-----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, S+Dn86HGYiXTjim7HNkjjYrue+Ed6E088KqLQTmDuJFxITbYhVH5hnqXfyEbiv2Q mUG/WJ1d/yEv2UWA0MWAVA== 0000950172-99-001106.txt : 19990825 0000950172-99-001106.hdr.sgml : 19990825 ACCESSION NUMBER: 0000950172-99-001106 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19990824 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMTEC INC CENTRAL INDEX KEY: 0000912890 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840873124 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-12475 FILM NUMBER: 99698049 BUSINESS ADDRESS: STREET 1: 599 LEXINGTON AVE STREET 2: 49TH FL CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2123199160 MAIL ADDRESS: STREET 1: 599 LEXINGTON AVENUE STREET 2: 49TH 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 10-K/A 1 10-K - AMENDMENT NO. 3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Amendment Number 3) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. Commission file number 0-22520 AMTEC, INC. ------------------------------------------------------ (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: Indicate by check mark whether the registrant: (i) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The issuer has no revenue for the fiscal year ended March 31, 1998. The number of shares outstanding of the registrant's common stock as of June 26, 1998 was 26,998,076 shares. The aggregate market value of the common stock (26,346,996 shares) held by non-affiliates, based on the closing price ($1.3125) of the common stock as of June 26, 1998 was approximately $34.6 million. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed in this Annual Report are forward-looking statements which involve risks and uncertainties, including but not limited to economic, competitive, governmental, international and technological factors affecting the Company's revenues, joint ventures, operations, markets and prices, and other factors discussed in this Annual Report. INTRODUCTORY NOTE This Second Amendment to the Company's annual report on Form 10-K for the fiscal year ended March 31, 1998 amends such report, as amended by Amendment No. 1 thereto filed on April 7, 1999 and is being filed to reflect the restatement of the Registrant's Consolidated Balance Sheet, Statements of Operations and Statement of Cash Flow ("the restatement"). Subsequent to the issuance of the Registrant's financial statements for the year ended March 31, 1998, the Registrant determined that the sale of one of its subsidiary's ("ITV") businesses should have been accounted for using accounting for discontinued operations. Previously, the result of ITV's business was included in the financial statements as part of continuing operations for the year ended March 31, 1996. As a result, the Statement of Operations and Statement of Cash Flow for the year ended March 31, 1996, have been restated to show the effect of such discontinued operations. The Registrant also determined that one of its subsidiaries should have been accounted for under the equity method of accounting, as the minority shareholders have substantive participating rights under the joint venture contracts. Previously, its subsidiary had been consolidated. As a result, the financial statements as of March 31, 1998 and 1997, and for the two years ended March 31, 1998, have been restated from amounts previously reported to account for its subsidiary under the equity method of accounting. Unless otherwise noted, all information provided in this Annual Report is current as of June 26, 1998, the original filing date of the Form 10-K. Information regarding recent events at the Registrant can be obtained from reports filed by the Registrant with respect to its activities during 1998, including the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1998, September 30,1998 and December 31, 1998 and Note 14, Note 15 and Note 16 to the consolidated financial statements of the Registrant included herewith. PART I ITEM 1. BUSINESS AmTec, Inc. ("AmTec" or "the Company") is a telecommunications company with investments in the People's Republic of China ( the "PRC" or "China"). The Company has focused its investments on China because of China's large and rapidly growing need for telecommunications services, China's requirement for foreign capital and technology to meet that need, and the opportunity to obtain cash flow sharing and technical services agreements with operators who hold exclusive or semi-exclusive communications licenses. The Company's joint venture operations primarily consist of a series of cellular telephone networks in the northeastern province of Hebei, which has 11 major cities and a population of approximately 65 million people. In addition, the Company has interests in other projects and networks in various stages of development, including a multimedia network for cable television programming transmission. Developing existing network interests and obtaining additional interests in communications networks in China in the future are key components of the Company's business strategy. CHINA TELECOMMUNICATIONS MARKET Through the Company's interest in cellular telephone networks in Hebei Province and relationships that the Company has developed with key policy makers and decision makers in Chinese governmental agencies, AmTec has focused its business to capitalize on the growth of the Chinese telecommunications market, which is among the world's largest, fastest growing, and most under-serviced telecommunications markets. Due to the importance of a well-developed communications infrastructure to China's continuing economic development, the PRC government has targeted communications network development as a high priority in the country's economic reform program. It is expected that before the year 2000, China will surpass the United States as both the largest cellular telephone and cable television markets in the world. Since the establishment of China United Telecommunications, Incorporated ("UNICOM") in 1994, China has had only two licensed competitors for cellular, fixed wire and long-distance telephony. The cable television market in China is a monopoly run by the Ministry of Information Industry, which also regulates telecommunications in China. While other communications markets in China have experienced greater competition, most notably paging and value-added services, communications licenses have generally been limited to a small number of competitors relative to markets in the United States. The Company believes that both the overall market size and the environment of limited competition are attractive aspects of the Chinese communications market. Although Chinese regulations currently prohibit direct foreign ownership or operation of communications networks, the regulatory environment has shown recent indications of continuing a policy of partial deregulation. And while there can be no assurance that this policy of partial deregulation will continue, the Company believes that it is well-positioned to benefit from deregulation permitting direct foreign ownership and operation of communications networks, if such deregulation were to occur in the future. JOINT VENTURES IN CHINA AmTec holds a 70% interest in Hebei United Telecommunications Equipment Company Limited ("Hebei Equipment"), a joint venture with a wholly owned subsidiary of the Electronics Industry Department of Hebei Province. Hebei Equipment, in turn, holds a 51% interest in Hebei United Telecommunications Engineering Company Limited ("Hebei Engineering"), a joint venture with NTT International ("NTTI") and Itochu Corp. Due to certain participating rights held by the minority partners of each joint venture, the Company accounts for its investment in Hebei Equipment, and Hebei Equipment accounts for its investment in Hebei Engineering, by the equity method of accounting. Both Hebei Equipment and Hebei Engineering are organized as Sino-foreign equity joint ventures under the laws of China and are headquartered in Shijiazhuang, the capital of Hebei Province. CELLULAR TELEPHONE NETWORKS Currently, legal restrictions in China prohibit foreign participation in the operation and ownership of communications networks. Therefore, the Company has established majority ownership in joint ventures with Chinese and other partners to provide financing, network construction and operational consulting services to licensed Chinese network operators. Hebei Engineering, entered into an agreement (the "UNICOM Agreement") on February 9, 1996 with UNICOM to (i) finance and assist UNICOM in the construction of cellular networks (the "GSM Networks" or "GSM Project") in the ten largest cities in Hebei Province and (ii) provide consulting and management support services to UNICOM in its operation of the GSM Networks in the 10 largest cities of Hebei Province. This GSM Project will have a capacity of up to 70,000 subscribers. The first of these networks commenced operations in February 1997. Hebei Engineering is entitled to 78% of the distributable cash flow (defined as activation charges plus depreciation plus net income) from the GSM Networks for a 15-year period commencing February 9, 1996. The construction and operational plan for the GSM Networks consists of a "roll-out" across Hebei Province on a city-by-city basis. As of June 26, 1998 two cities, Shijiazhuang and Tangshan, were providing commercial service, with approximately 11,000 subscribers; construction in five additional cities was substantially completed, with commercial launch dates scheduled during 1998 for these additional five cities. As of March 31, 1998, construction of the GSM Networks had been financed by Hebei Engineering with $3 million of equity capital, approximately $11 million of vendor financing guaranteed by NTTI, and a $20 million Term Loan facility from Bank of Tokyo Mitsubishi also guaranteed by NTTI and ItoChu. Of the $3 million of equity raised by Hebei Engineering, $1.17 million was contributed by Hebei Equipment. Realization of the Company's investment in its SFJVs is dependent upon UNICOM's operation of the GSM Networks, among other factors. The implementation of the GSM Networks involves systems design, site procurement, construction, electronics installation, initial systems optimization and receipt of necessary permits and business licenses prior to commencing commercial service. Each stage can involve various risks and contingencies, the outcome of which cannot be predicted with a high degree of assurance as interconnection of the GSM Networks with the public switched telephone network is sometimes difficult and time consuming, and the successful completion of all planned sites of the GSM Networks will be dependent, to a significant degree, upon the ability of the parties to lease or acquire sites for the location of their base station equipment. While no difficulties have been encountered to date in procuring such sites, future site acquisition can not be assured. COMPETITION UNICOM currently faces competition from China Telecom, which has substantially more experience in operating cellular telephone networks, greater financial resources, scientific and marketing personnel and facilities. China Telecom is the operating organization of the former Ministry of Posts and Telecommunications ("MPT"), previously the telecommunications policy setting and regulatory arm of the Chinese government. China Telecom has a dominant market share in all sectors of telecommunications in China, and already has established a fixed-wire network in the country. Formerly the MPT regulated and licensed all telecommunications networks in China, including network access, and the ability to make important regulatory decisions with respect to China Telecom's competitors. Although the MPT has been abolished and succeeded by the Ministry of Information Industry ("MII"), there can be no assurance that the new regulatory structure for telecommunications operations in China (i) will be more favorable to UNICOM or the Company or (ii) will not be adverse to UNICOM's operations in Hebei. In addition, new competitors may enter the market, including Code Division Multiple Access ("CDMA") cellular service offered by the People's Liberation Army and China Telecom through their joint venture, Great Wall Communications Group ("Great Wall"). At present there are four small commercial CDMA cellular trial networks being tested by Great Wall in China. None of these commercial trial networks are in Hebei, but there can be no assurances in the future that Great Wall will not enter the Hebei market. CONSTRUCTION AND OPERATION OF TELECOMMUNICATIONS NETWORKS The telecommunications networks in the PRC which the Company's joint ventures are currently engaged in developing may experience difficulties and delays relating to the construction and operation of such telecommunications networks. While UNICOM has successfully commenced commercial operation in two cities in Hebei, and although Hebei Engineering has substantially completed network construction in five additional cities in Hebei, there can be no assurance that such additional networks will be completed and that commercial operations in these five cities will commence. Currently, Hebei Engineering has no reason to believe that such additional networks will not commence commercial operations. ADDITIONAL FUNDING OF JOINT VENTURE PROJECTS At present, all network construction for a 40,000 subscriber capacity network in seven cities in Hebei has been funded. Expansion of network capacity from 40,000 subscribers to 70,000 subscribers will require additional capital. Since the UNICOM Agreement contains no specified deadline for expansion of the GSM Network to 70,000 subscribers, these future capital requirements for the GSM Network will depend largely on the market acceptance of the UNICOM GSM Network cellular service, among other factors. It is anticipated that debt or equity contributions made by the Company and its partners to the joint ventures, as well as potential investment from third parties, will be used to increase the capacity of the GSM Network as required. LEGAL & REGULATORY RISKS The PRC's legal system is a civil law system based on written statutes and is a system in which decided legal cases have little precedential value. The PRC Government began to promulgate a comprehensive system of laws in 1979. Many laws and regulations governing economic matters in general have been promulgated. The general effect of this legislation has been to enhance the protection afforded to foreign invested enterprises in the PRC. However, as these laws and regulations are relatively new, their interpretation and enforcement involve significant uncertainty. The current PRC regulations prohibit foreign investors and foreign invested enterprises from operating or participating in the operation of telecommunications networks in China. The relevant PRC laws and regulations do not define what constitutes foreign operations or participation in operations, and it is not clear what rights or actions would violate such laws and regulations. Based on advice of its Chinese legal counsel,the Company has structured its investments in China by establishing Chinese-foreign joint ventures in the PRC to provide financing and consultancy services to licensed telecommunications operators, i.e., utilizing the commonly-known Chinese-Chinese-Foreign ("CCF") structure. The PRC Government is currently undertaking a review of the CCF structure used by Unicom. It has been reported that Unicom has been instructed by the PRC Government not to use the CCF structure in the future and that the PRC Government is examining and evaluating the existing CCF contracts. It is unclear if, and to what extent, the existing CCF contracts entered into by Unicom will be required to be amended. It is also unclear whether foreign entities involved in the CCF structures will be required to divest themselves of their respective interests in the Chinese-foreign joint venture companies. The evaluation of the CCF structure by the PRC Government may have a material adverse impact on the contracts entered into by Hebei Engineering and by the Company which utilize the CCF structure and may have a material adverse effect on the Company's business, financial condition and results of operations. In order to provide a uniform regulatory framework to encourage the orderly development of the PRC telecommunications industry, the PRC authorities are currently preparing a draft Telecommunications Law. Once formulated, the draft law will be submitted to the National People's Congress for review and adoption. It is unclear if and when the Telecommunications Law will be adopted. The nature and the scope of the regulation envisaged by the Telecommunications Law is not fully known but the Company believes that, if adopted, the Telecommunications Law will have a positive effect on the overall development of the telecommunications industry in the PRC. However, the Telecommunications Law, if adopted, may have an adverse effect on the Company's business, financial condition or results of operations. The Chinese laws and regulations governing the telecommunications industry may also be changed or applied in a manner which would have a material adverse effect on the business, financial condition and results of operations of the Company. GOVERNMENT CONTROL OF CURRENCY CONVERSION AND EXCHANGE RATE RISKS The PRC government imposes control over its foreign currency reserves, in part through direct regulation of the conversion of Renminbi, the legal tender currency of the PRC, into foreign exchange and through restrictions on foreign trade. UNICOM's revenues are denominated in Renminbi. The Company's joint ventures will consequently receive almost all of their joint venture distributions in Renminbi, which is freely convertible only for current accounts. Approval of the State Administration of Foreign Exchange will be needed under current regulations for conversion of Renminbi for foreign currencies. The Company believes that its SFJV will be able to obtain all required approvals for the conversion and remittance abroad of foreign currency. However, such approvals do not guarantee the availability of foreign currency and no assurance can be given that the Company will be able to convert sufficient amounts of foreign currencies in the PRC's foreign exchange markets in the future at acceptable rates. Although the Renminbi to US dollar exchange rate has been relatively stable since January 1, 1994, there can be no assurance that exchange rates will not again become volatile or that the Renminbi will not devalue significantly against the US dollar. During late 1997 and early 1998, there were a number of currency devaluations in Asia and unstable and volatile capital markets and foreign exchange markets. The PRC has not devalued the Renminbi. However, there can be no assurances that the Renminbi will not be devalued in the future. EMPLOYEES As of June 26, 1998, the Company had 13 full time employees in New York and China. The Company intends to hire additional personnel as the development of the Company's business continues and makes such action appropriate. The Company employs a policy of staffing and managing its joint-venture subsidiaries and hiring PRC nationals for its China operations. As of June 26, 1998, the Company's subsidiaries had 6 employees in Hebei Equipment and 17 employees in Hebei Engineering. It is the intention of the Company to add employees to its Chinese subsidiaries for operational purposes. The Company's employees are not represented by a labor union and are not covered by a collective bargaining agreement. The Company believes that its relations with its employees are good. FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE This document contains certain forward-looking statements and information relating to the Company that are based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. When used in this document, the words "anticipate," "believe," "estimate," "expect," "going forward" and similar expressions, as they relate to the Company or Company management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions, described in this Form 10-K. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-looking statements. ITEM 2. PROPERTIES The Company leases a 7,600 square foot office located at 599 Lexington Avenue, 44th Floor, New York, New York 10022. The facility serves as the Company's principal executive offices. The Company pays an annual rent of $334,400 on a lease which expires in May 2000. The Company has obtained an option to extend the lease for an additional five year term based on the fair market value of the leased premises at or about the time of the expiration of the initial term of the lease. ITEM 3. LEGAL PROCEEDINGS A first amended complaint, dated April 15, 1996, was filed against the Company, ITV Communications, Inc., a subsidiary of the Company ("ITV"), and other parties, including certain of the Company's officers, directors and principal stockholders, by Jacqueline Brandwynne, a stockholder of the Company, in a matter captioned "Jacqueline B. Brandwynne vs. AVIC Group International, Inc., et al," civil action number BC145036. The complaint, filed in the Superior Court of California, County of Los Angeles, alleges fraud, misrepresentation and breach of contract with respect to the sale of 666,667 shares of ITV stock for $1,000,000 prior to the completion of the Reorganization Agreement between the Company and ITV (the "Reorganization Agreement") in February 1995, in connection with which the shares of ITV were exchanged on a two for one basis for shares of the Company. The complaint alleges that certain misrepresentations were made in connection with the sale of the 666,667 shares and that the claimant was entitled to receive 666,667 shares of the Company after the completion of the Reorganization Agreement. The complaint seeks rescission of the transaction and damages of no less than $1,000,000. The complaint also alleges a claim in connection with an alleged oral employment agreement for 125,000 options to purchase shares of the Company's Common Stock at an exercise price of $0.35 per share and the right to purchase additional shares of Common Stock at $1.00 per share, plus other benefits, including a salary of no less than $130,000. Management of the Company believes that these claims are without merit, that there are valid defenses to each claim and is in the process of vigorously defending the matter. The matter is in the discovery phase and it is not possible to predict with any degree of certainty the likely outcome. The Company is represented by the law firm of Matthias & Berg LLP, 515 South Flower Street, Seventh Floor, Los Angeles, California 90071, on this matter. The Company is not aware of any pending litigation that could have a material adverse effect on the Company's business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders during the quarter ended March 31, 1998. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of June 26, 1998, the authorized capital stock of the Company consisted of 100,000,000 shares of common stock, par value $0.001 per share (the "Common Stock"), and 10,000,000 shares of preferred stock, par value $0.001 per share (the "Preferred Stock"). As of June 26, 1998, there were issued and outstanding 26,998,076 shares of Common Stock, options to purchase 12,460,102 shares of Common Stock, 69 shares of Series E Convertible Preferred Stock. Further, there were issued and outstanding warrants to purchase 4,206,375 shares of Common Stock. As of June 26, 1998, there were approximately 2,680 holders of record of the Common Stock. The Company's Common Stock was originally listed for trading in the over-the-counter market on March 4, 1996 under the name AVIC Group International, Inc. and was quoted on the NASDAQ Bulletin Board or in the "pink sheets" maintained by the National Quotation Bureau, Inc. under the symbol "AVIC." The Company changed its listing on November 20, 1996, when its Common Stock was approved for listing on the American Stock Exchange under the ticker symbol "AVI." On July 8, 1997, the Company changed its name to AmTec, Inc. and it currently trades on the American Stock Exchange under the symbol "ATC". The high and low sales prices of the Common Stock, as quoted on the American Stock Exchange, on June 26, 1998 were $1.375 and $1.250, respectively. No dividend has been declared or paid by the Company on its shares of Common Stock since its inception. The payment of dividends by the Company on its shares of Common Stock is within the discretion of the Company's Board of Directors and will depend on the earnings, capital requirements, restrictions in any future credit agreements and operating and financial condition of the Company, among other factors. Except for dividends which may be payable on and according to the terms of shares of Preferred Stock, which may be issued from time to time, the Company does not anticipate that any dividends will be declared or paid in the future. There can be no assurance that the Company will ever pay a dividend on its shares of Common Stock. The following table sets forth for the period indicated the high and low sales price of the Company's Common Stock as reported on the American Stock Exchange.
1997 1998 COMMON 1ST Q 2ND Q 3RD Q 4TH Q 1ST Q 2ND Q 3RD Q 4TH Q STOCK PRICE ----- ----- ----- ----- ----- ----- ----- ----- High $10.250 $5.2500 $3.7500 $6.2500 $5.1875 $3.4375 $2.4375 $1.1875 Low $ 3.560 $1.4400 $1.4400 $2.1250 $2.8125 $1.8125 $0.5000 $0.5625
- --------------- (1) High and low sales price as reported on the American Stock Exchange. The transfer agent for the Company is Chasemellon Shareholder Services, LLC, 450 West 33rd Street, New York, New York, 10001. Its telephone number is (800) 851-9677. CERTAIN SALES OF UNREGISTERED SECURITIES On October 22, 1997 the Company completed the sale of 74 shares of its Series E Convertible Preferred Stock (the "Series E Stock" or "Series E Shares") for gross proceeds of $7,400,000. The Series E Shares were sold pursuant to Reg. D at $100,000 per share and the holders of the Series E Stock have no rights to cash dividends but are entitled to an 8% in-kind dividend. Conversion of the Series E Shares into Common Stock is based on the lower of (i) a 10% premium to the market price of the Company's Common Stock, as reported on the American Stock Exchange, at the time of closing, or of a 10% premium to the 10 day average trading price six months after the close or (ii) a discount to the lowest trade during the five (5) trading days prior to the conversion. The discount, which ranges from 15% to 20%, is based on the date of the shareholder's conversion of the Series E shares, with the discount increasing as the period the shares are held increases. The Conversion of the Series E Shares is restricted by certain "lock-up" agreements between the Company and the holders of the Series E Stock by which fifty shares of the Series E Shares could not be converted prior to March 2, 1998, and the remaining twenty four shares may not be converted prior to the first anniversary of the close of the offering, October 22, 1998. In addition to the shares, warrants were issued to five of the Series E Investors to purchase 1,236,346 shares of the Company's Common Stock at a price equal to 120% of the market price of the Company's Common Stock at the time of closing based on the amount invested by the shareholders and the length of the "lock-up" agreed upon between the Company and certain investors. Holders of the Series E Shares also had a registration right requiring the Company to file a registration statement covering the Common Stock underlying the Series E Preferred Shares and related warrants with the Securities and Exchange Commission (the "SEC") no later than March 2, 1998. The shares were registered on January 16, 1998. Of the $7,400,000 gross proceeds from the sale of the Series E Shares, approximately $641,000 was distributed as fees and expenses to a placement agent for the offering, and the balance of approximately $6,759,000 was held by the Company for working capital and possible investment in additional projects. The Company also issued warrants to purchase 326,171 shares of the Company's Common Stock to the Placement Agent as fees for services. These Warrants have an exercise price of $2.475 per share. ITEM 6. SELECTED FINANCIAL DATA The Company has focused its business solely on establishing Sino-foreign joint ventures to develop telecommunications networks in the PRC, following the sale of the assets of its subsidiary ITV Communications, Inc. in January 1996. Accordingly, the following historical financial data is not necessarily indicative of future results of operations. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
1998 (1) 1997 (1) 1996 (2) 1995 1994 -------- -------- -------- ---- ---- Net Sales $ -0- $ -0- $ -0- $ 345,276 $ 194,885 (Loss) from continuing operations (4,282,613) (3,563,568) (3,380,633) -0- -0- (Loss) from discontinued operations -0- -0- (1,932,977) (5,585,596) (3,388,833) Gain on sale of discontinued operations -0- -0- 31,888 -0- -0- Net (Loss) (5,403,368) (4,064,885) (5,281,730) (5,538,303) (3,737,542) Loss from continuing operation per common share (0.23) (0.14) (0.13) -0- -0- Loss from discontinued operation per common share -0- -0- (0.08) (0.32) (7,475.08) Basic Loss per common share (0.23) (0.14) (0.21) (0.32) (7,475.08) Total Assets 7,683,358 4,004,966 1,660,000 3,267,488 3,094,157 Shareholders' Equity (Deficit) 4,896,911 548,088 (2,421,606) (1,255,412) 1,402,532
(1) As restated, see note 15 of notes to consolidated financial statements. (2) As restated, see note 14 of notes to consolidated financial statements. Financial information for the years 1994, 1995 and 1996, is not comparable to the financial information provided for 1997 and 1998, because prior to 1997 the Company was not engaged in the development of telecommunications networks in the PRC. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company devotes substantially all of its efforts to financing and developing Sino-foreign joint ventures to establish telecommunications networks in the PRC. Subsequent to the issuance of the Company's financial statements for the year ended March 31, 1998, the Company's management determined that the sale of ITV's business should have been accounted for as a discontinued operations. Previously, the result of ITV's business was included in the financial statements as continuing operations for the year ended March 31, 1996. As a result, the Statement of Operations and Statement of Cash Flow for the year ended March 31, 1996, have been restated to show the discontinued operations. The Company's management also determined that Hebei Equipment should have been accounted for under the equity method of accounting, as the minority shareholders have substantive participating rights under the joint venture contracts. Previously, Hebei Equipment had been consolidated. As a result, the financial statements as of March 31, 1998 and 1997, and for the two years ended March 31, 1998, have been restated from amounts previously reported to account for its subsidiary under the equity method of accounting. INVESTMENT IN JOINT VENTURES AmTec holds a 70% interest in Hebei United Telecommunications Equipment Company Limited ("Hebei Equipment"), a joint venture with a wholly owned subsidiary of the Electronics Industry Department of Hebei Province. Hebei Equipment, in turn, holds a 51% interest in Hebei United Telecommunications Engineering Company Limited ("Hebei Engineering"), a joint venture with NTT International ("NTTI") and Itochu Corp. Due to certain participating rights held by the minority partners of each joint venture, the Company accounts for its investment in Hebei Equipment, and Hebei Equipment accounts for its investment in Hebei Engineering, by the equity method of accounting. As of March 31, 1998, AmTec's equity interest in Hebei Equipment was $1,352,217 which included a total investment of $2,100,000 and its share of equity losses in Hebei Equipment which amounted to $747,783. As of March 31, 1998, Hebei Equipment made a total investment of $1,530,000 in Hebei Engineering and its share of equity losses in Hebei Engineering amounted to $1,008,156. Hebei Equipment, through its 51%-owned subsidiary, Hebei Engineering has borrowed approximately $30,650,000 to purchase equipment which was contributed to China United Communications Company ("UNICOM") to construct the GSM networks in Hebei Province and has received the right to receive future cash flow. Initially, Hebei Engineering owned 100% of the assets prior to contributing such assets to UNICOM and once contributed, Heibei Engineering owned and retained title to a 70% interest in the assets and UNICOM owned and retained title to a 30% interest in the assets. Both parties agree to distribute the profit according to the "Distributable Cash Flow" (as defined) with 22% going to UNICOM and 78% going to Hebei Engineering. Each year, Hebei Engineering will transfer ownership of assets to UNICOM equal in value to the Distributable Cash Flow received up to 60% of the assets. The maximum amount of assets transferred will not exceed 90% of the assets until termination of the Project Cooperation Contract. Upon the termination of the contract the remaining 10% of the network assets shall be assigned to UNICOM without any further consideration. Hebei Engineering will continue to receive 78% of the Distributable Cash Flow after transfer of all the assets for the remainder of the 15-year period. Under PRC law, foreign investment entities, such as Hebei Engineering, are not permitted to own or operate telecommunications networks. Substantially all of the Hebei Engineering's revenues are derived from contractual arrangements for the sharing of cash flow from network operations rather than from ownership or operation of the networks. Hebei Engineering has recorded its investment (GSM Construction Costs) as a right to receive future cash flow at cost and is amortizing the cost of these rights based upon the greater of the amount computed using (a) the ratio that current gross revenues from the GSM networks to the total of current and anticipated future gross revenues from the GSM networks or (b) the straight-line method over 15 years which was the remaining estimated economic life of the GSM networks at the inception of this investment. Amortization of the Investment in GSM Networks for the year ended March 31, 1998 amounted to approximately $2,183,000. Income from the GSM networks is recognized at the time when Hebei Engineering can estimate or calculate the portion of its Distributable Cash Flow from the networks. UNICOM commenced operation of the GSM networks in February 1997. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily through equity investments. Approximately $3,924,000 of cash was used in the Company's operations for the fiscal year ended March 31, 1998, compared to cash used of approximately $3,382,000 for the year ended March 31, 1997. The cash flow from operating activities relates to increased as a result of the increased selling, general & administrative expenses. During the fiscal year ended March 31, 1996, the Company used approximately $2,887,000 in its operating activities. The Company used approximately $393,000 in its investing activities in the year ended March 31, 1998, compared to approximately $760,000 in the year ended March 31, 1997. These uses are related primarily to the investment in the Company's subsidiaries in Hebei province, PRC. The cash inflows from financing activities during the year ended March 31, 1998 were generated primarily from the sale of $9,900,000 of Preferred Stock through two offerings: (1) On June 12, 1997, the Company issued 250 shares of Series C Convertible Preferred Stock at a purchase price of $10,000 per share in consideration of $2,500,000. Proceeds from this offering were approximately $2,093,900, which is net of $406,100 of the Series C Shares which were repurchased by the Company. (2) On October 22, 1997, the Company issued 74 shares of the Company's Series E Convertible Preferred Stock, at a purchase price of $100,000 per share, for which the Company received $6,759,000 after placement agent's fees. During fiscal year ended March 31, 1997, the Company issued 150 shares of the Company's Series D Convertible Preferred Stock at a purchase price of $10,000 per share in consideration of $1,500,000. During fiscal 1996, the Company received approximately $2,934,000 from its financing activities through: (i) the sale of approximately $2,194,000 in Common Stock, and (ii) the receipt of shareholder loans of approximately $740,000. The Company anticipates that its cash and cash equivalents should be adequate to finance the Company's operating requirements for the current fiscal year. EQUITY ISSUANCE AND SERVICE AGREEMENTS Common Stock issued in connection with conversion of Preferred Stock: During fiscal 1998, the Company issued 2,236,507 shares of its Common Stock upon conversion of all outstanding shares of the Company's Series D Convertible Preferred Shares , 4,507,639 shares of its Common Stock upon conversion of all shares of its Series C Convertible Preferred Stock and 106,646 shares of its Common Stock upon conversion of 0.8 share of the Company's Series E Preferred Stock. Common stock issued in connection with stock option plans and services performed: During fiscal 1998 the Company issued (i) 10,000 shares of common stock to a former employee of the Company, upon the exercise of an option issued pursuant to the Company's 1996 Stock Option Plan. The option had an exercise price of $0.35 per share, (ii) 10,000 shares of common stock to each of its four outside directors as compensation for services. The shares issued had a combined value of $85,000, which was expensed as directors compensation, (iii) 8,500 shares of its common stock, at market, to its legal firm in lieu of $25,500 of legal billings, and (iv) 14,734 shares in connection with other services at a market value of $41,457. During the fiscal year, the Company issued 1,019,465 shares of its Common Stock, net of cancellation, into escrow for Promethean Investment Group, LLC ("Promethean") pursuant to a Common Stock Investment Agreement entered into between the Company and Promethean. The shares will be issued to Promethean if the Company draws on funds from Promethean pursuant to the Common Stock Investment Agreement. On July 30, 1996, the Company entered into an agreement with Merrill Lynch (Asia Pacific) Limited ("Merrill Lynch") pursuant to which Merrill Lynch was to act as a financial advisor to the Company and was to assist the Company with strategic financing alternatives with respect to the Company's PRC projects. The agreement was terminated in accordance with its terms in December 1997. In October 1996, the Company entered into an agreement with two of its law firms, to settle a portion of their accrued fees through the issuance of stock options. Accordingly, the Company converted accrued legal fees in the aggregate of approximately $98,000 into options to purchase an aggregate of 65,064 shares of the Company's Common Stock at an exercise price of $1.50 per share, the market value of the Company's common stock at that time. A portion of the accrued legal fees were credited against gains made by actual resale price. In addition, one firm continues to hold options to purchase 10,102 additional shares of Common Stock against future legal fees. The Company also agreed to register the underlying shares with the Commission on Form S-8. The registration statement relating to these shares was filed with the Commission on or about November 11, 1996. On October 15, 1996, the Company agreed to issue warrants to an individual to purchase 200,000 shares of the Company's Common Stock. These warrants were issued for services related to advising the Company with respect to its Sino-foreign joint ventures and marketing activities in the PRC. The warrants issued have a three year term and an exercise price of $1.50, which was the market value of the Company's Common Stock at the time of issuance of the warrants. On December 10, 1996, the Company agreed to issue to a consultant 5,000 shares of the Company's Common Stock with a market value of $18,125 (based on the fair market value at the time of issuance), in addition to 5,000 shares issued to the consultant in May 1996, which had a market value of $45,625 (based on the fair market value at the time of issuance), for professional executive search consulting services the consultant has been providing to the Company in developing the composition of its management and Board of Directors. The Company agreed to register shares of Common Stock underlying the warrants issued to the individual referenced above and shares of Common Stock issued to the consultant for consulting services, and certain shares of Common Stock issued to the Company's Chief Executive Officer in lieu of cash compensation. On or about December 31, 1996, the Company filed a registration statement on Form S-8. The total number of shares covered by the registration statement was 397,500. On or about October 19, 1996, the Company entered into a twelve month financial advisory services agreement with an investment bank. The services provided under this agreement relate to financial advisory services, including, but not limited to, the development of a financing strategy for the Company and the Company's projects in the PRC. The agreement called for a $50,000 retainer and the payment of success fees for raising capital for the Company and its projects. In addition, the Company issued a warrant to purchase up to 600,000 shares of the Company's Common Stock to the investment bank. This warrant has an exercise price of $2.00 per share, which was the market value of the Company's Common Stock at the time of the issuance of the warrant. 300,000 of the warrants are vested, and the additional 300,000 warrants will vest only if the investment bank has raised a minimum of ten million dollars in any form of financing for the Company. Future sales of shares of Common Stock by the Company and its stockholders could adversely affect the prevailing market price of the Common Stock. Pursuant to its Certificate of Incorporation, the Company has the authority to issue 73,001,924 additional shares of Common Stock and 8,475,248 additional shares of preferred stock. The issuance of such shares could result in the dilution of the voting power and other rights of the currently issued and outstanding shares of Common Stock. RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 31, 1997 The Company has a limited operating history and has incurred cumulative net losses since its inception. To date, the Company has not generated any income from its subsidiaries telecommunications operations and it has experienced net losses of $5,403,368 and $4,064,885 during the fiscal years ended March 31, 1998 and 1997, respectively. Selling, general and administrative expenses ("SG&A") increased from $3,563,568 during the year ended March 31, 1997, to $4,282,613 during the year ended March 31, 1998, due to increased levels of salaries paid to employees and legal and professional expenses incurred during the past year. The equity in losses of the Company's unconsolidated subsidiary of $140,524 recorded during the year ended March 31, 1997 and $606,647 during the year ended March 31, 1998 represents the Company's share of losses reported by Hebei Equipment for the year ended December 31, 1996 and December 31, 1997, during which period the Company owned a sixty point eight percent (60.8%) equity interest Hebei Equipment. The Company issued to the Hebei Provincial Government three million options to purchase an equal number of shares of the Company's Common Stock at a price of $3.0625 per share. In accordance with generally accepted accounting principles, the Company has recorded their value of $1,837,500 and has amortized approximately $459,000. The issuance of these options is a non-cash expense. Loss from abandoned assets relates to the assets of Netmatics which have been written off for the total amount of $87,441. Interest expense during the year ended March 31, 1998, decreased to approximately $126,000 from approximately $129,000 during the year ended March 31, 1997, due to a reduction in the outstanding balance of shareholder loans payable. Other income (net) of approximately $158,000 during the year ending March 31, 1998 was primarily related to a tax refund previously paid. The Company's net loss increased 33% from $4,064,885 during the year ended March 31, 1997, to $5,403,368 during the year ended March 31, 1998. This increase in net loss was primarily due to the shares of equity loss from Hebei Equipment, amortization of stock options issued to the Hebei Provincial Government, as well as increases in selling, general & administrative expenses. RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1997 AND MARCH 31, 1996 Following the sale by the Company of the assets of its subsidiary ITV in January 1996 (the "Asset Sale"), the Company has focused its business solely on establishing Sino-foreign joint ventures to develop telecommunications networks in the PRC. In light of this change in operations, the result of operations of ITV up to the Asset Sale was included in the Statement of Operations as Loss from Discounted Operations of $1,932,977. No revenue was recorded during the years ended March 31, 1996 and 1997 as the Company has not generated any revenue from its subsidiaries telecommunications operations at the development stage. Selling, general and administrative expenses increased from $2,515,554 during the year ended March 31, 1996 to $3,563,568 during the year ended March 31, 1997 due primarily to increased levels of salaries paid to employees and legal and professional expenses incurred over the past year. The equity in losses of unconsolidated subsidiary of $500,000 recorded during the year ended March 31, 1996 represents the Company's share of losses reported by Netmatics between January 17, 1996 and March 31, 1996, during which period the Company owned thirty-three percent (33%) of the issued and outstanding common shares of Netmatics. Through a series of secured debentures issued by Netmatics to its shareholders, and the conversion of a note in the amount of 2,250,000 to equity, the Company's ownership in Netmatics increased to 39%. Further, the Company has written off $198,538 of investments it has made in Netmatics. Interest expense during the year ended March 31, 1997 decreased to approximately $129,000 from approximately $242,000 during the year ended March 31, 1996 due to a reduction in outstanding balance of shareholder loans payable during the year ended March 31, 1997. The loss from abandoned assets of $130,840 recorded during the year ended March 31, 1996 represents a non-recurring "write-off" of certain remaining assets of ITV that were not sold in the ITV Asset Sale. The Company wrote off the $130,840 book value because these assets would not contribute to the generation of revenues for the Company in the future and thus were considered impaired assets. The Company's net loss decreased 23% from $5,281,730 during the year ended March 31, 1996 to $4,064,885 during the year ended March 31, 1997. This decrease in net loss was due to reductions in losses and "write-offs" associated with the operations of ITV, which were terminated following the ITV Asset Sale. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The financial statements required by this Item 8 are attached hereto as "Exhibit (a)(1)". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY The directors of the Company currently have terms which will end at the next annual meeting of the stockholders of the Company or until their successors are elected and qualified, subject to their prior death, resignation or removal. Officers are appointed by and serve at the discretion of the Board of Directors, subject to the rights of the officers under their respective employment agreements. There are no family relationships among any of the Company's directors and executive officers. NAME AGE POSITION ---------------------- --- -------------------------------------- Joseph R. Wright, Jr. 59 Chairman of the Board of Directors, Chief Executive Officer and President Richard T. McNamar 59 Vice Chairman of the Board of Directors Richard S. Braddock 56 Director Drew Lewis 66 Director Liang Jiangli 59 Director James R. Lilley 70 Director Michael H. Wilson 60 Director Michael J. Lim 34 Executive Vice President Albert G. Pastino 56 Senior Vice President, Chief Financial Officer and Treasurer James F. O'Brien 52 Senior Vice President, General Counsel and Corporate Secretary Xiao Jun 41 Executive Vice President - AVIC China Joseph R. Wright, Jr. has served as the Company's Chairman of the Board of Directors since May 1995, Chief Executive Officer since March 1996 and President since May 1996. Mr. Wright also serves as Chairman and member of the Board of GRC International, Inc. a U.S. public company that provides technical support to government and private entities, Co-Chairman of Baker & Taylor Holdings, Inc., an international book and video distribution company, a member of the Board of Travelers Group, a public company, and PanAm Sat, a public company. From 1989 to 1994, Mr. Wright served as Executive Vice President and Vice Chairman of W. R. Grace & Co., an international chemicals and health care company, President of Grace Energy Corporation and Chairman of Grace Environmental Company. From 1982 to 1989, Mr. Wright held the positions of Director and Deputy Director of the Office of Management and Budget, The White House, and was a member of President Reagan's cabinet. Prior to 1982, he served as Deputy Secretary, United States Department of Commerce, President of Citicorp Retail Services and Retail Consumer Services, held posts in the United States Department of Agriculture and the United States Department of Commerce, and was Vice President and Partner of Booz. Allen & Hamilton, a management consulting firm. He is also currently a member of the Board of Advisors of Barington Capital Corporation and Great Lakes Pulp and Fiber Corporation, and a Trustee of Hampton University. Richard T. McNamar has served as the Company's Vice Chairman of the Board of Directors since September 1996. He was the founder and Chairman of International Franchise, Inc., a firm that specialized in international financial transactions, from 1995 to 1997. He was a Managing Director of Oppenheimer & Co. from 1991 to 1994. Formerly, he was the Vice-Chairman of The Bank of New England Corporation and subsidiaries from 1990 to 1991. Mr. McNamar served as Deputy Secretary of the United States Treasury from 1981 to 1985. He served in the Nixon and Ford Administrations from 1972 to 1977, where he served as the Executive Director of the Federal Trade Commission from 1973 through 1977. Mr. McNamar is also currently a member of the Executive Board of the Bretton Woods Committee and the Board of the Institute of the Americas. Richard S. Braddock has served as a Director of the Company since August 1997. He has been the Chairman of True North Communications, Inc. (a public company) since 1997. He has served as a principal of Clayton, Dubilier & Rice, Inc. from 1994 to 1995 and as the Chief Executive Officer of Medco Containment Services from January 1993 to December 1993. Mr. Braddock held various positions at Citicorp from 1973 through 1992 including that of President and Chief Operating Officer of Citicorp and its principal subsidiary, Citibank, N.A., from January 1990 to November 1992 and as sector executive for worldwide consumer activities from 1985 to 1990. Mr. Braddock served as a director of Citicorp from 1985 to 1992. Mr. Braddock serves on the Board of Directors of E*Trade Group, Inc., Eastman Kodak Company, Cadbury Schweppes plc adr and True North Communications, Inc., all publicly-held companies, and of Lincoln Center for the Performing Arts. He is a trustee of the Cancer Research Institute. Mr. Braddock received his bachelors degree from Dartmouth College and his M.B.A from the Harvard Graduate School of Business Administration. Drew Lewis has served as a Director of the Company since May 1997. Mr. Lewis served as Chairman and Chief Executive Officer of Union Pacific Corporation from October 1987 to January 1997, and served as the Chief Operating Officer of Union Pacific Corporation from April 1986 to October 1987. Prior to his positions with Union Pacific Corporation, Mr. Lewis served as Chairman and Chief Executive Officer of Union Pacific Railroad Company from April to October 1986. From 1983 to 1986, Mr. Lewis was Chairman and Chief Executive Officer of Warner Amex Cable Communications. He served in the Reagan Administration from January 1981 to February 1983 as U.S. Secretary of Transportation. Mr. Lewis also serves as a director to American Express Company, FPL Group, Inc., Gannett Co., Inc., Gulfstream Aerospace Corporation, Lucent Technologies and Union Pacific Resources Group, Inc., all of which are publicly held companies. Liang Jiangli has served as a Director of the Company since October 1997. He has served as the Director of Hebei Electronics Industry Department since September 1993. Mr. Liang also serves as the Chairman of the Board of Hebei United Telecommunications Equipment Company Limited, the joint venture subsidiary of the Company. From 1987 to September 1993, Mr. Liang served as the Director of Hebei Electronics Bureau and the Deputy Director of Hebei Machinery and Electronics Industry Department. From 1983 to 1987, Mr. Liang served as the Deputy Director of Hebei Electronics Industry Bureau. From 1963 to 1983, Mr. Liang worked in a state owned institute, focusing on technology studies and management. Mr. Liang is a graduate of the Beijing Post and Telecommunications Institute. James R. Lilley has served as a Director of the Company since May 1997. Ambassador Lilley is currently a resident director at the American Enterprise Institute ("AEI") which he joined in January 1993, and has directed the Institute for Global Chinese Affairs at the University of Maryland since 1996. Prior to his joining AEI, Ambassador Lilley served in President Bush's Administration as the Assistant Secretary of Defense for International Security Affairs from November 1991 to January 1993. Ambassador Lilley was U.S. Ambassador to the People's Republic of China from April 1989 to May 1991, and to the Republic of Korea from 1986 to 1989. Ambassador Lilley is the co-editor of Beyond MFN: Trade with China and American Interests and is the author of the forward for the AEI publication, Chinese Military Modernization. He has represented Hunt Oil of Texas and United Technologies of Hartford, Connecticut in 1979 to 1980. Ambassador Lilley worked for Archer-Daniels-Midland Co. and Westinghouse as a business consultant. Michael H. Wilson has served as a Director of the Company since May 1997. He has been Vice-Chairman of RBC Dominion Securities, Inc. in Toronto, Canada since 1995. Prior to 1994, Mr. Wilson held senior Federal Cabinet posts with the Government of Canada in Finance, Industry, Science and Technology and International Trade. Prior to his career in public service, Mr. Wilson was Executive Vice-President of Dominion Securities Limited. Mr. Wilson also serves on the Board of Directors of Amoco Corporation and Rio Algom Limited, both publicly held companies. He is also active in a number of professional and community organizations, including The Clarke Institute of Psychiatry, The Aspen Institute and The Institute of the Americas. Michael J. Lim has served as the Executive Vice President of the Company since November 1995 and as the Chief Financial Officer from May 1996 through June 1997. Prior to his joining the Company, Mr. Lim was an investment banker with Bear, Stearns & Co., Inc. from 1986 to 1988 and from 1991 to 1995. During the two and a half years prior to his joining the Company, Mr. Lim served as Vice President of Bear Stearns Asia Limited, where he advised Asian enterprises on a wide variety of financing transactions, with particular focus on telecommunications and infrastructure financings. Mr. Lim also worked as an investment banker with the Chase Manhattan Bank from 1990 to 1991. Mr. Lim received his A.B. from Harvard College in English Literature in 1985 and his M.B.A. from the Amos Tuck School of Business Administration at Dartmouth in 1990. Albert G. Pastino was appointed in June 1997 to serve as a Senior Vice President and Chief Financial Officer of the Company and was appointed Treasurer of the Company in December 1997. From 1993 to 1997, Mr. Pastino served as the President of Kisco Capital Company, Inc., an affiliate of Kohlberg & Company, a private equity investment company. He also served on the boards of directors of a number of Kohlberg & Company's portfolio companies. From 1989 through 1992, Mr. Pastino served as Senior Vice President and Chief Operating Officer of Fortis Private Capital, Inc., a private equity investment company investing in expansion financing and management buyouts. Mr. Pastino began his business career at Deloitte & Touche LLP where he served as partner, and gained his investment banking experience at Alex Brown & Sons, Incorporated. Mr. Pastino received an M.B.A. from Fairleigh Dikinson University and a B.S. from St. Joseph's University. James F. O'Brien was appointed in June 1997 to serve as a Senior Vice President and General Counsel of the Company and was appointed Corporate Secretary of the Company in May 1998. Mr. O'Brien was a senior litigation partner at the law firm of Goulston and Storrs in Boston, Massachusetts where he founded the litigation practice in 1978 and specialized in complex financial transactions. He has served as an advisor to U.S. corporations seeking business opportunities in Southeast Asia. Mr. O'Brien received a J.D. from Boston College Law School and an A.B. from St. John's Seminary in Boston. Xiao Jun has served as Executive Vice President - AVIC China since December 1995. He also served as a Director from February 1995 through October 1997, the Company's Secretary from February 1995 to January 1996 and as Chief Financial Officer from June 1995 to May 1996. He has been the President of Xiao Hua International, Inc., an international steel trading business based in California since June 1993. He served as the Vice President of ITV from December 1994 to January 1996. From March 1990 to May 1993, Mr. Xiao was the Vice President of Chong Qing Special Metals Industry Co. From 1985 to 1990, Mr. Xiao served as an engineer and project manager at the representative office of IBM China/HK Corp. (Beijing). Mr. Xiao received a bachelor's degree in physics from the Beijing Polytechnic University in 1982. Timothy P. F. Crowley joined the Company in May 1995 and has served as the Assistant Secretary of the Company since May 1998, and served as the Secretary of the Company from January 1996 though May 1998. Prior to joining the Company, Mr. Crowley worked in Corporate Administration at Travelers Group. Mr. Crowley received his B.A. from Connecticut College in Anthropology and Art History, and was enrolled in a graduate program in the History of Art at New York University's Institute of Fine Arts from 1993 to 1994. The Board of Directors currently has an Audit Committee and a Compensation Committee. The members appointed to the Audit Committee of the Board of Directors during the fiscal year ended March 31, 1998 were Michael H. Wilson, Chairman of the Committee, James R. Lilley and Richard T. McNamar. The members appointed to the Compensation Committee of the Board of Directors during the fiscal year ended March 31, 1998 were Richard S. Braddock, Chairman of the Committee, Drew Lewis and Joseph R. Wright, Jr. Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers and beneficial holders of more than 10% of any class of the Company's equity securities to file with the Commission initial reports of ownership and reports of changes in ownership of such equity securities of the Company. Based solely upon a review of such forms furnished to the Company, and on written representations from certain reporting persons that no other reports were required for such persons, the Company believes that all reports required pursuant to Section 16(a) with respect to its executive officers, directors and 10% beneficial stockholders for the fiscal year ended March 31, 1997 were timely filed. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION The following tables set forth certain information concerning compensation for the fiscal years ended March 31, 1998, 1997 and 1996 of certain of the Company's executive officers, including the Company's Chief Executive Officer and all executive officers whose total annual salary and bonus exceeded $100,000, for the fiscal year ended March 31, 1998 (the "Named Executive Offices").
Long Term Compensation ----------------------- Annual Compensation Awards ---------------------------------------- ----------------------- Name and Other Annual Stock Options/ Principal Position Year Salary ($) Bonus ($) Compensation Awards ($) SARS (#) - ------------------ ------ ------------ ---------- ------------- ----------- --------- Joseph R. Wright 1998 392,967 50,000 (2)$30,000 Chief Executive 1997 256,250 (2)$30,000 $281,250 3,000,000 Officer(1) 1996 143,750 (2)$30,000 3,000,000 R. T. McNamar 1998 100,000 (4)$37,500 Vice Chairman (3) 1997 500,000 1996 Michael J. Lim 1998 253,417 75,000 250,000 Executive Vice 1997 167,333 President (5) 1996 79,615 1,000,000 Albert G, Pastino 1998 125,000 50,000 467,500 Senior Vice 1997 President, Chief 1996 Financial Officer & Treasurer (6) James F. O'Brien 1998 125,000 50,000 467,500 Senior Vice 1997 President, General 1996 Counsel & Corporate Secretary (7) Xiao Jun 1998 175,000 Executive Vice 1997 123,958 President-AVIC 1996 57,990 400,000 China (8)
- ----------------- (1) Mr. Wright has served as the Company's Chief Executive Officer since March 14, 1996. He joined the Company as the Chairman of the Board of Directors on May 1, 1995. (2) During fiscal 1996, 1997 and 1998, the Company paid approximately $30,000 per year on behalf of Mr. Wright for certain personal tax and accounting services rendered by third parties for Mr. Wright. (3) Mr. McNamar joined the Company on September 3, 1996 as Vice Chairman of the Board of Directors. (4) Mr. McNamar received 25,000 shares of the Company's Common Stock pursuant to his terms of employment with the Company, such shares having a value of $37,500 at the time of issuance in September 1997. (5) Mr. Lim joined the Company as the Executive Vice President - Operations on November 7, 1995 and served as the Company's Chief Financial Officer from May 1996 through June 15, 1997. (6) Mr. Pastino joined the Company as the Senior Vice President and Chief Financial Officer on June 16, 1997. He became the Treasurer of the Company on December 8, 1997. (7) Mr. O'Brien joined the Company as Senior Vice President and General Counsel on June 16, 1997. He became the Secretary of the Company on May 14, 1998. (8) Mr. Xiao joined the Company in 1995 as the Executive Vice President of AVIC-China. OPTION AND SAR GRANTS DURING LAST FISCAL YEAR The Company issued 1,185,000 stock options and no SARs to its Named Executive Officers during the fiscal year ended March 31, 1998. OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information regarding option exercises by the Named Executive Officers during the fiscal year 1998 and options held by such Named Executive Officers on March 31, 1998:
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.... 6,000,000 $5,775,000 R. T. McNamar....... 250,000 250,000 Michael J. Lim...... 1,062,500 187,500 997,656 $105,469 Albert G. Pastino... 300,625 166,875 James F. O'Brien.... 300,625 166,875 Xiao Jun............ 515,000 495,113
- ---------------- (1) Based on a per share price of $1.3125, the closing price of the Common Stock as reported on the American Stock Exchange on June 26, 1998, minus the exercise price of the option, multiplied by the number of shares underlying the Option. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with six of its executive officers, Messrs. Joseph R. Wright, Jr., Richard T. McNamar, Michael J. Lim, Albert G. Pastino, James F. O'Brien and Xiao Jun. The Company entered into a five year employment agreement dated as of April 15, 1995, and as amended on November 21, 1995 and September 6, 1996, with Joseph R. Wright, Jr., pursuant to which Mr. Wright agreed to serve as the Company's Chairman of the Board of Directors, Chief Executive Officer and President and to operate out of the Company's executive offices located in New York, New York. The employment agreement initially provided for an annual base salary of $50,000 during the year commencing April 15, 1995 and $300,000 during the year thereafter. The September 6, 1996 amendment to the employment agreement provides for the issuance of shares of Common Stock in lieu of cash compensation as payment for the salary that Mr. Wright had accrued from June 1995 through August 1996, at $1.50 per share, the market price of the Common Stock on September 6, 1996. Further, the amendment offers Mr. Wright an automatic extension of his contract of one year on each April 14, unless the Board of Directors notifies Mr. Wright 90 days prior to such date that such extension will not be made. The Board of Directors also approved revising his salary for the first year commencing on April 15, 1997 to $150,000, revising his salary for the second year to $300,000, and increasing his salary in each year thereafter by $100,000. The Board of Directors of the Company also approved the issuance of an additional three million options to Mr. Wright on September 12, 1996. These options have an exercise price of $3.00 per share, the fair market value on the date of grant, and vest with respect to fifty percent of said options on each April 15, 1997 and April 15, 1998. In September 1996 the Company approved the issuance of 187,500 shares of the Company's Common Stock to Mr. Wright, paid in lieu of a portion of cash compensation Mr. Wright had been accruing from June 1995 through October 15, 1996. The amount of salary accrued through October 15, 1996 was $281,250. The Common Stock was issued at $1.50 per share, the fair market value of such shares at the time of the grant. Pursuant to the employment agreement, Mr. Wright was granted an option to acquire 3,000,000 shares of Common Stock at an exercise price of $0.35 per share, and an additional 3,000,000 shares at an exercise price of $3.00 per share were granted on September 6, 1996. The option has vested with respect to the 3,000,000 shares which have an exercise price of $0.35 per share, and with respect to 3,000,000 shares which have an exercise price of $3.00 per share. The options issued to Mr. Wright have been issued pursuant to the Company's 1996 Stock Option Plan and were based on the market value of the Common Stock on the date of grant. On September 6, 1996, the Company entered into a one year verbal employment agreement with Richard T. McNamar pursuant to which Mr. McNamar will serve as Vice Chairman of the Company. He received 25,000 shares of the Company's Common Stock upon commencing employment. Initially, Mr. McNamar was part time, and negotiated to receive a contingent success fee for financings he introduced or arranged for the Company. On October 1, 1996 Mr. McNamar became a full time employee and waived his rights to any success fees. In his part time capacity, Mr. McNamar was issued an option to purchase 250,000 shares of the Company's Common Stock at an exercise price of $1.50 per share on September 6, 1996. He received an additional option for 250,000 shares at an exercise price of $1.50 per share when he became a full time employee on October 1, 1996. The exercise price of the options were based on the market value of the Common Stock on the date of grant. The Company and Mr. McNamar intend to sign a more definitive employment agreement during the current fiscal year. On January 23, 1998, the Company entered into a five-year contract with Mr. Lim, whereby Mr. Lim will serve as an Executive Vice President of the Company. In his first year, Mr. Lim will receive an annual base salary of $300,000 and stock options to acquire 250,000 shares of Common Stock at an exercise price of $0.75 per share, the market price of the Company's Common Stock, as reported on the American Stock Exchange, at the time the grant was made. The base salary and additional option grants for subsequent years of the contract will be determined by the Compensation Committee of the Board of Directors. On October 15, 1997, the Company entered into five-year employment agreements with each of Albert G. Pastino and James F. O'Brien. Mr. Pastino will serve as a Senior Vice President and Chief Financial Officer of the Company and will receive an annual base salary of $200,000 for the first year and stock options to acquire 467,500 shares of Common Stock at an exercise price of $2.125 per share. Mr. O'Brien will serve as a Senior Vice President and General Counsel of the Company and will receive an annual base salary of $200,000 for the first year and stock options to acquire 467,500 shares of Common Stock at an exercise price of $2.125 per share. The exercise price of the options for Mr. Pastino and Mr. O'Brien was based on the market price of the Company's Common Stock, as reported on the American Stock Exchange, at the time the grants were made EMPLOYEE STOCK OPTION PLANS As of February 8, 1995, the Company's Board of Directors and stockholders approved the Company's 1995 Stock Option Plan (the "1995 Stock Option Plan") in connection with the closing of the transactions contemplated by the Reorganization Agreement. The Company has reserved up to 500,000 shares of Common Stock for issuance under the 1995 Stock Option Plan. The Company has granted options to purchase up to 321,800 shares of Common Stock under the 1995 Stock Option Plan, 185,000 of which have been exercised as of June 26, 1998. The 1996 Stock Option Plan (the "1996 Stock Option Plan" and together with the 1995 Stock Option Plan, the "Stock Option Plans") was adopted by the Board of Directors on March 14, 1996 and by the Company's stockholders on May 7, 1996. The Company has reserved for issuance thereunder an aggregate of 12,000,000 shares of Common Stock. The Company has granted options to purchase up to 9,350,000 shares of Common Stock under the 1996 Stock Option Plan, 10,000 of which have been exercised. Of the 9,350,000 options granted as of the date of this Report, 8,578,750 options have vested, and the remaining 771,250 options may vest subject to certain schedules. The Board of Directors has approved a provision in the 1996 Stock Option Plan which will place a 6,000,000 share limit on the number of options that may be granted under the 1996 Stock Option Plan to an employee in the fiscal year ended March 31, 1996, and a 1,500,000 share limit in each fiscal year thereafter. A description of each of the Company's Stock Option Plans is set forth below. The description is intended to be a summary of the material provisions of the Company's Stock Option Plans and does not purport to be complete. Administration of and Eligibility Under Stock Option Plans. Each of the Stock Option Plans, as adopted, provides for the issuance of options to purchase shares of Common Stock to officers, directors, employees, independent contractors and consultants of the Company and its subsidiaries. The Stock Option Plans authorize the issuance of incentive stock options ("ISOs"), and non-qualified stock options ("NSOs") and stock appreciation rights ("SARs") to be granted by a committee (the "Committee") to be established by the Board of Directors to administer the Stock Option Plans. Subject to the terms and conditions of the Stock Option Plans, the Committee will have the sole authority to determine: (a) the persons ("optionees") to whom options to purchase shares of Common Stock and SARs will be granted, (b) the number of options and SARs to be granted to each such optionee, (c) the price to be paid for each share of Common Stock upon the exercise of such option, (d) the period within which each option and SAR will be exercised and any extensions thereof, and (e) the terms and conditions of each such stock option agreement and SAR agreement which may be entered into between the Company and any such optionee. All officers, directors and employees of the Company and its subsidiaries and certain consultants and other persons providing significant services to the Company and its subsidiaries will be eligible to receive grants of options and SARs under the Stock Option Plans. However, only employees of the Company and its subsidiaries are eligible to be granted ISOs. Stock Option Agreements. All options granted under the Stock Option Plans will be evidenced by an option agreement or SAR agreement between the Company and the optionee receiving such option or SAR. Provisions of such agreements entered into under the Stock Option Plans need not be identical and may include any term or condition which is not inconsistent with the respective Stock Option Plan and which the Committee deems appropriate for inclusion. Incentive Stock Options. Except for ISOs granted to stockholders possessing more than ten percent (10%) of the total combined voting power of all classes of the securities of the Company or its subsidiaries to whom such ownership is attributed on the date of grant ("Ten Percent Stockholders"), the exercise price of each ISO must be at least 100% of the fair market value of the Company's Common Stock as determined on the date of grant. ISOs granted to Ten Percent Stockholders must be at an exercise price of not less than 110% of such fair market value. Each ISO must be exercised, if at all, within ten (10) years from the date of grant, but, within five (5) years of the date of grant in the case of ISOs granted to Ten Percent Stockholders. An optionee of an ISO may not exercise an ISO granted under the Stock Option Plans so long as such person holds a previously granted and unexercised ISO. The aggregate fair market value (determined as of time of the grant of the ISO) of the Common Stock with respect to which the ISOs are exercisable for the first time by the optionee during any calendar year shall not exceed $100,000. As of the date of this Report, ISOs have been granted under the 1995 Stock Option Plan, subject to certain vesting schedules, to purchase up to 300,000 shares of Common Stock, 185,000 of which have been exercised. The 300,000 ISOs have an exercise price of $0.3555 per share. Further, as of the date of the Report, ISOs have been granted under the 1996 Stock Option Plan, subject to certain vesting schedules, to purchase up to 622,380 shares of Common Stock. These options have the following per share exercise prices: 285,714 shares ($0.35), 250,000 shares ($0.75), 76,666 shares ($3.00) and 10,000 shares ($1.50). Non-Qualified Stock Options. The exercise price of each NSO will be determined by the Committee on the date of grant. However, the exercise price for the NSOs under the 1995 Stock Option Plan will in no event be less than 85% of the fair market value of the Common Stock on the date the option is granted, or not less than 110% of the fair market value of the Common Stock on the date such option is granted in the case of an option granted to a Ten Percent Stockholder. No such restriction exists with respect to the exercise prices of NSOs granted under the 1996 Stock Option Plan. The exercise period for each NSO will be determined by the Committee at the time such option is granted, but in no event will such exercise period exceed ten (10) years from the date of the grant. As of the date of this Report, NSOs have been granted under the 1995 Stock Option Plan, subject to certain vesting schedules, to purchase up to 20,000 shares of Common Stock at an exercise price of $0.15 per share and up to 1,800 shares of Common Stock at an exercise price of $5.00 per share. As of the date of this Report, NSOs have been granted under the 1996 Stock Option Plan to purchase up to 8,727,620 shares of Common Stock, subject to certain vesting schedules. These options have the following per share exercise prices: 2,966,667 shares ($3.00), 935,000 shares ($2.125), 515,000 shares ($1.50) and 4,310,953 shares ($0.35). Stock Appreciation Rights. Each SAR granted under the Stock Option Plans will entitle the holder thereof, upon exercise of the SAR, to receive from the Company, in exchange therefor, an amount equal in value to the excess of the fair market value on the date of exercise of one share of Common Stock over its fair market value on the date of grant (or in the case of an SAR granted in connection with an option, the excess of the fair market value of one share of Common Stock at the time of exercise over the option exercise price per share under the option to which the SAR relates), multiplied by the number of shares of Common Stock covered by the SAR or the option, or portion thereof, that is surrendered. SARs will be exercisable only at the time or times established by the Committee. If an SAR is granted in connection with an option, the SAR will be exercisable only to the extent and on the same conditions that the related option could be exercised. The Committee may withdraw any SAR granted under the Stock Option Plans at any time and may impose any conditions upon the exercise of an SAR or adopt rules and regulations from time to time affecting the rights of holders of SARs. As of the date of this Report, no SARs have been granted pursuant to the 1995 Stock Option Plan, as part of the issuance of the 20,000 NSOs and no SARs have been granted under the 1996 Stock Option Plan. Termination of Option and Transferability. In general, any unexpired options or SARs granted under the Stock Option Plans will terminate: (a) in the event of death or disability, pursuant to the terms of the option agreement or SAR agreement, but not less than six (6) months or more than twelve (12) months after the applicable date of such event, (b) in the event of retirement, pursuant to the terms of the option agreement or SAR agreement, but no less than thirty (30) days or more than three (3) months after such retirement date, or (c) in the event of termination of such person other than for death, disability or retirement, until thirty (30) days after the date of such termination. However, the Committee may in its sole discretion accelerate the exercisability of any or all options or SARs upon termination of employment or cessation of services. The options and SARs granted under the Stock Option Plans generally will be non-transferable, except by will or the laws of descent and distribution. Adjustments Resulting from Changes in Capitalization. The number of shares of Common Stock reserved under the Stock Option Plans and the number and price of Common Stock covered by each outstanding option or SAR under the Stock Option Plans will be proportionately adjusted by the Committee for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from any stock dividends, split-ups, consolidations, recapitalizations, reorganizations or like event. Amendment or Discontinuance of Stock Option Plan. The Board of Directors has the right to amend, suspend or terminate the Stock Option Plans at any time. Unless sooner terminated by the Board of Directors, the 1995 Stock Option Plan and the 1996 Stock Option Plan will terminate on February 8, 2005 and May 7, 2006, respectively, the tenth anniversary date of the effectiveness of each such Stock Option Plan. Directors and Officers Liability Insurance. The Company has obtained directors' and officers' liability insurance with an aggregate liability for the policy year, inclusive of costs of defense, in the amount of $3,000,000. The insurance policy ending April 3, 1998, was renewed as of April 4, 1998 and will expire April 3, 1999. Indemnification of Officers and Directors. The Company's Certificate of Incorporation and Bylaws designate the relative duties and responsibilities of the Company's officers, establish procedures for actions by directors and stockholders and other items. The Company's Certificate of Incorporation and Bylaws also contain extensive indemnification provisions that will permit the Company to indemnify its officers and directors to the maximum extent provided by Delaware law. In addition, the Company has adopted a form of indemnification agreement (the "Indemnification Agreement") which provides the indemnitee with the maximum indemnification allowed under applicable law. The Company has not entered into Indemnification Agreements with any of its directors, executives, employees or consultants as of the date of this Report. Since the Delaware statute is non-exclusive, it is possible that certain claims beyond the scope of the statute may be indemnifiable. The Indemnification Agreements provide a scheme of indemnification which may be broader than that specifically provided by Delaware law. It has not yet been determined, however, to what extent the indemnification expressly permitted by Delaware law may be expanded, and therefore the scope of indemnification provided by the Indemnification Agreements may be subject to future judicial interpretation. The Indemnification Agreement provides, in pertinent part, that the Company shall indemnify an indemnitee who is or was a party or is threatened, pending or completed action or proceeding whether civil, criminal, administrative or investigative by reason of the fact that the indemnitee is or was a director, officer, key employee or agent of the Company or any subsidiary of the Company. The Company shall advance all expenses, judgments, fines, penalties and amounts paid in settlement (including taxes imposed on indemnitee on account of receipt of such payouts) incurred by the indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding as described above. The indemnitee shall repay such amounts advanced only if it shall be ultimately determined that he or she is not entitled to be indemnified by the Company. The advances paid to the indemnitee by the Company shall be delivered within 20 days following a written request by the indemnitee. Any award of indemnification to an indemnitee, if not covered by insurance, would come directly from assets of the Company, thereby affecting a stockholder's investment. Termination of Employment and Change of Control Agreements. Except as set forth in employment agreements and stock option agreements of certain employees of the Company and its subsidiaries, the Company has no compensatory plans or arrangements which relate to the resignation, retirement or any other termination of an executive officer or key employee with the Company or a change in control of the Company or a change in such executive officer's or key employee's responsibilities following a change in control. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of Common Stock as of June 26, 1998 by: (i) each person known by the Company to beneficially own 5% or more of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each Named Executive Officer of the Company and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law. The information set forth in the table and accompanying footnotes has been furnished by the named beneficial owners: NAME OF NO. OF BENEFICIAL OWNER SHARES(1) PERCENT(1) ---------------- --------- ---------- Polmont Investments Limited(2) ........ 2,450,000 9.10 Jenny Sun(3) .......................... 2,450,000 9.10 Max Chian Yi Sun(4).................... 2,798,191 10.40 Joseph R. Wright, Jr.(5)............... 6,237,700 18.90 Richard T. McNamar(6).................. 275,000 1.01 Richard S. Braddock(7)................. 208,592 * Drew Lewis(8).......................... 197,518 * Liang Jiangli.......................... 0 * James R. Lilley(9)..................... 61,074 * Michael H. Wilson(10).................. 103,222 * Michael J. Lim(11)..................... 1,069,400 3.81 Albert G. Pastino(12) ................. 359,199 1.31 James F. O'Brien(13) .................. 338,125 1.24 Xiao Jun(14)........................... 525,000 1.91 All executive officers and 9,474,830 26.52 Directors as a group (12 persons)(15) - -------------- * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options currently exercisable, or exercisable within 60 days of June 26, 1998, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. (2) The address of Polmont Investments Limited is c/o Havelet Trust Company, PO Box 3136, Road Town, Tortola, British Virgin Islands. (3) Includes 2,450,000 shares of Common Stock held by Polmont Investments Limited, of which Ms. Sun purports to have voting power. The address of Ms. Sun is 1052 North Beverly Drive, Beverly Hills, CA, 90210. (4) Includes 2,797,691 shares of Common Stock held by Occidental Worldwide Corporation of which Mr. Sun purports to have sole voting and investment power. The address of Mr. Sun is 126 JLN DEDAP, Taman Ampang Jaya, Trima Jaya, 68000 Ampang, Selangor, Malyasia. (5) Includes options to purchase 6,000,000 shares of Common Stock. The address of Mr. Wright is c/o AmTec, Inc., 599 Lexington Avenue, 44th Floor, New York, New York 10022. (6) Includes options to purchase 250,000 shares of Common Stock. (7) Includes options to purchase 30,000 shares of Common Stock. (8) Includes options to purchase 30,000 shares of Common Stock. (9) Includes options to purchase 30,000 shares of Common Stock. (10) Includes options to purchase 30,000 shares of Common Stock. (11) Includes options to purchase 1,062,500 shares of Common Stock. (12) Includes options to purchase 338,125 shares of Common Stock. (13) Includes options to purchase 338,125 shares of Common Stock. (14) Includes options to purchase 515,000 shares of Common Stock. (15) Includes options to purchase 8,723,750 shares of Common Stock of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Footnote 12 to the Consolidated Financial Statements - "Related Party Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS: The following financial statements and supplemental data are filed: Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULES: All applicable financial statement schedules have been omitted because the required information is included in the consolidated financial statements and notes thereto filed as Exhibit (a) (1). (B) REPORTS ON FORM 8-K. No Reports on Form 8-K were filed by the Company during the fourth quarter of the fiscal year ending March 31, 1998. (C) EXHIBITS The following exhibits, which are furnished with this Annual Report or incorporated herein by reference, are filed as part of this Annual Report: EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 2.1 Agreement for Sale of Assets by and between ITV Communications, Inc. and Netmatics, Inc., dated January 11, 1996, and Promissory Note and Security Agreement dated January 16, 1996(1) 2.2 Agreement of Merger between AVIC Group International, Inc., a Colorado corporation, with and into AVIC Group International, Inc., a Delaware corporation dated July 10, 1996(8) 3.1 Amendments to Articles of Incorporation of the Company dated June 7, 1996 and June 10, 1996(5) 3.2 Restated Certificate of Incorporation of the Company(7) 3.3 Certificate of Ownership and Merger Merging China Telecommunications and Technologies, Inc. into the Company(9) 3.4 Certificate of Designations of Preferences of Series C Convertible Preferred Stock of the Company(9) 3.5 Certificate of Designations of Preferences of Series D Convertible Preferred Stock of the Company(7) 3.6 Certificate of Designations of Preferences of Series E Convertible Preferred Stock of the Company(10) 3.7 Restated Bylaws of the Company 4.1 Specimen Common Stock Certificate(9) 10.1 1995 Stock Option Plan(2) 10.2 1996 Stock Option Plan(2) 10.3 Real Property lease between Lexreal Associates and the Company dated May 8, 1995(2) 10.4 Employment Agreement between Joseph R. Wright, Jr. and the Company dated as of April 15, 1995(3), and amendments thereto dated as of November 21 1995(4) and September 12, 1996(6) 10.5 Employment Agreement between Michael J. Lim and the Company dated as of November 6, 1995(4) 10.6 Employment Agreement between Xiao Jun and the Company dated as of January 1, 1996(4) 10.7 Employment Agreement between Albert G. Pastino and the Company dated as of October 15, 1997(12) 10.8 Employment Agreement between James F. O'Brien and the Company dated as of October 15, 1997(12) 10.9 Employment Agreement between Michael J. Lim and the Company dated January 23, 1998 10.10 Form of Indemnification Agreement for directors and officers of the Company(8) 10.11 Common Stock Investment Agreement between Promethean Investment Group L.L.C. and the Company dated March 31, 1997, as amended on April 29, 1997(9) 10.12 China Paging Networks Preliminary Agreement between Beijing CATCH Communications Group Co. and the Company dated April 1995(3) 10.13 Mobile Telephone Network Preliminary Agreement between Beijing CATCH Communications Group Co. and the Company dated April 27, 1995(3) 10.14 Cellular Telephone Network Preliminary Agreement between Beijing CATCH Communications Group Co., Tweedia International Limited and the Company dated April 1995(3) 10.15 Memorandum of Understanding between Hebei United Communications Equipment Company and the Company dated May 1, 1995(3) 10.16 Letter of Intent between Hebei United Communications Equipment Company and the Company dated October 10, 1995(4) 10.17 Joint Venture Contract between Hebei United Communications Equipment Company and NTTI dated December 22, 1995(5) 10.18 Agreement between Hebei United Communications Equipment Company and the Company dated March 22, 1996(5) 10.19 Joint Venture Contract between Hebei United Telecommunications Development Company, Beijing CATCH Communications Group Co. and the Company dated September 20, 1996(9) 10.20 Project Cooperation Contract between China United Telecommunications Co. and Hebei United Telecommunications Engineering Company Limited dated February 9, 1996(9) 10.21 Term Loan Agreement between Hebei United Telecommunications Engineering Company Limited and Bank of Tokyo-Mitsubishi, Ltd. dated August 5, 1996(9) 10.22 Project Cooperation Contract between Hebei Cable Television Station and Hebei United Communications Equipment Company Limited dated April 8, 1997(9) 21.1 Subsidiaries of the Company 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Singer, Lewak, Greenbaum & Goldstein 27 Financial Data Schedule - --------------- (1) Previously filed as part of the Company's Current Report on Form 8-K dated January 19, 1996. (2) Previously filed as part of the Company's Transition Report on Form 10-KSB for the transition period from October 1, 1994 to March 31, 1995. (3) Previously filed as part of the Company's Current Report on Form 8-K dated May 1, 1995. (4) Previously filed as part of the Company's Current Report on Form 8-K dated December 22, 1995. (5) Previously filed as part of the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996. (6) Previously filed as part of the Company's Registration Statement on Form S-8 filed on January 31, 1997. (7) Previously filed as part of the Company's Current Report on Form 8-K dated March 6, 1997. (8) Previously filed as part of the Company's Definitive Proxy Statement dated April 18, 1996. (9) Previously filed as part of the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997. (10) Previously filed as part of the Company's Quarterly Report on Form 10-Q/A dated September 30, 1997. (11) Previously filed as part of the Company's Current Report on Form 8-K dated December 8, 1997. (12) Previously filed as part of the Company's Quarterly Report on Form 10-Q dated December 31, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. AMTEC, INC. By /s/ Joseph R. Wright, Jr. -------------------------------- Joseph R. Wright, Jr. Chairman of the Board, Chief Executive Officer and President Date: August 23, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Joseph R. Wright, Jr. Chairman of the Board of August 23, 1999 - --------------------------- Directors, Chief Executive Joseph R. Wright, Jr. Officer and President (Principal Executive Officer) /s/ Richard T. McNamar Vice Chairman of the Board August 23, 1999 - --------------------------- of Directors Richard T. McNamar /s/ Richard S. Braddock Director August 23, 1999 - --------------------------- Richard S. Braddock /s/ Drew Lewis Director August 23, 1999 - --------------------------- Drew Lewis /s/ Liang Jiangli Director August 23, 1999 - --------------------------- Liang Jiangli /s/ James R. Lilley Director August 23, 1999 - --------------------------- James R. Lilley /s/ Michael H. Wilson Director August 23, 1999 - --------------------------- Michael H. Wilson /s/ Albert G. Pastino Senior Vice President, Chief August 23, 1999 - --------------------------- Financial Officer and Albert G. Pastino Treasurer (Principal Financial and Accounting Officer) TABLE OF CONTENTS - ----------------------------------------------------------------------------- PAGE AMTEC, INC. AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT F-1 REPORT OF INDEPENDENT CERTIFIED ACCOUNTANTS F-2 FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1998 (Restated), 1997 (Restated) AND 1996 (Restated): Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders' Equity (Deficiency) F-5 Consolidated Statements of Cash Flows F-6 - F-7 Notes to Consolidated Financial Statements F-8 - F-29 HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. INDEPENDENT AUDITORS' REPORT F-30 FINANCIAL STATEMENTS FOR THE PERIOD FROM APRIL 29, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER, 1997: Balance Sheets F-31 Statement of Operations F-32 Statement of Investors' Equity F-33 Statement of Cash Flows F-34 Notes to Financial Statements F-35 - F-40 HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. INDEPENDENT AUDITORS' REPORT F-41 FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER, 1996: Balance Sheets F-42 statements of Operations F-43 Statements of Investors' Equity F-44 Statements of Cash Flows F-45 Notes to Financial Statements F-46 - F-53 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders AmTec Inc. (formerly AVIC Group International Inc. and Subsidiaries) We have audited the accompanying consolidated balance sheets of AmTec Inc. and subsidiaries (formerly AVIC Group International Inc. and Subsidiaries) as of March 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in Note 15, the accompanying 1998 and 1997 financial statements have been restated. DELOITTE & TOUCHE LLP New York, New York June 11, 1998 (May 25, 1999, as to matters discussed in Note 15) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders AmTec Inc. We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of AmTec Inc. and subsidiaries (formerly AVIC Group International, Inc., and Subsidiaries) for the year ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of AmTec Inc. and subsidiaries (formerly AVIC Group International, Inc., and Subsidiaries) for the year ended March 31, 1996, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the year ended March 31, 1996, the Company had a net loss of $5,281,730. Recovery of the Company's assets is dependent upon future events, the outcome of which is indeterminable. In addition, successful completion of the Company's development program and its transition, ultimately, to the attainment of profitable operations is dependent upon obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support to Company's cost structure. These factors, among others, as discussed in Note 1 to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty. As discussed in Note 14, the accompanying 1996 financial statements have been restated. SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California June 18, 1996 (May 25, 1999, as to matters discussed in Note 14)
AMTEC INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND 1997 - --------------------------------------------------------------------------------------------- 1998 1997 ASSETS (AS RESTATED; SEE NOTE 15) CURRENT ASSETS: Cash $2,134,662 $1,346,713 Accounts receivable 114,661 - Prepaid expenses and other current assets 108,082 171,921 ----------- ---------- Total current assets 2,357,405 1,518,634 Investments in and advances to unconsolidated subsidiary 5,074,217 2,221,476 Property, plant and equipment, net 139,136 153,356 Office lease deposit 112,600 111,500 ----------- ---------- Total assets $7,683,358 $4,004,966 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 541,888 $ 261,193 Accrued expenses 792,006 782,132 Loans payable - shareholders 1,452,553 2,413,553 ----------- ---------- Total current liabilities 2,786,447 3,456,878 ----------- ---------- COMMITMENT AND CONTINGENCY STOCKHOLDERS' EQUITY: Preferred Stock: authorized 10,000,000 shares: Series A Convertible Preferred Stock: $.001 par value; 0 and 1,524,178 shares issued and outstanding in 1998 and 1997, respectively - 1,524 Series D Convertible Preferred Stock: $.001 par value; 0 and 150 shares issued and outstanding in 1998 and 1997, respectively - 1 Series E Convertible Preferred Stock: $.001 par value; 73 and 0 shares issued and outstanding in 1998 and 1997, respectively 1 - Common stock: $.001 par value, authorized 100,000,000 shares; 26,532,502 and 31,257,921 issued and outstanding in 1998 and 1997, respectively 26,533 31,258 Additional paid-in capital 33,149,142 25,200,877 Accumulated deficit (27,394,590) (20,592,536) Nonrefundable equipment purchase deposit - (4,572,536) Nonemployee deferred option cost, net (1,378,125) - Warrants 493,950 479,500 ----------- ---------- TOTAL STOCKHOLDERS' EQUITY 4,896,911 548,088 ---------- ---------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $7,683,358 $4,004,966 =========== ==========
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1998, 1997 AND 1996 - ----------------------------------------------------------------------------------------------------- 1998 1997 1996 (AS RESTATED; (AS RESTATED; SEE NOTE15) SEE NOTE 14) REVENUES $ - $ - $ - ------------ ------------ ------------ EXPENSES Selling, general and administrative 4,282,613 3,563,568 2,515,554 ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS (4,282,613) (3,563,568) (2,515,554) ------------ ------------ ------------ OTHER INCOME (EXPENSE): Amortization of stock options granted to non employees (459,375) - - Loss from abandoned assets (87,441) - (130,840) Interest expense (125,586) (129,039) (241,856) Other - net 158,294 (33,216) 7,617 Write off of investment in affiliate - (198,538) - ------------ ------------ ------------ Total other expense (514,108) (360,793) (365,079) ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN LOSSES OF UNCONSOLIDATED SUBSIDIARY (4,796,721) (3,924,361) (2,880,633) Equity in losses of unconsolidated subsidiary (606,647) (140,524) (500,000) ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS (5,403,368) (4,064,885) (3,380,633) ------------ ------------ ------------ DISCONTINUED OPERATIONS: Loss from discontinued operations - - (1,932,977) Gain on sale of discontinued operations - - 31,880 ------------ ------------ ------------ LOSS FROM DISCONTINUED OPERATIONS - - (1,901,097) ------------ ------------ ------------ NET LOSS (5,403,368) (4,064,885) (5,281,730) PREFERRED STOCK DIVIDEND 1,398,686 10,000 - ------------ ------------ ------------ LOSS APPLICABLE TO COMMON SHAREHOLDERS $(6,802,054) $(4,074,885) $(5,281,730) ============= ============= ============ BASIC LOSS PER SHARE: Loss from continuing operations $ (0.23) $ (0.14) $ (0.13) Loss from discontinued operations - - (0.08) ------------ ------------ ------------ BASIC LOSS PER COMMON SHARE $ (0.23) $ (0.14) $ (0.21) ============ ============= ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 29,843,712 29,102,347 25,651,045 ============ ============= =============
See notes to consolidated financial statements.
AMTEC INC. AND SUBSIDIARIES YEARS ENDED MARCH 31, 1998,1997 AND 1996 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY) - ------------------------------------------------------------------------------------------------------------------------------- SERIES A SERIES B SERIES C SERIES D COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK ---------------------- ------------------- --------------- ---------------- --------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT BALANCE, April 1, 1995 25,243,409 25,244 - - - - - - - - Issuance of Series A preferred stock for interest in deposit, December 1995 - - 1,524,178 1,524 - - - - - - Sale of common stock for cash 1,302,020 1,302 - - - - - - - - Conversion of stockholders' loans to common stock, February 1996 1,891,553 1,891 - - - - - - - - Equipment purchase deposit - - - - - - - - - - Net loss - - - - - - - - - - ---------- -------- --------- -------- ------- ------- -------- ------- ------- ------- BALANCE, March 31, 1996 28,436,982 28,437 1,524,178 1,524 - - - - - - Issuances of Series B preferred stock - - - - - 100 1 - - - Conversion of Series B shares 1,507,477 1,507 - - - (100) (1) - - - Issuance of Series D preferred stock - - - - - - - - 150 1 Common shares issued for services rendered 90,962 91 - - - - - - - - Common shares issued to employees as compensation 212,500 213 - - - - - - - - Common shares issued for directors fees 10,000 10 - - - - - - - - Sale of common shares 1,000,000 1,000 - - - - - - - - Cumulative foreign currency exchange loss - - - - - - - - - - Preferred dividends - - - - - - - - - - Warrants - - - - - - - - - - Net loss - - - - - - - - - - ---------- -------- --------- -------- ------- ------- -------- ------- ------- ------- BALANCE, March 31, 1997 (As Restated, see note 15) 31,257,921 31,258 1,524,178 1,524 - - - - 150 1 Exercise of employee stock options 69,000 69 - - - - - - - - Issuance of Series C preferred stock - - - - - - - - - - Common shares issued for services rendered 23,233 23 - - - - - - - - Conversion of Series D shares to common stock 2,236,507 2,237 - - - - - - - - Common stock investment agreement - net of cancellation 1,019,465 1,019 - - - - - - - - Common shares issued for directors fees 40,000 40 - - - - - - - - Cancellation of Series A preferred - - (1,524,178) (1,524) - - - - - - Cancellation of common stock (12,727,909) (12,728) - - - - - - - - Tweedia loan cancellation - - - - - - - - - - Allocation of non-refundable deposit from former affiliate - - - - - - - - - - Other - - - - - - - - - - Conversion of Series C shares to common stock 4,507,639 4,508 - - - - - - - - Issuance of Series E preferred stock - - - - - - - - - - Conversion of Series E shares to common stock 106,646 107 - - - - - - - - Buyback of Series C preferred stock - - - - - - - - - - Deferred financing costs, net of amortization - - - - - - - - - - Stock options issued to third party - - - - - - - - - - Cumulative foreign currency exchange loss - - - - - - - - - - Advance to joint venture partner - - - - - - - - - - Preferred stock dividends - - - - - - - - - - Cancellation of Warrants - - - - - - - - - - Net loss - - - - - - - - - - ---------- -------- --------- -------- ------- ------- -------- ------- ------- ------- BALANCE, March 31, 1998 (As Restated, see note 15) 26,532,502 $ 26,533 - $0 - $0 - $0 - $0 ========== ======== ========= ======== ======= ======= ======== ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------------------- SERIES E PREFERRED STOCK ADDITIONAL EQUIPMENT DEFERRED -------------------- PAID-IN ACCUMULATED PURCHASE OPTION SHARES AMOUNT WARRANTS CAPITAL DEFICIT DEPOSIT COSTS TOTAL BALANCE, April 1, 1995 - - - 9,995,265 (11,245,921) - - (1,225,412) Issuance of Series A preferred stock for interest in deposit, December 1995 - - - 4,571,012 - - - 4,572,536 Sale of common stock for cash - - - 2,192,681 - - - 2,193,983 Conversion of stockholders' loans to common stock, February 1996 - - - 1,889,662 - - - 1,891,553 Equipment purchase deposit - - - - - (4,572,536) - (4,572,536) Net loss - - - - (5,281,730) - - (5,281,730) --------- --------- -------- ----------- ------------ ----------- ------------ ----------- BALANCE, March 31, 1996 - - - 18,648,620 (16,527,651) (4,572,536) - (2,421,606) Issuances of Series B preferred stock - - - 2,341,218 - - - 2,341,219 Conversion of Series B shares - - - (1,506) - - - - Issuance of Series D preferred stock - - - 1,499,999 - - - 1,500,000 Common shares issued for services rendered - - - 316,249 - - - 316,340 Common shares issued to employees as compensation - - - 318,538 - - - 318,751 Common shares issued for directors fees - - - 89,990 - - - 90,000 Sale of common shares - - - 1,999,000 - - - 2,000,000 Cumulative foreign currency exchange loss - - - (1,231) - - - (1,231) Preferred dividends - - - (10,000) - - - (10,000) Warrants - - 479,500 - - - - 479,500 Net loss - - - - (4,064,885) - - (4,064,885) --------- --------- -------- ----------- ------------ ----------- ------------ ----------- BALANCE, March 31, 1997 (As Restated, see note 15) - - 479,500 25,200,877 (20,592,536) (4,572,536) - 548,088 Exercise of employee stock options - - - 34,681 - - - 34,750 Issuance of Series C preferred stock - - - 2,499,999 - - - 2,500,000 Common shares issued for services rendered - - - 66,934 - - - 66,958 Conversion of Series D shares to common stock - - - 129,673 - - - 131,909 Common stock investment agreement - net of cancellation - - - (1,019) - - - 0 Common shares issued for directors fees - - - 84,960 - - - 85,000 Cancellation of Series A preferred - - - (4,571,012) - 4,572,536 - 0 Cancellation of common stock - - - 12,728 - - - 0 Tweedia loan cancellation - - - 25,000 - - - 25,000 Allocation of non-refundable deposit from former affiliate - - - 850,000 - - - 850,000 Other - - - (580) - - - (580) Conversion of Series C shares to common stock - - - (4,508) - - - (1) Issuance of Series E preferred stock 74 1 - 6,759,000 - - - 6,759,001 Conversion of Series E shares to common stock (1) - - (107) - - - 0 Buyback of Series C preferred stock - - - (406,100) - - - (406,100) Deferred financing costs, net of amortization - - 161,450 (229,415) - - - (67,965) Stock options issued to third party - - - 1,837,500 - - ($1,378,125) 459,375 Cumulative foreign currency exchange loss - - - 1,844 - - - 1,844 Advance to joint venture partner - - - (540,000) - - - (540,000) Preferred stock dividends - - - 1,398,686 (1,398,686) - - 0 Cancellation of Warrants - - (147,000) - - - - (147,000) Net loss - - - - (5,403,368) - - (5,403,368) --------- --------- -------- ----------- ------------ ----------- ------------ ----------- BALANCE, March 31, 1998 (As Restated, see note 15) 73 $1 $ 493,950 $33,149,142 ($27,394,590) $0 ($ 1,378,125) $ 4,896,911 ========= ========= ========= =========== ============= =========== ============= ===========
See notes to consolidated financial statements
AMTEC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1998, 1997 AND 1996 - --------------------------------------------------------------------------------------------------------- 1998 1997 1996 (AS RESTATED; (AS RESTATED; SEE NOTE 15) SEE NOTE 14) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,403,368) $ (4,064,885) $ (5,281,730) Less: Loss of discontinued operations - - 1,901,097 ------------- -------------- -------------- Loss from continuing operations (5,403,368) (4,064,885) (3,380,633) Adjustments to reconcile net loss to net cash used in continuing operating activities: Amortization of deferred option cost 459,375 - - Depreciation 43,432 28,905 19,404 Loss from abandoned assets 87,441 - 130,840 Issuance of warrants for services rendered - 479,500 - Issuance of common stock and options for directors' fees and professional services rendered 151,957 725,091 - Equity in losses of unconsolidated subsidiary 606,647 140,524 500,000 (Increase) decrease in: Accounts receivable (114,661) - - Inventories - - - Prepaid expenses and other current assets 63,839 (111,243) (41,813) Office lease deposit (1,100) 55,700 (167,200) Increase (decrease) in: Accounts payable and accrued expenses 293,027 (485,959) 1,251,464 Loans payable - stockholders (111,000) (150,000) 136,982 ------------- -------------- -------------- Net cash used in continuing operations (3,924,411) (3,382,367) (1,550,956) Net cash used in discontinued operations - - (1,336,396) ------------- -------------- -------------- Net cash used in operating activities (3,924,411) (3,382,367) (2,887,352) CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Netmatics (87,441) - - Purchase of property and equipment (29,212) (106,028) (119,592) Investment in unconsolidated subsidiary (276,000) (654,000) (1,170,000) Proceeds from sale of assets - - 250,000 ------------- -------------- -------------- Net cash used in investing activities (392,653) (760,028) (1,039,592) ------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Warrants issued for services rendered - net of charges to APIC (215,546) - - Borrowings - - 739,952 Loans payable to stockholders 25,000 - - Advance to joint venture partner (3,724,000) (538,000) - Proceeds from sale of common stock 166,659 2,000,000 2,193,983 Proceeds from sale of Series B convertible preferred stock - 2,341,219 - Proceeds from sale of Series D convertible preferred stock - 1,500,000 - Proceeds from sale of Series C convertible preferred stock - net 2,093,900 - - Proceeds from sale of Series E convertible preferred stock 6,759,000 - - ------------- -------------- -------------- Net cash provided by financing activities 5,105,013 5,303,219 2,933,935 ------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 787,949 1,160,824 (993,009) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,346,713 185,889 1,178,898 ------------- -------------- -------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,134,662 $ 1,346,713 $ 185,889 ============= ============== ==============
See notes to consolidated financial statements. AMTEC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED MARCH 31, 1998, 1997 AND 1996 - ----------------------------------------------------------------------------- 1. SUPPLEMENTAL CASH INFORMATION: No interest or income taxes were paid during fiscal 1998, 1997 and 1996. 2. NONCASH FINANCING ACTIVITIES: In fiscal 1998, preferred stock dividends of $1,398,686 were paid upon determination of the first eligible conversion date of the Convertible Preferred Series C, D, and E. In fiscal 1998, 150 shares of Series D Convertible Preferred Stock were converted into 2,236,507 shares of common stock (inclusive of conversions of preferred dividends and related warrants). In fiscal 1998, 219 shares of Series C Convertible Preferred Stock were converted into 4,507,639 shares of common stock. In fiscal 1998, 0.8 share of Series E Convertible Preferred Stock was converted into 106,646 shares of common stock. In fiscal 1998, 12,727,909 shares of common stock were canceled upon determination that the full purchase price for such shares was not paid. In fiscal 1998, $850,000 Loans Payable related to a nonrefundable deposit received from a former affiliate was credited to Additional Paid in Capital. In fiscal 1998, 1,524,178 shares of the Company's Series A Convertible Preferred Shares were canceled in accordance with the terms of a subscription agreement. In fiscal 1998, the Company issued stock options valued at $1,837,500 to the Hebei provincial government in exchange for a long term cooperation agreement. In fiscal 1997, 100 shares of Series B Preferred Stock were converted into 1,507,477 shares of common stock. In fiscal 1996, loans from stockholders of $1,891,553 were converted into 1,891,553 shares of common stock. In fiscal 1996, 1,524,178 shares of Series A Preferred Stock were issued in exchange for the rights to a deposit totaling $4,572,536. In fiscal 1996, a deposit from a stockholder of $850,000 was converted to a note payable. See notes to consolidated financial statements. AMTEC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1998, 1997 AND 1996 - ----------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND LINE OF BUSINESS - AmTec Inc. (the "Company" or "AmTec") through its majority-owned subsidiary (accounted for under the equity method of accounting) in the People's Republic of China ("PRC") is involved in providing financing and assistance in building telecommunications networks for third parties in the PRC. The Company, through its wholly-owned subsidiary ITV Communications, Inc. ("ITV") was engaged in the design, manufacture and sale of technologically advanced communication devices. In January 1996, the Company sold all of the business and operating assets of ITV and is no longer involved in the business that ITV was engaged in (See Note 14). On July 8, 1997, the Company changed its name from AVIC Group International, Inc. to AmTec, Inc. During fiscal 1998 the Company organized two wholly-owned subsidiaries, one a Bermuda company and the other a British Virgin Island company. There was no activity in either company during the year ended March 31, 1998. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the Company's wholly- owned subsidiary, ITV Communications, Inc. All significant intercompany accounts and transactions are eliminated in consolidation. EQUITY METHOD OF ACCOUNTING - The Company accounts for its subsidiary Hebei United Telecommunications Equipment Co., Ltd. and subsidiary ("Hebei Equipment") (a limited life Sino-foreign joint venture) using the equity method of accounting, as minority Shareholders of Hebei Equipment have substantive participating rights under the joint venture contracts. The Company reports its investment in Hebei Equipment under the caption Investment in and advances to unconsolidated subsidiary. Under the equity method, the investment is carried at cost of acquisition, plus the Company's equity in undistributed earnings or losses since acquisition. Equity in the losses of the unconsolidated subsidiary is recognized according to the Company's percentage ownership in the unconsolidated subsidiary until the Company contributed capital has been fully depleted. Reserves are provided where management determines that the investment or equity in earnings is not realizable. For the period ending March 31, 1998, the Company used an ownership percentage of 60.8% for purposes of calculating the share of earnings of its unconsolidated subsidiary since it did not increase its ownership percentage in Hebei Equipment to 70% until after the close of Hebei Equipment's fiscal year-end (December 31, 1997). Hebei Equipment owns 51% of Hebei United Telecommunications Engineering Company, Ltd. ("Hebei Engineering"). Hebei Equipment also accounts for its investment using equity method of accounting as minority Shareholders of Hebei Engineering have substantive participating rights under the joint venture contracts. DIFFERENCE IN YEAR END - The Company's share of equity in losses of Hebei Equipment included in the consolidated financial statements are as of and for the periods ended December 31, 1997 and 1996, Hebei Equipment's year-end. Since inception the Company has had a March 31 year-end. The Company kept this year-end even though its subsidiaries have a calendar year-end so that delays in receiving information from China would not cause problems for the Company in meeting its reporting deadlines. However, the Company does monitor events in the lag period and, where appropriate, would disclose the occurrence of any significant event during the lag period. All companies established under PRC law are required to have a December 31 fiscal year-end date. Hebei Equipment and Hebei Engineering are equity joint venture companies established under PRC law. MANAGEMENT ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS - For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost. Depreciation is provided using the straight-line method, to write off the cost of property and equipment over their estimated useful lives, after deducting the estimated salvage value of the assets as follows: Furniture, fixtures and equipment 5 years Leasehold improvements 5 years Computer software 3 years LONG-LIVED ASSETS - The Company evaluates long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the net carrying amount may not be recoverable. When such events occur, the Company measures impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss. The impairment loss, if determined, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company determined that, as of March 31, 1998 and 1997, there had been no impairment in the carrying value of the long-lived assets. REVENUE RECOGNITION - Revenue related to the Company's former operations of ITV was derived primarily from product sales, and was recognized upon shipment of the products. RESEARCH AND DEVELOPMENT COSTS - Research and development costs of ITV were charged to expense as incurred. These costs consisted primarily of salaries and consulting fees. INCOME TAX - Deferred income taxes are provided for using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. The tax consequences of those differences are classified as current or non-current based upon the classification of the related assets or liabilities in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value because of the immediate short-term maturity of these financial instruments. LOSS PER SHARE - Basic loss per common share is based on the weighted average number of common shares outstanding during the year. The effect of shares issuable upon exercise of warrants and stock options is anti-dilutive, therefore diluted earnings per share is not presented. The Company adopted the provisions of FASB 128 during the fiscal year ended March 31, 1998. Adoption of such statement did not have a material effect on results of operations and financial condition. RECLASSIFICATION - Certain amounts for the fiscal years ended March 31, 1997 and 1996 have been reclassified to conform to the current year's presentation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Comprehensive Income - In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." This statement is effective for financial statements issued for periods beginning after December 15, 1997. Management is evaluating the effect on its financial reporting of the adoption of this statement. Segments of an Enterprise and Related Information - In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This statement is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires the reporting of profit and loss, specific revenue and expense items, and assets for reportable segments. It also requires the reconciliation of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments, in each case to the corresponding amounts in the general purpose financial statements. The Company has not yet determined what additional disclosures may be required in connection with adopting SFAS 131. Derivative Instruments and Hedging Activities - In June 1998, the FASB has issued a new standard SFAS No. 133 "Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after June 15, 1999. Management has not yet completed the analysis of the impact this would have on the financial statements of the Company and has not adopted this standard. 2. INVESTMENT IN AND ADVANCE TO UNCONSOLIDATED SUBSIDIARY The Company determined that it should conduct its operations in the PRC through a Sino Foreign Joint Venture ("SFJV"), Hebei Equipment. In March 1996, the Company invested $1,170,000 in a PRC joint venture, advanced $540,000 to its joint venture partner and requested from the Hebei Provincial government approval for conversion of such company to an SFJV. On September 24, 1996, preliminary regulatory approval for Hebei Equipment was granted and the SFJV was formed with the Company holding a 60.8% interest in the entity. In April 1997, the Company received final PRC regulatory approval for the SFJV. The Company invested an additional $276,000 in Hebei Equipment during the fiscal-year ended March 31, 1998, resulting in an increase in its holding to 70%. The Company's investments in the joint venture were accounted for by the equity method of accounting because minority shareholders of Hebei Equipment and Hebei Engineering have substantive participating rights under the provision of the Joint Venture contracts. (See Note 4 and 15) The following summarizes the total equity investment by the Company in Hebei Equipment for the year ended March 31, 1998 and 1997: 1998 1997 Investment in unconsolidated subsidiary $ 1,824,000 $ 2,100,000 Less: Share of equity losses (747,783) (140,524) -------------- ------------ 1,352,217 1,683,476 Add: Advance to unconsolidated subsidiary 3,722,000 538,000 -------------- ------------ Investment in and advanced to unconsolidated subsidiary $ 5,074,217 $ 2,221,476 ============== ============ Hebei Equipment holds a 51% interest in Hebei Engineering, which is developing Global System for Mobile Telecommunications networks (the "GSM networks") in the ten largest cities in Hebei Province, PRC. Nippon Telegraph and Telephone International, Inc. ("NTTI") and Itochu Corporation hold the remaining 49% interest in Hebei Engineering. As of March 31, 1998, Hebei Equipment had a total investment of $1,530,000 in Hebei Engineering and its share of equity losses in Hebei Engineering amounted to $1,008,156. The following summarized the major activities of Hebei Equipment and its subsidiary: A. HEBEI ENGINEERING'S INVESTMENT IN GSM NETWORKS Hebei Equipment, through its 51%-owned subsidiary, Hebei Engineering has borrowed approximately $30,650,000 to purchase equipment which was contributed to China United Communications Company ("UNICOM") to construct the GSM networks in Hebei Province and has received the right to receive future cash flow. The GSM networks are being built pursuant to a 15-year Project Cooperation Contract. Terms of the Project Cooperation contract include the following: Initially, Hebei Engineering owned 100% of the assets prior to contributing such assets to UNICOM and once contributed, Hebei Engineering owned and retained title to a 70% interest in the assets and UNICOM owned and retained title to a 30% interest in the assets. Both parties agree to distribute the profit according to the "Distributable Cash Flow" (as defined) with 22% going to UNICOM and 78% going to Hebei Engineering. Each year, Hebei Engineering will transfer ownership of assets to UNICOM equal in value to the Distributable Cash Flow received up to 60% of the assets. The maximum amount of assets transferred will not exceed 90% of the assets until termination of the Project Cooperation Contract. Upon the termination of the contract the remaining 10% of the network assets shall be assigned to UNICOM without any further consideration. Hebei Engineering will continue to receive 78% of the Distributable Cash Flow after transfer of all the assets for the remainder of the 15-year period. Under PRC law, foreign investment entities, such as Hebei Engineering, are not permitted to own or operate telecommunications networks. Substantially all of the Hebei Engineering's revenues are derived from contractual arrangements for the sharing of cash flow from network operations rather than from ownership or operation of the networks. Hebei Engineering has recorded its investment (GSM Construction Costs) as a right to receive future cash flow at cost and is amortizing the cost of these right based upon the greater of the amount computed using (a) the ratio that current gross revenues from the GSM networks to the total of current and anticipated future gross revenues from the GSM networks or (b) the straight-line method over 15 years which was the remaining estimated economic life of the GSM networks at the inception of this investment. Amortization of the Investment in GSM Networks for the year ended March 31, 1998 amounted to approximately $2,183,000. Income from the GSM networks is recognized at the time when Hebei Engineering can estimate or calculate the portion of its Distributable Cash Flow from the networks. UNICOM commenced operation of the GSM networks in February 1997. B. SUMMARY FINANCIAL INFORMATION FOR THE UNCONSOLIDATED SUBSIDIARY For the year ended December 31, 1996, Hebei Equipment did not exist and the Company recorded its equity of losses in Hebei Engineering directly. The following tables represent summary financial information for the Joint Venture (Hebei Equipment) as of and for the years ended December 31, 1997 and summary financial information for Hebei Engineering and its related projects in China as of and for the year ended December 31, 1996 and 1997:
HEBEI HEBEI HEBEI EQUIPMENT ENGINEERING ENGINEERING 1997 1997 1996 Revenues $ - $ 216,348 $ - ============== ============== ============== Net (loss) income $ (1,239,100) $ (1,972,013) $ 15,359 ============== ============== ============== Current assets $ 4,891,936 $ 3,642,561 $ 4,064,878 Non-current assets 587,612 29,093,456 22,464,991 -------------- -------------- -------------- Total assets $ 5,479,548 $ 32,736,017 $ 26,529,869 ============== ============== ============== Current liabilities $ 3,715,850 $ 10,354,023 $ 1,184,725 Non-current liabilities - 21,331,600 22,322,737 -------------- -------------- -------------- Total liabilities $ 3,715,850 $ 31,685,623 $ 23,507,462 ============== ============== ==============
3. PROPERTY AND EQUIPMENT Property and equipment consist of the following: 1998 1997 Furniture, fixtures and equipment $ 201,258 $ 176,962 Leasehold improvements 17,498 12,581 Computer software 12,273 12,274 --------- ----------- 231,029 201,817 Less accumulated depreciation 91,893 48,461 --------- ----------- $ 139,136 $ 153,356 ========= =========== Depreciation expense for fiscal 1998, 1997 and 1996 was $43,432; $28,905 and $19,404, respectively. 4. LOANS PAYABLE - SHAREHOLDERS Certain shareholders of the Company advanced funds to ITV, a wholly owned subsidiary of the Company. These amounts are payable on demand by ITV and bear interest at 8.5% per annum. There is no recourse to AmTec for these loans. 5. COMMITMENTS AND CONTINGENCIES LEASES - The Company leases a facility for its corporate and operations offices under a long-term lease agreement. Minimum annual rental commitments under this lease are as follows: MARCH 31, 1999 $ 334,400 2000 334,400 2001 55,733 --------- $ 724,533 ========= Rent expense for fiscal 1998, 1997 and 1996 was $337,763, $369,969 and $399,992 respectively. EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements with officers expiring through April 2002 with aggregate annual salaries of $1,475,000. LITIGATION - The Company and its subsidiaries are involved in litigation matters which involve certain claims which arise in the normal course of business, none of which, in the opinion of management, is expected to have a materially adverse effect on the Company's consolidated financial statements. REGULATION - The PRC's legal system is a civil law system based on written statutes and is a system in which decided legal cases have little precedential value. The PRC Government began to promulgate a comprehensive system of laws in 1979. Many laws and regulations governing economic matters in general have been promulgated. The general effect of this legislation has been to enhance the protection afforded to foreign invested enterprises in the PRC. However, as these laws and regulations are relatively new, their interpretation and enforcement involve significant uncertainty.(See Note 17) FOREIGN CURRENCY EXCHANGE - The Company's joint ventures will receive nearly all of their revenue in Renminbi, which will need to be converted to other currencies, primarily U.S. dollars, and remitted outside of the PRC. Although the Renminbi is not a freely convertible currency at present, effective July 1, 1996, foreign currency "current account" transactions by foreign investment enterprises, including Sino-foreign joint ventures, are no longer subject to the approval of State Administration of Foreign Exchange ("SAFE", formerly, "State Administration of Exchange Control"). These transactions need only a ministerial review, according to the Administration of the Settlement, Sale and Payment of Foreign Exchange Provisions promulgated in 1996. "Current account" items include international commercial transactions, which occur on a regular basis, such as those relating to trade and provision of services. Distributions to joint venture parties also are considered a "current account transaction." Other noncurrent account items, known as "capital account" items, remain subject to SAFE approval. 6. STOCKHOLDERS' EQUITY CANCELLATION OF SERIES A CONVERTIBLE PREFERRED STOCK - On August 19, 1997, upon determination that the entire amount of a nonrefundable deposit had been forfeited by a former affiliate, the Company canceled all of the outstanding Series A Convertible Preferred Stock (the "Series A Shares"). On December 19, 1995, the Company had issued 1,524,178 shares of the Company's Series A Shares in consideration of the transfer of a $4,572,536 nonrefundable equipment purchase deposit to the Company from a former affiliate. The Subscription Agreement for the Series A Convertible Preferred Stock provided that, if all or any portion of the deposit should be forfeited at any time and for any reason whatsoever by the former affiliate an equivalent number of the Series A Shares issued to it would be canceled. CANCELLATION OF CERTAIN SHARES OF COMMON STOCK - On December 8, 1997, the Company reduced its outstanding common stock and credited its Additional Paid in Capital $12,728 as a result of canceling 12,727,909 shares of its common stock and 318,182 options to purchase its common stock issued to Tweedia International, Ltd. The cancellation was based on a determination that the full purchase price for the shares was never paid. The 12,727,909 canceled shares represented approximately thirty-eight percent of the total number of the Company's common shares outstanding prior to the cancellation of such shares. In addition, the Company canceled an agreement with a former affiliate, which gave the Company a right of first refusal on certain investment opportunities in the Peoples Republic of China. (See Note 12-"Related Party Transactions".) CONVERSION OF LOANS PAYABLE - In December 1995, loans payable and accrued interest in the amount of $1,891,553 were converted to common stock at a price per share of $1.00 (based on other market sales at the time). SALE OF COMMON STOCK - In September and November 1995, and February 1996, the Company sold an aggregate of 976,000 shares of common stock for $976,000. In March 1996, the Company entered into a stock purchase agreement to sell 191,020 shares of common stock for $1,170,000, a price of $6.125 per share. In November 1996, the Company sold 1,000,000 shares of the Company's common stock through subscription agreements. The Company received $2 million in proceeds with respect to these subscriptions. The price per share reflected the quoted market value of the common shares at the time of the transactions. During fiscal 1998, 69,000 common shares were sold in connection with the exercise of certain employee stock options. Proceeds from these sales aggregated $34,750. SERIES B CONVERTIBLE PREFERRED STOCK - In June 1996, the Company completed a $2,500,000 offering of its Series B Convertible Preferred Stock ("Series B Preferred"). The net proceeds the Company received were approximately $2,341,000. The offering consisted of 100 shares of Series B Preferred at $25,000 per share and warrants to purchase common stock of the Company. Each warrant entitled the holder to purchase one share of common stock at a fixed conversion price. During fiscal 1997, all outstanding Series B shares were converted to 1,507,477 common shares. SERIES D CONVERTIBLE PREFERRED STOCK - In March 1997, the Company completed a $1,500,000 offering of its Series D Convertible Preferred Stock ("Series D Preferred"). The offering consisted of 150 shares of Series D Preferred at $10,000 per share and warrants to purchase common stock of the Company. The holder was entitled to cumulative dividends at the annual rate of 8% per annum per share, payable quarterly in shares of Common Stock or, in cash in connection with any payment pursuant to a Conversion Default at the election of the Company's board of directors. During fiscal 1998, the Series D Preferred was converted into common stock of the Company at a conversion rate equal to the lowest trading price of the Company's common stock during the 30 days preceding each conversion date. In addition, the Series D Preferred shareholders converted their warrants into common stock at prices aggregating $131,909. Such Series D Preferred and warrants conversions aggregated 2,236,507 shares. In connection with the discount for the above conversion, the Company credited Additional Paid in Capital $48,677 and charged preferred dividends in an equal amount. SERIES C CONVERTIBLE PREFERRED STOCK - In June 1997, the Company completed a $2,500,000 offering of its Series C Convertible Preferred Stock ("Series C Preferred"). The offering consisted of 250 shares of Series C Preferred at $10,000 per share and entitled the holder to cumulative dividends at an annual rate of 8% per annum per share. The dividends were payable quarterly in shares of Common Stock or, in cash in connection with any payment pursuant to a Conversion Default at the election of the Company's board of directors. Such Series C shares were converted at conversion rates equal to the lowest trading price of the Company's common stock during the 30 business days immediately preceding each conversion date. During fiscal 1998, 219 outstanding Series C shares were converted into 4,507,639 common shares. In addition, the Company repurchased for consideration of $406,100 and retired 31 Series C shares. In connection with the discount for the above conversion, the Company credited Additional Paid in Capital $260,784 and charged preferred dividends in an equal amount. SERIES E CONVERTIBLE PREFERRED STOCK - On October 22, 1997, the Company issued 74 shares of its Series E Convertible Preferred Stock, par value $.001 per share (the "Series E Preferred Shares") at a price of $100,000 per share and paying an 8% in-kind dividend. The net proceeds the Company received were approximately $6,759,000. The holders of Series E Preferred Stock have no voting rights except with respect to certain matters that affect the rights related to the Series E Preferred Stock. Conversion of the Series E Shares into Common Stock, which are restricted by certain "lock-up" agreements, is based on the lower of: (i) the lesser of a 10% premium to the market price of the Company's Common Stock, as reported on the American Stock Exchange, at the time of the investment's closing or of a 10% premium to the 10 day average trading price six months after the close or (ii) a discount to the lowest trade during the five (5) trading days prior to each conversion. The discount, which ranges from 15% to 20%, depends upon the date of the shareholders' conversion of the Series E shares, with the discount increasing as the period the shares are held increases. Warrants were issued to five of the Series E Investors to purchase up to 1,236,364 shares of the Company's Common Stock at a price equal to 120% of the market price of the Company's Common Stock at the time of the investment's closing. The number of warrants issued to each investor depended upon the amount invested and the length of the "lock-up" agreed upon between the Company and investor. The Company registered 13,832,792 shares of common stock on January 16, 1998, to cover the common stock issuable to the Series E Holders upon conversion of their Series E shares and exercise of their warrants. As of March 31, 1998, 0.8 share of the Series E Preferred Stock was converted into 106,646 shares of the Company's common stock. In connection with the discount for the above conversion, the Company credited Additional Paid in Capital $1,089,225 and charged preferred dividends in an equal amount. STOCK WARRANTS - During fiscal 1998, the Company issued warrants to purchase 326,171 shares of the Company's Common Stock to the Placement Agent as fees for services in connection with the placement of the Series E Convertible Preferred Stock described above. These warrants, which are exercisable one year from the closing date, have an exercise price of $2.475 per share and expire on October 22, 2002. The Company has assigned a value of $161,450 to these warrants. During fiscal 1998, the Company rescinded an agreement it entered into in July 1996 with an investment banking firm in which such firm was to act as a financial advisor to the Company. As part of this rescission the Company canceled warrants to purchase 200,000 shares of the Company's common stock. Professional fees and Warrants were reduced by $147,000 to reflect this cancellation. During fiscal 1997, the Company issued 186,111 warrants to purchase the Company's common stock at a conversion price of 110% of the quoted market value at the time of grant. The warrants were issued in connection with the Company's issuance of Series B Preferred Shares (see Series B Convertible Preferred Stock). On October 15, 1996, the Company agreed to issue warrants to purchase 200,000 shares of the Company's Common Stock to an advisor for services related to advising the Company with respect to its Sino-foreign joint ventures and marketing activities in the PRC. The warrants issued have a three year term and an exercise price of $1.50, which was the market value of the Company's Common Stock the warrants were issued. In connection with this agreement, the Company recorded $110,000 in professional fees which management determined to be the fair value of the warrants. In connection with a financial services agreement which has since been canceled, the Company issued 600,000 warrants to an investment banking firm, 300,000 of which vested at the time the agreement was entered into and 300,000 which were to vest when such firm had raised a minimum of $10 million. With respect to the vested 300,000 warrants, the Company recorded $222,500 in professional fees which management determined to be the fair value of the warrants. ISSUANCE OF COMMON STOCK FOR SERVICES - During the year ended March 31, 1998 the Company issued shares of its common stock for services rendered. The number of shares issued in each case was based upon the quoted market value of the stock at the issue date and the value of the services rendered. Total shares issued in connection with these services amounted to 63,233 covering the $151,957 of expenses which are included in the accompanying financial statements. In April 1996, two outside directors each received 5,000 shares of common stock for a total value of $90,000 which was recorded as compensation expense. The number of shares issued was based on the quoted market value of the common stock at the time of issuance. In May 1996, 5,000 shares of the Company's common stock were issued as payment for $45,625 of services rendered. In December 1996, 5,000 shares of the Company's common stock were issued as payment for $18,125 for services rendered. Both issuance have been recorded as professional fees at a value of the quoted market price of the common stock at the time of the transaction. In October 1996, the Company entered into agreements to settle $98,000 of outstanding professional fees through the issuance of options to purchase 44,962 common shares. The number of shares was determined based upon the quoted market value of the shares at the time of issuance. THE PROMETHEAN COMMON STOCK EQUITY AGREEMENT - On March 31, 1997 the Company entered into a Common Stock Investment Agreement with Promethean Investment Group L.L.C. ("Promethean") pursuant to which Promethean will provide a $10 million equity line to the Company. The agreement, which is cancelable, by either party, was amended on April 29, 1997 to increase the equity line to $25 million. Pursuant to the Common Stock Investment Agreement, the Company may sell from time to time shares of Common Stock to Promethean by providing a notice (the "Put Notice") containing the dollar amount (the "Required Dollar Amount") of the shares of Common Stock to be sold during the thirteen business day period commencing after the date of the Put Notice (the "Purchase Period"). Promethean shall be obligated to purchase the shares of Common Stock in the Required Dollar Amount specified in the Put Notice with the election to purchase an additional 30% of the Required Dollar Amount during the Purchase Period. Each of the shares of Common Stock covered by the Required Dollar Amount (and any additional amount of the shares of Common Stock to be sold during the Purchase Period) shall be sold at 90% of the lowest of the daily low trading price of the Common Stock, as quoted on the American Stock Exchange, during the three trading days preceding the date of the Put Notice. The Required Dollar Amount for each Put Notice shall be in increments of $250,000 and shall not exceed the lesser of (i) $1,500,000, subject to reductions of $75,000 for each trading day during the Purchase Period in which the average per share dollar value of the Common Stock traded on the American Stock Exchange is less than $2.50, and (ii) 10% of the dollar value of the Common Stock traded on the American Stock Exchange during the first ten trading days of the Purchase Period if the average per share of such dollar value is equal to or greater than $2.50 (subject to certain adjustment to account for stock splits, stock dividends and other similar transactions). The Company may not deliver a Put Notice to sell the shares of Common Stock if the closing price of the Common Stock on the date prior to the date of the intended Put Notice as reported on the American Stock Exchange is less than $2.50 or if certain other conditions exist. The Company has agreed to provide a minimum of $4,000,000 in Put Notices to Promethean within two years following the effective date of a registration statement covering the shares to be sold pursuant to the Common Stock Investment Agreement. Initially, 1,570,998 shares were issued into escrow on behalf of Promethean. During the year ended March 31, 1998, none of the shares issued under this agreement were released from escrow. As of March 31, 1998, this agreement has not been utilized, no shares have been issued and no monies have been received under this agreement. 551,533 of the shares issued into escrow were canceled. STOCK OPTIONS - The Company has adopted two stock option plans (the AmTec, Inc. 1995 Stock Plan and the AmTec, Inc. 1996 Stock Option Plan). Incentive and nonqualified options and stock appreciation rights may be granted to employees, officers, directors, and consultants of the Company. There are 12,500,000 shares of common stock reserved for issuance under these plans. The exercise price of the options are determined by the board of directors, but in the case of an incentive stock option, the exercise price may not be less than 100% of the fair market value on the date of grant. Options vest over periods not to exceed ten years. A summary of the status of all of the Company's stock options issued as of March 31, 1998, 1997 and 1996 and changes during the years then ended is presented below:
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 -------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE NUMBER PRICE NUMBER PRICE NUMBER PRICE Outstanding at beginning of year 7,905,000 $1.40 7,635,000 $1.39 350,000 $0.36 Granted 4,624,102 2.55 280,000 1.74 7,520,000 1.41 Exercised (69,000) (185,000) 0.36 Cancelled (10,000) 8.25 Forefeited (50,000) 0.36 Expired Outstanding at end ---------- ----- --------- ----- --------- ----- of year 12,460,102 $1.42 7,905,000 $1.40 7,635,000 $1.39 ========== ===== ========= ===== ========= ===== Options exercisable at end of year 7,671,102 $1.28 4,155,000 $0.42 3,135,000 $0.35 ========= ===== ========= ===== ========= ===== Weighted average fair value of options granted during the year $ 0.53 $ 0.69 $ 0.44 ========== ========= =========
The above options include options granted to the Hebei Provincial Government to acquire 3,000,000 shares of the Company's common stock at a price of $3.0625 per share. These options vest 25% every six months from the date of grant. In connection with granting these options, $1,837,500 was recorded as a charge to Deferred Option Cost and a corresponding credit was made to Additional Paid in Capital. During fiscal 1998, Deferred Option Cost was amortized by $459,375. The above options do not include 318,182 options granted and subsequently canceled to Tweedia, a former affiliate. The Company followed the guidelines under SFAS No. 123 to determine the fair value of options at the date of grant. The value was determined using an adjusted Black-Scholes option pricing model. The Black-Scholes model is generally accepted as appropriate primarily for short-term, exchange-traded options. For longer term options that do not have the liquidity of an exchange traded option or where the underlying common stock is not highly liquid, the Black-Scholes formula needs to be adjusted, especially in reference to the volatility measurement used. The Company's stock is thinly traded, averaging around 100,000 shares per day, and cannot be considered highly liquid. For the purpose of valuing the Company's options, which have a ten year life, the following assumptions were used, where the volatility measurement was based on management's expectations and judgement: Risk-free rate 5.64% Volatility 20-23% Expected Life 5 years Expected Dividends 0% The following table summarizes information about options outstanding at March 31, 1998:
WEIGHTED NUMBER RANGE NUMBER AVERAGE EXERCISABE OF OUTSTANDING REMAINING AVERAGE OPTIONS AVERAGE EXERCISE AT CONTRACTUAL EXERCISE AT EXERCISE PRICES MARCH 31, 1998 LIFE (YEARS) PRICE MARCH 31, 1998 PRICE $0.35-0.355 4,625,000 8.11 0.350 4,625,000 0.350 0.75 250,000 10.00 0.750 125,000 0.750 1.5 520,102 9.00 1.500 145,102 1.500 2.125 1,055,000 10.00 2.125 523,500 2.125 3.000 3,010,000 9.00 3.000 1,502,500 3.000 3.05-3.10 3,000,000 9.00 3.0625 750,000 3.063 ---------- --------- 12,460,102 7,671,102 ========== =========
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:
1998 1997 Net loss applicable to common shares - as reported $(6,802,054) $(4,074,885) ============== ============ Net loss - pro forma $(8,635,367) $(4,268,970) ============== ============ Loss per common share - as reported $ (0.23) $ (0.14) ============== ============ Loss per common share share - pro forma $ (0.29) $ (0.15) ============== ============
7. NONREFUNDABLE DEPOSIT On March 31, 1998, the Company reduced loans payable of $850,000 related to a nonrefundable deposit it received from a former affiliate. Additional paid in capital was credited for an equal amount. 8. INCOME TAXES The Company had net losses for 1998, 1997 and 1996 and, therefore, no income taxes have been provided. As of March 31, 1998, the Company has federal net operating loss carry forwards of approximately $13,848,606 through 2012. Significant components of the Company's deferred assets and tax liabilities for federal income taxes consist of the following:
1998 1997 Deferred tax assets: Net operating loss carryforwards $ 6,394,688 $ 5,085,404 Start-up and other costs 3,027,575 2,360,307 Research credit 266,000 266,000 ------------- ------------- Total deferred tax assets 9,688,263 7,711,711 Valuation allowance for deferred tax assets (9,688,263) (7,711,711) ------------- ------------- Net deferred tax assets $ - $ - ============= =============
The net change in the valuation allowance for the years ended March 31, 1998 and 1997 was an increase of $1,976,552 and $3,249,171, respectively. 9. MAJOR CUSTOMERS During the year ended March 31, 1996, the Company's wholly-owned subsidiary, ITV, conducted business with two customers whose sales comprised substantially all of the Company's revenues. In January 1996, the Company sold substantially all of the assets related to that business. 10. SALE OF BUSINESS In January 1996, the Company sold the business and the related operating assets ("Asset Sale") in which its wholly-owned subsidiary, ITV, was engaged. The sale price was $2,500,000 (which consisted of $250,000 in cash and $2,250,000 in the form of a note receivable). In addition, the Company received an equity interest in another company, which was valued at $500,000. Due to the uncertainty of the collection of the $2,250,000 note receivable, the amount of the note has not been recognized. The gain associated with the note will be recognized when the note receivable is collected. The sale of the assets resulted in a gain from sale of the assets of $31,880. (See Note 14) The Company recorded $130,840 loss from abandoned assets during the year ended March 31, 1996 which was a non-recurring "write-off" of certain remaining assets of ITV that were not sold in the ITV Asset Sale. The Company wrote off the $130,840 book value because these assets would not contribute to the generation of revenues for the Company in the future and thus were considered impaired assets. 11. INVESTMENT IN NETMATICS The Company held a 39% (as of March 31, 1997) ownership interest in Netmatics, Inc. ("Netmatics"), which it acquired in January 1996 in connection with the sale by the Company of the ITV business and operating assets. In fiscal 1996, the Company suspended the equity method of accounting for its investment in Netmatics when the Company's share of losses equaled the carrying amount of the investment. In fiscal 1996, the Company's share of Netmatics' loss charged to operations was $500,000. During fiscal 1997, the Company advanced $12,000 to and purchased $186,538 of debentures from Netmatics. Such amounts were written-off as of March 31, 1997. The Company is not required either contractually or otherwise to fund any additional losses of Netmatics or make any additional capital investments. In addition, the Company has not guaranteed any of Netmatics debt. Due to its poor operating results, huge accumulated losses and lack of financing, Netmatics Inc. ceased operation as of March 31, 1997. The Company considered its receivable from Netmatics Inc. not recoverable and wrote off the advance and debentures due from Netmatics. 12. RELATED PARTY TRANSACTIONS (SEE NOTE 6 REGARDING THE CANCELLATION OF THE 12,727,909 SHARES OF COMMON STOCK AND THE MASTER AGREEMENT) GENERAL - In February 1995, pursuant to a Reorganization Agreement, Tweedia International, Ltd. became the owner of approximately 12,727,909 shares, or 41%, of the Company's issued and outstanding Common Stock. The Company was informed that Beijing CATCH Communications Group Co. ("Beijing CATCH") has an option to acquire 100% of the outstanding capital stock of Tweedia. However, this option may not be exercised without the receipt by Beijing CATCH of all PRC regulatory approvals applicable to such exercise. After discussions with PRC counsel, management believes that these approvals to own securities listed on nonPRC stock exchanges are substantive in nature and are not normally readily obtained in the PRC. As of December 21, 1995, pursuant to the terms of a Master Agreement and Right of First Refusal (the "Master Agreement"), Beijing CATCH agreed to grant the Company a right of first refusal to participate as a majority investor and provide financial, operating and technical consulting services with respect to all rights granted, sold, licensed, or otherwise transferred to Beijing CATCH, directly or indirectly, that relate to the construction, operation or acquisition of any type of telephony, telecommunications, equipment, paging equipment or related forms of communication in the PRC. As consideration for this right of first refusal, the Company agreed to issue up to 50,000,000 shares of Common Stock to Tweedia based on the receipt of certain agreed upon amounts of net income by the Company relating to prospective Sino-foreign joint ventures involving the Company and Beijing CATCH. The Master Agreement supersedes certain terms of other prior agreements between the Company and Beijing CATCH concerning cooperation on telecommunications projects. The Company has not entered into, and management has no current intent of entering into, any Sino-foreign joint ventures with Beijing CATCH under the terms of the Master Agreement. As a result, no obligation for future issuances of Common Stock to Beijing CATCH under the Master Agreement exist or are contemplated. At the time of the Company's acquisition of the majority stake, Hebei Development held a 30% ownership of Hebei Equipment and Beijing CATCH held subscription rights to 9.2% ownership of Hebei Equipment. Subsequent to Hebei Equipment's conversion to a Sino-Foreign joint venture company, Beijing CATCH defaulted on its required capital contribution. On April 22, 1997, the Board of Directors of Hebei Equipment resolved to terminate Beijing CATCH's ownership participation in Hebei Equipment, and the Company and Hebei Development agreed to provide to Hebei Equipment the amount defaulted on by Beijing CATCH. (See Note 2 as to the Company's acquisition of Beijing Catch's interest.) 13. ITEMS RECORDED IN THE FOURTH QUARTER The Company recorded the following noncash items in the fourth quarter: Preferred stock dividends payable in the form of common stock of $1,399,000; A value of stock options awarded to non employees of $1,837,500 was recognized and $459,375 of such value was amortized, and Professional fees were reduced by $147,000 as a result of the cancellation of 200,000 warrants issued to an investment-banking firm. 14. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEAR 1996 In January 1996, the Company sold all of the business and operating assets of ITV. Prior to sale, ITV was engaged in the design, manufacture and sale of technologically advanced communication devices. Subsequent to the issuance of the Company's financial statements for the year ended March 31, 1998, the Company's management determined that the sale of ITV's business should have been accounted for using accounting for discontinued operations. Previously, the result of ITV's business was included in the financial statements as part of continuing operations for the year ended March 31, 1996. As a result, the Statement of Operations and Statement of Cash Flow for the year ended March 31, 1996, have been restated to show the discontinued operations. A summary of the significant effects of the restatement is as follows:
CONSOLIDATED STATEMENTS OF OPERATIONS FOR YEAR ENDED MARCH 31, 1996 1996 ---- ---- AS PREVIOUSLY AS REPORTED RESTATED REVENUES $ 683,733 $ - --------------- --------------- EXPENSES: Cost of revenues 637,065 - Selling, general and administrative 3,207,570 2,515,554 Research and development 1,287,629 - --------------- --------------- Total expenses 5,132,264 2,515,554 --------------- --------------- LOSS FROM CONTINUING OPERATIONS (4,448,531) (2,515,554) --------------- --------------- OTHER INCOME (EXPENSE): Gain from sale of assets 31,880 - Loss from abandoned assets (130,840) (130,840) Interest expense (241,856) (241,856) Other - net 7,617 7,617 --------------- --------------- Total other expense (333,199) (365,079) --------------- --------------- LOSS FROM CONTINUING OPERATIONS BEFORE EQUITY IN LOSSES OF UNCONSOLIDATED SUBSIDIARY (4,781,730) (2,880,633) Equity in losses of unconsolidated subsidiary (500,000) (500,000) ---------------- -------------- LOSS FROM CONTINUING OPERATIONS (5,281,730) (3,380,633) ---------------- --------------- DISCONTINUED OPERATIONS: Loss from discontinued operations - (1,932,977) Gain on sale of discontinued operations - 31,880 --------------- --------------- LOSS FROM DISCONTINUED OPERATIONS - (1,901,097) --------------- --------------- NET LOSS (5,281,730) (5,281,730) PREFERRED STOCK DIVIDEND - - --------------- --------------- LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (5,281,730) $ (5,281,730) =============== =============== BASIC LOSS PER SHARE: Loss from continuing operations $ (0.21) $ (0.13) Loss from discontinued operations - (0.08) --------------- --------------- BASIC LOSS PER COMMON SHARE $ (0.21) $ (0.21) =============== =============== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 25,651,045 25,651,045 =============== ===============
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEAR ENDED MARCH 31, 1996 1996 ---- ---- AS PREVIOUSLY AS REPORTED RESTATED CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,281,730) $ (5,281,730) Add: Loss from discontinued operations - 1,932,977 Less: Gain from sales of discontiued operations - (31,880) --------------- --------------- Net loss from continuing operations (5,281,730) (3,380,633) Adjustments to reconcile net loss to net cash used in Continuing operating activities: Amortization of capitalized software development cost 281,250 - Depreciation 346,005 19,404 Loss from abandoned assets 130,840 130,840 Gain from sale of assets (31,880) - Equity in losses of unconsolidated subsidiary 500,000 500,000 (Increase) decrease in: Accounts receivable 98,895 - Inventories (96,091) - Prepaid expenses and other current assets (91,200) (41,813) Office lease deposit - (167,200) Other assets (131,887) - Increase (decrease) in: Accounts payable and accrued expenses 1,251,464 1,251,464 Loans payable - stockholders 136,982 136,982 --------------- --------------- Net cash used in continuing operations (2,887,352) (1,550,956) Net cash used in discontinued operations - (1,336,396) --------------- --------------- Net cash used in operating activities (2,887,352) (2,887,352) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (119,592) (119,592) Investment in unconsolidated subsidiary (1,170,000) (1,170,000) Proceeds from sale of assets 250,000 250,000 --------------- --------------- Net cash used in investing activities (1,039,592) (1,039,592) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings 739,952 739,952 Proceeds from sale of common stock 2,193,983 2,193,983 --------------- --------------- Net cash provided by financing activities 2,933,935 2,933,935 --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (993,009) (993,009) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,178,898 1,178,898 --------------- --------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 185,889 $ 185,889 =============== ===============
15. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEARS 1998 AND 1997 Subsequent to the issuance of the Company's financial statements for the year ended March 31, 1998, the Company's management determined that Hebei Equipment, should have been accounted for under the equity method of accounting, as the minority shareholders have substantive participating rights under the joint venture contracts. Previously, Hebei Equipment had been consolidated. As a result, the financial statements as of March 31, 1998 and 1997, and for the two years ended March 31, 1998, have been restated from amounts previously reported to account for Hebei Equipment under the equity method of accounting. A summary of the significant effects of the restatement is as follows:
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 1998 1997 1997 ---- ---- ---- ---- AS AS PREVIOUSLY AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ASSETS CURRENT ASSETS Cash $10,442,334 $2,134,662 $5,390,871 $1,346,713 Accounts receivable 114,661 114,661 - - Prepaid expenses and other current assets 356,554 108,082 182,090 171,921 ----------- ---------- ----------- --------- TOTAL CURRENT ASSETS 10,913,549 2,357,405 5,572,961 1,518,634 Investment in unconsolidated subsidiary - 5,074,217 1,192,000 2,221,476 Property, plant & equipment, net 897,265 139,136 518,020 153,356 Investment in GSM network, net of amortization 28,461,810 - 22,017,869 - Office lease deposit 113,180 112,600 111,500 111,500 Deferred expenses 6,916 - 5,853 - ----------- ---------- ----------- --------- TOTAL ASSETS $40,392,720 $7,683,358 $29,418,203 $4,004,966 =========== ========== ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $551,705 $541,888 $991,194 $261,193 Accrued expenses 798,376 792,006 780,902 782,132 Loans payable - shareholders 1,452,553 1,452,553 2,413,553 2,413,553 Other current payables 10,234,872 - 450,685 - ----------- ---------- ----------- --------- TOTAL CURRENT LIABILITIES $13,037,506 $2,786,447 4,636,334 $3,456,878 Loans payable 20,028,602 - 11,956,486 - Other payables 1,487,727 - 10,290,128 - Minority interest 941,974 - 1,987,167 - ----------- ---------- ----------- --------- TOTAL LIABILITIES 35,495,809 2,786,447 28,870,115 3,456,878 STOCKHOLDERS' EQUITY Preferred Stock: authorized 10,000,000 shares: Series A Convertible Preferred Stock: $.001 par value; 0 and 1,524,178 shares issued and outstanding in 1998 and 1997, respectively - - 1,524 1,524 Series D Convertible Preferred Stock: $.001 par value; 0 and 150 shares issued and outstanding in 1998 and 1997, respectively - - 1 1 Series E Convertible Preferred Stock: $.001 par value; 73 and 0 shares issued and outstanding in 1998 and 1997, respectively 1 1 - - Common stock: $.001 par value, authorized 100,000,000 shares; 26,532,502 and 31,257,921 issued and outstanding in 1998 and 1997, respectively 26,533 26,533 31,258 31,258 Additional paid-in capital 33,148,529 33,149,142 25,202,108 25,200,877 Accumulated deficit (27,394,590) (27,394,590) (20,592,536) (20,592,536) Cumulative foreign currency exchange loss 613 - (1,231) - Non-refundable equipment purchase deposit - - (4,572,536) (4,572,536) Non employee deferred option cost, net (1,378,125) (1,378,125) - - Warrants 493,950 493,950 479,500 479,500 ----------- ---------- ----------- --------- TOTAL STOCKHOLDERS' EQUITY 4,896,911 4,896,911 548,088 548,088 ----------- ---------- ----------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $40,392,720 $7,683,358 $29,418,203 $4,004,966 =========== ========== =========== ==========
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998 1998 1997 1997 ---- ---- ---- ---- AS AS PREVIOUSLY AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED Revenues $ 216,348 $ - $ - $ - -------------- ------------- ------------- --------- Expenses: Cost of revenues Selling, general and administrative 4,254,009 4,282,613 3,996,151 3,563,568 Amortization of GSM networks 2,183,068 - - - -------------- ------------- ------------- --------- 6,437,077 4,282,613 3,996,151 3,563,568 -------------- ------------- ------------- --------- Loss from operations (6,220,729) (4,282,613) (3,996,151) (3,563,568) -------------- ------------- ------------- --------- Other income (expense) Rental income 95,667 - 42,420 - Interest income 239,067 - 152,824 - Amortization stock options granted non employees (459,375) (459,375) - - Loss from abandoned assets (87,441) - - - Interest expense (125,586) (125,586) (129,039) (129,039) Exchange loss (3,484) - (19,490) - Other - net 113,320 70,853 - (33,216) Write off investment in affiliate - - (198,538) (198,538) -------------- ------------- ------------- --------- Total other income (expense) (227,832) (514,108) (151,823) (360,793) -------------- ------------- ------------- --------- Loss before minority interest and equity interest (6,448,561) (4,796,721) (4,147,974) (3,924,361) Equity in losses of unconsolidated subsidiary - (606,647) - (140,524) Minority interest in loss of subsidiaries 1,045,193 - 83,089 - -------------- ------------- ------------- --------- Net loss (5,403,368) (5,403,368) (4,064,885) (4,064,885) Preferred stock dividend 1,398,686 1,398,686 10,000 10,000 -------------- ------------- ------------- --------- Loss applicable to common shareholders $ (6,802,054) $ (6,802,054) $ (4,074,885) $(4,074,885) ============== ============ ============= ============ Basic loss per common share $ (0.23) $ (0.23) $ (0.14) $ (0.14) ============== ============ ============= ============ Weighted average common shares outstanding 29,843,712 29,843,712 29,102,347 29,102,347 ============== ============ ============= ============
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEAR ENDED MARCH 31, 1998 1998 1997 1997 ---- ---- ---- ---- As previously As As preivously As Reported Restated Reported Restated CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(5,403,368) $(5,403,368) $ (4,064,885) $(4,064,885) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred option cost 459,375 459,375 - - Depreciation and amortization of GSM investment 2,274,443 43,432 43,193 28,905 Loss from abandoned assets 87,441 87,441 - - Minority interest in net loss - - 83,089 - Issuance of warrants for services rendered - - 479,500 479,500 Issuance of common stock and options for directors' fees and professional services rendered 151,957 151,957 725,091 725,091 Equity in losses of unconsolidated subsidiary - 606,647 - 140,524 (Increase) decrease in: Accounts receivable (114,661) (114,661) - - Inventories - - - - Prepaid expenses and other current assets (174,464) 63,839 5,948,801 (111,243) Office lease deposit (1,680) (1,100) 55,700 55,700 Other assets - - - - Deferred expenses (1,063) - 59,412 - Increase (decrease) in: Accounts payable and accrued expenses (422,015) 293,027 98,221 (485,959) Other current payable 9,784,187 - - - Loans payable - stockholders (111,000) (111,000) 129,839 (150,000) Minority interest (1,045,193) - - - ------------ ----------- ---------- --------- Net cash provided by (used in) operating activities 5,483,959 (3,924,411) 3,557,961 (3,382,367) ------------ ----------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Netmatics (87,441) (87,441) - - Purchase of property and equipment (470,620) (29,212) (362,417) (106,028) Investment in unconsolidated subsidiary - (276,000) 1,170,000 (654,000) GSM construction cost (8,627,007) - (21,880,584) - Joint venture's net liabilities assumed - - 6,549,703 - Timing reversal of investment in unconsolidated 1,192,000 - (1,192,000) - ------------ ----------- ---------- --------- Net cash used in investing activities (7,993,068) (392,653) (15,715,298) (760,028) ------------ ----------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Warrants issued for services rendered - net of charges to APIC Borrowings (215,546) (215,546) - - Borrowings 8,072,116 - 11,521,100 - Other long-term payables (8,802,401) - - - Loans payable to stockholders 25,000 25,000 - - Advance to joint venture partner (540,000) (3,724,000) - (538,000) Proceeds from sale of common stock 166,659 166,659 2,000,000 2,000,000 Proceeds from sale of Series B convertible preferred stock - - 2,341,219 2,341,219 Proceeds from sale of Series D convertible preferred stock - - 1,500,000 1,500,000 Proceeds from sale of Series C convertible preferred stock - net 2,093,900 2,093,900 - - Proceeds from sale of Series E convertible preferred stock 6,759,000 6,759,000 - - ------------ ----------- ---------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 7,558,728 5,105,013 17,362,319 5,303,219 ------------ ----------- ---------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,844 - - - ------------ ----------- ---------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,051,463 787,949 5,204,982 1,160,824 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,390,871 1,346,713 185,889 185,889 ------------ ----------- ---------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $10,442,334 $2,134,662 $5,390,871 $1,346,713 ============ =========== ========== ===========
16. SELECTED QUARTERLY DATA (UNAUDITED) The following table sets forth selected quarterly financial information beginning October 1,1996 (the period when AmTec first started consolidating the operating results of its Hebei Investments) through March 31, 1998:
Three Months Ended Three Months Ended December 31, 1996 March 31, 1997 --------------------------- --------------------------- As As Previously As Previously As Reported Restated Reported Restated Revenue $ - $ - $ - $ - Expenses 999,947 845,324 1,133,023 1,099,429 Loss from Operations (999,947) (845,324) (1,133,023) (1,099,429) Other Income(Expense) (504,153) (3,313) 534,164 (230,998) Equity in Loss of Unconsolidated Subsidiaries (115,061) (347,163) - 226,845 Minority Interest in Loss of Subsidiaries 423,361 - (504,723) - Net Loss (1,195,800) (1,195,800) (1,103,582) (1,103,582) Preferred Stock Dividend - - 10,000 10,000 Loss Applicable to Common Share (1,195,800) (1,195,800) (1,113,582) (1,113,582) Basic Loss per Common Share (0.04) (0.04) (0.04) (0.04)
Three Months Ended Three Months Ended June 30, 1997 September 30, 1997 --------------------------- --------------------------- As As Previously As Previously As Reported Restated Reported Restated Revenue $ - $ - $ - $ - Expenses 2,369,632 1,100,148 553,147 1,279,350 Loss from Operations (2,369,632) (1,100,148) (553,147) (1,279,350) Other Income(Expense) (21,017) (30,200) (169,484) (118,174) Equity in Loss of Unconsolidated Subsidiaries - (461,879) - 198,172 Minority Interest in Loss of Subsidiaries 798,422 - (476,721) - Net Loss (1,592,227) (1,592,227) (1,199,352) (1,199,352) Preferred Stock Dividend 108,000 108,000 - - Loss Applicable to Common Share (1,700,227) (1,700,227) (1,199,352) (1,199,352) Basic Loss per Common Share (0.05) (0.05) (0.04) (0.04)
Three Months Ended Three Months Ended December 31, 1997 March 31, 1998 --------------------------- --------------------------- As As Previously As Previously As Reported Restated Reported Restated Revenue $ - $ - $ 216,348 $ - Expenses 1,207,104 911,314 2,307,194 1,451,176 Loss from Operations (1,207,104) (911,314) (2,090,846) (1,451,176) Other Income(Expense) 21,339 54,487 (58,670) 39,154 Equity in Loss of Unconsolidated Subsidiaries - (56,567) - (286,374) Minority Interest in Loss of Subsidiaries 272,371 - 451,120 - Net Loss (913,394) (913,394) (1,698,396) (1,698,396) Preferred Stock Dividend 114,891 114,891 1,175,795 1,175,795 Loss Applicable to Common Share (1,028,285) (1,028,285) (2,874,191) (2,874,191) Basic Loss per Common Share (0.04) (0.04) (0.10) (0.10)
17. CHINA CONTINGENCY (UNAUDITED) The current PRC regulations prohibit foreign investors and foreign invested enterprises from operating or participating in the operation of telecommunications networks in China. The relevant PRC laws and regulations do not define what constitutes foreign operations or participation in operations, and it is not clear what rights or actions would violate such laws and regulations. Based on advice of its Chinese legal counsel, the Company has structured its investments in China by establishing Chinese-foreign joint ventures in the PRC to provide financing and consultancy services to licensed telecommunications operators, i.e., utilizing the commonly-known Chinese-Chinese-Foreign ("CCF") structure. The PRC Government is currently undertaking a review of the CCF structure used by Unicom. It has been reported that Unicom has been instructed by the PRC Government not to use the CCF structure in the future and that the PRC Government is examining and evaluating the existing CCF contracts. It is unclear if, and to what extent, the existing CCF contracts entered into by Unicom will be required to be amended. It is also unclear whether foreign entities involved in the CCF structures will be required to divest themselves of their respective interests in the Chinese-foreign joint venture companies. The evaluation of the CCF structure by the PRC Government may have a material adverse impact on the contracts entered into by Hebei Engineering and by the Company which utilize the CCF structure and may have a material adverse effect on the Company's business, financial condition and results of operations. In order to provide a uniform regulatory framework to encourage the orderly development of the PRC telecommunications industry, the PRC authorities are currently preparing a draft Telecommunications Law. Once formulated, the draft law will be submitted to the National People's Congress for review and adoption. It is unclear if and when the Telecommunications Law will be adopted. The nature and the scope of the regulation envisaged by the Telecommunications Law is not fully known but the Company believes that, if adopted, the Telecommunications Law will have a positive effect on the overall development of the telecommunications industry in the PRC. However, the Telecommunications Law, if adopted, may have an adverse effect on the Company's business, financial condition or results of operations. The Chinese laws and regulations governing the telecommunications industry may also be changed or applied in a manner which would have a material adverse effect on the business, financial condition and results of operations of the Company. Each of the Company's joint ventures, Hebei Equipment and Hebei Engineering, is organized under the laws of the PRC as a Sino-foreign equity joint venture enterprise, a distinct legal entity with limited liability. Such entities are governed by the Law of the PRC on Joint Ventures Using Chinese and Foreign Investments, and implementing regulations related thereto. The parties to an equity joint venture have rights to the financial returns of the joint venture in proportion to the joint venture interests that they hold. The operation of equity joint ventures is subject to an extensive body of law governing such matters as formation registration, capital contribution, capital distributions, accounting, taxation, foreign exchange, labor and liquidation. The transfer or increase of an interest in a Sino-foreign equity joint venture enterprise requires agreement among the parties to the venture and is effective upon approval of relevant government agencies. (See Note 2) INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. We have audited the accompanying balance sheets of Hebei United Telecommunications Equipment Co., Ltd. as of December 31, 1997 and the related statements of operations, investors' equity and cash flows for the period from April 29, 1997 (commencement of operations) to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Hebei United Telecommunications Equipment Co., Ltd. as of December 31, 1997 and the results of its operations and its cash flows for the period from April 29, 1997 (commencement of operations) to December 31, 1997 in conformity with accounting principles generally accepted in the United States of America. Deloitte Touche Tohmatsu Beijing, People's Republic of China June 11, 1998 HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. BALANCE SHEET DECEMBER 31, 1997 December 31, --------------- 1997 --------------- RMB ASSETS Current Assets: Cash and cash equivalents 39,500,312 Other receivables 1,102,753 --------------- Total current assets 40,603,065 Property and equipment, net 493,430 Investment in Joint Venture 4,383,750 --------------- Total Assets 45,480,245 =============== LIABILITIES AND INVESTORS' EQUITY Current Liabilities: Amount due to an investor 30,808,631 Other payables 32,925 --------------- Total current liabilities 30,841,556 --------------- Total Liabilities 30,841,556 --------------- Commitment and Contingency Investors' equity: Capital contribution 24,923,218 Accumulated deficit (10,284,529) --------------- Total Investors' equity 14,638,689 --------------- Total Liabilities and Investors' Equity 45,480,245 =============== See notes to financial statements HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. STATEMENT OF OPERATIONS FOR THE PERIOD FROM APRIL 29, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997 April 29, 1997 (commencement of operation) to December 31, 1997 ------------------ RMB General and administrative expenses (758,658) Other (expense) income: Operation set up expense (2,000,000) Equity in losses of Joint Venture (8,347,533) Exchange loss (24,680) Interest income 846,342 ------------------ Net loss (10,284,529) ================== See notes to financial statements HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. STATEMENTS OF INVESTORS' EQUITY AT DECEMBER 31, 1997
Capital Accumulated Contribution Deficit Total --------------- -------------- ------------- RMB RMB RMB Balance, April 29, 1997 - - - Capital contribution 24,923,218 - 24,923,218 Net loss - (10,284,529) (10,284,529) --------------- -------------- ------------- Balance, December 31, 1997 24,923,218 (10,284,529) 14,638,689 =============== ============== =============
See notes to financial statements HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM APRIL 29, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997 April 29.1997 (commencement of operations) to December 31, 1997 ----------------- RMB Cash flows from operating activities: Net loss (10,284,529) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 37,928 Equity in losses of Joint Venture 8,347,533 Changes in assets and liabilities: Other receivables (1,102,753) Other payables 32,925 ----------------- Net cash provided by operating activities (2,968,896) ----------------- Cash flows from investing activities: Additions of property and equipment (531,358) ----------------- Net cash used in investing activities (531,358) ----------------- Cash flow from financing activities: Amount due to an investor 30,808,631 Capital contribution 12,191,935 ----------------- Net cash provided by financing activities 43,000,566 ----------------- Net increase in cash and cash equivalents 39,500,312 Cash and cash equivalents, beginning of period - ----------------- Cash and cash equivalents, end of period 39,500,312 ================= Non-cash transactions: During the period ended December 31, 1997, DEVELOPMENT CO. and CATCH contributed their interest in a Joint Venture valued at RMB 12,731,283 into the Company as capital contribution. See notes to financial statements HEBEI UNITED TELECOMMUNICATIONS EQUIPMENT CO., LTD. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION The Company was established on April 29, 1997 as a limited liability joint venture company in the People's Republic of China ("PRC"). The period of operation is twenty years. The registered capital of the Company was US$3 million, of which 60.8% (US$ 1.824 million) was contributed by AmTec, Inc. (formerly known as AVIC Group International, Inc.), 9.2% (US$ 276,000) by CATCH Telecommunication Co., Ltd. (the "CATCH") and 30% (US$ 900,000) by Hebei United Telecommunications Development Co., Ltd. (the "DEVELOPMENT CO."). On November 7, 1997, CATCH agreed to transfer its interest in the Company to AmTec, Inc. Subsequent to the transfer (which occurred after December 31, 1997), AmTec, Inc. owns 70% (US$ 2.1 million) and DEVELOPMENT CO. owns 30% (US$900,000) of the Company's registered capital. The Company's major activity to date is an investment in a Chinese joint venture which is mainly engaged in the development and construction of telecommunication systems, and providing related technical consulting and repair services. 2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). This basis of accounting differs from that used in the statutory financial statements of the Company, which are required to be prepared in accordance with the accounting principles and relevant financial regulations as established by the Ministry of Finance of the PRC. The principal adjustments made to conform the statutory financial statements of the Company to US GAAP included the following: - Adjustment to write off organization and operation set up expenses. - Adjustment to write off exchange loss. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies which have been adopted in preparing the financial statements set out in this report, and which conform with accounting principles generally accepted in the United States of America are as follows: Cash and cash equivalents - Cash and cash equivalents include cash on hand, demand deposits and highly liquid instruments with a maturity of three months or less at the time of purchase. Property and equipment - Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method to write off the cost of property and equipment, net of the estimated residual value of 10% of cost, over their estimated useful lives as follows: Furniture, fixture and equipment 5 years Motor vehicles 5 years Long lived assets - The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the net carrying amount may not be recoverable. When such events occur, the Company measures impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss. The impairment loss, if determined, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Investment in Joint Venture - Hebei Equipment owns 51% of Hebei United Telecommunications Engineering Company, Ltd. ("Hebei Engineering"). Hebei Equipment accounts for its investment using equity method of accounting as minority shareholders of Hebei Engineering have substantive participating rights under the joint venture contracts. Under the equity method, the investment is carried at cost of acquisition, plus Hebei Equipment's equity in undistributed earnings or losses since acquisition. Equity in the losses of the unconsolidated subsidiary is recognized according to the Company's percentage ownership in the unconsolidated subsidiary until the Company contributed capital has been fully depleted. Income tax - Deferred income taxes are provided for using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. The tax consequences of those differences are classified as current or non-current based upon the classification of the related assets or liabilities in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized. Foreign currency translation - The Company's financial statements are prepared using Renminbi as the reporting currency. Foreign currency transactions are translated at the rates ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the rates ruling on the balance sheet date. Exchange gains and losses are reported in the statement of operation. Concentration of credit risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company places its temporary cash investments with various financial institutions in the PRC. The Company believes that no significant credit risk exists as these investments are made with high-credit, quality financial institutions. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosures of contingent assets and liabilities in the financial statements and recorded amounts of revenue and expenses during the period . Actual results could differ from these estimates. Fair value of financial instruments - The carrying values of cash and cash equivalents, other receivables, other payables, and amount due to an investor approximate fair value because of the short maturity of these instruments. Comprehensive Income - In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." This statement is effective for financial statements issued for periods beginning after December 15, 1997. Management is evaluating the effect on its financial reporting of the adoption of this statement. Segments of an Enterprise and Related Information - In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This statement is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires the reporting of profit and loss, specific revenue and expense items, and assets for reportable segments. It also requires the reconciliation of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments, in each case to the corresponding amounts in the general purpose financial statements. The Company has not yet determined what additional disclosures may be required in connection with adopting SFAS 131. New accounting standard not yet adopted - The Financial Accounting Standards Board has issued a new standard SFAS No. 133 "Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after June 15, 1999. Management has not yet completed the analysis of the impact this would have on the financial statements of the Company and has not adopted this standard. 4. OPERATION SET UP EXPENSE Amount represents payment to CATCH for services provided in connection with the formation of the Company. 5. INCOME TAX The statutory income tax rate of the Company is 33%. There is no provision for the income taxes during the period from April 29, 1997 (commencement of operation) to December 31, 1997 as the Company incurred losses during the relevant periods. Deferred tax assets of RMB639,209 existed as at the end of 1997, arising from a temporary difference. A valuation allowance has been fully provided against the deferred tax assets since it is considered more likely than not that all of the deferred assets will not be realized. Deferred tax assets are composed of the following: December 31, -------------- 1997 --------------- RMB Operation set up expense 660,000 Organization expenses (60,980) Exchange gain/loss 8,144 Other deferred assets written off 32,045 Valuation allowance (639,209) --------------- - =============== 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following: December 31, -------------- 1997 --------------- RMB At cost: Furniture, fixtures and equipment 233,958 Motor vehicles 297,400 --------------- 531,358 Less: Accumulated depreciation 37,928 --------------- 493,430 =============== All assets are located in the PRC. 7. INVESTMENT IN A JOINT VENTURE Hebei Equipment holds a 51% interest in Hebei Engineering, which is developing GSM networks in the ten largest cities in Hebei Province, PRC. Nippon Telegraph and Telephone International, Inc. ("NTT") and Itochu Corporation hold the remaining 49% interest in Hebei Engineering. Hebei Equipment's investment in the joint venture were accounted for by the equity method of accounting because minority shareholders of Hebei Engineering have substantive participating rights under the provision of the Joint Venture contracts.(See Note 3) December 31, -------------- 1997 -------------- RMB Cost 12,731,283 Less: Share of losses (8,347,533) --------------- 4,383,750 ============== Hebei Engineering is a Sino-foreign equity joint venture established on January 31, 1996 in the PRC. The period of operation is twenty-five years. The registered capital of the Company is US$ 3 million. The Company is mainly engaged in the development and construction of telecommunication systems, and providing related technical consulting services. The summarized balance sheet of Hebei Engineering as of December 31, 1997 and its summarized statement of operations for the year ended December 31, 1997 are as follows: Balance Sheet December 31, 1997 --------------- RMB ASSETS Current Assets 30,233,253 Other assets 5,840,362 Investment in GSM networks 235,635,325 --------------- Total Assets 271,708,940 =============== LIABILITIES AND INVESTORS' EQUITY Current liabilities 85,938,393 Long-term Liabilities: 177,052,277 --------------- Total Liabilities 262,990,670 --------------- Investors' equity 8,718,270 --------------- Total Liabilities and Investors' Equity 271,708,940 =============== Statement of operations Year ended December 31, 1997 --------------- RMB Net revenue from GSM networks 1,706,499 Total expenses (20,348,240) --------------- Net loss from operations (18,641,741) Total other income, net 2,274,029 --------------- Net loss (16,367,712) =============== 8. AMOUNT DUE TO AN INVESTOR Amount represents funds advanced to Hebei Equipment by AmTec, Inc. These amounts are payable on demand and bear no interest. The guarantee fees paid and payable to NTT and ITOCHU by Hebei Engineering represent fees payable to them for providing a guarantee to a GSM supplier and a bank in favor of Hebei Engineering. 9. CAPITAL CONTRIBUTION December 31, 1997 ---------------------------------- Ownership RMB Capital contributed by: DEVELOPMENT CO. 30% 7,480,150 AmTec Inc. 70% 17,443,068 --------------- ---------------- 100% 24,923,218 =============== ================ 10. COMMITMENTS The Company leases certain buildings under operating leases, which expire through March 1999. Rental expense under operating leases was RMB 62,580 in 1997. The aggregate annual minimum operating lease commitments under all non-cancellable leases at December 31, 1997 is as follows: December 31, --------------- 1997 --------------- RMB 1998 100,100 1999 16,700 --------------- 116,800 =============== 11. RETIREMENT BENEFITS The Company's retired employees are entitled to a retirement pension calculated with reference to their basic salaries on retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to these retired employees. The Company is required to make contributions to the state retirement plan at rates ranging from 18% to 20% of the adjusted monthly basic salaries of the current employees. The expense of such arrangements to the Company was insignificant for the period presented. The Company is not obligated under any other post-retirement plans and post-employment benefits are not material. INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. We have audited the accompanying balance sheets of Hebei United Telecommunications Engineering Co., Ltd. as of December 31, 1997 and 1996 and the related statements of operations, investors' equity and cash flows for the years ended December 31, 1997 and the period from January 31, 1996 (commencement of operations) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Hebei United Telecommunications Engineering Co., Ltd. as of December 31, 1997 and 1996 and the results of its operations and its cash flows for the year ended December 31, 1997 and the period from January 31, 1996 (commencement of operations) to December 31, 1996 in conformity with accounting principles generally accepted in the United States of America. Deloitte Touche Tohmatsu Beijing, People's Republic of China June 11, 1998 HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. BALANCE SHEETS DECEMBER 31, 1996 AND 1997 December 31 ------------------------------ 1997 1996 ------------- ------------- RMB RMB ASSETS Current Assets: Cash and cash equivalents 29,278,905 33,383,491 Short-term investment - 270,300 Other receivables 954,348 84,694 ------------- ------------- Total current assets 30,233,253 33,738,485 Property and equipment, net 5,783,117 3,037,067 Deferred assets 57,245 48,744 Investment in GSM networks 235,635,325 183,373,618 ------------- ------------- Total Assets 271,708,940 220,197,914 ============= ============= LIABILITIES AND INVESTORS' EQUITY Current Liabilities: Amount due to investors 997,597 - Other payables 84,888,076 9,808,654 Accrued expenses 52,720 24,560 ------------- ------------- Total current liabilities 85,938,393 9,833,214 ------------- ------------- Long-term Liabilities: Long-term loans 165,816,800 99,578,400 Other payables 11,235,477 85,700,318 ------------- ------------- 177,052,277 185,278,718 ------------- ------------- Total Liabilities 262,990,670 195,111,932 ------------- ------------- Commitment and Contingency Investors' equity: Capital contribution 24,963,300 24,963,300 Capital reserve (4,800) (4,800) (Accumulated deficit) retained earnings (16,240,230) 127,482 ------------- ------------- Total investors' equity 8,718,270 25,085,982 ------------- ------------- Total Liabilities and Investors' Equity 271,708,940 220,197,914 ============= ============= See notes to financial statements HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 January 31, 1996 Year ended (commencement December 31, of operations) 1997 to December 31, 1996 -------------- ---------------- RMB RMB Net revenue from GSM networks 1,706,499 - -------------- ---------------- Expenses: General and administrative expenses (2,222,446) (1,340,568) Amortization of GSM networks (18,125,794) - -------------- ---------------- Total expenses (20,348,240) (1,340,568) -------------- ---------------- Net loss from operations (18,641,741) (1,340,568) -------------- ---------------- Other income (expense) : Rental income, net 736,965 352,724 Other income, net 250,000 - Interest income 1,328,727 1,277,390 Exchange loss (41,663) (162,064) -------------- ---------------- Total other income (expense) 2,274,029 1,468,050 -------------- ---------------- Net (loss) income (16,367,712) 127,482 ============== ================ See notes to financial statements HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. STATEMENTS OF INVESTORS' EQUITY AT DECEMBER 31, 1996 AND 1997
(Accumulated Capital Capital deficit) contribution reserve retained Total earnings ------------- ------------- --------------- --------------- RMB RMB RMB RMB Balance, January 31, 1996 - - - - Capital contribution 24,963,300 - - 24,963,300 Exchange difference on capital contribution - (4,800) - (4,800) Net income - - 127,482 127,482 ------------- ------------- --------------- --------------- Balance, December 31, 1996 24,963,300 (4,800) 127,482 25,085,982 Net loss - - (16,367,712) (16,367,712) ------------- ------------- --------------- --------------- Balance, December 31, 1997 24,963,300 (4,800) (16,240,230) 8,718,270 ============= ============= =============== ===============
See notes to financial statements HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
January 31, 1996(commencement Year ended of December 31, operations) 1997 to December 31, 1996 -------------- --------------- RMB RMB Cash flows from operating activities: Net (loss) income (16,367,712) 127,482 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Loss on disposals of equipment 9,407 - Depreciation 358,278 119,003 Amortization of investment in GSM networks 18,125,794 - Changes in assets and liabilities: Other receivables (869,654) (84,694) Other payables 369,218 324,892 Accrued expenses 28,160 24,560 -------------- --------------- Net cash provided by operating activities 1,653,491 511,243 -------------- --------------- Cash flows from investing activities: Short-term investment 270,300 (270,300) Additions of property and equipment (3,113,736) (3,156,070) Increase in deferred assets (8,500) (48,744) Investment in GSM networks (69,144,541) (88,189,538) -------------- --------------- Net cash used in investing activities (71,996,477) (91,664,652) -------------- --------------- Cash flow from financing activities: Proceeds from loans 66,238,400 161,997,650 Repayment of loans - (62,419,250) Capital contribution - 24,958,500 -------------- --------------- Net cash provided by financing activities 66,238,400 124,536,900 -------------- --------------- (Decrease) increase in cash and cash equivalents (4,104,586) 33,383,491 Cash and cash equivalents, beginning of period 33,383,491 - -------------- --------------- Cash and cash equivalents, end of period 29,278,905 33,383,491 ============== =============== Supplemental disclosures of cash flow information: Interest paid 8,144,426 - ============== ===============
See notes to financial statements HEBEI UNITED TELECOMMUNICATIONS ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS 1. GENERAL The Company was established on January 31, 1996 as a limited liability joint venture company in the People's Republic of China ("PRC"). The period of operation is twenty-five years. The registered capital of the Company is US$3 million, of which 51% (US$1.53 million) was contributed by Hebei United Telecommunications Equipment Co., Ltd.("EQUIPMENT CO."), and 49% (US$ 1.47 million) by NTT International, Inc. ("NTT"). On October 18, 1996, NTT agreed to transfer 19.6% of the capital in the Company to Itochu Corporation ("ITOCHU") with effect from December 27, 1996. Subsequent to the transfer, EQUIPMENT CO. owns 51% (US$1.53 million), NTT owns 29.4% (US$882,000) and ITOCHU owns 19.6% (US$588,000) of the Company's registered capital. The Company is mainly engaged in developing and assisting in construction of telecommunication systems, and providing related technical consulting services. Hebei Engineering was considered a developmental stage entity at December 31, 1996. Hebei Engineering is no longer a development stage entity. Hebei Engineering has invested approximately RMB 253 million in the construction of GSM telecommunications networks (the "GSM networks") in Hebei Province of the PRC. The GSM networks are being built pursuant to a 15-year Project Cooperation Contract with China United Communications Company ("UNICOM"), the operator of the GSM Networks. Terms of the contract include the following: Initially, UNICOM will own 30% of the assets while Hebei Engineering will own 70% of the assets. Both parties agree to distribute the profit according to the "Distributable Cash Flow" (as defined) with 22% going to UNICOM and 78% going to Hebei Engineering. Each year, Hebei Engineering will transfer ownership of assets to UNICOM equal in value to the Distributable Cash Flow received up to 60% of the assets. The maximum amount of assets transferred will not exceed 90% of the assets until termination of the Project Cooperation Contract.. Upon the termination of the contract the remaining 10% of the network assets shall be assigned to UNICOM without any further consideration. Hebei Engineering will continue to receive 78% of the Distributable Cash Flow after transfer of all the assets for the remainder of the 15-year period. Under PRC law, foreign investment enterprises, such as Hebei Engineering, are not permitted to own or operate telecommunications networks. Substantially all of the Hebei Engineering's revenues are derived from contractual arrangements for the sharing of cash flow from network operations rather than from ownership or operation of the networks. Hebei Engineering has recorded its investment (GSM Construction Costs) as a right to receive future cash flow at cost and is amortizing it over the remaining life of the project. Income from the GSM networks is recognized at the time when Hebei Engineering can estimate or calculate the portion of its Distributable Cash Flow from the network. UNICOM commenced operation of the GSM networks in February 1997. 2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). This basis of accounting differs from that used in the statutory financial statements of the Company, which are required to be prepared in accordance with the accounting principles and relevant financial regulations as established by the Ministry of Finance of the PRC. The principal adjustments made to conform the statutory financial statements of the Company to US GAAP mainly included the following: - Adjustment to write off organization expenses. - Adjustment to write off exchange loss. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies which have been adopted in preparing the financial statements set out in this report, and which conform with accounting principles generally accepted in the United States of America are as follows: Cash and cash equivalents - Cash and cash equivalents include cash on hand, demand deposits and highly liquid instruments with a maturity of three months or less at the time of purchase. Property and equipment - Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method to write off the cost of property and equipment, net of the estimated residual value of 10% of cost, over their estimated useful lives as follows: Land and buildings 20 years Furniture, fixtures and equipment 5 years Motor vehicles 5 years Long lived assets - The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the net carrying amount may not be recoverable. When such events occur, the Company measures impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss. The impairment loss, if determined, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Investment in GSM networks - Investment in GSM networks is stated at cost less accumulated amortization. The investment in GSM networks is amortized on a straight-line basis over the remaining life of the Project Cooperation Contract between the Company and UNICOM. Capitalization of borrowing costs - Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e. assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalized as part of the cost of those assets. Capitalization of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Interest capitalized at December 31, 1997 was RMB8,144,426. Revenue recognition - Revenue related to the GSM networks is recognized at the time when the Company can estimate or calculate the portion of its distributable cash flow from the network. Income tax - Deferred income taxes are provided for using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. The tax consequences of those differences are classified as current or non-current based upon the classification of the related assets or liabilities in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized. Foreign currency translation - The Company's financial statements are prepared using Renminbi as the reporting currency. Foreign currency transactions are translated at the rates ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the rates ruling on the balance sheet date. Exchange gains and losses are taken to the statement of operations. Fair value of financial instruments - The carrying values of cash and cash equivalents, short-term investments, accounts receivable, other receivables, other payables, and amount due to investors approximate fair value because of the short maturity of these instruments. Concentration of credit risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivable. The Company places its temporary cash investments with various financial institutions in the PRC. The Company believes that no significant credit risk exists as these investments are made with high-credit, quality financial institutions. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosures of contingent assets and liabilities in the financial statements and recorded amounts of revenue and expenses during the period. Actual results could differ from these estimates. Comprehensive Income - In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." This statement is effective for financial statements issued for periods beginning after December 15, 1997. Management is evaluating the effect on its financial reporting of the adoption of this statement. Segments of an Enterprise and Related Information - In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This statement is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires the reporting of profit and loss, specific revenue and expense items, and assets for reportable segments. It also requires the reconciliation of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments, in each case to the corresponding amounts in the general purpose financial statements. The Company has not yet determined what additional disclosures may be required in connection with adopting SFAS 131. 4. INCOME TAX The statutory income tax rate of the Company is 33%. There is no provision for income taxes during the year ended December 31, 1997 and the period from January 31, 1996 (commencement of operations) to December 31, 1996 as the Company did not have any assessable income for the relevant periods. No provision for deferred taxation has been made in the financial statements for the period from January 31, 1996 (commencement of operations) to December 31, 1996 as no significant temporary differences arose during period and no significant deferred tax assets and liabilities existed at the relevant balance sheet date. Deferred tax assets of RMB5,359,276 existed as at the end of 1997 arising from temporary differences. A valuation allowance has been established for the full amount of the deferred tax assets since it is considered more likely than not that all of the deferred assets will not be realized. Deferred tax assets are composed of the following: December 31, -------------- 1997 --------------- RMB Amortization of GSM networks 5,981,512 Exchange gain/loss 67,230 Organization expenses (126,321) GSM networks revenue (563,145) Valuation allowance (5,359,276) --------------- - =============== 5. SHORT-TERM INVESTMENT The short-term investment of RMB 270,300 at December 31, 1996 represents an investment in negotiable Chinese Government bonds which approximates market value. 6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following: December 31, ------------------------------ 1997 1996 -------------- ------------ RMB RMB At cost: Land and buildings 4,629,909 1,626,952 Furniture, fixtures and equipment 656,751 602,180 Motor vehicles 973,738 926,938 -------------- ------------ 6,260,398 3,156,070 Less: accumulated depreciation (477,281) (119,003) -------------- ------------ 5,783,117 3,037,067 ============== ============
All assets are located in the PRC. 7. INVESTMENT IN GSM NETWORKS
December 31, ---------------------------- 1997 1996 ------------- ------------- RMB RMB Cost of investment 253,761,119 183,373,618 Less: accumulated amortization (18,125,794) - ------------- ------------- 235,635,325 183,373,618 ============= =============
The investment represents the investment in a GSM telecommunication networks in Hebei Province, PRC. The GSM networks were built pursuant to a 15-year agreement with UNICOM commencing in February, 1996. UNICOM commenced operation of the GSM networks in February 1997. The investment is being amortized on a straight-line basis over the remaining 13-year life of the agreement commencing from the operation of the networks. 8. RELATED PARTY TRANSACTIONS December 31, ---------------------------- Company Name 1997 1996 ------------------------------ ------------ ------------- RMB RMB Amount due to NTT 729,014 - Amount due to ITOCHU 268,583 - ------------ ------------- Total 997,597 - ============ ============= Guarantee fees paid and payable to NTT and ITOCHU are as follows: January 31, 1996 Year ended (commencement Company Name 1997 of operations) to December 31, 1996 ------------------------------ ------------ -------------- RMB RMB Amount paid and payable to NTT 2,167,260 - Amount paid and payable to ITOCHU 467,482 - ------------ -------------- Total 2,634,742 - ============ ============== The guarantee fees paid and payable to NTT and ITOCHU by Hebei Engineering represent fees payable to them for providing a guarantee to a GSM supplier and a bank in favor of Hebei Engineering. 9. OTHER PAYABLES The Company has acquired a digital microwave system and a GSM mobile phone system under deferred payment terms with the final installments payable in 2001 and 1998, respectively. The liabilities are guaranteed by NTT and are payable as follows: December 31, ---------------------------- 1997 1996 ------------ ------------- RMB RMB Liabilities payable: 1997 - 3,753,482 1998 73,619,849 74,439,872 1999 3,745,159 3,753,482 2000 3,745,159 3,753,482 2001 3,745,159 3,753,482 ------------ ------------- 84,855,326 89,453,800 Less: Liabilities due within one year (included in other payables) 73,619,849 3,753,482 ------------ ------------- Long-term payables 11,235,477 85,700,318 ============ ============= 10. LONG-TERM LOANS Scheduled repayments for the long-term loans are as follows: December 31, ------------------------------ 1997 1996 -------------- ------------ RMB RMB Liabilities payable: 1999 33,163,360 33,192,800 2000 66,326,720 66,385,600 2001 66,326,720 - -------------- ------------ 165,816,800 99,578,400 Less: Liabilities due within one year - - -------------- ------------ 165,816,800 99,578,400 ============== ============ On August 5, 1996, the Company was granted a long-term loan facility of US$ 20,000,000 by the Bank of Tokyo-Mitsubishi, Ltd. Beijing Branch at an annual interest rate of 6.82%. Interest is payable on the outstanding balance six months after the date of the agreement, every six months thereafter, and at maturity. All the obligations of the Company under the above agreements are guaranteed 60% by NTT and 40% by Itochu. 11. CAPITAL CONTRIBUTION December 31, 1997 and 1996 ------------------------------------------ Ownership RMB ----------------- -------------------- Capital contributed by: EQUIPMENT CO. 51.00% 12,731,283 NTT 29.40% 7,339,210 Itochu 19.60% 4,892,807 ----------------- -------------------- 100% 24,963,300 ================= ==================== 12. COMMITMENTS The Company leases certain buildings under operating leases, which expire through March 1999. Rental expense under these operating leases was RMB 319,200 and RMB 267,250 in 1997 and the period from January 31, 1996 (commencement of operations) to December 31,1996 respectively. The aggregate annual minimum operating lease commitments under all non-cancellable leases at December 31, 1997 are as follows: December 31 --------------- 1997 --------------- RMB 1998 319,200 1999 79,800 --------------- 399,000 =============== The Company has entered into a Project Cooperation Agreement with UNICOM relating to the construction of a telecommunication network in Hebei Province, PRC. The total estimated investment under the terms of this agreement is RMB320 million for the first phase and RMB254 million has been incurred up to December 31, 1997. The term of this agreement is fifteen years. 13. EMPLOYEE RETIREMENT BENEFITS AND POST-RETIREMENT BENEFIT The Company's retired employees are entitled to a retirement pension calculated with reference to their basic salaries on retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to these retired employees. The Company is required to make contributions to the state retirement plan at rates ranging from 18% to 20% of the adjusted monthly basic salaries of the current employees. The expense of such arrangements to the Company was immaterial in all the periods presented. The Company is not obligated under any other post-retirement plans and post-employment benefits are not material. EX-27 2 FINANCIAL DATA SCHEDULE
5 12-MOS 12-MOS 12-MOS MAR-31-1996 MAR-31-1997 MAR-31-1998 APR-01-1995 APR-01-1996 APR-01-1997 MAR-31-1996 MAR-31-1997 MAR-31-1998 185,889 1,346,713 2,134,662 0 0 0 0 0 114,661 0 0 0 0 0 0 246,567 1,518,634 2,357,405 76,233 153,356 139,136 19,556 48,461 91,893 6,232,536 4,004,966 7,683,358 4,081,606 3,456,878 2,786,447 0 0 0 0 0 0 1,524 1,525 1 28,437 31,258 26,533 2,120,969 515,305 4,870,377 0 0 0 0 0 0 0 0 0 0 0 0 2,515,554 3,563,568 4,282,613 365,079 360,793 514,108 0 0 0 241,856 129,039 125,586 (3,380,633) (4,064,885) (5,403,368) 0 0 0 (3,380,633) (4,064,885) (5,403,368) (1,901,097) 0 0 0 0 0 0 0 0 (5,281,730) (4,074,885) (6,802,054) (0.21) (0.14) (0.23) 0 0 0
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