FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] 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: _______
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3993618
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
575 Lexington Avenue, Suite 410, New York, NY 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 840-8866
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
----------------------------
Title of class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock as quoted
on the National Association of Securities Dealers, Inc.'s OTC Bulletin Board as
of April 6, 1999, was approximately $30,059,051. The number of shares of common
stock outstanding at that date was 12,467,945 shares, $.01 par value.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
TAXI LICENSES
A significant number of taxi licenses owned by subsidiaries of
Jinzhenghua Transport, ITN's subsidiary, have been the subject of recent legal
proceedings. These taxi licenses had been seized by certain Chinese Courts as a
result of being pledged as collateral for bank loans granted to Zhenghua Group
and its affiliates ("Zhenghua") prior to the reorganization of Jinzhenghua
Transport in March 1997.
The first proceeding, commencing May 1999, involved enforcement in the
Shenzhen Intermediate People's Court (the "Intermediate Court") in favor of
Shenzhen Cooperative Bank ("SCB") of certain liens which the SCB was granted
against the Company's taxi licenses in connection with approximately $14,188,000
of loans SCB made to Zhenghua during 1994 to 1996. These loans had been secured
by various assets of Zhenghua Group, which included 378 taxi licenses owned by
Jinzhenghua Transport. In March, 1997 (prior to the reorganization of
Jinzhenghua Transport), Zhenghua entered into an agreement with Jinzhenghua
Transport pursuant to which Zhenghua agreed to contribute and transfer various
assets including the 378 taxi licenses to Jinzhenghua Transport.
In May 1997, Zhenghua, with its understanding that the taxi licenses
were to be released as collateral, entered into an agreement (the "Agreement")
with SCB pursuant to which Zhenghua assumed sole responsibility for repaying the
outstanding loans to SCB and agreed to provide certain real estate as new
collateral to secure its debt to SCB. Additionally, in September, 1998, 2.1
million shares of the common stock of the Company (ITN), owned by the principal
stockholder, were pledged to SCB in support of certain guarantees given to SCB.
During the second quarter of 1999, the Intermediate Court advised Jinzhenghua
Transport of the foreclosure of the SCB debt and the 378 licenses were seized
under such foreclosure. During November 1999, the Intermediate Court restored
the seized taxi licenses to Jinzhenghua Transport.
Subsequent to that restoration of taxi licenses by the Intermediate
Court's action, the Company obtained written documentation from SCB in which SCB
confirmed that neither the Company nor Jinzhenghua Transport had any
responsibility or obligation to SCB in connection with any loans made by SCB to
Zhenghua. The Company also obtained written confirmation from the Shenzhen
Vehicle Registration Bureau that the 378 taxi licenses are owned by Jinzhenghua
and no collateral or lien is registered thereon.
The second proceeding related to an additional 50 taxi licenses of
Jinzhenghua Transport. In early 1999, another lender of Zhenghua, Shenzhen
Development Bank, sought to foreclose upon 50 of the Jinzhenghua Transport's
taxi licenses after Zhenghua defaulted on such loans. In September 1999, the
Shenzhen Luohu District People's Court reversed a prior foreclosure action on
these taxi licenses and ordered the return of the 50 taxi licenses to the
Company based solely upon procedural errors in the foreclosure, and the 50 taxi
licenses may be subject to further claims.
Since these actions took place in a developing China legal system, any
legal decisions relating to the Company's assets, including the 378 and 50 taxi
licenses discussed above, may be subject to further claims, liens or
repossession by the Court or the Chinese government. Any such further
proceedings might result in a material adverse effect on the financial position
of the Company. (Please also refer to Item 7, "Risk Factors", from the prior
submitted Form 10-K of the Company)
DAWSON SCIENCE CORPORATION
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In late 1997, the United States Securities and Exchange Commission
commenced an informal inquiry relating to public disclosures in 1997 by Dawson
Science Corporation ("Dawson"), the Company's former parent company. 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"). The
Company engaged counsel in connection with the inquiry. The outcome of such
inquiry could materially and adversely affect the Company.
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 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.
<PAGE>
The Company currently is engaged in settlement discussions with respect
to the class action referred to above. Based on these discussions, the Company
established in the fourth quarter of 1998 a liability and recorded a related
expense in the amount of $1.5 million in respect of the class action. There can
be no assurance, however, that the settlement discussions will result in a final
settlement, or that the liability of a final settlement will be limited to $1.5
million. If these settlement discussions are not the basis for a final
settlement, the liability with respect to the class action could materially
exceed $1.5 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
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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"). The Company
does not have any operating business other than the businesses operated through
Jinzhenghua Transport. The Company has also been developing a hotel business,
which is planned to commence operations in year 2000. All of the Company's
revenue and profits are attributable to Jinzhenghua Transport's businesses in
China. All the Company's operations are located in China. The Company maintains
executive offices in both New York City (USA) and Shenzhen (China).
For a description of the Company's reorganization in June 1998, see
Item 1, "Business - Overview".
The Company's transportation businesses 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.
In 1997, Jinzhenghua Transport further expanded its transportation
business to include automobile rental services in the Provinces of Jiangxi,
Guangdong, Jiangsu and Shaanxi. The Rental Business began operations in August
1997 with the purchase of 350 new automobiles and establishment of automobile
rental stations in Ganzhou, Guangzhou, Nanchang, Nanjing and Xian during 1997.
During the fourth quarter of 1998, the Company raised an aggregate of
approximately $1,600,000 through the sale of an aggregate 609,523 shares of
Common Stock, at the share price of $2.625, and warrants to purchase 500,000
shares of Common Stock. In addition, the company issued 2,228,571 shares of
Common Stock and warrants to purchase 334,286 shares of Common Stock, all in
satisfaction of approximately $3,900,000 in indebtedness of Jinzhenghua
Transport.
On a consolidated basis, revenue, net, increased $9,805,000 from
$12,538,000 in 1997 to $22,343,000 in 1998. Net income increased $1,983,000 from
$5,886,000 in 1997 to $7,869,000 in 1998.
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
$12,600,000, or 56.4%, of the Company's total revenue, net, in 1998. At both
December 1997 and 1998, the Rental Business had acquired 1,218 automobiles. Of
the aggregate 1,218 automobiles acquired by the Rental Business, 50 were
transferred to the Taxi Business and 1,168 are currently owned by the Rental
Business, of which 750 have been placed in service and the remaining 418 have
not yet been placed in service as the Company does not currently have available
the funds necessary (approximately $2,500,000) 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 Item 7. "Management's Discussion & Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources." 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, minority interest and cumulative effect of
change in accounting principle in 1997 and 70.3%, or $9,274,000, to the
Company's $13,184,000 in income before provision for income tax, minority
interest and cumulative effect of change in accounting principle (and excluding
the $1,500,000 provision for
<PAGE>
class action settlement) in 1998. See Note 17, "Segment Information," to the
consolidated financial statements included in Part IV of this report for
financial information concerning the Company's segments.
The Taxi Business accounted for $8,318,000, or 37.2% of the Company's
total revenue, net, in 1998. At both December 1997 and 1998, the Taxi Business
had deployed 728 taxis . The Taxi Business contributed $5,161,000 to income
before provision for income tax, minority interest and cumulative effect of
change in accounting principle in 1997 and $5,058,000 to the Company's income
before provision for income tax, minority interest and cumulative effect of
change in accounting principle (and excluding the $1,500,000 provision for
class action settlement) in 1998, representing 77.3% and 38.4 respectively. See
Note 17, "Segment Information," to the consolidated financial statements
included in Part IV of this report for financial information concerning the
Company's segments.
The Repair Business accounted for $1,425,000, or 6.4% of the Company's
total revenue, net and $464,000, or 3.5% of the Company's income before
provision for income tax, minority interest and cumulative effect of change in
accounting principle (and excluding the $1,500,000 provision for class action
settlement) in 1998. During the current year, revenue, net, from the Repair
Business was $1,425,000, compared with $1,477,000 in 1997, a decrease of
$52,000, or 3.5%. This decrease was attributable to a minor decrease in
business in 1998, compared to 1997. Taxi cab licenses are renewable every four
years. The Company expects income from taxi cab inspections to fluctuate based
on the number of licenses to be renewed in a given year. See Note 17, "Segment
Information," to the consolidated financial statements included in Part IV of
this report for financial information concerning the Company's segments.
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 in
1998. All expenditures related to the hotel before and during the year ended
December 31, 1998 have been capitalized and recorded as construction in
progress.
During 1997 and 1998, the Company's income before provision for income
tax, minority interest and cumulative effect of change in accounting principle
reflects $822,000 and $750,000 respectively, of accounting, legal and other
professional and advisory expenses that related primarily to the Company's
reorganization.
During 1998, the Company had interest expense, net of interest income,
of $660,000 which reflected interest expense of $675,000 and interest income of
15,000.
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, which was for 2,000 cars for an aggregate purchase price of
$31,336,000, has been terminated by the Company without liability or penalty.
The other purchase contract, which was subsequently cancelled during 1999 with
payment of penalties and car parking charges, was for 3,000 cars for an
aggregate purchase price of $47,475,000.
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. However, the Company
currently does not have sufficient capital to expand its businesses. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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.
Various other localities in China provide similar tax incentives. As the Company
matures, fewer tax incentives are and will be available to the Company.
Therefore, the Company's effective tax rate is expected to increase in future
periods which will increase income tax expense as a percentage of taxable
income.
<PAGE>
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
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<TABLE>
<CAPTION>
Year Ended Year Ended
December Percentage of December Percentage of
31, 1998 Revenue, Net 31, 1997 Revenue, Net
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Revenue, net $22,343,000 100.0% $12,538,000 100.0
Total operating expenses 8,499,000 38.0 5,132,000 40.9
Total expenses(1) 11,633,000 52.1 5,858,000 46.7
Income before provision for income tax,
minority interest and cumulative effect of
change in accounting principle(2) 11,684,000 52.3 6,680,000 53.3
Income before minority interest and
cumulative effect of change in accounting
principle(2) 9,774,000 43.7 6,223,000 49.6
Net income(1) 7,869,000 35.2 5,886,000 46.9
</TABLE>
(1) Includes in 1998 $2,474,000 in expenses, comprised of a $1,500,000
provision for settlement of class action lawsuit and $974,000,
representing the cumulative effect of a change in accounting principle
related to the write off of organization costs and excludes income
taxes.
(2) Includes in 1998 a $1,500,000 provision for settlement of class action
lawsuit.
Revenue, net was $22,343,000 in 1998, an increase of 78.2% from
$12,538,000 in 1997. The increase was primarily due to increased revenue from
the Rental Business of $9,964,000. The Taxi, Rental and Repair Businesses
contributed $8,318,000 (37.2%), $12,600,000 (56.4%) and $1,425,000 (6.4%),
respectively, to revenue, net, in 1998, compared with $8,425,000 (67.2%),
$2,636,000 (21.0%), and $1,477,000 (11.8%), respectively, in 1997. Revenue, net,
from the Taxi Business decreased from $8,425,000 in 1997 to $8,318,000 in 1998,
a 1.3% decrease. Revenue, net, for the Repair Business was $1,425,000 in 1998,
compared to $1,477,000 in the 1997 period, a 3.5% decrease.
Total expenses (excluding income taxes) were $11,633,000 in 1998, an
increase of $5,775,000 or 98.6% from $5,858,000 in 1997. During 1998, total
expenses as a percentage of revenue, net, increased to 52.1%, compared to 46.7%
in 1997. The increase in the amount of total expenses was comprised primarily of
a $1,543,000 increase in depreciation of revenue earning equipment, a 1,823,000
increase in other operating expenses, a $1,500,000 provision for class action
settlement, and a one time charge of $974,000 associated with the cumulative
effect of a change in accounting principle related to write off of organization
costs.
Operating expenses were $8,499,000 in 1998, an increase of $3,367,000
or 65.6% from $5,132,000 in 1997. During 1998, operating expenses as a
percentage of revenue, net, decreased to 38.0%, compared to 40.9% in 1997. The
increase in operating expenses was comprised primarily of a $1,543,000 increase
in depreciation of revenue earning equipment and a 1,823,000 increase in other
operating expenses.
Depreciation and Amortization Expense. During 1998, Depreciation and
amortization expense was $4,234,000, compared with $2,883,000 in 1997, an
increase of $1,351,000. During 1998, the depreciation and amortization expense
associated with the Rental Business, Taxi Business, and Repair Business was
$2,087,000, 2,068,000, and 78,000, respectively. Depreciation and amortization
expense, as a percentage of revenue, net, decreased during 1998, to 19.0%,
compared to 23.0% during 1997. 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 and amortization was
primarily due to a $1,600,000 increase in depreciation on new rental cars.
Other Operating Expenses. Other operating expenses includes traffic
regulation fees, road maintenance fees, insurance, salaries, rent, costs of
materials, depreciation (non-revenue earning equipment) and other general and
administrative expenses. During 1998, other operating expenses were $4,515,000,
compared with $2,692,000 during 1997, an increase of $1,823,000. During 1998,
other operating expenses, as a percentage of revenue, net, decreased to 20.2%,
compared with 21.5% for 1997. 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 a $971,000 increase in
expenses related to the new Rental Business,
<PAGE>
$245,000 in losses due to disposal of revenue earning equipment by the Taxi
Business, and a bad debt write-off of $240,000 by the Repair Business.
Income before provision for income tax, minority interest and
cumulative effective of change in accounting principle was $11,684,000 in 1998,
an increase of 74.9% from $6,680,000 in 1997. Before deducting $3,112,000
(consisting of $1,412,000 in general and administrative expenses, $1,500,000
provision for class action settlement, and $200,000 in interest expense) and
$934,000 of expenses of the parent company (unconsolidated) during 1998 and
1997, respectively, the Rental, Taxi and Repair Businesses contributed
$9,274,000, $5,058,000, and $464,000, respectively, to total income before
provision for income tax, minority interest and cumulative effect of change in
accounting principle in 1998, compared with $1,814,000, $5,161,000, and
$639,000, respectively, in 1997. The increase in income before provision for
income tax, minority interest and cumulative effect of change in accounting
principle is primarily attributable to increased income from the Company's
Rental Business, partially offset by a $1,500,000 provision for settlement of
class action lawsuit and increases in accounting, legal and other professional
and advisory expenses related to the Reorganization.
Provision for income tax was $1,910,000 in 1998 (14.5% of income before
provision for income tax, minority interest and cumulative effect of change in
accounting principle (and excluding the $1,500,000 provision for settlement of
class action), compared with $457,000 in 1997 (6.8% of income before provision
for income tax and minority interest). The increase was primarily a result of
increased taxable income.
Minority interest was $931,000 in 1998, compared with $337,000 in 1997,
which reflects the fact that the Company entered into new joint venture projects
in 1997, which have generated increased income during 1998.
As a result of the foregoing, net income was $7,869,000 in 1998,
compared with $5,886,000 in 1997.
For the year ended December 31, 1998, excluding the $1.5 million
provision for class action settlement, $975,000 in expense related to the change
in accounting principle regarding write off of organization costs, and $750,000
in professional fees related to the Reorganization, the Company's net income was
$11,093,000, an increase of $5,207,000 or 88.5%, compared to net income of
$5,886,000 in 1997.
<PAGE>
1997 Compared With 1996
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<TABLE>
<CAPTION>
Percentage
of Revenue, Percentage of
1997 Net 1996 Revenue, Net
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Revenue, net $12,538,000 100.0% $9,211,000 100.0%
Operating Expenses 5,132,000 40.9 3,487,000 37.9
Total expenses(1) 5,858,000 46.7 4,091,000 44.4
Income before provision for income tax,
minority interest and cumulative
effect of change in accounting principle 6,680,000 53.3 5,120,000 55.6
Income before minority interest and
cumulative effect of change in
accounting principle 6,223,000 49.6 4,720,000 51.2
Net income 5,886,000 46.9 4,563,000 49.5
</TABLE>
(1) Excludes income taxes.
Revenue, net, was $12,538,000 in 1997, an increase of 36.1% from
$9,211,000 in 1996. The increase was primarily due to the contribution of
$2,636,000 in 1997 from the new Rental Business started in August 1997. The
Taxi, Rental and Repair Businesses contributed 67.2%, 21.0% and 11.8%,
respectively, to revenue, net, in 1997, compared with 83.8%, 0% and 16.2%,
respectively, in 1996. Revenue, net, from the Taxi Business increased to
$8,425,000 in 1997 from $7,722,000 in 1996, a 9.1% increase. The increase was
primarily due to $151,000 of revenue from 50 additional taxi cabs in Ganzhou,
$180,000 of revenue from increases in night-shift taxi driver activities,
$262,000 of revenue from renewals of taxi driver contracts and $110,000 of
revenue from increases in monthly.
<PAGE>
rental payments from taxi drivers. Revenue, net, from the Repair Business was
$1,477,000 in 1997, an immaterial change from $1,489,000 in 1996.
Total expenses (excluding income taxes) were $5,858,000 in 1997, an
increase of $1,767,000, or 43.2%, from $4,091,000 in 1996. The increase, was
primarily attributable to a $419,000 increase in depreciation of revenue earning
equipment, a $122,000 increase in net interest expense, and a $1,224,000
increase in other operating expenses. The increase in depreciation of revenue
earning equipment was primarily due to $385,000 of depreciation on rental cars
related to the new Rental Business. The increase in net interest expense was
primarily due to fees paid to banks for the extention of short-term loans and an
increase in interest-bearing debt. The increase in other operating expenses was
primarily due to $403,000 of expenses related to the new Rental Business, which
commenced operations in August 1997, and $934,000 of accounting, legal and other
professional and advisory expenses that began to accrue in mid-1997 and related
primarily to the Reorganization. See "General" above. In addition, increases in
direct fixed costs and management expenses related to the Repair Business
($123,000) and increases in operating costs due to expansion of the Taxi
Business ($95,000) were offset by efficiencies in office expenses, rent and
maintenance charges in the Taxi and Repair Businesses. The Rental, Taxi and
Repair Businesses contributed 15.1%, 82.2% and 2.7%, respectively, to total
depreciation and amortization in 1997, compared to 0%, 96.2% and 3.8%,
respectively, in 1996.
Income before provision for income tax, minority interest and
cumulative effect of change in accounting principle was $6,680,000 in 1997
(53.3% of revenue, net), an increase of 30.5% from $5,120,000 in 1996 (55.6% of
revenue net). The Rental, Taxi and Repair Businesses contributed 27.2%, 77.3%
and 9.6%, respectively, to total income before provision for income tax,
minority interest and cumulative effect of change in accounting principle in
1997, compared with 0%, 84.9% and 15.1%, respectively, in 1996. The increase in
income before provision for income tax, minority interest and cumulative effect
of change in accounting principle is primarily attributable to income from the
Company's new Rental Business, revenue generated from 50 additional taxi cabs in
Ganzhou, additional income generated by increases in night-shift taxi driver
activities, additional income from renewals of taxi driver contracts and
efficiencies in office expenses, rent and maintenance charges in the Taxi and
Repair Businesses. The increase in income before provision for income tax,
minority interest and cumulative effect of change in accounting principle was
partially offset by increases in direct fixed costs and management expenses
associated with the Repair Business. The decrease in income before provision for
income tax, minority interest and cumulative effect of change in accounting
principle as a percentage of revenue, net, was primarily the result of
parent-company accounting, legal and other professional and advisory costs and
expenses incident to the Reorganization and related matters beginning in
mid-1997.
Provision for income tax was $457,000 in 1997 (6.8% of income before
provision for income tax and minority interest), compared with $400,000 in 1996
(7.8% of income before provision for income tax and minority interest). The
increase was primarily a result of increased taxable income.
Minority interest was $337,000 in 1997, an increase of 114.6% from
$157,000 in 1996, which reflects the Company having entered into new joint
venture projects in 1997.
As a result of the foregoing, net income was $5,886,000 in 1997, an
increase of 29.0% from $4,563,000 in 1996.
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 December 31, 1998, the Company had trade receivables ($105,000) and
cash and cash equivalents ($4,910,000) aggregating $5,015,000. The Company's
liabilities due within a year aggregated $8,549,000. Accordingly, at December
31, 1998, the Company's liabilities due within a year exceeded cash and cash
equivalents and receivables by $3,534,000, compared with $12,157,000, at
December 31, 1997. This was primarily attributable to an overall decrease in
liabilities due within a year of approximately $9,050,000, consisting primarily
of decreases in bank loans ($1.4 million), notes payable (4.0 million) and due
to affiliates ($6.1 million), partially offset by increased accrued expenses and
income taxes ($3.1 million).
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 Businesses. The Company contracted with a car manufacturing
company in early 1998 to acquire 3,000 cars for car rental business purposes.
The contracted amount for such agreement was $47,475,000 and the outstanding
<PAGE>
commitment was $36,000,000 after deduction of deposits paid of $11,475,000.
Subsequently, the Company entered into a supplementary agreement with the car
supplier to extend the payment due date under the contract. During 1999, as a
result of the Company not performing its obligations under such contract, the
Company has entered into a third agreement with the car supplier to terminate
the above two agreements by compensating the car supplier with payment of
penalties and car parking charges. Under that cancellation agreement, the
Company was subject to a penalty of $1,812,000 and car parking charges of
$884,000 (aggregating $2,696,000), the amount of which was charged to operations
during the quarter ended June 30, 1999. $6,847,000 of the deposits paid will be
applied by delivery of 390 cars by early year 2000 and the balance of $1,932,000
is treated as prepayment for purchase of spare parts from the car supplier.
Additionally, the Company has contracted with two car suppliers in June
1999 to acquire 300 cars for its Taxi Business. The contracted amount for such
agreements were $4,168,000. A down payment of $2,175,000 has been made to the
supplier as of September 30, 1999.
At December 31, 1998, the estimated cost of completing construction of
the hotel project was approximately $4.0 million. 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 has defaulted on payment of existing indebtedness in the
aggregate principal amount of $320,000 which was due and payable in April 1998.
The Company is currently negotiating to restructure this debt. In addition, the
Company has existing indebtedness in the aggregate principal amount of
approximately $2.7 million, which was due and payable in March, 1999. The
Company was unable to pay by the due date the amount due with respect to this
indebtedness. The Company has negotiated an agreement to extend the time for
payment for this $2.7 million in indebtedness to April, 2000.
As described under Item 3, "Legal Proceedings," based on settlement
discussions with respect to the class action lawsuit against the Company,
liability and recorded a related expense in the amount of $1.5 million in
respect of such lawsuit. If these discussions do not form the basis for any
final settlement, the liability arising out of the class action could materially
exceed $1.5 million. The Company expects to satisfy any amounts owing pursuant
to any settlement through issuance of shares of common stock. If, however, the
Company is required to pay any settlement in cash, there could be a material
adverse effect on the Company's financial condition.
Pursuant to Jinzhenghua Transport's organizational documents, the
Company and the minority owners of Jinzhenghua Transport were obligated to
contribute $9.2 Million and $800,000 (in cash or assets), respectively, to the
registered capital of Jinzhenghua Transport. In particular, the Company was
obligated to make its capital contribution to Jinzhenghua Transport in two equal
installments of $4.6 Million, the first of which was due October 30, 1998 and
the second of which will be due December 26, 1999. The minority owners were
obligated to contribute $340,000 by October 30, 1998 and the balance by December
26, 1999. To date, the Company has contributed approximately $300,000 of its
aggregate $9.2 Million obligation to the capital of Jinzhenghua Transport.
Accordingly, the Company has not performed on its obligation to contribute $4.2
Million to Jinzhenghua Transport by October 30, 1998. The minority owners also
did not perform on their obligations to contribute the aggregate $340,000 by
October 30, 1998.
The organizational documents were amended under date of November 22,
1999. Under the amended documents, the Company will be obligated to make its
capital contribution to Jinzhenghua Transport in two equal instalments of $4.45
million, the first of which will be due December 31, 2000 and the second of
which will be due August 28,2001. The minority owners will be obligated to
contribute $22,000 by February 29, 2000, $329,000 by December 31, 2000, and
$449,000 by August 28,2001. In the same amendment, Jinzhenghua Transport changed
its corporate name to Shenzhen Yunrun Transport Group Co., Ltd. ("Yunrun
Transport"). The amendment was approved by the appropriate Chinese authorities
on December 17, 1999. On December 27, 1999, the Chinese government renewed
Yunrun Transport's business license to August 28, 2001.
The Company expects that it will be required to make the remaining
capital contribution to Yunrun ($8.9 Million) by the appropriate due dates.
Although there can be no assurance, the Company believes that it will be able to
raise sufficient capital from additional financings to contribute the remaining
balance of $8.9 Million to the capital of Yunrun by the appropriate due dates.
If the Company fails timely to make any of the required contribution or fails to
obtain an extension approved by the government, the government may cancel or
refuse to renew Yunrun's business license, which would materially and adversely
affect the Company.
<PAGE>
The Company believes that through a combination of cash flow from
operations and proceeds from potential financings, the Company will be able to
repay existing indebtedness and finance capital expenditures, including the
purchase of some new automobiles. 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 planned
capital expenditures or to repay such indebtedness without refinancing. The
Company expects to generate significant cash flow from operations and will seek
to 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEGRATED TRANSPORTATION
NETWORK GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
CONTENTS
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 31
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 32
Statements of operations 33
Statements of shareholders' equity 34
Statements of cash flows 35
Notes to consolidated financial statements 36 - 57
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Integrated Transportation Network Group Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Integrated
Transportation Network Group Inc. and subsidiaries ("ITN") as of December 31,
1997 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of ITN's management.
Our responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As more fully discussed in Note 12(a) to the consolidated financial statements,
during the months of May to November 1999, uncertainties arose as to whether a
total of 528 taxi licenses owned by the Company in the People's Republic of
China collateralize borrowings by entities controlled by Shenzhen Transport
Zhenghua Group Co. Ltd., an affiliate of the Company. Such borrowings arose
prior to the reorganization discussed in Note 1. Ownership of the licenses had
reverted back to the Company as a result of legal and other proceedings.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated
Transportation Network Group Inc. and subsidiaries as of December 31, 1997 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
United States generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1998, ITN changed its method of accounting for organization costs.
/s/ BBO International
BDO International
Hong Kong
April 12, 1999 (except for Note 12, which is as of December 27, 1999)
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1997 1998
---------------------------------------------------------------------------------- ---------------- -----------------
ASSETS
Cash and cash equivalents $ 4,723 $ 4,910
Trade receivables, net of allowance of $67 and $-0-, respectively 719 105
Prepayments and other assets (Note 6) 366 17,077
Inventories (Note 9) 97 38
Property and equipment, net (Notes 2 and 9) 1,363 1,136
Revenue-earning equipment, net (Notes 3 and 8) 31,488 29,379
Taxi licenses, net (Notes 4 and 8 and 12) 12,093 11,814
Construction-in-progress (Note 5) 2,321 2,263
Organization costs, net 847 -
Deposit (Note 12) 1,937 1,935
---------------------------------------------------------------------------------- ---------------- -----------------
$55,954 $68,657
---------------------------------------------------------------------------------- ---------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Bank loans (Note 8) $ 3,776 $ 2,402
Notes payable (Note 9) 4,320 320
Trade payables 1,619 1,167
Other payables (Note 7) 3,522 5,160
Due to directors 286 71
Due to affiliate, Zhenghua (Note 10(b)) 6,220 149
Due to minority shareholders, net (Note 10(a)) 19 19
Deferred revenue 2,983 3,001
Accrued expenses 476 1,770
Income tax payable 883 2,651
Deferred income taxes (Note 11) 102 247
---------------------------------------------------------------------------------- ---------------- -----------------
TOTAL LIABILITIES 24,206 16,957
---------------------------------------------------------------------------------- ---------------- -----------------
MINORITY INTEREST 1,567 2,919
---------------------------------------------------------------------------------- ---------------- -----------------
COMMITMENTS AND CONTINGENCIES (NOTES 12 AND 13)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value - authorized 50,000,000 shares; issued and 60 104
outstanding 6,041,573 shares at December 31, 1997 and 10,435,030 shares at
December 31, 1998
Additional paid-in capital 12,665 23,385
Retained earnings 17,050 24,919
Accumulated other comprehensive income - foreign currency translation 406 373
adjustments
---------------------------------------------------------------------------------- ---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 30,181 48,781
---------------------------------------------------------------------------------- ---------------- -----------------
$55,954 $68,657
---------------------------------------------------------------------------------- ---------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(US DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1996 1997 1998
<S> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
REVENUE, NET $ 9,211 $12,538 $22,343
---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Depreciation of revenue-earning equipment 1,755 2,174 3,717
Amortization of taxi licenses 264 266 267
Other operating expenses 1,468 2,692 4,515
---------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,487 5,132 8,499
---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 5,724 7,406 13,844
OTHER EXPENSES:
Interest expense, net of interest income (604) (726) (660)
Provision for class action lawsuit (Note 12 and 19) - - (1,500)
---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAX, MINORITY 5,120 6,680 11,684
INTEREST AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
PROVISION FOR INCOME TAX (NOTE 11) 400 457 1,910
---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST AND CUMULATIVE 4,720 6,223 9,774
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
MINORITY INTEREST 157 337 931
---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN 4,563 5,886 8,843
ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - - - 974
WRITE-OFF OF ORGANIZATION COSTS (NOTE 1 AND 19)
---------------------------------------------------------------------------------------------------------------------
NET INCOME 4,563 5,886 7,869
OTHER COMPREHENSIVE INCOME (LOSS) - FOREIGN CURRENCY 39 59 (33)
TRANSLATION ADJUSTMENTS
---------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 4,602 $ 5,945 $ 7,836
---------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (NOTE 14):
Before cumulative effect of change in accounting principle:
Basic $ .76 $ .97 $ 1.21
Diluted .76 .97 1.17
After cumulative effect of change in accounting principle:
Basic $ .76 $ .97 $ 1.07
Diluted .76 .97 1.04
---------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (NOTE 14):
Basic 6,042 6,042 7,321
Diluted 6,042 6,132 7,648
---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(US DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1997 and 1998
---------------------------------------------------------------------------------------------------------------------
Additional Retained Accumulated Total
paid-in earnings other shareholders'
capital comprehensive equity
income -
foreign
currency
translation
adjustments
Common stock
Shares Amount
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 - $ - $ 5,142 $ 6,601 $ 308 $12,051
Contribution of capital - - 107 - - 107
Foreign currency translation - - - - 39 39
adjustments
Net income - - - 4,563 - 4,563
---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 - - 5,249 11,164 347 16,760
Contribution of capital (Notes 10 - - 7,476 - - 7,476
and 16)
Reorganization-March 1997 (Note 1) 6,041,573 60 (60) - - -
Foreign currency translation - - - - 59 59
adjustments
Net income - - - 5,886 - 5,886
---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 6,041,573 60 12,665 17,050 406 30,181
Issuance of shares for consulting 7,500 - 33 - - 33
services (Note 12)
Issuance of shares for liquidated 17,268 1 163 - - 164
damages under financing agreement
(Note 9(a))
Issuance of shares with respect to 1,324,345 13 4,227 - - 4,240
conversion of promissory notes
(Note 9(b))
Issuance of shares in connection 206,250 2 673 - - 675
with private placement during May
1998, net of issuance costs
(Note 13(a))
Issuance of shares in connection 609,523 6 1,434 - - 1,440
with private placement during
December 1998, net of issuance
costs (Note 13(b))
Conversion of debt to equity 2,228,571 22 3,878 - - 3,900
(Note 13(c))
Receipt of promissory note from - - 312 - - 312
minority shareholder (Note 13(d))
Foreign currency translation - - - - (33) (33)
adjustments
Net income - - - 7,869 - 7,869
---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 10,435,030 $104 $23,385 $24,919 $ 373 $48,781
---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1996 1997 1998
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,563 $ 5,886 $ 7,869
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property, equipment and 1,884 2,617 3,967
revenue-earning equipment
Amortization of taxi licenses 264 266 267
Minority interest 244 703 1,352
Amortization and write-off of organization costs 35 50 974
Deferred income tax 56 27 145
Exchange adjustment (18) (10) 15
Loss on disposal of fixed assets - - 275
Changes in assets and liabilities:
(Increase) decrease in trade and other receivables (428) (204) 375
(Increase) decrease in inventories (29) (68) 58
(Decrease) increase in trade and other payables (200) 2,669 679
Increase in accrued expenses 17 459 1,560
Increase in income tax payable 361 391 1,768
(Decrease) increase in deferred income (764) 830 18
---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,985 13,616 19,322
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, equipment and revenue-earning equipment (608) (1,489) (2,028)
Proceeds from sale of property, equipment and revenue-earning 94 - -
equipment
Organization costs (51) (735) (127)
Prepayment for acquisition of revenue-earning equipment - - (15,704)
---------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (565) (2,224) (17,859)
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on bank loans 200 605 -
Repayments of bank loans - (926) (1,169)
Repayments of amount due to affiliates (5,210) (11,565) (2,457)
Amount due from (to) minority shareholder 20 (362) -
Proceeds from notes payable - 4,320 -
Proceeds from issuance of common stock, net - - 2,350
---------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (4,990) (7,928) (1,276)
---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 430 3,464 187
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 829 1,259 4,723
---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,259 $ 4,723 $ 4,910
---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
1. ORGANIZATION AND Basis of Presentation and Reorganization
SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES
On January 25, 1998, the controlling shareholder of
Dawson Science Corporation ("Dawson") formed a new
Delaware corporation, Integrated Transportation
Network Group Inc. ("ITN" or the "Company").
Subsequently, that controlling shareholder
contributed all the outstanding shares in ITN to
Dawson. Dawson caused this new wholly-owned
subsidiary to acquire the assets and disclosed
liabilities of Dawson, including all the equity in
Dawson's 92%-owned Chinese subsidiary, Shenzhen
Jinzhenghua Transport Industrial Development Co. Ltd.
("Jinzhenghua Transport" or "Jinzhenghua"). Upon the
effectiveness on June 29, 1998 of a registration
statement filed with the Securities and Exchange
Commission, Dawson effected a plan of reorganization,
and the shares of ITN were distributed pro rata to
the common shareholders of Dawson. In the
distribution, each holder of record of shares of
Dawson common stock at the close of business on June
30, 1998 received, for each four shares of Dawson
common stock, one share of the Company's common
stock. The accompanying consolidated financial
statements give effect to this reorganization as if
it had occurred as of the earliest date reported and
all references to the number of shares outstanding
and per share amounts have been restated for all
periods to reflect this.
Reverse Acquisition
On March 19, 1997, Dawson exchanged 10,000,000 shares
of its common stock and 2,100,000 shares of its
convertible preferred stock (which was converted into
10,500,000 shares of common stock on June 29, 1998)
for 92% of the equity of Jinzhenghua Transport (the
"Exchange").
The Jinzhenghua Transport acquisition and the
exchange of common stock with the former Jinzhenghua
Transport shareholders resulted in those former
shareholders obtaining a majority voting interest in
Dawson. Generally accepted accounting principles
require that the company whose shareholders retain
the majority interest in a combined business be
treated as the acquiror for accounting purposes. As a
consequence, the Jinzhenghua Transport acquisition
has been accounted for as a "reverse acquisition" for
financial reporting purposes and Jinzhenghua
Transport is deemed to have acquired a 92% interest
in Dawson, as of the date of the acquisition. The
reverse acquisition process utilizes the capital
structure of Dawson and the assets and liabilities of
Jinzhenghua Transport are recorded at predecessor
cost.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Jinzhenghua Transport is the continuing operating
entity for financial reporting purposes, and the
financial statements prior to March 19, 1997
represent Jinzhenghua Transport's financial position
and results of operations. The assets, liabilities
and results of operations of Dawson are included as
of March 19, 1997. General and administrative
expenses of $822 and $1,412, interest expense of $112
and $200 and provision for class action lawsuit of
$-0- and $1,500 were incurred in the United States
during the nine and one-half months ended December
31, 1997 and the year ended December 31, 1998,
respectively. Although Jinzhenghua Transport is
deemed to be the acquiring corporation for financial
accounting and reporting purposes, the legal status
of Dawson as the surviving corporation did not
change.
Reorganization of Jinzhenghua Transport
Jinzhenghua Transport was registered as a privately
owned limited liability company under the laws of the
People's Republic of China ("PRC") on December 26,
1994. During March 1997, Jinzhenghua Transport was
reorganized by combining with the majority of equity
interests of seven subsidiaries of Shenzhen Transport
Zhenghua Group Co. Ltd. ("Zhenghua"), which was owned
by substantially the same owners of Jinzhenghua
Transport. The seven subsidiaries are as follows:
<TABLE>
<CAPTION>
Subsidiary Industry Jinzhenghua's
equity interest
-----------------------------------------------------------------------
<S> <C> <C>
Shenzhen Aorun Taxi Co. Ltd. Taxi leasing 97%
Shenzhen Guorun Taxi Co. Ltd. Taxi leasing 95
Shenzhen Anrun Taxi Co. Ltd. Taxi leasing 97
Shenzhen Yunhua Taxi Co. Ltd. Taxi leasing 97
Shimen Zhenghua Taxi Co. Ltd. Taxi leasing 98
Shenzhen Junpeng Auto Repair Plant Co.
Co. Ltd. Auto repair 100
Shimen Yindu Hotel Co. Ltd. Hotel 56
-----------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Subsequent to the aforementioned reorganization,
Jinzhenghua Transport has established new
subsidiaries as follows:
<TABLE>
<CAPTION>
Subsidiary Industry Jinzhenghua's
equity interest
-----------------------------------------------------------------------------
<S> <C> <C>
Guangzhou Jinzhenghua Transportation Car rental 98%
Co. Ltd.
Jiangxi Gannan Jinzhenghua Car rental 70
Transportation Co. Ltd
Yueyang Jinzhenghua Transportation Co. Car rental 90
Ltd.
Shaanxi Jinzhenghua Transportation Co. Car rental 100
Ltd.
Nanchang Jinzhenghua Transportation Co. Car rental 98
Ltd.
Jiangsu Jinzhenghua Automobile Lease Co. Car rental 100
Hunan Jinzhenghua Automobile Lease Co. Car rental 75
Ltd.
Henan Jinzhenghua Automobile Lease Co. Car rental 51
Ltd.
Changde Jinzhenghua Automobile Lease Car rental 75
Co. Ltd.
Guangxi Jinzhenghua Automobile Lease Car rental 80
Co. Ltd.
-----------------------------------------------------------------------------
</TABLE>
Businesses
The Company mainly conducts taxi leasing, car rental,
and auto repair businesses in the PRC and has a hotel
under construction which is located in the Hunan
Province, PRC.
Basis of Accounting
The consolidated financial statements are prepared in
accordance with generally accepted accounting
principles in the United States of America.
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and its subsidiaries. All
material intercompany transactions have been
eliminated. The consolidated financial statements are
presented in U.S. dollars.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Foreign Currency Translation and Transactions
The Company's foreign subsidiaries use Renminbi yuan
("RMB"), as the functional currency. Assets and
liabilities of these subsidiaries are translated at
the exchange rate in effect at each year-end. Income
statement accounts are translated at the average rate
of exchange prevailing during the year. Translation
adjustments arising from the use of differing
exchange rates from period to period are included as
a component of shareholders' equity as "Accumulated
other comprehensive income - foreign currency
translation adjustments". Gains and losses resulting
from foreign currency transactions are included in
other income (expense).
Revenue Recognition
Taxi leasing and car rental revenue is recognized
when rents (net of business tax) are due.
Nonrefundable deposit revenue is deferred and
recognized on a straight-line basis over the term of
the relevant taxi lease. Revenue from car repair
services is recognized when services are rendered.
Inventories
Inventories, which consist primarily of
transportation equipment spare parts and consumable
stores, are stated at the lower of cost (first-in,
first-out method) or market.
Revenue Earning Equipment, Property and Equipment,
and Depreciation
Revenue earning equipment, property and equipment are
stated at cost. Depreciation is computed by utilizing
the straight-line method over the estimated useful
lives of the assets as follows:
<TABLE>
<CAPTION>
Estimated useful
life (in years)
-------------------------------------------------------------------------------
<S> <C>
Revenue - earning equipment:
Taxi vehicles and rental cars 6-8
Repair shop equipment 5-10
Property and equipment:
Land usage rights 40
Furniture and fixtures 5-10
Transportation equipment 6-10
Other equipment 5-10
-------------------------------------------------------------------------------
</TABLE>
Maintenance, repairs and minor renewals are charged
directly to expense as incurred. Additions and
betterments to property and equipment are
capitalized. When assets are disposed of, the related
cost and accumulated depreciation thereon are removed
from the accounts and any resulting gain or loss is
included in operations.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Taxi Licenses
Taxi licenses are stated at cost. Amortization is
computed utilizing the straight-line method over the
taxi license term of 50 years.
Organization Costs
Organization costs represent costs incurred in
connection with the setting up of the Company and its
subsidiaries in order to operate on a commercial
basis. The Company has been capitalizing such costs
and they were being amortized over a period of five
years from the date of commencement of commercial
operation.
During the year ended December 31, 1998, the Company
adopted the provisions of AICPA Statement of Position
98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5") which requires that costs of start-up
activities, including organization costs, be expensed
as incurred. In accordance with SOP 98-5, the
unamortized balance of capitalized organization costs
of $847 at January 1, 1998 and additional
organization costs of $127 incurred during 1998 were
charged to expense as the cumulative effect of a
change in accounting principle. The effect of this
change in accounting principle was to decrease net
income for the year ended December 31, 1998 by $974.
Income Taxes
The Company accounts for income taxes using the
liability method, which requires an entity to
recognize deferred tax liabilities and assets.
Deferred income taxes are recognized based on the
differences between the tax bases of assets and
liabilities and their reported amounts in the
financial statements which will result in taxable or
deductible amounts in future years. Further, the
effects of enacted tax laws or rate changes are
included as part of deferred tax expenses or benefits
in the period that covers the enactment date. A
valuation allowance is recognized if it is more
likely than not that some portion, or all of, a
deferred tax asset will not be realized.
The Company does not provide taxes on unremitted
earnings of its Chinese subsidiaries since the
Company's intention is to reinvest these earnings.
Jinzhenghua has unremitted retained earnings at
December 31, 1998 of $28,965.
Deferred Revenue
Deferred revenue, which represents the non-utilized
portion of non-refundable deposit revenue collected
from contractual taxi drivers, is recognized as
revenue over unexpired taxi lease terms.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Net Income Per Common Share
In 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share".
SFAS No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very
similar to the previously reported fully diluted
earnings per share. All net income per share amounts
for all periods have been presented and, where
appropriate, restated to conform to SFAS No. 128
requirements.
Use of Estimates
The preparation of financial statements in accordance
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect 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. Among the more
significant estimates included in these financial
statements are the estimated allowance for doubtful
accounts receivable, and the deferred tax asset
valuation allowance. Actual results could differ from
those estimates and other estimates.
Fair Value of Financial Instruments
The carrying amounts of certain financial
instruments, including cash, trade receivables and
trade and other payables approximate fair value as of
December 31, 1997 and 1998 because of the relatively
short-term maturity of these instruments. The
carrying value of notes payable approximates fair
value as of December 31, 1997 and 1998 based upon the
borrowing rates currently available to the Company
for bank loans with similar terms and average
maturities. Fair value of the amounts due to or from
affiliates cannot be readily determined because of
the nature of the terms.
Accounting for Stock-Based Compensation
In connection with its adoption of SFAS No. 123,
"Accounting for Stock-Based Compensation", the
Company will adopt the intrinsic value method of
accounting for employee stock options, and disclose
the pro forma impact on net income and earnings per
share as if the fair value-based method had been
applied. Through December 31, 1998, no such stock
options had been granted. For equity instruments,
including stock options issued to non-employees,
including directors, the fair value of the equity
instruments issued or the fair value of the
consideration received, whichever is more readily
determinable, is used to determine the value of
services or goods received and the corresponding
charge to operations.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No.
130 ("Reporting Comprehensive Income"). The adoption
of this statement had no impact on the Company's net
income or shareholders' equity. SFAS No. 130
establishes new rules for the reporting and display
of comprehensive income and its components.
Comprehensive income is comprised of net income and
all changes to shareholders' equity, except those due
to investments by owners (changes in paid-in capital)
and distributions to owners (dividends).
SFAS No. 130 requires foreign currency translation
adjustments which, prior to adoption, were reported
separately in shareholders' equity, to be included in
other comprehensive income. Amounts for all periods
have been presented and, where appropriate,
reclassified to conform to SFAS No. 130 requirements.
Segment Information
On January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and
Related Information", which supersedes SFAS No. 14,
"Financial Reporting Segments of a Business
Enterprise", and establishes standards for the way
that public enterprises report information about
operating segments in financial statements. It also
establishes standards for disclosures regarding
products and services, geographic areas and major
customers. 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.
New Accounting Standards Not Yet Adopted
In February 1998, SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement
Benefits" amended the disclosure requirements for
pensions and other postretirement benefits. The
Company does not expect the adoption to have
significant change on the Company's financial
statement disclosures.
In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge,
the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with
the recognition of (i) the changes in the fair value
of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings
effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument,
the gain or loss is recognized in income in the
period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June
15, 1999.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Historically, the Company has not entered into
derivatives contracts either to hedge existing risks
or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard on
January 1, 2000 to affect its financial statements.
<TABLE>
<CAPTION>
PROPERTY AND Property and equipment consists of:
EQUIPMENT
December 31, 1997 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Land usage rights $ 362 $ 362
Furniture and fixtures 11 3
Transportation equipment 1,324 1,088
Other equipment 488 579
--------------------------------------------------------------------------------
2,185 2,032
Less: Accumulated depreciation and (822) (896)
amortization
--------------------------------------------------------------------------------
$1,363 $1,136
--------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization charged to
operations was $128, $443 and $250 in
1996, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
3. REVENUE-EARNING Revenue-earning equipment consists of:
EQUIPMENT
December 31, 1997 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Taxi vehicles $14,570 $14,824
Rental cars 24,067 24,230
Repair shop equipment 200 206
--------------------------------------------------------------------------------
38,837 39,260
Less: Accumulated depreciation (7,349) (9,881)
--------------------------------------------------------------------------------
$31,488 $29,379
--------------------------------------------------------------------------------
</TABLE>
Depreciation charged to operations was $1,756, $2,174
and $3,717 in 1996, 1997 and 1998, respectively.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
4. TAXI LICENSES The Company has a total of 728 taxi licenses (see
Note 12(a)) as of December 31, 1998, all of which
were acquired through public auction. Taxi licenses
consist of:
<TABLE>
<CAPTION>
December 31, 1997 1998
--------------------------------------------- ---------------- -----------------
<S> <C> <C>
Taxi licenses, at cost $13,381 $13,368
Less: Accumulated amortization (1,288) (1,554)
--------------------------------------------- ---------------- -----------------
$12,093 $11,814
--------------------------------------------- ---------------- -----------------
</TABLE>
Amortization charged to operations was $264, $266 and
$267 in 1996, 1997 and 1998, respectively.
5. CONSTRUCTION-IN- Construction-in-progress represents a hotel project
PROGRESS located in the Hunan Province, PRC. The construction
work of the hotel has been temporarily suspended.
Management considers that the construction work will
be continued in the near future and no provision for
loss as a result of such suspension is anticipated.
The construction-in-progress is stated at cost. All
direct costs relating to the construction of the
hotel are capitalized as long-term assets. No
interest has been capitalized.
6. PREPAYMENTS AND Prepayments and other assets includes deposits paid
OTHER ASSETS totaling $11,476 for the acquisition of 3,000
automobiles for car rental purposes (Note 12) and
$4,228 for the acquisition of 300 cars for taxi
replacement purposes.
<TABLE>
<CAPTION>
7. OTHER PAYABLES December 31, 1997 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Deposit from rental car customers $ 332 $ 435
Deposits from taxi drivers 1,042 1,420
Taxi car maintenance fund 273 188
Due to Traffic Authority 774 652
Receipts in advance from taxi drivers 436 1,726
Other, including car suppliers, 665 739
value-added tax and insurance
--------------------------------------------------------------------------------
$3,522 $5,160
--------------------------------------------------------------------------------
</TABLE>
8. BANK LOANS The Company obtained various lines of credit from
creditworthy commercial banks in China to finance its
operations. These loans were secured by certain of
the Company's assets. All the lending banks are
Chinese. Except for $200 of US dollar loans at
December 31, 1997, all loans are denominated in RMB.
Bank loans consist of the following:
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------
Principal Interest rate Maturity Collateral
--------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 200 16.2% 4/98 Properties of affiliates
605 18.0 3/99 50 taxi vehicles
2,971 15.1 3/99 150 taxi vehicles and 100
taxi licenses
--------------------------------------------------------------------------------
$3,776
--------------------------------------------------------------------------------
December 31, 1998
--------------------------------------------------------------------------------
Principal Interest rate Maturity Collateral
--------------------------------------------------------------------------------
$2,402 15.1% 4/00 150 taxi vehicles and 100
taxi licenses
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
9. NOTES PAYABLE Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------
Principal Interest rate Maturity Collateral
--------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 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
--------------------------------------------------------------------------------
December 31, 1998
--------------------------------------------------------------------------------
Principal Interest rate Maturity Collateral
--------------------------------------------------------------------------------
$320 8.0% 4/02/98 (in default) (a)
--------------------------------------------------------------------------------
</TABLE>
--------------
(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
December 31, 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 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
accrued at 12% per annum and was 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.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
10. RELATED PARTY (f) The amount due to minority shareholders
TRANSACTIONS represents the net balance due to two
minority shareholders.
The amount due to a minority shareholder of
the hotel project was $381 as of December
31, 1997 and 1998, as the minority
shareholder contributed excessive amounts
over its necessary share of contributed
capital in the form of land usage rights.
The amount did not bear any interest and
also did not have clearly defined terms of
repayment. In late 1997, the Company
advanced $362 to a minority shareholder in
Jiangxi Gannan Transportation Co. Ltd. The
advance does not bear any interest and did
not clearly specify terms of repayment.
(b) The Company, from time to time, receives
funding from or provides funding to Zhenghua
(see Note 12). All advances are noninterest
bearing and are without stated terms of
repayment. The following is a summary of the
balance of the amounts due to Zhenghua:
<TABLE>
<CAPTION>
December 31, 1997 1998
--------------------------------------------- ------------- -------------
<S> <C> <C>
Beginning balance $ 2,150 $ 6,220
Acquisition of revenue earning equipment 24,067 -
Acquisition of taxi licenses 115 -
Exchange difference 8 (8)
Construction costs, hotel (455) (56)
Repayments of advances (11,565) (2,220)
Expenses paid on behalf of Zhenghua (net) (624) -
Transferred to additional paid-in capital (7,476) -
Property and equipment transferred to - (87)
Zhenghua
Conversion of debt to equity (Note 13(c)) - (3,900)
Bank loan undertaken by Zhenghua - 200
--------------------------------------------- ------------- -------------
Ending balance $ 6,220 $ 149
--------------------------------------------- ------------- -------------
</TABLE>
(c) Other assets include advances to directors,
Mr. Peng Jun and Ms. Wu Qi Mei, in the
amount of $188 at December 31, 1998. All
advances do not bear interest and do not
have any clearly defined terms of repayment.
A $312 promissory note from a minority
shareholder (Note 13(d)) is also included in
other assets.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
11. INCOME TAXES The standard enterprise income tax rate in
China is 33% of which 30% is attributed to
central government and 3% to provincial
government. Enterprises in Shenzhen, a
Special Economic Zone, receive a special
income tax incentive program in which they
are charged a lower income tax rate of 15%
in accordance with Shenzhen municipal
government regulations. In addition,
enterprises in the transportation service
industry in Shenzhen enjoy another special
income tax incentive program composed of a
100% income tax credit for the first year
and a 50% income tax credit for the next two
years starting from the first profit taking
year. Certain other provincial governments
have also stipulated similar incentive
programs. The Company's subsidiaries are in
different stages of enjoying the
aforementioned types of income tax incentive
programs. Accordingly, the provision for
income taxes consists of the following:
<TABLE>
<CAPTION>
December 31, 1996 1997 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes $344 $430 $1,765
Deferred income taxes 56 27 145
--------------------------------------------------------------------------------
$400 $457 $1,910
--------------------------------------------------------------------------------
</TABLE>
As a result of implementing these income
tax incentive programs, the effective
income tax rate for the Company is
different from the standard income tax
rate. The following reconciliation shows
the differences between the effective and
standard rates.
<TABLE>
<CAPTION>
December 31, 1996 1997 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Standard income tax rate 33% 33% 33%
Result of income tax incentive (24) (26) (20)
programs
Other (1) - -
--------------------------------------------------------------------------------
Effective income tax rate 8% 7% 13%
--------------------------------------------------------------------------------
</TABLE>
The types of temporary differences between
the tax bases of assets and liabilities
and their financial reporting amounts that
give rise to the net deferred tax assets
and liabilities and their approximate tax
effects are as follows:
<TABLE>
<CAPTION>
December 31, 1997 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Bad debt reserves $ (8) $ -
Depreciation and amortization 110 247
--------------------------------------------------------------------------------
$102 $247
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
12. COMMITMENTS AND (a) Taxi Licenses
CONTINGENCIES
(i) A significant number of taxi licenses owned
by subsidiaries of Jinzhenghua Transport
("Jinzhenghua"), ITN's subsidiary, have been
the subject of recent legal proceedings.
These taxi licenses had been seized by
certain Chinese Courts as a result of being
pledged as collateral for bank loans granted
to Zhenghua Group and its affiliates
("Zhenghua" or "Zhenghua Group") prior to
the reorganization of Jinzhenghua as
discussed in Note 1.
The first proceeding, commencing May 1999,
involved enforcement in the Shenzhen
Intermediate People's Court (the
"Intermediate Court") in favor of Shenzhen
Cooperative Bank ("SCB") of certain liens
which the SCB was granted against the
Company's taxi licenses in connection with
approximately $14,188 of loans SCB made to
Zhenghua Group during 1994 to 1996. These
loans had been secured by various assets of
Zhenghua Group and 378 taxi licenses and
corporate guarantees from Jinzhenghua. No
registration of such pledges (including
pledges made after the effective date of
laws providing for lien registration) was
made at the Shenzhen Vehicle Registration
Bureau. In March, 1997 (prior to the
reorganization of Jinzhenghua as discussed
in Note 1), Zhenghua entered into an
agreement with Jinzhenghua pursuant to which
Zhenghua agreed to contribute and transfer
various assets including the taxi licenses
to Jinzhenghua.
In May 1997, Zhenghua, with its
understanding that the taxi licenses were to
be released as collateral, entered into an
agreement (the "Agreement") with SCB
pursuant to which Zhenghua assumed
responsibility for repaying the outstanding
loans to SCB and agreed to provide certain
real estate as new collateral to secure its
debt to SCB. Additionally, in September,
1998, 2.1 million shares of the common stock
of the Company (ITN), owned by the principal
stockholder, were pledged to SCB in support
of certain guarantees given to SCB. During
the second quarter of 1999, the Intermediate
Court advised Jinzhenghua of the foreclosure
of the SCB debt and the 378 licenses were
seized under such foreclosure. During
November 1999, the Intermediate Court
restored the seized taxi licenses to the
Company.
Subsequent to that restoration of taxi
licenses by the Intermediate Court's action,
the Company obtained written documentation
from SCB in which SCB confirmed that neither
the Company nor Jinzhenghua had any
responsibility or obligation to SCB in
connection with any loans made by SCB to
Zhenghua. The Company also obtained written
confirmation from the Shenzhen Vehicle
Registration Bureau that the 378 taxi
licenses are owned by Jinzhenghua and no
collateral or lien is registered thereon.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Management believes that based on various
agreements with the lenders and actions
taken by relevant parties, the subject
licenses are free from any encumbrances.
The second proceeding related to an
additional pledge of 50 taxi licenses of
Jinzhenghua. No registration of such pledge
(which was permissible under laws which
became effective shortly after the making
thereof) was made at the Shenzhen Vehicle
Registration Bureau. In early 1999, another
lender of Zhenghua Group, the Shenzhen
Development Bank ("SDB"), sought to
foreclose upon 50 of the Jinzhenghua's taxi
licenses after Zhenghua Group defaulted on
its loans. In September 1999, the Shenzhen
Luohu District People's Court reversed a
prior foreclosure action on these taxi
licenses and ordered the return of the 50
taxi licenses to the Company based solely
upon procedural errors in the foreclosure.
Management is not aware of any renewal by
SDB of efforts to foreclose on the taxi
licenses.
Since these actions took place in a
developing China legal system (including
developing lien registration practices and
procedures), any legal decisions relating to
the Company's assets, including the 378 and
50 taxi licenses discussed above, may be
subject to further claims, liens or
repossession by the Court or the Chinese
government. Any such further proceedings
might result in a material adverse effect on
the financial position of the Company.
(ii) Prior to the reorganization of Jinzhenghua
as discussed in Note 1, an agreement was
signed on December 29, 1995 to pledge an
aggregate of 528 taxi licenses, including
the 378 and 50 taxi licenses discussed in
(i) above, as collateral to the Guangdong
Overseas Chinese Trust & Investment
Cooperation (the "Trust") in support of the
obligations of the Zhenghua Group to the
Trust arising out of the Trust's agreement
to guarantee repayment of a loan in the
amount of $846 given by Everbright Bank of
China Shenzhen Branch. No registration of
such pledges (which was permissible under
laws which became effective shortly before
the making thereof) was made at the Shenzhen
Vehicle Registration Bureau. The loan went
into default and the Trust made payment.
Partial repayments were made by the Zhenghua
Group to the Trust subsequently, and the
Trust entered into an agreement with an
affiliate of Zhenghua Group on August 30,
1999 to take title to certain real estate in
satisfaction of the remaining principal
balance plus interest and costs in the total
of $395. In mid-1999, 100 out of the 528
taxi licenses were physically deposited at
the Trust and were subsequently returned on
November 11, 1999, after the transfer of the
real estate was completed. The Company
obtained written confirmation from the
Shenzhen Vehicles Registration Bureau that
no collateral or lien is registered on the
licenses. Management believes that the 528
licenses are free of any liens in favor of
the Trust.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
(b) Related Party Loan Agreements
Prior to the reorganization of Jinzhenghua
(as discussed in Note 1), Zhenghua caused
Jinzhenghua to borrow funds aggregating
$8,872. No assets of Jinzhenghua were
pledged as collateral for these loans. On
December 26, 1997, each of the lenders and
the respective borrowers (Jinzhenghua and
Zhenghua) entered into agreements pursuant
to which Jingzhenghua had been released from
its various obligations as to these loans
and the obligations were assumed by
Zhenghua.
(c) Related Party Loan Agreements
Minimum lease payments under operating
leases with noncancelable lease terms in
excess of one year are as follows:
Year ended December 31, Operating leases
--------------------------------------------
1999 $220
2000 206
2001 181
2002 139
2003 51
Thereafter 51
--------------------------------------------
$848
--------------------------------------------
Rent expense for the years ended December
31, 1996, 1997 and 1998 was $104, $200 and
$249, respectively.
(d) Contractual Obligations
The Company contracted with a building
contractor in 1996 to construct the group's
hotel in Hunan, PRC (see Note 5). The
budgeted costs of the whole project are
estimated to be $4,073. Through December 31,
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 resume construction of
the hotel as soon as it has sufficient
capital to do so.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
The Company contracted with a car
manufacturing company in early 1998 to
acquire 3,000 cars for car rental business
purposes. The contracted amount for such
agreement was $47,475 and the outstanding
commitment was $36,000 after deduction of
deposits paid of $11,475. Subsequently, the
Company entered into a supplementary
agreement with the car supplier to extend
the payment due date under the contract
During 1999, as a result of the Company not
performing its obligations under such
contract, the Company has entered into a
third agreement with the car supplier to
terminate the above two agreements by
compensating the car supplier with payments
of penalties and car parking charges. Under
that cancellation agreement, the Company was
subject to a penalty of $1,812 and car
parking charges of $884 (aggregating
$2,696), the amount of which was charged to
operations during the quarter ended June 30,
1999. $6,847 of the deposits paid will be
applied by delivery of 390 cars by early
year 2000 and the balance of $1,932 is
treated as prepayment for purchase of spare
parts from the car supplier.
The Company has contracted with a building
developer for the acquisition of villa
houses located in Shenzhen, PRC for $2,114.
The outstanding commitment at December 31,
1998 is $181 after deducting a deposit paid
of $1,933.
(e) Legal Matters
In early 1998, the United States Securities
and Exchange Commission, commenced an
informal inquiry relating to public
disclosures in 1997 by 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's common stock between March 25, 1997
and December 30, 1997, together with
interest and costs, including attorney fees,
under section 10(b) and 20(a) of the
Securities and Exchange Act of 1934 and Rule
10(b)(5) thereunder.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
The Company currently is engaged in
settlement discussions with respect to the
class action referred to above. Based on
these discussions, the Company has
established a $1,500 liability with respect
to the class action. There can be no
assurance, however, that the settlement
discussions will result in a final
settlement, or that the liability of a final
settlement will be limited to $1,500. If
these settlement discussions are not the
basis for a final settlement, the liability
with respect to the class action could
materially exceed this amount.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
(f) Capital Investment Obligation
Pursuant to Jinzhenghua Transport's
organizational documents, the Company and
the minority owners of Jinzhenghua Transport
were obligated to contribute $9,200 and $800
(in cash or assets), respectively, to the
registered capital of Jinzhenghua Transport.
In particular, the Company was obligated to
make its capital contribution to Jinzhenghua
Transport in two equal installments of
$4,600, the first of which was due October
30, 1998 and the second of which was due
December 26, 1999. The minority owners were
obligated to contribute $340 by October 30,
1998 and the balance by December 26, 1999.
To date, the Company has contributed
approximately $300 of its aggregate $9,200
obligation to the capital of Jinzhenghua
Transport. Accordingly, the Company has not
performed on its obligation to contribute
$4,200 to Jinzhenghua Transport by October
30, 1998. The minority owners also did not
perform on their obligations to contribute
the aggregate $340 by October 30, 1998.
The organizational documents were amended
under date of November 22, 1999. Under the
amended documents, the Company will be
obligated to make its capital contribution
to Jinzhenghua Transport in two equal
installments of $4,450, the first of which
will be due December 31, 2000 and the second
of which will be due August 28,2001. The
minority owners will be obligated to
contribute $22 by February 29, 2000, $329 by
December 31, 2000, and $449 by August
28,2001. In the same amendment, Jinzhenghua
Transport changed its corporate name to
Shenzhen Yunrun Transport Group Co., Ltd.
("Yunrun Transport"). The amendment was
approved by the appropriate Chinese
authorities on December 17, 1999. On
December 27, 1999, the Chinese government
renewed Yunrun Transport's business license
to August 28, 2001.
If the Company fails timely to make any of
the required contributions or fails to
obtain an extension approved by the
government, the government may cancel or
refuse to renew Yunrun's business license,
which would materially and adversely affect
the Company
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
(g) Consulting Agreements
As described in Note 9(a), the Company
entered into an agreement with a financial
consultant to introduce prospective offshore
investors. The Company agreed to pay a fee
of 5% of the gross securities sold in
addition to issuing 25 warrants to purchase
shares of common stock of Dawson per $2,500
of financing secured to buy the Company's
common stock for a period of five years from
the closing date of the first sale at a
strike price of 120% of the market price at
the time of closing. The agreement has
expired.
On September 1, 1997, the Company entered
into a consulting agreement with a financial
institution to provide business development
services for $12 monthly. Options to
purchase 250,000 shares of the Company's
common stock at an exercise price of $50.00
per share were also granted and expire on
September 30, 2002. The agreement has been
terminated; the options have not been
canceled.
On March 31, 1998, the Company issued 7,500
shares to a consultant as consideration for
provision of consulting services.
13. SHAREHOLDER'S (a) During May 1998, the Company issued, for an
EQUITY 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.
(b) During December 1998, the Company issued,
for an aggregate of $1,600 (less issuance
costs of $160), 609,523 shares of common
stock and warrants to purchase an aggregate
of 500,000 shares of common stock to certain
private investors. Additionally, as finder's
compensation, the Company issued warrants to
purchase an aggregate of 560,000 shares of
common stock to an unrelated third parties.
(c) In December 1998, the Company issued
2,228,571 shares of common stock at $1.75
per share and warrants to purchase 334,286
shares of common stock in cancellation of
$3,900 of indebtedness of the Company's
subsidiary, Jinzhenghua (Note 10(b)).
(d) In connection with the cancellation of
Jinzhenghua's indebtedness ((c) above), and
in consideration of the benefit received by
the minority owner of Jinzhenghua as a
result of the issuance of common stock, the
Company received a $312,000, 8% promissory
note from the minority owner of Jinzhenghua.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
14. EARNINGS PER SHARE The following table sets forth the
computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
December 31, 1996 1997 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income, numerator for basic $4,563 $5,886 $7,869
earnings per share - income
available to common shareholders
Effect of diluted securities: - 63 108
Interest on convertible debt after
tax
--------------------------------------------------------------------------------
Numerator for diluted earnings per $4,563 $5,949 $7,977
share-income available to common
shareholders
--------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per 6,042 6,042 7,321
share-weighted average shares
Effect of diluted securities:
Convertible debt - 90 327
--------------------------------------------------------------------------------
Dilutive potential common shares:
Denominator for dilutive earnings 6,042 6,132 7,648
per share-adjusted weighted
average shares
--------------------------------------------------------------------------------
Basic earnings per share $ .76 $ .97 $1.07
--------------------------------------------------------------------------------
Diluted earnings per share $ .76 $ .97 $1.04
--------------------------------------------------------------------------------
</TABLE>
15. FUTURE RENTAL INCOME Rental income from taxi drivers under
noncancelable taxi lease terms in excess
of one year is as follows:
Year ended December 31,
-------------------------------------------
1999 $13,666
2000 5,409
2001 3,686
2002 2,057
2003 1,033
Thereafter 3,867
-------------------------------------------
$29,718
-------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
16. STATEMENTS OF CASH Supplemental Disclosures of Cash Flow Information
FLOWS
<TABLE>
<CAPTION>
Year ended December 31, 1996 1997 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for:
Interest $604 $587 $675
Taxes - 39 -
--------------------------------------------------------------------------------
Supplemental Disclosures of Noncash Investing and Financing Activities
December 31, 1996 1997 1998
--------------------------------------------------------------------------------
Acquisition of property and $ 361 $24,067 $ -
equipment and revenue earning
equipment from affiliates
Acquisition of taxi licenses - 115 -
Construction-in-progress financed by 2,302 (455) -
affiliates
Additional paid-in capital - 7,476 -
contributed by shareholder
Disposal of hotel construction items - - 56
to affiliates
Disposal of property and equipment - - 87
to affiliates
Bank loan through related parties - - 200
Issuance of shares for consulting - - 197
services and liquidated damages
Issuance of shares from conversion - - 4,240
of debt and accrued interest
Receipt of promissory note from - - 312
minority shareholder
Issuance of shares from conversion - - 3,900
of debt to Zhenghua
--------------------------------------------------------------------------------
</TABLE>
17. SEGMENT INFORMATION The Company's operations are comprised of
taxi, car rental, and auto repair
businesses and a hotel project in
Guangdong, Hunan and other provinces in
PRC. The Company also maintains executive
offices in New York City (USA) and
Shenzhen (PRC). The industrial and
geographical information regarding
revenue, income before income tax,
minority interest, and cumulative effect
of change in accounting principle, total
assets, addition of long-term assets,
depreciation and amortization for the
years ended December 31, 1996, 1997 and
1998, are as follows:
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Industrial Segments
<TABLE>
<CAPTION>
Year ended December 31, 1996
--------------------------------------------------------------------------------
Taxi Car Rental Car Other Total
repairs
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue, net $ 7,722 $- $1,489 $ - $ 9,211
Income before provision 4,349 - 771 - 5,120
for income tax, minority
interest and cumulative
effect of change in
accounting principle
Total assets as at 25,120 - 692 3,287 29,099
December 31, 1996
Additions of productive 141 - 463 2,667 3,271
long-term assets
Depreciation and 2,066 - 81 1 2,148
amortization of property
and equipment,
revenue-earning
equipment and
amortization of taxi
licenses
--------------------------- ---------- --------- ---------- --------- ----------
Year ended December 31, 1997
--------------------------------------------------------------------------------
Taxi Car Car Other Total
rental repairs
--------------------------- ---------- --------- ---------- --------- ----------
Revenue, net $8,425 $2,636 $1,477 $- $12,538
Income before provision 5,161 1,814 639 (934) 6,680
for income tax, minority
interest and cumulative
effect of change in
accounting principle
Total assets as at 27,630 24,772 791 2,761 55,954
December 31, 1997
Additions of productive 1,580 24,085 4 - 25,669
long-term assets
Depreciation and 2,370 434 78 1 2,883
amortization of property
and equipment,
revenue-earning
equipment and
amortization of taxi
licenses
--------------------------- ---------- --------- ---------- --------- ----------
Year ended December 31, 1998
--------------------------------------------------------------------------------
Taxi Car Car Other Total
rental repairs
--------------------------- ---------- --------- ---------- --------- ----------
Revenue, net $ 8,318 $12,600 $1,425 $ - $22,343
Income before provision 5,058 9,274 464 (3,112) 11,684
for income tax, minority
interest and cumulative
effect of change in
accounting principle
Total assets as at 25,621 38,727 691 3,618 68,657
December 31, 1998
Additions of productive 1,834 184 8 - 2,026
long-term assets
Depreciation and 2,068 2,087 78 1 4,234
amortization of property
and equipment,
revenue-earning
equipment and
amortization of taxi
licenses
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Geographical Segments
Year ended December 31, 1996
--------------------------------------------------------------------------------
Guangdong Hunan Others Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue, net $ 7,983 $1,228 $- $ 9,211
Income before 4,553 567 - 5,120
provision for income
tax, minority
interest and
cumulative effect of
change in accounting
principle
Total assets 22,671 6,428 - 29,099
--------------------------------------------------------------------------------
Year ended December 31, 1997
--------------------------------------------------------------------------------
Guangdong Hunan Others Total
--------------------------------------------------------------------------------
Revenue, net $ 9,525 $ 1,344 $ 1,669 $12,538
Income before 5,858 647 175 6,680
provision for income
tax, minority
interest and
cumulative effect of
change in accounting
principle
Total assets 28,590 14,436 12,928 55,954
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1998
--------------------------------------------------------------------------------
Guangdong Hunan Others Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue, net $12,329 $ 2,136 $ 7,878 $22,343
Income before 7,133 1,235 3,316 11,684
provision for income
tax, minority
interest and
cumulative effect of
change in accounting
principle
Total assets 42,985 12,879 12,793 68,657
--------------------------------------------------------------------------------
</TABLE>
18. SUBSEQUENT EVENTS On January 1, 1999, the Company adopted a
stock option plan and reserved for issuance
2,500,000 shares of common stock. As of that
date, the Company granted options to
purchase an aggregate 2,210,000 shares of
common stock to certain of the Company's
officers and directors. The options have an
exercise price of $2.00 per share, which was
above the quoted price of the common stock
as reported on the National Association of
Securities Dealers, Inc.'s OTC Bulletin
Board at the time of grant.
During January 1999, the Company issued
152,381 shares of common stock to a private
investor for an aggregate of $400 (less
issuance costs of $40). Additionally, the
Company issued warrants to purchase an
aggregate of 240,000 shares of common stock
to an unrelated third party.
On January 29, 1999, the Company issued
warrants to purchase 3,000 shares of common
stock to a business and financial consultant
as consideration for consulting services.
During February 1999, the Company issued 5%
notes convertible into shares of the
Company's common stock at par value to a
private investor for an aggregate of $2,000.
During March 1999, the Company issued
2,000,000 shares of common stock to private
investors for an aggregate of $4,000.
On March 12, 1999, the Company issued 20,000
shares of common stock and warrants to
purchase 30,000 shares of common stock to a
financial consultant as consideration for
consulting services.
On March 25, 1999, the Company issued
warrants to purchase 30,000 shares of common
stock to a financial consultant as
consideration for consulting services.
19. FOURTH QUARTER In the fourth quarter of 1998, the Company
ADJUSTMENTS recorded the following significant
adjustments:
1. A $1,500 provision for a class
action lawsuit (Note 12)
2. Cumulative effect of a change in
accounting principle (Note 1) of
$974.
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the Company's executive officers required by
this Item is incorporated by reference to the text appearing under Part I, Item
1 - Business under the caption "Executive Officers". Information concerning the
Company's directors and compliance with Section 16(a) of the Securities Exchange
Act of 1934 is incorporated by reference to the Company's Definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 28, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on May 28, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on May 28, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on May 28, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for each of the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Shareholders Equity for each of the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
(2) Financial Statement Schedules
Schedule 1--Condensed financial information of Registrant for the years
ended December 31, 1998 and 1997.
<PAGE>
(3) Listing of Exhibits
<TABLE>
<CAPTION>
----------------- ------------------------------------------------------------------------------------------------
Exhibit No. Description of Exhibit
----------- ----------------------
----------------- ------------------------------------------------------------------------------------------------
<S> <C>
2.1(1) Agreement and Plan of Reorganization.
----------------- ------------------------------------------------------------------------------------------------
3.1(1) Certificate of Incorporation of the Company, as Amended.
----------------- ------------------------------------------------------------------------------------------------
3.2(1) Bylaws of the Company.
----------------- ------------------------------------------------------------------------------------------------
4.1(2) Assignment of Indebtedness, dated December 11, 1998 by Shenzhen Zhenghua Group Co. Ltd. to Wu
Zhi Jian, New Century International S.R.L., Billy Yung and Chusa International Ltd.
----------------- ------------------------------------------------------------------------------------------------
4.2(2) Subscription Agreement, dated December 11, 1998, between Integrated Transportation Network
Group Inc. and Wu Zhi Jian.
----------------- ------------------------------------------------------------------------------------------------
4.3(2) Stock Purchase Warrant, dated December 11, 1998 in favor of Wu Zhi Jian.
----------------- ------------------------------------------------------------------------------------------------
4.4(2) Subscription Agreement, dated December 11, 1998, between Integrated Transportation Network
Group Inc. and New Century International S.R.L.
----------------- ------------------------------------------------------------------------------------------------
4.5(2) Stock Purchase Warrant, dated December 11, 1998 in favor of New Century International S.R.L.
----------------- ------------------------------------------------------------------------------------------------
4.6(2) Subscription Agreement, dated December 11, 1998, between Integrated Transportation Network
Group Inc. and Chusa International Limited.
----------------- ------------------------------------------------------------------------------------------------
4.7(2) Stock Purchase Warrant, dated December 11, 1998 in favor of Chusa International Limited.
----------------- ------------------------------------------------------------------------------------------------
4.8(2) Subscription Agreement, dated December 11, 1998, between Integrated Transportation Network
Group Inc. and Yeung Shu Kin
----------------- ------------------------------------------------------------------------------------------------
4.9(2) Subscription Agreement, dated December 11, 1998, between Integrated Transportation Network
Group Inc. and Surewin International Limited.
----------------- ------------------------------------------------------------------------------------------------
4.10(2) Stock Purchase Warrant, dated December 11, 1998 in favor of Surewin International Limited.
----------------- ------------------------------------------------------------------------------------------------
4.11(2) Subscription Agreement, dated December 17, 1998, between Integrated Transportation Network
Group Inc. and Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
4.12(2) Stock Purchase Warrant, dated December 11, 1998 in favor of Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
4.13(2) Subscription Agreement, dated December 23, 1998, between Integrated Transportation Network
Group Inc. and Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
10.1(1) Letter of Agreement, dated March 19, 1997 between Dawson Science Corporation and Shenzhen City
Zhenghua Traffic and Transportation Main Company, Ltd.
----------------- ------------------------------------------------------------------------------------------------
10.2(1) Letter Agreement, dated June 27, 1997 between Dawson Science Corporation and Wharton Capital
Partners Ltd.
----------------- ------------------------------------------------------------------------------------------------
10.3(1) Consulting Agreement, dated February 11, 1998 between Dawson Science Corporation and R.I.P.
Consultants.
----------------- ------------------------------------------------------------------------------------------------
10.4(1) 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(1) Regulations for Chinese Foreign Equity Joint Venture, dated October 8, 1997 between Dawson
Science Corporation and Shenzhen Jinzhenghua Transport Industrial Development Co. Ltd.
----------------- ------------------------------------------------------------------------------------------------
<PAGE>
----------------- ------------------------------------------------------------------------------------------------
Exhibit No. Description of Exhibit
----------- ----------------------
----------------- ------------------------------------------------------------------------------------------------
10.6(1) Business Loan and Security Agreement, dated November 3, 1997 between Dawson Science
Corporation and Yeung Ming-Sum.
----------------- ------------------------------------------------------------------------------------------------
10.7(1) Business Loan and Security Agreement, dated September 19, 1997 between Dawson Science
Corporation and Yeung Shu-kin.
----------------- ------------------------------------------------------------------------------------------------
10.8(1) Business Loan and Security Agreement, dated September 30, 1997 between Dawson Science
Corporation and Neolite Neon Co. Pty. Ltd.
----------------- ------------------------------------------------------------------------------------------------
10.9(1) Grid Promissory Note, dated July 3, 1997, payable to Wharton Capital Partners, Ltd.
----------------- ------------------------------------------------------------------------------------------------
10.10(1) Agreement, dated May 28, 1998 between Dawson Science Corporation, Integrated Transportation
Network Group Inc. and R.I.P. Consultants.
----------------- ------------------------------------------------------------------------------------------------
10.11(2) Agreement to purchase 2000 automobiles, between Sun Loong and Shenzhen Jinzhenghua Transport
Industrial Development Co., Ltd. (terminated)
----------------- ------------------------------------------------------------------------------------------------
10.12(2) Agreement to purchase 3000 automobiles, between First Automobile and Shenzhen Jinzhenghua
Transport Industrial Development Co., Ltd.
----------------- ------------------------------------------------------------------------------------------------
21 List of Subsidiaries
----------------- ------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule.
----------------- ------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------
(1) Filed as an Exhibit, with the same Exhibit number, to
Amendment No. 3 to the Registrant's registration statement on
Form S-1 filed with the Securities and Exchange Commission on
June 29, 1998, and incorporated herein by this reference
* Filed as an Exhibit, with the same Exhibit number, to its
Annaul Report on Form 10-K, filed with the Securities and
Exchange Commission on April 15, 1999, and incorporated herein
by this reference.
(b) The Company did not file a Current Report on Form 8-K during the 4th Quarter
of fiscal 1998.
<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.
INTEGRATED TRANSPORTATION NETWORK
GROUP INC.,
Registrant
By: /s/Andrew Lee
------------------------------
Andrew Lee, President
Date: March 8, 2000
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/ Wu Zhi Jian Chairman of the Board, Director March 8, 2000
- ------------------------------------ (Principal Executive Officer)
Wu Zhi Jian
/s/ Andrew Lee President and Director March 8, 2000
- ------------------------------------
Andrew Lee
/s/ Willy Wu Executive Vice President, March 8, 2000
- ------------------------------------ Chief Financial Officer
Willy Wu (Principal Financial Officer)
/s/ Peng Jun Executive Vice President, March 8, 2000
- ------------------------------------ Treasurer, Director
Peng Jun (Principal Accounting Officer)
/s/ Zhang Li Wei Director March 8, 2000
- ------------------------------------
Zhang Li Wei
<PAGE>
/s/ Lewis Burridge Director March 8, 2000
- ------------------------------------
Lewis Burridge
/s/ Robert L. Stewart Director March 8, 2000
- ------------------------------------
Robert L. Stewart
</TABLE>
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.
INTEGRATED TRANSPORTATION NETWORK
GROUP INC.,
Registrant
By:
------------------------------
Andrew Lee, President
Date: ____________, 2000
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>
Chairman of the Board, Director ___________, 2000
- ------------------------------------ (Principal Executive Officer)
Wu Zhi Jian
President and Director ____________, 2000
- ------------------------------------
Andrew Lee
Executive Vice President, ____________, 2000
- ------------------------------------ Chief Financial Officer
Willy Wu (Principal Financial Officer)
Executive Vice President, ____________, 2000
- ------------------------------------ Treasurer, Director
Peng Jun (Principal Accounting Officer)
Director ____________, 2000
- ------------------------------------
Zhang Li Wei
<PAGE>
Director ____________, 2000
- ------------------------------------
Lewis Burridge
Director ____________, 2000
- ------------------------------------
Robert L. Stewart
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
----------------- ------------------------------------------------------------------------------------------------
Exhibit No. Description of Exhibit
----------- ----------------------
----------------- ------------------------------------------------------------------------------------------------
<S> <C>
2.1(1) Agreement and Plan of Reorganization.
----------------- ------------------------------------------------------------------------------------------------
3.1(1) Certificate of Incorporation of the Company, as Amended.
----------------- ------------------------------------------------------------------------------------------------
3.2(1) Bylaws of the Company.
----------------- ------------------------------------------------------------------------------------------------
4.1(2) Assignment of Indebtedness, dated December 11, 1998 by Shenzhen Zhenghua Group Co. Ltd. to Wu
Zhi Jian, New Century International S.R.L., Billy Yung and Chusa International Ltd.
----------------- ------------------------------------------------------------------------------------------------
4.2(2) Subscription Agreement, dated December 11, 1998, between Integrated Transportation Network
Group Inc. and Wu Zhi Jian.
----------------- ------------------------------------------------------------------------------------------------
4.3(2) Stock Purchase Warrant, dated December 11, 1998 in favor of Wu Zhi Jian.
----------------- ------------------------------------------------------------------------------------------------
4.4(2) Subscription Agreement, dated December 11, 1998, between Integrated Transportation Network
Group Inc. and New Century International S.R.L.
----------------- ------------------------------------------------------------------------------------------------
4.5(2) Stock Purchase Warrant, dated December 11, 1998 in favor of New Century International S.R.L.
----------------- ------------------------------------------------------------------------------------------------
4.6(2) Subscription Agreement, dated December 11, 1998, between Integrated Transportation Network
Group Inc. and Chusa International Limited.
----------------- ------------------------------------------------------------------------------------------------
4.7(2) Stock Purchase Warrant, dated December 11, 1998 in favor of Chusa International Limited.
----------------- ------------------------------------------------------------------------------------------------
4.8(2) Subscription Agreement, dated December 11, 1998, between Integrated Transportation Network
Group Inc. and Yeung Shu Kin
----------------- ------------------------------------------------------------------------------------------------
4.9(2) Subscription Agreement, dated December 11, 1998, between Integrated Transportation Network
Group Inc. and Surewin International Limited.
----------------- ------------------------------------------------------------------------------------------------
4.10(2) Stock Purchase Warrant, dated December 11, 1998 in favor of Surewin International Limited.
----------------- ------------------------------------------------------------------------------------------------
4.11(2) Subscription Agreement, dated December 17, 1998, between Integrated Transportation Network
Group Inc. and Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
4.12(2) Stock Purchase Warrant, dated December 11, 1998 in favor of Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
4.13(2) Subscription Agreement, dated December 23, 1998, between Integrated Transportation Network
Group Inc. and Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
10.1(1) Letter of Agreement, dated March 19, 1997 between Dawson Science Corporation and Shenzhen City
Zhenghua Traffic and Transportation Main Company, Ltd.
----------------- ------------------------------------------------------------------------------------------------
10.2(1) Letter Agreement, dated June 27, 1997 between Dawson Science Corporation and Wharton Capital
Partners Ltd.
----------------- ------------------------------------------------------------------------------------------------
10.3(1) Consulting Agreement, dated February 11, 1998 between Dawson Science Corporation and R.I.P.
Consultants.
----------------- ------------------------------------------------------------------------------------------------
10.4(1) 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(1) Regulations for Chinese Foreign Equity Joint Venture, dated October 8, 1997 between Dawson
Science Corporation and Shenzhen Jinzhenghua Transport Industrial Development Co. Ltd.
----------------- ------------------------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
----------------- ------------------------------------------------------------------------------------------------
Exhibit No. Description of Exhibit
----------- ----------------------
----------------- ------------------------------------------------------------------------------------------------
10.6(1) Business Loan and Security Agreement, dated November 3, 1997 between Dawson Science
Corporation and Yeung Ming-Sum.
----------------- ------------------------------------------------------------------------------------------------
10.7(1) Business Loan and Security Agreement, dated September 19, 1997 between Dawson Science
Corporation and Yeung Shu-kin.
----------------- ------------------------------------------------------------------------------------------------
10.8(1) Business Loan and Security Agreement, dated September 30, 1997 between Dawson Science
Corporation and Neolite Neon Co. Pty. Ltd.
----------------- ------------------------------------------------------------------------------------------------
10.9(1) Grid Promissory Note, dated July 3, 1997, payable to Wharton Capital Partners, Ltd.
----------------- ------------------------------------------------------------------------------------------------
10.10(1) Agreement, dated May 28, 1998 between Dawson Science Corporation, Integrated Transportation
Network Group Inc. and R.I.P. Consultants.
----------------- ------------------------------------------------------------------------------------------------
10.11(2) Agreement to purchase 2000 automobiles, between Sun Loong and Shenzhen Jinzhenghua Transport
Industrial Development Co., Ltd. (terminated)
----------------- ------------------------------------------------------------------------------------------------
10.12(2) Agreement to purchase 3000 automobiles, between First Automobile and Shenzhen Jinzhenghua
Transport Industrial Development Co., Ltd.
----------------- ------------------------------------------------------------------------------------------------
21 List of Subsidiaries
----------------- ------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule.
----------------- ------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------
(1) Filed as an Exhibit, with the same Exhibit number, to
Amendment No. 3 to the Registrant's registration statement on
Form S-1 filed with the Securities and Exchange Commission on
June 29, 1998, and incorporated herein by this reference
(2) Filed as an Exhibit, with the same exhibit number, to the
Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on _____________, and incorporated
herein by this reference.
EXHIBIT 21
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------
<S> <C>
Shenzhen Jinzhenghua Transport Industrial A company organized under the laws of the People's
Development Co. Ltd. Republic of China
</TABLE>
