-----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, M60CJAVWwtCYAiL9+65UzA6npPNIKW5uHb9+XWzWAirwqaD8z6EqlNAJaQxOnk3K kUg+4ItFbmBI1aLSt7hnNw== 0000912057-97-024260.txt : 19971014 0000912057-97-024260.hdr.sgml : 19971014 ACCESSION NUMBER: 0000912057-97-024260 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970715 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMTEC INC CENTRAL INDEX KEY: 0000912890 STANDARD INDUSTRIAL CLASSIFICATION: 1000 IRS NUMBER: 521989122 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-12475 FILM NUMBER: 97640778 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: AVIC GROUP INTERNATIONAL INC/ DATE OF NAME CHANGE: 19950323 FORMER COMPANY: FORMER CONFORMED NAME: YAAK RIVER MINES LTD DATE OF NAME CHANGE: 19931001 10KSB 1 FORM 10KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. Commission file number 0-22520 AMTEC, INC. ----------- (Exact name of registrant as specified in its charter) Delaware 52-1989122 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 599 Lexington Avenue, 44th Floor, New York, New York 10022 ----------------------------------------------------------- (Address of principal executive offices, including zip code) 212-319-9160 ------------ (Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: Title of Each Name of Each Exchange Class so Registered On Which Registered ------------------- ------------------- Common Stock, $0.001 par value per share American Stock Exchange Securities registered under Section 12(g) of the Exchange Act: Check whether the registrant: (i) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer's revenues for the fiscal year ended March 31, 1997 were $0. The number of shares outstanding of the registrant's common stock as of July 8, 1997 was 31,312,065 shares. The aggregate market value of the common stock (18,229,756 shares) held by non-affiliates, based on the closing price ($3.125) of the common stock as of July 8, 1997 was approximately $57.0 million. Transitional Small Business Disclosure Format: Yes No X ----- ----- SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS ANNUAL REPORT ARE FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO ECONOMIC, COMPETITIVE, GOVERNMENTAL, INTERNATIONAL AND TECHNOLOGICAL FACTORS AFFECTING THE COMPANY'S REVENUES, JOINT VENTURES, OPERATIONS, MARKETS AND PRICES, AND OTHER FACTORS DISCUSSED IN THE SECTION ENTITLED "RISK FACTORS" ON PAGES 7 THROUGH 11 OF THIS ANNUAL REPORT. 2. PART I Item 1. BUSINESS AmTec, Inc. (the "Company") develops and finances communications networks in the People's Republic of China ("PRC"). The Company's Chinese communications networks include a Global Service Mobile system ("GSM") and a multimedia network, both in the northern province of Hebei, PRC. The Company holds these interests through Sino-foreign joint ventures ("SFJVs"), which are the legally authorized vehicle for foreign investment in China. Consistent with PRC laws and regulations, the Company's SFJVs have entered into contracts with authorized network operators in the PRC to build networks and sell the assets of such networks to the operators for a portion of the cash-flow generated by operations of the networks. On July 8, 1997, the Company changed its name to "AmTec, Inc." from "AVIC Group International, Inc." JOINT VENTURES IN THE PEOPLE'S REPUBLIC OF CHINA Each of the Company's joint ventures, Hebei United Communications Equipment Company Limited ("Hebei Equipment") and Hebei United Telecommunications Engineering Company Limited ("Hebei Engineering"), is organized under the laws of the PRC as a Sino-foreign equity joint venture enterprise, a distinct legal entity with limited liability. Such entities are governed by the Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investments, and implementing regulations related thereto (the "Equity Joint Venture Law"). The parties to the joint ventures have contractual rights to the financial returns of the joint venture in proportion to the joint venture interests that they hold. The transfer or increase of an interest in a Sino-foreign equity joint venture enterprise requires agreement among the parties to the venture and is effective upon approval of relevant government agencies. For a discussion of the risks associated with PRC laws, regulations and policies, see "Risk Factors -- Risks Relating to Doing Business in the PRC - - - -- PRC Laws; Evolving Regulations and Policies." JOINT VENTURE NETWORKS In March 1996, the Company formed a joint venture with a 60.8% equity interest in Hebei Equipment. As a result, Hebei Equipment was converted from a PRC enterprise into a Sino-foreign joint venture company. On April 15, 1997, all PRC governmental approvals were finalized for the conversion of Hebei Equipment to a Sino-foreign joint venture company. See "Certain Relationships and Related Transactions." The Company, through Hebei Equipment, is currently involved in the development of two communications networks in Hebei Province: a digital cellular telephone network (the "GSM Network") and a province-wide multimedia network (the "Hebei Multimedia Network"). The GSM Network is being constructed by Hebei Engineering, which is a 51%-owned subsidiary of Hebei Equipment and is 49%-owned by Nippon Telegraph and Telephone International ("NTTI"), a subsidiary of Nippon Telegraph & Telephone Corporation. The Hebei Multimedia Network, which will link existing cable television systems in Hebei Province, is being constructed by Hebei Equipment. GSM NETWORK IN HEBEI PROVINCE Hebei Engineering is constructing the GSM Network pursuant to a 15-year agreement (the "UNICOM Agreement"), dated February 9, 1996, with China United Communications Co. ("UNICOM"). UNICOM holds one of two licenses to operate cellular telephone networks in the PRC. Under the terms of the UNICOM Agreement, Hebei Engineering will build the GSM Network and sell ownership of the GSM Network over the life of the agreement to UNICOM in exchange for a majority share of cash flow generated by UNICOM from UNICOM's operation of the GSM Network. Hebei Engineering will also provide consulting assistance to UNICOM in the operation of the GSM Network. Hebei Engineering will receive 3. 78% of up front connection fees paid by new subscribers to connect to the GSM Network, 78% of depreciation of fixed assets and 78% of net income generated by UNICOM from operation of the GSM Network until February 9, 2011. Through the Company's 60.8% interest in Hebei Equipment and Hebei Equipment's 51% interest in Hebei Engineering, the Company holds an indirect 31% interest in Hebei Engineering. Under the UNICOM Agreement, the GSM Network will provide cellular telephone service, using the Global Service for Mobile Telecommunications technology, in the eleven major cities of Hebei Province, which have a total population, including surrounding metropolitan areas, of approximately 50 million, or approximately 78% of Hebei Province's total population of 64 million. In the first phase of construction, the GSM Network will be built in 7 major cities, and have a subscriber capacity of 40,000. In the second phase of construction, the GSM Network will be built in the remaining four major cities of Hebei Province, thereby expanding the total network capacity to 70,000. Based on market demand, management believes the capacity of the GSM network may be expanded in the future beyond 70,000 subscribers. In February 1997, the GSM Network commenced commercial operations in Shijiazhuang, the capital of Hebei Province. Six additional cities are anticipated to commence commercial operation before the end of 1997. Construction in the remaining four major cities of Hebei Province is anticipated to commence during the first half of 1998. See "Risk Factors -- Risks Relating to the Company's Joint Venture Operations." As of July 8, 1997, construction of the first phase of the GSM Network had been financed with a $3 million equity investment from Hebei Equipment and NTTI, and vendor financing guaranteed by NTTI and a $20 million Term Loan facility from Bank of Tokyo Mitsubishi guaranteed by NTTI. Of these amounts, the Company has provided $1.17 million of equity funding to Hebei Engineering through the Company's investment in Hebei Equipment. At present, all funding required for completion of the first phase of construction has been obtained by Hebei Engineering. HEBEI MULTIMEDIA NETWORK On April 8, 1997, Hebei Equipment entered into a 20-year agreement (the "Hebei Multimedia Agreement") with Hebei Cable Television Station, the monopoly provider of cable television service in Hebei Province, pursuant to which Hebei Equipment will (i) build a fiber-optic and microwave network to connect the existing cable television systems in the eleven major cities in Hebei Province, (ii) upgrade one city on a trial basis to a hybrid fiber coaxial network ("HFC"), and (iii) hold the option to upgrade the network to an HFC network. Under the Hebei Multimedia Agreement, Hebei Equipment will sell ownership of the Hebei Multimedia Network to Hebei Cable Television Station in exchange for a majority share of cash flow generated by Hebei Cable Television Station from operation of the Hebei Multimedia Network. Hebei Equipment will also provide operating personnel and assistance to Hebei Cable Television Station in the operation of the Hebei Multimedia Network. Until Hebei Equipment has recovered its investment, Hebei Equipment will receive 80% of depreciation of fixed assets and 80% of net income generated by Hebei Cable Television Station from operation of the Hebei Multimedia Network. Thereafter, for the balance of 20 years from the commencement date of formal commercial operations, Hebei Equipment will receive 30% of depreciation of fixed assets and 30% of net income generated by Hebei Cable Television Station from operation of the Hebei Multimedia Network. Hebei Cable Television Station is a subsidiary enterprise of the Hebei Radio and Television Department, under the jurisdiction of the Ministry of Radio, Film and Television in the PRC. The current funding requirement for the Hebei Multimedia Network is estimated at approximately $23 million to link cable systems in the eleven largest cities in Hebei Province. As of July 8, 1997, the Company had invested approximately $1.0 million in Hebei Equipment for purposes of investment in the Hebei Multimedia Network. The Company anticipates that the balance of required funding will be provided in the form of equity and debt investments in Hebei Equipment and additional joint venture entities that may be established with strategic partners. See "Risk Factors -- Risks Relating to the Company's Joint Venture Operations." 4. OTHER TELECOMMUNICATION PROJECTS In addition to the UNICOM Agreement and the Hebei Multimedia Agreement, the Company has entered into a number of letters of intent and preliminary agreements relating to the development of (i) a fixed wire telephone network in Hebei Province, (ii) a GSM Network in Sichuan Province, (iii) a nationwide paging network with Beijing CATCH Communications Group Co. ("Beijing CATCH") and (iv) an enhanced specialized mobile radio network in Beijing with Beijing CATCH. All of these letters of intent and preliminary agreements are non-binding in nature, and management will determine over the course of the next fiscal year whether to pursue these opportunities. There can be no assurance that any definitive agreements relating to these networks will ever be entered into by the Company or its subsidiaries. HISTORY OF THE COMPANY 1996-1997 In November 1996, the Company was listed on the American Stock Exchange. Prior to that, from March 1996 through November 1996, the Company's Common Stock was traded on the Over-the-Counter Market of NASDAQ. On January 16, 1996, pursuant to an Agreement for Sale of Assets, dated as of January 11, 1996 (the "Asset Sale Agreement"), between ITV Communications, Inc. ("ITV") and Netmatics, Inc. ("Netmatics"), ITV, the former primary operating subsidiary of the Company, sold substantially all of its assets to Netmatics and Netmatics assumed certain of ITV's liabilities and obligations in consideration for an aggregate purchase price of $2,500,000 in cash and notes and common stock of Netmatics equal to 33.0% of the issued and outstanding shares of Netmatics at the time of the sale. Although $250,000 in cash has been received by the Company, the balance of the consideration is unlikely to be received by the Company. REINCORPORATION TO DELAWARE AND NAME CHANGE At a meeting of the Company's stockholders on May 7, 1996, the stockholders adopted a resolution approving a change in the Company's state of incorporation from Colorado to Delaware. The Company effectuated the transactions contemplated by the resolution on July 10, 1996 and reincorporated to Delaware by means of a merger (the "Reincorporation Merger") of the Company with and into a wholly-owned Delaware subsidiary of the Company. On the effective date of the Reincorporation Merger, each issued and outstanding share of common stock and preferred stock of the Company was converted into one share of common stock and preferred stock, respectively, of the Company's Delaware subsidiary. The Delaware subsidiary succeeded to all of the assets, liabilities and business of the Company and possesses all of the rights and powers of the Company. On July 8, 1997, the Company changed its name to "AmTec, Inc." from "AVIC Group International, Inc." by way of a merger of the Company with and into a wholly-owned Delaware subsidiary of the Company. HISTORY OF THE COMPANY 1982-1996 The Company was originally incorporated under the laws of the State of Colorado on May 10, 1982 under the name "Yaak River Mines, Ltd." From inception through January 1992, the Company was engaged in certain business operations which are not associated with the Company's current business of developing telecommunications networks in the PRC. From January 1992 through September 1994, the Company was operationally dormant. 5. On September 2, 1994, the Company entered into an Agreement and Plan of Reorganization, as amended by an agreement dated December 28, 1994 (the "Reorganization Agreement") with ITV Communications, Inc. in connection with which the Company acquired ITV as a wholly-owned subsidiary in exchange for a number of shares of the Company's Common Stock and options to purchase shares of the Company's Common Stock equal to approximately 91% of the issued and outstanding shares of the Common Stock on a fully diluted basis after the completion of the transaction. On February 8, 1995, the Company and ITV completed the transactions contemplated by the Reorganization Agreement, and the Company changed its name to "AVIC Group International, Inc." Since April 1995, the Company has been engaged in the business of developing telecommunications networks in the PRC. The Reorganization Agreement has been accounted for as a reverse acquisition or as a recapitalization of ITV, with ITV as the acquiror. The historical financial statements of the Company prior to the closing of the Reorganization Agreement are those of ITV. EMPLOYEES As of July 8, 1997, the Company had twelve full time employees, consisting of six executive personnel, three financial personnel and three clerical employees. The Company intends to hire additional personnel as the development of the Company's business continues and makes such action appropriate. The Company's employees are not represented by a labor union and are not covered by a collective bargaining agreement. The Company believes that its relations with its employees are good. 6. RISK FACTORS AN INVESTMENT IN SECURITIES OF THE COMPANY IS SPECULATIVE IN NATURE, INVOLVES A HIGH DEGREE OF RISK, AND SHOULD NOT BE UNDERTAKEN BY ANY INVESTOR WHO CANNOT AFFORD THE LOSS OF HIS ENTIRE INVESTMENT. PERSONS WHO MAY OWN OR INTEND TO PURCHASE SECURITIES OF THE COMPANY SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER MATTERS DISCUSSED IN THIS ANNUAL REPORT, THE FOLLOWING RISK FACTORS: COMPANY AND FINANCIAL RISKS PRIOR AND ANTICIPATED LOSSES. To date, the Company has not generated revenue and has experienced net losses of $4,064,885 and $5,281,730 during the fiscal years ended March 31, 1997 and 1996, respectively. The Company does not expect to achieve profitability during the current fiscal year. The ability of the Company to achieve profitability is dependent upon numerous factors, including the operations of the Company's joint venture projects and its ability to finance, develop and implement its PRC telecommunications projects. There can be no assurance that the Company will achieve profitability in any future period. HOLDING COMPANY. The Company is a holding company. The Company's operating assets and only source of income and operational cash flow are its interests in its existing subsidiaries. The ability of the Company to pay any dividends on its capital stock is entirely dependent on the Company's ability to receive distributions from its subsidiaries. See "Risk Factors -- Risks Relating to the Company's Joint Venture Operations" and "-- Risks Relating to Doing Business in the PRC." EARLY STAGE PROJECTS. The telecommunications projects which constitute the Company's entire business are in the early stages, and are subject to all of the risks inherent in the establishment of new telecommunications projects. The likelihood of the success of the Company's PRC telecommunications operations must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the construction and operation of a new telecommunications network. There can be no assurance that the Company's existing or future PRC telecommunications operations will be successfully implemented or that any of them will generate any revenue for the Company. POSSIBLE NEED FOR ADDITIONAL CAPITAL. The Company's future capital requirements will depend on many factors, including, but not limited to, the financial success of the Company's PRC telecommunications operations, future capital requirements of the Company's operations and capital requirements arising out of participation in other telecommunications networks in the future. At present, the Company's only contractual obligation is for the Hebei Multimedia Network. To the extent that existing funds are insufficient to fund the Company's activities, the Company may need to raise additional capital through public or private financing. If additional funds are raised through the issuance of equity securities, the percentage ownership of existing shareholders of the Company will be reduced, and such equity securities may have rights, preferences, or privileges senior to those of the holders of the existing securities. No assurance can be given that additional financing will be available or that, if available, it can be obtained on terms favorable to the Company and its shareholders. If adequate funds are not available, the Company may default on commitments for existing projects, which may have a material adverse effect on the business and financial condition of the Company. COMPETITION. The opportunity to profit from growth in the PRC's telecommunications sector has attracted participants from around the world. Many such competitors have greater marketing resources and technological capability as well as greater financial resources than the Company. Accordingly, there can be no assurance that the Company will be successful in securing roles in additional PRC telecommunications networks or, if able to do so, will be able to negotiate favorable terms. POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Company's Certificate of Incorporation includes certain provisions which are intended to protect the Company's stockholders by 7. rendering it more difficult for a person or persons to obtain control of the Company without cooperation of the Company's management. These provisions include certain super-majority requirements for the amendment of the Company's Certificate of Incorporation and Bylaws. Such provisions are often referred to as "anti-takeover" provisions. The inclusion of such provisions in the Certificate of Incorporation may delay, deter or prevent a takeover of the Company which the stockholders may consider to be in their best interests, thereby possibly depriving holders of the Company's securities of certain opportunities to sell or otherwise dispose of their securities at above-market prices, or limit the ability of stockholders to remove incumbent directors as readily as the stockholders may consider to be in their best interests. CONTROL BY PRINCIPAL STOCKHOLDERS. Tweedia International Limited ("Tweedia") is the Company's principal stockholder and has the beneficial ownership of approximately 43.9% of the outstanding Common Stock. As a result of such Common Stock ownership, Tweedia is in a position to exercise significant control with respect to the affairs of the Company and the election of the Company's directors. In addition, a potential buyer might be deterred from an effort to acquire the Company, absent the consent of Tweedia or its participation in the transaction. EFFECT OF TECHNOLOGICAL CHANGE ON OPERATIONS. The market in the telecommunications industry is characterized by rapidly changing technology. There can be no assurance that technologies developed by others will not render obsolete or otherwise significantly diminish the value of the business operations of the joint ventures in which the Company participates. SECURITIES RISKS LACK OF DIVIDENDS ON COMMON STOCK. The Company has paid no dividends on its Common Stock to date and there are no plans for paying dividends on the Common Stock in the foreseeable future. The Company has certain obligations to pay dividends, which can be paid in common stock to holders of the Series C and D Preferred Shares. Except for dividends which may be payable on the shares of issued and outstanding preferred stock and other preferred stock that may be issued from time to time in the future that require such dividends, the Company intends to retain earnings, if any, to provide funds for the expansion of the Company's business. ISSUANCE OF ADDITIONAL SHARES; SHARES ELIGIBLE FOR FUTURE SALE. Future sales of shares of Common Stock by the Company and its stockholders could adversely affect the prevailing market price of the Common Stock. Pursuant to its Certificate of Incorporation, the Company has the authority to issue 68,687,935 additional shares of Common Stock and 8,475,322 additional shares of preferred stock. The issuance of such shares could result in the dilution of the voting power and other rights of the currently issued and outstanding shares of Common Stock. As of May 1, 1997, certain investors who have held an aggregate of approximately 8.7 million shares of restricted Common Stock may sell such shares without restriction. Such sales may have a materially adverse effect on the prevailing market price of the Common Stock. The extent of such adverse effect, if any, cannot be predicted, but based on the volume of trading in the market and on the number of shares that could be sold thereunder, such adverse effect may be material. FUTURE ISSUANCE'S OF PREFERRED STOCK. The Company's Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock with such designation, powers, rights and preferences as may be determined from time to time by the Board of Directors, without stockholder approval. In the event of the issuance of additional series of preferred stock, such preferred stock could have voting, liquidation, dividend and other rights superior to the rights of the outstanding stock of the Company and, in addition, could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. 8. RISKS RELATING TO THE COMPANY'S JOINT VENTURE OPERATIONS CONSTRUCTION AND OPERATION OF PROPOSED TELECOMMUNICATIONS NETWORKS. The telecommunications networks in the PRC which the Company's joint ventures are currently engaged in developing may experience difficulties and delays relating to the construction and operation of such networks. While the Company's joint ventures have undertaken to obtain the technical capability, personnel or resources to build, service and maintain a telecommunications network in the PRC, the performance of all or any of the Company's joint venture obligations under its agreements relating to PRC telecommunications networks may require the cooperation and participation of third parties. Such third parties may be parties to or independent contractors with the Company's Sino-foreign joint ventures, for the purpose of building, servicing or maintaining any such telecommunications network. There can be no assurance that the Company's joint ventures will be able to obtain such cooperation, if required, with respect to its PRC telecommunications networks. Moreover, there can be no assurance that such networks will be completed in a timely manner, if at all, or that any financing which may be completed with respect to any such network will be sufficient to complete or to operate any proposed project. The failure by the joint ventures to achieve these goals, or any difficulties or delays, may have a material adverse effect on the Company's business, financial condition and results of operations. SIGNIFICANT ADDITIONAL FUNDING OF JOINT VENTURE PROJECTS REQUIRED. The aggregate funding required from joint venture partners for the first phase of construction for the Hebei Multimedia Network is approximately $23 million of which, to date, $1.0 million has been invested by the Company into Hebei Equipment. While the Company and Hebei Equipment currently have approximately $4 million of cash on hand and the Company has entered into a $25 million Common Stock Investment Agreement, material limitations exist on the Company's right to access funds under such agreement. At present there can be no assurance that the Company will meet its funding requirement for the Hebei Multimedia Network. Beyond this expansion phase, future capital requirements for the GSM Network will depend on the rate of network capacity growth which, in turn, will depend on the market acceptance of the GSM cellular service, among other factors. There can be no assurance that the Company's joint venture partners will meet their funding commitments under the joint venture contracts. It is anticipated that debt or equity contributions made by the Company and its partners to the joint ventures, as well as additional loans made by third parties, will be used to develop the GSM Network and the Hebei Multimedia Network. However, there can be no assurance that the equity contributions and loans made, or to be made, to the joint ventures by their respective partners will be sufficient to meet the capital needs of either the GSM Network or the Hebei Multimedia Network, or to successfully complete or support the competitive position of either project. The Company may elect to make additional equity contributions or loans to either joint venture to fund such additional capital needs, thus creating an additional demand on the Company's capital, or may elect not to make such payments, which may negatively affect the successful implementation of the networks. Securing alternative sources of funds may dilute the Company's ownership ROLE IN FUTURE EXPANSION OF THE HEBEI GSM NETWORK. Further expansion of the GSM Network is anticipated beyond Phase II of the Hebei GSM Network, but the joint venture partners, timing and amount of investment have not been finally determined. In the event of such expansion, UNICOM is to give preferential consideration, in securing new investment, to investments from the Company and its joint venture partners on the same terms as their prior investments. However, at present there can be no assurance that further expansion of the GSM Network will occur, or that the Company will be allowed to participate in later stages of the Hebei GSM project. COMPETITION WITH THE MINISTRY OF POSTS AND TELECOMMUNICATIONS AND OTHERS. The two primary providers of telecommunications services in China, the Ministry of Posts and Telecommunications (the "MPT") (through its operating subsidiary China Telecom) and UNICOM, compete intensely. UNICOM has entered into a contract with a subsidiary of the Company with respect to the GSM Network, and, therefore, the Company indirectly competes with the MPT in certain of its activities. The MPT has a dominant market share in all sectors of telecommunications in China, and already has established a fixed-wire network in the 9. country. Moreover the MPT regulates and licenses all public telephone service projects in China, including network access, and maintains the ability to make important regulatory decisions with respect to its competitors, including the Hebei GSM project. The Company's joint venture may also have to compete with other telecommunications services providers, some of which may have greater marketing and development budgets and greater capital resources than the Company's joint ventures. Accordingly, there can be no assurance that the Company will be able to achieve and maintain a competitive position in the PRC telecommunications industry. In addition, new competitors may be entering the market, including the People's Liberation Army through it's Great Wall Communications Group. GOVERNMENT APPROVAL FOR JOINT VENTURE PROJECTS. All the Company's joint venture contracts will require approval at some level of the provincial or related government in China. There can be no assurance that in the future all necessary governmental approvals will be obtained for joint venture projects that the Company may enter in the future. RISKS RELATING TO DOING BUSINESS IN THE PRC INTERNAL POLITICAL RISKS. The Company's business operations may be adversely affected by the political environment in the PRC. The PRC has been a socialist state since 1949 and is controlled by the Communist Party of China. Changes in the political leadership of the PRC may have a significant effect on laws and policies related to the current economic reforms program, other policies affecting business and the general political, economic and social environment in the PRC, including the introduction of measures to control inflation, changes in the rate or method of taxation and imposition of additional restrictions on currency conversion and remittances abroad and foreign investment. These effects could substantially impair the Company's business, profits or prospects in China. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increases of such disparities could affect the political or social stability of the PRC. GOVERNMENT CONTROL OVER ECONOMY. The PRC only recently has permitted greater provincial and local economic autonomy and private economic activities. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC or particular regions thereof, and could require the Company to divest the interests it then holds in Chinese properties or joint ventures. Any such developments could have a material adverse effect on the business prospects of the Company. INFLATION AND ANTI-INFLATION POLICIES. In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation, which have led to the adoption by the PRC government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has moderated since 1995, high inflation may in the future cause the PRC government to impose controls on credit and/or prices, or to take other action which could inhibit economic activity in China, and, thereby, adversely affect the Company's intended business operations in the PRC. There can be no assurance that potential high rates of inflation and any PRC anti-inflation policies adopted in the future will not have a material adverse effect on the Company's liquidity and business operations. RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE. The Renminbi is not a freely convertible currency at present. The Company's joint ventures will receive nearly all of their revenue in Renminbi, which will need to be converted to other currencies, primarily U.S. dollars, and remitted outside of the PRC. Effective July 1, 1996, foreign currency "current account" transactions by foreign investment enterprises, including Sino-foreign joint ventures, are no longer subject to the approval of State Administration of Foreign Exchange ("SAFE", formerly, "State Administration of Exchange Control"), but need only a ministerial review, 10. according to the ADMINISTRATION OF THE SETTLEMENT, SALE AND PAYMENT OF FOREIGN EXCHANGE PROVISIONS promulgated in 1996 (the "FX regulations"). "Current account" items include international commercial transactions which occur on a regular basis, such as those relating to trade and provision of services. Distributions to joint venture parties also are considered a "current account transaction." Other non-current account items, known as "capital account" items, remain subject to SAFE approval. EXCHANGE RATES LOSSES. Until 1994, the Renminbi had experienced a gradual but significant devaluation against most major currencies, including U.S. dollars, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of the Renminbi relative to the U.S. dollar has remained stable. However, if devaluation of the Renminbi were to occur in the future, the Company's returns on its operations in China, which are expected to be in the form of Renminbi, will be negatively affected upon conversion to U.S. dollars. PRC LAWS; EVOLVING REGULATIONS AND POLICIES. The PRC's legal system is a civil law system based on written statutes in which decided legal cases have little value as precedents, unlike the common law system prevalent in the United States. The PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion and variation, and may be subject to influence by external forces unrelated to the legal merits of a particular matter. China's regulations and policies with respect to foreign investments are evolving. Definitive regulations and polices with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published, statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks that the Company will not be able to achieve its investment objectives. There can be no assurance that the Company will be able to enforce any legal rights it may have under its joint venture contracts or otherwise. EXPROPRIATION. The PRC government has, in the past, renounced various debt obligations incurred by predecessor governments, which obligations remain in default, and expropriated assets without compensation. There can be no assurance that the PRC government will not in the future expropriate or nationalize assets which may relate to any current or prospective business operations of the Company. RELIANCE ON STATISTICS. Statistics relating to economic, demographic, and general business data are not widely disseminated within or outside of the PRC. Further, certain PRC statistics may not be compiled in accordance with, or may not be subject to, Western standards of accuracy. The resultant imperfect information naturally hinders the performance of the Company's business planning or investment analysis and introduces risks in conducting business in the PRC. ITEM 2. PROPERTIES The Company leases a 7,600 square foot office located at 599 Lexington Avenue, 44th Floor, New York, New York 10022. The facility serves as the Company's principle executive offices. The Company pays an annual rent of $334,400 on a lease which expires in May 2000. The Company has obtained an option to extend the lease for an additional five year term based on the fair market value of the leased premises at or about the time of the expiration of the initial term of the lease. ITEM 3. LEGAL PROCEEDINGS A first amended complaint, dated April 15, 1996, was filed against the Company, ITV, and other parties, including certain of the Company's officers, directors and principal stockholders, by Jacqueline Brandwynne, a stockholder of the Company, in a matter captioned "Jacqueline B. Brandwynne vs. AVIC Group International, Inc., et al," civil action number BC145036. The complaint, filed in the Superior Court 11. of California, County of Los Angeles, alleges fraud, misrepresentation and breach of contract with respect to the sale of 666,667 shares of ITV for $1,000,000 prior to the completion of the Reorganization Agreement between the Company and ITV in February 1995, in connection with which the shares of ITV were exchanged on a two for one basis for shares of the Company. The complaint alleges that certain misrepresentations were made in connection with the sale of the 666,667 shares and that the claimant was entitled to receive 666,667 shares of the Company after the completion of the Reorganization Agreement. The complaint seeks rescission of the transaction and damages of no less than $1,000,000. The complaint also alleges a claim in connection with an alleged oral employment agreement for 125,000 options to purchase shares of the Company's Common Stock at an exercise price of $0.35 per share and the right to purchase additional shares of Common Stock at $1.00 per share, plus other benefits, including a salary of no less than $130,000. Management of the Company believes that these claims are without merit, that there are valid defenses to each claim and is in the process of vigorously defending the matter. The matter is in the discovery phase and it is not possible to predict with any degree of certainty the likely outcome. The Company is represented by the law firm of Matthias & Berg LLP, 515 South Flower Street, Seventh Floor, Los Angeles, California 90071, on this matter. The lessor of certain property formerly leased by ITV in Canoga Park, California brought a lawsuit against the Company, ITV and other parties, captioned "6800 Owensmouth, Inc. vs. ITV Communications, Inc., et al," civil action number BC146964, with respect to the premises in March 1996. The complaint, filed in the Superior Court of California, County of Los Angeles, alleged certain claims, including abandonment of the lease and failure to pay rent plus late charges and other expenses from September 1995 through October 12, 1995, and the amount of rent abated during the first six months of the lease, in the aggregate principal amount of approximately $82,000. The lessor also sought approximately $760,500 which was the amount of rent payment due under the lease for its full term ending in 1999. The Company and the lessor of the property agreed to a settlement of the claims of abandonment and failure to pay rent on March 18, 1997, whereby the Company agreed to pay to the lessor the amount of $75,000 in cash and 25,000 shares of the Company's Common Stock, with a then market value of $112,500. The 25,000 shares of Common Stock issued had certain demand and "piggy-back" registration rights. Further, if at the time of registration, the share price of the Company has increased or decreased by 20% or more, the Company shall issue, or the lessor shall return, as the case may be, a number of shares to restore the value of the Common Stock so issued to $112,500. Except as set forth above, the Company is not aware of any pending litigation that could have a material adverse effect on the Company's business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders during the quarter ended March 31, 1997. 12. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of July 8, 1997, the authorized capital stock of the Company consisted of 100,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par value $0.001 per share (the "Preferred Stock"). As of July 8, 1997, there were issued and outstanding 31,257,921 shares of Common Stock, options to purchase 8,543,284 shares of Common Stock, 1,524,178 shares of Series A Convertible Preferred Stock, 250 shares of Series C Convertible Preferred Stock and 150 shares of Series D Convertible Preferred Stock. All shares of the Series B Convertible Preferred Stock have been converted into 1,507,477 Common Shares as of July 8, 1997. Further, there were issued and outstanding warrants to purchase 2,345,000 shares of Common Stock. As of July 8, 1997, there were approximately 1620 holders of record of the Common Stock. The Company's Common Stock was originally listed for trading in the over-the-counter market on March 4, 1996 and was quoted on the NASDAQ Bulletin Board or in the "pink sheets" maintained by the National Quotation Bureau, Inc. under the symbol "AVIC." The Company changed its listing on November 20, 1996, when its Common Stock was approved for listing on the American Stock Exchange, where it currently trades under the symbol "AV." In connection with the name change of the Company from "AVIC Group International, Inc." to "AmTec, Inc.," the Company changed its trading symbol on the American Stock Exchange to "ATC" on July 14, 1997. The high and low sales prices of the Common Stock, as quoted on the American Stock Exchange, on July 7 1997 were approximately $3.00 and $3.125, respectively. No dividend has been declared or paid by the Company on its shares of Common Stock since its inception. The payment of dividends by the Company on its shares of Common Stock is within the discretion of the Company's Board of Directors and will depend on the earnings, capital requirements, restrictions in any future credit agreements and operating and financial condition of the Company, among other factors. The Company has certain obligations to pay dividends on issued and outstanding shares of certain Preferred Stock. Except for dividends which may be payable on and according to the terms of shares of Preferred Stock, the Company does not anticipate that any dividends will be declared or paid in the future. There can be no assurance that the Company will ever pay a dividend on its shares of Common Stock. See "Risk Factors -- Lack of Dividends on Common Stock." The following table sets forth for the period indicated before November 20, 1996, the high and low bid information of the Company's Common Stock as quoted on the NASDAQ Bulletin Board, and for the period indicated on or after November 20, 1996, the high and low sales price of the Company's Common Stock as reported on the American Stock Exchange. Quotations on the NASDAQ Bulletin Board reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may not represent actual transactions. Fiscal Year Ending March 31 ----------------------------------------------------------- 1996 1997 ------ ------------------------------------------------- 4th Q 1st Q 2nd Q 3rd Q 4th Q ------ ------ ------ ------------------- ------ COMMON STOCK PRICE High $8.500 $9.125 $5.000 $3.875(1)/$4.125(2) $6.250 Low $8.250 $3.250 $1.125 $1.438(1)/$1.625(2) $2.125 _______________ (1) High and low bid information as quoted on the NASDAQ Bulletin Board for the period from October 1, 1996 to November 19, 1996. (2) High and low sales price as reported on the on the American Stock Exchange for the period from November 20, 1996 to December 31, 1996. 13. The transfer agent for the Company is Chasemellon Shareholder Services, LLC, 450 West 33rd Street, New York, New York, 10001. Its telephone number is (800) 851-9677. CERTAIN SALES OF UNREGISTERED SECURITIES OFFERING OF SERIES B CONVERTIBLE PREFERRED STOCK. On June 12, 1996, the Company issued 100 shares of its Series B Convertible Preferred Stock (the "Series B Preferred Shares") to six institutional investors, at a purchase price of $25,000 per share for a total consideration of $2,500,000. Each of the Series B Preferred Shares was convertible into shares of Common Stock based on a conversion formula. Pursuant to the purchase arrangement, the Company agreed to issue warrants to the holders of the Series B Preferred Shares to purchase additional shares of the Company's Common Stock, based on the number of shares of Common Stock into which the corresponding number of Series B Preferred Shares are convertible. The Series B Preferred Shares and warrants were issued pursuant to an exempt transaction under Regulation S promulgated under the Securities Act of 1933, as amended (the "Securities Act"). During the period from September 1996 to February 1997, all of the Series B Preferred Shares were converted into an aggregate of 1,507,477 shares of Common Stock, and warrants to purchase an aggregate of 1,507,477 shares of the Company's Common Stock were issued to the investors. The warrants are currently exercisable at the exercise price of $3.19 per share and have terms of five years. In connection with the issuance of the Series B Preferred Shares, the Company paid fees and expenses to the placement agent in the aggregate amount of $200,000 and issued warrants to purchase 120,599 shares of Common Stock at an exercise price equal to $3.19 per share. Further, the Company agreed to provide the placement agent with the right to raise up to an additional $12,500,000 on behalf of the Company until August 13, 1997, subject to certain terms and conditions satisfactory to the Company. In addition, in connection with the issuance of the Series B Preferred Shares, the Company issued warrants to purchase 33,670, 16,800 and 16,633 shares of Common Stock to Regal International Capital, Inc., Heracles Fund and Charles Kreusen, respectively, with an exercise price of $3.31 per share in consideration for certain investment advisory services provided by them. OFFERING OF SERIES D CONVERTIBLE PREFERRED STOCK. On March 6, 1997, the Company issued to a single investor 150 shares of the Company's Series D Convertible Preferred Stock, par value $.001 per share (the "Series D Preferred Shares"), at a price of $10,000 per share for a total consideration of $1,500,000. The holder of the Series D Preferred Shares is entitled to receive, when, as and if declared by the Board of Directors of the Company out of funds legally available therefor, cumulative dividends at the annual rate of 8% per annum per share, payable quarterly (i) in shares of Common Stock, or (ii) in cash in connection with any payment pursuant to a Series D Conversion Default (as defined below) at the election of the Company's Board of Directors. The holder of Series D Preferred Shares has certain preferential rights over the holders of Common Stock in the event of the liquidation, dissolution or winding-up of the Company or a disposition of the Company's assets. The holder of the Series D Preferred Shares also has certain registration rights and certain rights to participate in exempt equity offerings by the Company until March 6, 1999. The Series D Preferred Shares are convertible by the holder into the number of shares of Common Stock which may be purchased at the lowest trading price during the 30 business days immediately preceding each conversion date (the "Lowest Trading Price") for the Series D Preferred Shares. In addition, under certain circumstances, the holder of the Series D Preferred Shares may be obligated to purchase additional shares of Common Stock for cash. In the event the Company issues or sells any shares of Common Stock or shares of securities convertible into or exchangeable for Common Stock (other than shares of Common Stock or options to purchase Common Stock issued pursuant to stock option plans or are otherwise currently issued and outstanding) at an effective purchase price per share of less than $5.00, then at the time the Series D Preferred Shares are submitted for conversion, the Company shall cause the effective market price on the 14. conversion date of such shares of Common Stock to be equal to the lesser of (i) the Lowest Trading Price, or (ii) the effective price at which such securities are issued. If the Company does not have sufficient shares available to satisfy its obligations to the holder of Series D Preferred Shares upon receipt of a conversion notice, or otherwise fails or refuses to perfect conversion of any Series D Preferred Shares (a "Series D Conversion Default"), the holder of the Series D Preferred Shares has the right to put the Series D Preferred Shares to the Company at a price equal to 125% of the purchase price, plus all accrued and unpaid dividends. The holder of the Series D Preferred Shares may not convert such shares prior to May 5, 1997 and may convert subsequent to such date as follows: (i) 30 shares after May 6, 1997; (ii) 60 shares after June 5, 1997; (iii) 90 shares after July 5, 1997; (iv) 120 shares after August 4, 1997; and (v) 150 shares after September 2, 1997. As of June 20, 1997, there were 150 Series D Preferred Shares outstanding and held of record. The holder of the Series D Preferred Shares has no voting rights, except with respect to certain matters that affect the rights of the Series D Preferred Shares. OFFERING OF SERIES C CONVERTIBLE PREFERRED STOCK. On June 13, 1997, the Company issued to ten accredited investors 250 shares of the Company's Series C Convertible Preferred Stock, par value $.001 per share (the "Series C Preferred Shares"), at a price of $10,000 per share pursuant to an exempt transaction under Regulation D promulgated under the Securities Act. The holders of the Series C Preferred Shares are entitled to receive, when, as and if declared by the board of directors of the Company out of funds legally available therefor, cumulative dividends at the annual rate of 8% per annum per share, payable quarterly (i) in shares of Common Stock, or (ii) in cash in connection with any payment pursuant to a Series C Conversion Default (as defined below). The holders of Series C Preferred Shares have certain preferential rights over the holders of Common Stock in the event of the liquidation, dissolution or winding-up of the Company or a disposition of the Company's assets. The holders of the Series C Preferred Shares also have certain registration rights and certain rights to participate in exempt equity offerings by the Company until June 12, 1999. The Series C Preferred Shares are convertible by the holders into the number of shares of Common Stock which may be purchased at the lowest trading price during the 30 business days immediately preceding each conversion date (the "Lowest Trading Price") for the Series C Preferred Shares. In addition, under certain circumstances, the holders of the Series C Preferred Shares may be obligated to purchase additional shares of Common Stock for cash. In the event the Company issues or sells any shares of Common Stock or shares of securities convertible into or exchangeable for Common Stock (other than shares of Common Stock or options to purchase Common Stock issued pursuant to stock option plans or are otherwise issued as compensation to employees or directors or shares of Common Stock issued upon exercise of options, warrants or rights outstanding as of June 13, 1997 or shares of Common Stock or options to purchase Common Stock issued in consideration for business acquisitions or combinations made by the Company) at an effective purchase price per share of less than $5.00, then at the time the Series C Preferred Shares are submitted for conversion, the Company shall cause the effective market price on the conversion date of such shares of Common Stock to be equal to the lesser of (i) the Lowest Trading Price, or (ii) the effective price at which such securities are issued. If the Company does not have sufficient shares available to satisfy its obligations to the holders of Series C Preferred Shares upon receipt of a conversion notice, or otherwise fails or refuses to perfect conversion of any Series C Preferred Shares (a "Series C Conversion Default"), the holders of the Series C Preferred Shares have the right to put the Series C Preferred Shares to the Company at a price equal to 125% of the purchase price, plus all accrued and unpaid dividends. 15. The holders of the Series C Preferred Shares may not convert such shares prior to August 12, 1997 and may convert subsequent to such date as follows: (i) 60 shares after August 13, 1997; (ii) 120 shares after September 12, 1997; (iii) 180 shares after October 12 1997; (iv) 240 shares after November 11, 1997; and (v) 300 shares after December 10, 1997. As of July 8, 1997, there were 250 Series C Preferred Shares outstanding and held of record. The holders of the Series C Preferred Shares have no voting rights, except with respect to certain matters that affect the rights of the Series C Preferred Shares. THE PROMETHEAN COMMON STOCK INVESTMENT AGREEMENT. On March 31, 1997, the Company entered into a Common Stock Investment Agreement with Promethean Investment Group L.L.C. ("Promethean") pursuant to which Promethean will provide $10 million in equity funding to the Company. The Company has agreed to issue a minimum of $4,000,000 in Common Stock, at a 10% discount to market price, to Promethean within two years following the effective date of a registration statement covering the shares to be sold pursuant to the Common Stock Investment Agreement. On April 29, 1997, the Company and Promethean agreed to increase the equity funding commitment from $10 million to $25 million. OTHER SALES OF UNREGISTERED SECURITIES. On December 10, 1996, the Company issued 5,000 shares of the Company's Common Stock to Westergaard and Company as consideration for certain consulting services provided to the Company. On March 31, 1997, the Company issued 25,000 shares of its Common Stock, with a then market value of $112,500, to a lessor of certain property formerly leased by ITV in connection with a settlement of a lawsuit involving the lease of such property. The shares of Common Stock issued had certain demand and "piggy-back" registration rights. Further, if at the time of registration, the share price of the Company has increased or decreased by 20% or more, the Company shall issue, or the lessor shall return, as the case may be, a number of shares to restore the value of the Common Stock so issued to $112,500. On September 6, 1996, the Company issued options to purchase 20,000 shares of the Company's Common Stock as compensation to two employees. For a discussion of the issuance of securities as compensation to the directors and executive officers of the company, see "Executive Compensation." Except as otherwise provided above, the Company believes that the issuances of securities pursuant to the foregoing transactions were exempt from registration under the Securities Act by virtue of section 4(2) thereof as transactions not involving public offerings. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company devotes substantially all of its efforts to financing and developing Sino-foreign joint ventures to establish telecommunications networks in the PRC. In January 1996, the Company completed the sale of the assets of its ITV subsidiary. As such, research and development, marketing, and sales of products from its ITV subsidiary have ceased. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily through equity investments and loans from its founding stockholders. Approximately $3,558,000 of cash was provided by the Company's operations for the fiscal year ended March 31, 1997, compared to the use of approximately $2,887,000 of cash for the year ended March 31, 1996. The cash flow from operating activities relates to the increase in prepaid expenses and other current assets reflected in the Company's financial statements as a result of the consolidation of its joint venture subsidiaries in the PRC. The use of cash from operations for the year ended March 31, 1996 16. reflects increases in accounts payable and accrued expenses, including accrued interest, of approximately $1,400,000. During the fiscal year ended March 31, 1995 the Company used approximately $4,399,000 in its operating activities. The decrease in cash used in the Company's operating activities from the year ended March 31, 1995 to the year ended March 31, 1996 reflects a greater net loss in 1995, and an increase in accounts payables and accrued expenses in 1996. The Company used approximately $15,715,000 in its investing activities in the year ended March 31, 1997, compared to approximately $1,040,000 in the year ended March 31, 1996. This increase reflects the Company's joint venture funding during the year ended March 31, 1997, as well as construction costs of approximately $21,881,000 in the Company's GSM Network in Hebei Province. The Company further reported approximately $6,550,000 of net liabilities assumed through consolidation of its joint venture subsidiaries in the PRC. Net cash used in the Company's investing activities for the year ended March 31, 1995 was approximately $861,000, which reflects development expenses related to research and development of its ITV subsidiary prior to the sale of ITV to Netmatics. The cash inflows from financing activities during the year ended March 31, 1997 were generated from the following sources: (i) approximately $11,521,000 in loans from Mitsubishi Bank and vendor provided financing for the development of the Hebei GSM Network, which the Company has reported through the consolidation of its PRC joint ventures, (ii) the receipt of additional Common Stock subscriptions of $2,000,000 and (iii) the receipt of $3,841,219 in Preferred Stock subscriptions. On June 12, 1996, the Company issued 100 shares of the Company's Series B Convertible Preferred Stock, at a purchase price of $25,000 per share, and a number of warrants equal to the number of common shares into which the Series B Preferred Shares were converted in consideration of $2,500,000, of which the Company received $2,341,219 after placement agent's fees. In addition, on March 31, 1997, the Company issued 150 shares of the Company's Series D Convertible Preferred Stock at a purchase price of $10,000 per share in consideration of $ 1,500,000. During the years ended March 31, 1996 and March 31, 1995, the Company received approximately $2,934,000 and $6,387,000 from its financing activities, respectively. The sources of these amounts were from: (i) the sale of approximately $2,194,000 and $2,605,000 in Common Stock during the years ended March 31, 1996 and March 31, 1995, respectively, (ii) the receipt of approximately $1,536,000 in Common Stock subscriptions in the year ended March 31, 1995, and (iii) the receipt of shareholder loans of approximately $740,000 during the year ended March 31, 1996 and $2,245,000 during the year ended March 31,1995. On December 15, 1995, the Company also agreed to issue 1,524,178 shares of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Shares") to Tweedia as consideration for the contribution to the Company by Beijing CATCH of Beijing CATCH's interest in a $4,572,536 non-refundable deposit paid to Motorola in connection with an Enhanced Specialized Mobile Relay System Equipment Purchase Contract #700.0008D, dated December 12, 1993, and as amended, between Beijing CATCH and Motorola. The deposit has been reflected in the financial statements as a deduction of stockholders' equity, as it is currently the view of management that this deposit may be forfeited and such Series A Preferred Shares will be canceled. As of December 21, 1995, the Company agreed to issue up to 50,000,000 shares of Common Stock to Tweedia, an affiliate of Beijing CATCH and the principal shareholder of the Company, pursuant to the terms of a Master Agreement and Right of First Refusal, dated December 21, 1995, between Beijing CATCH, Tweedia and the Company (the "Master Agreement"). As of July 8, 1997, the Company has not issued any shares pursuant to the Master Agreement, and has not entered into, and management has no current intent of entering into, any Sino-foreign joint ventures with Beijing CATCH under the terms of the Master Agreement. As a result, no obligation for future issuances of Common Stock to Beijing CATCH under the Master Agreement exists or are contemplated. See "Certain Relationships and Related Transactions." 17. The current funding requirement for the Hebei Multimedia Network is estimated at approximately $23 million to link cable systems in the eleven largest cities in Hebei Province. As of June 20, 1997, the Company had invested approximately $1.0 million in Hebei Equipment for purposes of investment in the Hebei Multimedia Network. The Company anticipates that the balance of required funding will be provided in the form of equity and debt investments in Hebei Equipment and additional joint venture entities that may be established with strategic partners. See "Risk Factors -- Significant Additional Funding of Joint Venture Projects Required." The Company's ability to obtain profitable operations is dependent in part on the successful development, implementation and marketing of the PRC joint ventures' products and services. The Company will continue to seek funds in the form of lines of credit and/or equity and debt offerings to third parties as well as its existing shareholders. See "Risk Factors -- Possible Need for Additional Capital." In the event the Company fails to raise additional funds from such financing, and fails to generate any additional revenues from operations, the Company may not be able to meet all of its obligations past December 1997, based on its current operating expenditures. There can be no assurances that any sources of financing will be available from existing stockholders or external sources on terms favorable to the Company or at all or that the business of the Company will ever achieve profitable operations. In the event the Company does not receive any such financing or generate profitable operations, management's options will be to suspend or discontinue its business activity in its present form. EQUITY ISSUANCE AND SERVICE AGREEMENTS As the Company's entire business consists of the financing and development of telecommunications networks in the PRC, and the Sino-foreign joint ventures for such projects are in their development stage, the Company had no cash flow from such ventures during the fiscal year ended March 31, 1997. Since inception of its current business in February 1995, the Company has financed its participation in the Sino-foreign joint ventures through private equity investments and loans from its founding stockholders. The following is a discussion of arrangements entered into by the Company for certain financial, legal and consulting services. On July 30, 1996, the Company entered into an agreement with Merrill Lynch (Asia Pacific) Limited ("Merrill Lynch") pursuant to which Merrill Lynch will act as a financial advisor to the Company and will assist the Company with strategic financing alternatives with respect to the Company's PRC projects. The Company was required to pay Merrill Lynch a retainer of $50,000 upon the execution of the agreement and three installments of $150,000 each payable every 120 days thereafter, none of which has been paid by the Company to date. Additional fees may be paid to Merrill Lynch if Merrill Lynch successfully assists the Company in raising capital for the Company and the Company's Sino-foreign joint ventures. In October 1996, the Company entered into an agreement with two of its law firms, to settle a portion of their accrued fees through the issuance of stock options. With this transaction, the Company converted accrued legal fees in the aggregate of approximately $98,000 into options to purchase an aggregate of 65,064 shares of the Company's Common Stock at an exercise price of $1.50 per share, the market value of the Company's common stock at that time. A portion of the accrued legal fees were credited against gains made by actual resale price. In addition, one firm continues to hold options to purchase 10,102 additional shares of Common Stock against future legal fees. The Company also agreed to register the underlying shares with the Commission on Form S-8. The registration statement relating to these shares was filed with the Commission on or about November 11, 1996. On October 15, 1996, the Company agreed to issue warrants to David Rubenstein to purchase 200,000 shares of the Company's Common Stock. These warrants were issued for Mr. Rubenstein's services related to advising the Company with respect to its Sino-foreign joint ventures and marketing activities in 18. the PRC. The warrants issued have a three year term and an exercise price of $1.50, which was the market value of the Company's Common Stock at the time of issuance of the warrants. On December 10, 1996, the Company agreed to issue to E. Pendelton James 5,000 shares of the Company's Common Stock with a market value of $18,125 (based on the fair market value at the time of issuance), in addition to 5,000 shares issued to him in May 1996 which had a market value of $45,625 (based on the fair market value at the time of issuance), for professional executive search consulting services he has been providing to the Company in developing the composition of its management and Board of Directors. The Company agreed to register shares of Common Stock underlying warrants issued to David Rubenstein and shares of Common Stock issued to E. Pendelton James for consulting services, and certain shares of Common Stock issued to Joseph R. Wright, Jr. in lieu of cash compensation with the Commission. On or about December 31, 1996, the Company filed a registration statement on Form S-8 with the Commission. The total number of shares covered by the registration statement was 397,500. On or about October 19, 1996, the Company entered into a twelve month financial advisory services agreement with an investment bank. The services provided under this agreement relate to financial advisory services, including, but not limited to, the development of a financing strategy for the Company and the Company's projects in the PRC. The agreement calls for a $50,000 retainer and the payment of success fees for raising capital for the Company and its projects. In addition, the Company has agreed to issue a warrant to purchase up to 600,000 shares of the Company's Common Stock to the investment bank. This warrant has an exercise price of $2.00 per share, which was the market value of the Company's Common Stock at the time of the issuance of the warrants. 300,000 of the warrants vest immediately, and the additional 300,000 warrants will vest only when the investment bank has raised a minimum of ten million dollars in any form of financing for the Company. RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1997 AND MARCH 31, 1996 Following the ITV Asset Sale in January 1996, the Company has focused its business solely on establishing Sino-foreign joint ventures to develop telecommunications networks in the PRC. As a result of the ITV Asset Sale, the Company does not currently generate sales or market any products. Management expects to begin reporting sales during fiscal year 1998 from Hebei Equipment's interest in the GSM Network, which commenced operations in the fourth quarter of fiscal year 1997. In light of this change in operations, net sales decreased from $683,733 during the year ended March 31, 1996 to $0 during the year ended March 31, 1997. Net sales during the year ended March 31, 1996 reflected the former operations of ITV and related to the sale of prototypes of the Company's products and miscellaneous services provided to the Company's customers on a pilot-testing basis, as well as filed testing of the Company's products. The decrease in net sales during the year ended March 31, 1997 is attributable to cessation of operations of the Company's ITV subsidiary after the Asset Sale of ITV. Selling, general and administrative expenses increased 25% from $3,207,570 during the year ended March 31, 1996 to $3,996,151 during the year ended March 31, 1997 due to increased levels of salaries paid to employees and legal and professional expenses incurred over the past year. Net research and development expenses decreased from $1,287,629 during the year ended March 31, 1996 to $0 during the year ended March 31, 1997. The decrease in research and development expenses related to a shift in the focus of the business of the Company from manufacturing technologically advanced networking equipment through its ITV subsidiary to establishing Sino-foreign joint ventures with entities in the PRC involved in telecommunications through its PRC subsidiary. As a result of the closing of the Asset Sale Agreement in January 1996, the Company ceased all activities related to research and development. 19. The equity in losses of unconsolidated subsidiary of $500,000 recorded during the year ended March 31, 1996 represents the Company's share of losses reported by Netmatics between January 17, 1996 and March 31, 1996, during which period the Company owned thirty-three percent (33%) of the issued and outstanding common shares of Netmatics. Through a series of secured debentures issued by Netmatics to its shareholders, and the conversion of a note in the amount of 2,250,000 to equity, the Company's ownership in Netmatics increased to 39%. Further, the Company has written off $198,538 of investments it has made in Netmatics. Interest expense during the year ended March 31, 1997 decreased to approximately $130,000 from approximately $241,856 during the year ended March 31, 1996 due to a reduction in outstanding balance of shareholder loans payable during the year ended March 31, 1997. The loss from abandoned assets of $130,840 recorded during the year ended March 31, 1996 represents a non-recurring "write-off" of certain remaining assets of ITV that were not sold in the ITV Asset Sale. The Company's net loss decreased 23% from $5,281,730 during the year ended March 31, 1996 to $4,064,885 during the year ended March 31, 1997. This decrease in net loss was due to reductions in losses and "write-offs" associated with the operations of ITV, which were terminated following the ITV Asset Sale. RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1996 AND MARCH 31, 1995 Net sales increased from $345,276 during the year ended March 31, 1995 to $683,733 during the year ended March 31, 1996. Net sales during the year ended March 31, 1995 related to the sale of prototypes of the Company's products and miscellaneous services provided to the Company's customers on a pilot-testing basis. The increase in net sales during the year ended March 31, 1996 is attributable to the development of a tested product line and a nation-wide sales and marketing program for the distribution of the Company's products. As all of the Company's revenues since inception were generated by ITV, the Company had no net sales subsequent to the closing of the Asset Sale Agreement in January 1996. Selling, general and administrative expenses decreased nine percent from $3,513,567 during the year ended March 31, 1995 to $3,207,570 during the year ended March 31, 1996. This reduction is primarily related to a decrease in payroll and related expenses associated with the closing of the Asset Sale Agreement in January 1996, which led to a reduction in the number of employees working in the Company. Net research and development expenses decreased by 38% from $2,086,324 during the year ended March 31, 1995 to $1,287,629 during the year ended March 31, 1996. The decrease in research and development expenses related to a shift in the focus of the business of the Company from manufacturing technologically advanced networking equipment to establishing Sino-foreign joint ventures with entities in the PRC involved in telecommunications. As a result of the closing of the Asset Sale Agreement in January 1996, the Company ceased all activities related to research and development. The equity in losses of unconsolidated subsidiary of $150,000 recorded during the year ended March 31, 1996 represents the Company's share of losses reported by Netmatics between January 17, 1996 and March 31, 1996, during which period the Company owned thirty-three percent (33%) of the issued and outstanding common shares of Netmatics. Interest expense during the year ended March 31, 1996 increased to approximately $242,000 from approximately $118,000 during the year ended March 31, 1995 due to a higher average outstanding balance of shareholder loans payable during the year ended March 31, 1996. 20. The loss from abandoned assets of $130,840 recorded during the year ended March 31, 1996 represents the write-off of certain remaining assets of ITV that were not sold. The Company's net loss decreased from $5,538,303 during the year ended March 31, 1995 to $5,281,730 during the year ended March 31, 1996. This decrease in net loss was due to decreases in SG&A and research and development expenses that more than offset the loss from the abandonment of assets and higher interest expenses incurred during the year ended March 31, 1996. ITEM 7. FINANCIAL STATEMENTS The financial statements required by this Item 7 are attached hereto as "Exhibit (a)(1)" and incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Previously reported. 21. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The directors of the Company currently have terms which will end at the next annual meeting of the stockholders of the Company or until their successors are elected and qualified, subject to their prior death, resignation or removal. Officers are appointed by and serve at the discretion of the Board of Directors, subject to the rights of the officers under their respective employment agreements. There are no family relationships among any of the Company's directors and executive officers. NAME AGE POSITION - - - --------------------- --- -------------------------------------------------- Joseph R. Wright, Jr. 58 Chairman of the Board of Directors, Chief Executive Officer and President Richard T. McNamar 58 Vice Chairman of the Board of Directors Xiao Jun 40 Executive Vice President - AVIC China and Director James R. Lilley 69 Director Michael H. Wilson 59 Director Drew Lewis 65 Director Ju Feng 50 Director Teoh Set Seng 45 Director Albert G. Pastino 55 Senior Vice President and Chief Financial Officer James F. O'Brien 51 Senior Vice President and General Counsel Michael J. Lim 33 Executive Vice President - Operations Timothy P. F. Crowley 25 Corporate Secretary JOSEPH R. WRIGHT, JR. has served as the Company's Chairman of the Board of Directors since May 1995, Chief Executive Officer since March 1996 and President since May 1996. Mr. Wright also serves as Chairman and member of the Board of GRC International, Inc. a U.S. public company that provides technical support to government and private entities, Co-Chairman of Baker & Taylor Holdings, Inc., an international book and video distribution company, Vice Chairman of The Jefferson Group, a member of the Board of Travelers Group, a public company, PanAm Sat, a public company, and Deswell Industries, a public company. From 1989 to 1994, Mr. Wright served in various executive capacities for W. R. Grace & Co., an international chemicals and health care company, and its associated companies, including Executive Vice President and Vice Chairman of W. R. Grace & Co., President of Grace Energy Corporation and Chairman of Grace Environmental Company. From 1982 to 1989, Mr. Wright held the positions of Director and Deputy Director of the Office of Management and Budget, The White House, and was a member of President Reagan's cabinet. Prior to 1982, he served as Deputy Secretary, United States Department of Commerce, President of Citicorp Retail Services and Retail Consumer Services, held posts in the United States Department of Agriculture, the United States Census Bureau and the United States Department of Commerce, and was Vice President and Partner of Booz. Allen & Hamilton, a management consulting firm. He is also currently a member of the Board of Advisors of Barington Capital Corporation and Great Lakes Pulp and Fiber Corporation, and a Trustee of Hampton University. RICHARD T. MCNAMAR has served as the Company's Vice Chairman of the Board of Directors since September 1996. He was the founder and Chairman of International Franchise, Inc., a firm that specialized in international financial transactions, from 1995 to 1997. He was a Managing Director of Oppenheimer & Co. from 1991 to 1994. Formerly, he was the Vice-Chairman of The Bank of New England Corporation and subsidiaries from 1990 to 1991. Mr. McNamar served as Deputy Secretary of the United States 22. Treasury from 1981 to 1985. He served in the Nixon and Ford Administrations from 1972 to 1977, where he served as the Executive Director of the Federal Trade Commission from 1973 through 1977. Mr. McNamar is also currently a member of the Executive Board of the Bretton Woods Committee, the Board of the Institute of the Americas and the Advisory Committee of the World Economic Forum. XIAO JUN has served as a Director of the Company since February 1995 and Executive Vice President - AVIC China since December 1995. He also served as the Company's Secretary from February 1995 to January 1996 and as Chief Financial Officer from June 1995 to May 1996. He has been the President of Xiao Hua International, Inc., an international steel trading business based in California since June 1993. He served as the Vice President of ITV from December 1994 to January 1996. From March 1990 to May 1993, Mr. Xiao was the Vice President of Chong Qing Special Metals Industry Co. From 1985 to 1990, Mr. Xiao served as an engineer and project manager at the representative office of IBM China/HK Corp. (Beijing). Mr. Xiao received a bachelor's degree in physics from the Beijing Polytechnic University in 1982. JAMES R. LILLEY has served as a Director of the Company since May 1997. Ambassador Lilley is currently the Director of Asian Studies at the American Enterprise Institute ("AEI") which he joined in January 1993, and directs the Institute for Global Chinese Affairs at the University of Maryland. Prior to his joining AEI, Ambassador Lilley served in President Bush's Administration as the Assistant Secretary of Defense for International Security Affairs from November 1991 to January 1993. Ambassador Lilley was U.S. Ambassador to the People's Republic of China from April 1989 to May 1991, and to the Republic of Korea from 1986 to 1989. Ambassador Lilley is the co-editor of BEYOND MFN: TRADE WITH CHINA AND AMERICAN INTERESTS and is the author of the forward for the AEI publication, CHINESE MILITARY MODERNIZATION. He has represented Hunt Oil of Texas and United Technologies of Hartford, Connecticut in 1979 to 1980. Ambassador Lilley worked for Archer-Daniels-Midland Co. and Westinghouse as a business consultant. MICHAEL H. WILSON has served as a Director of the Company since May 1997. He has been Vice-Chairman of RBC Dominion Securities, Inc. in Toronto, Canada since 1995. Prior to 1994, Mr. Wilson held senior Federal Cabinet posts with the Government of Canada in Finance, Industry, Science and Technology and International Trade. Prior to his career in public service, Mr. Wilson was Executive Vice-President of Dominion Securities Limited. Mr. Wilson also serves on the Board of Directors of Manulife Financial, a mutual insurance company, Amoco Corporation, a publicly held company, and Rio Algom Limited, a publicly held company. He is also active in a number of professional and community organizations, including The Clarke Institute of Psychiatry, The Aspen Institute and The Institute of the Americas. DREW LEWIS has served as a Director of the Company since May 1997. Mr. Lewis served as Chairman and Chief Executive Officer of Union Pacific Corporation from October 1987 to January 1997, and served as the Chief Operating Officer of Union Pacific Corporation from April 1986 to October 1987. Prior to his positions with Union Pacific Corporation, Mr. Lewis served as Chairman and Chief Executive Officer of Union Pacific Railroad Company from April to October 1986. From 1983 to 1986, Mr. Lewis was Chairman and Chief Executive Officer of Warner Amex Cable Communications. He served in the Reagan Administration from January 1981 to February 1983 as U.S. Secretary of Transportation. Mr. Lewis also serves as a director to American Express Company, FPL Group, Inc., Gannett Co., Inc., Gulfstream Aerospace Corporation, Lucent Technologies, Union Pacific Resources Group, Inc. and Dal-Tile International, all of which are publicly held companies. JU FENG has served as a Director of the Company since February 1995. He has been the Vice President and Chief Technical Officer of Beijing CATCH since 1990. Mr. Ju also serves as the Chairman of Hebei Equipment. He was an associate professor and director of the telecommunications laboratory at the Beijing University of Aeronautics and Astronautics from 1989 to 1990. From 1987 to 1990, Mr. Ju served as a visiting scholar on mobile communication at the Department of Electrical and Electronics Engineering at Liverpool University (United Kingdom). Mr. Ju received a master's degree from the 23. Department of Electronics Engineering from the Beijing University of Aeronautics and Astronautics in 1980, and a bachelor's degree in electrical engineering from Tshinghua University (Beijing, China) in 1968. TEOH SET SENG has served as a Director of the Company since July 1994 and served as the Secretary of the Company from July 1994 to February 1995. She has also served as an internal auditor for Villa Genting Development SDN BHD since June 1993. From 1983 to June 1993, Ms. Teoh served as a manager for Planglobal Insurance SDN based in Malaysia. ALBERT G. PASTINO was appointed in June 1997 to serve as a Senior Vice President and Chief Financial Officer of the Company, subject to ratification of such appointment by the Board of Directors. From 1993 to 1997, Mr. Pastino served as the President of Kisco Capital Company, Inc., an affiliate of Kohlberg & Company, a private equity investment company, where he was involved in a number of equity transactions. He also served on the boards of directors of a number of Kohlberg & Company's portfolio companies and currently serves on the board of four such portfolio companies. From 1989 through 1992, Mr. Pastino served as Senior Vice President and Chief Operating Officer of Fortis Private Capital, Inc., a private equity investment company investing in expansion financing and management buyouts. Mr. Pastino began his business career at Deloitte & Touche LLP where he served as senior partner, and gained his investment banking experience at Alex Brown & Sons, Incorporated. Mr. Pastino received an M.B.A. from Fairleigh Dikinson University and a B.S. from St. Joseph's University and completed the Harvard University Graduate School of Business SCMP Program. JAMES F. O'BRIEN was appointed in June 1997 to serve as a Senior Vice President and General Counsel of the Company, subject to ratification of such appointment by the Board of Directors. Mr. O'Brien was a senior litigation partner at the law firm of Goulston and Storrs in Boston, Massachusetts where he founded the litigation practice in 1978 and specialized in complex financial transactions. Prior to that, Mr. O'Brien was an associate with the firm of Bingham, Dana & Gould. He has served as an advisor to U.S. corporations seeking business opportunities in Southeast Asia. Mr. O'Brien received a J.D. from Boston College Law School and an A.B. from St. John's Seminary in Boston. MICHAEL J. LIM has served as the Executive Vice President - Operations of the Company since November 1995 and as the Chief Financial Officer from May 1996 through June 1997. He also served as a Director of the Company from December 1996 to April 1997. Prior to his joining the Company, Mr. Lim was an investment banker with Bear, Stearns & Co., Inc. from 1986 to 1988 and from 1991 to 1995. During the two and a half years prior to his joining the Company, Mr. Lim served as Vice President of Bear Stearns Asia Limited, where he advised Asian enterprises on a wide variety of financing transactions, with particular focus on telecommunications and infrastructure financings. Mr. Lim also worked as an investment banker with the Chase Manhattan Bank from 1990 to 1991. Mr. Lim received his A.B. from Harvard College in English Literature in 1985 and his M.B.A. from the Amos Tuck School of Business Administration at Dartmouth in 1990. TIMOTHY P. F. CROWLEY joined the Company in May 1995 and has served as the Secretary of the Company since January 1996. Prior to joining the Company. Mr. Crowley worked in Corporate Administration at Travelers Group. Mr. Crowley received his B.A. from Connecticut College in Anthropology and Art History, and was enrolled in a graduate program in the History of Art at New York University's Institute of Fine Arts from 1993 to 1994. There are currently no members appointed to the Audit Committee of the Board of Directors. During the fiscal year ended March 31, 1997, William H. Davidson was the sole member of such committee until his resignation from the Board in March 1997. In May 1997 Klaus Schwab, the President and Founder of the World Economic Forum in Geneva, Switzerland was appointed by the Board of Directors to serve as a member of the Board of Directors of the Company. At the request of the World Economic Forum's directors that Mr. Schwab reduce his involvement 24. in outside for-profit activities, Mr. Schwab resigned from the Company's Board of Directors in June 1997. He resigned from a European corporation's board of directors at approximately the same time. No Board meetings were held while he was a Director. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers and beneficial holders of more than 10% of any class of the Company's equity securities to file with the Commission initial reports of ownership and reports of changes in ownership of such equity securities of the Company. Based solely upon a review of such forms furnished to the Company, and on written representations from certain reporting persons that no other reports were required for such persons, the Company believes that all reports required pursuant to Section 16(a) with respect to its executive officers, directors and 10% beneficial stockholders for the fiscal year ended March 31, 1997 were timely filed. 25. ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION The Following tables set forth certain information concerning compensation for the fiscal years ended March 31, 1997, 1996 and 1995 of certain of the Company's executive officers, including the Company's Chief Executive Officer and all executive officers whose total annual salary and bonus exceeded $100,000, for the fiscal year ended March 31, 1997 (the "Named Executive Offices").
Long Term Compensation ------------------------- Annual Compensation Awards ---------------------------------------- ------------------------- Name and Other Annual Stock Options/ Principal Position Year Salary ($) Bonus ($) Compensation Awards ($) SARS (#) - - - ------------------ ---- ---------- --------- ------------ ---------- --------- Joseph R. Wright 1997 $256,250 0 (2)$30,000 $281,250 3,000,000 Chief Executive 1996 143,750 0 (2)$30,000 3,000,000 Officer(1) Xiao Jun 1997 123,958 0 0 Executive Vice 1996 57,990 0 400,000 President-AVIC 1995 42,250 0 125,000 China Michael J. Lim 1997 167,333 0 0 Chief Financial 1996 79,615 0 1,000,000 Officer(3)
_________________ (1) Mr. Wright has served as the Company's Chief Executive Officer since March 14, 1996. He joined the Company as the Chairman of the Board of Directors on May 1, 1995. (2) During fiscal 1996 and 1997, the Company paid approximately $30,000 per year on behalf of Mr. Wright for certain personal tax and accounting services rendered by third parties for Mr. Wright. (3) Mr. Lim joined the Company as the Executive Vice President - Operations on November 7, 1995 and served as the Company's Chief Financial Officer from May 1996 through June 15, 1997. 26. OPTION AND SAR GRANTS DURING LAST FISCAL YEAR The Company did not grant any stock options or SARs to its Named Executive Officers during the fiscal year ended March 31, 1997. OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information regarding option exercises by the Named Executive Officers during the fiscal year 1997 and options held by such Named Executive Officers on March 31, 1997:
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Shares Options at Fiscal Year End at Fiscal Year End(1) Acquired on Value -------------------------- --------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- --------- ----------- ------------- ----------- ------------- Joseph R. Wright. . . 4,500,000 1,500,000 $10,800,000 3,600,000 Xiao Jun. . . . . . . 10,000 $78,950 415,000 100,000 995,425 240,000 Michael J. Lim. . . . 750,000 250,000 1,800,000 600,000
________________ (1) Based on a per share price of $2.750, the closing price of the Common Stock as reported on the American Stock Exchange, minus the exercise price of the option, multiplied by the number of shares underlying the Option. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with six of its executive officers, Messrs. Joseph R. Wright, Jr., Richard T. McNamar, Albert G. Pastino, James F. O'Brien, Xiao Jun and Michael J. Lim. The Company entered into a five year employment agreement dated as of April 15, 1995, and as amended on November 21, 1995 and September 6, 1996, with Joseph R. Wright, Jr., pursuant to which Mr. Wright agreed to serve as the Company's Chairman of the Board of Directors, Chief Executive Officer and President and to operate out of the Company's executive offices located in New York, New York. The employment agreement initially provided for an annual base salary of $50,000 during the year commencing April 15, 1995 and $300,000 during the year thereafter. The September 6, 1996 amendment to the employment agreement provides for the issuance of shares of Common Stock in lieu of cash compensation as payment for the salary that Mr. Wright had accrued from June 1995 through August 1996, at $1.50 per share, the market price of the Common Stock on September 6, 1996. Further, the amendment offers Mr. Wright an automatic extension of his contract of one year on each April 14, unless the Board of Directors notifies Mr. Wright 90 days prior to such date that such extension will not be made. The Board of Directors also approved revising his salary for the first year commencing on April 15, 1997 to $150,000, revising his salary for the second year to $300,000, and increasing his salary in each year thereafter by $100,000. The Board of Directors of the Company also approved the issuance of an additional three million options to Mr. Wright on September 12, 1996. These options have an exercise price of $3.00 per share, the fair market value on the date of grant, and vest with respect to fifty percent of said options on each April 15, 1997 and April 15, 1998. In September 1996 the Company approved the issuance of 187,500 shares of the Company's Common Stock to Mr. Wright, paid in lieu of a portion of cash compensation Mr. Wright had been accruing from June 1995 through October 15, 1996. The amount of salary accrued through October 15, 1996 was $281,250. The Common Stock was issued at $1.50 per share, the fair market value of such shares at the time of the grant. 27. Pursuant to the employment agreement, Mr. Wright was granted an option to acquire 3,000,000 shares of Common Stock at an exercise price of $0.35 per share, and an additional 3,000,000 shares at an exercise price of $3.00 per share were granted on September 6, 1996. The option has vested with respect to the 3,000,000 shares which have an exercise price of $0.35 per share, and with respect to 1,500,000 shares which have an exercise price of $3.00 per share. The balance of the option with respect to 1,500,000 shares which have an exercise price of $3.00 per share will vest on April 15, 1998. The options issued to Mr. Wright have been issued pursuant to the Company's 1996 Stock Option Plan and were based on the market value of the Common Stock on the date of grant. On September 6, 1996, the Company entered into a one year verbal employment agreement with Richard T. McNamar pursuant to which Mr. McNamar will serve as Vice Chairman of the Company. He received 25,000 shares of the Company's Common Stock upon commencing employment. Initially, Mr. McNamar was part time, and was arranged to receive a contingent success fee for financings he introduced or arranged for the Company. On October 1, 1996 Mr. McNamar became a full time employee and waived his rights to any success fees. In his full time capacity, Mr. McNamar will be paid $200,000 annual base salary. Mr. McNamar was issued an option to purchase 250,000 shares of the Company's Common Stock at an exercise price of $1.50 per share on September 6, 1996. He received an additional option for 250,000 shares at an exercise price of $1.50 per share when he became a full time employee on October 1, 1996. The exercise price of the options were based on the market value of the Common Stock on the date of grant. The Company and Mr. NcNamar intend to sign an employment agreement during the current fiscal year. On June 16, 1997, the Company entered into two year employment agreements with each of Albert G. Pastino and James F. O'Brien, which agreements are subject to ratification by the Board of Directors of the Company. Mr. Pastino will serve as a Senior Vice President and Chief Financial Officer of the Company and will receive an annual base salary of $100,000 for the first year and stock options to acquire 400,000 shares of Common Stock at an exercise price of $3.00 per share. Mr. O'Brien will serve as a Senior Vice President and General Counsel of the Company and will receive an annual base salary of $100,000 for the first year and stock options to acquire 400,000 shares of Common Stock at an exercise price of $3.00 per share. The Company entered into a two year employment agreement, effective as of November 6, 1995, with Michael J. Lim, pursuant to which he will serve as the Company's Executive Vice President - Operations at an annual base salary of $200,000. Mr. Lim also acted as the Company's Chief Financial Officer from May 1996 through June 15, 1997. The Company entered into a two year employment agreement, effective as of January 1, 1996, with Xiao Jun, pursuant to which he will serve as the Company's Executive Vice President - AVIC China, at an annual base salary of $175,000. In connection with these employment agreements, the Company has agreed to issue, to Messrs. Lim and Xiao, options to purchase up to 1,000,000 and 400,000 shares, respectively, of the Company's Common Stock, with an exercise price of $0.35 per share. The options have been granted pursuant to the Company's 1996 Stock Option Plan. The options vest at the rate of twenty-five percent (25%) of the aggregate number of options so granted at the end of each six (6) month period following the date of each respective employment agreement. The options granted to Messrs. Lim and Xiao expire on November 6, 2005 and December 31, 2005, respectively, and were based on the market value of the Common Stock on the date of grant. The Company has also granted Mr. Xiao a five year option to acquire 125,000 shares of the Company's Common Stock at an exercise price of $0.3555 per share pursuant to the Company's 1995 Stock Option Plan, all of which options vested as of February 8, 1995. See "Stock Option Plans." 28. CONSULTANTS The Company has entered into a consulting agreement with David Rubenstein pursuant to which Mr. Rubenstein will provide to the Company advise on marketing strategies and joint venture structures in the PRC. Mr. Rubenstein was granted warrants to purchase 200,000 shares of Common Stock of the Company at an exercise price of $1.50 per share, the market value of the Common Stock on the date of the grant. STOCK OPTION PLANS As of February 8, 1995, the Company's Board of Directors and stockholders approved the Company's 1995 Stock Option Plan (the "1995 Stock Option Plan") in connection with the closing of the transactions contemplated by the Reorganization Agreement. The Company has reserved up to 500,000 shares of Common Stock for issuance under the 1995 Stock Option Plan. The Company has granted options to purchase up to 321,800 shares of Common Stock under the 1995 Stock Option Plan, 135,000 of which have been exercised. The 1996 Stock Option Plan (the "1996 Stock Option Plan") was adopted by the Board of Directors on March 14, 1996 and by the Company's stockholders on May 7, 1996. The Company has reserved for issuance thereunder an aggregate of 12,000,000 shares of Common Stock. The Company has granted options to purchase up to 8,040,000 shares of Common Stock under the 1996 Stock Option Plan. Of the 8,040,000 options granted as of the date of this Report, 5,660,000 options have vested, and the remaining 2,380,000 options may vest subject to certain schedules. The Board of Directors has approved a provision in the 1996 Stock Option Plan which will place a 6,000,000 share limit on the number of options that may be granted under the 1996 Stock Option Plan to an employee in the fiscal year ended March 31, 1996, and a 1,500,000 share limit in each fiscal year thereafter. A description of each of the Company's Stock Option Plans is set forth below. The description is intended to be a summary of the material provisions of the Company's Stock Option Plan and does not purport to be complete. ADMINISTRATION OF AND ELIGIBILITY UNDER STOCK OPTION PLANS. Each of the Stock Option Plans, as adopted, provides for the issuance of options to purchase shares of Common Stock to officers, directors, employees, independent contractors and consultants of the Company and its subsidiaries. The Stock Option Plans authorize the issuance of incentive stock options ("ISOs"), and non-qualified stock options ("NSOs") and stock appreciation rights ("SARs") to be granted by a committee (the "Committee") to be established by the Board of Directors to administer the Stock Option Plans. Subject to the terms and conditions of the Stock Option Plans, the Committee will have the sole authority to determine: (a) the persons ("optionees") to whom options to purchase shares of Common Stock and SARs will be granted, (b) the number of options and SARs to be granted to each such optionee, (c) the price to be paid for each share of Common Stock upon the exercise of such option, (d) the period within which each option and SAR will be exercised and any extensions thereof, and (e) the terms and conditions of each such stock option agreement and SAR agreement which may be entered into between the Company and any such optionee. All officers, directors and employees of the Company and its subsidiaries and certain consultants and other persons providing significant services to the Company and its subsidiaries will be eligible to receive grants of options and SARs under the Stock Option Plans. However, only employees of the Company and its subsidiaries are eligible to be granted ISOs. STOCK OPTION AGREEMENTS. All options granted under the Stock Option Plans will be evidenced by an option agreement or SAR agreement between the Company and the optionee receiving such option or SAR. Provisions of such agreements entered into under the Stock Option Plans need not be identical and 29. may include any term or condition which is not inconsistent with the respective Stock Option Plan and which the Committee deems appropriate for inclusion. INCENTIVE STOCK OPTIONS. Except for ISOs granted to stockholders possessing more than ten percent (10%) of the total combined voting power of all classes of the securities of the Company or its subsidiaries to whom such ownership is attributed on the date of grant ("Ten Percent Stockholders"), the exercise price of each ISO must be at least 100% of the fair market value of the Company's Common Stock as determined on the date of grant. ISOs granted to Ten Percent Shareholders must be at an exercise price of not less than 110% of such fair market value. Each ISO must be exercised, if at all, within ten (10) years from the date of grant, but, within five (5) years of the date of grant in the case of ISOs granted to Ten Percent Stockholders. An optionee of an ISO may not exercise an ISO granted under the Stock Option Plans so long as such person holds a previously granted and unexercised ISO. The aggregate fair market value (determined as of time of the grant of the ISO) of the Common Stock with respect to which the ISOs are exercisable for the first time by the optionee during any calendar year shall not exceed $100,000. As of the date of this Report, ISOs have been granted under the 1995 Stock Option Plan, subject to certain vesting schedules, to purchase up to 300,000 shares of Common Stock, 160,000 of which have been exercised. The 300,000 ISOs have an exercise price of $0.3555 per share. Further, as of the date of the Report, ISOs have been granted under the 1996 Stock Option Plan, subject to certain vesting schedules, to purchase up to 362,380 shares of Common Stock. These options have the following per share exercise prices: 285,714 shares ($0.35), 66,666 shares ($3.00) and 10,000 shares ($1.50). NON-QUALIFIED STOCK OPTIONS. The exercise price of each NSO will be determined by the Committee on the date of grant. However, the exercise price for the NSOs under the 1995 Stock Option Plan will in no event be less than 85% of the fair market value of the Common Stock on the date the option is granted, or not less than 110% of the fair market value of the Common Stock on the date such option is granted in the case of an option granted to a Ten Percent Stockholder. No such restriction exists with respect to the exercise prices of NSOs granted under the 1996 Stock Option Plan. The exercise price for each NSO will be determined by the Committee at the time such option is granted, but in no event will such exercise period exceed ten (10) years from the date of the grant. As of the date of this Report, NSOs have been granted under the 1995 Stock Option Plan, subject to certain vesting schedules, to purchase up to 20,000 shares of the Common Stock at an exercise price of $0.15 per share and up to 1,800 shares of Common Stock at an exercise price of $5.00 per share. As of the date of this Report, NSOs have been granted under the 1996 Stock Option Plan to purchase up to 10,227,620 shares of Common Stock, subject to certain vesting schedules. These options have the following per share exercise prices: 3,733,334 shares ($3.00), 260,000 shares ($1.50) and 6,234,286 shares ($0.35). STOCK APPRECIATION RIGHTS. Each SAR granted under the Stock Option Plans will entitle the holder thereof, upon exercise of the SAR, to receive from the Company, in exchange therefor, an amount equal in value to the excess of the fair market value on the date of exercise of one share of Common Stock over its fair market value on the date of exercise of one share of Common Stock over its fair market value on the date of grant (or in the case of an SAR granted in connection with an option, the excess of the fair market 30. of one share of Common Stock at the time of exercise over the option exercise price per share under the option to which the SAR relates), multiplied by the number of shares of Common Stock covered by the SAR or the option, or portion thereof, that is surrendered. SARs will be exercisable only at the time or times established by the Committee. If an SAR is granted in connection with an option, the SAR will be exercisable only to the extent and on the same conditions that the related option could be exercised. The Committee may withdraw any SAR granted under the Stock Option Plans at any time and may impose any conditions upon the exercise of an SAR or adopt rules and regulations from time to time affecting the rights of holders of SARs. As of the date of this Report, no SARs have been granted pursuant to the 1995 Stock Option Plan, as part of the issuance of the 20,000 NSOs and no SARs have been granted under the 1996 Stock Option Plan. TERMINATION OF OPTION AND TRANSFERABILITY. In general, any unexpired options or SARs granted under the Stock Option Plans will terminate: (a) in the event of death or disability, pursuant to the terms of the option agreement or SAR agreement, but not less than six (6) months or more than twelve (12) months after the applicable date of such event, (b) in the event of retirement, pursuant to the terms of the option agreement or SAR agreement, but no less than thirty (30) days or more than three (3) months after such retirement date, or (c) in the event of termination of such person other than for death, disability or retirement, until thirty (30) days after the date of such termination. However, the Committee may in its sole discretion accelerate the exercisability of any or all options or SARs upon termination of employment or cessation of services. The options and SARs granted under the Stock Option Plans generally will be non-transferable, except by will or the laws of descent and distribution. ADJUSTMENTS RESULTING FROM CHANGES IN CAPITALIZATION. The number of shares of Common Stock reserved under the Stock Option Plans and the number and price of Common Stock covered by each outstanding option or SAR under the Stock Option Plans will be proportionately adjusted by the Committee for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting form any stock dividends, split-ups. Consolidations, recapitalizations, reorganizations or like event. AMENDMENT OR DISCONTINUANCE OF STOCK OPTION PLAN. The Board of Directors has the right to amend, suspend or terminate the Stock Option Plans at any time. Unless sooner terminated by the Board of Directors, the 1995 Stock Option Plan and the 1996 Stock Option Plan will terminate on February 8, 2005 and May 7, 2006, respectively, the tenth anniversary date of the effectiveness of each such Stock Option Plan. COMPENSATION OF DIRECTORS. The Company does not currently compensate its Directors for services provided as Directors of the Company. Except for two non-employee directors who each received 5,000 shares of Common Stock for a value totaling $90,000 (based on market value) in April 1996, no compensation was paid to non-employee Directors for services performed as Directors of the Company during the fiscal year ended March 31, 1997. DIRECTORS AND OFFICERS LIABILITY INSURANCE. The Company has obtained directors' and officers' liability insurance with an aggregate liability for the policy year, inclusive of costs of defense, in the amount of $3,000,000. The insurance policy ending April 3, 1997, was renewed April 1, 1997 and will expire April 3, 1998. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Company's Certificate of Incorporation and Bylaws designate the relative duties and responsibilities of the Company's officers, establish procedures for actions by directors and stockholders and other items. The Company's Certificate of Incorporation and Bylaws also contain extensive indemnification provisions that will permit the Company to indemnify its officers and directors to the maximum extent provided by Delaware law. 31. In addition, the Company has adopted a form of indemnification agreement (the "Indemnification Agreement") which provides the indemnitee with the maximum indemnification allowed under applicable law. The Company has not entered into Indemnification Agreements with any of its directors, executives, employees or consultants as of the date of this Report. Since the Delaware statute is non-exclusive, it is possible that certain claims beyond the scope of the statute may be indemnifiable. The Indemnification Agreements provide a scheme of indemnification which may be broader than that specifically provided by Delaware law. It has not yet been determined, however, to what extent the indemnification expressly permitted by Delaware law may be expanded, and therefore the scope of indemnification provided by the Indemnification Agreements may be subject to future judicial interpretation. The Indemnification Agreement provides, in pertinent part, that the Company shall indemnify an indemnitee who is or was a party or is threatened, pending or completed action or proceeding whether civil, criminal, administrative or investigative by reason of the fact that the indemnitee is or was a director, officer, key employee or agent of the Company or any subsidiary of the Company. The Company shall advance all expenses, judgments, fines, penalties and amounts paid in settlement (including taxes imposed on indemnitee on account of receipt of such payouts) incurred by the indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding as described above. The indemnitee shall repay such amounts advanced only if it shall be ultimately determined that he or she is not entitled to be indemnified by the Company. The advances paid to the indemnitee by the Company shall be delivered within 20 days following a written request by the indemnitee. Any award of indemnification to an indemnitee, if not covered by insurance, would come directly from assets of the Company, thereby affecting a stockholder's investment. TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS. Except as set forth in employment agreements of certain employees of the Company and its subsidiaries, the Company has no compensatory plans or arrangements which relate to the resignation, retirement or any other termination of an executive officer or key employee with the Company or a change in control of the Company or a change in such executive officer's or key employee's responsibilities following a change in control. 32. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of Common Stock as of July 8, 1997 by: (i) each person known by the Company to beneficially own 5% or more of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each Named Executive Officer of the Company and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law. The information set forth in the table and accompanying footnotes has been furnished by the named beneficial owners: NAME OF NO. OF BENEFICIAL OWNER SHARES(1) PERCENT(1) ---------------- ---------- ---------- Tweedia International Limited(2). . . . 14,570,269 43.9 Max Chian Yi Sun(3) . . . . . . . . . . 2,798,191 9.0 Joseph R. Wright, Jr.(4). . . . . . . . 4,802,500 13.4 Richard T. McNamar(5) . . . . . . . . . 150,000 * Xiao Jun(6) . . . . . . . . . . . . . . 425,000 1.3 James R. Lilley . . . . . . . . . . . . 0 - Michael H. Wilson . . . . . . . . . . . 0 - Drew Lewis. . . . . . . . . . . . . . . 10,000 * Ju Feng(7). . . . . . . . . . . . . . . 14,575,269 43.9 Teoh Set Seng . . . . . . . . . . . . . 0 - Michael J. Lim(8) . . . . . . . . . . . 756,900 2.4 All executive officers and directors as a group. . . . . . . . . 21,469,669 54.1 ______________ * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options currently exercisable, or exercisable within 60 days of July 8, 1997, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. (2) Includes 1,524,178 shares of Series A Convertible Preferred Stock which are convertible into an equivalent number of shares of Common Stock and options to purchase 318,182 shares of Common Stock. Beijing CATCH is the beneficial owner of all of the outstanding stock of Tweedia. Beijing CATCH is a wholly-owned subsidiary of the Committee on Science and Technology of the Municipality of Beijing, a political subdivision of the People's Government of the Municipality of Beijing. The address of Tweedia is Columbus Centre Building, Wickhams Cay, Road Town Tortola, British Virgin Islands. (3) Includes 2,797,691 shares of Common Stock held of record by Occidental Worldwide Corporation of which Mr. Sun has sole voting and investment power. The address of Mr. Sun is 126 JLN DEDAP, Taman Ampang Jaya, Trima Jaya, 68000 Ampang, Selangor, Malyasia. (4) Includes options to purchase 4,500,000 shares of Common Stock. The address of Mr. Wright is c/o AmTec, Inc., 599 Lexington Avenue, 44th Floor, New York, New York 10022. (5) Includes options to purchase 125,000 shares of Common Stock. (6) Includes options to purchase 415,000 shares of Common Stock. (7) Includes shares beneficially owned by Tweedia. Mr. Ju is an officer and director of Beijing CATCH which has an option to acquire Tweedia. Mr. Ju is the record holder of 5,000 shares of Common 33. Stock. The address for Mr. Ju is Jing Ming Building, No. 10 Hua Yan Road, Chaoyang District, Beijing, PRC, 100029. (8) Includes options to purchase 750,000 shares of Common Stock. 34. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In February 1995, pursuant to the Reorganization Agreement, Tweedia became the owner of approximately 12,727,000 shares, or approximately 41%, of the Company's issued and outstanding Common Stock. Beijing CATCH Communications Group Co., a Chinese paging company under the jurisdiction of the Beijing Municipal Government, has an option to acquire 100% of the outstanding capital stock of Tweedia. However, this option may not be exercised without the receipt by Beijing CATCH of all PRC regulatory approvals applicable to such exercise. After discussions with PRC counsel, management believes that these approvals to own securities listed on non-PRC stock exchanges are substantive in nature and are not readily obtained in the PRC except by corporations or banks that are specifically authorized to own foreign securities. As of December 21, 1995, pursuant to the terms of the Master Agreement, Beijing CATCH agreed to grant the Company a right of first refusal to participate as a majority investor and provide financial, operating and technical consulting services with respect to all rights granted, sold, licensed, or otherwise transferred to Beijing CATCH, directly or indirectly, that relate to the construction, operation or acquisition of any type of telephony, telecommunications equipment, paging equipment or related forms of communication equipment or service in the PRC. As consideration for this right of first refusal, the Company agreed to issue up to 50,000,000 shares of Common Stock to Tweedia based on the receipt of certain agreed upon amounts of net income by the Company relating to prospective Sino-foreign joint ventures involving the Company and Beijing CATCH. The Master Agreement supersedes certain terms of other prior agreements between the Company and Beijing CATCH concerning cooperation on telecommunications projects. As of July 8, 1997, the Company has not entered into, and management has no current intent of entering into, any Sino-foreign joint ventures with Beijing CATCH under the terms of the Master Agreement. As a result, no obligation for future issuances of Common Stock to Beijing CATCH under the Master Agreement exists or are contemplated. Beijing CATCH is in the process of being acquired by Hainan Minyuan Modern Agriculture Company ("Hainan Minyuan"), a publicly listed company in the PRC primarily engaged in real estate development and agriculture production in Hainan Province of the PRC. In late 1996, Hainan Minyuan proposed to acquire Beijing CATCH, and the acquisition was approved by the shareholders of both companies. As of May 1997, Hainan Minyuan's proposed acquisition of Beijing CATCH was awaiting final approval by the Chinese governmental authorities. If the acquisition receives final approval by the necessary Chinese governmental authorities, Hainan Minyuan will in turn hold the option to acquire control of Tweedia and a proxy to vote the shares of Tweedia. This option may not be exercised until all applicable PRC approvals are obtained. Hence at this time the control of Tweedia by Hainan Minyuan and its indirect ability to substantially influence the Company is uncertain. At the time of the Company's acquisition of the majority stake in Hebei Equipment, Hebei United Telecommunications Development Co. ("Hebei Development") held a 30% ownership of Hebei Equipment and Beijing CATCH held subscription rights to 9.2% ownership of Hebei Equipment. Subsequent to Hebei Equipment's conversion to a Sino-foreign joint venture company, Beijing CATCH defaulted on its required capital contribution of 2 million Renminbi (1 U.S. dollar equals approximately 8.35 Renminbi). On April 22, 1997, the Board of Directors of Hebei Equipment resolved to terminate Beijing CATCH's ownership participation in Hebei Equipment, and the Company and Hebei Development agreed to provide to Hebei Equipment the 2 million Renminbi defaulted on by Beijing CATCH. The allocation of (i) the 2 million Renminbi investment required from the Company and Hebei Development and (ii) the 9.2% ownership previously held by Beijing CATCH are currently under discussions between the Company and Hebei Development. 35. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS: Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (a)(2) EXHIBITS The following exhibits, which are furnished with this Annual Report or incorporated herein by reference, are filed as part of this Annual Report: EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 2.1 Agreement for Sale of Assets by and between ITV Communications, Inc. and Netmatics, Inc., dated January 11, 1996, and Promissory Note and Security Agreement dated January 16, 1996(1) 2.2 Agreement of Merger between AVIC Group International, Inc., a Colorado corporation, with and into AVIC Group International, Inc., a Delaware corporation dated July 10, 1996(8) 3.1 Amendments to Articles of Incorporation of the Company dated June 7, 1996 and June 10, 1996(5) 3.2 Restated Certificate of Incorporation of the Company(7) 3.3 Certificate of Ownership and Merger Merging China Telecommunications and Technologies, Inc. into the Company 3.4 Certificate of Designations of Preferences of Series C Convertible Preferred Stock of the Company 3.5 Certificate of Designations of Preferences of Series D Convertible Preferred Stock of the Company(7) 3.6 Restated Bylaws of the Company(8) 4.1 Specimen Common Stock Certificate 10.1 1995 Stock Option Plan(2) 10.2 1996 Stock Option Plan(2) 10.3 Real Property lease between Lexreal Associates and the Company dated May 8, 1995(2) 10.4 Employment Agreement between Joseph R. Wright, Jr. and the Company dated as of April 15, 1995(3), and amendments thereto dated as of November 21 1995(4) and September 12, 1996(6) 10.5 Employment Agreement between Michael J. Lim and the Company dated as of November 6, 1995(4) 10.6 Employment Agreement between Xiao Jun and the Company dated as of January 1, 1996(4) 10.7 Employment Agreement between Albert G. Pastino and the Company dated as of June 16, 1997 10.8 Employment Agreement between James F. O'Brien and the Company dated as of June 16, 1997 10.9 Form of Indemnification Agreement for directors and officers of the Company(8) 10.10 Consulting Agreement between American CATCH Communications Group Co. and the Company dated November 30, 1995(4) 10.11 Consulting Agreement between Michael Markow and the Company dated December 15, 1995(4) 10.12 Consulting Agreement between David Rubenstein and the Company dated October 15, 1996(6) 10.13 Consulting Agreement between E. Pendleton James and the Company dated March 22, 1995, and amendment thereto dated January 8, 1997(6) 36. 10.14 Common Stock Investment Agreement between Promethean Investment Group L.L.C. and the Company dated March 31, 1997, as amended on April 29, 1997 10.15 China Paging Networks Preliminary Agreement between Beijing CATCH Communications Group Co. and the Company dated April 1995(3) 10.16 Mobile Telephone Network Preliminary Agreement between Beijing CATCH Communications Group Co. and the Company dated April 27, 1995(3) 10.17 Cellular Telephone Network Preliminary Agreement between Beijing CATCH Communications Group Co., Tweedia International Limited and the Company dated April 1995(3) 10.18 Memorandum of Understanding between Hebei United Communications Equipment Company and the Company dated May 1, 1995(3) 10.19 Master Agreement and Right of First Refusal between Beijing CATCH Communications Group Co., Tweedia International Limited and the Company dated December 21, 1995(4) 10.20 Letter of Intent between Hebei United Communications Equipment Company and the Company dated October 10, 1995(4) 10.21 Joint Venture Contract between Beijing CATCH Communications Group Co. and the Company dated June 11, 1996(5) 10.22 Joint Venture Contract between Hebei United Communications Equipment Company and NTTI dated December 22, 1995(5) 10.23 Agreement between Hebei United Communications Equipment Company and the Company dated March 22, 1996(5) 10.24 Joint Venture Contract between Hebei United Telecommunications Development Company, Beijing CATCH Communications Group Co. and the Company dated September 20, 1996 10.25 Project Cooperation Contract between China United Telecommunications Co. and Hebei United Telecommunications Engineering Company Limited dated February 9, 1996 10.26 Term Loan Agreement between Hebei United Telecommunications Engineering Company Limited and Bank of Tokyo-Mitsubishi, Ltd. dated August 5, 1996 10.27 Project Cooperation Contract between Hebei Cable Television Station and Hebei United Communications Equipment Company Limited dated April 8, 1997 21.1 Subsidiaries of the Company 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP 27 Financial Data Schedule _______________ (1) Previously filed as part of the Company's Current Report on Form 8-K dated January 19, 1996. (2) Previously filed as part of the Company's Transition Report on Form 10-KSB for the transition period from October 1, 1994 to March 31, 1995. (3) Previously filed as part of the Company's Current Report on Form 8-K dated May 1, 1995. (4) Previously filed as part of the Company's Current Report on Form 8-K dated December 22, 1995. (5) Previously filed as part of the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996. (6) Previously filed as part of the Company's Registration Statement on Form S-8 filed on January 31, 1997. (7) Previously filed as part of the Company's Current Report on Form 8-K dated March 6, 1997. (8) Previously filed as part of the Company's Definitive Proxy Statement dated April 18, 1996. (b) REPORTS ON FORM 8-K: During the quarter ended March 31, 1997, the Company filed a report on Form 8-K dated March 6, 1997 covering Items 7 and 9 under that Form relating to the issuance of shares of the Company's Series D Convertible Preferred Stock. 37. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. AMTEC, INC. By /s/ Joseph R. Wright, Jr. ---------------------------------------- Joseph R. Wright, Jr. CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT Date: July 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Joseph R. Wright, Jr. Chairman of the Board of Directors, July 14, 1997 - - - ------------------------- Chief Executive Officer and President Joseph R. Wright, Jr. (Principal Executive Officer) /s/ Richard T. McNamar Vice Chairman of the Board of July 14, 1997 - - - ------------------------- Directors Richard T. McNamar /s/ Xiao Jun Executive Vice President - AVIC July 14, 1997 - - - ------------------------- China and Director Xiao Jun /s/ James R. Lilley Director July 14, 1997 - - - ------------------------- James R. Lilley /s/ Michael H. Wilson Director July 14, 1997 - - - ------------------------- Michael H. Wilson /s/ Drew Lewis Director July 14, 1997 - - - ------------------------- Drew Lewis Director July 14, 1997 - - - ------------------------- Ju Feng Director July 14, 1997 - - - ------------------------- Teoh Set Seng /s/ Michael J. Lim Executive Vice President - Operations July 14, 1997 - - - ------------------------- (Principal Financial and Accounting Michael J. Lim Officer) 38. AMTEC INC. AND SUBSIDIARIES (FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1997 AND 1996, AND INDEPENDENT AUDITORS' REPORT F-1 AMTEC INC. AND SUBSIDIARIES (FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES) TABLE OF CONTENTS - - - -------------------------------------------------------------------------------- PAGE INDEPENDENT AUDITOR'S REPORT F-3 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-4 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1997 AND 1996: Consolidated Balance Sheets F-5 Consolidated Statements of Operations F-6 Consolidated Statements of Stockholders' Equity F-7 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-10 - F-24 F-2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders AmTec Inc. and Subsidiaries (formerly AVIC Group International Inc. and Subsidiaries) We have audited the accompanying consolidated balance sheet of AmTec Inc. and Subsidiaries (formerly AVIC Group International, Inc. and Subsidiaries) as of March 31, 1997, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the March 31, 1997 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company is engaged in developing telecommunications networks in the People's Republic of China. As discussed in Note 1 to the financial statements, the Company's substantial capital requirements and the Company's operating losses since inception raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP New York, New York June 20, 1997 July 8, 1997 (as to Note 16) F-3 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders AVIC Group International, Inc. We have audited the accompanying consolidated balance sheet of AmTec, Inc. and Subsidiaries (formerly AVIC Group International, Inc. and Subsidiaries) as of March 31, 1996, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the two years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AmTec, Inc. and Subsidiaries (formerly AVIC Group International, Inc. and Subsidiaries) as of March 31, 1996, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the year ended March 31, 1996, the Company had a net loss of $5,281,730. Recovery of the Company's assets is dependent upon future events, the outcome of which is indeterminable. In addition, successful completion of the Company's development program and its transition, ultimately, to the attainment of profitable operations is dependent upon obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure. These factors, among others, as discussed in Note 1 to the financial statements raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California June 18, 1996 F-4 AMTEC INC. AND SUBSIDIARIES (FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES) CONSOLIDATED BALANCE SHEETS MARCH 31, 1997 AND 1996 - - - --------------------------------------------------------------------------------
1997 1996 ASSETS: CURRENT ASSETS: Cash $ 5,390,871 $ 185,889 Prepaid expenses and other current assets 182,090 60,678 ------------- ------------ Total current assets 5,572,961 246,567 Property and equipment, net 518,020 76,233 GSM construction costs 22,017,869 - Joint venture deposits - 1,170,000 Additional investment in joint venture 1,192,000 - Office lease deposit 111,500 167,200 Deferred expenses 5,853 - ------------- ------------ Total assets $ 29,418,203 $ 1,660,000 ------------- ------------ ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable and accrued expenses $ 991,194 $ 866,990 Accrued interest 780,902 651,063 Loans payable - stockholders 2,413,553 2,563,553 Current portion of other payables 450,685 - ------------- ------------ Total current liabilities 4,636,334 4,081,606 ------------- ------------ Loans payable 11,956,486 - ------------- ------------ Other payables 10,290,128 - ------------- ------------ Minority interest 1,987,167 - ------------- ------------ Commitments and contingencies STOCKHOLDERS' EQUITY/(DEFICIT): Series A Convertible Preferred Stock: $.001 par value, authorized 10,000,000 shares; 1,524,178 shares issued and outstanding in 1997 and 1996 1,524 1,524 Series D Convertible Preferred Stock: $.001 par value, authorized 10,000,000 shares; 150 and 0 shares issued and outstanding in 1997 and 1996, respectively. 1 - Common stock: $.001 par value, authorized 100,000,000 shares; 31,257,921 and 28,436,952 issued and outstanding in 1997 and 1996, respectively 31,258 28,437 Additional paid-in capital 25,202,108 18,648,620 Accumulated deficit (20,592,536) (16,527,651) Cumulative foreign currency exchange gain (1,231) - Non-refundable equipment purchase deposit (4,572,536) (4,572,536) Warrants 479,500 - ------------- ------------ Total stockholders' equity/(deficit) 548,088 (2,421,606) ------------- ------------ $ 29,418,203 $ 1,660,000 ------------- ------------ ------------- ------------
See notes to consolidated financial statements. F-5 AMTEC INC. AND SUBSIDIARIES (FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF OPERATIONS - - - --------------------------------------------------------------------------------
1997 1996 1995 Net sales $ - $ 683,733 $ 345,276 ------------ ------------- ------------- Expenses: Cost of sales - 637,065 330,981 Selling, general and administrative 3,996,151 3,207,570 3,513,567 Research and development - 1,287,629 2,086,324 ------------ ------------- ------------- Total expenses 3,996,151 5,132,264 5,930,872 ------------ ------------- ------------- Loss from operations (3,996,151) (4,448,531) (5,585,596) ------------ ------------- ------------- Other income (expense): Consulting income - - 150,000 Rental income 42,420 - - Interest income 152,824 - - Gain from sale of assets - 31,880 - Loss from abandoned assets - (130,840) - Equity in losses of unconsolidated subsidiary - (500,000) - Interest expense (129,039) (241,856) (117,533) Exchange loss (19,490) - - Other - net - 7,617 14,826 Write off of investment in Netmatics (198,538) - - ------------ ------------- ------------- Total other income (expense) (151,823) (833,199) 47,293 ------------ ------------- ------------- Loss before minority interest (4,147,974) (5,281,730) (5,538,303) Minority interest in loss of subsidiaries 83,089 - - ------------ ------------- ------------- Net loss $ (4,064,885) $ (5,281,730) $ (5,538,303) ------------ ------------- ------------- ------------ ------------- ------------- Preferred stock dividend requirement $ 10,000 $ - $ - ------------ ------------- ------------- Loss applicable to common shares $ (4,074,885) $ - $ - ------------ ------------- ------------- ------------ ------------- ------------- Net loss per common share $ (0.14) $ (0.21) $ (0.32) ------------ ------------- ------------- ------------ ------------- ------------- Weighted average common shares outstanding 29,102,347 25,651,045 17,173,262 ------------ ------------- ------------- ------------ ------------- -------------
See notes to consolidated financial statements. F-6 AMTEC INC. AND SUBSIDIARIES (FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) - - - --------------------------------------------------------------------------------
SERIES A SERIES B SERIES D COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK --------------------- -------------------- ---------------- ---------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- --------- --------- -------- ------ ------ ------ ------ BALANCE, April 1, 1994 10,000,500 $ 10,001 - $ - - $ - - $ - Sale of common stock for cash 12,742,909 12,743 - - - - - - Forgiveness of stockholder accrued expenses, September 1994 - - - - - - - - Issuance of common stock for merger, February 1995 2,500,000 2,500 - - - - - - Net loss - - - - - - - - ---------- --------- --------- -------- ------ ------ ------ ------ BALANCE, March 31, 1995 25,243,409 25,244 - - - - - - Issuance of Series A preferred stock for interest in deposit, December 1995 - - 1,524,178 1,524 - - - - Sale of common stock for cash 1,302,020 1,302 - - - - - - Conversion of stockholders' loans to common stock, February 1996 1,891,553 1,891 - - - - - - Exercise of options, February 1996 - - - - - - - - Equipment purchase deposit - - - - - - - - Net loss - - - - - - - - ---------- --------- --------- -------- ------ ------ ------ ------ BALANCE, March 31, 1996 28,436,982 28,437 1,524,178 1,524 - - - - Issuances of Series B preferred stock - - - - 100 1 - Conversion of Series B shares 1,507,477 1,507 - - (100) (1) - Issuance of Series D preferred stock - - - - - - 150 1 Common shares issued for services rendered 90,962 91 - - - - - - Common shares issued to employees as compensation 212,500 213 - - - - - - Common shares issued for directors fees 10,000 10 - - - - - - Sale of common shares 1,000,000 1,000 - - - - - - Preferred dividends - - - - - - - - Warrants - - - - - - - - Cumulative foreign exchange loss - - - - - - - - Net loss - - - - - - - - ---------- --------- --------- -------- ------ ------ ------ ------ BALANCE, March 31, 1997 31,257,921 $ 31,258 1,524,178 $ 1,524 - $ - 150 $ 1 ---------- --------- --------- -------- ------ ------ ------ ------ ---------- --------- --------- -------- ------ ------ ------ ------ CUMULATIVE FOREIGN EQUIPMENT ADDITIONAL EXCHANGE PURCHASE PAID-IN ACCUMULATED GAIN (LOSS) DEPOSIT WARRANTS CAPITAL DEFICIT TOTAL BALANCE, April 1, 1994 $ - $ 7,100,149 $ (5,707,618) $ - $ - $ 1,402,532 Sale of common stock for cash - 2,592,589 - - - 2,605,332 Forgiveness of stockholder accrued expenses, September 1994 - 305,027 - - - 305,027 Issuance of common stock for merger, February 1995 - (2,500) - - - - Net loss - - (5,538,303) - - (5,538,303) ---------- ------------ ------------ --------- ------------ ---------- BALANCE, March 31, 1995 - 9,995,265 (11,245,921) - - (1,255,412) Issuance of Series A preferred stock for interest in deposit, December 1995 - 4,571,012 - - - 4,572,536 Sale of common stock for cash - 2,192,681 - - - 2,193,983 Conversion of stockholders' loans to common stock, February 1996 - 1,889,662 - - - 1,891,553 Exercise of options, February 1996 - - - - - - Equipment purchase deposit - - - - (4,572,536) (4,572,536) Net loss - - (5,281,730) - - (5,281,730) ---------- ------------ ------------ --------- ------------ ---------- BALANCE, March 31, 1996 - 18,648,620 (16,527,651) - (4,572,536) (2,421,606) Issuances of Series B preferred stock - 2,341,218 - - - 2,341,219 Conversion of Series B shares - (1,506) - - - - Issuance of Series D preferred stock - 1,499,999 - - - 1,500,000 Common shares issued for services rendered - 316,249 - - - 316,340 Common shares issued to employees as compensation - 318,538 - - - 318,751 Common shares issued for directors fees - 89,990 - - - 90,000 Sale of common shares - 1,999,000 - - - 2,000,000 Preferred dividends (10,000) - - (10,000) Warrants 479,500 - - - - 479,500 Cumulative foreign exchange loss - - - (1,231) - (1,231) Net loss - - (4,064,885) - - (4,064,885) ---------- ------------ ------------ --------- ------------ ---------- BALANCE, March 31, 1997 $ 479,500 $ 25,202,108 $(20,592,536) $ (1,231) $ (4,572,536) $ 548,088 ---------- ------------ ------------ --------- ------------ ---------- ---------- ------------ ------------ --------- ------------ ----------
See notes to consolidated financial statements. F-7 AMTEC INC. AND SUBSIDIARIES (FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF CASH FLOWS - - - --------------------------------------------------------------------------------
1997 1996 1995 Cash flows from operating activities: Net loss $ (4,064,885) $ (5,281,730) $ (5,538,303) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of capitalized software development costs - 281,250 168,750 Depreciation 43,193 346,005 344,611 Loss from abandoned assets - 130,840 - Gain from sale of assets - (31,880) - Minority interest in net loss 83,089 - - Issuance of warrants for services rendered 479,500 - - Issuance of common stock for compensation, directors' fees and services rendered 725,091 - - Equity in losses of unconsolidated subsidiary - 500,000 - (Increase) decrease in: Accounts receivable - 98,895 (96,614) Inventories - (96,091) (110,154) Prepaid expenses and other current assets 5,948,801 (91,200) (12,258) Office lease deposit 55,700 - 850,000 Other assets - (131,887) (16,453) Deferred expenses 59,412 - - Increase (decrease) in: Accounts payable and accrued expenses 98,221 1,251,464 (103,086) Accrued interest 129,839 136,982 114,293 ------------ ---------- ------------ Net cash provided by (used in) operating activities 3,557,961 (2,887,352) (4,399,214) ------------ ---------- ------------ Cash flows from investing activities: Purchase of property and equipment (362,417) (119,592) (527,725) Joint venture deposit 1,170,000 (1,170,000) - Proceeds from sale of assets - 250,000 - Increase in capitalized computer software development costs - - (333,767) GSM construction costs (21,880,584) - - Joint Venture's Net liabilities assumed 6,549,703 - - Increase in Investment in joint venture (1,192,000) - - ------------ ---------- ------------ Net cash used in investing activities (15,715,298) (1,039,592) (861,492) ------------ ---------- ------------ Cash flows from financing activities: Borrowings 11,521,100 739,952 2,245,227 Receipt of common stock subscription receivable - - 1,536,303 Proceeds from sale of common stock 2,000,000 2,193,983 2,605,200 Proceeds from sale of Series B Convertible Preferred Stock 2,341,219 - - Proceeds from sale of Series D Convertible Preferred Stock 1,500,000 - - ------------ ---------- ------------ Net cash provided by financing activities 17,362,319 2,933,935 6,386,730 ------------ ---------- ------------ Net increase (decrease) in cash and cash equivalents 5,204,982 (993,009) 1,126,024 Cash and cash equivalents, beginning of period 185,889 1,178,898 52,874 ------------ ---------- ------------ Cash and cash equivalents, end of period $ 5,390,871 $ 185,889 $ 1,178,898 ------------ ---------- ------------ ------------ ---------- ------------
(Continued) F-8 AMTEC INC. AND SUBSIDIARIES (FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF CASH FLOWS - - - -------------------------------------------------------------------------------- Supplemental Cash Information: No interest or income taxes were paid during fiscal 1997, 1996 and 1995. Non Cash Financing Activities: In fiscal 1997, 100 shares of Series B Preferred stock were converted into 1,507,477 shares of common stock. In fiscal 1996, loans from stockholders of $1,891,553 were converted into 1,891,553 shares of common stock. In fiscal 1996, 1,524,178 shares of Series A Preferred Stock were issued in exchange for the rights to a deposit totaling $4,572,536. In fiscal 1996, a deposit from a stockholder of $850,000 was converted to a note payable. In fiscal 1995, accrued expenses to a stockholder of $305,159 was forgiven and additional paid-in capital was increased by $305,159. See notes to consolidated financial statements. (Concluded) F-9 AMTEC INC. AND SUBSIDIARIES (FORMERLY AVIC GROUP INTERNATIONAL INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 - - - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND LINE OF BUSINESS - AmTec, Inc. (the "Company" or "AmTec") was incorporated in Colorado on May 10, 1982. In February 1995, AmTec acquired all of the outstanding stock of ITV Communications, Inc. ("ITV"). For accounting purposes, the acquisition has been treated as a reverse acquisition with ITV as the acquirer. The historical financial statements prior to February 1995 are those of ITV. AmTec had no assets at the date of the acquisition and, therefore, no proforma information is being presented. The Company is currently devoting substantially all of its efforts with its majority-owned subsidiary in the People's Republic of China ("PRC") which is involved in providing financing and building telecommunications networks for third parties in the PRC. The Company, through its wholly-owned subsidiary, ITV was engaged in the design, manufacture and sale of technologically advanced communication devices. In January 1996, the Company sold all of the business and operating assets of ITV and is no longer involved in the business that ITV was engaged in. The Company (including its subsidiaries) currently does not generate sales or market any products. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the Company, its 60.8% owned subsidiary Hebei United Communications Equipment Co., Ltd. and subsidiary ("Hebei Equipment") (a limited life Sino-foreign joint venture) and its wholly-owned subsidiary, ITV Communications, Inc. All significant intercompany accounts and transactions are eliminated in consolidation. Hebei Equipment owns 51% of Hebei United Telecommunications Engineering Company, Ltd. ("Hebei Engineering"). The financial statements of Hebei Equipment included in the consolidated financial statements are as of and for the period ended December 31, 1996, Hebei Equipment's year-end. In the period January 1, 1997 to the Company's fiscal year end, an additional $1,192,000 has been invested by the Company in Hebei Engineering. Such amount will not eliminate on consolidation due to the different year-end dates. As such, the amount has been included in the balance sheet at March 31, 1997 as Additional investment in joint venture. BASIS OF PRESENTATION - The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. During the years ended March 31, 1997, 1996 and 1995, the Company experienced net losses of $4,064,885, $5,281,730 and $5,538,303, respectively. In view of these matters, realization of the assets in the accompanying balance sheet is dependent upon the Company's ability to raise capital, to meet its financing and operating requirements and the success of its majority owned subsidiary in the PRC to complete its projects and to obtain profitable operations. In response, management is pursuing investor opportunities and joint ventures to provide funds needed for such existing and future projects. MANAGEMENT ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the F-10 financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS - For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost. Depreciation is provided using the straight line method, to write off the cost of property and equipment over their estimated useful lives, after deducting the estimated salvage value of 10% of cost, as follows: Land and buildings 20 years Furniture, fixtures and equipment 5 years Motor vehicles 5 years Leasehold improvements 5 years Computer equipment 3 years REVENUE RECOGNITION - Revenue related to the Company's former operations of ITV was derived primarily from product sales, and was recognized upon shipment of the products. (See Note 3 as to current projects). RESEARCH AND DEVELOPMENT COSTS - Research and development costs of ITV were charged to expense as incurred. These costs consist primarily of salaries and consulting fees. INCOME TAXES - The Company uses the liability method of accounting for income taxes pursuant to Statement of Financial Accounting Standards, No. 109 "Accounting for Income Taxes." FOREIGN CURRENCY TRANSLATION - The functional currency for the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for the balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains and losses, net of applicable deferred income taxes if any, resulting from such translation are included in stockholders' equity. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value because of the immediate short-term maturity of these financial instruments. NET LOSS PER SHARE - Net loss per share is based on the weighted average number of common and common equivalent shares outstanding during each year. The shares to be issued upon exercise of outstanding stock options and warrants are not included as common stock equivalents as they are antidilutive. RECLASSIFICATION - Certain amounts for the fiscal year ended March 31, 1996 have been reclassified to conform to the current year's presentation. NEW ACCOUNTING PRONOUNCEMENTS - In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which is effective for financial statements ending after December 15, 1997. This statement supersedes Accounting Principles Board No. 15 and replaces the presentation of primary EPS on the face of the income statement for all F-11 entities with complex capital structures, and provides guidance on other computational changes. Had the provisions of the statement been effective for the current year, the following proforma EPS amounts would have been disclosed: Basic EPS $ (0.14) --------- --------- No disclosure of Diluted EPS would be required due to the anti-dilutive effects of the Company's warrants, options and convertible securities. 2. CONSOLIDATION OF MAJORITY OWNED SUBSIDIARY In establishing its activities in the PRC, the Company determined to form a Sino Foreign Joint Venture ("SFJV") as its investment vehicle. In March 1996, the Company invested $1,170,000 in a PRC joint venture company and requested approval for conversion of such company to an SFJV from the Hebei Province government. In September 1996, preliminary regulatory approval for Hebei Equipment was granted and the SFJV was formed with the Company holding a 60.8% interest in the entity. In April 1997, the Company received final PRC regulatory approval for the SFJV. Hebei Equipment was established to hold a 51% interest in Hebei Engineering which is developing a GSM network in Hebei Province, PRC. Nippon Telegraph and Telephone International, Inc. ("NTTI") holds the remaining 49% of Hebei Engineering. The Company's investment was previously accounted for as a joint venture deposit totaling $1,170,000. 3. INVESTMENT IN GSM PROJECT Hebei Equipment, through its 51%-owned subsidiary, Hebei Engineering has invested approximately $22,000,000 in the construction of a GSM telecommunications network (the "GSM network") in Hebei Province of the PRC. The GSM network is being built pursuant to a 15-year agreement with China United Telecommunication Company ("UNICOM"). Terms of the agreement include the following: - Initially, UNICOM will own 30% of the assets while Hebei Engineering will own 70% of the assets. - Both parties agree to distribute the profit according to the "Distributable Cash Flow" (as defined) with 22% going to UNICOM and 78% going to Hebei Engineering. - Each year, Hebei Engineering will transfer assets equal in value to the Distributable Cash Flow received up to 60% of the assets. - The remaining 10% shall be assigned to UNICOM without any consideration upon the termination of the contract. - Hebei Engineering will continue to receive 78% of the Distributable Cash Flow after transfer of all the assets for the remainder of the 15 year period. Under PRC law, foreign entities, such as Hebei Engineering, are not permitted to own telecommunications networks. As such, the Company has recorded its investment (GSM Construction costs) at cost and will amortize it over the life of the project. Income will be recognized on receipt of distributable cash flow. Management's current cash flow projections indicate the investment is fully realizable. UNICOM commenced operation of the GSM network in February 1997. F-12 4. INVESTMENT IN NETMATICS The Company held a 39% (as of March 31, 1997) investment interest in Netmatics, Inc. ("Netmatics"), which it acquired in January 1996 in connection with the sale by the Company of the ITV business and operating assets. Netmatics was engaged in the design, manufacture, and sale of technologically advanced communication devices. In fiscal 1996, the Company suspended the equity method of accounting for its investment in Netmatics when the Company's share of losses equaled the carrying amount of the investment. In fiscal 1996, the Company's share of Netmatics' loss charged to operations was $500,000. During fiscal 1997, the Company advanced $12,000 to and purchased $186,538 of debentures from Netmatics. Such amounts were written-off as of March 31, 1997. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following: 1997 1996 Land and buildings $ 195,350 $ - Furniture, fixtures and equipment 249,268 70,936 Motor vehicles 111,298 - Computer software 12,273 12,273 Leasehold improvements 12,580 12,580 ---------- --------- 580,769 95,789 Less accumulated depreciation 62,749 19,556 ---------- --------- $ 518,020 $ 76,233 ---------- --------- ---------- --------- Depreciation expense for fiscal 1997, 1996, and 1995 was $43,193, $346,005 and $344,611 respectively. 6. DEPOSITS NON-REFUNDABLE EQUIPMENT PURCHASE DEPOSIT - In December 1995, the Company issued 1,524,178 shares of Series A Convertible Preferred Stock to its principal stockholder, Tweedia International Limited ("Tweedia"), in exchange for a $4,572,536 non-refundable deposit which Tweedia held with a vendor. The deposit is in connection with the purchase of equipment. If the deposit is not utilized, Tweedia has agreed to return the Convertible Preferred Shares to the Company for cancellation. As the preferred shares were issued in connection with acquiring the deposit, and the utilization of such deposit is in doubt, the deposit is reflected in the financial statements as a deduction of stockholders' equity. 7. OTHER PAYABLES The Company is financing equipment purchases related to construction of the GSM network through vendor financing under deferred payment terms with final installment repayable in 2001 and 1998, respectively. All of the repayment of the liabilities were guaranteed by NTTI. Liabilities will be payable as follows: F-13 LIABILITY REPAYABLE Current $ 450,685 1998 8,938,073 1999 450,685 2000 450,685 2001 450,685 ------------- Total 10,740,813 Less: current portion 450,685 ------------- $ 10,290,128 ------------- ------------- 8. LOANS PAYABLE Loans payable consists of the following: MARCH 31, 1997 1996 Amounts due to shareholders (1) $ 2,413,553 $ 2,563,553 Bank loan (2) 11,956,486 - ------------- ------------ 14,370,039 2,563,553 Less - current maturities 2,413,553 2,563,553 ------------- ------------ $ 11,956,486 $ - ------------- ------------ ------------- ------------ (1) The amounts are payable on demand with a 8.5% interest rate. The above amounts include a non-interest bearing note of $850,000 due to Beijing CATCH, a related party. (2) On August 5, 1996, the SFJV obtained a loan facility of $20,000,000 from the Bank of Tokyo - Mitsubishi, Ltd. Beijing Branch at an annual rate of 6.82%, of which approximately $12,000,000 was borrowed as of December 31, 1996. The obligation of the borrower under the agreement was guaranteed by NTTI. The principal of the loan shall be repaid in five equal, consecutive, semi-annual installments, each in an amount equal to one-fifth of the principal amount of the loan outstanding on the third anniversary of the date of the agreement with subsequent installments on the last day of each of the next four six-month periods thereafter, provided, however, that the last such installment shall be in the amount necessary to repay in full the unpaid principal amount of the loan. This amount is repayable as follows: F-14 YEAR ENDING MARCH 31, 1998 $ - 1999 - 2000 2,400,000 2001 2,400,000 2002 2,400,000 Thereafter 4,756,486 ------------- $ 11,956,486 ------------- ------------- 9. COMMITMENTS AND CONTINGENCIES LEASES - The Company leases a facility for its corporate and operations offices under a long-term lease agreement. Minimum annual rental commitments under this lease are as follows: YEAR ENDING MARCH 31, 1998 $ 372,327 1999 372,327 2000 343,582 2001 55,667 ------------ $ 1,143,903 ------------ ------------ Rent expense for fiscal 1997, 1996 and 1995 was $369,969, $399,992 and $340,918, respectively. EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements with officers expiring through April 2000 with aggregate annual salaries of $1,125,000. LITIGATION - The Company and its subsidiaries are involved in litigation matters which involve certain claims which arise in the normal course of business, none of which, in the opinion of management, is expected to have a materially adverse effect on the Company's consolidated financial statements. FINANCIAL SERVICES - The Company entered into a financial advisory services agreement with an investment banking firm. The agreement calls for a $50,000 retainer and the payment of success fees for raising capital for the Company and its projects. In addition, the Company has agreed to issue a warrant to purchase up to 600,000 shares of the Company's Common Stock to such investment banking firm. This warrant has an exercise price of $2.00 per share, which was the market value of the Company's Common Stock at the time of the issuance of the warrants. 300,000 of the warrants vest immediately, and the additional 300,000 warrants will vest only when such investment banking firm has raised a minimum of ten million dollars in any form of financing for the Company. (See Note 10) REGULATION - Each of the Company's joint ventures, Hebei Equipment and Hebei Engineering, is organized under the laws of the PRC as a Sino-foreign equity joint venture enterprise, a distinct legal entity with limited liability. Such entities are governed by the Law of the PRC on Joint Ventures Using Chinese and Foreign Investments, and implementing regulations related thereto. The parties to an equity joint venture have rights to the financial returns of the joint venture in proportion to the joint F-15 venture interests that they hold. The operation of equity joint ventures is subject to an extensive body of law governing such matters as formation registration, capital contribution, capital distributions, accounting, taxation, foreign exchange, labor and liquidation. The transfer or increase of an interest in a Sino-foreign equity joint venture enterprise requires agreement among the parties to the venture and is effective upon approval of relevant government agencies. RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE - The Renminbi Chinese currency is not a freely convertible currency at present. The Company's joint ventures will receive nearly all of their revenue in Renminbi, which will need to be converted to other currencies, primarily U.S. dollars, and remitted outside of the PRC. Effective July 1, 1996, foreign currency "current account" transactions by foreign investment enterprises, including Sino-foreign joint ventures, are no longer subject to the approval of State Administration of Foreign Exchange ("SAFE", formerly, "State Administration of Exchange Control"), but need only a ministerial review, according to the ADMINISTRATION OF THE SETTLEMENT, SALE AND PAYMENT OF FOREIGN EXCHANGE PROVISIONS promulgated in 1996. "Current account" items include international commercial transactions which occur on a regular basis, such as those relating to trade and provision of services. Distributions to joint venture parties also are considered a "current account transaction." Other non-current account items, known as "capital account" items, remain subject to SAFE approval. CAPITAL COMMITMENTS - The Company's 60.8% owned subsidiary Hebei Equipment has entered into a 15-year agreement with UNICOM which defines terms relating to the construction of a telecommunications network in Hebei Province in China. The total investment is approximately $72,000,000, of which approximately $22,000,000 had been paid in 1996. EMPLOYEE RETIREMENT BENEFITS AND POST-RETIREMENT BENEFIT - The Company's Chinese employees in the PRC are entitled to a retirement pension calculated with reference to their basic salaries on retirement and their length of services in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to these retired staff. The Company is required to make contributions to the state retirement plan at 18% of the adjusted monthly basic salaries of the current employees. The Company is not obligated under any other post-retirement plans and post-employment benefits are not material. 10. STOCKHOLDERS' EQUITY STOCK PURCHASE AGREEMENT - On August 31, 1994, the Company entered into a stock purchase agreement to sell 12,727,909 shares of common stock for approximately $2,600,000. The price per share of $.051 was determined based on the cash received and the value attributed to the exclusive distribution agreement. In connection with this sale, an option (expiring December 31, 1997) was granted to purchase 318,182 shares of common stock at $.711 per share. CONVERSION OF LOANS PAYABLE - In December 1995, loans payable and accrued interest in the amount of $1,891,553 were converted to common stock at a price per share of $1.00 (based on other market sales at the time). SALE OF COMMON STOCK - In September and November 1995, and February 1996, the Company sold an aggregate of 976,000 shares of common stock for $976,000, a price of $1.00 per share. In March 1996, the Company entered into a stock purchase agreement to sell 191,020 shares of common stock for $1,170,000, a price of $6.125 per share. F-16 In November 1996, the Company sold 1,000,000 shares of the Company's common stock through subscription agreements. The Company received $2 million in proceeds with respect to these subscriptions based on the quoted market value of the common shares at the time of the transactions. FORGIVENESS OF STOCKHOLDERS ACCRUED EXPENSES - In September 1994, a stockholder forgave $305,027 of accrued consulting fees owed by the Company. This amount has been charged to expense and included as an addition to additional paid-in capital. ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK - In December 1995, the Company issued 1,524,178 shares of Series A Convertible Preferred Stock (Series A Preferred) to its principal shareholder as consideration for the contribution of an interest in a non-refundable deposit in connection with a purchase contract. As such, the deposit and the Series A Preferred have been reflected in the financial statements as separate components of stockholders' equity. See Note 6. The holder of Series A Preferred Stock have full voting rights. The holder of the Series A Preferred is entitled to receive a cumulative preferential dividend of $0.18 per share per annum, payable in cash on December 31, of each year, commencing December 31, 1996. The Series A Preferred have a liquidation preference of $3 per share, plus the amount of any accrued and unpaid dividends. The Series A Preferred is convertible at the option of the holder at any time after January 1, 1997. SERIES B CONVERTIBLE PREFERRED STOCK - In June 1996, the Company completed a $2,500,000 offering of its Series B Convertible Preferred Stock ("Series B Preferred"). The offering consisted of 100 shares of Series B Preferred at $25,000 per share and warrants to purchase common stock of the Company. Each warrant entitles the holder to purchase one share of common stock at a fixed conversion price. During fiscal 1997 all outstanding Series B shares were converted to 1,507,477 common shares (priced at $3.19 per share based on fair market value at the time of conversion). No additional shares of Series B Convertible Preferred stock are authorized. SERIES D CONVERTIBLE PREFERRED STOCK - On March 6, 1997, the Company issued to a single investor 150 shares of the Company's Series D Convertible Preferred Stock, par value $.001 per share (the "Series D Preferred Shares") at a price of $10,000 per share. The holder of Series D Preferred Stock has no voting rights except with respect to certain matters that affect the rights of the Series D Preferred Stock. The holder of the Series D Preferred Shares is entitled to receive cumulative dividends at the annual rate of 8% per annum per share, payable quarterly (i) in shares of Common Stock or, (ii) in cash in connection with any payment pursuant to a Conversion Default (as defined below) at the election of the Company's board of directors. As of March 31, 1997, $10,000 of cumulative dividends were in arrears. The holders of Series D Preferred Shares have certain preferential rights over the holders of Common Stock in the event of the liquidation, dissolution or winding-up of the Company or a disposition of the Company's assets. The holder of the Series D Preferred Shares also has certain registration rights and certain rights to participate in exempt equity offerings by the Company until March 6, 1999. The Series D Preferred Shares are convertible by the holder into the number of shares of Common Stock which may be purchased at the lowest trading price during the 30 business days immediately preceding each conversion date (the "Lowest Trading Price") for the Series D Preferred Shares. In addition, under certain circumstances, the holder of the Series D Preferred Shares may be obligated to F-17 purchase additional shares of Common Stock for cash. If the Company does not have sufficient shares available to satisfy its obligations to the holder of Series D Preferred Shares upon receipt of a conversion notice, or otherwise fails or refuses to perfect conversion of any conversion of any Series D Preferred Shares (a "Series D Conversion Default"), the holder of the Series D Preferred Shares has the right to put the Series D Preferred Shares to the Company at a price equal to 125% of the purchase price, plus all accrued and unpaid dividends. The holder of the Series D Preferred Shares may not convert such shares prior to May 5, 1997 and may convert subsequent to such date as follows: (i) 30 shares after May 6, 1997; (ii) 60 shares after June 5, 1997; (iii) 90 shares after July 5, 1997; (iv) 120 shares after August 4, 1997; and (v) 150 shares after September 2, 1997. STOCK WARRANTS - During fiscal 1996, the Company issued warrants to purchase 150,000 shares of common stock at a price 10% above quoted market value. The warrants have a 5 year term and "piggy-back" registration rights. During fiscal 1997, the Company issued 187,702 warrants to purchase the Company's common stock at a conversion price of 110% of the quoted market value at the time of grant. The warrants were issued in connection with the Company's issuance of Series B Preferred Shares (see above). On July 17, 1996, the Company entered into an agreement with an investment banking firm in which such firm will act as a financial consultant to the Company relating to corporate finance and other financial matters through July 31, 1999. As compensation for this engagement, such firm received a five year warrant to purchase 200,000 shares of the Company's common stock at $2.50 per share (the market price at the time of issuing the warrant). In connection with this agreement, the Company has recorded $147,000 in professional fees. Such amount was based on the fair value of the warrants as determined by the Black-Scholes model utilizing the following assumptions; dividend yield - 0%, expected volatility - 45%, risk free interest rate - 5.99% and expected life of the warrant 2 years. On October 15, 1996, the Company agreed to issue warrants to David Rubenstein to purchase 200,000 shares of the Company's Common Stock. These warrants were issued for Mr. Rubenstein's services related to advising the Company with respect to its Sino-foreign joint ventures and marketing activities in the PRC. The warrants issued have a three year term and an exercise price of $1.50, which was the market value of the Company's Common Stock at the time of issuance of the warrants. In connection with this agreement, the company has recorded $110,000 in professional fees. Such amount was based on the fair value of the warrants as determined by the Black-Scholes model utilizing the following assumptions; dividend yield - 0%, expected volatility - 45%, risk free interest rate - 6.14% and expected life of the warrant 3 years. In connection with the financial services agreement described in note 9, the Company issued 600,000 warrants to an investment banking firm, 300,000 which vest immediately and 300,000 which vest when such firm has raised a minimum of $10 million. With respect to the immediately vested 300,000 warrants, the Company has recorded $222,500 in professional fees. Such amount was based on the fair value of the warrants as determined by the Black-Scholes model utilizing the following assumptions; dividend yield - 0%, expected volatility - 45%, risk free interest rate - 6.50% and expected life of the warrant 3 years. ISSUANCE OF COMMON STOCK AND OPTIONS FOR SERVICES - In April 1996, two outside directors each received 5,000 shares of common stock for a value totaling $90,000 which has been recorded as F-18 compensation expense. The number of shares issued was based on the quoted market value at such time. In May 1996, 5,000 shares of the Company's common stock were issued in connection with services provided for a value totaling $45,625. In December 1996, 5,000 shares of the Company's common stock were issued in connection with services provided for a value totaling $18,125. Both issuances have been recorded as professional fees based on the quoted market value at the time of the transaction. In October 1996, the Company entered into agreements to settle $98,000 of outstanding professional fees through the issuance of options to purchase 65,064 common shares. The number of shares was determined based on the quoted market value of the shares at the time of issuance. THE PROMETHEAN COMMON STOCK EQUITY AGREEMENT - On March 31, 1997, the Company entered into a Common Stock Investment Agreement with Promethean Investment Group L.L.C. ("Promethean") pursuant to which Promethean will provide $10 million in equity funding to the Company. The Company has agreed to issue a minimum of $4,000,000 in Common Stock, at a 10% discount to market price, to Promethean within two years following the effective date of a registration statement covering the shares to be sold pursuant to the Common Stock Investment Agreement. On April 29, 1997, the Company and Promethean agreed to increase the equity funding commitment from $10 million to $25 million. STOCK OPTIONS - The Company has adopted two stock option plans (the AmTec, Inc. 1995 Stock Plan and the AmTec, Inc. 1996 Stock Option Plan). Incentive and nonqualified options and stock appreciation rights may be granted to employees, officers, directors, and consultants of the Company. There are 12,500,000 shares of common stock reserved for issuance under these plans. The exercise price of the options are determined by the board of directors, but in the case of an incentive stock option, the exercise price may not be less than 100% of the fair market value on the date of grant. Options vest over periods not to exceed ten years. F-19 A summary of the status of the Company's stock options issued to employees as of March 31, 1997, 1996 and 1995 and changes during the years then ended is presented below:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE NUMBER PRICE NUMBER PRICE NUMBER PRICE --------- -------- --------- -------- ------- -------- Outstanding at beginning of year 7,635,000 $ 1.39 350,000 $ 0.36 - $ - Granted 280,000 1.74 7,520,000 1.41 350,000 0.36 Exercised - - (185,000) 0.36 - - Cancelled (10,000) 8.25 - - - - Forefeited - - (50,000) 0.36 - - Expired - - - - - - --------- ------- --------- ------- ------- ------- Outstanding at end of year 7,905,000 $ 1.40 7,635,000 $ 1.39 350,000 $ 0.36 --------- ------- --------- ------- ------- ------- --------- ------- --------- ------- ------- ------- Options Exercisable at end of year 4,155,000 $ 0.42 3,135,000 $ 0.35 350,000 $ 0.36 --------- ------- --------- ------- ------- ------- --------- ------- --------- ------- ------- ------- Weighted Average fair value of options granted during the year $ 0.69 $ 0.44 $ 0.09 --------- -------- ------- --------- -------- -------
The fair value of each option granted during 1997 and 1996 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Dividend yield 0.00% Expected volatility 45.00% Risk Free Interest Rate 6.25% Expected Life 5 years The following table summarizes information about options outstanding at March 31, 1997: WEIGHTED AVERAGE RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXCERSISABLE EXERCISE PRICES AT 3/31/97 LIFE (YEARS) PRICE AT 3/31/97 PRICE - - - ------------ ----------- ------------ ---------- ------------ -------- $.350 - .355 4,635,000 9 $ 0.35 3,885,000 $ 0.35 1.50 20,000 10 1.50 20,000 1.50 3.00 3,000,000 9 3.00 --------- ----------- 7,655,000 3,905,000 --------- ----------- --------- ----------- F-20 The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized with respect to the plans. Had compensation cost for the Company's stock option plans been determined consistent with Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net earnings and earnings per share would have approximated the pro forma amounts indicated below: 1997 1996 Net earnings - as reported $ (4,064,885) $ (5,281,730) -------------- -------------- -------------- -------------- Net earnings - pro forma $ (4,258,970) (8,592,261) -------------- -------------- -------------- -------------- Earnings per share - as reported $ (0.14) $ (0.21) -------------- -------------- -------------- -------------- Earnings per share - pro forma $ (0.15) $ (0.33) -------------- -------------- -------------- -------------- 11. MAJOR CUSTOMERS During the years ended March 31, 1996 and 1995, the Company's wholly owned subsidiary, ITV, conducted business with two customers whose sales comprised substantially all of the Company's revenues. In January 1996, the Company sold substantially all of the assets related to that business. 12. SALE OF BUSINESS In January 1996, the Company sold the business and the related operating assets in which its wholly owned subsidiary, ITV, was engaged. The sale price was $2,500,000 (which consisted of $250,000 in cash and $2,250,000 in the form of a note receivable), plus the Company received an equity interest in Netmatics which was valued at $500,000. Due to the uncertainty of the collection of the $2,250,000 note receivable, the amount of the note has not been recognized. The gain associated with the note will be recognized when the note receivable is collected. The sale of the assets resulted in a gain from sale of the assets of $31,880. See note 4 as to write-off of Netmatics balance. F-21 13. INCOME TAXES The Company had net losses for 1997, 1996 and 1995 and, therefore, no income taxes have been provided. As of March 31, 1997, the Company has federal net operating loss carryforwards of approximately $11,000,000 through 2012. Significant components of the Company's deferred tax liabilities and assets for federal income taxes consist of the following: 1997 1996 Deferred tax assets Net operating loss carryforwards $ 5,085,404 $ 3,310,000 Start-up and other costs 2,360,307 1,786,000 Research credit 266,000 266,000 ------------ ------------ Total deferred tax assets 7,711,711 5,362,000 Valuation allowance for deferred tax assets (7,711,711) (4,462,000) Deferred tax liabilities Note receivable on sale of ITV - (900,000) ------------ ------------ Net deferred tax liability $ - $ - ------------ ------------ ------------ ------------ The net change in the valuation allowance for the year ended March 31, 1997 and 1996 was an increase of $3,249,711 and $156,000, respectively. 14. RELATED PARTY TRANSACTIONS GENERAL - In February 1995, pursuant to the Reorganization Agreement, Tweedia, became the owner of approximately 12,727,000 shares, or 41%, of the Company's issued and outstanding Common Stock. Beijing CATCH Communications Group Co. ("Beijing CATCH") has an option to acquire 100% of the outstanding capital stock of Tweedia. However, this option may not be exercised without the receipt by Beijing CATCH of all PRC regulatory approvals applicable to such exercise. After discussions with PRC counsel, management believes that these approvals to own securities listed on non-PRC stock exchanges are substantive in nature and are not normally readily obtained in the PRC except by corporations or banks that are specifically authorized to own foreign securities. As of December 21, 1995, pursuant to the terms of a Master Agreement and Right of First Refusal (the "Master Agreement"), Beijing CATCH agreed to grant the Company a right of first refusal to participate as a majority investor and provide financial, operating and technical consulting services with respect to all rights granted, sold, licensed, or otherwise transferred to Beijing CATCH, directly or indirectly, that relate to the construction, operation or acquisition of any type of telephony, telecommunications, equipment, paging equipment or related forms of communication in the PRC. As consideration for this right of first refusal, the Company agreed to issue up to 50,000,000 shares of Common Stock to Tweedia based on the receipt of certain agreed upon amounts of net income by the Company relating to prospective Sino-foreign joint ventures involving the Company and Beijing F-22 CATCH. The Master Agreement supersedes certain terms of other prior agreements between the Company and Beijing CATCH concerning cooperation on telecommunications projects. As of June 20, 1997, the Company has not entered into, and management has no current intent of entering into, any Sino-foreign joint ventures with Beijing CATCH under the terms of the Master Agreement. As a result, no obligation for future issuances of Common Stock to Beijing CATCH under the Master Agreement exist or are contemplated. Beijing CATCH is in the process of being acquired by Hainan Minyuan Modern Agriculture Company ("Hainan Minyuan"), a publicly listed company in the PRC primarily engaged in real estate development and agriculture production in Hainan Province of the PRC. In late 1996, Hainan Minyuan proposed to acquire Beijing CATCH, and the acquisition was approved by the shareholders of both companies. As of May 1997, Hainan Minyuan's proposed acquisition of Beijing CATCH was awaiting final approval by the Chinese governmental authorities. If the acquisition receives final approval by the necessary Chinese governmental authorities, Hainan Minyuan will in turn hold an option to acquire control of Tweedia and a proxy to vote the Tweedia share. This option may not be exercised until all applicable PRC approvals are obtained. Hence at this time the control of Tweedia by Hainan Minyuan and its indirect ability to substantially influence AmTec is uncertain. At the time of the Company's acquisition of the majority stake Hebei Development held a 30% ownership of Hebei Equipment and Beijing CATCH held subscription rights to 9.2% ownership of Hebei Equipment. Subsequent to Hebei Equipment's conversion to a Sino-Foreign joint venture company, Beijing CATCH defaulted on its required capital contribution of 2 million Renminbi (1 U.S. dollar equals approximately 8.35 Renminbi). On April 22, 1997, the Board of Directors of Hebei Equipment resolved to terminate Beijing CATCH's ownership participation in Hebei Equipment, and the Company and Hebei Development agreed to provide to Hebei Equipment the 2 million Renminbi defaulted on by Beijing CATCH. The allocation of (i) the 2 million Renminbi investment required from the Company and Hebei Development and (ii) the 9.2% ownership previously held by Beijing CATCH are currently under discussions between the Company and Hebei Development. 15 POST BALANCE SHEET EVENTS CONTRACTUAL COMMITMENTS - On April 8, 1997, Hebei Equipment entered into a 20-year agreement (the "Hebei Multimedia Agreement") with Hebei Cable Television Station, the monopoly provider of cable television service in Hebei Province, to build a multimedia network, which will connect the existing cable television systems in the eleven major cities of Hebei Province. The Hebei Multimedia Agreement grants Hebei Equipment the option to upgrade the systems to hybrid fiber coaxial networks ("HFC"). Under the Hebei Multimedia Agreement, Hebei Equipment will build the Hebei Multimedia Network, sell ownership of the Hebei Multimedia Network to Hebei Cable Television Station in exchange for a majority share of cash flow generated by Hebei Cable Television Station from operation of the Hebei Multimedia Network. Hebei Equipment will also provide operating personnel and assistance to Hebei Cable Television Station in the operation of the Hebei Multimedia Network. Until Hebei Equipment has recovered its investment, Hebei Equipment will receive 80% of depreciation of fixed assets and 80% of net income generated by Hebei Cable Television Station from operation of the Hebei Multimedia Network. Thereafter, for the balance of 20 years from the commencement date of formal commercial operations, Hebei Equipment will receive 30% of depreciation of fixed assets and 30% of net income generated by Hebei Cable Television Station from operation of the Hebei Multimedia Network. Hebei Cable Television Station is a subsidiary enterprise of the Hebei Radio and Television Department, under the jurisdiction of the Ministry of Radio, Film and Television in the PRC. F-23 Under the Hebei Multimedia Agreement, Hebei Equipment will (i) build a fiber-optic and microwave network to connect the existing cable television systems in the eleven major cities in Hebei Province, (ii) upgrade one city on a trial basis to an HFC network, and (iii) hold the option to upgrade the network to an HFC network. The current funding requirement for the Hebei Multimedia Network is estimated at approximately $23 million to link cable systems in the eleven largest cities in Hebei Province. As of June 20, 1997, the Company had invested approximately $1.0 million in Hebei Equipment for purposes of investment in the Hebei Multimedia Network. The Company anticipates that the balance of required funding will be provided in the form of equity and debt investments in Hebei Equipment and additional joint venture entities that may be established with strategic partners. 16 SUBSEQUENT EVENTS On July 8, 1997, the Company changed its name to AmTec, Inc. from AVIC Group International, Inc. ****** F-24 EX-3.3 2 EXHIBIT 3.3 CERTIFICATE OF OWNERSHIP AND MERGER MERGING CHINA TELECOMMUNICATIONS AND TECHNOLOGIES, INC. INTO AVIC GROUP INTERNATIONAL, INC. AVIC Group International, Inc. ("Avic" or "Corporation"), a corporation organized and existing under the laws of Delaware, DOES HEREBY CERTIFY: FIRST: That this Corporation was incorporated on the 20th day of June, 1996, pursuant to the General Corporation Law of the State of Delaware. SECOND: That this Corporation owns all of the outstanding shares of the stock of China Telecommunications and Technologies, Inc. ("China"), a corporation incorporated on the 13th day of May, 1997, pursuant to the General Corporation Law of the State of Delaware. THIRD: That this Corporation, by the following resolutions of its Board of Directors, duly adopted at a meeting held on the 26th day of February, 1997, determined to merge into itself said China: RESOLVED: That AVIC merge, and it hereby does merge into itself said China and assumes all of its obligations; and it is RESOLVED FURTHER: That the merger shall become effective upon filing with the Delaware Secretary of State; and it is RESOLVED FURTHER: That the proper officer of this Corporation be and he or she is hereby directed to make and execute a Certificate of Ownership and Merger setting forth a copy of the resolutions to merge China and assume its liabilities and obligations, and the date of adoption thereof, and to cause the same to be filed with the Secretary of State and to do all acts and things whatsoever, whether within or without the State of Delaware, which may be in anywise necessary or proper to effect said merger, and it is RESOLVED FURTHER: That this Corporation change its corporate name in connection with the merger, by amending Article FIRST of the Restated Certificate of Incorporation of this Corporation to read as follows: "FIRST: The name of the corporation is AmTec, Inc." FOURTH: Anything herein or elsewhere to the contrary notwithstanding, this merger may be amended or terminated and abandoned by the Board of Directors of AVIC at any time prior to the date of filing the merger with the Secretary of State. IN WITNESS WHEREOF, said AVIC has caused this Certificate to be signed by Joseph R. Wright, Jr., its Chairman, Chief Executive Officer and President, this 14th day of May, 1997. AVIC GROUP INTERNATIONAL, INC. By /s/ Joseph B. Wright, Jr. --------------------------------- Joseph B. Wright, Jr., Chairman, Chief Executive Officer and President EX-3.4 3 EXHIBIT 3.4 AVIC GROUP INTERNATIONAL, INC. Certificate of Designations of Preferences of Series C Convertible Preferred Stock of Avic Group International, Inc. Joseph R. Wright and Timothy P.F. Crowley hereby certify that: (1) They are the President and Secretary, respectively of Avic Group International, Inc., a Delaware corporation (the "Corporation"). (2) Pursuant to the authority granted under the Corporation's Certificate of Incorporation, the Board of Directors of said Corporation has duly adopted the following recitals and resolutions: WHEREAS, this Corporation is authorized by its Certificate of Incorporation to issue Ten Million (10,000,000) shares of Preferred Stock (the "Preferred Stock"); and WHEREAS, the Board of Directors of this Corporation is authorized, as to the Preferred Stock, within the limitations and restrictions stated in the Certificate of Incorporation, to fix by resolution or resolutions the designation of each Series of Preferred Stock and the powers, preferences and relative participating, optional or other special rights and qualifications, limitations or restrictions thereof, including, without limitation, such provisions as may be desired concerning dividends, redemption, voting, dissolution or the distribution of assets, conversion or exchange, and such other subjects or matters as may be fixed by resolution or resolutions of the Board of Directors; and WHEREAS, 1,524,328 shares of such Preferred Stock are issued and outstanding and the Board of Directors of this Corporation desires, Pursuant to its authority granted under the Certificate of Incorporation, to determine and fix the rights, preferences, privileges and restrictions relating to a Series C of said Preferred Stock, and to fix the number of shares constituting and the designation of such Series; NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized a Series C of Preferred Stock on the terms and with the provisions herein set forth: -2- 1. DEFINITIONS. For purposes hereof the following Definitions shall apply: "AVERAGE STOCK PRICE" shall mean the lowest Market Price for Shares of Common Stock during the thirty (30) business days immediately preceding each Holder Conversion Date. "BOARD" shall mean the Board of Directors of the Company. "CLOSING DATE" shall mean the date of original issuance of the Series C Preferred Stock. "COMMON STOCK" shall mean the Common Stock, $0.001 par value of the Company. "COMPANY" shall mean this corporation. "CONVERSION DATE MARKET PRICE" shall mean an amount that is equal to the Average Stock Price, subject however to adjustment as provided in Section 7 and 8 of this Certificate of Designations and in Section 7 of the Registration Rights Agreement executed by the Company in favor of the holders of the Series C Preferred Stock as of the date of issuance of the Series C Preferred Stock, which provisions are hereafter incorporated herein. "CONVERSION DEFAULT" shall have the meaning set forth in Paragraph 10(b). "CONVERSION NOTICE" shall have the meaning set forth in Paragraph 7(c). "CONVERSION RATE" shall have the meaning set forth in Paragraph 7(b). "DESIGNATED PRICE" shall mean $10,000 per share plus all accrued and unpaid dividends. "HOLDER CONVERSION DATE" shall have the meaning set forth in Paragraph 7(c). "JUNIOR STOCK" shall mean the Common Stock and all other shares of the Company's capital stock, whether presently outstanding or hereafter issued, other than the Series A, Series C, and Series D Preferred Stock; -3- PROVIDED, HOWEVER, the Company may from time to time, without the consent of the holders of the outstanding shares of the Series C Preferred Stock, issue additional series of its presently authorized and unissued Preferred Stock which rank pari passu to or do not have preference over the Series C Preferred Stock in dividends, distribution upon liquidation or other respects. "MARKET PRICE FOR SHARES OF COMMON STOCK" shall mean the price of one share of Common Stock determined as follows: (i) If the Common Stock is listed on NASDAQ, the daily low trading price on the date of valuation; (ii) If the Common Stock is listed on a national securities exchange, the daily low trading price on the date of valuation; (iii) If neither (i) or (ii) apply but the Common Stock is quoted in the over-the-counter market on the pink sheets or bulletin board, the lowest "bid" price thereof on the date of valuation; and (iv) If neither clause (i), (ii) or (iii) above applies, the market value as determined by a nationally recognized investment banking firm or other nationally recognized financial advisor retained by the Company for such purpose, taking into consideration, among other factors, the earnings history book value and prospects for the Company, and the prices at which shares of Common Stock recently have been traded. Such determination shall be conclusive and binding on all persons. "PARAGRAPH 5 TRANSACTION" shall mean a merger, consolidation or other transaction referred to in Paragraph 5. "SERIES C PREFERRED STOCK" shall mean the Series C Convertible Preferred Stock of the Company $0.001 par value. 2. DESIGNATION AND NUMBER. The designation of the shares of Preferred Stock authorized by these resolutions shall be "Series C Convertible Preferred Stock" (the "Series C Preferred Stock"). The authorized number of shares constituting the Series C Preferred Stock shall be 250 shares and each share of Series C Preferred Stock shall rank equally in all respects. 3. DIVIDENDS. The holders of the then outstanding Series C Preferred Stock shall be entitled to receive cumulative dividends at the annual rate of 8% per annum per share, payable quarterly (i) in shares of -4- Common Stock at the time of Conversion (as provided in Paragraph 7 hereof) or (ii) in cash in connection with any payment pursuant to Paragraph 10(b). Dividends on the Series C Preferred Stock shall accumulate and accrue from the date of its original issue and shall accrue from day to day thereafter, whether or not earned or declared. The Series C Preferred Stock shall participate on an "as converted basis" in cash dividends paid on Junior Stock and in other dividends on Common Stock as provided in Section 8(b) below. 4. LIQUIDATION RIGHTS OF SERIES C PREFERRED STOCK. (a) PREFERENCE. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or a sale or other disposition of all or substantially all of the assets of the Company which shall be deemed to be a liquidation, dissolution or winding up of the Company, the holders of the Series C Preferred Stock then outstanding shall be pari passu with the holders of Series D Preferred Stock and shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, whether such assets are capital, surplus, or earnings, before any payment or declaration and setting apart for payment of any amount shall be made in respect of any Junior Stock, an amount equal to the Designated Price, and no more. If upon any actual or deemed liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the assets to be distributed to the holders of the Series C Preferred Stock shall be insufficient to permit the payment to such stockholders of the full preferential amounts aforesaid, then all of the assets of the Company to be distributed shall be distributed ratably to the holders of the Series C Preferred Stock and to any holders of any series of Preferred Stock that ranks PARI PASSU with the Series C Preferred Stock (including Series D Preferred Stock), on the basis of the number of shares of Preferred Stock held. The Company shall promptly mail written notice of such liquidation, dissolution or winding up (with a copy sent by facsimile), but in any event such notice shall not be given less than thirty (30) days prior to the effective date stated therein to each record holder of the Series C Preferred Stock. If the Company determines to effect a liquidation, dissolution or winding up of the Company, then, notwithstanding the limitations set forth in Paragraph 7, the Series C Preferred Stock shall thereupon, at the option of a holder thereof, be convertible in full. (b) REMAINING ASSETS. After the payment or distribution to the holders of the Series C Preferred Stock of the full preferential amounts aforesaid, the holders of the Junior Stock then outstanding shall be entitled to receive all remaining assets of the Company to be distributed. -5- 5. MERGER, CONSOLIDATION. If at any time there occurs any consolidation or merger of the Company with or into any other corporation or other entity or person (whether or not the Company is the surviving corporation), or any other corporate reorganization or transaction or series of related transactions in which in excess of 50% of the Company's voting power is transferred (a "Paragraph 5 Transaction"), the holders of the Series C Preferred Stock then outstanding shall have the right in their sole discretion to participate in any such transaction as a class with common stockholders on the same basis as if the Preferred Stock had been converted one day prior to the record date or effective date of such transactions, as applicable. 6. VOTING RIGHTS. The holders of the Series C Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. The affirmative approval (by vote or written consent as permitted by applicable law) of the holders of at least 66 2/3% of the outstanding shares of the Series C Preferred Stock, voting separately as a class, will be required for (i) any amendment, alteration or repeal of the Company's Restated Certificate of Incorporation (including any Certificate of Designations, Rights and Preferences) if the amendment, alteration or repeal adversely affects the powers, preferences or rights of the Series C Preferred Stock (including, without limitation, by creating any class or series of equity securities having a preference over the Series C Preferred Stock with respect to dividends, distribution upon liquidation or in any other respect, but excluding the issuance, of a series of Preferred Stock that ranks PARI PASSU with the Series C Preferred Stock), or (ii) any amendment to or waiver of the terms of the Series C Preferred Stock or this Certificate. To the extent that under Delaware law the approval of the holders of the Series C Preferred Stock, voting separately as a class, is required to authorize a given action of the Company, the affirmative approval (by vote or written consent as permitted by applicable law) of the holders of a majority of the outstanding shares of the Series C Preferred Stock shall constitute the approval of such action by the class. To the extent that under Delaware law the holders of the Series C Preferred Stock are entitled to vote on a matter with holders of the Common Stock, voting together as one class, each share of Series C Preferred Stock shall be entitled to that number of votes as shall be equal to the number of shares of Common Stock into which such shares of Series C Preferred Stock could have been converted on the record date for any meeting of stockholders or -6- on the date of any written consent of stockholders as applicable. Holders of the Series C Preferred Stock shall be entitled to notice of all shareholder meetings or written consents (whether or not they are entitled to vote thereat), which notice will be provided pursuant to the Company's by-laws and applicable statutes. 7. CONVERSION. The holders of Series C Preferred Stock shall have the following conversion rights. (a) HOLDER'S RIGHT TO CONVERT. Each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof, into fully paid and nonassessable shares of Common Stock. (b) CONVERSION PRICE FOR HOLDER CONVERTED SHARES. Each share of the Series C Preferred Stock, valued at the Designated Price, that is converted into shares of Common Stock at the option of the holder shall be convertible into the number of shares of Common Stock which may be purchased at the Conversion Date Market Price. The number of shares of Common Stock into which each share of Series C Preferred Stock may be converted pursuant to this paragraph hereof is hereafter referred to as the "Conversion Rate" for such Series C Preferred Stock. (c) MECHANICS OF CONVERSION. In order to convert any or all shares of Series C Preferred Stock into full shares of Common Stock, the holder shall surrender the certificate or certificates therefor, duly endorsed, by either overnight courier or 2-day courier, to the principal office of the Company or of any transfer agent for the Series C Preferred Stock, and shall give written notice (the "Conversion Notice") together with the holder's calculation of the Conversion Rate by facsimile (with the original of such notice forwarded with the foregoing courier) to the Company at such office that he elects to convert the number of shares (specified therein, which such notice and election shall be irrevocable by the holder; PROVIDED, HOWEVER, that the Company shall not be obligated to issue certificates evidencing the shares of the Common Stock issuable upon such conversion unless either the certificates evidencing the shares of Series C Preferred Stock are delivered to the Company or its transfer Agent as provided above, or the holder notifies the Company that such certificates have been lost, stolen or destroyed and promptly executes an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with the loss of such certificates. -7- Immediately on receipt of the Conversion Notice, the Company shall verify the holder's calculation of the Conversion Rate as calculated by the holder or, if the Company disagrees with the holder's calculation of the Conversion Rate, deliver the Company's calculation of the Conversion Rate to the holder. If the holder and the Company cannot agree on the Conversion Rate within two (2) business days, the Company shall, without delay, issue a certificate or certificates for the number of shares of Common Stock to which the holder is entitled according to the Company's calculation of the Conversion Rate and in accordance with the procedures set forth in this subparagraph (c). The disagreement as to the Conversion Rate shall be submitted to a single arbitrator agreeable to the Company and the holder within five (5) business days and shall be decided by said arbitrator within two (2) business days of submission of the dispute to such arbitrator. The decision of the arbitrator shall be conclusive on the Company and the holder. If there is no dispute with respect to the Conversion Rate, the Company shall use its best efforts to issue and deliver within three (3) business days after delivery to the Company of the Conversion Notice, to such holder of Series C Preferred Stock at the address of the holder on the stock books of the Company, or to its designee, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid, together with a certificate or certificates for the number of Series C Preferred Stock not submitted for conversion. The date on which the Conversion Notice is given (the "Holder Conversion Date") shall be deemed to be the date the Company received by facsimile the Conversion Notice, provided that the original shares of Series C Preferred Stock to be converted, or the aforesaid notice of lost, stolen or destroyed certificates, are received by the Company or any transfer agent for the Series C Preferred Stock within five business days thereafter, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the original certificates or the aforesaid notice of lost, stolen or destroyed certificates, are not received by the Company or any transfer agent for the Series C Preferred Stock within five business days after the Holder Conversion Date, the Conversion Notice shall become null and void. (d) ADDITIONAL SHARES OF COMMON STOCK. If the Conversion Date Market Price on a Holder Conversion Date shall be $5.00 (the "Minimum Additional Share Price"), as the Minimum Additional Share Price may be adjusted as hereinafter provided, or more, then, in addition to and not in lieu of the shares of Common Stock issuable by reason of the conversion notice given on such Conversion Date, the Company shall issue and sell to the Holder giving such conversion notice and such Holder shall purchase -8- from the Company, at a price per share equal to such Conversion Date Market Price on such Conversion Date, one (1) share of Common Stock (each an "Additional Share" and, collectively with all such other shares so purchased and sold hereunder, "Additional Shares") for each share of Common Stock issuable to such Holder by reason of such conversion of Series C Preferred Stock pursuant to such conversion notice. If the Conversion Date Market Price on a Holder Conversion Date shall be less than the Minimum Additional Share Price, upon the conversion of shares of Series C Preferred Stock on such Holder Conversion Date, any rights to purchase Additional Shares with respect to such shares of Series C Preferred Stock so converted on such Holder Conversion Date shall terminate. The total price for such Additional Shares so to be purchased and sold incident to such a conversion notice shall be paid by such Holder upon issuance of the certificate or certificates therefor pursuant to subparagraph 7(c) hereof by wire transfer of immediately available federal funds to such account as the Company shall specify in writing to such Holder following receipt by the Company of such conversion notice. The Minimum Additional Share Price shall be appropriately adjusted upon any stock dividend, stock split, combination, recapitalization, or other reorganization affecting the Common Stock outstanding. (e) In the event the Company issues or sells any shares of its Common Stock or any of its securities which are convertible into or exchangeable for its Common Stock or any convertible security, or any warrants or other rights subscribed for or to purchase any options for the purchase of its Common Stock or other securities in a transaction other than a Qualified Transaction (as hereinafter defined), then the Minimum Additional Share Price for any remaining and unconverted shares of Series C Preferred Stock shall be adjusted, at the sole option of the Subscriber, to the closing market price of the Company's Common Stock on the date of such transaction. Qualified Transactions are defined as the following: any of (i) the issuance of Equity Securities which result in the issuance of the Company's Common Stock at an effective purchase price greater than or equal to $5.00 per share, (ii) shares or options issued or which may be issued pursuant to the Company's employee or director option plans or otherwise issued as compensation to employees or directors, or shares issued upon exercise of options, warrants, or rights outstanding on the Closing date listed in the Exchange Act Reports, (iii) any public offering of the Company's securities underwritten by one of the following underwriters which, together with their affiliates, are generally known as: Goldman Sachs, Merrill Lynch, Morgan Stanley, Credit Suisse First Boston, Lehman Brothers, Salomon Brothers, Bear Stearns, J.P. Morgan, Donaldson, Lufkin & Jenrette, or Smith Barney, or (iv) Equity Securities issued whose shares or underlying shares of Common Stock are -9- restricted from resale on any national market system or any public stock market before March 1,1998. (f) MANDATORY CONVERSION. On the third anniversary of the first date on which the Company issues any shares of Series C Convertible Preferred Stock, each outstanding share of Series C Convertible Preferred Stock shall be converted automatically and without further action into fully paid and nonassessable shares of Common Stock (as such shares of Common Stock may be constituted on the Holder Conversion Date) at the rate specified in Section 7(b) hereof, subject to adjustment in accordance with Section 8 hereof, and a Conversion Notice shall be deemed to have been given by the holder of each such outstanding share of Series C Convertible Preferred Stock on such date. 8. ADJUSTMENTS; REORGANIZATIONS. (a) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. In the event that at any time or from time to time after the Closing Date, the Common Stock issuable upon the conversion of the Series C Preferred Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or reorganization provided for elsewhere in this Paragraph 8 or a merger or consolidation, provided for in Paragraph 5), then and in each such event each holder of Series C Preferred Stock shall have the right thereafter to convert such stock into the kind of stock receivable upon such recapitalization, reclassification or other change by Holders of shares of Common Stock, all subject to further adjustment as provided herein. In such event, the formulae set forth herein for conversion and redemption shall be equitably adjusted to reflect such change in number of shares or, if shares of a class of stock are issued to reflect the market price of the class or classes of stock (applying the same factors used in determining the Market Price for Shares of Common Stock) issued in connection with the above described transaction. (b) ADJUSTMENTS FOR STOCK SPLITS, COMBINATIONS, DIVIDENDS, DISTRIBUTIONS OR REORGANIZATION. If at any time or from time to time after the Closing Date, the Company (i) effects a subdivision of the outstanding Common Stock, (ii) combines the outstanding shares of Common Stock into a smaller number of shares (i.e., by reverse stock split or otherwise), (iii) makes or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock, (iv) makes or fixes a record date for the determination of holders of Common Stock entitled to receive a -10- dividend or other distribution payable in securities of the Company other than shares of Common Stock, or (v) there is a capital reorganization of the Common Stock (other than as set forth in (i)-(iv), above) then, as a part of such dividend or distribution, provision shall be made so that the holders of the Series C Preferred Stock shall thereafter be entitled (A) to receive when paid to other holders of Common Stock, on an "as converted" basis, the number of shares of stock (other than Common Stock) or other securities or property to which a holder of the number of shares of Common Stock deliverable would have been entitled on such event and (B) to receive, to the extent that the dividend or distribution is made within thirty days prior to a conversion event, payable in Common Stock, upon conversion of the Series C Preferred Stock, that number of shares of additional Common Stock to which they would have been entitled if they were holding Common Stock on the relevant date. In any such case, appropriate adjustment shall be made in the application of the provisions of this Paragraph 8 with respect to the rights of the holders of the Series C Preferred Stock after such event to the end that the provisions of this Paragraph 8 shall be applicable after that event and be as nearly equivalent as may be practicable, including, by way of illustration and not limitation, by equitably adjusting the formulae set forth herein for conversion and redemption to reflect the market price of the securities or property (applying the same factors used in determining the Market Price for Shares of Common Stock) issued in connection with the above described transaction. (c) CONVERSION DATE MARKET PRICE ADJUSTMENT. In the event that the Company issues or sells any shares of its Common Stock or any of its securities which are convertible into or exchangeable for its Common Stock or any convertible security, or any warrants or other rights subscribed for or to purchase any options for the purchase of its Common Stock or other securities (other than shares or options issued or which may be issued pursuant to the Company's employee or director option plans or otherwise issued as compensation to employees or directors, or shares issued upon exercise of options, warrants or rights outstanding on the Closing Date listed in the Exchange Act Reports or shares or options issued in consideration for business acquisitions or combinations made by the Company) (the "Equity Securities") at an effective purchase price per share of Common Stock which is less than $5.00, then at the time the Series C Preferred Stock is submitted for conversion, upon such conversion, the Company shall issue to the Holder or any assignee of Holder's rights hereunder such number of shares of Common Stock as will cause the effective Conversion Date Market Price of such shares of Common Stock to be equal to the lesser of (i) the Average Stock Price or (ii) the effective issuance price at which such Equity Securities are issued. -11- 9. FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares of Common Stock shall be issuable hereunder. The number of shares of Common Stock that are issuable upon any conversion shall be rounded up or down to the nearest whole share. 10. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. (a) RESERVATION REQUIREMENT. The Company has reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, shares of Common Stock for the purpose of enabling the Company to satisfy any obligation to issue shares of its Common Stock upon conversion of the Series C Preferred Stock provided, however, that the number of shares so reserved shall at all times be at least equal to 150% of the number of shares necessary for the Company to satisfy any obligation to issue shares of its Common Stock (and Additional Shares, if any) incident to the conversion of Series C Preferred Stock. The number of shares so reserved may be reduced by the number of shares actually delivered pursuant to conversion of Series C Preferred Stock; provided that in no event shall the number of shares so reserved be less than 150% of the number of shares required to satisfy remaining conversion rights on the unconverted Series C Preferred Stock and the number of shares so reserved shall be increased to reflect stock splits and stock dividends and distributions. (b) DEFAULT. If the Company does not have a sufficient number of shares of Common Stock available to satisfy the Company's obligations to a holder of Series C Preferred Stock upon receipt of a Conversion Notice, or otherwise fails or refuses to perfect conversion of any Series C Preferred Stock, with respect to the Series C Preferred Stock as to which conversion is not perfected by the Company through the delivery of certificates representing the shares of Common Stock issuable upon such conversion (including Additional Shares, if any) (a "Conversion Default") the holder of the Series C Preferred Stock shall have the right to put the Preferred Stock to the Company at a price which shall be equal to 125% of the Designated Price. 11. NO REISSUANCE OF SERIES C PREFERRED STOCK. No share or shares of Series C Preferred Stock acquired by the Company by reason of redemption, purchase, conversion or otherwise shall be reissued as Series C Preferred Stock, and all such shares shall be retired and shall return to the status of authorized, unissued and retired and undesignated shares of Preferred Stock. No additional shares of Series C Preferred Stock shall be -12- authorized or issued without the consent of at least 66 2/3% in interest of the holders of Series C Preferred Stock outstanding immediately prior thereto. 12. NO IMPAIRMENT. The Company shall not intentionally take any action which would impair the rights and privileges of the shares of Series C Preferred Stock set forth herein. 13. HOLDER'S RIGHTS IF SHARES ARE DELISTED OR IF TRADING IN COMMON STOCK IS SUSPENDED. In the event that at any time on or after the date hereof and prior to the third anniversary of the Closing Date, trading in the shares of the Company's Common Stock is suspended on the principal market or exchange for such shares (including the NASDAQ Stock Market), for a period of five consecutive trading days, other than as a result of the suspension of trading in securities in general, or if such shares are delisted, then, at holder's option, the Company shall redeem such holder's shares of Series C Preferred Stock at a redemption date designated by such holder and at the price which is the greater of (a) the product of the Conversion Rate and the Closing Market Price of the Company's Common Stock on the date of Redemption Notice and (b) 125% of the Designated Price of the Preferred Stock. 14. LIMITATIONS ON HOLDER'S RIGHT TO CONVERT. Holders of Series C Preferred Stock may not convert any of the Series C Preferred Stock within the first 60 calendar days following the date of issuance of the Series C Preferred Stock. Thereafter, Holders of Series C Preferred Stock may convert the Series C Preferred Stock as follows: Calendar Days from Issuance Shares Convertible 61 60 91 120 121 180 151 250 Notwithstanding anything to the contrary contained herein, each Conversion Notice shall contain a representation that the number of shares of the Company's Common Stock that the holder is then entitled to receive upon the conversion of such number of Shares of Series C Preferred Stock as is then being submitted for conversion, together with any other shares of Common Stock -13- deemed beneficially owned by such holder, together with all shares of the Company's Common Stock deemed beneficially owned by the holder's "affiliates" as defined in Rule 144 of the Act will not exceed 4.9% of the total issued and outstanding shares of the Company's Common Stock, after giving effect to the shares of Common Stock to be issued pursuant to such conversion notice. 15. The authorized number of shares of Preferred Stock of this Corporation is 10,000,000 shares and the number of shares constituting the Series C Convertible Preferred Stock, none of which has been issued, is 250 shares. -14- IN WITNESS WHEREOF the undersigned have executed this Certificate of Designations of Preferences at the City of New York, State of New York, on this 12th day of June, 1997. /s/ Joseph R. Wright --------------------------------- Joseph R. Wright, President /s/ Timothy P.F. Crowley --------------------------------- Timothy P.F. Crowley, Secretary The undersigned declare under the penalty of perjury that the matters set forth in the foregoing Certificate are true of their own knowledge. Executed at New York, New York, on the 12th day of June, 1997. /s/ Joseph R. Wright --------------------------------- Joseph R. Wright, President /s/ Timothy P.F. Crowley --------------------------------- Timothy P.F. Crowley, Secretary EX-4.1 4 EXHIBIT 4.1 NUMBER SHARES NY- COMMON STOCK [LOGO] AVIC GROUP INTERNATIONAL, INC. COMMON STOCK A DELAWARE CORPORATION INCORPORATED UNDER THE CUSIP 002348 10 0 LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT THOMAS DELARUE IS THE RECORD HOLDER OF SPECIMEN FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE, OF ------------------------AVIC GROUP INTERNATIONAL, INC.---------------------- TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER AGENT AND REGISTRAR. WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES OF ITS DULY AUTHORIZED OFFICERS. DATED: /s/ Timothy P.F. Crowley [seal] /s/ Joseph R. Wright, Jr. ------------------------ ------------------------- SECRETARY SPECIMEN PRESIDENT Countersigned and Registered CHASEMELLON SHAREHOLDER SERVICES, L.L.C. Transfer Agent and Registrar BY: AUTHORIZED SIGNATURE AVIC GROUP INTERNATIONAL, INC. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT --______Custodian_______ (Cust) (Minor) TEN ENT -- as tenants by the entireties under Uniform Gifts to Minors JT TEN -- as joint tenants with right Act ____________________________ of survivorship and not as (State) tenants in common Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED HEREBY SELL, ASSIGN AND TRANSFER UNTO PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - - - -------------------- - - - ----------------------------------------------------------------------------- - - - ----------------------------------------------------------------------------- (NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN) - - - ----------------------------------------------------------------------------- - - - ---------------------------------------------------------------------- SHARES OF THE COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT ________________________________ ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. DATED: ------------------------ ---------------------------------- SIGNATURE NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature Guaranteed By: ---------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, GENERALLY, BANKS, STOCK BROKERS, SAVINGS INSTITUTIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM. EX-10.7 5 EXHIBIT 10.7 EMPLOYMENT AGREEMENT This Employment Agreement dated as of the 16th day of June 1997, between AVIC Group International, Inc., a Delaware Corporation ("Employer"), and Albert G. Pastino ("Executive"). W I T N E S S E T H : 1. TERM. Employer hereby employs Executive and Executive hereby accepts employment on the terms and conditions hereinafter set forth. Subject to the provisions of Section 7 and 8 hereof, the term of this Agreement shall commence on the date hereof and shall terminate on June15, 1999. 2. DUTIES. A. Executive agrees to serve Employer as Senior Vice President and Chief Financial Officer and in such capacity Executive agrees to render his services to the best of his ability. Executive will report to the Chairman of the Board of the Company and the Chief Executive Officer of the Company. During the term of this Agreement, subject to Paragraph B below, Executive will devote substantially all of his working time and attention to, but no less than four days per week, and use his best efforts to advance the business and welfare of Employer, subject to the direction and control of the Board of Directors. B. Nothing herein shall prevent Executive from meeting certain business obligations (described generally in Exhibit "A" attached hereto) and such additional obligations which may be approved hereafter by the Chairman of the Board of Directors of the Company, provided that he will do so as long as such obligations do not impair his ability to fulfill effectively his duties to the Company. 3. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE. (a) Executive hereby agrees that, during the term of this Agreement and thereafter, he will not disclose to any person, or otherwise use or exploit any of the proprietary or confidential information or knowledge, including without limitation, trade secrets, processes, records of research, proposals, reports, methods, processes, techniques, computer software or programming, or budgets or other non-public financial information, regarding Employer, its business, properties or affairs obtained by him at any time prior to or subsequent to the execution of this Agreement, except in the furtherance of the interests of Employer in the execution of Executive's duties hereunder or as may be required pursuant to a lawful order of a judicial tribunal or legislative body of competent jurisdiction. (b) Upon termination of employment Executive will deliver to Employer all processes, records of research, proposals, reports, memoranda, computer software and programming, budgets and other financial information, and other non-public materials or records or writings of any other type (including any copies thereof) made, used or obtained by Executive in connection with his employment by Employer. (c) During the term of this Agreement, Executive agrees that he will not (i) authorize his name to be used by, (ii) or engage in or carry on, directly or indirectly, for himself as a member of a partnership or as a stockholder (other than as a stockholder of less than five percent (5%) of the issued and outstanding stock of a publicly held corporation having assets in excess of $10,000,000), investor, officer, or director of a corporation (other than Employer, or any parent, subsidiary, affiliate or successor of Employer), or as an employee, agent, associate, or consultant of any person, partnership, corporation or other business entity, in competition with any business carried on, directly or indirectly, by Employer prior to the date hereof or hereafter conducted, directly or indirectly, by Employer during the term of this Agreement, in any county where business is then carried on or conducted by Employer, subject to paragraph 2B hereof. (d) Executive agrees that the remedy at law for any breach by him of any of the covenants and agreements set forth in this Section 3 will be inadequate and that in the event of any such breach, Employer may, in addition to the other remedies which may be available to it at law, obtain injunctive relief prohibiting him (together with all those persons associated with him) from the breach of such covenants and agreements. (f) The parties hereto intent that the covenants and agreements contained in this Section 3 shall be deemed to include a series of separate covenants and agreements. If, in any judicial proceeding, a court shall refuse to enforce all of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions hereof for the purposes of such proceeding to the extent necessary to permit the remaining separate covenants to be enforced in such proceeding. 4. COMPENSATION. 4.1 SALARY. For the services to be rendered by Executive during the first year of the term of this Agreement, Employer shall pay Executive an annual salary of One Hundred Thousand Dollars ($100,000), payable semi-monthly and subject to income tax withholdings and other payroll deductions as customary in respect of Employer's salaried employees in general. The base salary of Executive for the second year of this Agreement will be determined by the Compensation Committee of the Board of Directors, but will be no less than One Hundred Twenty Thousand Dollars ($120,000). 4.2 BONUS. Executive shall be entitled to participate in such bonus plans of Employer applicable to senior executives of Employer as determined by the Board of Directors of Employer in its sole discretion. Notwithstanding the foregoing, it is the intention of the Employer to pay Executive a bonus greater than One Hundred Thousand Dollars ($100,000) for each year of the term of this Agreement, within thirty days of the end of each year of employment hereunder. Criteria for the determination of the amount of said bonus will be as agreed upon by the Executive and the Chairman of the Board within forty-five days of the date of this Agreement. 4.3 VACATION. Executive shall be entitled to four weeks' paid vacation for each year during the term of this Agreement. 4.4 MEDICAL INSURANCE. During the term of this Agreement Employer shall furnish Executive with the same medical and hospital insurance furnished to other executive employees of Employer. 4.5 STOCK OPTIONS. Upon the execution of this agreement, Employer shall grant stock options to Executive covering 400,000 shares of Common Stock of Employer. Such options shall be exercisable at a price of $3.00 per share, and shall have a 10 year term. The options shall vest as follows: 62,500 options on June 16, 1997, September 16, 1997, December 16, 1997 and March 16, 1998, provided that the Executive is still employed by Employer at each date of vesting. The remaining 150,000 options shall vest with respect to 37,500 shares on the following dates: June 16, 1998, September 16, 1998, December 16, 1998 and March 16, 1999, provided that the Executive is still employed by Employer at each date of vesting. In the event Executive is terminated without cause, all of such stock options shall immediately vest. The shares covered by these options are the subject of a S-8 Registration Statement currently on file with the Securities and Exchange Commission. 5. EXPENSES. Employer will pay or reimburse Executive for such reasonable travel, entertainment, or other expenses as he may incur at the request of Employer during the term of this agreement in connection with the performance of his duties hereunder. Executive shall comply with such expense reporting requirements as may be generally applicable to executive officers and employees of the Company. 6. DEATH OR TOTAL DISABILITY OF EXECUTIVE. If Executive dies, or becomes totally disabled (for a period of more than six (6) consecutive weeks), during the term of this Agreement, Executive's employment under this Agreement shall automatically terminate and all of Executive's benefits and all payments to Executive under this Agreement shall immediately terminate. 7. TERMINATION FOR CAUSE. Executive's employment under this Agreement may be terminated by Employer for "good cause." The term "good cause" is defined as any one or more of the following occurrences: (a) Executive's breach of any of the covenants contained in Section 3 of this Agreement; (b) Executive's conviction by, or entry of a plea of guilty or nolo contendere TO A FELONY; (c) Executive's commission of a knowing act of fraud, whether prior to or subsequent to the date hereof upon, Employer; (d) Executive's continuing failure or refusal to perform his duties as required by this Agreement; (e) Executive's gross negligence, insubordination, material violation of any duty or loyalty to Employer or any other material misconduct relating to the business or good will of Employer. 8. MISCELLANEOUS. 8.1 MODIFICATION AND WAIVER OF BREACH. No waiver or modification of this Agreement shall be binding unless it is in writing signed by the parties hereto. No waiver of a breach hereof shall be deemed to constitute a waiver of a future breach, whether of a similar or dissimilar nature. 8.2 COMPLETE AGREEMENT. The Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated by this Agreement and supersedes all previous oral and written and all contemporaneous negotiations, commitments, writings, and understandings and is and shall be binding upon and inure to the benefit of Employer, its successors and permitted assigns and Executive, his heirs, executors and administrators. 8.3 LEGAL FEES. If any legal action, arbitration or other proceeding is brought for the enforcement of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 8.4 ASSIGNMENT. This Agreement may not be assigned in any manner whatsoever. IN WITNESS WHEREOF, the undersigned have executed this Agreement on the day and year first above written. EXECUTIVE: EMPLOYER: AVIC GROUP INTERNATIONAL, INC. /s/ Albert G. Pastino - - - ------------------------- Albert G. Pastino Address of Executive: 6 South Road Chester, NJ 07930 By: /s/ Joseph R. Wright, Jr. -------------------------- Chairman EXHIBIT "A" OUTSIDE DIRECTORSHIPS OF ALBERT G. PASTINO COMPANY OWNERSHIP INDUSTRY ANNUAL DAYS Northwestern Steel and Wire Company Public Steel 5 B. Manischwitz Kohlberg Food Mfg. 5 Bay Area Foods Kohlberg Food Retail 2 Magnavision Kohlberg/Public Pvt. Cable 12 Satellite Ithaco/Space Sciences Kohlberg Components 5 Shrine of St. Joseph Not-for-Profit 6 National NF Foundation Not-for-Profit 2 St. Joseph's University Not-for-Profit 5 Square Earth, Inc. Private Internet 2 TOTAL 44 EX-10.8 6 EXHIBIT 10.8 EMPLOYMENT AGREEMENT This Employment Agreement dated as of the 16th day of June 1997, between AVIC Group International, Inc., a Delaware Corporation ("Employer"), and James F. O'Brien ("Executive"). W I T N E S S E T H : 1. TERM. Employer hereby employs Executive and Executive hereby accepts employment on the terms and conditions hereinafter set forth. Subject to the provisions of Section 7 and 8 hereof, the term of this Agreement shall commence on the date hereof and shall terminate on June15, 1999. 2. DUTIES. Executive agrees to serve Employer as Senior Vice President and General Counsel and in such capacity Executive agrees to render his services to the best of his ability. Executive will report to the Chairman of the Board of the Company and the Chief Executive Officer of the Company. During the term of this Agreement, Executive will devote substantially all of his time and attention to, but no less than four days per week, and use his best efforts to advance the business and welfare of Employer, subject to the direction and control of the Board of Directors. 3. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE. (a) Employer acknowledges that Executive has certain professional obligations to third parties described in Exhibit "A" hereto and that Executive will continue to perform those obligations. With respect to such of those professional obligations as may or may appear to constitute a conflict between the interests of Employer and the interests of such third parties, Employer and Executive agree that Executive shall not provide services to Employer or such third parties in connection with any matters now existing or hereafter arising in which the interests of Employer and such third parties are adverse or have the potential to be adverse. (b) Executive hereby agrees that, during the term of this Agreement and thereafter, he will not disclose to any person, or otherwise use or exploit any of the proprietary or confidential information or knowledge, including without limitation, trade secrets, processes, records of research, proposals, reports, methods, processes, techniques, computer software or programming, or budgets or other financial information, regarding Employer, its business, properties or affairs obtained by him at any time prior to or subsequent to the execution of this Agreement, except in the furtherance of the interests of Employer in the execution of Executive's duties hereunder or as may be required pursuant to a lawful order of a judicial tribunal or legislative body of competent jurisdiction. (c) Upon termination of employment Executive will deliver to Employer all processes, records of research, proposals, reports, memoranda, computer software and programming, budgets and other financial information, and other materials or records or writings of any other type (including any copies thereof) made, used or obtained by Executive in connection with his employment by Employer. (d) During the term of this Agreement, Executive agrees that he will: (i) neither authorize his name to be used by, (ii) nor engage in or carry on, directly or indirectly, for himself as a member of a partnership or as a stockholder (other than as a stockholder of less than five percent (5%) of the issued and outstanding stock of a publicly held corporation having assets in excess of $10,000,000), investor, officer, or director of a corporation (other than Employer, or any parent, subsidiary, affiliate or successor of Employer), or as an employee, agent, associate, or consultant of any person, partnership, corporation or other business entity, in competition with any business carried on, directly or indirectly, by Employer prior to the date hereof or hereafter conducted, directly or indirectly, by Employer during the term of this Agreement, in any county were business is then carried on or conducted by Employer. (e) Executive agrees that the remedy at law for any breach by him of any of the covenants and agreements set forth in this Section 3 will be inadequate and that in the event of any such breach, Employer may, in addition to the other remedies which may be available to it at law, obtain injunctive relief prohibiting him (together with all those persons associated with him) from the breach of such covenants and agreements. (f) The parties hereto intent that the covenants and agreements contained in this Section 3 shall be deemed to include a series of separate covenants and agreements. If, in any judicial proceeding, a court shall refuse to enforce all of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions hereof for the purposes of such proceeding to the extent necessary to permit the remaining separate covenants to be enforced in such proceeding. 4. COMPENSATION. 4.1 SALARY. For the services to be rendered by Executive during the first year of the term of this Agreement, Employer shall pay Executive an annual salary of One Hundred Thousand Dollars ($100,000), payable semi-monthly and subject to income tax withholdings and other payroll deductions as customary in respect of Employer's salaried employees in general. The base salary of Executive for the second year of this Agreement will be determined by the Compensation Committee of the Board of Directors, but will be no less than One Hundred Twenty Thousand Dollars ($120,000). 4.2 BONUS. Executive shall be entitled to participate in such bonus plans of Employer applicable to senior executives of Employer as determined by the Board of Directors of Employer in its sole discretion. Notwithstanding the foregoing, it is the intention of the Employer to pay Executive a bonus greater than One Hundred Thousand Dollars ($100,000) for each complete, but not partial, year of the term of this Agreement, within thirty days of the end of each year of employment hereunder. Criteria for the determination of the amount of said bonus will be as agreed upon by the Executive and the Chairman of the Board within forty-five days of the date of this Agreement. 4.3 VACATION. Executive shall be entitled to four weeks' paid vacation for each year during the term of this Agreement. 4.4 MEDICAL INSURANCE. During the term of this Agreement Employer shall furnish Executive with the same medical and hospital insurance furnished to other employees of Employer. 4.5 STOCK OPTIONS. Upon the execution of this agreement, Employer shall grant stock options to Executive covering 400,000 shares of Common Stock of Employer. Such options shall be exercisable at a price of $3.00 per share, and shall have a 10 year term. 250,000 options shall vest 25% on each of the following dates: June 16, 1997, September 16, 1997, December 16, 1997 and March 16, 1998, provided that the Executive is still employed by Employer at each date of vesting. The remaining 150,000 options shall vest 25% on each of the following dates: June 16, 1998, September 16, 1998, December 16, 1998 and March 16, 1999, provided that the Executive is still employed by Employer at each date of vesting. In the event Executive is terminated by the Company pursuant to Paragraph 8, or the Executive is terminated without good cause pursuant to Paragraph 7, all of such stock options shall immediately vest. 5. EXPENSES. Employer will pay or reimburse Executive for such reasonable travel, entertainment, or other expenses as he may incur at the request of Employer during the term of this agreement in connection with the performance of his duties hereunder. Executive shall furnish Employer with such evidence that such expenses were incurred as Employer may from time to time require or request. 6. DEATH OR TOTAL DISABILITY OF EXECUTIVE. If Executive dies, or becomes totally disabled (for a period of more than six (6) consecutive weeks), during the term of this Agreement, Executive's employment under this Agreement shall automatically terminate and all of Executive's benefits and all payments to Executive under this Agreement shall immediately terminate. 7. TERMINATION FOR CAUSE. Executive's employment under this Agreement may be terminated by Employer for "good cause." The term "good cause" is defined as any one or more of the following occurrences: (a) Executive's breach of any of the covenants contained in Section 3 of this Agreement; (b) Executive's conviction by, or entry of a plea of guilty or nolo contendere to a felony; (c) Executive's commission of an act of fraud, whether prior to or subsequent to the date hereof upon, Employer; (d) Executive's continuing failure or refusal to perform his duties as required by this Agreement; (e) Executive's gross negligence, insubordination, material violation of any duty or loyalty to Employer or any other material misconduct relating to the business or good will of Employer. 8. EARLY TERMINATION. Subject to Section 7, above, either of Employer or Executive may terminate Executive's employment hereunder upon thirty days prior written notice. 9. MISCELLANEOUS. 9.1 MODIFICATION AND WAIVER OF BREACH. No waiver or modification of this Agreement shall be binding unless it is in writing signed by the parties hereto. No waiver of a breach hereof shall be deemed to constitute a waiver of a future breach, whether of a similar or dissimilar nature. 9.2 COMPLETE AGREEMENT. The Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated by this Agreement and supersedes all previous oral and written and all contemporaneous negotiations, commitments, writings, and understandings and is and shall be binding upon and inure to the benefit of Employer, its successors and permitted assigns and Executive, his heirs, executors and administrators. 9.3 LEGAL FEES. If any legal action, arbitration or other proceeding is brought for the enforcement of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 9.4 ASSIGNMENT. This Agreement may not be assigned in any manner whatsoever. IN WITNESS WHEREOF, the undersigned have executed this Agreement on the day and year first above written. EXECUTIVE: EMPLOYER: AVIC GROUP INTERNATIONAL, INC. /s/ James F. O'Brien - - - ----------------------------- James F. O'Brien Address of Executive: 23 Ketch Lane By: /s/ Joseph R. Wright, Jr. Quincy, MA 02171 ------------------------------ Chairman EXHIBIT "A" PROFESSIONAL OBLIGATIONS OF JAMES F. O'BRIEN Promethean Investment Group, L.L.C. Counsel Promethean Investment Group, Inc. Counsel Themis Partners, L. P. Counsel Heracles Fund Counsel and Member of the Board of Directors (The above entities are subject to Paragraph 3(a) of the Employment Agreement.) The Jetty Fund Counsel The Longshore Fund Counsel Goulston & Storrs, P.C. Co-Counsel (Involves representations of two clients of Goulston & Storrs in litigation matters pending in the Superior Court and the Land Court of the Commonwealth of Massachusetts.) EX-10.14 7 EXHIBIT 10.14 PROPRIETARY AND CONFIDENTIAL COMMON STOCK INVESTMENT AGREEMENT Between Promethean Investment Group L.L.C. And Avic Group International, Inc. Dated as of March 31, 1997 INVESTMENT AGREEMENT dated as of March 31, 1997 between Promethean Investment Group L.L.C. (together with its successors in interest and assigns, the "Investor"), and Avic Group International, Inc., a corporation duly organized and existing under the laws of the State of Delaware (the "Company"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Investor shall invest up to $10,000,000 in shares (the "Shares") of the Company's common stock, par value $0.001 per share (the "Common Stock"), NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS Terms used herein which are not defined herein but are defined in the Registration Rights Exhibit, which is annexed hereto, incorporated herein and hereby made an integral part hereof shall have the same meaning herein as therein. ARTICLE II PURCHASE AND SALE OF COMMON STOCK Section 2.1. PURCHASE AND SALE OF COMMON STOCK. Upon the terms and conditions set forth herein, the Company shall issue and sell to the Investor, and the Investor shall purchase from the Company up to $10,000,000 of the Common Stock. Section 2.2. DELIVERY OF PUT NOTICES, (a) At any time and from time to time during the period beginning on the calendar day following the initial effective date of the Registration Statement and ending on the earlier of (i) the date two years after the initial effective date of the Registration Statement day and (ii) termination of this Agreement in accordance with Article VIII (the "Open Period"), the Company may deliver written notices to the Investor (each such notice hereinafter referred to as a "Put Notice") stating a dollar amount (the "Dollar Amount") of Common Stock which the Company intends to sell to the Investor within the thirteen business days (the "Purchase Period") following the date (the "Put Notice Date") on which the Put Notice is given to the Investor by the Company in accordance with this Agreement. "Business Day" shall mean any day on which the -2- Company's Principal Market is open for trading. The Dollar Amount designated by the Company in any given Put Notice shall be in increments of $250,000. Notwithstanding anything herein to the contrary, (A) the Investor shall not be required to purchase during the Purchase Period following a Put Notice Date a dollar amount of Common Stock (the "Required Dollar Amount") which exceeds the lesser of (i) $1,500,000, subject to reduction during the Purchase Period as hereinafter provided, or (ii) ten percent of the Trading Dollar Value (hereinafter defined) during those of the first ten trading days of the Purchase Period during which the average per share Trading Dollar Value is $2.50 or more, but (B) the Investor may, at its election and pursuant to its Purchase Notices (hereinafter defined), purchase during any such Purchase Period up to one hundred thirty percent of the Required Dollar Amount; provided that (x) the Investor may not, pursuant to clause (B) of this Section, invest all or any portion of any amount in excess of a Required Dollar Amount if the investment thereof by the Investor, and (y) a Required Dollar Amount may not in any event include an amount which, if invested by the Investor hereunder, would result, in the case of either (x) or (y), in the Investor purchasing, during a Purchase Period, shares of Common Stock at a price determined in accordance with Section 2.3 hereof which, when aggregated with all other shares of Common Stock acquired by the Investor pursuant to this Agreement in the 90 calendar days preceding such Purchase Period, would result in the Investor having purchased pursuant to this Agreement, during such Purchase Period and such period of 90 calendar days, shares of Common Stock totalling more than 4.9% of the Common Stock outstanding on the Put Notice Date for such Purchase Period, as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the regulations promulgated thereunder. The Put Notice shall include a representation of the Company as to the Common Stock outstanding on the Put Notice Date as determined in accordance with Section 13(d) of the Exchange Act. In the event that the amount of Common Stock outstanding is determined in accordance with Section 13(d) of the Exchange Act and the regulations promulgated thereunder is different on any date during a Purchase Period than on the Put Notice Date associated with such Purchase Period, the amount of Common Stock outstanding on such date during such Purchase Period shall govern for purposes of determining whether the Investor, when aggregating all purchases of Common Stock made pursuant to this Agreement in the 90 calendar days preceding such date, would have acquired more than 4.9% of the Common Stock during such period. The amount provided in clause (i) of this Section 2.2(a) shall be in effect at the beginning of each Purchase Period but shall be reduced during such Purchase Period by $150,000 for each trading day during the Purchase Period on which the -3- average per share Trading Dollar Value is less than $2.50 per share. For purposes hereof "Trading Dollar Value" shall mean the dollar value of the Common Stock traded on the Principal Market for the applicable day or period, provided that individual trades of 15,000 shares or more on any trading day shall, for this purpose, be treated as a trade of 5,000 shares at the average per share price at which such trades of 15,000 shares or more were actually made. (b) Notwithstanding any of the foregoing, the Company may not deliver a Put Notice (i) if the Applicable Trading Price (hereinafter defined) on the day prior to delivery of such Put Notice was less than $2.50 per share or (ii) if trading of the Common Stock on the Principal Market is suspended or the Common Stock is delisted from the Principal Market, or (iii) if the Common Stock is not registered under the Exchange Act or if the Registration Statement is no longer effective or is subject to a stop order or its use or the use of the prospectus which is a part thereof is otherwise suspended. If (a) the Applicable Trading Price on any trading day during the Purchase Period associated with an effective Put Notice shall be less than $2.50 per share or (b) any of the events described in clauses (ii) and (iii) above occurs after an effective Put Notice is so delivered, and if any such circumstance described in (a) or (b) above so occurs before the entire Required Dollar Amount of Common Stock covered by such Put Notice shall have been purchased during the Purchase Period, then the Investor shall have no further obligation to purchase the balance of such Required Dollar Amount of Common Stock during such Purchase Period; PROVIDED, HOWEVER, that on any day during the balance of such Purchase Period upon which such events described in clauses (ii) and (iii) above do not exist or which follows a trading day upon which the Applicable Trading Price shall be $2.50 per share or more, the Investor may in its sole discretion but shall not be required to give the Company one or more Purchase Notices covering some or all of such balance of the Required Dollar Amount, as well as some or all of the additional amounts of Common Stock which the Investor may elect to purchase during such Purchase Period pursuant to Section 2.2(a)(B) above. For purposes of this Section 2.2(b), the "Applicable Trading Price" on any day shall mean the closing trading price of the Common Stock on the Principal Market on such day, as reported by the Principal Market, unless the closing trade on such day was made by or on behalf of the Investor or an affiliate of the Investor, in which case the Applicable Trading Price for such day shall mean the trading price of the last trade made on such day by other than the Investor or any affiliate. -4- (c) During the Open Period the Company shall deliver Put Notices to the Investor having a total, aggregate Dollar Amount not less than $4,000,000. (d) During the Open Period Put Notices may be delivered no more frequently than once in each period of thirteen consecutive business days, such that Put Notices and associated Purchase Periods not overlap each other. (e) The Investor shall not in any event be required to invest more than $10,000,000 in the aggregate (excluding additional purchases which may be made at the election or option of the Investor pursuant to Section 2.2(a)), under or pursuant to Put Notices given hereunder. Section 2.3. DETERMINATION OF PRICE PER SHARE. The prices (each, a "Purchase Period Price Per Share") at which shares that the Company shall be obligated to issue and sell and the Investor shall be obligated to purchase in connection with a Put Notice (including, without limitations any such additional purchases pursuant to Section 2.2(a)(B)) shall be 90% (the "Common Stock Investment Percentage") of the lowest of the daily low trading prices of the Common Stock on the Principal Market on each of the three days next preceding a Purchase Notice Date (hereinafter defined) upon which shares of the Common Stock were traded on the Principal Market (the "Average Stock Price"); provided, however, that if a sale of Common Stock shall have been made by the Investor or an affiliate of the Investor at the low trading price on any such trading day, such trade shall be disregarded for purposes of the foregoing. The number of shares so to be purchased pursuant to each Purchase Notice shall be rounded to the nearest whole number so as to avoid the issuance of fractional shares. Section 2.4. PURCHASE CLOSINGS. (a) Purchases of Common Stock by the Investor during a Purchase Period may be made at any time and from time to time during the Purchase Period pursuant to one or more "Purchase Notices" given by the Investor to the Company during the Purchase Period, each specifying the dollar amount to be invested by the Investor pursuant to such Purchase Notice and the Purchase Period Price Per Share at which Common Stock is to be so purchased pursuant to such Purchase Notice. If the entire Required Dollar Amount of Common Stock required to be purchased during such Period shall not have been covered by Purchase Notices before the last day of the Purchase Period, the Investor shall be deemed so to have given the Company a Purchase Notice on the last day -5- of the Purchase Period specifying therein the balance of such Required Dollar Amount of Common Stock so to be purchased during such Period and the Purchase Period Price Per Share applicable to such purchase. Each date upon which a Purchase Notice is or is deemed so to have been given is herein referred to as a "Purchase Notice Date." (b) Each purchase and sale of Common Stock pursuant to a Purchase Notice (a "Closing") shall take place on the third business day following the giving of the Purchase Notice to which such Closing relates, or the earliest date thereafter on which all conditions to Closing have been satisfied. Each date on which a Closing occurs is referred to herein as a "Closing Date." (c) (i) On each Closing Date, the Company shall deliver to the Investor certificates representing the shares of Common Stock to be issued and sold to the Investor on such date and registered in the name of the Investor or deposit such shares into the accounts designated by the Investor for the benefit of the Investor and (ii) on each Closing Date, the Investor shall deliver to the Company the price to be paid for such shares, determined as aforesaid, by cashier's check or wire transfer in immediately available funds to such account as shall be designated in writing by the Company. In addition, each of the Company and the Investor shall deliver all documents, instruments and writings required to be delivered by either of them pursuant to this Agreement at or prior to each Closing. Section 2.5. CERTAIN ADJUSTMENTS. Average Stock Prices, Purchase Period Prices Per Share, the Maximum Common Stock Issuance (hereinafter defined) the $2.50 amounts provided in Sections 2.2(a) and 2.2(b) hereof and the $3.33 amounts provided in Section 5.2 shall be adjusted appropriately to reflect stock splits, stock dividends, combinations and like transactions affecting the Common Stock. Section 2.6. DELISTING/DEREGISTRATION/SUSPENSION. If at any time during the Open Period or within thirty days after the end of the Open Period, (i) the Common Stock is delisted from the Principal Market or (ii) the Common Stock is not registered under the Exchange Act or (iii) trading of the Common Stock on the Principal Market is suspended for more than two consecutive full trading days or for any cause(s) or reason(s) which have or are likely to have, individually or in the aggregate, an effect on the business, operations, properties, prospects, or financial condition of the Company and any other entities controlled by the Company, taken as a whole, which is material and adverse to it or them, as the case may be, or (iv) if any registration statement with -6- respect to the Common Stock issued or issuable hereunder including the Registration Statement) is no longer effective or subject to a stop order or otherwise suspended by the Company or as a result of action or inaction by the Company, and if, in the case of the circumstances described in clause (iv) of this Section 2.6, such circumstances shall exist for periods in excess of those provided in Section 8 of the Registration Rights Exhibit with respect thereto, the Investor shall have the right, at its option in its sole discretion, which right shall be exercised within thirty days of such event or occurrence, to sell to the Company, and the Company agrees to buy, promptly upon the exercise of such right by the Investor and subject to the limitations imposed by the Delaware General Corporation Law, all or any part of the Common Stock issued to the Investor and then held by the Investor at a price per share equal to the Average Stock Price at the time such share was purchased or at the time such right pursuant to this Section 2.6 is exercised by the Investor, whichever is greater; PROVIDED, HOWEVER, that the number of Shares of Common Stock subject to the Investor's option hereunder shall in no event exceed the number of such Shares acquired by the Investor hereunder during the 60 trading days preceding the Investor's exercise of the option provided to it in this Section 2.6 and during no part of which any of the circumstances described in clause (i) through (iv) of this Section 2.6 existed; and provided further that the Company's obligation so to buy said Common Stock from the Investor shall be subordinated to certain Senior Indebtedness. Section 2.7. OVERALL LIMIT ON COMMON STOCK ISSUABLE; MINIMUM DOLLAR AMOUNT. Notwithstanding anything herein contained to the contrary, the number of shares of Common Stock issuable by the Company hereunder shall not exceed twenty percent of all authorized Common Stock of the Company, subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalization affecting the Common Stock, (the "Maximum Common Stock Issuance"), unless the issuance of Common Stock hereunder excess of the Maximum Common Stock Issuance shall first be approved by the Company's stockholders in accordance with applicable law and the by-laws of the Company. In the event that the foregoing limitation provided in this Section 2.7 shall prevent the Investor's purchase of Common Stock pursuant to this Article II as and when the obligations, right or option to make such purchase is or would arise or be elected or exercised by the Investor according to the terms hereof or if the Company has not delivered Put Notices in the minimum Dollar Amount established in Section 2.2(c) above, then, at the election of the Investor, the Company shall, to the extent permissible by Delaware law, offer to sell to the Holders stock or other securities having rights substantially similar to those contained in the Company's Series D -7- preferred stock in an amount equal to the shortfall. Notwithstanding anything herein to the contrary, the Company will use its best efforts and all due diligence to obtain its shareholders' approval of the issuance and sale of the Common Stock or the substitute securities and all transactions relating or pertaining thereto, as contemplated by this Agreement. Without limiting the generality of the foregoing, such shareholders' approval will duly authorize the issuance by the Company of shares of Common Stock totalling twenty percent or more of the Company's Common Stock outstanding on the date hereof. The parties understand and agree that the Company's failure to obtain such approval shall in no way adversely affect the validity and due authorization, as provided in Sections 4.4 and 4.6 hereof of the issuance and sale of Common Stock hereunder, and that such approval pertains only to the applicability of the Maximum Common Stock Issuance Limitation provided in this Section 2.7. ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVESTOR The Investor represents and warrants to the Company that: Section 3.1. INTENT. The Investor will be purchasing the Common Stock to be purchased by it hereunder for its own account and the Investor has no present arrangement (whether or not legally binding) at any time to sell any such Common Stock to or through any person or entity; PROVIDED, HOWEVER, that by making the representations herein, the Investor does not agree to hold such Common Stock for any minimum or other specific term and reserves the right to dispose of such Common Stock at any time in accordance with federal and state securities laws applicable to such disposition. The Investor understands that such Common Stock must be held indefinitely unless such Common Stock is, either at the time of purchase or subsequently, registered under the Securities Act or an exemption from registration is available. The Investor has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act. Section 3.2. SOPHISTICATED INVESTOR. The Investor is a sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D promulgated under the Securities Act ("Regulation D")) and an accredited investor (as defined in Rule 501 of Regulation D), and the Investor has such experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in such Common Stock. The Investor acknowledges that an investment in the Common Stock is speculative and involves a high degree of risk. -8- Section 3.3. AUTHORITY. The Investor has full power and authority to enter into and to perform this Agreement in accordance with its terms. This Agreement has been duly authorized and validly executed and delivered by the Investor and is a valid and binding agreement of the Investor enforceable against it in accordance with its terms, subject to bankruptcy, insolvency or similar laws relating to, or affecting generally the enforcement of creditors' rights and remedies, and subject also to other equitable principles of general application. Section 3.4. NO BROKERS. The Investor has taken no action which would give rise to any claim by any person for brokerage commission, finder fees, or similar payments relating to this Agreement or the transactions contemplated hereby. Section 3.5. NOT AN AFFILIATE. The Investor is not an officer, director or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of the Company. Section 3.6. ORGANIZATION AND STANDING. The Investor is duly organized, validly existing, and in good standing under the laws of the place of its organization set forth at the beginning of this Agreement. The Investor, if a corporation, partnership or trust, has not been organized, reorganized or recapitalized specifically for the purpose of investing in the Company. Section 3.7. ABSENCE OF CONFLICTS. The execution and delivery of this Investment and any other documents or instruments executed in connection herewith, and the consummation of the transactions contemplated hereby and thereby, and compliance with the requirements thereof, will not violate any law, rule, regulation, order, writ, judgment, injunction, decree or award applicable to the Investor, or the provision of any indenture, instrument or agreement to which the Investor is a party or is subject, or by which the Investor or any of its assets is bound, or conflict with or constitute a material default thereunder, or result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by the Investor to any third party, or require the approval of any third party pursuant to any material contract, agreement, instrument, relationship or legal obligation to which the Investor is subject or to which any of its assets, operations or management may be subject. Section 3.8. DISCLOSURE, ACCESS TO INFORMATION. The Investor has received all documents, records, books and other information pertaining to Investor's Common Stock investment in the Company that have been -9- requested by the Investor. The Investor further acknowledges that it understands that the Company is subject to the periodic reporting requirements of the Exchange Act, and the Investor has reviewed or received copies of any such reports that have been requested by it. The Investor has carefully reviewed the representations concerning the Company contained in this Agreement and has made inquiry concerning the Company, its business and its personnel; the officers of the Company have made available to the Investor any and all written information which it has requested and have answered all inquiries made by the Investor; and the Investor has sufficient knowledge and experience in investing in companies similar to the Company so as to be able to evaluate the risks and merits of its investment in the Company and is able financially to bear the risks thereof. Section 3.9. MANNER OF SALE. At no time was the Investor presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising with respect to Investor's Common Stock investment. Section 3.10. RELIANCE ON COMPANY. The Investor acknowledges that it has had the opportunity to review this Agreement and the transactions contemplated by this Agreement with its own legal counsel and tax advisors. Except for any statements or representations of the Company made in this Agreement and the SEC Documents (as defined below), the Investor is not relying on any other statements or representations of the Company or any of its representatives or agents with respect to such investment. Section 3.11. HART-SCOTT-RODINO. (A) The Person (as that term is defined in 16 C.F.R. Section 801.1(a)(I)) of which the Investor is a part does not have total assets or annual net sales of $100,000,000 or more, as measured under the applicable rules and regulations interpreting the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, ("HSR"), and/or (B) for purposes of Section 802.9 of HSR, the Investor's acquisition of Common Stock will be made solely for the purposes of investment and, as a result of such acquisition and any such conversion or exercise, the Investor will hold ten percent or less of the voting securities of the Company outstanding on the date hereof, and/or (C) as a result of such acquisition and any such conversion or exercise, the Investor will not hold assets or voting securities of the Company valued at more than $1,500,000, and/or (D) the Investor is an Institutional Investor for purposes of Section 802.64 of HSR, such voting securities of the Company will be acquired directly by the Investor in the ordinary course of its business and solely for the purpose of investment (for purposes of such Section 802.64) and, as -10- a result of any such acquisition the Investor will hold fifteen percent or less of the voting securities of the Company outstanding on the date hereof or voting securities of the issuer valued at $25,000,000 or less. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Investor that: Section 4.1. COMPANY STATUS. The Company has registered its Common Stock pursuant to Section 12(b) or 12(g) of the Exchange Act, is in compliance in all material respects with all reporting requirements of the Exchange Act, and the Company has maintained all requirements for the continued listing of its Common Stock, and such Common Stock is currently listed on the Principal Market. As of the date hereof the Company's Principal Market is the American Stock Exchange. Section 4.2. CURRENT PUBLIC INFORMATION. The Company has furnished the Investor with true and correct copies of the Company's latest proxy statement and Annual Report on Form 10-K and all reports and other documents filed with the SEC by the Company since January 24, 1996, pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act (collectively, the "SEC Documents") Section 4.3. GENERAL SOLICITATION IN REGARD TO THIS TRANSACTION. Neither the Company nor any of its affiliates nor any distributor or any person acting on its or their behalf has conducted any "directed selling efforts" (as that term is defined in Rule 902(b) of Regulation S under the Securities Act) with respect to the Common Stock which may be acquired hereunder, nor has the Company conducted any general solicitation (as that term is used in Rule 502(c) of Regulation D) with respect to any of such Common Stock, nor have they made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of such Common Stock under the Securities Act. Section 4.4. CAPITALIZATION AND VALID ISSUANCE OF STOCK. As of the date hereof, the Company has an authorized capitalization consisting of 100,000,000 shares of Common Stock, par value $0.001, and 10,000,000 shares of Preferred Stock, par value $0.001. As of the date hereof, the Company has issued and outstanding 31,232,921 shares of Common Stock and 1,524,328 shares of Preferred Stock. All such options and warrants to acquire shares of Company's Common Stock, which were outstanding as of December 31, 1996 or which the Company was obligated to issue as of -11- December 31, 1996, are described as required in the SEC Documents. As of the date hereof, the Company has outstanding stock options and warrants to acquire a total of 8,543,284 and 2,859,082 shares, respectively, of the Company's Common Stock, which outstanding options and warrants, to the extent issued or granted prior to December 31, 1996, are otherwise as so described in the SEC Documents and, to the extent granted since December 31, 1996, are upon terms which are not materially different from the terms of those options and warrants as have been issued or granted on or before December 31, 1996. The Company has not issued or granted and there are not now outstanding, nor has the company undertaken or become obligated to issue or grant, any convertible securities or, apart from such stock options and warrants outstanding on the date hereof, any options, warrants or other rights to acquire Common Stock, other than the Company's Series C Preferred Stock offering which is currently being undertaken by Patricof & Co. All of the issued shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable; the Common Stock issuable pursuant to this Agreement, when issued, sold and delivered against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued, fully paid and nonassessable; and the holders of outstanding Common Stock of the Company are not and shall not be entitled to preemptive or other rights afforded by the Company to subscribe for the capital stock or other securities of the Company as a result of the sale of the Common Stock to the Investor hereunder. Section 4.5. ORGANIZATION AND QUALIFICATION. The Company is a corporation duly incorporated and existing in good standing under the laws of the State of Delaware and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company does not have any subsidiaries, except for those listed in the SEC Documents. The Company and each such subsidiary, if any, is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, other than those in which the failure so to qualify would not have a Material Adverse Effect. "Material Adverse Effect" means any effect on the business, operations, properties, prospects, or financial condition of the entity with respect to which such term is used and which is material and adverse to such entity and other entities controlling or controlled by such entity, taken as A whole, and/or any condition or situation which would prohibit or otherwise interfere with the ability of the entity with respect to which said term is used to enter into and perform its obligations under this Agreement, including the Registration Rights Exhibit. -12- Section 4.6. AUTHORIZATION, ENFORCEMENT. (i) The Company has the requisite corporate power and authority to enter into and perform the Agreements and to issue the Common Stock pursuant to this Agreement, all in accordance with the terms hereof, (ii) the execution and delivery of this Agreement and the issuance of such Common Stock by the Company and the consummation by the Company of the transactions contemplated hereby to be performed and observed by the Company have been duly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors or stockholders is required, (iii) this Agreement has been duly executed and delivered by the Company, and (iv) this Agreement constitutes the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Section 4.7. CORPORATE DOCUMENTS. The Company has furnished or made available to the Investors true and correct copies of the Company's Certificate of Incorporation, as amended and in effect on the date hereof (the "Certificate"), and the Company's By-Laws, as amended and in effect on the date hereof (the "By-Laws"). Section 4.8. NO CONFLICTS. The execution, delivery and performance of the Agreements by the Company and the consummation by the Company of the transactions contemplated hereby and thereby, including without limitation the issuance of such Common Stock, do not and will not (i) result in a violation of the Company's Certificate of Incorporation or By-Laws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any material agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or (iii) result in a violation of any federal, state, local or foreign law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected (except in the case of any of clause (i), (ii) or (iii) for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations which either singly or in the aggregate do not and will not have a Material Adverse Effect. The -13- Company is not required under federal, state, local or foreign law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or issue and/or sell such Common Stock in accordance with the terms hereof (other than any SEC, NASD or state securities filings which may be required or permitted to be made by the Company subsequent to this date hereof, and any registration statement which may be filed incident to this Agreement), provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Investors herein. For purposes of the Company's representations and warranties as to foreign law, rule or regulation made in clause (iii) above and in the next preceding sentence of this Section 4.8, such representations and warranties are made only to the best of the Company's knowledge insofar as the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby and thereby are or may be affected by the status of the Investor under or pursuant to any such foreign law, rule or regulation. Section 4.9. SEC DOCUMENTS. The Company has delivered or made available to the Investors true and complete copies of the SEC Documents (including, without limitation, proxy information and solicitation materials). The Company has not provided to the Investors any information which, according to applicable law, rule or regulation, should have been disclosed publicly prior to the date hereof by the Company but which has not been so disclosed. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and rules and regulations of the SEC promulgated thereunder, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in fight of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements or to the extent they are subject to normal year-end audit adjustments) and fairly present in all material -14- respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Section 4.10. NO MATERIAL ADVERSE CHANGE. Since December 31, 1996, no event which had or is likely to have a Material Adverse Effect has occurred or exists. Section 4.11. NO UNDISCLOSED LIABILITIES. The Company and its subsidiaries have no liabilities or obligations which are material, individually or in the aggregate, and which are not disclosed in the SEC Documents, other than those incurred in the ordinary course of the Company's or its subsidiaries' respective businesses since December 31, 1996, and which, individually or in the aggregate, have had or are likely to have a Material Adverse Effect on the Company and upon any of its subsidiaries. Section 4.12. NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. No event or circumstance has occurred or exists with respect to the Company or its subsidiaries or their respective businesses, properties, prospects, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. Section 4.13. NO INTEGRATED OFFERING. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, other than pursuant to this Agreement, under circumstances that would require registration under the Securities Act of the Common Stock issuable hereunder. Section 4.14. NO BROKERS. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by the Investor relating to the Agreements or the transactions contemplated hereby and thereby. Section 4.15. LITIGATION AND OTHER PROCEEDINGS. Except as may be set forth in the SEC Documents, there are no lawsuits or proceedings pending or to the best knowledge of the Company threatened, against the Company, nor has the Company received any written or oral notice of any such action, suit, proceeding or investigation, which, if decided adversely, is reasonably expected to have a Material Adverse Effect on the Company or which might materially adversely affect this Agreement or the -15- transactions contemplated by this Agreement. Except as set forth in the SEC Documents, no judgment, order, writ, injunction or decree or award has been issued by or, so far as is known by the Company, requested of any court, arbitrator or governmental agency which is reasonably expected to result in a Material Adverse Effect on the Company or which might materially adversely affect the transactions contemplated by this Agreement. ARTICLE V COVENANTS OF THE COMPANY Section 5.1. REGISTRATION RIGHTS. The Registration Rights Exhibit is hereby incorporated herein by reference and is hereby made an integral part hereof as though fully set forth herein. Section 5.2. RESERVATION OF COMMON STOCK. As of the date hereof, the Company has reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, shares of Common Stock for the purpose of enabling the Company to satisfy any obligation to issue shares of its Common Stock hereunder; provided, however, that the number of shares of Common Stock initially so reserved on the date hereof shall not be less than 1,333,333 and provided further that in no event shall the number of shares so reserved be less the number which might thereafter be issued if the Average Stock Price of the Common Stock on the Principal Market remained at $3.33 per share. The number of shares so reserved from time to time, as theretofore increased or reduced as hereinafter provided, may be reduced by the number of shares of Common Stock actually delivered hereunder and the number of shares so reserved shall be increased to reflect stock splits and stock dividends and distributions and like transactions with respect to Common Stock. In the event that, notwithstanding the foregoing, the Company determines that it does not have a sufficient number of authorized shares of Common Stock to reserve and keep available for issuance as described in this Section 5.2, the Company shall use its best efforts to increase the number of authorized shares of Common Stock by seeking stockholder approval for the authorization of such additional shares. Section 5.3. LISTING OF SHARES. The Company hereby agrees, promptly following the date hereof, to take such action, if any, or may be required to cause all of the Common Stock which may be or become issuable hereunder to be listed on the Principal Market as promptly as possible but no later than one hundred fifty (150) days following the date hereof. The Company further agrees, if the Company applies to have the -16- Common Stock traded on any other Principal Market, it will include in such application all of the Common Stock so issuable and will take such other action as is necessary or desirable to cause the Common Stock to be listed on such other Principal Market as promptly as possible. Section 5.4. EXCHANGE ACT REGISTRATION. The Company will cause its Common Stock to continue to be registered under Section 12(b) or 12(g) of the Exchange Act, will comply in all material respects with its reporting and filing obligations under said Act, and will not take any action or file any document (whether or not permitted by said Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Act. The Company will take all reasonable action necessary to continue the listing and trading of its Common Stock on the Principal Market and will comply in all material respects with the Company's reporting, filing and other obligations under the bylaws or rules of the NASD and the Principal Market. Section 5.5. A. LEGENDS. Except as hereinafter provided, certificates evidencing any Common Stock issued hereunder will bear the following legend (the "Legend"). THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS UNLESS AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT REGISTRATION UNDER SAID ACT IS NOT REQUIRED. Prior to the Closing, the Company will issue to the transfer agent for its Common Stock (and to any substitute or replacement transfer agent for its Common Stock coterminous with the Company's appointment of any such substitute or replacement transfer agent) instructions in substantially the form and substance of the Transfer Agent Irrevocable Instruction Exhibit which is annexed hereto and hereby made a part hereof. Such instructions shall be irrevocable by the Company from and after the date hereof or from and after the issuance thereof to any such substitute or replacement transfer agent, as the case may be, except as otherwise expressly provided in the Registration Rights Exhibit. Notwithstanding the foregoing, such Exhibit may be revoked if required by a change in law, as determined mutually by counsel to the Company -17- and counsel to the Investor or the successors and assigns of the Investor. It is the intent and purpose of such instructions, as provided therein, to require the transfer agent for the Common Stock from time to time to issue certificates evidencing Common Stock free of the Legend during the following periods and under the following circumstances and without consultation by the transfer agent with the Company or its counsel and without the need for any further advice or instruction to the transfer agent by or from the Company or its counsel: (a) For so long as the Registration Statement remains effective, other than during any period of time (a "Black-Out Period") during which the Registration Statement is not effective, for any reason or no reason, or during which the Company has suspended the use of the Registration Statement pursuant to Section 8 of the Registration Rights Exhibit, (i) incident to the issuance of Common Stock hereunder by the Company; and (ii) upon any surrender of one or more certificates evidencing Common Stock and which bear the Legend; provided that in connection with such event, a notice is provided to the transfer agent representing that (i) the holder of or the person or entity acquiring such shares of Common Stock has sold or intends promptly to sell such shares pursuant to and in accordance with the Registration Statement, including the prospectus delivery requirements applicable thereto, and that (ii) to the Holder's knowledge, which has been confirmed in writing by the Company, the Registration Statement was or will be effective, on the date of the sale and the sale did not occur or will not occur during a Black-Out Period, and requesting that certificates for the shares sold or to be sold be issued free of the Legend to the transferee of the holder or to the Holder, as the case may be; and provided further that if, in the event of any such representation in accordance with Clause (i) of the preceding proviso, such certificate evidencing the Common Stock so sold or to be sold is not delivered incident to or for purposes of the completion of such sale within ten (10) trading days after the receipt of such certificate by the Holder or by the Holder's designee, the Holder will return such certificate to the transfer agent for the purpose of enabling the transfer agent to add the Legend to such Certificate and then return the legended certificate to the Holder. (b) At any time from and after the Closing Date, upon any surrender of one or more certificates evidencing Common Stock and which -18- bear the Legend, to the extent accompanied by a notice requesting the issuance of new certificates free of the Legend to replace those surrendered and containing or also accompanied by an opinion of counsel satisfactory to the Company that (i) the then Holder thereof is permitted to dispose thereof pursuant to Rule 144(k) under the Securities Act or (ii) such Holder intends to effect the sale or other disposition of such stock, whether or not pursuant to the Registration Statement, to a purchaser or purchasers who will not be subject to the registration requirements of the Act, or (iii) such holder or the disposition of such Common Stock is not then subject to such requirements. B. NO OTHER LEGEND OR STOCK TRANSFER RESTRICTIONS. No Legend has been or shall be placed on the share certificates representing such Common Stock and no instructions or "stop transfers," so called, "stock transfer restrictions," so called, or other restrictions have been or shall be given to the Company's transfer agent with respect thereto, other than as expressly set forth in Section 5.5 A. hereof. C. INVESTOR'S COMPLIANCE. Nothing in this Section 5.5 shall affect in any way each Holder's obligations under and agreement to comply with all applicable securities laws upon resale of such Common Stock. Section 5.6. CORPORATE EXISTENCE. The Company will take all steps reasonably necessary to preserve and continue the corporate existence of the Company. Section 5.7. ADDITIONAL SEC DOCUMENTS. The Company will furnish to the Investors, promptly after the originals thereof are submitted to the SEC for filing, copies of all SEC Documents so furnished or submitted to the SEC. ARTICLE VI PRELIMINARY PUT NOTICE In order to provide the Investor's designated representatives adequate opportunity to conduct appropriate due diligence in connection with each Put Notice, the Company shall deliver to the Investor, at least seventeen calendar days prior to the delivery of each Put Notice, a Preliminary Put Notice, which Notice shall state that the Company is considering delivery of a Put Notice to the Investor ten (10) or more calendar days following delivery of the Preliminary Put Notice. In no event shall delivery of a Preliminary Put Notice to the Investor obligate the Company to deliver any Put Notice to the Investor, PROVIDED, HOWEVER, that if the Company fails on more than two occasions in any twelve month -19- period to deliver a Put Notice within thirty days of delivery of a Preliminary Put Notice, then the Company shall pay the reasonable due diligence costs of the Investor with respect to each subsequent Preliminary Put Notice delivered during such twelve month period, not to exceed $15,000 in each such case. ARTICLE VII CONDITIONS Section 7.1. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO SELL SHARES. The obligation hereunder of the Company to issue and/or sell the Shares to the Investor is further subject to the satisfaction, at or before the respective issuances and deliveries thereof, of each of the following conditions set forth below. These conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion. (a) ACCURACY OF THE INVESTOR REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Investor shall be true and correct in all material respects as of the date when made and as of the date of such issuance and delivery as though made at that time. (b) PERFORMANCE BY THE INVESTOR. The Investor shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Investor at or prior to such date. (c) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. Section 7.2. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE INVESTOR TO PURCHASE ANY SHARES. The obligation of the Investor hereunder to acquire and pay for Shares is subject to the satisfaction, at or before each Closing, of each of the following conditions set forth below. These conditions are for the Investor's sole benefit and may be waived by the Investor at any time in its sole discretion. (a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as -20- of each Closing Date, as though made at that time (except for representations and warranties that speak as of a particular date or refer to a particular point in time). (b) PERFORMANCE BY THE COMPANY. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to such Closing. (c) PRINCIPAL MARKET. From the date hereof to each Closing Date, as to the Shares to be issued and delivered on such Closing Date, trading in the Company's Common Stock shall not have been suspended by the SEC or the Principal Market, (except for any suspension of trading of limited duration agreed to between the Company and the Principal Market, solely to permit dissemination of material information regarding the Company), and trading in securities generally as reported by the Principal Market, shall not have been suspended or limited or minimum prices shall not have been established on securities whose trades are reported by the Principal Market. (d) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. (e) OPINION OF COUNSEL, ETC. At each Closing the Investor shall have received an opinion of counsel to the Company, satisfactory to the Investor in form and substance, dated the effective date of such Closing, and such other certificates, opinions of other counsel and documents as the Investor or its counsel shall reasonably require incident to such Closing; PROVIDED, HOWEVER, that if the Investor shall have received such an opinion incident to a Closing which occurred no more than thirty days earlier, a new opinion shall not be required of such counsel, other than updates of the earlier opinion provided pursuant to counsel's undertaking therein to provide the same, and for all purposes of the current Closing, the Investor may rely upon such earlier opinion as the same may have been modified by such updates. (f) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement shall be effective at the time of each Closing and no stop order suspending the effectiveness of the Registration Statement shall have been instituted or shall be pending. -21- (g) ACCURACY OF REGISTRATION STATEMENT. At the time of each Closing, the Registration Statement (including information or documents incorporated by reference therein) and any amendments or supplements thereto shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (h) AUDITOR'S LETTER. Investor shall have received a letter of the type, in the form and with the substance of the letter described in Section 2(b)(iii) of the Registration Rights Exhibit; provided, however, that if the Investor shall have received such a letter incident to a Closing which occurred no more than thirty days earlier, a new letter shall not be required of such auditors, other than updates of the earlier letter provided pursuant to such auditor's undertaking therein to provide the same, and for all purposes of the current Closing, the Investor may rely upon such earlier letter as the same may have been modified by such updates. (i) OFFICER'S CERTIFICATE. At each Closing the Investor shall have received a certificate(s) from the CEO and/or CFO of the Company relating to the representations and warranties of the Company herein which shall be satisfactory to the Investor in form and substance. (j) NO BANKRUPTCY FILING. There shall have been no filing of a petition in bankruptcy, either voluntarily or involuntarily with respect to the Company and there shall not have been commenced any proceedings under any bankruptcy or insolvency laws, or any laws relating to the relief of debtors, readjustment of indebtedness or reorganization of debtors, and there shall have been no calling of a meeting of creditors of the Company or appointment of a committee of creditors or liquidating agents or offering of a composition or extension to creditors by, for, with or without the consent or acquiescence of the Company. (k) NO ADVERSE OPINION OF COUNSEL. During the seventeen calendar day period following a Preliminary Put Notice, the Investor's counsel shall not have delivered to the Company a copy of an opinion addressed to the Investor stating Investor's counsel's belief that there is a reasonable likelihood that the Registration Statement contains an untrue statement of material fact or omits a material fact required to make the statements contained therein, in light of the circumstances in which they were made, not misleading. If any such opinion is delivered, copies of the same shall be delivered to the Company's counsel and Investor's counsel shall communicate the basis for such opinion to the Company's counsel -22- promptly after rendering such opinion to Investor. The Company shall have no right or claim against Investor's counsel with respect to any such opinion. In the event that the Company's counsel and the Investor's Counsel are unable, within four business days of such delivery of such opinion of Investor's counsel, to agree upon the appropriate resolution of such belief expressed by Investor's counsel in order that this condition (k) may be satisfied, either counsel may refer the matter to the Neutral Lawyer in accordance with Section 2(d) of the Registration Rights Exhibit. Pending resolution of such belief in accordance with such Section 2(d), the Company shall not deliver any new Put Notices to the Investor and, at the Investor's election, purchases of Common Stock pursuant to Put Notices outstanding and under which the Required Dollar Amount of Common Stock shall not have been fully purchased at the time any such opinion of Investor's counsel shall have been delivered, shall be suspended and the Purchase Period applicable thereto extended by fifteen days for each day from delivery of such opinion to the date upon which such resolution has been obtained and implemented. ARTICLE VIII TERMINATION Section 8.1. OPTIONAL TERMINATION. This Agreement may be terminated at any time by the mutual consent of the Company and the Investor, or at any time upon written notice delivered to the Investor by the Company, provided that the representations, warranties and covenants contained in or incorporated into this Agreement, insofar as applicable to the transactions consummated hereunder prior to such termination, shall survive its termination for the period of any applicable statute of limitations. Section 8.2. AUTOMATIC TERMINATION. This Agreement shall automatically terminate without any further action of either party hereto when (a) the Investor has invested an aggregate of $10,000,000 in the Common Stock of the Company pursuant to this Agreement, apart from additional amounts which may be invested pursuant to Section 2.2(a)(B), provided that the representations, warranties and covenants contained in this Agreement insofar as applicable to the transactions consummated hereunder prior to such termination, shall survive the termination of this Agreement for the period of any applicable statute of limitations or (b) the Open Period has ended. All representations, warranties and covenants shall survive each Closing and for six months after termination of this Agreement. -23- Section 8.3. CHANGE IN CONTROL. From and after the date hereof upon any Change of Control (as defined below), the Company shall no longer have the right to deliver any Put Notice to the Investor, unless otherwise agreed by the Investor. A "Change of Control" shall mean any transaction or series of transactions which results in any person or affiliated group of persons becoming the beneficial owner of 50% or more of the voting stock of the Company or constituting 50% or more of the Company's board of directors. ARTICLE IX MISCELLANEOUS Section 9.1. FEES AND EXPENSES. Each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. Any attorneys' fees and expenses incurred by either the Company or by any Holder in connection with the preparation, negotiation, execution and delivery of any amendments to this Agreement or relating to the enforcement of the rights of any party, after the occurrence of any breach of the terms of this Agreement by another party or any default by another party in respect of the transactions contemplated hereunder, shall be paid on demand by the party which breached the Agreement and/or defaulted, as the case may be. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of any Shares issued pursuant hereto. Section 9.2. SPECIFIC ENFORCEMENT; CONSENT TO JURISDICTION. (a) The Company and the Investor acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which either of them may be entitled by law or equity. (b) Each of the Company and the Investor (i) hereby irrevocably submits to the exclusive jurisdiction of the United States District Court and other courts of the United States sitting in New York City for the purposes of any suit, action or proceeding arising out of or relating to this Agreement and, if such court or courts shall lack or deny -24- jurisdiction thereof, of the courts of the State of New York sitting in New York City and having jurisdiction thereof and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Company and the Investor consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof Nothing in this paragraph shall affect or limit any right to serve process in any other manner permitted by law. Section 9.3. ENTIRE AGREEMENT; AMENDMENTS. Other than with respect to matters described in the Registration Rights Exhibit and documents and agreements relating thereto and hereto, this Agreement contains the entire understanding of the parties with respect to the transactions contemplated hereby and, except as specifically set forth herein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. Section 9.4. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be effective upon hand delivery or delivery by facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received). The addresses for such communications shall be: to the Company: Avic Group International, Inc. 599 Lexington Avenue, 44th Floor New York, New York 10022 Attn: Tim Crowley, Corporate Secretary Fax: 212-319-9288 to the Investor: Promethean Investment Group, L.L.C. 40 West 57th Street, Suite 1520 New York, New York 10019 Attn:James F. O'Brien, Jr., President Fax: 212-698-0505 -25- with copies to: Bingham, Dana & Gould LLP 150 Federal Street Boston, Massachusetts 02110 Attn: James C. Stokes, Esq. Fax: 617-951-8736 Any of the foregoing may from time to time change its address for notices under this Section 9.4 by giving written notice of such changed address to the other party hereto. Section 9.5. WAIVERS. No waiver by either party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. The parties hereto waive any and all rights to a jury trial in connection with any action or proceeding arising under this Agreement or transactions contemplated hereby or thereby. Section 9.6. HEADINGS. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. Section 9.7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. The parties hereto may amend this Agreement without notice to or the consent of any third party. Neither the Company nor the Investor shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other (which consent may be withheld for any reason in the sole discretion of the party from whom consent is sought); PROVIDED, HOWEVER, that the Company may assign its rights and obligations hereunder to any acquirer of substantially all of the assets or a controlling equity interest of the Company provided that such assignment shall be subject to (i) the Change of Control provisions contained in Section 8.3 above, (ii) Investor's prior written consent which consent may not be unreasonably withheld; and PROVIDED FURTHER that the Investor may assign its rights and obligations hereunder to any person or entity, (iii) either controlled by the Investor or whose portfolio investments are made through accounts over which the Investor has discretionary authority without the Company's consent, and (iv) other than those described in the immediately preceding clause, with the Company's prior written consent, which consent may not be -26- unreasonably withheld. The assignment by a party of this Agreement or any rights hereunder shall not affect the obligations of such party under this Agreement. Section 9.8. NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. Section 9.9. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflict of laws. Section 9.10. EXECUTION. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event any signature is delivered by facsimile transmission, the party using such means of delivery shall cause four additional executed signature pages to be physically delivered to the other party within five days of the execution and delivery hereof. Section 9.11. PUBLICITY. The Company and the Investor shall consult and cooperate with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby, provided the foregoing shall not interfere with the legal obligations of either party with respect to public disclosure; and provided further, that neither the Company nor the Investor shall be required to consult with the other if any such press release or public statement does not specifically name the other. -27- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. AVIC GROUP INTERNATIONAL, INC. By: /s/ Michael J. Lim ------------------------- Name: Michael J. Lim Its CFO PROMETHEAN INVESTMENT GROUP L.L.C. By: /s/ James F. O'Brien, Jr. ------------------------- James F. O'Brien, Jr. President REGISTRATION RIGHTS EXHIBIT (to Common Stock Investment Agreement dated March 31, 1997) THIS IS THE REGISTRATION RIGHTS EXHIBIT referred to in and incorporated into and made an integral part of that certain Common Stock Investment Agreement (the "Common Stock Investment Agreement") dated March 31, 1997, between Avic Group International, Inc. (the "Company") and Promethean Investment Group L.L.C. (the "Investor"). 1. CERTAIN DEFINITIONS. As used in this Exhibit, the following terms shall have the following respective meanings. Other terms used herein which are defined in the Common Stock Investment Agreement or in the agreements and other documents referred to in the Common Stock Investment Agreement shall have the same meanings herein as they do therein. "Commission" or "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Holders" shall include the Investor and any transferee of Registrable Securities which have not been sold pursuant to the Registration Statement to whom the registration rights conferred by this Exhibit have been transferred in compliance with Section 13 of this Exhibit. "Principal Market" shall mean the American Stock Exchange. "Registrable Securities" shall mean: (i) the shares of Common Stock issued or issuable under or pursuant to the Common Stock Investment Agreement; and (ii) any other shares of Common Stock of the Company issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations or similar events); -2- provided, however, that shares of Common Stock which are Registrable Securities shall cease to be Registrable Securities upon (a) any sale pursuant to a Registration Statement, Section 4 of the Securities Act or Rule 144 under the Securities Act, (b) any sale in any manner to a person or entity which, by virtue of Section 13 of this Exhibit, is not entitled to the rights provided by this Exhibit, or (c) the date on which such shares become eligible for resale under Rule 144(k) under the Securities Act. The terms "register", "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses to be incurred by the Company in connection with the Holders' exercise of registration rights under this Exhibit other than Selling Expenses, including, without limitation, all registration and filing, fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). "Registration Effective Date" shall mean the date upon which the Registration Statement becomes effective as contemplated herein. "Registration Statement" shall have the meaning set forth in Section 2(a) herein. "Regulation D" shall mean Regulation D as promulgated pursuant to the Securities Act, and as subsequently amended. "Securities Act" shall mean the Securities Act of 1933, as amended. "Selling Expenses" shall mean all underwriting discounts and selling commissions, if any, applicable to the sale of Registrable Securities and all fees and disbursements of counsel for Holder not included within "Registration Expenses." 2. THE REGISTRATION REQUIREMENTS. The Company shall, promptly after the date hereof, file and use its best efforts to cause to become effective, as promptly as possible and in any event by the one hundred fiftieth (150th) calendar day after such filing date, a registration -3- statement (a "Registration Statement") on Form S-3 under the Securities Act or, if Form S-3 is not then available, another appropriate form covering the resale of all Registrable Securities including, without limitation, all of the Common Stock reserved for issuance from time to time pursuant to the Common Stock Investment Agreement. The Company warrants and represents to the Holders that, to the best of its knowledge and belief and notwithstanding anything herein to the contrary, Form S-3 became available for purposes of such registration on or before March 1, 1997. The Company shall use its diligent best efforts to effect the registration contemplated by the foregoing (including, without limitation, the preparation and filing of any and all amendments and post-effective amendments and supplements as may be necessary or appropriate so to effect such registration, appropriate qualification under and compliance with applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) and as would permit or facilitate the sale and distribution of all the Registrable Securities in all states reasonably requested by the Holders for purposes of maximizing the proceeds realizable by the Holder from such sale and distribution. Such best efforts by the Company shall include, without limitation, the following: (a) The Company shall prepare and file (i) as aforesaid, a registration statement with the Commission pursuant to applicable rules and regulations under the Securities Act, on Form S-3 under the Securities Act, and the Company shall use its best efforts to qualify for the use of such Form (or in the event that the Company is ineligible to use such form, such other form as the Company is eligible to use under the Securities Act) covering the Registrable Securities so to be registered (the "Registration Statement"); (ii) such blue sky filings as shall be reasonably requested to permit sales of Registrable Securities included in the Registration Statement, PROVIDED, HOWEVER, that the Company shall not be required to register the Registrable Securities in any jurisdiction that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any tax in any such jurisdiction where it is not then so subject or require the Company to qualify to do business in any jurisdiction where it is not then so qualified; and (iii) any required filings with the National Association of Securities Dealers, Inc. ("NASD") or the Principal Market; all as soon as reasonably practicable after the date hereof the Company shall use its best efforts to have the Registration Statement and other filings declared effective as soon thereafter as may be practicable and, in any event, within the one hundred fiftieth (150) day period hereinabove provided; PROVIDED, HOWEVER, that such one hundred fiftieth (150) day period may, at the Company's option, be extended for up to 14 calendar days if and to the -4- extent such extension would enable the Registration Statement to include or incorporate, directly or by reference to other SEC Documents, when the same becomes effective, the Company's audited financial statements for its fiscal year ending March 31, 1997. The Investor agrees to cooperate reasonably and in good faith with the Company so to effect such registration and other filings. (b) The Company shall enter into such customary agreements (including a customary underwriting agreement with the underwriter or underwriters, if any) and take all such other reasonable actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, in addition to and not in lieu or limitation of the covenants and conditions provided in the Common Stock Investment Agreement and whether or not the Registrable Securities are to be sold in an underwritten offering, the Company shall, at or incident to each such disposition or closing thereof: (i) make such representations and warranties to the Holder and the underwriter or underwriters, if any, in form and substance and scope as are customarily made by issuers to underwriters in secondary underwritten offerings; (ii) cause to be delivered to the sellers of Registrable Securities and the underwriter or underwriters, if any, opinions of counsel to the Company, dated the effective day (or in the case of an underwritten offering, dated the date of delivery of any Registrable Securities sold pursuant thereto) of the applicable. registration statement, which counsel and opinions (in form, scope and substance), shall be reasonably satisfactory to the managing underwriter or underwriters, if any, and the appointed representative or counsel of the Holder, addressed to the Holder and each underwriter, if any, covering the matters customarily covered in opinions requested in secondary underwritten offerings, in the case of any underwritten offering, and such other matters as may be reasonably requested by the Holder; (iii) cause to be delivered, immediately prior to the effectiveness of the Registration Statement (and, in the case of an underwritten offering, at the time of delivery of any Registrable Securities sold pursuant thereto), letters from the Company's independent certified public accountants addressed to the Holders and each underwriter, if any, stating that such accountants are independent public accountants within the meaning of the Securities Act and the applicable published rules and regulations thereunder, and otherwise (x) in customary form and covering such financial and accounting matters as are customarily covered by -5- letters of independent certified public accountants delivered to underwriters in connection with secondary underwritten public offerings, in the case of such letters to such underwriters, if any, and (y) in the case of such letters to the Holders, they shall be in the same form and substance as such letters to such underwriters are or would be if and to the extent permitted and authorized by applicable auditing standards and otherwise in the form and substance of so-called "agreed upon procedures" letters; (iv) if an underwriting agreement is entered into, cause the same to set forth indemnification and contribution provisions and procedures which are customarily included in underwriting agreements used in secondary underwritten offerings but which are no less favorable to the Holder and the Company than those contemplated by Sections 9 and 10 hereof with respect to all parties to be indemnified pursuant to such Sections; and (v) deliver such other documents and certificates as may be reasonably requested by the Holders of the Registrable Securities being sold or the managing underwriter or underwriters, if any, including, without limitation, to evidence compliance with clause (i) above and with any customary conditions confined in the underwriting agreement, if any, or other agreement entered into by the Company. (c) The Company shall, as expeditiously as reasonably possible after the filing of the Registration Statement: (i) furnish to the Holders such reasonable numbers of copies of the definitive prospectus, in conformity with the requirements of the Securities Act, and such other documents as the Holders may reasonably request in order to facilitate the disposition of Common Stock sold by such Holders; (ii) notify the Holders promptly after becoming aware of the happening of any event or the existence of any circumstance (without any obligation to disclose the specific actual event or circumstance) as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing and, as soon as may be practicable and subject to Section 8 hereof, prepare and file with the SEC such amendments and supplements to such Registration Statement and prospectus used in connection therewith as may be necessary to eliminate or correct such untrue statement or omission and otherwise to cause such Registration -6- Statement and prospectus to remain current and useable for the purposes intended hereunder. Upon notification of such event or circumstance, the Holders shall immediately cease making offers of or selling Registrable Securities and shall return all prospectuses held by them to the Company until such time as the prospectus has been amended or supplemented. Following the receipt of revised prospectuses, the Holders shall be free to resume making offers of or selling the Registrable Securities. (d) The Company shall make available for inspection and review by the Holders, advisors to and representatives of the Holders (who or which may or may not otherwise be affiliated with the Holders and are reasonably acceptable to the Company), any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney or accountant retained by such Holders, advisor, representative or underwriter, any such registration statement or amendment or supplement or any blue sky, NASD or other filing, all financial and other records, all SEC documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Holders or any such representative, advisor, underwriter, attorney or accountant in connection with such Registration Statement (including without limitation in response to all questions and other inquiries reasonably made or submitted by any of them), all prior to and from time to time after the filing and becoming effective of the Registration Statement and all for the sole purpose of enabling the Holders and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing and reasonably appropriate due diligence of and with respect to the Company; PROVIDED, HOWEVER, that any information that is reasonably and in good faith designated by the Company in writing as confidential at the time of delivery of such information or is designated in writing as confidential within 15 days of disclosure of such information (and shall not have previously been disclosed by any of the Holders prior to any such designation by the Company) shall be kept confidential by the Holders and the Holders will use reasonable efforts to cause its representatives and such other persons so to keep such information confidential, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities, (ii) disclosure of such information is required by law (including any, disclosure requirements pursuant to federal securities laws in connection with the filing of any Registration Statement or the use of any prospectus referred to in this Exhibit), (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to -7- safeguard by any such person, (iv) such information becomes available to any such person from a source other than the Company and such source, to the knowledge of such persons, is not bound to maintain the confidentiality of such information, or (v) such information was known to or is developed by such persons without reference to such confidential information of the Company. Nothing herein shall require the Company to disclose non-public information to the Holder, and the Company represents that it does not disseminate material non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, PROVIDED, HOWEVER, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of each Holder and, if any, underwriters of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities) which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this paragraph 2(d) shall be construed to mean that such persons or entities may not obtain material non-public information in the course of conducting due diligence in accordance with the terms of this Exhibit and nothing herein shall prevent the Holder or any of such other persons from notifying the Company that the Holder or such person believes, because of the unavailability of material non-public information, that it has been unable to conduct a satisfactory due diligence investigation, or that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading; PROVIDED, HOWEVER, that in no event shall the Holder's advisors or representatives disclose to the Holder the nature of the specific event or circumstance constituting any material nonpublic information discovered by such advisors or representatives in the course of their due diligence. The Holder's, advisors or representatives shall, make complete disclosure to the Holder's independent counsel of all events or circumstances, including any nonpublic information, discovered by such advisors or representatives in the course of their due diligence and upon which such advisors or representatives form the opinion that the -8- Registration Statement contains an untrue statement of a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. Upon receipt of such disclosure, the Holder's independent counsel shall communicate with the Company's independent counsel, requesting that such material misstatement or omission be corrected in the Registration Statement. If the Company disputes the existence of any such material misstatement or omission, the Holder's independent counsel or the Company's independent counsel or both may submit the dispute to a lawyer mutually agreed upon by the Company and the then Holders within four business days of a request by either party (the "Neutral Lawyer"). If the parties are unable to agree upon a Neutral Lawyer who is willing to serve within such four business day period, then the Neutral Lawyer shall be appointed by the Boston, Massachusetts office of the American Arbitration Association at the request of either party. The Neutral Lawyer shall be a partner at a major New York or Boston law firm with at least ten years of experience in securities law matters. Such counsel and the Neutral Lawyer shall use their reasonable best efforts to resolve such dispute within no more than four business days. After conferring with such counsel and performing such further review as he or she deems necessary or appropriate for this purpose (within such four business day period), the Neutral Lawyer shall advise both counsel in writing of his or her determination as to whether and the extent to which he or she believes that the Registration Statement contains a material misstatement or omission. The Company shall, in accordance with the applicable provisions of this Registration Rights Exhibit, promptly make such revisions to the Registration Statement as are necessary or appropriate, if any, to reflect fully and accurately such determination of the Neutral Lawyer. 3. UNDERWRITTEN DISTRIBUTION. If the Holders intend to distribute the Registrable Securities covered by a Registration Statement by means of an underwriting, the Holders shall so advise the Company and, within 15 days of the date thereof and without limiting the generality of other provisions hereof, the Company will prepare and file such amendment or amendments to the Registration Statement and make such other filings as may be necessary or appropriate to effect any such underwritten distribution. 4. MULTIPLE HOLDERS. If there is more than one Holder, such Holders shall act with respect to their rights under this Exhibit according to the vote of a majority-in-interest. -9- 5. EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with any registration. qualification or compliance pursuant to this Exhibit shall be borne by the Company, and all Selling Expenses shall be borne by the Holders. 6. REGISTRATION DELAY OR FAILURE. The Company acknowledges that its failure to register the Registrable Securities in accordance with the Common Stock Investment Agreement and this Exhibit will cause the Holders to suffer damages and undertake risks in amounts that will be difficult ascertain and were not anticipated in negotiating the terms hereof or of the Common Stock Investment Agreement. Accordingly, the parties agree that it is appropriate to include herein a provision for liquidated damages and to compensate the Holders fairly for the additional risk undertaken by the Holders resulting from the Company's delay or failure to effect such registration, and the Holders agree that the provisions set forth in this Section 6 shall be its sole and exclusive remedy with respect to the Company's failure to register the Registrable Securities in accordance with this Exhibit. The parties acknowledge and agree that the provisions hereinafter set forth in this Section 6 represent the parties' good faith effort to quantify such damages and to compensate for such additional risk and, as such, agree that the form and amount of damages and risk compensation are reasonable and will not constitute a penalty. If the Registration Statement shall not have become effective within 150 calendar days (as such period may be extended pursuant to paragraph 2(a) hereof) after March 31, 1997, as contemplated herein, then, the Common Stock Investment Percentage shall be reduced by one (1) percentage point for each successive 30 day period or portion thereof following such 150th day (or later date to which such 150th day may be so extended) during which the Registration Statement shall not have become effective. If, for example, the Registration Statement shall not be effective during any part of the first such 30 day period, the Common Stock Investment Percentage shall be reduced by one (1) percentage point, from 90% to 89%. If, by way of further example, the Registration Statement still has not become effective during any part of the second such 30 day period, the Common Stock Investment Percentage shall be reduced by another one (1) percentage point from 89% to 88%. 7. REGISTRATION PROCEDURES. The Company will keep the Holders reasonably well advised as to initiation of the registration, progress in the preparation and filing of the Registration Statement and any and all amendments and supplements thereto, and as to the completion and becoming effective thereof. At its expense, the Company will use its best -10- efforts to keep such registration effective for the period ending upon the first to occur of (i) the Registration Statement having been effective for resales of Registrable Securities for thirty-six (36) months in the aggregate, exclusive of periods of suspension of such use pursuant to Section 8 hereof or otherwise, (ii) when the Holders have completed the distribution of the Registrable Securities described in the Registration Statement relating thereto, or (iii) the date on which the Registrable Securities are distributed to the public pursuant to Rule 144 or are saleable pursuant to Rule 144(k) promulgated under the Securities Act. 8. SUSPENSION OF USE OF REGISTRATION STATEMENT. The Holders agree that, upon receipt of any notice from the Company (A) of the happening of any event which makes any statements made in the Registration Statement(s) or related prospectus(es) filed pursuant to this Registration Rights Exhibit, or any document incorporated or deemed to be incorporated therein by reference, untrue in any material respect or which requires the making of any changes in such Registration Statement(s) or prospectus(es) so that, in the case of such Registration Statement(s), it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstance under which they were made, not misleading or (B) that, in the judgment of the Company's Board of Directors, it is advisable to suspend use of the prospectus(es) for a discrete period of time due to pending corporate developments which are or may be material to the Company but have not been disclosed in the Registration Statement(s) or in relevant public filings with the SEC, or (C) that the SEC has issued a stop order suspending the effectiveness of the Registration Statement(s), or (D) that the Company is engaged in a public offering of its Common Stock by the Company through a "bulge-bracket" (hereinafter defined) underwriter or (E) of the filing by the Company of a post-effective amendment to the Registration Statement made in order (i) to comply with the regulations under the Securities Act relating to shelf registrations on Form S-3, including without limitation to file audited financial statements or (ii) to reflect any changes to the Registration Statement requested by the Holders, including without limitation changes to the description of the method of distribution of the Registrable Securities or to the information in the Registration Statement relating to the Holders, and the filing of which post-effective amendment requires, under applicable law, rule or regulation, The suspension of use of the Registration Statement or the prospectus therein for the disposition of Registration Securities; the Holders will forthwith discontinue the disposition in accordance with the Registration Statement or prospectus(es) of such Shares covered by such Registration Statement(s) or prospectus(es) until it is advised in writing -11- by the Company that use of the applicable prospectus may be resumed, and has received copies of any additional or supplemented filings that are incorporated or deemed to be incorporated by reference in such prospectuses). Such notice shall not be required to disclose the reason for the suspension beyond noting under which clause of Section 8 the notice is given. The Company shall use reasonable best efforts to insure that the use of the prospectus(es) may be resumed as soon as practicable, and in any event shall not be entitled to require the Holders to suspend use of the prospectus(es) pursuant to the foregoing (i) in the case of notices from the Company relating to clauses (A), (B), (C) or (E) above, for more than an aggregate of twenty (20) calendar days in any 24-month period for purposes of all such notices given during such period, and (ii) in the case of a notice relating to clause (D) above, for more than sixty (60) calendar days on one occasion in any 24-month period; provided that on one additional occasion during such 24-month period, upon notice from the Company pursuant to clause (D) above, the Holder shall be permitted to continue to dispose of such shares, but shall not dispose of such shares pursuant to an underwritten offering during such period, For purposes hereof, a "bulge-bracket" underwriter shall mean Goldman Sachs, Morgan Stanley, JP Morgan, Salomon Bros., Credit Suisse First Boston, Smith Barney, Merrill Lynch, Lehman Bros., Bear Steams and Paine Webber. 9. INDEMNIFICATION. (a) COMPANY INDEMNITY. The Company will indemnify the Holders, each of its officers, directors, partners and attorneys, and each person controlling the Holders within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder with respect to which registration, qualification or compliance has been effected pursuant to this Exhibit, and each underwriter, if any, and each person who controls, within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder, any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based an any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance or arising out of or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any state securities law or in either case, any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse the Holders, -12- each of its officers, directors and partners, and each person controlling such Holders, each such underwriter and each person who controls any such underwriter for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on (i) any untrue statement or omission (or alleged untrue statement or omission) made in such Registration Statement or prospectus based upon written information furnished to the Company by or on behalf of Holders or any underwriter and stated to be specifically for use therein, (ii) any offer or sale by the Holder during a suspension period permitted or required pursuant to Section 8 hereof, or (iii) the failure of the Holder to comply with applicable prospectus delivery requirements. The Indemnity agreement contained in this Section 9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent will not be unreasonably withheld). (b) HOLDERS INDEMNITY. Each Holder will, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors, officers, partners and attorneys, and each underwriter, if any, of the Company's securities covered by such a Registration Statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder, each other Holder (if any), and each of their officers, directors and partners, and each person controlling such other Holder against all claims, losses, damages and liabilities (or actions in respect thereof arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement. prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse the Company and such other Holders and their directors, officers, and partners, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by the Holder and stated to be specifically for use therein; provided, however, that the obligations of the -13- Holder shall not apply to amounts paid in settlement of any such claims, losses, damages or liabilities if such settlement is effected without the consent of Holder (which consent shall not be unreasonably withheld), and provided further that the liability of the Holder hereunder shall not exceed the net proceeds received by the Holder from the sale of Registrable Securities pursuant to the Registration Statement. (c) PROCEDURE. Each party entitled to indemnification under this Section 9 (the "Indemnified Party") shall give written notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Patty has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim in any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this section except to the extent that the Indemnifying Party is actually prejudiced by such failure to provide notice. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. 10. CONTRIBUTION. If the indemnification provided for in Section 9 herein is unavailable to the Indemnified Parties in respect of any losses, claims, damages or liabilities referred to herein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities as between the Company on the one hand and the Indemnified Parties on the other, in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the Indemnified Parties, as the case may be, on the other, in connection with the statements or omissions or other actions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. -14- The relative fault of Company on the one hand and of the Holders or underwriters, as the case may be, on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company, by the Holders or by the underwriters. In no event shall the obligation of any Indemnifying Party to contribute under this Section 10 exceed the amount that such Indemnifying Party would have been obligated to pay by way of indemnification if the indemnification provided for under Section 9(a) or 9(b) hereof had been available under the circumstances. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation (even if the Indemnified Parties were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraphs. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraphs shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this section, no Indemnified Party shall be required to contribute any amount in excess of the amount by which (i) in the case of the Holders, the net proceeds received by the Holders from the sale of Registrable Securities or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that the Holders or underwriter have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 11. SURVIVAL. The indemnity and contribution agreements contained in Sections 9 and 10 hereof and the representations and warranties of the Company referred to in Section 2(b)(i) hereof shall remain operative and in full force and effect regardless of (i) any termination of this Registration Rights Exhibit or any underwriting agreement, (ii) any investigation made by or on behalf of any Indemnified -15- Party or by or on behalf of the Company and (iii) the consummation of the sale or successive resales of the Registrable Securities. 12. INFORMATION BY HOLDERS AND ANY UNDERWRITERS. The Holders and the underwriters, if any, shall furnish to the Company, within 20 business days of the Company's request therefor, such information regarding such Holders or underwriters, as the case may be, and the distribution proposed by such Holders or underwriters as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Exhibit. 13. TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights, granted to Holders by the Company under this Registration Rights Exhibit, to cause the Company to register Registrable Securities, may be transferred or assigned to another Holder, any affiliate of such Holder or to any person acquiring at least 10,000 Registrable Securities (such number being subject to adjustment for any stock dividend, stock split, subdivision, combination or other recapitalization of the Common Stock of the Company); provided that (i) the Company is given written notice by the transferor at the time of such transfer stating the name and address of the transferee and identifying the securities with respect to which such rights are being assigned, and (ii) such transferee (other than an existing Holder) shall, as a condition to such transfer, deliver to the Company a written instrument by which such transferee agrees to be bound by the obligations imposed on Holders pursuant to this Exhibit to the same extent as if such transferee were an original Holder hereunder. END OF EXHIBIT As of April 29, 1997 James F. O'Brien, Jr. Promethean Investment Group, L.L.C. 40 West 57th Street, Suite 1520 New York, NY 10019 Dear Jamie: This letter is to amend the Common Stock Investment Agreement between Promethean Investment Group, L.L.C. ("Promethean") and AVIC Group International, Inc. (the "Company") dated as of March 31, 1997. By signing this amendment, Promethean and the Company agree to amend paragraph 2.1 with respect to the maximum Common Stock Investment, and to increase such amount from ten million dollars to twenty-five million dollars. Agreed to and Accepted As of April 29, 1997 By: AVIC Group International, Inc. By: Promethean Investment Group, L.L.C. /s/ Joseph R. Wright, Jr. /s/ James F. O'Brien, Jr. - - - --------------------------------- ----------------------------------- Joseph R. Wright, Jr. James F. O'Brien, Jr. Chairman and CEO President EX-10.24 8 EXHIBIT 10.24 THE JOINT VENTURE CONTRACT (AVIC GROUP INTERNATIONAL, INC., HEBEI UNITED TELECOMMUNICATIONS DEVELOPMENT CO. AND BEIJING CATCH COMMUNICATION GROUP CO.) 1 CHAPTER 1: PRINCIPLE Hebei United Telecommunications Equipment Company is a domestic Joint Venture Company formed by Hebei United Telecommunications Development Company and Beijing CATCH Communication Group Co. Its address is 2 Jichang Road, Shijiazhuang, Hebei Province. The total registered capital is RMB 5 million, in which Hebei United Development Company invests RMB 0.75 million (15%) and Beijing CATCH invests RMB 4.25 million (85%). AVIC Group International, Inc., ("Party A"), Hebei United Telecommunications Development Company ("Party B" and Beijing CATCH Communication Group, Co. ("Party C") wants to jointly set up a Sino-foreign Joint Venture Company. Therefore, subject to the principle of fair profit sharing and cooperation for development, and pursuant to the Law of PRC on Sino-Foreign Joint Venture ("Joint Venture Law") and the Implementation Regulation of the PRC on Sino-Foreign Joint Ventures ("JV Implementation Regulation") and other relevant Chinese regulations and laws, the above three parties agree to jointly set up a Sino-Foreign Joint Venture Company in Shijiazhuang, Hebei Province. The contract has been signed on _________, 1996 in Shijiazhuang. CHAPTER 2: JOINT VENTURE PARTIES 1. THE JOINT VENTURE PARTIES 1.1 Party A: Name: AVIC Group International, Inc. Organization: A public company incorporated in the State of Colorado of United States Address: 599 Lexington Avenue, 44th Floor New York, NY 10022 U. S. A. Legal Representative: Joseph R. Wright, Jr. Position: Chairman, Chief Executive Officer and President Nationality: American Party B: Name: Hebei United Telecommunications Development Co. Ltd. Organization: A limited liability corporation established in People's Republic of 2 China in accordance with the Chinese Laws Address: 2 Jichang Road Shijiazhuang, Hebei Province The People's Republic of China Legal Representative: Ye Yunyun Position: Chairman Nationality: Chinese Party C: Name: Beijing CATCH Communication Group Co. Organization: A corporation owned by the people established in People's Republic of China in accordance with the Chinese Laws Address: No. 5 Da Ni Wan, Hia Dian District Beijing The People's Republic of China Legal Representative: Ma Yuhe Position: Chairman Nationality: Chinese 2. LEGAL ABILITY 2.1 Party A, B and C guarantee the following: (1). Party A is legally formed in New York, U. S. A. Party B is legally established in Hebei Province, the People's Republic of China. Party C is legally established in Beijing, the People's Republic of China (2). Party A, B and C have the complete right to negotiate and fulfill the responsibilities and obligations set out in this Contract. (3). The signatories of Party A, B and C have the right appointed by both parties to execute this contract. CHAPTER 3: ESTABLISHMENT OF THE JOINT VENTURE COMPANY 3. ESTABLISHMENT OF THE JOINT VENTURE COMPANY 3.1 Party A, B and C agree to form and incorporate a Sino-Foreign Joint Venture Company with limited liability ("The Joint Venture Company") in the PRC 3 on the terms and conditions approved by certain authorities. The Joint Venture Company will be established under the Joint Venture Law and the Joint Venture Implementation Regulations. All important decisions and documents related to the Joint Venture business shall be approved by the Joint Venture Company first before submitting to the relevant authority for approval. 4. THE JOINT VENTURE COMPANY 4.1 The Name of the Joint Venture Company The Chinese name of the Joint Venture Company shall be ____________________________. The English name of the Joint Venture Company shall be Hebei United Telecommunications Engineering Co. Limited. The legal location of the Joint Venture Company is 80 Hongqi Street, Shijiazhuang, Hebei Province, PRC. The Joint Venture Company must be registered at Industry and Commerce Administration and Management Bureau. 4.2 None Joint Venture party can use its parent company and other related company's trademark and logo without a written agreement from other Joint Venture parties. 5. LAW 5.1 The Joint Venture Company's activities in China must fully comply with all the relevant laws, regulations in China and the provisions set out in this contract. 6. ORGANIZATION: 6.1 The Joint Venture Company will be a limited liability company for the purpose of the Company Law of the PRC. All parties shall undertake the liability of the Joint Venture Company subject to its investment amount. All parties agree that the Joint Venture Company's investment will be a full risk investment negotiated as part of a joint business exercise designed to share both risks, rewards and loses based on its share ownership ratio in the registered capital between the partners. 4 CHAPTER 4: BUSINESS OBJECTIVE AND SCOPE 7. BUSINESS OBJECTIVE OF THE JOINT VENTURE COMPANY 7.1 All parties agree that the business objectives of the Joint Venture Company are to participate in the construction and installation of Hebei GSM digital telecommunications project and other post and telecommunications projects; to strengthen in business cooperation and technology development and exchange; to apply advanced telecommunications technology and efficient management skills; to improve technical standard of telecommunications industry and relating services; and to reach both economic and social goals that are satisfactory to all parties. 8. THE SCOPE OF THE JOINT VENTURE COMPANY 8.1 The Joint Venture Company agrees to provide the following services: construction and installation of the telecommunications projects; upgrade technology of existing systems and other related network projects; providing technical consultation, maintenance, services and other related businesses. CHAPTER 5. TOTAL INVESTMENT CAPITAL, REGISTERED CAPITAL, AND SHARE RATIO OF THE JOINT VENTURE PARTNERS 9. TOTAL INVESTMENT CAPITAL AND REGISTERED CAPITAL 9.1 The total investment capital of the Joint Venture Company will be US$ 6 million. 9.2 The registered capital of the Joint Venture Company will be US$3 million. 10. SHARE RATIO Party A, B and C will provide US$ 3 million as the Joint Venture Company's registered capital, in which: 10.1 Party A will contribute US$1.824 million (60.8%). Party B will invest US$0.90 million (30%)and Party C will invest US$0.276 million (9.2%). 5 The capital payment responsibility of each Joint Venture party will be equal to their capital contribution. 11. THE AMOUNT AND TERM OF THE CAPITAL PAYMENT 11.1 All parties shall infuse capital in accordance with the following method after obtaining a Joint Venture Company Business License ("Business License") from the state industry and commerce administration authority: Party A: US$930,000.00 shall be wired to the Joint Venture account within 30 days after getting the business license. The rest (US$894,000.00) shall be wired to the account within 3-6 months after getting the business license. Party B: The total amount shall be wired to the account within 30 days after getting the business license. Party C: The total amount shall be wired to the account within 30 days after getting the business license. 11.2 The investment amount shall be wired to the Joint Venture bank account according to clause 42 listed in this contract. 12. CERTIFICATE OF INVESTMENT 12.1 The investment payment from Party A, B and C shall be certified by a registered public accountant. After receiving a satisfactory certificate recording such investment, the Joint Venture Company will issue the Certificate of Investment, including the amount and share ownership of the registered capital, signed by the Chairman and Vice Chairman of the Joint Venture Company to Party A, B and C. 13. THE USAGE OF THE INVESTMENT 13.1 None of Party A, Party B, Party C or any other parties have the right to use the investment capital infused to the bank account according to Clause 11.2 without the Board's decision of how to use such investment. However, the funds which 6 will be used during the Joint Venture preparation period shall be paid by the Joint Venture Company subject to the approvals from all Parties. 14. TRANSFER OF CAPITAL 14.1 Except for Clause 14.3, Party A, B or C may, as either Party wishes transfer, in whole or part, its shares of the Joint Venture Company to other Party with prior written notice to the other Parties and approval from the relevant authorities. Party A, B or C shall make the decision within 90 days of receiving the written notice. 14.2 If either Party A, B or C wishes to transfer its whole or partial shares, such Party shall first offer the share to the other Party of the Joint Venture Company for purchase. The other Party shall submit a written notice to declare its decision of purchasing those shares within 90 days. If the other Party does not submit its decision within 120 days, or this Party has first offered partial share to the other Party of the Joint Venture Company, any unsubscribed shares may then be offered to a third Party at a price not less than the price offered to the other Joint Venture Party. 14.3 All Parties may transfer its whole or partial shareholding to their parent companies or their subsidiaries during the term of this Contract in accordance with Clause 47. However, the relevant government approvals must be submitted to execute such transfer. 14.4 After the Party transferring its whole or partial shares to a third Party, such third Party shall abide by the terms of this Contract and perform and discharge all of its obligations of this Contract and share its rights as well. In addition, certain provisions in this contract shall be revised pursuant to the change in the shareholding ratio. 14.5 The transfer will not be effective if one of the Parties violates any provisions set out in this contract. 15. THE INCREASE OF THE REGISTERED CAPITAL 15.1 The registered capital (Clause 9) may be increased 7 from time to time subject to approval of the Board of Directors of the Joint Venture Company. The contribution from all parties to increase the registered capital pursuant to Clause 10 of this Contract shall be pro rata in accordance with the share ratio of each Party at the time of such capital increase. If one Party declines to increase the registered capital, the other Party then has the priority to increase the whole or a portion of the amount of the increase in registered capital which is rejected by the other Party. The obligations of each Party shall also be adjusted pursuant to the new share ownership ratio. In addition, Party A, B and C have the right to ask the other Party to increase the registered capital upon receipt of a written agreement between the Joint Venture parties and subject to obtaining the relevant PRC governmental approvals. 16. MORTGAGE: 16.1 Party A, B and C shall not use their portion of the Joint Venture Company's investment capital as any kind of mortgage or guarantee. CHAPTER 6: RESPONSIBILITIES OF ALL PARTIES 17. RESPONSIBILITIES OF PARTY A, B AND C: 17.1 The parties shall contribute, where necessary in accordance with the Joint Venture Company's Business Plan and upon such terms and conditions as may be agreed with the Joint Venture Company, to the general business development of the Joint Venture Company by fulfilling the following responsibilities: A. Party B and C shall: (1). Provide the registered capital based on the share ratio pursuant to Clause 11 of this Contract. (2). Assist the Joint Venture Company in its fund raising, and to obtain investment capital at favorable terms and conditions. (3). Provide necessary assistance to exchange 8 foreign currency to RMB or to exchange RMB to foreign currency. (4). Obtain all necessary approvals and permits from the competent authorities of the PRC, including, establishment and registration of the Joint Venture Company, and all other approvals or permits necessary for the proper conduct of the Joint Venture Company's business and endeavor to obtain preferential treatment for the Joint Venture Company. (5). Assist in the construction of public utilities, such as water, electricity and gas, the connection of the telephone and fax lines and provide the material transportation. (6). Purchase and rent the required equipment, machinery, raw material, cars, communication equipment and others which shall be bought in China in accordance with the agreement by both parties. (7). Assist the Joint Venture Company with customs clearance for import and export of equipment and products and obtain entry permits, visas, work permits, travel permits and all other approvals for expatriate personnel of the Joint Venture Company and obtain suitable accommodation for expatriate personnel. (8). Provide necessary assistance for recruiting executives, technicians, workers and other employees in China. In addition, it shall help its employees to settle their accommodation if necessary. (9). Provide the information of China market to the Joint Venture Company and develop a domestic market for the Joint Venture Company. (10).Provide documents and information relating to the Chinese economy, investment and marketing and also relevant documents relating to Chinese policy, law, 9 regulation, tax system, accounting system and others. (11). Obtain all necessary approvals, registration and licenses from the competent Chinese authorities required for the establishment of the Joint Venture Company. (12). Obtain the approvals for the Joint Venture Company to use land from the Land Administration Authority. (13). Organize the construction and design of the Joint Venture Company building. (14). Handle all other matters appointed by the Joint Venture Company and agreed to by Party A. B. Party A shall: (1). Provide the registered capital based on share ratio according to Clause 11 set up in this Contract. (2). Assist the fund raising for the telecommunications projects confirmed and approved by all parties of the Joint Venture Company outside China and guarantee that the money be transferred to the Joint Venture account pursuant to the Business Plan. The interest rate of such fund shall not be too high and loan provided by Party A to the Joint Venture Company shall not be at usurious rates. (3). Obtain all necessary approvals and permits from the competent authorities in the United States required for the establishment of the Joint Venture Company. (4). Purchase and rent the necessary equipment, machines, materials, cars, communication and office equipment which shall be purchased abroad by Party A and agreed by all Parties. (5). Assist the Joint Venture Company with 10 customs clearance for import/export of equipment and products (including all necessary export permits), obtain entry permits, visas, work permits, travel permits and all other approvals for expatriate personnel of the Joint Venture Company and obtain suitable accommodation for expatriate personnel. (6). Provide necessary assistance for recruiting foreign executives, technicians and other employees in a method agreed by the President. (7). Provide the documents and information relating to the American economy, investment and marketing, and also the relevant documents about American policy, law, rules, tax system, accounting system, etc. (8). Provide advanced technology to the Joint Venture Company and appoint its technicians to support the Joint Venture Company's projects. (9). Provide technical training for the Joint Venture Company's employees in accordance with the technical training contract signed by the Joint Venture Company and Party A. (10).Handle all other matters appointed by the Joint Venture Company and agreed by Party A. CHAPTER 7: TECHNICAL ASSISTANCE 18. TECHNICAL SERVICE 18.1 When it is necessary, the Joint Venture Company has the right to enter into a Technology Service Agreement with Party A or any other Parties based on the agreement of all parties. 19. CONFIDENTIALITY 19.1 It is agreed that all information generated 11 pursuant to the terms of this Contract is confidential and neither Party shall, except with the written consent of the other Party, disclose or release such information to any third Party. 19.2 Party A, B and C shall ask their executives and all other employees to understand the importance of confidentiality for the Company. All employees shall sign the Confidentiality Agreement when they join the Joint Venture Company. CHAPTER 8: PURCHASE OF EQUIPMENT AND MATERIAL 20. PURCHASE OF RAW MATERIALS, EQUIPMENT AND MACHINES 20.1 The Joint Venture Company shall determine if the necessary equipment, materials, fuel, transportation equipment and office equipment shall be purchased in China or abroad. However, if the quality, quantity, performance, delivery, and after-sale service of a foreign product are comparable to a Chinese product, the Joint Venture shall first consider purchasing the product in China. If Party A has to purchase equipment abroad for the Joint Venture Company, Party B and C shall be involved in such purchasing if necessary. CHAPTER 9: BOARD OF DIRECTORS 21. OBLIGATIONS OF BOARD OF DIRECTORS 21.1 The Board of Directors of the Joint Venture Company is the authoritative organ of the Joint Venture Company and shall be fully responsible for the entire business of the Joint Venture Company. 22. ESTABLISHMENT OF THE BOARD OF DIRECTORS 22.1 The Joint Venture Company's Board of Directors will be established on the day a Business License is granted to the Joint Venture Company. 23. COMPOSITION OF THE BOARD AND THE TERM OF EACH DIRECTOR 23.1 The Board of Directors shall consist initially of Seven (7) members, one (1) Chairman and one (1) Vice Chairman. Four (4) Directors will be appointed by Party A, and three (3) Directors will be appointed by Party B. The Chairman of the Board 12 shall be appointed by Party B. The Vice Chairman shall be appointed by Party A. The term of the Chairman, Vice Chairman and directors shall be three years and these positions may be re-appointed consecutively if necessary. The term of the Chairman and Vice Chairman shall begin from the date a Business License is granted to the Joint Venture Company to the closing date of the Board meeting which will discuss the financial statement for the 4th fiscal year of the Joint Venture Company. During the term of the directors, if such matters as death, resignation, retirement or inability to fulfill the job occurs, the Party who appoints such director shall select a replacement as soon as possible. The replacement director shall serve out the term of his predecessor. 23.2 If one Party wants to change the director, a written notice shall be submitted to the BOD meeting within 30 days. 23.3 The Chairman, Vice Chairman and directors will receive no salary from the Joint Venture Company. If any of the Chairman, Vice Chairman or directors hold the titles of the President, Executive Vice President or Vice President of the Joint Venture Company, they shall receive compensation from the Joint Venture Company for fulfilling the duties of these executive positions, but no extra money shall be paid to them for their directorships. 24. BOARD: 24.1 The Board shall be responsible for formulating and implementing the general policy of the Joint Venture Company. If any decision of the Board of Directors is in compliance with applicable Chinese laws, then no third Party shall be involved in such decision. 24.2 The Chairman is the legal representative of the Joint Venture Company. If the Chairman can not fulfill his obligations for some reason, the Vice Chairman or another director shall temporarily assume his responsibilities. 25. BOARD MEETING 25.1 Board meetings shall be held at the Joint Venture 13 Company's offices at least once a year and shall be hosted by the Chairman. Meetings of the Board of Directors may be held at other locations subject to the agreement of Chairman and the Vice Chairman. If more than two directors submit a written notice to the Chairman and suggest the Chairman to issue a written notice for a temporary Board meeting 30 days before a scheduled Board meeting, the Chairman must agree to hold such temporary Board meeting. However, any proposals within 30 days before the Board meeting will be valid upon the agreement of all directors. 25.2 A written notice with details of agenda and papers supporting the items on the agenda shall be given to all directors 30 days before the Board meeting. Upon receipt of the agenda and prior to the meeting, the directors may consult with each other on any items on the agenda. 25.3 If 2/3 of the directors attend the Board meeting, such Board meeting shall be considered as legally effective. If one director can not be in the meeting for some reason, he can appoint his representative to attend the meeting with a written notice, and his representative shall have the same right to vote the decisions of the Board meeting. If a decision is made at a Board meeting with insufficient director attendance, such decision shall have no legal force. 25.4 All costs associated with attending Board meetings by director, including travel and accommodations and all costs incurred by Directors in attending to the business of the Joint Venture Company shall be reimbursed by the Joint Venture Company. 25.5 All minutes of the meetings of the Board of Directors shall be prepared and recorded in the English and Chinese languages and shall be signed by the directors and its representatives who attend the Board meeting. The original copy shall be kept in the Joint Venture Company until the Company dismisses. The copy of the minutes shall be sent to Party A and Party B. If there is any difference between the two versions, the Chinese version shall be taken as the ruling version. 26. RESOLUTIONS OF THE BOARD OF DIRECTORS 14 26.1 Except for clause 26.2 and 26.3, a Board of Directors resolution will become effective upon receiving approval from 1/2 of the directors present at any meeting. 26.2 The following matters require approval from at least 2/3 of the directors in attendance at any meeting to become effective: (1). Approval of the long-term, medium-term and annual business plan, equipment investment, product sales and employment arrangements, etc. (2). Decisions on the changes of annual budget plan, payment of any expenditure in excess of the amount approved in the budget and payment of liabilities. However, if the budget amount is less than RMB1 million and not over 20% of the budget plan, or if the budget amount is over RMB1 million and not over RMB500,000, President and Vice President can make the decision without any restriction but must report to the Board afterwards. (3). Approval of the annual business plan, financial report and annual budget plan. (4). The declaration or payment of any profits or dividend distribution to the shareholders. (5). Approval to raise investment capital. (6). The approval of the annual or semi-annual financial report. (7). Approval of significant changes in the Joint Venture Company's management organizational structure. (8). Any significant changes on the Board's regulation, accounting system, operation expenses, cash control regulation or any other Joint Venture internal regulations. (9). Any changes in Employment Contracts and the Employee's Handbook. (10). Any decisions regarding the salary, 15 welfare and reward of the President, the Vice President, Joint Venture Company Executives and other employees. (11). The appointment or dismissal of the Joint Venture Company's President, Executive Vice President, Vice President or CFO. (12). Any capital transfer from other business entities. (13). Manage and transfer of the Joint Venture Company's partial or total capital. Set up the Joint Venture Company's mortgage right and guarantee right. (14). Establishment or dissolution of any branch company, subsidiary or agency of the Joint Venture Company. (15). Approval of any investment, loan or guarantee of $100,000 or greater. 26.3 The following matters require unanimous approval from the Board of Directors present at any meeting: (1). Any change in the Joint Venture Company's Articles of Incorporation. (2). Any increase or decrease in the registered capital. (3). Any merger with other business entities. (4). Dissolution of the Joint Venture Company except as set forth in Clause 48 and 51 of this Joint Venture Contract. (5). Setting up the asset mortgage right of the Joint Venture Company. 27. WRITTEN RESOLUTIONS OF THE BOARD OF DIRECTORS 27.1 Written resolutions of the Board of Directors shall become effective if approved by all directors. The directors have the right to approve, object or abstain from any Board resolution. CHAPTER 10. MANAGEMENT ADMINISTRATION ORGANIZATION 16 28. PRESIDENT AND VICE PRESIDENT 28.1 A management administration organization shall be set up under the supervision of the Board, and such organization shall handle the day-to-day operation of the Joint Venture Company. 28.2 The management shall consist one President, and one Vice Presidents. The Board of Directors shall decide the appointment of President and Vice President of the Joint Venture Company. 28.3 The term of the President and Vice President shall be three years. Reappointment of each position will be available. If the management changes during the term of the position, the replacement shall serve out the term of his predecessor 29. THE OBLIGATION OF PRESIDENT OF THE JOINT VENTURE COMPANY 29.1 In addition to the day-to-day management of the Joint Venture Company, President shall fulfill the following responsibilities: (1). To make long-term and annual Business Plan of equipment investment, product sales and employee arrangement, and submit such plans to the Board. President shall execute the Board's resolution on all above-mentioned items. (2). President shall be responsible for the presentation of the Business Plan, Budget Plan and financial review for each succeeding financial year for approval and adoption by the Board meeting. (3). To make capital collection, distribution and investment plan and submit such plan to the Board meeting. (4). To make quarterly and yearly financial report and submit it to the relevant authority upon receiving the approval from Board meeting. If it is urgent, the Board approval can be received after submitting to the authority. (5). To set up management structure and submit to the Board meeting for approval. 17 (6). To appoint senior executive positions in the Joint Venture Company. (7). To set up the regulations of the Board meeting, accounting system, expense budget, cash management and all other internal regulations of the Joint Venture Company, and submit to the Board meeting for approval. (8). To make Employment Contract and other regulations regarding the employment of the Joint Venture Company and submit to the Board meeting for approval. (9). To formulate the salary of the Company's executives and other employees, including welfare and reward, and submit to the Board meeting for approval. (10).To appoint and dismiss the employees except for President, Vice President and CFO. (11).To set up the plans to establish and dismiss the Joint Venture Company's branch company, subsidiary and other agency. (12).To purchase of the property within certain expense limit approved by the Board meeting. (13).To sign the contract with a third Party within his job responsibilities. (14).The other responsibilities and obligations appointed by the Board meeting. 29.2 Vice President can be concurrently the head of each different department except for its daily job to assist President of the Joint Venture Company. If President can not fulfill his obligations for some reason, Vice president shall take his responsibilities temporarily. 29.3 President and Executive Vice President shall work closely on the important decisions of the Joint Venture Company. If a disagreement occurs, President has the right to select the final decision. 30. THE CONCURRENT POSITION OF THE COMPANY EXECUTIVES 18 30.1 President, Vice President and other senior executives shall not take the other executive positions in any other business companies concurrently. In addition, they shall not be involved in any other activities with any other companies or organizations which have the similar business. 31. BRIBES, CORRUPTION AND OTHER INAPPROPRIATE ACTIVITIES 31.1 The Board has the right to dismiss President, Vice President and CFO at any time if their inappropriate activities have been found. For the Joint Venture Company employees, President has the right to dismiss them if their inappropriate activities have been found. CHAPTER 11. LABOR MANAGEMENT 32. THE MANAGEMENT OF EMPLOYEE AND WORKERS 32.1 The rules concerning employment, recruitment, dismissal of employees of the Joint Venture Company and their salary, welfare, benefits, labor insurance, labor protection, labor discipline and other matters shall be specified by the Board of Directors in accordance with the "Regulations of the PRC Labor Management in Foreign Investment Enterprises" and its implementation rules. 33. EMPLOYMENT CONTRACT 33.1 The Joint Venture Company shall sign the contract with the Joint Venture Union and individual employees. The Employment Contract shall include the salary, welfare, benefit, labor insurance, labor protection, labor discipline, dismissal, reward and job description, etc. The copies of such contract shall be submitted to local labor administration department for file. 33.2 The salary of the Joint Venture employees will be under the principle of "same position same payment". Under such principle, the salary and welfare of the foreign employees and the employees from U. S. appointed by Party A shall be decided based on the Sino-foreign Joint Venture foreign employee's basic standard. 19 CHAPTER 12. UNION 34. THE SET UP OF THE JOINT VENTURE COMPANY UNION 34.1 The Joint Venture employees have the right to set up a Union and hold various activities under the "PRC Union Law". 34.2 The Union's leader shall represent the interest of the Joint Venture employees. Its responsibilities include: to protect Joint Venture employees' material benefits and their democratic rights; to assist the Joint Venture to set up its welfare fund; to organize various activities for the Joint Venture employees in the field of politics, business, science, technology, entertainment, sports, etc.; to train the employees to obey various employment regulations; and to fulfill various business responsibilities appointed by the Joint Venture Company. 35. OBLIGATIONS 35.1 The Union's leader shall represent each individual employee to sign the Employment Contract with the Joint Venture Company. The Union's leader shall also participate in the Joint Venture's Board meeting and bring employees' opinions to the Board. 35.2 To mediate the quarrel between the Joint Venture employees. 36. FEE 36.1 Each employee shall contribute 2% of his/her monthly salary to the Joint Venture Union. Such fee will be used under the supervision of relevant Chinese laws and regulations. CHAPTER 13. TAX, FINANCE AND AUDITING 37. ACCOUNTING AND TAX 37.1 The Joint Venture's accounting activities shall be conducted under the relevant Chinese laws and regulations. The financial statement of the Joint Venture Company shall be made in accordance with 20 "PRC Foreign Investment Enterprise Accounting System". 37.2 Joint Venture Company shall pay taxes pursuant to the relevant Chinese regulations. In addition, the Joint Venture employees shall pay income tax to the State under the "Individual Income Tax Law of the PRC". 38. CURRENCY 38.1 RMB shall be used as the standard currency for the Joint Venture Company's daily business and accounting. US dollar will be used to record the registered capital. The Joint Venture's foreign currency debt, income and expense shall be recorded pursuant to its actual currency. The conversion of RMB to foreign currency or from any foreign currency to RMB shall be conducted based on the exchange rate on each transaction date issued by China Foreign Currency Management Bureau. 38.2 The difference of the actual currency amount caused by increase and decrease of the foreign currency exchange rate shall be recorded in the Company's annual financial report. 39. FINANCING MODEL 39.1 The Joint Venture's quarterly and annual asset liability statement and other annual financial report shall be prepared in Chinese and submit to Party A, B, C and other relevant authorities for their approval. The financing model can also be translated into Chinese and submit to Party A if required. 40. ACCOUNTING AND AUDITING 40.1 The Company shall allow an independent reputable accounting firm (registered in China) nominated by the Joint Venture Company, access to relevant sections of such accounts and records for the sole purpose of verifying the Joint Venture Company's fee and payment arrangements. The accounting report shall submit to the Board meeting for approval. 40.2 Party A, B and C have the right to invite an 21 accountant to check the Company's accounting book at any time at its own expenses. The Joint Venture Company and its employee shall provide the necessary assistance and convenience for that accountant. 41. FISCAL YEAR 41.1 The fiscal year of the Joint Venture Company shall be from January 1 to December 31. However, the first fiscal year shall start from the date of obtaining the Business License to Dec, 31. All accounting reports shall be written in Chinese. 42. BANK ACCOUNT 42.1 After getting the Business License, the Joint Venture Company shall open its foreign currency bank account and RMB bank account at Bank of China or other assigned banks under the relevant regulations and laws of PRC. In addition, the Joint Venture Company can also open its foreign currency bank account or RMB bank account abroad, including Hong Kong and Macao subject to the approval from China Foreign Currency Management Bureau. 43. FOREIGN CURRENCY LAW 43.1 All Joint Venture Company's activities regarding the foreign currency business shall comply with and carry out the relevant laws and regulations issued by Chinese government. 44. THE USAGE OF THE FOREIGN CURRENCY 44.1 The Joint Venture's foreign currency shall be used in the following activities: (1). To purchase the import materials for the Joint Venture Company. (2). To pay the capital and interest of a foreign currency loan. (3). To pay the expenses of technical service from abroad. (4). To pay the possible distributable profit. 22 45. WIRE TRANSFER OF FOREIGN CURRENCY 45.1 The Joint Venture Company can wire the foreign currency to an abroad bank account only under the following conditions: to wire the Company profit to Party A; to pay the expenses of technical service from abroad; to pay the interest and capital of a foreign currency loan; to get the approval from China Foreign Currency Management Bureau. CHAPTER 14. PROFIT DISTRIBUTION 46. PROFIT DISTRIBUTION 46.1 The parties agree that all of the net after tax profits and setting up saving fund, employee reward fund or other company business fund (hereinafter called "distributable profit"), funds established in accordance with the laws of the PRC shall be distributed to the parties pursuant to the Board resolution. The Joint Venture Company's profit shall be handled in accordance with the following provisions: (1). The Joint Venture Company shall not increase the capital to make up the deficit because of the lose in the first half year. (2). Before making up the deficit for the first half year, both parties can not distribute the Joint Venture Company's profit. (3). Subject to the Board decision, the Joint Venture shall distribute the distributable profit once a year within 90 days after the end of the fiscal year. Such profit will be shared by Party A, B and C in the following ratio: Party A: 60.8% Party B: 30% Party C: 9.2% (4). The Joint Venture Company shall assist Party A to exchange the profit from RMB to the foreign currency. If the Joint Venture Company is unable to exchange the whole or partial amount of the profit to foreign currency for some reasons, this amount of profit can be kept in Joint Venture Company until such exchange is 23 available. The exchange rate from RMB to foreign currency shall be based on each day's interest rate issued by PRC Foreign Currency Administration Bureau. CHAPTER 15. TERM 47. TERM 47.1 The Parties agree that the Joint Venture Company shall continue for a term of 20 years from the date of registration of the Joint Venture Company. 47.2 The Board meeting shall decide the extension or the change of the term of the Joint Venture Company and shall submit its decision to the relevant Chinese authority for approval one year before the termination of the Joint Venture Contract. CHAPTER 16. TERMINATION 48. TERMINATION 48.1 If one of the following events occurs, Party A, B and C shall have the right to terminate the Joint Venture Contract within 60 days and shall submit to the Board for approval. Meanwhile, an application to terminate the contract shall also be provided to the relevant authority: (1). The Joint Venture Company has suffered the serious loses continuously for five years, and still no important and efficient decision has been made to save such lose after 60 days receiving the financial report, or after mutual negotiation, both parties fail to find an efficient way to continue the operation. (2). If Party A, B or C violates the regulations under clause 17 and 19 of this Contract. (3). If an event of Force Majeure occurs under clause 55 of this Contract. (4). To merge the Joint Venture Company with another business entities, and therefore the Joint Venture Company does not exist any more. (5). If one Party goes bankruptcy. 24 (6). If all parties agree that the Joint Venture Company can not achieve its original goal due to some other reasons. (7). All parties agree to terminate this Contract. (8). If the Joint Venture Company has to change its contract, regulations, the technical service contract and other related important documents unreasonably because of the order from the government, and such change will obviously prevent the development of the Joint Venture Company. 48.2 If one of the above-mentioned events occurs, and all parties can not get a mutual agreement, the Party who agrees to continue the business shall purchase the registered capital from the other Party who wants to terminate the Joint Venture Contract. 48.3 The Board of Directors shall take every possible measures including to suspend the business if the Joint Venture has not got the approval from the relevant authority within 90 days under the condition of Clause 48.1. 49. CLEARING COMMITTEE 49.1 The Board of Directors shall form a Clearing Committee to handle the termination of the Joint Venture Company business, and all such activities shall be conducted under relevant Chinese laws and regulations. The members of the Clearing Committee shall be selected from the directors. If the director can not take such responsibilities for some reasons, the Joint Venture Company shall appoint its accountant or lawyer (registered in China) to be involved in such activities. The Clearing Committee shall be responsible to provide a whole set of Joint Venture Company's capital and liability financial report, and to sell the Joint Venture Company based on the fair market price. The Clearing Committee shall also try their best to sell the Joint Venture Company at its highest price in China or abroad in foreign currency if possible. 50. DISMISSAL AND CLEARANCE 25 50.1 Pursuant to the Clause 48 of this contract, the clearance of the Joint Venture Company shall be conducted under the following methods: after selling the Joint Venture Company and handling the other Joint Venture capital matters, the Joint Venture shall pay (a) the clearance fee, (b) employee's salary, insurance and other welfare, (c) taxes and (d) the Joint Venture debts. The rest of the Joint Venture capital shall be distributed to all parties in accordance with the share ratio under Clause 10 of this contract. 50.2 Under the conditions set out in Clause 50.1, the capital distributed to Party A shall be in cash, and shall first consider to pay back in foreign currency. The exchange rate of such amount of foreign currency shall be based on the rate issued by China Foreign Currency Management Bureau at the same day. CHAPTER 17. VIOLATION OF THE JOINT VENTURE CONTRACT 51. DISMISSAL OF THE CONTRACT 51.1 One Party has the right to apply for the termination of the Joint Venture Contract from the relevant state authorities if the Joint Venture Company can not continue its business because of violation of this Contract caused by Party A, B or C, and such violation has not been corrected within 30 days after a written notice has been issued from other Party. 52. VIOLATION AND LOSE 52.1 If one Party does not fulfill its obligations set out in this Contract, or if one Party violates some of the provisions of this Contract, and such violation causes the loses to the other Party, the other Party then has the right to ask for a compensation. 52.2 Party A, B or C shall not be responsible for the expected profit, indirect lose and deriving lose caused by one of the other Parties. 52.3 Subject to Clause 11 of this Contract, if Party 26 A, B or C has not infused the capital into the Joint Venture Company, such Party shall pay the violation fee to the Joint Venture Company based on a 15% annual interest rate. 52.4 The violation fee mentioned in Clause 52.3 is not related to the registered capital and share ownership ratio of the Company. CHAPTER 18. OTHER CONTRACTS 53. OTHER CONTRACTS 53.1 Subject to the requirement of the Joint Venture business, Party A, B and C may sign the following contracts with the Joint Venture Company from the date of obtaining Business License. (1). The Technical Service Agreement under Clause 18. (2). The Technical Training Agreement for the Joint Venture Employees. CHAPTER 19. OTHERS 54. CHANGE OF THE JOINT VENTURE CONTRACT 54.1 The change of the Joint Venture contract shall be effective upon receipt of the signatures from all parties, and shall submit such changes to the relevant authorities for approval. 54.2 If there is any difference between the Joint Venture Contract and the Joint Venture's other regulations, this Contract shall be the only standard. 55. FORCE MAJEURE 55.1 The obligations of a Party shall be suspended if at any time its performance is prevented by any cause beyond its reasonably control including acts of war, riots, strikes, labor disputes, fires, floods, storms, earthquake or other natural disasters and any other event which that party could not foresee at the time of executing this Contract and its occurrence and consequences can not be avoided and can not be overcome. The Party 27 whose obligations are suspended by reason of any such event shall promptly submit the notarized certificate or the first class new report stating the nature of the suspension, the reasons and the expected duration. 55.2 All parties shall negotiate and decide the termination and extension of the Joint Venture contract or other related matters caused by the event of Force Majeure. 56. INSURANCE 56.1 The Joint Venture Company shall select a Chinese Insurance Company to obtain appropriate insurance cover. The type, price and time of the insurance shall be decided in accordance with the regulations of the insurance company in China. If some type of insurance can not be covered by the insurance company in China, the Joint Venture Company may buy it abroad subject to the Board's decision. 57. CHANGE OF THE LAW 57.1 If the performance of the Joint Venture Company has been prevented by the change of the governing law or government in China and the United States or other causes beyond its reasonable control, Party A, B and C have the right to change or terminate this Contract. 58. GOVERNING LAW This Contract shall be governed by and interpreted in accordance with the Laws of PRC. 59. ARBITRATION 59.1 Any dispute and lose compensation arising out of this Contract shall to the fullest extent possible be settled amicably by negotiation and discussion between the Parties. 59.2 Any such dispute not settled by amicable agreement shall be submitted to an Arbitration Organization for arbitration. When Party B and C initiates an action, Party A will appoint Beijing China International Economic Trade Committee for arbitration, and when Party B initiates an action, 28 Party A will appoint the arbitration association selected by Party A for arbitration. The International Business Arbitration Association shall conduct the arbitration under each party's regulation of arbitration. There shall be three arbitrators of whom one each shall be appointed by each Party and the third arbitrator by each Party's Commission. The third arbitrator can neither be Chinese nor American. Any decision taken by the arbitrators will be final, binding and conclusive. 59.3 All Parties shall pay their cost of arbitration separately except for the special requirement written in the final arbitration decision. The cost paid to the arbitration organization shall be shared by all parties. 59.4 During the process of arbitration, the Joint Venture Company's daily business shall be operated continuously, except for the dispute part currently under the arbitration. 60. THE LANGUAGE OF THE JOINT VENTURE CONTRACT 60.1 The Joint Venture Contract shall have eight copies. Each Party holds one copy. Two copies shall be sent to the relevant authority. The rest of the copies shall be kept in the Joint Venture's file. 60.2 The Joint Venture Contract is written in both Chinese and English, and shall take the Chinese version as the standard. 61. EFFECTIVE DATE OF THE CONTRACT This Joint Venture Contract will be effective from the date of getting the approval from Foreign Economic and Trade Ministry of PRC. 62. NOTICE 62.1 Any notices or communications to be given under this Contract shall be sent by either telegram, telex or facsimile transmission. Any notices or communications relating to the important business on Joint Venture partner's obligations, profits and responsibilities shall be sent by registered post. The addresses for service of each Party 29 shall be those addresses previously notified to the other Party. The notice shall be effective from the receipt date of such post. 62.2 Any notices or communications mentioned in Clause 62.1 shall be written in Chinese or English. 63. OTHER COSTS 63.1 Party A, B and C shall be responsible to its own cost relating to the negotiation, preparation and signature of this Contract, including legal service fee. 63.2 After signing the Joint Venture Contract, any cost relating to the establishment of the Joint Venture Company can be put into the Joint Venture Company's preparation budget. 64. THE RELATIONSHIP OF THE ALL PARTIES 64.1 Party A, B and C shall fulfill its own obligations and responsibilities set out in this Contract, and have no right to represent the other Party to fulfill its obligations. This Contract has been signed on ______________, 1996 in __________, PRC, by the representatives from Party A, B and C. Party A: AVIC Group International, Inc. By: /s/ Xiao Jun Name: Xiao Jun Title: Executive Vice President - AVIC China Date: December 18, 1996 Party B: Hebei United Telecommunications Development Co. By: /s/ Ye Yunyun Name: Ye Yunyun Title: Chairman Date: September 20, 1996 Party C: Beijing CATCH Communication Group Co. By: /s/ Ju Feng Name: Ju Feng Title: President Date: September 20, 1996 30 EX-10.25 9 EXHIBIT 10.25 PROJECT COOPERATION CONTRACT CHINA UNICOM'S HEBEI GLOBAL SERVICE FOR MOBILE TELECOMMUNICATIONS (GSM) NETWORK PROJECT CHINA UNITED TELECOMMUNICATIONS CO. AND HEBEI UNITED TELECOMMUNICATIONS ENGINEERING COMPANY LIMITED FEBRUARY 9, 1996 1 CONTENTS Article I Definitions and Interpretation Article II Representations and Warranties Article III Covenants of Both Parties Article IV Contract and Its Attachment Article V Basic Content of the Contract Article VI Content Outline of the Project Article VII Providing Construction and Operating Capital Article VIII Project Construction Article IX Project Operation Article X Project Asset Ownership Article XI Rights and Obligations Article XII Working Group Article XIII Profit Distribution Article XIV Project Expansion Article XV Asset Transfer & Grant Article XVI Insurance Article XVII Confidentiality Article XVIII Force Majeure Article XIX Violation of the Contract Article XX Termination of the Contract Article XXI Governing Law Article XXII Dispute Settlement Article XXIII Term and Effective Date of the Contract Article XXIV Fulfillment of the Responsibilities After Termination of the Contract Article XXV Transfer and Change of the Contract Article XXVI Complete Contract Article XXVII Miscellaneous Attachment 1 Financial Implementation Details 2 Party A: China United Telecommunications Co. ("Party A") Address: 15 Yang Fang Dian Road, Fu Wai Street, Beijing, PRC Zip Code: Legal Representative: Zhao Weichen Position: Chairman Telephone: Fax: Party B: Hebei United Telecommunications Engineering Company Limited ("Party B") Address: 11 Zhong Shan Xi Road, Shijiazhuang, Hebei Province Zip Code: Legal Representative: Ye Yunyun Position: Chairman Telephone: Fax: Pursuant to PRC laws and regulations, subject to the principles of fair profit sharing, sincere cooperation, and, after amicable negotiations, both Party A and B have agreed to enter into the following contract to develop the China UNICOM's Hebei Global Service for Mobile Telecommunications (GSM) Network Project. ARTICLE I DEFINITIONS: 1. Unless the context, including the recitals, in this contract require otherwise, the following words and expressions shall have the meanings shown below: (1). "THE PROJECT" indicates the China UNICOM's Hebei Global Service for Mobile Telecommunications (GSM) Network Project which will cover 10 cities or prefectures with 70,000 subscribers. (2). "THE CONTRACT" means the contract and all attachments signed by Party A and B regarding the China UNICOM's Hebei Global Service for Mobile Telecommunications (GSM) Network Project. It is also called the "Master Contract". (3). "ATTACHMENT" means attachment 1 of the Master Contract. It is part of the contract and can not be separated. When mentioning "the Contract", the attachment shall be included. 3 (4). "UPFRONT NETWORK CONNECTION FEE" indicates the special fund which will be used in the construction of telecommunications projects in accordance with the regulations issued by the relevant state authority. (5). "OPERATING REVENUES" mean the total revenues obtained through the operation of the project, including airtime revenues, monthly leasing revenues, handset sales revenues, SIM Card revenues, service revenues, etc. (6), "OPERATING COSTS AND EXPENSES" mean the costs and expenses occurred during project operation, including special network resource leasing expenses, postal and telecommunications public network calculation fees, depreciation, spare parts fees, power and fuel expenses, network maintenance and repair expenses, labor expenses (including salary, welfare, bonus and other compensation, etc.), business expenses, handset expenses, financial expenses, management expenses, sales expenses, business taxes and other various operating expenses. (7). "PROJECT CAPITAL" means all required capital for project construction and operation provided by Party B pursuant to the Contract (8). "PROJECT ASSETS" means total assets provided by Project Capital invested by Party B. (9). "CHINA UNICOM" indicates China United Telecommunications Co. 2. The title of each article in the contract shall not be considered part of the contract, and shall not restrict, modify or affect the meaning of the contract. ARTICLE II REPRESENTATIONS AND WARRANTS: Both parties, or either party, upon execution of the Contract and thereafter, represents and warrants that: 1. Both entities are corporations duly incorporated and existing in good standing under the laws of the PRC, and have obtained the necessary business license from the Industry and Commerce Administration Department. Each party has its own company regulations and has maintained a good reputation in its own business field. Both parties have the right to execute the contract, and the execution and fulfillment of this contract will not violate their respective corporate regulations. 4 2. Party B warrants that the execution and fulfillment of this contract will not be in conflict with any other contracts, agreements or letters of guarantee which have binding force on Party B or its assets. 3. Party B warrants that, pursuant to its current financial and business situation, it has full power and authority to enter into and to perform under the Contract in accordance with its terms. Further, it is possible and feasible for Party B to fulfill its responsibilities to provide the required capital for the construction and operation of the Project. ARTICLE III COVENANTS OF BOTH PARTIES: Party A and B guarantee the following upon the execution of the contract: 1. Party B guarantees to provide all required capital for the construction and operation of the project pursuant to the schedule, method, and sub-amounts listed in the Contract. 2. Party A guarantees to pay all payments due to Party B in accordance with the terms of the Contract. 3. Both parties guarantee to fulfill all regulations issued by the Chinese government relating to the Contract. ARTICLE IV CONTRACT AND ITS ATTACHMENTS: The Contract and its attachments shall be deemed as a complete legal document of this project upon execution by both parties. ARTICLE V BASIC CONTENT OF THE CONTRACT: Both parties agree that the contract shall include the following items: 1. All contents described in the Contract shall be confirmed and agreed by both parties. 2. Based on this contract, both parties will be responsible for the construction of the project while Party A will be responsible for project operation. 5 3. Party B will provide all required capital for the construction and operation of the project pursuant to the schedule, method, and sub-amounts listed in the Contract. 4. Party A will pay all payments due to Party B in accordance with the terms of the Contract. 5. Party B will be involved in the project construction through its Working Group pursuant to the Contract, and will supervise the operation of the project. ARTICLE VI CONTENT OUTLINE OF THE PROJECT: The Project includes, but is not limited to, the following contents: 1. LOCATION OF THE PROJECT: The location of the Project will be Hebei Province, the People's Republic of China. 2. SIZE OF THE PROJECT: (1). SIZE OF THE PROJECT: The total capacity which ensures the normal operation of the GSM network is 70,000 subscribers. The initial phase will cover 7 cities with 40,000 subscribers and phase two will be increased to 70,000 subscribers from the initial phase. (2). AMOUNT OF PROJECT CAPITAL: A. The initial phase of the project requires an estimated investment of RMB 320 million. The actual investment amount invested will be determined in the financial closing documents of the project approved by Party A. B. Phase two of the Project requires an estimated investment of RMB 280 million. The actual investment amount invested will be determined in the financial closing documents of the project approved by Party A. 6 (3). Once the Contract becomes effective, both parties shall further negotiate a technical proposal. When approved, this proposal shall be signed by both parties and shall be included as an Attachment to this Contract. ARTICLE VII PROVIDING CONSTRUCTION AND OPERATING CAPITAL: Party B agrees that: 1. Once the Contract becomes effective, Party B shall provide RMB 25 million start-up capital to begin the construction of the Project within 15 days. After the Contract becomes effective, Party A shall submit a funding usage plan to the Working Group within 10 days, and shall guarantee that such funds will be used in accordance with the preliminary design and estimation of the project. 2. Party B shall fulfill its obligation to pay all expenses required to purchase any imported equipment and domestic corollary equipment, including, but not limited to, issuing the Letters of Credit pursuant to Article VIII of this Contract. 3. Party A shall formulate (Party B will be involved if Party A requires) a fund usage plan for the construction of this Project based on the preliminary design agreed upon by the Working Group and approved by China UNICOM. Such plan shall be examined by the Working Group and shall be approved by Party A. Party B shall provide the required capital pursuant to this fund usage plan. ARTICLE VIII PROJECT CONSTRUCTION 1. Both parties agree to complete this project in accordance with the following documents: (1) the preliminary design and construction design of this Project approved by China UNICOM; (2) the Contract; (3) Certain regulations regarding the management of GSM construction issued by China UNICOM. 2. Both parties agree that project construction includes, but is not limited to, the following: (1). The Working Group will appoint a qualified Chinese design institute to be responsible for related designs of project construction through a public auction. The design shall be examined and approved by China UNICOM 7 pursuant to construction standards and procedures issued by the state authority and China UNICOM. (2). Construction and installation for the sub-projects, including building construction, pipeline and network construction, switchboard installation, accessory equipment installation, etc., and other construction work which must be done before formal operation. (3). Once construction is completed, the Working Group shall conduct initial testing and acceptance. Party A shall arrange for testing and acceptance once approved by the Working Group. (4). After testing and acceptance of project construction, Party A shall be responsible for formulating the financial closing documents of this project. These documents shall be examined by the Working Group first, and then submitted to China UNICOM for examination and approval. 3. Party A shall be responsible for selecting imported equipment required by construction of this project through a public aucction, and Party B shall participate in this activity. The equipment suppliers shall be determined by both parties. 4. Party B approves any construction work completed by Party A before the execution of this Contract as long as such construction work is within the scope of the preliminary design and cost estimation. ARTICLE IX PROJECT OPERATION: 1. When Party A commences operation of the network, Party A immediately obtains the right for project operation, management, and maintenance, and the right to receive revenues through network operation. 2. Party A shall operate, manage and maintain the Project pursuant to China UNICOM's requirements regarding operation, management and maintenance of the Project and the related items listed in the Contract. Party A shall also operate the network appropriately and reasonably in order to obtain the best benefit through this Project. 8 ARTICLE X PROJECT ASSET OWNERSHIP 1. Pursuant to the financial closing documents, Party A owns 30% of the Project Assets and Party B owns 70% of the Project Assets. 60% of the Project Assets owned by Party B will be transferred to Party A year by year through the method of paying Party B the "Distributable Cash Flow" from Party A in accordance with the regulations listed in Attachment 1 of this Contract. Each year, the Project Assets transferred from Party B to party A shall be equal to the amount of the "Distributable Cash Flow" paid to Party B by Party A at that year. Once the Project Assets transferred by Party B year after year accumulate to 60% of the entire Project Assets, such transfer shall be terminated. The remaining 10% of the Project Assets owned by Party B shall be transferred to Party A without any condition after the Contract expires. 2. The exercise of the asset ownership right by both parties shall not be in conflict with the following: (1). Asset transfer shall be in accordance with the terms of the Contract. (2). Any Party who obtains the asset from the other Party shall be entitled to the asset ownership on the part transferred. (3). Any Party will be able to exercise its right as listed in the Contract. ARTICLE XI RIGHTS AND OBLIGATIONS: Unless otherwise specified in the Contract, both parties shall be entitled to the following rights and shall undertake the following obligations: 1. Party A: (1). Shall be the owner of this Project and shall be responsible for project construction and operation. (2). Shall make all payments due to Party B in accordance with the terms of the Contract. (3). Shall obtain all approvals and permits required for the operation of the project, including the approvals from the State Radio Regulatory Department and Management Department of Telecommunications Industry. 9 (4). Shall obtain all import permits for purchasing imported equipment and other materials as well as network connection permits. (5). Shall obtain the frequency and number resources required by this project and handle other related matters regarding the interconnection between this Project and the post and telecommunications network. (6). Shall cooperate with the Working Group to develop this project pursuant to the terms of this Contract. 2. Party B: (1). Shall provide the required capital pursuant to the regulations of this Contract. (2). Shall be involved in the purchase of the main equipment for this Project. (3). Shall participate in the Project construction, and shall supervise the operation and management of this Project through the Working Group. (4). Shall provide consulting services for project construction and operation. (5). Shall examine the project's preliminary design (including a budget estimate), the financial closing documents, the annual project budget and financial closing documents through the Working Group. (6). Shall cooperate with the Working Group to develop this project pursuant to the terms of this Contract. 3. Each Party shall fulfill its own responsibilities on a timely basis to ensure that the construction and operation of the project proceed smoothly. ARTICLE XII WORKING GROUP: 1. In order to settle any problems promptly during the construction and operation of the Project, both parties shall jointly establish a Working Group (hereafter referred to as the "Working Group"). Party B shall participate in the construction of the Project through the Working Group pursuant to Item 3 of this Article as well as supervise the operation of this Project. 10 2. Both parties will appoint 3 representatives to the Working Group. These 6 representatives shall be the formal members of the Working Group. During the construction period, the Director of the Working Group shall be appointed by Party B and the Deputy Director shall be appointed by Party A. During the operation period, the Director of the Working Group shall be appointed by Party A and Deputy Director shall be appointed by Party B. 3. Party B shall conduct its business within the following areas through the Working Group: (1). It shall examine the Project's preliminary design and construction design (including budget estimate). It shall also participate in the formulation of the Project capital usage plan required by Party A and supervise Party A's implementation of this fund usage plan. (2). It shall participate in the initial testing and acceptance of the Project construction. (3). It shall examine the financial closing documents of the Project. (4). It shall examine the annual project budget and financial closing documents of the Project. (5). It shall resolve any major issues arising during Project construction, such as the changes of design, budget estimation, etc. (6). It shall be responsible for any other tasks assigned by both parties. Other than the above described responsibilities, it shall also examine and supervise all issues deemed necessary by both parties. 4. The time, location, subject and agenda of the Working Group meetings shall be decided by the Director and Deputy Director of the Working Group. 5. Both parties shall submit a list of the candidates who will participate in the Working Group respectively to the other Party within 7 days after this Contract becomes effective. 6. The first Working Group meeting shall be held within 10 days after this Contract becomes effective. 7. If 2/3 of the 6 members of the Working Group attend the meeting, such meeting shall be deemed effective. Any resolutions passed by at least 2/3 11 of the 6 members of the Working Group shall be deemed effective. If any member can not attend a meeting for any reason, he is allowed to appoint a representative to attend the meeting with a written notice. His representative shall be entitled to have the same rights as other formal members of the Working Group. 8. The Working Group may formulate its own working procedures, systems and other working contents if required. However, these "self-made regulations" shall not be in conflict with PRC laws, regulations and policies regarding construction and operation of this Project. ARTICLE III PROFIT DISTRIBUTION 1. Both parties agree to distribute the "Distributable Cash Flow" generated by this Project pursuant to Attachment 1 of this Contract. The distribution proportion will be: Party A gets 22% and Party B gets 78%. 2. Party A shall pay all payments due to Party B pursuant to Attachment 1 of this Contract. ARTICLE XIV PROJECT EXPANSION: If the market demand is greater than the capacity mentioned in Article VI, Item 2, and Party A decides to expand the project which will require additional investment, party B shall have priority to invest in the Project under the same condition. ARTICLE XV ASSET TRANSFER AND GRANT: During the term of the Contract, neither party shall transfer, present or sell the assets to a third party without getting written approval from the other party. ARTICLE XVI INSURANCE: 1. Both parties shall select the appropriate type of insurance, insurance amounts and insurance clauses for project equipment. The insurance premium shall be accounted for as part of construction and operating expenses. The insurance beneficiary shall be identified in the insurance contract. 12 2. Party A or Party B (which shall be decided according to the requirements of the insurance organizations. If both parties can be the policyholders, Party A shall purchase insurance) shall purchase insurance from insurance companies in China to insure the equipment or assets of this project for the full amount based on the type of insurance, insurance amount and insurance clauses selected by both parties. During the construction of this project, Party B shall be the policyholder and shall pay for the insurance premium, and the amount shall be regarded as part of its investment. When Party A formally starts to operate the network, Party A shall be the policyholder and shall pay for the insurance premium, and the amount shall be regarded as part of Operating Costs and Expenses. ARTICLE XVII CONFIDENTIALITY: 1. During the term of the Contract and three years after the termination of the Contract, both parties shall not disclose, release, or provide any information to a third party, which includes financial, business related, technological, managerial and other related documents and information obtained from the other party (either orally or in writing). 2. The above confidential responsibilities shall exclude the following: (1). Information already known to the recipient of the Contract before the information is delivered by the other party of the Contract. (2). Any confidential information already in the public domain, or the release of information is not a mistake caused by the recipient of the Contract. (3). Information received from a third party outside of the Contract. Since no third party has responsibility to keep the information confidential, it may disclose or release this information to the recipient of the Contract. (4). The confidential information was developed alone by the recipient of the Contract. (5). One party of the Contract has obtained a written agreement from another party of the Contract to disclose or release any confidential information to a third party outside of the Contract. 3. Disclosing, releasing or providing confidential information shall be permitted in the following situations: 13 (1). It is required by documents issued by the government authority which is based on laws and regulations. (2). It is required to source orders, or to fulfill equipment purchase contracts or service contracts. (3). Confidential information has become public information through other methods without violating the confidentiality provisions. (4). Either party of the Contract may disclose certain confidential information to its technical consultants who are also subject to the same confidentiality provisions. 4. Either party of the Contract may disclose certain confidential information to employees or contractors if required. However, the employees or contractors shall be restrained by the same confidentiality provisions. ARTICLE XVIII FORCE MAJEURE: 1. During the term of the Contract, if the performance of the Contract is prevented by any cause beyond its reasonable control including acts of earthquake, storms, war, fires, floods, strikes, riots, government martial law or other natural disaster and any other event which that party could not foresee at the time of executing this contract, both parties shall handle such matters pursuant to relevant Chinese regulations. 2. The obligations of a party shall be terminated, in whole or in part, if its power to perform the terms of the Contract is prevented by any course beyond its natural control. 3. The party whose obligations are terminated by reasons of any such event shall notify the other party of the Contract of such event by telex or fax. In addition, it shall submit effective documents issued by government agencies related to such event within 30 days, stating the nature of the event, the reasons for the party's inability to fulfill its responsibilities or to delay the fulfillment of its responsibilities. Both parties shall immediately resolve the situation to minimize all losses that may be incurred by such event. ARTICLE XIX VIOLATION OF THE CONTRACT: 14 1. If the Contract or part of the Contract cannot be fulfilled due to one party's violation of the Contract, the violating party shall be responsible for compensating any direct losses. If both parties violate the Contract, both parties shall pay for any compensation in accordance to the party's responsibilities based on the specific situation. 2. Both parties agree that neither party has the right to terminate the Contract except for causes beyond its reasonable control, or due to severe violations of the Contract performed by both parties which result in the inability to fulfill the Contract. ARTICLE XX TERMINATION OF THE CONTRACT: 1. The contract may be terminated under the following situations, and with the consents of both parties: (1). If the normal operation of the Project is prevented by any of the force majeure events. (2). If the normal operation of the Project is prevented due to non-performance or violations of the Contract by Party A or Party B. (3). If the normal operation of the Project is prevented due to other reasons. And both parties agree that there is not a future for further project development. 2. If the time of termination is during the investment repayments period, the following method shall be applied: At the time of termination agreed by both parties, if the accumulative amount of project construction fees, consultant fees and service fees made by Party A to Party B is less than the Project Capital, then party A shall pay to Party B an amount of money within 60 days after the termination of the contract in accordance with the following calculation: Due payment amount = (Project Capital - Paid Project Construction Fees, Consultant Fees and Service Fees) + (Project Capital - Paid Project Construction Fees, Consultant Fees and Service Fees) x (bank deposit interest/day) x (number of days from the termination date of this contract to the date of paying such Due payment amount to Party B) ARTICLE XXI 15 GOVERNING LAW: This contract shall be governed by and interpreted in accordance with the laws of the PRC. ARTICLE XXII DISPUTE SETTLEMENT: 1. Any disputes, differences in opinion, or conflicts arising out of the Contract during the fulfillment of the Contract shall, to the fullest extent possible, shall be settled amicably by negotiation and discussion between the parties. 2. If such disputes, differences in opinion, or conflicts can not be settled by amicable agreement within 60 days of one party submitting a written notice to the other party, it shall be submitted to the Beijing Arbitration Committee for arbitration. 3. The arbitration shall be conducted under "PRC Arbitration Law". 4. Any decision taken by the arbitrators will be final, binding and conclusive. 5. The arbitration fee shall be paid by the party who loses the case. 6. During the process of arbitration, both parties shall continue to operate the Project in accordance with the Contract, except for the part currently under arbitration. ARTICLE XXIII TERM OF THE CONTRACT 1. The Contract shall be deemed effective upon execution of the Contract by Party A and Party B. 2. The term of this contract commences on the effective day, and terminates 15 years from the date of formal operation of the project. ARTICLE XXIV FULFILLMENT OF THE RESPONSIBILITIES AFTER TERMINATION OF THE CONTRACT: 1. Upon termination of the Contract and pursuant to the terms of the Contract, if there are unfulfilled responsibilities according to the Contract by either party, such party shall fulfill any remaining obligations (including payments owed by Party A to Party B during the term of the Contract). 16 2. Before one party has completely fulfilled its obligations, the other party still has the binding right toward that party on any unfinished obligations. 17 ARTICLE XXV TRANSFER AND CHANGE OF THE CONTRACT Neither Party A nor Party B shall transfer the Contract, any portion of the Contract, any right, profit or obligations specified by the Contract to a third party without prior written consent from the other Joint Venture party. ARTICLE XXVI COMPLETE CONTRACT The Contract and its Attachments are the only contract regarding this project signed by Party A and Party B. ARTICLE XXVII MISCELLANEOUS 1. Any amendments to the Contract shall only become effective after such amendments are signed by authorized persons from both parties. 2. Further negotiations regarding the Contract's technical attachment shall be proceeded by both parties once the Contract has been signed and becomes effective, and it shall be executed upon mutual agreements. This technical attachment shall be one of the attachments of this Contract once it has been signed. Both parties shall fulfill their responsibilities pursuant to this Contract prior to the execution of this technical attachment. 3. Any notice, request, or communications to be given under this contract shall be sent by registered mail, and shall be written in Chinese. Telegram, telex and fax are acceptable. However, the original copy shall be sent by registered post to each party. Any telex, telegram, fax and registered mail shall be sent to the following address: Party A: China United Telecommunications Co. Address: 15 Yang Fang Dian Road, Fu Wai Street, Beijing, PRC Zip Code: 100038 Receiver: General Manager Fax: 010-3242879 Party B: Hebei United Communications Engineering Company Limited Address: 248 He Ping Xi Road, Shijiazhuang, Hebei, PRC Zip Code: 050071 Receiver: General Manager Fax: 0311-7044228 18 4. The notice shall be effective from the date of receipt of such post. 5. This contract is written in Chinese and has two copies. Each party holds one copy, and each copy has equal legal force. 6. This contract has been signed on February 9, 1996 by representatives of Party A and party B at Beijing, the People's Republic of China. Party A: China United Telecommunications Co. Representative: Guo Huanmin Party B: Hebei United Telecommunications Engineering Company Limited Representative: Ye Yunyun 19 EX-10.26 10 EXHIBIT 10.26 FACILITY LETTER BANKING FACILITY OF U.S. DOLLARS 20 MILLION DATED: AUGUST 5, 1996 BETWEEN THE BANK OF TOKYO-MITSUBISHI, LTD. BEIJING BRANCH AS LENDER AND HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. AS BORROWER TERM LOAN AGREEMENT TERM LOAN AGREEMENT dated as of August 5, 1996 between Hebei United Telecommunications Engineering Co. Ltd., a legal person organized under the laws of the People's Republic of China (the "Borrower"), and The Bank of Tokyo-Mitsubishi, Ltd. (the "Bank") through its Beijing Branch (the "Bank's Office"). The parties hereto hereby agree as follows: Article I AMOUNT AND TERMS OF THE LOAN Section 1.01. TERM LOAN; DRAWDOWN PERIOD. The Bank agrees on the terms and conditions hereinafter set forth to make advances in minimum amounts of Five Hundred Thousand Dollars (US$500,000.00) each to the Borrower (in the aggregate, the "Loan") from the date of this Agreement until the first anniversary of the date of this Agreement up to the principal amount of Twenty Million United States Dollars (US$20,000,000.00). Section 1.02. NOTICE AND MANNER OF BORROWING. The Borrower shall give the Bank at least three (3) days' prior notice of any request for an advance under this Agreement, specifying the date and amount thereof. Not later than 10 A.M. on the date of such advance and upon fulfillment of the applicable conditions set forth in Article II, the Bank will make such advance available to the Borrower in immediately available funds by crediting the amount thereof to the Borrower's account with the Bank. Section 1.03. INTEREST. The Borrower shall pay interest to the Bank on the outstanding and unpaid principal amount of the Loan at a rate per annum equal to _____ percent (6.82%). Interest shall be calculated on the basis of a year of three hundred and sixty (360) days for the actual number of days elapsed. Interest shall be paid immediately available funds six months after the date of this Agreement, every six months thereafter, and at maturity at the Bank's Office. Any principal amount not paid when due (at maturity, by acceleration, or otherwise) shall bear interest thereafter until paid in full, payable upon demand, at a rate which shall be 15 percent (15%) per annum. Section 1.04. TERM. The principal of the Loan shall be repaid in five (5) equal, consecutive, semi-annual installments, each in an amount equal to one-fifth (1/5) of the principal amount of the Loan outstanding on the third anniversary of the date of this Agreement with subsequent installments on the last day of each of the next four six-month periods thereafter, provided, however, that the last such installment shall be in the amount necessary to repay in full the unpaid principal amount of the Loan. Section 1.05. PREPAYMENTS. There shall be no prepayment of the advances made under this Agreement. Section 1.06. METHOD OF PAYMENT. The Borrower shall make each payment under this Agreement not later than 1 P.M. on the date when due in lawful money of the United States to the Bank at the Bank's Office in immediately available funds. Whenever any payment to be made under this Agreement shall be stated to be due on a day other than a day on which the Bank's Office is open for business, such payment shall be made on the next succeeding day on which it is open, and such reduction of time shall in such case be included in the computation of payment of interest. All payments hereunder shall be free and clear of and without deduction of any tax, stamp duty, set-off or counterclaim. If the Borrower is prohibited by the operation of law from making payments without deduction, the payments due to the Bank shall be increased to equal the amounts which would have been received as if such deduction or withholding was not required. Section 1.07. USE OF PROCEEDS. The proceeds of the Loan hereunder shall be used by the Borrower to make payments to its local and foreign suppliers and contractors for the purchase, leasing, construction, installation and acquisition by other means of telecommunications equipment and facilities for use in providing telecommunications related services in Hebei Province. Article II CONDITIONS PRECEDENT Section 2.01. CONDITIONS PRECEDENT TO THE LOAN. The obligations of the Bank hereunder are subject to the conditions precedent that the Bank shall have received on or before the day of: 2 (a) the first advance under this Agreement, in form and substance satisfactory to the Bank, a guaranty of all of the obligations of the Borrower under this Agreement by NTT International Corporation; and (b) the first and every advance under this Agreement, upon request by the Bank, evidence satisfactory to the Bank that the Borrower has obtained all authorizations, consents, approvals and registrations, including but not limited to a copy of the State Administration of Exchange Control ("SAEC") Registration issued to the Borrower, following the Borrower's presentation to SAEC officials a copy of this Agreement and its Chinese translation within fifteen (15) days of signing this Agreement. Article III EVENTS OF DEFAULT Section 3.01. EVENTS OF DEFAULT. If the Borrower fails either to pay the principal of, or interest on, the Loan, as and when due and payable, or, upon request by the Bank, provide to the Bank evidence satisfactory to the Bank that the Borrower has obtained all those authorizations, consents, approvals and registrations required from any governmental authority, as more specifically described in Section 2.01(b) above, the Bank may by notice to the Borrower, declare the Loan and all interest thereon to be immediately due and payable, whereupon the Loan and all such interest shall become and be forthwith due and payable. Article IV COMMITMENT FEE Section 4.01. COMMITMENT FEE. The Borrower shall pay the Bank a commitment fee calculated from and including the execution date of this Agreement to the first anniversary thereof at a rate of one-eighth percent (1/8%) per annum on the undrawn portion of the facility. Such commitment fee shall accrue from day to day and be computed on the basis of a year of three hundred and sixty (360) days and the actual number of days elapsed and shall be paid in arrears on the first anniversary of the date of this Agreement. 3 Article V CHANGE IN CIRCUMSTANCES Section 5.01. CHANGE IN CIRCUMSTANCES. If any change in the applicable laws, ordinances, rules and regulations of the People's Republic of China makes it unlawful for the Bank to continue its obligations under this Agreement, those obligations shall terminate immediately, and the Borrower, on demand from the Bank, shall repay the amount of total advances outstanding under this Agreement plus any accrued interest. If under the applicable laws of the People's Republic of China, the Borrower can not lawfully repay those amounts, the Bank and the Borrower shall negotiate in good faith toward a solution restoring those amounts to the Bank. Article VI MISCELLANEOUS Section 6.01. COSTS, EXPENSES, AND TAXES. The Borrower agrees to pay on demand all costs incurred by the Bank in connection with the preparation and administration of this Agreement, and of any amendment, modification or supplement to it, including, without limitation, reasonable fees and out-of-pocket expenses of counsel for the Bank incurred in connection with preparation of this Agreement. The Borrower also agrees to pay all such costs, including arbitration and court costs, incurred in connection with enforcement of this Agreement, or any amendment, modification of supplement thereto, whether by negotiations, legal proceedings or otherwise. In addition, the borrower shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Loan Agreement, and agrees to hold the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. This provision shall survive termination of this Agreement. Section 6.02. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of Japan. 4 Section 6.03. ARBITRATION. Any dispute arising out of this Agreement, including any question regarding its existence or validity, shall be finally resolved in Tokyo, Japan by arbitration under the arbitration rules of the Japanese Commercial Arbitration Association as at present in force. Article VII GUARANTY Section 7.01. GUARANTY. The Bank shall have received a guaranty of all of the obligations of the Borrower under this Agreement by NTT International Corporation. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO. By: /s/ [illegible] ---------------------- Title: [illegible] [SEAL][SEAL] THE BANK OF TOKYO-MITSUBISHI, LTD. By: /s/ [illegible] ---------------------- Title: 5 APPENDIX I FORM OF NOTICE OF DRAWING To: The Bank of Tokyo-Mitsubishi, Ltd. Beijing Branch Beijing Fortune Building No. 5 Dong San Huan Bei Lu Chaoyang District, Beijing, China Ann: Loan Department Dear Sirs: RE: U.S. Dollar 20 Million Facility Letter dated August 5, 1996 ------------------------------------ We refer to the above Facility Letter between you and us. Terms defined in the Facility Letter have the same meaning herein. We hereby give you notice that we wish to borrow a principal amount of __________ from ____________ to ___________ or, if any such date is not a Banking Day, on the next succeeding Banking Day, provided, however, that such period shall not end after the Maturity Date. Such amount should be credited to our account number [ ] at [ ]. We confirm that: no Event of Default or other event which, with the passing of time or giving of notice or both, would constitute an Event of Default has occurred which remains unwaived or unremedied. For and on behalf of Hebei United Telecommunications Engineering Co., Ltd. By: Dated: -------------------- --------------------- EX-10.27 11 EXHIBIT 10.27 PROJECT COOPERATION CONTRACT (HEBEI PROVINCIAL MULTI-MEDIA NETWORK) HEBEI CABLE TELEVISION STATION AND HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT COMPANY LIMITED APRIL 8, 1997 1 CONTENTS Article I Definitions & Interpretation Article II Representations and Warranties Article III Covenants of Both Parties Article IV Contract and Its Attachment Article V Basic Content of the Contract Article VI Content Outline of the Project Article VII Providing Construction Capital Article VIII Project Construction Article IX Project Operation Article X Investment Repayments and Profit Distributions Article XI Project Asset Ownership Article XII Rights and Obligations Article XIII Advisory Board Article XIV Project Expansion Article XV Asset Transfer & Grant Article XVI Insurance Article XVII Confidentiality Article XVIII Force Majeure Article XIX Violation of the Contract Article XX Termination of the Contract Article XXI Governing Law Article XXII Dispute Settlement Article XXIII Term of the Contract Article XXIV Fulfillment of the Responsibilities After Termination of the Contract Article XXV Transfer and Change of the Contract Article XXVI Complete Contract Article XXVII Miscellaneous Attachment 1 Financial Implementation Details Attachment 2 Technical Plan Attachment 3 Project Asset Ownership 2 Party A: Hebei Cable Television Station Address: 100 Jianhua South Street, Shijiazhuang, Hebei Province Zip Code: 050031 Legal Representative: Yang Xingsheng Position: Deputy Director Telephone: 0311-5078985 Fax: 0311-5060184 Party B: Hebei United Telecommunications Equipment Company Limited Address: 11th Floor, 288 Songbiandian Building, Xinhua Road, Shijiazhuang Hebei Province Zip Code: 050051 Legal Representative: Liang Jiangli Position: Chairman Telephone: 0311-7086142 Fax: 0311-7086143 Pursuant to PRC laws and regulations, subject to the principles of fair profit sharing, sincere cooperation, and, after amicable negotiations, both Party A and B have agreed to enter into the following contract to develop the Hebei Provincial Multi-Media Network: ARTICLE I DEFINITIONS: 1. Unless the context, including the recitals, in this contract require otherwise, the following words and expressions shall have the meanings shown below: (1). "THE PROJECT" indicates the Hebei Provincial Multi-media Network Project which will cover 11 cities in Hebei Province. This network will not only transmit radio and television programs, but will also be developed to offer various forms of information services and provide information channels to different businesses. (2). "THE CONTRACT" means the contract and its attachments signed by Party A and B regarding the Hebei Provincial Multi-Media Network Project ("Master Contract"). "ATTACHMENTS" means attachment 1, 2 and 3 of the Contract. Attachments are part of the contract and can not be separated. When mentioning "the Contract", attachments shall be included. (3). "OPERATING REVENUES" mean the total revenues obtained through the operation of the project, including cable TV subscription revenues, line leasing revenues, advertising revenues, information service revenues, etc. 3 (4), "OPERATING COSTS AND EXPENSES" mean costs and expenses occurred during project operation, including equipment maintenance expenses (water, electricity, equipment, instrument, transportation maintenance and other maintenance expenses), management expenses, program expenses, and taxes (5% revenue tax and 3% income tax according to the tax law issued by the state authority). (5). "PROJECT CAPITAL" means all required capital to construct the Project provided by Party B pursuant to the Contract (including interest incurred during the construction phase. The interest shall be calculated based on the loan interest rate issued by the Bank of China at the time the amount of capital has been remitted). (7). "PROJECT ASSETS" mean total of all fixed assets, intangible assets, and deferred assets which is not considered fixed assets provided by Project Capital invested by Party B. 2. The title of each article in the contract shall not be considered part of the contract, and shall not restrict, modify or affect the meaning of the contract. ARTICLE II REPRESENTATIONS AND WARRANTIES: Both parties, or either party, upon execution of the Contract and thereafter, represents and warrants that: 1. Both entities are corporations duly incorporated and existing in good standing under the laws of the PRC, and have obtained the necessary business license from the Industry and Commerce Administration Department. Each party has its own company regulations and has maintained a good reputation in its own business field. Both parties have the right to execute the contract, and the execution and fulfillment of this contract will not violate their respective corporate regulations. 2. Party B warrants that the execution and fulfillment of this contract will not be in conflict with any other contracts, agreements or letters of guarantee which have binding force on Party B or its assets. 3. Party B warrants that, pursuant to its current financial and business situation, it has full power and authority to enter into and to perform under the Contract in accordance with its terms. Further, it is possible and feasible for Party B to fulfill its project construction responsibilities. 4 ARTICLE III COVENANTS OF BOTH PARTIES: Party A and B guarantee the following upon the execution of the contract: 1. Party A guarantees to pay all payments due to Party B in accordance with the terms of the Contract. 2. Party A and Party B guarantee to fulfill all regulations issued by the Chinese government relating to the Contract. 3. Party B guarantees to provide all required Project Capital pursuant to the schedule, method, and sub-amounts required pursuant to the Contract. ARTICLE IV CONTRACT AND ITS ATTACHMENTS: The Contract and its attachments shall be deemed as a complete legal document of this project upon execution by Party A and Party B. ARTICLE V BASIC CONTENT OF THE CONTRACT: Both parties agree that the contract shall include the following items: 1. All contents described in the Contract shall be confirmed and agreed by both parties. 2. Based on this contract, Party B will have primary responsibility during the construction period while Party A will be responsible for project operation. 3. All equipment procurements, engineering designs and construction shall be settled through a bid process in which both parties are involved. 4. Based on the technical plan, finalized by both parties, Party B shall be responsible for raising the capital and shall control the use of such funds raised. 5. Party A shall be responsible for the actual construction process. Upon completion of project construction, both parties shall be responsible for network testing and acceptance. 5 6. Party A and Party B shall supervise and manage the operation of the Project. 7. Party A and Party B shall set forth the employment and billing structures for the Project. The structures will be implemented after they are approved by the Provincial Employment Planning Commission and Pricing Bureau ARTICLE VI CONTENT OUTLINE OF THE PROJECT: The Project includes, but is not limited to, the following contents: 1. LOCATION OF THE PROJECT: The location of the Project will be Hebei Province, the People's Republic of China. 2. SIZE OF THE PROJECT: (1). SIZE OF THE PROJECT: A. To complete the network connection in 11 provincially administered cities. - To complete a self-healing loop network from Shijiazhuang, Baoding, Langfang, Cangzhou, Hengshui and to Shijiazhang. - To complete bus-organized transmission construction from Shijiazhuang, Xingtai to Handan. - To complete a digital microwave transmission network in the northeast (from Langfang, Tangshan to Qinghuangdao) - To complete the upgrade of microwave network digitization from Yutian to Xinglong and Chengde in northern Hebei. - To complete the upgrade of microwave network digitization from Guan to Hengling, Xiahuayuan and Zhangjiakou. - To complete the HFC upgrade in at least one city. B. Construction Period: the construction will be finished one and a half years after the Contract has been executed. (2). AMOUNT OF PROJECT CAPITAL: Phase one of the project requires an estimated investment of RMB 190 million. The actual investment amount invested will be determined in the financial closing documents of the project approved by both parties. 6 (3). Once the Master Contract becomes effective, both parties shall further negotiate a technical proposal. When approved, this proposal shall be signed by both parties and shall be included as Attachment 2. ARTICLE VII PROVIDING CONSTRUCTION CAPITAL: Both parties agree that: 1. Once the Contract becomes effective, Party A shall submit a funding usage plan to Party B one month before using such funds, and shall guarantee that such funds will be used in accordance with the preliminary design of the project as approved by both parties. 2. Party A shall formulate a funding usage plan for the construction of the project based on the preliminary design approved by both parties. Such plan shall be approved by Party B. Then Party B shall provide required capital pursuant to the related construction development contracts. 3. Both parties shall fulfill their obligations to pay all expenses required to purchase any imported equipment and domestic corollary equipment, including, but not limited to, issuing the Letters of Credit pursuant to Article VIII of the Contract. 4. Investment currency and foreign exchange rate: both parties agree that mainly RMB will be invested for the construction and operation of the Project, except for the purchase of imported equipment. When investing in US dollars, the exchange rate shall be based on the average of the buying and selling prices of the PRC's exchange rate. Party B shall be responsible for handling all required procedures and related currency exchange service charge. ARTICLE VIII PROJECT CONSTRUCTION: 1. Both parties agree to complete this project in accordance with the following documents: (1) the approved preliminary design and construction design of this project; (2) the Contract. 2. Both parties agree that the project construction includes, but is not limited to, the following: 7 (1). Both parties will appoint a qualified institute to be responsible for the related designs. The designs shall be examined and approved by both parties pursuant to the construction standards and procedures issued by the State authority or Ministry of Radio, Film and Television. (2). Both parties are responsible for network testing and acceptance upon network completion. (3). After the testing and acceptance of the project construction, Party B shall be responsible to draft the financial closing documents of this project which need to be approved by both parties. 3. Both parties shall be responsible for selecting imported equipment and domestic corollary equipment required by the construction of the project through a public bid. ARTICLE IX PROJECT OPERATION: 1. When Party A starts to operate the network, Party A immediately obtains the right for project operation, management, and maintenance, and the right to receive revenues through network operation. Party B then immediately obtains the right to supervise project operation and management (see attachment 1 for operation structure) . 2. In order to fully utilize the initiative of both parties and improve the efficiency of the operation, both parties shall establish an Advisory Board. The Advisory Board will have financial report meetings and Board meetings on a regular basis. 3. Party B shall only be responsible for the operating expenses pursuant to the basic content of the project described in the Contract. Party A shall be responsible for operating expenses not included in the Project. 4. Party B shall be able to participate in the project operation through financial management at a minimum. Party B is allowed to appoint a PRC representative to be jointly in charge of and to supervise financial management and operation with Hebei Cable Television Station. ARTICLE X INVESTMENT REPAYMENTS AND PROFIT DISTRIBUTIONS 8 1. Both parties have agreed on the form of the project operation in which the project shall keep separate accounting and assume sole responsibility for its profits and losses. All revenues generated by the Project, less all expenses incurred during the process of generating such revenues, shall be distributed. The method of asset amortization shall be handled based on attachment 1 ("Financial Implementation Details"). 2. DEPRECIATION: Before Party A obtains ownership of the assets of the Project, ownership of all equipment of the Project shall be notarized with a notary agency, and be temporarily recorded on Party A's account. Depreciation shall then be accounted for as part of Party A's cost. Depreciation shall be drawn from the revenue after operating tax has been paid but before income tax is paid and shall be distributed between Party A and Party B in accordance with their pro rata ownership of the project assets. The profit retained after paying income tax shall then be distributed on a 2:8 ratio (Party A 20% and Party B 80%). 3. INVESTMENT REPAYMENTS: During the period of investment repayments (the period to repay all investment principle and interest incurred during the construction phase), Operating Revenues, less Operating Costs and Expenses, shall be distributed to Party A and Party B in the ratio of 20% and 80%, respectively. After the period of investment repayments, the profit distribution ratio shall be 70% to Party A and 30% to Party B until the cooperation term is satisfied. 4. Operating expenses shall be confirmed by both parties. 5. Investment repayments and profit distributions shall be made on a quarterly basis, but financial statements shall be prepared every 6 months. ARTICLE XI PROJECT ASSET OWNERSHIP (SEE ATTACHMENT 3) ARTICLE XII RIGHTS AND OBLIGATIONS: Unless otherwise specified in the Contract, both parties shall be entitled to the following rights and shall undertake the following obligations: 1. Party A: (1). Shall participate in project construction and shall be responsible for project operation. 9 (2). Shall make all payments due to Party B in accordance with the terms of the Contract. (3). Shall obtain all approvals and permits required for the operation of the project. (4). Shall obtain all import permits for purchasing equipment and other materials abroad. (5). Shall develop this project pursuant to the terms of this Contract. (6). Shall approve the financial closing documents of the project. 2. Party B: (1). Shall be responsible for project construction, for raising project construction capital, and for controlling the use of funds. (2). Shall participate in the management of the project operation. (3). Shall provide consulting services for project operation. (4). Shall examine and approve the project's preliminary design (including a budget estimate), and construction budget plans. In addition, Party B shall submit the financial closing documents of the project. It shall also examine and approve the annual project budget and annual financial documents. (5). Shall directly supervise the project's financial status during project operation. (6). Shall appoint management to participate in network operation and financial management. (7). Shall develop the Project pursuant to the terms of the Contract. 3. Each party shall fulfill its own responsibilities on a timely basis to ensure that the construction and operation of the project proceed smoothly. 10 ARTICLE XIII ADVISORY BOARD: 1. In order to settle any problems promptly during the operation of the Project, both parties shall jointly establish an Advisory Board after the network testing and acceptance (hereafter referred to as the "Advisory Board"). 2. Both parties will appoint 4 representatives to the Advisory Board. These 8 representatives shall be the formal members of such Advisory Board. The Chairman of the Advisory Board shall be appointed by Party A and the Vice Chairman shall be appointed by Party B. 3. The Advisory Board shall have the following responsibilities: (1). It shall examine and approve the annual project budget plan and annual financial documents. (2). It shall resolve any major issues arising during project operation. It shall also check and ratify operating expenses, billing structure, and employment structure. (3). It shall be responsible for any other tasks assigned by both parties. Other than the above described responsibilities, it shall also examine, approve and supervise all issues deemed necessary by both parties. 4. The time, location, subject and agenda of the Advisory Board meetings shall be decided by the Chairman and Vice Chairman. 5. If 2/3 of the 8 members of the Advisory Board members attend the meeting, such meeting shall be deemed effective. Any resolutions passed by at least 2/3 of the 8 members of the Advisory Board shall be deemed effective. If any member can not attend a meeting for any reason, he is allowed to appoint a representative to attend the meeting with a written notice. His representative shall be entitled to have the same rights as other formal members on the board. ARTICLE XIV PROJECT EXPANSION: Party A shall determine any expansion of the project according to market demand. When additional investment is required, Party B shall provide any required capital if it decides not to give up its right of investment. 11 1. SIZE OF PROJECT EXPANSION: A. To upgrade the networks in certain cities. B. To connect 40 counties to the provincial network. 2. The estimated investment amount will be RMB 210 million. ARTICLE XV ASSET TRANSFER AND PRESENT: During the term of the Contract, neither party shall transfer, present or sell the assets to a third party without getting written approval from the other party. ARTICLE XVI INSURANCE: 1. Both parties shall select the appropriate type of insurance, insurance amounts and insurance clauses for project equipment. The insurance premium shall be accounted for as part of construction and operating expenses. The insurance beneficiary shall be identified in the insurance contract. 2. Party A or Party B (During the construction period, Party B shall be the policyholder. During the operation period, Party A shall be the policyholder) shall purchase insurance from the insurance companies in China to insure the equipment or assets of this project for the full amount based on the type of insurance, insurance amount and insurance clauses selected by both parties. During the construction of this project, Party B shall be the policyholder and shall pay for the insurance premium, and the amount shall be regarded as part of its investments. When Party A formally starts to operate the network, Party A shall be the policyholder and shall pay for the insurance premium, and the amount shall be regarded as part of Operating Costs and Expenses. ARTICLE XVII CONFIDENTIALITY: 1. During the term of the Contract and three years after the termination of the Contract, both parties shall not disclose, release, or provide any information to a third party, which includes financial, business related, technological, managerial and other related documents and information obtained from the other party (either orally or in writing). 2. The above confidential responsibilities shall exclude the following: 12 (1). Information already known to the recipient of the Contract before the information is delivered by the other party of the Contract. (2). Any confidential information already in the public domain, or the release of information is not a mistake caused by the recipient of the Contract. (3). Information received from a third party outside of the Contract. Since no third party has responsibility to keep the information confidential, it may disclose or release this information to the recipient of the Contract. (4). The confidential information was developed alone by the recipient of the Contract. (5). One party of the Contract has obtained a written agreement from another party of the Contract to disclose or release any confidential information to a third party outside of the Contract. 3. Disclosing, releasing or providing confidential information shall be permitted in the following situations: (1). It is required by documents issued by the government authority which is based on laws and regulations. (2). It is required to source orders, or to fulfill equipment purchase contracts or service contracts. (3). Confidential information has become public information through other methods without violating the confidentiality provisions. (4). Either party of the Contract may disclose certain confidential information to its technical consultants who are also subject to the same confidentiality provisions. 4. Either party of the Contract may disclose certain confidential information to employees or contractors if required. However, the employees or contractors shall be restrained by the same confidentiality provisions. ARTICLE XVIII FORCE MAJEURE: 13 1. During the term of the Contract, if the performance of the Contract is prevented by any cause beyond its reasonable control including acts of earthquake, storms, war, fires, floods, strikes, riots, government martial law or other natural disaster and any other event which that party could not foresee at the time of executing this contract, both parties shall handle such matters pursuant to relevant Chinese regulations. 2. The obligations of a party shall be terminated, in whole or in part, if its power to perform the terms of the Contract is prevented by any course beyond its natural control. 3. The party whose obligations are terminated by reasons of any such event shall notify the other party of the Contract of such event by telex or fax. In addition, it shall submit effective documents issued by government agencies related to such event within 30 days, stating the nature of the event, the reasons for the party's inability to fulfill its responsibilities or to delay the fulfillment of its responsibilities. Both parties shall immediately resolve the situation to minimize all losses that may be incurred by such event. ARTICLE XIX VIOLATION OF THE CONTRACT: 1. If the Contract or part of the Contract cannot be fulfilled due to one party's violation of the Contract, the violating party shall be responsible for compensating any direct losses. If both parties violate the Contract, both parties shall pay for any compensation in accordance to the party's responsibilities based on the specific situation. 2. Both parties agree that neither party has the right to terminate the Contract except for causes beyond its reasonable control, or due to severe violations of the Contract performed by both parties which result in the inability to fulfill the Contract. ARTICLE XX TERMINATION OF THE CONTRACT: 1. The contract may be terminated under the following situations, and with the consents of both parties: (1). If the normal operation of the Project is prevented by any of the force majeure events. 14 (2). If the normal operation of the Project is prevented due to non-performance or violations of the Contract by Party A or Party B. (3). If the normal operation of the Project is prevented due to other reasons. And both parties agree that there is not a future for further project development. 2. If the time of termination is during the investment repayments period, the following method shall be applied: At the time of termination agreed by both parties, if the total investment repayments made by Party A to Party B is less than the Project Capital, then party A shall pay to Party B an amount of money within 60 days after the termination of the contract in accordance with the following calculation: Due payment amount = (Project Capital - Paid Investment Repayments) + (Project Capital - Paid Investment Repayments) x (bank deposit interest/day) x (number of days from the termination date of this contract to the date of paying such Due payment amount to Party B) 3. If the time of termination is after the investment repayments period, the following method shall be applied: Due payment amount = (Operating Revenues - Operating Costs and Expenses) of the previous year of the Contract termination date/365 x 30% x (20 x 365 - the actual cooperation date before the termination of this contract). ARTICLE XXI GOVERNING LAW: This contract shall be governed by and interpreted in accordance with the laws of the PRC. ARTICLE XXII DISPUTE SETTLEMENT: 1. Any disputes, differences in opinion, or conflicts arising out of the Contract during the fulfillment of the Contract shall, to the fullest extent possible, shall be settled amicably by negotiation and discussion between the parties. 2. If such disputes, differences in opinion, or conflicts can not be settled by amicable agreement within 60 days of one party submitting a written notice 15 to the other party, it shall be submitted to the Hebei Arbitration Committee for arbitration. 3. The arbitration shall be conducted under "PRC Arbitration Law". 4. Any decision taken by the arbitrators will be final, binding and conclusive. 5. The arbitration fee shall be paid by the party who loses the case. 6. During the process of arbitration, both parties shall continue to operate the Project in accordance with the Contract, except for the part currently under arbitration. ARTICLE XXIII TERM OF THE CONTRACT 1. The Contract shall be deemed effective upon execution of the Contract by Party A and B (Master contract and all attachments will become effective simultaneously upon execution of the Contract by both parties). 2. The term of this contract commences on the effective day, and terminates 20 years from the date of formal operation of the project (the same date 20 years after the date of formal operation). ARTICLE XXIV FULFILLMENT OF THE RESPONSIBILITIES AFTER TERMINATION OF THE CONTRACT: 1. Upon termination of the Contract and pursuant to the terms of the Contract, if there are unfulfilled responsibilities according to the Contract by either party, such party shall fulfill any remaining obligations (including payment owed by Party A to Party B during the term of the Contract). 2. Before one party has completely fulfilled its obligations, the other party still has the binding right toward that party on any unfinished obligations. ARTICLE XXV TRANSFER AND CHANGE OF THE CONTRACT Neither Party A nor Party B shall transfer the Contract, any portion of the Contract, any right, profit or obligations specified by the Contract to a third party without prior written consent from the other Joint Venture party. ARTICLE XXVI 16 COMPLETE CONTRACT The Contract and its Attachments are the only contract regarding this project signed by Party A and Party B. 17 ARTICLE XXVII MISCELLANEOUS 1. Any amendments to the Contract shall only become effective after such amendments are signed by authorized persons from both parties. 2. Any notice, request, or communications to be given under this contract shall be sent by registered mail, and shall be written in Chinese. Telegram, telex and fax shall are acceptable. However, the original copy shall be sent by registered post to each party. Any telex, telegram, fax and registered mail shall be sent to the following address: Party A: Hebei Cable Television Station of the PRC Address: 100 Jianhua South Street, Shijiazhuang, Hebei Province Zip Code: 050031 Receiver: Wang Hui Fax: 0311-5060184 Party B: Hebei United Communications Equipment Company Limited Address: 288 Xinhua West Road, Shijiazhuang, Hebei Province Zip Code: 050051 Receiver: Xiao Jun Fax: 0311-7086143 3. The notice shall be effective from the date of receipt of such post. 4. This contract is written in Chinese and has two copies. Each party holds one copy, and each copy has equal legal force. 5. This contract has been signed on April 8 ,1997 by representatives of Party A and B at Shijiazhuang, the People's Republic of China. Party A: Hebei Cable Television Station Representative: Yang Xingsheng Position: Deputy Director of Radio and Television Department of Hebei Province Party B: Hebei United Telecommunications Equipment Company Limited Representative: Xiao Jun Position: 18 EX-21.1 12 EXHIBIT 21.1 Subsidiaries of the Company: ITV Communications, Inc., California Hebei United Communications Equipment Company Limited, People's Republic of China, and its subsidiary, Hebei United Telecommunications Engineering Company Limited, People's Republic of China. EX-23.1 13 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333-15925, No. 333-26435 and No. 333-20839 of AmTec, Inc, (formerly AVIC Group International, Inc.) all on Form S-8 of our report dated June 20, 1997, appearing in this Annual Report on Form 10-KSB of AmTec, Inc. (formerly AVIC Group International, Inc.) for the year ended March 31, 1997. DELOITTE & TOUCHE LLP New York, New York June 20, 1997 EX-23.2 14 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated June 18, 1996, accompanying the consolidated financial statements included in the Annual Report of AmTec, Inc. (formerly AVIC Group International, Inc.) on Form 10-KSB for the year ended March 31, 1997. We hereby consent to the incorporation by reference of said report in the Registration Statements of AmTec, Inc. (formerly AVIC Group International, Inc.) on Forms S-8 (File nos. 333-15925, 333-20839, and 333-26435). SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California July 14, 1997 EX-27 15 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMTEC, INC.'S FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 1997. IT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 5,390,871 0 0 0 0 5,572,961 182,090 62,749 29,418,203 4,636,334 0 0 1,525 31,258 515,305 29,418,203 0 0 0 3,996,151 175,754 198,538 129,039 (4,147,974) 0 (4,147,974) 0 0 0 (4,064,885) (0.14) 0
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