1
As filed with the Securities and Exchange Commission on JANUARY 20, 1998
Registration No. 333-40083
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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\
AMENDMENT NO. 1
TO
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 Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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
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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. [ ]
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CALCULATION OF REGISTRATION FEE
================================================================================
Proposed Proposed
Maximum Maximum Amount of
Titles of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Offering Fee
Security(2) Price(2)
- --------------------------------------------------------------------------------------------------------
Units, each consisting of one share of
Common Stock, $.001 par value, and one
Redeemable Warrant to purchase one
share of Common Stock(1) ................. 1,150,000 $ 7.00 $ 8,050,000 $2,374.75
- --------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per
share, issuable upon exercise of
Redeemable Warrants(4) ................... 1,150,000 $10.50 $12,075,000 $3,562.13
- --------------------------------------------------------------------------------------------------------
Representative's Warrants ................ 100,000 $.0001 $ 10.00 (3)
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Units issuable upon exercise of the
Representative's Warrants(5) ............. 100,000 $ 8.40 $ 840,000 $ 247.80
- --------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per
share, underlying the Redeemable
Warrants included in the
Representative's Warrants ................ 100,000 $ 8.40 $ 840,000 $ 247.80
- --------------------------------------------------------------------------------------------------------
Total $6,432.48*
========================================================================================================
*$5,246.27 has been previously paid
(1) Based on the offering of 1,000,000 Units and 150,000 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.
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PROSPECTUS
SUBJECT TO COMPLETION, DATED _______________, 1998
1,000,000 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") 1,000,000 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 150% of the offering price per Unit at any time commencing
_______________, 1999 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 _______________, 1999, 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 $5.50 and $7.00. 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." The Company has also applied to have its Common Stock quoted on the
Nasdaq SmallCap Market 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 __________, 1998, 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."
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THE SECURITIES OFFERED HEREBY INVOLVE SUBSTANTIAL RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE [ ] AND
"DILUTION" BEGINNING ON PAGE [ ].
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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.
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================================================================================
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 150,000 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 __________, 1998.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is __________, 1998
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[PHOTOS]
The Company is currently a computer network
integrator and a distributor of industrial equipment.
The Company formed a joint venture to develop, design, install and maintain
a nationwide computerized multi-market securities quotation and trading
network in China.
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
stockholders 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 UNITS. SPECIFICALLY, THE UNDERWRITERS MAY
OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES
OF UNITS IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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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, (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, and (iii) gives effect to a
reverse stock split of 1 for 3 authorized and approved by the Company's Board of
Directors and stockholders on January 13, 1998, which will go into effect on
January 26, 1998. This Prospectus contains certain forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed in such forward-looking statements. Factors that
might cause a difference include, but are not limited to, those discussed in
"Risk Factors."
THE COMPANY
The Company is currently a computer network integrator and a
distributor 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 the
third quarter 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 Chairman,
President, Chief Executive Officer and principal stockholder, Kit Kung's
experience in the business of designing and installing computer networks and
importing industrial equipment into China since 1980. Building on Mr. Kung's
business experience in China, the Company formed a joint venture with a company
controlled by the STAQ Exchange, one of four national stock exchanges in China,
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. The Company currently has contracts with the
Industrial and Commercial Bank of China ("ICBC"), the largest retail bank in
China, to design and install wireless telecommunication networks for ATM linkage
and clearance and settlements for eight 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.
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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, Shenzhen and Wuhan, 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 commence commercial
operations of the STAQ On-line Network in the third quarter of 1998.
Industrial 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), 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.
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THE OFFERING
Securities Offered by the Company .. 1,000,000 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
_______________, 1999, unless earlier
redeemed, for one share of Common Stock
each, at an exercise price of 150% of the
offering price per Unit in the Offering. The
Warrants may not be separately traded until
_______________, 1999, 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
_______________, 1999, 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 ........... 1,165,111 shares
After the Offering(1) ........... 2,165,111 shares
- ----------
(1) Does not include: (i) 1,000,000 shares of Common Stock issuable upon
exercise of the Warrants; (ii) 100,000 shares of Common Stock issuable upon the
exercise of the Representative's Warrants; or (iii) up to 150,000 shares of
Common Stock issuable upon exercise of the Underwriters' Over-Allotment Option.
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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 SmallCap Market Symbols ..... Common Stock .................. "BRTK"
Units ......................... "BRTU"
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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
September 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 September 30, 1997 and for the nine months ended September 30, 1996
and 1997, have been derived from unaudited financial statements. The financial
statements as of September 30, 1997 and for the nine months ended September 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 September 30, 1997. The following data gives
retroactive effect to the 1 for 3 reverse stock split which was effective on
November 11, 1996, the 1 for 3 reverse stock split effective October 17, 1997
and the 1 for 3 reverse stock split authorized and approved by the Company's
Board of Directors and stockholders on January 13, 1998, which will go into
effect on January 26, 1998. All share and per share data have been restated for
all periods presented to reflect these splits.
Years Ended Nine Months Ended
December 31, September 30,
----------------------------- -----------------------------
1995(1) 1996 1996 1997
----------- ----------- ----------- -----------
STATEMENT OF
OPERATIONS
DATA:
Revenues $ 8,370,537 $ 8,006,260 $ 6,796,972 $ 5,913,330
Gross profit 2,205,336 2,220,753 1,802,817 1,856,123
Operating income (loss) 557,320 465,724 238,056 (257,562)
Income (loss) before
income taxes and
minority interests 560,644 514,750 287,014 (206,306)
Net income (loss) 172,347 198,524 145,351 (108,024)
Net income (loss) per
common share:
Primary and fully diluted .17 .19 .14 (.09)
Weighted average
number of common
shares and common share
equivalents outstanding:
Primary 1,008,333 1,033,965 1,008,333 1,157,289
Fully diluted 1,008,333 1,046,891 1,022,223 1,199,838
(1) As restated (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION-OVERVIEW").
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September 30, 1997
----------------------------------
December 31, Historical
1996 Historical As Adjusted(2)
------------ ------------ ------------
BALANCE SHEET
DATA:
Working capital (deficiency) ($ 879,481) ($ 1,203,728) $ 3,763,620
Fixed assets, net 1,536,458 1,720,352 1,720,352
Total assets 10,187,068 8,577,178 13,307,433
Total liabilities 9,602,032 7,738,446 7,631,201
Stockholders' equity 585,036 838,732 5,676,232
(2) Gives effect to the sale of 1,000,000 Units offered hereby at an assumed
price of $6.25 per Unit, reduced by $1,412,500 of costs attributable to the
Offering.
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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,
in addition to historical information, certain forward-looking statements that
involve risks and uncertainties. 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 such forward-looking statements include, but are not limited
to, those set forth in the risk factors below.
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 fifteen years, 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.
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
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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 ("Rmb"), 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 and interpretation thereof inconsistent. The Chinese judiciary is
relatively inexperienced in enforcing the laws that
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exist, leading to a higher than usual degree of uncertainty as to the
outcome of any litigation. Even whereadequate 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-THE COMPANY'S CORPORATE STRUCTURE."
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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. The
Brighton-STAQ joint venture is inherently a new business for the Company. The
Company projects that Brighton-STAQ will operate at a loss for at least 1998,
the first year of operation. 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 "RISKS RELATING TO OPERATIONS IN CHINA."
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 the Company's understanding that Huazheng's
affiliation with the STAQ Exchange 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 be able to 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, during negotiations for the establishment of Brighton-STAQ, orally
agreed that under certain financial performance criteria to be agreed upon by
the parties, Huazheng would have the right, during the term of Brighton-STAQ, 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 yet agreed on the mechanism
for determining such performance criteria. The Company is uncertain with respect
to the validity of this oral agreement under Chinese law since it was not
reflected in the written agreement approved by the Chinese government providing
for the establishment of Brighton-STAQ. However, the Company believes that local
business custom dictates that the Company honor such oral agreement if so
requested by its partner. If Huazheng decides to exercise such right at a time
when Brighton-STAQ is profitable, the Company's operating results and
anticipated growth may be adversely affected. In addition, the mechanism for
determining market valuation if and when Huazheng exercises such right, which is
not yet agreed to by the parties, 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
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Company obtains all necessary governmental approvals related to, and has
adequate financing to fund construction and operation of the STAQ 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 negotiating a
three-year contract for satellite services with The People's Daily, which it
expects to finalize in the first quarter of 1998. 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. In addition to the net proceeds from
the Offering allocated to the STAQ On-line Network project, the Company may be
required to fund additional capital expenditures, development and construction
costs and working capital requirements related to the Company's development of
the STAQ On-line Network. Furthermore, the Company may decide to reallocate the
net proceeds from the Offering allocated to working capital to satisfy any
future financing requirements of the STAQ On-line Network project. 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 Common Stock comprising a part of the Units offered hereby.
See "USE OF PROCEEDS."
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) for
Brighton-STAQ without the consent of relevant Chinese Governmental authorities.
The Company intends to apply for approval to increase the authorized total
investment amount when the funds from the Offering are available. The Company
currently expects that the required governmental approvals will be obtained
based on several factors, including, but not limited to, the Chinese
Government's focus on attracting foreign investment into China, and that the
Company has made, to date, all of its requisite capital contributions to
Brighton-STAQ on a timely basis. Such approvals, however, are beyond the control
of the Company and Brighton-STAQ and 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.
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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 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. Due
to 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 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,
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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 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, including China National as
described in the following paragraph. 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") for the engineering design and
implementation for a sodium bichromate production plant with an annual
production capacity of 20,000 metric tons is an $11 million turn-key contract.
This contract accounted for 34% and 13% of the Company's revenues for the years
ended December 31, 1995 and 1996, respectively, and 40% of the Company's
revenues for the nine months ended September 30, 1997. Management does not
expect that any significant revenues will be earned from this contract during
1998. 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. The Company does not currently have or plan to have any projects
of this nature in the foreseeable future. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION-OVERVIEW" and "BUSINESS-CHINA NATIONAL."
COMPETITION. The network integration and industrial equipment
distribution businesses are highly competitive in China and include 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 Networks, Inc., a U.S. company, and Kb/Tel, SA,
a Mexican company, which both offer wireless telecommunication equipment with
identical features as Aria Wireless Systems, Inc.'s wireless telecommunications
system marketed by the Company (the "Aria Wireless System"). In the industrial
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. See "BUSINESS-COMPUTER NETWORK
INTEGRATION-COMPETITION."
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
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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 43.3% of the issued and outstanding Common Stock,
assuming the Warrants have not been converted into Common Stock, or 29.6% 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."
DISCRETIONARY USE OF PROCEEDS. The Company intends to use $4,000,000 of
the net proceeds from the Offering to bring the STAQ On-line Network project to
commercial operation and $837,500 for working capital and general corporate
purposes. To the extent the STAQ On-line Network project requires financing in
addition to the allocated net proceeds of the Offering, the Company may decide
to satisfy such financing requirements by reallocating the net proceeds from the
Offering from working capital to the STAQ On-line Network project. 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. 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 projected
cash flow provided by operations, will be sufficient to meet the Company's
anticipated cash needs and to finance its current plans for the STAQ On-line
Network project for at least the next 12 months from the date of this
Prospectus. However, if the Company's plans for the STAQ On-line Network project
change or if the Company decides to expand such plans, it may require additional
financing to meet the changed or expanded 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 such changed or
expanded plans for the STAQ On-line Network project could be materially
adversely affected. The Company has financed its operations to date primarily
from cash flow from operations, financing and other assistance from Kit Kung and
his family and private sales of equity. All prior financing and other assistance
from Kit Kung and his family members were provided on a case by case basis with
no commitment to provide such financing or assistance in the future by Kit Kung
or his family members. Subsequent to the completion of the Offering, the Company
will adopt a policy to the effect that any future related party transactions be
on terms no less favorable to the Company than could reasonably be obtained in
arm's length transactions with independent third parties, and that any such
transactions be approved by a majority of the Company's independent directors
disinterested in the transaction. See "USE OF PROCEEDS," "CAPITALIZATION,"
"CERTAIN TRANSACTIONS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS."
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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 $3.64 per share of Common Stock. See "DILUTION."
NO PRIOR MARKET FOR THE UNITS; ARBITRARY 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. The offering price for the Units may be higher or lower than the
price of the Common Stock quoted on the OTC Electronic Bulletin Board. 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 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 ByLaws, 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 2,165,111 shares of Common Stock outstanding (assuming no conversion of
convertible notes), of which 1,031,279 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
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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 Units 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.
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
1,000,000 shares of Common Stock for issuance upon exercise of the Warrants, and
100,000 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
18
21
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 __________, 1999, 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 CERTAIN 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. Although the Nasdaq SmallCap
listing requirements provide that the Company is required to seek stockholder
approval for certain acquisitions and stock offerings, the stockholders of the
Company may not have the opportunity to review the terms of any other
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 Underwriters. Such customers
subsequently may engage in transactions for the sale or purchase of such
securities through or with the Underwriters. 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
Underwriters 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 Representative exercises the Warrants, it 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 Underwriters' participation in such market. See "UNDERWRITING."
19
22
USE OF PROCEEDS
Based on an assumed offering price of $6.25 per Unit, net proceeds
to the Company from the sale of the Units in the Offering are estimated to be
$4,837,500, 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 82.7%
Working capital 837,500 17.3%
----------- ------
TOTAL $4,837,500 100.0%
=========== ======
The commercialization of the STAQ On-line Network, currently in the
testing phase of linking Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen and
Wuhan to the STAQ Exchange, requires aggregate capital expenditures of
$3,540,000, consisting of $3,000,000 for the necessary satellite-linking
equipment and $540,000 for other capital expenditures, and $460,000 in related
costs to establish operations in the cities of Beijing, Chongqing, Guangzhou,
Shanghai, Shenzhen and Wuhan, 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."
20
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." 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, the 1-for-3 reverse stock split effective
October 17, 1997 and the 1-for-3 reverse stock split authorized and approved by
the Company's Board of Directors and stockholders on January 13, 1998, which
will go into effect on January 26, 1998.
FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW
------- -------
Quarter Ended March 31, 1996 (1) $135.00 $ 27.00
Quarter Ended June 30, 1996 (1) 94.50 94.50
Quarter Ended September 30, 1996 (1) (2) (2)
Period from October 1, 1996 - November 11, 1996 (1) 62.46 33.75
Period from November 12, 1996 - December 31, 1996 64.17 56.25
FISCAL YEAR ENDED DECEMBER 31, 1997
Quarter Ended March 31, 1997 63.00 48.42
Quarter Ended June 30, 1997 52.92 29.25
Quarter Ended September 30, 1997 46.14 21.39
Quarter Ended December 31, 1997 21.39 4.50
FISCAL YEAR ENDING DECEMBER 31, 1998
Period from January 1, 1998 to January 15, 1998 7.50 6.75
(1) High and low bid prices of the Company's Common Stock traded under the
symbol "ZNTX" prior to the reverse acquisition effective November 11, 1996.
(2) Not available.
On January 14, 1998, the closing bid price for the Common Stock as
reported by OTC Electronic Bulletin Board was $6.75.
As of December 31, 1997, the number of security holders of record of
the Company's Common Stock was 91. As of such date, 1,165,111 shares were
outstanding.
21
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."
22
25
DILUTION
The following discussion and tables allocate no value to the Warrants
contained in the Units and assumes no exercise of the Warrants, the
Underwriters' Over-Allotment Option or the Representative's Warrants. See
"UNDERWRITING" and "DESCRIPTION OF SECURITIES." 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 September 30, 1997, the net tangible book value of the Company was
$575,930, or $.50 per share of Common Stock. After giving effect to the sale of
the 1,000,000 shares of Common Stock included in the Units offered by the
Company hereby at an assumed offering price of $6.25 per Unit (less underwriting
discounts and estimated expenses of the Offering), the pro forma net tangible
book value of the Company at September 30, 1997 would have been $5,650,523 or
$2.61 per share, representing an immediate increase in net tangible book value
of $2.11 to existing stockholders and an immediate dilution of $3.64 per share
of Common Stock to the purchasers of Units in the Offering.
The following table illustrates the dilution to prospective investors
on a per-share basis:
Offering price..................................................... $6.25
Net tangible book value before the Offering................... $.50
Increase attributable to prospective investors................ 2.11
-----
Pro forma net tangible book value after the Offering............... 2.61
------
Dilution to prospective investors.................................. $3.64
=====
After giving effect to the sale of 1,000,000 shares of Common Stock
included in the Units offered by the Company hereby at an assumed offering price
of $6.25 per Unit (less underwriting discounts and estimated expenses of the
Offering), and assuming conversion into Common Stock of the convertible notes
payable, the pro forma net tangible book value of the Company at September 30,
1997 would have been $6,452,628 or $2.82 per share, representing an immediate
increase in net tangible book value of $2.32 to existing stockholders and an
immediate dilution of $3.43 per share of Common Stock to the purchasers of Units
in the Offering.
The following table sets forth, as of September 30, 1997, with respect
to the existing stockholders and 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:
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26
Shares Purchased Total Consideration Average
--------------------- ------------------------- Price Per
Number Percentage Amount Percentage Share
--------- ---- ---------- ---- -----
Existing Stockholders 1,161,222 53.7% $2,096,703(2) 25.1% $1.81
Prospective Investors 1,000,000 46.3% 6,250,000 74.9% 6.25
--------- ----- ---------- -----
Total(1) 2,161,222 100.0% $8,346,703 100.0%
========= ===== ========== =====
(1) Does not include (i) 3,889 shares of Common Stock issued to a consulting
firm in November 1997 for certain business development services; (ii) 128,337
additional shares of Common Stock issuable at the option of the holders upon
conversion of convertible notes; and (iii) 150,000 shares issuable upon the
exercise of the Underwriters' Over-Allotment option.
(2) Includes contribution to capital of net amounts owed to Kit Kung by the
Company of $1,266,973 in December 1996.
24
27
CAPITALIZATION
The following table sets forth the actual short term debt and
capitalization of the Company as of September 30, 1997 and as adjusted to
reflect the sale of Units at an assumed offering price of $6.25 per Unit.
See "USE OF PROCEEDS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
SEPTEMBER 30, 1997
------------------------------
ACTUAL AS ADJUSTED
----------- -----------
Short term debt:
Convertible demand note payable,
including accrued interest (1) $ 643,355 $ 643,355
Note payable,
including accrued interest (2) 158,750 158,750
----------- -----------
Total short term debt payable 802,105 802,105
----------- -----------
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, 1,161,222
shares outstanding; 2,161,222(3)
shares issued and outstanding as adjusted 1,161 2,161
Contributed capital 1,856,740 6,693,240
Accumulated deficit (1,006,919) (1,006,919)
Unearned compensation cost (12,250) (12,250)
----------- -----------
Stockholders' equity 838,732 5,676,232
----------- -----------
Total short term debt and capitalization $ 1,640,837 $ 6,478,337
=========== ===========
(1) The note is payable upon demand, bears interest at 5% per annum and is
convertible into shares of Common Stock at prevailing market values.
(2) The note bears interest at 10% per annum, with interest to accrue until the
due date of February 24, 1998. Thereafter, the note will be payable upon demand,
with interest at 12% per annum.
(3) Does not include: (i) 1,000,000 shares of Common Stock issuable upon
exercise of the Warrants; (ii) 100,000 shares of Common Stock issuable upon the
exercise of the Representative's Warrants; or (iii) up to 150,000 shares of
Common Stock issuable upon exercise of the Underwriters' Over-Allotment Option;
(iv) 3,889 shares of Common Stock issued during November 1997 pursuant to a
consulting agreement; and (v) the conversion of convertible notes at the option
of the holders thereof into an aggregate of 128,337 shares of Common Stock.
25
28
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 consolidate the
operating companies (BIC and BECL) owned by the Brighton Shareholders into one
entity and to attract and facilitate investment into the Company. 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 joint ventures (See "BUSINESS-THE COMPANY'S CORPORATE
STRUCTURE.") All share and per share amounts presented herein have been adjusted
to reflect the 1 for 3 reverse stock split effective November 11, 1996, the
reverse stock split effective October 17, 1997 and the 1 for 3 reverse stock
split authorized and approved by the Company's Board of Directors and
stockholders on January 13, 1998, which will go into effect January 26, 1998.
BIC is a distributor of third party manufactured industrial equipment
to customers in China and other Pacific Basin countries. BECL is an investment
and holding company whose subsidiaries 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 China 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 - Industrial Equipment
Distribution and Networking.
On April 15, 1994, BIC entered into a long-term contract with expected
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 industrial 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. This contract was temporarily suspended in February 1996 by
the municipal government due to environmental concerns relating to China
National's proposed methods 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 Company has been advised by China National that they are currently
negotiating with third party lenders for the necessary funds to complete the
construction of the project. The Company is currently unable to predict the
ultimate outcome of these discussions. In the event that China National is
unsuccessful in its efforts to obtain such financing and construction efforts
are suspended or terminated, the Company's anticipated revenues in the future
with regard to this contract may be reduced or eliminated. Based on an
assessment of discussions with China National and the timing involved in
obtaining the necessary funds, management of the Company does not expect that
any significant revenues will be earned from this contract during the year
ending December 31, 1998. If China National is unable to complete the project,
management does not expect that the ultimate resolution of this matter will have
a material adverse impact on the Company's financial position or cash flows.
26
29
Revenues under this contract for the years ended December 31, 1995 and
1996, and the nine months ended September 30, 1997, were approximately
$2,855,000, $1,048,000 and $2,337,000, respectively, or 34%, 13% and 40% of the
Company's total revenues, respectively, and 67%, 29% and 65% of industrial
equipment distribution revenues, respectively. The Company has recorded
cumulative aggregate revenues of $6,898,000 through September 30, 1997 under
this contract (including revenues of $658,000 for the year ended December 31,
1994), or approximately 63% of the contract's total expected revenues.
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 China. The Company expects that a significant
portion of its future revenues will continue to be generated by a limited number
of customers in China. 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 China could have a material
adverse effect on future results of operations.
27
30
The following tables set forth certain historical operating data for
the periods presented. The 1995 financial statements were restated to reflect
the correction of depreciation expense recorded on project equipment, accounting
for losses related to BECL's subsidiaries, 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 data for
the periods presented:
Years Ended December 31, Nine Months Ended September 30,
------------------------------------------ --------------------------------------------
1995 1996 1996 1997
------------------- -------------------- -------------------- --------------------
Amount % Amount % Amount % Amount %
----------- ----- ----------- ----- ----------- ----- ----------- -----
Revenues $ 8,370,537 100.0 $ 8,006,260 100.0 $ 6,796,972 100.0 $ 5,913,330 100.0
Cost of
Revenues 6,165,201 73.6 5,785,507 72.3 4,994,155 73.5 4,057,207 68.6
General and
Administrative
Expenses 1,648,016 19.7 1,755,029 21.9 1,564,761 23.0 1,747,255 29.6
Consulting
Fees 366,430 6.2
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total
Operating
Expenses 1,648,016 19.7 1,755,029 21.9 1,564,761 23.0 2,113,685 35.8
----------- ----- ----------- ----- ----------- ----- ----------- -----
Operating
Income (Loss) 557,320 6.7 465,724 5.8 238,056 3.5 (257,562) (4.4)
Total Other
Income, Net 3,324 -- 49,026 .6 48,958 .7 51,256 .9
----------- ----- ----------- ----- ----------- ----- ----------- -----
Income (Loss)
Before Income
Taxes and
Minority
Interests 560,644 6.7 514,750 6.4 287,014 4.2 (206,306) (3.5)
Provision
(Benefit) for
Income Taxes 444,000 5.3 309,000 3.8 115,000 1.7 (89,000) (1.5)
Minority
Interests 55,703 .7 (7,226) (.1) (26,663) (.4) 9,282 .2
----------- ----- ----------- ----- ----------- ----- ----------- -----
Net Income
(Loss) $ 172,347 2.1 $ 198,524 2.5 $ 145,351 2.1 $ (108,024) (1.8)
=========== ===== =========== ===== =========== ===== =========== =====
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31
Revenues from the United States consist primarily of revenues from industrial
equipment distribution export sales to the Far East, while revenues from the Far
East based operations consist of revenues from both industrial equipment
distribution and networking.
GEOGRAPHIC AREA INFORMATION
Years Ended December 31, Nine Months Ended September 30,
-------------------------------------------- -----------------------------------------------
1995 1996 1996 1997
-------------------- -------------------- -------------------- -----------------------
Amount % Amount % Amount % Amount %
----------- ----- ----------- ----- ----------- ----- ----------- -----
Revenues:
United States $ 6,497,541 77.6 $ 6,039,716 75.4 $ 4,960,347 73.0 $ 5,000,743 84.6
Far East 1,872,996 22.4 1,966,544 24.6 1,836,625 27.0 912,587 15.4
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total $ 8,370,537 100.0 $ 8,006,260 100.0 $ 6,796,972 100.0 $ 5,913,330 100.0
=========== ===== =========== ===== =========== ===== =========== =====
Operating
Income
(Loss):
United States $ 927,375 166.4 $ 730,875 156.9 $ 396,717 166.6 $ 340,257 312.5
Far East (370,055) (66.4) (265,151) (56.9) (158,661) (66.6) (231,389) (212.5)
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total $ 557,320 100.0 $ 465,724 100.0 $ 238,056 100.0 $ 108,868(1) 100.0
=========== ===== =========== ===== =========== ===== =========== =====
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32
BUSINESS SEGMENT INFORMATION
Years Ended December 31, Nine Months Ended September 30,
--------------------------------------- ------------------------------------------
1995 1996 1996 1997
------------------ ------------------ ------------------ ---------------------
Amount % Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- ----- ---------- -----
Revenues:
Networking $4,102,746 49.0 $4,341,827 54.2 $3,465,793 51.0 $2,340,570 39.6
Industrial
Equipment
Distribution 4,267,791 51.0 3,664,433 45.8 3,331,179 49.0 3,572,760 60.4
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total $8,370,537 100.0 $8,006,260 100.0 $6,796,972 100.0 $5,913,330 100.0
========== ===== ========== ===== ========== ===== ========== =====
Operating
Income:
Networking $ 309,891 55.6 $ 251,209 53.9 $ 104,513 43.9 $ 99,525 91.4
Years Ended December 31, Nine Months Ended September 30,
--------------------------------------- ------------------------------------------
1995 1996 1996 1997
------------------ ------------------ ------------------ ---------------------
Amount % Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- ----- ---------- -----
Industrial
Equipment
Distribution 247,429 44.4 214,515 46.1 133,543 56.1 9,343 8.6
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total $ 557,320 100.0 $ 465,724 100.0 $ 238,056 100.0 $ 108,868(1) 100.0
========== ===== ========== ===== ========== ===== ========== =====
- ---------------------
(1) Operating income (loss) for both Geographic Area Information and Business
Segment Information exclude operating expenses relating to business development
consulting fees of $366,430.
30
33
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997:
Revenues. Revenues for the nine months ended September 30, 1997 were
$5,913,330, as compared to $6,796,972 for the nine months ended September 30,
1996, a decrease of $883,642 or 13.0%. The decrease in revenues of $883,642 in
1997 as compared to 1996 consisted of a decrease of $1,125,223 or 32.5% from
networking, which was offset in part by an increase of $241,581 or 7.3% from
industrial equipment distribution. For the nine months ended September 30, 1997
and 1996, revenues from industrial equipment distribution represented
approximately 60.4% and 49.0% of revenues, respectively, and revenues from
networking represented approximately 39.6% and 51.0% 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
"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 nine months ended September 30, 1997 and 1996, the China
National contract accounted for approximately 39.5% and 0% of revenues,
respectively, and approximately 65.4% and 0% of industrial equipment
distribution revenues, respectively. Revenues from the China National contract
were approximately $2,337,000 for the nine months ended September 30, 1997 and
$0 for the nine months ended September 30, 1996 due to the project's temporary
suspension (which suspension was imposed in February 1996 and was lifted in
January 1997). Management of the Company does not expect that any significant
revenues will be earned from this contract during the year ending December 31,
1998.
Networking revenues include revenues from the sale and installation of
the Aria Wireless System. During the nine months ended September 30, 1997, the
Company completed five agreements with ICBC to provide and install the Aria
Wireless System for ATM linkage and clearance and settlements for five of its
bank branches as transaction automation is introduced within the bank's entire
system comprising over 12,000 branches in China. For the nine months ended
September 30, 1997, revenues from the sale and installation of the Aria Wireless
System were $906,498 or 38.7% of networking revenues. The Company did not have
any revenues from the sale and installation of the Aria Wireless System during
the nine months ended September 30, 1996.
For the nine months ended September 30, 1997, United States revenues
from export sales to the Far East increased by $40,396 or 0.8%, to $5,000,743 in
1997 from $4,960,347 in 1996, and revenues from operations based in the Far East
decreased by $924,038 or 50.3%, to $912,587 in 1997 from $1,836,625 in 1996.
Revenues from operations based in the Far East decreased in 1997 as compared to
1996 as a result of the Company's focus on development of the Brighton STAQ
On-line project, which is not expected to become operational until the third
quarter of 1998. For the nine months ended September 30, 1997 and 1996, United
States export sales revenues represented approximately 84.6% and 73.0% of
consolidated revenues, respectively, and revenues from the Far East operations
represented 15.4% and 27.0% of consolidated revenues, respectively.
Gross Profit. Gross profit for the nine months ended September 30, 1997
increased by $53,306 or 3.0%, to $1,856,123 or 31.4% of revenues, as compared to
$1,802,817 or 26.5% of revenues for the nine months ended September 30, 1996.
Despite a decrease in revenues in 1997 as
31
34
compared to 1996 of 13.0%, gross profit increased as a result of improvement in
gross margin, which was primarily a result ofincreased progress on the
completion of the China National contract in early 1997, and improved gross
margins from certain industrial equipment distribution contracts.
General and Administrative Expenses. Excluding consulting fees of
$366,430 as described below, general and administrative expenses increased by
$182,494 or 11.7% to $1,747,255 or 29.5% of revenues for the nine months ended
September 30, 1997, as compared to $1,564,761 or 23.0% of revenues for the nine
months ended September 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 both Networking and Industrial Equipment Distribution
operations in general.
During the nine months ended September 30, 1997, the Company incurred
consulting fees aggregating $366,430 for certain 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
nine months ended September 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 $366,430 of consulting fees are (i)
500 shares of Common Stock issued to a consultant for services rendered which
were valued at $17,438, and (ii) $175,000 of costs pursuant to a consulting
agreement with a consulting firm as described below at "Consulting Fees."
Consulting Fees. On February 25, 1997, the Company entered into a
consulting agreement with 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. The note is
unsecured, bears interest at 10% per annum, with interest to accrue until the
due date of February 24, 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
24, 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 25,000
shares. Such shares, if issued, will be restricted and will have piggyback
registration rights.
If the Company completes a private financing by February 24, 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 24, 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.
Operating Income (Loss). For the nine months ended September 30, 1997,
operating loss was ($257,562) as compared to operating income of $238,056 for
the nine months ended September 30, 1996, and operating income (loss) as a
percent of revenues was (4.4%) in 1997 as compared to 3.5% 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 nine months ended September 30, 1997 and 1996, operating income
from industrial equipment distribution represented approximately 0.3% and 4.0%
of industrial equipment
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35
distribution revenues, respectively, and operating income from networking
represented approximately 4.3% and 3.0% of networking revenues, respectively.
The decline in operating income from industrial equipment distribution in 1997
as compared to 1996 was a result of increased general and administrative
expenses, in particular from expanded operations in China, and a change in the
business mix which affected the allocation of general and administrative
expenses.
For the nine months ended September 30, 1997 and 1996, operating income
from the United States export sales to the Far East represented approximately
6.8% and 8.0% of such revenues, respectively, and operating income (loss) from
Far East based operations represented approximately (25.4%) and (8.6%) of Far
East revenues, respectively.
Other Income (Expense). For the nine months ended September 30, 1997,
interest expense and bank fees increased by $21,347 or 94.3% to $43,994, as
compared to $22,647 for the nine months ended September 30, 1996, primarily as a
result of an increase in notes payable.
For the nine months ended September 30, 1997, interest income increased
by $54,591 or 239.2%, as compared to $22,827 for the nine months ended September
30, 1996, primarily as a result of increased cash balances generated by contract
advances.
During the nine months ended September 30, 1996, miscellaneous income
aggregated $48,778, and included nonrecurring license income of $44,871.
Miscellaneous income was $17,832 for the nine months ended September 30, 1997.
Income Taxes. For the nine months ended September 30, 1997, the benefit
from income taxes was ($89,000) or 43.1% of the loss before income taxes and
minority interests, as compared to a provision for income taxes of $115,000 or
40.1% of income before income taxes and minority interests for the nine months
ended September 30, 1996, primarily as a result of a lower valuation allowance
relating to foreign tax loss carryforwards. Substantially all of the income tax
benefit for the nine months ended September 30, 1997 arises from the Company's
United States operations. As previously discussed, there were substantial
consulting fees charged in 1997 which led, in part, to a loss before taxes and
minority interests of $206,306. Based on an assessment of all available
information, including historical trends, the Company has concluded that
realization of the domestic deferred tax asset is more likely than not. 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.
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36
Net Income (Loss). The net loss for the nine months ended September 30,
1997 was ($108,024) or ($.09) per share, as compared to net income of $145,351
or $.14 per share for the nine months ended September 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 industrial 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 industrial 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.
Industrial 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 industrial 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 $1,807,000 in 1996 as compared to 1995, from
approximately $2,855,000 in 1995 to $1,048,000 in 1996.
United States revenues from export sales to the Far East consist
primarily of revenues from industrial equipment distribution, while revenues
from operations based in the Far East consist of revenues from both industrial
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 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
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37
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
industrial equipment distribution represented approximately 5.9% and 5.8% of
industrial 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 industrial 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
$198,524 ($.19 per share), as compared to net income of $172,347 ($.17 per
share) for the year ended December 31, 1995.
CONSOLIDATED FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES:
Operating. For the nine months ended September 30, 1997, the Company's
operations utilized cash resources of $873,496, as compared to generating cash
resources of $1,336,304 for the nine months ended September 30, 1996. The
Company had a net working capital deficit of ($1,203,728) at September 30, 1997,
as compared to a net working capital deficit of ($879,481) at December 31, 1996,
reflecting a current ratio of .84:1 at September 30, 1997 as compared to .91:1
at December 31, 1996. The Company's operations utilized cash resources in 1997
as compared to generating cash resources in 1996 as a result of increased
activity with respect to the China National contract and the STAQ On-line
Network project.
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
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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 $701,025 to $2,040,343 at September
30, 1997, from $1,339,318 at December 31, 1996, and by $1,185,943 to $1,339,318
at December 31, 1996, from $153,375 at December 31, 1995. Accounts receivable
increased during the nine months ended September 30, 1997 as a result of the
timing of certain revenues from the third quarter 1997 projects. During the nine
months ended September 30, 1997, the accounts receivable from a Hong Kong-based
customer, on an unsecured basis, was $240,700, which represents a $271,229
reduction from the December 31, 1996 balance of $511,929. This accounts
receivable balance at December 31, 1996 represented approximately 38% of total
accounts receivable. Management is currently discussing the timing of the
settlement of the remainder of this accounts receivable with the customer and
expects that it will be paid in full during the first quarter of 1998.
During the three months ended September 30, 1997, the Company received
net customer advances aggregating $2,153,628 with respect to the commencement of
the third phase of the China National contract, which has been recorded as
customer deposits at September 30, 1997, and which is expected to be utilized in
the fulfillment of the Company's obligations under that contract during the
remainder of 1997 and subsequent to such date.
As an accommodation to China National for excess funds held by the
Company, the Company has periodically loaned funds to China National. These
loans do not bear interest and do not stipulate repayment dates. As of September
30, 1997, the Company had loaned $1,132,169 to China National; such amount has
been offset against customer deposits on the December 31, 1996 and September 30,
1997 consolidated balance sheets.
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. During the nine months ended September 30, 1997,
the Company acquired fixed assets aggregating $55,935, which does not include a
non-cash purchase of $185,950 of equipment for the STAQ On-line Network project
from the Company's major stockholder, as described at "CERTAIN TRANSACTIONS."
Other than equipment which the Company purchases in the fulfillment of its
contracts, the Company has no capital expenditure commitments. However, the
Company owns a 90% interest in the joint venture developing the STAQ On-line
Network project, has already invested $1,600,000 in such project, and is
obligated to provide additional funding of approximately $4,000,000 during the
first quarter of 1998, which is expected to be satisfied from the net proceeds
of the Offering. (See "BUSINESS - BRIGHTON-STAQ").
Cash set aside for customer purchases which represents prepayments by
customers that are set aside to pay project related current liabilities and
commitments, decreased by $1,276,365, from $2,636,000 at December 31, 1996 to
$1,359,635 at September 30, 1997, as a result of the utilization of a portion of
such cash balance to fulfill certain equipment contract obligations related to
the China National contract during the nine months ended September 30, 1997.
Cash set aside for customer purchases increased by $2,036,000 during
1996, from $600,000 at December 31, 1995 to $2,636,000 at December 31, 1996.
Such 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 customer 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 $643,355 at December
31, 1996 and September 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.
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During December 1996, the Company sold 11,111 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 nine
months ended September 30, 1997, the Company sold an additional 8,002 shares of
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 2,030 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.
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.
However, no funds from the Offering will be paid to Kit Kung or 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 nine months ended September 30, 1997, the Company
advanced $349,834 to Kit Kung and his family members and repaid amounts due Kit
Kung and his family members aggregating $227,298, resulting in receivables from
stockholders and related parties of $200,668 at September 30, 1997, net of a
credit of $185,950 resulting from the purchase of certain equipment for the STAQ
On-line Network project from Kit Kung. Such amount is expected to be repaid or
otherwise satisfied in the ordinary course of business during the remainder of
1997 and during 1998. Subsequent to the completion of the Offering, the Company
will adopt a policy to the effect that any future transactions between it and
its officers, directors, principal stockholders and the Affiliates of the
foregoing persons be on terms no less favorable to the Company than could
reasonably be obtained in arm's length transactions with independent parties,
and that any such transactions be approved by a majority of the Company's
independent directors disinterested in the transaction.
During December 1997, in order for the Company to arrange the
purchase of certain equipment for a customer, Hong Yun, an officer and director
of the Company and the wife of Kit Kung, agreed to provide a short-term credit
facility by depositing $500,000 into a short-term interest bearing
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40
account with a Hong Kong bank as security for the bank's letter of credit of
approximately $2,145,000 issuable to a supplier.
Due the delays in the financing and construction of the China
National project, 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 "BUSINESS-INDUSTRIAL EQUIPMENT
DISTRIBUTION"). The contractual value of services currently under negotiation is
approximately $450,000, and the settlement of such obligation is predicated on
the resolution of the China National project (See "OVERVIEW". The inability of
the Company to fulfill contractual terms of long-term projects or to negotiate
favorable arrangements for the use or distribution of licensed technology may
have a material adverse effect on the Company's consolidated financial
statements.
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that its projected cash flow provided by
operations will be sufficient to support operations at current levels for at
least the 12 months following the date of this Prospectus. Although the
Company's Networking and Industrial Equipment Distribution business segments on
a combined basis generate or have available sufficient working capital to
support their operations, the Company requires additional capital in connection
with the STAQ On-line Network project (see "BUSINESS - STAQ ON-LINE NETWORK"),
which the Company anticipates obtaining from the net proceeds of the Offering.
The Company projects that Brighton- STAQ will operate at a loss for at least
1998, the first year of operation. To the extent that the Company is unable to
timely fund its $4,000,000 commitment to fund the STAQ On-line Network project
during the first quarter of 1998, 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 were to be unable to fund the continuing
development of the Brighton-STAQ project, project equipment aggregating
$1,517,538 at September 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 STAQ
On-line Network 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, the Renminbi is not freely
convertible into foreign currencies. All foreign exchange transactions involving
the Renminbi 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.
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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.
YEAR 2000 ISSUE:
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year.
Computer programs that have sensitive software may recognize a date using "00"
as the year 1900 rather that the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a recent internal assessment, the Company has determined
that certain of its software programs will have to be modified or replaced so
that its computer systems will properly utilize dates beyond December 31, 1999.
The Company presently believes that the cost to modify its existing software
and/or convert to new software will not be significant.
The Company has also reviewed both the business operations in its
Networking segment in order to determine the potential impact of the Year 2000
Issue with respect to computer networks that the Company has integrated in
China. Although the current computer networks that the Company
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integrated are Year 2000 compliant, certain prior computer networks may not have
been Year 2000 compliant. However, the Company believes that any software
modifications necessary to make such computer networks Year 2000 compliant will
be provided by the companies that developed the hardware and software integrated
by the Company. In addition, based on the Company's contracts with its
customers, including its standard one year warranty provision, the Company does
not believe that it has any obligation to modify or replace any network software
that it has previously integrated that it is not Year 2000 compliant.
Accordingly, the Company does not believe that it will incur any significant
costs in this regard with respect to the year 2000 issue.
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BUSINESS
GENERAL
The Company is currently a computer network integrator and a
distributor 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 the third quarter of 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 Chairman, President, Chief Executive Officer
and principal stockholder, Kit Kung's experience in the business of designing
and installing computer networks and importing industrial equipment in China
since 1980. Building on Mr. Kung's business experience in China, the Company
formed a joint venture with a company controlled by the STAQ Exchange, one of
four national stock exchanges in China, 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. Its business strategy is focused as follows:
- Emphasis on network integration in the banking and finance
industries
- Commercialization of the on-line securities trading
network
- 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. 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 seven 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 according to STAQ Exchange officials, in the cities of
Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen and Wuhan, 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.
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The Company expects to commence commercial operations of the STAQ On-line
Network in the third quarter of 1998.
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), 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"
projects1.
(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.
(3) GROWING DEMAND FOR INFORMATION TECHNOLOGY SYSTEMS FROM
ENTERPRISES AND GOVERNMENT AGENCIES: As the Chinese
economy develops and matures, enterprises
- --------
(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 expected 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.
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and governmental agencies will need 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
subsidiaries' projects:
CUSTOMER PROJECT DESCRIPTION DATE OF EXECUTION CONTRACTUAL BILLINGS
- -------- ------------------- ----------------- --------------------
ICBC Bank branch networking in June 1993 $3,478,000
eight cities in China to
December 1997
Zhongzhou Hotel Hotel management September 1997 $210,000
computer system for 300-
room hotel in Zhongzhou
City, PRC
The People's Daily Office automation system November 1996 $440,000
for text retrieval and high
speed line printer
integration
The Company is currently in the process of completing the
integration of a hotel management computer system for Zhongzhou Hotel, Zhongzhou
City, China. 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
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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 introduced the Aria Wireless Systems, which is
suitable for high volume transactions that require instant responses, such as
ATM transactions, credit card verifications, clearance and settlements, 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, the Company secured nine contracts with ICBC to customize
integration of and install Aria Wireless Systems for ATM linkage and for
clearance and settlements for eight of its bank branches. Five of the contracts
have been completed and four 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.
GENERAL
The Company's Aria Wireless Systems utilizes radio frequency to
transmit data in metropolitan areas within a 50 kilometer (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 an industry leader for wireless data
transfer technology in on-line transactions processing applications. There are
over 5,000 remote locations connected to their respective hosts through Aria
Wireless Systems in over 50 countries throughout the world.
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 the Aria Wireless System in the China market on an
exclusive basis. The Preincorporation Agreement provided that the Company was to
receive a 59% ownership of Aria China, and the two other parties, Aria, Inc. and
Valdacom, were to receive a 23% and 18% 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. The Company is currently negotiating
with Aria, Inc. to restructure the existing business arrangement. The Company
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expects to finalize a sole distributor agreement for China between Aria, Inc.
and BIC in the first quarter of 1998. No assurance can be given that the Company
will be able to finalize this agreement.
In the meantime, the Company has been able to market and sell the
Aria Wireless Systems as a component of its network integration business and
plans to continue such sales practice. Aria, Inc.'s financial difficulties have
not affected the Company's operations to date. Since its emergence from
reorganization, the Company believes that, based upon a review of its financial
statements, Aria, Inc. will continue to be a financially viable company. 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. Although there is no formal
written agreement, the Company is the sole distributor of the Aria Wireless
System in China.
The Company participates in two to three trade shows per annum
and holds two to three 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, banks, universities and research facilities.
COMPETITION
The Company competes with Multipoint Networks, 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
January 12, 1998 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.
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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 in developing 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. According to STAQ
Exchange officials, a seat on the Shanghai Stock Exchange is Rmb1,000,000
($120,482) and the annual membership fee is Rmb500,000 ($60,241). The Shanghai
Stock Exchange does not offer off-floor on-line trading of its stocks. In 1996,
287 companies were listed on the Shanghai Stock Exchange with market
capitalization of Rmb141.5 billion ($17.0 billion). The average daily turnover
in 1996 was Rmb446 million ($53.7 million).
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 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. According to STAQ Exchange officials, the annual
membership fee for the Shenzhen Stock Exchange is Rmb600,000 ($72,289) and it
charges its members an installation charge of approximately Rmb300,000 ($36,145)
to set up satellite linkage and an annual maintenance fee of Rmb60,000 ($7,229).
Stocks, debt instruments and investment funds are traded on the Shenzhen Stock
Exchange. In October 1996, 224 companies were listed on the Shenzhen Stock
Exchange with an aggregate market capitalization of Rmb394 billion ($47.5
billion). The 1996 turnover through October 1996 was Rmb735.2 billion ($88.6
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. According to
STAQ officials, the annual membership fee for the STAQ Exchange is Rmb150,000
($18,072).
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.
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49
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 1991 and 1990, respectively. According to STAQ Exchange
officials, 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 STAQ Exchange officials, 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 STAQ Exchange officials, 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.
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. NASDAQ has no on-going involvement with the
STAQ Exchange or Brighton-STAQ.
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
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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, $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 orally agreed during negotiations
for the establishment of Brighton-STAQ that under certain financial performance
criteria to be agreed by the parties, Huazheng would have the right, during the
term of Brighton-STAQ, to acquire up to an additional 10% of the joint venture
annually, at market valuation, up to a total ownership interest of 49% of
Brighton-STAQ. The Company is uncertain with respect to the validity of this
oral agreement under Chinese law since it was not reflected in the written
agreement approved by the Chinese government providing for the establishment of
Brighton-STAQ. The Company believes that local business custom dictates that the
Company honor such oral agreement if so requested by its partner. If Huazheng
decides to exercise such right at a time when Brighton-STAQ is profitable, the
Company's operating results and anticipated growth may be adversely affected. In
addition, the mechanism for determining market valuation if and when Huazheng
exercised such right, which is not yet agreed to by the parties, may possibly be
unfavorable to the Company.
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
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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. Two satellite communication links, one
between the STAQ Exchange trading floor in Beijing and Shanghai and the other
between the STAQ Exchange trading floor in Beijing and Chongqing, have been
completed. The cost of construction for each satellite communication link was
approximately $38,000. The satellite equipment utilized for the STAQ On-line
Network is manufactured by Hughes Electronics Corporation. 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. While The People's Daily provides the services of its satellite
transponders to operate the communications linkages, the Company owns 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 Company is currently negotiating
with a domestic telecommunication service provider in Shanghai to use its
assigned radio frequency for the STAQ On-line Network. The Company expects to
finalize an agreement with this telecommunication service provider in the first
quarter of 1998.
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 other companies
controlled by the Company's Chairman, Chief Executive Officer, President and
principal stockholder 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 the second quarter of
1998. During the test period, the STAQ On-line Network will be provided to the
selected stock brokerages free of charge. 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 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 STAQ Exchange officials, only half of its
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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, in cooperation with the STAQ Exchange, by
packaging it with membership to the STAQ Exchange to all stock brokerages who
are not yet members of 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
providing trading on off-exchange floor trading for foreign securities markets,
currency trading and 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 of their domestically listed securities.
INDUSTRIAL 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 industrial
equipment distribution sector in China is highly saturated with significant
competition among manufacturers and distributors from around the world.
PRODUCTS
The Company facilitates 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.
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The Company has signed exclusive distributor agreements with
several major manufacturers of industrial equipment (Milltronics Manufacturing
Company (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 as of December 31, 1997 and the Company's projected
revenues in 1998 based on the Company's on-going negotiations with customers:
Type of Industrial
SUPPLIER Equipment 1997 1998
- -------- ------------------ ---- ----
Adaptive Motion Tube & pipe bending $200,000 $300,000
Control Systems machine
Alo-Teknik AB Saw tooth grinders $782,000 $300,000
Forest-Line Large size milling - $1,500,000
Capdenac machines
Milltronics Machine centers $163,500 $2,000,000
Manufacturing
Corporation
Normac, Inc. Shred grinding machines - $350,000
Royal Master Centerless grinders - $450,000
Grinders, Inc.
Sullair Corporation Industrial air compressors $1,200,000 $1,500,000
and dryers
The Monarch Vertical Machine centers $1,780,000 $1,000,000
Machine Tool
Company
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
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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 in 1997 totaling approximately $6,980,000.
The Company has been awarded a $1,690,000 contract from Shenyang Aircraft
Corporation to equip five heavy duty vertical machining centers. Shenyang
Aircraft Corporation is a 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 state-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 a leading
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 industrial 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.
The Company's industrial equipment distribution business sales
and support teams, based in China and New Jersey, have grown from a total of
three 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 (nine employees), Shanghai (eight employees) and Wuhan (eight
employees). All orders are sent to Beijing for approval and processing.
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FOREIGN TRADE CORPORATIONS ("FTC's")
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 an 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 Renminbi
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 an 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 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.
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AFTER-SALE 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 U.S., which maintains its own direct sales
force in China. In addition, certain manufacturers, such as Ingersoll-Rand
Company of the U.S., 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, for a total of $11 million, engineering design and implementation for a
sodium bichromate production plant with an annual 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. ("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
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May 1997 and October 1997, respectively. After construction of the plant is
complete and ready to commence production, 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
industrial 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 methods 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.
The Company has been advised by China National that they are
currently negotiating with third party lenders for the necessary funds to
complete the construction of the project. The Company is currently unable to
predict the ultimate outcome of these discussions. In the event that China
National is unsuccessful in its efforts to obtain such financing and
construction efforts are suspended or terminated, the Company's anticipated
revenues in the future with regard to this contract may be reduced. Based on an
assessment of discussions with China National and the timing involved in
obtaining the necessary funds, management of the Company does not expect that
any significant revenues will be earned from this contract during the year
ending December 31, 1998. If China National is unable to complete the project,
management does not expect that the ultimate resolution of this matter will have
a material adverse impact on the Company's financial position or cash flows.
BACKGROUND OF THE COMPANY
The Company was incorporated in the State of Delaware on November
4, 1988 as Sirone Corporation. On November 1, 1995, the Company changed its name
to Zentex Corporation. For a period of time prior to November 11, 1996, under
previous management, 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 business purpose of the Reverse Merger was to
facilitate the consolidation of BIC and BECL into one publicly traded entity to
attract investment in the Company. 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. On January 13, 1998, the Company's
Board of Directors and stockholders authorized and approved a 1 for 3 reverse
stock split, which will go into effect on January 26, 1998. All Common Stock and
per share data have been restated to reflect the reverse stock splits.
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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.
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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 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 59%; (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:
[BRIGHTON TECHNOLOGIES FLOWCHART]
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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 industrial equipment distribution
business segment and 18 are engineering and technical support personnel in the
computer network integration 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.
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SHENZHEN. The Brighton Elevator Shenzhen representative office
occupies office space in the Shenzhen Beijing Hotel in Shenzhen. The lease
expires June 30, 1998.
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.
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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 December 31, 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 stockholders. 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.
NAME AGE POSITION
---- --- --------
BRIGHTON TECHNOLOGIES CORPORATION
Kit Kung 47 Chairman of the Board, President
and Chief Executive Officer
Robert N. Weingarten 45 Chief Financial Officer
Warren Wang 50 Secretary and Chief Accounting Officer
Hong Yun 43 Director;
Vice President/General Manager of
The Brighton Industries Corporation
Nils Ollquist 42 Director
Michael Muldavin 77 Director
KEY MANAGEMENT PERSONNEL
Edith Wong 47 General Manager
Brighton Electronics Corporation Ltd.
(Hong Kong)
He Ping 38 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 31 Manager of Finance and Administration
Brighton Electronic Corporation Ltd.
(Beijing)
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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.
ROBERT N. WEINGARTEN has served as Chief Financial Officer of
the Company since November 3, 1997. Mr. Weingarten has agreed to devote, as
necessary, up to 80% of his time to serve in this position. 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. and as an officer and director of GolfGear
International, Inc., both of which are publicly held companies specializing in
sports-related products. 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 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 naturalization. Ms. Yun graduated from
Beijing University of Beijing, China specializing in electronics engineering.
She is the wife of Kit Kung.
NILS A. OLLQUIST has been a director of the Company since
October 1996. Mr. Ollquist also held the positions of Chief Financial Officer
and Vice President of the Company until his resignation, in November 1997. 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.
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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 is the General Manager of BECL and is responsible
for the day-to-day operations of BECL and its Hong Kong subsidiaries. Ms. Wong
has worked with Mr. Kung in his computer integration and industrial equipment
businesses since 1984. 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 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 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.
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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 will be required under the Nasdaq SmallCap Market listing rules 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 December 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.
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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.
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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 BENEFICIALLY
BENEFICIAL OWNER BENEFICIALLY OWNED OWNED BEFORE OFFERING OWNED AFTER OFFERING
Kit Kung 937,642(1),(2) 80.5% 43.3%
c/o Brighton Technologies
Corporation
6 Pearl Court
Allendale, NJ 07401
Hong Yun 55,556(3) 4.8% 2.6%
c/o Brighton Technologies
Corporation
6 Pearl Court
Allendale, NJ 07401
Nils Ollquist 3,890 0.3% 0.2%
c/o Orient Financial
Services 13C, Chinaweal
Centre
414-424 Jaffe Road
Wanchai, Hong Kong
Robert N. Weingarten -- -- --
c/o Brighton Technologies
Corporation
6 Pearl Court
Allendale, NY 07401
Warren Wang -- -- --
c/o Brighton Technologies
Corporation
6 Pearl Court
Allendale, NJ 07401
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PERCENTAGE OF PERCENTAGE OF
NUMBER OF SHARES OF OUTSTANDING COMMON OUTSTANDING COMMON
NAME AND ADDRESS OF COMMON STOCK STOCK BENEFICIALLY STOCK BENEFICIALLY
BENEFICIAL OWNER BENEFICIALLY OWNED OWNED BEFORE OFFERING OWNED AFTER OFFERING
Michael Muldavin -- -- --
c/o Brighton Technologies
Corporation
6 Pearl Court
Allendale, NJ 07401
All Directors and 997,088 85.6% 46.1%
executive Officers as a
group
(6 persons)
(1) Does not include 55,556 shares of Common Stock owned by Hung Yun, Mr.
Kung's wife. Mr. Kung disclaims beneficial ownership of such shares.
(2) On April 15, 1997, Mr. Kung executed an agreement granting two
individuals, who are also stockholders, an option to purchase an aggregate of
6,803 shares of Common Stock owned by Mr. Kung at the exercise price of $4.50
per share through June 30, 1998. Such options have not yet been exercised and
the shares of Common Stock underlying such options are included herein.
(3) Does not include 937,642 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.
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CERTAIN TRANSACTIONS
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. The advances relate to personal travel and related expenses
incurred on corporate charge cards. 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 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 was 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 September 1997, Kit Kung sold project equipment to the
Company with a fair market value of $185,950, which is equivalent to the price
that the Company would have had to pay to purchase such equipment in the open
market, in exchange for an equivalent reduction in the amount due the Company
from Kit Kung.
During the nine months ended September 30, 1997, the Company
advanced $349,834 to Kit Kung and his family members and repaid amounts due Kit
Kung and his family members aggregating $227,298, resulting in receivables from
stockholders and related parties of $200,668 at September 30, 1997, net of a
credit of $185,950 resulting from the sale of certain equipment for the STAQ On-
line Network project from Kit Kung as described above.
During December 1997, in order for the Company to arrange the
purchase of certain equipment for a customer, Hong Yun, an officer and director
of the Company and the wife of Kit Kung, provided a short-term credit facility
by depositing $500,000 into a short-term interest bearing account with a Hong
Kong bank as security for the bank's letter of credit of approximately
$2,145,000 issuable to a supplier.
Subsequent to the completion of the Offering, the Company will
adopt a policy to the effect that any future transactions between it and its
officers, directors, principal stockholders and the affiliates
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of the foregoing persons be on terms no less favorable to the Company than could
reasonably be obtained in arm's length transactions with independent parties,
and that any such transactions be approved by a majority of the Company's
independent directors disinterested in the transaction.
The Company has in the past relied on Kit Kung and his family
members, from time to time, for financing requirements and assistance. All prior
financing and other assistance were provided on a case by case basis with no
commitment to provide any such financing or assistance in the future by Kit Kung
or his family members.
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 nine months
ended September 30, 1997, $19,308 was paid to Orient Financial Services Limited.
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 December 31, 1997, 1,165,111 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.
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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 Continental Stock Transfer & Trust Co. (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.
Each Warrant entitles the registered holder thereof to purchase
one share of Common Stock at a price of 150% of the offering price per Unit at
any time commencing _______________, 1999 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 _______________, 1999, 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 offering 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.
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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 Continental Stock Transfer & Trust Co.,
New York, New York, as transfer agent for the Units.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the
Units or the Redeemable Warrants. No prediction can be made of the effect, if
any, that future market sales of the Common Stock, the Redeemable Warrants or
the availability of such shares or warrants for sale will have on
the prevailing market price of the securities following this Offering.
Nevertheless, sales of substantial amounts of such shares or warrants in the
open market following this Offering could adversely affect the prevailing
market price of the Units or the Common Stock.
Upon completion of the Offering, the Company will have 1,165,111
shares of Common Stock outstanding, of which 1,031,279 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
_________________, 1999. 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 133,832
share balance of the 1,165,111 shares of Common Stock currently outstanding plus
the 1,000,000 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................................................... 1,000,000
=========
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% of
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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 150,000 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 100,000 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 stockholders 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
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established criteria of value. Among the factors considered in determining the
offering price, in addition to 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.
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CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Effective October 23, 1996, Zentex Corporation ("Zentex"),
formerly known as Sirone Corporation, an inactive non-reporting public company,
acquired BIC and BECL in a transaction accounted for as a reverse merger, and
was renamed Brighton Technologies Corporation ("Brighton") on November 12, 1996.
Accordingly, BIC and BECL are each wholly-owned subsidiaries of the Company, and
Brighton, BIC and BECL are collectively referred to herein as the "Company".
Tanner & Co. audited the financial statements of Zentex for the
years ended December 31, 1993 and 1994, and certain prior periods. Zentex's
financial statements were not audited for the year ended December 31, 1995. As a
result of the reverse merger, Tanner & Co. was dismissed as Zentex's independent
accountants effective December 3, 1996. The decision to dismiss Tanner & Co. was
approved by the Company's board of directors. Tanner & Co.'s reports for the
years ended December 31, 1993 and 1994 did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
During the years ended December 31, 1993 and 1994, and the period
from January 1, 1995 to December 3, 1996, there were no disagreements with
Tanner & Co. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Tanner & Co., would have caused such firm to
make reference to the subject matter of the disagreements in connection with its
reports on Zentex's financial statements.
The Company has provided Tanner & Co. with a copy of the
disclosures contained herein, and Tanner & Co. has furnished the Company with a
letter addressed to the Commission confirming that it agrees with the statements
made by the Company in response to Item 304(a) of Regulation S-B under the
Securities Act regarding such firm's involvement with Zentex as independent
accountants.
Russo and Shapiro audited the consolidated financial statements
of the Company for the year ended December 31, 1995, on the basis that the
reverse merger had occurred effective January 1, 1995. Russo and Shapiro was
dismissed as independent accountants of the Company effective December 3, 1996.
The decision to dismiss Russo and Shapiro was approved by the Company's board of
directors. Russo and Shapiro's report on such financial statements for the year
ended December 31, 1995 did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope, or
accounting principles.
In connection with Russo and Shapiro's audit of the consolidated
financial statements of the Company for the year ended December 31, 1995, BECL's
financial statements were audited by Francis S.L. Yan & Co., whose report was
furnished to Russo and Shapiro. Russo and Shapiro's opinion, insofar as it
related to amounts included for BECL in the consolidated financial statements
for the year ended December 31, 1995, was based solely on the report of Francis
S.L. Yan & Co. As a result of the dismissal of Russo and Company, Francis S.L.
Yan & Co. was also dismissed. The decision to dismiss Francis S.L. Yan & Co. was
approved by the Board with the consent of the majority of the Company's
stockholders. Francis S.L. Yan & Co.'s report on such financial statements for
the year ended December 31, 1995 did not contain an adverse opinion or a
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope, or accounting principles.
During the year ended December 31, 1995, and the period from
January 1, 1996 to December 3, 1996, there were no disagreements with Russo and
Shapiro on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not
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resolved to the satisfaction of Russo and Shapiro, would have caused such firm
to make reference to the subject matter of the disagreements in connection with
its report on the Company's financial statements.
During the year ended December 31, 1995, and the period from
January 1, 1996 to November 11, 1997, there were no disagreements with Francis
S.L. Yan & Co. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Francis S.L. Yan & Co., would have caused
such firm to make reference to the subject matter of the disagreements in
connection with its report on BECL's financial statements.
The Company has provided Russo and Shapiro with a copy of the
disclosures contained herein, and Russo and Shapiro has furnished the Company
with a letter addressed to the Commission confirming that it agrees with the
statements made by the Company in response to Item 304(a) regarding such firm's
involvement with the Company as independent accountants.
The Company has provided Francis S.L. Yan & Co. with a copy of
the disclosures contained herein, and Francis S.L. Yan & co. has furnished the
Company with a letter addressed to the Securities and Exchange Commission
confirming that it agrees with the statements made by the Company in response to
Item 304(a) regarding such firm's involvement with BECL as independent
accountants.
Effective December 3, 1996, the Company engaged BDO Seidman, LLP
as the Company's independent accountants to audit the Company's consolidated
financial statements for the year ended December 31, 1996. Prior to the
engagement of BDO Seidman, LLP, the Company did not consult with such firm
regarding the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on the Company's financial statements, or any matter that was either
the subject of a disagreement or a reportable event.
The Company has provided BDO Seidman, LLP with a copy of the
disclosures contained herein, and BDO Seidman, LLP has indicated that no letter
will be provided containing any new information, clarification of the Company's
expression of its views, or the respect in which it does not agree with the
statements made by the Company in response to Item 304(a).
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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 through the Commission's Web site (http://www.sec.gov). Copies may be
obtained from the Commission's principal office upon payment of the fees
prescribed by the Commission.
79
79
BRIGHTON TECHNOLOGIES CORPORATION
Brighton Technologies Corporation and Subsidiaries
Index to Consolidated Financial Statements
Page
Number
------
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
Report of Independent Certified Public Accountants -
Russo and Shapiro.........................................................F-2
Francis S.L. Yan & Co.....................................................F-3
BDO Seidman, LLP..........................................................F-5
Consolidated Balance Sheets -
December 31, 1995 (as restated) and 1996..................................F-6
Consolidated Statements of Income -
Years Ended December 31, 1995 (as restated) and 1996......................F-7
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1995 (as restated) and 1996......................F-8
Consolidated Statements of Cash Flows -
Years Ended December 31, 1995 (as restated) and 1996......................F-9
Notes to Consolidated Financial Statements
Years Ended December 31, 1995 (as restated) and 1996.....................F-10
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1996 AND 1997
Condensed Consolidated Balance Sheet -
September 30, 1997.......................................................F-28
Condensed Consolidated Statements of Operations -
Nine Months Ended September 30, 1996 and 1997............................F-30
Condensed Consolidated Statements of Stockholders'
Equity - Nine Months Ended September 30, 1997............................F-32
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1997............................F-33
Notes to Condensed Consolidated Financial Statements.......................F-35
F-1
80
[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, stockholders' 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 1995
financial statements of Brighton Electronics Corporation Limited, which are
included in 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 $1,872,996 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
F-2
81
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
F-3
82
[FRANCIS S. L. YAN & CO. LETTERHEAD]
REPORT OF THE AUDITORS TO THE MEMBERS OF
BRIGHTON ELECTRONICS CORPORATION LIMITED
We have audited the financial statements on pages 3 to 9 which have been
prepared in accordance with accounting principles generally accepted in Hong
Kong.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The Companies Ordinance requires the directors to prepare financial statements
which give a true and fair view. In preparing financial statements which give a
true and fair view it is fundamental that appropriate accounting policies are
selected and applied consistently.
It is our responsibility to form an independent opinion, based on our audit, on
those statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Statements of Auditing Standards
issued by the Hong Kong Society of Accountants. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgments made by the directors in the preparation of the
financial statements, and of whether the accounting policies are appropriate to
the company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the financial
statements are free from material misstatement. In forming our opinion we also
evaluated the overall adequacy of the presentation of information in the
financial statements. We believe that our audit provides a reasonable basis for
our opinion.
The financial statements have been audited on 13th August, 1996. In view of the
benefits of the subsequent information available and the change of the
accounting policy of the Group after that date, the financial statements have
been re-stated to cancel the interest charges of $1,287,000.00 from the Company
to its subsidiary, to write off the subsidiary's preliminary expenses of
$950,193.53 in setting up its representative office in China and to consolidate
the accounts of the Company and its subsidiaries on 31st December, 1995.
F-4
83
[FRANCIS S. L. YAN & CO. LETTERHEAD]
REPORT OF THE AUDITORS TO THE MEMBERS OF
BRIGHTON ELECTRONICS CORPORATION LIMITED
OPINION
In our opinion the financial statements give a true and fair view, in all
material respects, of the state of the Company's and the Group's affairs as at
31st December, 1995 and of the results of the Group for the year then ended and
have been properly prepared in accordance with the Companies Ordinance.
/s/Francis S.L. Yan & Co.
FRANCIS S. L. YAN & CO.
Certified Public Accountants
Hong Kong 11 Nov 1997
F-5
84
[THE FORM OF REPORT TO BE FURNISHED UPON COMPLETION OF THE JANUARY 26, 1998
REVERSE STOCK SPLIT DISCUSSED IN THE LAST PARAGRAPH OF NOTE 8]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Brighton Technologies Corporation
and Subsidiaries
Allendale, New Jersey
**5 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.
** 6 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.
** 7 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.
BDO Seidman LLP
Woodbridge, New Jersey
May 29, 1997 (January ___, 1998 as to the last paragraph of Note 8)
F-6
85
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
Cash set aside for customer purchases (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 - 1,008,333 and 1,149,559 in 1995 and 1996, respectively 1,008 1,150
Preferred stock; $.001 par value; shares authorized -
5,000,000; none issued and outstanding -- --
Contributed capital 25,774 1,482,781
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.
F-7
86
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 ........................... $ .17 $ .19
=========== ===========
Weighted average shares outstanding - primary ....... 1,008,333 1,033,965
=========== ===========
Weighted average common shares and common equivalents
outstanding - fully diluted ......................... 1,008,333 1,046,891
=========== ===========
See accompanying notes to financial statements.
F-8
87
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) 1,008,333 $ 1,008 $ 25,774 $ (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) 1,008,333 1,008 25,774 (1,269,766)
Net income, as restated, for 1995 -- -- -- 172,347
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 1,008,333 1,008 25,774 (1,097,419)
Net shares issued in
connection with reverse
merger (Note 1) 130,115 131 (131) --
Sale of common stock 11,111 11 449,989 --
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 1,149,559 $ 1,150 $ 1,482,781 $ (898,895)
=========== =========== =========== ===========
See accompanying notes to financial statements.
F-9
88
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 cash set aside for customer
purchases (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.
F-10
89
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
F-11
90
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 two
active 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.
F-12
91
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.
F-13
92
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF Business Combination and Consolidation
SIGNIFICANT Policy
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.
F-14
93
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.
Cash Set Aside for Customer Purchases
Cash that is set aside to pay project
related liabilities and commitments
totaled $600,000 and $2,636,000 at
December 31, 1995 and 1996,
respectively.
F-15
94
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Provisions for Doubtful Accounts
The Company performs initial and ongoing
credit evaluations of its customers, and
periodically reviews the collectibility
of accounts receivable and provides an
allowance for its estimate of accounts
deemed to be uncollectible. A significant
portion of the Company's business is done
on the basis of letters of credit or cash
advances with a relatively limited number
of customers, and as a result, the Company
did not experience any significant bad
debt expense in 1996 or 1997 (See Note 11).
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, 130,115 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.
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.
F-16
95
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 (also see Note 8). 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.
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).
F-17
96
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 $258,353
($.26 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:
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
========== ==========
F-18
97
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(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.
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.
F-19
98
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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
=========== ===========
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 $ 4,078,131 $ 6,205,662
contracts
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)
============ ============
F-20
99
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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.
8. STOCKHOLDERS' Private Placement
EQUITY
In December 1996, the Company sold
11,111 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 8,002 shares
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
F-21
100
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 13,778 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, 3,141 shares of
common stock to various individuals and
firms. Of this issuance, 2,033 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.
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 and
January 26, 1998, the Company
subsequently effected separate one for
three reverse stock splits. All share
and per share data have been restated
for all periods presented to reflect
these splits.
F-22
101
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
F-23
102
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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
========= =========
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
=========== ===========
F-24
103
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
======== ========
F-25
104
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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:
1995 1996
----------------------------------------- -----------------------------------------
December 31, Asset Liability Net ASSET LIABILITY NET
----------- ----------- ----------- ----------- ----------- -----------
Current deferred
income taxes:
Accrued account
receivables $ -- $ (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)
=========== =========== =========== =========== =========== ===========
F-26
105
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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.
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.
F-27
106
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 Cash set aside for customer purchases
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.
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.
F-28
107
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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
=========== =========== =========== ===========
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
=========== =========== =========== ===========
F-29
108
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Substantially all of the Company's
United States revenues are derived from
customers based in the Far East.
F-30
109
BRIGHTON TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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
=========== =========== ===========
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
=========== =========== ===========
F-31
110
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30,
1997
-------------
ASSETS
Current assets:
Cash and cash equivalents $ 556,940
Cash set aside for customer purchases (Note 4) 1,359,635
Accounts receivable, net 2,040,343
Costs and accumulated gross profit
in excess of billings
on uncompleted contracts 945,107
Receivables from stockholders
and related parties 200,668
Prepaid expenses 45,376
Deferred taxes 1,164,000
----------
Total current assets 6,312,069
----------
Fixed assets:
Project equipment (Notes 7 and 8) 1,517,538
Furniture and equipment, net 202,814
----------
Net fixed assets 1,720,352
----------
Other assets:
Non-current accounts receivable -
related parties 22,339
Deposits 30,883
Prepaid contract fees 228,733
Deferred offering costs
(Notes 5 and 10) 237,093
Organization costs, net 25,709
----------
Total other assets 544,757
----------
Total assets $8,577,178
==========
(continued)
F-32
111
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (CONTINUED)
SEPTEMBER 30,
1997
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,628,857
Accrued expenses 378,038
Accrued licensing costs (Note 4) 450,000
Billings in excess of costs
and accumulated gross profit
on uncompleted contracts 516,725
Deferred revenue 94,444
Notes payable (Note 2) 802,105
Customer deposits, net (Note 4) 2,153,628
Taxes payable 1,492,000
----------
Total current liabilities 7,515,797
----------
Long-term liabilities:
Deferred taxes 88,000
Minority interests 134,649
----------
Total long-term liabilities 222,649
----------
Commitments and contingencies (Notes 4 and 8)
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 - 1,161,222 1,161
Contributed capital 1,856,740
Accumulated deficit (1,006,919)
Unearned compensation cost (12,250)
----------
Total stockholders' equity 838,732
----------
Total liabilities and
stockholders' equity $8,577,178
==========
See accompanying notes to condensed
consolidated financial statements.
F-33
112
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1996 1997
---------- ----------
Revenues $6,796,972 $5,913,330
Cost of revenues 4,994,155 4,057,207
---------- ----------
Gross profit 1,802,817 1,856,123
---------- ----------
General and administrative expenses:
Salaries, payroll taxes and
employee benefits 578,837 868,887
Rent and premises 321,678 326,783
Travel and lodging 289,412 169,394
Depreciation and amortization 21,332 63,269
Foreign transaction losses 3,108 20,895
Consulting fees (Note 6) 366,430
Miscellaneous 350,394 298,027
---------- ----------
Total general and
administrative expenses 1,564,761 2,113,685
---------- ----------
Operating income (loss) 238,056 (257,562)
---------- ----------
Other income (expense):
Interest expense and bank fees (22,647) (43,994)
Interest income 22,827 77,418
Miscellaneous income 48,778 17,832
---------- ----------
Total other income, net 48,958 51,256
---------- ----------
Income (loss) before income taxes
and minority interests 287,014 (206,306)
Provision (benefit) for income taxes 115,000 (89,000)
Minority interests (26,663) 9,282
---------- ----------
Net income (loss) $ 145,351 $ (108,024)
========== ==========
(continued)
F-34
113
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1996 1997
--------- ----------
Net income (loss) per common share (Note 1):
Primary and fully diluted $.14 $ (.09)
========= =========
Weighted average number of common shares
and common share equivalents
outstanding (Note 1):
Primary 1,008,333 1,157,289
========= =========
Fully diluted 1,022,223 1,199,838
========= =========
See accompanying notes to condensed
consolidated financial statements.
F-35
114
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
UNEARNED
COMMON STOCK CONTRIBUTED ACCUMULATED COMPENSATION
SHARES AMOUNT CAPITAL DEFICIT COST
--------- ------ ---------- ----------- ------------
Balance at December 31, 1996 1,149,559 $1,150 $1,482,781 $ (898,895)
Sale of common stock 8,002 8 352,940
Costs associated with the sale
of common stock (45,416)
Issuance of common stock for
costs associated with the
sale of common stock 2,030 2 (2)
Issuance of restricted common
stock to employee 1,111 1 48,999 $(49,000)
Issuance of restricted common
stock for consulting fees 500 17,438
Issuance of common stock
from rounding as a result
of reverse stock split 20
Amortization of unearned
compensation
36,750
Net loss for the nine months
ended September 30, 1997 (108,024)
--------- ------ ---------- ----------- --------
Balance at September 30, 1997 1,161,222 $1,161 $1,856,740 $(1,006,919) $(12,250)
========= ====== ========== ============ ========
See accompanying notes to condensed
consolidated financial statements.
F-36
115
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1996 1997
---------- -----------
Cash flows from operating activities:
Net income (loss) $ 145,351 $ (108,024)
---------- -----------
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 124,457 166,394
Deferred income taxes (707,000) 83,000
Minority interests (32,321) (9,282)
Non-cash compensation expense 54,187
Note payable issued
for consulting fees 150,000
Interest accrued on notes payable 36,936 32,004
Changes in operating assets
and liabilities:
Accounts receivable, net (863,629) (701,025)
Costs and accumulated
gross profit in
excess of billings on
uncompleted contracts (1,133,197) 1,111,880
Prepaid expenses (424,615) 105,318
Other current assets (20,682) 4,700
Deposits (30,182) (21,638)
Accounts payable 146,300 670,307
Accrued expenses 245,415 64,701
Billings in excess of
costs and accumulated
gross profit on
uncompleted contracts 2,615,452 (4,454,669)
Deferred revenue 540,901 11,023
Customer deposits, net 2,153,628
Taxes payable 693,118 (186,000)
---------- ----------
Total adjustments 1,190,953 (765,472)
---------- ----------
Net cash provided by
(used in) operating
activities 1,336,304 (873,496)
---------- ----------
(continued)
F-37
116
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1996 1997
----------- -----------
Cash flows from investing activities:
(Increase) decrease in cash set aside for customer purchases $ (610,000) $ 1,276,365
Acquisition of fixed assets (51,852) (55,935)
Organization costs (211)
----------- -----------
Net cash provided by
(used in) investing activities (662,063) 1,220,430
----------- -----------
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 (349,834)
Decrease in payable to stockholders (1,297,876) (227,298)
Deferred offering costs (86,147) (237,093)
------------ -----------
Net cash used in financing
activities (306,449) (506,693)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 367,792 (159,759)
Cash and cash equivalents, at
beginning of period 137,067 716,699
----------- -----------
Cash and cash equivalents, at
end of period $ 504,859 $ 556,940
=========== ===========
See accompanying notes to condensed
consolidated financial statements.
F-38
117
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
1. Basis of Presentation
The accompanying condensed consolidated financial statements as of
September 30, 1997 and for the nine months ended September 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 September 30,
1997, the results of operations for the nine months ended September 30, 1996 and
1997, and cash flows for the nine months ended September 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 nine months ended September 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 nine months ended September 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 market price
of the Company's common stock during September 1997, and the conversion of the
note payable issued for a consulting fee (See Note 2) 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 the 1 for 3 reverse stock split effective October
17, 1997 and the 1 for 3 reverse stock split which will go into effect on
January 26, 1998.
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 $643,355 at September 30,
1997.
On February 25, 1997, the Company entered into a consulting agreement
with 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 was charged to operations
during the nine months ended September 30, 1997. The note is unsecured, bears
interest at 10% per annum, with interest to accrue until the due date of
February 24, 1998. Thereafter, such note will become payable upon demand, with
interest at 12% per annum.
F-39
118
Brighton Technologies Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
Nine Months Ended September 30, 1996 and 1997
If the Company does not complete a debt or equity financing by February
24, 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 25,000
shares. Such shares, if issued, will be restricted and will have piggyback
registration rights.
If the Company completes a private financing by February 24, 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 (See
Note 10) by February 24, 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 nine
months ended September 30, 1997 consisted of the following:
a. The Company sold 8,002 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 2,030 shares of common stock to various individuals and firms
for services rendered in connection therewith. The 2,030 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 1,111 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 to operations, as earned, during the year ending December 31, 1997. At
September 30, 1997, the balance of unearned compensation cost was $12,250.
c. In July 1997, the Company issued 500 shares of common stock
with an aggregate value of $17,438 to a consultant for services rendered, which
was recorded as a charge to operations during the nine months ended September
30, 1997.
d. Effective September 13, 1997, the Company entered into a
letter of agreement with a public relations firm to provide corporate and
investor relations. In conjunction therewith, the Company issued the public
relations firm a three year stock option to purchase 2,778 shares of common
stock with an exercise price of $22.50 per share, which was the fair market
value on the date of grant. The imputed fair value of this stock option is
$23,000, which will be amortized to operations, as earned, during the period
from October 1997 through March 1998.
F-40
119
Brighton Technologies Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
Nine Months Ended September 30, 1996 and 1997
4. China National Project and Related Contractual Obligations
The original turn-key contract with China National Chemical
Construction Company ("China National") for the engineering design and
implementation for a sodium bichromate production plant with an annual
production capacity of 20,000 metric tons was expected to generate total
revenues of $11,000,000 for the Company. Revenues under this contract for the
years ended December 31, 1995 and 1996, and the nine months ended September 30,
1997, were approximately $2,855,000, $1,048,000 and $2,337,000, respectively, or
34%, 13% and 40% of the Company's total revenues, respectively. The Company has
recorded cumulative aggregate revenues of $6,898,000 through September 30, 1997
under this contract (including revenues of $658,000 for the year ended December
31, 1994), or approximately 63% of the contract's total expected revenues.
The Company has been advised by China National that they are currently
negotiating with third party lenders for the necessary funds to complete the
construction of the project. The Company is currently unable to predict the
ultimate outcome of these discussions. In the event that China National is
unsuccessful in its efforts to obtain such financing and construction efforts
are suspended or terminated, the Company's anticipated revenues in the future
with regard to this contract may be reduced or eliminated. Based on an
assessment of discussions with China National and the timing involved in
obtaining the necessary funds, management of the Company does not expect that
any significant revenues will be earned from this contract during the year
ending December 31, 1998. If China National is unable to complete the project,
management does not expect that the ultimate resolution of this matter will have
a material adverse impact on the Company's financial position or cash flows.
As an accommodation to China National for excess funds held by the
Company, the Company has periodically loaned funds to China National. These
loans do not bear interest and do not stipulate repayment dates. As of September
30, 1997, the Company had loaned $1,132,169 to China National; such amount has
been offset against customer deposits on the December 31, 1996 and September 30,
1997 consolidated balance sheets.
Due to delays in the financing and construction of the China National
project, 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. The contractual value of services
currently under negotiation is approximately $450,000, and the settlement of
such obligation is predicated on the resolution of the matter described above.
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.
5. Deferred Offering Costs
Deferred offering costs aggregating $237,093 at September 30, 1997
represent certain legal, accounting and underwriter costs incurred in connection
with the contemplated public sale of the Company's securities (See Note 10).
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 $366,430 were charged to operations during
the nine months ended September 30, 1997 for certain professional, consulting
and other costs incurred in connection with the
F-41
120
Brighton Technologies Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
Nine Months Ended September 30, 1996 and 1997
Company's ongoing business development activities. Of such amount, $19,308 was
paid to an affiliate of a director during the nine months ended September 30,
1997 and $175,000 was incurred pursuant to an agreement with a consulting firm
(See Note 2).
7. Related Party Transactions
During September 1997, the Company's founder and majority stockholder
sold project equipment to the Company with a fair market value of $185,950,
which is equivalent to the price that the Company would have had to pay to
purchase such equipment in the open market, in exchange for an equivalent
reduction in the amount due the Company from the stockholder.
8. Brighton STAQ Project
The Company owns a 90% interest in the joint venture developing the
STAQ On-line Network project, has already invested $1,600,000 in such project,
and is obligated to provide additional funding of approximately $4,000,000
during the first quarter of 1998. The Company accounts for the joint venture on
a consolidated basis.
The Company currently expects to meet its funding obligation through
the sale of its equity securities in the contemplated public offering (See Note
10), although there can be no assurances that the Company will be successful in
this regard. To the extent that the Company is unable to timely fund its
$4,000,000 commitment to fund the STAQ On-line Network project during the first
quarter of 1998, 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 were to be unable to fund the continuing development of the
Brighton-STAQ project, project equipment aggregating $1,517,538 at September 30,
1997 would be liquidated at net realizable value and the resulting loss, if any,
would be charged to operations.
9. 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
F-42
121
Brighton Technologies Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
Nine Months Ended September 30, 1996 and 1997
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.
10. 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 1,000,000 units ("Units") of the Company's securities at an offering
price ranging from $5.50 to $7.00 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 150% of the offering price
per Unit, subject to adjustment in certain circumstances, at any time commencing
__________, 1999 until _______________, 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 150,000 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 100,000 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.
11. Subsequent Events
a. Effective October 1, 1997, the Company entered into a
consulting agreement with a firm to provide certain business development
services in exchange for 3,889 shares of common stock with a fair market value
of approximately $29,000, which will be amortized to operations, as earned,
during the period from October 1997 through June 1998. The shares were issued on
November 3, 1997.
b. During December 1997, in order for the Company to arrange the
purchase of certain equipment for a customer. The wife of the Company's founder
and majority stockholder, who is an officer and director of the Company,
provided a short-term credit facility by depositing $500,000 into a short-term
interest bearing account with a Hong Kong bank as security for the bank's letter
of credit of approximately $2,145,000 issuable to a supplier. The Company will
record a credit
F-43
122
Brighton Technologies Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) (continued)
Nine Months Ended September 30, 1996 and 1997
to contributed capital and a charge to operations for the estimated imputed cost
of such credit facility during the period for which it is outstanding.
F-44
123
The Company maintains offices in the following cities in
China -- Beijing, Hong Kong, Shanghai, Shenzhen and Wuhan.
124
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 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 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 to whom it is unlawful to make such offer or
solicitation.
----------------------------
TABLE OF CONTENTS
Page
Prospectus Summary.........................................................
Risk Factors...............................................................
Use of Proceeds............................................................
Market Price for Common Stock..............................................
Dividend Policy............................................................
Dilution...................................................................
Capitalization.............................................................
Management's Discussion and Analysis
or Plan of Operations..................................................
Industry Overview..........................................................
Business Development.......................................................
Business...................................................................
Management.................................................................
Certain Transactions.......................................................
Principal Stockholders.....................................................
Description of Securities..................................................
Shares Eligible for Future Sale............................................
Underwriting...............................................................
Legal Matters..............................................................
Experts....................................................................
Changes in Registrant's
Certifying Accountants.................................................
Additional Information.....................................................
Index to Financial Statements..............................................
--------------------
Until __________, 1998 (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 to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
1,000,000 UNITS
[LOGO]
BRIGHTON
TECHNOLOGIES
CORPORATION
UNITS
----------
PROSPECTUS
----------
________________, 1998
125
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....................................... $6,556.38
NASD Filing Fee............................................ 2,231.21
Nasdaq SmallCap Market Filing Fee.......................... 10,000.00
Blue Sky Fees and Expenses................................. 25,000.00
Transfer Agent Fees........................................ 2,500.00
Legal Fees................................................. 200,000.00
Accounting Fees............................................ 220,000.00
Printing and Engraving Costs............................... 70,000.00
Miscellaneous.............................................. 63,712.41
Total........................................... $600,000.00
===========
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 November 11, 1996, the 1 for
II-1
126
3 reverse stock split effective October 17, 1997 and the 1 for 3 reverse stock
split authorized and approved by the Company's Board of Directors and
stockholders on January 13, 1998 which will go into effect on January 26, 1998):
1. On November 28, 1995, the Company issued an aggregate of
62,222 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 5,556
shares of common stock to two investors, the offering was done pursuant to Rule
504 of Regulation D.
3. On October 1, 1996, the Company issued an aggregate of 100,481
shares of common stock to eight investors. The offering was done 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
944,444 shares of common stock to Mr. Kit Kung and 55,556 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 8,333
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
11,111 shares of common stock. The offering was done 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 3,141
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 8,002 shares of common stock to twelve investors for an aggregate
purchase price of $352,948. The offering was done pursuant to Rule 504 of
Regulation D.
9. In July 1997, the Company issued 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 3,889 shares of common
stock to a consultant for services to be rendered, of which 3,333 shares were
issued pursuant to Rule 504 of the Securities Act and 556 shares were issued
pursuant to Rule 701 of the Securities Act.
The Company believes that the transactions described above were
exempt from registration under Section 3(a)(9), 3(b) or 4(2) of the Securities
Act because the Company was not subject to reporting under the Exchange Act and
was not a development stage company, the aggregate amount of the subject
securities was less than $1,000,000 and the subject securities were,
respectively, either (i) issued pursuant to a compensatory benefit plan pursuant
to Rule 701 under the Securities Act; or (ii) sold to a limited group of
persons, each of whom was believed to have been a sophisticated investor or had
a pre-existing business or personal relationship with the Company or its
management and was purchasing for investment without a view to further
distribution. Restrictive legends were placed on Stock Certificates evidencing
the shares.
II-2
127
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 November 1, 1995*
3.4 Certificate of Amendment to Certificate of Incorporation, as filed
with the Delaware Secretary of State on October 31, 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
10.12 Lease Extension Summary (Shenzhen)
16.1 Letter of Tanner & Co., Independent Certified Accountants
16.2 Letter of Russo & Shapiro, Independent Certified Accountants
16.3 Letter of Francis S.L. Yan & Co., Independent Certified Accountants
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)
23.5 Consent of Zhong Xin Law Office
24.1 Power of Attorney (included on signature page)*
27.1 Financial Data Schedule
- --------------------
* Previously filed.
II-3
128
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:
(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
129
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 Form SB-2 and authorized this Amendment No. 1
to this Registration Statement to be signed on its behalf by the undersigned, in
the City of Allendale, State of New Jersey, on the 16th day of January, 1998.
BRIGHTON TECHNOLOGIES CORPORATION
By:/s/ Kit Kung
-----------------------------------------
Kit Kung
Chairman, President and Chief
Executive Officer
II-5
130
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 Amendment No. 1
to this Registration Statement on Form SB-2 of Brighton Technologies
Corporation, 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
Amendment No. 1 to 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 January 16, 1998
- -------------------------------
Kit Kung Officer and Chairman
of the Board of Directors
(Principal Executive Officer)
* Chief Financial Officer January 16, 1998
- -------------------------------
Robert N. Weingarten
* Secretary and Chief January 16, 1998
- -------------------------------
Warren Wang Accounting Officer
* Director January 16, 1998
- -------------------------------
Nils Ollquist
* Director January 16, 1998
- -------------------------------
Hong Yun
* Director January 16, 1998
- -------------------------------
Michael Muldavin
II-6