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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 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
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(Name of small business issuer in its charter)
Delaware 87-04604562
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6 Pearl Court
Allendale, New Jersey 07401
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(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (201) 818-2889
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, $.001
par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended December 31, 1998 were
$13,098,207.
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The aggregate market value of the issuer's common stock held by
non-affiliates as of October 1, 1999 was approximately $1,675,527.
As of October 1, 1999, the issuer had 4,557,529 shares of common
stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-KSB for the fiscal year ended December
31, 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 in this Annual Report on Form 10-KSB for the fiscal year ended
December 31, 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.
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TABLE OF CONTENTS
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PART I...........................................................................................................1
ITEM 1. DESCRIPTION OF BUSINESS...............................................................1
ITEM 2. DESCRIPTION OF PROPERTY...............................................................16
ITEM 3. LEGAL PROCEEDINGS.....................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................17
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.............................19
ITEM 7. FINANCIAL STATEMENTS..................................................................29
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE............................................................................29
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.....................................30
ITEM 10. EXECUTIVE COMPENSATION................................................................32
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................33
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................34
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K......................................................36
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
General
Brighton Technologies Corporation (the "Company") (hereinafter,
reference to the "Company" shall include its subsidiaries unless the context
otherwise requires) operates in one business segment: the buying, selling and
installation of computer, communications and industrial equipment. The
Company acts as an intermediary, purchasing such products from sources in the
United States and selling such products to customers in the People's Republic
of China ("PRC" or "China"). The Company operates through offices in the
United States, Hong Kong and the PRC.
The Company is also an owner of an interest in Beijing Brighton STAQ
Electronic System Company Limited ("Brighton-STAQ"). Brighton-STAQ is
developing an on-line securities trading network for the Securities Trading
Automated Quotations System (the "STAQ Exchange"), one of four national stock
exchanges in China, which commenced operations in the second quarter of 1998.
During 1999, the Company experienced a significant reduction in its
existing and anticipated business arising principally from three factors: (1)
the bombing of the Chinese embassy in Belgrade which caused a substantial
reduction in orders from Chinese companies to U.S. based firms; (2) a
restraining order obtained by Allied Signal, Inc. in February 1999 preventing
the Company from using in its business operations cash of $357,230 (See
"DESCRIPTION OF BUSINESS-Major Developments during 1999"); and (3) the
inability to use certain investment funds for the STAQ project because of a
financial scandal within the STAQ Exchange (See "DESCRIPTION OF
BUSINESS-Brighton-STAQ").
Business Strategy
The Company intends to maintain its focus on the Chinese
marketplace. Its business strategy is as follows:
- - Emphasis on network integration in the banking and finance industries
- - Commercialization of the on-line securities trading network
- - Expansion of the industrial equipment distribution business to meet customer
demand
COMPUTER NETWORK INTEGRATION. As the Chinese economy continues to grow and
the standard of living increases in China, the Company believes that there
will be an increased demand for consumer oriented financial services such as
automated teller machines ("ATM") and retail outlets that accept credit card
transactions. The Company's strategy has been to meet this increasing demand
in the Chinese marketplace by installing wireless telecommunications networks
suitable for high volume transactions that require instant responses, such as
ATM transactions, credit card verifications, clearance and settlements. The
Company believes that as market demand for ATMs and retail outlets that
accept credit card transactions increases, it will be able to secure
additional contracts in this area.
INFORMATION SERVICES. As of December 31, 1998, the Company was the owner of a
90% interest in Brighton-STAQ, a PRC registered Sino-Hong Kong joint venture.
As of such date, the remaining 10% interest was owned by a company controlled
by the STAQ Exchange, one of four national securities
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exchanges in China. In April 1999, Brighton-STAQ entered into an agreement
with a new joint venture partner, The Masses Mail Order Limited of China
("The Masses") pursuant to which The Masses agreed to invest a total of
$4,800,000, with an initial investment of $1,800,000 for 53% of the equity in
the joint venture, and a second investment of $3,000,000 to increase the
Masses total interest to 75% in the joint venture. $1,800,000 was invested in
July 1999 and the balance is scheduled to be invested by the end of 1999.
Upon the investment, Brighton's interest would be reduced to 47% and then to
25% from its initial 90% investment, but it would retain its position as the
managing partner in the joint venture. In this new agreement, the former
joint venture partner, Huazheng Electronic Technology Co., Ltd., would return
its 10% equity to Brighton-STAQ. The agreement was subject to the approval of
the Beijing Municipal Government, which was granted on June 16, 1999.
The purpose of Brighton-STAQ is to develop, design, install and
maintain a nationwide computerized multi-market securities quotation and
trading network, similar to the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") in the U.S., for trading of stocks
listed on the Shanghai, Shenzhen and STAQ Exchange (the "STAQ On-line
Network"). The Company's initial plans are to offer the STAQ On-line Network
to the approximately 550 stock brokerages (operating 2,200 offices) that are
members of the STAQ Exchange in the cities of Beijing, Chongqing, Guangzhou,
Shanghai, Shenzhen and other major cities in China, with plans to eventually
market the STAQ On-line Network to all 2,800 stock brokerages (operating over
10,000 offices) in China. The Company expects to initially charge an
installation fee of $6,000 and a monthly maintenance fee of $1,000 for each
terminal installed at the stock brokerages.
Due to a highly publicized financial scandal within the STAQ
Exchange, The Masses has not authorized the disbursement of the newly
invested funds for expansion until the outcome of the investigation is
completed. There is also uncertainty as to when the $3,000,000 balance will
be invested into the joint venture by the Masses. Management of the Company
is unable to predict the outcome of such investigation, but believes that the
STAQ project continues to be commercially viable.
INDUSTRIAL EQUIPMENT DISTRIBUTION. Industrial equipment distribution accounts
for a substantial portion of the current revenues of the Company. The type
of industrial equipment which the Company has been marketing in China
includes machine tools, such as machine center and grinder measurement
devices, and heavy machinery, such as gantry mills, pressing machine
production lines and dyes transfer automation systems. The Company is the
exclusive distributor for Milltronics Manufacturing Company (a U.S. company),
ALO Teknik AB (a Swedish company), Royal Master Grinders, Inc. (a U.S.
company) and K.O. Lee Company (a U.S. company) for the sale of their
industrial equipment in China.
COMPUTER NETWORK INTEGRATION
Market Overview
China's information technology market has enjoyed significant growth
and will likely grow at an increasing rate in the next decade as market
demand for Western style modernization increases. In particular, growth will
be most significant for system engineering services that provide customized
products tailoring to customer's specifications. The following are the market
factors that are expected to contribute to this growth:
(1) Development of large scale information "infrastructures": The
Chinese Central Government has made "informationization" of the economy a
priority of its most recent five year plan, and is planning to invest
substantial amounts of capital in numerous information superhighway type
projects such as the "Golden" projects(1).
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(2) Growing demand for complex information systems from other large
infrastructure projects: Continuous investment in large-scale infrastructure
in areas such as power generation and transportation will drive demand for
information technology systems.
(3) Growing demand for information technology systems from
enterprises and government agencies: As the Chinese economy develops and
matures, enterprises and governmental agencies will need to utilize
information technology systems to become competitive with their counterparts
in more developed countries.
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1) China's State Council plans to develop the country's
information infrastructure by 2000. The plan, known as the China National
Information Infrastructure was implemented at the end of 1993 and is
characterized by a series of "Golden" Projects, including the Golden Bridge,
Golden Taxation, Golden Customs and Golden Card Projects. The Golden Bridge
Project's goal is to link, via a telecommunications network, all the cables
of the Ministry of Posts and Telecommunications and special telecommunication
grids of other ministries and official departments. The telecommunication
network is expected to digitally transmit documents, sound and pictures used
for serving China's finance, customs, foreign trade, tourism, meteorology,
communication, State security, science and technology and other information
businesses. The Golden Tax and Golden Customs Projects are extensions of the
Golden Bridge Project. The Golden Card Project is consumer oriented and
expected to modernize China's payment and cashing services with the
introduction and popularization of credit cards and other related media and
decrease the amount of cash in circulation.
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Due to their relative lack of technological sophistication, Chinese
customers usually require more systems engineering services on each project
than customers in more developed markets. Compared to Western countries,
China's information technology industry is relatively young, such that most
organizations do not have dedicated information technology departments as are
common in Western countries. Much of the industry's technical resources are
concentrated in companies that directly engage in the information technology
business. As a result, companies outside the industry must rely on external
technical expertise to meet their needs. The demand for outside technical
assistance will likely increase as most of the software packages being
developed are general platforms that require substantial customization to
meet specific needs of each organization.
Operations
The Company provides customized full service computer network and
telecommunications equipment integration, installation and maintenance for
customers in China and other Pacific Basin countries. The Company provides
integrating solutions for customers utilizing software and hardware developed
by third parties. The Company's computer network integration projects include
integration of hotel management computer systems capable of managing
reservations, telephones and billings, office automation projects, including
integration of software from Chinese vendors with computer equipment
manufactured by Digital Equipment Corporation, and wireless telecommunication
systems for banking and finance industries. The Company's focus on the
computer network integration segment of the business is currently in wireless
telecommunication systems.
The Company has introduced Aria Wireless Systems, Inc.'s wireless
telecommunication equipment ("Aria Wireless Systems"), which is suitable for
high volume transactions that require instant
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responses, such as ATM transactions, credit card verifications, clearance and
settlements, in the Chinese marketplace. In 1997, the Company secured ten
contracts with ICBC to customize integration of and install Aria Wireless
Systems for ATM linkage and for clearance and settlements for eight of its
bank branches. Seven of the contracts were completed in 1997 and the
remaining three contracts were completed in 1998.
To solicit contracts for its computer network integration services
business, the Company participates in two to three trade shows per annum and
holds two to three promotional seminars per annum throughout China and
follows up with mass mailings of product catalogues. To date, the Company's
customers for this business segment have all been PRC Government owned or
controlled entities, including government ministries, banks, universities and
research facilities.
Information Services
China's Securities Market Overview (all conversions to U.S. dollars use the
October 1, 1999 exchange rate)
The Chinese securities market comprises four national exchanges:
Shanghai, Shenzhen, STAQ and China National Securities Trading System
("NETS"). The securities industry is regulated by two organizations: The
State Council Securities Policy Committee, which is responsible for macro
policy, and the China Securities Regulatory Commission ("CSRC"), which is
responsible for the day-to-day regulation of the securities industry. The
CSRC dictates the stock exchange on which the shares of any Chinese company,
whether state-owned or foreign-owned, is listed. The CSRC also determines the
terms of the listing, including the size of the offering of securities and
the price of the offering.
Trade orders on all four national exchanges are computer matched.
Each exchange seat at each of the four exchanges is equipped with a computer
terminal for entering trade orders. Membership to the exchanges is limited to
licensed stock brokerages and only registered members can trade on the
respective exchanges. Non-members of the exchanges place orders with member
stock brokerages either personally or by telephone. Each exchange has taken a
different approach in developing its distribution system to its members. The
NETS Exchange, the Exchange under the control of the People's Bank of China
that was originally established for government bond clearing for the other
national exchanges, has been inactive for a number of years and is not
further discussed.
The Shanghai Stock Exchange operates 21 sub-exchanges across China.
These sub-exchanges are linked to the main computer via satellite. A member
of the Shanghai Stock Exchange can obtain exchange seats at the main exchange
or at any of the sub-exchanges. Stocks, debt instruments and investment funds
are traded on the Shanghai Stock Exchange. According to STAQ Exchange
officials, a seat on the Shanghai Stock Exchange is Rmb1,000,000 ($120,482)
and the annual membership fee is Rmb500,000 ($60,241). The Shanghai Stock
Exchange began offering off-floor on-line trading of its stocks in late 1997
and to date, has installed approximately 500 remote terminals. The
installation charge for each terminal is Rmb300,000 ($36,145) and the annual
maintenance fee is Rmb60,000 ($7,229). Stock brokerages that have not
subscribed for the off-floor on-line trading must place their orders with
their floor agents by telephone. As of May 31, 1998, 407 companies were
listed on the Shanghai Stock Exchange with an aggregate market capitalization
of Rmb118.7 billion ($14.3 billion). The 1998 average daily turnover through
May 1998 was Rmb778 million ($93.7 million).
The Shenzhen Stock Exchange offers direct on-line linkage to its
central computer via satellite. Each subscribing stock brokerage is directly
linked to one satellite station. Trade orders can be entered directly onto
computer terminals at the respective stock brokerages. According to STAQ
Exchange
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officials, the annual membership fee for the Shenzhen Stock Exchange is
Rmb600,000 ($72,289) and it charges its members an installation charge of
approximately Rmb300,000 ($36,145) to set up satellite linkage and an annual
maintenance fee of Rmb60,000 ($7,229). Stocks, debt instruments and
investment funds are traded on the Shenzhen Stock Exchange. As of December
31, 1998, 384 companies were listed on the Shenzhen Stock Exchange with an
aggregate market capitalization of Rmb104.7 billion ($12.6 billion). The 1998
turnover through December 1998 was Rmb857.4 million ($103.3 million).
The STAQ Exchange has its main trading floor in Beijing and a
sub-exchange in Xiamen. The STAQ Exchange is the official exchange for (i)
legal-person-owned shares (C Shares), that are shares of PRC state-owned
enterprises which may only be held by other PRC state-owned enterprises, and
(ii) State Treasury Bonds issued by the Ministry of Finance. In addition to
listing C Shares (total of seven stocks) and State Treasury Bonds, the STAQ
Exchange acts as a sub-exchange for both the Shanghai and Shenzhen Stock
Exchanges. A sub-exchange functions as a branch of the main exchange. Through
direct computer linkages via satellite with both the Shanghai and Shenzhen
Stock Exchanges, members of the STAQ Exchange can directly trade stocks
listed on the Shanghai and Shenzhen Stock Exchanges from the STAQ Exchange
trading floor. According to STAQ officials, the annual membership fee for the
STAQ Exchange is Rmb150,000 ($18,072).
The STAQ Exchange
The STAQ Exchange was approved by the CSRC in 1992. The Stock
Exchange Executive Council (the "SEEC"), a non-governmental advisory body to
the CSRC, was assigned the responsibility of designing and developing the
STAQ Exchange into a computer-based over-the-counter multi-point to
multi-point on-line automated quotations system for securities trading. The
members of the SEEC consist of China's largest trust and investment
corporations, securities firms, and other non-bank financial institutions
authorized to engage in securities and other financial businesses.
About 80% of all State Treasury Bonds are distributed by the
Ministry of Finance through the STAQ Exchange and 50% of all State Treasury
Bond trading is done through the STAQ Exchange. Due to the restrictive
ownership requirements of C Shares, trading of C Shares is limited and
sporadic. When the STAQ Exchange was first approved as a sub-exchange for the
Shanghai and Shenzhen Stock Exchanges in 1992 and in 1993, respectively, the
trading volume fluctuated substantially due to the inherent instabilities of
these two fledgling exchanges which were formally established only in 1991
and 1990, respectively. According to STAQ Exchange officials, the high end
trading volume for the STAQ Exchange was approximately 3% of the Shanghai
Stock Exchange and 10% of the Shenzhen Stock Exchange. According to STAQ
Exchange officials, trading on the STAQ Exchange has stabilized at 1.5% and
4% of the trading volume on the Shanghai and Shenzhen Stock Exchanges,
respectively, for the last three years.
Trade orders on the STAQ Exchange are entered onto the computer
terminals located on the trading floor in either Beijing or Xiamen and are
computer matched. Members telephone their floor agents to execute
transactions. According to statistics provided by STAQ Exchange officials,
there are currently approximately 550 licensed stock brokerages (operating
approximately 2,200 offices in China) that are members of the STAQ Exchange.
Brighton-STAQ
Brighton-STAQ is a PRC registered Sino-Hong Kong equity joint
venture company of which, as of December 31, 1998, the Company owned 90% and
Huazheng owned 10%. Brighton-STAQ has its registered office and principal
place of business in Beijing and branch offices registered in Chongqing
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and Shanghai. Brighton-STAQ was formed to design, develop, install and
maintain the STAQ On-line Network.
In 1992, the STAQ Exchange received a grant of $200,000 from the
World Bank for the development of the STAQ Exchange. The STAQ Exchange used
part of the funds to invite seven technical experts from NASDAQ to visit the
STAQ Exchange in Beijing and also asked the experts from NASDAQ to review the
designs for the national on-line securities trading system that was modeled
after NASDAQ. After reviewing the plans submitted, the NASDAQ experts
confirmed that, as presented, the designs were functionally suitable for the
on-line securities trading system as contemplated. Based on its expertise in
the computer network integration services business, the Company was invited
by the STAQ Exchange to submit designs for the computer network component of
the on-line securities trading system. The Company's designs for the STAQ
On-line Network were submitted, along with the designs of the securities
trading system, for review and approved by the NASDAQ experts. NASDAQ has no
on-going involvement with the STAQ Exchange.
In February 1998, the STAQ On-line Network commenced initial linkage
of remote computer terminals installed at stock brokerages in the cities of
Beijing and Chongqing (with plans to expand linkage to Guangzhou, Shanghai,
Shenzhen and other major cities in China) to the STAQ Exchange trading floor
in Beijing. As of October 1, 1999, the Company had installed approximately 72
terminals in Beijing and Chongqing. The Company has contracted to provide
maintenance and service of the STAQ On-line Network to 71 stock brokerages.
The Company anticipates that linkage will eventually be on a nationwide
level, with such expansion being driven by the Company's estimated break-even
for each city of approximately 15 terminals. Through the use of the STAQ
On-line Network, the stock brokerages will then be able to obtain real time
price quotations of shares traded on the Shanghai and Shenzhen Stock
Exchanges as well as C Shares and State Treasury Bonds and will be able to
trade through party-to-party negotiations on remote computer terminals. The
STAQ On-line Network is modeled after the on-line trading system offered by
NASDAQ in the U.S. although, unlike NASDAQ, with the exception of C Shares,
no stock will be quoted solely on the STAQ Exchange.
Information displayed on the remote computer terminals will be
identical to information available on the trading floor of the STAQ Exchange
in Beijing. The operation of the STAQ On-line Network, including all software
programs installed on the remote computer terminals at the stock brokerage
houses, will be maintained and controlled by the STAQ Exchange.
Brighton-STAQ's role is to develop, design, install and maintain the STAQ
On-line Network. The Company will earn its revenue through an initial
installation charge and a monthly maintenance fee charged to the stock
brokerage houses for each terminal. The Company initially plans to charge a
maintenance fee equivalent to approximately $1,000 per month for each remote
computer terminal. The maintenance fee will be paid and denominated in
Renminbi. The Company expects to initially charge an installation fee
equivalent to approximately $6,000 for installing each remote computer
terminal at the stock brokerages which will also be paid and denominated in
Renminbi.
Brighton-STAQ is authorized by the Ministry of Foreign Economic
Relations and Trade for a total investment of $1,600,000. The Company had
invested or advanced approximately $1,738,172 and $1,997,324 with respect to
Brighton-STAQ as of December 31, 1997 and 1998, respectively. As of December
31, 1997, the Company had fully funded its original obligation to invest
$1,600,000 in Brighton-STAQ.
In April 1999, Brighton-STAQ entered into an agreement with a new
joint venture partner, The Masses Mail Order Limited of China ("The Masses")
in the PRC. The new agreement calls for The Masses to invest a total of
$4,800,000, with an initial investment of $1,800,00 for 53% of the equity in
the
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joint venture, and a second investment of $3,000,000 to increase The Masses
total interest to 75% in the joint venture. $1,800,000 was invested in July
1999 and the balance of $3,000,000 is scheduled to be invested by the end of
1999. In such event, Brighton's interest would be reduced to 47% and then to
25% from its initial 90% investment, but it would retain its position as the
managing partner in the joint venture. In this new agreement, the former
joint venture partner Huazheng Electronic Technology Co., Ltd. would return
its 10% equity in the joint venture company to Brighton-STAQ. The agreement
was subject to the approval of the Beijing Municipal Government, which was
granted on June 16, 1999.
Due to a highly publicized financial scandal within the STAQ
Exchange, The Masses has not agreed to disburse the newly invested funds for
expansion until the outcome of the investigation is completed. There is also
uncertainty as to when the $3,000,000 balance will be invested into the joint
venture by the Masses. Management of the Company is unable to predict the
outcome of such investigation, but believes that the STAQ project continues
to be commercially viable.
Current Status of the STAQ On-line Network
The Company has successfully tested the STAQ On-line Network using
dedicated land telephone lines leased from ChinaPac, a commercial arm of the
Ministry of Information Industry. In order to be fully commercially
operational, the Company intends to convert the STAQ On-line Network to
satellite and wireless linkage. In December 1997, the Company signed a
three-year arrangement with The People's Daily, the major newspaper serving
China, to subscribe for use of its satellite service. The Company is able to
obtain services from The People's Daily at a rate of one-third the rate
generally charged by commercial providers of satellite service because The
People's Daily uses satellite communication only at night for distribution of
text, as is customary for daily newspaper publications. As a result, its
satellite communication resources are idle during daylight hours. This
provides the opportunity for the Company to lease the system, with
availability during key daylight trading hours, at very competitive rates.
The satellite transponder providers of The People's Daily are Asia Satellite
Telecommunications Co. Ltd. in Hong Kong for C-Band transponder and China
Telecommunications Broadcast Satellite Corporation in Beijing for Ku-Band
transponder.
The stock price quotations from the STAQ Exchange trading floor in
Beijing will be uplinked to The People's Daily's transponder and down linked
to various cities then being served. Two satellite communication links, one
between the STAQ Exchange trading floor in Beijing and Shanghai and the other
between the STAQ Exchange trading floor in Beijing and Chongqing have been
completed. The cost of construction for each satellite communication link was
approximately $38,000. The satellite equipment utilized for the STAQ On-line
Network is manufactured by Hughes Electronics Corporation. After being down
linked to the various cities, the stock price quotations will be transmitted
over a wireless system for broadcast to the remote computer terminals at the
brokerages. Nodes for receiving the data broadcast over the wireless system
will be installed at the terminals. When a buy or sell order is executed at
the terminals, such information is transmitted back via the wireless system
and the satellite linkage to the STAQ Exchange in Beijing. A pair of radio
frequencies, one for receiving and one for transmitting data, is generally
able to support simultaneous broadcast and receipt of data to a maximum of 20
end users. The Company has, in conjunction with Aria Wireless Systems, Inc.,
developed data broadcast software that enables a pair of radio frequencies to
support up to 250 end users of the STAQ On-line Network. The Company believes
that its data broadcast software will significantly enhance its ability to
offer the STAQ On-line Network services to end users as radio frequencies,
which are controlled by the government, are limited and difficult to obtain
in China. While The People's Daily provides the services of its satellite
transponders to operate the communications linkages, the Company owns the
satellite equipment necessary for uplinking and downlinking the stock price
quotations.
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For local wireless communication, the Company plans to "piggyback"
on the frequencies used by the Aria Wireless Systems which it has installed
for other customers. Radio frequency is a controlled resource in China.
Current Chinese laws and regulations do not allow foreign ownership or
control of radio frequency. As a result, the Company cannot independently
lease radio frequencies from the National Management Bureau of Radio
Frequencies to build its wireless networks. The Company's customer, ICBC, has
agreed to allot a portion of ICBC's assigned radio frequency in Beijing and
Chongqing for the Company's use for a fee of $100 per node per year.
The STAQ On-Line Network is functionally similar to other on-line
transaction processing systems the Company has designed and installed for its
financial services and hospitality industry customers. On-line transaction
processing systems are designed to provide instant responses for high volume
transactions. In the last seven years, the Company and other companies
controlled by the Company's Chairman, Chief Executive Officer, President and
principal stockholder have developed, designed and installed over 45 on-line
transaction processing networks in the Pacific Basin region to customer's
specifications, including credit verification and authorization systems,
airline ticket reservation systems, ATM networks and bank branch networking.
The Company has applied this knowledge in the design and development of the
STAQ On-Line Network.
Marketing
In February 1998, the Company commenced operations of the
satellite-linked STAQ On-line Network in the cities of Beijing and Chongqing
and installed computer terminals in a selected number of STAQ Exchange member
stock brokerages for three month test periods. As of October 1, 1999, the
Company had installed approximately 71 terminals in Beijing and Chongqing.
During the test period, the STAQ On-line Network is provided to the selected
stock brokerages free of charge. At the end of the test period, these stock
brokerages will have the option to subscribe for the STAQ On-line Network by
executing maintenance agreements with Brighton-STAQ. The Company plans to
host a series of seminars at these test sites for other traders from the STAQ
Exchange member stock brokerages during the test period to attract customers.
As of October 1, 1999, the Company had contracted to provide maintenance and
service of the STAQ On-line Network to approximately 71 stock brokerages.
Subject to the Company obtaining additional working capital, the Company
intends to expand the STAQ On-line Network to Shanghai, Shenzhen, Guangzhou
and other major cities in China.
The Company believes that the STAQ On-line Network will increase the
STAQ Exchange's ability to offer access to trading on the exchange. According
to STAQ Exchange officials, only half of its members currently have seats on
the trading floor because of the STAQ Exchange's insufficient technical
expertise and capital resources. The remaining members must collaborate with
seat members to trade. Eventually, Brighton-STAQ plans to co-market the STAQ
On-line Network, in cooperation with the STAQ Exchange, by packaging it with
membership to the STAQ Exchange to all stock brokerages who are not yet
members of the STAQ Exchange.
Competition - Brighton-STAQ
Both the Shanghai and Shenzhen Stock Exchanges maintain their own
on-line securities quotation and trading systems and have the potential to
compete with the STAQ Exchange for trading of securities listed on their
respective stock exchanges. The Company believes that it is unlikely that
either the Shanghai or Shenzhen Stock Exchanges would compete with the STAQ
Exchange because all three exchanges are now under common control. The
Shanghai and Shenzhen Stock Exchanges were brought under direct control of
the CSRC by the PRC State Council in August 1997 to settle conflict of
interest issues among the exchanges. In addition, as their sub-exchange, the
STAQ Exchange is contributing to
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the development of the Shanghai and Shenzhen Stock Exchanges. The Company
believes that the development of the STAQ On-line Network by Brighton-STAQ
will likely complement the Shanghai and Shenzhen Stock Exchanges by
increasing the volume of securities traded on both exchanges.
The Company will potentially compete with other businesses
experienced in the systems management and computer network integration
business as well as the wireless communications business, which are capable
of designing, installing and maintaining on-line transaction processing
systems. The Company believes that information providers that have entered
the China market and utilize on-line transaction processing systems in their
businesses, such as Dow Jones Markets, Inc., Reuters Limited and Bloomberg
L.P., are potential competitors of the Company. These potential competitors
have greater marketing and development budgets than the Company and have
greater capital resources than the Company. In the developed securities
markets in the Pacific Basin region (such as Hong Kong, Singapore, Japan,
Malaysia, Thailand and Taiwan), Dow Jones Markets, Inc., Reuters Limited and
Bloomberg L.P. have been successful in providing trading on off-exchange
floor trading for foreign securities markets, currency trading and news and
information. It should be noted that except for China, which permits
off-exchange floor trading, the stock exchanges in the Pacific Basin region
are all floor-based electronic trading systems which do not permit
off-exchange floor trading of their domestically listed securities.
Industrial Equipment Distribution
Market Overview
Beginning in the mid-1980's, China commenced economic reforms that
significantly decentralized the purchasing authority of government owned or
controlled entities with respect to imports. In response to this process of
decentralization and market orientation, increased numbers of industrial
equipment manufacturers and independent distributors have entered the Chinese
market to meet the market demand for modernization. Currently, the industrial
equipment distribution sector in China is highly saturated with significant
competition among manufacturers and distributors from around the world. The
industrial equipment distribution business in 1999 was materially impacted by
the virtual cessation of orders for several months following the bombing of
the Chinese embassy in Belgrade, Yugoslavia. The Company also experienced a
working capital shortfall following the restraining order/attachment against
a deposit account of $357,230 with the New York branch of the Bank of China
(See "DESCRIPTION OF BUSINESS - Major Developments during 1999").
Products
The Company facilitates access to the Chinese marketplace by United
States, European and other manufacturers of industrial equipment by providing
marketing, sales and technical services for their products. The industrial
equipment which the Company has been marketing in China are machine tools,
such as machine centers and grinder measurement devices, and heavy machinery,
such as gantry mills, pressing machine production lines and dyes transfer
automation systems.
The Company has signed exclusive distributor agreements with several
major manufacturers of industrial equipment (Milltronics Manufacturing
Company (a U.S. company), ALO Teknik AB (a Swedish company), Royal Master
Grinders, Inc. (a U.S. company) and K.O. Lee Company (a U.S. company)) for
the sale of their industrial equipment in China. However, these manufacturers
may sell the industrial equipment to their own customers based outside of
China for use in China, such as, sales to the American party of a
Sino-foreign joint venture company for use by the Sino-foreign joint venture
company in China. In such cases, these manufacturers would pay the Company a
sales commission of 5%
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of the sales price for the Company to provide repair and servicing for the
industrial equipment inside China. The Company also sells industrial
equipment for other manufacturers on a non-exclusive basis.
Customers
The Company's customers for industrial equipment are PRC Government
owned or controlled entities, including government ministries, universities,
research facilities and factories. The majority of the Company's customers
are metal handling and processing factories in the automotive, ship building
and aviation industries in China.
The Company signed three major contracts with Chinese customers for
the sale of industrial equipment in 1997 totaling approximately $7,171,000.
The Company was awarded a $1,690,000 contract from Shenyang Aircraft
Corporation to equip five heavy duty vertical machining centers. The machine
centers have been delivered and installed by the Company in 1998. Shenyang
Aircraft Corporation is a leading aircraft manufacturer in China and produces
sections of the Boeing 737 aircraft. The Company entered into a contract to
provide computer-controlled auto body stamping equipment to Changan
Automobile Works, a Chinese state-owned automotive manufacturer, located in
Chongqing, for $3,081,000. Changan Automobile Works is one of the largest
automotive manufacturers in China and is a long standing customer of the
Company. The Company contracted to provide a gantry milling machine to
Shenyang Blower Works, in Shenyang, for $2,400,000. Shenyang Blower Works is
a leading manufacturer of air blowers and air compressors for the petroleum,
chemical and electricity generating industries in China.
For the year ended December 31, 1998, the Company signed a number of
contracts with Chinese customers totaling approximately $5,364,760. The
Company signed a contract with Instrimpex Instec Import & Export Corp. to
supply 29 Ultra SPARC Processors from Sun Microsystems, Inc. The processors
will be used to create high-speed internet connections and multimedia
networks in China. The Company was awarded a contract from Chongqing Foreign
Trade Import & Export Corporation to supply a fully automatic setting machine
from Alo Teknik. The machine is for cutting metal sheets, pipes and other
materials in heavy industrial production lines. The combined contract price
for both contracts is approximately $930,000. The Company was also awarded a
$1,570,760 contract from China Songhai Industrial Corporation for
communications network equipment manufactured by Cisco Systems, Inc. The
Company received two contracts for a total of $1,024,000 to supply air
compressors manufactured by Sullair Corporation to Shanxi Electric Power
Complete Equipment Company and the Commercial Bureau of Heilongjiang
Province. The air compressors will be utilized at the Yangcheng Power Plant
and at ShuangYa Shan Mine in Heilongjiang Province. The Yangcheng Power Plant
will be one of the largest power plants in China after its construction is
completed. In September 1998, the Company signed two contracts for over
$1,840,000 from China Xinxing Import & Export Corporation for communications
network equipment manufactured by Cisco Systems, Inc.
Although the Company's customers vary from year to year, the Company
historically has relied on a limited number of customers for a substantial
portion of its total revenues, the margins of which may vary significantly.
The Company expects that a significant portion of its future revenues from
this business segment will continue to be generated by a limited number of
customers, 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.
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Marketing
The Company solicits potential customers for the sale of industrial
equipment by participating in trade shows, promotional seminars and
exhibitions throughout China and following up with mass mailings of product
catalogues. At the trade shows, the Company operates a separate promotional
exhibit. When the Company receives a request for particular equipment, the
Company's sales staff is provided with the technical specifications and
searches for suitable equipment manufacturers in the global market. When
equipment that meets the technical specifications of the customer is
identified, a case-by-case arrangement is negotiated between the equipment
manufacturer and the Company. After a purchase agreement is signed with the
customer, the Company will purchase the equipment from the manufacturer and
resell it to the customer.
The Company's industrial equipment distribution business sales and
support teams, based in China and New Jersey, have grown from a total of
three employees in 1991 to 23 employees as of December 31, 1998. The
Company's sales teams in China for the industrial equipment distribution
business are located in Beijing (six employees), Shanghai (three
employees),Wuhan (three employees) and Chongqing (three employees). All
orders are sent to Beijing for approval and processing.
Foreign Trade Corporations ("FTC's")
Contracts for the sale of industrial equipment are entered into
between affiliates of the Company, and the customer. The Company does not
place an order with the third party manufacturer for industrial equipment
until a sale has been made to the customer. As a result, the Company does not
generally need to warehouse inventory. In most cases, however, the Company
does take title to the industrial equipment and bears the risk of loss in the
event of non-payment by the customer.
Sales of the industrial equipment, regardless of the nature of the
customer, are made through FTC's, since Chinese domestic companies and
individuals are not permitted to trade directly with foreign companies. The
FTC's make purchases on behalf of the customers and are legally authorized by
the PRC Government to conduct import business. FTC's are chartered and
regulated by the government and were formed to facilitate foreign trade. Once
the customer selects the foreign vendor and the industrial equipment to be
purchased, it selects an FTC to carry out the necessary procedures for the
import and purchase of the equipment. The FTC's function as procurement arms
for the customers. Although the purchase decision is made by the customer,
the Company enters into formal purchase contracts with FTC's. The FTC's take
title to the industrial equipment and resell to the customers. The customers
pay the FTC's in Renminbi and the FTC's, which have access to foreign
exchange, pay the foreign vendors in U.S. dollars or other foreign currency.
By virtue of its direct contractual relationship with the FTC,
rather than the customer, the Company is to some extent dependent upon the
continuing existence of and contractual compliance by the FTC until the
particular transaction has been consummated. The Company's industrial
equipment sales business, however, is not dependent on any single FTC or
customer. Although sales by the Company to certain industries involve repeat
transactions with FTC's that operate in those industries, the Company does
not believe that it is dependent upon any particular FTC or that the loss of
relations with any particular FTC would have a material adverse effect on the
Company. Rather, FTC's, which earn commissions in transactions, compete with
each other for the right to handle the customer's business.
The Company believes that it is able to ensure that purchase orders
for industrial equipment by the customers are properly approved and
authorized when a purchase contract is signed with an FTC because the FTC
will review all necessary paperwork before executing contracts on the
customer's
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behalf. As an additional precaution, to date, all of the Company's direct
sales to its customers have been guaranteed by letters of credit. As a
policy, the Company will not ship any industrial equipment ordered until a
bank letter of credit is provided by the customer. As such, the Company has
seldom experienced nonpayment for industrial equipment orders and the risk of
loss due to nonpayment is negligible even though the Company takes title to
the industrial equipment. The Company has also never experienced a problem
with obtaining payment in U.S. dollars for the industrial equipment.
The customer is responsible for carrying out any necessary import
procedure for the industrial equipment, obtaining the import license and for
freight charges. The Company ships the ordered industrial equipment to the
port of entry specified by the customer. It is also the customer's
responsibility to clear the industrial equipment through customs and ship the
industrial equipment from the port of entry to the customer's premises. After
the industrial equipment has arrived at its destination in China, the Company
arranges with the customer for the installation of the industrial equipment
and the training of the customer's personnel in the operation of the
industrial equipment. The industrial equipment is generally warranted for a
period of one year after installation. The customer is responsible for any
out of warranty service and repairs.
YangZhou Brighton Equipment Corporation Ltd.
The Company's Hong Kong subsidiary, Brighton Equipment Corporation
Limited ("BECL"), on October 17, 1997, signed a joint venture contract with
YangZhou Machine Tools Works to form YangZhou Brighton Equipment Corporation
Ltd. ("YangZhou Brighton"), a Sino-Hong Kong equity joint venture company.
YangZhou Brighton was established to produce and sell industrial equipment to
small-to-midsize companies not ordinarily able to engage the services of
FTC's due to costs. These companies are not permitted to trade directly with
foreign companies and are not able to secure foreign exchange. YangZhou
Brighton, a Chinese domestic company, is able to transact and accept
Renminbi. YangZhou Brighton's office is located in YangZhou City, PRC.
YangZhou Brighton commenced operations in March 1998. The Company has not
generated any revenue from this joint venture through December 31, 1998. The
interest of the Company in the joint venture was transferred in connection
with the sale by the Company of BECL (See "BUSINESS - Major Developments
during 1999").
After-Sale Services
In order to perform its servicing and other after-sale
responsibilities, the Company employs a staff of five engineering and
technical support personnel. The technical support engineers work out of the
Company's various offices throughout China and are trained to handle service
calls initially through advice and consultation. If necessary, the engineers
travel to the location of the unit and perform required servicing. The
Company maintains what it believes is an adequate inventory of supplies,
spare parts and tools to handle most servicing. If parts under warranty
require replacement, the Company may elect to replace that part out of its
own parts inventory with the understanding that the manufacturer would in
turn replace the part in the Company's inventory. Any post-warranty repair or
servicing, charged on a time and material basis, has historically been
immaterial to the Company's business.
Competition
The Company competes with other independent distributors in China
marketing similar products. Although the Company believes that it is one of
the major independent distributors of industrial equipment, there may be
other distributors with greater resources or other competitive advantages
over the Company.
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In addition to other independent distributors, the Company faces
more significant competition directly from established manufacturers. With
respect to its industrial equipment, for example, the Company competes with
Cincinnati Milacron, Inc. of the U.S., which maintains its own direct sales
force in China. In addition, certain manufacturers, such as Ingersoll-Rand
Company of the U.S., are better able than the Company to establish name
recognition across industry lines as they market a wide variety of products
in China under one brand name.
Domestic Chinese entities also compete in various product areas.
Certain of these competitors, whether joint venture projects with foreign
manufacturers or with all-Chinese groups, often receive preferential
treatment by the government regulatory authorities, who seek to curtail
spending on imported equipment in favor of domestic Chinese industrial
development. Although the Company competes directly with products of certain
joint ventures and all-Chinese groups, the Company does not believe that this
preference by the regulatory authorities is frequently applied to the
material detriment of the Company.
China National Contract
On April 15, 1994, the Company, through its subsidiary, the Brighton
Industries Corporation ("BIC"), contracted with China National to provide,
for a total of $11 million, engineering design and implementation for a
sodium bichromate production plant with an annual production capacity of
20,000 metric tons. This contract and the work related to it are outside the
ordinary course of the Company's business. However, because of certain
third-party technology that was available to it at that time, the Company was
able to successfully bid on the contract. Turn-key contracts of this nature
are generally discrete projects, and the Company does not anticipate repeat
business from China National. The Company also does not currently have or
plan to have any other projects of this nature in the foreseeable future. All
payments from China National were remitted to the Company in U.S. dollars.
The Company was responsible for the basic engineering design and
transferring to China National certain manufacturing technological know-how
licensed to the Company by Allied Signal, Inc. ("Allied Signal") for use in
the production of sodium bichromate, chromic anhydride and chromium sulfate.
The Company was also commissioned to procure key production equipment on
China National's behalf. To date, the Company has completed the transfer of
the basic engineering design and Allied Signal's technology, and procurement
of key production equipment. The first and second shipments of the equipment
were made in May 1997 and October 1997, respectively. After construction of
the plant is complete and ready to commence production, the Company will
provide plant commissioning services, including supervision of final
construction, equipment installation and pre-operational testing. This
contract was temporarily suspended by the municipal government in February
1996, due to environmental concerns relating to China National's proposed
methods for 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 expect to recognize any revenues
from this contract during the year ending December 31, 1999. The Company
believes that any future involvement with China National will be the
responsibility of BIC which was sold by the Company in July 1999 (See
"DESCRIPTION OF BUSINESS - Major Developments during 1999"). However, no
assurance can be given that China National will not look to the Company for
the satisfaction of any executory obligations remaining under
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the China National contract, including any monetary obligation. In this
connection, the Company anticipates establishing a deferred liability on its
balance sheet of approximately $2,500,000.
Major Developments during 1999
Sale Of The Brighton Industries Corporation and Brighton Equipment
Corporation, Limited
On July 14, 1999, the Company completed the divestiture of BIC and
BECL to GIS Worldtrade Corporation Limited ("GIS"), a Hong Kong corporation.
At the time of the transaction, GIS owned 300,000 shares in the Company,
which it had received as the result of converting a portion of a note payable
in June 1998.
The divestiture was consummated because BIC and BECL were engaged in
businesses which the management of the Company concluded were not part of its
core business: the China National contract, in the case of BIC; and the
YangZhou Brighton joint venture, in the case of BECL. However, substantially
all of the other previous business operations of BIC and BECL will continue
to be conducted by the Company or other subsidiaries. It is not expected that
the divestiture will have a material adverse affect on the financial
condition or results of operations of the Company.
Attachment Order
As indicated above (See "DESCRIPTION OF BUSINESS - China National
Contract"), in connection with the China National contract, BIC entered into
a technology licensing and engineering services contract with Allied Signal.
The terms of the contract stipulated that BIC would pay Allied Signal a
$1,000,000 down payment due no later than September 30, 1994, $500,000 upon
completion of the basic engineering design of the Plant, but in no event 12
months from Allied Signal's receipt of the down payment, and $500,000 upon
completion by Allied Signal of review of the design but in no event later
than 20 months from Allied Signal's receipt of the down payment. In
accordance with the terms of the contract with Allied Signal, BIC made three
payments to Allied Signal totaling $900,000. This amount represents the
$1,000,000 down payment less 10% withholding tax on technology imports
imposed by the Chinese Government.
In February 1996, the Chongqing municipal government suspended
construction, delaying the completion of the plant and China National
discontinued any further payments to BIC. In response, BIC determined that no
other payments were due until the project was able to commence construction
and continue to the next phase.
On April 3, 1998, Allied Signal filed a Notice of Intention to
Arbitrate and Demand for Arbitration with the American Arbitration
Association in New York seeking the balance claimed to be owing. In its
Demand for Arbitration, Allied Signal sought an award of $1,000,000, plus
interest from the date such payment became due, in addition to attorneys'
fees and costs of the arbitration proceeding. BIC filed an answer in May 1998
denying Allied Signal's claim and asserting a defense of force majeure.
On February 11, 1999, Allied Signal filed a Petition for an Order of
Attachment with a Temporary Restraining Order against BIC with the Supreme
Court of the State of New York. On February 11, 1999, in response to Allied
Signal's Petition, the Supreme Court of the State of New York issued an Order
to Show Cause for Order of Attachment with Temporary Restraining Order, in
effect temporarily encumbering $357,230 that BIC had on deposit with The Bank
of China in New York. On June 18, 1999, the Supreme Court of New York granted
the Order of Attachment and ordered that the amount of $357,230 be turned
over to The City of New York - Sheriff's Department. In October 1999,
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the Company settled the arbitration proceedings with Allied Signal pursuant
to which Allied Signal agreed to a release of $107,000 which had been subject
to the attachment. The balance of $250,230 was payable to Allied Signal with
an additional $100,000 payable to Allied Signal on October 1, 2000.
The Order of Attachment, combined with the reduction in business
caused by the bombing of the Chinese Embassy in Belgrade, profoundly affected
all aspects of the Company's business, including the Company's ability to
solicit new business, purchase equipment in order to complete existing
contracts, and maintain employees and morale. The order of attachment of the
funds combined with the reduction in business resulted in serious cash flow
problems for the Company. The Company's management was forced to take a
number of steps to address these problems. During the first half of 1999,
four employees in the United States and 39 employees in China were
terminated. The audit of the 1998 financial statements was suspended due to
the Company's inability to pay the costs of the audit. As a result, the
Company had not been able to file an Annual Report on Form 10-KSB for the
year ended December 31, 1998 with the United States Securities and Exchange
Commission, thus causing the Company to become delinquent in its filings. The
Company suspended or reduced payments to its vendors and outside
professionals.
Background of the Company
The Company was incorporated in the State of Delaware on November 4,
1988 as Sirone Corporation. On November 1, 1995, the Company changed its name
to Zentex Corporation. For a period of time prior to November 11, 1996, under
previous management, the Company was engaged in the distribution in the
United States and Canada of a shampoo and conditioner treatment. In October
1996, the Company entered into an acquisition agreement (the "Acquisition
Agreement") with BIC, BECL, and the Brighton Shareholders pursuant to which
effective November 11, 1996 the Company acquired all of the issued and
outstanding capital stock of BIC and BECL from the Brighton Shareholders in
exchange for the issuance by the Company of a controlling interest in the
Company to the Brighton Shareholders (the "Reverse Merger"). The business
purpose of the Reverse Merger was to facilitate the consolidation of BIC and
BECL into one publicly traded entity to attract investment in the Company.
Pursuant to the Reverse Merger, and in furtherance of its new business plan,
the Company's name was changed to "Brighton Technologies Corporation," and
its symbol on the OTC Electronic Bulletin Board was changed to "BRTK."
Immediately prior to the Reverse Merger, the Company had a total of
3,513,000 shares of Common Stock issued and outstanding. In connection with
the Reverse Merger, the Company issued to the Brighton Shareholders an
aggregate of 27,000,000 shares of Common Stock representing approximately 88%
of the then outstanding shares of Common Stock of the Company. The Common
Stock of the Company underwent a 1 for 3 reverse stock split effective as of
November 11, 1996, a 1 for 3 reverse stock split effective as of October 17,
1997, a 1 for 3 reverse stock split effective as of January 20, 1998 and a 1
for 3 forward stock split effective as of April 15, 1998. In connection with
the 1 for 3 reverse stock split effective as of April 15, 1998, the Company's
symbol on the OTC Electronic Bulletin Board was changed to "BGHT." All Common
Stock and per share data have been restated to reflect the stock splits.
Pursuant to the terms of the Acquisition Agreement, the Company
transferred to two individuals who were part of the prior management (the
"Transferees") all of its operating assets existing immediately subsequent to
the closing of the Reverse Merger (excluding the shares of BIC and BECL) in
exchange for the assumption by the Transferees of all of the liabilities of
the Company as of the closing of the Reverse Merger and the delivery of a
release of all obligations owed by the Company to an affiliate of
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the Transferees. In addition, at the closing of the Reverse Merger, each
member of the Company's then Board of Directors resigned, and was replaced by
representatives of the Brighton Shareholders.
Government Regulation
All foreign entities, businesses, persons and all onshore foreign
investors, including Sino-foreign cooperative joint ventures, and
Sino-foreign equity joint ventures, are prohibited from managing or
participating in the management of any telecommunication operations business
in China. In addition, all such telecommunication operations businesses are
prohibited from having any foreign ownership of the management of such
businesses. Participation in projects engaged in the leasing service industry
is also prohibited to foreign entities, businesses, persons and all on-shore
foreign investors.
The Company believes that Brighton-STAQ does not violate the
provisions of these regulations at the present time. The Company has received
an opinion from its Chinese counsel, Zhong Xin Law Office, to the effect that
the design, installation and maintenance of the STAQ On-line Network and the
charge of a related maintenance fee by Brighton-STAQ does not violate any
rules of the relevant Chinese Governmental agencies. The telecommunication
services essential to the operation of the STAQ On-line Network will be
provided by domestically licensed third-party providers (i.e., The People's
Daily and ICBC). In addition, operation of the STAQ On-line Network is
controlled directly by the STAQ Exchange. Revenue earned by Brighton-STAQ is
for the maintenance and service of the equipment for the STAQ On-line Network.
Compliance with Environmental Laws
The Company has no material expenses and anticipates no material
impact on its business occasioned by compliance with environmental laws.
Employees
As of December 31, 1998, the Company and its subsidiaries had
approximately 125 full-time employees, of which over 80% are professionals
with specialized skills. There are 18 employees based in Hong Kong, 97 based
in China and 10 in the Company's corporate office in Allendale, New Jersey,
U.S.A., which serves as technical support base for the Asian operations. Of
the 97 employees in China, 23 are dedicated to sales related activities for
the industrial equipment distribution business segment and 21 are engineering
and technical support personnel in the computer network integration business
segment.
Patents and Trademarks
The Company owns no registered patents. The Company has applied to
the PRC Patent and Trademark Office to register its logo in June 1997. The
Company also applied to the United States Patent and Trade Office and
received approval in June 1999. The Company believes that its business is not
materially dependent on any patent or trademark.
ITEM 2. DESCRIPTION OF PROPERTY
New Jersey. The Company and BIC currently occupy facilities leased
by BIC in Allendale, New Jersey consisting of 5,000 square feet. The lease
expires on July 31, 2001. The annual rent is $57,500.
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Hong Kong. BECL and its subsidiaries occupy facilities leased by
BECL in Quarry Bay, Hong Kong consisting of Room 1001 on the 10th floor of
Eastern Centre. The lease expires on March 22, 2000. The annual rent is
$62,100.
Beijing. The facilities occupied are under two separate lease
agreements. One location is the in the Hanwei Plaza expiring September 30,
2001. The second is in the No. 11 Hall in the Beijing Workers' Stadium
expiring July 30, 2000. The annual rents are $61,245 and $3,614, respectively.
Chongqing. Brighton-STAQ signed a three-year lease for its branch
office, effective June 15, 1998 and expiring June 15, 2001, for office space
in Chongqing, consisting of five offices on the 29th floor of the ICBC
Building in Chongqing. The annual rents are $4,193 in total.
Shanghai. Brighton-STAQ signed a two-year lease for its branch
office, effective September 1, 1997 and expiring June 30, 2001, for office
space in Shanghai, consisting of Suite D and E on the 5th Floor of the Nan
Yang Properties Building. The annual rent is $7,729.
Shenzhen. The Brighton Elevator Shenzhen representative office
occupies office space in the Shenzhen Beijing Hotel in Shenzhen. The lease
expires June 30, 2000. The annual rent is $5,422.
Wuhan. The Brighton Elevator Wuhan representative office occupies
120 square feet of office space in Wuhan. The lease expires on October 1,
1998. The annual rent is $4,337.
ITEM 3. LEGAL PROCEEDINGS
The Company is either a plaintiff or a defendant in several pending
legal matters or threatened claims. In the opinion of management, the final
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
In October 1999, the Company settled a pending arbitration with
Allied Signal regarding the contractual value of services provided in the
China National project. As a result of a delay in the China National project,
a dispute had arisen with the supplier of the technological services, Allied
Signal, and as a result and per the terms of the Agreement, an arbitration
hearing was scheduled for November 1999. The dispute was settled prior to the
arbitration hearing. During September 1999, pursuant to the terms of the
settlement agreement, Allied Signal agreed to the immediate release of
$107,000 to the Company that were previously frozen as a result of a levy
issued by the New York State Supreme Court. The balance of $250,230 is
payable to Allied Signal, with an additional $100,000 payable to Allied
Signal by the Company on October 1, 2000. The Company will also provide
Allied Signal with a confession of judgement in the amount of $750,000 to
only be filed in the event the Company defaults under this agreement. (See
"DESCRIPTION OF BUSINESS - Major Developments during 1999").
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31, 1998.
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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price for the Common Stock
The Company was formed as a result of a reverse acquisition
effective November 11, 1996, whereby the Company acquired all of the issued
and outstanding capital stock of BIC and BECL from their shareholders in
exchange for the issuance by the Company of a controlling interest in the
Company to such shareholders (the "Reverse Merger"). From April 15, 1998,
through August 31, 1999, the Company's Common Stock was traded on the OTC
Bulletin Board under the symbol "BGHT." From September 1, 1999 to the
present, the Company's Common Stock has been traded on the Pink Sheets. The
Company's Common Stock initially began trading under the symbol "BRTK"
immediately after the Reverse Merger on November 12, 1996. Prior to that
date, the Company's Common Stock traded under the symbol "ZNTX." The trading
market is limited and sporadic and should not be deemed to constitute an
"established trading market."
The following table sets forth the range of high ask and low bid
prices for the Company's common stock as quoted on the OTC Bulletin Board
during the periods indicated. Such prices reflect prices between dealers in
securities and do not include any retail markup, markdown or commission and
may not necessarily represent actual transactions. All prices reflect the 1
for 3 reverse stock split effective November 11, 1996, the 1 for 3 reverse
stock split effective October 17, 1997, the 1 for 3 reverse stock split
effective January 26, 1998 and the 1 for 3 forward stock split effective
April 15, 1998.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1997 High Low
- ---------------------------------------------- ------ -----
<S> <C> <C>
Quarter Ended March 31, 1997 21.00 16.14
Quarter Ended June 30, 1997 17.64 9.75
Quarter Ended September 30, 1997 15.38 7.13
Quarter Ended December 31, 1997 7.13 1.50
Fiscal Year Ending December 31, 1998
- -----------------------------------------------
Quarter Ended March 31, 1998 7.33 1.96
Quarter Ended June 30, 1998 10.69 2.00
Quarter Ended September 30, 1998 5.94 2.88
Quarter Ended December 31, 1998 2.38 5.75
</TABLE>
As of October 1, 1999, the number of security holders of record of the
Company's Common Stock was 125.
The Company has not paid any dividends on its common stock and has
no present intention of paying cash dividends in the foreseeable future.
18
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview:
Effective November 11, 1996, the Company acquired all of the issued
and outstanding capital stock of BIC and BECL from Kit Kung and Hong Yun (the
"Brighton Shareholders") in exchange for the issuance by the Company of an
approximate 88% controlling interest in the Company to the Brighton
Shareholders 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 (See "BUSINESS - THE COMPANY'S CORPORATE STRUCTURE"). All common
share and per share amounts presented herein have been adjusted to reflect
the 1-for-3 reverse stock splits effective November 11, 1996, October 17,
1997 and January 26, 1998, and a three-for-one stock split effective April
15, 1998.
The Company has historically incurred significant losses, which have
resulted in an accumulated deficit of $ 3,956,558 at December 31, 1998, which
raises substantial doubt about the Company's ability to continue as a going
concern. It is the intent of management to create additional revenue
opportunities through the expansion of STAQ, pursue other related business
ventures, and implement cost reductions to generate working capital and
sustain operations. If these measures prove to be inadequate or unsuccessful,
management may have to curtail certain of the Company's operations and
consider filing for a bankruptcy reorganization.
The Company has historically derived the majority of its revenues
from the sale of industrial equipment to the PRC. Although the Company's
customers vary from year to year, the Company historically has relied on a
limited number of customers for a substantial portion of its total revenues,
the margins of which may vary significantly. The Company expects that a
significant portion of its future revenues from this business segment will
continue to be generated by a limited number of customers, 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. As a
result, the Company has from time to time experienced certain cash
constraints and has been forced to cut back on its level of operations
accordingly.
During 1999, the Company experienced a significant reduction in its
existing and anticipated business arising principally from three factors: (1)
the bombing of the Chinese embassy in Belgrade which caused a substantial
reduction in orders from Chinese companies to U.S. based firms; (2) a
restraining order obtained by Allied Signal in February 1999 preventing the
Company from using in its business operations the sum of $357,230 (See
"DESCRIPTION OF BUSINESS - Major Developments during 1999"); and (3) the
inability to use certain investment funds for STAQ because of a financial
scandal within the STAQ Exchange (See "DESCRIPTION OF BUSINESS
- -Brighton-STAQ"). As a result of the foregoing factors, the Company
experienced extreme cash constraints in the first half of 1999. In response
to these cash constraints, Company management was forced to implement a
business strategy to conserve cash reserves. As part of this plan to reduce
costs, the Company laid off 37
19
<PAGE>
employees during the first half of 1999. The Company was also forced to
suspend the audit of its 1998 financial statements as a result of the
Company's inability to continue to pay the costs of the annual audit.
The Company operates in one business segment: the buying, selling
and installation of computer, communications and industrial equipment. The
Company acts as an intermediary, purchasing such products from sources in the
United States and selling such products to customers in the PRC. The Company
operates through offices in the United States, Hong Kong and the PRC.
The Company had invested $1,997,324 in the Brighton-STAQ project at
December 31, 1998. The Company accounts for its investment in STAQ under the
equity method of accounting. In April 1999, STAQ entered into a new agreement
with a new joint venture partner, The Masses Mail Order Limited of China
("The Masses") in the PRC. The new agreement calls for The Masses to invest a
total of $4,800,000, with an initial investment of $1,800,000 to own 53% of
the equity in the joint venture, and a second investment of $3,000,000 to
increase the Masses' total interest to 75% in the joint venture. $1,800,000
was invested in July 1999 and the balance of $3,000,000 is scheduled to be
invested by the end of 1999. In such event, Brighton's interest would be
reduced to 47% and then to 25% from its initial 90% investment, but it would
retain its position as the managing partner in the joint venture. In this new
agreement, the former joint venture partner Huazheng Electronic Technology
Co., Ltd. would return its 10% equity in the joint venture company back to
Brighton-STAQ. The agreement was subject to the approval of the Beijing
Municipal Government, which was granted on June 16, 1999. The Company
accounts for its interest in STAQ under the equity method of accounting.
Due to a highly publicized financial scandal within the STAQ
Exchange, The Masses has not agreed to disburse the newly invested funds for
expansion until the outcome of the investigation is completed. There is also
uncertainty as to when the $3,000,000 balance will be invested into the joint
venture by The Masses. Management of the Company is unable to predict the
outcome of such investigation, but believes that the STAQ project continues
to be commercially viable.
China National accounted for approximately 35% for the year ended
December 31, 1997. No revenues were recognized from China National during
1998. 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, 1998 and 1997, the Company had advanced $1,181,513 to China
National, classified as advances to customers in the consolidated balance
sheets. In addition, a deposit payable to China National of $2,150,000 was
outstanding at December 31, 1998 and 1997.
Revenues under this contract for the year ended December 31, 1997
were approximately $2,237,000, or 35% of the Company's total revenues. The
Company did not record any revenues with respect to this contract in 1998.
The Company had recorded cumulative aggregate revenues of $6,798,000 through
December 31, 1998 under this contract, or approximately 62% of the contract's
total expected revenues.
During the year ended December 31, 1998, three customers accounted
for 49% of the total revenues, consisting of 23%, 14% and 12%, respectively.
During the year ended December 31, 1997, the only customer that accounted for
more than 10% of total revenues was China National, which accounted for 35%
of total revenues.
Historically, the Company has relied on a limited number of
customers for a substantial portion of its total revenues. The Company
expects that a significant portion of its future revenues will continue to be
generated by a limited number of customers. The loss of any of these
customers or any substantial
20
<PAGE>
reduction in business volume with any of these customers could materially
adversely affect operating results.
The vast majority of the Company's revenues are derived from
customers based in countries outside the United States, primarily the PRC.
Such operations subject the Company to certain operational risks. The
Company's prospective results of operations could be negatively affected by
adverse consequences arising from these risks. Although management believes
that the likelihood of such factors occurring is not significant, the
possibility of unanticipated events disrupting the Company's operations, such
as the bombing of the Chinese Embassy in Belgrade, exists.
During the year ended December 31, 1998, revenues from United
States-based operations were $8,984,820 or 69% of total revenues, and
revenues from Far East-based operations were $4,113,387 or 31% of total
revenues. During the year ended December 31, 1997, revenues from United
States-based operations were $5,275,052 or 82% of total revenues, and
revenues from Far East-based operations were $1,171,565 or 18% of total
revenues.
21
<PAGE>
The following table sets forth certain historical operating data for
the periods presented:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997
------------------------- ----------------------
<S> <C> <C> <C> <C>
Amount % Amount %
------------ ----- ----------- -----
Revenues $ 13,098,207 100.0 $ 6,446,617 100.0
Cost of revenues 10,715,786 81.8 4,519,381 70.1
Operating expenses 3,482,073 26.6 2,944,610 45.7
------------ ----- ----------- -----
Loss from operations (1,099,652) (8.4) (1,017,374) (15.8)
Other income (expense), net (136,523) (1.0) 70,828 1.1
Write-off of offering costs (582,685) (4.4) - -
------------ ----- ----------- -----
Loss before income taxes
and investment in STAQ (1,818,860) (13.9) (946,546) (14.7)
Benefit for income taxes 48,000 0.4 - -
Loss on STAQ (284,961) (2.2) (55,296) (0.9)
------------ ----- ----------- -----
Net loss $ (2,055,821) (15.7) $ (1,001,842) (15.5)
============= ===== ============ =====
</TABLE>
Years Ended December 31, 1997 and 1998:
Revenues. Revenues for the year ended December 31, 1998 were
$13,098,207, as compared to $6,446,617 for the year ended December 31, 1997, an
increase of $6,651,590 or 103.2%. Revenues increased in 1998 as compared to 1997
primarily as a result of increased demand on the part of existing and new
customers in China and the timing in the signing and execution of certain
contracts. There were four contracts in 1998 that resulted in the significant
increase in revenues in 1998 as follows: Changan Automobile Import & Export for
$ 3,061,405, China National Aero Technology for $ 1,780,000, China Songhai
Industrial Corporation for $1,570,760 and China Xingxing Import & Export for
$1,221,885. These four contracts totaled $ 7,634,050 or 58.3% of the total
revenue for 1998.
Gross Profit. Gross profit for the year ended December 31, 1998 was
$2,382,421 or 18.2% of revenues, as compared to $1,927,236 or 29.9% of revenues
for the year ended December 31, 1997. The decrease in gross margin in 1998 as
compared to 1997 was primarily a result of increased competition within China
and specifically in the industrial equipment area, which the Company expects
will continue into 1999.
General and Administrative Expenses. General and administrative
expenses increased by $489,504 or 28.8%, to $2,187,375 or 16.7% of revenues for
the year ended December 31, 1998, as
22
<PAGE>
compared to $1,697,871 or 26.3% of revenues for the year ended December 31,
1997, primarily as a result of increases in employee compensation and
occupancy costs incurred to develop 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 $214,446 or 41.1%, to $736,400 or 5.6% of revenues for the year
ended December 31, 1998, as compared to $521,954 or 8.1% of revenues for the
year ended December 31, 1997, primarily as a result of increases in employee
compensation and occupancy costs incurred to support the Company's efforts to
expand its operations in the Far East.
Consulting Fees. During the year ended December 31, 1997, the Company
incurred consulting fees aggregating $434,899 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 year ended December 31, 1998.
Included in the consulting fees of $434,899 in 1997 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 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 Loss. For the year ended December 31, 1998, operating loss
was ($1,099,652), as compared to an operating loss of ($1,017,374) for the year
ended December 31, 1997.
Interest Expense. For the year ended December 31, 1998, interest
expense and bank fees increased by $89,651 or 141.3% to $153,087, as compared to
$63,436 for the year ended December 31, 1997, primarily as a result of an
increase in notes payable and bank fees related to a bank letter of credit
issued in conjunction with an industrial equipment purchase contract completed
in 1998.
Interest Income. For the year ended December 31, 1998, interest income
decreased by $63,082 or 63.3%, to $36,499, as compared to $99,5681 for the year
ended December 31, 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 1998.
Income Taxes. For the year ended December 31, 1998, the Company
incurred a consolidated loss before income taxes and investment in STAQ of
($1,818,860). Based on assessment of all available information, including
historical trends, the Company was unable to conclude that realization of the
23
<PAGE>
deferred tax asset was more likely than not. Accordingly, the Company
established a 100% valuation allowance on the deferred tax assets related to its
domestic and foreign net operating losses. Reductions in the valuation allowance
will be recorded when, in the opinion of management, the Company's ability to
generate taxable income in the future is considered more likely than not. For
the year ended December 31, 1997, the Company had a loss before income taxes and
investment in STAQ of ($946,546). For the year ended December 31, 1998 the
Company recognized a tax benefit of $48,000 relating to Hong Kong based income
taxes. A refund related to this benefit was received in October 1999.
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 year ended December 31, 1998 was
($2,055,821) or ($.49) per share, as compared to a net loss for the year ended
December 31, 1997 of ($1,001,842) or ($.29) per share.
Consolidated Financial Condition
Liquidity and Capital Resources:
Operating. For the year ended December 31, 1998, the Company's
operations provided cash resources of $515, as compared to utilizing cash
resources of $1,920,744 for the year ended December 31, 1997. The Company had a
working capital deficit of $2,229,381 at December 31, 1998, as compared to a
working capital deficit of $1,718,875 at December 31, 1997, reflecting current
ratios of .71:1 and .78:1, respectively.
Accounts receivable increased by $1,502,911 to $2,838,146 at December
31, 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 $460,000 to $1,211,166 at December
31, 1997, 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 December
31, 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 1998,
the Company had advanced $1,181,513 to China National, which is included in
advances to customers at those dates.
Investing. During the year ended December 31, 1998, the Company
purchased fixed assets aggregating $45,629, primarily in the form of project
equipment that will be utilized in completing future projects. During 1998,
the Company's investment in STAQ increased by $259,152 as a result of
additional advances of $544,113, partially offset by losses in STAQ of
$284,961. Other than equipment which the Company purchases in the fulfillment
of its contracts, the Company has no capital expenditure commitments.
24
<PAGE>
Restricted cash of $250,230 represents the portion of the cash attached
by the New York State Supreme court in response to the request by Allied Signal
in an arbitration pending at December 31, 1998. A settlement agreement was
reached in October 1999 to allow $107,000 of the $357,230 to be returned to the
Company and the balance to Allied Signal, with the remainder of $250,230 being
disbursed to Allied Signal.
Financing. During January 1996, the Company entered into a convertible
demand note agreement with GIS Worldtrade Corporation Limited, with interest at
5% per annum. The note was convertible into Company common stock at prevailing
market values. The note, including accrued interest and principal, had a balance
of $620,101 as of 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 year ended December 31, 1997, the Company sold 24,006 shares
of common stock for proceeds of $352,948. Costs directly related to the
completion of these offerings amounted to $45,416 and were charged directly to
contributed capital in 1997.
During the year ended December 31, 1998, the Company sold 738,046
shares of common stock in private sales for aggregate proceeds of $1,210,169.
Costs directly related to the completion of these offerings amounted to $121,449
and were charged directly to contributed capital in 1998.
In 1997, the Company issued, for nominal consideration, 22,590 shares
of common stock to various individuals and firms. Of this issuance, 6,090 shares
related to services rendered in connection with the 1997 Private Placement. The
charge to operations for the issuance of 16,500 shares of common stock totaled
$95,437 for the year ended December 31, 1997, which was based upon the fair
market value of the stock at the date of the grants.
In December 1998, the Company entered into an agreement with a
consulting firm for business advisory services providing for the issuance of
20,000 shares of common stock to the firm. Pursuant to the terms of the
agreement, 15,000 shares were deposited in escrow subject to the successful
investment of $1,000,000 (net) to the Company, which has not yet occurred.
In order to meet its working capital requirements, the Company has
periodically received funding from Kit Kung, the Chairman of the Board of
Directors, President and Chief Executive Officer, and his family members. The
Company has also periodically made advances to the principals and officers of
the Company. Such advances are unsecured and generally bear no stated interest
rate or terms of repayment. As of December 31, 1998, amounts due to Kit Kung and
his family members aggregated $182,040. As of December 31, 1997 amounts due from
Kit Kung and his family members aggregated $232,221. During the year ended
December 31, 1997 the Company repaid $330,157 of advances previously made by Kit
Kung and his family members to the Company. During 1997, the Company reduced the
receivable from stockholders and related parties by $185,950, representing the
estimated fair market value of project equipment acquired by the Company from
Kit Kung in a non-cash transaction. During the year ended December 31, 1998
$414,261 was advanced to the Company by Kit Kung and family members resulting in
a net amount due to Kit Kung and family members of $182,040 at December 31,
1998.
At December 31, 1998, the Company had issued irrevocable letters of
credit for $711,216, which represents a contingent commitments for the purchase
of equipment, of which $90,000 had not been disbursed as of October 1, 1999.
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
25
<PAGE>
security for the bank's letter of credit for $2,145,000 issued to a supplier
in conjunction with the aforementioned Changan Automobile Works contract. The
full amount of the letter of credit was disbursed during 1998.
As a result of the delay in the China National project, the Company
was in the process of renegotiating the terms of certain obligations under
the technological licensing arrangements that it entered into in conjunction
with the China National contract (See "BUSINESS -- CHINA NATIONAL CONTRACT").
As a result of a dispute with Allied Signal, the licensor of the technology,
an arbitration was scheduled to commence in November 1999. The pending
arbitration was settled in October 1999. Pursuant to the terms of the
settlement agreement, Allied Signal agreed to the immediate release of
$107,000 in funds that were previously frozen in February 1999 by the New
York Supreme Court. The balance of $250,230 was payable to Allied Signal with
an additional $100,000 payable on October 1, 2000.
The Company does not expect to recognize any revenues from this
contract during the year ending December 31, 1999 and the first half of 2000. 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.
Brighton-STAQ 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 at December 31, 1998 owned a 90% interest in
Brighton-STAQ and has invested or advanced approximately $1,738,172 and
$1,997,324 with respect to Brighton-STAQ as of December 31, 1997 and 1998,
respectively. As of December 31, 1997, the Company had fully funded its original
obligation to invest $1,600,000 in Brighton-STAQ.
The Company had invested $1,997,324 in the Brighton-STAQ project at
December 31, 1998. The Company accounts for its investment in STAQ under the
equity method of accounting. In April 1999, STAQ entered into a new agreement
with a new joint venture partner, The Masses Mail Order Limited of China ("The
Masses") in the PRC. The new agreement calls for The Masses to invest $4,800,000
and to own 53% of the equity in the joint venture, of which $1,800,000 was
invested in July 1999 and the balance of $3,000,000 was scheduled to be invested
by the end of 1999. In such event, Brighton's interest would be reduced to 47%
from its initial 90% investment, but it would retain its position as the
managing partner in the joint venture. In this new agreement, the former joint
venture partner, Huazheng Electronic Technology Co., Ltd., would return its 10%
equity in the joint venture company to Brighton-STAQ. The agreement was subject
to the approval of the Beijing Municipal Government, which was granted on June
16, 1999.
Due to a highly publicized financial scandal within the STAQ Exchange,
The Masses has not agreed to disburse the newly invested funds for expansion
until the outcome of the investigation is completed. There is also uncertainty
as to when the $3,000,000 balance will be invested into the joint venture by the
Masses. Management of the Company is unable to predict the outcome of such
investigation, but believes that the STAQ project continues to be commercially
viable.
Inflation and Currency Matters:
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,
26
<PAGE>
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. All foreign exchange transactions involving
the Renminbi must take place either through the Bank of China or other
institutions authorized to buy and sell foreign exchange, or at a Foreign
Exchange Adjustment Center. The ability to convert the Renminbi is subject to
the availability of foreign currencies.
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 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 does not believe that devaluation of the
Chinese Renminbi would have a material effect on the Company's consolidated
financial position.
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 adopted SFAS No. 130 for its fiscal year
beginning January 1, 1998. The Company does not have any significant components
of comprehensive income other 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.
27
<PAGE>
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,
1997. SFAS No. 131 established 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 adopted SFAS No. 131 for its fiscal
year beginning January 1, 1998. The Company's results of operations and
financial position were not affected by implementation of SFAS No. 131. As a
result of the adoption of SFAS No. 131, the Company revised its segment
disclosure included in the December 31, 1998 financial statements.
In February 1998, the Financial Accounting Standards Board issued
Statement No. 132, "Employers' Disclosures about Pensions and Other Post
retirement 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 post
retirement benefit plans. SFAS No. 132 requires comparative information for
earlier years to be restated. The Company adopted SFAS No. 132 for its fiscal
year beginning January 1, 1998. Adoption of SFAS No. 132 did not have a
material effect on the Company's financial statement presentation and
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 ears beginning after June 15, 2000. 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 will adopt SFAS
No. 133 for its fiscal year beginning January 1, 2000, and does not
anticipate that its adoption will have a material impact on its financial
statement presentation and 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 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
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 will adopt SFAS No. 134
28
<PAGE>
for its fiscal year beginning January 1, 1999, and does not anticipate that
its adoption will have a material impact on its financial statement
presentation and disclosures.
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 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are listed at "Index to Consolidated
Financial Statements" elsewhere in this document.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
<PAGE>
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table and text sets forth the names and ages of all
directors and executive officers of the Company and the key management
personnel as of October 1, 1999. The Board of Directors of the Company is
comprised of only one class. All of the directors will serve until the next
annual meeting of stockholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Executive officers serve at the discretion of the Board of Directors, and are
appointed to serve until the first Board of Directors meeting following the
annual meeting of stockholders. Except as otherwise noted, there are no
family relationships among directors and executive officers. Also provided is
a brief description of the business experience of each director and executive
officer and the key management personnel during the past five years and an
indication of directorships held by each director in other companies subject
to the reporting requirements under the Federal securities laws.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
<S> <C> <C>
Kit Kung 47 Chairman of the Board,
President and Chief
Executive Officer
Alan A. Jurewicz 45 Chief Financial Officer
Nils A. Ollquist 41 Director and Secretary
Hong Yun 43 Director;
Vice President/General Manager
Michael Muldavin 77 Director
KEY MANAGEMENT PERSONNEL
------------------------
He Ping 38 General Manager Beijing
Brighton Staq Electronic System
Company Limited (Beijing)
Xue Yong 30 Manager of Engineering
Department of Information \
Services Group
Brighton-STAQ
Dali Zhang 28 Deputy General Manager of
Industrial Automation Group
(Southern China)
Ping Yu 40 Deputy General Manager
</TABLE>
Background and Experience
Kit Kung has been Chairman of the Board, President and Chief
Executive Officer of the Company since October 1996. Mr. Kung is the Founder
of BECL. He was born in Shanghai and emigrated to the United States in 1974.
He re-visited China in 1980, and by 1981 was the first ever to legally export
32-bit computers from the United States into China; those first computers
being two sets of
30
<PAGE>
VAX computer systems from Digital Equipment Corporation. From that profile,
he established an extensive network of customers and relationships in China.
Mr. Kung graduated from Rutgers University with a degree in Physics and is a
citizen of the United States. Mr. Kung has been listed in the "Who's Who
Worldwide" publication since 1993 and the "Outstanding Americans" publication
since 1994. He is the husband of Hong Yun.
Alan A. Jurewicz has served as Chief Financial Officer of the
Company since August 5, 1998. Prior to joining the Company, Mr. Jurewicz was
the regional controller for Global Passenger Services, a New York based
transportation services company from June 1997 to July 1998. Mr. Jurewicz
served as chief financial officer of Liberty Helicopter Corp., the largest
helicopter operator in the Northeast United States, from June 1992 to June
1997. Mr. Jurewicz also served in controller positions with Trump Air, Texas
Air Corp. (Continental Airlines) and Pan American World Airways from March
1977 to June 1992. Mr. Jurewicz holds a bachelor of science degree in
accounting from Fairleigh Dickinson University. He is a member of the Phi
Omega Epsilon Honor Society, American Institute of Certified Public
Accountants and New Jersey Society of Certified Public Accountants.
Hong Yun has been a director of the Company since October 1996. She
founded BIC in 1989 and is the individual responsible for developing the
industrial equipment business into a significant operation. Ms. Yun is a
native of Beijing and a U.S. citizen by naturalization. Ms. Yun graduated
from Beijing University of Beijing, China specializing in electronics
engineering. She is the wife of Kit Kung.
Nils A. Ollquist has been a director of the Company since October
1996 and Secretary of the Company since May 7, 1998. Mr. Ollquist also held
the positions of Chief Financial Officer and Vice President of the Company
until his resignation, in November 1997. He is also a Principal of Orient
Financial Services Limited in Hong Kong. Mr. Ollquist has fifteen years of
experience in investment banking and corporate finance in Hong Kong, the
United States and Australia. Prior to creating Orient Financial in 1993, he
served as head of Bank of America's mergers and acquisitions group in Asia.
Before joining Bank of America in 1990, Mr. Ollquist was Director and head of
Security Pacific Australia's U.S. corporate finance and investment banking
activities. He worked for several years in Sydney with Amsterdam Rotterdam
Bank and Barclays Bank from 1980 to 1984. Prior to commencing his investment
banking career, Mr. Ollquist served for 5 years in the Australian Treasury in
Canberra. He holds degrees in Economics and Law from the Australian National
University.
Michael Muldavin has been a director of the Company since October
1996. Mr. Muldavin, currently a visiting professor at the University of
California at Los Angeles, was a pioneer in China trading, having assumed
responsibility for the family trading business in Heilongjiang province
before WWII. In 1979, Mr. Muldavin was invited by the Chinese Government to
establish a joint Chinese language magazine "Science & Technology Review." In
recent years, Mr. Muldavin has been involved in a total of more than 80 joint
venture investments in China including agribusiness, automotive and
media/data systems and communications. Mr. Muldavin founded the Benchmark
Company Group, an investment consultancy and advisory firm, and has consulted
on investments and ventures in China, Russia and Vietnam since 1980. Mr.
Muldavin received his B.S. in mathematics and engineering, M.S. in economics,
joint PhDs in economics and public administration and J.D. from Harvard
College. Mr. Muldavin also holds a M.P.H. (medical care administration and
epidemiology) from the University of California, Los Angeles.
He Ping is the General Manager of Brighton-STAQ. Mr. He joined the
Company as the Deputy General Manager and then Acting General Manager of
Brighton-STAQ project in September 1994, and was promoted to his current
position. Prior to joining the Company, Mr. He was the Business Development
Officer and Administrative Executive in the Beijing representative office of
Imperial
31
<PAGE>
Chemical Industry since 1993. Mr. He graduated from Beijing TV University in
1988 and was a graduate of the China-Europe Management Institute MBA program
in 1993. Mr. He is a native of Beijing and a Chinese national.
Xue Yong is the Manager of the Engineering Department of the
Information Services Group of Brighton-STAQ. Mr. Xue joined the Company in
November 1991 and was assigned a number of technical positions within the
Company. Mr. Xue presently is responsible to construct the nationwide network
for the STAQ On-Line Network project. Prior to joining the Company, Mr. Xue
was an EDA System Analyst for The No. 3 Research Institute under the Ministry
of Electronics Industry of China. Mr. Xue graduated from Hua Zhong University
of Science and Technology in 1987, majoring in Electronics and Information
Engineering. Mr. Xue is a native of Beijing and a Chinese national.
Dali Zhang is the Deputy General Manager of the Industrial
Automation Group responsible for the business activities in Southern China
Region. Mr. Zhang joined the Company in 1994 as a sales engineer and was
gradually promoted to the present position. Mr. Zhang graduated from China
Yanjing Overseas Chinese College in 1994 and holds a degree in international
trade. Mr. Zhang is a native of Beijing and a Chinese national.
Ping Yu has been Deputy General Manager of Allendale, New Jersey
based operations since 1994. Mr. Yu has more than 12 years of experience in
international trade business and held a number of managerial positions with
Chinese government owned trading organizations, such as China Technical
Corporation (CTC), USA and China National Technical Import & Export
Corporation prior to joining the Company. Mr. Yu worked as an engineer for
two years for Beijing Solar Energy Research Institute from 1982 to 1984. Mr.
Yu graduated from Beijing Electronics Engineering Institute in 1982 with a
B.S. degree in telecommunications. Mr. Yu is a native of Beijing and a
Chinese national. He is a permanent resident of the United States.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during fiscal
years ended December 31, 1997 and 1998 to the Company's Chief Executive
Officer. No officer of the Company received annual compensation in excess of
$100,000 per annum.
<TABLE>
<CAPTION>
Summary Compensation Table
Name and
Principal Position Year Salary
------ --------
<S> <C> <C>
Kit Kung, Chairman, President and Chief 1998 $80,000
Executive Officer 1997 $80,000
1996 $80,000
</TABLE>
Compensation Agreements
There are currently no long-term employment or consulting agreements
between the Company and the executive officers or directors of the Company.
32
<PAGE>
Board of Directors
During the year ended December 31, 1998, no meetings of the Board of
Directors were held; all corporate actions were conducted by unanimous
written consent of the Board of Directors. Directors receive no compensation
for serving on the Board of Directors, but are reimbursed for any
out-of-pocket expenses incurred in attending board meetings. The Board of
Directors has established an audit committee which consists of Messrs.
Michael Muldavin and Nils A. Ollquist.
Stock Option Plan
As of October 15, 1999, the Company had not adopted a stock option
plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 1,
1999 with respect to (i) the beneficial ownership of the Common Stock of the
Company by each beneficial owner of more than 5% of the outstanding shares of
Common Stock of the Company, each director, each executive officer and all
executive officers and directors of the Company as a group, (ii) the number
of shares of Common Stock owned by each such person and group and (iii) the
percent of the Company's Common Stock so owned.
As used in this section, the term beneficial ownership with respect
to a security is defined by Rule 13d-3 under the Exchange Act as consisting
of sole or shared voting power (including the power to vote or direct the
vote) and/or sole or shared investment power (including the power to dispose
of or direct the disposition of) with respect to the security through any
contract, arrangement, understanding, relationship or otherwise, subject to
community property laws where applicable. Each person has sole voting and
investment power with respect to the shares of Common Stock, except as
otherwise indicated. Beneficial ownership consists of a direct interest in
the shares of Common Stock, except as otherwise indicated.
<TABLE>
<CAPTION>
Percentage of
Number of Shares of Outstanding Common
Name and Address Common Stock Stock Beneficially
Beneficial Owner Beneficially Owned Owned
<S> <C> <C>
Kit Kung 2,715,035(1) 59.57%
c/o Brighton Technologies Corporation
6 Pearl Court
Allendale, NJ 07401
Hong Yun 166,667(2) 3.66%
c/o Brighton Technologies Corporation
6 Pearl Court
Allendale, NJ 07401
Nils A. Ollquist -- --
c/o Orient Financial Services 13C,
Chinaweal Centre
414-424 Jaffe Road
Wanchai, Hong Kong
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
Alan A. Jurewicz 105,000(3) 2.25%
c/o Brighton Technologies Corporation
6 Pearl Court
Allendale, NY 07401
Michael Muldavin -- --
c/o Brighton Technologies Corporation
6 Pearl Court
Allendale, NJ 07401
All Directors and 2,986,702 64.06%
executive Officers as a group
(5 persons)
</TABLE>
(1) Does not include 166,667 shares of Common Stock owned by
Hung Yun, Mr. Kung's wife. Mr. Kung disclaims beneficial ownership of such
shares.
(2) Does not include 2,715,035 shares of Common Stock owned by
Kit Kung, Ms. Yun's husband. Ms. Yun disclaims beneficial ownership of such
shares.
(3) Represents stock options which are fully exercisable within
60 days of October 1, 1999.
Changes in Control
The Company is unaware of any contract or other arrangement, the
operation of which may at a subsequent date result in a change in control of
the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In order to meet its working capital requirements, the Company has
periodically received funding from Kit Kung, the Chairman of the Board of
Directors, President and Chief Executive Officer, and his family members. The
Company has also periodically made advances to the principals and officers of
the Company. The advances relate to personal travel and related expenses
incurred on corporate charge cards. Such advances are unsecured and generally
bear no stated interest rate or terms of repayment. As of December 31, 1998
and 1997, amounts due to (from) Kit Kung and his family members aggregated
$182,040 and ($232,499), respectively.
In 1997, Kit Kung sold project equipment to the Company with a fair
market value of $185,950, which is equivalent to the price that the Company
would have had to pay to purchase such equipment in the open market, in
exchange for an equivalent reduction in the amount due the Company from Kit
Kung.
During 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 during the six months ended June 30,
1998, and was repaid in August 1998. The estimated imputed cost of such
credit facility was not significant.
During the year ended December 31, 1997, $27,804, was paid to Orient
Financial Services Limited, a Hong Kong-based company in which Nils A.
Ollquist is a principal.
34
<PAGE>
During the year ended December 31, 1998, the Company's majority
shareholder and family members advanced an aggregate of $414,261 to the
Company, resulting in a balance due to Kit Kung and his family members of
$182,040.
Salaries and incentives expenses for Kit Kung and his family members
totaled approximately $135,000 in each of the years ended December 31, 1998
and 1996.
35
<PAGE>
PART IV.
<TABLE>
<CAPTION>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
Number Title
- --------- -----
<S> <C>
2.1 Acquisition Agreement with BIC, BECL, Kit Kung and Hung Yun *
3.1 Certificate of Incorporation as filed with the Delaware Secretary of
State *
3.2 Certificate of Correction of Certificate of Incorporation, as filed
with the Delaware Secretary of State on January 17,1989 *
3.3 Articles of Amendment to the Articles of Incorporation, as filed with
the Delaware Secretary of State on November 1,1995 *
3.4 Certificate of Amendment to Certificate of Incorporation, as filed with
the Delaware Secretary of State on October 31, 1996 *
3.5 Certificate of Amendment to Certificate of Incorporation, as filed with
the Delaware Secretary of State on October 10, 1997 *
3.6 Certificate of Amendment to Certificate of Incorporation, as filed with
the Delaware Secretary of State on January 22, 1998 *
3.7 Certificate of Amendment to Certificate of Incorporation, as filed with
the Delaware Secretary of State on April 15, 1998 *
3.8 By-laws *
10.1 Lease Agreement (Allendale - The Company's and BIC's facilities) *
10.2 Lease Agreement Summary (Hong Kong -- BECL's and its subsidiaries'
facilities) *
10.3 Lease Agreement Summary (Beijing) *
10.4 Lease Agreement Summary (Beijing) *
10.5 Lease Agreement Summary (Beijing) *
10.6 Lease Agreement Summary (Chongqing) *
10.7 Lease Agreement Summary (Shanghai) *
10.8 Lease Agreement Summary (Shenzhen) *
10.9 Lease Agreement Summary (Wuhan) *
10.10 Agreement with China National *
10.11 Agreement with Allied Signal *
10.12 Agreement with Huazheng for establishment of Brighton-STAQ *
21.1 Subsidiaries of the Registrant *
27.1 Financial Data Schedule for the year ended December 31, 1998
(electronic filing only)
* Previously filed as an Exhibit to the Company's Registration
Statement on Form 10-SB, and incorporated herein by reference.
b. Reports on Form 8-K - Three Months Ended December 31, 1998 - None.
</TABLE>
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BRIGHTON TECHNOLOGIES CORPORATION
---------------------------------
(Registrant)
Date: November 15, 1999 By: /s/ Kit Kung
-----------------------------------------
Kit Kung
President/Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------- ----- ------
<S> <C> <C>
/s/ Kit Kung President/Chief Executive Officer November 15, 1999
- --------------------------------- Kit Kung
Kit Kung
/s/ Alan A. Jurewicz Chief Financial Officer November 15, 1999
- ---------------------------------
Alan A. Jurewicz
/s/ Michael Muldavin Director November 15, 1999
- --------------------------------- Michael Muldavin
Michael Muldavin
Director November 15, 1999
- --------------------------------- Nils A. Ollquist
Nils A. Ollquist
</TABLE>
37
<PAGE>
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1998 and 1997
<TABLE>
<S> <C>
Consolidated Balance Sheets (Unaudited) ..................................................................F - 2
Consolidated Statements of Operations (Unaudited) ........................................................F - 4
Consolidated Statements of Stockholders' Equity (Deficiency) (Unaudited) .................................F - 5
Consolidated Statements of Cash Flows (Unaudited) ........................................................F - 6
Notes to the Consolidated Financial Statements (Unaudited) ...............................................F - 7
</TABLE>
F-1
<PAGE>
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $687,813 $258,144
Cash and cash equivalents-restricted (Note 2) 250,230
Refundable income taxes (Note 8) 48,000
Accounts receivable (net of allowance for doubtful accounts
of $272,000 and $150,000 at December 31, 1998 and 1997, 2,838,146 1,335,235
respectively)
Inventories (Note 2) 232,488 103,110
Costs and accumulated gross profit in excess of billings on
uncompleted contracts (Note 5) 2,001,521
Receivables from stockholders and related parties (Note 3) 232,221
Prepaid expenses 198,595 602,410
Advances to customers (Note 10) 1,211,166 1,671,166
Other 1,000
------------------------------------
Total current assets 5,466,438 6,204,807
------------------------------------
Fixed assets (Note 4):
Furniture and equipment 424,115 378,486
Less: accumulated depreciation (258,169) (163,125)
------------------------------------
Net fixed assets 165,946 215,361
------------------------------------
Other assets:
Investment in and advances to STAQ (Note 9) 1,997,324 1,738,172
Deposits 22,351 14,490
Prepaid contract fees 34,375
Deferred expenses 24,946
Deferred offering costs (Note 9) 582,685
------------------------------------
Total other assets 2,019,675 2,394,668
------------------------------------
Total assets $7,652,059 $8,814,836
====================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $2,244,655 $835,654
Accrued expenses 548,266 659,616
Accrued licensing costs (Note 9) 350,230 450,000
Billings in excess of costs and accumulated gross profit on
uncompleted contracts (Note 5) 1,648,894 3,291,991
Payables to stockholders and related parties (Note 3) 182,040
Customer deposits (Note 10) 2,222,044 2,150,000
Deferred revenue 286,690 91,759
Note payable (Note 6) 150,000 381,662
Taxes payable (Note 8) 63,000 63,000
------------------------------------
Total current liabilities 7,695,819 7,923,682
------------------------------------
Long-term liabilities
Long-term debt (Note 6) 425,000
Deferred taxes (Note 8) 456,000 456,000
------------------------------------
Total long-term liabilities 456,000 881,000
------------------------------------
Stockholders' equity (deficiency) (Note 3 and 7):
Preferred stock, $.001 par value;
authorized - 5,000,000 shares;
issued - none
Common stock, $.001 par value;
authorized - 100,000,000 shares;
issued - 4,553,379 shares and 3,495,333 shares
at December 31, 1998 and 1997, respectively 4,553 3,495
Contributed capital 3,488,808 1,907,396
Accumulated deficit (3,956,558) (1,900,737)
Shares held in escrow (Note 7) (36,563)
------------------------------------
Net stockholders' equity (deficiency) (499,760) 10,154
------------------------------------
Total liabilities and stockholders' equity (deficiency) $7,652,059 $8,814,836
====================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Revenues $13,098,207 $6,446,617
Cost of revenues 10,715,786 4,519,381
------------------------------------
Gross profit 2,382,421 1,927,236
------------------------------------
Operating expenses:
General and administrative 2,187,375 1,697,871
Selling and marketing 736,400 521,954
Depreciation and amortization 112,183 111,658
Provision for bad debt (Note 2) 457,917 148,000
Consulting fees (Note 7) 434,899
Foreign currency transaction (gains) losses (11,802) 30,228
------------------------------------
Total operating expenses 3,482,073 2,944,610
------------------------------------
Loss from operations (1,099,652) (1,017,374)
------------------------------------
Other income (expense):
Interest expense and bank fees (153,087) (63,436)
Interest income 36,499 99,581
Write-off of offering costs (Note 7) (582,685)
Miscellaneous income (expense) (19,935) 34,683
------------------------------------
Total other income (expense), net (719,208) 70,828
------------------------------------
Loss before income taxes and investment from STAQ (1,818,860) (946,546)
Benefit from income taxes (Note 8) (48,000)
Loss from investment in STAQ (Note 9) (284,961) (55,296)
------------------------------------
Net loss $(2,055,821) $(1,001,842)
====================================
Net loss per common share - basic and diluted (Note 2) $(0.49) $(0.29)
====================================
Weighted average common shares outstanding - basic and diluted 4,162,834 3,474,766
====================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK CONTRIBUTED ACCUMULATED SHARES HELD
----------------
SHARES AMOUNT CAPITAL DEFICIT IN ESCROW TOTAL
------ ------ ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 3,448,677 $3,449 $1,480,482 $(898,895) $ $585,036
Sales of common stock 24,006 24 352,924 352,948
Cost associated with the sale of common stock (45,416) (45,416)
Issuance of common stock for costs
associated with the sales of common stock 6,090 6 (6) -
Issuance of restricted common stock to employee 3,333 3 48,997 49,000
Issuance of restricted common stock for
consulting fees 13,167 13 46,429 46,442
Issuance of common stock from rounding
as a result of reverse stock split 60 -
Issuance of stock options for services 23,986 23,986
Net loss for the period (1,001,842) (1,001,842)
----------------------------------------------------------------------------
Balance, December 31, 1997 3,495,333 3,495 1,907,396 (1,900,737) 10,154
Sale of common stock 738,046 738 1,209,431 1,210,169
Issuance of common stock in exchange for
services 20,000 20 48,730 (36,563) 12,187
Costs related to the sale of common stock (121,449) (121,449)
Conversion of note payable and accrued
interest into common stock 300,000 300 424,700 425,000
Stock option issued below market value
to employee 20,000 20,000
Net loss for the period (2,055,821) (2,055,821)
----------------------------------------------------------------------------
Balance, December 31, 1998 4,553,379 $4,553 $3,488,808 $(3,956,558) $(36,563) $(499,760)
============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,055,821) $(1,001,842)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 150,938 265,257
Loss from investment in STAQ 284,961 55,296
Provision for bad debts 457,917 148,000
Deferred income taxes 1,615,000
Non-cash compensation expense 32,188 119,428
Note payable issued for consulting fees 150,000
Interest accrued on notes payable 36,561
Write-off of deferred offering costs 582,685
Changes in operating assets and liabilities:
(Increase) decrease in -
Refundable income taxes (48,000)
Accounts receivable and advances to customers (1,500,828) (1,353,329)
Costs and accumulated gross profit in excess of billings
on uncompleted contracts 2,001,521 (47,644)
Inventories (129,378)
Prepaid expenses 403,815
Other current assets 1,000 (454,228)
Deposits and deferred expenses (2,242)
Increase (decrease) in -
Accounts payable 1,409,001 (119,306)
Accrued expenses (111,350) (1,983)
Billings in excess of costs and accumulated gross profit
on uncompleted contracts (1,643,097) (2,221,571)
Accrued licensing (99,770)
Deferred revenue 194,931 354,617
Customer deposits net 72,044 2,150,000
Taxes payable (1,615,000)
-----------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 515 (1,920,744)
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash (250,230) 2,636,000
Investment in and advances to STAQ (544,113) (296,428)
Acquisition of fixed assets (45,629)
-----------------------------------
Net cash provided by (used in) investing activities (839,972) 2,339,572
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of related costs 1,088,720 307,532
Repayment of note payable (233,855)
Advances to related parties (272,073)
Advances from related parties 414,261
Repayment on stockholder advances (330,157)
Increase in deferred offering costs (582,685)
-----------------------------------
Net cash provided by (used in) financing activities 1,269,126 (877,383)
-----------------------------------
Net increase (decrease) in cash and cash equivalents 429,669 (458,555)
Cash and cash equivalents, at beginning of period 258,144 716,699
-----------------------------------
Cash and cash equivalents, at end of period $687,813 $258,144
===================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $1,566
===================================
Interest paid $851 $109,228
===================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of note payable and accrued interest into
common stock $425,000
===================================
Acquisition of fixed assets from stockholder in exchange
for reduction in due from stockholder $185,950
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
1. Organization of Company
General
Brighton Technologies Corporation (the "Company") serves as the parent
of Brighton Industries Corporation ("BIC"), a United States of America
based company, and Brighton Electronics Corporation Limited ("BECL"), a
Hong Kong based holding company for two Hong Kong subsidiaries and
interests in two active joint ventures.
On October 23, 1996, Zentex Corporation ("Zentex"), an inactive public
company, effected a reverse merger transaction of BIC and BECL
structured in the following manner. Stockholders of BIC and BECL
transferred ownership of their shares to Zentex in exchange for the
issuance of shares representing a controlling interest in Zentex.
Pursuant to the terms of the agreement, Zentex transferred to the
predecessor Zentex shareholders all of its operating assets (excluding
the shares of BIC and BECL) in exchange for the assumption of
liabilities existing immediately subsequent to the closing of the
transaction. As part of the transaction, Zentex received a release of
all obligations owed by it to an affiliate of the predecessor Zentex
shareholders. In addition, at the closing, each member of the
predecessor Zentex Board of Directors resigned and was replaced by
representatives of the BIC and BECL stockholders. On November 12, 1996,
Zentex was renamed Brighton Technologies Corporation. This transaction
was consummated to facilitate the consolidation of the operating
companies of BIC and BECL's founder and majority stockholder (the
"Stockholder") into one entity. The Stockholder and members of his
family control the operations of the Company and its subsidiaries.
Prior to this transaction, the Stockholder and his family had full
ownership of BIC and BECL. Since the BIC and BECL Stockholders obtained
control of the Company, the accompanying financial statements reflect
the operations of BIC and BECL for periods prior to the consummation of
the transaction. The issuance of shares to the predecessor Zentex
shareholders was accounted for as the issuance of equity by the Company
for no consideration.
The combination of the Company's subsidiaries, which were previously
under the common control of the Stockholder, has been accounted for in
a manner similar to the pooling-of-interests method of business
combinations. This method presents the Company's financial position,
results of operations and cash flows as if BIC and BECL were combined
for all periods presented.
BIC, a Delaware Corporation, principally conducts its business in the
People's Republic of China ("PRC") through registered PRC offices,
where it acts as the purchaser and distributor of third party
manufactured industrial, telecommunication and computer equipment to
PRC customers. The Company has also entered into a long-term contract
with China National Chemical Construction Chongqing Company ("China
National") to provide assistance in the design and construction of a
sodium bichromate production plant in the PRC. Management does not
expect to enter into any significant long-term contracts of this type
in the future (see Notes 9 and 10).
BECL is located in and incorporated in Hong Kong and is an investment
and holding company for PRC companies. BECL subsidiaries are involved
in the buying, selling and installation of computer, communications and
industrial equipment.
The Company had invested $1,997,324 in the Brighton-STAQ project at
December 31, 1998. The Company accounts for its investment in
Brighton-STAQ under the equity method of accounting. In April 1999,
STAQ entered into a new agreement with a new joint venture partner, The
Masses Mail Order Limited of China ("The Masses") in the PRC. The new
agreement calls for The Masses to invest a total of $4,800,000, with an
initial investment of $1,800,000 to own 53% of the equity in the joint
venture, and a second investment of $3,000,000 to own a total of 75% in
the joint venture. $1,800,000 was invested in July 1999 and the balance
is scheduled to be invested by the end of 1999. In such event,
Brighton's interest would be reduced to 47% and then
F-7
<PAGE>
to 25% from its initial 90% investment, but it would retain its
position as the managing partner in the joint venture. In this new
agreement, the former joint venture partner Huazheng Electronic
Technology Co., Ltd. would return its 10% equity in the joint
venture company back to Brighton-STAQ. The agreement was subject to
the approval of the Beijing Municipal Government, which was granted
June 16, 1999.
Due to a highly publicized financial scandal within the STAQ Exchange,
The Masses has not agreed to disburse the newly invested funds for
expansion until the outcome of the investigation is completed. There is
also uncertainty as to when the $3,000,000 balance will be invested
into the joint venture by the Masses. Management of the Company is
unable to predict the outcome of such investigation, but believes that
the STAQ project continues to be commercially viable.
2. Summary of Significant Accounting Policies
Business Combination and Consolidation Policy
The consolidated financial statements include the accounts of the
Company and its direct subsidiaries and joint ventures in which the
Company has a controlling interest. All intercompany accounts and
transactions have been eliminated in consolidation.
Restatement of Financial Statements
As a result of discussions with the Securities and Exchange
Commission's review of the Company's Registration Statement on Form
10-SB, the Company revised and restated its previously reported
financial statements as of and 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 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 the deferred offering
costs of $582,685 during the year ended December 31, 1998.
As a result of the restatement of the Company's financial statements,
with respect to deferred offering costs as discussed above, the
previously reported net loss for the year ended December 31, 1997
decreased from ($1,584,527) to ($1,001,842), and net loss per common
share decrease from ($.46) to ($.29) per share. As of December 31,
1997, the previously reported total assets increased from $8,364,573 to
$8,814,836, and net stockholders equity (deficit) increased from
($572,531) to $10,154.
The Company also restated its financial statements as of and for the
year ended December 31, 1997, to account for the Company's interest in
the STAQ joint venture under the equity method of accounting rather
than as a consolidated subsidiary. This restatement resulted from the
restrictions in the joint venture agreement that prevented the Company
from exercising full operational control over the joint venture.
Subsequent to December 31, 1998, the Company's effective interest in
the STAQ joint venture will be reduced to less than 50% as a result of
a financing transaction (see Note 9).
F-8
<PAGE>
Unaudited Financial Statements
The accompanying consolidated financial statements are unaudited, but
in the opinion of management of the Company, contain all adjustments,
which include normal recurring adjustments, necessary to present fairly
the financial position at December 31, 1998 and 1997, the results of
operations for the years ended December 31, 1998 and 1997, and the cash
flows for the years ended December 31, 1998 and 1997. Due to
significant operational and financial problems experienced during 1999,
the Company has been unable to fund the audit of such financial
statements.
Going Concern
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going concern,
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has
historically incurred significant losses, which have resulted in an
accumulated deficit of $4,004,558 at December 31, 1998, which raises
substantial doubt about the Company's ability to continue as a going
concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty. It is the intent of
management to create additional revenue opportunities through the
expansion of Brighton-STAQ, pursue other related business ventures, and
implement cost reductions to generate working capital and sustain
operations. If these measures prove to be inadequate or unsuccessful,
management may have to curtail certain of the Company's operations and
consider filing for bankruptcy reorganization.
Foreign Currencies
For BECL subsidiaries and BIC branch offices, whose functional currency
is the Hong Kong Dollar or the PRC Renminbi, balance sheet accounts are
translated at exchange rates in effect at the end of the year and
income statement accounts are translated at average exchange rates for
the year. Translation adjustments were not material as of December 31,
1998 and 1997. For the majority of BIC transactions, revenues and costs
are invoiced in United States dollars. Accordingly, the effects of
foreign exchange Transaction gains or losses are not material. The
Company does not enter into foreign currency forward exchange contracts
to hedge foreign currency exposures.
Revenue Recognition
The Company accounts for long-term contracts on the percentage-of-
completion method and income is recognized as work on contracts
progress, but estimated losses on contracts in progress are charged to
operations immediately. The Company generally bills customers in
accordance with contractual terms. At December 31, 1998 and 1997,
management estimated that the Company will, at a minimum, recover its
outlay for expenses when the projects are completed. Accordingly, no
loss provisions for such contracts were recorded during 1998 and 1997.
The only contract accounted for under this method is the China National
Contract (see Note 9).
For short-term contracts and projects, revenue is recognized on the
accrual basis as goods are shipped and services are performed.
F-9
<PAGE>
Income Taxes
The Company accounts for income taxes using the liability method, which
requires an entity to recognize deferred tax liabilities and assets for
the expected future tax consequences of events that have been
recognized in the Corporation's financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying
amounts and tax basis of liabilities and assets using enacted tax rates
in effect in years in which the differences are expected to reverse.
Valuation allowances are established against deferred tax assets when
management concludes that the realization of such deferred tax assets
cannot be considered more likely than not.
Income tax expense (benefit) is determined on a separate company basis
and includes current Federal, foreign and state taxes and deferred
taxes.
Cash Equivalents
The Company considers all highly liquid debt instruments with a
maturity of three months or less at the date of purchase to be cash
equivalents.
Restricted Cash
As a result of an "Order of Attachment" issued by the New York State
Supreme Court and filed against BIC on June 25, 1999, $357,230
previously on deposit in a corporate bank account was attached,
restricting the Company from using these funds for its operations. As a
result of a settlement agreement in September 1999, $107,000 of the
previously attached funds were authorized to be released back to the
Company. Accordingly the net amount of such cash balance of $250,230
has been shown as restricted cash as of December 31, 1998.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk
with respect to its trade receivables and advances to customers.
The Company performs initial and ongoing credit evaluations of its
customers and periodically reviews the collectibility of accounts
receivable and advances to customers, although a significant portion of
the Company's business is done on the basis of letters of credit or
cash advances with a relatively limited number of customers.
Accordingly, the Company provides an allowance for its estimate of
accounts deemed to be uncollectible. Provision for bad debts for the
years ended December 31, 1998 and 1997 amounted to $457,917 and
$148,000, respectively. During 1998 a receivable for $307,917 from a
PRC customer was deemed to be uncollectible and was written off in
full.
Organization Costs
Costs incurred in connection with the incorporation of the Company and
the formation of its current structure were capitalized and amortized
through December 31, 1997. The unamortized portion of these costs was
written off in full during the year ended December 31, 1998. Effective
December 31, 1998, the Company adopted AICPA Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities." Accordingly,
costs of start-up activities, including organization costs, are
expensed as incurred.
F-10
<PAGE>
Inventories
Inventories consist of purchased goods used to fulfill signed sales
contracts and purchase orders that remain undelivered at year end and
are stated at the lower of cost or market using the specific
identification method.
Fixed Assets
Fixed assets are carried at cost and are depreciated over the estimated
useful lives of the related assets (generally 2 to 5 years) on a
straight line basis. The cost of leasehold improvements is amortized
over the lesser of the length of the related leases or the estimated
useful lives of the assets. Assets purchased, but not utilized in
operations, are not subject to depreciation.
Benefit Plans
BIC has no pension or profit sharing plans. BECL has a defined
contribution plan covering qualified participants. The amount of
contributions for the years ended December 31, 1998 and 1997 were
$8,128 and $18,909, respectively.
Long-Lived Assets
The carrying values of long-lived assets are periodically reviewed by
management and impairments are recognized if the expected future
operating undiscounted cash flows derived from an asset are less than
its carrying value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The Company utilizes
estimates in measuring and projecting revenues, costs and gross profit
on long-term contracts, in providing for an allowance for doubtful
accounts (see Note 10) and in recording accrued liabilities.
Actual results could differ from those estimates.
Earnings Per Share
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), which establishes
standards for computing and presenting earnings per share. SFAS 128
replaces the presentation of primary earnings per share and fully
dilutive 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 income (loss) available to common stockholders by
the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed assuming the exercise or
conversion of common equivalent shares, if dilutive, consisting of
unissued shares under options, warrants and debt instruments. In
accordance with SFAS 128, all prior periods presented have been
restated to conform to the new presentation.
Potential common shares for the years ended December 31, 1998 and 1997
totaling 64,754 and 542,937, respectively, comprised of options,
warrants and convertible notes were not included in the calculation of
diluted loss per share since such effects would be antidilutive.
Recent Accounting Pronouncements
F-11
<PAGE>
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 adopted SFAS No. 130 for its
fiscal year beginning January 1, 1998. The Company does not have any
significant components of comprehensive income other 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, 1997. SFAS No. 131 established 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 adopted SFAS No. 131 for its fiscal
year beginning January 1, 1998. The Company's results of operation and
financial position were not affected by implementation of SFAS No. 131.
As a result of the adoption of SFAS No. 131, the Company revised its
segment disclosures (see Note 10).
In February 1998, the Financial Accounting Standards Board issued
Statement No. 132, "Employers' Disclosures about Pensions and Other
Post retirement 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 post retirement benefit plans. SFAS No. 132 requires comparative
information for earlier years to be restated. The Company adopted SFAS
No. 132 for its fiscal year beginning January 1, 1998. Adoption of SFAS
No. 132 did not have a material effect on the Company's financial
statement presentation and 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 ears beginning after June 15, 2000. 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 will adopt SFAS No. 133 for its fiscal year
beginning January 1, 2000, and does not anticipate that its adoption
will have a material impact on its financial statement presentation and
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
F-12
<PAGE>
effective for financial statements for the first fiscal quarter
beginning after December 15, 1998. SFAS No. 134 amends 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 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 will adopt SFAS No. 134 for its fiscal year beginning
January 1, 1999, and does not anticipate that its adoption will have
a material impact on its financial statement presentation and
disclosures.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current year presentation.
3. Related Parties
Receivables and Liabilities
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
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 1998 the Company's majority
shareholder and family members advanced an aggregate of $414,261 to the
Company, resulting in a balance due to of $182,040 at December 31,
1998.
<TABLE>
<CAPTION>
December 31, 1998 1997
----------------------------------------------- --------- ---------
<S> <C> <C>
Receivables (current and non-current):
Stockholder and family members -- $232,221
Other -- --
--------- ---------
-- $232,221
========= ========
Liabilities:
Stockholder and family members $182,040
========= ========
Fixed Assets
</TABLE>
In 1997, the Company's Stockholder sold project equipment to the
Company with an estimated fair market value of $185,950, in exchange
for an equivalent reduction in the amount due the Company from the
Stockholder.
Professional Fees
F-13
<PAGE>
Fees paid to Directors and their affiliates for financial advisory
services totaled $0 and $27,804 for the years ended December 31, 1998
and 1997, respectively.
General and Administrative Expenses
Salaries and incentives expenses for the Stockholder and members of his
family totaled approximately $135,000 in each of the years ended
December 31, 1998 and 1997.
4. Fixed Assets
Fixed assets at December 31, 1998 and 1997 are comprised of the
following:
<TABLE>
<CAPTION>
December 31, 1998 1997
------------------------------ ------------ ------------
<S> <C> <C>
Equipment $ 352,047 $ 306,021
Furniture and fixtures 30,561 16,902
Leasehold improvements 18,027 32,083
Vehicles 23,480 23,480
Less: Accumulated depreciation (258,169) (163,125)
---------- ----------
Total $ 165,946 $ 215,361
============ ============
</TABLE>
5. Long-Term Contracts
At December 31, 1998 and 1997, costs, estimated gross profit and
billings on uncompleted long-term contracts accounted for on the
percentage of completion method are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
------------------------------ ------------- -------------
<S> <C> <C>
Costs incurred on long-term contracts $ -- $ 1,722,940
Estimated gross profit -- 278,581
------------- -------------
-- 2,001,521
Less: Billings to date -- (3,291,991)
------------- -------------
$ -- $ (1,290,470)
============= =============
</TABLE>
These amounts are included in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
December 31, 1998 1997
------------------------------ --------------- ---------------
<S> <C> <C>
Costs and accumulated gross profit in $ -- $2,001,521
excess of billing on uncompleted contracts
Billings in excess of costs and accumulated 1,648,894 3,291,991
gross profit on uncompleted contracts
</TABLE>
During 1998, a project related to the sale and installation of
elevators at a hotel in China was halted as a result of insufficient
funding by the owners of the hotel. As a result, the estimated costs
and accumulated gross profit in excess of billing on uncompleted
contracts and the billings in excess of costs and accumulated gross
profit on uncompleted contracts were written off, resulting in a net
loss to the Company of $358,424. This amount was included in cost of
sales in the consolidated statement of operations for the year ended
December 31, 1998.
6. Demand Note
F-14
<PAGE>
During January 1996, BECL entered into a convertible demand note
agreement with a third party, with interest at 5% per annum. The note
was convertible into Company common stock at prevailing market values.
The note, including accrued interest and principal, had a balance of
$620,101 as of 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.
On February 25, 1997, the Company entered into an agreement with a
consulting firm for business advisory services. Pursuant to that
agreement, the Company paid the consulting firm $25,000 and issued a
one-year note for $150,000 for services rendered. This charge of
$175,000 was included in Consulting fees in the statement of operations
for the year ended December 31, 1997. The note is unsecured, with
interest at 10% per annum, to accrue until the due date of February 24,
1998, and is convertible at the option of the Company into a maximum
225,000 shares of common stock. Thereafter, such note became payable
upon demand, including principal and interest at 12% per annum. The
Company contemplates negotiating a settlement of this obligation and
the related payment terms.
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.
7. Stockholders' Equity
Private Placements
During the year ended December 31, 1997, the Company sold 24,006 shares
of common stock for proceeds of $352,948. Costs directly related to the
completion of these offerings amounted to $45,416 and were charged
directly to contributed capital in 1997.
During the year ended December 31, 1998, the Company sold 738,046
shares of common stock in private sales for aggregate proceeds of
$1,210,169. Costs directly related to the completion of these offerings
amounted to $121,449 and were charged directly to contributed capital
in 1998. Stock Issued for Services
In 1997, the Company issued, for nominal consideration, 22,590 shares
of common stock to various individuals and firms. Of this issuance,
6,090 shares related to services rendered in connection with the 1997
Private Placement. The charge to operations for the issuance of 16,500
shares of common stock totaled $95,437 for the year ended December 31,
1997, which was based upon the fair market value of the stock at the
date of the grants.
In December 1998, the Company entered into an agreement with a
consulting firm for business advisory services providing for the
issuance of 20,000 shares of common stock to the firm. Pursuant to the
terms of the agreement, 15,000 shares were deposited in escrow subject
to the successful investment of $1,000,000 (net) to the Company, which
has not yet occurred.
Preferred Stock
The Company has 5,000,000 authorized shares of preferred stock, none of
which have been issued as of December 31, 1998. The Company's Board of
Directors reserves the right to determine the rights, preferences and
privileges of the preferred stock.
Stock Options
F-15
<PAGE>
During 1997, the Company entered into a letter of agreement with a
public relations firm to provide corporate and investor relations. In
conjunction therewith, the Company issued the public relations firm a
three year stock option to purchase 8,334 shares of common stock with
an exercise price of $7.50 per share, which was the fair market value
on the date of the grant. The imputed fair value of this stock option
is approximately $24,000, which was charged to operations in 1997.
In July 1998, the Company entered into a one year employment agreement
with its Chief Financial Officer which provides for stock options,
pursuant to which the Company's common stock may be purchased at a 50%
discount from the fair market value. The Company recognized $20,000
with respect to this stock option during the year ended December 31,
1998. No stock options have been exercised.
Increase in Authorized Shares
In 1996, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to establish the number of
authorized shares of common stock of the Company at 100,000,000 shares,
with a par value of $.001 per share and also approved a one for three
stock split of the Company's common stock outstanding at that time. On
October 17, 1997 and January 26, 1998, the Company subsequently
effected separate one for three stock splits, and in April 1998, a
three for one stock split was also enacted. All share and per share
data have been restated for all periods presented to reflect these
splits.
Consulting Fees
The Company incurred costs of $434,899 in 1997 for professional fees
related to general business development and financing efforts.
8. Income Taxes
The statutory tax rates in the United States (including applicable net
state rates), Hong Kong and the PRC are 40%, 16.5% and 33%,
respectively. At December 31, 1998 and 1997 the Company has established
a valuation allowance on the deferred tax assets related to its
domestic net operating loss and the foreign net operating loss carry
forwards. Reductions in the valuation allowance will be recorded when,
in the opinion of management, the Company's ability to generate taxable
income in the future is considered more likely than not.
At December 31, 1998, the Company has net operating loss carry-forwards
for Hong Kong tax purposes of approximately $511,000, which can be
carried forward indefinitely. At December 31, 1998, the Company has
domestic net operating losses of $2,068,000 for Federal and State tax
purposes. There are no tax holidays, exemptions and incentives afforded
to the Company for its off-shore operations.
9. Commitments and Contingencies
Operating Leases
The Company and its subsidiaries lease administrative office space and
equipment under operating leases which expire prior to the end of 2001.
Total future minimum lease payments as of December 31, 1998 are:
<TABLE>
<S> <C>
1999 $ 221,428
2000 77,747
</TABLE>
F-16
<PAGE>
<TABLE>
<S> <C>
2001 31,375
2002 --
---------
Total minimum lease payment $ 330,450
=========
</TABLE>
Rent expense and related costs for 1998 and 1997 were $338,364 and
$337,440 respectively.
Legal Matters
The Company is either a plaintiff or a defendant in several pending
legal matters or threatened claims. In the opinion of management, the
final resolution of these matters will not have a material adverse
effect on the Company's financial position or results of operations.
In October 1999, the Company settled a pending arbitration with Allied
Signal regarding the contractual value of services provided in the
China National project. As a result of a delay in the China National
project, a dispute had arisen with the supplier of the technological
services, Allied Signal, and as a result and per the terms of the
Agreement, an arbitration hearing was scheduled for November 1999. The
dispute was settled prior the arbitration hearing, preventing both
parties from initiating arbitration in the future.
During September 1999, pursuant to the terms of the settlement
agreement, Allied Signal agreed to the immediate release of $107,000 in
funds to the Company that were previously frozen as a result of a levy
issued by the New York State Supreme Court. The balance of $250,230 is
payable to Allied Signal, with an additional $100,000 payable to Allied
Signal by the Company on October 1, 2000. The Company will also provide
Allied Signal with a confession of judgement in the amount of $750,000
to only be filed in the event the Company defaults under this
agreement.
China National Project
The original turn-key contract with China National for the engineering
design and implementation for a sodium bichromate production plant was
expected to generate total revenues of $11,000,000 for the Company.
Revenues under this contract for the years ended December 31, 1998 and
1997 were approximately $ 0 and $2,237,000, respectively, or 0% and 35%
of the Company's total revenues, respectively. The Company has recorded
cumulative aggregate revenues of $6,798,000 through December 31, 1998
under this contract or approximately 62% of the contract's total
expected revenues.
The Company has been advised by China National that they are currently
negotiating with third party lenders for the necessary funds to
complete the construction of the project. The Company is currently
unable to predict the ultimate outcome of these discussions, although
it appears very unlikely that there will be any resolution of this
matter in 1999 or in the first half of 2000. In the event that China
National is unsuccessful in its efforts to obtain such financing and
construction efforts are suspended or terminated, the Company's
anticipated revenues in the future with regard to this contract would
be reduced or eliminated. 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 December 31, 1998, the Company had
F-17
<PAGE>
advanced $1,181,513 to China National, which is included in advances
to customers in the consolidated balance sheets. In addition, a
deposit payable to China National of $2,150,000 was outstanding at
December 31, 1997 and 1998, which is classified as customer deposits
in the consolidated balance sheets.
STAQ Joint Venture
The Company had invested $1,997,324 in the STAQ project at December 31,
1998. The Company accounts for its investment in Brighton-STAQ under
the equity method of accounting. In April 1999, Brighton-STAQ entered
into a new agreement with a new joint venture partner, The Masses Mail
Order Limited of China ("The Masses") in the PRC. The new agreement
calls for The Masses to invest $4,800,000 and to own 53% of the equity
in the joint venture, of which $1,800,000 was invested in July 1999 and
the balance of $3,000,000 was scheduled to be invested by the end of
1999. In such event, Brighton's interest would be reduced to 47% from
its initial 90% investment, but it would retain its position as the
managing partner in the joint venture. In this new agreement, the
former joint venture partner Huazheng Electronic Technology Co., Ltd.
would return its 10% equity in the joint venture company back to
Brighton-STAQ. The agreement was subject to the approval of the Beijing
Municipal Government, which was granted on June 16, 1999.
Due to a highly publicized financial scandal within the STAQ Exchange,
The Masses has not agreed to disburse the newly invested funds for
expansion until the outcome of the investigation is completed. There is
also uncertainty as to when the $3,000,000 balance will be invested
into the joint venture by the Masses. Management of the Company is
unable to predict the outcome of such investigation, but believes that
the STAQ project continues to be commercially viable.
Letters of Credit
At December 31, 1998 and 1997, the Company had issued irrevocable
letters of credit $711,216 and $1,230,000, respectively, representing
contingent commitments on equipment purchases. All the 1997 letters of
credit have been closed out and $90,000 remains open at October 1, 1999
with respect to the December 31, 1998 balance.
10. Concentrations and Segment Information
Segment Information
The Company operates in one business segment: the buying, selling and
installation of computer, communications and industrial equipment. The
Company acts as an intermediary, purchasing such products from sources
in the United States and selling such products to customers in the PRC.
The Company operates through offices in the United States, Hong Kong
and the PRC.
As of January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". As a result,
segment information for the year ended December 31, 1997 has been
restated.
Segment information excludes the STAQ project, in which the Company has
a minority interest, which is accounted for under the equity method of
accounting (see Note 2).
Major Customers
China National accounted for approximately 35% for the year ended
December 31, 1997. No revenues were recognized from China National
during 1998. A BECL customer accounted for approximately 17% of
revenues in 1996. As an accommodation to China National for excess
F-18
<PAGE>
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, 1998 and 1997, the Company had
advanced $1,181,513 to China National, classified as advances to
customers in the consolidated balance sheets. In addition, a deposit
payable to China National of $2,150,000 was outstanding at December 31,
1998 and 1997.
During the year ended December 31, 1998, three customers accounted for
49% of the total revenues, consisting of 23%, 14% and 12%,
respectively. During the year ended December 31, 1997, the only
customer that accounted for more that 10% of total revenues was China
National, which accounted for 35% of total revenues (see Note 9).
Historically, the Company has relied on a limited number of customers
for a substantial portion of its total revenues. The Company expects
that a significant portion of its future revenues will continue to be
generated by a limited number of customers. The loss of any of these
customers or any substantial reduction in business volume with any of
these customers could materially adversely affect operating results.
Suppliers
The Company purchases a substantial amount of equipment and licenses
technology from a limited number of entities. Based on the number of
alternate qualified suppliers, management does not believe that the
Company has a concentration of risks under its current arrangements.
Geographical
The vast majority of the Company's revenues are derived from customers
based in countries outside the United States, primarily the PRC. Such
operations subject the Company to certain operational risks. The
Company's prospective results of operations could be negatively
affected by adverse consequences arising from these risks. Although
management believes that the likelihood of such factors occurring is
not significant, the possibility of unanticipated events disrupting the
Company's operations exists.
During the year ended December 31, 1998, revenues from United
States-based operations were $8,984,820 or 69% of total revenues, and
revenues from Far East-based operations were $4,113,387 or 31% of total
revenues. During the year ended December 31, 1997, revenues from United
States-based operations were $5,275,052 or 82% of total revenues, and
revenues from Far East-based operations were $1,171,565 or 18% of total
revenues.
12. Subsequent Events
During 1999, the Company experienced a significant reduction in its
existing and anticipated business arising principally from three
factors: (1) the bombing of the Chinese embassy in Belgrade which
caused a substantial reduction in orders from Chinese companies to
U.S. based firms; (2) a restraining order obtained by Allied Signal,
Inc. in February 1999 preventing the Company from using in its
business operations cash of $357,230; and (3) the inability to use
certain investment funds for the STAQ project because of financial
scandal within the STAQ Exchange.
Sale Of The Brighton Industries Corporation and Brighton Equipment
Corporation, Limited
On July 14, 1999, the Company completed the divestiture of BIC and
BECL to GIS Worldtrade Corporation Limited ("GIS"), a Hong Kong
corporation. At the time of the transaction, GIS owned 300,000
shares in the Company, which it had received as the result of a
conversion of a portion of a note payable in June 1998.
F-19
<PAGE>
The divestiture was consummated because BIC and BECL were engaged in
businesses which the management of the Company concluded were not
part of its core business: the China National contract, in the case
of BIC; and the YangZhou Brighton joint venture, in the case of
BECL. However, substantially all of the other previous business
operations of BIC and BECL will continue to be conducted by the
Company or other subsidiaries. It is not expected that the
divestiture will have a material adverse affect on the financial
condition or results of operations of the Company.
Attachment Order
In connection with the China National contract, BIC entered into a
technology licensing and engineering services contract with Allied
Signal. The terms of the contract stipulated that BIC would pay
Allied Signal a $1,000,000 down payment due no later than September
30, 1994, $500,000 upon completion of the basic engineering design
of the Plant, but in no event 12 months from Allied Signal's receipt
of the down payment, and $500,000 upon completion by Allied Signal
of review of the design but in no event later than 20 months from
Allied Signal's receipt of the down payment. In accordance with the
terms of the contract with Allied Signal, BIC made three payments to
Allied Signal totally $900,000. This amount represents the $1,000,000
down payment less 10% withholding tax on technology imports imposed
by the Chinese Government.
In February 1996, the Chongqing municipal government suspended
construction, delaying the completion of the plant and China
National discontinued any further payments to BIC. BIC determined
that no other payments were due until the project was able to
commence construction and continue to the next phase.
On April 3, 1998, Allied Signal filed a Notice of Intention to
Arbitrate and Demand for Arbitration with the American Arbitration
Association in New York seeking the balance claimed to be owing. In
its Demand for Arbitration, Allied Signal sought an award of
$1,000,000, plus interest from the date such payment became due, in
addition to attorney's fees and costs of the arbitration proceeding.
BIC filed an answer in May 1998 denying Allied Signal's claim and
asserting a defense of force majeure.
On February 11, 1999, Allied Signal filed a Petition for an Order of
Attachment with a Temporary Restraining Order against BIC with the
Supreme Court of the State of New York. On February 11, 1999, in
response to Allied Signal's Petition, the Supreme Court of the State
of New York issued an Order to Show Cause for Order of Attachment
with Temporary Restraining Order, in effect temporarily encumbering
$357,230 that BIC had on deposit with The Bank of China in New York.
On June 18, 1999, the Supreme Court of New York granted the Order of
Attachment and ordered that the amount of $357,230 be turned over to
The City of New York -Sheriff's Department. In October 1999, the
Company settled the arbitration proceedings with Allied Signal
pursuant to which Allied Signal agreed to a release of $107,000
which had been subject to the attachment. The balance of $250,230
was payable to Allied Signal with an additional $100,000 payable to
Allied Signal on October 1, 2000.
The Order of Attachment, combined with the reduction in business
caused by the bombing of the Chinese Embassy in Belgrade, profoundly
affected all aspects of the Company's business, including the
Company's ability to solicit new business, purchase equipment in
order to complete existing contracts, and maintain employees and
morale. The order of attachment of the funds combined with the
reduction in business resulted in serious cash flow problems for the
Company. The Company's management was forced to take a number of
steps to address these problems. During the first half of 1999, four
employees in the United States and 39 employees in China were
terminated. The audit of the 1998 financial statements was suspended
due to the Company's inability to pay the costs of the audit. As a
result, the Company had not been able to file an Annual Report or
10-KSB for the year ended December 31, 1998 with the United States
Securities and Exchange Commission, this causing the Company to
become delinquent in its filings. The Company suspended or reduced
payments to its vendors and outside professionals.
F-20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 687,813
<SECURITIES> 0
<RECEIVABLES> 3,110,146
<ALLOWANCES> 272,000
<INVENTORY> 232,488
<CURRENT-ASSETS> 5,466,438
<PP&E> 424,115
<DEPRECIATION> 258,169
<TOTAL-ASSETS> 7,652,059
<CURRENT-LIABILITIES> 7,695,819
<BONDS> 0
0
0
<COMMON> 4,553
<OTHER-SE> (504,313)
<TOTAL-LIABILITY-AND-EQUITY> 7,652,059
<SALES> 13,098,207
<TOTAL-REVENUES> 13,098,207
<CGS> 10,715,786
<TOTAL-COSTS> 10,715,786
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 457,917
<INTEREST-EXPENSE> 153,087
<INCOME-PRETAX> 1,818,860
<INCOME-TAX> (48,000)
<INCOME-CONTINUING> (2,055,821)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,055,821)
<EPS-BASIC> (.49)
<EPS-DILUTED> (.49)
</TABLE>
