UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission file number: 0-24903
BRIGHTON TECHNOLOGIES CORPORATION
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 87-0460452
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6 Pearl Court
Allendale, New Jersey 07401
- -------------------------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (201) 818-2889
Not applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ ] No
[X]
As of September 30, 1998, the issuer had 4,530,379 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) - September 30, 1998
Consolidated Statements of Operations (Unaudited) -
Three Months and Nine Months Ended September 30,
1997 and 1998
Consolidated Statement of Stockholders' Equity (Unaudited) -
Nine Months Ended September 30, 1998
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1997 and 1998
Notes to Consolidated Financial Statements
(Unaudited) - Nine Months Ended September 30, 1997
and 1998
Item 2. Management's Discussion and Analysis or Plan of
Operation
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
Brighton Technologies Corporation and Subsidiaries
Consolidated Balance Sheet (Unaudited)
September 30, 1998
ASSETS
Current assets:
Cash and cash equivalents $1,147,324
Accounts receivable, net 2,166,677
Costs and accumulated gross
profit in excess of billings
on uncompleted contracts 2,242,891
Receivables from stockholders
and related parties (Note 6) 480,917
Prepaid expenses 397,893
Advances to customers (Note 4) 1,196,588
---------
Total current assets 7,632,290
---------
Fixed assets:
Furniture and equipment 566,500
Less: Accumulated depreciation (234,886)
---------
331,614
Brighton-STAQ project
equipment (Note 4) 1,822,294
---------
Net fixed assets 2,153,908
---------
Other assets:
Deposits 22,351
Intangible assets, net 19,804
---------
Total other assets 42,155
---------
Total assets $9,828,353
=========
(continued)
3
Brighton Technologies Corporation and Subsidiaries
Consolidated Balance Sheet (Unaudited) (continued)
September 30, 1998
LIABILITIES
Current liabilities:
Accounts payable $1,220,538
Accrued expenses 506,348
Accrued licensing costs
(Note 4) 450,000
Billings in excess of costs
and accumulated gross
profit on uncompleted
contracts 3,291,991
Customer deposits (Note 4) 2,255,116
Deferred revenue 189,866
Current portion of long-term
debt (Note 5) 150,000
Taxes payable 63,000
---------
Total current liabilities 8,126,859
---------
Long-term liabilities:
Deferred taxes 456,000
Minority interests 128,832
---------
Total long-term liabilities 584,832
---------
(continued)
4
Brighton Technologies Corporation and Subsidiaries
Consolidated Balance Sheet (Unaudited) (continued)
September 30, 1998
STOCKHOLDERS' EQUITY
Stockholders' equity (Note 3):
Preferred stock, $.001 par
value; authorized -
5,000,000 shares; issued -
none
Common stock, $.001 par value;
authorized - 100,000,000
shares; issued - 4,530,379
shares $ 4,530
Contributed capital 3,449,530
Accumulated deficit (2,337,398)
---------
Net stockholders' equity 1,116,662
---------
Total liabilities and
stockholders' equity $9,828,353
=========
See accompanying notes to consolidated financial statements.
5
Brighton Technologies Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, 1997 and 1998
1997 1998
---------- ----------
Revenues $1,377,465 $1,255,565
Cost of revenues 852,063 1,016,010
--------- ---------
Gross profit 525,402 239,555
--------- ---------
Operating expenses:
General and administrative 467,296 493,166
Selling and marketing 96,931 156,203
Depreciation and amortization 22,955 23,726
Consulting fees (Note 5) 91,849
Foreign currency transaction
(gains) losses 13,472 (2,612)
--------- ---------
Total operating expenses 692,503 670,483
--------- ---------
Operating loss (167,101) (430,928)
--------- ---------
Other income (expense):
Interest expense and bank fees (15,870) (41,439)
Interest income 33,898 10,819
Miscellaneous income (expense) 9,741 23,539
--------- ---------
Total other income
(expense), net 27,769 (7,081)
--------- ---------
Loss before income taxes and
minority interests (139,332) (438,009)
Benefit from income taxes (Note 1) (58,000)
Minority interests 3,332
--------- ---------
Net loss $ (78,000) $ (438,009)
========= =========
Net loss per common share -
basic and diluted (Note 2) $ (.02) $ (.10)
========= =========
See accompanying notes to consolidated financial statements.
6
Brighton Technologies Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Nine Months Ended September 30, 1997 and 1998
1997 1998
---------- ----------
Revenues $5,913,330 $10,106,896
Cost of revenues 4,057,207 7,556,511
--------- ----------
Gross profit 1,856,123 2,550,385
--------- ----------
Operating expenses:
General and administrative 1,309,832 1,769,834
Selling and marketing 353,259 436,769
Depreciation and amortization 63,269 83,199
Consulting fees (Note 5) 366,430
Foreign currency transaction
(gains) losses 20,895 (10,115)
--------- ----------
Total operating expenses 2,113,685 2,279,687
--------- ----------
Operating income (loss) (257,562) 270,698
--------- ----------
Other income (expense):
Interest expense and bank fees (43,994) (154,707)
Interest income 77,418 32,028
Write-off of offering costs
(Note 7) (582,685)
Miscellaneous income (expense) 17,832 4,186
--------- ----------
Total other income
(expense), net 51,256 (701,178)
--------- ----------
Loss before income taxes
and minority interests (206,306) (430,480)
Provision (benefit) for income
taxes (Note 1) (89,000) 6,311
Minority interests 9,282 130
--------- ----------
Net loss $ (108,024) $ (436,661)
========= ==========
Net loss per common share -
basic and diluted (Note 2) $ (.03) $ (.11)
========= ==========
See accompanying notes to consolidated financial statements.
7
Brighton Technologies Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity (Unaudited)
Nine Months Ended September 30, 1998
Common Stock
---------------- Contributed Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance,
December
31, 1997 3,495,333 $3,495 $1,907,396 $(2,483,422) $ (572,531)
Adjustment
to reflect
restatement
- deferred
offering
costs (see
Note 7) 582,685 582,685
--------- ----- --------- --------- ---------
Balance,
December
31, 1997,
as
restated 3,495,333 3,495 1,907,396 (1,900,737) 10,154
Sale of
common
stock 735,046 735 1,198,436 1,199,171
Costs
related
to the
sale of
common
stock (81,002) (81,002)
Conversion
of note
payable
and
accrued
interest
into
common
stock 300,000 300 424,700 425,000
Net loss
for the
period (436,661) (436,661)
--------- ----- --------- --------- ---------
Balance,
September
30, 1998 4,530,379 $4,530 $3,449,530 $(2,337,398) $1,116,662
========= ===== ========= ========= =========
See accompanying notes to consolidated financial statements.
8
Brighton Technologies Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1997 and 1998
1997 1998
---------- ----------
Cash flows from operating activities:
Net loss $ (108,024) $ (436,661)
--------- ---------
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 166,394 113,471
Deferred income taxes 83,000
Minority interests (9,282) (130)
Non-cash compensation expense 54,187
Note payable issued for
consulting fees 150,000
Write-off of deferred
offering costs 582,685
Changes in operating assets
and liabilities:
(Increase) decrease in -
Accounts receivable and
advances to customers (1,340,370) (356,864)
Costs and accumulated
gross profit in
excess of billings on
uncompleted contracts 1,111,880 (138,260)
Prepaid expenses 105,318 364,517
Deposits (21,638) (7,861)
Other current assets 4,700 1,000
Increase (decrease) in -
Accounts payable 670,307 381,294
Accrued expenses 96,705 (153,138)
Billings in excess of
costs and accumulated
gross profit on
uncompleted contracts (3,815,324)
Deferred revenue 11,023 98,107
Customer deposits 2,153,628 105,116
Taxes payable (186,000)
--------- ---------
Total adjustments (765,472) 989,937
--------- ---------
Net cash provided by (used in)
operating activities (873,496) 553,276
--------- ---------
(continued)
9
Brighton Technologies Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) (continued)
Nine Months Ended September 30, 1997 and 1998
1997 1998
---------- ----------
Cash flows from investing activities:
Decrease in restricted cash $1,276,365 $
Acquisition of fixed assets (55,935) (301,697)
--------- ---------
Net cash provided by (used in)
investing activities 1,220,430 (301,697)
--------- ---------
Cash flows from financing activities:
Sale of common stock, net of
related costs 307,532 1,118,169
Repayment of note payable (233,855)
Advances to stockholder and
related parties (349,834) (248,696)
Decrease in payable to
stockholders (227,298)
Increase in deferred offering
costs (237,093)
--------- ---------
Net cash provided by (used in)
financing activities (506,693) 635,618
--------- ---------
Net increase (decrease) in cash
and cash equivalents (159,759) 887,197
Cash and cash equivalents, at
beginning of period 716,699 260,127
--------- ---------
Cash and cash equivalents, at
end of period $ 556,940 $1,147,324
========= =========
See accompanying notes to consolidated financial statements.
10
Brighton Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 1997 and 1998
1. Basis of Presentation
The accompanying consolidated financial statements are unaudited but, in
the opinion of management of the Company, contain all adjustments necessary
to present fairly the financial position at September 30, 1998, the results
of operations for the three months and nine months ended September 30, 1997
and 1998, and the cash flows for the nine months ended September 30, 1997 and
1998. Except as may be noted below, these adjustments are of a normal
recurring nature. The accompanying consolidated financial statements include
the accounts of the Company and its direct subsidiaries and joint ventures in
which the Company has a controlling interest. All intercompany accounts and
transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in
financial statements that have been prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission, although
management of the Company believes that the disclosures contained in these
financial statements are adequate to make the information presented therein
not misleading. For further information, refer to the Company's consolidated
financial statements and notes thereto for the years ended December 31, 1996
and 1997, as filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The results of operations for the nine months ended September 30,
1998 are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 1998.
All common share, common share equivalent and per share amounts have been
restated for all periods presented to reflect one-for-three reverse stock splits
effective October 17, 1997 and
11
January 26, 1998, and a three-for-one stock split effective April 15, 1998.
Certain prior period amounts have been reclassified to conform to the
current year presentation.
2. Net Loss Per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), which
establishes standards for computing and presenting earnings per share. SFAS
No. 128 replaces the presentation of primary earnings per share and fully
diluted earnings per share with basic earnings per share and diluted earnings
per share, respectively. Basic earnings per share excludes the dilutive
effects of options and convertible securities, if any, and is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed assuming the exercise or conversion of common
equivalent shares, if dilutive, consisting of unissued shares under stock
options, warrants and debt instruments. In accordance with SFAS No. 128, all
prior periods presented have been restated to conform to the new
presentation.
At September 30, 1998, potentially dilutive securities representing 62,269
shares of common stock were outstanding, consisting of a $150,000 convertible
note payable (see Note 5), plus accrued interest, convertible into 55,067 shares
of common stock, a stock option exercisable at $7.50 per share (which was in
excess of average fair market value during 1998) to purchase 8,334 shares of
common stock, and employee stock options exercisable at $4.50 per share to
purchase 1,868 shares of common stock.
Basic and diluted loss per share are the same for all periods presented.
The following tables present the components of basic and diluted loss per
share for the three months and nine months ended September 30, 1997 and 1998:
12
Three Months Ended September 30,
--------------------------------
1997 1998
---------- ----------
Net loss - as reported $ (78,000) $ (438,009)
========= =========
Weighted average number of
common shares outstanding 3,482,706 4,527,712
========= =========
Net loss per common share -
Basic and Diluted $ (.02) $ (.10)
========= =========
Nine Months Ended September 30,
-------------------------------
1997 1998
---------- ----------
Net loss - as reported $ (108,024) $ (436,661)
========= =========
Weighted average number of
common shares outstanding 3,471,867 4,039,651
========= =========
Net loss per common share -
Basic and Diluted $ (.03) $ (.11)
========= =========
Note: For the three months and nine months ended September 30, 1997 and 1998,
the assumed conversion into common stock of a $150,000 note payable and the
exercise of outstanding stock options were not included in the calculation of
net loss per common share, as the effect would be anti-dilutive.
3. Stockholders' Equity
During the nine months ended September 30, 1998, the Company sold a total
of 735,046 shares of common stock for gross proceeds of $1,199,171, and incurred
related costs of $81,002, generating net proceeds of $1,118,169.
During June 1998, the Company settled a note payable with a balance of
$672,940, including accrued interest, by issuing 300,000 shares of common stock
for $425,000 of such amount and by
13
making a cash payment of $247,940 for the remaining amount.
4. Commitments and Contingencies
China National Project -
During April 1994, the Company entered into a long-term turn-key contract
with China National Chemical Construction Chongqing Company ("China National")
to assist in the design and construction of a sodium bichromate production plant
in the PRC that was expected to generate total revenues of $11,000,000 for the
Company. Revenues under this contract for the years ended December 31, 1996 and
1997 were approximately $1,048,000 and $2,237,000, respectively, or 13% and 35%
of the Company's total revenues, respectively. Revenues under this contract for
the nine months ended September 30, 1997 were approximately $2,237,000 or 38% of
the Company's total revenues; the Company did not record any revenues with
respect to this contract for the nine months ended September 30, 1998. The
Company had recorded cumulative aggregate revenues of $6,969,000 through
September 30, 1998 under this contract, or approximately 63% of the contract's
total expected revenues. Management does not expect to enter into any
significant contracts of this type in the future.
The Company has been advised by China National that they are currently
negotiating with third party lenders for the necessary funds to complete the
construction of the project. The Company is currently unable to predict the
ultimate outcome of these discussions. In the event that China National is
unsuccessful in its efforts to obtain such financing and construction efforts
are further suspended or terminated, the Company's anticipated revenues in the
future with regard to this contract may be reduced or eliminated. The Company
does not currently expect that it will recognize any significant revenues from
this contract during the year ending December 31, 1998. If China National is
unable to complete the project, management does not expect that the ultimate
resolution of this matter will have a material adverse impact on the Company's
financial position, results of operations or cash flows, other than the loss of
revenue, profits and cash flows that would have been realized if the project had
been completed.
As an accommodation to China National for excess funds held by the
Company, the Company has periodically loaned funds to China National. These
loans do not bear interest and do not stipulate repayment dates. As of
December 31, 1997 and September 30, 1998, the Company had advanced $1,181,513
to China National, which is included in advances to customers in the
consolidated balance sheet. In addition, a deposit payable to China
National of $2,150,000 was outstanding at December 31, 1997 and September 30,
1998, which is included in customer deposits in
14
the consolidated balance sheet.
Brighton-STAQ Joint Venture -
Beijing Brighton-STAQ Electronic System Company Limited ("Brighton-STAQ")
is a PRC joint venture that was formed to design, develop, install and maintain
a computer network for the trading of securities in China (the "STAQ On-line
Network"). The Company owns a 90% interest in the Brighton-STAQ and had
invested or advanced approximately $1,650,000 and $2,105,000 with respect to
Brighton-STAQ as of December 31, 1997 and September 30, 1998, respectively. As
of December 31, 1997, the Company had fully funded its original obligation to
invest $1,600,000 in Brighton-STAQ. The remaining 10% interest in Brighton-STAQ
is owned by a company controlled by the STAQ Exchange, one of four national
securities exchanges in China. The minority interest holder of Brighton-STAQ
has the right to acquire an additional 10% ownership interest per annum (at the
then determinable fair values) up to a maximum interest of 49%. The Company had
also committed to provide aggregate funding of approximately $4,000,000 during
1998 in the form of loans, based on initial estimates of the amount of working
capital required during 1998 to support the start-up and subsequent expansion of
the STAQ On-line Network.
To the extent that the Company is unable to timely fund its current
commitment to Brighton-STAQ during 1998, the planned expansion of the STAQ
On-line Network into additional cities in China will be deferred, thus delaying
the development of Brighton-STAQ and its ability to reach operational viability.
A delay in expanding the STAQ On-line Network may also result in potential
customers adopting alternative systems to trade securities in China, thus
diminishing the STAQ On-line Network's expansion potential and competitive
position in China. The occurrence of these events could reduce the potential
future commercial and economic value of the STAQ On-line Network, which would
adversely affect the potential future profitability of Brighton-STAQ as it
relates to the Company's consolidated results of operations.
Based on revised and updated estimates of the cost to fund the expansion
of the STAQ On-line Network, the Company does not believe that the entire
$4,000,000 funding will be required during 1998. The Company currently
expects to meet its funding commitment to Brighton-STAQ through a private
sale of its common stock, although there can be no assurances that the
Company will be successful in this regard. To the extent that Brighton-STAQ
were to be funded by sources unrelated to the Company, the Company's interest
in Brighton-STAQ could be reduced or eliminated, which would adversely affect
the potential future profitability of Brighton-STAQ as it relates to the
Company's consolidated results of operations. Since the Company has fully
15
funded its original $1,600,000 commitment to Brighton-STAQ, the Company believes
that this event is unlikely. If Brighton-STAQ were to cease operations as a
result of the Company's inability to provide adequate and timely funding, the
Brighton-STAQ equipment aggregating $1,822,294 at September 30, 1998 would be
liquidated at net realizable value and the resulting loss, if any, would be
charged to operations.
Contractual Obligations -
As a result of the delay in the China National project, the Company is in
the process of renegotiating the terms of certain aspects of technological
licensing arrangements that it entered into in conjunction with its contract
with China National. The contractual value of services currently under
negotiation is approximately $450,000. The inability of the Company to fulfill
contractual terms of long-term projects or to negotiate favorable arrangements
on the use or distribution of licensed technology may have a material adverse
effect on the Company's consolidated financial statements.
Letters of Credit -
As of September 30, 1998, the Company had issued an irrevocable letter of
credit for approximately $253,000, representing a contingent commitment for the
purchase of equipment, none of which had been disbursed. During December 1997,
the wife of the Company's founder and majority stockholder, who is an officer
and director of the Company, provided a short-term credit facility to the
Company by depositing $500,000 into a short-term interest-bearing account with a
Hong Kong bank as security for the bank's letter of credit for $2,145,000 issued
to a supplier. The full amount of the letter of credit was disbursed and repaid
during the nine months ended September 30, 1998. The estimated imputed cost of
such credit facility was not significant.
Income Taxes -
The Company and the Internal Revenue Service are in preliminary
discussions regarding certain tax matters and related methodologies utilized
in previous tax years. The Company is unable to predict, with any degree of
certainty, the ultimate resolution of this matter. The Company does not
believe such resolution will have a material impact on its results of
operations, financial condition or cash flows.
5. Consulting Fees
During the three months and nine months ended September 30, 1997, the
Company recorded a charge to operations for consulting fees related to
certain professional, consulting and other costs incurred in connection with
the Company's ongoing business development and financing activities. During
the three months ended September 30, 1997, such consulting fees aggregated
$91,849, of which $3,435 was paid to an affiliate of a director of the
Company. During the nine months ended September 30, 1997, such consulting
fees aggregated $366,430, of which $19,308 was paid to an affiliate of a
director of the Company, and $175,000 consisted of a cash payment of $25,000
and a note payable for $150,000 for services rendered by a consulting firm.
The Company did not incur any similar consulting fees during the three months
and nine months ended September 30, 1998.
16
The $150,000 note payable was unsecured, with interest at 10% per annum to
accrue until the due date of February 24, 1998. Thereafter, such note is due
and payable upon demand, with interest at 12% per annum. The Company has the
option of converting the note, including accrued interest, on or after the due
date, into shares of common stock, with the value of such common shares to be
calculated at 75% of the market price on the conversion date. The maximum
number of common shares that the Company will be required to reserve and issue
as full settlement for the note, including accrued interest, is 75,000 shares.
Such shares, if issued, will be restricted and will have piggyback registration
rights. As of September 30, 1998, the note, including accrued interest, was
convertible into 55,067 shares of common stock.
6. Related Party Transactions
During September 1997, the Company's founder and majority stockholder sold
project equipment to the Company with a fair market value of $185,950, which was
equivalent to the price that the Company would have had to pay to purchase such
equipment in the open market, in exchange for an equivalent reduction in the
amount due the Company from the stockholder.
In order to meet its working capital requirements, the Company has
periodically received funding from the Company's founder and majority
stockholder and his family members. The Company has also periodically made
advances to or on behalf of the principals and officers of the Company. Such
advances are unsecured and generally bear no stated interest rate or terms of
repayment. As of December 31, 1997, amounts due from the Company's founder
and majority stockholder and his family members aggregated $232,221. During
the nine months ended September 30, 1998, the Company advanced an aggregate
of $248,696 to the Company's founder and majority stockholder and his family
members, resulting in a balance due of $480,917 at September 30, 1998. On
June 30, 1998, $190,564 of such advances were converted into a note bearing
interest at 5% per annum.
7. Restatement of Financial Statements
The Company is currently in discussions with the staff of the Securities
and Exchange Commission (the "Staff") regarding certain accounting issues raised
by the Staff as a result of its review of the Company's Registration Statement
on Form 10-SB, which became effective on November 22, 1998.
As a result of such discussions, the Company revised and restated its
previously reported financial statements as of and for the year ended December
31, 1997 which were included in the Registration Statement on Form 10-SB. The
revised financial statements reflect deferred offering costs of $582,685 as an
asset at December 31, 1997, rather than as an expense for the year ended
December 31, 1997. Deferred offering costs consisted of capitalized
professional fees and related costs incurred in connection with the Company's
contemplated public offering of its
17
securities. Based on an assessment of market conditions and other factors, the
Company decided to abandon the offering during the three months ended March 31,
1998. The revised financial statements reflect the write-off of
deferred offering costs of $582,685 during the three months ended March 31, 1998
and the nine months ended September 30, 1998.
As a result of the restatement of the Company's financial statements as
discussed above, the previously reported net loss for the year ended December
31, 1997 decreased from ($1,584,527) to ($1,001,842), and net loss per common
share decreased from ($.46) to ($.29) per share. As of December 31, 1997, the
previously reported total assets increased from $8,364,573 to $8,947,258, and
net stockholders' equity (deficit) increased from ($572,531) to $10,154. For
the six months ended June 30, 1998, the previously reported net income decreased
from $584,033 to $1,348, and net income per common share decreased from $.15 to
$0 per share.
The Company does not expect that the resolution of the remaining
accounting issues will have a material effect on the Company's consolidated
financial position at September 30, 1998.
8. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances in a full set of
general purpose financial statements. SFAS No. 130 defines comprehensive income
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is presented with the same prominence as other
financial statements. The Company does not have any significant components of
comprehensive income other than net income (loss). Accordingly, adoption of
SFAS No. 130 did not have a material effect on the Company's financial statement
presentation and disclosures, and a separate statement of comprehensive income
has not been presented.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise", and which is effective for financial
statements issued for fiscal years beginning after December 15,
18
1997. SFAS No. 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. SFAS No. 131 also establishes
standards for disclosures by public companies regarding information about their
major customers, operating segments, products and services, and the geographic
areas in which they operate. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. SFAS No. 131
requires comparative information for earlier years to be restated. The
Company's results of operations and financial position will not be affected by
implementation of SFAS No. 131. The Company is evaluating the effect that
adoption of SFAS No. 131 will have on its financial statement disclosures.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS No. 132"), which is effective for financial statements issued
for fiscal years beginning after December 15, 1997. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 requires comparative information for earlier years to be restated.
The Company's results of operations and financial position will not be affected
by implementation of SFAS No. 132. The Company is evaluating the effect that
adoption of SFAS No. 132 will have on its financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), which is effective for financial statements for all fiscal quarters of
all fiscal years beginning after June 15, 1999. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS No. 133 also addresses the accounting for hedging
activities. The Company has not determined whether SFAS No. 133 will have a
material impact on its financial statement presentation or disclosures.
In October 1998, the Financial Accounting Standards Board issued
Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" ("SFAS No. 134"), which is effective for financial statements for
the first fiscal quarter beginning after December 15, 1998. SFAS No. 134
amends
19
Statement No. 65, "Accounting for Certain Mortgage Banking Activities" ("SFAS
No. 65"), which, as amended, required that after the securitization of a
mortgage loan held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed security as a trading security. SFAS No.
134 further amends SFAS No. 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. SFAS No. 134
conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking entity with the
subsequent accounting for securities retained after the securitization of other
types of assets by non-mortgage banking enterprises, resulting in such
securities being classified as held-to-maturity if they conform to the
requirements of SFAS No. 115. The Company has not determined whether SFAS No.
134 will have a material impact on its financial statement presentation or
disclosures.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 1998 contains "forward-looking statements" within the meaning of
the Federal securities laws. These forward-looking statements include, among
others, statements concerning the Company's expectations regarding sales trends,
gross margin trends, the availability of short-term bank borrowings to fund
operations and capital expenditures, the repayment of loans, facility expansion
plans, and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. The forward-looking statements contained
in this Quarterly Report on Form 10-QSB for the quarterly period ended September
30, 1998 are subject to risks and uncertainties that could cause actual results
to differ materially from those results expressed in or implied by the
statements contained herein.
Overview:
Effective November 11, 1996, the Company acquired all of the issued and
outstanding capital stock of BIC and BECL from Kit Kung and Hong Yun (the
"Brighton Shareholders") in exchange for the issuance by the Company of an
approximate 88% controlling interest in the Company to the Brighton Shareholders
at that time. The acquisition of BIC and BECL by the Company was accounted for
as a recapitalization of BIC and BECL, with BIC and BECL as the acquirer
(reverse acquisition). This transaction was consummated to consolidate the
operating companies (BIC and BECL) owned by the Brighton Shareholders into one
entity and to attract and facilitate investment into the Company. Accordingly,
the historical financial statements consist of the combined financial statements
of BIC and BECL, for all periods presented. The consolidated financial
statements include the accounts of BIC, a United States-based company, and BECL,
a Hong Kong-based holding company with controlling interests in four active Hong
Kong subsidiaries and joint ventures. All common share and per share amounts
presented herein have been adjusted to reflect the 1-for-3 reverse stock splits
effective October 17, 1997 and January 26, 1998, and a three-for-one stock split
effective April 15, 1998.
BIC is a distributor of third party manufactured industrial equipment to
customers in China and other Pacific Basin countries. BECL is an investment and
holding company whose subsidiaries are involved in the buying, selling and
installation of computer and industrial equipment, and the marketing, sale
and service of wireless telecommunication
21
equipment used for credit card approval and authorization systems in China and
other Pacific Basin countries by banks and other financial institutions.
Beijing Brighton-STAQ Electronic System Company Limited ("Brighton-STAQ")
is a PRC joint venture that was formed to design, develop, install and maintain
a computer network for the trading of securities in China (the "STAQ On-line
Network"). The Company owns a 90% interest in Brighton-STAQ, and a company
controlled by the STAQ Exchange, one of four national securities exchanges in
China, owns the remaining 10% interest in Brighton-STAQ. During February 1998,
the Company commenced initial operations of the STAQ On-line Network for the
STAQ Exchange. Revenues from the STAQ On-line Network during the nine months
ended September 30, 1998 were not significant.
Accordingly, the Company considers its operations at September 30, 1998 to
be in three business segments: industrial equipment distribution, computer
network integration and information services.
On April 15, 1994, BIC entered into a long-term contract with expected
revenues of $11,000,000 with China National to provide aid in the design and
construction of a sodium bichromate production plant in Chongqing, Sichuan
Province, PRC, with an annual production capacity of 20,000 metric tons.
Although this contract and the work related to it were outside the ordinary
scope of the Company's industrial equipment distribution business, given its
size and complexity, because of certain third party technology that was
available to the Company at that time, the Company was able to successfully bid
on the contract. Contracts of this nature are project based and since the
Company's current focus is on developing other business opportunities in China,
the Company does not anticipate engaging in additional projects of this type or
size in the foreseeable future. This contract was temporarily suspended in
February 1996 by the municipal government due to environmental concerns relating
to China National's proposed methods of waste disposal by the plant, but
activity under this contract continued through 1997 as a result of existing
commitments.
The Company has been advised by China National that they are currently
negotiating with third party lenders for the necessary funds to complete the
construction of the project. The Company is currently unable to predict the
ultimate outcome of these discussions. In the event that China National is
unsuccessful in its efforts to obtain such financing and construction efforts
are further suspended or terminated, the Company's anticipated revenues in the
future with regard to this contract may be reduced or eliminated. The Company
does not currently expect that it will recognize any significant revenues from
this contract during the year ending December 31, 1998. If China
22
National is unable to complete the project, management does not expect that the
ultimate resolution of this matter will have a material adverse impact on the
Company's financial position, results of operations or cash flows, other than
the loss of revenue, profits and cash flows that would have been realized if the
project had been completed.
Revenues under this contract for the years ended December 31, 1996 and 1997
were approximately $1,048,000 and $2,237,000, respectively, or 13% and 35% of
the Company's total revenues, respectively. Revenues under this contract for
the nine months ended September 30, 1997 were approximately $2,237,000 or 38% of
the Company's total revenues; the Company did not record any revenues with
respect to this contract for the nine months ended September 30, 1998. The
Company had recorded cumulative aggregate revenues of $6,969,000 through
September 30, 1998 under this contract, or approximately 63% of the contract's
total expected revenues. For the years ended December 31, 1996 and 1997, and
the nine months ended September 30, 1997 and 1998, this contract accounted for
approximately 29%, 50%, 63% and 0% of industrial equipment distribution
revenues, respectively.
During 1997, no customer other than China National accounted for as much as
10% of revenues. During 1996, another customer accounted for approximately 17%
of revenues. During the nine months ended September 30, 1998, three customers
accounted for approximately 30.3%, 17.6% and 15.5% of revenues, respectively.
Although the Company's customers vary from year to year, the Company has
historically relied on large contracts with a limited number of customers for a
substantial portion of its total revenues, the margins of which may vary
significantly. In addition, substantially all of the Company's business is
currently conducted with or in China. The Company expects that a significant
portion of its future revenues will continue to be generated by a limited number
of customers in China, and revenues may vary substantially from quarter to
quarter as a result of both the large order sizes and the long lead times
characteristic of this business. However, the Company expects that revenues
from the STAQ On-line Network will represent an increasing proportion of total
China-based revenues in the future. The loss of any of these customers or any
substantial reduction in business volume with any of these customers, or any
political or economic difficulties in China or between the United States and
China, or any currency restrictions or devaluations relative to the United
States dollar, could have a material adverse effect on future results of
operations.
The following tables set forth certain historical operating data for the
periods presented.
23
Three Months Ended September 30,
--------------------------------
1997 1998
----------------- -----------------
Amount % Amount %
------ ----- ------ -----
Revenues $1,377,465 100.0 $1,255,565 100.0
Cost of
revenues 852,063 61.8 1,016,010 80.9
Operating
expenses 600,654 43.6 670,483 53.4
Consulting
fees 91,849 6.7
--------- ----- --------- -----
Operating
loss (167,101) (12.1) (430,928) (34.3)
Other income
(expense), net 27,769 2.0 (7,081) (.6)
--------- ----- --------- -----
Loss before
income
taxes and
minority
interests (139,332) (10.1) (438,009) (34.9)
Benefit from
income taxes (58,000) (4.2)
Minority
interests 3,332 .2
--------- ----- --------- -----
Net loss $ (78,000) (5.7) $ (438,009) (34.9)
========= ===== ========= =====
24
Nine Months Ended September 30,
-------------------------------
1997 1998
----------------- -----------------
Amount % Amount %
------ ----- ------ -----
Revenues $5,913,330 100.0 $10,106,896 100.0
Cost of
revenues 4,057,207 68.6 7,556,511 74.8
Operating
expenses 1,747,255 29.6 2,279,687 22.5
Consulting
fees 366,430 6.2
--------- ----- --------- -----
Operating
income (loss) (257,562) (4.4) 270,698 2.7
Other income
(expense), net 51,256 .9 (701,178) (6.9)
--------- ----- --------- -----
Loss before
income taxes
and minority
interests (206,306) (3.5) (430,480) (4.2)
Provision
(benefit) for
income taxes (89,000) (1.5) 6,311 .1
Minority
interests 9,282 .2 130
--------- ----- --------- -----
Net loss $ (108,024) (1.8) $ (436,661) (4.3)
========= ===== ========= =====
25
GEOGRAPHIC AREA INFORMATION
---------------------------
Three Months Ended September 30,
--------------------------------
1997 1998
--------------------- ----------------------
Amount % Amount %
---------- ----- ---------- -----
Revenues:
United
States (1) $1,047,377 76.0 $ 962,426 76.7
Far East 330,088 24.0 293,139 23.3
--------- ----- --------- -----
Total $1,377,465 100.0 $1,255,565 100.0
========= ===== ========= =====
Operating
Loss:
United States $ (15,167) (9.1) $ (260,254) (60.4)
Far East (19,755) (11.8) (65,443) (15.2)
Corporate (132,179) (79.1) (105,231) (24.4)
--------- ----- --------- -----
Total $ (167,101) (100.0) $ (430,928) (100.0)
========= ===== ========= =====
(1) Substantially all of the United States revenues are derived from customers
based in the Far East.
26
Nine Months Ended September 30,
-------------------------------
1997 1998
--------------------- ----------------------
Amount % Amount %
---------- ----- ---------- -----
Revenues:
United
States (1) $5,000,743 84.6 $ 6,231,556 61.7
Far East 912,587 15.4 3,875,340 38.3
--------- ----- ---------- -----
Total $5,913,330 100.0 $10,106,896 100.0
========= ===== ========== =====
Operating
Income
(Loss):
United States $ 449,524 174.5 $ 686,998 253.8
Far East (175,151) (68.0) 19,419 7.2
Corporate (531,935) (206.5) (435,719) (161.0)
--------- ----- --------- -----
Total $ (257,562) (100.0) $ 270,698 (100.0)
========= ===== ========= =====
(1) Substantially all of the United States revenues are derived from customers
based in the Far East.
27
BUSINESS SEGMENT INFORMATION
----------------------------
Three Months Ended September 30,
------------------------------------------------
1997 1998
------------------------ ----------------------
Amount % Amount %
---------- ----- ---------- -----
Revenues:
Computer
network
integration $ 723,349 52.5 $ 217,339 17.3
Industrial
equipment
distribution 654,116 47.5 1,038,226 82.7
Information
services (1)
--------- ----- --------- -----
Total $1,377,465 100.0 $1,255,565 100.0
========= ===== ========= =====
Operating
Income
(Loss):
Computer
network
integration $ 86,929 52.0 $ 107,538 25.0
Industrial
equipment
distribution (121,851) (72.9) (360,087) (83.6)
Information
services (1) (73,148) (17.0)
Corporate (132,179) (79.1) (105,231) (24.4)
--------- ----- --------- -----
Total $ (167,101) (100.0) $ (430,928) (100.0)
========= ===== ========= =====
(1) The information services business segment did not generate any operating
revenues through September 30, 1998. Costs attributable to the information
services business segment were not significant prior to 1998.
28
Nine Months Ended September 30,
------------------------------------------------
1997 1998
------------------------ ----------------------
Amount % Amount %
---------- ----- ---------- -----
Revenues:
Computer
network
integration $2,340,570 39.6 $1,398,621 13.8
Industrial
equipment
distribution 3,572,760 60.4 8,708,275 86.2
Information
services (1)
--------- ----- ---------- -----
Total $5,913,330 100.0 $10,106,896 100.0
========= ===== ========== =====
Operating
Income
(Loss):
Computer
network
integration $ 165,034 64.1 $ 659,811 243.8
Industrial
equipment
distribution 109,339 42.4 266,049 98.3
Information
services (1) (219,443) (81.1)
Corporate (531,935) (206.5) (435,719) (161.0)
--------- ----- --------- -----
Total $ (257,562) (100.0) $ 270,698 (100.0)
========= ===== ========= =====
(1) The information services business segment did not generate any operating
revenues through September 30, 1998. Costs attributable to the information
services business segment were not significant prior to 1998.
29
Consolidated Results of Operations:
Three Months Ended September 30, 1998 and 1997 -
Revenues. Revenues for the three months ended September 30, 1998 were
$1,255,565, as compared to $1,377,465 for the three months ended September
30, 1997, a decrease of $121,900 or 8.8%. The decrease in revenues in 1998
as compared to 1997 consisted of a decrease in computer network integration
revenues of $506,010 or 70.0%, offset in part by an increase of $384,110 or
58.7% in industrial equipment distribution revenues. For the three months
ended September 30, 1998 and 1997, industrial equipment distribution revenues
represented approximately 82.7% and 47.5% of consolidated revenues,
respectively, and computer network integration revenues represented
approximately 17.3% and 52.5% of consolidated revenues, respectively.
Revenues decreased in 1998 as compared to 1997 primarily as a result of the
timing of certain industrial equipment distribution contracts.
For the three months ended September 30, 1998 and 1997, revenues from the
China National contract were $0 and $171,000, respectively. For the three
months ended September 30, 1998 and 1997, the China National contract accounted
for approximately 0% and 12% of consolidated revenues, respectively, and
approximately 0% and 26% of industrial equipment distribution revenues,
respectively.
The Company's current focus in the computer network integration segment
of its business is in wireless telecommunication systems. Computer network
integration revenues include revenues from the sale and installation of the
Aria Wireless System. During 1997, the Company was awarded ten contracts
with the Industrial and Commercial Bank of China to customize integration of
and install Aria Wireless Systems for ATM linkage and for clearance and
settlements for its bank branches. Seven of these contracts were completed
during 1997 and the remaining three contracts were scheduled to be completed
during 1998, one of which was completed during the three months ended
September 30, 1998. For the three months ended September 30, 1998 and 1997,
revenues from the sale and installation of the Aria Wireless System were
$83,869 and $497,696, respectively, or 38.6% and 68.8% of computer network
integration revenues, respectively.
For the three months ended September 30, 1998, revenues from United States
export sales to the Far East decreased by $84,951 or 8.1%, to $962,426 in 1998
from $1,047,377 in 1997, and revenues from Far East based operations decreased
by $36,949 or 11.2%, to $293,139 in 1998 from $330,088 in 1997. For the three
months ended September 30, 1998 and 1997, revenues from United States export
sales to the Far East represented approximately 76.7% and 76.0% of consolidated
revenues, respectively, and
30
revenues from Far East based operations represented 23.3% and 24.0% of
consolidated revenues, respectively.
Gross Profit. Gross profit for the three months ended September 30, 1998
decreased by $285,847 or 54.4%, to $239,555 or 19.1% of revenues, as compared to
$525,402 or 38.1% of revenues for the three months ended September 30, 1997.
The decrease in gross profit margin in 1998 as compared to 1997 was a result of
generally increased competition in the industrial equipment business segment,
which the Company expects will continue at least for the remainder of 1998 and
1999.
General and Administrative Expenses. General and administrative expenses
increased by $25,870 or 5.5% to $493,166 or 39.3% of revenues for the three
months ended September 30, 1998, as compared to $467,296 or 33.9% of revenues
for the three months September 30, 1997.
Selling and Marketing Expenses. Selling and marketing expenses increased
by $59,272 or 61.1% to $156,203 or 12.4% of revenues for the three months ended
September 30, 1998, as compared to $96,931 or 7.0% of revenues for the three
months September 30, 1997, primarily as a result of increases in employee
compensation and occupancy costs incurred to develop and promote the STAQ
On-line Network and to support the Company's efforts to expand its operations in
the Far East.
Consulting Fees. During the three months ended September 30, 1997, the
Company incurred consulting fees aggregating $91,849 for certain professional,
consulting and other costs incurred in connection with the Company's ongoing
business development and financing activities. The Company did not incur any
similar consulting fees during the three months ended September 30, 1998.
Operating Income (Loss). For the three months ended September 30, 1998,
the Company incurred an operating loss of ($430,928), as compared to an
operating loss of ($167,101) for the three months ended September 30, 1997. The
increase in the operating loss in 1998 as compared to 1997 was primarily a
result of decreased gross margins and increased costs.
For the three months ended September 30, 1998 and 1997, industrial
equipment distribution operating loss represented approximately 34.6% and 18.6%
of industrial equipment distribution revenues, respectively, and computer
network integration operating income represented approximately 49.5% and 12.0%
of computer network integration revenues, respectively. Computer network
integration operating income increased significantly in 1998 as compared to 1997
as a result of the aforementioned focus by the Company on the sale and
installation of the Aria Wireless System, from which the Company realized
31
improved margins in 1998.
For the three months ended September 30, 1998 and 1997, operating loss from
United States export sales to the Far East represented approximately 27.0% and
1.4% of revenues from United States export sales to the Far East, respectively,
and operating loss from Far East based operations represented approximately
22.3% and 6.0% of revenues from Far East based operations, respectively.
The information services business segment, which consists of the STAQ
On-line Network, did not generate any revenues during the three months ended
September 30, 1998 and 1997. For the three months ended September 30, 1998, the
operating loss from information services was $73,148. Costs related to the STAQ
On-line Network were not significant during the three months ended September 30,
1997.
Interest Expense. For the three months ended September 30, 1998, interest
expense and bank fees increased by $25,569 or 161.1% to $41,439, as compared to
$15,870 for the three months ended September 30, 1997, primarily as a result of
the conversion of a note payable for $672,940 into common stock during June
1998, and bank fees related to a bank letter of credit issued in conjunction
with an industrial equipment purchase contract scheduled for completion in 1998.
Interest Income. For the three months ended September 30, 1998, interest
income decreased by $23,079 or 68.1%, to $10,819, as compared to $33,898 for the
three months ended September 30, 1997, primarily as a result of decreased cash
balances.
Income Taxes. For the three months ended September 30, 1998, the
Company had a loss before income taxes and minority interests of $438,009.
The Company recorded a 100% valuation allowance with respect to the domestic
and foreign income tax benefits arising from such losses, based on
management's conclusion that the realization of the related deferred tax
assets cannot be considered more likely than not. For the three months
ended September 30, 1997, the Company had a loss before income taxes and
minority interests of $139,332, and recorded an income tax benefit of
$58,000.
The Company is subject to different tax rates and tax laws because it
operates in various distinct jurisdictions. As a result, the Company may not
necessarily be able to offset its income earned in one jurisdiction against
losses incurred in another jurisdiction. Therefore, the Company anticipates
that its consolidated effective tax rate may vary significantly between periods.
Net Loss. Net loss for the three months ended September 30, 1998 was
($438,009) or ($.10) per common share (basic and diluted), as compared to a net
loss for the three months ended September 30, 1997 of ($78,000) or ($.02) per
common share (basic
32
and diluted).
Nine Months Ended September 30, 1998 and 1997 -
Revenues. Revenues for the nine months ended September 30, 1998 were
$10,106,896, as compared to $5,913,330 for the nine months ended September 30,
1997, an increase of $4,193,566 or 70.9%. The increase in revenues in 1998 as
compared to 1997 consisted of an increase in industrial equipment distribution
revenues of $5,135,515 or 143.7%, offset in part by a decrease of $941,949 or
40.2% in computer network integration revenues. For the nine months ended
September 30, 1998 and 1997, industrial equipment distribution revenues
represented approximately 86.2% and 60.4% of consolidated revenues,
respectively, and computer network integration revenues represented
approximately 13.8% and 39.6% of consolidated revenues, respectively. Revenues
increased in 1998 as compared to 1997 primarily as a result of the timing of
three industrial equipment distribution contracts aggregating approximately
$6,412,000.
For the nine months ended September 30, 1998 and 1997, revenues from the
China National contract were $0 and $2,237,000, respectively. For the nine
months ended September 30, 1998 and 1997, the China National contract accounted
for approximately 0% and 38% of consolidated revenues, respectively, and
approximately 0% and 63% of industrial equipment distribution revenues,
respectively.
The Company's current focus in the computer network integration segment
of its business is in wireless telecommunication systems. Computer network
integration revenues include revenues from the sale and installation of the
Aria Wireless System. During 1997, the Company was awarded ten contracts
with the Industrial and Commercial Bank of China to customize integration of
and install Aria Wireless Systems for ATM linkage and for clearance and
settlements for its bank branches. Seven of these contracts were completed
during 1997 and the remaining three contracts were scheduled to be completed
during 1998, all of which were completed during the nine months ended
September 30, 1998. For the nine months ended September 30, 1998 and 1997,
revenues from the sale and installation of the Aria Wireless System were
$1,002,302 and $1,484,799, respectively, or 71.7% and 63.4% of computer
network integration revenues, respectively.
For the nine months ended September 30, 1998, revenues from United States
export sales to the Far East increased by $1,230,813 or 24.6%, to $6,231,556 in
1998 from $5,000,743 in 1997, as a result of a general increase in demand for
industrial goods, and revenues from Far East based operations increased by
$2,962,753 or 324.7%, to $3,875,340 in 1998 from $912,587 in 1997, primarily as
a result of the aforementioned significant
33
contracts. For the nine months ended September 30, 1998 and 1997, revenues from
United States export sales to the Far East represented approximately 61.7% and
84.6% of consolidated revenues, respectively, and revenues from Far East based
operations represented 38.3% and 15.4% of consolidated revenues, respectively.
Gross Profit. Gross profit for the nine months ended September 30, 1998
increased by $694,262 or 37.4%, to $2,550,385 or 25.2% of revenues, as compared
to $1,856,123 or 31.4% of revenues for the nine months ended September 30, 1997.
The decrease in gross profit margin in 1998 as compared to 1997 was a result of
generally increased competition in the industrial equipment business segment,
which the Company expects will continue at least for the remainder of 1998 and
1999.
General and Administrative Expenses. General and administrative expenses
increased by $460,002 or 35.1% to $1,769,834 or 17.5% of revenues for the nine
months ended September 30, 1998, as compared to $1,309,832 or 22.2% of revenues
for the nine months September 30, 1997, primarily as a result of increases in
employee compensation and occupancy costs incurred to develop the STAQ On-line
Network and to support the company's efforts to expand its operations in the Far
East, and corporate costs associated with the operation of a public company.
Selling and Marketing Expenses. Selling and marketing expenses increased
by $83,510 or 23.6% to $436,769 or 4.3% of revenues for the nine months ended
September 30, 1998, as compared to $353,259 or 6.0% of revenues for the nine
months September 30, 1997, primarily as a result of increases in employee
compensation and occupancy costs incurred to develop and promote the STAQ
On-line Network and to support the Company's efforts to expand its operations in
the Far East.
Consulting Fees. During the nine months ended September 30, 1997, the
Company incurred consulting fees aggregating $366,740 for certain professional,
consulting and other costs incurred in connection with the Company's ongoing
business development and financing activities. The Company did not incur any
similar consulting fees during the nine months ended September 30, 1998.
Included in the consulting fees of $366,430 are $175,000 of costs pursuant
to a consulting agreement with a consulting firm. The Company entered into the
consulting agreement with the consulting firm for business advisory services on
February 25, 1997. Pursuant to that agreement, the Company paid the consulting
firm $25,000 and issued a one-year note for $150,000 for services rendered. The
note was unsecured, with interest at 10% per annum to accrue until the due date
of February 24, 1998. Thereafter, such note is due and payable upon demand,
with
34
interest at 12% per annum.
The Company has the option of converting the note, including accrued
interest, on or after the due date, into shares of common stock, with the value
of such common shares to be calculated at 75% of the market price on the
conversion date. The maximum number of common shares that the Company will be
required to reserve and issue as full settlement for the note, including accrued
interest, is 75,000 shares. Such shares, if issued, will be restricted and will
have piggyback registration rights.
Operating Income (Loss). For the nine months ended September 30, 1998,
operating income was $270,698, as compared to an operating loss of ($257,562)
for the nine months ended September 30, 1997. The Company had operating income
in 1998, as compared to an operating loss in 1997, primarily as a result of
increased revenues and decreased consulting fees.
For the nine months ended September 30, 1998 and 1997, industrial
equipment distribution operating income represented approximately 3.1% of
industrial equipment distribution revenues, and computer network integration
operating income represented approximately 47.2% and 7.1% of computer network
integration revenues, respectively. Computer network integration operating
income increased significantly in 1998 as compared to 1997 as a result of the
aforementioned focus by the Company on the sale and installation of the Aria
Wireless System, from which the Company realized improved margins in 1998.
For the nine months ended September 30, 1998 and 1997, operating income
from United States export sales to the Far East represented approximately 11.0%
and 9.0% of revenues from United States export sales to the Far East,
respectively, and operating income (loss) from Far East based operations
represented approximately .5% and (19.2%) of revenues from Far East based
operations, respectively.
The information services business segment, which consists of the STAQ
On-line Network, did not generate any revenues during the nine months ended
September 30, 1998 and 1997. For the nine months ended September 30, 1998, the
operating loss from information services was $219,443. Costs related to the
STAQ On-line Network were not significant during the nine months ended September
30, 1997.
Interest Expense. For the nine months ended September 30, 1998, interest
expense and bank fees increased by $110,713 or 251.7% to $154,707, as compared
to $43,994 for the nine months ended September 30, 1997, primarily as a result
of bank fees related to a bank letter of credit issued in conjunction with an
industrial equipment purchase contract scheduled for completion in 1998.
35
Interest Income. For the nine months ended September 30, 1998, interest
income decreased by $45,390 or 58.6%, to $32,028, as compared to $77,418 for the
nine months ended September 30, 1997, primarily as a result of decreased cash
balances.
Write-off of Offering Costs. Deferred offering costs consisted of
capitalized professional fees and related costs incurred in connection with
the Company's contemplated public offering of its securities. Based on an
assessment of market conditions and other factors, the Company decided to
abandon the offering during the three months ended March 31, 1998.
Accordingly, the Company wrote-off deferred offering costs of $582,685, which
is reflected as a charge to operations during the three months ended March
31, 1998 and the nine months ended September 30, 1998.
Income Taxes. For the nine months ended September 30, 1998, the Company
had consolidated income before income taxes and minority interests of
$152,205, and recorded a foreign provision for income taxes of $6,311. The
Company recorded a 100% valuation allowance with respect to the domestic and
foreign income tax benefits arising from such losses, based on management's
conclusion that the realization of the related deferred tax assets cannot be
considered more likely than not. For the nine months ended September 30,
1997, the Company had a loss before income taxes and minority interests of
$206,306, and recorded an income tax benefit of $89,000.
The Company is subject to different tax rates and tax laws because it
operates in various distinct jurisdictions. As a result, the Company may not
necessarily be able to offset its income earned in one jurisdiction against
losses incurred in another jurisdiction. Therefore, the Company anticipates
that its consolidated effective tax rate may vary significantly between periods.
Net Loss. Net loss for the nine months ended September 30, 1998 was
($436,661) or ($.11) per common share (basic and diluted), as compared to a net
loss for the nine months ended September 30, 1997 of ($108,024) or ($.03) per
common share (basic and diluted).
Consolidated Financial Condition:
Liquidity and Capital Resources -
Operating. For the nine months ended September 30, 1998, the Company's
operations provided cash resources of $553,276, as compared to utilizing cash
resources of $873,496 for the nine months ended September 30, 1997. The Company
had a net working capital deficit of ($494,569) at September 30, 1998, as
compared to a net working capital deficit of ($1,560,352) at December 31, 1997,
reflecting current ratios of .94:1 and .80:1, respectively. The Company's
operations provided cash resources in 1998 as
36
compared to utilizing cash resources in 1997 primarily as a result of increased
revenues and improved profitability and project management that focused on cash
collection.
Accounts receivable increased by $831,442 to $2,166,677 at September 30,
1998, from $1,335,235 at December 31, 1997, as a result of increased
operating activity and the timing of cash collections during 1998.
Advances to customers decreased by $474,588 to $1,196,588 at September 30,
1998, from $1,671,166 at December 31, 1997.
During the year ended December 31, 1997, the Company received customer
advances aggregating $2,150,000 with respect to the China National contract,
which has been recorded as customer deposits at December 31, 1997 and September
30, 1998, and which is expected to be utilized in the fulfillment of the
Company's obligations under that contract in subsequent periods. As an
accommodation to China National for excess funds held by the Company, the
Company has periodically loaned funds to China National. These loans do not
bear interest and do not stipulate repayment dates. As of December 31, 1997 and
September 30, 1998, the Company had advanced $1,181,513 to China National, which
is included in advances to customers at those dates.
Investing. During the nine months ended September 30, 1998, the Company
acquired fixed assets aggregating $301,697, of which $113,683 related to
Brighton-STAQ project equipment. During the nine months ended September 30,
1997, the Company acquired fixed assets aggregating $55,935, excluding
project equipment with an estimated fair market value of $185,950 in a
non-cash transaction from the Company's majority stockholder in exchange for
an equivalent reduction in the amount due the Company from the majority
stockholder. Other than equipment which the Company purchases in the
fulfillment of its contracts and its commitment to Brighton-STAQ, the Company
has no capital expenditure commitments.
Financing. During January 1996, the Company entered into a convertible
demand note agreement with a third party, with interest at 5% per annum,
providing proceeds of $575,603. The note had an outstanding balance, including
accrued interest, of $620,101 at December 31, 1997. During June 1998, the
Company settled the note, including accrued interest, by issuing 300,000 shares
of common stock for $425,000 of such amount and by making a cash payment of
$247,940 for the remaining amount.
During the nine months ended September 30, 1998, the Company sold a total
of 735,046 shares of common stock for gross proceeds of $1,199,171, and incurred
related costs of $81,002, generating net proceeds of $1,118,169.
In order to meet its working capital requirements, the
37
Company has periodically received funding from Kit Kung, the Chairman of the
Board of Directors, President and Chief Executive Officer, and his family
members. The Company has also periodically made advances to or on behalf of
the principals and officers of the Company. Such advances are unsecured and
generally bear no stated interest rate or terms of repayment. As of December
31, 1997, amounts due from Kit Kung and his family members aggregated
$232,221. During the nine months ended September 30, 1998, the Company
advanced an aggregate of $248,696 to Kit Kung and his family members,
resulting in a balance due of $480,917 at September 30, 1998. On June 30,
1998, $190,564 of such advances were converted into a note bearing interest
at 5% per annum.
As of September 30, 1998, the Company had issued an irrevocable letter of
credit for $253,000, representing a contingent commitment for the purchase of
equipment, none of which had been disbursed. During December 1997, the wife of
the Company's founder and majority stockholder, who is an officer and director
of the Company, provided a short-term credit facility to the Company by
depositing $500,000 into a short-term interest-bearing account with a Hong Kong
bank as security for the bank's letter of credit for $2,145,000 issued to a
supplier. The full amount of the letter of credit was disbursed and repaid
during the nine months ended September 30, 1998.
As a result of the delay in the China National project, the Company is in
the process of renegotiating the terms of certain aspects of technological
licensing arrangements that it entered into in conjunction with the China
National contract. The contractual value of services currently under
negotiation is approximately $450,000, and the settlement of such obligation is
predicated on the resolution of the China National project. The Company does
not currently expect that it will recognize any significant revenues from this
contract during the year ending December 31, 1998. If China National is unable
to complete the project, management does not expect that the ultimate resolution
of this matter will have a material adverse impact on the Company's financial
position, results of operations or cash flows, other than the loss of revenue,
profits and cash flows that would have been realized if the project had been
completed.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that its projected cash flow provided by operations,
supplemented with borrowings from related parties as necessary, will be
sufficient to support operations at current levels for at least the next 12
months. Although the Company's computer network integration and industrial
equipment distribution business segments on a combined basis generate or have
available sufficient working capital to support their operations, the Company
requires additional capital in connection with the development of the STAQ
On-line Network.
Beijing Brighton-STAQ Electronic System Company Limited
38
("Brighton-STAQ") is a PRC joint venture that was formed to design, develop,
install and maintain a computer network for the trading of securities in China
(the "STAQ On-line Network"). The Company owns a 90% interest in the
Brighton-STAQ and had invested or advanced approximately $1,650,000 and
$2,105,000 with respect to Brighton-STAQ as of December 31, 1997 and September
30, 1998, respectively. As of December 31, 1997, the Company had fully funded
its original obligation to invest $1,600,000 in Brighton-STAQ. The remaining
10% interest in Brighton-STAQ is owned by a company controlled by the STAQ
Exchange, one of four national securities exchanges in China. The minority
interest holder of Brighton-STAQ has the right to acquire an additional 10%
ownership interest per annum (at the then determinable fair values) up to a
maximum interest of 49%. The Company had also committed to provide aggregate
funding of approximately $4,000,000 during 1998 in the form of loans, based on
initial estimates of the amount of working capital required during 1998 to
support the start-up and subsequent expansion of the STAQ On-line Network.
To the extent that the Company is unable to timely fund its current
commitment to Brighton-STAQ during 1998, the planned expansion of the STAQ
On-line Network into additional cities in China will be deferred, thus delaying
the development of Brighton-STAQ and its ability to reach operational viability.
A delay in expanding the STAQ On-line Network may also result in potential
customers adopting alternative systems to trade securities in China, thus
diminishing the STAQ On-line Network's expansion potential and competitive
position in China. The occurrence of these events could reduce the potential
future commercial and economic value of the STAQ On-line Network, which would
adversely affect the potential future profitability of Brighton-STAQ as it
relates to the Company's consolidated results of operations.
Based on revised and updated estimates of the cost to fund the expansion of
the STAQ On-line Network, the Company does not believe that the entire
$4,000,000 of funding will be required during 1998. The Company currently
expects to meet its funding commitment to Brighton-STAQ through a private sale
of its common stock, although there can be no assurances that the Company will
be successful in this regard. To the extent that Brighton-STAQ were to be
funded by sources unrelated to the Company, the Company's interest in
Brighton-STAQ could be reduced or eliminated, which would adversely affect the
potential future profitability of Brighton-STAQ as it relates to the Company's
consolidated results of operations. Since the Company has fully funded its
original $1,600,000 commitment to Brighton-STAQ, the Company believes that this
event is unlikely.
Inflation and Currency Matters:
39
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as relatively high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. Since
1993, the Chinese government has implemented an economic program designed to
control inflation, which has resulted in the tightening of working capital
available to Chinese business enterprises. The recent Asian financial crisis
has resulted in a general reduction in domestic production and sales, and a
general tightening of credit, throughout China. The success of the Company
depends in substantial part on the continued growth and development of the
Chinese economy.
Since the Company's contracts are generally denominated in United States
dollars and are usually of short duration, the Company is not subject to any
significant economic exposure from the effects of inflation in China.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations and the ability of customers to
satisfy obligations owed to the Company. In addition, the Renminbi is not
freely convertible into foreign currencies, and the ability to convert the
Renminbi is subject to the availability of foreign currencies. As a result of
the Asian financial crisis, China recently tightened foreign exchange controls.
Effective December 1, 1998, all foreign exchange transactions involving the
Renminbi must take place through authorized banks in China at the prevailing
exchange rates quoted by the People's Bank of China.
The continuing Asian financial crisis has had a negative impact on the
Company's operations by reducing the Chinese economy's growth and general level
of activity and by causing uncertainty with respect to the ultimate cost of
equipment ordered from United States-based suppliers, which must be paid for by
converting Renminbi into United States dollars. Although the central government
of China has recently indicated that it does not intend to devalue its currency
in the near future, devaluation still remains a possibility. Should the central
government of China decide to devalue the Renminbi, the Company believes that
such an action would have a detrimental effect on the Company's operations, by
reducing the purchasing power of the Company's Chinese customers and by
decreasing the potential earnings from the STAQ On-line Network, when measured
in United States dollars. Although the functional currency of certain of the
Company's Far East operations is the Hong Kong Dollar or the Chinese Renminbi,
the majority of the Company's transactions are conducted in United States
dollars. Accordingly, the Company
40
does not believe that devaluation of the Chinese Renminbi would have a material
effect on the Company's consolidated financial position.
However, the operations of the STAQ On-line Network will be subject to the
effects of inflation and the risk of currency devaluation in China, since its
operations will be conducted in Renminbi.
Year 2000 Issue:
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
programs that have sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Based on a recent internal assessment, the Company has determined that
certain of its software programs will have to be modified or replaced so that
its computer systems will properly utilize dates beyond December 31, 1999. The
Company is in the process of developing estimated costs to be Year 2000
compliant. However, the Company does not believe that the cost to modify its
existing software and/or convert to new software will be significant.
The Company has also reviewed the business operations of its computer
network integration segment in order to determine the potential impact of the
Year 2000 Issue with respect to computer networks that the Company has installed
in China. Although the current computer networks that the Company installs are
Year 2000 compliant, certain prior computer networks may not have been Year 2000
compliant. However, the Company believes that any software modifications
necessary to make such computer networks Year 2000 compliant will be provided by
the companies that developed the hardware and software installed by the Company.
In addition, based on the Company's contracts with its customers, including the
standard one year warranty provision, the Company does not believe that it has
any obligation to modify or replace any network software that it has previously
installed that is not Year 2000 compliant. Accordingly, the Company does not
believe that it will incur any significant costs in this regard with respect to
the Year 2000 Issue.
41
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 1998, the Company issued an
aggregate of 4,000 shares of its common stock to four investors in Taiwan,
Republic of China, for an aggregate purchase price of $20,000. The shares of
common stock were issued under Regulation S of the Securities Act of 1933, as
amended, based on the representations of the recipients.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K - Three Months Ended September 30, 1998: None
42
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
BRIGHTON TECHNOLOGIES CORPORATION
---------------------------------
(Registrant)
Date: January 11, 1999 By: /s/ KIT KUNG
-------------------------
Kit Kung
President and Chief Executive Officer
(Duly authorized officer)
Date: January 11, 1999 By: /s/ ALAN A. JUREWICZ
-------------------------
Alan A. Jurewicz
Chief Financial Officer
(Principal financial
officer)
43