As filed with the Securities and Exchange Commission on December 23, 2004
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
COMTECH GROUP, INC.
(Exact name of registrant as specified in its charter)
3669
(Primary standard industrial
classification code number)
MARYLAND 52-0466460
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
ROOM 10001, TOWER C, SKYWORTH BUILDING
HIGH-TECH INDUSTRIAL PARK
NANSHAN, SHENZHEN 5180, PRC
011-86-755-267-43210
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-----------------------------
JEFFREY KANG
CHIEF EXECUTIVE OFFICER
ROOM 10001, TOWER C, SKYWORTH BUILDING
HIGH-TECH INDUSTRIAL PARK
NANSHAN, SHENZHEN 5180, PRC
011-86-755-267-43210
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------------------
COPIES TO:
MITCHELL S. NUSSBAUM
FRAN STOLLER
LOEB & LOEB LLP
345 PARK AVENUE
NEW YORK, NEW YORK 10154
(212) 407-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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 of
1933, as amended (the "Securities Act"), check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) 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 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 this form is a post-effective amendment filed pursuant to Rule 462(d) 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, check
the following box. |_|
-----------------------------
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE(1) REGISTRATION FEE (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value per share 12,080,834 $2.50 $30,202,085 $3,554.79
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(1) Estimated in accordance with Rule 457(c) solely for the purpose of
determining the registration fee. The price shown is the average of the high and
low bid price of the common stock on December 20, 2004 as reported by the Over
the Counter Bulletin Board.
(2) The registration fee has been calculated in accordance with Rule 457(o)
under the Securities Act of 1933.
-----------------------------
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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
2
The information in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS
SUBJECT TO COMPLETION, DATED DECEMBER 23, 2004
12,080,834 SHARES
COMTECH GROUP, INC.
COMMON STOCK
----------------------
This prospectus relates to the resale of up to 12,080,834 shares of our
Common Stock being offered by the selling stockholders. Of the shares covered by
this prospectus, 10,000,000 shares have been issued, 1,850,834 shares are
issuable upon the exercise of outstanding warrants and 230,000 shares are
issuable upon the exercise of outstanding stock options. We will not receive any
proceeds from the sale of the shares of Common Stock by the selling
stockholders. Assuming that all of the warrants held by selling stockholders are
exercised for cash, we will realize proceeds of approximately $2,556,000.
Assuming that all of the stock options held by selling stockholders are
exercised for cash, we will realize proceeds of approximately $345,000.
----------------------
Our Common Stock is quoted on the Electronic Bulletin Board of the
Over-The-Counter Market (OTCBB) under the symbol "COGO." We have applied to list
our Common Stock on The Nasdaq National Market under the same symbol.
----------------------
THE SELLING STOCKHOLDERS, AND INTERMEDIARIES THROUGH WHOM SUCH
SECURITIES ARE SOLD, MAY BE DEEMED UNDERWRITERS WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), WITH RESPECT TO THE
SECURITIES OFFERED, AND ANY PROFITS REALIZED OR COMMISSIONS RECEIVED MAY BE
DEEMED UNDERWRITING COMPENSATION. WE HAVE AGREED TO INDEMNIFY CERTAIN OF THE
SELLING STOCKHOLDERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER
THE SECURITIES ACT.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------
The date of this prospectus is _________, 2005
3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
YOU SHOULD ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE
AS OF THE DATE ON THE FRONT OF THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME AFTER THE DATE OF THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO
GIVE ANY INFORMATION OR TO REPRESENT ANYTHING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
YOU SHOULD NOT RELY UPON SUCH INFORMATION OR REPRESENTATIONS AS HAVING BEEN
AUTHORIZED BY US. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE.
INFORMATION CONTAINED ON OUR WEBSITE DOES NOT CONSTITUTE PART OF THIS
PROSPECTUS.
----------------------
TABLE OF CONTENTS
Page
SUMMARY......................................................................5
RISK FACTORS.................................................................9
FORWARD-LOOKING STATEMENTS...................................................15
USE OF PROCEEDS..............................................................17
DIVIDEND POLICY..............................................................17
CAPITALIZATION...............................................................17
PRICE RANGE OF COMMON STOCK..................................................18
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA...........................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................................21
BUSINESS.....................................................................32
MANAGEMENT...................................................................40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................47
PRINCIPAL STOCKHOLDERS.......................................................48
DESCRIPTION OF SECURITIES....................................................50
SHARES ELIGIBLE FOR FUTURE SALE..............................................50
WHERE YOU CAN FIND MORE INFORMATION..........................................55
LEGAL MATTERS................................................................55
EXPERTS......................................................................55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS...........................Q-1
----------------------
4
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD
READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND
OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS
PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. REFERENCES IN THIS PROSPECTUS
TO "COMTECH," "THE COMPANY," "WE," "US" AND "OUR" REFER TO COMTECH GROUP, INC.
AND ITS SUBSIDIARIES.
OUR BUSINESS
OVERVIEW
Comtech is a leading module design solutions provider in China focused
on the mobile handset and telecom equipment industries. Our team of engineers
works with leading manufacturers of mobile handset and telecom equipment to
design solutions that meet their need to provide state of the art products to
their customers. Our design solutions for mobile device products include LCD
modules, camera modules, persistent storage modules, input/output modules, sound
system and power supply modules. In the telecom equipment industry we currently
target optical solutions, data communication solutions, PSTN switching and
wireless base stations.
Since we began operations in 1995, we have evolved from a distribution
company to a customized design solution provider. Our client base has grown to
serve over 200 companies representing most of the large manufacturers in the
mobile handset and telecom equipment industries in China. Our largest customer
in the mobile handset market is TCL Mobile Communication (HK) Company Ltd., or
TCL, one of China's largest domestic mobile handset manufacturers. Our top two
revenue producing customers from the telecom equipment industry have been
Zhongxing International (Hong Kong) Trading Co. Ltd. (ZTE) and Huawei Technology
Investment Co. Ltd., or Huawei, which are China's two largest telecom equipment
vendors.
We currently offer our clients over 500 design solutions and product
lines integrating components from many leading suppliers. Our engineers work
with our customers' product development team to understand their needs for each
specific function module. Based on a customer's specific requirements, our
engineers provide a proposed customized module design solution. A module design
solution incorporates several components. If the customer accepts our design,
the customer agrees to purchase from us key specific components outlined in our
module design. We purchase the specific components from our suppliers.
We do not charge our customers an independent design fee. Instead, we
generate revenue through the sale of the specific components that are
incorporated in our module design. The price mark-up between the purchase price
and the selling price of such components compensate our design, technical
support and distribution services.
Our business model has proven to be profitable and sustainable during
our nine year operating history. We have had significant growth in both net
revenues and profits since 1995. In 2003, we had over $43 million in net
revenues and $3.4 million in net income, which amounts to an increase of
approximately 72% and 209%, respectively, from $25 million in net revenue and
$1.1 million in profit in 2002. For the nine month period ended September 30,
2004, our net revenues and net income were $56.2 million and $5.3 million,
respectively, compared to the nine month period ended September, 2003, during
which our net revenues and net income were $29.8 million and $2.8 million,
respectively.
5
SHARE EXCHANGE
On July 22, 2004, we acquired all of the outstanding capital stock of
Comtech Group, a Cayman Islands company ("Comtech Cayman"), in exchange for the
issuance of 40,502,150 shares of our Common Stock to the shareholders of Comtech
Cayman. We then changed our name from Trident Rowan Group, Inc. ("Trident") to
Comtech Group, Inc. The share exchange was accounted for as a reverse
acquisition, whereby Comtech was deemed to be the accounting acquirer and
Trident the legal acquirer. Accordingly, (i) the historical financial statements
of Trident for periods prior to the date of the transaction are no longer
presented; (ii) the historical financial statements presented herein for periods
prior to the share exchange date are those of Comtech Cayman, as the accounting
acquirer; and (iii) the number of shares has been restated retrospectively to
reflect the share exchange ratio as at the date of the transaction in a manner
similar to a stock split.
As of September 30, 2004, the ownership structure of the Company as a
result of the share exchange transaction is as follows:
Comtech Group Inc.
(formerly known as Trident OAM S.P.A.
Rowan Group Inc.) - - - - - - - - - - (a)
(established in Italy)
(established in Maryland) (non operating subsidiary)
|
|
|
Comtech Group
(established on April 26, 2002
in the Cayman Islands)
|
|
- - - - - - - - - - - - - - | - - - - - - - - - - - - - - - - -
| |
Comtech (China) Holding Limited Comtech (Hong Kong) Holding Limited
("Comtech China") ("Comtech Holding")
(established on May 27, 2002 (established on May 27, 2002 in the BVI)
in the British Virgin Islands ("BVI")) |
| |
| |
- - - - - - - -|- - - - - - - - - - - - - - - - - - - - |
| | | |
Shenzhen Comtech Comtech Communication Comtech Software Comtech Interrnational
International Limited Technology (Shenzhen) Technology (Shenzhen) (Hong Kong) Limited
("Shenzhen Comtech") Company Limited Co. Ltd. ("Comtech Hong Kong")
("Comtech ("Comtech Software")
Communication")
(established on (established on (established on (established on
July 4, 1996 in the PRC) July 23, 2002 in the PRC) 18 March 2004 in the PRC) July 14, 2000
| in Hong Kong)
|
|
Shanghai E & T
System Co. Ltd.
("Shanghai E & T")
(a)
(established on January
18, 2004 in the PRC)
(a) The Company owns 98.6% of the shares in OAM S.P.A. and 60% of the shares in
Shanghai E & T.
6
CORPORATE INFORMATION
Trident was incorporated in 1917 as a Maryland corporation. Our
principal executive offices are located at Room 1001, Tower C, Skyworth
Building, High-Tech Industrial Park, Nanshan, Shenzhen, PRC. Our telephone
number at that location is 86-755-26743210. We have numerous branch offices
located throughout China, including Beijing, Shanghai, Qingdao, Wuhan and Hong
Kong. Our website is WWW.COMTECH.COM.CN.
Please note that in this prospectus, all references to "Renminbi" and
"RMB" are to the legal currency of China and all references to "dollars," "USD,"
"$" and "US$" are to the legal currency of the United States. The consolidated
financial statements are reported in Renminbi, the Company's functional
currency, because all of the Company's material operating entities are based in
and operated entirely within the People's Republic of China. The translation of
RMB amounts into U.S. dollar amounts contained in this prospectus is included
solely for the convenience of the readers of the financial statements and has
been calculated at the rate of US$1 to RMB 8.2773, the approximate exchange rate
at September 30, 2004. Such translations should not be construed as
representations that the RMB amounts could be converted into US$ at that rate or
any other rate.
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table shows summary consolidated financial information
and other data for our business. You should read this information in conjunction
with:
o the section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations,"
o our consolidated financial statements and related notes
beginning on page F-1 of this prospectus, and
o our unaudited condensed consolidation financial statements and
related notes beginning on page Q-1 of this prospectus.
The consolidated statement of operations data for the years ended
December 31, 2003, 2002 and 2001 and the consolidated balance sheet data
presented below as of December 31, 2003, 2002 and 2001, are derived from our
audited consolidated financial statements and related notes thereto which have
been included elsewhere in this prospectus. These audited consolidated financial
statements and the related notes thereto have been prepared in accordance with
accounting principles generally accepted in the United States, or U.S. GAAP, and
have been audited by Deloitte Touche Tohmatsu, an independent registered public
accounting firm.
The consolidated statement of operations data for the nine months ended
September 30, 2004 and 2003, and the consolidated balance sheet as of September
30, 2004, are derived from our unaudited condensed consolidated financial
statements and related notes thereto which have been included elsewhere in this
prospectus. These unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. GAAP. We have prepared the unaudited
consolidated financial statements on the same basis as the audited consolidated
financial statements, and have included in our opinion, all adjustments,
consisting only of normal and recurring adjustments that we consider necessary
for a fair presentation of the financial information set forth in those
statements. Our historical results for any prior or interim period are not
necessarily indicative of results to be expected for a full fiscal year or for
any future period.
7
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(In thousands, except share and per share amounts)
Nine months ended September 30, Year ended December 31,
---------------------------------------- ------------------------------------------------------
2004 2004 2003 2003 2003 2002 2001
---- ---- ---- ---- ---- ---- ----
USD RMB RMB USD RMB RMB RMB
--- --- --- --- --- --- ---
Net revenue 56,174 464,970 246,324 43,227 357,805 207,607 171,721
Cost of revenue (47,742) (395,171) (210,290) (37,082) (306,939) (190,265) (159,244)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 8,432 69,799 36,034 6,145 50,866 17,342 12,477
Selling, R&D, general and
administrative expenses (2,402) (19,886) (11,836) (2,457) (20,341) (7,461) (7,911)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income from operations 6,030 49,913 24,198 3,688 30,525 9,881 4,566
Interest expenses (202) (1,669) (500) (97) (801) -- (9)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Interest income 19 159 34 6 54 157 175
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income before income tax 5,847 48,403 23,732 3,597 29,778 10,038 4,732
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income tax (217) (1,799) (964) (156) (1,295) (820) (825)
Net income before minority
interest 5,630 46,604 22,768 3,441 28,483 9,218 3,907
------------ ------------ ------------ ------------ ------------ ------------ ------------
Minority interest (369) (3,055) -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income 5,261 43,549 22,768 3,441 28,483 9,218 3,907
------------ ------------ ------------ ------------ ------------ ------------ ------------
Basic and diluted earnings per
share 0.13 1.05 0.56 0.08 0.70 0.23 0.10
============ ============ ============ ============ ============ ============ ============
Dividends declared per share -- -- -- 0.12 1.02 -- --
============ ============ ============ ============ ============ ============ ============
Weighted average number of
shares outstanding
Basic 41,507,253 41,507,253 40,502,150 40,502,150 40,502,150 40,502,150 40,502,150
============ ============ ============ ============ ============ ============ ============
Diluted 41,666,436 41,666,436 40,502,150 40,502,150 40,502,150 40,502,150 40,502,150
============ ============ ============ ============ ============ ============ ============
8
CONSOLIDATED BALANCE SHEET DATA:
As of September 30, As of December 31,
------------------- ------------------
2004 2004 2003 2003 2002 2001
---- ---- ---- ---- ---- ----
USD RMB USD RMB RMB RMB
--- --- --- --- --- ---
Cash 2,142 17,727 3,707 30,683 12,194 30,066
Accounts receivable, net
of allowance for
doubtful accounts 18,248 151,043 11,146 92,259 67,597 45,048
Property, plant and
equipment 384 3,180 358 2,961 2,371 2,446
Total assets 28,851 238,809 19,354 160,200 97,072 80,724
Total current liabilities 17,846 147,719 17,222 142,546 66,514 59,467
Total liabilities 18,465 152,845 17,222 142,546 66,514 59,467
Total shareholders'
equity 10,386 85,964 2,132 17,654 30,558 21,257
RISK FACTORS
An investment in our Common Stock involves a high degree of risk. You
should carefully read and consider the risks described below before deciding to
invest in our Common Stock. If any of the following risks actually occur, our
business, financial condition, results of operation or cash flows could be
materially harmed. In any such case, the trading price of our Common Stock could
decline, and you could lose all or part of your investment. When determining
whether to buy our Common Stock, you should also refer to the other information
in this prospectus, including our consolidated financial statements and the
related notes.
9
RISKS RELATED TO OUR BUSINESS
OUR REVENUES MAY VARY FROM QUARTER TO QUARTER DUE TO FLUCTUATING DEMAND
FOR OUR PRODUCTS. We derive revenues through the sale of products to our
customers. Fluctuating demand for our products by our customers may result from
a variety of factors, including, but not limited to, the cancellation of large
orders, price concessions on high volume orders, competitive pressures,
technical synchronization between us and our clients, time required for research
and development and changing design requirements resulting from rapid technology
shifts. If customer demand for our products is not consistent, our revenues
would be adversely affected.
WE MAY NOT HAVE SUFFICIENT WORKING CAPITAL TO PAY OUR ACCOUNTS PAYABLE
WHEN DUE. We experience a lag between the time we incur operating expenses in
connection with a project and the collection of accounts receivable from
customers in connection with that project. For this reason, among others, we may
experience periods during which our working capital is not sufficient to fund
our operations. If we do not have sufficient working capital to timely pay our
suppliers, they may reduce the quantity of product they supply or no longer sell
products to us, which would have a material adverse effect on our operations and
net revenues.
IF OUR CUSTOMERS DO NOT ACCEPT OUR PROPOSED DESIGNS, OUR REVENUE WILL
BE ADVERSELY AFFECTED. We dedicate personnel, management and financial resources
to research and development and technical support in developing new design
solutions or establishing a new market channel for our customers. In the telecom
equipment industry, the time frame for most research and development projects
ranges from several months to as long as one to two years. Approximately 50% of
our proposed design solutions are accepted by our customers. If our customers do
not accept our proposed design solutions, we will fail to capitalize on the
invested resources, time and effort that we expended on a project and our
revenue would be adversely affected.
WE DO NOT HAVE EXCLUSIVE AGREEMENTS WITH OUR CLIENTS AND IF THEY CHOOSE
NOT TO ENGAGE OUR SERVICES ON A CONSISTENT BASIS, OR AT ALL, OUR REVENUES WOULD
BE ADVERSELY AFFECTED. Customer loyalty, trust and established relationships are
key factors in doing business in our industry. Although it is industry practice
that upon acceptance of our module design our clients will purchase from us the
specific components incorporated in the module design, we do not have agreements
with our customers requiring them to purchase from us. If a client chooses our
design solution proposal for a new project, the client is only obligated to
purchase our products for that project. We cannot guarantee that clients will
not contract with our competitors to purchase products that we have previously
custom designed for them. Furthermore, we can not assure you that clients will
not begin to purchase components directly from our suppliers instead of through
us. The loss of consistent business from our clients and the transition away
from us in favor of direct purchases from our suppliers, would have a negative
impact on our ability to sell our design solution services and would result in a
substantial loss of revenues for us.
LOSS OF CERTAIN KEY CLIENTS MAY ADVERSELY IMPACT OUR REVENUES. We
generate the majority of our revenues from certain key clients. In 2003, our top
ten clients represented 64% of revenues and our top four clients represented
nearly 48% percent of total revenues. During the nine months ended September 30,
2004, our top ten clients generated 62% of our revenues. Should we lose or
receive reduced orders from any of our large customers, we would have a
substantial loss in revenues.
10
RELIANCE ON OUR SUPPLIERS FOR PRODUCT MAKES US VULNERABLE TO THE LOSS
OF ONE OR MORE KEY SUPPLIERS. If our suppliers do not continue to sell products
to us, clients who have engaged us because of the brand-name associated with our
product may no longer seek our services. Furthermore, if our suppliers do not
expand their product line to keep up with new technologies, they may be
surpassed by new suppliers entering the market. In either event, we would have
to seek alternative suppliers. There is no guarantee that alternative suppliers
will sell their products to us or that our clients will want to purchase those
products. If we lose our supplier base, we would be unable to continue to
operate our business. In addition, we rely on our suppliers to maintain
sufficient inventory of the components we need for our module designs. If our
suppliers have a shortage of components needed for a customer's project, we may
not meet our customer's scheduled shipment deadline. If we fail to timely
deliver our products our business relationships with our customers may be harmed
and they may no longer seek our services.
THE UNAUTHORIZED USE OF OUR PROPRIETARY DESIGN SOLUTIONS COULD HAVE A
MATERIAL ADVERSE IMPACT ON OUR REVENUES. Although we have in-house design
engineering teams to design our component solutions, we provide our suppliers
with our custom specifications to manufacture the components. Our design
solutions are proprietary, however, we do not have patent protection for our
solutions and we do not have non-disclosure or confidentiality agreements with
suppliers to keep our design specifications confidential. Although we have good
relationships with our suppliers, we face the risk that they will use our
specifications in components to be sold to competitors, or that they will
attempt to circumvent us and sell these components directly to our clients. The
unauthorized use by our suppliers of our design specifications would result in a
substantial loss of revenues for us.
AN INABILITY TO RESPOND QUICKLY AND EFFECTIVELY TO NEW TRENDS WOULD
ADVERSELY IMPACT OUR COMPETITIVE POSITION. Our failure to maintain the
superiority of our technological capabilities or to respond effectively to
technological changes could adversely affect our ability to retain existing
clients and secure new clients. We will need to constantly seek out new products
and develop new solutions to maintain in our portfolio. If we are unable to keep
current with new trends, our competitors' technologies or products may render us
noncompetitive and our products obsolete.
THE INDUSTRIES IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE AND
FRAGMENTED. We expect competition to persist and intensify in the future. For
each project, we partner with our supplier to compete with other key enabling
component suppliers. For example, we partner with JDS Uniphase to compete
against Intel for optical module designs. Currently many of our customers and
suppliers do not focus on module level design. If our customers or suppliers
decide to devote time and resources to in-house component design, the demand for
our products may decline. In addition, our customers may change their
procurement strategy or decide to rely on us primarily for component delivery,
and not for integration or design work. The loss of clients for our design
solutions services would have a material adverse effect on our business,
financial condition and results of operations.
Also, some traditional distributors have been enhancing their designing
capabilities. Competitive pressures from current or future competitors could
cause our services and products to lose market acceptance or require us to
significantly reduce the price of our services to keep and attract clients.
11
OUR SUCCESS IS HIGHLY DEPENDENT UPON THE CONTINUING SERVICE OF OUR
OFFICERS, MANAGEMENT TEAM AND OTHER PERSONNEL. Competition in our industry for
executive-level personnel is strong, and recruiting, training, and keeping
qualified key personnel with both technical and market expertise are important
factors in our ongoing success and survival. Should key employees leave, we may
lose both an important internal asset and revenues from customer projects tied
to those employees.
OUR OPERATIONS COULD BE CURTAILED IF WE ARE UNABLE TO OBTAIN REQUIRED
ADDITIONAL FINANCING. We currently have an available bank line, and we also have
cash available in our bank account from our predecessor company, Trident Rowan
Group, Inc. However, in the future, we may need to raise additional funds
through public or private financing, which may include the sale of equity
securities. The issuance of these equity securities could result in dilution to
our stockholders. If we are unable to raise capital when needed, our business
strategy will be affected, which could severely limit our ability to generate
revenue. Moreover, failure to obtain such additional funds on a timely basis
could result in lost business opportunities.
IF OUR ITALIAN SUBSIDIARY, OAM S.P.A., IS NOT SUCCESSFUL IN ITS PENDING
LITIGATION IN ITALY, WE MAY SUFFER LOSSES.
As a result of its former operations, our Italian subsidiary, OAM
S.p.A, is currently a party to ongoing legal proceedings in Italy. In connection
with claims for tax rebates made by OAM in 1984, the Italian tax authorities
counterclaimed assessing additional taxes and penalties. OAM has been successful
in two lower courts in its defense of such counterclaims and awaits the results
of a final appeal in the highest Italian tax court. In 1999, OAM sold real
estate to a third party that subsequently leased such real estate to CSD Srl.
CSD has brought a claim against OAM in the Rome Civil Court alleging that the
commercial designation of the property was not properly disclosed and
consequently CSD's lease payments were excessive. CSD is seeking reimbursement
from OAM of such alleged excessive lease payments. On March 25, 2004,the Court
requested that the parties present their conclusions in order for it to render a
final verdict. If OAM is not successful in its defense, there may be a material
adverse effect on our business, financial condition and results of operations.
RISKS ASSOCIATED WITH DOING BUSINESS IN GREATER CHINA
There are substantial risks associated with doing business in greater
China, as set forth in the following risk factors.
THE ESTABLISHMENT AND EXPANSION OF INTERNATIONAL OPERATIONS REQUIRES
SIGNIFICANT MANAGEMENT ATTENTION. All of our current, as well as any anticipated
future revenues, are or are expected to be derived from Asia. Our international
operations are subject to risks, including the following, which, if not planned
and managed properly, could materially adversely affect our business, financial
condition and operating results:
12
o legal uncertainties or unanticipated changes regarding
regulatory requirements, liability, export and import
restrictions, tariffs and other trade barriers;
o longer customer payment cycles and greater difficulties in
collecting accounts receivable;
o uncertainties of laws and enforcement relating to the
protection of intellectual property; and
o potentially uncertain or adverse tax consequences.
FLUCTUATIONS IN THE VALUE OF THE RMB RELATIVE TO FOREIGN CURRENCIES
COULD AFFECT OUR OPERATING RESULTS. We have historically conducted transactions
with customers, paid payroll and other costs of operations in Chinese Renminbi.
To the extent future revenue is denominated in foreign currencies, we would be
subject to increased risks relating to foreign currency exchange rate
fluctuations that could have a material adverse affect on our financial
condition and operating results. To date, we have not engaged in any hedging
transactions in connection with our international operations.
OUR OPERATIONS AND ASSETS IN GREATER CHINA ARE SUBJECT TO SIGNIFICANT
POLITICAL AND ECONOMIC UNCERTAINTIES. Changes in laws and regulations, or their
interpretation, or the imposition of confiscatory taxation, restrictions on
currency conversion, imports and sources of supply, devaluations of currency or
the nationalization or other expropriation of private enterprises could have a
material adverse effect on our business, results of operations and financial
condition. Under its current leadership, the Chinese government has been
pursuing economic reform policies that encourage private economic activity and
greater economic decentralization. There is no assurance, however, that the
Chinese government will continue to pursue these policies, or that it will not
significantly alter these policies from time to time without notice.
WE MAY HAVE LIMITED LEGAL RECOURSE UNDER CHINESE LAW IF DISPUTES ARISE
UNDER CONTRACTS WITH THIRD PARTIES. The Chinese government has enacted some laws
and regulations dealing with matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. However, their
experience in implementing, interpreting and enforcing these laws and
regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. The resolution of these matters
may be subject to the exercise of considerable discretion by agencies of the
Chinese government, and forces unrelated to the legal merits of a particular
matter or dispute may influence their determination. Any rights we may have to
specific performance, or to seek an injunction under Chinese law, in either of
these cases, are severely limited, and without a means of recourse by virtue of
the Chinese legal system, we may be unable to prevent these situations from
occurring. The occurrence of any such events could have a material adverse
effect on our business, financial condition and results of operations.
COMPLIANCE WITH THE FOREIGN CORRUPT PRACTICES ACT COULD ADVERSELY
IMPACT OUR COMPETITIVE POSITION; FAILURE TO COMPLY COULD SUBJECT US TO PENALTIES
AND OTHER ADVERSE CONSEQUENCES. We are subject to the United States Foreign
Corrupt Practices Act, which generally prohibits United States companies from
engaging in bribery or other prohibited payments to foreign officials for the
purpose of obtaining or retaining business. Foreign companies, including some
that may compete with us, are not subject to these prohibitions. Corruption,
extortion, bribery, pay-offs, theft and other fraudulent practices occur from
time-to-time in mainland China. We have attempted to implement safeguards to
prevent and discourage such practices by our employees and agents. We can make
no assurance, however, that our employees or other agents will not engage in
such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our
business, financial condition and results of operations.
13
RISKS RELATED TO AN OFFERING OF OUR COMMON STOCK
OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER CONTROLS A MAJORITY OF OUR
COMMON STOCK. Jeffrey Kang, our President and Chief Executive Officer, through
entities he controls, beneficially owns 73.46% of our outstanding Common Stock.
As a result, Mr. Kang has the ability to control the outcome of all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions, such as mergers, consolidations or the
sale of substantially all of our assets. Consequently, this concentration of
ownership may have the effect of delaying or preventing a change of control,
including a merger, consolidation or other business combination involving us, or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control, even if such a change of control would benefit our
other shareholders.
EFFORTS TO COMPLY WITH RECENTLY ENACTED CHANGES IN SECURITIES LAWS AND
REGULATIONS WILL INCREASE OUR COSTS AND REQUIRE ADDITIONAL MANAGEMENT RESOURCES
AND WE STILL MAY FAIL TO COMPLY. As directed by Section 404 of the
Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to
include a report of management on the company's internal controls over financial
reporting in their annual reports on Form 10-K. In addition, the public
accounting firm auditing the company's financial statements must attest to and
report on management's assessment of the effectiveness of the company's internal
controls over financial reporting. This requirement will first apply to our
annual report on Form 10-K for our fiscal year ending December 31, 2005. If we
are unable to conclude that we have effective internal controls over financial
reporting or, if our independent auditors are unable to provide us with an
unqualified report as to the effectiveness of our internal controls over
financial reporting as of December 31, 2005 and future year ends as required by
Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence
in the reliability of our financial statements, which could result in a decrease
in the value of our securities. We have only recently begun a formal process to
evaluate our internal controls over financial reporting. Given the status of our
efforts, coupled with the fact that guidance from regulatory authorities in the
area of internal controls continues to evolve, substantial uncertainty exists
regarding our ability to comply by applicable deadlines.
THERE HAS NOT BEEN SIGNIFICANT TRADING IN OUR COMMON STOCK. Our Common
Stock is quoted on the Over the Counter Bulletin Board and has a limited trading
market. There is a significant risk that our stock price may fluctuate
dramatically in the future in response to any of the following factors, some of
which are beyond our control:
o variations in our quarterly operating results;
o announcements that our revenue or income are below analysts'
expectations;
o general economic slowdowns;
o changes in market valuations of similar companies;
o sales of large blocks of our Common Stock;
o announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
o fluctuations in stock market prices and volumes, which are
particularly common among highly volatile securities of
internationally-based companies.
14
PROSPECTIVE INVESTORS MAY SUFFER DILUTION UPON THE EXERCISE OF
OUTSTANDING OPTIONS AND WARRANTS. As of November 30, 2004, we had stock options
outstanding to purchase 3,935,000 shares of Common Stock and warrants to
purchase 1,850,834 shares of Common Stock. The holders of 230,000 of the options
and the holders of the warrants have registration rights with respect to the
securities. To the extent that the options and warrants are exercised, they may
be exercised at prices below the price of our shares of Common Stock on the
public market, resulting in a significant number of shares entering the public
market and the dilution of our Common Stock. In addition, in the event that any
future financing should be in the form of securities convertible into, or
exchangeable for, equity securities, investors may experience additional
dilution upon the conversion or exchange of such securities.
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. These statements relate to future events or to our future
financial performance, and involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
forward-looking statements. In some cases, you can identify forward-looking
statements by the use of words such as "may," "will," "could," "expect,"
"intend," "plan," "seek," "anticipate," "believe," "estimate," "predict,"
"potential," "continue," or similar terms, variations of those terms, or the
negative of these terms. You should carefully consider the risk factors in this
prospectus and not place undue reliance on forward-looking statements since they
involve known and unknown risks, uncertainties and other factors which are, in
some cases, beyond our control and which could materially affect actual results,
levels of activity, performance or achievements. Factors that may cause actual
results to differ materially from current expectations, which we describe in
more detail elsewhere in this prospectus under the heading "Risk Factors",
include, but are not limited to:
o unfavorable results of our product development and design
efforts;
o failure to achieve market acceptance of our products;
o the outcome of plans for manufacturing, sales and marketing;
o the introduction of competitive products;
o impairment of proprietary rights;
o the impact of present and future collaborative agreements;
failure to implement our strategy; and
o deteriorating financial performance.
If one or more of these or other risks or uncertainties materialize, or
if our underlying assumptions prove to be incorrect, actual results may vary
significantly from what we projected. Any forward-looking statement you read in
this prospectus reflects our current views with respect to future events and is
subject to these and other risks, uncertainties and assumptions relating to our
operations, results of operations, growth strategy and liquidity. Although we
believe that our plans, intentions and expectations reflected in or suggested by
such forward-looking statements are reasonable, we cannot assure that such
plans, intentions or expectations will be achieved in whole or in part. You
should carefully review the risk factors described herein and any other
cautionary statements contained in this prospectus. All forward-looking
15
statements attributable to the Company or persons acting on its behalf are
expressly qualified by the risk factors and other cautionary statements in this
prospectus. We assume no obligation to publicly update or revise these
forward-looking statements for any reason, or to update the reasons actual
results could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the future.
The safe harbor for forward-looking statements contained in the
Securities Litigation Reform Act of 1995 protects companies from liability for
their forward looking statements if they comply with the requirements of the
Act. The Act does not provide this protection for initial public offerings.
EXCHANGE RATE INFORMATION
Our business is primarily conducted in China and denominated in
Renminbi. This prospectus contains translations of Renminbi amounts into U.S.
dollars at a specific rate solely for the convenience of the reader. The
conversion of Renminbi into U.S. dollars in this prospectus is based on the noon
buying rate in The City of New York for cable transfers of Renminbi as certified
for customs purposes by the Federal Reserve Bank of New York. We make no
representation that any Renminbi or U.S. dollar amounts could have been, or
could be, converted into U.S. dollars or Renminbi, as the case may be, at any
particular rate, the rates stated below, or at all. The PRC government imposes
controls over its foreign currency reserves in part through direct regulation of
the conversion of Renminbi into foreign exchange and through restrictions on
foreign trade.
The following table sets forth information concerning exchange rates
between Renminbi and U.S. dollars for the periods indicated. These rates are
provided solely for your convenience and are not necessarily the exchange rates
that we used in this prospectus or will use in the preparation of our periodic
reports or any other information to be provided to you. The source of these
rates is the Federal Reserve Bank of New York.
- ------------------------------------------------------------------------------------------------------------
NOON BUYING RATE
---------------------------------------------------------------
PERIOD PERIOD END AVERAGE (1) LOW HIGH
- ------------------------------------------------------------------------------------------------------------
(RMB PER USD1.00)
1998 ................................ RMB8.2789 RMB8.3006 RMB8.3180 RMB8.2774
1999 ................................ 8.2795 8.2783 8.2800 8.2770
2000 ................................ 8.2774 8.2784 8.2799 8.2768
2001 ................................ 8.2766 8.2770 8.2786 8.2676
2002 ................................ 8.2800 8.2770 8.2800 8.2669
2003 ................................ 8.2767 8.2771 8.2765 8.2880
2004 ................................
January ................ 8.2768 8.2769 8.2767 8.2772
February ................ 8.2769 8.2771 8.2768 8.2773
March ................ 8.2770 8.2771 8.2767 8.2774
April ................ 8.2771 8.2769 8.2768 8.2772
May ................ 8.2769 8.2771 8.2768 8.2773
June ................ 8.2766 8.2767 8.2766 8.2768
July ................ 8.2769 8.2767 8.2766 8.2769
August ................ 8.2766 8.2768 8.2766 8.2770
September ................ 8.2766 8.2767 8.2766 8.2768
October ................ 8.2766 8.2765 8.2768 8.2765
November ................ 8.2765 8.2765 8.2765 8.2764
December(2) ................ 8.2765 8.2765 8.2767 8.2765
- ------------------------------------------------------------------------------------------------------------
(1) Annual and monthly averages are calculated using the average of the daily
rates during the relevant period.
(2) For the period to and including December 17, 2004.
16
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of Common
Stock by the selling stockholders. Assuming that all of the warrants held by
selling shareholders are exercised for cash, we will realize proceeds of
approximately $2,556,000. Assuming that all of the options held by selling
stockholders are exercised for cash, we will realize proceeds of approximately
$345,000.
DIVIDEND POLICY
Since the share exchange, we have not declared any cash dividends on
our Common Stock. We currently intend to retain our future earnings, if any, to
finance the further development and expansion of our business and do not intend
to pay cash dividends for the foreseeable future. Any future determination to
pay dividends will be at the discretion of our board of directors and will
depend on our financial condition, results of operations, capital requirements,
restrictions contained in current or future financing instruments and such other
factors as our board of directors deems relevant.
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2004 on a historical basis and on a pro forma basis giving retroactive effect to
the sale of 6,300,000 shares in a private placement completed in October 2004
and November 2004:
Actual Actual Pro Forma Pro Forma
---------- ---------- ---------- ----------
USD'000 RMB'000 USD'000 RMB'000
---------- ---------- ---------- ----------
Common stock, $.01 par value; 50,000,000 shares authorized at
September 30, 2004 and 200,000,000 shares authorized on a pro
forma basis; 44,422,050 shares issued and outstanding at
September 30, 2004 and 50,722,050 on a pro forma basis,
respectively 444 3,676 507 4,198
---------- ---------- ---------- ----------
Additional paid-in capital 4,249 35,168 14,499 120,010
---------- ---------- ---------- ----------
Retained earnings 5,693 47,120 5,693 47,120
---------- ---------- ---------- ----------
Total stockholders' equity 10,386 85,964 20,699 171,328
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity 28,851 238,809 39,164 324,173
---------- ---------- ---------- ----------
The table above does not include:
o 5,785,834 shares of Common Stock issuable upon the exercise of
outstanding options and warrants to purchase our Common Stock,
at a weighted average exercise price of USD1.67 per share;
and
o 3,705,000 shares of Common Stock reserved for issuance under
our 2004 Incentive Stock Option Plan.
17
PRICE RANGE OF COMMON STOCK
We changed our name from "Trident Rowan Group, Inc." to "Comtech Group,
Inc." on August 2, 2004. From March 18, 1999 to August 8, 2004, our Common Stock
was quoted on the Over-The-Counter Market known as the "pink sheets" under the
symbol "TRGI". From August 8, 2004 to August 23, 2004, our Common Stock was
quoted on the Electronic Bulletin Board of the Over-The-Counter Market (OTCBB)
under the symbol "TRGI" and since August 24, 2004 under the symbol "COGO". The
following table sets forth the high and low sale prices for our Common Stock for
the periods indicated as reported by the respective markets. Such prices
represent prices between dealers, without adjustment for retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions. All periods presented prior to July 22, 2004 represent the
performance of the stock of Trident, the legal acquirer.
HIGH LOW
---- ---
FISCAL 2002
First Quarter $1.50 $1.15
Second Quarter $1.18 $0.75
Third Quarter $0.60 $0.45
Fourth Quarter $0.47 $0.20
FISCAL 2003
First Quarter $0.42 $0.22
Second Quarter $0.42 $0.28
Third Quarter $0.80 $0.29
Fourth Quarter $0.85 $0.52
FISCAL 2004
First Quarter $0.95 $0.75
Second Quarter $1.43 $0.85
Third Quarter:
July 1 - July 21 $1.15 $1.14
July 22 - September 30* $2.50 $1.80
Fourth Quarter (through Dec. 20) $2.85 $1.75
________________
*Represents stock performance for periods after the share exchange transaction.
On December 20, 2004, the closing price of our Common Stock as reported
on the OTCBB was $2.50, and there were approximately 927 holders of record of
our Common Stock. The number of record holders does not reflect the number of
beneficial owners of our Common Stock for whom shares are held by brokerage
firms and other institutions.
18
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The consolidated statement of operations data for the years ended
December 31, 2003, 2002 and 2001 and the consolidated balance sheet data
presented below as of December 31, 2003, 2002 and 2001, are derived from our
audited consolidated financial statements and related notes thereto which have
been included elsewhere in this prospectus. These audited consolidated financial
statements and the related notes thereto have been prepared in accordance with
accounting principles generally accepted in the United States, or U.S. GAAP, and
have been audited by Deloitte Touche Tohmatsu, an independent registered public
accounting firm.
The consolidated statement of operations data for the nine months ended
September 30, 2004 and 2003, and the consolidated balance sheet as of September
30, 2004, are derived from our unaudited condensed consolidated financial
statements and related notes thereto which have been included elsewhere in this
prospectus. These unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. GAAP. We have prepared the unaudited
condensed consolidated financial statements on the same basis as the audited
consolidated financial statements, and have included in our opinion, all
adjustments, consisting only of normal and recurring adjustments, that we
consider necessary for a fair presentation of the financial information set
forth in those statements. Our historical results for any prior or interim
period are not necessarily indicative of results to be expected for a full
fiscal year or for any future period.
The consolidated financial statements are reported in Renminbi because
all of the Company's material operating entities are based in and operated
entirely within the People's Republic of China. The translation of RMB amounts
into U.S. dollar amounts set forth below is included solely for the convenience
of the readers of the financial statements and has been calculated at the rate
of US$1 to RMB 8.2773, the approximate exchange rate at September 30, 2004. Such
translations should not be construed as representations that the RMB amounts
could be converted into US$ at that rate or any other rate. RMB and US$ amounts
are presented in thousands.
This data should be read in conjunction with our "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes included elsewhere
in this prospectus.
19
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(In thousands, except share and per share amounts)
Nine months ended September 30, Year ended December 31,
---------------------------------------- -----------------------------------------------------
2004 2004 2003 2003 2003 2002 2001
---- ---- ---- ---- ---- ---- ----
USD RMB RMB USD RMB RMB RMB
--- --- --- --- --- --- ---
Net revenue 56,174 464,970 246,324 43,227 357,805 207,607 171,721
Cost of revenue (47,742) (395,171) (210,290) (37,082) (306,939) (190,265) (159,244)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 8,432 69,799 36,034 6,145 50,866 17,342 12,477
Selling, R&D general and
administrative expenses (2,402) (19,886) (11,836) (2,457) (20,341) (7,461) (7,911)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income from operations 6,030 49,913 24,198 3,688 30,525 9,881 4,566
Interest expenses (202) (1,669) (500) (97) (801) -- (9)
Interest income 19 159 34 6 54 157 175
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income before income tax 5,847 48,403 23,732 3,597 29,778 10,038 4,732
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income tax (217) (1,799) (964) (156) (1,295) (820) (825)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income before minority
interest 5,630 46,604 22,768 3,441 28,483 9,218 3,907
------------ ------------ ------------ ------------ ------------ ------------ ------------
Minority interest (369) (3,055) -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income 5,261 43,549 22,768 3,441 28,483 9,218 3,907
------------ ------------ ------------ ------------ ------------ ------------ ------------
Basic and diluted earnings per
share 0.13 1.05 0.56 0.08 0.70 0.23 0.10
============ ============ ============ ============ ============ ============ ============
Dividends declared per share -- -- -- 0.12 1.02 -- --
============ ============ ============ ============ ============ ============ ============
Weighted average number of
shares outstanding
Basic 41,507,253 41,507,253 40,502,150 40,502,150 40,502,150 40,502,150 40,502,150
============ ============ ============ ============ ============ ============ ============
Diluted 41,666,436 41,666,436 40,502,150 40,502,150 40,502,150 40,502,150 40,502,150
============ ============ ============ ============ ============ ============ ============
CONSOLIDATED BALANCE SHEET DATA:
As of September 30, As of December 31,
------------------- ------------------
2004 2004 2003 2003 2002 2001
---- ---- ---- ---- ---- ----
USD RMB USD RMB RMB RMB
--- --- --- --- --- ---
Cash 2,142 17,727 3,707 30,683 12,194 30,066
Accounts receivable,
net of allowance for
doubtful amounts 18,248 151,043 11,146 92,259 67,597 45,048
Property, plant and
equipment 384 3,180 358 2,961 2,371 2,446
Total assets 28,851 238,809 19,354 160,200 97,072 80,724
Total current
liabilities 17,846 147,719 17,222 142,546 66,514 59,467
Total liabilities 18,465 152,845 17,222 142,546 66,514 59,467
Total shareholders'
equity 10,386 85,964 2,132 17,654 30,558 21,257
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial
condition and results of operations should be read in conjunction with our
audited consolidated financial statements and related notes included in this
prospectus. This discussion and analysis contains forward-looking statements
that are subject to risks, uncertainties and other factors, including, but not
limited to, those discussed under "Risk Factors" and elsewhere in this
prospectus, that could cause our actual results, performance, prospects or
opportunities to differ materially from those expressed in, or implied by, these
forward-looking statements. See "Forward-Looking Statements."
OVERVIEW
We provide customized module design solutions to various manufacturers
in the mobile handset and telecom equipment industries in China. Our revenues
are generated through the sale of the customized components used by these
manufacturers in their products. Over the last year, due to an increased demand
for mobile handsets in China, we have seen a turnaround in the contribution of
revenue from sales of our mobile handset components over that of our telecom
equipment line. For example, in 2003 our mobile handset components line
represented only 40% of our net revenues, as of September 30, 2004 sales of
mobile handset components represented almost 60% of our net revenue. We are
seeking to enter the consumer electronics market by providing components to
Chinese consumer electronics makers. The consumer electronics market is expected
to experience strong growth. The China Center of Information Industry
Development estimates that China's market for DTV products and services will be
RMB 500 billion (approximately USD60 billion) by the year 2015. We believe that
we are well positioned to enter this market because many of our existing mobile
handset customers, such as TCL, Haier, AMoi and Xoceco, also produce televisions
and other consumer electronics devices. We believe that we may be able to
leverage our existing relationships with these manufacturers to sell consumer
electronics components to them. Currently, we are engaged in the research and
development of a set-up box and we are working closely with some of our existing
customers on this new project.
China continues to be one of the fastest-growing and largest markets
for communications services and equipment in the world. We have seen a trend
toward increased government commitment to develop a powerful communications
infrastructure to support the increased demand for communications services.
Since 2001, we have experienced a trend of growth in our net revenues, gross
margin and net operating income. We expect that we will continue to see growth
in these areas as the industry continues to grow. Total net revenues for the
nine months ended September 30, 2004 were RMB464,970 thousand or 88.8% higher
than that of the same period of the prior year. In 2003 we generated RMB357,805
thousand in net revenues which was 72% higher than 2002. We generated total net
revenues of RMB207,607 thousand in 2002 and RMB171,721 thousand in 2001, which
represents a 21% increase over 2001. We believe that our increased growth in net
revenues has been the result of three main factors. First, China has seen an
increased demand for services and products in its telecommunications industry
and a significant expansion in the mobile phone market. Also, over the last 3
years we have significantly increased our customer base and our existing
customers have increased their demand for our products, which we attribute to
our ability to provide more design and value-added services to our customers. .
We believe that this increased demand from our customers is the result of the
China domestic industry expansion and an increase in exports by these same
customers. Finally, we have expanded our product line to offer our customers
more modular design services and have increased the number of suppliers with
whom we have established relationships.
Our gross profit was 69,799 thousand for the nine months ended
September 30, 2004, RMB50,866 thousand in 2003, RMB17,342 thousand in 2002, and
RMB12,477 thousand in 2001. Gross profit, as a percentage of net revenues, was
approximately 15% for the nine months ended September 30, 2004, 14%, 8% and 7%
in 2003, 2002 and 2001, respectively. We believe that the increase in gross
profit from year to year can be primarily attributed to a change in our product
mix. Specifically, sales of mobile handset components, which have higher profit
margins than our sales of telecom equipment, have continued to comprise a
significantly greater portion of our total net revenues over the nine months
ended September 30, 2004 as well as the three-year period ended December 31,
2003.
21
We generated net income of RMB43,549 thousand for the nine months ended
September 30, 2004, RMB28,483 thousand in 2003, RMB9,218 thousand in 2002 and
RMB3,907 thousand in 2001. As a percentage of net revenue, net income was
approximately 9% for the nine months ended September 30, 2004, 8%, 4% and 2% in
2003, 2002 and 2001 respectively. Although our increase in net income is
primarily attributable to the increase in net revenues and gross margins, for
the reasons noted above, we have also been able to maintain our relatively low
operating expenses, which has further contributed to the increase in net income
from year to year.
The effective tax rate was 3.7% for the nine months ended September 30,
2004 and 4.3%, 8.2% and 17.4% in 2003, 2002 and 2001, respectively. Our gradual
decrease in the effective tax rate was mostly due to our mix of subsidiaries'
earnings. More income was earned in the subsidiaries with tax benefits granted
from local tax authorities.
The major factors affecting our results of operations and financial
condition include:
GROWTH IN INDUSTRY AND IN END MARKETS. As the telecommunications industry, and
in particular the mobile handset and telecom equipment markets grow, we expect
there will be increased demand for the purchase of our services and products,
which will increase our net revenue. We believe that the increasing complexity
of mobile devices and the upgrade of telecom networks will stimulate an increase
in the demand for new components. In the mobile handset market, new features are
added to mobile handsets at an accelerating pace due to competition between
mobile handset makers and the increasing use of 2.5G services. We believe that
the launch of new more advanced services in 2.5G and 3G wireless networks and
broadband access networks in the telecom equipment industry will increase demand
for more advanced components.
INCREASE IN EXPORTS. We believe that China has established itself as a strong
global manufacturing center, which has caused overseas companies to continue to
seek products from local vendors. Leading domestic device and equipment vendors
are also increasingly looking to distribute their products in overseas markets.
In addition, there has been strong government support for increased mobile
handset exports. We believe that growth in the export market will likely have a
positive impact on our results of operations and financial condition, as it will
increase the demand for components, such as those we provide, among our mobile
handset clients.
DESCRIPTION OF REVENUE AND COST ITEMS
We generate revenue through the sale of components. Our net revenue is
net of value-added tax (VAT). Our sales of components are generally subject to a
VAT of 17%. Cost of goods sold primarily consists of the purchase of components
from suppliers. Our gross profit is affected by product mix, average selling
prices and the cost of components. Our gross margin, as a percentage of net
revenues, varies among our product range. . We expect that our overall gross
margin, as a percentage of net revenues , will fluctuate from period to period
as a result of shifts in product mix, changes in selling prices and costs of
good sold.
Our selling expenses include, expenditures to promote new product lines
and gain a larger customer base, freight charges, personnel expenses and travel
and entertainment costs related to sales and marketing activities. We expense
all selling expenses as they are incurred. We look for ways to maintain or
minimize these expenses, however, historically, as the demand for our module
designs have increased and revenue has increased, our marketing costs, freight
charges and other selling expenses have increased and we would expect that trend
to continue.
General and administrative expenses include compensation and benefits
of general and administrative staff, professional fees and travel and
entertainment costs related to general corporate purposes. Some of these
expenses are related to regulatory compliance necessary to maintain our listing
as a US public company. We expense all general and administrative expenses as
they are incurred. We expect that general and administrative expenses will
continue to increase for the foreseeable future as a result of our expected
continued growth and the increased costs of complying with US rules and
regulations necessary to maintain our listing status.
22
Research and development expenses consist primarily of salaries and
related costs of employees engaged in research, design and development
activities, the cost of parts for prototypes, equipment depreciation and third
party development expenses. We expense research and development expenses as they
are incurred. We believe that continued investment in research and development
is critical to our long-term success. Accordingly, we expect that our research
and development expenses will increase in future periods as we seek to expand
our business by designing new solutions, offering new product lines and
penetrating new industries. As of September 30, 2004, the Company has hired 25
engineers and employees who are performing research activities to develop new
product lines for telecom equipment, handsets and consumer electronics. Research
and development expenses are significantly higher in the nine months ended
September 30, 2004 than those of the prior year. The Company expects to continue
to make significant investment in R&D in the future, and accordingly, expenses
associated with this activity can be expected to increase as well.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results we report in our financial
statements. The U.S. Securities and Exchange Commission, or SEC, has defined
critical accounting policies as those that are most important to the portrayal
of our financial condition and results of operations and require us to make our
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. We have summarized below our
accounting policies that we believe are both important to the portrayal of our
financial results and involve the need to make estimates about the effect of
matters that are inherently uncertain.
ALLOWANCE FOR BAD AND DOUBTFUL ACCOUNTS - The Company maintains
allowances for its bad and doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. If the financial
condition of its customers changed, changes to these allowances may be required,
which would impact the Company's future operating results.
LITIGATION - The Company records contingent liabilities relating to
litigation or other loss contingencies when it believes that the likelihood of
loss is probable and the amount of the loss can be reasonable be estimated.
Changes in judgments of outcome and estimated losses are recorded, as necessary,
in the period such changes are determined or become known. Any changes in
estimates would impact its future operating results.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
NET REVENUES
Details of revenue for the nine month period ended September 30 are as
follows:
2004 2004 2003 2003
---- ---- ---- ----
RMB'000 % of revenue RMB'000 % of revenue % change
------- ------------ ------- ------------ --------
Mobile handset components 279,473 60.1 76,100 30.9 267.2
Telecom equipment 179,327 38.6 167,188 67.9 7.3
Other 6,170 1.3 3,036 1.2 103.2
------- -------- -------- -------- --------
Total Net Revenues 464,970 100.0 246,324 100.0 88.8
23
Total net revenues for the nine months ended September 30, 2004 were
RMB218,646 thousand or 88.8% higher than that of the same period of the prior
year. The increase was mainly attributed to the increase in revenues from both
mobile handset components and telecom equipment sales. Sales of mobile handset
components increased by RMB203,373 thousand or 267.2% and sales of telecom
equipment increased by RMB12,139 or 7.3%. Sales of mobile handset components
increase was because demand for mobile handsets has been growing in China and
the domestic mobile handset vendors, which make up our customer base, have
continued to penetrate the market and capture market share. Sales of telecom
equipment increase due to the increase in demand from telecom operators which
continue to expand their existing infrastructures. The contribution to total net
revenues by sales of mobile handset components increased from RMB76,100 thousand
or 30.9% of total net revenues to RMB279,473 thousand or 60.1% of total net
revenues. Whereas the contribution of sales of telecom equipment total net
revenues decreased from 67.9% to 38.6%, though total sales increased from
RMB167,188 thousand to RMB179,327 thousand.
GROSS PROFIT
Gross profit for the nine months ended September 30, 2004 increased
from RMB36,034 thousand or 14.6% in the first three quarters of 2003 to
RMB69,799 thousand or 15.0% in the same period of 2004. The increase was
principally due to the change in revenue mix, where revenues from mobile handset
components sales had a higher margin than those from telecom equipment. The
ratio of margin contribution from mobile handset components sales for the three
quarters ended September 30, 2003 and 2004 were 33.8% and 66.5% respectively,
representing an increase of 32.7%. In terms of margin amount, the mobile handset
components sales contribution increased by approximately RMB34,264 thousand.
SELLING, R&D, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, R&D, general and administrative expenses of RMB19,886 thousand
were RMB8,050 thousand or 68.0% higher than incurred in the same period of the
prior year. The expenses for the nine month period ended September 30 are as
follows:
2004 2003
---- ----
RMB'000 RMB'000 % change
------- ------- ---------
Selling expenses 6,059 1,913 216.7
R&D expenses 5,613 638 779.8
General and administrative expenses 8,214 9,285 (11.5)
------ ------ ------
Total 19,886 11,836 68.0
The increase in the selling expenses by RMB4,146 thousand or 216.7% was mainly
attributed to the increase in marketing and business development expenses of
approximately RMB1.4 million for promoting new product lines and gaining larger
customer base. Other indirect selling expenses such as freight charges and
salesperson expenses contributed to the balance of the increase and consistent
with the same period of last year, they represented about one percent of
revenue.
R&D expenses increased by RMB4,975 thousand or 779.8%. The increase was
comprised of approximately RMB2.6 million in additional costs incurred in
developing new product lines for telecom equipment, mobile handset components
and consumer electronics and additional personnel cost of approximately RMB2.4
million associated with strengthening our engineering team in 2004. Our
headcount in the R&D department has increased from 20 as of September 30, 2003
to 25 as of September 30, 2004.
General and administrative expenses decreased by RMB1,071 thousand or
11.5%. The decrease was attributable to the bad debt provision of RMB2 million
recorded in the nine months ended September 30, 2003, whereas no such provision
was additionally made in the same period of 2004. However, the decrease was
offset in part by additional corporate expenses of about RMB1 million in the
first nine months of 2004, which were incurred as a result of expanding the
Company and an increase in legal and other expenses associated with meeting our
reporting and compliance obligations as a public company in the United States.
24
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 2004 amounted
to RMB1,669 thousand as compared to RMB500 thousand in the same period of 2003.
The increase of RMB1,169 thousand or 233.8% was due to new bank loans totaling
RMB72,482 (USD8,757) thousand obtained in August and September of 2004. The
interest rate was overnight LIBOR or 1.5% per annum above the deposit rate ,
whichever is the highest. No such loans were outstanding in 2003.
INTEREST INCOME
Interest income for the nine months ended September 30, 2004 amounted
to RMB159 thousand, compared to RMB34 thousand in the same period of 2003. The
increase is attributable to higher net cash inflows generated from increased net
revenues and the resulting increase in our average deposit balances.
INCOME TAX
The effective tax rate for the nine months ended September 30, 2004 was
3.7% compared to 4.1% for the comparable period in the prior year. The decrease
in the effective tax rate was mostly due to the Company having earned more
income at subsidiaries with tax benefits granted from their respective local tax
authorities.
MINORITY INTERESTS
Minority interests comprises 40% of the outstanding shares in Shanghai
E&T System Co., Ltd. and 1.4% of the shares in OAM S.p.A..
NET INCOME; EARNINGS PER SHARE
As a result of the above items, net income for the nine months ended
September 30, 2004 was RMB43,549 thousand compared to a net income of RMB22,768
thousand in the corresponding period of 2003. The Company reported basic per
share earnings of RMB1.05 for the nine months ended September 30, 2004 based on
41,507,253 outstanding weighted average shares and a diluted per share earnings
of RMB1.05 based on 41,666,436 outstanding weighted average shares, compared to
basic and diluted per share earnings of RMB0.56 for the nine months ended
September 30, 2003, based on 40,502,150 outstanding weighted average shares.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET REVENUES
Details of revenue for the year ended December 31 are as follows:
2003 2003 2002 2002
---- ---- ---- ----
RMB'000 % of RMB'000 % of % change
------- ----- ------- ----- ---------
revenue revenue
------- -------
Mobile handset components 143,179 40.0 62,282 30.0 129.9
Telecom equipment 207,281 57.9 143,325 69.0 44.6
Other 7,345 2.1 2,000 1.0 267.3
------- ------- ------- ------- -------
Total net revenues 357,805 100.0 207,607 100.0 72.3
25
Net revenue was RMB357,805 thousand or 72.3% higher than the year ended 2002.
The increase was mainly attributed to the increase in net revenues from both
mobile handset components and telecom equipment sales. The increase in mobile
handset components net revenue was due to the fact that the demand for mobile
handsets has been growing in China and domestic mobile handset vendors have
continued to penetrate the market and capture market share. The increase in
telecom equipment revenue was attributed to growth in China's telecom equipment
industry driven by an increase in investment by telecom operators. Contribution
of mobile handset components net revenue to total revenue increased from
RMB62,282 thousand or approximately 30.0% to RMB143,179 thousand or 40.0%.
Whereas contribution of telecom equipment net revenue to total net revenue
decreased from 69.0% to 57.9%, though its net revenue increased from RMB143,325
thousand to RMB207,281 thousand.
GROSS MARGIN
Gross margin increased from RMB17,342 thousand in 2002 to RMB50,866
thousand in 2003. The increase was principally due to increase in sales volume
and a change in revenue mix, where net revenues from mobile handset components
sales, which are a higher margin product, were higher than those from telecom
equipment. In addition, since more design and value-added services were provided
to our customers, it resulted in higher gross margin.
SELLING, R&D, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, R&D, general and administrative expenses of RMB20,341 thousand
were RMB12,880 thousand or 173% higher than those of the prior year. The
expenses for the year ended December 31 are as follows:
2003 2002
---- ----
RMB'000 RMB'000 % change
------- ------- ---------
Selling expenses 2,649 760 248.6
R&D expenses 983 1,042 (5.7)
General and administrative expenses 16,709 5,659 195.3
------ ------ ------
Total 20,341 7,461 172.6
The increase in the selling expenses by RMB1,889 thousand or 248.6% was
mainly attributed to the increase in marketing and business development expenses
of approximately RMB1 million for promoting new product lines and gaining larger
customer base. Other indirect selling expenses such as freight charges and
salesperson expenses contributed to the balance of the increase was primarily
due to increased sales transactions.
R&D expenses slightly decreased by RMB59 thousand or 5.7%. The R&D
costs were incurred in developing new product lines for telecom equipment,
handset components and consumer electronics.
General and administrative expenses increased by RMB11,050 thousand or
195.3%. The increase was mainly attributable to the of the bad debt provision of
RMB4 million that was made in 2003. The remaining RMB7 million increase was due
to increase in staff cost, and an increase in legal and other expenses
associated with our reporting and compliance obligations as a public company.
INTEREST EXPENSE
Interest expense for the year ended December 31, 2003 amounted to
RMB801 thousand as compared to zero in 2002. The increase in interest expense
was associated with bank overdraft and bank handling charges incurred during
2003.
26
INTEREST INCOME
Interest income for the year ended December 31, 2003 amounted to RMB54
thousand, compared to RMB157 thousand in 2002. The decrease was owing to
increase in net cash outflow used in operating activities during 2003.
INCOME TAX
The effective tax rate for the year ended December 31, 2003 was 4.3%
compared to 8.2% for the prior year. The decrease in the effective tax rate was
mostly due to our mix of subsidiaries' earnings. More income was earned in the
subsidiaries with tax benefits granted from their respective local tax
authorities.
NET INCOME; EARNINGS PER SHARE
As a result of the above items, net income for the year ended December
31, 2003 was RMB28,483 thousand compared to a net income of RMB9,218 thousand in
2002. We reported a basic and diluted per share earnings of RMB0.70 for the year
ended December 31, 2003 based on 40,502,150 outstanding weighted average shares,
compared to basic and diluted per share earnings of RMB0.23 for the year ended
December 31, 2002, based on 40,502,150 outstanding weighted average shares.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
NET REVENUE
Details of net revenue for the year ended December 31 are as follows:
2002 2002 2001 2001
---- ---- ---- ----
RMB'000 % of revenue RMB'000 % of revenue % change
------- ------------ ------- ------------ ---------
Mobile handset components 62,282 30.0 51,516 30.0 20.9
Telecom equipment 143,325 69.0 118,117 68.8 21.3
Other 2,000 1.0 2,088 1.2 (4.2)
------- ------- ------- ------- -------
Total 207,607 100.0 171,721 100.0 20.9
Net revenue was RMB207,607 thousand or 20.9% higher than the year ended
2001. The increase was mainly attributed to an increase in our customer base in
both the mobile handset components and telecom equipment markets, which resulted
in an increase in new revenue from sales to customers in those markets. The
increase in mobile handset components net revenue was due to the fact that the
demand for mobile handsets has been growing in China and domestic mobile handset
vendors have continued to penetrate the market and capture market share. The
increase in telecom equipment revenue was attributed to growth in China's
telecom equipment industry driven by an increase in investment by telecom
operators.
GROSS MARGIN
Gross margin increased from RMB12,477 thousand in 2001 to RMB17,342
thousand in 2002. The increase was principally due to increase in net revenue.
Gross margin percentage increased from 7% to 8% because we have started to
provide value-added services to our customers since late 2002.
27
SELLING, R&D, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, R&D, general and administrative expenses of RMB7,461 thousand
were RMB450 thousand or 6% lower than those of the prior year. The expenses for
the year ended December 31 are as follows:
2002 2001
---- ----
RMB'000 RMB'000 % change
------- ------- --------
Selling expenses 760 169 349.7
R&D expenses 1,042 1,928 (46.0)
General and administrative expense 5,659 5,814 (2.7)
----- ----- ------
Total 7,461 7,911 (5.7)
The increase in the selling expenses by RMB591 thousand or 349.7% was
mainly attributed to increase in sales transactions.
R&D expenses decreased by RMB886 thousand or 46.0%. The decrease was
due to extra costs spent in 2001 for future development of value-added services
provided to customers.
General and administrative expenses were consistent and slightly
decreased by RMB155 thousand or 2.7%.
INTEREST EXPENSE
Interest expense for the year ended December 31, 2002 amounted zero as
compared to RMB9 thousand in 2001. A significant portion of the interest expense
in 2001 was represented by bank handling charges.
INTEREST INCOME
Interest income for the year ended December 31, 2002 amounted to RMB157
thousand, compared to RMB175 thousand in 2001. The amounts in both years
represented bank interest income earned from bank deposits.
INCOME TAX
The effective tax rate for the year ended December 31, 2002 was 8.2%
compared to 17.4% for the prior year. The decrease in the effective tax rate was
mostly due to our mix of subsidiaries' earnings. More income was earned in the
subsidiaries with tax benefits granted from their respective local tax
authorities.
NET INCOME; EARNINGS PER SHARE
As a result of the above items, net income for the year ended December
31, 2002 was RMB9,218 thousand compared to a net income of RMB3,907 thousand in
2001. We reported a basic and diluted per share earnings of RMB0.23 for the year
ended December 31, 2002 based on 40,502,150 outstanding weighted average shares,
compared to basic and diluted per share earnings of RMB0.10 for the year ended
December 31, 2001, based on 40,502,150 outstanding weighted average shares.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENT
The following table sets forth our contractual obligations as of
September 30, 2004:
28
Payments due by Period
---------------------------------------------------------
Contractual Obligations
Total Less than 1-3 Years 3-5 Years More Than 5
1 year Years
---------------------------------------------------------
(in thousands of RMB)
Operating Lease Obligations 774 586 188 - -
Purchase Obligations 75,408 75,408 - - -
Total 76,182 75,994 188 - -
On July 21, 2004, Comtech International (Hong Kong) Limited ("Comtech
HK"), one of our wholly-owned subsidiaries, entered into a RMB33,109,200
(USD4,000,000) revolving credit facility (the "Facility") with Bank of
Communications Hong Kong branch. On September 14, 2004, the amount of the
Facility was increased to RMB82,773,000, or (USD10,000,000). During August and
September 2004, Comtech HK drew down approximately RMB72,482,000, or
(USD8,757,000) under the Facility. The Facility is secured by funds on deposit
with the bank owned by Jeffrey Kang, our Chief Executive Officer, in an amount
equal to the borrowings. Borrowings bear interest at the higher of LIBOR or 1.5%
over the deposit rate, payable monthly.
On August 24, 2004, Comtech Communication Technology (Shenzhen) Co.,
Ltd.("Comtech Communication"), one of our wholly-owned subsidiaries, entered
into an accounts receivable factoring agreement (the " Factoring Agreement")
with Guangdong Development Bank Shenzhen branch. Pursuant to the Factoring
Agreement, accounts receivable from UT Starcom with the maximum amount of RMB30
million (USD3,624,000) can be transferred to the bank with recourse. An amount
equal to 30% of the accounts receivable transferred is secured by funds we have
on deposit from Comtech Communication with the bank. The factoring arrangement
bears interest at the PRC official loan interest rate, payable monthly. On
October 20, 2004, Comtech Communication transferred accounts receivable of
approximately RMB11,449 thousand (USD1,383,000) under the Agreement.
As of September 30, 2004, we have outstanding purchase orders to
purchase various components from suppliers in the amount of approximately
RMB75,408 thousand. However, we do not have any minimum purchase obligations
with these suppliers. We have no other contractual obligations and have not
engaged in any off-balance sheet guarantees or arrangements or transactions.
OFF-BALANCE SHEET ARRANGEMENTS
We have no outstanding derivative financial instruments, off-balance
sheet guarantees, interest rate swap transactions or foreign currency forward
contracts. We do not engage in trading activities involving non-exchange traded
contracts
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through a
combination of cash generated from sales, borrowings from shareholders and
available credit facilities. As of September 30, 2004, we had working capital of
RMB88,542 thousand as compared with working capital of RMB14,349 thousand at
December 31, 2003.
29
Operating activities used cash of RMB19,681 thousand for the nine
months ended September 30, 2004 compared to cash provided of RMB5,464 thousand
in the corresponding period of 2003, despite the contribution of net income for
the nine months ended September 30, 2004 of RMB43,549 thousand compared to a net
income of RMB22,768 thousand in the corresponding period of 2003. The decrease
in cash provided by operating activities as compared to the prior year is
primarily due to the increase in receivables of RMB76,215 thousand and
investments in inventories of RMB2,693 thousand, partially offset by the
increase in trade payables and accrued liabilities of RMB11,895 and increase in
minority interest of RMB3,055 thousand. Trade accounts receivable turnover
approximated 89 days for the nine months ended September 30, 2004 compared to
119 days for the comparable period in the prior year. Overall collections of
trade accounts receivables and credit quality of customers has improved. The
impact of the increase in trade accounts payable and inventory balances was
offset primarily by an increase in trade accounts payable balances associated
with the increased purchases of inventories. Investing activities used RMB1,617
thousand during the first three quarters of 2004, mainly for the purchase of
property and equipment, and for the acquisition of a 60% owned subsidiary,
Shanghai E&T System Co. Ltd.
Financing activities provided net cash inflow of RMB8,342 thousand
during the first three quarters of 2004. Cash was provided by new bank loans
amounting to RMB72,482 thousand and proceeds of RMB27,603 thousand obtained from
Trident as a result of the share exchange. These financing cash inflows were
partially off-set by repayment of amounts due to the holding company of
RMB50,356 thousand and the dividend payment for the prior year amounting to
RMB41,387 thousand.
Our accounts payable cycle is shorter than our accounts receivable
term. Accordingly, additional working capital is needed to fund this time lag.
Apart from revenues from operations, our principal source of liquidity
is our USD10 million revolving credit facility with the Bank of Communications,
Hong Kong branch is used to fund our working capital needs. We are currently in
the process of negotiating an additional credit facility with another bank to
fund our working capital needs.
During the nine months ended September 30, 2004, we also entered into
an accounts receivable factoring agreement with Guangdong Development Bank
Shenzhen branch. Pursuant to the agreement, accounts receivable from UT Starcom,
up to a maximum amount of RMB30 million, can be transferred to the Bank with
recourse.
FUTURE LIQUIDITY NEEDS
As of September 30, 2004, we had approximately RMB17,727 thousand in
cash. On October 27, 2004, we completed a private placement of 5.04 million
shares of Common Stock of aggregate proceeds of approximately USD8.8 million
with a group primarily consisting of institutional investors. We sold an
additional 1.26 million shares of Common Stock for aggregate proceeds of
approximately USD2.2 million in a second closing on November 5, 2004. We
regularly reviews our cash funding requirements and attempt to meet those
requirements through a combination of cash on hand, cash provided by operations,
available borrowings under bank lines of credit and possible future public or
private equity offerings. At times, we evaluate possible acquisitions of, or
investments in, businesses that are complementary to ours, which transactions
may require the use of cash. We believe that our cash, other liquid assets,
operating cash flows, credit arrangements, access to equity capital markets,
taken together, provide adequate resources to fund ongoing operating
expenditures. In the event that they do not, we may require additional funds in
the future to support our working capital requirements or for other purposes and
may seek to raise such additional funds through the sale of public or private
equity as well as from other sources.
EFFECTS OF INFLATION
Our most liquid assets are cash, cash equivalents and short-term
investment. Because of their liquidity, these assets are not directly affected
by inflation. Because we intend to retain and continue to use our equipment,
furniture and fixtures and leasehold improvements, we believe that the
incremental inflation related to replacement costs of such items will not
materially affect our operations. However, the rate of inflation affects our
expenses, such as those for employee compensation and contract services, which
could increase our level of expenses and the rate at which we use our resources.
30
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RISK
Our functional currency is the RMB. Transactions in other currencies
are recorded in RMB at the rates of exchange prevailing when the transactions
occur. Monetary assets and liabilities denominated in other currencies are
translated into RMB at rates of exchange in effect at the balance sheet dates.
Exchange gains and losses are recorded in our statements of operations as a
component of current period earnings. We have experienced minimal foreign
exchange gain and losses to date. We believe that our exposure to foreign
currency exchange rate risk is not material and we do not currently engage in
hedging activities to reduce our exposure to exchange rate fluctuations.
The value of the RMB against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in the China's
political and economic conditions. Since 1994, the conversion of Renminbi into
foreign currencies, including U.S. dollars, has been based on rates set by the
People's Bank of China, which are set daily based on the previous day's
interbank foreign exchange market rates and current exchange rates on the world
financial markets. Since 1994, the official exchange rate generally has been
stable. However, recently there has been increased political pressure on the
Chinese government to decouple the RMB from the USD. Because many of our
customers are involved in the export of goods, the appreciation of the RMB would
make our customers products more expensive to purchase, which may have an
adverse impact on their sales. A decrease in sales by our customers could have
an adverse effect on our operating results. In addition, the Company also has
USD denominated debt and therefore decoupling of RMB many affect the Company's
financial performance in the future.
INTEREST RATE RISK
We are exposed to interest rate risk arising from having short-term
variable rate obligations of RMB72,482,000 (USD8,757,000)as of September 30,
2004. Our future interest expense would fluctuate in line with any change in
LIBOR. For example, if LIBOR increases by 1%, our payment obligation would
increase by approximately RMB725,000 (USD88,000) per annum. We do not have any
derivative financial instruments and believes our exposure to interest rate risk
and other relevant market risks is not material.
INFLATION AND MONETARY RISK
Inflation in China has not had a material impact on our results of
operations in recent years. According to the National Bureau of Statistics of
China, the change in Consumer Price Index in China was 0.7%, -0.8% and 1.2% in
2001, 2002 and 2003, respectively.
However, following the 2.8% average change in the Consumer Price Index
in China in the first quarter of 2004 and a 3.8% change in the month of April
2004, the PRC government has announced measures to restrict lending and
investment in China in order to reduce inflationary pressures in China's
economy. The change in the Consumer Price Index in China was 4.3% in October
2004, compared to October 2003. The PRC government may introduce further
measures intended to reduce the inflation rate in China. Any such measures
adopted by the PRC government may not be successful in reducing or slowing the
increase in China's inflation rate.
31
BUSINESS
COMPANY OVERVIEW
Comtech Group, Inc. is a leading module design solutions provider in
China, focused on the mobile handset components and telecom equipment
industries. Our team of engineers works with leading manufacturers of mobile
handset components and telecom equipment to design solutions that meet their
need to provide state of the art products to their customers. When we began
operations in 1995, our initial business strategy was to develop a strong
distribution channel for the sale of components to mobile handset and telecom
equipment manufacturers and then gradually add value to our business by
providing design solutions. As we accumulated market and technical experience,
we used our well-established distribution channels to evolve into a design
solutions provider combining custom solutions, component sales and technical
support to manufacturers. We believe that this transformation has been the main
factor in our increased profitability in the recent years.
Our client base has grown to serve over 200 companies representing most
of the large manufacturers in the mobile handset components and telecom
equipment industries in China. We also have well established supplier
relationships. We have approximately 30 suppliers which include many large
multinational companies like Matsushida and JDS Uniphase. Currently, we offer
our clients over 500 design solutions and product lines integrating components
from many leading suppliers. Our engineers work with our customers' product
development team to understand their needs for each specific function module.
Based on a customer's specific requirements, our engineers provide a proposed
customized module design solution. A module design solution incorporates several
components. If the customer accepts our design, the customer agrees to and will
purchase from us key specific components outlined in our module design. We
purchase the specific components from our suppliers. We issue purchase orders to
our suppliers immediately after we receive customer orders, which enables us to
maintain a relatively low inventory risk.
We do not charge our customers an independent design fee. Instead, we
generate revenue through the sale of the specific components that are
incorporated in our module design. The price mark-up between the purchase price
and the selling price of such components compensate our design, technical
support and distribution services.
INDUSTRY OVERVIEW
According to BDA China Limited ("BDA"), the mobile handset and the
telecom equipment market have been among the most important segments supporting
China's recent emergence as a technology driven society. BDA estimates that
domestic mobile handset sales in China increased by approximately 88% in 2003.
BDA expects continued growth in the mobile handset market in China, with the
handset market size anticipated to reach 72.1 million units and total production
volume to increase to 213 million units by 2006. As the demand for mobile
handsets has grown in China, domestic mobile handset vendors (our target
clients) have continued to penetrate the market and capture market share. In
2004, local mobile handset vendors had a combined market share of approximately
45% of the mobile handset vendors in China compared to 1999, when the domestic
vendors' market share was less than 5%. In 2003, sales to mobile handset
manufacturers comprised approximately 40.0% of our net revenues and sales to
telecom equipment companies comprised approximately 57.9% of net revenues, and
for the nine month period ended September 30, 2004, 60.1% of our net revenue was
derived from sales to mobile handset manufacturers and 38.6% of our net revenue
was derived from sales to telecom equipment companies. We supply less than 1% of
our client's total purchase of modules for their end-products, which we believe
leaves us significant room to capture market share by increasing the number of
products that we can offer to our clients.
China's telecom equipment industry has recently experienced increased
investment by telecom operators. We believe that key segments within the telecom
equipment industry are the data communications segment, consisting of asymmetric
digital subscriber line (ADSL) modems, Voice over Internet Protocol (VoIP)
equipment, routers and network security equipment, the optical component segment
and the Public Switched Telephone Network (PSTN) switch segment.
32
o DATA COMMUNICATIONS. Digital Subscriber Line Access
Multiplexer, or DSLAM, has been one of the main investment
focuses for China's fixed-line operators and is expected to be
one of the fastest growing markets in China in the next two to
three years. VoIP has been a mainstream technology for long
distance calls since 2002, and the VoIP equipment market is
expected to have significant growth in the future according to
the International Data Corporation Asia/Pacific. The router
and network security market continues to be driven by
government supported projects aimed at improving information
technology and telecommunications systems.
o OPTICAL COMPONENTS. Domestic vendors increased their share of
the optical equipment, subsystem and component market.
According to Tongxin Xinxi Bao, a telecom information
newspaper, over 50% of new deployments of optical equipment in
2003 were made by Huawei and, together Fiberhome and Shenzhen
Photon Technology, represent over 50% of the market share in
the optical subsystem and component market.
o PSTN SWITCHES. Growth in the PSTN switch market has been
attributed to network upgrades of older PSTN switch equipment
and the increasing volume of exports of PSTN switches.
MARKET OPPORTUNITY AND GROWTH STRATEGY
We believe that certain trends are developing in China's wireless
communication and telecom equipment industries that will have a positive effect
on our business operations. These trends include:
o INCREASED EXPORT BY MANUFACTURERS BASED IN CHINA. The mobile
handset, PSTN data communication, optical, and wireless
equipment markets have experienced significant growth in
recent years and are expected to continue to grow in the
foreseeable future. We believe that China has established
itself as a strong global manufacturing center, which will
cause overseas companies to continue to seek products from
local vendors. Leading domestic device and equipment vendors
are also increasingly looking to distribute their products in
overseas markets. For example, Huawei sold over $1 billion of
equipment overseas and expects growth in its exports to
continue. ZTE and other Chinese equipment makers and mobile
handset device makers have also begun to expand overseas. In
an effort to seek global partnerships, TCL, our second largest
client, recently formed a joint venture with Alcatel into
which Alcatel contributed its mobile handset business. There
has also been strong government support for increased mobile
handset exports. At the 2004 Telecom Industry Policy and
Development Briefing, MII's Economic System Reform and
Operation Department stated that the government's core policy
for the industry would be to encourage mobile handset exports,
research and development, and development of the industry
supply chain. We believe that growth in the export market is
positive for us as it will drive component demand among our
mobile handset clients as well.
o MORE STRINGENT PROCUREMENT SYSTEMS BY MANUFACTURERS. Over
time, leading manufacturers have developed more stringent
procurement systems to control their purchasing. The approval
process to sell products to these vendors is lengthy, time
consuming and costly, and often creates a barrier to entry for
potential competitors. For example, Huawei's procurement
process can take over a year for suppliers to become
qualified. Barriers to entry are increasingly high, and the
possibility of price wars and competition is reduced. Due to
our long, ongoing relationships with manufacturers, we believe
we are well positioned.
o INCREASED RELIANCE ON OUTSOURCING. OEMs are increasingly
outsourcing the development, design, prototyping, engineering,
manufacturing, assembly and testing of components and systems
to subsystem suppliers in order to:
33
o reduce their investments in inventory, property,
plant and equipment in the face of cyclical demands
for their products;
o reduce design-to-delivery cycle times;
o take advantage of subsystem suppliers' ability to
quickly modify and reconfigure product designs;
o take advantage of subsystem suppliers' inventory
management capabilities and purchasing power; and
o focus on their core competencies in light of
increasing research and development requirements and
industry-wide pricing pressure.
Because handset and telecom systems are among the most
technologically complex subsystems, we believe we are
establishing strong partner relationships with companies that
possess the engineering expertise, design capabilities,
quality control, financial stability and highly flexible
manufacturing operations required to satisfy the cyclical and
constantly changing demands of handset and telecom
manufacturers.
o GROWTH IN THE END MARKETS INTO WHICH OUR COMPONENTS ARE SOLD.
We believe that the increasing complexity of mobile devices
and the upgrade of telecom networks will drive demand for new
components. In the mobile handset market new features are
added to mobile handsets at an accelerating pace due to
competition between mobile handset makers and the increasing
use of 2.5G services. We have developed a storage solution by
using M-System's DOC, a product for which demand has developed
only as high volume storage has become necessary with more
advanced data services offered over mobile handset devices. We
believe that the launch of new more advanced services in 2.5G
and 3G wireless networks and broadband access networks in the
telecom equipment industry, will drive demand for more
advanced components.
o INCREASED MULTI-NATIONAL CORPORATE PRESENCE IN CHINA. Recently
there has been a trend toward the re-location by
multi-national corporations of their research and development
centers to China. Currently, all of our component sales have
been to domestic Chinese companies. We believe that the
increase in multi-national companies outsourcing their R&D to
China will open up a new opportunity for us to expand our
customer base to foreign manufacturers and begin the export of
our products abroad.
GROWTH STRATEGY
Our objective is to be the leading module designer and component
supplier for high growth industry segments including telecom handsets,
equipment, and consumer electronics. We plan to use our design, development,
prototyping, engineering, testing expertise and efficiency to allow us to
continue to penetrate into more product lines of existing customers as well as
to add new customers in our target markets. Our ultimate objective is to evolve
into a chipset and application software design house and ultimately create
products with our own intellectual property which is an evolutionary model that
has been successfully implemented by other Chinese companies.
We have a two prong growth strategy to accomplish these objectives
which focus on horizontal growth to increase revenue and vertical growth to
increase profit margins. We believe that our continued focus on increasing
revenue and profit margin while minimizing operating costs has historically and
will continue to allow us to build a strong, profitable and growing business
model.
34
We intend to grow horizontally by acquiring new product lines,
designing new solutions, establishing new market channels, securing new clients
and penetrating new industries. This strategy will allow us to offer new
products to existing customers and broaden our customer base to new customers
seeking products that we do not currently provide. For example, we are seeking
to enter the consumer electronics market by providing components to Chinese
consumer electronics makers. The consumer electronics market is expected to
experience strong growth. According to BDA, digital television, or DTV, will be
one of the key drivers of this growth with China targeting 100% DTV penetration
by the year 2010. There are currently 330 million TVs in China, and the China
Center of Information Industry Development estimates that China's market for DTV
products and services will be RMB 500 billion (approximately USD60 billion) by
the year 2015. We believe that we are well positioned to enter this market
because many of our existing mobile handset customers, such as TCL, Haier, AMoi
and Xoceco, also produce televisions and other consumer electronics devices. We
believe that we may be able to leverage our existing relationships with these
manufacturers to sell consumer electronics components to them.
We believe that the most effective way to accomplish our vertical
growth objective is by acquiring companies, and forming joint ventures or other
partnership relationships. We intend to acquire chipset companies that have
existing products. Capitalizing on our broad and well established distribution
channel, we believe that we can immediately generate revenue by marketing and
selling such products. With acquired IP and technology know-how in addition to
our deep understanding of our customers needs, we believe we are well positioned
to design and produce our own proprietary components. We recently launched
Comtech-branded proprietary products which contributed approximately USD0.9
million in net revenues in 2003. We anticipate that continued development and
expansion of our proprietary products may contribute to our future growth. If we
are successful in our vertical integration strategy, we may be able to enhance
our profit margin.
PRODUCTS AND TECHNOLOGY
Our products enable our OEM customers to improve the efficiency and
time to market while reducing the costs of their design and manufacturing
processes. We purchase our products from suppliers that manufacture components
needed in our target industries. Our key suppliers include, Pixelplus,
Mtekvision, NAIS, Matsushida, Sambu, JDSU and M-Systems. We develop our design
solutions based on their components. We believe that the core value in our
business comes from our ability to provide last-mile customization for each of
our many customers' specific needs.
Our design solutions include:
MOBILE SOLUTIONS
- ----------------
o LCD Module Solutions;
o Camera Module Solutions;
o Persistent Storage Module Solutions;
o Input/Output Module Solutions;
o Sound System Solutions;
o Power Supply Module Solutions; and
o Peripheral Module Solutions.
35
TELECOMMUNICATION EQUIPMENT SOLUTIONS
- -------------------------------------
o PSTN Switching
o Line card solution
OPTICAL SOLUTIONS
- -----------------
o 2.5-10G DWDM optical transmission solutions including tunable
transmitters, variable optical attenuators, EML modulators and
transceivers;
o 2.5-10G DWDM electrical signal processing solutions, including
optical transmission controls, Mux/Demux, trans-impedance
amplifiers and forward error correction;
o Optical signal amplification solutions including EDFA and
Linear optical amplifiers; and
o Passive optical network solutions including a thermal AWG,
optical switching and optical add/drop Mux
DATA COMMUNICATION SOLUTIONS
- ----------------------------
o ADSL modem solutions, including ADSL modems in PCI and
Programmable DSL;
o FLASH storage solutions for secure networks including Flash
Disk On Chip (DOC) and DOC arrays;
o Voice over packet (VOP) solutions, including VoIP and VoATM;
o Core router data processing solutions, including network
processors and switch fabric;
o Gigabit data optical interconnect solutions; and
o Ethernet transceiver solutions
WIRELESS BASE STATION
- ---------------------
o RF module; and
o Lightning protection module.
SUPPLIERS
We purchase our products from suppliers that manufacture components
needed in our target industries. We have approximately 30 suppliers. Our key
suppliers include, Pixelplus (CMOS sensors), Mtekvision (Camera ICs), NAIS
(connectors, Relay), Matsushida (switches), Sambu (speakers), JDSU
(opteoelectronic components) and M-Systems (DiskOnChip). We develop our design
solutions based on their components. In order to maintain low inventory levels,
we generally submit purchase orders to suppliers once we receive sale orders
from our customers. However, we keep certain inventory when we foresee a
possible shortage in such products. Our inventory, as of September 30, 2004 was
RMB22.7million (USD2.7 million).
36
CUSTOMERS
We have more than 200 customers in China, including many of the largest
mobile device and telecom equipment manufacturers. The following table sets
forth the revenue contribution from each of these sectors during 2003 and for
the first nine months of 2004.
Comtech Revenue Contribution
----------------------------
SECTOR 2003 2004
------ ----- ----
Mobile handset components 40.0% 60.1%
Telecom equipment 57.9% 38.6%
Other 2.1% 1.3%
Our largest customer in the mobile handset is TCL, one of China's
largest domestic mobile handset manufacturers. Our top two revenue producing
customers from the telecom equipment industry have been ZTE and Huawei, China's
two largest telecom equipment vendors.
Our existing customer base includes the following companies:
oMOBILE HANDSET MANUFACTURERS: TCL, Konka, Amoisonic, Capitel, Xiahua,
ZTE, Haier, HiSense, BIRD, Eastcom, Soutec, Kejian, UTStarcom, Legend, HiTech
Wealth, 1Zen, HYT, Inventec, Mitac, Arimma, GlobalFlex, CECW, Galaxy, Hollycomm,
Motorola and Cosmobics.
oTELECOM SYSTEM EQUIPMENT/ORIGINAL EQUIPMENT MANUFACTURERS: Huawei,
ZTE, Datang, FiberHome, SHBell, Great Dragon, JingPeng, Optel, Harbour Network,
UTStarcom, Lucent, Motorola, Ericsson, Siemens, NEC, Emerson, Solectron,
SCI-Sanmina, Flextronics, Celestica, Jabil Circuits, Elcoteq and Via-systems.
For the nine months ended September 30, 2004, our top 10 customers in
terms of net revenues were as follows:
REVENUE AMOUNT PERCENTAGE OF REVENUE
CUSTOMER NAME (RMB'000) (%)
------------- --------- ---
Zhongxing International (Hong Kong) Trading Co. Ltd. (ZTE) 7,775 14%
UT Starcom 6,936 12%
Huawei Tech. Investment Co. Ltd 6,873 12%
Hongdin International Trading Limited (KONKA) 3,984 7%
Jabil Circuit Shanghai Ltd. 2,211 4%
TCL Mobile Communication (HK) Company Ltd. 2,074 4%
SOUTEC 1,731 3%
Guangzhou Kyokuto Electronics Ltd. 1,351 2%
CPTE 1,272 2%
Xian Datang Telecom 1,080 2%
TOTAL 35,287 62%
37
SALES AND SUPPORT
We sell our products through our direct sales force which, as of
November 30, 2004, consisted of a total of 30 sales directors, account managers
and sales support staff. Our sales directors are responsible for establishing
sales strategy and setting the objectives for specific customer accounts. Each
account manager is dedicated to a specific customer account and is responsible
for the day-to-day management of that customer. Account managers work closely
with customers and in many cases provide on-site support. Account managers often
attend customers' internal meetings related to production, engineering design
and quality to ensure that customer expectations are interpreted and
communicated properly to our operations group. Account managers also work with
our customers to identify and meet their cost and design-to-delivery cycle time
objectives.
We have dedicated account managers responsible for new business
development for handset and telecom system products and related technologies.
Our new business development account managers initiate and develop long-term,
multi-level relationships with customer accounts and work closely with customers
on new business opportunities throughout the design-to-delivery cycle. We
believe that our customer support services allow us to offer our customers high
quality services.
COMPETITION
For each project, we partner with our supplier to compete with other
key enabling component suppliers. For example, we partnered with JDS Uniphase to
compete with Intel's optical module. While the largest component suppliers have
substantial financial and technical resources, we believe they lack the close
project-by-project and day-to-day working relationship that we provide to
customers. Furthermore, these large key enabling component suppliers usually do
not focus on module level design.
We also compete with foreign distribution and design companies that
have operations in China, such as Arrow Electronics, Avnet, Memec, EDOM, Secom,
World Piece Industrial Co. and others. China's electronic components market is
fragmented with over 1,500 distributors in the market. We believe that we have
better design and technical capabilities compared to distributors, and we have
better distribution channel and customer base compared to design companies.
RESEARCH AND DEVELOPMENT
We believe that continued and timely development and introduction of
new and enhanced solutions are essential if we are to maintain our competitive
position. We have been able to cost-effectively hire highly skilled technical
employees from a large pool of qualified candidates in China. Our research and
development expenditures totaled RMB983,000 in 2003, RMB1,042,000 in 2002 and
RMB1,928,000 in 2001. Our research and development expenditures have increased
to RMB 5,613,000 for the first nine months of 2004. We are seeking to enter the
consumer electronics market by providing components to Chinese consumer
electronics makers. We have commenced research and development of a set-up box
and are currently working closely with some of our existing clients on this
project.
EMPLOYEES
As of September 30, 2004, we had 70 employees, 25 of whom perform
scientific and research activities.
38
FACILITIES
We lease properties in seven locations in China including Shenzhen,
Shanghai, Beijing, Wuhai, Qingdao, Tianjin and Hong Kong. These properties are
used as our corporate headquarters, for sales and support offices, and for
research and development and manufacturing purposes.
We lease approximately 35,000 square feet of property in China.
Approximately 8,000 square feet is for our corporate headquarters located in
Shenzhen , approximately 7,000 square feet is for our research and development
center, approximately 20,000 square feet is for representative offices located
in the other six cities, and approximately 13,000 square feet is used for
manufacturing.
In 2001, we purchased an office building from Matsunichi for cash
consideration of RMB1,672 thousands and the payment of technical services fees
of RMB1,620 thousands.
We believe our existing facilities and equipment are well maintained
and in good operating condition, and we believe our facilities are sufficient to
meet our needs for the foreseeable future.
LEGAL PROCEEDINGS
In 1999, CSD Srl ("CSD") caused a leasing company to purchase from OAM
real estate in via Baronia, Rome and entered into a leasing arrangement with the
leasing company. Subsequently, on October 9, 1999, CSD brought a claim against
OAM in the Rome Civil Court alleging that the commercial designation of the
property in 1998 was not properly disclosed and consequently its lease payments
were excessive and sought reimbursement of the lease payments that it considered
excessive from OAM in an aggregate amount of approximately (euro)800 thousand.
The proceedings have continued intermittently over the years. On March
25, 2004, the Court requested that the parties present their conclusions in
order for it to render a final verdict. It is management's opinion that the risk
of a negative judgment is low and the potential liability remote.
39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information about our directors and
executive officers as of November 30, 2004:
NAME AGE POSITION
---- --- --------
Jeffrey Kang 34 Chief Executive Officer, President and Director
Li Zhou 38 Chief Technical Officer and Director
Hope Ni 32 Chief Financial Officer and Secretary
Amy Kong (1)(2)(3) 49 Director
Q.Y. Ma (1)(2)(3) 47 Director
Jason Kim 37 Director
Mark S. Hauser (3) 46 Director
Mark B. Segall (1)(2) 42 Director
(1) Member of Nominating and Governance Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
JEFFREY KANG, CHAIRMAN OF THE BOARD, CEO, PRESIDENT AND CO-FOUNDER. Mr.
Kang was a co-founder of Comtech and has served as our Chief Executive Officer
and a Director since September 1999. Mr. Kang founded Shenzhen Matsunichi
Electronics Co., Ltd. and Matsunichi Electronic (Hong Kong) Limited, the
Company's predecessor, in 1995 when Matsunichi commenced operations as a
distributor for Matsushita. In 1999, Mr. Kang formed Comtech and transferred all
operations and assets of Matsunichi into the Company. Prior to forming
Matsunichi, Mr. Kang worked for Matsushita (Panasonic) Electric Industrial from
March 1992 to September 1995 where he was responsible for selling components to
the telecom industry within China. From 1998 to 1999, Mr. Kang was vice
president of Shenzhen SME (Small and Medium Enterprises) Association, a
non-profit association in Shenzhen. Mr. Kang earned an undergraduate degree in
Electrical Engineering from South China University of Technology in Guangzhou,
China.
LI ZHOU, CHIEF TECHNICAL OFFICER. Prior to joining us in November 2003,
Mr. Zhou served as CTO of HTW China, the largest PDA vendor in China from
October 2000 to December 2002. Previously, he worked for Microsoft in Redmond,
Washington from 1991 to 1998, and in Beijing, China from 1998-2000, where he
held various positions including the Group Manager of Microsoft's embedded
systems. Mr. Zhou earned a masters degree in computer science from Michigan
State University after completing his undergraduate degree in China.
HOPE NI, CHIEF FINANCIAL OFFICER AND SECRETARY. Prior to joining us in
August 2004, Ms. Ni spent six years as a practicing attorney at Skadden, Arps,
Slate, Meagher & Flom LLP in New York and Hong Kong, specializing in corporate
finance. Prior to that, Ms. Ni worked at Merrill Lynch, investment banking
division in New York. Currently, Ms. Ni is a member of the investment committee
of Time Innovation Ventures, a venture capital firm focused on funding
technology start-ups and joint ventures in China. Ms. Ni also serves on the
board of Qianjia Consulting Company which she founded in 2002. Ms. Ni received
her Juris Doctor degree from University of Pennsylvania Law School and her
Bachelor degree in Applied Economics and Business Management from Cornell
University.
40
AMY KONG, DIRECTOR. Prior to joining Comtech as a director, Ms. Kong
founded Primustech Ventures (HK) Limited, an investment firm focused on Greater
China. Ms. Kong invested in a number of private equity projects in the areas of
document management, professional training and education, medical waste
management, medical device, consumer electronics and information technology
consulting. From 1999 to 2000, Ms. Kong served as interim Chief Executive
Officer of Cyber City International, a privately owned Shenzhen based science
park company. In 1996, Ms. Kong founded GTF Asset Management for the Gajah
Tunggal Group, a USD800 million global asset management company.
Q.Y. MA, DIRECTOR. Dr. Ma is the Managing Partner of Time Innovation
Ventures (TIV), a venture capital firm focused on funding technology start-ups
and joint ventures in China. Dr. Ma has over 18 years of hands-on R&D experience
in North America. Dr. Ma has been an Associate Professor at the Columbia
University (1994-2000). Dr. Ma's expertise includes microelectronics,
superconductivity, RF circuits, MRI, and biomedical devices, technology
transfer, and hi-tech start-ups. He has served as a technology consultant to
IBM, General Electric, TRW, Du Pont as well as other leading electronic
companies. Dr. Ma is a co-founder and advisor of Semiconductor Manufacture
International Corp. He has invested several start-ups including Comlent, AIC,
CSI, Mediachip, Suntek, and UniStar. He was elected as "Top Ten Returned Chinese
Entrepreneurs of the Year" in 2002 by the China Investment Magazine of the State
Planning and Development Commission. Dr. Ma has served as an adviser to the
Ministry of Information Industry, Beijing Government, and a Senior Advisor to
Zhangjiang Hi-Tech Park in Shanghai. Dr. Ma was the president of the Chinese
Association for Science & Technology-USA, and is currently the president of
Chinese-American Innovation & Development Association. Dr. Ma received his Ph.D.
from Columbia University, and is a graduate of Stanford Executive Program (SEP)
of Stanford Business School.
JASON KIM, DIRECTOR. Mr. Kim founded TG Asia Venture, a Korean venture
capital firm based in Hong Kong in 2000 and currently serves as its CEO. From
1994 to 2000, Mr. Kim served as the head of the China team at the Tong Yang
Group, Asia Regional Headquarters in Hong Kong, which specializes in Chinese
corporate finance and direct investment activity in Asia.
MARK S. HAUSER, DIRECTOR. Mr. Hauser has served as a director of the
Company since May 1997. He was an attorney and a founder and Managing Director
of Tamarix Capital Corporation, a New York-based merchant and investment-banking
firm. Since July 2000, Mr. Hauser has been a Managing Director of FdG
Associates, a middle-market private equity fund based in New York.
MARK B. SEGALL, DIRECTOR. Mr. Segall has served as a director of TRGI,
prior to the Share Exchange, since December 1999, and previously served as
TRGI's non-executive Secretary from December 1999 until the consummation of the
share exchange on July 22, 2004. Mr. Segall is the founder and CEO of Kidron
Corporate Advisors LLC, an M&A and corporate advisory boutique for emerging
growth companies. Prior to founding Kidron in 2003, Mr. Segall was the CEO of
Investec Inc., the US investment banking operations of the South African based
Investec Group. While at Investec, Mr. Segall also served as general counsel and
Senior Vice President of Investec Ernst & Company, the US securities and
clearing operations of Investec. Prior to joining Investec in 1999, he was a
partner at Kramer Levin Naftalis & Frankel LLP, a New York law firm.
BOARD COMPOSITION
Our business and affairs are managed under the direction of our board
of directors. The primary responsibilities of our board of directors are to
provide oversight, strategic guidance, counseling and direction to our
management. It is our expectation that the board of directors will meet
regularly on a quarterly basis and additionally as required.
41
DIRECTOR COMPENSATION
Our non-employee directors receive compensation in the form of cash and
stock options for serving on our board. On November 11, 2004 each of our
non-employee directors were granted 10-year options to purchase 10,000 shares of
common stock, exercisable at $1.87 per share and $2,000 in cash for serving on
the Board since the share exchange transaction. One-half of the options granted
vested on September 30, 2004, and the remainder will vest on December 31, 2004.
Commencing January 2005, each non-employee director will receive
annually $4,000 in cash and 10-year options to purchase 20,000 shares of our
common stock. The members of our Audit Committee will receive options to
purchase 10,000 shares of common stock per year, with the Chairman of the Audit
Committee receiving an additional option to purchase 5,000 shares of common
stock per year. The members of each of our Compensation Committee and Nominating
Committees will receive options to purchase 5,000 shares of common stock per
year. All of the options granted to the directors will be exercisable at the
fair market value on date of grant and will vest quarterly during the one-year
period following the date of grant.
BOARD COMMITTEES
Our board of directors has a compensation committee, an audit committee
and a governance and nominating committee. Our board of directors has determined
that Ms. Amy Kong, Messrs. Hauser, Ma and Segall are "independent" under the
current independence standards of the SEC, and have no material relationships
with us (either directly or as a partner, shareholder or officer of any entity)
which could be inconsistent with a finding of their independence as members of
our board of directors.
COMPENSATION COMMITTEE
The compensation committee makes recommendations to the board
concerning salaries and incentive compensation for our officers and employees
and administers our stock option plans. The audit committee oversees the
Company's financial reporting process on behalf of the board of directors.
Our compensation committee is responsible for the following functions:
o reviewing and recommending policy relating to compensation and
benefits of our officers and employees, including reviewing
and approving corporate goals and objectives relevant to
compensation of our chief executive officer and other senior
officers, evaluating the performance of these officers in
light of those goals and objectives, and setting compensation
of these officers based on such evaluations;
o administering our benefit plans and the issuance of stock
options and other awards under our stock plans; reviewing and
establishing appropriate insurance coverage for our directors
and executive officers;
o recommending the type and amount of compensation to be paid or
awarded to members of our board of directors, including
consulting, retainer, meeting, committee and committee chair
fees and stock option grants or awards; and
o reviewing and approving the terms of any employment
agreements, severance arrangements, change-of-control
protections and any other compensatory arrangements for our
executive officers; and
42
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee is comprised of three members, Ms. Amy Kong,
and Messrs. Q.Y. Ma and Mark Segall. No member of our Compensation Committee has
at any time been an officer or employee of ours, or our subsidiary. No
interlocking relationship exists between our board of directors or compensation
committee and the board of directors or compensation committee of any other
company, nor has any interlocking relationship existed in the past.
AUDIT COMMITTEE
Our audit committee is responsible for the following functions:
o approve and retain the independent auditors to conduct the
annual audit of our books and records;
o review the proposed scope and results of the audit;
o review and pre-approve the independent auditors' audit and
non-audited services rendered;
o approve the audit fees to be paid;
o review accounting and financial controls with the independent
auditors and our financial and accounting staff;
o review and approve transactions between us and our directors,
officers and affiliates;
o recognize and prevent prohibited non-audit services;
o establish procedures for complaints received by us regarding
accounting matters; and
o oversee internal audit functions.
Our board of directors has determined that Ms. Kong, the Chairperson of
the Audit Committee, is an "audit committee financial expert" as defined by the
SEC's rules.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The governance and nominating committee is responsible for identifying
potential candidates to serve on our board.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation awarded to, earned by, or paid to the Chief Executive Officer.
There are no other executive officers whose annual compensation exceeded
$100,000 for the fiscal years ended December 31, 2003, 2002 and 2001:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM ALL OTHER
----------------------------------------- COMPENSATION AWARDS COMPENSATION
------------------------------ ($USD)
AWARDS PAYOUTS ------------
------ -------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP
COMPENSATION AWARD(S) OPTIONS PAYOUTS
NAME AND PRINCIPAL POSITION YEAR SALARY ($USD) BONUS ($USD) ($USD) (#) (#) ($USD)
Jeffrey Kang, Chairman, Chief 2003 10,590 416,984 - - - - -
Executive Officer and President 2002 10,590 - - - - - -
2001 10,590 - - - - - -
OPTION GRANTS IN LAST FISCAL YEAR
During the fiscal year ended December 31, 2003, no stock option grants
were made to the named executive officers. No stock appreciation rights were
granted to these individuals during such year.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
During the fiscal year ended December 31, 2003, no stock options were
exercised by any named executive officer.
43
2004 INCENTIVE STOCK OPTION PLAN
On August 3, 2004, our Board of Directors adopted the Comtech Group,
Inc. 2004 Stock Incentive Plan (the "Incentive Plan") pursuant to which
5,000,000 shares of Common Stock are reserved for issuance upon exercise of
stock options, and for the issuance of stock appreciation rights, restricted
stock awards and performance shares. The purpose of the Incentive Plan is to
provide additional incentive to employees, directors, advisors and consultants
by facilitating their acquisition of our Common Stock. The Incentive Plan
provides for a term of 10 years from the date of its adoption by the Board of
Directors, after which no awards may be made, unless the Plan is earlier
terminated by the Board. Options granted under the Incentive Plan are either
incentive stock options (i.e. options that afford favorable tax treatment to
recipients upon compliance with certain restrictions pursuant to Section 422 of
the Internal Revenue Code and that do not result in tax deductions to us unless
participants fail to comply with Section 422 of the Internal Revenue Code) or
options that do not so qualify. We intend to seek stockholder approval of the
Incentive Plan.
In 1995, the Trident Board of Directors adopted, and the stockholders
approved, the 1995 Stock Option Plan for Outside Directors (the "Directors'
Plan"), pursuant to which 5,000 options would be granted annually to each
non-employee director of Trident for each full fiscal year of service on the
Board. The Directors Plan expires on December 31, 2005, however the options
exercisable under the Directors Plan terminate on July 1, 2009. We do not intend
to issue any additional options under this Directors Plan.
The Incentive Plan and the Directors Plan are administered by the
Compensation Committee of the Board of Directors. The Compensation Committee
selects the employees to whom awards are to be granted, the number of shares to
be subject to such awards, and the terms and conditions of such awards (provided
that any discretion exercised by the Compensation Committee must be consistent
with resolutions adopted by the Board of Directors and the terms of the
Incentive Plan).
As of November 30, 2004, options to purchase an aggregate of 3,705,000
shares had been granted under the Incentive Plan, and options to purchase an
aggregate of 230,000 shares had been granted under the 1995 Directors Plan.
44
The following table sets forth aggregate information regarding our
equity compensation plans in effect as of November 30, 2004:
NUMBER OF
SECURITIES TO BE NUMBER OF SECURITIES
ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
EXERCISE OF EXERCISE PRICE OF FUTURE ISSUANCE UNDER
OUTSTANDING OUTSTANDING EQUITY COMPENSATION
OPTIONS/WARRANTS OPTIONS/WARRANTS PLANS
PLAN CATEGORY (a) (b) (c)
- ----------------------------------------------------- ---------------- ------------------ -----------------------
Equity compensation plans approved by security
holders........................................... 230,000 USD1.5 44,166(1)
Equity compensation plans not approved by security
holders........................................... 3,705,000 USD1.83 1,295,000
---------- --------------- ----------------
Total................................................ 3,935,000 USD1.67 1,339,166
========== =============== ================
- -------------------
(1) We do not intend to grant further options under this plan.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
On August 1, 2004, the Company entered into an employment agreement
with Hope Ni to serve as its Chief Financial Officer. The employment agreement
terminates on December 31, 2007, but will be automatically extended, unless
either the Company or Ms. Ni gives written notice to the other party of their
election not to extend. Pursuant to the terms of the agreement, Ms. Ni receives
a base salary of USD117,000 per annum and was granted 10-year options to
purchase up to 420,000 shares of the Company's common stock at an exercise price
of USD1.50, which options vest in various installments through August 1, 2007.
In the event the Company engages in an underwritten offering of shares of common
stock which yields gross proceeds to the Company in excess of $30,000,000, all
stock options shall accelerate and be fully vested.
It the Company terminates Ms. Ni without cause or she resigns for good
reason, Ms. Ni will receive termination benefits, including (i) the payment of a
lump sum amount equal to three times Ms. Ni's monthly salary in effect
immediately prior to her termination and (ii) payment of all premiums due for
health insurance for a period of six months after termination.
If a change in control occurs prior to December 31, 2007, and the
Company terminates Ms. Ni without cause or she resigns for good reason prior to
the date that the Company's Board of Directors certifies the audit of the
Company for the first complete fiscal year after the change in control (the
"Change in Control Audit Date"), Ms. Ni will be entitled to receive the standard
termination benefits, and a payment equal to the greater of six times her
monthly rate of compensation or 12 months salary, less compensation paid to her
between the date of the change in control and the date of termination. If the
change in control occurs after the Change in Control Audit Date, Ms. Ni would be
entitled to the same severance payment she would have received had a change in
control not occurred and the Company terminated her without cause or she
resigned for good reason. Upon a change in control Ms. Ni's stock options will
accelerate and all stock options will be deemed fully vested. If Ms. Ni's
employment is terminated after the Change in Control Audit Date, other than as a
result of her resignation, Ms. Ni shall have the right to exercise all of her
stock options. If Ms. Ni resigns prior to the Change in Control Audit Date,
notwithstanding the acceleration of vesting of the stock options on a change in
control, Ms. Ni shall have the right to exercise a specified number of shares at
a price to be determined pursuant to the terms of the agreement at the time of
her resignation. For purposes of Ms. Ni's employment agreement, a change in
control shall mean the consummation of a reorganization, merger of consolidation
of the Company with one or more other persons.
45
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION ON LIABILITY
Our bylaws currently provide and, upon the closing of this offering our
amended and restated bylaws will provide, that we shall indemnify our directors
and officers to the fullest extent permitted by Maryland law, provided that,
with respect to proceedings initiated by our officers and directors, we are only
required to indemnify these persons if the proceeding was authorized by our
board of directors. Our bylaws permit us, by action of our board of directors,
to indemnify our other employees and agents to the same extent as we are
required to indemnify our officers and directors. We are also empowered under
our bylaws to enter into indemnification agreements with our directors,
officers, employees or agents and to purchase insurance on behalf of any of our
director, officer, employee or agent whether or not we are required or permitted
to indemnify such persons under Maryland law.
In addition, our bylaws provide that our directors will not be
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as a director, except for liability:
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; or
o for any transaction from which the director derives an
improper personal benefit.
There is no pending litigation or proceeding involving any of our
directors or officers for which indemnification is being sought, nor are we
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 2003, Comtech Global Investment Ltd.
("Comtech Global"), an entity controlled by Jeffrey Kang, our Chief Executive
Officer, made working capital advances to us in the aggregate amount of
RMB50,356,000 (USD6,084,000). In addition, during 2003, we deferred payment of a
dividend payable to Comtech Global in the amount of RMB41,387,000
(USD5,000,000). During August and September 2004, the Company repaid the
shareholder loan from, and dividends payable to, Comtech Global.
In July 2004, our Hong Kong subsidiary entered into a RMB33,109,000
(USD4,000,000) credit facility with the Bank of Communications in Hong Kong
which line was increased to RMB82,773,000 (USD10,000,000) on September 14, 2004.
The line is secured by funds of Jeffrey Kang, our Chief Executive Officer, on
deposit with the bank, which is presently in the amount of RMB72,482,000
(USD8,757,000). The Company has drawn down an aggregate of RMB72,482,000
(USD8,757,000) of the bank line. Any additional draw downs from this credit
facility will require Mr. Kang or other parties to pledge additional funds on
deposit with the bank as security to the credit facility.
During the year ended December 31, 2003, we purchased RMB5,456,000
(USD659,000) of products from Viewtran Technology Limited (Viewtran), an entity
in which Jeffrey Kang has as 6.12% interest. We sold these products on behalf of
Viewtran at the same price at which we purchased those products. According to an
agreement entered into between Comtech and Viewtran, we conducted these sales
and purchase transactions on behalf of Viewtran and the risk and rewards as a
result of these transactions remained with Viewtran. Therefore, the sales,
purchases, and the corresponding receivables and payables related to the
foregoing transactions are not reflected in our financial statements. As of
December 31, 2003, the Company did not owe any amounts to Viewtran.
In June 2004, our wholly owned subsidiary, Shenzhen Comtech
International Ltd., borrowed RMB3,600,000 (USD435,000) from Viewtran and of
which RMB3,000,000 (USD362,000) was repaid on June 30, 2004. The balance in the
amount of RMB600,000 (USD72,000) is currently outstanding. The amount was
unsecured, non-interest bearing and had no fixed repayment terms.
47
PRINCIPAL STOCKHOLDERS
The following table contains information about the beneficial ownership
of our Common Stock before and after the consummation of this offering for:
o each person, or group of persons, who beneficially owns more
than 5% of our capital stock;
o each of our directors;
o each executive officer named in the summary compensation
table; and
o all directors and executive officers as a group.
Unless otherwise indicated, the address for each person or entity is
High-Tech Industrial Park Nanshan, Shenzhen 5180, PRC.
Number of Shares Beneficially
Name of Beneficial Owner Owned (1) Percentage Ownership
- ------------------------------------- ----------------------------- --------------------
Jeffrey Kang 37,345,311(2) 73.51%
Hope Ni 420,000(3) *
Amy Kong 10,000(4) *
Q.Y. Ma 0 N/A
Li Zhou 20,833(5) *
Jason Kim 10,000(6) *
Mark S. Hauser 687,871(7) 1.35%
Mark B. Segall 190,000(8) *
Comtech Global Investment, Ltd. 26,326,398 51.90%
Ren Investment International, Ltd. 10,935,580 20.56%
Purple Mountain Holding, Ltd. 3,240,172 6.39%
All executive officers and directors as a
group (8 persons) 38,684,015 74.49%
------------------------
* Represents beneficial ownership of less than one percent of our
outstanding shares.
1) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the percentage
ownership of that person, shares of Common Stock subject to options
held by that person that are currently exercisable or exercisable with
60 days of the date hereof are deemed outstanding. Such shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. Except as indicate in the
48
footnotes to the following table or pursuant to applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name. The percentage of beneficial ownership is based on
50,722,050 shares of Common Stock outstanding as of November 30, 2004.
2) Includes (i) 83,333 shares issuable upon exercise of currently
exercisable stock options, (ii) 26,326,398 shares beneficially owned by
Comtech Global Investment Ltd., over which Mr. Kang and his wife, Ms.
Nan Ji, share voting and investment power, and (iii) 10,935,580 shares
beneficially owned by Ren Investment International Ltd., over which Mr.
Kang, as sole director, has sole voting and investment power. Mr. Kang
does not own any shares of Ren Investment International.
3) Represents shares issuable upon exercise of currently exercisable stock
options.
4) Represents shares issuable upon exercise of currently exercisable stock
options. Does not include shares held by Ren Investment International
Ltd., in which Ms. Kong owns less than a 1% interest. Ms. Kong
disclaims beneficial ownership of such shares.
5) Represents shares issuable upon exercise of currently exercisable stock
options. Does not include shares held by Ren Investment International
Ltd., in which Mr. Zhou has an approximate 3.7% interest. Mr. Zhou
disclaims beneficial ownership of such shares.
6) Represents shares issuable upon exercise of currently exercisable stock
options. Does not include shares held by Ren Investment International
Ltd. in which Mr. Kim owns less than a 1% interest. Mr. Kim disclaims
beneficial ownership of such shares.
7) Includes warrants to purchase 468,337 shares and 10,000 shares issuable
upon exercise of currently exercisable stock options.
8) Includes 40,000 shares issuable upon exercise of currently exercisable
stock options and warrants to purchase an aggregate of 150,000 shares
issued to Kidron Corporate Advisors LLC, an affiliate of Mark B.
Segall.
49
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 200,000,000 shares of Common
Stock, $0.01 par value per share. As of November 30, 2004, there were
outstanding:
o 50,722,050 shares of Common Stock, held of record by 927
stockholders; and
o 5,785,834 shares of Common Stock underlying options and
warrants.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Holders of Common Stock are entitled
to receive dividends declared by the board of directors out of funds legally
available for dividends. In the event of our liquidation, dissolution or winding
up, holders of Common Stock are entitled to share in all assets remaining after
payment of liabilities. Holders of Common Stock have no preemptive, conversion,
subscription or other rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
We currently have outstanding an aggregate of 50,722,050 shares of
Common Stock. 46,802,150 of these shares are restricted securities under Rule
144. The number of these shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act. In general, under
Rule 144 as currently in effect, beginning 90 days after the date of this
prospectus, a person (or persons whose shares are aggregated), including any of
our affiliates, who has beneficially owned restricted shares for at least one
year (including the holding period of any prior owner, except if the prior owner
was an affiliate) will be entitled to sell, within any three-month period a
number of shares that does not exceed the greater of: (a) one percent of the
number of shares of Common Stock then outstanding (which will equal
approximately 507,220 shares upon completion of this offering); or (b) the
average weekly trading volume of our Common Stock on the Nasdaq Over-the-Counter
Bulletin Board during the four calendar weeks preceding the filing of a notice
on Form 144 with respect to the sale. Sales of restricted securities pursuant to
Rule 144 are also subject to requirements relating to manner of sale notice and
the availability of current public information about us. Sales of substantial
amounts of our Common Stock in the public market could adversely affect the
market price of our Common Stock. We cannot estimate the number of shares of
Common Stock that may be sold by third parties in the future because such sales
will depend on market prices, the circumstances of sellers and other factors.
50
SELLING STOCKHOLDERS
PRINCIPAL STOCKHOLDER
Our Board of Directors has made a determination to allow Ren Investment
International, Ltd. ("Ren"), one of our principal stockholders, to register a
portion of its shares for resale. The following table sets forth as of November
30, 2004, information regarding the current beneficial ownership of our Common
Stock by Ren and its beneficial ownership assuming sale of all of the shares of
Common Stock offered hereby. Ren is owned by certain of our employees, however,
Jeffrey Kang does not own any shares of Ren. For a description of our
relationship with Ren, see "Principal Stockholders."
Number of Shares
Shares Maximum Number Beneficially Percentage
Name of Beneficially Owned of Shares Owned Ownership After
Selling Stockholder Prior to Offering to be Sold After Offering Offering
------------------- ----------------- ---------- -------------- --------
Ren Investment International, Ltd. 10,935,580 3,700,000 7,235,580 14.26%
WARRANTS AND OPTIONS
Prior to the share exchange, Trident granted warrants to purchase up to
1,850,834 shares of Common Stock and options to purchase up to 230,000 shares of
Common Stock. The holders of these warrants and options were granted piggyback
registration rights with respect to the underlying shares of Common Stock. The
following table sets forth as of November 30, 2004, information regarding the
current beneficial ownership of our Common Stock by these warrant and option
holders and their beneficial ownership assuming the sale of all of the
underlying shares of Common Stock.
No selling stockholder listed below has held any position, office, nor
had any material relationship with the Company or any of its predecessors or
affiliates during the past three years, except for Messrs. Hauser and Segall,
who are current directors, and Messrs. Arbib, Bulgari and Chase who were
previously directors and/or officers of Trident.
Number of
Shares, Warrants
Number of Shares, Maximum Number and Options
Warrants and Options of Underlying Beneficially Percentage
Name of Beneficially Owned Shares Owned Ownership After
Selling Stockholder Prior to Offering to be Sold After Offering Offering
------------------- ----------------- ---------- -------------- --------
Simtov LDC
Mark Hauser
Gianni Bulgari
Kidron Corporate Advisors LLC
William Spier
Centro Internationale Handelsbank AG
Hess Investment Fund
David Tobey
Phillip Kendall
Jo-Jo El Investors LP
SG Private Banking (Suisse) SA
FAI General Insurance Company Limited
Kabuki Partners, ADP, GP
Emanuel Arbib
Nick Speyer
Mark Segall
Howard Chase
51
PRIVATE PLACEMENT
On each of October 27 and November 5, 2004, we completed a private
placement in which we sold an aggregate of 6,300,000 shares of Common Stock. C.
E. Unterberg Towbin acted as lead placement agent in connection with the
offering and received a 6% placement fee. We are filing this registration
statement pursuant to the terms of a securities purchase agreement between each
investor and us. We also agreed to bear expenses in connection with the
registration and sale of the shares. See "Plan of Distribution."
The following table sets forth as of November 30, 2004, information
regarding the current beneficial ownership of our Common Stock by the investors
in the private placement and their beneficial ownership assuming sale of all of
the shares of Common Stock offered hereby. Information as to current ownership
is based upon information provided to us by the selling stockholders, which we
have not independently verified. The selling stockholders are not making any
representation that the shares covered by this prospectus will be offered for
sale.
No selling stockholder listed below has held any position, office, nor
had any material relationship with the Company or any of its predecessors or
affiliates during the past three years with the exception of Unterberg as
described above.
Number of Shares
Shares Maximum Number Beneficially Percentage
Name of Beneficially Owned of Shares Owned Ownership After
Selling Stockholder Prior to Offering to be Sold After Offering Offering
------------------- ----------------- ---------- -------------- --------
Renaissance US Growth Investment Trust PLC 960,000 960,000 0 0
BFS US Special Opportunities Trust PLC 960,000 960,000 0 0
Renaissance Capital Growth & Income Fund
III, Inc. 480,000 480,000 0 0
SF Capital Partners Ltd. 1,150,000 1,150,000 0 0
Shea Ventures, LLC 1,165,000 1,165,000 0 0
Cordillera Fund L.P. 265,000 265,000 0 0
Leaf Investment Partners, L.P. 366,250 366,250 0 0
Leaf Offshore Investment Fund, Ltd. 103,750 103,750 0 0
Basso Multi-Strategy Holding Fund Ltd. 211,750 211,750 0 0
Basso Private Opportunity Holding Fund Ltd. 63,250 63,250 0 0
C.E. Unterberg, Towbin Capital Partners I,
L.P. 619,300 619,300 0 0
Peter John Lee 5,700 5,700 0 0
Lake Street Fund, L.P. 90,000 90,000 0 0
MPFV, LLC 125,000 125,000 0 0
Nite Capital L.P. 125,000 125,000 0 0
Turkel Partners, L.P. 50,000 50,000 0 0
Richard M. Chong 16,000 16,000 0 0
William Shelander 4,000 4,000 0 0
Stuart Shapiro Money Purchase Plan 20,000 20,000 0 0
Stephen R. Rizzone 25,000 25,000 0 0
52
PLAN OF DISTRIBUTION
We are registering the Common Stock on behalf of the above selling
stockholders. The selling stockholders are offering shares of Common Stock that
they received in connection with the private placement. As used in this
prospectus, the term "selling stockholders" includes pledgees, transferees or
other successors-in-interest selling shares received from the selling
stockholders as pledgors, assignees, borrowers or in connection with other
non-sale-related transfers after the date of this prospectus. This prospectus
may also be used by transferees of the selling stockholders, including
broker-dealers or other transferees who borrow or purchase the shares to settle
or close out short sales of shares of Common Stock. The selling stockholders
will act independently of us in making decisions with respect to the timing,
manner and size of each sale or non-sale related transfer. We will not receive
any of the proceeds of such sales by the selling stockholders.
The selling stockholders may sell their shares of Common Stock directly
to purchasers from time to time. Alternatively, they may from time to time offer
the Common Stock to or through underwriters, broker/dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the selling stockholders or the purchasers of such securities
for whom they may act as agents. The selling stockholders and any underwriters,
broker/dealers or agents that participate in the distribution of Common Stock
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any profit on the sale of such
securities and any discounts, commissions, concessions or other compensation
received by any such underwriter, broker/dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The selling stockholders have informed us
that they do not have any agreement or understanding, directly or indirectly,
with any person to distribute the Common Stock.
The Common Stock may be sold by the selling stockholders from time to
time in one or more transactions at or on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. The sales
may be made at fixed prices, at prevailing market prices at the time of sale, at
varying prices determined at the time of sale or at negotiated prices. The sale
of the Common Stock may be affected by means of one or more of the following
transactions (which may involve cross or block transactions):
o a block trade in which the broker-dealer so engaged will
attempt to sell such shares as agent, but may position and
resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
o transactions on any exchange or quotation service on which the
shares may be listed or quoted at the time of sale in
accordance with the rules of the applicable exchange;
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o privately negotiated transactions;
o transactions through the settlement of short sales;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale;
53
o transactions through the writing or settlement of options or
other hedging transactions, whether through an options
exchange or otherwise; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 of the
Securities Act, if available, rather than under this prospectus. To the extent
required, this prospectus may be amended and supplemented from time to time to
describe a specific plan of distribution.
Broker-dealers engaged by the selling stockholders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchase of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders may also enter into option or other
transactions with broker-dealers, or other financial institutions for the
creation of one or more derivative securities, which require the delivery to
such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
In connection with the sale of the Common Stock or otherwise, the
selling stockholders may enter into hedging transactions with broker/dealers of
other financial institutions, which may in turn engage in short sales of the
Common Stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our Common Stock short and deliver these
shares to close out such short positions, or loan or pledge Common Stock to
broker/dealers that in turn may sell such securities.
The selling stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the Common Stock by the
selling stockholders. The foregoing may affect the marketability of such
securities.
Pursuant to the registration rights agreement with the selling
stockholders, all expenses of the registration of the Common Stock will be paid
by us, including, without limitation, SEC filing fees; provided, however, that
the selling stockholders will pay any broker or similar commissions, or, except
to the extent otherwise provided for, any legal fees or other costs of the
selling stockholders. The selling stockholders will be indemnified by us against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith. We will be
indemnified by the selling stockholders severally against certain civil
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith.
To comply with the securities laws of certain jurisdictions, if
applicable, the Common Stock will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers.
54
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act, with respect to the Common Stock offered by this prospectus.
As permitted by the rules and regulations of the SEC, this prospectus, which is
a part of the registration statement, omits various information, exhibits,
schedules and undertakings included in the registration statement. For further
information pertaining to us and the Common Stock offered under this prospectus,
reference is made to the registration statement and the attached exhibits and
schedules. Although required material information has been presented in this
prospectus, statements contained in this prospectus as to the contents or
provisions of any contract or other document referred to in this prospectus may
be summary in nature, and in each instance reference is made to the copy of this
contract or other document filed as an exhibit to the registration statement,
and each statement is qualified in all respects by this reference.
A copy of the registration statement may be inspected without charge at
the public reference facilities maintained by the SEC at the Public Reference
Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any part
of the registration statement may be obtained from the SEC's offices upon the
payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the Public Reference facilities. In
addition, registration statements and certain other filings made with the
commission through its Electronic Data Gathering, Analysis and Retrieval system,
including our registration statement and all exhibits and amendments to our
registration statement, are publicly available through the SEC's website at
www.sec.gov.
After this offering, we will have to provide the information and
reports required by the Securities Exchange Act of 1934, as amended, and we will
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission.
LEGAL MATTERS
The validity of the shares of Common Stock offered in this prospectus
will be passed upon for us by Loeb & Loeb LLP, New York, New York.
EXPERTS
The consolidated financial statements for the years ended December 31,
2003, 2002, and 2001 included in this prospectus and the related financial
statement schedules included elsewhere in the registration statement have been
audited by Deloitte Touche Tohmatsu, an independent registered public accounting
firm, as stated in their reports appearing herein and elsewhere in the
registration statement (which report expresses an unqualified opinion and
includes explanatory paragraphs relating to a series of transactions to
restructure the organization of the entities owned by the Shareholders which
were accounted for at historical cost and the translation of Renminbi into
United States dollars for the convenience of the reader), and have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
55
12,080,834 SHARES
COMTECH GROUP, INC.
COMMON STOCK
PROSPECTUS
__________________________, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by Comtech Group,
Inc. (the "Registrant") in connection with the sale of the Common Stock being
registered, other than underwriting commissions and discounts. All amounts are
estimates, except for the SEC registration fee, the NASD filing fee and the
Nasdaq National Market listing application fee.
Amount to Be Paid
-----------------------
SEC registration fee $ 3,554.79
Nasdaq National Market listing application fee 5,000.00
Blue sky qualification fees and expenses *
Printing and engraving expenses *
Legal fees and expenses *
Accounting fees and expenses *
Transfer agent and registrar fees *
Miscellaneous *
-----------------------
Total $ *
=======================
- ----------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Maryland General Corporation Law permits a Maryland corporation to
include in its charter a provision eliminating the liability of its directors
and officers to the corporation and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) acts committed in bad faith or active and
deliberate dishonesty established by a final judgment as being material to the
cause of action. The Company's charter contains such a provision which
eliminates such liability to the maximum extent permitted by Maryland law.
The Company's charter authorizes the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonably expenses in advance of final disposition of a proceeding to
(1) any present or former director or officer or (2) any individual who, while a
director and at the Company's request, serves or has served another corporation,
real estate investment trust, partnership, joint venture, trust, employee
benefit plan or other enterprise from and against any claim or liability to
which he or she may become subject or which he or she may incur by reason of his
or her service in such capacity. The Company's bylaws obligate it, to the
maximum extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer who is made party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director or officer of the Company and at the request of the Company, serves or
has served another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
II-1
officer, partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity,
against any claim or liability to which he may become subject by reason of such
status. The Company's charter and bylaws also permit the Company to indemnify
and advance expenses to any person who served a predecessor of the Company in
any of the capacities described above and to any employee or agent of the
Company or a predecessor of the Company. The Maryland General Corporation Law
requires a corporation (unless its charter provides otherwise, which the
Company's charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he or she is made, or threatened to be made, a party by reason of his or
her service in that capacity. The Maryland General Corporation Law permits a
corporation to indemnify its directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceedings to which they may be made,
or are threatened to be made, a party by reason of their service in those or
other capacities unless it is established that (a) the act or omission of the
director or officer was material to the matter giving rise to the proceedings
and (1) was committed in bad faith or (2) was the result of active and
deliberate dishonesty, (b) the director or officer actually received an improper
personal benefit in money, property or services or (c) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the Maryland General
Corporation Law, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation or for a judgment of
liability on the basis that personal benefit was improperly received, unless in
either case a court orders indemnification and then only for expenses. In
accordance with the Maryland General Corporation Law, the Company's bylaws
require it, as a condition to advancing expenses, to obtain (1) a written
affirmation by the director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for indemnification by the
Company as authorized by the Company's bylaws and (2) a written statement by or
on his or her behalf to repay the amount paid or reimbursed by the Company if it
shall ultimately be determined that the standard of conduct was not met.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information regarding sales of the
registrant's unregistered securities during the last three years:
On July 22, 2004, the registrant issued 40,502,150 shares of Common
Stock pursuant to a share exchange agreement with Comtech Group, a Cayman
Islands company ("Comtech") and Comtech's three shareholders.
On each of October 29 and November 5, 2004, we consummated a private
placement of 6,300,000 shares of our Common Stock to a group of institutional
and individual accredited investors at a purchase price of $1.75 per share for
aggregate consideration of $11,025,000.
All of the above-described issuances were exempt from registration
pursuant to Section 4(2) of the Securities Act, or Regulation D or Rule 144A
promulgated thereunder, as transactions not involving a public offering. With
respect to each transaction listed above, no general solicitation was made by
either us or any person acting on our behalf; the securities sold are subject to
transfer restrictions; and the certificates for the shares contained an
appropriate legend stating such securities have not been registered under the
Securities Act and may not be offered or sold absent registration or pursuant to
an exemption therefrom. No underwriters were involved in connection with the
sales of securities referred to in this Item 15.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) EXHIBITS.
3.1 Amended Articles of Restatement of the Articles of
Incorporation (1)
3.1(a)+ Amendments to Articles of Incorporation
3.2+ Form of Bylaws
4.1* Specimen Stock Certificate
5.1* Opinion of Loeb & Loeb LLP
10.1+ Comtech Group, Inc. 2004 Incentive Stock Option Plan
10.2+ Employment Agreement with Hope Ni, dated as of August 1, 2004
21.1+ List of Subsidiaries of the Registrant.
23.1+ Consent of Deloitte Touche Tohmatsu, Independent Registered
Public Accounting Firm.
23.2* Consent of Loeb & Loeb LLP. Reference is made to Exhibit 5.1.
24.1+ Power of Attorney. Reference is made to page II-4.
- -------------
* To be filed by amendment.
+ Filed herewith
(1) Incorporated by reference to Exhibit 3.1 of the Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 filed with the Securities and
Exchange Commission on April 15, 1997,
(b) Financial statement schedules.
All schedules are omitted because they are not required, are not
applicable or the information is included in our financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(a) (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 of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) of Regulation S-K if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
II-3
PROVIDED, HOWEVER, That paragraphs (i) and (ii) above do not apply if the
registration statement is on Form S-3, and the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purpose of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act of 1933 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 the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of the
issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized on December 22, 2004.
By: /s/ Jeffrey Kang
-----------------------------------------
Jeffrey Kang, Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jeffrey Kang and Hope Ni, and each of
them (with full power of each to act alone), severally, as his or her true and
lawful attorneys-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place, and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments, exhibits thereto and other documents in connection therewith) to
this Registration Statement and any subsequent registration statement filed by
the registrant pursuant to Rule 462(b) of the Securities Act of 1933, as
amended, which relates to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-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 connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agent, or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jeffrey Kang Chief Executive Officer and Chairman of the December 22, 2004
- ------------------------- Board of Directors
Jeffrey Kang (Principal Executive Officer)
/s/ Li Zhou Chief Technical Officer and Director December 22, 2004
- -------------------------
Li Zhou
/s/ Amy Kong Director December 22, 2004
- -------------------------
Amy Kong
/s/ Q.Y. Ma Director December 22, 2004
- -------------------------
Q.Y. Ma
Director December 22, 2004
- -------------------------
Jason Kim
/s/ Mark S. Hauser Director December 22, 2004
- -------------------------
Mark S. Hauser
/s/ Mark B. Segall Director December 22, 2004
- -------------------------
Mark B. Segall
/s/ Hope Ni Chief Financial Officer December 22, 2004
- ------------------------- (Principal Financial Officer)
Hope Ni
II-5
COMTECH GROUP
- -------------
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -----------------------------------------------------------
CONTENTS PAGE(S)
- -------- -------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 1
CONSOLIDATED BALANCE SHEETS F - 2
CONSOLIDATED STATEMENTS OF OPERATIONS F - 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY F - 4
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 6 - F - 16
COMTECH GROUP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF COMTECH GROUP
- -----------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Comtech Group
and its subsidiaries (the "Company") as of December 31, 2003, 2002 and 2001 and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years 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 audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2003, 2002 and 2001, and the results of its operations and its cash flows for
each of the three years then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company has
entered into a series of transactions to restructure the organisation of the
entities owned by the Shareholders and those transactions were accounted for at
historical cost.
Our audit also comprehended the translation of Renminbi amounts into United
States dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2. Such United States dollar amounts
are presented solely for the convenience of the readers in the United States of
America.
/s/ DELOITTE TOUCHE TOHMATSU
DELOITTE TOUCHE TOHMATSU
Certified Public Accountants
Hong Kong
August 18, 2004 except for Note 11,
which is dated December 17, 2004
F-1
COMTECH GROUP
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2003, 2002 AND 2001
- -----------------------------------------------------------------------------------
(in thousands, except shares and per share amounts)
2003 2003 2002 2001
-------- -------- -------- --------
USD RMB RMB RMB
ASSETS
Current assets:
Cash 3,707 30,683 12,194 30,066
Trade accounts receivable, net
of allowance for doubtful
accounts of USD501 (RMB4,145)
- 2003; RMB190 - 2002; RMB58 - 2001 11,146 92,259 67,597 45,048
Bills receivable 1,607 13,306 6,142 1,000
Other trade receivables 278 2,297 1,513 873
Amount due from other related party -- -- 298 298
Inventories 2,217 18,350 6,913 949
-------- -------- -------- --------
Total current assets 18,955 156,895 94,657 78,234
Property and equipment, net 358 2,961 2,371 2,446
Other assets 41 344 44 44
-------- -------- -------- --------
399 3,305 2,415 2,490
-------- -------- -------- --------
TOTAL ASSETS 19,354 160,200 97,072 80,724
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 5,384 44,564 55,701 51,738
Amount due to holding company 6,084 50,356 5,144 --
Amount due to other related party 192 1,592 3,165 4,497
Dividend payable 5,000 41,387 -- --
Income tax payable 109 902 86 184
Accrued expenses and other liabilities 453 3,745 2,418 3,048
-------- -------- -------- --------
Total current liabilities 17,222 142,546 66,514 59,467
-------- -------- -------- --------
Shareholders' equity(note 11):
Common stock 405 3,352 3,352 3,352
Additional paid-in capital 1,296 10,731 10,731 10,648
Retained earnings 431 3,571 16,475 7,257
-------- -------- -------- --------
Total shareholders' equity 2,132 17,654 30,558 21,257
-------- -------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 19,354 160,200 97,072 80,724
======== ======== ======== ========
- ----------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-2
COMTECH GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
2003 2003 2002 2001
------------ ------------ ------------ ------------
USD RMB RMB RMB
Net revenues 43,227 357,805 207,607 171,721
Cost of revenue (37,082) (306,939) (190,265) (159,244)
------------ ------------ ------------ ------------
Gross profit 6,145 50,866 17,342 12,477
Selling, general and administrative expenses (2,457) (20,341) (7,461) (7,911)
------------ ------------ ------------ ------------
Income from operations 3,688 30,525 9,881 4,566
Interest expense (97) (801) -- (9)
Interest income 6 54 157 175
------------ ------------ ------------ ------------
Income before income tax 3,597 29,778 10,038 4,732
Income tax 156 1,295 820 825
------------ ------------ ------------ ------------
Net income 3,441 28,483 9,218 3,907
============ ============ ============ ============
Basic and diluted earnings per share 0.08 0.70 0.23 0.10
============ ============ ============ ============
Weighted average number of ordinary
shares outstanding, basic and diluted
(note 11) 40,502,150 40,502,150 40,502,150 40,502,150
============ ============ ============ ============
See notes to consolidated financial statements.
F-3
COMTECH GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------
(in thousands, except shares and per share amounts)
Additional Total
paid-in Retained shareholders'
Common stock capital earnings equity
------------------------ ----------- ----------- -----------
Number of shares RMB RMB RMB RMB
(note 11) (note 11) (note 11)
Balance at January 1, 2001 (note 11) 40,502,150 3,352 10,648 3,350 17,350
Net income -- -- -- 3,907 3,907
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 40,502,150 3,352 10,648 7,257 21,257
Additional paid-in capital -- -- 83 -- 83
Net income -- -- -- 9,218 9,218
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 40,502,150 3,352 10,731 16,475 30,558
Dividend -- -- -- (41,387) (41,387)
Net income -- -- -- 28,483 28,483
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 40,502,150 3,352 10,731 3,571 17,654
=========== =========== =========== =========== ===========
Balance at December 31, 2003
(in thousands of USD) 405 1,296 431 2,132
=========== =========== =========== ===========
See notes to consolidated financial statements.
F-4
COMTECH GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------------------------------------
(in thousands)
2003 2003 2002 2001
------------ ------------ ------------ ------------
USD RMB RMB RMB
Cash flows from operating activities:
Net income 3,441 28,483 9,218 3,907
Adjustment to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation expense 51 427 455 370
Changes in operating assets and
liabilities:
Trade accounts receivable (2,979) (24,662) (22,549) (37,417)
Bills receivable (865) (7,164) (5,142) (1,000)
Inventories (1,381) (11,437) (5,964) 2,687
Other trade receivables (95) (784) (640) (549)
Amount due from other related party 36 298 -- (298)
Trade accounts payable (1,345) (11,137) 3,963 45,726
Accrued expenses and other
liabilities 160 1,327 (630) 1,640
Amount due to other related party (190) (1,573) (1,332) 2,825
Income tax payable 98 816 (98) (943)
------------ ------------ ------------ ------------
Cash (used in) provided by operating
activities (3,069) (25,406) (22,719) 16,948
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (123) (1,017) (380) (2,258)
Increase in other assets (36) (300) -- --
------------ ------------ ------------ ------------
Cash used in investing activities (159) (1,317) (380) (2,258)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Capital contribution -- -- 83 --
Amount received from holding company 5,462 45,212 5,144 --
Amount due to other related party -- -- -- 1,672
------------ ------------ ------------ ------------
Cash provided by financing activities 5,462 45,212 5,227 1,672
------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 2,234 18,489 (17,872) 16,362
Cash at beginning of the year 1,473 12,194 30,066 13,704
------------ ------------ ------------ ------------
Cash at end of the year 3,707 30,683 12,194 30,066
============ ============ ============ ============
Supplemental disclosure of cash flows information:
Cash paid for:
Interest 97 801 -- 9
============ ============ ============ ============
Income taxes 58 479 918 1,297
============ ============ ============ ============
See notes to consolidated financial statements.
F-5
COMTECH GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands, except shares and per share amounts)
1. ORGANIZATION AND NATURE OF OPERATIONS
Comtech Group and its subsidiaries (together, the "Company") uses
advanced technology to process and sell telecommunication system
equipment, handset components and produce network protection devices in
the People's Republic of China ("PRC").
Ms. Ji Nan and Mr. Kang Jing Wei (together, the "Shareholders") owned
79% (of which 8% was acquired from another party on June 25, 2002) and
21%, respectively, of the outstanding ordinary shares of the Company.
The Shareholders held the equity interest of the Company through a
holding company, Comtech Global Investment Ltd.
As of December 31, 2003, the ownership structure of the Company is as
follows:
-------------------------------
Comtech Group
(established on April 26, 2002
in the Cayman Islands)
-------------------------------
|
- ------------------------------- -----------------------
Comtech (China) Holding Limited Comtech (Hong Kong)
("Comtech China") Holding Limited
("Comtech Holding")
(established on May 27, 2002
in the British Virgin Islands ("BVI")) (established on May 27,
2002 in the BVI)
- -------------------------------------- -----------------------
| | |
| | |
- ------------------- --------------- -----------------
Shenzhen Comtech Comtech Communication Comtech
International Technology (Shenzhen) International
Limited Company Limited (Hong Kong)
("Shenzhen ("Comtech Communication") Limited
Comtech") ("Comtech
(established on Hong Kong")
(established on July 23, 2002 in the PRC)
July 4, 1996 in (established
the PRC) on July 14,
2000
in Hong
Kong)
- ------------------- --------------- -----------------
F-6
COMTECH GROUP
1. ORGANIZATION AND NATURE OF OPERATIONS - continued
The Company, prior to the incorporation of the Comtech Group, conducted
its business through Shenzhen Comtech, which then wholly owned Comtech
Hong Kong. The Shareholders reorganized the Group; the reorganization
consisted of the following: (i) incorporation of the Comtech Group;
(ii) establishment of Comtech China and Comtech Holding as wholly owned
subsidiaries of the Comtech Group; (iii) establishment of Comtech
Communication as a wholly owned subsidiary of Comtech China, (iv)
transfer of the ownership in Comtech Hong Kong from Shenzhen Comtech to
Comtech Holding on August 28, 2002, and (v) transfer of the direct
ownership in Shenzhen Comtech by the Shareholders of Shenzhen Comtech.
The Shareholders, on December 30, 2003, transferred to Comtech China
their direct ownership interests in Shezhen Comtech at no
consideration.
Pursuant to the foregoing transfer of the direct ownership in Shenzhen
Comtech, the Shareholders and Comtech China entered into a Trusteeship
Agreement whereby the parties acknowledge that the ownership interest
in Shenzhen Comtech are being held by the Shareholders on behalf of
Comtech China.
The transactions described in the two preceding paragraphs represent a
reorganization of companies under common control and were accounted for
at historical cost. The accompanying consolidated financial statements
reflect the historical result of operations and cash flows of the
Company during each respective period and include the results of
operations and cash flows of Shenzhen Comtech and Comtech Hong Kong
from January 1, 2001. The consolidated balance sheet as of December 31,
2001 represents the consolidated assets and liabilities of Shenzhen
Comtech and Comtech Hong Kong. The share capital of Shenzhen Comtech
was accounted for as additional equity contribution by the Shareholders
and was presented in shareholders' equity as "Additional paid-in
capital".
The Company participates in a dynamic high technology industry and
believes that changes in any of the following areas could have a
material adverse effect on the Company's future financial position,
results of operations, or cash flows: changes in the overall demand for
telecommunication system equipment; competitive pressures due to excess
capacity or price reductions; advances and trends in new technologies
and industry standards; changes in key suppliers; changes in certain
strategic relationships or customer relationships; regulatory or other
factors; risks associated with the ability to obtain necessary raw
materials; and risks associated with the Company's ability to attract
and retain employees necessary to support its growth.
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America ("US GAAP").
Principle of consolidation
--------------------------
The consolidated financial statements include the financial statements
of Comtech Group and its subsidiaries. All significant intercompany
transactions and balances are eliminated in consolidation.
F-7
COMTECH GROUP
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued
Use of Estimates
----------------
The preparation of financial statements 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 reported period. Actual results could
differ from those estimates.
Cash
----
Cash consisted of cash in bank and the Company does not have any cash
equivalents.
Trade accounts receivable
-------------------------
Trade accounts receivable are stated at the nominal value and are
reduced by appropriate allowances for estimated irrecoverable amounts.
Bills receivable
----------------
Bills receivable are unsecured, non-interest bearing and redeemable
from the banks without recourse.
Property and equipment
----------------------
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on a straight-line basis over
the estimated useful lives of the assets. Estimated useful lives of
property and equipment are as follows:
Office building 10 years
Machinery 5 years
Furniture and office equipment 5 years
Motor vehicles 5 years
Major improvements of property and equipment are capitalized, while
expenditures for repairs, maintenance and minor renewals and
betterments are expensed.
Inventories
-----------
Inventories, which primarily consist of telecommunication system
equipment, handset components and network protection devices, are
stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
F-8
COMTECH GROUP
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued
Long-lived assets
-----------------
The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable according to FAS144 "Accounting for
the Impairment or Disposal of Long-Lived Assets". Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of the assets to future undiscounted net cash flows expected to
be generated by use of the assets. If the carrying amounts of
long-lived assets are not recoverable, the impairment loss to be
recognized is measured by the amount by which the carrying amounts of
the assets exceed their fair values. No impairment loss was recorded
for all periods presented.
Income taxes
------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amounts
of existing assets and liabilities and their respective tax bases as
well as operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Valuation allowances are established when it is more likely than not
that some or all of the deferred tax assets will not be realized.
Revenue recognition
-------------------
Sales of telecommunication system equipment, handset components and
network protection devices are recorded when the equipment is
delivered, title has passed to the customers and the Company has no
further obligations to provide services related to the operation of
such equipment. Revenue is recorded net of value added tax incurred.
Such value added taxes amounted to RMB41,693 (USD5,037), RMB21,075, and
RMB20,259, for the years ended December 31, 2003, 2002 and 2001,
respectively.
Cost of revenue
---------------
Cost of revenue includes purchase costs and shipping and handling costs
for products sold, and direct costs associated with the delivery of the
equipment, including salaries, employee benefits and overhead costs
associated with employees providing the related services.
Foreign currency translation
----------------------------
The functional currency of the Company is the Renminbi ("RMB").
Transactions in other currencies are recorded in RMB at the rates of
exchange prevailing when the transactions occur. Monetary assets and
liabilities denominated in other currencies are translated into RMB at
rates of exchange in effect at the balance sheet dates. Exchange gains
and losses are recorded in the consolidated statements of operations as
a component of current period earnings and were insignificant.
F-9
COMTECH GROUP
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued
Translation into United States Dollars
--------------------------------------
The financial statements of the Company are stated in RMB. The
translation of RMB amounts at and for the year ended December 31, 2003
into United States dollars ("USD") are included solely for the
convenience of readers and have been made at the rate of RMB 8.2773 to
USD 1. Such translations should not be construed as representations
that RMB amounts could be converted into USD at that rate or any other
rate.
Fair value of financial instruments
-----------------------------------
The carrying amounts of cash, trade receivables, bills receivable,
other receivables and accounts payable approximate their fair values
due to the short-term maturity of these instruments.
Foreign Currency Risk
---------------------
The RMB is not a freely convertible currency. The State Administration
for Foreign Exchange, under the authority of the People's Bank of
China, controls the conversion of Renminbi into foreign currencies. The
value of the RMB is subject to changes in central government policies
and to international economic and political developments affecting
supply and demand in the China Foreign Exchange Trading System market.
The PRC subsidiaries conduct their business substantially in the PRC,
and their financial performance and position are measured in terms of
RMB. Any devaluation of the RMB against the United States dollar would
consequently have an adverse effect on the financial performance and
asset values of the Company when measured in terms of United States
dollar. The PRC subsidiaries' products are primarily sold and delivered
in the PRC for RMB. Thus, their revenues and profits are predominantly
denominated in RMB. Should the RMB devalue against United States
dollar, such devaluation could have a material adverse effect on the
Company's profits and the foreign currency equivalent of such profits
repatriated by the PRC entities to the Company.
Concentration of credit risk
----------------------------
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, and accounts receivable. The Company places its cash and
cash equivalents with financial institutions with high-credit ratings
and quality.
The Company conducts credit evaluations of customers and generally does
not require collateral or other security from its customers. The
Company establishes an allowance for doubtful accounts primarily based
upon the age of the receivables and factors surrounding the credit risk
of specific customers.
Comprehensive income
--------------------
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
During the years presented, the Company's comprehensive income
represents its net income.
F-10
COMTECH GROUP
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued
Research and development expenses
---------------------------------
Expenditure on research activities is recognised as an expense in the
period in which it is incurred. These expenditures amounted to RMB983
(USD119), RMB1,042 and RMB1,928 for the years ended December 31, 2003,
2002 and 2001, respectively.
Earnings per share
------------------
Basic earnings per share is computed by dividing net income
attributable to ordinary shareholders by the weighted average number of
ordinary shares outstanding during the year. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue ordinary shares were exercised into ordinary shares.
Ordinary share equivalents are excluded from the computation of the
diluted earnings per share in periods when their effect would be
anti-dilutive. There were no dilutive potential ordinary shares in
issue during the years presented.
Recently Issued Accounting Pronouncements
-----------------------------------------
In November 2002, EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides
guidance on how to account for arrangements that involve the delivery
or performance of multiple products, services and/ or rights to use
assets. The provisions of EITF Issue No. 00-21 applied to revenue
arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF Issue No. 00-21 did not have a material
impact on the Company's results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires that guarantors recognise, at the inception of the
guarantee, a liability for the fair value of the guarantee. In
addition, FIN 45 clarifies the disclosures required of guarantors for
certain guarantees that it has issued. The recognition and measurement
criteria of this Interpretation are to be applied prospectively to
guarantees issued or modified after December 31, 2002. The recognition
and measurement criteria of FIN 45 did not have a material impact on
the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". It establishes standards for how an issuer classifies and
measures certain financial instruments. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after September 15, 2003. It requires that certain financial
instruments that, under previous guidance, could be accounted for as
equity be classified as liabilities, or assets in some circumstances.
It does not apply to features embedded in a financial instrument that
is not a derivative in its entirety. SFAS No. 150 also requires
disclosures about alternative ways of settling the instruments and the
capital structure of entities whose shares are mandatory redeemable.
The adoption of SFAS No. 150 did not have an impact on the Company's
results of operations or financial position.
F-11
COMTECH GROUP
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued
Recently Issued Accounting Pronouncements - continued
-----------------------------------------
In January 2003, the FASB issued FIN No. 46 (revised), "Consolidation
of Variable Interest Entities - an Interpretation of Accounting
Research Bulletin No. 51". FIN No. 46 (revised) requires the primary
beneficiary to consolidate a variable interest entity if it has a
variable interest that will absorb a majority of the entity's expected
losses if they occur, receive a majority of the entity's expected
residual returns if they occur, or both. FIN No. 46 (revised) applies
immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which the entity obtains an
interest after that date. For variable interest entities acquired
before February 1, 2003, the effective date for the Company is January
1, 2004. The Company believes the adoption of FIN No. 46 (revised) did
not have a material impact on its results of operations or financial
position.
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement
133 on Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative
instruments, including derivatives embedded in other contracts and
hedging activities. SFAS No. 149 amends SFAS No. 133 for decisions made
by the FASB as part of its Derivatives Implementation Group process.
SFAS No. 149 also amends SFAS No. 133 to incorporate clarifications of
the definition of a derivative. SFAS No. 149 is effective for contracts
entered into or modified and hedging relationships designated after
June 30, 2003. The provisions of SFAS No. 149 did not have a material
impact on the Company's financial position, results of operations, or
cash flows.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2003 2003 2002 2001
------ ------ ------ ------
USD RMB RMB RMB
Office building 202 1,672 1,672 1,672
Machinery 9 76 53 51
Furniture and office equipment 130 1,073 755 377
Motor vehicles 184 1,526 850 850
------ ------ ------ ------
Total 525 4,347 3,330 2,950
Less: accumulated depreciation 167 1,386 959 504
------ ------ ------ ------
Property and equipment, net 358 2,961 2,371 2,446
====== ====== ====== ======
4. INVENTORIES
2003 2003 2002 2001
------ ------ ------ ------
USD RMB RMB RMB
Raw materials 979 8,100 4,059 --
Finished goods 1,238 10,250 2,854 949
------ ------ ------ ------
2,217 18,350 6,913 949
====== ====== ====== ======
F-12
COMTECH GROUP
5. INCOME TAXES
The provision for income taxes consists of the following:
2003 2003 2002 2001
------ ------ ------ ------
USD RMB RMB RMB
PRC, excluding Hong Kong 143 1,187 740 808
Hong Kong 13 108 80 17
------ ------ ------ ------
156 1,295 820 825
====== ====== ====== ======
The subsidiaries that are incorporated in Cayman Islands and the
British Virgin Islands are not subject to income taxes under those
jurisdictions.
The PRC statutory tax rate is 33%. Shenzhen Comtech and Comtech
Communication are located in the Shenzhen Special Economic Zone in the
PRC, which is subject to a reduced tax rate of 15%. In addition,
Shenzhen Comtech is subject to a PRC preferential income tax rate at
7.5% in 2002 and 2003 while the income of Comtech Communication in 2002
and 2003 was exempt from the PRC income taxes. Comtech Hong Kong is
subject to Profit Taxes in Hong Kong at 16% in 2001 and 2002, and 17.5%
in 2003.
A reconciliation of income tax expense to the amount computed by
applying the PRC statutory tax rate to the income before income tax in
the consolidated statements of operations is as follows:
2003 2003 2002 2001
------ ------ ------ ------
USD RMB RMB RMB
Income before income tax 3,597 29,778 10,038 4,732
PRC statutory tax rate 33% 33% 33% 33%
Income tax expense at PRC statutory
tax rate 1,187 9,827 3,313 1,562
Effect of concessionary tax rate in
the Shenzhen Special Economic Zone (692) (5,728) (1,712) (755)
Effect of preferential income tax rate 78 646 (713) --
Effect of tax exemptions granted
to a PRC subsidiary (622) (5,147) -- --
Effect of the different income tax
rate in other tax jurisdictions (11) (91) (90) (92)
Non-deductible (taxable) items 174 1,444 (4) (20)
Tax effect of utilisation of tax
losses not previously recognised -- -- -- (49)
Others 42 344 26 179
------ ------ ------ ------
156 1,295 820 825
====== ====== ====== ======
There was no significant deferred tax asset or liability as of December
31, 2003, 2002 and 2001.
F-13
COMTECH GROUP
6. COMMITMENTS
The Company has operating lease agreements principally for its office
facilities. Such leases have remaining terms of one to thirty-six
months. Rental expense was RMB958 (USD116), RMB418 and RMB388 for the
years ended December 31, 2003, 2002 and 2001, respectively.
Future minimum lease payments under non-cancellable operating lease
agreements as of December 31, 2003 were as follows:
2003 2003
-------- --------
USD RMB
Fiscal year
2004 114 944
2005 31 253
2006 14 116
-------- --------
Total 159 1,313
======== ========
7. RELATED PARTY BALANCES AND TRANSACTIONS
2003 2003 2002 2001
------ ------ ------ ------
USD RMB RMB RMB
Related Party Balances
----------------------
AMOUNT DUE FROM OTHER RELATED PARTY
Viewtran Technology Limited
("Viewtran") -- -- 298 298
====== ====== ====== ======
AMOUNT DUE TO OTHER RELATED PARTY
Matsunichi Electronics (Hong Kong)
Limited ("Matsunichi")
192 1,592 3,165 4,497
====== ====== ====== ======
Mr. Kang Jing Wei has a controlling interest in Viewtran and Matsunichi.
AMOUNT DUE TO HOLDING COMPANY
Comtech Global Investment Ltd. 6,084 50,356 5,144 --
====== ====== ====== ======
The amount due to other related party and amount due to holding company
represent cash advances to or from them and were unsecured, non-interest
bearing and had no fixed repayment terms.
F-14
COMTECH GROUP
7. RELATED PARTY BALANCES AND TRANSACTIONS - continued
Related party transaction
-------------------------
(a) The Company, in 2003, purchased products from Viewtran
totalling RMB5,456 (USD659).The Company sold these products on
behalf of Viewtran at the same price at which it purchased
those products. According to an agreement entered into between
the Company and Viewtran, the Company conducted these sales
and purchase transactions on behalf of Viewtran and the risk
and rewards as a result of these transactions are belonging to
Viewtran. Therefore, the sales, purchases, and the
corresponding receivables and payables related to the
foregoing transactions are not reflected in the accompanying
financial statements.
(b) The Company purchased an office building from Matsunichi at a
cash consideration of RMB1,672 in 2001 and paid technical
services fees of RMB1,620 to Matsunichi in 2001.
8. SHAREHOLDERS' EQUITY
Ordinary shares
---------------
The holders of those shares have the right to vote, receive dividends
and have liquidation rights in proportion to their shareholdings. There
are no contracts outstanding to issue additional ordinary shares of the
Company as of December 31, 2003, 2002 or 2001, respectively.
Statutory reserves
------------------
Shenzhen Comtech and Comtech Communication (being a limited company and
wholly foreign owned enterprise established in the PRC) are, pursuant
to PRC regulations, required to appropriate from their net profits (as
reported in their PRC statutory accounts) to certain statutory reserves
(namely, statutory surplus reserve and statutory public welfare
reserve). These reserves can only be used for specific purposes and are
not distributable as cash dividends. The balance of the statutory
reserves shown in the accounts of Shenzhen Comtech and Comtech
Communications amounted to RMB2,730 (USD330), RMB 2,730, and RMB 907 as
of December 31, 2003, 2002 and 2001, respectively.
Dividend
--------
There are no restrictions on dividends and the shareholders have the
right to receive dividends in proportion to their shareholding
percentages.
F-15
COMTECH GROUP
9. CONCENTRATIONS
Major customers
---------------
The Company has three customers which account for more than 10% of
total revenues as follows:
2003 2002 2001
-------- -------- --------
Company A 24% 30% 38%
Company B 14% -- --
Company C -- 12% --
The above three customers represents 21%, 40% and 34% of the balance of
trade receivable as of 2003, 2002 and 2001, respectively.
Major suppliers
---------------
The Company has five suppliers which account for more than 10% of total
purchases as follows:
2003 2002 2001
-------- -------- --------
Company A -- 54% 66%
Company B 30% -- --
Company C 15% -- --
Company D 14% -- --
Company E 11% -- --
The Company made purchases from Company A, which accounted for
approximately 54% and 66% of the total purchases for the years ended
2002 and 2001, respectively. The accounts payable from this supplier as
of each balance sheet date represents 87% in 2002 and 99% in 2001 of
the balance of trade accounts payable. A director of Comtech Hong Kong
is a shareholder of this supplier for which he held the shares on
behalf of an unrelated third party.
The payables to other four suppliers with the largest trade accounts
payable balances represent 77% of the balance of trade accounts payable
as of December 31 2003.
10. EMPLOYEE BENEFIT PLANS
Certain employees of the Company in the PRC are entitled to retirement
benefits calculated with reference to their salaries upon retirement
and their length of service in accordance with a PRC government-managed
retirement plan. The PRC government is directly responsible for the
payments of the benefits to these retired employees. The Company is
required to make contributions to the government-managed retirement
plan at 6.5% to 9% of the monthly basic salaries of certain employees.
The expense of such arrangements to the Company for the year ended
December 31, 2003, 2002 and 2001 was RMB179 (USD22), RMB87 and RMB26,
respectively.
The Company operates a Mandatory Provident Fund Scheme for all
qualifying employees in Hong Kong. The assets of the scheme are held
separately from those of the Company by trustees. The Company
contributes 5% of relevant payroll costs to the scheme, which
contribution is matched by employees. The contributions paid by the
Company for the years ended December 31, 2003, 2002 and 2001 were RMB34
(USD4), RMB36 and RMB15, respectively.
F-16
COMTECH GROUP
11. SUBSEQUENT EVENTS
On January 18, 2004, the Company signed an agreement to acquire a 60%
owned subsidiary, Shanghai E&T System Co., Ltd., in the PRC. The
Company contributed RMB1,200 (USD145) to this new subsidiary, which
represented 60% of the registered capital of this subsidiary.
On March 18, 2004, the Company established a 100% owned subsidiary,
Comtech Software Technology (Shenzhen) Co, Ltd., in the PRC. The
Company contributed RMB4,906 (USD600) to this new subsidiary, which
represented 100% of the registered capital.
On July 22, 2004, the Company and Trident Rowan Group, Inc.
("Trident"), a Maryland corporation, reached an agreement pursuant to
which, the Company transferred all of its equity to Trident and
Trident, in turn, issued to the Company's shareholders 40,502,150
shares of Trident's stock (the "Shares"). As a result of the
transaction, the Company became a wholly-owned subsidiary of Trident
and, upon the issuance of the Shares, the Company's shareholders owned
approximately 91.2% of Trident's issued and outstanding stock. Trident
then changed its name to Comtech Group, Inc. In addition, as a part of
the share exchange transaction with Trident, the Company assumed fully
vested options issued by Trident to purchase 230,000 shares of the
Company's common stock with an exercise price of USD 1.50 per share.
Also, as part of the share exchange transaction, the Company assumed
1,850,834 fully exercisable common stock warrants. Each warrant
represents the right to receive 1 share of the Company's common stock,
at an exercise price of USD1.50 per share for 968,903 common stock
warrants and USD1.25 per share for 881,931 common stock warrants. The
options and warrants assumed from Trident both expire on July 1, 2009.
The share exchange transaction was accounted for as a reverse
acquisition in which the Company was deemed to be the accounting
acquirer and Trident the legal acquirer. Because Trident was a
non-operating public shell company, no goodwill has been recorded in
connection with the transaction and the costs incurred in connection
with the transaction are charged directly to equity.
As a result of the share exchange transaction, the number of shares of
the Company has been retroactively restated to reflect the share
exchange ratio as at the date of the transaction in a manner similar to
a stock split. The related common stock, additional paid-in capital,
earnings per share and weighted average number of shares data in the
consolidated balance sheets, consolidated statements of operations and
consolidated statements of shareholders' equity for the year ended
December 31, 2003, 2002 and 2001 have been restated retroactively.
In June 2004, Shenzhen Comtech borrowed RMB3,600 (USD435) from Viewtran
and of which RMB3,000 (USD362) was paid on June 30,2004. The amount was
unsecured, non-interest bearing and had no fixed repayment terms.
F-17
COMTECH GROUP
11. SUBSEQUENT EVENTS - continued
On July 21, 2004, Comtech Hong Kong, a wholly-owned subsidiary of the
Company, entered into a RMB33,109 (USD4,000) revolving credit facility
(the "Facility") with the Bank of Communications Hong Kong branch (the
"Bank of Communication"). On September 14, 2004, the amount of the
Facility was increased to RMB82,773 (USD10,000). During August and
September 2004, Comtech Hong Kong drew down approximately RMB72,482
(USD8,757) under the Facility. These bank borrowings were raised for
general working capital purposes of the Company and RMB8,095 (USD978)
of them were directly used for settlement of amount to Comtech Global
Investment Ltd. The Facility is secured by funds on deposit with the
Bank of Communication owned by Jeffrey Kang, the Company's principal
shareholder and Chief Executive Officer, in an amount equal to the
borrowings. The facility bears interest at the higher of LIBOR or 1.5%
over the deposit rate, payable monthly.
On August 24, 2004, Comtech Communication, a wholly-owned subsidiary of
the Company, entered into a factoring agreement (the "Agreement") with
Guangdong Development Bank Shenzhen branch (the "Guangdong Development
Bank"). Pursuant to the Agreement, accounts receivable from UT Starcom
with the maximum amount of RMB30,000 (USD3,624) can be transferred to
the Guangdong Development Bank with recourse. An amount equal to 30% of
the accounts receivable transferred is secured by funds on deposit from
Comtech Communication with the Guangdong Development Bank. The
factoring arrangement bears interest at the PRC official loan interest
rate as of September 30, 2004, payable monthly. On October 20, 2004,
Comtech Communication transferred accounts receivable of approximately
RMB11,449 (USD1,381) under the Agreement.
In addition, the Company satisfied all of its outstanding obligations
in the approximate amount of RMB91,743 (USD11,084) to Comtech Global
Investment Ltd. by paying approximately RMB50,356 (USD6,084) of the
amount due to holding company and a RMB41,387 (USD5,000) dividend
obligation subsequent to the year end date.
On October 26, 2004, Comtech Group, Inc. entered into definitive
purchase agreements (the "Purchase Agreements") for the sale of an
aggregate of 6,300,000 shares ("Purchased Shares") of common stock to
institutional and individual investors for gross proceeds of
approximately RMB91,257(USD11,025), before deducting a 6% placement fee
and other expenses of the offering. A closing was held on the first
5,040,000 shares on October 27, 2004 (the "First Closing Date"). A
second closing on the balance of the shares occurred on November 5,
2004. Pursuant to the Purchase Agreements, Comtech Group, Inc. has
agreed to prepare and file with the SEC in no event later than 60 days
following the First Closing Date, a registration statement
("Registration Statement") on Form S-1, to enable the resale of the
Purchase Shares and use its best efforts to cause such Registration
Statement to be declared effective as promptly as possible after
filing, but in any event, within 120 days following the First Closing
Date or, in the event of a review of the Registration Statement by the
SEC, within 180 days following the First Closing Date, and to remain
continuously effective until the earlier of (1) the second anniversary
of the First Closing Date or (2) the date on which all Purchased Shares
have been sold thereunder. If the Company fails to comply with certain
timetable as described in the Purchase Agreements, the Company will be
subject to penalty provision as specified in the Purchase Agreements.
Subsequent to the year end date, Comtech Group, Inc. granted 3,705,000
stock options to its directors and employees under the Comtech Group,
Inc. 2004 Stock Incentive Plan at an average exercise price of USD1.83
per share.
F-18
COMTECH GROUP
CONTENTS PAGE(S)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 Q - 1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003 Q - 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003 Q - 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Q - 4- Q - 11
COMTECH GROUP
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 AND DECEMBER 2003
- -----------------------------------------------------------------------------------------
(IN THOUSANDS)
September 30 September 30 December 31
2004 2004 2003
----------- ----------- -----------
USD RMB RMB
ASSETS
Current assets:
Cash 2,142 17,727 30,683
Trade accounts receivable, net of allowance
for doubtful accounts 18,248 151,043 92,259
Bills receivable 4,209 34,843 13,306
Other trade receivables 1,081 8,940 2,297
Inventories 2,746 22,732 18,350
----------- ----------- -----------
Total current assets 28,426 235,285 156,895
Property and equipment, net 384 3,180 2,961
Other assets 41 344 344
----------- ----------- -----------
425 3,524 3,305
----------- ----------- -----------
TOTAL ASSETS 28,851 238,809 160,200
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 6,918 57,269 44,564
Amount due to holding company -- -- 50,356
Amount due to other related party 265 2,192 1,592
Bank loans 8,757 72,482 --
Dividend payable -- -- 41,387
Income tax payable 135 1,114 902
Accrued expenses and other liabilities 1,771 14,662 3,745
----------- ----------- -----------
Total current liabilities 17,846 147,719 142,546
----------- ----------- -----------
Minority interests 619 5,126 --
----------- ----------- -----------
Shareholders' equity:
Common stock and additional paid-in capital 4,693 38,844 14,083
Retained earnings 5,693 47,120 3,571
----------- ----------- -----------
Total shareholders' equity 10,386 85,964 17,654
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY 28,851 238,809 160,200
=========== =========== ===========
Q-1
COMTECH GROUP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
September 30 September 30 September 30
2004 2004 2003
------------ ------------ ------------
USD RMB RMB
Net revenues 56,174 464,970 246,324
Cost of revenue (47,742) (395,171) (210,290)
------------ ------------ ------------
Gross profit 8,432 69,799 36,034
Selling, general and administrative
expenses (2,402) (19,886) (11,836)
------------ ------------ ------------
Income from operations 6,030 49,913 24,198
Interest expense (202) (1,669) (500)
Interest income 19 159 34
------------ ------------ ------------
Income before income tax 5,847 48,403 23,732
Income tax (217) (1,799) (964)
------------ ------------ ------------
Net income before minority interests 5,630 46,604 22,768
Minority interests (369) (3,055) --
------------ ------------ ------------
Net income 5,261 43,549 22,768
============ ============ ============
Earnings per share
Basic 0.13 1.05 0.56
============ ============ ============
Diluted 0.13 1.05 0.56
============ ============ ============
Weighted average number of ordinary
shares outstanding
Basic 41,507,253 41,507,253 40,502,150
============ ============ ============
Diluted 41,666,436 41,666,436 40,502,150
============ ============ ============
Q-2
COMTECH GROUP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
- --------------------------------------------------------------------------------------------------
(IN THOUSANDS)
September 30 September 30 September 30
2004 2004 2003
------------ ------------ ------------
USD RMB RMB
Cash flows from operating activities:
Net income 5,261 43,549 22,768
Adjustment to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation expense 88 728 319
Minority interests 369 3,055 --
Changes in operating assets and liabilities:
Trade accounts receivable (6,481) (53,642) (39,633)
Bills receivable (2,602) (21,537) (1,917)
Inventories (325) (2,693) 5,186
Other trade receivables (125) (1,036) (12,724)
Amount due from other related party -- -- 298
Trade accounts payable 676 5,592 18,987
Accrued expenses and other liabilities 663 5,491 11,345
Amount due to other related party 72 600 (1,573)
Income tax payable 26 212 2,408
------------ ------------ ------------
Cash (used in) provided by operating activities (2,378) (19,681) 5,464
------------ ------------ ------------
Cash flows from investing activities:
Net cash outflow from acquisition of a subsidiary (109) (906) --
Purchases of property and equipment (86) (711) (418)
Increase in other assets -- -- (300)
------------ ------------ ------------
Cash used in investing activities (195) (1,617) (718)
------------ ------------ ------------
Cash flows from financing activities:
New bank loans 8,757 72,482 --
Net cash inflow from share exchange
transaction (net of transaction cost) 3,335 27,603 --
Repayment of amount due to holding company (6,084) (50,356) --
Payment of 2003 dividend (5,000) (41,387) --
------------ ------------ ------------
Cash provided by financing activities 1,008 8,342 --
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (1,565) (12,956) 4,746
Cash at beginning of the period 3,707 30,683 12,194
------------ ------------ ------------
Cash at end of the period 2,142 17,727 16,940
============ ============ ============
Q-3
COMTECH GROUP
1. BASIS OF PRESENTATION
(in thousands, except shares and per share amounts)
The accompanying unaudited consolidated condensed financial statements
of Comtech Group Inc. (formerly known as "Trident Rowan Group, Inc",
the "Company") have been prepared in accordance with the Company's
accounting policies as stated in the Company's Audited Consolidated
Financial Statements for the years ended December 31, 2003, 2002 and
2001 included in the F pages. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. For a summary of the Company's accounting
principles, and other footnote information, reference is made to the
Company's Audited Consolidated Financial Statements for the years ended
December 31, 2003, 2002 and 2001 included in the F pages. The interim
financial statements and notes thereto should be read in conjunction
with the financial statements and notes included in the F pages. All
adjustments necessary for the fair presentation of the results of
operations for the interim periods covered by this report have been
included. All such adjustments are of a normal and recurring nature.
The results of operations for the nine months ended September 30, 2004
are not necessarily indicative of the operating results for the full
year.
The consolidated financial statements are reported in Renminbi ("RMB")
because all of the Company's material operating entities are based in
and operated entirely within the People's Republic of China. The
translation of RMB amounts into U.S. dollar amounts is included solely
for the convenience of the readers of the financial statements and has
been calculated at the rate of USD1 to RMB8.2773, the approximate
exchange rate at September 30, 2004. Such translations should not be
construed as representations that the RMB amounts could be converted
into USD at that rate or any other rate.
2. SHARE EXCHANGE BETWEEN TRIDENT ROWAN GROUP, INC. AND COMTECH GROUP
On May 11, 2004, Comtech Group's original sole shareholder, Comtech
Global Investment Ltd., sold part of its shares to Purple Mountain
Holding Ltd. and Ren Investment Ltd., which then became the
shareholders of Comtech Group.
On May 25, 2004, the Company entered into a Share Exchange Agreement
(the "Exchange Agreement") with Comtech Group, a privately owned Cayman
Islands company ("Comtech"), and Comtech's shareholders, Comtech Global
Investment Ltd., Purple Mountain Holding Ltd., and Ren Investment
Ltd.(collectively, the "Shareholders"), pursuant to which the Company
was to acquire all of the issued and outstanding shares of stock of
Comtech in exchange for the issuance in the aggregate of 42,000,000 of
the Company's shares of common stock to the Shareholders. The
transaction contemplated by the Exchange Agreement was consummated on
July 22, 2004. Pursuant to certain provisions in the Exchange
Agreement, the number of shares issued to the Shareholders was adjusted
at closing to 40,502,150 (the "Shares").
As a result of the transaction, Comtech became a wholly-owned
subsidiary of the Company and, upon the issuance of the Shares, the
Shareholders owned approximately 91.2% of the Company's issued and
outstanding stock. The Company currently has a total of 44,422,050
shares of Common Stock issued and outstanding as of September 30, 2004.
The Company then changed its name from Trident Rowan Group, Inc.
("Trident") to Comtech Group, Inc.
Q-4
COMTECH GROUP
2. SHARE EXCHANGE BETWEEN TRIDENT ROWAN GROUP INC. AND COMTECH GROUP- continued
As of September 30, 2004, the ownership structure of the Company as a
result of the share exchange transaction is as follows:
-------------------------- ------------------------------
Comtech Group Inc. OAM S.P.A.
(formerly known as Trident (a)
Rowan Group Inc.) (established in Italy)
(non operating subsidiary)
(established in Maryland)
-------------------------- ------------------------------
|
|
--------------------------
Comtech Group
(established on April 26, 2002
in the Cayman Islands)
--------------------------
|
|
-------------------------- ------------------------------
Comtech (China) Holding Limited Comtech (Hong Kong)
("Comtech China") Holding Limited
("Comtech Holding")
(established on May 27, 2002
in the British Virgin Islands (established on May 27, 2002
("BVI")) in the BVI)
-------------------------- ------------------------------
| |
--------|------------------------------------ |
| | | |
| | | |
- --------------------- --------------------- -------------------- ---------------------
Shenzhen Comtech Comtech Communication Comtech Software Comtech International
International Limited Technology (Shenzhen) Technology (Shenzhen) (Hong Kong) Limited
("Shenzhen Comtech") Company Limited Co. Ltd. ("Comtech Hong Kong")
("Comtech ("Comtech Software")
Communication")
(established on (established on (established on (established on
July 4, 1996 in the PRC) July 23, 2002 18 March 2004 July 14, 2000
in the PRC) in the PRC) in Hong Kong)
- --------------------- --------------------- -------------------- ---------------------
|
|
- --------------------
Shanghai E&T
System Co. Ltd.
("Shanghai E&T"
(a)
(established on
January 18, 2004
in the PRC)
- ---------------------
(a) The Company owns 98.6% shares in OAM S.P.A. and 60% shares in Shanghai
E & T.
Q-5
COMTECH GROUP
2. SHARE EXCHANGE BETWEEN TRIDENT ROWAN GROUP INC. AND COMTECH GROUP - continued
The share exchange transaction was accounted for as a reverse
acquisition in which Comtech was deemed to be the accounting acquirer
and Trident the legal acquirer. Because Trident was a non-operating
public shell company, no goodwill has been recorded in connection with
the transaction and the costs incurred in connection with the
transaction have been charged directly to equity.
As a result of the share exchange transaction, (i) the historical
financial statements of Trident for periods prior to the date of the
transaction are no longer presented; (ii) the historical financial
statements of the Company for periods prior to the date of the
transaction are those of Comtech, as the accounting acquirer; (iii) all
references to the financial statements of the Company apply to the
historical financial statements of Comtech prior to the transaction and
the financial statements of the Company subsequent to the transaction;
and (iv) the number of shares of the Company has been restated
retroactively to reflect the share exchange ratio as at the date of the
transaction in a manner similar to a stock split.
Unaudited condensed consolidated statements of shareholders' equity for
the nine months ended September 30, 2004 are set forth below:
Additional Total
paid-in Retained shareholders'
Common stock capital earnings equity
----------------------- ---------- ---------- ----------
Number of RMB RMB RMB RMB
shares
Balance at January 1, 2004 40,502,150 3,352 10,731 3,571 17,654
Shares of stock held by
Trident's shareholders 3,919,900 324 -- -- 324
Recapitalization in connection with
the share exchange transaction -- -- 24,089 -- 24,089
Share compensation cost -- -- 348 -- 348
Net income -- -- -- 43,549 43,549
---------- ---------- ---------- ---------- ----------
Balance at September 30, 2004 44,422,050 3,676 35,168 47,120 85,964
---------- ---------- ---------- ---------- ----------
Balance at September 30, 2004
(in thousands of USD) 444 4,249 5,693 10,386
========== ========== ========== ==========
The assets and liabilities of Trident acquired under the share exchange
transaction are as follows:
RMB
Net assets acquired:
Cash 32,367
Other trade receivables and prepaid expenses 2,853
Accrued expenses and other liabilities (5,126)
Minority interests (917)
------------
29,177
Less: Transaction costs (note) (4,764)
------------
24,413
============
Q-6
COMTECH GROUP
2. SHARE EXCHANGE BETWEEN TRIDENT ROWAN GROUP INC,. AND COMTECH GROUP -
continued
Note: In connection with the share exchange transaction with Trident,
the Company has paid RMB1,324 (USD160) to a financial advisor under a
service agreement and such amount has been included in the transaction
costs as stated above. In addition, pursuant to the service agreement,
the Company is required to issue warrants to the financial advisor to
purchase 1,000,000 shares of common stock of the Company at an exercise
price of USD1.5 per share, subject to the fact that Trident has cash
assets of at least RMB41,387 (USD5,000) However, since the cash assets
of Trident is less than RMB41,387(USD5,000) prior to the share exchange
transaction, the Company has not issued any warrants to the financial
advisor. The financial advisor is now requesting the issue of warrants
and is currently under discussion with the Company. No final resolution
has yet been reached.
As a part of the share exchange transaction with Trident, the Company
assumed fully vested options issued by Trident to purchase 230,000
shares of the Company's common stock with an exercise price of USD 1.50
per share. Additionally, the Company assumed 1,850,834 fully
exercisable common stock warrants. Each warrant represents the right to
receive 1 share of the Company's common stock, at an exercise price of
USD1.50 per share for 968,903 common stock warrants and USD 1.25 per
share for 881,931 common stock warrants. The options and warrants
assumed from Trident both expire on July 1, 2009.
Q-7
COMTECH GROUP
3. FINANCING ARRANGEMENTS
(a) Bank loans
On July 21, 2004, Comtech International (Hong Kong) Limited
("Comtech Hong Kong"), a wholly-owned subsidiary of the
Company, entered into a RMB33,109 (USD4,000) revolving credit
facility (the "Facility") with the Bank of Communications Hong
Kong branch (the "Bank of Communication"). On September 14,
2004, the amount of the Facility was increased to RMB82,773
(USD10,000). During August and September 2004, Comtech Hong
Kong drew down approximately RMB72,482 (USD8,757) under the
Facility. These bank borrowings were raised for general
working capital purposes of the Company and RMB8,095(USD978)
of them were directly used for settlement of amount to Comtech
Global Investment Ltd. The Facility is secured by funds on
deposit with the Bank of Communication owned by Jeffrey Kang,
the Company's principal shareholder and Chief Executive
Officer, in an amount equal to the borrowings. The facility
bears interest at the higher of LIBOR or 1.5% over the deposit
rate, payable monthly.
(b) Factoring arrangement
On August 24, 2004, Comtech Communication Technology
(Shenzhen) Co., Ltd. ("Comtech Communication"), a wholly-owned
subsidiary of the Company, entered into a factoring agreement
(the "Agreement") with Guangdong Development Bank Shenzhen
branch (the "Guangdong Development Bank"). Pursuant to the
Agreement, accounts receivable from UT Starcom with the
maximum amount of RMB30,000 (USD3,624) can be transferred to
the Guangdong Development Bank with recourse. An amount equal
to 30% of the accounts receivable transferred is secured by
funds on deposit from Comtech Communication with the Guangdong
Development Bank. The factoring arrangement bears interest at
the PRC official loan interest rate as of September 30, 2004,
payable monthly. On October 20, 2004, Comtech Communication
transferred accounts receivable of approximately RMB11,449
(USD1,381)under the Agreement.
4. SETTLEMENT OF AMOUNT DUE TO COMTECH GLOBAL INVESTMENT LTD.
The Company satisfied all of its outstanding obligations in the
approximate amount of RMB91,743 (USD11,084)to Comtech Global Investment
Ltd. by paying approximately RMB50,356 (USD6,084) of the amount due to
holding company and a RMB41,387 (USD5,000) dividend obligation during
the nine month period ended September 30, 2004
Q-8
COMTECH GROUP
5. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method in accordance with Accounting Principles Board ("APB")
Opinion No.25, "Accounting for Stock Issued to Employees", and its
related interpretations. Under this method, compensation cost for stock
options, warrants and stock awards is measured as the excess, if any,
of the quoted market price of the Company's common stock at the date of
the grant over the amount an employee must pay to acquire the stock.
At the board of directors' meeting held on August 3, 2004, the Company
adopted the Comtech Group, Inc. 2004 Stock Incentive Plan providing for
the grant of incentive and non-statutory stock options and the issuance
of restricted stock up to 5,000,000 shares of common stock, in the
aggregate. The compensation costs for the 420,000 options granted under
the Company's share option plan for the period ended September 30, 2004
are insignificant as calculated under APB Opinion No. 25. The
compensation costs for the 420,000 options granted under the Company's
stock option plan for the period ended September 30, 2004, had they
been accounted for using the fair value of awards at the grant date in
accordance with the method of Statement of Financial Accounting
Standards No.123, "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been as follows:
For the nine month period ended September 30, 2004:
RMB
Net income, as reported 43,549
Less: Stock based compensation costs under fair (389)
value based method for all awards
Net income, pro forma 43,160
Earnings per share - basic As reported RMB1.05
Pro forma RMB1.04
Earnings per share - diluted As reported RMB1.05
Pro forma RMB1.04
The weighted average fair value of options granted during 2004 was
USD1.17, using the Black-Scholes option-pricing model based on the
following assumptions:
Risk-free interest rate 4.25%
Expected life 10 years
Expected volatility 59%
Expected dividend yield --
Q-9
COMTECH GROUP
6. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted average number of shares of common stock outstanding for the
period. Diluted earnings per share are computed by dividing net income
by the sum of (a) the weighted average number of shares of common stock
outstanding during the period and (b) the dilutive effect of potential
common stock equivalents during the period. As of September 30, 2004,
the Company has (1) outstanding options granted under the Company's
2004 Stock Incentive Plan to purchase an aggregate of 420,000 shares of
common stock with an exercise price of USD1.50 per share ; (2) fully
vested outstanding options granted under Trident's prior option plans
to purchase an aggregate of 230,000 shares of common stock with an
exercise price of USD1.50 per share ; and (3) outstanding warrants
issued to purchase an aggregate of 1,850,834 shares of common stock
with an exercise price of USD1.50 per share for 968,903 common stock
warrants and USD1.25 per share for 881,931 common stock warrants. The
options issued under the 2004 plan vest in accordance with the terms of
the agreements entered into by the Company and the grantee of the
options. Of the 420,000 options, options for (1) 78,750 shares vesting
on February 1, 2005 or vesting in equal monthly instalments over the
six months from August 16, 2004 (2) the options for 236,250 shares
vesting in equal monthly instalments over the period of 1.5 years from
February 2, 2005 to August 1, 2006, and (3) the options for 105,000
shares vesting in equal monthly instalments over the period of 1 year
from August 2, 2006 to August 1, 2007. The options and warrants assumed
from Trident both expire on July 1, 2009. All outstanding options
granted under Tridents' prior option plans and warrants are exercisable
as of September 30, 2004. The weighted average number of shares used
for the computation of diluted earnings per share is as follows:
Nine month
period ended
September 30
2004
------------
Weighted average number of shares outstanding - basic 41,507,253
Dilutive effect of stock options and warrants 159,183
------------
Weighted average number of shares outstanding - diluted 41,666,436
============
7. COMPREHENSIVE INCOME
Comprehensive income represents total non-shareholder changes in equity
during a period except those resulting from investments by and
distributions to shareholders. For the nine months ended September 30,
2004 and 2003, comprehensive income is the same as net income.
8. MINORITY INTERESTS
Minority interests for the nine month periods ended September 30, 2004
represent the 40% interests in Shanghai E & T and 1.6% interests in OAM
S.P.A. held by the minority shareholders.
Q-10
COMTECH GROUP
9. SUBSEQUENT EVENTS
On October 26, 2004, the Company entered into definitive purchase
agreements (the "Purchase Agreements") for the sale of an aggregate of
6,300,000 shares ("Purchased Shares") of common stock to institutional
and individual investors for gross proceeds of approximately
RMB91,257(USD11,025), before deducting a 6% placement fee and other
expenses of the offering. A closing was held on the first 5,040,000
shares on October 27, 2004 (the "First Closing Date"). A second closing
on the balance of the shares occurred on November 5, 2004. Pursuant to
the Purchase Agreements, Comtech Group, Inc. has agreed to prepare and
file with the SEC in no event later than 60 days following the First
Closing Date, a registration statement ("Registration Statement") on
Form S-1, to enable the resale of the Purchased Shares and use its best
efforts to cause such Registration Statement to be declared effective
as promptly as possible after filing, but in any event, within 120 days
following the First Closing Date or, in the event of a review of the
Registration Statement by the SEC, within 180 days following the First
Closing Date, and to remain continuously effective until the earlier of
(1) the second anniversary of the First Closing Date or (2) the date on
which all Purchased Shares have been sold thereunder. If the Company
fails to comply with certain timetable as described in the Purchase
Agreements, the Company will be subject to penalty provision as
specified in the Purchase Agreements.
Subsequent to the period end date, Comtech Group, Inc. granted
3,285,000 stock options to its directors and employees under the
Comtech Group, Inc. 2004 Stock Incentive Plan at an exercise price of
USD1.87 per share.
Q-11