all necessary approvals, registration and licenses from the competent Chinese authorities required for the establishment of the Joint Venture Company. (12). Obtain the approvals for the Joint Venture Company to use land from the Land Administration Authority. (13). Organize the construction and design of the Joint Venture Company building. (14). Handle all other matters appointed by the Joint Venture Company and agreed to by Party A. B. Party B shall: (1). Provide the registered capital based on share ratio according to Clause 11 set up in this Contract. (2). Assist the fund raising for the Joint Venture Company outside China and guarantee that the money be transferred to the Joint Venture account pursuant to the Business Plan. The interest rate of such fund shall not be too high and loan provided by Party B to Party A shall not be at usurious rates. (3). Obtain all necessary approvals and permits from the competent Japanese authorities required for the establishment of the Joint Venture Company. (4). Purchase and rent the necessary equipment, machines, materials, cars, communication and office equipment which shall be purchased abroad by Party B and agreed by both Parties. (5). Assist the Joint Venture Company with customs clearance for import/export of equipment and products (including all necessary export permits), obtain entry permits, visas, work permits, travel permits and all other approvals for expatriate personnel of the Joint Venture 9 Company and obtain suitable accommodation for expatriate personnel. (6). Provide necessary assistance for recruiting executives, technicians and other employees in Japan. (7). Provide the documents and information relating to the Japanese economy, investment and marketing, and also the relevant documents about Japanese policy, law, rules, tax system, accounting system, etc. (8). Provide advanced technology to the Joint Venture Company and appoint its technicians to support the Joint Venture Company's projects. (9). Provide technical training for the Joint Venture Company's employees in accordance with the technical training contract signed by the Joint Venture Company and Party B. (10). Handle all other matters appointed by the Joint Venture Company and agreed by Party B. CHAPTER 7: TECHNICAL ASSISTANCE TO THE JOINT VENTURE COMPANY 18. TECHNICAL SERVICE 18.1 When it is necessary, the Joint Venture Company has the right to enter into a Technology Service Agreement with Party B or any other third Party based on the agreement of both parties. 19. CONFIDENTIALITY 19.1 It is agreed that all information generated pursuant to the terms of this Contract is confidential and neither Party shall, except with the written consent of the other Party, disclose or release such information to any third Party. 19.2 Party A and B shall ask their executives and all other employees to understand the importance of confidentiality for the Company. All employees shall sign the Confidentiality Agreement when they join the Joint Venture Company. 10 CHAPTER 8: PURCHASE OF EQUIPMENT AND MATERIAL 20. PURCHASE OF RAW MATERIALS, EQUIPMENT AND MACHINES 20.1 The Joint Venture Company shall determine if the necessary equipment, materials, fuel, transportation equipment and office equipment shall be purchased in China or abroad. However, if the quality, quantity, performance, delivery, and after-sale service of a foreign product are comparable to a Chinese product, the Joint Venture shall first consider purchasing the product in China. If Party B has to purchase equipment abroad for the Joint Venture Company, Party A shall be involved in such purchasing if necessary. CHAPTER 9: BOARD OF DIRECTORS 21. OBLIGATIONS OF BOARD OF DIRECTORS 21.1 The Board of Directors of the Joint Venture Company is the authoritative organ of the Joint Venture Company and shall be fully responsible for the entire business of the Joint Venture Company. 22. ESTABLISHMENT OF THE BOARD OF DIRECTORS 22.1 The Joint Venture Company's Board of Directors will be established on the day a Business License is granted to the Joint Venture Company. 23. COMPOSITION OF THE BOARD AND THE TERM OF EACH DIRECTOR 23.1 The Board of Directors shall consist initially of seven members, one Chairman and one Vice Chairman. Four directors will be appointed by Party A and three directors will be appointed by Party B. The Chairman of the Board shall be appointed by Party A. The Vice Chairman shall be appointed by Party B. The term of Chairman, Vice Chairman and directors shall be four years and these positions may be re-appointed consecutively if necessary. The term of the Chairman and Vice Chairman shall begin from the date a Business License is granted to the Joint Venture Company to the closing date of the Board meeting which will discuss the financial statement for the 4th fiscal year of the Joint Venture Company. During the term of the directors, if such matters as death, resignation, retirement or inability to fulfill the job occurs, the Party who appoints such director shall select a replacement as soon as possible. The replacement director shall serve out the term of his predecessor. 23.2 If one Party wants to change the director, a written notice shall be submitted to the BOD meeting within 30 days. 23.3 The Chairman, Vice Chairman and directors will 11 receive no salary from the Joint Venture Company. If any of the Chairman, Vice Chairman or directors hold the titles of the President, Executive Vice President or Vice President of the Joint Venture Company, they shall receive compensation from the Joint Venture Company for fulfilling the duties of these executive positions, but no extra money shall be paid to them for their directorships. 24. BOARD: 24.1 The Board shall be responsible for formulating and implementing the general policy of the Joint Venture Company. If any decision of the Board of Directors is in compliance with applicable Chinese laws, then no third Party shall be involved in such decision. 24.2 The Chairman is the legal representative of the Joint Venture Company. If the Chairman can not fulfill his obligations for some reason, the Vice Chairman or another director shall temporarily assume his responsibilities. 25. BOARD MEETING 25.1 Board meetings shall be held at the Joint Venture Company's offices at least twice a year and shall be hosted by the Chairman. Meetings of the Board of Directors may be held at other locations subject to the agreement of Chairman and the Vice Chairman. If two or more directors submit a written notice to the Chairman and suggest the Chairman to issue a written notice for a temporary Board meeting 30 days before a scheduled Board meeting, the Chairman must agree to hold such temporary Board meeting. However, any proposals within 30 days before the Board meeting will be valid upon the agreement of all directors. 25.2 A written notice with details of agenda and papers supporting the items on the agenda shall be given to all directors 30 days before the Board meeting. Upon receipt of the agenda and prior to the meeting, the directors may consult with each other on any items on the agenda. 25.3 If 2/3 of the directors attend the Board meeting, such Board meeting shall be considered as legally effective. If one director can not be in the meeting for some reason, he can appoint his representative to attend the meeting with a written notice, and his representative shall have the same right to vote the decisions of the Board meeting. If a decision is made at a Board meeting with insufficient director attendance, such decision shall have no legal force. 12 25.4 All costs associated with attending Board meetings by director, including travel and accommodations and all costs incurred by Directors in attending to the business of the Joint Venture Company shall be reimbursed by the Joint Venture Company. 25.5 All meetings of the Board shall be conducted in either Japanese or Chinese provided that adequate translation is made available during the meeting in other relevant languages. All minutes of the meetings of the Board of Directors shall be prepared and recorded in the Japanese and Chinese languages. If there is any difference between the two versions, the Chinese version shall be taken as the ruling version. 26. RESOLUTIONS OF THE BOARD OF DIRECTORS 26.1 Except for clause 26.2 and 26.3, a Board of Directors resolution will become effective upon receiving approval from 1/2 of the directors present at any meeting. 26.2 The following matters require approval from at least 2/3 of the directors in attendance at any meeting to become effective: (1). Approval of the long-term, short-term and annual business plan, equipment investment, product sales and employment arrangements, etc. (2). Decision on the changes of annual budget plan, payment of any expenditure in excess of the amount approved in the budget and payment of liabilities. However, if the budget amount is less than RMB1 million and not over 20% of the budget plan, or if the budget amount is over RMB1 million and not over RMB500,000, President and Vice president can make the decision without any restriction but must report to the Board afterwards. (3). Approval of the annual business plan, financial report and annual budget plan. (4). The declaration or payment of any profits or dividend distribution to the shareholders. (5). Approval to raise investment capital. (6). The approval of the annual or semi-annual financial report. (7). Approval of significant changes in the Joint Venture Company's management organizational structure. 13 (8). Any significant changes on the Board's regulation, accounting system, operation expenses, cash control regulation or any other Joint Venture internal regulations. (9). Any changes in Employment Contracts and the Employee's Handbook. (10). Any decisions regarding the salary, welfare and reward of the President, the Vice President, Joint Venture Company Executives and other employees. (11). The appointment or dismissal of the Joint Venture Company's President, Executive Vice President, Vice President or CFO. (12). Any capital transfer from other business entities. (13). Manage and transfer of the Joint Venture Company's partial or total capital. Set up the Joint Venture Company's mortgage right and guarantee right. (14). Establishment or dissolution of any branch company, subsidiary or agency of the Joint Venture Company. (15). Approval of any investment, loan or guarantee of $100,000 or greater. 26.3. The following matters require unanimous approval from the Board of Directors present at any meeting: (1). Any change in the Joint Venture Company's article of incorporation. (2). Any increase or decrease in registered capital. (3). Any merger with other business entities. (4). Dissolution of the Joint Venture Company except as set forth in Clause 48 and 51 of this Joint Venture Contract. 14 27. WRITTEN RESOLUTIONS OF THE BOARD OF DIRECTORS 27.1 Written resolutions of the Board of Directors shall become effective if approved by all directors. The directors have the right to approve, object or abstain from any Board resolution. CHAPTER 10. MANAGEMENT ADMINISTRATION ORGANIZATION 28. PRESIDENT, EXECUTIVE VICE PRESIDENT AND VICE PRESIDENT 28.1 A management administration organization shall be set up under the supervision of the Board, and such organization shall handle the day- to-day operation of the Joint Venture Company. 28.2 The management shall consist one President, one Executive Vice President and one Vice President. President of the Joint Venture Company shall be recommended by Party A, and Executive Vice President shall be recommended by Party B. The Board of Directors shall decide the appointment of President, Executive Vice President and Vice President of the Joint Venture Company. 28.3 The term of the President, Executive Vice President and Vice President shall be three years. Reappointment of each position will be available. If the management changes during the term of the position, the replacement shall serve out the term of his predecessor. 29. THE OBLIGATION OF PRESIDENT OF THE JOINT VENTURE COMPANY 29.1 In addition to the day-to-day management of the Joint Venture Company, President shall fulfill the following responsibilities: (1). To make long-term and annual Business Plan of equipment investment, product sales and employee arrangement, and submit such plans to the Board. President shall execute the Board's resolution on all above-mentioned items. (2). President shall be responsible for the presentation of the Business Plan, Budget Plan and financial review for each succeeding financial year for approval and adoption by the Board meeting. 15 (3). To make capital collection, distribution and investment plan and submit such plan to the Board meeting. (4). To make quarterly and yearly financial report and submit it to the relevant authority upon receiving the approval from Board meeting. If it is urgent, the Board approval can be received after submitting to the authority. (5). To set up management structure and submit to the Board meeting for approval. (6). To appoint senior executive positions in the Joint Venture Company. (7). To set up the regulations of the Board meeting, accounting system, expense budget, cash management and all other internal regulations of the Joint Venture Company, and submit to the Board meeting for approval. (8). To make Employment Contract and other regulations regarding the employment of the Joint Venture Company and submit to the Board meeting for approval. (9). To formulate the salary of the Company's executives and other employees, including welfare and reward, and submit to the Board meeting for approval. (10). To appoint and dismiss the employees except for President, Executive Vice President and CFO. (11). To set up the plans to establish and dismiss the Joint Venture Company's branch company, subsidiary and other agency. (12). To purchase of the property within certain expense limit approved by the Board meeting. (13). To sign the contract with a third Party within his job responsibilities. (14). The other responsibilities and obligations appointed by the Board meeting. 29.2 Executive Vice President and Vice President can be concurrently the head of each different department except for their daily job to assist President of 16 the Joint Venture Company. If President can not fulfill his obligations for some reason, Executive Vice president shall take his responsibilities temporarily. 29.3 President and Executive Vice President shall work closely on the important decisions of the Joint Venture Company. If a disagreement occurs, President has the right to select the final decision. 30. THE CONCURRENT POSITION OF THE COMPANY EXECUTIVES 30.1 President, Executive Vice President and other senior executives shall not take the other executive positions in any other business companies concurrently. In addition, they shall not be involved in any other activities with any other companies or organizations which have the similar business. 31. BRIBES, CORRUPTION AND OTHER INAPPROPRIATE ACTIVITIES 31.1 The Board has the right to dismiss President,Executive Vice President, Vice President and CFO at any time if their inappropriate activities have been found. For the Joint Venture Company employees, President has the right to dismiss them if their inappropriate activities have been found. CHAPTER 11. LABOR MANAGEMENT 32. THE MANAGEMENT OF EMPLOYEE AND WORKERS 32.1 The rules concerning employment, recruitment, dismissal of employees of the Joint Venture Company and their salary, welfare, benefits, labor insurance, labor protection, labor discipline and other matters shall be specified by the Board of Directors in accordance with the "Regulations of the PRC Labor Management in Foreign Investment Enterprises" and its implementation rules. 33. EMPLOYMENT CONTRACT 33.1 The Joint Venture Company shall sign the contract with the Joint Venture Union and individual employees. The Employment Contract shall include the salary, welfare, benefit, labor insurance, labor protection, labor discipline, dismissal, reward and job description, etc. The terms and 17 provisions of the contract shall be agreed by both Parties. 33.2 The salary of the Joint Venture employees will be under the principle of "same position same payment". Under such principle, the salary and welfare of the foreign employees shall be decided based on the Sino-foreign Joint Venture foreign employee's basic standard. CHAPTER 12. UNION 34. THE SET UP OF THE JOINT VENTURE COMPANY UNION 34.1 The Joint Venture employees have the right to set up a Union and hold various activities under the "PRC Union Law". 34.2 The Union's leader shall represent the interest of the Joint Venture employees. Its responsibilities include: to protect Joint Venture employees' material benefits and their democratic rights; to assist the Joint Venture to set up its welfare fund; to organize various activities for the Joint Venture employees in the field of politics, business, science, technology, entertainment, sports, etc.; to train the employees to obey various employment regulations; and to fulfill various business responsibilities appointed by the Joint Venture Company. 35. OBLIGATIONS 35.1 The Union's leader shall represent each individual employee to sign the Employment Contract with the Joint Venture Company. The Union's leader shall also participate in the Joint Venture's Board meeting and bring employees' opinions to the Board. 35.2 To mediate the quarrel between the Joint Venture employees. 36. FEE 36.1 Each employee shall contribute 2% of his/her monthly salary to the Joint Venture Union. Such fee will be used under the supervision of relevant Chinese laws and regulations. 18 CHAPTER 13. TAX, FINANCE AND AUDITING 37. ACCOUNTING AND TAX 37.1 The Joint Venture's accounting activities shall be conducted under the relevant Chinese laws and regulations. The financial statement of the Joint Venture Company shall be made in accordance with "PRC Foreign Investment Enterprise Accounting System". 37.2 Joint Venture Company shall pay taxes pursuant to the relevant Chinese regulations. In addition, the Joint Venture employees shall pay income tax to the State under the "Individual Income Tax Law of the PRC". 38. CURRENCY 38.1 RMB shall be used as the standard currency for the Joint Venture Company's daily business and accounting. US dollar will be used to record the registered capital. The Joint Venture's foreign currency debt, income and expense shall be recorded pursuant to its actual currency. The conversion of RMB to foreign currency or from any foreign currency to RMB shall be conducted based on the exchange rate on each transaction date issued by China Foreign Currency Management Bureau. 38.2 The difference of the actual currency amount caused by increase and decrease of the foreign currency exchange rate shall be recorded in the Company's annual financial report. 39. FINANCIAL CHARTS 39.1 The Joint Venture's quarterly and annual financial charts shall be prepared in Chinese and submit to Party A, B and other relevant authorities for their approval. The financial charts can also be translated into Japanese and submit to Party B if required. 40. ACCOUNTING AND AUDITING 40.1 The Company shall allow an independent reputable accounting firm (registered in China) nominated by the Joint Venture Company, access to relevant sections of 19 such accounts and records for the sole purpose of verifying the Joint Venture Company's fee and payment arrangements. The accounting report shall submit to the Board meeting for approval. 40.2 Party A and B have the right to invite an accountant to check the Company's accounting book at any time at its own expenses. The Joint Venture Company and its employee shall provide the necessary assistance and convenience for that accountant. 41. FISCAL YEAR 41.1 The fiscal year of the Joint Venture Company shall be from January 1 to December 31. However, the first fiscal year shall start from the date of obtaining the Business License to Dec, 31. All accounting reports shall be written in Chinese. 42. BANK ACCOUNT 42.1 After getting the Business License, the Joint Venture Company shall open its foreign currency bank account and RMB bank account at Bank of China or other assigned banks under the relevant regulations and laws of PRC. In addition, the Joint Venture Company can also open its foreign currency bank account or RMB bank account abroad, including Hong Kong and Macao subject to the approval from China Foreign Currency Management Bureau. 43. FOREIGN CURRENCY LAW 43.1 All Joint Venture Company's activities regarding the foreign currency business shall comply with and carry out the relevant laws and regulations issued by Chinese government. 44. THE USAGE OF THE FOREIGN CURRENCY 44.1 The Joint Venture's foreign currency shall be used in the following activities: (1). To purchase the import materials for the Joint Venture Company. (2). To pay the capital and interest of a foreign currency loan. 20 (3). To pay the expenses of technical service from abroad. (4). To pay the salary of the Joint Venture executives and other employees appointed by Part B and their living expenses in China. 45. WIRE TRANSFER OF FOREIGN CURRENCY 45.1 The Joint Venture Company can wire the foreign currency to an abroad bank account only under the following conditions: to wire the Company profit to Party B; to pay the expenses of technical service from abroad; to pay the interest and capital of a foreign currency loan; to get the approval from China Foreign Currency Management Bureau. CHAPTER 14. PROFIT DISTRIBUTION 46. PROFIT DISTRIBUTION 46.1 The parties agree that all of the net after tax profits and setting up saving fund, employee reward fund or other company business fund, funds established in accordance with the laws of the PRC shall be distributed to the parties pursuant to the Board resolution. The Joint Venture Company's profit shall be handled in accordance wit the following provisions: (1). The Joint Venture Company shall not increase the capital to make up the deficit because of the lose in the first half year. (2). Before making up the deficit for the first half year, both parties can not distribute the Joint Venture Company's profit. (3). Subject to the Bard decision, the Joint Venture shall distribute the distributable profit once a year within 90 days after the end of the fiscal year. Such profit will be shared by Party A and B pursuant to Clause 10 set out in this Contract and subject to the share ownership ratio at the time of such distribution. (4). The Joint Venture Company shall assist Party B 21 to exchange the profit from RMB to the foreign currency. If the Joint Venture Company is unable to exchange the whole or partial amount of the profit to foreign currency for some reasons, this amount of profit can be kept in Joint Venture Company until such exchange is available. CHAPTER 15. TERM 47. TERM 47.1 The Parties agree that the Joint Venture Company shall continue for a term of twenty five years from the date of registration of the Joint Venture Company. 47.2 The Board meeting shall decide the extension or the change of the term of the Joint Venture Company and shall submit its decision to the relevant Chinese authority for approval one year before the termination of the Joint Venture Contract. CHAPTER 16. TERMINATION 48. TERMINATION 48.1 If one of the following events occurs, Party A and B shall have the right to terminate the Joint Venture Contract within 60 days and shall submit to the Board for approval. Meanwhile, an application to terminate the contract shall also be provided to the relevant authority: (1). The Joint Venture Company has suffered the serious loses continuously for five years, and still no important and efficient decision has been made to save such lose after 60 days receiving the financial report, or after mutual negotiation, both parties fail to find an efficient way to continue the operation. (2). If Party A or B violates the regulations under clause 17 and 19 of this Contract. (3). If an event of Force Majeure occurs under clause 55 of this Contract. (4). To merge the Joint Venture Company with 22 another business entities, and therefore the Joint Venture Company does not exist any more. (5). If one Party goes bankruptcy. (6). If both parties agree that the Joint Venture Company can not achieve its original goal due to some other reasons. (7). Both parties agree to terminate this Contract. (8). If the Joint Venture Company has to change its contract, regulations, the technical service contract and other related important documents unreasonably because of the order from the government, and such change will obviously prevent the development of the Joint Venture Company. 48.2 If one of the above-mentioned events occurs, and both parties can not get a mutual agreement, the Party who agrees to continue the business shall purchase the registered capital from the other Party who wants to terminate the Joint Venture Contract. 48.3 The Board of Directors shall take every possible measures including to suspend the business if the Joint Venture has not got the approval from the relevant authority within 90 days under the condition of Clause 48.1. 49. CLEARING COMMITTEE 49.1 The Board of Directors shall form a Clearing Committee to handle the termination of the Joint Venture Company business, and all such activities shall be conducted under relevant Chinese laws and regulations. The members of the Clearing Committee shall be selected from the directors. If the director can not take such responsibilities for some reasons, the Joint Venture Company shall appoint its accountant or lawyer (registered in China) to be involved in such activities. The Clearing Committee shall be responsible to provide a whole set of Joint Venture Company's capital and liability financial report, and to sell the Joint Venture Company based on the fair market price. The Clearing Committee shall also try their best 23 to sell the Joint Venture Company at its highest price in China or abroad. 50. DISMISSAL AND CLEARANCE 50.1 Pursuant to the Clause 48 of this contract, the clearance of the Joint Venture Company shall be conducted under the following methods: after selling the Joint Venture Company and handling the other Joint Venture capital matters, the Joint Venture shall pay (a) the clearance fee, (b) employee's salary, insurance and other welfare, (c) taxes and (d) the Joint Venture debts. The rest of the Joint Venture capital shall be distributed to both parties in accordance with the share ratio under Clause 10 of this contract. 50.2 Under the conditions set out in Clause 50.1, the capital distributed to Party B shall be in cash, and shall first consider to pay back in foreign currency. The exchange rate of such amount of foreign currency shall be based on the rate issued by China Foreign Currency Management Bureau at the same day. CHAPTER 17. VIOLATION OF THE JOINT VENTURE CONTRACT 51. DISMISSAL OF THE CONTRACT 51.1 One Party has the right to apply for the termination of the Joint Venture Contract if the Joint Venture Company can not continue its business because of violation of this Contract caused by Party A or B, and such violation has not been corrected within 30 days after a written notice has been issued from other Party. 52. VIOLATION AND LOSE 52.1 If one Party does not fulfill its obligations set out in this Contract, or if one Party violates some of the provisions of this Contract, and such violation causes the loses to the other Party, the other Party then has the right to ask for a compensation. 52.2 Party A or B shall not be responsible for the expect profit, indirect lose and deriving lose caused by one of the other Parties. 24 52.3 Subject to Clause 10 of this Contract, if Party A or B has not infused the capital into the Joint Venture Company, such Party shall pay the violation fee to the Joint Venture Company based on a 15% annual interest rate. 52.4 The violation fee mentioned in Clause 52.3 is not related to the registered capital and share ownership ratio of the Company. CHAPTER 18. OTHER CONTRACTS 53. OTHER CONTRACTS 53.1 Subject to the requirement of the Joint Venture business, Party A and B may sign the following contracts with the Joint Venture Company from the date of obtaining Business License. (1). The Technical Service Agreement under Clause 18. (2). The Technical Training Agreement for the Joint Venture Employees. CHAPTER 19. OTHERS 54. CHANGE OF THE JOINT VENTURE CONTRACT 54.1 The change of the Joint Venture contract shall be effective upon receipt of the signatures from both parties, and shall submit such changes to the relevant authorities for approval. 54.2 If there is any difference between the Joint Venture Contract and the Joint Venture's other regulations, this Contract shall be the only standard. 55. FORCE MAJEURE 55.1 The obligations of a Party shall be suspended if at any time its performance is prevented by any cause beyond its reasonably control including acts of war, riots, strikes, labor disputes, fires, floods, storms, equthquake or other natural disasters and any other event which that party could not foresee at the time of executing this 25 Contract and its occurrence and consequences can not be avoided and can not be overcome. The Party whose obligations are suspended by reason of any such event shall promptly submit the notarized certificate or the first class new report stating the nature of the suspension, the reasons and the expected duration. 55.2 Both parties shall negotiate and decide the termination and extension of the Joint Venture contract or other related matters caused by the event of Force Majeure. 56. INSURANCE 56.1 The Joint Venture Company shall select a Chinese Insurance Company to obtain appropriate insurance cover. The type, price and time of the insurance shall be decided in accordance with the regulations of the insurance company in China. If some type of insurance can not be covered by the insurance company in China, the Joint Venture Company may buy it abroad subject to the Board's decision. 57. CHANGE OF THE LAW 57.1 If the performance of the Joint Venture Company has been prevented by the change of the governing law or government in China and Japan or other causes beyond its reasonable control, Party A and B have the right to change or terminate this Contract. 58. GOVERNING LAW This Contract shall be governed by and interpreted in accordance with the Laws of PRC. 59. ARBITRATION 59.1 Any dispute and lose compensation arising out of this Contract shall to the fullest extent possible be settled amicably by negotiation and discussion between the Parties. 59.2 Any such dispute not settled by amicable agreement shall be submitted to the Arbitration Organization. Party A will appoint China International Economic and Trade Arbitration Commission for arbitration and Party B will 26 will appoint Japan International Business Arbitration Association for arbitration. There shall be three arbitrators of whom one each shall be appointed by each Party and the third arbitrator by each Party's Commission. The third arbitrator can neither be Chinese nor Japanese. Any decision taken by the arbitrators will be final, binding and conclusive. 59.3 Both Parties shall pay their cost of arbitration separately. The cost paid to the arbitration organization shall be shared by both parties. 59.4 During the process of arbitration, the Joint Venture Company's daily business shall be operated continuously, except for the dispute part currently under the arbitration. 60. THE LANGUAGE OF THE JOINT VENTURE CONTRACT 60.1 The Joint Venture Contract shall have six copies. Each Party holds one copy. Two copies shall be sent to the relevant authority. The rest of the copies shall be kept in the Joint Venture's file. 60.2 The Joint Venture Contract is written in both Chinese and Japanese, and shall take the Chinese version as the standard. 61. EFFECTIVE DATE OF THE CONTRACT This Joint Venture Contract will be effective from the date of getting the approval from Foreign Economic and Trade Ministry of PRC. 62. NOTICE 62.1 Any notices or communications to be given under this Contract shall be sent by either telegram or facsimile transmission. Any notices or communications relating to the important business on Joint Venture partner's obligations, profits and responsibilities shall be sent by registered post. The addresses for service of each Party shall be those addresses previously notified to the other Party. The notice shall be effective from the receipt date of such post. 62.2 Any notices or communications mentioned in Clause 62.1 shall be written in Chinese or Japanese. 27 63. OTHER COSTS 63.1 Party A and B shall be responsible to its own cost relating to the negotiation, preparation and signature of this Contract, including legal service fee. 63.2 After signing the Joint Venture Contract, any cost relating to the establishment of the Joint Venture Company can be put into the Joint Venture Company's preparation budget. 64. THE RELATIONSHIP OF THE TWO PARTIES 64.1 Party A and B shall fulfill its own obligations and responsibilities set out in this Contract, and have no right to represent the other Party to fulfill its obligations. This Contract has been signed at December 22, 1995 in Shijiazhuang, PRC by the representatives from Party A and B. 28 AGREEMENT (1) -------------- By the consent of all Parties and to perfect the contract signed by both parties, Hebei United Telecommunication Equipment Company ("Party A") and NTT ("Party B") has further agreed the following provisions: 1. Both Parties agree that the initial deposit of the total capital for the Hebei GSM project will be RMB 600M. 2. Party B shall be responsible to raise capital for the Joint Venture Company. The amount of such capital shall be based on the projects selected and decided by both parties. The initial deposit of the capital shall be transferred to the joint venture account in 12 days from the date of getting the Joint Venture Business License. 3. The repayment of Party B's investment shall be no more than 5 years. The Joint Venture Company shall also be responsible to pay the 1% service charge or deposit if the loan is obtained through Party B or Party B's bank. 4. Party B shall be responsible to collect all the required funding for the project construction pursuant to the Joint Venture Contract. However, both parties agree that Party A shall retain the right to raise the capital, and the conditions of such a fund raising shall be as same as Party B. 5. Subject to the agreement between both parties, the capital which has already been infused to Liantong by Party A will be put into Liantong's construction capital and will be repaid to Party A from the project construction capital by the Joint Venture Company. The amount of such capital shall be checked by the Certified Public Accountant. 6. Party B has already wired $1,075,000.00 to the bank account of Hebei Electronic Commission. Such amount of money will be transferred to the Joint Venture account as the registered capital after the establishment of the Joint Venture Company. The registered capital cannot be used as the project construction capital. This agreement is the supplement to the Joint Venture contract and will be effective at the same date of the execution of this contract. December 22, 1995 at Shijiazhuang, Hebei Province, PRC.) Party A: Hebei United Telecommunication Equipment Company signed by Ye Yun Yun Party B: NTT signed by _________. AGREEMENT (2) ------------- Party A: Hebei United Telecommunication Equipment Company Party B: NTT The total registered capital for the Joint Venture Company is $3M. Party A will be responsible for 51% of the capital, in which 20% will be provided by Hebei Municipal Government. Such 20% required capital will be divided into 2 parts: 8% ($240,000) will be obtained from Party A and the rest of 12% ($360,000) will be provided by Party B. The conditions are as follows: 1. Party A shall not contact any other companies or negotiate the possibilities of setting up the joint venture of same kind of business except for Party B. 2. Party B shall not provide any amount of the registered capital to any other party except the 12% registered capital for Hebei Municipal Government. 3. In addition to the 12% registered capital to Hebei Municipal Government, Party B will not provide any amount of the registered capital for Party A. 4. The payment to the Municipal Government's share will be negotiated in a separate agreement. This agreement will be effective from the date of the execution of the Joint Venture Contract and is the supplement document to this Contract. (December 22, 1995 at Shijiazhuang, Hebei Province, PRC.) AGREEMENT (3) ------------- Hebei United Telecommunication Equipment Company ("Party A") and NTT ("Party B") have agreed to enter into the following agreements: 1. Ito Chu ("Party C") will not participate in any of the responsibilities and obligations appointed in the Letter of Agreement signed by Party A, B and C on September 27, 1995. Such responsibilities and obligations will be transferred to Party B. 2. The Meeting Minutes signed by Party A, B and C on September 27, 1995 will be ceased from the date of getting Joint Venture Business License. 3. If any provisions in this agreement is not as same as the Joint Venture Contract, all parties shall use the Joint Venture Contract as the only standard. This agreement has been written and signed in Chinese and Japanese, and each Party gets one copy. (December 22, 1995 at Shijiazhuang, Hebei Province, PRC) AGREEMENT (4) ------------- Hebei United Telecommunication Equipment Company ("Party A") and NTT ("Party B") have agreed to enter into the following agreement: Party B will transfer 40% of the share ownership from its total 49% share ownership of the Joint Venture Company to Ito Chu (an Osaka Company), which is equal to 19.6% of the total registered capital. Party A agrees such transfer. This agreement will be signed in both Chinese and Japanese, and each Party gets one copy. (December 22, 1995 at Shijiazhuang, Hebei Province, PRC) EX-10.16 5 EXHIBIT 10.16 AGREEMENT Party A: Hebei United Telecommunication Equipment Co. Party B: AVIC Group International, Inc. Hebei United Telecommunication Equipment Company ("Party A") and AVIC Group International, Inc. ("Party B") have agreed to enter into the following agreement: 1. Party A assigned 60.8% (originally owned by CATCH) of its 51% share ownership of the Joint Venture Company to AVIC Group International, Inc. (a US subsidiary of Beijing CATCH Communication Group Company), which is equal to 31% of the total registered capital of the Joint Venture Company. 2. AVIC received 31% of interests in Hebei United Telecommunication Engineering Development Co. through Party A and paid to Party A the total amount of US$1.17 million. 3. After receiving its interest, Party B shall agree that the contract signed between Hebei United Telecommunication Equipment Co. and NTTI shall remain the same, and Party B shall also abide by the contents of the Joint Venture contract, as well as the Company Regulation of Hebei United Telecommunication Engineering Development Co. and other agreements. 4. AVIC Group International, Inc. and Beijing CATCH Communication Group Co. will work closely with Party A and assist Party A in fulfilling Party A's responsibilities under the Joint Venture Contract between Party A and Party B, and AVIC Group International, Inc. and Beijing CATCH Communication Group Co. will each appoint one director to the Joint Venture Company's Board of Directors. This agreement will be signed in Chinese and English, and each Party receives one copy. If in the future there is any discrepancy concerning this agreement, the Chinese version will be the standard. By signing the above, both Party A and party B indicate their agreement to the items specified above. Party A: Hebei United Telecommunications Party B: AVIC Group Equipment Co. International, Inc. Signed by: Ye Yun Yun Signed by: Joseph R. Wright, Jr. EX-21.1 6 EXHIBIT 21.1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF THE COMPANY 1. ITV Communications, Inc. -----END PRIVACY-ENHANCED MESSAGE-----