<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-24815
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3993618
(State or other jurisdiction of (I.R.S Employer Identification Number)
- - ------------------------------- --------------------------------------
incorporation or organization)
575 Lexington Avenue, Suite 410, New York, New York 10022
- - --------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 572-9612
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15d of the Securities Exchange Act of 1934 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
--- ---
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
7,596,936 common shares, $.01 par value, were outstanding as of November 13,
1998.
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INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:
Balance sheets, September 30, 1998 and December 31, 1997
Statements of operations, three months and nine months ended
September 30, 1998 and 1997
Statements of shareholders' equity, nine months ended September 30,
1998
Statements of cash flows, nine months ended September 30, 1998 and
1997
Notes to consolidated condensed financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
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INTEGRATED TRANSPORTATION NETWORK GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(US dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,723 $ 6,504
Trade receivables, net of allowance of
$67 and $132, respectively 719 176
Other assets (Note 3) 366 9,345
Inventories 97 50
Property and equipment, net 1,363 1,174
Revenue earning equipment, net 31,488 29,737
Taxi licenses, net 12,093 11,881
Construction-in-progress 2,321 2,263
Organization costs, net 847 874
Deposit 1,937 1,933
------- -------
$55,954 $63,937
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Bank loans $ 3,776 $ 2,801
Notes payable (Note 2) 4,320 320
Trade payables 1,619 342
Other payables 3,522 5,400
Due to directors 286 71
Due to affiliates 6,220 4,132
Due to minority shareholders, net 19 19
Deferred revenue 2,983 2,403
Accrued expenses 476 139
Income tax payable 883 1,551
Deferred income taxes 102 265
------- -------
TOTAL LIABILITIES 24,206 17,443
------- -------
MINORITY INTEREST 1,567 2,635
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
SHAREHOLDERS' EQUITY (NOTES 2 & 4):
Common stock, $.01 par value -
authorized 50,000,000 shares; issued and outstanding
6,041,573 shares at December 31, 1997 and
7,596,936 shares at September 30, 1998 60 76
Additional paid-in capital 12,665 17,761
Retained earnings 17,050 25,635
Accumulated other comprehensive income -
foreign currency translation adjustments 406 387
------- -------
TOTAL SHAREHOLDERS' EQUITY 30,181 43,859
------- -------
$55,954 $63,937
======= =======
</TABLE>
See accompanying note to consolidated condensed financial statements.
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INTEGRATED TRANSPORTATION NETWORK GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(US dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
------- ------ ------ --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE, NET $ 2,313 $5,655 $7,058 $ 16,806
------- ------ ------ --------
EXPENSES:
Depreciation of revenue earning equipment 449 847 1,338 2,714
Amortization of taxi licenses 67 66 199 200
Other operating expenses 701 970 1,548 3,307
Interest expense, net of interest income 171 120 480 535
------- ------ ------ --------
TOTAL EXPENSES 1,388 2,003 3,565 6,756
------- ------ ------ --------
INCOME BEFORE PROVISION FOR INCOME TAX
AND MINORITY INTEREST 925 3,652 3,493 10,050
PROVISION FOR INCOME TAX 106 249 317 817
------- ------ ------ --------
INCOME BEFORE MINORITY INTEREST 819 3,403 3,176 9,233
------- ------ ------ --------
MINORITY INTEREST 32 238 117 648
------- ------ ------ --------
NET INCOME 787 3,165 3,059 8,585
OTHER COMPREHENSIVE INCOME NET OF TAX
- - - FOREIGN CURRENCY TRANSLATION ADJUSTMENTS (1) 17 -- (19)
------- ------ ------ --------
COMPREHENSIVE INCOME $ 786 $3,182 $3,059 $ 8,566
======= ====== ====== ========
NET INCOME PER COMMON SHARE:
Basic $ .13 $ .42 $ .51 $ 1.22
Diluted .13 .42 .51 1.16
======= ====== ====== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 6,042 7,597 6,042 7,049
Diluted 6,042 7,597 6,042 7,486
======= ====== ====== ========
</TABLE>
See accompanying note to consolidated condensed financial statements.
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INTEGRATED TRANSPORTATION NETWORK GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(US dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
other
comprehensive
income-foreign
Additional currency Total
Common Stock paid-in Retained translation shareholders'
Shares Amount capital earnings adjustments equity
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 6,041,573 $60 $12,665 $17,050 $ 406 $ 30,181
Issuance of shares for consulting
services (unaudited) (Note 4) 7,500 -- 33 -- -- 33
Issuance of shares for liquidated
damages under financing
agreement (unaudited) (Note 2(a)) 17,268 1 163 -- -- 164
Issuance of shares with respect
to conversion of promissory
notes (unaudited) (Note 2(b)) 1,324,345 13 4,227 -- -- 4,240
Issuance of shares in connection
with private placement during
May 1998, net of issuance
costs (unaudited) (Note 4) 206,250 2 673 -- -- 675
Foreign currency translation
adjustments (unaudited) -- -- -- -- (19) (19)
Net income (unaudited) -- -- -- 8,585 -- 8,585
--------- --- ------- ------- ----- --------
Balance, September 30, 1998
(unaudited) 7,596,936 $76 $17,761 $25,635 $ 387 $ 43,859
========= === ======= ======= ===== ========
</TABLE>
See accompanying note to consolidated condensed financial statements.
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INTEGRATED TRANSPORTATION NETWORK GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(US dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1998
------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,059 $ 8,585
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of property,
equipment and revenue earning equipment 1,709 2,832
Amortization of taxi licenses 199 200
Minority interest 478 1069
Amortization of organization costs 29 238
Deferred income tax 13 163
Exchange adjustment 26 18
Loss (gain) on disposal of fixed assets -- 94
Changes in assets and liabilities:
(Increase) decrease in trade and other receivables (224) 539
(Increase) decrease in inventories (63) 47
(Decrease) increase in trade and other payables 501 558
Increase in accrued expenses 24 (72)
Increase in income tax payable (375) 668
(Decrease) increase in deferred income 1,313 (580)
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,689 14,359
------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of property, and equipment and
revenue earning equipment (15) (1,121)
Proceeds from sale of property, equipment and
revenue earning equipment 33 16
Organization costs (251) (267)
Prepayment for acquisition of revenue earning equipment -- (8,811)
------- --------
NET CASH USED IN INVESTING ACTIVITIES (233) (10,183)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on bank loans 602 --
Repayments of bank loans (696) (770)
Proceeds from notes payable 320 --
Repayments of amount due to affiliates (7,350) (2,300)
Proceeds from issuance of common stock, net -- 675
------- --------
NET CASH USED IN FINANCING ACTIVITIES (7,124) (2,395)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (668) 1,781
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,259 4,723
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 591 $ 6,504
======= ========
</TABLE>
See accompanying note to consolidated condensed financial statements.
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INTEGRATED TRANSPORTATION NETWORK GROUP INC. AND SUBSIDIARIES
NOTE TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US dollars in thousands) (unaudited)
1. BASIS OF PRESENTATION --
The consolidated condensed interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual audited
financial statements for the year ended December 31, 1997 and its unaudited
financial statements for the three months ended March 31, 1998 included in the
Company's prospectus dated June 29, 1998 which forms a part of the Company's
Registration Statement on Form S-1 that was declared effective by the Securities
and Exchange Commission on June 30, 1998. Such financial statements include a
detailed description of (i) the reverse acquisition of Dawson Science
Corporation ("Dawson") by Shenzhen Jinzhenghua Transport Industrial Development
Co. Ltd. during March 1997, and (ii) Dawson's plan of reorganization which was
approved during June 1998. The Company follows the same accounting policies in
preparation of interim reports.
Results of operations for the interim periods are not indicative of
annual results.
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<PAGE> 8
2. NOTES PAYABLE --
Notes payable consist of the following:
Year ended December 31, 1997
----------------------------------------------------------------
Principal Interest rate Maturity Collateral
----------------------------------------------------------------
$ 320 8.0% 4/02/98 (a)
500 12.0 3/18/98 (b)
1,500 12.0 3/29/98 (b)
2,000 12.0 5/02/98 (b)
----------------------------------------------------------------
$4,320
Nine months ended September 30, 1998 (unaudited)
----------------------------------------------------------------
Principal Interest rate Maturity Collateral
----------------------------------------------------------------
$320 8.0% 4/02/98 (in default) (a)
- - ---------------
(a) On July 3, 1997, the Company entered into a financing agreement which
provides for borrowings of up to $1,000. Advances are payable monthly. The loan
is collateralized by the Company's inventory, equipment and machinery, existing
or acquired. The balance outstanding at December 31, 1997 and September 30, 1998
was $320. The note was due April 2, 1998 and is in default.
Under the terms of the agreement, if the Company did not file a registration
statement with the Securities and Exchange Commission which was declared
effective by October 2, 1997, certain shares of common stock were due the lender
as liquidated damages. As of December 31, 1997, these shares had not been issued
but the liability for such issuance was included in accrued expenses at
December 31, 1997. The Company issued 17,268 shares as liquidated damages on
March 31, 1998.
(b) On September 19, September 30 and November 3, 1997, the Company issued
convertible promissory notes to three entities. Interest accrues at 12% per
annum and is payable monthly. At any time after the maturity date and prior to
repayment of all amounts due, the notes, at the option of the holders, were
convertible into shares of the Company's common stock equal to an amount
determined by formula, as defined, in the agreement. The notes were
collateralized by 1,000,000 shares of common stock pledged personally by a
principal shareholder. On March 31, 1998, upon default under these notes due to
non-payment of interest and principal, the holders opted to convert such debt
($4,000) and accrued interest ($240) into shares of the Company's common stock.
Accordingly, under the terms of the three agreements, 1,324,345 shares of common
stock were issued in settlement of such obligations.
-8-
<PAGE> 9
3. COMMITMENTS AND CONTINGENCIES --
CONTRACTUAL OBLIGATIONS
The Company contracted with a building contractor in 1996 to construct
the group's hotel in Hunan, PRC. The budgeted costs of the whole project are
estimated to be $4,073. Through September 30, 1998, the Company has made Hotel
related expenditures of $2,263. Due to financial constraints, the Company has
suspended construction of the hotel project. The Company intends to assume
construction of the hotel as soon as it has sufficient capital to do so.
At September 30, 1998, the Company had committed through a purchase
agreement to purchase 3,000 new automobiles for an aggregate purchase price of
approximately $47,475 (in respect of which an $8,811 deposit, included in other
assets, was made as of September 30, 1998).
CONTINGENCIES
In early 1998, the United States Securities and Exchange Commission,
following an informal inquiry, commenced an investigative proceeding relating to
public disclosures in 1997 by Dawson Science Corporation ("Dawson"). The public
disclosures involved, among other things, press releases relating to the
acquisition of Shenzhen, Jinzhenghua Transport Industrial Development Co., Ltd.,
the value of Dawson's assets, Dawson's financial prospects and Dawson's
anticipated revenues and earnings (collectively, the "Public Disclosures").
In August 1998, a stockholder of the Company filed a class action
complaint in the United States District Court for the Southern District of New
York naming the Company, Dawson, and their respective executive officers and
directors as defendants. The complaint alleges that the Public Disclosures
omitted or misrepresented material facts. The plaintiff seeks unspecified
damages on behalf of himself and all other persons who purchased shares of
Dawson common stock between March 25, 1997 and December 30, 1997, together with
interest and costs, including attorney fees, under sections 10(b) and 20(a) of
the Securities and Exchange Act of 1934 and Rule 10(b)(5) thereunder.
The Company engaged counsel in connection with the investigation and
litigation described above. Such counsel is currently evaluating the various
claims. Although the Company cannot predict the outcome of these matters, these
matters could materially and adversely affect the Company, its financial
condition and results of operations.
4. SHAREHOLDERS' EQUITY --
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<PAGE> 10
On March 31, 1998, the Company issued 7,500 shares to a consultant as
consideration for provision of consulting services. The Company is presently
negotiating an agreement with such consultant to provide consulting services for
$9 monthly.
During May 1998, the Company issued, for an aggregate of $750 (less
issuance costs of $75), 206,250 shares of common stock and warrants to purchase
an aggregate of 220,000 shares of common stock to certain private investors.
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<PAGE> 11
INTEGRATED TRANSPORTATION NETWORK GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The Company, through its 92%-owned subsidiary, Shenzhen Jinzhenghua
Transport Industrial Development Co., Ltd. ("Jinzhenghua Transport"), primarily
operates a group of transportation related businesses (the "Transportation
Businesses"). The Transportation Businesses are comprised of the automobile
rental business (the "Rental Business"); the taxi business (the "Taxi Business")
and the automobile repair services business (the "Repair Business"). All the
Company's operations are located in China. The Company maintains executive
offices in both New York City (USA) and Shenzhen (China). Jinzhenghua Transport
also has been developing a hotel in a resort town in Hunan Province, which is
scheduled to commence operations in early 1999.
In 1986, Wu Zhi Jian ("Mr. Wu") organized Shenzhen Zhenghua Group Co.
Ltd. (the "Zhenghua Group") to own and operate a diversified group of
businesses. In 1988, Jinzhenghua Transport, an affiliate of Zhenghua Group,
established a transportation business. The transportation business began with
the acquisition of taxi licenses in the first auction of such licenses in 1988
in Shenzhen, China. Jinzhenghua Transport has continued to acquire taxi licenses
and expand its taxi business into other cities and provinces.
In 1994, Jinzhenghua Transport expanded its transportation business to
include automobile repair services in Shenzhen. The Repair Business primarily
services the Company's Rental and Taxi Businesses.
In 1997, Jinzhenghua Transport further expanded its transportation
business to include automobile rental services in Jiangxi Province, Guangdong
Province, Jiangsu Province and Shaanxi Province.
The Company does not have any operating business other than the
businesses operated through Jinzhenghua Transport.
On a consolidated basis, revenue, net, increased $9,748,000 from
$7,058,000 in the nine months ended September 30, 1997 to $16,806,000 in the
nine months ended September 30, 1998. Net income increased $5,526,000 from
$3,059,000 in the nine months ended September 30, 1997 to $8,585,000 in the nine
months ended September 30, 1998.
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<PAGE> 12
The Rental Business, which began operations in August 1997, accounted
for $2,636,000, or 21.0%, of the Company's total revenue, net, in 1997 and
$9,530,000, or 56.7%, of the Company's total revenue, net, in the nine months
ended September 30, 1998. At September 30, 1997, and 1998, the Rental Business
had acquired 370, and 1,218 automobiles, respectively. Of the 1,218 automobiles,
650 have been placed in service and the remaining 568 have not yet been placed
in service as the Company does not currently have available the funds necessary
(approximately $3,400,000) to pay the expenses related to placing the cars in
service (license fees, taxes, and levies). The Company intends to place these
cars in service as and when it has funds available to do so. See "Liquidity and
Capital Resources." The Company's average purchase price for each automobile
acquired for the Rental Business during 1997 and the nine months ended September
30, 1998 was $19,432 and $20,566, respectively; the average depreciation and
other operating expenses for each such automobile during the nine months ended
September 30, 1997 and 1998 was $402 and $3,884, respectively; and the average
revenue, net, from each such automobile during the nine months ended September
30, 1997 and 1998 was $293 and $14,661, respectively. The Rental Business
contributed 27.2%, or $1,814,000, to the Company's $6,680,000 of total income
before provision for income tax and minority interest in 1997 and 69.1%, or
$6,944,000, to the Company's $10,050,000 total income before provision for
income tax and minority interest in the nine months ended September 30, 1998.
The Taxi Business accounted for 36.8% of the Company's total revenue,
net, in the nine months ended September 30, 1998. At both September 30, 1997 and
1998, the Taxi Business had deployed 728 taxi cabs. An amount equal to the sum
of the Company's average purchase price for each taxi license plus the average
purchase price for each automobile deployed in the Taxi Business during 1997 and
the nine months ended September 30, 1998 was $18,379 and $18,357, respectively,
and $19,200 and $20,614, respectively; the average depreciation, amortization
and other operating expenses for each such taxi during the nine months ended
September 30, 1997 and 1998 was $3,253 and $2,807, respectively; and the average
revenue, net, from each such taxi during the nine months ended September 30,
1997 and 1998 was $8,101 and $8,505, respectively. The Taxi Business contributed
$3,372,000 and $3,858,000 to income before provision for income tax and minority
interest in the nine months ended September 30, 1997 and 1998, respectively,
representing 96.5% and 38.4% respectively, of the Company's total income before
provision for income tax and minority interest in the nine months ended
September 30, 1998.
The Repair Business accounted for 6.5% of the Company's total revenue;
net and 4.9% of the Company's total income before provision for income tax and
minority interest in the nine months ended September 30, 1998. During the
current quarter, revenue, net, from the Repair Business was $411,000, compared
with $337,000 in the comparable prior period, a decrease of $74,000, or 18%.
This decrease was attributable to a decrease in the number of taxi cab
inspections, related to renewal of taxi licenses, performed in the current
quarter. Taxi cab licenses are renewable every
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<PAGE> 13
three years. The Company expects income from taxi cab inspections to fluctuate
based on the number of licenses to be renewed in a given year.
The Company's only operations besides the Rental Business, the Taxi
Business and the Repair Business relate to the hotel being developed in Hunan
Province, in respect of which neither revenue nor expenses were recorded through
September 30, 1998. All expenditures related to the hotel (up to September 30,
1998) have been recorded as construction in progress.
During the nine months ended September 30, 1997 and 1998, the Company's
income before provision for income tax and minority interest reflects $380,000
and $1,060,000 respectively, of accounting, legal and other professional and
advisory expenses that related primarily to the Company's reorganization.
During the nine months ended September 30, 1998, the Company had
interest expense, net of interest income, of $535,000 which reflected interest
expense of $548,000 and interest income of $13,000.
The Company had entered into two agreements to purchase an aggregate of
5,000 automobiles for an aggregate purchase price of approximately $78,811,000.
One contract was for 2,000 cars for an aggregate purchase price of $31,336,000,
and the other contract was for 3,000 cars for an aggregate purchase price of
$47,475,000. The Company has paid approximately $8,811,000 as a deposit with
respect to the purchase agreement for 3,000 cars. The Company has terminated the
agreement to purchase 2,000 cars , as the Company was not able to obtain the
capital necessary to fund the purchase price. The Company terminated the
purchase agreement without liability or penalty.
With respect to the purchase agreement for 3,000 cars, the Company
currently is negotiating to extend the payment period under this contract, as
the Company does not currently have the capital to pay the balance of the
purchase price. Although the Company expects that it will be able to extend the
payment terms, there can be no assurance that the Company will be able to do so.
If the Company is unable to negotiate an extension of the payment terms, or
otherwise obtain financing to fund the balance of the purchase price, the
Company could be subject to damages and penalties under the purchase agreement,
which could have a material adverse effect on the Company's financial condition
and results of operations.
The Company plans to continue to expand the Rental Business as rapidly
as the Company's capital resources permit. The Company plans to continue to
expand the Taxi Business through selective acquisitions in certain cities. The
Company plans to expand the Repair Business as necessary to accommodate the
expansion of the Rental Business and Taxi Business. The Company currently does
not have sufficient capacity to expand its businesses. See "Liquidity and
Capital Resources."
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<PAGE> 14
The Company enjoys preferential tax treatment as a result of its
location in Shenzhen, a Special Economic Zone. Enterprises in Shenzhen are
subject to an income tax rate of 15%, compared with the standard enterprise
income tax rate of 33%. In addition, Shenzhen enterprises in the transportation
service industry have a 100% income tax credit for the first year in which they
have a profit and a 50% income tax credit for the second and third years.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998
<TABLE>
<CAPTION>
Three Months
Three Months Percentage of Ended Percentage of
Ended September Revenue, September Revenue,
30, 1997 Net 30, 1998 Net
--------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue, net $2,313,000 100.0% $5,655,000 100.0%
Total expenses 1,388,000 60.0 2,003,000 35.4
Income before provision for income 925,000 40.0 3,652,000 64.6
tax and minority interest
Income before minority interest 819,000 35.4 3,403,000 60.2
Net income 787,000 34.0 3,165,000 56.0
</TABLE>
Revenue, net, was $5,655,000 in the three months ended September 30,
1998, an increase of 144.5% from $2,313,000 in the three months ended September
30, 1997. The increase was primarily due to the contribution of $3,269,000 in
the 1998 period from the new Rental Business. The Taxi, Rental and Repair
Businesses contributed $2,049,000 (36.2%), $3,269,000 (57.8%) and $337,000
(6.0%), respectively, to revenue, net, in the 1998 period, compared with
$1,873,000 (81.0%), $29,000 (1.3%) and $411,000 (17.7%), respectively, in the
1997 period. Revenue, net, from the Taxi Business increased $176,000, or 9.4%
from $1,873,000 to $2,049,000. The increase was primarily due to new revenue
generated from the expanded Taxi Business in Ganzhou and increased monthly
leasing charges and increased amortization of deferred revenue related to the
renewal of taxi lease contracts in 1998. Revenue, net, from the Repair Business
was $337,000 in the 1998 period, from $411,000 in the 1997 period, an 18.0%
decrease.
Total expenses were $2,003,000 during the three months ended September
30, 1998, an increase of $615,000 or 44.3% from $1,388,000 during the three
months ended September 30, 1997. During the three months ended September 30,
1998, total expenses as a percentage of revenue, net, decreased to 35.4%,
compared to 60.0% during the comparable prior quarter.
Depreciation Expense. During the three months ended September 30, 1998,
Depreciation expense was $847,000, compared with $449,000 in the comparable
prior period, an increase of $398,000. During the current quarter, the
depreciation expense
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<PAGE> 15
associated with the Rental Business, Taxi Business, and Repair Business was
$481,000, $360,000, and $6,000, respectively. Depreciation expense, as a
percentage of revenue, net, decreased in the current quarter to 15.0%, compared
to 19.4% during the comparable prior quarter. The decrease in depreciation
expense as a percentage of revenue, net, was due primarily to expansion of the
Rental Business, which has lower depreciation expenses, as a percentage of
revenue, than the Taxi Business. The increase in the amount of depreciation of
revenue earning equipment was primarily due to a $448,000 in depreciation on
rental cars related to the new Rental Business and to a $49,000 decrease in
depreciation of new taxis.
Other operating expenses. Other operating expenses includes traffic
regulation fees, road maintenance fees, insurance, salaries, rent, repairs and
maintenance, costs of materials, depreciation and other general and
administrative expenses.. During the current quarter, other operating expenses
were $970,000, compared with $701,000 in the comparable prior period, an
increase of $269,000. During the current quarter, other operating expenses, as a
percentage of revenue, net, decreased to 17.2% from 30.3% during the comparable
prior quarter. The decrease in other operating expenses as a percentage of
revenue, net, was due primarily to cost control measures implemented in the Taxi
Business, and expansion of the Rental Car Business (whose operating costs are
lower as a percentage of revenue than the Taxi Business), partially offset by an
increase in the bad debt provision for the Repair Business and $306,000 of
professional and advisory expenses related to the Company's reorganization. The
increase in the amount of other operating expenses was primarily due to $335,000
of other operating expenses related to the new Rental Business.
Income before provision for income tax and minority interest was
$3,652,000 in the three months ended September 30, 1998, an increase of 294.8%
from $925,000 in the three months ended September 30, 1997. Before $306,000 and
$342,000 of expenses of the parent company (unconsolidated) during the three
months ended September 30, 1998 and 1997, respectively, the Rental, Taxi and
Repair Businesses contributed $2,450,000, $1,364,000, and $158,000,
respectively, to total income before provision for income tax and minority
interest in the 1998 period, compared with $(31,000), $112,000, and $193,000,
respectively, in the 1997 period. The increase in income before provision for
income tax and minority interest is primarily attributable to income from the
Company's new Rental Business.
Provision for income tax was $249,000 in the three months ended
September 30, 1998 (6.8% of income before provision for income tax and minority
interest), compared with $106,000 in the three months ended September 30, 1997
(11.5% of income before provision for income tax and minority interest). The
increase was primarily a result of increased taxable income.
-15-
<PAGE> 16
Minority interest was $238,000 in the three months ended September 30,
1998, an increase of 643.8% from $32,000 in the three months ended September 30,
1997, which reflects the fact that the Company entered into new joint venture
projects in 1997.
As a result of the foregoing, net income was $3,165,000 in the three
months ended September 30, 1998, an increase of 302.2% from $787,000 in the
three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Nine Months
Nine Months Percentage of Ended Percentage of
Ended September Revenue, September Revenue,
30, 1997 Net 30, 1998 Net
--------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue, net $7,058,000 100.0% $16,806,000 100.0%
Total expenses 3,565,000 50.5 6,756,000 40.2
Income before provision for income 3,493,000 49.5 10,050,000 59.8
tax and minority interest
Income before minority interest 3,176,000 45.0 9,233,000 54.9
Net income 3,059,000 43.3 8,585,000 51.1
</TABLE>
Revenue, net was $16,806,000 in the nine months ended September 30,
1998, an increase of 138.1% from $7,058,000 in the nine months ended September
30, 1997. The increase was primarily due to the contribution of $9,530,000 in
the 1998 period from the new Rental Business. The Taxi, Rental and Repair
Businesses contributed $6,191,000 (36.8%), $9,530,000 (56.7%) and $1,085,000
(6.5%), respectively, to revenue, net, in the 1998 period, compared with
$5,898,000 (83.6%), $29,000 (0.4%), and $1,131,000 (16.0%), respectively, in the
1997 period. Revenue, net, from the Taxi Business increased to $6,191,000 in the
1998 period from $5,898,000 in the 1997 period, a 5.0% increase. The increase
was primarily due to revenue generated by the expanded Taxi Business in Ganzhou
and increased monthly leasing charges and increased amortization of deferred
revenue related to the renewal of taxi lease contracts in 1998. Revenue, net,
for the Repair Business was $1,085,000 in the 1998 period, from $1,131,000 in
the 1997 period, a 4.1% decrease.
Total expenses were $6,756,000 in the nine months ended September 30,
1998, an increase of $3,191,000 or 89.5% from $3,565,000 in the nine months
ended September 30, 1997. During the current quarter, total expenses as a
percentage of revenue, net, decreased to 40.2%, compared to 50.5% in the
comparable prior quarter. The increase in the amount of total expenses was
comprised primarily of $1,376,000 of depreciation of revenue earning equipment,
$55,000 increase in net interest expense, and a $1,759,000 increase in other
operating expenses.
-16-
<PAGE> 17
Depreciation Expense. During the nine months ended September 30, 1998,
Depreciation expense was $2,714,000, compared with $1,338,000 in the comparable
prior period, an increase of $1,376,000. During the nine months ended September
30, 1998, the depreciation expense associated with the Rental Business and Taxi
Business was $1,420,000 and $1,311,000 respectively. Depreciation expense, as a
percentage of revenue, net, decreased during the nine months ended September 30,
1998, to 16.1%, compared to 19.0% during the comparable prior period. The
decrease in depreciation expense as a percentage of revenue, net, was due
primarily to the expansion of the Rental Business which has lower depreciation,
as a percentage of revenue, than the Taxi Business. The increase in the amount
of depreciation of revenue earning equipment was primarily due to $1,387,000 of
depreciation on rental cars related to the new Rental Business and to an $22,000
increase in depreciation of new taxis.
Other Operating Expenses. During the nine months ended September 30,
1998, other operating expenses were $3,307,000, compared with $1,549,000 during
the comparable prior period, an increase of $1,759,000. During the nine months
ended September 30, 1998, other operating expenses, as a percentage of revenue,
net, decreased to 19.7%, compared with 21.9% for the comparable prior period.
The decrease in operating expenses as a percentage of revenue, net, was due
primarily to cost control measurers implemented in the Taxi Business and
expansion of the Rental Business (which has lower operating costs, as a
percentage of revenue, than the Taxi Business). The increase in the amount of
other operating expenses was primarily due to $1,104,000 of other operating
expenses related to the new Rental Business, which commenced operations in
August 1997, and a $680,000 increase in operating expenses consisting primarily
of professional and advisory expenses related to the Company's reorganization.
Income before provision for income tax and minority interest was
$10,050,000 in the nine months ended September 30, 1998, an increase of 187.7%
from $3,493,000 in the nine months ended September 30, 1997. Before deducting
$1,060,000 and $380,000 of expenses of the parent company (unconsolidated)
during the nine months ended September 30, 1998 and 1997, respectively, The
Rental, Taxi and Repair Businesses contributed $6,944,000, $3,858,000, and
$493,000, respectively, to total income before provision for income tax and
minority interest in the 1998 period, compared with $(31,000), $3,372,000, and
$539,000, respectively, in the 1997 period. The increase in income before
provision for income tax and minority interest is primarily attributable to
income from the Company's new Rental Business, income generated from additional
taxi cabs in Ganzhou, as well as reductions in operating expenses associated
with the Taxi Business, partially offset by increases in accounting, legal and
other professional and advisory expenses related to the Company's
reorganization.
Provision for income tax was $817,000 in the nine months ended
September 30, 1998 (8.1% of income before provision for income tax and minority
interest), compared with $317,000 in the nine months ended September 30, 1997
(9.1% of income before
-17-
<PAGE> 18
provision for income tax and minority interest). The increase was primarily a
result of increased taxable income.
Minority interest was $648,000 in the nine months ended September 30,
1998, compared with $117,000 in the nine months ended September 30, 1997, which
reflects the fact that the Company entered into new joint venture projects in
1997.
As a result of the foregoing, net income was $8,585,000 in the nine
months ended September 30, 1998, compared with $3,059,000 in the nine months
ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Rental and Taxi Businesses are cash flow businesses that
do not require significant amounts of working capital; but they are capital
intensive and require substantial capital expenditures for revenue producing
equipment. Working capital for the Repair Business was initially financed mainly
by cash flow from the Taxi Business.
At September 30, 1998, the Company had trade receivables ($176,000) and
cash and cash equivalents($6,504,000) aggregating $6,680,000. The Company's
liabilities due within a year aggregated $14,775,000, including $4,132,000 due
to affiliates (Zhenghua Group). Accordingly, at September 30, 1998, the
Company's liabilities due within a year exceeded cash (and cash equivalents) and
receivables by $8,095,000, compared with $15,679,000, at December 31, 1997. This
was primarily attributable to an increase in cash and cash equivalents of
$1,238,000 and an overall decrease in current liabilities of approximately
$6,300,000.
The Company believes that the Zhenghua Group does not presently intend
to declare due and payable what the Company owes it, unless the Company is
unable to refinance such indebtedness. The Company is currently negotiating with
the Zhenghua Group to convert the aggregate $4,132,000 in indebtedness into
common stock of the Company, based on the market price of the common stock, as
quoted on the OTC Bulletin Board. The Company anticipates issuing Common Stock
purchase warrants to Zhenghua Group in connection with any conversion. Based on
the current quoted price of the Common Stock ($2.25 per share at November 12,
1998), the $4,132,000 in indebtedness would be converted into approximately
1,837,000 shares of Common Stock. Based on an assumed rate of conversion of
$2.75 per share, the Company anticipates issuing Zhenghua Group warrants to
purchase approximately 275,000 shares of Common Stock at an exercise price based
on the quoted price of the Common Stock. Although the Company has not yet
entered into a definitive conversion agreement with the Zhenghua Group, the
Company anticipates that it will do so in the near term. However, the Company
may not be able to enter into a conversion agreement or other restructuring of
the debt on terms acceptable to the Company, if at all, in which case, the
Zhenghua Group would continue to have the right to declare the $4,132,000 debt
due and payable.
-18-
<PAGE> 19
In addition, the Company believes that it will be able to negotiate an
extension for the repayment of $2,800,000 in bank debt currently due March, 1999
until March, 2000.
As the Company's financial resources permit, the Company intends to
make capital expenditures, primarily for the purchase of new automobiles for the
Taxi and Rental Business and the completion of construction of the Company's
hotel project. The Company does not currently have sufficient capital to fund
such capital expenditures. At September 30, 1998, the Company had committed
through two purchase agreements to purchase an aggregate 5,000 new automobiles
for an aggregate purchase price of approximately $78,811,000 (in respect of
which an $8,811,000 deposit was made as of September 30, 1998). One contract was
for 2,000 cars, for an aggregate purchase price of $31,366,000, and the other
contract was for 3,000 cars, for an aggregate purchase price of $47,475,000..
With respect to the contract to purchase 2,000 cars, the Company has terminated
its obligations under such contract, as the Company did not have sufficient
capital to fund the purchase price. The Company terminated the purchase
agreement without liability or penalty. With respect to the agreement to
purchase 3,000 cars for approximately $47,475,000 (in respect of which the
Company has made the $8,811,000 deposit), as the Company does not currently have
the funds necessary to pay the balance of the purchase price ($38,664,000), the
Company is currently negotiating to extend the payment period under this
contract. Although the Company expects to be able to extend the payment terms,
there can be no assurance that the Company will be able to do so. If the Company
is unable to negotiate an extension of the payment terms, or otherwise obtain
financing to fund the balance of the purchase price, the Company could be
subject to damages and penalties under the purchase agreement, which could have
a material adverse effect on the Company's financial condition and results of
operations.
At September 30, 1998, the estimated cost of completing construction of
the hotel project was approximately $1,810,000. The Company has suspended
construction of the hotel project, as the Company does not currently have
sufficient capital to fund the construction of such project. The Company intends
to resume construction on the hotel project at such time as the Company has
sufficient capital to do so.
The Company believes that through a combination of cash flow from
operations and proceeds from potential financings, the Company will be able to
remedy the shortfall of cash relative to liabilities due within a year, finance
capital expenditures, including the purchase of some new automobiles and
resumption of construction of the hotel project, and to refinance debt in the
amount of $4,123,000. At present, the Company has no commitments from third
parties to finance capital expenditures or to refinance any of its existing
indebtedness, and does not have sufficient resources to finance capital
expenditures or to repay such indebtedness without refinancing. The Company
expects to generate significant cash flow from operations and will seek to
-19-
<PAGE> 20
obtain capital from the sale of securities, borrowings, and vendor financing
arrangements. There can be no assurance the Company will be successful in
raising additional capital, or, if it raises additional capital, the terms on
which such capital will be raised.
To date, the Company has obtained a substantial portion of its
financing from the Zhenghua Group, an affiliate of the Company, and a
substantial portion of the Company's indebtedness to third parties has been
guaranteed by Mr. Wu. There can be no assurance the Zhenghua Group will be
willing or able to provide capital in the future, or that Mr. Wu will be willing
or able to guarantee the Company's indebtedness in the future. If the Company
does not generate sufficient cash flow from operations and/or proceeds from
financings to remedy the shortfall of cash relative to liabilities due within a
year, fulfill its contractual commitment to purchase automobiles, and refinance
its existing indebtedness, the Company may be materially and adversely affected.
Even if the Company obtains sufficient capital to refinance its existing
indebtedness and remedy such shortfall, the Company may not obtain sufficient
capital to expand as contemplated.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In early 1998, the United States Securities and Exchange Commission,
following an informal inquiry, commenced an investigative proceeding relating to
public disclosures in 1997 by Dawson Science Corporation ("Dawson"), the
Company's former parent. The public disclosures involved, among other things,
press releases relating to the acquisition of Shenzhen, Jinzhenghua Transport
Industrial Development Co., Ltd., the value of Dawson's assets, Dawson's
financial prospects and Dawson's anticipated revenues and earnings
(collectively, the "Public Disclosures").
On August 28, 1998, David Weightman, a stockholder of the Company,
filed a class action complaint in the United States District Court for the
Southern District of New York naming the Company, Dawson, and their respective
executive officers and directors as defendants. The complaint alleges that the
Public Disclosures omitted or misrepresented material facts. The plaintiff seeks
unspecified damages on behalf of himself and all other persons who purchased
shares of Dawson's common stock between March 25, 1997 and December 30, 1997,
together with interest and costs, including attorney fees, under sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)(5) thereunder.
The Company engaged counsel in connection with the investigation and
litigation described above. Such counsel is currently evaluating the various
claims. Although the Company cannot predict the outcome of these matters, these
matters could materially and adversely affect the Company.
-20-
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K
2.1 Agreement and Plan of Reorganization.*
3.1 Certificate of Incorporation of the Company, as Amended.*
3.2 By-Laws of the Company*
10.1 Letter of Agreement, dated March 19, 1997 between Dawson Science
Corporation and Shenzhen City Zhenghua Traffic and Transportation
Main Company, Ltd.*
10.2 Letter Agreement, dated June 27, 1997 between Dawson Science
Corporation and Wharton Capital Partners Ltd.*
10.3 Consulting Agreement, dated February 11, 1998 between Dawson
Science Corporation and R.I.P. Consultants.**
10.4 Contract for Chinese Foreign Equity Joint Venture, dated October
8, 1997 between Dawson Science Corporation and Wu Qui Mei
(Shenzhen Jinzhenghua Transport Industrial Development Co. Ltd.*
10.5 Regulations for Chinese Foreign Equity Joint Venture, dated
October 8, 1997 between Dawson Science Corporation and Shenzhen
Jinzhenghua Transport Industrial Development Co. Ltd.*
10.6 Business Loan and Security Agreement, dated November 3, 1997
between Dawson Science Corporation and Yeung Ming-Sum.*
10.7 Business Loan and Security Agreement, dated September 19, 1997
between Dawson Science Corporation and Yeung Shu-kin.*
10.8 Business Loan and Security Agreement, dated September 30, 1997
between Dawson Science Corporation and Neolite Neon Co. Pty. Ltd.*
10.9 Grid Promissory Note, dated July 3, 1997 payable to Wharton
Capital Partners, Ltd.*
10.10 Agreement, dated May 28, 1998 between Dawson Science Corporation,
Integrated Transportation Network Group Inc. and R.I.P.
Consultants.**
21.1 List of Subsidiaries (incorporated by reference to Note 1 to the
financial statements in the prospectus that is a part of Amendment
No. 3 to the Registration Statement).*
27.1 Financial Data Schedule.
-21-
<PAGE> 22
* Filed with Amendment No. 3 to the Company's Registration Statement on Form
S-1, SEC File No. 333-47879, and incorporated herein by this reference.
** Filed with Amendment No. 2 to the Company's Registration Statement on Form
S-1, SEC File No. 333-47879, and incorporated herein by this reference.
(b) Reports on Form 8-K
None
-22-
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: November 16, 1998 INTEGRATED TRANSPORTATION
NETWORK GROUP INC.
By: /s/ Wu Zhi Jian
---------------------------------
Wu Zhi Jian
Chairman of the Board
By: /s/ Willy Wu
---------------------------------
Willy Wu
Chief Financial Officer
-23-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTEGRATED TRANSPORTATION NETWORK GROUP, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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<ALLOWANCES> (132)
<INVENTORY> 50
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<DEPRECIATION> (842)
<TOTAL-ASSETS> 63,937
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0
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<COMMON> 76
<OTHER-SE> 43,783
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