1 As filed with the Securities and Exchange Commission on November 12, 1997 Registration No.333- =============================================================================== U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ BRIGHTON TECHNOLOGIES CORPORATION (Name of Small Business Issuer in Its Charter) DELAWARE 7373 87-0460452 (State or Other (Primary Standard Industrial (I.R.S. Employer Jurisdiction of Classification Code Number) Identification Number) Incorporation or Organization) 6 PEARL COURT ALLENDALE, NEW JERSEY 07401 (201) 818-2889 (Address and Telephone Number of Principal Executive Offices) KIT KUNG, CHAIRMAN BRIGHTON TECHNOLOGIES CORPORATION 6 PEARL COURT ALLENDALE, NEW JERSEY 07401 (201) 818-2889 (Name, Address, and Telephone Number of Agent For Service) ------------------- Copies of all communications to: DAVID L. FICKSMAN, ESQ. ALAN I. ANNEX, ESQ. LOEB & LOEB LLP ROBERT S. MATLIN, ESQ. 1000 WILSHIRE BOULEVARD, SUITE 1800 CAMHY KARLINSKY & STEIN LLP LOS ANGELES, CALIFORNIA 90017 1740 BROADWAY, 16TH FLOOR TELEPHONE: (213) 688-3400 NEW YORK, NEW YORK 10019-4315 FACSIMILE: (213) 688-3460 TELEPHONE: (212) 977-6600 FACSIMILE: (212) 977-8389 --------------------------- Approximate Date of Proposed Sale to the Public: As soon as practicable after the Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, please check the following box. [ ] 2 CALCULATION OF REGISTRATION FEE =================================================================================================== Proposed Maximum Proposed Titles of Each Class of Amount to be Offering Maximum Securities to be Registered Registered Price Aggregate Amount of Per Offering Registration Security(2) Price(2) Fee - --------------------------------------------------------------------------------------------------- Units, each consisting of one share of Common Stock, $.001 par value, and one Redeemable Warrant to purchase one share of Common Stock(1)................ 1,437,500 $5.00 $7,187,500 $2,178.03 - --------------------------------------------------------------------------------------------------- Common Stock, par value $.001 per share, issuable upon exercise of Redeemable Warrants(4).................. 1,437,500 $6.00 $8,625,000 $2,613.64 - --------------------------------------------------------------------------------------------------- Representative's Warrants............... 125,000 $.0001 $12.50 (3) - --------------------------------------------------------------------------------------------------- Units issuable upon exercise of the Representative's Warrants(5)............ 125,000 $6.00 $750.000 $ 227.27 - --------------------------------------------------------------------------------------------------- Common Stock, par value $.001 per share, underlying the Redeemable Warrants included in the Representative's Warrants............... 125,000 $6.00 $750,000 $ 227.27 =================================================================================================== Total................................... $5,246.27 =================================================================================================== (1) Based on the offering of 1,250,000 Units and 187,500 Units pursuant to the over-allotment. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended ("Securities Act"). (3) No Fee is required pursuant to Rule 457(g) under the Securities Act. (4) Issuable upon the exercise of Redeemable Warrants to be offered to the public. Pursuant to Rule 416 under the Securities Act, this Registration Statement covers any additional shares of Common Stock which may become issuable by virtue of the anti-dilution provisions of new Redeemable Warrants. (5) These Units are identical to the Units offered to the public. Pursuant to Rule 416 under the Securities Act, this Registration Statement also covers any additional Units which may become issuable by virtue of the anti-dilution provisions of the Representative's Warrants. (6) Issuable upon the exercise of the Redeemable Warrants included in the Representative's Warrants. Pursuant to Rule 416 under the Securities Act, this Registration Statement also covers any additional shares of Common Stock which may become issuable by virtue of the anti-dilution provision of the Redeemable Warrants. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. 3 PROSPECTUS SUBJECT TO COMPLETION, DATED _______________, 1997 1,250,000 UNITS [LOGO] BRIGHTON TECHNOLOGIES CORPORATION EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT ---------- Brighton Technologies Corporation (the "Company") is hereby offering (the "Offering") 1,250,000 units (the "Units"), each Unit consisting of one share of common stock (the "Common Stock"), $.001 par value per share, and one redeemable Common Stock purchase warrant (the "Warrants"). The Units, the Common Stock and the Warrants are sometimes referred to as the "Securities." The Common Stock and the Warrants included in the Units may not be separately traded until _______________, 1998, unless earlier separated upon three days' prior written notice from National Securities Corporation (the "Representative") to the Company at the sole discretion of the Representative. Each Warrant entitles the holder thereof to purchase one share of Common Stock (a "Warrant Share") at an exercise price of 120% of the offering price per Unit at any time commencing _______________, 1998 until _______________, 2003, unless earlier redeemed. The Warrants are subject to redemption by the Company at a price of $0.10 per Warrant at any time commencing _______________, 1998, on thirty days prior written notice, provided that the closing price per share of the Common Stock has equaled or exceeded $_______________ (150% of the offer price) for twenty consecutive trading days within the thirty-day period immediately preceding such notice. See "DESCRIPTION OF SECURITIES" and "UNDERWRITING." It is currently estimated that the initial public offering price per Unit will be between $_____ and $_____. The Company has applied to have the Units quoted on the Nasdaq SmallCap Market under the symbol "BRTU." The Common Stock is presently quoted on the OTC Electronic Bulletin Board under the symbol "BRTK." See "UNDERWRITING" for a discussion of the factors to be considered in determining the initial public offering price of the Units. On __________, 1997, the closing bid price of the Common Stock, as reported on the OTC Electronic Bulletin Board, was $________ per share. See "MARKET PRICE FOR THE COMMON STOCK" and "DIVIDEND POLICY." ---------- THE SECURITIES OFFERED HEREBY INVOLVE SUBSTANTIAL RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE [ ] AND "DILUTION" BEGINNING ON PAGE [ ]. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------- ================================================================================================== Underwriting Discounts and Proceeds to Price to Public Commissions(1) Company(2) - -------------------------------------------------------------------------------------------------- Per Unit $ $ $ - -------------------------------------------------------------------------------------------------- Total (3) $ $ $ ================================================================================================== (1) Does not include additional compensation to be received by the Representative as representative of the several underwriters (the "Underwriters") consisting of a non-accountable expense allowance equal to 3% of the total price to the public. In addition, the Company has agreed to indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act. See "UNDERWRITING." (2) Before deducting expenses of the Offering payable by the Company estimated at $______, excluding the Representative's non-accountable expense allowance. (3) The Underwriters have been granted an option, expiring 45 days from the date of this Prospectus, to purchase up to 187,500 additional Units from the Company, solely to cover over-allotments, if any. If the over-allotment option is exercised in full, the Total Price to the Public, Underwriting Discounts and Commissions and proceeds the Company will be $__________, $__________ and $__________, respectively, See "UNDERWRITING." The Securities are being offered by the Underwriters named herein on a firm commitment basis subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to approval to certain legal matters by their counsel and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify the Offering and to reject any order in whole or in part. It is expected that delivery of certificates representing the Units will be made at the offices of National Securities in Seattle, Washington on or about __________, 1997. NATIONAL SECURITIES CORPORATION The date of this Prospectus is __________, 1997 4 [PHOTOGRAPHS] The Company is not currently a reporting company under the Securities Exchange Act of 1934, as amended ("Exchange Act"). The Company intends to furnish its shareholders with annual reports containing audited financial statements and interim reports as it deems appropriate. The Company's year end is December 31. In addition, as of the date of this Prospectus, the Company will be subject to the information requirements of the Exchange Act, and in accordance therewith, will file reports, proxy statements and other information with the Commission. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS, ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE, WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 4 5 PROSPECTUS SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and financial statements and the related notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus (i) assumes that the Underwriters' over-allotment option will not be exercised and (ii) gives retroactive effect to a reverse stock split of 1 for 3 as a result of which the 10,450,820 outstanding Common Stock of the Company as of October 17, 1997 were converted into 3,483,666 shares of Common Stock ("Reverse Stock Split"). This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY The Company currently operates in two business segments: (i) computer network integration, and (ii) distribution of industrial equipment. The Company is also developing an on-line securities trading network for the Securities Trading Automated Quotations System (the "STAQ Exchange"), which the Company expects to be operational in late 1998. The Company provides such services and equipment primarily to customers in the People's Republic of China ("PRC" or "China"), as well as other Pacific Basin countries. The Company believes that it has a strong reputation as an independent full service provider of computer network integration services and as a distributor of industrial equipment in China. This belief is based on several factors, including the Company's and its predecessor's experience in designing and installing computer networks and importing industrial equipment into China since 1981. Building on its operating experience in China, the Company formed a Chinese joint venture to develop, design, install and maintain a nationwide computerized multi-market securities quotation and trading network in China. (Hereinafter, reference to the Company shall include its subsidiaries unless the context otherwise requires). The Company intends to maintain its focus on the Chinese market place and its business strategy is focused as follows: o Emphasis on network integration in the banking and finance industries o Commercialization of the on-line securities trading network o Expansion of the industrial equipment distribution business to meet customer demand Banking and Finance Oriented Information Technology. As the Chinese economy continues to grow and the standard of living increases in China, the Company believes that there will be an increased demand for consumer oriented financial services such as automated teller machines ("ATMs") and retail outlets that accept credit card transactions. The Company's strategy has been to meet this increasing demand in the Chinese marketplace by installing wireless telecommunications networks suitable for high volume transactions that require instant responses, such as ATM transactions, credit card verifications, clearance and settlements. Historically, the Company's gross margin on contracts for computer network integration for such wireless telecommunication systems has been at least 40 percent. The Company currently has contracts with the Industrial and Commercial Bank of China, the largest retail bank in China, to design and install wireless telecommunication networks for clearance and settlements for six of its bank branches. The Company believes that as market demand for ATMs and retail outlets that accept credit card transactions increases, it will be able to secure additional contracts in this area. 5 6 Securities Quotation and Trading Network. The Company is the owner of a 90% interest in Beijing Brighton Staq Electronic System Company Limited ("Brighton-STAQ"), a PRC registered Sino-Hong Kong joint venture. The remaining 10% interest is owned by a company controlled by the STAQ Exchange, one of four national securities exchanges in China, located in Beijing. The purpose of Brighton-STAQ is to develop, design, install and maintain a nationwide computerized multi-market securities quotation and trading network, similar to the National Association of Securities Dealers Automated Quotation System ("NASDAQ") in the U.S., for trading of stocks listed on the Shanghai, Shenzhen and STAQ Exchange (the "STAQ On-line Network"). The Company's initial plans are to offer the STAQ On-line Network to the 550 stock brokerages (operating 2,200 offices) that are members of the STAQ Exchange in the cities of Beijing, Chongqing, Guangzhou, Shanghai and Shenzhen, with plans to eventually market the STAQ On-line Network to all 2,800 stock brokerages (operating over 10,000 offices) in China. The Company expects to initially charge an installation fee of $6,000 and a monthly maintenance fee of $1,000 for each terminal installed at the stock brokerages. The STAQ On-line Network project is currently in the testing phase. The Company expects to commercialize the STAQ On-line Network in the first quarter of 1998. Equipment Distribution. Industrial equipment distribution accounts for a substantial portion of the current revenues and operating income of the Company. The types of industrial equipment which the Company has been marketing in China include machine tools, such as machine center and grinder measurement devices, and heavy machinery, such as gantry mills, pressing machine production lines and dyes transfer automation systems. The Company is the exclusive distributor for Milltronics Manufacturing Company (a U.S. company), Normac Incorporated (a U.S. company), ALO Teknik AB (a Swedish company), Royal Master Grinders, Inc. (a U.S. company) and K.O. Lee Company (a U.S. company) for the sale of their industrial equipment in China. In addition to representing these manufacturers, the Company has adopted the strategy of increasing sales by searching for industrial equipment from manufacturers worldwide that meet both the customer's technical specifications and budget. The Company will continue its past practice of gradually increasing the size of its sales team to meet customer demand for industrial equipment. CORPORATE STRUCTURE The Company conducts its business through two principal subsidiaries: The Brighton Industries Corporation, a Delaware corporation ("BIC"), and Brighton Electronics Corporation Limited, the Company's Hong Kong registered subsidiary ("BECL"). BIC acts as distributor of third-party manufactured industrial equipment to customers in Pacific Basin countries, with primary distribution to customers in China. BECL is an investment and holding company for Asian-based investments focusing on data transfer networks and industrial equipment related ventures in the Pacific Basin region. BECL holds investments in five second-tier subsidiaries, four of which are companies organized under the laws of Hong Kong and one of which is a Chinese joint venture company. The Company's executive offices are located at 6 Pearl Court, Allendale, New Jersey 07401, and its telephone number is (201) 818-2889. 6 7 THE OFFERING Securities Offered by the Company................. 1,250,000 Units, each Unit consisting of one share of Common Stock and one Warrant. Warrants.......................................... Each Warrant will entitle the holder thereof to purchase one share of Common Stock. The Warrants are exercisable commencing _______________, 1998, unless earlier redeemed, for one share of Common Stock each, at an exercise price of 120% of the offering price per Unit in the Offering. The Warrants may not be separately traded until ______________, 1998, unless earlier separated upon three days prior written notice by the Representative to the Company at the discretion of the Representative. The Warrants are redeemable by the Company at $0.10 per Warrant at any time commencing _______________, 1998, on thirty days prior written notice, provided that the closing sale price per share for the Common Stock has equaled or exceeded $__________ (150% of the offer price) for twenty consecutive trading days within the thirty-day period immediately preceding such notice. See "DESCRIPTION OF SECURITIES." Offering Price.................................... $_________ per Unit Common Stock Outstanding: Prior to the Offering........................ 3,495,333 shares After the Offering(1)........................ 4,745,333 shares - -------------------- (1) Does not include: (i) 1,250,000 shares of Common Stock issuable upon exercise of the Warrants; (ii) 125,000 shares of Common Stock issuable upon the exercise of the Representative's Warrants; or (iii) up to 187,500 shares of Common Stock issuable upon exercise of Warrants and Common Stock issuable upon the exercise of the Underwriters' Over-Allotment Option. 7 8 Use of Proceeds................................... To complete the investment required to commercialize the STAQ On-line Network project and for general working capital. See "USE OF PROCEEDS." Risk Factors...................................... The Offering involves a substantial degree of risk, including the entry of the Company into a new business in China, discretionary use of proceeds, general risks associated with operating in China, possible regulatory constraints and possible need for additional financing. See "RISK FACTORS." NASDAQ Market Symbols............................ Common Stock.............................. "BRTK" Units .................................... "BRTU" 8 9 SUMMARY FINANCIAL INFORMATION The following table sets forth (i) for the periods indicated and at the dates indicated historical summary financial information of the Company and (ii) adjusted historical balance sheet information of the Company as of June 30, 1997. The historical information contained in the table as of December 31, 1996 and for the years ended December 31, 1995 and 1996 has been derived from audited financial statements, and is qualified in its entirety by, and should be read in connection with, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," the audited financial statements (and notes thereto) and other financial and statistical information of the Company appearing elsewhere in this Prospectus. The historical statements of operations and balance sheet data as of June 30, 1997 and for the six months ended June 30, 1996 and 1997, have been derived from unaudited financial statements. The financial statements as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 are unaudited; however in the opinion of management all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial statements for interim periods have been made. The results of interim periods are not necessarily indicative of the results to be obtained in a full fiscal year. The accompanying historical as adjusted unaudited balance sheet data is adjusted to give effect to the Offering as if it had occurred on June 30, 1997. The following data gives retroactive effect to a 1 for 3 reverse stock split which was effective on October 17, 1997. All share and per share data have been restated for all periods presented to reflect this split. Years Ended Six Months Ended December 31, June 30, ------------------------ ------------------------- 1995(1) 1996 1996 1997 ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenues $8,370,537 $8,006,260 $5,496,964 $4,535,865 Gross profit 2,205,336 2,220,753 1,040,701 1,330,721 Operating income (loss) 557,320 465,724 236,892 (90,461) Income (loss) before income taxes and minority interests 560,644 514,750 297,259 (66,966) Net income (loss) 172,347 198,524 141,375 (30,024) Net income (loss) per common share: Primary and fully diluted .06 .06 .05 (.01) Weighted average number of common shares and common share equivalents outstanding: Primary 3,025,000 3,101,896 3,025,000 3,467,630 Fully diluted 3,025,000 3,140,672 3,066,155 3,547,339 (1) As restated (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION-OVERVIEW"). 9 10 June 30, 1997 ---------------------------- December 31, Historical 1996 Historical As Adjusted(2) ---- ----------- -------------- BALANCE SHEET DATA: Working capital (deficiency) $ (879,481) $ (667,134) $ Total assets 10,187,068 6,683,432 Total liabilities 9,602,032 5,796,388 Stockholders' equity 585,036 887,044 (2) Gives effect to the sale of 1,250,000 Units offered hereby. 10 11 RISK FACTORS An investment in the securities offered hereby involves a substantial degree of risk. Prospective investors, prior to making an investment decision, should carefully consider the following risk factors. This Prospectus contains forward-looking statements within the meaning of the `safe harbor' provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of the Company's plans and objectives for future operations, assumptions underlying such plans and objectives and other forward-looking statements included in "PROSPECTUS SUMMARY," "USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS" and "BUSINESS" in this Prospectus. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. Factors which could cause such results to differ materially from those described in the forward-looking statements include those set forth in the risk factors below. RISKS RELATING TO OPERATIONS IN CHINA. The Company conducts substantially all its marketing and sales, and provides its services to, end-users in China. The Company expects to continue to focus its efforts on the Chinese market. As such, there are risks involved with the conduct of the Company's business in China, including the following: Internal Political Risks. During the past decade and a half, the Chinese Government has implemented a program of reform, and is expected to continue to open its economic and political systems. Such reforms have resulted in significant economic growth and social progress. Many of the reforms are unprecedented or experimental and are expected to be refined and improved upon. Other political, economic and social factors may also lead to further readjustment of the reform measures. This refinement and readjustment process may not have a positive effect on the operations of the Company. The Company's results at times may also be adversely affected by changes in China's political, economic and social conditions, and/or by changes in the policies of the Chinese Government, such as changes in laws and regulations (or the interpretation thereof), including those with respect to trade with the United States, Sino-foreign joint ventures, the introduction of measures to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittances abroad and others. Over the past years, there has been an increasing focus on attracting foreign investment into China. There can be no assurance that the Chinese Government will continue with the policy of encouraging foreign investment in the Company's businesses, nor that the maximum levels of foreign percentage holding allowed for joint ventures will be continued. Government Control Over the Economy and Inflation. The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development ("OECD") in such respects as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate of inflation and balance of payments position, among others. For almost 40 years, the economy of China has been primarily a planned economy subject to one-, five- and 10-year State Plans. Pursuant to such State Plans, various Central Government agencies with jurisdiction over different industries and local Governments at various levels formulate and implement more specific plans applicable to their respective industries and localities. Although the majority of productive assets in China are still owned by the Chinese Government, which relies on state-owned enterprises for a substantial portion of its revenue, in recent years the portion of the Chinese economy subject to State Plans has been diminishing. Nevertheless, at times, the economic reform measures adopted by the Chinese Government may be inconsistent or ineffectual and, therefore, the Company may not be able at times to capitalize on such reforms. 11 12 The Chinese economy has experienced significant growth in the past five years, but such growth has been uneven both geographically and among various sectors of the economy. Economic growth has also been accompanied by rising inflation. The Chinese Government has implemented policies from time-to-time to restrain the rate of such economic growth and control inflation in order to achieve coordinated economic development. In July 1993, the Central Government adopted a number of measures to strengthen "macroeconomic control" of the economy, including increasing interest rates on bank loans and deposits, and postponing certain planned price reforms. Despite some successes in controlling economic expansion and the inflation rate, the Central Government has stated its intention to slow further economic growth in order to combat inflation which has seen prices rise more than 20% in some years. A significant portion of the economic activity in China is related to exports and may therefore be affected by developments in the economies of China's principal trading partners. The United States annually reconsiders the renewal of "Most Favored Nation" ("MFN") trading status for China, which provides China with trading privileges available to trading partners of the United States. If trade relations between China and the United States were to deteriorate for any reason, the Company could be adversely affected. Restrictions on Currency Conversions. The Company's income from the STAQ On-line Network project will be received or realized in the Chinese currency, Renminbi, although the Company will be required to compute and report its results of operations in U.S. dollars. Accordingly, changes in the Renminbi against the U.S. dollar, will result in corresponding changes in the U.S. dollar value of the Company's assets denominated in Renminbi, and will change the U.S. dollar value of income and dividends received or to be received in Renminbi. The Company does not currently engage in hedging transactions and does not intend to do so in the future. During the last five years, the value of the Renminbi generally has experienced a gradual but significant devaluation against most major currencies. On January 1, 1994, the official exchange rate was abolished and a new managed floating-rate foreign exchange system was implemented. Although the Renminbi to U.S. dollar exchange rate has been stable since January 1, 1994 and the Central Government has stated its intention to intervene in the future to support the value of the Renminbi, there can be no assurance that exchange rates will not again become volatile or that the Renminbi will not further decline in value against the U.S. dollar. Both the conversion of Renminbi into foreign currencies and the remittance of foreign currencies abroad require Chinese Government approvals. The Company believes that it will be able to obtain all required approvals for the conversion and remittance abroad of foreign currency necessary to support the operations of the Company and distribute dividends to stockholders should the Company elect to do so. 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 China's foreign exchange markets. See "BUSINESS-STAQ ON-LINE NETWORK." Restrictions on Repatriation of Foreign Currency. Foreign investment enterprises may generally remit out of China profits or dividends derived from a source within China, subject to the availability of foreign currency. Except for such profits or dividends, remittance out of China by foreign investment enterprises of any other amount (including proceeds from a disposition of an investment in China) is subject to the approval of governmental regulatory agencies and the availability of foreign currency. In addition, if there were to be a deterioration in China's balance of payments, or for other reasons, China could impose restrictions on foreign currency remittances abroad. No assurance can be given that the Company will be able to remit out of China amounts due the Company from any Sino-foreign joint venture with which the Company may engage in business. Legal System. Since 1979, many laws and regulations governing economic matters in general have been promulgated in China. Despite these efforts in developing the legal system, China does not have a comprehensive system of laws. In addition, the enforcement of existing laws may be uncertain and sporadic, and implementation 12 13 and interpretation thereof inconsistent. The Chinese judiciary is relatively inexperienced in enforcing the laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate laws exists in China, it may be difficult to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a judgment by a court of another jurisdiction. The Chinese legal system is based on written statutes and, therefore, decided legal cases are without binding legal effect, although they are often followed by judges as guidance. The interpretation of Chinese laws may be subject to policy changes which reflect domestic political changes. As the Chinese legal system develops, the promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect the Company's businesses. The general effect of legislation over the past 18 years, however, has been to significantly enhance the protection afforded to foreign investment enterprises in China. However, there can be no assurance that changes in such legislation or interpretation thereof will not have an adverse effect upon the businesses and prospects of the Company. The Company's activities in China are by law subject, in certain cases, to administrative review and approval by various national and local agencies of the Chinese government. In particular, part of the Company's current operations and the realization of its future expansion programs in China will be subject to Chinese government approvals. Enforceability of Judgements. China has not entered into treaties or arrangements providing for the recognition and enforcement of judgements of courts in most other countries. Accordingly, it may be difficult to secure recognition and enforcement in China for the judgements of courts in such jurisdictions. Foreign Trade Corporations. In order to conduct the distribution business in China, the Company must make most of its sales through foreign trade corporations ("FTC's") which are legally authorized by the Chinese Government to conduct import business. Although purchasing decisions are made by the end-user, which is obligated to pay the applicable purchase prices, the Company enters into a formal purchase contract with only the FTC. The FTC's make purchases on behalf of the end-users. By virtue of its direct contractual relationship with the FTC's, rather than the end-user, the Company is to some extent dependent upon the continuing existence of the contractual compliance by the FTC's until the particular transaction has been consummated. The Company's business, however, is not dependent on any single FTC or end-user. Although sales to certain industries involve repeat transactions with FTC's that operate in those industries, the Company does not believe that it is dependent upon relations with any particular FTC or that the loss of relations with any particular FTC would have a material adverse affect on the Company. Rather, FTC's, which earn commissions in transactions, compete with each other for the right to handle end-users' business. See "BUSINESS-INDUSTRIAL EQUIPMENT DISTRIBUTION BUSINESS." Hong Kong: Transfer of Sovereignty. BECL, the Company's investment and holding company for Asian based investments for information and industrial equipment related ventures in the Pacific Basin region, is a Hong Kong registered company. As a result, the Company's results of operations and financial condition may be influenced by the political situation in Hong Kong and by the general state of the Hong Kong economy. On July 1, 1997, sovereignty over Hong Kong was transferred from the United Kingdom to China, and Hong Kong became a Special Administrative Region of China (an "SAR"). As provided in the Sino-British Joint Declaration on the Question of Hong Kong and the Basic Law of the Hong Kong SAR of China (the "Basic Law"), the Hong Kong SAR is to have its own legislature, legal and judicial system and full economic autonomy for 50 years. Based on the current political conditions and the Company's understanding of the Basic Law, the Company does not believe that the transfer of sovereignty over Hong Kong will have a material adverse impact on the Company's financial and operating environment. There can be no assurance, however, that changes in political or other conditions will not result in such an adverse impact. See "BUSINESS-BUSINESS DEVELOPMENT." 13 14 BRINGING BRIGHTON-STAQ TO COMMERCIALIZATION. It is management's belief that Brighton-STAQ represents the primary growth opportunity for the Company. Consequently, the future success of the Company depends to a substantial extent on the successful implementation of the Brighton-STAQ joint venture. While the Company and its predecessor have been in business for more than 16 years, the Brighton-STAQ joint venture is inherently a new business for the Company. The Company projects that the Brighton-STAQ will not be profitable until, at least, after the first year of commercialization. Prospective investors, therefore, have no historical financial information about Brighton-STAQ upon which to evaluate the Company's performance in this business and investment in the Units offered hereby. The likelihood of the success of Brighton-STAQ must be considered in light of the problems, expenses, difficulties and delays frequently encountered in connection with the formation of a new business. See "BUSINESS-STAQ ON-LINE NETWORK." China's Securities Industry Related Risk. Although the Chinese government has introduced new laws and regulations since January 1, 1994 to modernize its securities market, China does not have a well-developed, consolidated body of law governing the securities industry. As China continues to develop its securities market, changes to existing laws, regulations and policies (or in the application or enforcement thereof), the adoption of new laws, and the pre-emption of local regulations by national laws may adversely affect Brighton-STAQ. See "GOVERNMENT CONTROL OVER THE ECONOMY AND INFLATION." Dependence on Strategic Relationship. The Company, through its subsidiary, operates Brighton-STAQ as a joint venture company with Beijing Huazheng Electronic Technology Co., Ltd. ("Huazheng"), a Chinese registered Sino-Hong Kong equity joint venture company. Huazheng is a company controlled by the STAQ Exchange in Beijing. It is Huazheng's affiliation with the STAQ Exchange that provides Brighton-STAQ with access to the STAQ Exchange. The deterioration of this strategic relationship would have a material adverse effect on Brighton-STAQ and would potentially limit the Company's ability to continue to design, install and maintain the STAQ On-line Network. There can be no assurance that the Company's relationship with its strategic partner will remain on agreeable terms or that the Company's partner will not end its relationship with the Company by selling its interest in Brighton-STAQ. See "BUSINESS-STAQ ON-LINE NETWORK." Limited Duration of Joint Venture. Brighton-STAQ has a term of 12 years. To the extent that the Company is unable to either extend the term of the joint venture in 2006 or replace the revenues generated from its operations, the Company's future earnings may be adversely affected. Although the Company expects to be able to extend the term of Brighton-STAQ, there can be no assurance that the Company will be successful in extending the term of the joint venture or establish new arrangements sufficient to replace such lost revenues. See "BUSINESS-STAQ ON-LINE NETWORK." Right of Huazheng to buy up to 49% of Brighton-STAQ. The Company and Huazheng have a verbal agreement that Huazheng has the right during the term of Brighton-STAQ, under certain financial performance criteria to be agreed upon by the parties, to acquire up to an additional 10% of Brighton-STAQ annually, at market valuation, up to a total ownership of 49%. The parties have not agreed on the mechanism for determining such performance criteria. If Huazheng decides to exercise this right at a time when Brighton-STAQ is profitable, the Company's operating results and anticipated growth may be adversely affected. Also, the mechanism for determining market valuation (yet to be negotiated between the parties) at the time Huazheng exercises its acquisition right may possibly be unfavorable to the Company. See "BUSINESS-STAQ ON-LINE NETWORK." Construction and Operation of the STAQ On-line Network. In order for the STAQ On-line Network to be fully operational, additional Chinese governmental approvals will be required. Even in the event that the Company obtains all necessary governmental approvals related to and has adequate financing to fund construction and operation of the STAQ 14 15 On-line Network, Brighton-STAQ may experience difficulties and delays relating to the construction and operation of such network system. There can be no assurance that such network system will be completed in a timely manner, if at all, or that financing will be sufficient to complete or to operate the STAQ On-line Network. The failure to achieve these goals may have a material adverse effect upon the liquidity, working capital requirements and anticipated growth of the Company's business operations. See "BUSINESS-STAQ ON-LINE NETWORK." Dependence on The People's Daily as Satellite Provider. The operation of the STAQ On-line Network is dependent on satellite service provided by The People's Daily, the major newspaper serving China. The Company is currently negotiating a three-year contract for satellite services with The People's Daily and expects to finalize the contract by the end of October 1997. The People's Daily is not a commercial provider of satellite service and itself subscribes to Asia Satellite Telecommunications Co. Ltd. in Hong Kong for lease of a C-Band transponder and China Telecommunications Broadcast Satellite Corporation in Beijing for lease of a Ku-Band transponder. The Company is dependent on The People's Daily's transponder lease agreements with the commercial satellite service providers. If The People's Daily's transponder lease agreements were to terminate for any reason, the Company will need to subscribe for satellite service from a commercial provider at substantially higher cost to the Company. See "BUSINESS-STAQ ON-LINE NETWORK." Additional Capital Requirements. Capital, in addition to the net proceeds from the Offering, may be required to fund the capital expenditures, development and construction costs and working capital requirements related to the Company's development of the STAQ On-line Network. The Company cannot predict the extent to which additional capital may be required for those purposes and there can be no assurance that the Company will be able to obtain such additional capital on terms acceptable to the Company. To the extent that future financing requirements are satisfied through the issuance of equity securities, prospective investors may experience significant dilution in the net book value of the Units offered hereby. In addition, the projected capital requirements to complete the STAQ On-line Network exceed Brighton-STAQ's current authorized total investment amount. Under Chinese law, the Company may not make capital contributions in excess of authorized total investment amounts (currently $1,600,000) without the consent of relevant Chinese Governmental approval authorities. The Company has decided for practical reasons to delay application until funds from the Offering are available. Although the Company currently expects that the required governmental approvals will be obtained and the Company will be able to obtain financing when necessary to expand capacity to meet projected targets, such approval and ability of the Company to obtaining financing are beyond the control of Brighton-STAQ and the Company. There can be no assurance that such approval will be granted. If such approval is not obtained, the ability of Brighton-STAQ to meet its projected future business targets may be materially adversely impacted. See "BUSINESS-STAQ ON-LINE NETWORK" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS." Competition. The STAQ On-line Network may potentially compete with the Shanghai and Shenzhen Stock Exchanges as both the exchanges maintain their own on-line securities quotation and trading system. Management believes that it is unlikely that either of the two exchanges would compete with the STAQ On-line Network because the STAQ Exchange and the Shanghai and Shenzhen Stock Exchanges are under common control and the development of the STAQ On-line Network complements the two stock exchanges. No assurances can be given that competition from these exchanges will not arise. In addition, other businesses experienced in the systems management and computer network integration business as well as the wireless communications business, such as Dow Jones Markets, Inc., Reuters Limited and Bloomberg L.P., may compete with the Company. These competitors have greater marketing and development budgets than the Company and have greater capital resources than the Company. There can be no assurance that the Company will be successful in commercializing the STAQ On-line Network. DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES. The Company's network integration and STAQ On-line Network business segments operate in an industry that is characterized by fast-changing technology. As a 15 16 result, the Company will be required to expend substantial funds for and commit significant resources to the conduct of continuing product development, including research and development activities and the engagement of additional engineering and other technical personnel. Any failure by the Company to anticipate or respond adequately to technological developments, customer requirements, or new design and production techniques, or any significant delays in product development or introduction, could have a material adverse effect on the operating results of the Company. The Company's future operating results will depend to a significant extent on its ability to identify, develop, and market enhancements or improvements to existing network integration applications as well as to introduce new product lines that compare favorably on the basis of time to introduction, cost and performance with the product lines offered by competitors. The success of new product lines depend on various factors, including proper market segment selection, utilization of advances in technology, innovative development of new product concepts, timely completion and delivery, efficient and cost-effective features, and market acceptance. Because of the complexity of the design and implementation process required by the Company's integration services, the Company may experience delays from time to time in completing the design and implementation of improvements to existing network systems or the introduction of new network integration applications. In addition, there can be no assurance that any new network integration application will receive or maintain customer or market acceptance. The Company's future operating results would be adversely affected in the event that it is unable to design and implement enhancements to existing network systems or introduce new network integration applications on a timely and cost-effective basis. See "BUSINESS -- COMPUTER NETWORK INTEGRATION AND STAQ ON-LINE NETWORK." Complex network integration systems, such as those developed by the Company and incorporated third party hardware and software programs, often encounter development delays and occasionally contain errors that are discovered only after network systems have been installed and used by many different customers in a variety of business operations. Significant development delays in the future may result in increased product development costs, delays in market acceptance, loss of sales, and reduction of market share, which could have a material adverse effect on the Company's operating results. Although the Company conducts extensive testing of its network integration applications and systems, there can be no assurance that the Company will successfully detect and eliminate all programming errors. CHANGE IN PRODUCT MIX. Historically, the Company has derived a substantial portion of its revenue from the sale and integration of hardware and software developed by others. The resale of hardware products manufactured by third parties is extremely competitive and involves relatively low profit margins. The sale of software developed by others also involves relatively low profit margins and exposes the Company to various risks, including product performance and market acceptance of such products as well as the strategies of the product developers, over which the Company has little control. The Company has changed its business strategy to emphasize the development of its own network system in an effort to increase the relative percentage of revenue it will derive from offering network services for securities trading on the STAQ Exchange. The Company has completed testing of the STAQ On-line Network using land telephone lines and is in the process of bringing it to commercialization. There can be no assurance, however, that the Company will be successful in commercializing the STAQ On-line Network. The failure of the Company to successfully develop and market the STAQ On-line Network could have a material adverse effect on the Company. See "BRINGING BRIGHTON-STAQ TO COMMERCIALIZATION." MANAGEMENT OF CHANGE IN BUSINESS. The Company currently is experiencing a period of significant growth in the development of the STAQ On-line Network. The Company's ability to effectively manage this change in its business operations will require it to enhance its operational, financial, and management systems; to expand its facilities and equipment; and to successfully hire, train, and motivate additional employees, including 16 17 the technical personnel necessary to develop the STAQ On-line Network and to integrate new software systems with evolving hardware technologies. The failure of the Company to manage effectively the change in its business focus could have a material adverse effect on the Company. DEPENDENCE ON KEY CUSTOMERS. The Company's industrial equipment customers vary from year to year, but, historically, significant portions of its revenues are from a limited number of customers. The Company expects that significant portions of future revenues from this business segment will continue to be generated by a limited number of customers. The Company's inability to secure individual contracts for significant industrial equipment may result in substantial reduction in business volume and would adversely affect operating results. China Henan Light Industrial Products Import and Export Corporation, a BECL customer, accounted for 17% of the Company's revenues in 1996 and Honest Fortune International, Ltd., a BIC customer, accounted for 10% of the Company's revenues in 1995. CHINA NATIONAL CONTRACT. The Company's contract with China National Chemical Construction Company ("China National") which accounted for 34% and 13% of the Company's revenues for the years ended December 31, 1995 and 1996, respectively, is a turn-key contract. Contracts of this nature are generally discrete projects, and the Company does not anticipate repeat business from China National after the completion of the contract in 1997. The Company does not currently have or plan to have any projects of this nature in the foreseeable future. See "BUSINESS-CHINA NATIONAL." COMPETITION. The network integration and equipment distribution businesses are highly competitive in China and includes competition from distributors and service providers from around the world. Certain of the Company's competitors have considerably greater financial, marketing, personnel and other resources than the Company, as well as greater experience and customer recognition than the Company. In the wireless system integration area, the Company competes with Multipoint, Inc., a U.S. company, and Kb/Tel, SA, a Mexican company, who offer wireless telecommunication equipment offering identical features as the Aria Wireless System. In the equipment distribution area, the Company competes with other independent distributors, as well as manufacturers such as Cincinnati Milacron, Inc. and Ingersoll-Rand Company. There can be no assurance that the Company will be able to successfully compete with its competitors. DEPENDENCE ON KEY PERSONNEL. The Company depends to a large extent on the abilities and relationships of its Chairman, President, Chief Executive Officer and principal stockholder, Kit Kung. Mr. Kung does not have an employment agreement with the Company (see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"). The loss of Mr. Kung as an officer and director could have a material adverse effect on the Company's business. In addition, there is strong competition for qualified technical and management personnel in the information, systems management and communications industries, and the loss of key technical and management personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect the Company's business. There can be no assurance that the Company will be able to retain its existing key personnel or attract additional qualified personnel. The Company does not have a key-person life insurance policy on Mr. Kung or any employee of the Company. The Company will, prior to the completion of the Offering, obtain and maintain a $2,000,000 term life insurance policy covering Kit Kung which names the Company as the sole beneficiary. See "MANAGEMENT." CONTROL BY KIT KUNG. Upon the consummation of the Offering, Kit Kung will own approximately 59.7% of the issued and outstanding Common Stock, assuming the Warrants have not been converted into Common Stock, or 47.3% of the issued and outstanding Common Stock, assuming the Warrants have been converted into Common Stock. Accordingly, Kit Kung will be able to significantly influence the Company's business and affairs. This concentration of ownership may have the affect of delaying, deferring or preventing a change in control of the Company. See "PRINCIPAL STOCKHOLDERS." 17 18 DISCRETIONARY USE OF PROCEEDS. The Company intends to use all of its net proceeds from the Offering to finance commercialization of the STAQ On-line Network project except for approximately $____________ which the Company intends to use for working capital and general corporate purposes. However, delays or difficulties in project development could cause the Company to use such net proceeds for general corporate purposes. The Company's management will, therefore, retain broad discretion in allocating all of the net proceeds of the Offering. See "USE OF PROCEEDS." NO DIVIDENDS AND NONE ANTICIPATED. The Company has not paid any dividends on its Common Stock since it acquired all of the issued and outstanding capital stock of BIC and BECL, effective November 11, 1996, and does not intend to pay dividends in the foreseeable future. Earnings of the Company, if any, not paid as dividends are expected to be retained to finance the expansion of the Company's business. The payment of dividends on its Common Stock in the future will depend on the results of operations, financial condition, capital expenditure plans and other cash obligations of the Company and will be at the sole discretion of the Board of Directors. See "DIVIDEND POLICY" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS." NEED FOR ADDITIONAL FINANCING. Based on the Company's operating plan, management believes that the proceeds from the Offering, together with borrowings that will be available under its existing credit facility or any replacement credit facility and anticipated cash flow from operations, will be sufficient to meet the Company's anticipated cash needs and to finance its plans for the STAQ On-line Network project for at least the next 12 months from the date of this Prospectus. Thereafter, the Company anticipates that it may require additional financing to meet its plans for the STAQ On-line Network project. No assurance can be given that the Company will be successful in obtaining additional financing on favorable terms, if at all. If the Company is unable to obtain additional financing, its ability to meet its plans for the STAQ On-line Network project beyond 12 months could be materially adversely affected. The Company has financed its operations to date primarily from cash flow from operations, related party loans and private sales of equity. See "USE OF PROCEEDS," "CAPITALIZATION," "CERTAIN TRANSACTIONS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS." DILUTION. Upon completion of the Offering, prospective investors of the Units will experience dilution in net tangible book value of their investment in the Company of $____ per share of Common Stock. See "DILUTION." NO PRIOR MARKET FOR THE UNITS; DETERMINATION OF OFFERING PRICE. Prior to the Offering, there has been no public market for the Units. While the Company has applied for the listing of the Units on the Nasdaq SmallCap Market, there can be no assurance that an active trading market for the Units will be established, or if so established, sustained. The initial offering price for the Units has been arbitrarily determined through negotiation between the Company and the Representative based on such factors as the business potential and earnings prospects of the Company and prevailing market conditions. Such price may not be indicative of the market price of the Units after the Offering has been consummated. See "UNDERWRITING." The trading price of the Company's Units may be highly volatile and could be subject to significant fluctuations in response to variations in the Company's quarterly operating results and other factors. In addition, the stock market is subject to price and volume fluctuations affecting the market price for the securities of many companies generally, which fluctuations often are unrelated to operating results. ANTI-TAKEOVER CONSIDERATIONS. The Board of Directors has the authority to issue up to Five Million (5,000,000) shares of preferred stock, par value $.001 per share and to establish the rights and preferences of such shares. Such issuance could occur without action by the holders of the Common Stock and the holders of the Units. Such preferred stock could have voting and conversion rights that adversely affect the voting power of the holders of Units and/or Common Stock, or could result in one or more classes of outstanding securities that would 18 19 have dividend, liquidation or other rights superior to those of the Units and/or Common Stock. Issuance of such preferred stock may have an adverse effect on the then prevailing market price of the Units and/or Common Stock. This authority, together with certain provisions in the Company's Restated Certificate of Incorporation and By-Laws, may delay, deter or prevent a change in control of the Company, may discourage bids for the Units and/or Common Stock at a premium over the market price of the Units and/or Common Stock, and may adversely affect the market price of, and the voting and other rights of the holders of, Units and/or the Common Stock. Additionally, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law ("Delaware Law"), which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Section 203 could have the effect of delaying or preventing a change of control of the Company. See "DESCRIPTION OF SECURITIES." SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, there will be 4,745,333 shares of Common Stock outstanding, of which 3,093,837 shares of Common Stock will be "restricted" securities within the meaning of the Securities Act and may not be sold in the absence of registration under the Securities Act or an exemption therefrom, including the exemptions contained in Rule 144 under the Securities Act. Without regard to the "Lock-Up Agreements" with the Representative, referred to below, such shares will become available for sale under Rule 144 at various times commencing 90 days from the date of this Prospectus. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock will have on the market price of the shares of Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that these sales could occur, could adversely affect prevailing market prices for the Common Stock and could impair the ability of the Company to raise additional capital through the sale of its equity securities or through debt financing. The Company and its officers, directors and current stockholders have agreed to enter into agreements ("Lock-Up Agreements") under which they will agree not to sell or otherwise dispose of any of their shares of Common Stock or other securities of the Company for a period of thirteen (13) months commencing upon the date of this Prospectus, without the prior written consent of the Representative. See "UNDERWRITING" and "SHARES ELIGIBLE FOR FUTURE SALE." POSSIBLE DELISTING FROM NASDAQ SYSTEM AND MARKET ILLIQUIDITY. While the Units meet the Nasdaq listing requirements and are expected to be initially quoted on the Nasdaq SmallCap Market, there can be no assurance the Company will meet the criteria for continued listing. For continued listing on the Nasdaq SmallCap Market, a company would need to have, among other things, (A) net tangible assets of $2,000,000, (B) a market capitalization of $35,000,000, or net income for two of the last three fiscal years of $500,000, (C) a minimum market value of public float of $1,000,000 and (D) a minimum bid price of $1.00 per share. Additionally, for both initial listing and continued listing on the Nasdaq SmallCap Market, companies would be required to have at least two independent directors, and an Audit Committee, a majority of the members of which must be independent directors. If the Company's Common Stock were delisted from Nasdaq, it could become subject to Rule 15g-9 under the Exchange Act and be considered a "penny stock" under such Rule, which imposes additional sales practice requirements on broker-dealers that sell such delisted securities to persons other than established customers and "accredited investors" (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale. Consequently, Rule 15g-9 may adversely affect the ability of broker-dealers to sell the Company's Common Stock or Units and may adversely affect the ability of purchasers in the Offering to sell in the secondary market any of the Units or Common Stock acquired. 19 20 PENNY STOCK REGULATION. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. If the Units do not qualify for quotation on the Nasdaq SmallCap Market, or if it qualifies and is later delisted from such Market and has a price of less than $5.00 per Unit, then unless another exemption is available, the Units and the underlying Common Stock would be subject to the penny stock rules. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If the Securities become subject to the penny stock rules, investors in the Offering may find it more difficult to sell their Securities. ADVERSE CONSEQUENCES ASSOCIATED WITH WARRANTS. The Company has reserved 1,250,000 shares of Common Stock for issuance upon exercise of the Warrants, and 125,000 shares of Common Stock for issuance upon the exercise of the Representative's Warrants. Holders of such Warrants are likely to exercise them when, in all likelihood, the Company could obtain additional capital on terms more favorable than those provided thereby. Furthermore, such Warrants may adversely affect the terms on which the Company could obtain additional capital. Should a significant portion of such Warrants be exercised, the resulting increase in the amount of Common Stock in the public market may have the effect of reducing the per share market price thereof. See "SHARES ELIGIBLE FOR FUTURE SALE." POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants are subject to redemption by the Company at a price of $0.10 per Warrant under certain conditions at any time commencing __________, 1998, on thirty days prior written notice. If the Warrants are redeemed, Warrant holders will lose their right to exercise the Warrants except during the 30 day redemption period. Upon receipt of notice of redemption, Warrant holders would be required to: (i) exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for them to do so, (ii) sell the Warrants at the then market price, if any, when they might otherwise wish to hold the Warrants, or (iii) accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "DESCRIPTION OF SECURITIES -- WARRANTS." STOCKHOLDERS INABILITY TO VOTE ON OR REVIEW TRANSACTIONS. As is customary under the Delaware Law, the Board of Directors, not the stockholders, of the Company have authority to review many types of prospective business transactions and approve or disapprove of the same. As such, the stockholders of the Company may not have the opportunity to review the terms of any prospective transactions nor review the financial statements of any entities relating to any such transactions. REPRESENTATIVE'S INFLUENCE ON THE MARKET. A significant number of Units offered hereby may be sold to customers of the Underwriter. Such customers subsequently may engage in transactions for the sale or purchase of such securities through or with the Underwriter. Although they have no obligation to do so, the Underwriters intend to make a market in the Units and may otherwise effect transactions in such securities. If they participate in such market, the Underwriter may exert a dominating influence on the market, if one develops, for the Units. Such market-making activity may be discontinued at any time. Moreover, if the Underwriter exercises the 20 21 Warrants, they may be required under the Exchange Act to temporarily suspend market-making activities. The price and liquidity of the Units may be significantly affected by the degree, if any, of the Underwriter's participation in such market. See "UNDERWRITING." 21 22 USE OF PROCEEDS The net proceeds to the Company from the sale of the Units in the Offering are estimated to be _______________, after deducting estimated selling commissions and other expenses associated with the Offering. The Company intends to use such net proceeds as set forth below: OFFERING AMOUNT PERCENTAGE Commercialization of the STAQ On-line Network Project $ 4,000,000 % Working capital $ % ----------- ------ TOTAL $ 100.00% =========== ====== The commercialization of the STAQ On-line Network, currently in the testing phase of linking Beijing, Chongqing, Shanghai and Shenzhen to the STAQ Exchange, requires $3,000,000 for the necessary satellite-linking equipment and $1,000,000 in related costs for establishing operations in the cities of Beijing, Chongqing, Shanghai and Shenzhen, such as wireless systems, office facilities, office equipment and personnel. See "BUSINESS-STAQ ON-LINE NETWORK." The foregoing allocations are estimates only and are subject to revision from time-to-time to meet the Company's requirements. Pending full utilization of the proceeds of the Offering, the Company may invest the net proceeds in insured interest-bearing savings accounts, U.S. Government obligations, insured Certificates of Deposit or other insured short-term investments of similar quality. See "RISK FACTORS - ADDITIONAL CAPITAL REQUIREMENTS," "- DISCRETIONARY USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS" and "BUSINESS-STAQ ON-LINE NETWORK." 22 23 MARKET PRICE FOR THE COMMON STOCK The Company was formed as a result of a reverse acquisition, effective November 11, 1996, whereby the Company acquired all of the issued and outstanding capital stock of BIC and BECL from their shareholders in exchange for the issuance by the Company of a controlling interest in the Company to such shareholders (the "Reverse Merger"). Since November 12, 1996, the Company's Common Stock has been listed for trading on the OTC Electronic Bulletin Board under the symbol "BRTK." (As a result of the Reverse Stock Split, the Common Stock will trade under the symbol "BRTKD" for 30 days from the effective date of the Reverse Stock Split (October 17, 1997), after which the symbol will revert back to "BRTK.") Prior to that date, the Company's Common Stock traded under the symbol "ZNTX." The trading market is limited and sporadic and should not be deemed to constitute an "established trading market." The following table sets forth the range of bid prices of the Company's common stock as quoted on the OTC Electronic Bulletin Board during the periods indicated. Such prices reflect prices between dealers in securities and do not include any retail markup, markdown or commission and may not necessarily represent actual transactions. The information set forth below was provided by Nasdaq Trading & Market Services. All prices reflect the 1-for-3 reverse stock split effective November 11, 1996 and the Reverse Stock Split. FISCAL YEAR ENDED DECEMBER 31, 1996 (1) HIGH LOW - --------------------------------------- ---- --- Quarter Ended March 31, 1996 $45.00 $ 9.00 Quarter Ended June 30, 1996 31.50 31.50 Quarter Ended September 30, 1996 (2) (2) Period from October 1, 1996 - November 11, 1996 20.82 11.25 Period from November 12, 1996 - December 31, 1996 21.39 18.75 FISCAL YEAR ENDING DECEMBER 31, 1997 - ------------------------------------ Quarter Ended March 31, 1997 21.00 16.14 Quarter Ended June 30, 1997 17.64 9.75 Quarter Ended September 30, 1997 15.38 7.13 Period from October 1, 1997 - November 10, 1997 7.13 6.00 (1) Not available prior to 1/1/96. (2) Not available. On November 10, 1997, the closing bid price for the Common Stock as reported by OTC Electronic Bulletin Board was $6. As of the date of this Prospectus, the number of security holders of record of the Company's Common Stock was 91. As of such date, 3,495,333 shares were outstanding. 23 24 DIVIDEND POLICY The Company has not paid dividends on the Common Stock since its acquisition of all of the issued and outstanding capital stock of BIC and BECL, effective November 11, 1996, and does not anticipate paying dividends on its Common Stock in the foreseeable future. It is the present policy of the Board of Directors to retain all earnings to provide for the future growth of the Company. Earnings of the Company, if any, not paid as dividends are expected to be retained to finance the expansion of the Company's business. The payment of dividends on its Common Stock in the future will depend on the results of operations, financial condition, capital expenditure plans and other cash obligations of the Company and will be at the sole discretion of the Board of Directors. See "DESCRIPTION OF SECURITIES." 24 25 DILUTION The following discussion and tables allocate no value to the Warrants contained in the Units. The difference between the public offering price per share of Common Stock and the pro forma net tangible book value per share of Common Stock after the Offering constitutes the dilution per share of Common Stock to investors in the Offering. Net tangible book value per share of Common Stock on any given date is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) on such date by the number of shares of Common Stock outstanding on such date. At June 30, 1997, the net tangible book value of the Company was $____________, or $________ per share of Common Stock. After giving effect to the conversion of the demand note payable into shares of Common Stock, the pro forma net tangible book value of the Company on June 30, 1997 would have been $____________ or $_____ per share of Common Stock. After giving effect to the sale of the __________ shares of Common Stock included in the Units offered by the Company hereby (less underwriting discounts and estimated expenses of the Offering), the pro forma net tangible book value of the Company at June 30, 1997 would have been $____________ or $_____ per share, representing an immediate increase in net tangible book value of $_____ to existing stockholders and an immediate dilution of $_____ per share to the purchasers of Units in the Offering. The following table illustrates the dilution to prospective investors on a per-share basis: Offering price..................................................... $ Net tangible book value before pro forma adjustments.......... $ Increase attributable to pro form adjustments................. ______ Pro forma net tangible book value before the Offering......... $ Increase attributable to prospective investors................ ______ Pro forma net tangible book value after the Offering............... ______ Dilution to prospective investors.................................. ====== The following table sets forth, as of June 30, 1997, with respect to (i) the existing stockholders, (ii) the holders of the convertible notes payable, and (iii) the purchasers of Common Stock constituting part of the Units in the Offering, a comparison of the number and percentage of shares of Common Stock acquired from the Company, the amount and percentage of consideration paid and the average price per share: Average Shares Purchased Total Consideration Price Per Number Percentage Amount Percentage Share Existing Stockholders................... $ $ Holders of Convertible Notes Payable ... Public Stockholders..................... Total................................... 100.0% 100.0% ======== ====== ======= ====== 25 26 CAPITALIZATION The following table sets forth the actual short term debt and capitalization of the Company as of June 30, 1997 and as adjusted to reflect the sale of Units at an assumed offering price of $________ per Unit. See "USE OF PROCEEDS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION." JUNE 30, 1997 -------------------------- ACTUAL AS ADJUSTED -------- ----------- Short term debt: Convertible demand note payable (1).......... $635,603 Note payable(2).............................. 155,000 -------- Total short term debt payable................ 790,603 -------- Stockholders' equity: Preferred Stock, $.001 par value 5,000,000 shares authorized, none issued and outstanding................................ Common Stock, $.001 par value 100,000,000 shares authorized, 3,482,107 shares outstanding; ______(3) shares issued and outstanding as adjusted.. 3,482 ________ Contributed capital........................ 1,836,981 ________ Accumulated deficit........................ (928,919) ________ Unearned compensation cost................. (24,500) ------- Stockholders' equity...................... 887,044 ________ ---------- Total short term debt capitalization...... $1,677,647 $ ========== ======== (1) The note is payable upon demand, bears interest at 5% per annum and is convertible into shares of Common Stock at prevailing market rates. (2) The note bears interest at 10% per annum, with interest to accrue until the due date of February 25, 1998. Thereafter, the note will be payable upon demand, with interest at 12% per annum. (3) Does not include: (i) 1,250,000 shares of Common Stock issuable upon exercise of the Warrants; (ii) 125,000 shares of Common Stock issuable upon the exercise of the Representative's Warrants; or (iii) up to 187,500 shares of Common Stock issuable upon exercise of Warrants and Common Stock issuable upon the exercise of the Underwriters' Over-Allotment Option. 26 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OVERVIEW: Effective November 11, 1996, the Company acquired all of the issued and outstanding capital stock of BIC and BECL from Kit Kung and Hong Yun (the "Brighton Shareholders") in exchange for the issuance by the Company of an approximate 88% controlling interest in the Company to the Brighton Shareholders. The acquisition of BIC and BECL by the Company was accounted for as a recapitalization of BIC and BECL, with BIC and BECL as the acquirer (reverse acquisition). This transaction was consummated to facilitate the consolidation of the operating companies (BIC and BECL) owned by the Brighton Shareholders into one entity. Accordingly, the historical financial statements consist of the combined financial statements of BIC and BECL for all periods presented. The consolidated financial statements include the accounts of BIC, a United States-based company, and BECL, a Hong Kong-based holding company with controlling interests in four Hong Kong subsidiaries and three Hong Kong joint ventures (see "Item 1. Description of Business - Business Development.") All common share and per share amounts presented herein have been adjusted to reflect the 1 for 3 reverse stock split effective November 11, 1996, as well as the 1 for 3 reverse stock split effective October 17, 1997. BIC is a distributor of third party manufactured industrial, telecommunication and computer equipment and technological processes to customers in the PRC and other Pacific Basin countries. BECL is an investment and holding company whose subsidiaries and joint ventures are involved in (i) the buying, selling and installation of computer and industrial equipment, and (ii) the marketing, sale and service of wireless telecommunication equipment used for credit card approval and authorization systems in the PRC and other Pacific Basin countries. In addition, the Company is developing the STAQ On-line Network for the STAQ Exchange, which is not yet operational. Accordingly, the Company considers its current operations to be in two business segments - Equipment Distribution and Networking. On April 15, 1994, BIC entered into a long-term contract with estimated revenues of $11,000,000 with China National to provide aid in the design and construction of a sodium bichromate production plant in Chongqing, Sichuan Province, PRC, with an annual production capacity of 20,000 metric tons. Although this contract and the work related to it was outside the ordinary scope of the Company's equipment distribution business, given its size and complexity, because of certain third party technology that was available to the Company at that time, the Company was able to successfully bid on the contract. Contracts of this nature are project based and since the Company's current focus is on developing other business opportunities in the PRC, the Company does not anticipate engaging in additional projects of this type or size in the foreseeable future. Revenue from this contract has been recognized in the years ended December 31, 1994, 1995, and 1996, and the six months ended June 30, 1997, and revenue is expected to continue to be recognized through the year ending December 31, 1998. This contract was temporarily suspended in February 1996 by the municipal government due to environmental concerns relating to China National's proposed methodology for waste disposal by the plant. The revised proposal for waste management submitted by China National was approved by the municipal government and the temporary suspension was lifted in January 1997. The contract resumed following the lifting of the temporary suspension. The China National contract accounted for approximately 34% and 13% of revenues for the years ended December 31, 1995 and 1996, respectively, and approximately 67% and 28% of equipment distribution revenues for the years ended December 31, 1995 and 1996, respectively. In addition, during 1995 and 1996, a different customer in each such year accounted for approximately 10% and 17% of revenues, respectively. The Company has historically relied on a limited number of customers for a substantial portion of its total revenues. In addition, substantially all of the Company's business is currently conducted with or in the PRC. The Company expects that a significant portion of its future revenues will continue to be generated by a limited number of customers in the PRC. The loss of any of these customers or any substantial reduction in business volume with any of these customers, or any political or economic difficulties between the United States and the PRC could have a material adverse effect on future results of operations. The following tables set forth certain historical operating data for the periods presented. The 1995 financial statements 27 28 were restated to reflect the correction of depreciation expense recorded on project equipment, accounting for losses related to joint ventures, and to appropriately recognize revenue from certain long-term projects. As a result, net income for the year ended December 31, 1995 was reduced by $258,353. The following table sets forth certain historical operating date for the periods presented: Years Ended December 31, Six Months Ended June 30, ------------------------------------------ ---------------------------------------------- 1995 1996 1996 1997 -------------------- ------------------- ------------------------- ------------------- Amount % Amount % Amount % Amount % ---------- ---- ---------- ----- ---------- ------ ----------- ----- Revenues $8,370,537 100.0 $8,006,260 100.0 $5,496,964 100 $ 4,535,865 100.0 Cost of Revenues 6,165,201 73.6 5,785,507 72.3 4,456,263 81.1 3,205,144 70.7 General and Administrative Expenses 1,648,016 19.7 1,755,029 21.9 803,809 14.6 1,146,601 25.3 Consulting Fees 274,581 6.0 ---------- ----- ---------- ----- ---------- ----- ----------- ----- Operating Income (Loss) 557,320 6.7 465,724 5.8 236,892 4.3 (90,461) (2.0) Total Other Income, Net 3,324 -- 49,026 .6 60,367 1.1 23,495 .5 ---------- ----- ---------- ----- ---------- ----- ----------- ----- Income (Loss) Before Income Taxes and Minority Interests 560,644 6.7 514,750 6.4 297,259 5.4 (66,966) (1.5) Provision (Benefit) for Income Taxes 444,000 5.3 309,000 3.8 133,176 2.4 (31,000) (.7) Minority Interests 55,703 .7 (7,226) (.1) (22,708) (.4) 5,942 .1 ---------- ----- ---------- ----- ---------- ----- ----------- ----- Net Income (Loss) $ 172,347 2.1 $ 198,524 2.5 $ 141,375 2.6 $ (30,024) (.7) ========== ===== ========== ===== ========== ===== =========== ===== 28 29 Revenues from the United States consist primarily of revenues from equipment distribution export sales to the Far East, while revenues from the Far East based operations consist of revenues from both equipment distribution and networking. GEOGRAPHIC AREA INFORMATION Years Ended December 31, Six Months Ended June 30, ---------------------------------------- ----------------------------------------- 1995 1996 1996 1997 ------------------ ------------------- ------------------- -------------------- Amount % Amount % Amount % Amount % ---------- ----- ---------- ----- ---------- ------ ----------- ------ Revenues: United States $6,497,541 77.6 $6,039,716 75.4 $4,081,042 74.2 $3,953,366 87.2 Far East 1,872,996 22.4 1,966,544 24.6 1,415,922 25.8 582,499 12.8 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total $8,370,537 100.0 $8,006,260 100.0 $5,496,964 100.0 $4,535,865 100.0 ========== ===== ========== ===== ========== ===== ========== ===== Operating Income (Loss): United States $ 927,375 166.4 $ 730,875 156.9 $ 212,590 89.7 $ 339,517 184.4 Far East (370,055) (66.4) (265,151) (56.9) 24,302 10.3 (155,397) (84.4) ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total $ 557,320 100.0 $ 465,724 100.0 $ 236,892 100.0 $ 184,120(1) 100.0 ========== ===== ========== ===== ========== ===== ========== ===== BUSINESS SEGMENT INFORMATION Years Ended December 31, Six Months Ended June 30, ---------------------------------------- ----------------------------------------- 1995 1996 1996 1997 ------------------ ------------------- ------------------- -------------------- Amount % Amount % Amount % Amount % ---------- ----- ---------- ----- ---------- ------ ----------- ------ Revenues: Networking $4,102,746 49.0 $4,341,827 54.2 $2,638,543 48.0 $1,617,221 35.7 Equipment Distribution 4,267,791 51.0 3,664,433 45.8 2,858,421 52.0 2,918,644 64.3 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total $8,370,537 100.0 $8,006,260 100.0 $5,496,964 100.0 $4,535,865 100.0 ========== ===== ========== ===== ========== ===== ========== ===== Operating Income: Networking $ 309,891 55.6 $ 251,209 53.9 $ 113,708 48.0 $ 78,105 42.4 Equipment Distribution 247,429 44.4 214,515 46.1 123,184 52.0 106,015 57.6 ---------- ---- ---------- ----- ---------- ---- --------- ----- Total $ 557,320 100.0 $ 465,724 100.0 $ 236,892 100.0 $ 184,120(1) 100.0 ========== ===== ========== ===== ========== ===== ========== ===== (1) Operating income (loss) for both Geographic Area Information and Business Segment Information exclude business development consulting fees of $274,581. 29 30 Consolidated Results of Operations SIX MONTHS ENDED JUNE 30, 1996 AND 1997: Revenues. Revenues for the six months ended June 30, 1997 were $4,535,865, as compared to $5,496,964 for the six months ended June 30, 1996, a decrease of $961,099 or 17.5%. The decrease in revenues of $961,099 in 1997 as compared to 1996 consisted of a decrease of $1,021,322 or 38.7% from networking, which was offset in part by a nominal increase of $60,233 or 2.1% from equipment distribution. For the six months ended June 30, 1997 and 1996, revenues from equipment distribution represented approximately 64.3% and 52.0% of revenues, respectively, and revenues from networking represented approximately 35.7% and 48.0% of revenues, respectively. The primary reason for the decrease in revenues from networking in 1997 as compared to 1996 was management's decision to allocate personnel and resources in 1997 to continue the development of the STAQ On-line Network (see "Description of Business - STAQ On-line Network"), which, due to the Company's limited capital and operating resources, required the Company to reduce its sales efforts with respect to the networking business segment. For the six months ended June 30, 1997 and 1996, the China National contract accounted for approximately 46% and 0% of revenues, respectively, and approximately 71% and 0% of equipment distribution revenues, respectively. Revenues from the China National contract were approximately $2,066,000 for the six months ended June 30, 1997, and $0 for the six months ended June 30, 1996 due to the project's temporary suspension (which suspension was imposed in February 1996 and was lifted in January 1997). Networking revenues include revenues from the sale and installation of the Aria Wireless System. During the six months ended June 30, 1997, the Company completed six agreements with the Industrial and Commercial Bank of China ("ICBC") to provide and install the Aria Wireless System for ATM linkage progressively as transaction automation is introduced within the bank's entire system comprising over 600 branches in the PRC. For the six months ended June 30, 1997, revenues from the sale and installation of the Aria Wireless System were $987,103 or 61.0% of networking revenues. The Company did not have any revenues from the sale and installation of the Aria Wireless System during the six months ended June 30, 1996. For the six months ended June 30, 1997, United States revenues from export sales to the Far East decreased by $127,676 or 3.1%, to $3,953,366 in 1997 from $4,081,042 in 1996, and revenues from operations based in the Far East decreased by $833,423 or 58.9%, to $582,499 in 1997 from $1,415,922 in 1996. For the six months ended June 30, 1997 and 1996, export sales' revenues from the United States represented approximately 87.2% and 74.2% of revenues, respectively, and revenues from the Far East operations represented 12.8% and 25.8% of revenues, respectively. Gross Profit. Gross profit for the six months ended June 30, 1997 increased by $290,020 or 27.9%, to $1,330,721 or 29.3% of revenues, as compared to $1,040,701 or 18.9% of revenues for the six months ended June 30, 1996. Despite a decrease in revenues in 1997 as compared to 1996 of 17.5%, gross profit increased as a result of improvement in gross margin, which was primarily a result of increased progress on the completion of the China National contract in early 1997, and improved gross margins from certain equipment distribution contracts. General and Administrative Expenses. Excluding consulting fees of $247,581 as described below, general and administrative expenses increased by $342,792 or 42.6% to $1,146,601 or 25.3% of revenues for the six months ended June 30, 1997, as compared to $803,809 or 14.6% of revenues for the six months June 30, 1996, primarily as a result of increases in employee compensation and occupancy costs incurred to develop the STAQ On-line Network in particular and to expand operations in general. During the six months ended June 30, 1997, the Company incurred consulting fees aggregating $274,581 for certain legal, professional, consulting and other costs incurred in connection with the Company's ongoing business development activities. The Company did not incur any similar costs during the six months ended June 30, 1996. The Company does not expect that this category of costs will continue at these levels in 1998 subsequent to the completion of the offering. Included in the $274,581 of consulting fees is $175,000 of costs pursuant to a consulting agreement with a consulting firm as described below in "Consulting Fees." 30 31 Operating Income (Loss). For the six months ended June 30, 1997, operating loss was ($90,461) as compared to operating income of $236,892 for the six months ended June 30, 1996, and operating income (loss) as a percent of revenues was (2.0%) in 1997 as compared to 4.3% in 1996. The Company incurred an operating loss in 1997 as compared to operating income in 1996 primarily as a result of increased general and administrative expenses related to business development activities. For the six months ended June 30, 1997 and 1996, operating income from equipment distribution represented approximately 3.6% and 4.3% of equipment distribution revenues, respectively, and operating income from networking represented approximately 4.8% and 4.3% of networking revenues, respectively. For the six months ended June 30, 1997 and 1996, operating income from the United States export sales to the Far East represented approximately 8.6% and 5.2% of such revenues, respectively, and operating income (loss) from Far East based operations represented approximately (26.7%) and 1.7% of Far East revenues, respectively. Miscellaneous Income. During the six months ended June 30, 1996, miscellaneous income aggregated $70,841, and included nonrecurring license income of $44,871. Miscellaneous income was $8,099 for the six months ended June 30, 1997. Consulting Fees. On February 25, 1997, the Company entered into a consulting agreement with a financial consulting firm for business advisory services. Pursuant to that agreement, the Company paid the consulting firm $25,000 and issued a one-year note for $150,000 for services rendered. The note is unsecured, bears interest at 10% per annum, with interest to accrue until the due date of February 25, 1998. Thereafter, such note will become payable upon demand, with interest at 12% per annum. If the Company does not complete a debt or equity financing by February 25, 1998, then the Company will have the option of converting the note, including accrued interest, into its common stock, with the value of such common shares to be calculated at 75% of the market price on such date. The maximum number of common shares that the Company will be required to reserve and issue as full settlement for the note, including accrued interest, will be 75,000 shares. Such shares, if issued, will be restricted and will have piggyback registration rights. If the Company completes a private financing by February 25, 1998, then the noteholder will have the option of converting the note, including accrued interest, into the same debt or equity instrument issued in connection with such private financing. If the Company completes a secondary public offering by February 25, 1998, the noteholder will have the option of converting the balance of the note, including interest, into the same securities issued in connection with the secondary public offering at the offering price. Such securities, if issued, will be restricted and will have piggyback registration rights. In addition, the noteholder will have the right to elect one member of the Company's board of directors. 31 32 Income Taxes. For the six months ended June 30, 1997, the benefit from income taxes was ($31,000) or 46.3% of the loss before income taxes and minority interests, as compared to a provision for income taxes of $133,176 or 44.8% of income before income taxes and minority interests for the six months ended June 30, 1996, primarily as a result of a lower valuation allowance relating to foreign tax loss carryforwards. Accordingly, the Company's consolidated effective tax rate is increased by the effects of valuation allowances established against net operating losses generated by BECL subsidiaries, the realization of which cannot be considered more likely than not. The Company is subject to different tax rates and tax laws because it operates in various distinct jurisdictions. As a result, the Company may not necessarily be able to offset its income earned in one jurisdiction against losses incurred in another jurisdiction. Therefore, the Company anticipates that its consolidated effective tax rate may vary significantly between periods. Net Income (Loss). The net loss for the six months ended June 30, 1997 was ($30,024) or ($.01) per share, as compared to net income of $141,375 or $.05 per share for the six months June 30, 1996. CONSOLIDATED RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995 AND 1996: Revenues. Revenues for the year ended December 31, 1996 were $8,006,260, as compared to $8,370,537 for the year ended December 31, 1995, a decrease of $364,277 or 4.4%. The decrease in revenues of $364,277 in 1996 as compared to 1995 consisted of a decrease in revenues from equipment distribution of $603,358 or 14.1%, which was partially offset by an increase in revenues from networking of $239,081 or 5.8%. For the years ended December 31, 1996 and 1995, revenue from equipment distribution represented approximately 45.8% and 51.0% of revenues, respectively, and revenues from networking represented approximately 54.2% and 49.0% of revenues, respectively. Equipment distribution revenues for the year ended December 31, 1996 decreased primarily because of the temporary suspension imposed by the municipal government from February 1996 to January 1997 relating to the previously described contract with China National. Revenue from this long term contract is included in the Company's equipment distribution business segment, and is recognized using the percentage of completion method. As a result of the project's temporary suspension, revenue from this contract was reduced by approximately $1,810,000 in 1996 as compared to 1995, from approximately $2,850,000 in 1995 to $1,040,000 in 1996. As a result of the lifting of the temporary suspension in January 1997, the Company expects to recognize revenue from this contract of approximately $6,400,000 during 1997. United States revenues from export sales to the Far East consist primarily of revenues from equipment distribution, while revenues from operations based in the Far East consist of revenues from both equipment distribution and networking. For the year ended December 31, 1996, revenues from the United States export sales decreased by $457,825 or 7.0%, to $6,039,716 in 1996 from $6,497,541 in 1995, and revenues from the Far East operations increased by $93,548 or 5.0%, to $1,966,544 in 1996 from $1,872,996 in 1995. For the years ended December 31, 1996 and 1995, revenues from the United States export sales represented approximately 75.4% and 77.6% of consolidated revenues, respectively, and revenues from the Far East operations represented approximately 24.6% and 22.4% of consolidated revenues, respectively. Gross Profit. Gross profit for the year ended December 31, 1996 was $2,220,753 or 27.7% of revenues, as compared to $2,205,336 or 26.3% of revenues for the year ended December 31, 1995. The increase in the gross margin from 1995 to 1996 was primarily a result of the increase in revenues from networking, both on an absolute basis and as a percentage of revenues. General and Administrative Expenses. General and administrative expenses increased by $107,013 or 6.5%, to $1,755,029 or 21.9% of revenues for the year ended December 31, 1996, as compared 32 33 to $1,648,016 or 19.7% of revenues for the year ended December 31, 1995, primarily as a result of increases in employee compensation and occupancy costs incurred to develop the STAQ On-line Network in particular and to expand operations in general. These increased costs were offset in part by decreases in travel and lodging and miscellaneous costs. Operating Income. For the year ended December 31, 1996, operating income decreased by $91,596 or 16.4% to $465,724, as compared to $557,320 for the year ended December 31, 1995, and operating income as a percent of revenues decreased to 5.8% in 1996 from 6.7% in 1995. The reduction in operating income in 1996 as compared to 1995 reflects a decrease in revenues, primarily from the China National contract, increased start-up and marketing costs in the networking business segment and increased general and administrative costs. For the years ended December 31, 1996 and 1995, operating income from equipment distribution represented approximately 5.9% and 5.8% of equipment distribution revenues, respectively, and operating income from networking represented approximately 5.8% and 7.6% of networking revenues, respectively. The decrease in operating income from equipment distribution of $32,914 or 13.3% in 1996 as compared to 1995 reflects a decrease in revenues, primarily from the China National contract, and the decrease in operating income from networking of $58,682 or 18.9% in 1996 as compared to 1995 reflects an increase in various operating costs. For the years ended December 31, 1996 and 1995, operating income from the United States represented approximately 12.1% and 14.3% of United States revenues, respectively, and operating loss from the Far East represented approximately 13.5% and 19.8% of Far East revenues, respectively. The decrease in operating income from the United States of $196,500 or 21.2% in 1996 as compared to 1995 was a result of the decrease in revenues, primarily from the China National contract, and the decrease in operating loss from the Far East of $104,904 or 28.3% in 1996 as compared to 1995 was a result of an increase in revenues. Income Taxes. For the year ended December 31, 1996, the provision for income taxes was $309,000 or 60.0% of income before income taxes and minority interests, as compared to $444,000 or 79.2% of income before income taxes and minority interests for the year ended December 31, 1995, primarily as a result of a lower valuation allowance relating to foreign tax loss carryforwards. Accordingly, the Company's effective tax rate is increased by the effects of valuation allowances established against net operating losses generated by BECL subsidiaries, the realization of which cannot be considered more likely than not. The Company is subject to different tax rates and tax laws because it operates in various distinct jurisdictions. As a result, the Company may not necessarily be able to offset its income earned in one jurisdiction against losses incurred in another jurisdiction. Therefore, the Company anticipates that its consolidated effective tax rate may vary significantly between periods. Net Income. Net income for the year ended December 31, 1996 was $198,524 ($.06 per share), as compared to net income of $172,347 ($.06 per share) for the year ended December 31, 1995. CONSOLIDATED FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES: Operating. For the six months ended June 30, 1997, the Company's operations utilized cash resources of $1,576,867, as compared to utilizing cash resources of $583,782 for the six months ended June 30, 1996. The Company had a net working capital deficit of ($667,134) at June 30, 1997, as compared to a net working capital deficit of ($879,481) at December 31, 1996, reflecting a current ratio of .88:1 at June 30, 1997 as compared to .91:1 at December 31, 1996. The Company's operations utilized an increased amount of cash 33 34 resources in 1997 as compared to 1996 as a result of increased activity with respect to the China National contract. For the year ended December 31, 1996, the Company's cash flow from operations was $2,741,329, as compared to $599,233 for the year ended December 31, 1995. The Company had a net working capital deficit of ($879,481) at December 31, 1996, as compared to a net working capital deficit of ($2,819,778) at December 31, 1995, reflecting current ratios of .91:1 and .48:1, respectively. The Company's operating cash flow improved substantially in 1996 as compared to 1995 primarily as a result of improved project management that focused on cash collection. Accounts receivable increased by $1,185,943 to $1,339,318 at December 31, 1996, from $153,375 at December 31, 1995. Included in the accounts receivable balance at December 31, 1996 is approximately $512,000 due from a Hong Kong-based customer on an unsecured basis, which represents approximately 38% of total accounts receivable. Management is currently discussing the timing of the settlement of this accounts receivable with the customer and expects that it will be paid in full during the latter part of 1997. During the six months ended June 30, 1997, accounts receivable levels remained relatively constant, and the Company collected approximately $101,000 of the accounts receivable balance from the Hong Kong-based customer. Investing. During the years ended December 31, 1995 and 1996, the Company purchased fixed assets aggregating $1,352,434 and $154,484, respectively, primarily in the form of project equipment which will be utilized in completing future projects. Other than equipment which the Company purchases in the fulfillment of its contracts, the Company has no capital expenditure commitments, except with regard to the Brighton-STAQ project into which it has already invested $1,600,000 (see "Description of Business - Brighton-STAQ"). The Company owns a 90% interest in the joint venture developing the Brighton-STAQ project, and is obligated to provide additional funding of approximately $4,000,000 during the latter part of 1997 and early 1998. The Company is in discussions with various parties regarding funding this obligation, and it currently expects to meet its funding obligation through the sale of its equity securities, although there can be no assurances that the Company will be successful in this regard. The restricted cash balances decreased by $1,555,425, from $2,636,000 at December 31, 1996 to $1,080,575 at June 30, 1997, as a result of the utilization of a portion of the restricted cash balances to fulfill certain equipment contract obligations related to the China National contract during the six months ended June 30, 1997. Restricted cash balances, which represent prepayments by customers that are restricted to pay project related current liabilities and commitments, increased by $2,036,000 during 1996, from $600,000 at December 31, 1995 to $2,636,000 at December 31, 1996. The restricted cash balance at December 31, 1996 secures, in part, irrevocable letters of credit aggregating $746,230 that the Company had issued for contingent commitments on equipment purchases. Financing. During January 1996, the Company entered into a convertible demand note agreement with a third party, with interest at 5% per annum. The note had a principal balance outstanding of $620,101 and $635,603 at December 31, 1996 and June 30, 1997. The note is convertible into shares of common stock at prevailing market prices. The Company is currently negotiating with the note holder to convert a portion of this demand note into common stock. During December 1996, the Company sold 33,333 shares of common stock in a private transaction for aggregate proceeds of $450,000, less costs of $259,824, generating net proceeds of $190,176. Subsequently, during the six months ended June 30, 1997, the Company sold an additional 24,007 shares of 34 35 common stock for aggregate proceeds of $352,948, less costs of $45,416, generating net proceeds of $307,532. Such costs consist of payments to various related and unrelated parties as compensation for services rendered. In addition, the Company issued 6,089 shares of common stock with a value of $89,504 to various individuals and firms for services rendered with respect to capital raising activities. Included in the costs of $259,824 in 1996 and $45,416 in 1997 are payments of $105,731 and $11,931, respectively, to Orient Financial Services Limited, a Hong Kong-based company in which Nils A. Ollquist, a director of the Company, is a principal. During the six months ended June 30, 1997, the Company granted 3,333 shares of restricted common stock to an employee. The aggregate value of the shares of $49,000 was recorded as a reduction to stockholders' equity as unearned compensation cost and is being amortized, as earned, during the year ended December 31, 1997. At June 30, 1997, the balance of unearned compensation costs was $24,500. In order to meet its working capital requirements, the Company has periodically received funding from Kit Kung, the Chairman of the Board of Directors, President and Chief Executive Officer, and his family members. The Company has also periodically made advances to the principals and officers of the Company. Such advances are unsecured and generally bear no stated interest rate or terms of repayment. As of December 31, 1995 and 1996, amounts due from Kit Kung and his family members aggregated $0 and $43,239, respectively; outstanding receivables from other related parties aggregated $8,220 and $15,884, respectively; and amounts due to Kit Kung and his family members aggregated $2,612,896 and $227,298, respectively. During the year ended December 31, 1995, Kit Kung and his family members had advanced $1,612,041 to the Company, and during the year ended December 31, 1996, the Company had repaid $1,118,625 of such advances. During the years ended December 31, 1995 and 1996, advances to other related parties aggregated $518,322 and $43,239, respectively, and during the year ended December 31, 1996, $424,872 of accounts receivable from related parties was repaid. In December 1996, Kit Kung contributed $1,266,973 of net borrowings, consisting of $1,515,076 of amounts owed by the Company to Kit Kung less $248,103 of amounts owed to the Company, to contributed capital. During the six months ended June 30, 1997, the Company advanced $325,001 to Kit Kung and his family members and repaid amounts due Kit Kung and his family members aggregating $182,513, resulting in receivables from stockholders and related parties of $360,124 and a payable to stockholders of $44,785 at June 30, 1997. The Company is in the process of renegotiating the terms of certain aspects of technological licensing arrangements that it entered into in conjunction with the China National contract (see "Description of Business - Industrial Equipment Distribution"). The contractual value of services currently under negotiation is approximately $450,000. The inability of the Company to fulfill contractual terms of long-term projects or to negotiate favorable arrangements on the use or distribution of licensed technology may have a material adverse effect on the Company's results of operations and financial condition. The Company anticipates, based on currently proposed plans and assumptions relating to its operations, that its projected cash flow provided by operations, supplemented with borrowings from related parties as necessary, will be sufficient to support operations at current levels for at least the next 12 months. However, the Company requires additional capital in connection with the Brighton-STAQ project (see "Description of Business - STAQ On-line Network"), which the Company anticipates obtaining from the net proceeds of the Offering and from subsequent debt and/or equity financings. To the extent that the Company is unable to timely fund its $4,000,000 commitment to fund the Brighton-STAQ project, the Company's interest in the project may be reduced or eliminated, which would adversely affect the potential future profitability of this project as it relates to the Company's consolidated results of operations. If the Company 35 36 were to be unable to fund the continuing development of the Brighton-STAQ project, project equipment aggregating $1,331,588 at June 30, 1997 would be liquidated at net realizable value and the resulting loss, if any, would be charged to operations. INFLATION AND CURRENCY MATTERS: In recent years, the PRC economy has experienced periods of rapid economic growth as well as high rates of inflation, which in turn has resulted in the periodic adoption by the PRC government of various corrective measures designed to regulate growth and contain inflation. Since 1993, the PRC government has implemented an economic program designed to control inflation, which has resulted in the tightening of working capital available to PRC business enterprises. The success of the Company depends in substantial part on the continued growth and development of the PRC economy. Since the Company's contracts are generally denominated in U.S. dollars and are generally of short duration, the Company is not subject to any economic exposure from the effects of inflation in the PRC. However, the Brighton-STAQ project will be subject to the effects of inflation in the PRC. Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, and fluctuations in the relative value of currencies. Changes in the relative value of currencies occur periodically and may, in certain instances, materially affect the Company's results of operations and the ability of customers to satisfy obligations owed to the Company. In addition, PRC currency is not freely convertible into foreign currencies. All foreign exchange transactions involving PRC currency must take place either through the Bank of China or other institutions authorized to buy and sell foreign exchange, or at a Foreign Exchange Adjustment Center. The ability to convert PRC currency is subject to the availability of foreign currencies. RECENT ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is effective for financial statements issued for periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods presented. Under the new requirements, the Company will be required to present "basic" earnings per share and "diluted" earnings per share. Basic earnings per share does not include the dilutive effect of stock options and warrants. The Company does not expect that adoption of this statement will have a material effect on reported earnings per share. In February 1997, the Financial Accounting Standards Board issued Statement No. 129, "Disclosure of Information about Capital Structure," which is effective for financial statements issued for periods ending after December 15, 1997. The new standard reinstates various disclosure requirements previously in effect under Accounting Principles Board Opinion No. 15, which has been superseded by this statement. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," which is effective for financial statements issued for periods ending after December 15, 1997. Earlier application is permitted. This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income consists of net income and other comprehensive income. Other comprehensive income 36 37 refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for financial statements issued for periods ending after December 15, 1997. This statement discusses how to report operating segments and certain information about a public company's products and services, the geographic areas in which it operates, and its major customers. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. 37 38 BUSINESS GENERAL The Company currently operates in two business segments, (i) computer network integration and (ii) distribution of industrial equipment. The Company is also developing an on-line securities trading network for the STAQ Exchange, which the Company expects to be operational in late 1998. The Company provides such services and equipment primarily to customers in China, as well as other Pacific Basin countries. The Company believes that it has a strong reputation as an independent full service provider of computer network integration services and a distributor of industrial equipment in China. This belief is based on several factors, including the Company's and its predecessor's experience in designing and installing computer networks and importing industrial equipment in China since 1981. Building on its operating experience in China, the Company formed a Chinese joint venture to develop, design, install and maintain a nationwide computerized multi-market securities quotation and trading network in China. BUSINESS STRATEGY The Company intends to maintain its focus on the Chinese market place and its business strategy is focused as follows: o Emphasis on network integration in the banking and finance industries o Commercialization of the on-line securities trading network o Expansion of the industrial equipment distribution business to meet customer demand Banking and Finance Oriented Information Technology. As the Chinese economy continues to grow and the standard of living increases in China, the Company believes that there will be an increased demand for consumer oriented financial services such as ATMs and retail outlets that accept credit card transactions. The Company's strategy has been to meet this increasing demand in the Chinese marketplace by installing wireless telecommunications networks suitable for high volume transactions that require instant responses, such as ATM transactions, credit card verifications, clearance and settlements, in China. Historically, the Company's gross margin on contracts for computer network integration for such wireless telecommunication systems has been at least 40 percent. The Company currently has contracts with the Industrial and Commercial Bank of China to design and install wireless telecommunication networks for clearance and settlements for six of its bank branches. The Company believes that as market demand for ATMs and retail outlets that accept credit card transactions increases, it will be able to secure additional contracts in this area. Securities Quotation and Trading Network. The Company is the owner of a 90% interest in Brighton-STAQ, a PRC registered Sino-Hong Kong joint venture. The remaining 10% interest is owned by a company controlled by the STAQ Exchange, one of four national securities exchanges in China, located in Beijing. The purpose of Brighton-STAQ is to develop, design, install and maintain the STAQ On-line Network. The Company's initial plans are to offer the STAQ On-line Network to the 550 stock brokerages (operating 2,200 offices) that are members of the STAQ Exchange in the cities of Beijing, Chongqing, Guangzhou, Shanghai and Shenzhen, with plans to eventually market the STAQ On-line Network to all 2,800 stock brokerages (operating over 10,000 offices) in China. The Company expects to initially charge an installation fee of $6,000 and a monthly maintenance fee of $1,000 for each terminal installed at the stock brokerages. The STAQ On-line Network project is currently in the testing phase. The Company expects to commercialize the STAQ On-line Network in the first quarter of 1998. 38 39 Industrial Equipment Distribution. Industrial equipment distribution accounts for a substantial portion of the current revenues and profits of the Company. The type of industrial equipment which the Company has been marketing in China include machine tools, such as machine center and grinder measurement devices, and heavy machinery, such as gantry mills, pressing machine production lines and dyes transfer automation systems. The Company is the exclusive distributor for Milltronics Manufacturing Company (a U.S. company), Normac Incorporated (a U.S. company), ALO Teknik AB (a Swedish company), Royal Master Grinders, Inc. (U.S. company) and K.O. Lee Company (a U.S. company) for the sale of their industrial equipment in China. In addition to representing these manufacturers, the Company has adopted the strategy of increasing revenues by searching for industrial equipment from manufacturers worldwide that meet both the customer's technical specifications and budget. The Company will continue its past practice of gradually increasing the size of its sales team to meet customer demand for industrial equipment. COMPUTER NETWORK INTEGRATION MARKET OVERVIEW China's information technology market has enjoyed significant growth and will likely grow at an increasing rate in the next decade as market demand for Western style modernization increases. In particular, growth will be most significant for system engineering services that provide customized products tailoring to customer's specifications. The following are the market factors which will contribute to this growth: (1) DEVELOPMENT OF LARGE SCALE INFORMATION "INFRASTRUCTURES": The Chinese Central Government has made "informationization" of the economy a priority of its most recent five year plan, and is planning to invest substantial amounts of capital in numerous information super-highway type projects such as the "Golden" projects(1). (2) GROWING DEMAND FOR COMPLEX INFORMATION SYSTEMS FROM OTHER LARGE INFRASTRUCTURE PROJECTS: Continuous investment in large-scale infrastructure in areas such as power generation and transportation will drive demand for information technology systems. One example is the Three Gorges Dam hydro-electric project, where the information technology system is estimated to cost in the area of $30,000,000. (3) GROWING DEMAND FOR INFORMATION TECHNOLOGY SYSTEMS FROM ENTERPRISES AND GOVERNMENT AGENCIES: As the Chinese economy develops and matures, enterprises and governmental agencies will need to utilize information technology systems to become competitive with their counterparts in more developed countries. - ------------------------ (1) China's State Council plans to develop the country's information infrastructure by 2000. The plan, know as the China National Information Infrastructure was implemented at the end of 1993 and is characterized by a series of "Golden" Projects, including the Golden Bridge, Golden Taxation, Golden Customs and Golden Card Projects. The Golden Bridge Project's goal is to link, via a telecommunication network, all the cables of the Ministry of Posts and Telecommunications and special telecommunication grids of other ministries and official departments. The telecommunication network is expect to digitally transmit documents, sound and pictures used for serving China's finance, customs, foreign trade, tourism, meteorology, communication, State security, science and technology and other information businesses. The Golden Tax and Golden Customs Projects are extensions of the Golden Bridge Project. The Golden Card Project is consumer oriented and expected to modernize the China's payment and cashing services with the introduction and popularization of credit cards and other related media and decrease the amount of cash in circulation. 39 40 and governmental agencies will neet to utilize information technology systems to become competitive with their counterparts in more developed countries In addition, due to their relative lack of technological sophistication, Chinese customers usually require more systems engineering services on each project than customers in more developed markets. Compared to Western countries, China's information technology industry is relatively young, such that most organizations do not have dedicated information technology departments as are common in Western countries. Much of the industry's technical resources are concentrated in companies that directly engage in the information technology business. As a result, companies outside the industry must rely on outside technical expertise to meet their needs. The demand for outside technical assistance will likely increase, as most of the software packages being developed are general platforms that require substantial customization to meet specific needs of each organization. OPERATIONS The Company provides customized full service computer network and telecommunication equipment integration, installation and maintenance for customers in China and other Pacific Basin countries. The Company provides integrating solutions for customers utilizing software and hardware developed by third parties. The following examples are indicative of the Company's and its predecessor's projects: ========================================================================================== CUSTOMER PROJECT DESCRIPTION DATE OF EXECUTION CONTRACTUAL BILLINGS ========================================================================================== ICBC Bank branch networking June 1993 $1,700,000 in six cities in China to August 1997 - ------------------------------------------------------------------------------------------ Bank of China Credit card September 1992 $420,000 authorization and processing for Beijing Headquarters - ------------------------------------------------------------------------------------------ Travel Industry Ticket reservation April 1993 $1,200,000 Automatic Systems system for three of Australia (TIAS) airline companies, linking 3,500 reservation terminals - ------------------------------------------------------------------------------------------ Mobil Oil Credit card October 1992 $160,000/yr. authorization and to processing for retail September 1994 outlets across Australia and New Zealand - ------------------------------------------------------------------------------------------ Shell Oil Credit card October 1992 $85,000/yr. authorization and to processing for retail September 1994 outlets across Australia and New Zealand - ------------------------------------------------------------------------------------------ New Zealand ATM network January 1994 $1,200,000 National Bank - ------------------------------------------------------------------------------------------ 40 41 ========================================================================================== CUSTOMER PROJECT DESCRIPTION DATE OF EXECUTION CONTRACTUAL BILLINGS ========================================================================================== Coles Myer Credit card August 1994 $1,650,000 authorization and processing for all Coles Myer Stores in Australia - ------------------------------------------------------------------------------------------ Queensland Bank ATM network March 1993 $800,000 - ------------------------------------------------------------------------------------------ Zhongzou Hotel Hotel management September 1997 $210,000 computer system for 300-room hotel in Zhongzou City, PRC - ------------------------------------------------------------------------------------------ The People's Daily Office automation November 1996 $760,000 system for text retrieval and high speed line printer integration ========================================================================================== The Company completed integration of a hotel management computer system for Zhengzhou Hotel, Zhengzhou City, China in September 1997. The Company has developed its own software for integration of hotel management computer systems capable of managing reservations, telephones and billings. The Company has installed over 60 hotel management computer systems in China and Hong Kong. The Company's customers include Regent Hotel in Hong Kong, The China Hotel in Guangzhou, International Hotel in Beijing and JC Mandarin Hotel in Shanghai. The Company's gross margin for installation of hotel management computer systems is in the range of 20-25 percent. The Company also provides computer network integration for office automation. The Company installed a database management system for The People's Daily in November 1996 that is capable of scanning, storing, retrieving and typesetting texts in Chinese characters. The Company integrated software from Chinese vendors with computer equipment manufactured by Digital Equipment Corporation, with computer software from Oracle Corporation for database management, as well as with high speed line printers. The Company's gross margin for office automation projects is approximately 10 percent. ARIA WIRELESS SYSTEM The Company has been particularly successful in introducing wireless telecommunication equipment manufactured by Aria Wireless Systems, Inc., a U.S. company, which is suitable for high volume transactions that require instant responses, such as ATM transactions, credit card verifications, clearance and settlements ("Aria Wireless Systems"), in the Chinese market place. The Company's gross margin on contracts for computer network integration of the Aria Wireless Systems has been approximately 40 percent. In 1997, to date, the Company has secured eight contracts with the Industrial and Commercial Bank of China to customize integration of and install Aria Wireless Systems for ATM linkage and for clearance and settlements for six of its bank branches. Four of the contracts have been completed and two of the contracts are currently in progress. The Company's focus in the computer network integration segment of its business currently is in wireless telecommunication systems and it expects to secure two additional contracts for the Aria Wireless System by the end of 1997. 41 42 GENERAL The Company's Aria Wireless Systems utilizes radio frequency to transmit data in metropolitan areas within a 38 mile radius. Primary application for the Aria Wireless System is in the financial service industry and includes ATM linkage, credit card processing and banking data transfer. The Aria Wireless System is the industry leader for wireless data transfer technology in on-line transactions processing applications. There are over 230 Aria Wireless Systems installed in 53 nations worldwide in the financial services industry. As the Chinese economy continues to grow and the standard of living increases in China, there will be an increased demand for consumer oriented financial services such as ATMs and retail outlets that accept credit card transactions. The Company believes that the Aria Wireless System is particularly well-suited for use by the financial services industry in China because it offers a more reliable alternative to land telephone lines for data transmission. Unlike Western countries, the land telephone lines in China are not yet able to support the rapid transmission of data with the accuracy and speed required by the financial industry. The Aria Wireless System, which utilizes radio frequencies, will assist the financial services industry to address the demand for consumer oriented financial services. SALES AND MARKETING In 1995, the Company's subsidiary, BECL, signed a Preincorporation Agreement to form a Hong Kong joint venture company, Aria Wireless Systems (China) Limited ("Aria China"), with two U.S. companies, Aria Wireless Systems, Inc. ("Aria, Inc.") and Valdacom, Inc. ("Valdacom"), to market, sell and service wireless telecommunication products from Aria, Inc. ("Aria Wireless System") in the China market on an exclusive basis. The Preincorporation Agreement provided that the Company was to receive a 65% ownership of Aria China, and the two other parties, Aria, Inc. and Valdacom, were to receive a 19.5% and 15.5% ownership of Aria China, respectively. Financial difficulties at Aria, Inc. delayed formation of Aria China. Aria, Inc. filed for reorganization under Chapter 11 of the United States Bankruptcy Code in February 1996. On May 22, 1997, Aria, Inc. emerged from Chapter 11 under an approved reorganization plan and with a new financial structure. Aria China was incorporated in 1995 by the Company but has remained inactive as the parties to the Preincorporation Agreement have, to date, not subscribed for their respective shares. There are no immediate plans for Aria China to complete formation or commence operations while Aria, Inc. is solving its financial difficulties. In the meantime, the Company has marketed and sold the Aria Wireless Systems as a component of its network integration business and plans to continue to such sales practice. Sales of Aria Wireless Systems by the Company so far have been concentrated in the Beijing area. The Company has plans to target sales of the Aria Wireless System to other large metropolitan markets in China. The Company is the only distributor of the Aria Wireless System in China. The Company participates in 2 to 3 trade shows per annum and holds 2 to 3 promotional seminars per annum throughout China and follows up with mass mailings of product catalogues to solicit contracts for its computer network integration services business. The Company's current focus is the network integration of the Aria Wireless Service in the banking and financial industry. To date, the Company's customers for this business segment have all been PRC Government owned or controlled entities, including government ministries, universities and research facilities. 42 43 COMPETITION The Company competes with Multipoint, Inc., a U.S. company and Kb/Tel, SA, a Mexican company, on a worldwide basis for the wireless system installation and service business. Both companies manufacture wireless systems that offer features identical to the Aria Wireless System. The Company also competes with other manufacturers of wireless systems that offer similar features to the Aria Wireless System. The Company believes that its technical expertise in computer network integration makes the Aria Wireless System more competitive than the wireless systems offered by the other two companies. The Company has 11 engineers dedicated to installing and customizing system applications for the Aria Wireless System to customer's specifications. It is the Company's belief that its competitors do not have technical staff with the level of expertise of the Company's engineers and the Company is aware that the wireless systems installed by the Company's competitors have in the past experienced numerous technical problems due to improper integration installation. STAQ ON-LINE NETWORK CHINA'S SECURITIES MARKET OVERVIEW (all conversions to U.S. dollars use the November 10, 1997 exchange rate) The Chinese securities market comprises four national exchanges: Shanghai, Shenzhen, STAQ and China National Securities Trading System ("NETS"). The securities industry is regulated by two organizations: The State Council Securities Policy Committee, which is responsible for the macro policy of the industry, and the China Securities Regulatory Commission ("CSRC"), which is responsible for the day-to-day regulation of the securities industry. The CSRC dictates the stock exchange on which the shares of any Chinese company, whether State owned or foreign owned, is listed. The CSRC also determines the terms of the listing, including the size of the offering of securities and the price of the offering. Trade orders on all four national exchanges are computer matched. Each exchange seat at each of the four exchanges is equipped with a computer terminal for entering trade orders. Membership to the exchanges is limited to licensed stock brokerages and only registered members can trade on the respective exchanges. Non-members of the exchanges place orders with member stock brokerages either personally or by telephone. Each exchange has taken a different approach to develop its distribution system to its members. The NETS Exchange, the Exchange under the control of the People's Bank of China that was originally established for government bond clearing for the other national exchanges, has been inactive for a number of years and is not further discussed. The Shanghai Stock Exchange operates 21 sub-exchanges across China. These sub-exchanges are linked to the main computer via satellite. A member of the Shanghai Stock Exchange can obtain exchange seats at the main exchange or at any of the sub-exchanges. The stock brokerages must place their order with their floor agents by telephone. Stocks, debt instruments and investment funds are traded on the Shanghai Stock Exchange. A seat on the Shanghai Stock Exchange is Rmb1,000,000 ($120,754) and the annual membership fee is Rmb500,000 ($60,376). The Shanghai Stock Exchange does not offer off-floor on-line trading of its stocks. In 1994, 204 stocks were traded on the Shanghai Stock Exchange with market capitalization of Rmb225.5 billion ($27.2 billion). The annual turnover in 1994 was Rmb250 billion ($30.2 billion). The Shenzhen Stock Exchange offers direct on-line linkage to its central computer via satellite. Each subscriptive stock brokerage is directly linked to one satellite station. Unlike the Shanghai Stock 43 44 Exchange, the Shenzhen Stock Exchange allows connections at its members' offices. Trade orders can be entered directly onto computer terminals at the respective stock brokerages. This arrangement offers more flexibility and wider coverage but at a substantial financial cost. The annual membership fee for the Shenzhen Stock Exchange is Rmb600,000 ($72,452) and it charges its members an installation charge of approximately Rmb300,000 ($36,226) to set up satellite linkage and an annual maintenance fee of Rmb60,000 ($7,245). Stocks, debt instruments and investment funds are traded on the Shenzhen Stock Exchange. In 1994, 127 stocks were traded on the Shanghai Stock Exchange with market capitalization of Rmb133.4 billion ($16.1 billion). The annual turnover in 1994 was Rmb137.8 billion ($16.6 billion). The STAQ Exchange has its main trading floor in Beijing and a sub-exchange in Xiamen. The STAQ Exchange is the official exchange for (i) legal-person-owned shares (C Shares), that are shares of PRC State owned enterprises which may only be held by other PRC State-owned enterprises, and (ii) State Treasury Bonds issued by the Ministry of Finance. In addition to listing C Shares (total of 8 stocks) and State Treasury Bonds, the STAQ Exchange acts as a sub-exchange for both the Shanghai and Shenzhen Stock Exchanges. A sub-exchange functions as a branch of the main exchange. Through direct computer linkages via satellite with both the Shanghai and Shenzhen Stock Exchanges, members of the STAQ Exchange can directly trade stocks listed on the Shanghai and Shenzhen Stock Exchanges from the STAQ Exchange trading floor. The annual membership fee for the STAQ Exchange is Rmb150,000 ($18,113). THE STAQ EXCHANGE The STAQ Exchange was approved by the CSRC in 1992 and The Stock Exchange Executive Council (the "SEEC"), a non-governmental advisory body to the CSRC, was assigned the responsibility of designing and developing the STAQ Exchange into a computer-based over-the-counter multi-point to multi-point on-line automated quotations system for securities trading. The members of the SEEC consist of China's largest trust and investment corporations, securities firms, and other non-bank financial institutions authorized to engage in securities and other financial businesses. About 80% of all State Treasury Bonds are distributed by the Ministry through the STAQ Exchange and 50% of all State Treasury Bond trading is done through STAQ. Due to the restrictive ownership requirements of C Shares, trading of C Shares is limited and sporadic. When the STAQ Exchange was first approved as a sub-exchange for the Shanghai and Shenzhen Stock Exchanges in 1992 and in 1993, respectively, the trading volume fluctuated substantially due to the inherent instabilities of these two fledgling exchanges which were formally established only in 1990 and 1991, respectively. The high end trading volume for the STAQ Exchange was approximately 3% of the Shanghai Stock Exchange and 10% of the Shenzhen Stock Exchange. According to officials at STAQ, trading on the STAQ Exchange has stabilized at 1.5% and 4% of the trading volume on the Shanghai and Shenzhen Stock Exchanges, respectively, for the last three years. Trade orders on the STAQ Exchange are entered onto the computer terminals located on the trading floor in either Beijing or Xiamen and are computer matched. Members telephone their floor agents to execute transactions. According to statistics provided by officials of the STAQ Exchange, there are currently approximately 550 licensed stock brokerages (operating approximately 2,200 offices in China) that are members of the STAQ Exchange. BRIGHTON-STAQ Brighton-STAQ is a PRC registered Sino-Hong Kong equity joint venture company of which the Company owns 90% and Huazheng owns 10%. Brighton-STAQ has its registered office and principal place of business in Beijing and a branch office registered in Shanghai. Brighton-STAQ was formed to develop, design, install and maintain the STAQ On-line Network. 44 45 In 1992, the STAQ Exchange received a grant of $200,000 from the World Bank for the development of the STAQ Exchange. The STAQ Exchange used part of the funds to invite seven technical experts from NASDAQ to visit the STAQ Exchange in Beijing and also asked the experts from NASDAQ to review the designs for the national on-line securities trading system that was modeled after NASDAQ. After reviewing the plans submitted, the NASDAQ experts confirmed that, as presented, the designs were functionally suitable for the on-line securities trading system as contemplated. Based on its expertise in the computer network integration services business, the Company was invited by the STAQ Exchange to submit designs for the computer network component of the on-line securities trading system. The Company's designs for the STAQ On-line Network were submitted, along with the designs of the securities trading system, for review and approved by the NASDAQ experts. The STAQ On-line Network will initially link remote computer terminals installed at stock brokerages in the cities of Beijing and Chongqing (with plans to expand linkage to Guangzhou, Shanghai and Shenzhen) to the STAQ Exchange trading floor in Beijing. The Company anticipates that linkage will eventually be on a nationwide level, with such expansion being driven by the Company's estimated break-even for each city of approximately 15 terminals. Through the use of the STAQ On-line Network, the stock brokerages will then be able to obtain real time price quotations of shares traded on the Shanghai and Shenzhen Stock Exchanges as well as C Shares and State Treasury Bonds and will be able to trade through party-to-party negotiations on remote computer terminals. The STAQ On-line Network is modeled after the on-line trading system offered by NASDAQ in the U.S. although, unlike NASDAQ with the exception of C Shares, no stock will be quoted solely on the STAQ Exchange. Information displayed on the remote computer terminals will be identical to information available on the trading floor of the STAQ Exchange in Beijing. The operation of the STAQ On-line Network, including all software programs installed on the remote computer terminals at the stock brokerage houses, will be maintained and controlled by the STAQ Exchange. Brighton-STAQ's role is to develop, design, install and maintain the STAQ On-line Network. The Company will earn its revenue through an initial installation charge and a monthly maintenance fee charged to the stock brokerage houses for each terminal. The Company initially plans to charge a maintenance fee equivalent to approximately $1,000 per month for each remote computer terminal. The maintenance fee will be paid and denominated in Renminbi. The Company expects to initially charge an installation fee equivalent to approximately $6,000 for installing each remote computer terminal at the stock brokerages which will also be paid and denominated in Renminbi. Brighton-STAQ is authorized by the Ministry of Foreign Economic Relations and Trade for a total investment of $1,600,000. To date, approximately $1,600,000 has been contributed by the Company into the joint venture, with an additional $4,000,000 expected to be required to complete the STAQ On-line Network project (all of which will be the responsibility of the Company). To ensure that all investment in Brighton-STAQ in excess of the authorized total investment is adequately protected under Chinese law, it will be necessary for the Company to submit, for approval, a request for an increase in the total investment of the joint venture, which application will be submitted when the funds from the Offering are available. The Company has no reason to believe that such application would not be approved. Additional capital contributed by the Company will be structured as loans to Brighton-STAQ such that the Huazheng's percentage ownership in Brighton-STAQ will not be diluted. The joint venture has a 12-year term expiring in 2006. Extension of the term of the joint venture is subject to the approval of the Ministry of Foreign Economic Relations and Trade, the approval authority for Sino-Hong Kong joint venture companies. The Company will be required to submit a formal application for extension to the Ministry six months prior to the expiration of the term for approval. The Company has no reason to believe that such application would not be approved. The parties have a verbal agreement that Huazheng has the right, under certain financial performance criteria, to acquire up to an 45 46 additional 10% of the joint venture annually, at market valuation, up to a total ownership interest of 49% of Brighton-STAQ. CURRENT STATUS OF THE STAQ ON-LINE NETWORK The Company has successfully tested the STAQ On-line Network using dedicated land telephone lines leased from ChinaPac, a commercial arm of the Ministry of Post and Telecommunications. In order to be fully commercially operational, the Company intends to convert the STAQ On-line Network to satellite linkage. The Company is negotiating a three-year arrangement with The People's Daily, the major newspaper serving China, to subscribe for use of its satellite service, which it will finalize pending completion of the Offering. The Company is able to obtain services from The People's Daily at a rate of one-third the rate generally charged by commercial providers of satellite service because The People's Daily uses satellite communication only at night for distribution of text, as is customary for daily newspaper publications. As a result, its satellite communication resources are idle during daylight hours. This provides the opportunity for the Company to lease the system, with availability during key daylight trading hours, at very competitive rates. The satellite transponder providers of The People's Daily are Asia Satellite Telecommunications Co. Ltd. in Hong Kong for C-Band transponder and China Telecommunications Broadcast Satellite Corporation in Beijing for Ku-Band transponder. The stock price quotations from the STAQ Exchange trading floor in Beijing will be uplinked to The People's Daily's transponder and downlinked to various cities then being served. After being downlinked to the various cities, the stock price quotations will be transmitted over a wireless system for broadcast to the remote computer terminals at the brokerages. Nodes for receiving the data broadcasted over the wireless system will be installed at the remote computer terminals. When a buy or sell order is executed at the remote computer terminals, such information is transmitted back via the wireless system and the satellite linkage to the STAQ Exchange in Beijing. The Company will own the satellite equipment necessary for uplinking and downlinking the stock price quotations. For local wireless communication, the Company plans to "piggyback" on the frequencies used by the Aria Wireless Systems which it has installed for other customers. Radio frequency is a controlled resource in China. Current Chinese laws and regulations do not allow foreign ownership or control of radio frequency. As a result, the Company cannot independently lease radio frequencies from the Ministry of Post and Telecommunication to build its wireless networks. The Company's customer, ICBC, has agreed to allot a portion of ICBC's assigned radio frequency in Beijing and Chongqing for the Company's use for a fee of $100 per node per year. The STAQ On-Line Network is functionally similar to other on-line transaction processing systems the Company has designed and installed for its financial services and hospitality industry customers. On-line transaction processing systems are designed to provide instant responses for high volume transactions. In the last seven years, the Company and its predecessor have developed, designed and installed over 35 on-line transaction processing networks in the Pacific Basin region to customer's specifications, including credit and authorization systems, airline ticket reservation systems, ATM networks and bank branch networking. The Company has applied this knowledge in the design and development of the STAQ On-Line Network. MARKETING The Company plans to initially set up the satellite-linked STAQ On-line Network in the cities of Beijing and Chongqing and install computer terminals in a selected number of STAQ Exchange member stock brokerages for a three month test period, which is anticipated to begin in January 1998. During the test period, the STAQ On-line Network will be provided to the selected stock brokerages for free. At the end of the test period, these stock brokerages will have the option to subscribe for the STAQ On-line Network by executing maintenance agreements with Brighton-STAQ. The Company plans to host a series of seminars at 46 47 these test sites for other traders from the STAQ Exchange member stock brokerages during the test period to attract customers. Once the Company establishes the STAQ On-line Network service in Beijing and Chongqing, it plans to extend its coverage area to Shanghai, Shenzhen and Guangzhou. The Company believes that the STAQ On-line Network will increase the STAQ Exchange's ability to offer access to trading on the exchange. According to officials at the STAQ Exchange, only half of its members currently have seats on the trading floor because of the STAQ Exchange's insufficient technical expertise and capital resources. The remaining members must collaborate with seat members to trade. Eventually, Brighton-STAQ plans to co-market the STAQ On-line Network by packaging it with membership to the STAQ Exchange to all stock brokerages who are not yet members of the STAQ Exchange, in cooperation with the STAQ Exchange. COMPETITION - BRIGHTON-STAQ Both the Shanghai and Shenzhen Stock Exchanges maintain their own on-line securities quotation and trading systems for internal use and both have the potential to compete with the STAQ Exchange for trading of securities listed on their respective stock exchanges. The Company believes that it is unlikely that either the Shanghai or Shenzhen Stock Exchanges would compete with the STAQ Exchange because all three exchanges are now under common control. The Shanghai and Shenzhen Stock Exchanges were brought under direct control of the CSRC by the PRC State Council in August 1997 to settle conflict of interest issues among the exchanges. In addition, as their sub-exchange, the STAQ Exchange is contributing to the development of the Shanghai and Shenzhen Stock Exchanges. The Company believes that the development of the STAQ On-line Network by Brighton-STAQ will likely complement the Shanghai and Shenzhen Stock Exchanges by increasing the volume of securities traded on both exchanges. The Company will potentially compete with other businesses experienced in the systems management and computer network integration business as well as the wireless communications business, which are capable of designing, installing and maintaining on-line transaction processing systems. The Company believes that information providers that have entered the China market and utilize on-line transaction processing systems in their businesses, such as Dow Jones Markets, Inc., Reuters Limited and Bloomberg L.P., are potential competitors of the Company. These potential competitors have greater marketing and development budgets than the Company and have greater capital resources than the Company. In the developed securities markets in the Pacific Basin region (such as Hong Kong, Singapore, Japan, Malaysia, Thailand and Taiwan), Dow Jones Markets, Inc., Reuters Limited and Bloomberg L.P. have been successful in offering access to trading on securities markets that permit off-exchange floor trading, currency trading as well as news and information. It should be noted that except for China, which permits off-exchange floor trading, the stock exchanges in the Pacific Basin region are all floor-based electronic trading systems which do not permit off-exchange floor trading. EQUIPMENT DISTRIBUTION BUSINESS MARKET OVERVIEW Beginning in the mid-1980's, China commenced economic reforms that significantly decentralized the purchasing authority of government owned or controlled entities with respect to imports. In response to this process of decentralization and market orientation, increased numbers of industrial equipment manufacturers and independent distributors have entered the Chinese market to meet the market demand for modernization. Currently, the equipment distribution sector in China is highly saturated with significant competition among manufacturers and distributors from around the world. 47 48 PRODUCTS The Company and its predecessor have, since 1981, facilitated United States, European and other manufacturers of industrial equipment with access to the Chinese marketplace by providing marketing, sales and technical services for their products. The industrial equipment which the Company has been marketing in China are machine tools, such as machine center and grinder measurement devices, and heavy machinery, such as gantry mills, pressing machine production lines and dyes transfer automation systems. The Company has signed exclusive distributor agreements with several major manufacturers of industrial equipment (Milltronics Manufacturing Company (a U.S. company), Normac Incorporated (a U.S. company), ALO Teknik AB (a Swedish company), Royal Master Grinders, Inc. (a U.S. company) and K.O. Lee Company (a U.S. company)) for the sale of their industrial equipment in China. However, these manufacturers may sell the industrial equipment to their own customers based outside of China for use in China, such as, sales to the American party of a Sino-foreign joint venture company for use by the Sino-foreign joint venture company in China. In such cases, these manufacturers would pay the Company a sales commission of 5% of the sales price for the Company to provide repair and servicing for the industrial equipment inside China. The Company also sells industrial equipment for other manufacturers on a non-exclusive basis. The following table sets forth the Company's sales of industrial equipment by supplier made during the ten month period ended October 31, 1997 and the Company's projected revenues in 1998 based on the Company's on-going negotiations with customers: ==================================================================================== SUPPLIER TYPE OF INDUSTRIAL 1997 1998 EQUIPMENT ==================================================================================== Adaptive Motion Tube & pipe bending $200,000 $300,000 Control Systems machine - ------------------------------------------------------------------------------------ Alo-Teknik AB Saw tooth grinders $750,000 $300,000 - ------------------------------------------------------------------------------------ Forest-Line Capdenac Large size milling - $1,500,000 machines - ------------------------------------------------------------------------------------ Milltronics Machine centers $300,000 $2,000,000 Manufacturing Corporation - ------------------------------------------------------------------------------------ Normac, Inc. Shred grinding machines $350,000 $350,000 - ------------------------------------------------------------------------------------ Royal Master Centerless grinders $450,000 $450,000 Grinders, Inc. - ------------------------------------------------------------------------------------ Sullair Corporation Industrial air $900,000 $1,500,000 compressors and dryers - ------------------------------------------------------------------------------------ The Monarch Machine Vertical Machine centers $1,000,000 $1,000,000 Tool Company ==================================================================================== 48 49 CUSTOMERS The Company's customers for industrial equipment are PRC Government owned or controlled entities, including government ministries, universities, research facilities and factories. The majority of the Company's customers are metal handling and processing factories in the automotive, ship building and aviation industries in China. The following sets forth the Company's major customers for industrial equipment: China National Chemical Construction Chongqing Company Shenyang Blower Works Shenyang Aircraft Corporation State-owned Benxi Toolplant China Offshore Industrial Corporation Dongfeng-Citroen Automobile Company Ltd. Changan Automobile Works Shanghai Jiao Tong University Deyang Qitong Machinery Co. Ltd. Shenzhen Baosheng Co. Ltd. The Company signed three major contracts with Chinese customers for the sale of industrial equipment, as of October 29, 1997, totaling approximately $6,980,000. The Company has been awarded a $1,690,000 contract from Shenyang Aircraft Corporation to equip 5 heavy duty vertical machining centers. Shenyang Aircraft Corporation is the leading aircraft manufacturer in China and produces sections of the Boeing 737 aircraft. The Company has entered into a contract to provide computer-controlled auto body stamping equipment to Changan Automobile Works, a Chinese government-owned automotive manufacturer, located in Chongqing, for $2,890,000. Changan Automobile Works is one of the largest automotive manufacturers in China and is a long standing customer of the Company. Delivery for the stamping equipment is scheduled for the first quarter of 1998. The Company has contracted to provide a gantry milling machine to Shenyang Blower Works, in Shenyang, for $2,400,000. Shenyang Blower Works is the largest manufacturer of air blowers and air compressors for the petroleum, chemical and electricity generating industries in China. Due to the long manufacturing cycle for large-size machine tools, delivery to Shenyang Blower Works is scheduled for the fourth quarter of 1998. The equipment distribution business accounted for approximately $4,300,000 and $3,700,000 in revenue for 1995 and 1996, respectively. Historically, the Company has relied on a limited number of customers for a substantial portion of its total revenues. The Company's customers vary from year to year, but, historically, significant portions of its revenues are from a limited number of customers. The Company expects that significant portions of future revenues from this business segment will continue to be generated by a limited number of customers, and revenue may vary substantially from quarter to quarter as a result of both the large order sizes and the long lead times characteristic of this business. MARKETING The Company solicits potential customers for the sale of industrial equipment by participating in trade shows, promotional seminars and exhibitions throughout China and following up with mass mailings of product catalogues. At the trade shows, the Company operates a separate promotional exhibit. When the Company receives a request for particular equipment, the Company's sales staff in New Jersey is provided with the technical specifications and searches for suitable equipment manufacturers in the global market. When equipment that meets the technical specifications of the customer is identified, a case-by-case arrangement is negotiated between the equipment manufacturer and the Company. After a purchase agreement is signed with the customer, the Company will purchase the equipment from the manufacturer and resell it to the customer. 49 50 The Company's industrial equipment distribution business sales and support teams, based in China and New Jersey, have grown from a total of 3 employees in 1991 to 27 employees as of September 30, 1997. The Company's sales teams in China for the industrial equipment distribution business are located in Beijing (9 employees), Shanghai (8 employees) and Wuhan (8 employees). All orders are sent to Beijing for approval and processing. FOREIGN TRADE CORPORATIONS ("FTC") Contracts for the sale of industrial equipment are entered into between BIC or Brighton Equipment Corporation Limited, a wholly owned Hong Kong subsidiary of BECL ("Brighton Equipment"), and the customer. The Company does not place an order with the third party manufacturer for industrial equipment until a sale has been made to the customer. As a result, the Company does not generally need to warehouse inventory. In most cases, however, the Company does take title to the industrial equipment and bears the risk of loss in the event of non-payment by the customer. Sales of the industrial equipment, regardless of the nature of the customer, are made through FTC's, since Chinese domestic companies and individuals are not permitted to trade directly with foreign companies. The FTC's make purchases on behalf of the customers and are legally authorized by the PRC Government to conduct import business. FTC's are chartered and regulated by the government and were formed to facilitate foreign trade. Once the customer selects the foreign vendor and the industrial equipment to be purchased, it selects a FTC to carry out the necessary procedures for the import and purchase of the equipment. The FTC's function as procurement arms for the customers. Although the purchase decision is made by the customer, the Company enters into formal purchase contracts with FTC's. The FTC's take title to the industrial equipment and resell to the customers. The customers pay the FTC's in local currency (Rmb) and the FTC's, which have access to foreign exchange, pay the foreign vendors in U.S. dollars or other foreign currency. By virtue of its direct contractual relationship with the FTC, rather than the customer, the Company is to some extent dependent upon the continuing existence of and contractual compliance by the FTC until the particular transaction has been consummated. The Company's industrial equipment sales business, however, is not dependent on any single FTC or customer. Although sales by the Company to certain industries involve repeat transactions with FTC's that operate in those industries, the Company does not believe that it is dependent upon any particular FTC or that the loss of relations with any particular FTC would have a material adverse effect on the Company. Rather, FTC's, which earn commissions in transactions, compete with each other for the right to handle the customer's business. The Company believes that it is able to ensure that purchase orders for industrial equipment by the customers are properly approved and authorized when a purchase contract is signed with a FTC because the FTC will review all necessary paperwork before executing contracts on the customer's behalf. As an additional precaution, to date, all of the Company's direct sales to its customers have been guaranteed by letters of credit. As a policy, the Company will not ship any industrial equipment ordered until a bank letter of credit is provided by the customer. As such, the Company has seldom experienced nonpayment for industrial equipment orders and the risk of loss due to nonpayment is negligible even though the Company takes title to the industrial equipment. The Company has also never experienced a problem with obtaining payment in U.S. dollars for the industrial equipment. The customer is responsible for carrying out any necessary import procedure for the industrial equipment, obtaining the import license and for freight charges. The Company ships the ordered industrial equipment to the port of entry specified by the customer. It is also the customer's responsibility to clear the industrial equipment through customs and ship the industrial equipment from the port of entry to the customer's 50 51 premises. After the industrial equipment has arrived at its destination in China, the Company arranges with the customer for the installation of the industrial equipment and the training of the customer's personnel in the operation of the industrial equipment. The industrial equipment is generally warranted for a period of one year after installation. The customer is responsible for any out of warranty service and repairs. AFTER SALES SERVICES In order to perform its servicing and other after-sale responsibilities, the Company employs a staff of five engineering and technical support personnel. The technical support engineers work out of the Company's various offices throughout China and are trained to handle service calls initially through advice and consultation. If necessary, the engineers travel to the location of the unit and perform required servicing. The Company maintains what it believes is an adequate inventory of supplies, spare parts and tools to handle most servicing. If parts under warranty require replacement, the Company may elect to replace that part out of its own parts inventory with the understanding that the manufacturer would in turn replace the part in the Company's inventory. Any post-warranty repair or servicing, charged on a time and material basis, has historically been immaterial to the Company's business. COMPETITION The Company competes with other independent distributors in China marketing similar products. Although the Company believes that it is one of the major independent distributors of industrial equipment, there may be other distributors with greater resources or other competitive advantages over the Company. In addition to other independent distributors, the Company faces more significant competition directly from established manufacturers. With respect to its industrial equipment, for example, the Company competes with Cincinnati Milacron, Inc. of the US, which maintains its own direct sales force in China. In addition, certain manufacturers, such as Ingersoll-Rand Company of the US, are better able than the Company to establish name recognition across industry lines as they market a wide variety of products in China under one brand name. Domestic Chinese entities also compete in various product areas. Certain of these competitors, whether joint venture projects with foreign manufacturers or all-Chinese groups, often receive preferential treatment by the government regulatory authorities, who seek to curtail spending on imported equipment in favor of domestic Chinese industrial development. Although the Company competes directly with products of certain of such joint ventures and all-Chinese groups, the Company does not believe that this preference by the regulatory authorities is often applied to the material detriment of the Company. CHINA NATIONAL CONTRACT On April 15, 1994, the Company contracted with China National to provide engineering design and implementation for a sodium bichromate production plant with production capacity of 20,000 metric tons. This contract and the work related to it are outside the ordinary course of the Company's business. However, because of certain third-party technology that was available to it at that time, the Company was able to successfully bid on the contract. Turn-key contracts of this nature are generally discrete projects, and the Company does not anticipate repeat business from China National. The Company also does not currently have or plan to have any other projects of this nature in the foreseeable future. The Company is responsible for the basic engineering design and transferring to China National certain manufacturing technological know-how licensed to the Company by AlliedSignal, Inc. 51 52 ("AlliedSignal") for use in the production of sodium bichromate, chromic anhydride and chromium sulfate. The Company is also commissioned to procure key production equipment on China National's behalf. To date, the Company has completed the transfer of the basic engineering design and AlliedSignal's technology, and procurement of key production equipment. The first and second shipments of the equipment were made in May 1997 and October 1997, respectively. The third (final) shipment of the equipment is scheduled for February 1998. After construction of the plant is complete and ready to commence production (expected to occur at the end of 1998), the Company will provide plant commissioning services, including supervision of final construction, equipment installation and pre-operational testing. The contract with China National accounted for approximately 34% and 13% of the Company's revenues for the years ended December 31, 1995 and 1996, respectively, and approximately 67% and 28% of equipment distribution revenues for the years ended December 31, 1995 and 1996, respectively. The decrease in revenues was due to a temporary suspension of the project imposed by the municipal government in February 1996, due to environmental concerns relating to China National's proposed methodology for waste disposal by the plant. The revised proposal for waste management submitted by China National was approved by the municipal government and the temporary suspension was lifted in January 1997. The contract resumed following the lifting of the temporary suspension. All payments from China National are remitted to the Company in U.S. dollars. BACKGROUND OF THE COMPANY The Company was incorporated in the State of Delaware on November 4, 1988 as Sirone Corporation. On October 31, 1995, the Company changed its name to Zentex Corporation. For a period of time prior to November 11, 1996, the Company was engaged in the distribution in the United States and Canada of a shampoo and conditioner treatment. In October 1996, the Company entered into an acquisition agreement (the "Acquisition Agreement") with BIC, BECL, and the Brighton Shareholders pursuant to which effective November 11, 1996 the Company acquired all of the issued and outstanding capital stock of BIC and BECL from the Brighton Shareholders in exchange for the issuance by the Company of a controlling interest in the Company to the Brighton Shareholders (the "Reverse Merger"). The Reverse Merger was effected to facilitate the consolidation of BIC and BECL into one entity. Pursuant to the Reverse Merger, and in furtherance of its new business plan, the Company's name was changed to "Brighton Technologies Corporation," and its symbol on the OTC Electronic Bulletin Board was changed to "BRTK." Immediately prior to the Reverse Merger, the Company had a total of 3,513,000 shares of Common Stock issued and outstanding. In connection with the Reverse Merger, the Company issued to the Brighton Shareholders an aggregate of 27,000,000 shares of Common Stock representing approximately 88% of the then outstanding shares of Common Stock of the Company. On November 11, 1996, a 1-for-3 reverse stock split was effected. Effective October 17, 1997, a second 1-for-3 reverse stock split was effected. All Common Stock and per share data have been restated to reflect the reverse stock splits. Pursuant to the terms of the Acquisition Agreement, the Company transferred to two individuals who were part of the prior management (the "Transferees") all of its operating assets existing immediately subsequent to the closing of the Reverse Merger (excluding the shares of BIC and BECL) in exchange for the assumption by the Transferees of all of the liabilities of the Company as of the closing of the Reverse Merger and the delivery of a release of all obligations owed by the Company to an affiliate of the Transferees. In addition, at the closing of the Reverse Merger, each member of the Company's then Board of Directors resigned, and was replaced by representatives of the Brighton Shareholders. THE COMPANY'S CORPORATE STRUCTURE The Company conducts its business through two principal subsidiaries: BIC and BECL. BIC acts as distributor of third party manufactured industrial equipment to customers in Pacific Basin countries with primary distribution to customers in China. BIC established a representative in Wuhan, China. BECL is an investment and holding company for Asian based investments focusing on information and industrial equipment 52 53 related ventures in the Pacific Basin region. BECL holds investments in five second tier subsidiaries, four of which are companies organized under the laws of Hong Kong and one is a PRC joint venture company (the percentage of ownership of the issued and outstanding capital stock is denoted parenthetically): (i) Brighton OLTP Systems Limited ("Brighton OLTP") (100%); (ii) Aria China 100%; (iii) Brighton-Equipment (100%); (iv) Brighton Elevator Corporation Limited ("Brighton Elevator") (79%); and (v) Brighton-STAQ (90%). Brighton Equipment provides computer network integration to customers in Pacific Basin countries other than China. Brighton Elevator is a distributor of elevator and escalators in China. Both Brighton OLTP and Aria China are inactive companies. Brighton-STAQ is a PRC Sino-Hong Kong equity joint venture company that was formed to develop, design, install and maintain computer equipment for an automated securities trading and quotation system. The following is a diagram of the Company's structure: [DIAGRAM OF COMPANY STRUCTURE] 53 54 GOVERNMENT REGULATION All foreign entities, businesses, persons and all onshore foreign investors, including Sino-foreign cooperative joint ventures, and Sino-foreign equity joint ventures, are prohibited from managing or participating in the management of any telecommunication business in China. In addition, all such telecommunication businesses are prohibited from structuring any foreign ownership of the management of such businesses. Participation in projects engaged in the leasing service industry is also prohibited to foreign entities, businesses, persons and all on-shore foreign investors. The Company believes that Brighton-STAQ does not violate the provisions of these regulations at the present time. The Company has received an opinion from its Chinese counsel, Zhong Xin Law Office, to the effect that the design, installation and maintenance of the STAQ On-line Network and the charge of a related maintenance fee by Brighton-STAQ does not violate any rules of the relevant Chinese Governmental agencies. The telecommunication services essential to the operation of the STAQ On-line Network will be provided by domestically licensed third-party providers (i.e., The People's Daily and ICBC). In addition, operation of the STAQ On-line Network is controlled directly by the STAQ Exchange. Revenue earned by Brighton-STAQ is for the maintenance and service of the equipment for the STAQ On-line Network. COMPLIANCE WITH ENVIRONMENTAL LAWS The Company has no material expenses and anticipates no material impact on its business occasioned by compliance with environmental laws. EMPLOYEES The Company and its subsidiaries have approximately 130 full-time employees of which over 80% are professionals with specialized skills. There are 32 employees based in Hong Kong, 88 based in China and 10 in the Company's corporate office in Allendale, New Jersey U.S.A., which serves as technical support base for the Asian operations. Of the 88 employees in China, 27 are dedicated to sales related activities for the equipment distribution business segment and 18 are engineering and technical support personnel in the Network Group business segment. PROPERTIES NEW JERSEY. The Company and BIC currently occupy facilities leased by BIC in Allendale, New Jersey consisting of 5,000 square feet. The lease expires on July 31, 2001. HONG KONG. BECL and its subsidiaries occupy facilities leased by BECL in Quarry Bay, Hong Kong consisting of office B and D1 on the 14th floor of Aik San Factory Building. The lease expires on February 28, 1998. BEIJING. The facilities occupied by Brighton-STAQ in the Ritan Office Building, Chao Yang District, Beijing are under two separate lease agreements. Both leases expire on April 30, 1999. SHANGHAI. Brighton-STAQ signed a two-year lease for its branch office, effective September 1, 1997 and expiring August 31, 1999, for office space in Shanghai, consisting of Suite D and E on the 5th Floor of the Nan Yang Properties Building. 54 55 SHENZHEN. The Brighton Elevator Shenzhen representative office occupies office space in the Shenzhen Beijing Hotel in Shenzhen. The lease expires December 30, 1997. The Company intends to renew the lease upon its expiration. WUHAN. The Brighton Elevator Wuhan representative office occupies 120 square feet of office space in Wuhan. The lease expires on October 1, 1998. At such time, the BIC Wuhan representative office will assume the remainder of the lease. PATENTS AND TRADEMARKS The Company owns no registered patents or trademarks. The Company believes that its business is not materially dependent on any patent or trademark. LEGAL MATTERS The Company is either a plaintiff or a defendant in several pending legal matters. In the opinion of management, the final resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. 55 56 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table and text sets forth the names and ages of all directors and executive officers of the Company and the key management personnel as of September 30, 1997. The Board of Directors of the Company is comprised of only one class. All of the directors will serve until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. Executive officers serve at the discretion of the Board of Directors, and are appointed to serve until the first Board of Directors meeting following the annual meeting of shareholders. Except as otherwise noted, there are no family relationships among directors and executive officers. Also provided is a brief description of the business experience of each director and executive officer and the key management personnel during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws. AGE NAME (AS OF OCTOBER 31, 1997) POSITION ---- ------------------------ -------- BRIGHTON TECHNOLOGIES CORPORATION Kit Kung 46 Chairman of the Board, President and Chief Executive Officer Nils Ollquist 41 Director and Vice President Robert N. Weingarten 45 Chief Financial Officer Warren Wang 49 Secretary and Chief Accounting Officer Hong Yun 42 Director; Vice President/General Manager of The Brighton Industries Corporation (New Jersey) Michael Muldavin 77 Director KEY MANAGEMENT PERSONNEL Edith Wong 47 General Manager Brighton Electronics Corporation Ltd. (Hong Kong) He Ping 37 General Manager Beijing Brighton Staq Electronic System Company Limited (Beijing) Lu Jian Guo 39 General Manager Beijing Brighton Staq Electronic System Company Limited - Shanghai Branch Office (Shanghai) Ma Yong Jun 39 Manager of Finance and Administration Brighton Electronic Corporation Ltd. (Beijing) 56 57 BACKGROUND AND EXPERIENCE KIT KUNG has been Chairman of the Board, President and Chief Executive Officer of the Company since October 1996. Mr. Kung is the Founder of BECL. He was born in Shanghai and emigrated to the United States in 1974. He re-visited China in 1980, and by 1981 was the first ever to legally export 32-bit computers from the United States into China; those first computers being two sets of VAX computer systems from Digital Equipment Corporation. From that profile, he established an extensive network of customers and relationships in China. Mr. Kung graduated from Rutgers University with a degree in Physics and is a citizen of the United States. Mr. Kung has been listed in the "Who's Who Worldwide" publication since 1993 and the "Outstanding Americans" publication since 1994. He is the husband of Hong Yun. NILS A. OLLQUIST has been a director, Vice President and Chief Financial Officer of the Company since October 1996. He is also a Principal of Orient Financial Services Limited in Hong Kong. Mr. Ollquist has fifteen years of experience in investment banking and corporate finance in Hong Kong, the United States and Australia. Prior to creating Orient Financial in 1993, he served as head of Bank of America's mergers and acquisitions group in Asia. Before joining Bank of America in 1990, Mr. Ollquist was Director and head of Security Pacific Australia's U.S. corporate finance and investment banking activities. He worked for several years in Sydney with Amsterdam Rotterdam Bank and Barclays Bank from 1980 to 1984. Prior to commencing his investment banking career, Mr. Ollquist served for 5 years in the Australian Treasury in Canberra. He holds degrees in Economics and Law from the Australian National University. ROBERT N. WEINGARTEN has served as Chief Financial Officer of the Company since November 3, 1997. From July 1992 to present, Mr. Weingarten has been the sole shareholder of Resource One Group, Inc., a financial consulting and advisory company. From January 1, 1997 through July 31, 1997, Mr. Weingarten was a principal in Chelsea Capital Corporation, a merchant banking firm. From January 1991 through December 1992, Mr. Weingarten served as a general partner of Commerce Partners, a consulting firm specializing in financial restructurings and business reorganizations in financial restructurings and business reorganizations. Since 1979, Mr. Weingarten has served as a consultant with numerous public companies in various stages of development, operation or reorganization. Mr. Weingarten currently serves as a director of Fotoball USA, Inc., a publicly-held company specializing in sports products, and as an officer and director of GolfGear International, Inc., a privately-held company. Mr. Weingarten received an M.B.A. in Finance from the University of Southern California and a B.A. in Accounting from the University of Washington. WARREN WANG has been Secretary and Chief Accounting Officer of the Company since November 1996. From 1981 to 1996, he was Vice President-Finance at Seavest, Inc. (a financial investment firm with interests in real estate, securities, oil and gas, and other capital ventures). From 1979 to 1980, he was the Accounting Manager at Mailman Brothers. From 1977 to 1978, he was with the CPA firm of Louis Sturz & Co. From 1975 to 1977, he was an accountant with Western Union International, Inc. Mr. Wang is a certified public accountant and received his B.B.A. in accounting from the Bernard M. Baruch College of the City University of New York. HONG YUN has been a director of the Company since October 1996. She joined BIC's predecessor in 1982 and founded BIC in 1989 and is the individual responsible for developing the industrial equipment business into a significant operation. Ms. Yun is a native of Beijing and a U.S. citizen by 57 58 naturalization. Ms. Yun graduated from Beijing University of Beijing, China specializing in electronics engineering. She is the wife of Kit Kung. MICHAEL MULDAVIN has been a director of the Company since October 1996. Mr. Muldavin, currently a visiting professor at the University of California at Los Angeles, was a pioneer in China trading, having assumed responsibility for the family trading business in Heilongjiang province before WWII. In 1979, Mr. Muldavin was invited by the Chinese Government to establish a joint Chinese language magazine "Science & Technology Review." In recent years, Mr. Muldavin has been involved in a total of more than 80 joint venture investments in China including agribusiness, automotive and media/data systems and communications. Mr. Muldavin founded the Benchmark Company Group, an investment consultancy and advisory firm, and has consulted on investments and ventures in China, Russia and Vietnam since 1980. Mr. Muldavin received his B.S. in mathematics and engineering, M.S. in economics, joint PhDs in economics and public administration and J.D. from Harvard College. Mr. Muldavin also holds a M.P.H. (medical care administration and epidemiology) from the University of California, Los Angeles. EDITH WONG joined BIC's predecessor in 1984 as the first employee and office manager in Hong Kong. Ms. Wong is the General Manager of BECL and is responsible for the day-to-day operations of BECL and its Hong Kong subsidiaries. Ms. Wong received her Bachelors Degree in Business Administration and Post-graduate Diploma in Purchasing and Supply from Polytechnic of North London. Ms. Wong is a resident of Hong Kong. HE PING is the General Manager of Brighton-STAQ. Mr. He joined the Company as the Deputy General Manager and then Acting General Manager of Brighton-STAQ project in September 1994, and was promoted to his current position. Prior to joining the Company, Mr. He was the Business Development Officer and Administrative Executive in the Beijing representative office of Imperial Chemical Industry since 1993. Mr. He graduated from Beijing TV University in 1988 and was a graduate of the China-Europe Management Institute MBA program in 1993. Mr. He is a native of Beijing and a Chinese national. LU JIAN GUO is based in the Brighton-STAQ Shanghai branch office and is responsible for the Eastern China operations of the Company. Mr. Lu joined BIC's predecessor in 1995 as the Deputy General Manager of Eastern Region operations. Prior to joining the Company, Mr. Lu held a number of managerial positions with Sino-Foreign joint venture companies in southern and eastern China from 1991 to 1995. Mr. Lu graduated from Eastern Normal China University in 1983 majoring in mechanical design. He was a lecturer for Shanghai University from 1983 to 1991. Mr. Lu is a native of Shanghai and a Chinese national. MA YONG JUN was employed by BECL in September 1994 as the Manager of Finance and Administration for BIC's predecessor's and BECL's Beijing based operations. Prior to joining Brighton, Mr. Ma worked as the Accounting Executive and Financial Manager for Bei Chen Group, a large scale real estate company, from 1990 to 1994. Mr. Ma has had more than eight years in managing financial and administrative matters. Presently, Mr. Ma is responsible for the corporate planning for the China based operations for BIC and BECL. Mr. Ma graduated from the University of Beijing Finance & Accounting College majoring in Finance in 1986. Mr. Ma is native of Beijing and a Chinese national. EXECUTIVE COMPENSATION The following table sets forth the compensation paid during fiscal years ended December 31, 1995 and 1996 to the Company's Chief Executive Officer. No officer of the Company received annual compensation in excess of $100,000 per annum. 58 59 SUMMARY COMPENSATION TABLE Name and Principal Position Year Salary ------------------ ---- ------ Kit Kung, Chairman, President and Chief 1996 $80,000 Executive Officer 1995 $80,000 COMPENSATION AGREEMENTS There are currently no long-term employment or consulting agreements between the Company and the executive officers or directors of the Company. BOARD OF DIRECTORS During the year ended December 31, 1996, no meetings of the Board of Directors were held; all corporate actions were conducted by unanimous written consent of the Board of Directors. Directors receive no compensation for serving on the Board of Directors, but are reimbursed for any out-of-pocket expenses incurred in attending board meetings. The Company had no audit, nominating or compensation committees, or committees performing similar functions, during the year ended December 31, 1996. Subsequent to the Offering, the Company intends to have at least two independent directors and to form an audit committee with a majority of the members being independent directors. STOCK OPTION PLAN As of October 31, 1997, the Company has not adopted a stock option plan. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Restated Certificate of Incorporation includes provisions which limit the liability of its directors. As permitted by applicable provisions of the Delaware Law, directors will not be liable to the Company for monetary damages arising from a breach of their fiduciary duty as directors in certain circumstances. This limitation does not affect liability for any breach of a director's duty to the Company or its stockholders (i) with respect to approval by the director of any transaction from which he or she derives an improper personal benefit, (ii) with respect to acts or omissions involving an absence of good faith, that the director believes to be contrary to the best interests of the Company or its stockholders, that involve intentional misconduct or a knowing and culpable violation of law, that constitute an unexcused pattern or inattention that amounts to an abdication of his or her duty to the Company or its stockholders, or that show a reckless disregard for duty to the Company or its stockholders in circumstances in which he or she was, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to the Company or its stockholders, or (iii) based on transactions between the Company and its directors or another corporation with interrelated directors or based on improper distributions, loans or guarantees under applicable sections of Delaware Law. This limitation of directors' liability also does not affect the availability of equitable remedies, such as injunctive relief or rescission. 59 60 The Company has been advised that it is the position of the Commission that insofar as the provision in the Company's Restated Certificate of Incorporation may be invoked for liabilities arising under the Securities Act, the provision is against public policy as expressed in the Securities Act and is therefore unenforceable. KEY MAN INSURANCE The Company will, prior to the completion of the Offering, obtain and maintain a $2,000,000 term life insurance policy covering Kit Kung which names the Company as the sole beneficiary. 60 61 PRINCIPAL STOCKHOLDERS The following table sets forth certain information as of the date of this Prospectus with respect to (i) the beneficial ownership of the Common Stock of the Company by each beneficial owner of more than 5% of the outstanding shares of Common Stock of the Company, each director, each executive officer and all executive officers and directors of the Company as a group, (ii) the number of shares of Common Stock owned by each such person and group and (iii) the percent of the Company's Common Stock so owned. As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Exchange Act as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose of or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable. Each person has sole voting and investment power with respect to the shares of Common Stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of Common Stock, except as otherwise indicated. PERCENTAGE OF PERCENTAGE OF NUMBER OF SHARES OF OUTSTANDING COMMON OUTSTANDING COMMON NAME AND ADDRESS OF COMMON STOCK STOCK BENEFICIALLY STOCK BENEFICIARY BENEFICIAL OWNER BENEFICIALLY OWNED OWNED BEFORE OFFERING OWNED AFTER OFFERING ------------------- ------------------- --------------------- -------------------- Kit Kung 2,833,334(1) 81.1% 59.7% c/o Brighton Technologies Corporation 6 Pearl Court Allendale, NJ 07401 Hong Yun 166,667(2) 4.8% 3.5% c/o Brighton Technologies Corporation 6 Pearl Court Allendale, NJ 07401 Nils Ollquist 18,334 0.5% 0.4% c/o Orient Financial Services 13C, Chinaweal Centre 414-424 Jaffe Road Wanchai, Hong Kong Robert N. Weingarten -- -- -- 5439 Lockhurst Drive Woodland Hills, CA 91367 Warren Wang -- -- -- c/o Brighton Technologies Corporation 6 Pearl Court Allendale, NJ 07401 Michael Muldavin -- -- -- c/o Brighton Technologies Corporation 6 Pearl Court Allendale, NJ 07401 61 62 PERCENTAGE OF PERCENTAGE OF NUMBER OF SHARES OF OUTSTANDING COMMON OUTSTANDING COMMON NAME AND ADDRESS OF COMMON STOCK STOCK BENEFICIALLY STOCK BENEFICIARY BENEFICIAL OWNER BENEFICIALLY OWNED OWNED BEFORE OFFERING OWNED AFTER OFFERING ------------------- ------------------- --------------------- -------------------- All Directors and 3,018,335 86.4% 63.6% executive Officers as a group (6 persons) (1) Does not include 166,667 shares of Common Stock owned by Hung Yun, Mr. Kung's wife. Mr. Kung disclaims beneficial ownership of such shares. (2) Does not include 2,833,334 shares of Common Stock owned by Kit Kung, Ms. Yun's husband. Ms. Yun disclaims beneficial ownership of such shares. CHANGES IN CONTROL The Company is unaware of any contract or other arrangement, the operation of which may at a subsequent date result in a change in control of the Company. 62 63 CERTAIN TRANSACTIONS In order to meet its working capital requirements, the Company periodically received funding from Kit Kung, the Chairman of the Board of Directors, President and Chief Executive Officer, and his family members. The Company has also periodically made advances to the principals and officers of the Company. Such advances are secured and generally bear no stated interest rate or terms of repayment. As of December 31, 1995 and 1996, amounts due from Kit Kung and his family members aggregated $0 and $43,239, respectively; outstanding receivables from other related parties aggregated $8,220 and $15,884, respectively; and amounts due to Kit King and his family members aggregated $2,612,896 and $227,298, respectively. At December 31, 1995, BIC had a net receivable, funded by advances from Kit Kung, from Brighton Information Systems Corporation (now known as Greater China Corporation) of $493,751. Kit Kung had previously served as a director and officer of Greater China Corporation until his resignation in September 1994 but continued to serve as officer and director of certain subsidiaries until January 1997. In partial settlement of this indebtedness, the Company received an assignment of fixed assets and accounts receivable during 1996 valued at $381,433, resulting in a balance of $112,318. During the year ended December 31, 1995, Kit Kung and his family members had advanced $1,612,041 to the Company, and during the year ended December 31, 1996, the Company had repaid $1,118,625 of such advances. During the years ended December 31, 1995 and 1996, advances to other related parties aggregated $518,322 and $43,239, respectively, and during the year ended December 31, 1996, $424,872 of accounts receivable from related parties were repaid. Through November 1996, BECL had $248,103 of advances to affiliates of Greater China Corporation, which were funded by advances from Kit Kung. Kit Kung agreed to assume responsibility for settlement of such advances (and the previously described balance of $112,318 owed to BIC) and such amounts were offset against advances to stockholders. In December 1996, Kit Kung contributed approximately $1,266,973 of net borrowings, consisting of $1,515,076 of the net amounts owed by the Company to Kit Kung less $248,103 of amounts Kit Kung owed to the Company, to contributed capital. During the six months ended June 30, 1997, the Company advanced $325,001 to Kit Kung and his family members and repaid amounts due Kit Kung and his family members aggregating $182,513, resulting in receivables from stockholders and related parties of $360,124 and a payable to stockholders of $44,785 at June 30, 1997. Subsequent to the completion of the Offering, the Company does not intend to enter into any future transactions with Kit Kung and his family members, and the Company intends to have all future transactions with affiliates approved by a committee of disinterested directors. During the year ended December 31, 1996, $105,731 was paid to Orient Financial Services Limited, a Hong Kong-based company in which Nils A. Ollquist is a principal: $60,000 was paid as a retainer fee with respect to advisory services provided in relation to the reverse merger with Zentex Corporation (the former name of the Company) and fund raising activities and $45,731 was reimbursement of travel and related expenses. During the six months ended June 30, 1997, $15,870 was paid to Orient Financial Services Limited. During the years ended December 31, 1995 and 1996, salaries and incentive expenses to Kit Kung and his family members aggregated approximately $135,000 in each of such years. 63 64 DESCRIPTION OF SECURITIES GENERAL The Company is authorized by its Restated Certificate of Incorporation to issue an aggregate of 100,000,000 shares of Common Stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per share, which preferred stock may be issued with such rights, designations and privileges (including redemption and voting rights) as the Board of Directors may, from time to time, determine. The following summary descriptions are qualified in their entirety by reference to the Company's Restated Certificate of Incorporation, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company is authorized to issue 100,000,000 shares of Common Stock, par value $.001 per share. As of the date of this Prospectus, 3,495,333 shares of Common Stock were issued and outstanding and held of record by 91 stockholders. Each stockholder is entitled to one vote per share of Common Stock owned by such stockholder on all matters submitted to a vote of the stockholders. The Common Stock is not entitled to preemptive rights and is not subject to redemption. Subject to the dividend rights of holders of any then outstanding preferred stock, holders of Common Stock are entitled to receive dividends at such times and in such amounts as the Board of Directors, from time to time, may determine. Subject to the liquidation preference of any then outstanding preferred stock, holders of Common Stock are entitled to receive, on a pro rata basis, all remaining assets of the Company available for distribution to the holders of Common Stock in the event of the liquidation, dissolution or winding up of the Company. All outstanding shares of Common Stock are, and the shares of the Common Stock issued pursuant to the Offering will be, validly issued, fully paid and non-assessable. PREFERRED STOCK The Board of Directors has the authority to cause the Company to issue, without any further vote or action by the stockholders, up to 5,000,000 shares of preferred stock, par value $.001 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders. The issuance of preferred stock with voting and conversion rights may adversely effect the voting power of the holders of Common Stock, including the loss of voting control. The Company has no present plans to issue any shares of preferred stock. WARRANTS The Warrants sold in the Offering will be issued pursuant to a warrant agreement (the "Warrant Agreement") among the Company, the Representative and Interwest Transfer Company (the "Warrant Agent"), and will be evidenced by warrant certificates in registered form. The following summary is qualified in its entirety by the text of the Warrant Agreement. 64 65 Each Warrant entitles the registered holder thereof to purchase one share of Common Stock at a price of 120% of the offering price per Unit at any time commencing _______________, 1998 until _______________, 2003, unless previously redeemed. The Warrants comprising part of the Units will not be transferable separately from the Units until ____________, 1998, unless earlier separated upon three days' prior written notice from the Representative at the sole discretion of the Representative. The Warrants are subject to redemption by the Company at a price of $0.10 per Warrant, at any time commencing _______________, 1998, on 30 day's prior written notice, provided that the closing price per share of the Common Stock has equaled or exceeded $____________ (150% of the offer price) for twenty consecutive trading days within the thirty-day period immediately preceding such notice. The exercise price of the Warrants and the number of shares of Common Stock or other securities issuable upon the exercise thereof are subject to adjustment in certain circumstances, including, but not limited to, any stock dividend on the Common Stock, any subdivision, combination or reclassification of the Common Stock, any distribution to all stockholders or rights, warrants or options to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock), or any distribution to all stockholders of assets or evidence of indebtedness of the Company. Adjustments also would be made upon a merger or consolidation where the Company is not the surviving entity, or the sale of all or substantially all of the assets of the Company, so as to enable warrantholders to purchase the kind and number of shares of stock or other securities or property (including cash) receivable in such event by a holder of the number of shares of Common Stock that might otherwise have been purchased upon exercise of such Warrant. The exercise price of the Warrants bears no relation to any objective criteria of value and should not be regarded as an indication of the future market price of the Securities offered hereby. The Warrants do not confer upon the holder any voting or any rights of a stockholder of the Company. Upon written notice to the warrantholders, the Company has the right to reduce the exercise price or extend the expiration date of the Warrants. SECTION 203 OF DELAWARE LAW Section 203 of the Delaware Law prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) prior to the date of the business combination, the transaction is approved by the board of directors of the corporation; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock, or (iii) on or after such date, the business combination is approved by the board of directors and by the affirmative vote of at least 66-2/3% of the outstanding voting stock that is not owned by the interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person, who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. Section 203 may have a depressive effect on the market price of the Common Stock and/or the Units. TRANSFER AGENT The Company has appointed Interwest Transfer Company, Salt Lake City, Utah, as transfer agent for the Units. 65 66 SHARES ELIGIBLE FOR FUTURE SALE Of the 3,495,333 shares of Common Stock outstanding 3,093,837 shares are "restricted securities" as that term is defined in Rule 144 under the Securities Act and, under certain circumstances, may be sold without registration pursuant to Rule 144. Generally, under Rule 144, each person holding restricted securities of a period of one year may, every three months, sell in ordinary brokerage transactions or to market makers an amount of shares equal to no more than the greater of 1% of the Company's then outstanding Common Stock or the average weekly trading volume for the four weeks prior to the proposed sale. This limitation on the amount of shares which may be sold under the Rule 144 does not apply to restricted securities sold for the account of a person who is not or has not been an affiliate of the Company during the three months prior to the sale and who has beneficially owned the restricted securities for at least two years. The Company's officers, directors and substantially all of its principal stockholders have agreed not to publicly sell any securities of the Company owned by them without the written consent of the Underwriters prior to _________________, 1998. Any sales of restricted securities must be in compliance with Rule 144, pursuant to registration under the Securities Act or pursuant to an exemption therefrom. The public sale of restricted securities pursuant to Rule 144, an effective registration statement, or otherwise, may have an adverse affect on the market price of the Common Stock. The 401,496 share balance of the 3,495,333 shares of Common Stock currently outstanding plus the 1,250,000 shares of Common Stock issuable upon exercise of the Warrants are freely tradable. UNDERWRITING The Underwriters named below, for whom the Representative is acting as representative, has agreed, subject to the terms and conditions of the Underwriting Agreement between the Company and the Underwriters (the "Underwriting Agreement"), to purchase from the Company, and the Company has agreed to sell to the Underwriters on a firm commitment basis, the respective number of Units set forth opposite their names: Underwriter Number of Units ----------- --------------- National Securities Corporation........................ -----------............................................ Total.................................................. [ ] =============== The Underwriters are committed to purchase all of the Units offered hereby, if any of such Units are purchased. The Underwriting Agreement provides that the obligations of the several Underwriters are subject to conditions precedent specified therein. The Company has been advised by the Representative that the Underwriters propose initially to offer the Units to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such prices less concessions not in excess of $___ per Unit. Such dealers may re-allow a concession not in excess of $___ per Unit to certain other dealers. After the initial public offering, the public offering price concession and reallowance may be changed by the Representative. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make. The Company has agreed to pay to the Representative a non-accountable expense allowance equal to [3%] 66 67 of the gross proceeds of the Offering, of which $25,000 has already been paid. The Company has also agreed to pay all of the costs of qualifying the Units under federal and state securities laws, together with legal and accounting fees, printing and other costs in connection with the Offering. The Company has granted to the Underwriters an over-allotment option exercisable for 45 days from the date of this Prospectus, to purchase up to 187,500 Units at the initial public offering price per Unit offered hereby, less underwriting discounts and commissions, if any (the "Over-Allotment Option"). The Underwriters may exercise this option, in whole or in part, from time to time, solely for the purpose of covering over-allotments, if any, made in connection with the sale of the Units. To the extent the Over-Allotment Option is exercised in whole or in part, each Underwriter will have a firm commitment, subject to certain conditions, to purchase the number of Units proportionate to its initial commitment. Such option may be exercised only for the purpose of covering over-allotments, if any, incurred in the sale of the Units offered hereby. In connection with the Offering, the Company has agreed to sell to the Representative and its designees, for nominal consideration, warrants to purchase from the Company up to 125,000 Units (the "Representative's Warrants"). The Representative's Warrants are initially exercisable at a price of $___ per Unit (120% of the initial public offering price per Unit) for a period of five years commencing on the effectiveness of the Offering. The Representative's Warrants may not be sold, transferred, assigned or hypothecated for a period of one year from the date of this Prospectus, except to officers and directors of the Representative. The Representative's Warrants provide for adjustments in the number of shares of Common Stock and Warrants and in the exercise price of the Representative's Warrants as a result of certain events, including subdivisions and combinations of the Securities. The Representative's Warrants grant to the holders thereof certain rights of registration for the Common Stock and Warrants issuable upon exercise of the Representative's Warrants. The Company and all of the officers, directors and holders of all outstanding securities of the Company as of the date of this Prospectus have agreed not to, without the Representative's prior written consents, sell, transfer, assign, pledge, hypothecate or otherwise dispose of any equity securities of the Company, or any securities convertible into, or exercisable or exchangeable for, any equity securities of the Company, for a period of 13 months following the effective date of the Registration Statement, except pursuant to the Over-Allotment Option. An appropriate legend shall be marked on the reverse of the certificates representing such securities. The Company has agreed that, for a period of five (5) years from the date of this Prospectus, if so requested by the Representative, the Company shall nominate and use its best efforts to cause an individual designated by the Representative to be elected as a member of the Board of Directors of the Company. In the event that the Representative elects not to designate a person to serve on the Board of Directors of the Company, the Representative shall have the right to designate one person to attend meetings of the Board of Directors of the Company. Such person shall be entitled to attend all such meetings and to receive all notices and other correspondence and communications sent by the Company to members of its Board of Directors. The Company's officers, directors and shareholders have agreed to vote their shares of Common Stock in favor of such designee. The Representative has not yet exercised its right to designate such a person. The Company has agreed to reimburse the designee of the Representative for such designee's out-of-pocket expenses incurred in connection with such designee's attendance of meetings of the Company's Board of Directors. Prior to the Offering, there has been no public trading market for the Units. Consequently, the initial public offering price of the Units has been determined by negotiations between the Company and the Representative and does not necessarily bear any relationship to the Company's asset value, net worth, or other established criteria of value. Among the factors considered in determining the offering price, in addition to 67 68 prevailing market conditions, were the Company's financial condition, prospects and management. There can be no assurance however, that the price at which the Units will sell in any public market after the Offering will not be lower than the offering price. Neither the Representative nor any of the participants of the underwriting group have a material relationship with the promoters, officers and/or directors of the Company. In connection with the Offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Units. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which, such person may bid for or purchase Units for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Units in connection with the Offering than they are committed to purchase from the Company, and in such case may purchase Units in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position by exercising the Over-Allotment Option. In addition, the Representative, on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby they may reclaim from an Underwriter (or dealer participating in the Offering) for the account of other Underwriters, the selling concession with respect to Units that are distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may stabilize or maintain the price of the Units at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discontinued at any time. The foregoing is a brief summary of the agreements described above and does not purport to be complete. Reference is made to copies of each such agreement which are filed as exhibits to the Registration Statement. See "ADDITIONAL INFORMATION." LEGAL MATTERS The validity of the shares of Units offered hereby will be passed upon for the Company by Loeb & Loeb LLP, Los Angeles, California. Camhy Karlinsky & Stein LLP, New York, New York, has acted as counsel for the Underwriters in connection with the Offering. EXPERTS The 1996 financial statements and schedules included in this Prospectus and in the Registration Statement have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the period set forth in their report appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. The 1995 financial statements and schedules included in this Prospectus and in the Registration Statement have been audited by Russo and Shapiro and Francis S. L. Yan & Co., independent certified public accountants, to the extent and for the period set forth in their reports appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting. 68 69 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a registration statement ("Registration Statement"), together with exhibits thereto, under the Securities Act with respect to the Units offered hereby. This Prospectus, which constitutes a part of the Registration Statement, omits certain of the information set forth in the Registration Statement in accordance with the rules and regulations of the Commission. For further information with respect to the Company and to the Units offered hereby, reference is made to such Registration Statement and such exhibits filed as a part thereof. Statements contained in this Prospectus as to the content of any contract or other document referred to are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement and exhibits can be inspected and copied at the public reference section at the Commission's principal office, 450 5th Street, N.W., Judiciary Plaza, Washington, D.C. 20549, the Commission's Regional Offices located at the Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511, and 7 World Trade Center, 13th Floor, New York, New York 10048 and on the Commission's website at http://www.sec.gov. Copies may be obtained from the Commission's principal office upon payment of the fees prescribed by the Commission. 69 70 BRIGHTON TECHNOLOGIES CORPORATION Brighton Technologies Corporation and Subsidiaries Index to Consolidated Financial Statements Sequential Page Numbers ---------- AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 - ---------------------------------------------- Report of Independent Certified Public Accountants - BDO Seidman, LLP Russo and Shapiro Consolidated Balance Sheets - December 31, 1995 (as restated) and 1996 Consolidated Statements of Income - Years Ended December 31, 1995 (as restated) and 1996 Consolidated Statements of Stockholders' Equity Years Ended December 31, 1995 (as restated) and 1996 Consolidated Statements of Cash Flows Years Ended December 31, 1995 (as restated) and 1996 Notes to Consolidated Financial Statements Years Ended December 31, 1995 (as restated) and 1996 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 Condensed Consolidated Balance Sheet - June 30, 1997 Condensed Consolidated Statements of Operations - Six Months Ended June 30, 1996 and 1997 Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 1996 and 1997 Notes to Condensed Consolidated Financial Statements 70 71 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Brighton Technologies Corporation and Subsidiaries Allendale, New Jersey We have audited the consolidated balance sheet of Brighton Technologies Corporation and Subsidiaries (the "Company") as of December 31, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. 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 our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Brighton Technologies Corporation and Subsidiaries at December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP - -------------------- BDO Seidman LLP Woodbridge, New Jersey May 29, 1997 (October 17, 1997 as to the last paragraph of Note 8) 71 72 [RUSSO AND SHAPIRO LETTERHEAD] INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Brighton Technologies Corporation and Subsidiaries We have audited the accompanying consolidated balance sheet of Brighton Technologies Corporation and subsidiaries as of December 31, 1995, and the related statements of income, stockholder's equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the financial statements of Brighton Technologies Corporation which statements reflect total assets of $2,634,859 as of December 31, 1995, and total revenues of $9,872,996 for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Brighton Electronics Corporation Limited, is based solely on the report of the other auditors. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brighton Technologies Corporation and subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 3 to the financial statements, the 1995 financial statements have been restated to reflect the correction of depreciation expenses recorded on project equipment, accounting for losses related to joint ventures and in the recognition of revenue on certain long-term projects. Accordingly, the Company's financial statements for the year ended December 31, 1995 have been restated to reflect the correction of these errors. /s/ Russo and Shapiro New York, New York September 25, 1997 72 73 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS 1995 (As restated) December 31, (Note 3) 1996 - ------------------------------------------------------------------------------------------------------------ ASSETS CURRENT: Cash and cash equivalents $ 137,067 $ 716,699 Restricted cash (Note 2) 600,000 2,636,000 Accounts receivable (net of allowance for doubtful accounts of $30,000 in 1995 and 1996) (Note 11) 153,375 1,339,318 Costs and accumulated gross profit in excess of billings on uncompleted contracts (Note 6) 747,168 2,056,987 Receivables from stockholders and related parties (Note 4) 17,622 43,239 Prepaid expenses 529,460 310,677 Deferred taxes (Note 9) 408,000 1,315,000 Other 1,207 4,700 - ---------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 2,593,899 8,422,620 - ---------------------------------------------------------------------------------------------------------- FIXED ASSETS, NET (NOTE 5) 1,349,757 1,536,458 OTHER ASSETS: Non-current accounts receivable - related parties (Note 4) 484,349 15,884 Deposits -- 9,245 Prepaid contract fees 314,375 171,875 Organization costs, net 365 30,986 - ---------------------------------------------------------------------------------------------------------- TOTAL OTHER ASSETS 2,148,846 1,764,448 - ---------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 4,742,745 $10,187,068 ========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT: Accounts payable $ 427,877 $ 958,550 Accrued expenses 252,716 313,337 Accrued licensing costs 600,000 450,000 Billings in excess of costs and accumulated gross profit on uncompleted contracts (Note 6) 1,160,188 4,971,394 Deferred revenue -- 83,421 Demand note payable (Note 7) -- 620,101 Payable to stockholders (Note 4) 2,612,896 227,298 Taxes payable (Note 10) 360,000 1,678,000 - ---------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 5,413,677 9,302,101 - ---------------------------------------------------------------------------------------------------------- LONG-TERM: Deferred taxes (Note 9) 263,000 156,000 Minority interests (Note 2) 136,705 143,931 - ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 5,813,382 9,602,032 - ---------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 10) STOCKHOLDERS' EQUITY (DEFICIT) (NOTES 4 AND 8): Common stock; $.001 par value; shares authorized - 100,000,000; issued and outstanding - 3,025,000 and 3,448,678 in 1995 and 1996, respectively 3,025 3,449 Preferred stock; $.001 par value; shares authorized - 5,000,000; none issued and outstanding -- -- Contributed capital 23,757 1,480,482 Accumulated deficit (1,097,419) (898,895) - ---------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,070,637) 585,036 - ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,742,745 $10,187,068 ========================================================================================================== See accompanying notes to financial statements 73 74 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME 1995 (As restated) Year ended December 31, (Note 3) 1996 - ----------------------------------------------------------------------------------------------- REVENUES (NOTES 6 AND 11) $ 8,370,537 $ 8,006,260 COST OF REVENUES (NOTE 6) 6,165,201 5,785,507 - ----------------------------------------------------------------------------------------------- GROSS PROFIT 2,205,336 2,220,753 - ----------------------------------------------------------------------------------------------- GENERAL AND ADMINISTRATIVE EXPENSES: Salaries, payroll taxes and employee benefits (Note 4) 579,713 765,035 Rent and premises (Note 10) 299,365 377,154 Travel and lodging 234,565 84,402 Depreciation and amortization 6,007 38,738 Foreign transaction (gains) losses 4,615 5,268 Miscellaneous 523,751 484,432 - ----------------------------------------------------------------------------------------------- TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 1,648,016 1,755,029 - ----------------------------------------------------------------------------------------------- OPERATING INCOME 557,320 465,724 - ----------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest expense and bank fees (Note 7) (38,488) (33,170) Interest income 27,949 37,451 Miscellaneous income 13,863 44,745 - ----------------------------------------------------------------------------------------------- 3,324 49,026 - ----------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 560,644 514,750 PROVISION FOR INCOME TAXES (NOTE 9) 444,000 309,000 - ----------------------------------------------------------------------------------------------- MINORITY INTERESTS (NOTE 2) 55,703 (7,226) - ----------------------------------------------------------------------------------------------- NET INCOME $ 172,347 $ 198,524 =============================================================================================== EARNINGS PER SHARE DATA: Primary and fully diluted $ .06 $ .06 =============================================================================================== Weighted average shares outstanding - primary 3,025,000 3,101,896 =============================================================================================== Weighted average common shares and common equivalents outstanding - fully diluted 3,025,000 3,140,672 =============================================================================================== See accompanying notes to financial statements. 74 75 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Years ended December 31, 1995 and 1996 - ----------------------------------------------------------------------------------------------------- Common Stock Contributed Accumulated Shares Amount Capital Deficit - ----------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1995 (NOTE 3) 3,025,000 $3,025 $ 23,757 $ (755,013) Adjustment for the effect on prior years of correction of errors (Note 3) -- -- -- (514,753) - ----------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1995, AS RESTATED (NOTE 3) 3,025,000 3,025 23,757 (1,269,766) Net income, as restated, for 1995 -- -- -- 172,347 - ----------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 3,025,000 3,025 23,757 (1,097,419) Net shares issued in connection with reverse merger (Note 1) 390,345 390 (390) -- Sale of common stock 33,333 34 449,966 -- Costs associated with the sale of common stock -- -- (259,824) -- Conversion of advances from majority stockholder (Note 4) -- -- 1,266,973 -- Net income -- -- -- 198,524 - ----------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 3,448,678 $3,449 $1,480,482 $ (898,895) - ----------------------------------------------------------------------------------------------------- See accompanying notes to financial statements. 75 76 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 1995 (As restated) Year ended December 31, (Note 3) 1996 - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 172,347 $ 198,524 - ----------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 143,508 176,238 Deferred income taxes 75,000 (1,014,000) Minority interests (55,703) 7,226 Changes in assets and liabilities: Accounts receivable 2,299,745 (1,185,943) Costs and accumulated gross profit in excess of billings (747,168) (1,309,819) Other current assets (513,530) 208,941 Other assets 63,809 (38,227) Accounts payable (1,946,011) 530,673 Billings in excess of costs and accumulated gross profits 160,013 3,811,206 Taxes payable 573,000 1,318,000 Other liabilities and deferred revenue 374,223 38,510 - ----------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS 426,886 2,542,805 - ----------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 599,233 2,741,329 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES (NOTE 2): Increase in restricted cash (600,000) (2,036,000) Purchases of fixed assets (1,352,434) (154,484) - ----------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (1,952,434) (2,190,484) - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES (NOTE 2): Proceeds from demand note payable -- 575,603 Issuance of common stock, net of related costs -- 190,176 Proceeds from Stockholder advances 1,612,041 -- Repayments on Stockholder advances -- (1,118,625) Repayment of accounts receivable - related parties -- 424,872 Advances to related parties (518,322) (43,239) - ----------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,093,719 28,787 - ----------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (259,482) 579,632 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 396,549 137,067 - ----------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 137,067 $ 716,699 - ----------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Taxes paid $ 221,466 $ 5,358 Interest expense paid 38,488 18,046 - ----------------------------------------------------------------------------------------------- See accompanying notes to financial statements. 76 77 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ 1. ORGANIZATION OF General COMPANY Brighton Technologies Corporation (the "Company") serves as the ultimate parent of Brighton Industries Corporation ("BIC"), a United States of America based company, and Brighton Electronics Corporation Limited ("BECL"), a Hong Kong based holding company for two Hong Kong subsidiaries and interests in three Hong Kong joint ventures. On October 23, 1996, Zentex Corporation ("Zentex"), an inactive public company, affected a reverse non-cash merger transaction of BIC and BECL structured in the following manner. Stockholders of BIC and BECL transferred ownership of their shares to Zentex in exchange for the issuance of shares representing a controlling interest in Zentex. Pursuant to the terms of the agreement, Zentex transferred to the predecessor Zentex shareholders all of its operating assets (excluding the shares of BIC and BECL) in exchange for the assumption of liabilities existing immediately subsequent to the closing of the transaction. As part of the transaction, Zentex received a release of all obligations owed by it to an affiliate of the predecessor Zentex shareholders. In addition, at the closing, each member of the predecessor Zentex Board of Directors resigned and was replaced by representatives of the BIC and BECL stockholders. On November 12, 1996, Zentex was renamed Brighton Technologies Corporation. This transaction was consummated to facilitate the consolidation of the operating companies of BIC and BECL's founder and majority stockholder (the "Stockholder) into one entity. The Stockholder and members of his family control the operations of the Company and its subsidiaries. Prior to this transaction, the Stockholder and his family had full ownership of BIC and BECL. Since the BIC and BECL Stockholders obtained control of the Company, the accompanying financial statements reflect the operations of BIC and BECL for periods prior to the consummation of the transaction. The issuance of shares to the predecessor Zentex shareholders was accounted for as the issuance of equity by the Company for no consideration. 77 78 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ BIC, a Delaware Corporation, principally conducts its business in the People's Republic of China ("PRC") through registered PRC offices, where it acts as the purchaser and distributor of third party manufactured industrial, telecommunication and computer equipment and technological processes to PRC customers. The Company is actively marketing similar services in other Pacific basin countries. The Company has also entered into a long-term contract with China National Chemical Construction Chongqing Company ("China National") to aid in the design and construction of a sodium bichromate production plant in the PRC. Management does not expect to enter into any significant long-term contracts of this type in the future (see Note 11). BECL is located in and incorporated in Hong Kong and is an investment and holding company for Asian based companies. BECL subsidiaries are involved in the buying, selling and installation of computer and industrial equipment and in the development of credit card approval and authorization systems. One joint venture in which BECL has a 90% interest ("STAQ") has been formed to design, install and maintain a computer network for the trading of securities in the PRC. The minority interest holders of STAQ have the right to acquire an additional 10% ownership interest per annum (at the then determinable fair values) up to a maximum interest of 49%. Under the STAQ joint venture arrangements, the Company is required to invest approximately $4,000,000 ($1,600,000 of which has been invested) at December 31, 1996. BECL also has interests in two other inactive joint ventures. 78 79 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ 2. SUMMARY OF Business Combination and Consolidation Policy SIGNIFICANT ACCOUNTING POLICIES The combination of the Company's subsidiaries, which were previously under the common control of the Stockholder, has been accounted for in a manner similar to the pooling-of-interests method of business combinations. This method presents the Company's financial position, results of operations and cash flows as if BIC and BECL were combined for all periods presented. Accordingly, the consolidated financial statements include the accounts of the Company and its direct subsidiaries and joint ventures in which the Company has a controlling interest. All intercompany accounts and transactions have been eliminated in consolidation. Minority Interests BECL consolidates the accounts of three joint ventures in which it holds controlling interests. Income (loss) allocable to minority interests is recorded in the accompanying consolidated financial statements. Operating losses are allocated to the minority interests only to the extent of the minority interests' investment in these joint ventures. The Company is responsible for losses in excess of the minority interests' investments. At December 31, 1996, the excess of such investments over accumulated losses was approximately $39,000. Foreign Currencies For BECL subsidiaries and BIC branch offices, whose functional currency is the Hong Kong Dollar or the PRC Renminbi, balance sheet accounts are translated at exchange rates in effect at the end of the year and income statement accounts are translated at average exchange rates for the year. Translation adjustments are not material as of December 31, 1996 and 1995. For the majority of BIC transactions, revenue and costs are invoiced in U.S. dollars. Accordingly, the effects of foreign exchange transaction gains or losses are not material. The Company does not enter into foreign currency forward exchange contracts to hedge foreign currency exposures. 79 80 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ Revenue Recognition The Company accounts for long-term contracts on the percentage-of- completion method and income is recognized as work on contracts progresses, but estimated losses on contracts in progress are charged to operations immediately. The Company generally bills customers in accordance with contractual terms. At December 31, 1996 and 1995, management estimated that the Company will, at a minimum, recover its outlay for expenses when the projects are completed. Accordingly, no loss provisions for such contracts were recorded during 1996 and 1995. For short-term contracts and projects, revenue is recognized on the accrual basis as goods are shipped and services are performed. Income Taxes The Company accounts for income taxes using the liability method, which requires an entity to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Corporation's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of liabilities and assets using enacted tax rates in effect in years in which the differences are expected to reverse. Income tax expense (benefit) is determined on a separate company basis and includes current Federal, foreign and state taxes and deferred taxes. For U.S. purposes, the Company files its income tax returns on a cash basis. Cash Equivalents The Company considers all highly liquid debt instruments with a maturity of three months or less at the date of purchase to be cash equivalents. 80 81 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ Restricted Cash Cash that is restricted to pay project related liabilities and commitments totaled $600,000 and $2,636,000 at December 31, 1995 and 1996, respectively. Non-Cash Investing and Financing Activities During 1996, the Stockholder contributed $1,266,973 of net advances owed by the Company to contributed capital. In 1996, the Company received fixed assets valued at $67,297 in lieu of payments on 1995 accounts receivable balances. In connection with the merger described in Note 1, 390,345 shares of common stock were issued to Zentex stockholders with no proceeds to the Company. The increase in common stock was offset by a reduction to contributed capital in the accompanying financial statements. Organization Costs Costs incurred in connection with the incorporation of the Company and the formation of its current structure are capitalized and amortized over a period of five years. Fixed Assets Fixed assets are carried at cost and are depreciated over the estimated useful lives of the related assets (generally 2 to 5 years) on a straight line bases. The cost of leasehold improvements is amortized over the lesser of the length of the related leases or the estimated useful lives of the assets. Assets purchased, but not utilized in operations, are not subject to depreciation. Prepaid Contract Fees Prepaid contract fees are principally comprised of prepayments for services to be rendered over the life of a long-term contract. The related amortization expense for the years ended December 31, 1995 and 1996 was $137,500. 81 82 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ Benefit Plans BIC has no pension or profit sharing plans. BECL has a defined contribution plan covering qualified participants. The amount of contributions for the years ended December 31, 1995 and 1996 were $13,586 and $20,416, respectively. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company utilizes estimates in measuring and projecting revenue, costs and gross profit on long-term contracts, in providing for an allowance for doubtful accounts (also see Note 11) and in recording accrued liabilities. Actual results could differ from those estimates. Fair Values of Financial Instruments At December 31, 1995 and 1996, the carrying values of cash equivalents, restricted cash, accounts receivable (current and non-current), related party receivables and payables, accounts payable, demand notes payable and long-term debt approximates fair values due to the immediate or short-term maturity of these financial instruments. Earnings Per Share Earnings per share is based on the weighted average number of common stock shares. For purposes of determining fully diluted earnings per share, the conversion of the demand note into common stock equivalents was valued using the average sales price of the Company's common stock sold in 1996. 82 83 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). This statement is effective for the Company's 1997 financial statements and establishes criteria for the calculation and presentation of "Basic" and "Diluted" earnings per share. Based on an assessment of its current capital structure, management believes that adoption of SFAS 128 will not have a significant effect on the Company's reported earnings per share. Reclassifications Certain prior period amounts have been reclassified to conform with the current year presentation (also see Note 3). 3. RESTATEMENTS The 1995 financial statements have been restated to reflect the correction of depreciation expense recorded on project equipment, accounting for losses related to joint ventures, and to appropriately recognize revenue from certain long-term projects. In prior periods, BIC recognized revenue on long-term projects as certain stages of a project were completed, rather than on a ratable basis over the term of the entire contract. As a result, accumulated deficit at January 1, 1995 was increased by $514,753 and net income for the year ended December 31, 1995 was reduced by $258,353 ($.09 per share) from amounts previously published. 4. RELATED PARTIES Receivables and Liabilities From time to time, the Company receives funding from or provides funding to the Stockholder, his family members, principals and officers. Such advances generally bear no stated interest rate or terms of payments. Outstanding balances with stockholders and related parties at December 31, 1995 and 1996 were as follows: 83 84 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ December 31, 1995 1996 --------------------------------------------------------------------- Receivables (current and non-current): Stockholder and family members $ - $ 43,239 Brighton Information Systems Corporation (a) and (b) 493,751 - Other 8,220 15,884 --------------------------------------------------------------------- $ 501,971 $ 59,123 ===================================================================== Liabilities: Stockholder and family members $2,612,896 $227,298 ===================================================================== (a) At December 31, 1995, BIC had a net receivable, funded by the Stockholder, from Brighton Information System Corporation (now known as Greater China Corporation, "Greater China") in the amount of $493,751. The Stockholder had previously served as a director and officer of Greater China until his resignation in March 1996. In partial settlement of this indebtedness in 1996, the Company received an assignment of fixed assets and accounts receivable valued at $381,433. (b) Through November 1996, BECL had $248,103 of advances to affiliates of Greater China, which were funded by advances from the Stockholder. Accordingly, the Stockholder has agreed to assume responsibility for settlement of such advances (and the balance owed to BIC after the transactions described in (a) above) and such amounts were offset against "Advances to stockholders." In December 1996, the Stockholder contributed outstanding borrowings (net of these advances) to the Company's capital structure (see below). Conversion of Advances In December 1996, the Stockholder elected to contribute $1,266,973 of net borrowings ($248,103 of amounts the Stockholder owed to the Company and $1,515,076 of the net amounts owed by the Company) into the Company's capital structure. 84 85 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ Professional Fees Fees paid to Directors and their affiliates for financial advisory services totaled $0 and $105,731 for the years ended December 31, 1995 and 1996, respectively. The entire amount in 1996 was charged to contributed capital (see Note 8). General and Administrative Expenses Salaries and incentives expenses for the Stockholder and members of his family totaled approximately $135,000 in each of the years ended December 31, 1995 and 1996. 5. FIXED ASSETS Fixed assets at December 31, 1995 and 1996 are comprised of the following: December 31, 1995 1996 ------------------------------------------------------------ Equipment $ 18,707 $ 210,367 Furniture and fixtures 6,572 18,834 Leasehold improvements 6,850 18,027 Less: Accumulated depreciation (7,278) (42,358) ------------------------------------------------------------ 24,851 204,870 Project equipment (assets to be utilized in completing future projects) 1,324,906 1,331,588 ------------------------------------------------------------ Total $ 1,349,757 $ 1,536,458 ============================================================ 85 86 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ 6. LONG-TERM At December 31, 1995 and 1996, costs, estimated CONTRACTS gross profit and billings on uncompleted long-term contracts accounted for on the percentage of completion method are summarized as follows: December 31, 1995 1996 ------------------------------------------------------- Costs incurred on long-term contracts $ 4,078,131 $ 6,205,662 Estimated gross profit 834,357 1,242,824 ------------------------------------------------------- 4,912,488 7,448,486 Less: Billings to date (5,325,508) (10,362,893) ------------------------------------------------------- $ (413,020) $ (2,914,407) ======================================================= These amounts are included in the accompanying balance sheets under the following captions: December 31, 1995 1996 --------------------------------------------------------- Costs and accumulated gross profit in excess of billing on uncompleted contracts $ 747,168 $2,056,987 Billings in excess of costs and accumulated gross profit on uncompleted contracts 1,160,188 4,971,394 ========================================================= 7. DEMAND NOTE In 1996, BECL entered into a convertible demand note agreement with a third party. The note is convertible to common shares at prevailing market values. The balance outstanding at December 31, 1996 was $620,101. The fixed interest rate at December 31, 1996 was 5% per annum. Interest expense for the year ended December 31, 1996 was $15,124. The Company and the creditor are in the process of negotiating the conversion of $440,000 of the note to common shares. 86 87 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ 8. STOCKHOLDERS' Private Placement EQUITY In December 1996, the Company sold 33,333 shares of common stock in a private underwriting for aggregate net proceeds (before the costs discussed in the following paragraph) of approximately $450,000. In 1997, the Company sold an additional 24,007 of common stock for net proceeds of approximately $350,000. Costs directly related to the completion of these offerings amounted to $259,824 and have been charged to contributed capital in 1996. Public Offering Subject to certain conditions in 1997, the Company is considering a public offering of an unspecified number of shares of its common stock. Proceeds from this sale, if consummated, will be used for general corporate purposes and investments in joint ventures. Common Stock Reserved for Issuance At December 31, 1996, the Company had reserved 41,333 shares for fulfilling the conversion of a demand note payable to common stock. The conversion terms are based on the fair market value of the Company's common stock. Subsequent to December 31, 1996, the Company issued, at nominal cost, 9,422 shares of common stock to various individuals and firms. Of this issuance, 6,100 shares related to services rendered in connection with the Private Placement and contemplated Public Offering. The balance of the authorized, but not outstanding, common stock are not reserved. Preferred Stock The Company has 5,000,000 authorized shares of Preferred Stock (with a par value of $.001 per share), none of which have been issued or remained outstanding as of and for the years ended December 31, 1995 and 1996. The Company's Board of Directors reserves the right to determine the ownership privileges of the Preferred Stockholders and terms of the security prior to its issuance. 87 88 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ Dividends There were no dividends declared or paid on the Company's common stock in 1995 and 1996. Increase in Authorized Shares In 1996, the Company's stockholders approved an amendment to the Company's Certificate of Incorporation to establish the number of authorized shares of common stock of the Company at 100,000,000 shares, with a par value of $.001 per share and also approved a three for one stock split of the Company's common stock outstanding at that time. On October 17, 1997, the Company approved a one for three reverse stock split. All share and per share data have been restated for all periods presented to reflect these splits. 9. INCOME TAXES The domestic and foreign components of income (loss) before income taxes and minority interests are as follows: December 31, 1995 1996 ------------------------------------------------------- Domestic $ 936,307 $ 764,000 Foreign (375,663) (249,250) ------------------------------------------------------- $ 560,644 $ 514,750 ======================================================= 88 89 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ The components of the provision (benefit) for income taxes are as follows: December 31, 1995 1996 ------------------------------------------------------- Current: Federal $274,000 $ 988,000 Foreign 16,000 47,000 State 79,000 288,000 ------------------------------------------------------- 369,000 1,323,000 ------------------------------------------------------- Deferred: Federal 59,000 (802,000) Foreign (87,000) (29,000) State 16,000 (212,000) ------------------------------------------------------- (12,000) (1,043,000) ------------------------------------------------------- Net change in valuation allowance 87,000 29,000 ------------------------------------------------------- Provision for income taxes $444,000 $ 309,000 ======================================================= 89 90 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ The following table presents the principal reasons for the difference between the actual income tax provision and the tax provision computed by applying the U.S. Federal statutory income tax rate to income before income taxes and minority interests: December 31, 1995 1996 -------------------------------------------------------- U.S. Federal income tax provision at statutory rates $191,000 $ 175,000 State income taxes, net of Federal benefit 63,000 50,000 Effects of foreign operations and tax rate differentials 66,000 44,000 Valuation allowance - foreign loss carryforwards 87,000 29,000 Non-deductible losses and expenses 30,000 7,000 Other, net 7,000 4,000 -------------------------------------------------------- Provision for income taxes $444,000 $ 309,000 ======================================================== The statutory tax rates in the United States (including applicable net state rates), Hong Kong and the PRC are 40%, 16.5% and 33%, respectively. There are no tax holidays, exemptions and incentives afforded to the Company for its off-shore operations. Deferred income taxes as recorded in the accompanying consolidated balance sheets are comprised of the following: 90 91 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ 1995 1996 - ---------------------------------------------------------------------------------------------------- December 31, Asset Liability Net ASSET LIABILITY NET - ---------------------------------------------------------------------------------------------------- Current deferred income taxes: Accrued accounts receivable $ -- $ (88,000) $ (88,000) $ -- $ (371,000) $ (371,000) Contract costs -- (234,000) (234,000) -- -- -- Liabilities 733,000 -- 733,000 1,706,000 -- 1,706,000 Other current -- (3,000) (3,000) -- (20,000) (20,000) - ---------------------------------------------------------------------------------------------------- $ 733,000 $(325,000) $ 408,000 $ 1,706,000 $ (391,000) $ 1,315,000 ==================================================================================================== Non-current deferred income taxes: Foreign net operating loss carryforwards $ 87,000 $ -- $ 87,000 $ 116,000 $ -- $ 116,000 Deferred costs -- (258,000) (258,000) -- (146,500) (146,500) Fixed assets -- (4,500) (4,500) -- (9,000) (9,000) Other non- current -- (500) (500) -- (500) (500) Valuation allowance (87,000) -- (87,000) (116,000) -- (116,000) - ---------------------------------------------------------------------------------------------------- -- $(263,000) $(263,000) $ -- $(156,000) $(156,000) ==================================================================================================== At December 31, 1995 and 1996, the Company had established a valuation allowance on the deferred tax assets related to the foreign net operating loss carryforwards of BECL. Reductions to the valuation allowance will be recorded when, in the opinion of management, BECL's ability to generate taxable income in the future is considered more likely than not. At December 31, 1996, the Company has net operating loss carryforwards for Hong Kong tax purposes of approximately $702,000, which can be carried forward indefinitely. 91 92 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ 10. COMMITMENTS AND Operating Leases CONTINGENCIES The Company and its subsidiaries lease administrative office space and equipment under operating leases which expire prior to the end of 2001. Total future minimum lease payments as of December 31, 1996 are: ------------------------------------------------------- 1997 $284,055 1998 187,899 1999 85,817 2000 43,750 2001 25,521 ------------------------------------------------------- Total minimum lease payments $627,042 ======================================================= Rent expense and related costs for 1995 and 1996 were $149,880 and $260,396, respectively. Legal Matters The Company is either a plaintiff or a defendant in several pending legal matters. In the opinion of management, the final resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. 92 93 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ Contractual Obligations The Company may also be subject to claims and penalties arising from failure to comply with specific contractual requirements on the progression of long-term projects. Management does not believe that it has any measurable exposures related to such contingencies at December 31, 1996. The Company is also in the process of renegotiating the terms of certain aspects of technological licensing arrangements. The contractual value of services currently under negotiation approximates $450,000. The inability of the Company to fulfill contractual terms of long-term projects or to negotiate favorable arrangements on the use or distribution of licensed technology may have a material adverse effect on the Company's financial statements. Letters of Credit At December 31, 1996, the Company had issued irrevocable letters of credit of $746,230 (included in the determination of Restricted Cash balances at December 31, 1996) representing contingent commitments on equipment purchases. 11. CONCENTRATIONS Major Customers China National accounted for approximately 34% and 13% of revenues for the years ended December 31, 1995 and 1996, respectively. A BECL customer accounted for approximately 17% of revenues in 1996 and a BIC customer accounted for approximately 10% of revenues in 1995. The Company had an unsecured accounts receivable balance of approximately $512,000 at December 31, 1996 with a Hong Kong based customer. Management is currently discussing the timing of the settlement of this account receivable with the customer and expects full payment in 1997. 93 94 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ Historically, the Company has relied on a limited number of customers for a substantial portion of its total revenues. The Company expects that a significant portion of its future revenues will continue to be generated by a limited number of customers. The loss of any of these customers or any substantial reduction in business volume with any of these customers could materially adversely affect operating results. Suppliers The Company purchases a substantial amount of equipment and licenses technology from a limited number of entities. Based on the number of alternate qualified suppliers, management does not believe that the Company has a concentration of risks under its current arrangements. Geographical The vast majority of the Company's revenues are derived from customers based in countries outside the United States. Such operations subject the Company to certain operational risks. The Company's prospective results of operations could be negatively affected by adverse consequences arising from these risks. Although management believes that the likelihood of such factors occurring is remote, the possibility of unanticipated events disrupting the Company's operations exists. 12. SEGMENT Operations by Geographic Area INFORMATION Net revenues, operating income (loss) and identifiable assets from United States export sales to the Far East and for the Company's operations based in the Far East (principally, PRC and Hong Kong) are as follows: December 31, 1995 United States Far East Eliminations Consolidated - -------------------------------------------------------------------------------- Net revenues $6,497,541 $ 1,872,996 $ -- $8,370,537 Operating income (loss) 927,375 (370,055) -- 557,320 Identifiable assets 2,574,807 2,634,859 (466,921) 4,742,745 ================================================================================ 94 95 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ December 31, 1996 - -------------------------------------------------------------------------------- Net revenues $6,039,716 $ 1,966,544 $ -- $ 8,006,260 Operating income (loss) 730,875 (265,151) -- 465,724 Identifiable assets 7,152,549 4,299,370 (1,264,851) 10,187,068 ================================================================================ Substantially all of the Company's United States revenues are derived from customers based in the Far East. Operations by Segment The Company's predominant businesses are equipment distribution and networking. Net revenues, operating income and allocated assets for the Company's segments are as follows: Equipment December 31, 1995 Distribution Networking Consolidated - -------------------------------------------------------------------------------- Net revenues $4,267,791 $4,102,746 $8,370,537 Operating income 247,429 309,891 557,320 Identifiable assets 1,757,405 2,985,340 4,742,745 Purchases of fixed assets 27,049 1,325,385 1,352,434 Depreciation and amortization expense 5,887 120 6,007 ================================================================================ 95 96 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS ================================================================================ December 31, 1996 - -------------------------------------------------------------------------------- Net revenues $3,664,433 $4,341,827 $ 8,006,260 Operating income 214,515 251,209 465,724 Identifiable assets 4,179,102 6,007,966 10,187,068 Purchases of fixed assets 20,083 134,401 154,484 Depreciation and amortization expense 33,702 5,036 38,738 ================================================================================ 96 97 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) JUNE 30, 1997 ---------- ASSETS Current assets: Cash and cash equivalents $ 370,117 Restricted cash 1,080,575 Accounts receivable, net 1,345,658 Costs and accumulated gross profit in excess of billings on uncompleted contracts 675,396 Receivables from stockholders and related parties 360,124 Prepaid expenses 316,903 Deferred taxes 746,000 ---------- Total current assets 4,894,773 ---------- Fixed assets: Project equipment 1,331,588 Furniture and equipment, net 202,871 ---------- Net fixed assets 1,534,459 ---------- Other assets: Non-current accounts receivable - related parties 24,000 Deposits 9,245 Prepaid contract fees 103,125 Deferred offering costs (Notes 5 and 8) 90,387 Organization costs, net 27,443 ---------- Total other assets 254,200 ---------- Total assets $6,683,432 ========== (continued) 97 98 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (CONTINUED) JUNE 30, 1997 ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $1,875,837 Accrued expenses 138,019 Accrued licensing costs (Note 4) 450,000 Billings in excess of costs and accumulated gross profit on uncompleted contracts 1,030,225 Deferred revenue 107,438 Notes payable (Note 2) 790,603 Payable to stockholders 44,785 Taxes payable 1,125,000 --------- Total current liabilities 5,561,907 --------- Long-term liabilities: Deferred taxes 96,500 Minority interests 137,981 --------- Total long-term liabilities 234,481 ---------- Commitments and contingencies (Notes 4 and 5) Stockholders' equity (Notes 1 and 3): Preferred stock; $.001 par value; shares authorized - 5,000,000; issued and outstanding - none Common stock; $.001 par value; shares authorized - 100,000,000; issued and outstanding - 3,482,107 shares 3,482 Contributed capital 1,836,981 Accumulated deficit (928,919) Unearned compensation cost (24,500) ---------- Total stockholders' equity 887,044 ---------- Total liabilities and stockholders' equity $6,683,432 ========== See accompanying notes to condensed consolidated financial statements. 98 99 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED JUNE 30, ---------------------------- 1996 1997 ----------- ----------- Revenues $ 5,496,964 $ 4,535,865 Cost of revenues 4,456,263 3,205,144 ----------- ----------- Gross profit 1,040,701 1,330,721 ----------- ----------- General and administrative expenses: Salaries, payroll taxes and employee benefits 304,981 560,908 Rent and premises 133,312 218,987 Travel and lodging 133,176 110,886 Depreciation and amortization 16,227 40,314 Foreign transaction losses 3,148 7,423 Consulting fees (Note 6) (274,581) Miscellaneous 212,965 208,083 ----------- ----------- Total general and administrative expenses 803,809 1,421,182 ----------- ----------- Operating income (loss) 236,892 (90,461) ----------- ----------- Other income (expense): Interest expense and bank fees (19,565) (28,124) Interest income 9,091 43,520 Miscellaneous income 70,841 8,099 ----------- ----------- Total other income, net 60,367 23,495 ----------- ----------- Income (loss) before income taxes and minority interests 297,259 (66,966) Provision (benefit) for income taxes 133,176 (31,000) Minority interests (22,708) 5,942 ----------- ----------- Net income (loss) $ 141,375 $ (30,024) =========== =========== (continued) 99 100 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED) SIX MONTHS ENDED JUNE 30, --------------------------- 1996 1997 ------------- ----------- Net income (loss) per common share (Note 1): Primary and fully diluted $ .05 $ (.01) ============ =========== Weighted average number of common shares and common share equivalents outstanding (Note 1): Primary 3,025,000 3,467,630 ============ ============= Fully diluted 3,066,155 3,547,339 ============ ============= See accompanying notes to condensed consolidated financial statements. 100 101 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1997 COMMON STOCK UNEARNED --------------------- CONTRIBUTED ACCUMULATED COMPENSATION SHARES AMOUNT CAPITAL DEFICIT COST --------- ------- ----------- ----------- ------------ Balance at December 31, 1996 3,448,678 $ 3,449 $ 1,480,482 $ (898,895) Sale of common stock 24,007 24 352,924 Costs associated with the sale of common stock (45,416) Issuance of common stock for costs associated with the sale of common stock 6,089 6 (6) Issuance of restricted common stock to employee 3,333 3 48,997 $ (49,000) Amortization of unearned compensation 24,500 Net loss for the six months ended June 30, 1997 (30,024) --------- ------- ----------- ----------- ------------ Balance at June 30, 1997 3,482,107 $ 3,482 $ 1,836,981 $ (928,919) $ (24,500) ========= ======= =========== =========== ============ See accompanying notes to condensed consolidated financial statements 101 102 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, ---------------------------- 1996 1997 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 141,375 $ (30,024) ----------- ----------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 84,977 109,063 Deferred income taxes (507,000) 509,500 Minority interests 13,752 (5,950) Non-cash compensation expense 24,500 Note payable issued for consulting fees 150,000 Interest accrued on notes payable 29,373 20,502 Changes in operating assets and liabilities: Accounts receivable, net (739,233) (6,340) Costs and accumulated gross profit in excess of billings on uncompleted contracts (733,243) 1,381,591 Prepaid expenses (642,251) (6,226) Other current assets (19,093) 4,700 Deposits (20,151) Accounts payable 119,497 917,287 Accrued expenses (76,397) (175,318) Billings in excess of costs and accumulated gross profit on uncompleted contracts 827,144 (3,941,169) Deferred revenue 275,468 24,017 Taxes payable 662,000 (553,000) ----------- ----------- Total adjustments (725,157) (1,546,843) ----------- ----------- Net cash used in operating activities (583,782) (1,576,867) ----------- ----------- (continued) 102 103 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) SIX MONTHS ENDED JUNE 30, --------------------------------- 1996 1997 ------------ ----------- Cash flows from investing activities: Decrease in restricted cash $ $ 1,555,425 Acquisition of fixed assets (1,298) (34,771) Organization costs (211) ------------ ----------- Net cash provided by (used in) investing activities (1,509) 1,520,654 ------------ ----------- Cash flows from financing activities: Proceeds from demand note payable 575,603 Sale of common stock, net of related costs 307,532 (Advances to) repayments from stockholder and related parties 501,971 (325,001) Decrease in payable to stockholders (36,140) (182,513) Deferred offering costs (90,387) ------------ ----------- Net cash provided by (used in) financing activities 1,041,434 (290,369) ------------ ----------- Net increase (decrease) in cash and cash equivalents 456,143 (346,582) Cash and cash equivalents, at beginning of period 137,067 716,699 ------------ ------------ Cash and cash equivalents, at end of period $ 593,210 $ 370,117 ============ ============ See accompanying notes to condensed consolidated financial statements. 103 104 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1996 AND 1997 1. Basis of Presentation The accompanying condensed consolidated financial statements as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 are unaudited but, in the opinion of management of the Company, contain all adjustments necessary to present fairly the financial position at June 30, 1997, the results of operations for the six months ended June 30, 1996 and 1997, and the changes in cash flows for the six months ended June 30, 1996 and 1997. These adjustments are of a normal recurring nature. The accompanying condensed consolidated financial statements include the accounts of the Company and its direct subsidiaries and joint ventures in which the Company has a controlling interest. All intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the Company's consolidated financial statements and notes thereto for the years ended December 31, 1995 and 1996. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 1997. Net income (loss) per share for the six months ended June 30, 1996 and 1997 is based on the weighted average number of shares of common stock outstanding for each respective period. For purposes of determining fully diluted net income (loss) per share, the conversion of the demand note (see Note 2) into common stock equivalents was calculated using the average sales price of the Company's common stock sold during the six months ended June 30, 1997, and the conversion of the note payable issued for a consulting fee into common stock equivalents was calculated at the estimated offering price. All common share and per share amounts have been restated for all periods presented to reflect a one-for-three reverse stock split effective October 17, 1997. 2. Notes Payable During 1996, Brighton Electronics Corporation Limited, a Hong Kong-based subsidiary of the Company, entered into a convertible demand note agreement with a third party, with interest at 5% per annum. The note is convertible into common stock of the Company at prevailing market values. The note, including accrued interest, had a balance of $635,603 at June 30, 1997. On February 25, 1997, the Company entered into a consulting firm for business advisory services. Pursuant to that agreement, the Company paid the consulting firm $25,000 and issued a one-year note for $150,000 for services rendered. This amount has been charged to operations in the six month period ended June 30, 1997. The note is unsecured, bears interest at 10% per annum, with interest to accrue until the due date of February 25, 1998. Thereafter, such note will become payable upon demand, with interest at 12% per annum. If the Company does not complete a debt or equity financing by February 25, 1998, then the Company will have the option of converting the note, including accrued interest, into its common stock, with 104 105 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) SIX MONTHS ENDED JUNE 30, 1996 AND 1997 the value of such common shares to be calculated at 75% of the market price on such date. The maximum number of common shares that the Company will be required to reserve and issue as full settlement for the note, including accrued interest, will be 75,000 shares. Such shares, if issued, will be restricted and will have piggyback registration rights. If the Company completes a private financing by February 25, 1998, then the noteholder will have the option of converting the note, including accrued interest, into the same debt or equity instrument issued in connection with such private financing. If the Company completes a secondary public offering by February 25, 1998, the noteholder will have the option of converting the balance of the note, including accrued interest, into the same securities issued in connection with the secondary public offering at the offering price. Such securities, if issued, will be restricted and will have piggyback registration rights. In addition, the noteholder will have the right to elect one member of the Company's board of directors. 3. Stockholders' Equity Transactions affecting the Company's capital structure during the six months ended June 30, 1997 consisted of the following: a. The Company sold 24,007 shares of common stock for proceeds of $352,948, and incurred related costs of $134,920 of which $45,416 was paid in cash (including $11,931 to an affiliate of a director) and $89,504 was paid by the issuance of 6,089 shares of common stock to various individuals and firms for services rendered in connection therewith. The 6,089 shares of common stock were recorded as a charge to contributed capital at par value. The values ascribed to such shares were based on the sales price of the Company's common stock sold in comparable periods. b. The Company granted 3,333 shares of restricted common stock to an employee. The aggregate value of the shares of $49,000 was recorded as a reduction to stockholders' equity as deferred compensation cost and is being amortized, as earned, during the year ending December 31, 1997. At June 30, 1997, the balance of unearned compensation cost was $24,500. 4. Contractual Obligations The Company is in the process of renegotiating the terms of certain aspects of technological licensing arrangements that it entered into in conjunction with its contract with China National. The contractual value of services currently under negotiation is approximately $450,000. The inability of the Company to fulfill contractual terms of long-term projects or to negotiate favorable arrangements on the use or distribution of licensed technology may have a material adverse effect on the Company's consolidated financial statements. 105 106 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) SIX MONTHS ENDED JUNE 30, 1996 AND 1997 5. Deferred Offering Costs Deferred offering costs aggregating $90,387 at June 30, 1997 represent certain legal, accounting and underwriter costs incurred in connection with the contemplated public sale of the Company's securities (see Note 8). These costs have been capitalized and will be charged to stockholders' equity upon successful completion of the offering or charged to operations if the offering is not completed. 6. Consulting Fees Consulting fees aggregating $274,581 were charged to operations during the six months ended June 30, 1997 for certain professional, consulting and other costs incurred in connection with the Company's ongoing business development activities. Of such amount, $15,873 was paid to an affiliate of a director during the six months ended June 30, 1997 and $175,000 was incurred pursuant to an agreement with a consulting firm (see Note 2). 7. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is effective for financial statements issued for periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods presented. Under the new requirements, the Company will be required to present "basic" earnings per share and "diluted" earnings per share. Basic earnings per share does not include the dilutive effect of stock options and warrants. The Company does not expect that adoption of this statement will have a material effect on reported earnings per share. In February 1997, the Financial Accounting Standards Board issued Statement No. 129, "Disclosure of Information about Capital Structure," which is effective for financial statements issued for periods ending after December 15, 1997. The new standard reinstates various disclosure requirements previously in effect under Accounting Principles Board Opinion No. 15, which has been superseded by this statement. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," which is effective for financial statements issued for periods ending after December 15, 1997. Earlier application is permitted. This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income consists of net income and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for financial statements issued for periods ending after December 15, 1997. This statement discusses how to report operating segments and certain information about a public company's products and services, the geographic areas in which it operates, and its major customers. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. 106 107 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) SIX MONTHS ENDED JUNE 30, 1996 AND 1997 8. Public Offering a. On May 7, 1997, the Company entered into a Letter of Intent agreement with an underwriter ("Representative"), as representative of certain underwriters ("Underwriters"), to act as managing underwriter in a firm commitment underwriting for a proposed offering ("Offering") and sale to the public of 1,250,000 units ("Units") of the Company's securities at an offering price ranging from $_______ to $_______ per Unit. Each Unit consists of one share of common stock and one redeemable common stock purchase warrant ("Warrant") of the Company. Each Warrant entitles the holder to purchase one share of common stock for 120% of the offering price per Unit, subject to adjustment in certain circumstances, at any time commencing on _________________, 1998 until ________________, 2003, unless earlier redeemed. The Company has granted to the Underwriters an option, exercisable for 45 days from the date of the Offering, to purchase up to 187,500 additional Units at the Unit offering price, less the underwriting discounts and the nonaccountable allowance, for the sole purpose of covering over-allotments, if any. In connection with the Offering, the Company has agreed to sell to the Representative and its designees, for a nominal consideration, an option ("Unit Purchase Option") to purchase up to 125,000 Units. The Unit Purchase Option is exercisable initially at 120% of the Offering price per Unit for a period of five years commencing on the effectiveness of the Offering. 9. Subsequent Events a. In July 1997, the Company issued 1,500 shares of common stock with an aggregate value of $17,438 to a consultant for services rendered. b. Effective September 13, 1997, the Company entered into a letter of agreement with a public relations firm to provide corporate and investor relations for a period of six months. In conjunction therewith, the Company issued the public relations firm a stock option to purchase 8,333 shares of common stock with an exercise price of $7.50 per share, which was the fair market value on the date of grant. c. Effective October 1, 1997, the Company entered into a consulting agreement with a firm to provide certain business development services in exchange for 11,667 shares of Common Stock, which were issued on November 3, 1997. 105 108 ============================================================================ ================================================== No dealer, salesperson or other person has been authorized to give any information or to make any representation other than those contained in this Prospectus in connection with the offer made by this Prospectus. If 1,250,000 Units given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriters. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof. This Prospectus does not [LOGO] constitute an offer to, or solicitation of, anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone BRIGHTON to whom it is unlawful to make such offer or solicitation. TECHNOLOGIES CORPORATION -------------------- TABLE OF CONTENTS Page Prospectus Summary............................ Risk Factors.................................. Use of Proceeds............................... Market Price for Common Stock................. Dividend Policy............................... Dilution...................................... Capitalization................................ Units Management's Discussion and Analysis or Plan of Operations.................... Industry Overview............................. Business Development.......................... Business...................................... Management.................................... Certain Transactions.......................... ---------- Principal Stockholders........................ PROSPECTUS Description of Securities..................... ---------- Shares Eligible for Future Sale............... Underwriting.................................. Legal Matters................................. Experts....................................... Additional Information........................ Index to Financial Statements................. -------------------- Until __________, 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities offered hereby, whether or not participating in the Offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers ________________, 1997 to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ============================================================================ =================================================== 109 PART II ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Restated Certificate of Incorporation includes provisions which limit the liability of its directors. As permitted by applicable provisions of the Delaware Law, directors will not be liable to the Company for monetary damages arising from a breach of their fiduciary duty as directors in certain circumstances. This limitation does not affect liability for any breach of a director's duty to the Company or its stockholders (i) with respect to approval by the director of any transaction from which he or she derives an improper personal benefit, (ii) with respect to acts or omissions involving an absence of good faith, that the director believes to be contrary to the best interests of the Company or its stockholders, that involve intentional misconduct or a knowing and culpable violation of law, that constitute an unexcused pattern or inattention that amounts to an abdication of his or her duty to the Company or its stockholders, or that show a reckless disregard for duty to the Company or its stockholders in circumstances in which he or she was, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to the Company or its stockholders, or (iii) based on transactions between the Company and its directors or another corporation with interrelated directors or based on improper distributions, loans or guarantees under applicable sections of Delaware Law. This limitation of directors' liability also does not affect the available of equitable remedies, such as injunctive relief or rescission. The Company has been advised that it is the position of the Commission that insofar as the provision in the Company's Restated Certificate of Incorporation may be invoked for liabilities arising under the Securities Act, the provision is against public policy and is therefore unenforceable. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses for the issuance and distribution of the Units registered hereby, other than underwriting commissions, fees and Representative's nonaccountable expense allowance are set forth in the following table: ITEM AMOUNT SEC Registration Fee...................................................... $______ NASD Filing Fee........................................................... ______ Nasdaq SmallCap Market Filing Fee......................................... ______ Blue Sky Fees and Expenses................................................ ______ Transfer Agent Fees....................................................... ______ Legal Fees................................................................ ______ Accounting Fees........................................................... ______ Printing and Engraving Costs.............................................. ______ Miscellaneous............................................................. ______ Total............................................................ $ ====== ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES The following is information for all securities that the Company has sold within the past three years without registering the securities under the Securities Act (all share information reflect the 1 for 3 reverse stock split effective October 17, 1997): II-1 110 1. On November 28, 1995, the Company issued an aggregate of 186,667 share of common stock to 24 investors. The offering was done as a private placement pursuant to Rule 505 of Regulation D. 2. On November 30, 1995, the Company issued an aggregate of 16,667 shares of common stock to two investors, the offering was done as a private placement pursuant to Rule 504 of Regulation D. 3. On October 1, 1996, the Company issued an aggregate of 300,001 shares of common stock to eight investors. The offering was done as a private placement pursuant to Rule 504 of Regulation D for a total offering price of $60,000. 4. On October 22, 1996, the Company issued an aggregate of 2,833,333 shares of common stock to Mr. Kit Kung and 166,667 shares to Ms. Hong Yun in connection with the Reverse Acquisition. The shares were issued pursuant to Section 4(2) of the Securities Act. 5. On October 22, 1996, the Company issued an aggregate of 25,000 shares of common stock to a consultant for the Company in connection with the Reverse Acquisition. The Shares were issued pursuant to Section 4(2) of the Securities Act. 6. On November 27, 1996, the Company issued an aggregate of 33,333 shares of common stock. The offering was done as a private placement pursuant to Rule 504 of Regulation D for an aggregate offering price of $500,000. 7. On March 5, 1997, the Company issued an aggregate of 9,422 shares of common stock to five consultants or employees of the Company for services rendered. The shares were issued pursuant to Section 4(2) of the Securities Act. 8. From March 5 through April 28, 1997, the Company issued an aggregate of 24,007 shares of common stock to twelve investors for an aggregate purchase price of $352,948. The offering was done as a private placement pursuant to Rule 504 of Regulation D. 9. In July 1997, the Company issued 1,500 shares of common stock, with an aggregate value of $17,438 to a consultant for services rendered. 10. On November 3, 1997, the Company issued 11,667 shares of common stock to a consultant, for services to be rendered, of which 10,000 shares were issued pursuant to Rule 504 of the Securities Act and 1,667 shares were issued pursuant to Rule 701 of the Securities Act. II-2 111 ITEM 27. EXHIBITS Exhibit Number Title 1.1 Form of Underwriting Agreement* 2.1 Acquisition Agreement with BIC, BECL, Kit Kung and Hung Yun 3.1 Certificate of Incorporation as filed with the Delaware Secretary of State 3.2 Certificate of Correction of Certificate of Incorporation, as filed with the Delaware Secretary of State on January 17, 1989 3.3 Articles of Amendment to the Articles of Incorporation, as filed with the Delaware Secretary of State on October 31, 1995 3.4 Certificate of Amendment to Certificate of Incorporation, as filed with the Delaware Secretary of State on October 28, 1996. 3.5 Certificate of Amendment to Certificate of Incorporation, as filed with the Delaware Secretary of State on October 10, 1997. 3.6 By-laws 4.1 Form of Common Stock Certificate* 4.2 Form of Representative's Warrant Agreement (including form of Representative's Warrants)* 4.3 Form of Redeemable Warrant Agreement* 5.1 Opinion of Loeb & Loeb LLP* 10.1 Lease Agreement (Allendale - The Company's and BIC's facilities) 10.2 Lease Agreement (Hong Kong -- BECL's and its subsidiaries' facilities) 10.3 Lease Agreement Summary (Beijing) 10.4 Lease Agreement Summary (Beijing) 10.5 Lease Agreement Summary (Shanghai) 10.6 Lease Agreement Summary (Shenzhen) 10.7 Lease Agreement Summary (Wuhan) 10.8 Agreement with China National 10.9 Agreement with AlliedSignal 10.10 Agreement with Huazheng for establishment of Brighton-STAQ 10.11 Form of Lock-Up Agreement* 21.1 Subsidiaries of Registrant 23.1 Consent of BDO Seidman, LLP, Independent Certified Public Accountants 23.2 Consent of Russo & Shapiro, Independent Certified Public Accountants 23.3 Consent of Francis S.L. Yan & Co., Independent Certified Public Accountants 23.4 Consent of Loeb & Loeb LLP (included in the opinion to be filed as Exhibit 5.1)* 24.1 Power of Attorney (included on signature page) 27.1 Financial Data Schedule - -------------------- * To be filed by amendment. ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes as follows: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: II-3 112 (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the Registration Statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement. (2) To provide to the Underwriters at the closing specified in the Underwriting Agreement (filed herewith as Exhibit 1.1) certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (3) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described above in Item 24, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction of the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (4) For purposes of determining any liability under the Securities Act, to treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective. (5) For the purpose of determining any liability under the Securities Act, to treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the Registration Statement, and the offering of such securities at that time as the initial bona fide offering of those securities. II-4 113 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Registration Statement or amendment thereto to be signed on its behalf by the undersigned in the City of Allendale, State of New Jersey, on the ____ day of November, 1997. BRIGHTON TECHNOLOGIES CORPORATION By: /s/ KIT KUNG --------------------------------------- Kit Kung Chairman, President and Chief Executive Officer II-5 114 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kit Kung, as his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, grant unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date stated. Signature Title Date /s/ KIT KUNG President, Chief Executive November 12, 1997 - -------------------------- Officer and Chairman of Kit Kung the Board of Directors (Principal Executive Officer) /s/ NILS OLLQUIST Vice President and Director November 12, 1997 - -------------------------- Nils Ollquist /s/ WARREN WANG Secretary and Chief November 12, 1997 - -------------------------- Accounting Officer Warren Wang /s/ ROBERT H. WEINGARTEN Chief Financial Officer November 12, 1997 - -------------------------- Robert H. Weingarten /s/ HONG YUN Director November 12, 1997 - -------------------------- Hong Yun /s/ MICHAEL MULDAVIN Director November 12, 1997 - -------------------------- Michael Muldavin II-6