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