UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number 0-24815
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
--------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 13-3993618
- --------------------------------------------- --------------------------------------
(State or other jurisdiction of incorporation (I.R.S Employer Identification Number)
or organization)
575 Lexington Avenue, Suite 410, New York, New York 10022
- ----------------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(212) 572-9612
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15d of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
12,625,411 common shares, $.01 par value, were outstanding as of August 25,
1999.
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:
Balance sheets, June 30, 1999 and December 31, 1998
Statements of operations, six months and three months ended June
30, 1999 and 1998
Statements of shareholders' equity, six months ended June 30,
1999
Statements of cash flows, six months ended June, 1999 and 1998
Notes to consolidated condensed financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
-2-
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(US DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998 June 30,
1999
----------------------------------------------------------------------- ---------------------- ----------------------
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,910 $12,071
Trade receivables 105 136
Due from affiliate - 301
Other assets (Notes 3 and 4) 17,077 15,936
Inventories 38 52
Property and equipment, net 1,136 1,013
Revenue-earning equipment, net 29,379 28,192
Taxi licenses, net 11,814 12,546
Construction-in-progress (Note 5) 2,263 2,263
Deposit 1,935 1,935
----------------------------------------------------------------------- ---------------------- ----------------------
$68,657 $74,445
----------------------------------------------------------------------- ---------------------- ----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Bank loans $ 2,402 $ 2,438
Notes payable (Note 2) 320 2,320
Trade payables 1,167 665
Other payables 5,160 6,662
Due to directors 71 60
Due to affiliates 149 -
Due to minority shareholders, net 19 19
Deferred revenue 3,001 2,986
Accrued expenses 1,770 5,294
Income tax payable 2,651 2,838
Deferred income taxes 247 167
----------------------------------------------------------------------- ---------------------- ----------------------
TOTAL LIABILITIES 16,957 23,449
----------------------------------------------------------------------- ---------------------- ----------------------
MINORITY INTEREST 2,919 3,107
----------------------------------------------------------------------- ---------------------- ----------------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY (NOTES 2 AND 4):
Common stock, $.01 par value - authorized 50,000,000 shares; 104 127
issued and outstanding 10,435,030 shares at December 31, 1998
and 12,625,411 shares at June 30, 1999
Additional paid-in capital 23,385 27,825
Retained earnings 24,919 19,565
Accumulated other comprehensive income - foreign currency
translation adjustments 373 372
----------------------------------------------------------------------- ---------------------- ----------------------
TOTAL SHAREHOLDERS' EQUITY 48,781 47,889
----------------------------------------------------------------------- ---------------------- ----------------------
$68,657 $74,445
----------------------------------------------------------------------- ---------------------- ----------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-3-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(US DOLLARS AND SHARES IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
----------------- ---------------- ---------------- -----------------
1998 1999 1998 1999
------------------------------------------- ---------------------------------- --- ----------------------------------
(unaudited) (unaudited)
REVENUE, NET $5,990 $ 4,314 $11,151 $10,006
------------------------------------------- ----------------- ---------------- --- ---------------- -----------------
OPERATING EXPENSES:
<S> <C> <C> <C> <C>
Depreciation of revenue-earning 969 1,791 1,867 2,864
equipment
Amortization of taxi licenses 67 88 134 173
Loss on disposal of revenue earning - 3,959 - 4,555
equipment
Other operating expenses 1,100 3,322 2,337 4,740
------------------------------------------- ----------------- ---------------- --- ---------------- -----------------
TOTAL OPERATING EXPENSES 2,136 9,160 4,338 12,332
------------------------------------------- ----------------- ---------------- --- ---------------- -----------------
OPERATING INCOME (LOSS) 3,854 (4,846) 6,813 (2,326)
OTHER EXPENSES:
Interest expense, net of interest
income 163 118 415 253
Provision for loss on non-fulfillment
of car purchase agreement (Note 5)
- 2,696 - 2,696
------------------------------------------- ----------------- ---------------- --- ---------------- -----------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAX AND MINORITY 3,691 (7,660) 6,398 (5,275)
INTEREST
PROVISION (BENEFIT) FOR INCOME TAX 367 (301) 568 133
------------------------------------------- ----------------- ---------------- --- ---------------- -----------------
INCOME (LOSS) BEFORE MINORITY
INTEREST 3,324 (7,359) 5,830 (5,408)
MINORITY INTEREST 217 (158) 410 (54)
------------------------------------------- ----------------- ---------------- --- ---------------- -----------------
NET INCOME (LOSS) 3,107 (7,201) 5,420 (5,354)
OTHER COMPREHENSIVE INCOME NET OF TAX -
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS (38) 10 (36) (1)
------------------------------------------- ----------------- ---------------- --- ---------------- -----------------
COMPREHENSIVE INCOME (LOSS) $3,069 $(7,191) $ 5,384 $ (5,355)
------------------------------------------- ----------------- ---------------- --- ---------------- -----------------
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ .42 $ (.57) $ .80 $ (.44)
Diluted .42 (.57) .74 (.44)
------------------------------------------- ----------------- ---------------- --- ---------------- -----------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 7,477 12,625 6,771 12,014
Diluted 7,477 12,625 7,430 12,014
------------------------------------------- ----------------- ---------------- --- ---------------- -----------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-4-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(US DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Accumulated
other
comprehensive
income -
foreign
Common stock Additional currency Total
------------ ----------- paid-in Retained translation shareholders'
Shares Amount capital earnings adjustments equity
- -------------------------------- ------------ ----------- ----- ------------ ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 10,435,030 $104 $23,385 $24,919 $373 $48,781
Issuance of shares in 2,152,381 22 4,338 - - 4,360
connection with private
placements, net of issuance
costs (Note 4) (unaudited)
Issuance of shares for 38,000 1 102 - - 103
consulting and other
services (Note 4)
(unaudited)
Foreign currency translation - - - - (1) (1)
adjustments (unaudited)
Net loss (unaudited) - - - (5,354) - (5,354)
- -------------------------------- ------------ ----------- ----- ------------ ---------------- ---------------- -----------------
BALANCE, JUNE 30, 1999 12,625,411 $127 $27,825 $19,565 $372 $47,889
(UNAUDITED)
- -------------------------------- ------------ ----------- ----- ------------ ---------------- ---------------- -----------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(US DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1998 1999
----------------------------------------------------------------------- ---------------------- ----------------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 5,420 $ (5,354)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property, equipment and 1,947 2,980
revenue-earning equipment
Amortization of taxi licenses 134 173
Non cash consulting and other services - 103
Minority interest 830 188
Amortization of organization costs 211 -
Deferred income tax 153 (81)
Exchange adjustment 10 11
Loss on disposal of revenue earning equipment 63 4,555
Provision for loss on non-fulfillment of car purchase - 2,696
agreement
Accrued loan interest - 36
Changes in assets and liabilities:
(Increase) decrease in trade and other receivables 687 (1,289)
(Increase) decrease in inventories 49 (13)
(Decrease) increase in trade and other payables (960) 986
(Decrease) increase in accrued expenses (159) 564
Increase in income tax payable 420 187
Decrease in deferred income (532) (15)
----------------------------------------------------------------------- ---------------------- ----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,273 5,727
----------------------------------------------------------------------- ---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, equipment and revenue-earning equipment (522) (4,816)
Proceeds from sale of property, equipment and revenue-earning 20 3,075
equipment
Organization costs (241) -
Prepayment for acquisition of revenue-earning equipment (4,944) -
Acquisition of taxi licenses - (906)
Deposit paid for the acquisition of taxi business - (1,208)
Prepayment for acquisition of property and equipment - (797)
----------------------------------------------------------------------- ---------------------- ----------------------
NET CASH USED IN INVESTING ACTIVITIES (5,687) (4,652)
----------------------------------------------------------------------- ---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from director - 177
Proceeds from notes payable - 2,000
Repayments of bank loans (710) -
Repayments of amount due to affiliates (1,363) (451)
Proceeds from issuance of common stock, net 675 4,360
----------------------------------------------------------------------- ---------------------- ----------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,398) 6,086
----------------------------------------------------------------------- ---------------------- ----------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,188 7,161
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,723 4,910
----------------------------------------------------------------------- ---------------------- ----------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,911 $12,071
----------------------------------------------------------------------- ---------------------- ----------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-6-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
1. BASIS OF The consolidated condensed interim financial
PRESENTATION statements included herein have been
prepared by the Company, without audit,
pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain
information and footnote disclosures
normally included in financial statements
prepared in accordance with generally
accepted accounting principles have been
condensed or omitted pursuant to such rules
and regulations, although the Company
believes that the disclosures are adequate
to make the information presented not
misleading.
These statements reflect all adjustments,
consisting of normal recurring adjustments
which, in the opinion of management, are
necessary for fair presentation of the
information contained therein. It is
suggested that these consolidated condensed
financial statements be read in conjunction
with the financial statements and notes
thereto included in the Company's annual
audited financial statements for the year
ended December 31, 1998. The Company follows
the same accounting policies in preparation
of interim reports.
Results of operations for the interim
periods are not indicative of annual
results.
2. NOTES PAYABLE Notes payable consist of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1998
<S> <C> <C> <C>
---------------------------------------------------------------------------------
Principal Interest rate Maturity Collateral
--------------- --------------- ---------------------- -------------------------
$320 8.0% 4/02/98 (a)
--------------- --------------- ---------------------- -------------------------
Six months ended June 30, 1999 (unaudited)
--------------- --------------- ---------------------- -------------------------
Principal Interest rate Maturity Collateral
--------------- --------------- ---------------------- -------------------------
$ 320 8.0% 4/02/98 (in default) (a)
2,000 5.0% 2/10/01 (b)
--------------- --------------- ---------------------- -------------------------
$2,320
--------------- --------------- ---------------------- -------------------------
</TABLE>
-7-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
(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, 1998
and March 31, 1999 was $320. The
note was due April 2, 1998 and is
in default.
(b) On February 10, 1999, the Company
issued a $2,000, 5% convertible
promissory note. At any time after
the maturity date and prior to
repayment of all amounts due, the
note, at the option of the holder,
is convertible into shares of the
Company's common stock at the
conversion price of $2.00 per
share.
3. OTHER ASSETS Other assets include deposits paid totaling
$11,475 for the acquisition of 3,000
automobiles for car rental purposes. (see
note 5)
4. SHAREHOLDERS' On January 1, 1999, the Company adopted a
EQUITY 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
in payment of finder's fees.
-8-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
On January 29, 1999, the Company issued
3,000 shares of common stock to a business
and financial consultant as consideration
for consulting services.
During March 1999, the Company agreed to
issue 2,000,000 shares of common stock to
private investors for an aggregate of
$4,000.
On March 12, 1999, the Company agreed to
issue 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.
In connection with the convertible
promissory note transaction discussed in
Note 2(b), during March 1999, the Company
agreed to issue 15,000 shares of common
stock as consideration for finder's fees.
5. 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
Transport in March 1997.
-9-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
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 in 1994 to 1996. These loans had
been secured by various assets of Zhenghua
Group, which included 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), Zhenghua
entered into an agreement with Jinzhenghua
pursuant to which Zhenghua agreed to
contribute and transfer various assets
including the 378 taxi licenses to
Jinzhenghua.
In May 1997, Zhenghua, with the
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 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.
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 Jinzhengua 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 the Company and no
collateral or lien is registered thereon.
Management believes that based on various
agreements with the lenders and actions
taken by relevant parties, the subject
licenses are free from any encumbrances.
-10-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
The second proceeding related to an
additional 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, 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
would result in a material adverse effect on
the financial position of the Company.
-11-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
(ii) Prior to the reorganization of
Jinzhenghua as discussed in (i) above, 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.
(b) Related Party Loan Agreements
Prior to the reorganization of Jinzhenghua,
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.
-12-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
c) Contractual Obligations
The Company contracted with a building
contractor in 1996 to construct a hotel in
Hunan, PRC. The budgeted costs of the whole
project are estimated to be $4,073. Through
June 30, 1999, 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.
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. As of June 30,
1999, the Company had not performed its
obligations under the contract.
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 and car parking charges of $884
(aggregating $2,696), the amount of which
was charged to operations during the quarter
ended June 30, 1999.
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 June 30, 1999
is $181, after deducting a deposit paid of
$1,933.
-13-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
(d) Legal Matters
In early 1998, the United States Securities
and Exchange Commission commenced an
informal inquiry relating to public
disclosures in 1997 by Dawson Science
Corporation, the Company's former parent
company ("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 sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934 and Rule
10(b)(5) thereunder.
The Company currently is engaged in
settlement discussions with respect to the
class action referred to above. Based on
these discussions, during the fourth quarter
of 1998, the Company 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 for
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.
-14-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
(e) Capital Investment Obligation
Pursuant to Jinzhenghua's organizational
documents, the Company and the minority
owners of Jinzhenghua were obligated to
contribute $9,200 and $800 (in cash or
assets), respectively, to the registered
capital of Jinzhenghua. In particular, the
Company was obligated to make its capital
contribution to Jinzhenghua in two equal
installments of $4,600, 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 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. Accordingly, the Company has
not performed on its obligation to
contribute $4,200 to Jinzhenghua 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 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.
-15-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
The Company expects that it will be
required to make the remaining capital
contribution to Yunrun Transport ($8,900) 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 $8,900
to the capital of Yunrun Transport 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
Transport's business license, which would
materially and adversely affect the Company.
-16-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
6. EARNINGS PER SHARE
<TABLE>
<CAPTION>
The following table sets forth the
computation of basic and diluted earnings
per share:
<S> <C> <C>
Six months ended June 30, 1998 1999
----------------------------------------- ------------------- ------------------
Numerator:
Net income (loss), numerator for
basic earnings per share - income
(loss) available to common
shareholders $5,420 $(5,354)
Effect of dilutive securities -
interest on convertible debt after tax 108 -
----------------------------------------- ------------------- ------------------
Numerator for diluted earnings per
share - income (loss) available to
common shareholders $5,528 $(5,354)
----------------------------------------- ------------------- ------------------
Denominator:
Denominator for basic earnings per
share - weighted average shares 6,771 12,014
Effect of dilutive securities:
Options and warrants - -
Convertible debt 659 -
----------------------------------------- ------------------- ------------------
Dilutive potential common shares:
Denominator for dilutive earnings per
share - adjusted weighted average
shares and assumed conversions 7,430 12,014
----------------------------------------- ------------------- ------------------
Basic earnings (loss) per share $ .80 $ (.44)
----------------------------------------- ------------------- ------------------
Diluted earnings (loss) per shares $ .74 $ (.44)
----------------------------------------- ------------------- ------------------
</TABLE>
-17-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
7. SEGMENT The Company's operations are comprised of
INFORMATION taxi, car rental, and auto repair businesses
and a hotel project in Guangdong, Hunan and
other provinces in China. The industrial and
geographical information regarding revenue,
income before income tax and minority
interest, total assets, addition of
long-term assets, depreciation and
amortization for the six months ended June
30, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
Industrial Segments
Six months ended June 30, 1998 (unaudited)
--------------------------------------------------------------------------------
Taxi Car rental Car Other Total
repairs
----------------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue, net $ 4,142 $ 6,261 $748 $ - $11,151
Income (loss) before
income tax and 2,494 4,494 335 (925) 6,398
minority interest
Total assets as at
June 30, 1998 25,241 30,784 675 2,909 59,609
Additions of
productive
long-term assets 497 23 1 - 521
Depreciation and
amortization 1,128 939 14 - 2,081
----------------------- ---------- ----------- ---------- ----------- ----------
Six months ended June 30, 1999 (unaudited)
--------------------------------------------------------------------------------
Taxi Car rental Car Other Total
repairs
----------------------- ---------- ----------- ---------- ----------- ----------
Revenue, net $ 4,458 $ 4,945 $603 $ - $10,006
Income (loss) before
income tax and (1,152) (2,952) 321 (1,492) (5,275)
minority interest
Total assets as at
June 30, 1999 48,353 23,575 1,137 1,380 74,445
Additions of
productive 7,312 2,638 - - 9,950
long-term assets
Depreciation and
amortization 2,120 993 40 - 3,153
----------------------- ---------- ----------- ---------- ----------- ----------
</TABLE>
-18-
<PAGE>
INTEGRATED TRANSPORTATION NETWORK GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Geographical Segments
Six months ended June 30, 1998 (unaudited)
--------------------------------------------------------------------------------
Guangdong Hunan Other Total
------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue, net $ 6,251 $ 881 $ 4,019 $11,151
Income before income
tax and minority 3,896 535 1,967 6,398
interest
Total assets 32,979 13,267 13,363 59,609
------------------------ ------------- ------------- ------------- -------------
Six months ended June 30, 1999 (unaudited)
------------------------ ------------- ------------- ------------- -------------
Guangdong Hunan Other Total
------------------------ ------------- ------------- ------------- -------------
Revenue, net $ 5,384 $ 1,715 $ 2,907 $10,006
Income (loss) before
income tax and (4,101) 573 (1,747) (5,275)
minority interest
Total assets 38,650 16,797 18,998 74,445
------------------------ ------------- ------------- ------------- -------------
</TABLE>
-19-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
General
- -------
The Company, through its 92%-owned subsidiary, Shenzhen Jinzhenghua
Transport Industrial Development Co., Ltd. ("Jinzhenghua Transport"), primarily
operates a group of transportation related businesses (the "Transportation
Businesses"). The Transportation Businesses are comprised of the automobile
rental business (the "Rental Business"), the taxi business (the "Taxi Business")
and the automobile repair services business (the "Repair Business"). The Company
does not have any operating business other than the businesses operated through
Jinzhenghua Transport. 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).
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, including the city of Shimen in the
Hunan province, the city of Ganzhou in the Jiangxi province, and the city of
Yueyang in the Hunan province.
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 the establishment during 1997
of automobile rental stations in Ganzhou, Guangzhou, Nanchang, Nanjing and Xian.
During 1998, Jinzhenghua Transport further expanded its transportation
business to include automobile rental services in the city of Yueyang and
Changsha in the Hunan province.
By the end of the first quarter of 1999, another rental station was
opened in the city of Nanning in the Guangxi province. The Company will continue
to pursue expansion opportunities in other locations of China it currently does
not have a presence in.
On a consolidated basis, revenue, net, decreased $1,145,000 (10.3%)
from $11,151,000 during the six months ended June 30, 1998 to $10,006,000 during
the six months ended June 30, 1999. Net income decreased from $5,420,000 during
the six months ended June 30, 1998 to having a net loss of $5,354,000 during the
six months ended June 30, 1999.
-20-
<PAGE>
The Rental Business, which began operations in August 1997, accounted
for $6,261,000 (56.2%) and $4,945,000 (49.4%) of the Company's total revenue,
net, during the six months ended June 30, 1998 and 1999, respectively. As of
March 31, 1999, the Rental Business had acquired a rental fleet of 1,168
automobiles, of which 770 automobiles had already been deployed for normal
rental operations and the remaining 398 automobiles not yet in active services.
During the three months for the quarter ended June 30, 1999, the Company had
disposed some of its old automobiles from its rental operations. A total of 400
automobiles were disposed, which includes 100 automobiles from Ganzhou of the
Jiangxi province, 150 automobiles from Guangzhou of the Guangdong province, 50
automobiles from Nanchang of the Jiangxi province, and 100 automobiles from
Nanjing of the Jiangsu province. Another 250 new automobiles were deployed for
rental services out of the existing 398 idle non-operating automobiles, which
includes 100 automobiles in Ganzhou of the Jiangxi province, 100 automobiles in
Xian of the Shaanxi province, and 50 automobiles in Nanning of the Guangxi
province. Additionally, a total of 10 automobiles were removed from the Yueyang
rental operations and later on placed in the Yueyang taxi operations.
Subsequent allocations placed the remaining 138 idle automobiles to services as
follows :- 40 automobiles to Yueyang of the Hunan province, 50 automobiles to
Changsha of the Hunan province, and 48 automobiles to Nanning of the Guangxi
province. As of June 30, 1999, the total rental fleet consisted of 758
automobiles, of which 568 automobiles were deployed in rental operations and
the remaining 190 vehicles were in the process of deployment. The Rental
Business contributed income of $4,494,000 (70.2%) and loss of $2,952,000
(56.0%) of total income/loss before provision for income tax and minority
interest during the six months ended June 30, 1998 and 1999, respectively.
The Taxi Business accounted for $4,142,000 (37.1%) and $4,458,000
(44.6%) of the Company's total revenue, net, during the six months ended June
30, 1998 and 1999, respectively. As of June 30, 1998, the Taxi Business had
deployed 728 taxis. In early 1999, the Company had added 50 taxi automobiles to
its taxi operations in the city of Yueyang in the Hunan province. During the
second quarter of 1999, 250 automobiles were also disposed from the taxi fleet
but replaced by 250 new taxi automobiles purchased prior, which includes 100
automobiles for the Shenzhen Guorun Taxi Company Ltd. in Shenzhen in the
Guangdong province, and 150 automobiles for the Shimen Zhenghua Taxi Company
Ltd. in Shimen in the Hunan province. As of June 30, 1999, there is a total of
778 taxis. During the third quarter of 1999, the Company allocated 60 more new
vehicles to its taxi operations in the city of Yueyang. As of September 30,
1999, the Company owned a taxi fleet with a total of 838 automobiles, all of
which in operations already. The Taxi Business contributed income of $2,494,000
(39.0%) and loss of $1,152,000 (21.8%) to income before provision for income
tax and minority interest during the six months ended June 30, 1998 and 1999.
The Repair Business accounted for $748,000 (6.7%) and $603,000 (6.0%)
of the Company's total revenue, net, during the six months ended June 30, 1998
and 1999, respectively. The Repair Business contributed $335,000 and $321,000
to income before provision for income tax and minority interest during the six
months ended June 30, 1998 and 1999, respectively.
-21-
<PAGE>
The Company's only other plans besides the Rental Business, the Taxi
Business and the Repair Business relate to a hotel being developed in the Hunan
Province, in respect of which neither revenue nor expenses were recorded in the
current or comparable prior quarter. All expenditures related to the hotel
before and during the quarter ended June 30, 1999 have been capitalized and
recorded as construction in progress.
The Company had entered into an agreement in early 1998 to purchase
3,000 cars for an aggregate purchase price of $47,475,000. In late October,
1999, due to insufficient funds obtained by the Company in fulfillment of the
contract, the Company had entered into a subsequent agreement with the car
manufacturer to terminate the purchase contract by compensating to the car
supplier with payment of penalties and car parking charges. See "Liquidity and
Capital Resources."
The Company plans to continue to expand its Rental and Taxi Businesses
as rapidly as the Company's capital resources permit, and to expand the Repair
Business as necessary to accommodate any expansion of the Rental Business and
Taxi Business. However, the Company currently does not have sufficient capital
to expand its businesses. See "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 in China 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. Certain other provincial governments have also stipulated similar
incentive programs. The Company's subsidiaries are in different stages of
enjoying the aforementioned income tax incentive programs. However, 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.
Comparison of three months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Percentage Ended Percentage
June of Revenue, June of Revenue,
30, 1998 Net 30, 1999 Net
<S> <C> <C> <C> <C>
Revenue, net $5,990,000 100,0% $4,314,000 100.0%
Total operating expenses 2,136,000 35.7% 9,160,000 212.3%
Total expenses (excluding income tax) (1) 2,299,000 38.4% 11,974,000 277.6%
Income (loss) before provision for income tax 3,691,000 61.6% ( 7,660,000 ) ( 177.6% )
and minority interest
Income (loss) before minority interest 3,324,000 55.5% ( 7,359,000 ) ( 170.6% )
Net Income (loss) 3,107,000 51.9% ( 7,201,000 ) ( 166.9% )
</TABLE>
(1) Includes in 1999 a $2,696,000 provision for loss on non-fulfillment of car
purchase agreement and $3,959,000 loss on disposal of revenue earning
equipment
-22-
<PAGE>
Revenue, net was $4,314,000 in the three months ended June 30, 1999, a
decrease of 28.0% from $5,990,000 during the comparable prior period. The
decrease was primarily due to a $1,751,000 (50.2%) decrease in revenue from the
Rental Business. The Rental, Taxi and Repair Businesses contributed $1,740,000
(40.3%), $2,282,000 (52.9%) and $292,000 (6.8%), respectively, to revenue, net,
during the three months ended June 30, 1999, compared with $3,491,000 (58.3%),
$2,117,000 (35.3%), and $382,000 (6.4%), respectively, during the comparable
prior period. Revenue, net, from the Taxi Business increased from $2,117,000 in
the comparable prior quarter to $2,282,000 in the current quarter, a 7.8%
increase. Revenue, net, for the Repair Business was $292,000 in the current
quarter, compared to $382,000 during the comparable prior period, a 23.6%
decrease. The decrease in net revenue from the Rental Business is primarily due
to the reduction of the rental fleet from the prior year and the disposal of a
large number of rental and taxi automobiles during 1999. Profit margins of the
Rental Business are comparatively reduced due to the increasingly
competitiveness of the loosely-regulated Rental Industry in PRC. As of the end
of the quarter, the total rental fleet consisted of 758 automobiles, of which
only 568 automobiles were deployed in rental operations and the remaining 190
vehicles were in process of deployment. A total of 400 rental automobiles were
disposed during the second quarter alone, while adding another 250 idle but new
rental automobiles to services from the non-operating pool of new automobiles.
Time and money were lost due to process of deployment as well. The increase in
net revenue from the Taxi Business is primarily due to the addition of 50 taxis
in Yueyang, Hunan Province, since April, 1998. Another 250 taxi automobiles were
replenished by new taxis purchased prior. The decrease in net revenue from the
Repair Business is primarily due to a general slow down in the repair business.
Total Expenses (excluding income taxes) were $11,974,000 during the
three months ended June 30, 1999, an increase of $9,675,000 from $2,299,000
during the comparable prior period. During the current quarter, total expenses
as a percentage of revenue, net, increased to 277.6%, compared to 38.4% in the
prior period. The increase in the amount of total expenses was comprised
primarily of a $822,000 increase in depreciation of revenue-earning equipment, a
$3,959,000 increase in loss on disposal of revenue-earning equipment, a
$2,222,000 increase in other operating expenses, and a $2,696,000 one-time
provision for loss on non-fulfillment of car purchase agreement.
Depreciation and Amortization Expense. During the current quarter,
depreciation and amortization expense was $1,933,000, compared with $1,053,000
in the comparable prior period, an increase of $880,000. During the current
quarter, the depreciation and amortization expense associated with the Rental
Business, Taxi Business, and Repair Business was $418,000, $1,495,000, and
$20,000, compared with $488,000, $571,000, and ($6,000), respectively, during
the comparable prior period. Depreciation and amortization expense, as a
percentage of revenue, net, increased during the current quarter, to 44.8%,
compared to 17.6% during the comparable prior period. The increase in
depreciation expense was due primarily to a one-time useful life adjustment of
$877,000 on all taxis so that all taxis of the Company will be uniformly
depreciated under a six years life period.
-23-
<PAGE>
Loss on disposal of revenue-earning equipment amounts to $3,959,000
during the current quarter, from $0 during the comparable prior quarter. The
increase in loss on revenue-earning equipment was due to disposition of old
rental automobiles during the second quarter ended June 30, 1999. A total of 650
automobiles from the rental fleet (400) and taxi fleet (250) were disposed
during the quarter with a subsequent deployment of 250 new rental automobiles
and 250 new taxi automobiles. New rental automobiles and taxis are estimated to
have a service life of six years from now on before disposal.
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 the current quarter, other operating expenses
were $3,322,000, compared with $1,100,000 during the comparable prior period, an
increase of $2,222,000. During the current quarter, other operating expenses, as
a percentage of revenue, net, increased to 77.0%, compared with 18.4% for the
comparable prior period. The increase in operating expenses as a percentage of
revenue, net, was due primarily to extraordinary legal and consulting fees
incurred during the second quarter of 1999. The increase in the amount of other
operating expenses was primarily due to a $1,546,000 cost of legal and
consulting charges resulting from the Company's unusual legal matter of
re-claiming ownership of its own taxi licenses.
Provision for loss on non-fulfillment of car purchase agreement amounts
to $2,696,000 during the current quarter, from $0 during the comparable prior
quarter. In early 1998, the Company has contracted with a car manufacturing
company to acquire 3,000 automobiles. The contracted amount for such agreement
was $47,475,000 and the outstanding commitment was $36,000,000 after deduction
of deposits paid by the Company of $11,475,000 as of June 30, 1999. As a result
of non-fulfillment of the contract due to insufficient working capital in paying
off the outstanding commitment, the Company had to cancel the contract. 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 operation during the
quarter ended June 30, 1999.
Income before provision for income tax and minority interest was a loss
of $7,660,000 in the current quarter, as compared with income of $3,691,000 in
the comparable prior period. Before deducting $983,000 (consisting of $957,000
in professional and general and administrative expenses, and $26,000 in interest
expense) and $324,000 (consisting of $294,000 in professional and general and
administrative expenses, and $30,000 in interest expense) of expenses of the
parent company during the current quarter and the comparable prior quarter,
respectively, the Rental, Taxi and Repair Businesses contributed ($5,104,000),
($1,747,000), and $147,000, respectively, to total income before provision for
income tax and minority interest, compared with $2,487,000, $1,326,000, and
$202,000, respectively, in the comparable prior period. The decrease in income
before provision for income tax and minority interest is primarily attributable
to the following few identifiable higher-than-normal expenses : the loss on
disposal of rental and taxi automobiles, the adjustment on depreciation of all
automobiles to conform to a six years life period, and the
-24-
<PAGE>
additional legal and consulting fees incurred during the current period.
Additionally, the decrease in income before provision for income tax and
minority interest is further affected by the one-time provision for loss on
non-fulfillment of car purchase agreement.
Provision (benefit) for income tax was ($301,000) in the current
quarter (3.9% of loss before provision for income tax and minority interest),
compared with $367,000 in the comparable prior period (9.9% of income before
provision for income tax and minority interest). The Company enjoys preferential
tax treatment as a result of its location in Shenzhen, a Special Economic Zone.
Certain other provincial governments have also stipulated similar incentive
programs. The Company's subsidiaries are in different stages of enjoying the
aforementioned income tax incentive programs. However, 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.
Minority interest was ($158,000) in the current quarter, compared with
$217,000 in the comparable prior period, which reflects the Company's having
generated a loss of income during the current period.
As a result of the foregoing, net income was a net loss of $7,201,000
in the current quarter, compared with net income of $3,107,000 in the comparable
prior period.
Currently, the exchange rate for conversion of Renminbi to U.S. Dollars
is RMB 8.278 to $1.00. The Financial position and results of operations of
Jinzhenghua Transport are determined using Renminbi. Assets and liabilities are
translated at the exchange rate in effect at each year or period end. Income
statement amounts are translated at the average rate of exchange prevailing
during the year. Any significant devaluation of the Renminbi relative to U.S.
dollars would materially and adversely affect the Company's reported earnings
and assets as reported in U.S. dollars.
-25-
<PAGE>
Comparison of six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Six Six
Months Months
Ended Percentage Ended Percentage
June of Revenue, June of Revenue,
30, 1998 Net 30, 1999 Net
<S> <C> <C> <C> <C>
Revenue, net $11,151,000 100.0% $10,006,000 100.0%
Total operating expenses 4,338,000 38.9% 12,332,000 123.4%
Total expenses (excluding income tax) (1) 4,753,000 42.6% 15,281,000 152.7%
Income (loss)before provision for income tax 6,398,000 57.4% ( 5,275,000 ) ( 52.7% )
and minority interest
Income (loss) before minority interest 5,830,000 52.3% ( 5,408,000 ) ( 54.1% )
Net Income (loss) 5,420,000 48.6% ( 5,354,000 ) ( 53.5% )
</TABLE>
(1) Includes in 1999 a $2,696,000 provision for loss on non-fulfillment of car
purchase agreement and loss on disposal of revenue earning equipment of
$4,555,000
Revenue, net was $10,006,000 in the six months ended June 30, 1999, a
decrease of 10.3% from $11,151,000 during the comparable prior period. The
decrease was primarily due to a $1,316,000 (21.0%) decrease in revenue from the
Rental Business. The Rental, Taxi and Repair Businesses contributed $4,945,000
(49.4%), $4,458,000 (44.6%) and $603,000 (6.0%), respectively, to revenue, net,
during the six months ended June 30, 1999, compared with $6,261,000 (56.2%),
$4,142,000 (37.1%), and $748,000 (6.7%), respectively, during the comparable
prior period. Revenue, net, from the Taxi Business increased from $4,142,000 in
the comparable prior two quarters to $4,458,000 in the current two quarters, a
7.6% increase. Revenue, net, for the Repair Business was $603,000 in the current
two quarters, compared to $748,000 during the comparable prior period, a 19.4%
decrease. The decrease in net revenue from the Rental Business is primarily due
to the reduction of the rental fleet from the prior year and the disposal of a
large number of rental automobiles during 1999. Profit margins of the Rental
Business are comparatively reduced due to the increasingly competitiveness of
the loosely-regulated Rental Industry in PRC. As of June 30, 1999, the total
rental fleet consisted of 758 automobiles, of which only 568 automobiles were
deployed in rental operations and the remaining 190 vehicles were in process of
deployment. A total of 400 rental automobiles were disposed during the second
quarter alone, with another 250 new rental automobiles deployed for rental
services out of the existing 398 non-operating rental automobiles. Time and
money were lost due to process of deployment as well. The increase in net
revenue from the Taxi Business is primarily due to the addition of 50 taxis in
Yueyang, Hunan Province, since April, 1998. Another 250 taxi automobiles were
replenished by new taxis purchased prior. The decrease in net revenue from the
Repair Business is primarily due to a general slow down in the repair business.
Total Expenses (excluding income taxes) were $15,281,000 during the six
months ended June 30, 1999, an increase of $10,528,000 from $4,753,000 during
the comparable prior period. During the current six months, total expenses as a
percentage of revenue, net, increased to 152.7%, compared to 42.6% in the prior
period. The increase in the amount of total expenses was comprised primarily of
a $997,000 increase in depreciation of revenue-earning equipment, a $4,555,000
-26-
<PAGE>
increase in loss on disposal of revenue-earning equipment, a $2,403,000 increase
in other operating expenses, and a $2,696,000 one-time provision for loss on
non-fulfillment of car purchase agreement.
Depreciation and Amortization Expense. During the current six months,
depreciation and amortization expense was $3,153,000, compared with $2,081,000
in the comparable prior period, an increase of $1,072,000. During the current
quarter, the depreciation and amortization expense associated with the Rental
Business, Taxi Business, and Repair Business was $993,000, $2,120,000, and
$40,000, compared with $ 939,000, $1,128,000, and $14,000, respectively, during
the comparable prior period. Depreciation and amortization expense, as a
percentage of revenue, net, increased during the current quarter, to 31.5%,
compared to 18.7% during the comparable prior period. The increase in
depreciation expense was due primarily to a one-time useful life adjustment of
$877,000 on all taxis so that all taxis of the Company will be uniformly
depreciated under a six years life period, and $87,000 on increase in
depreciation of additional taxis and amortization of taxi licenses.
Loss on disposal of revenue-earning equipment amounts to $4,555,000
during the first six months of 1999, from $0 during the comparable prior period.
The increase in loss on revenue-earning equipment was due to disposition of old
rental and taxi automobiles and replenishment of old rental automobiles and
taxis during the first six months ended June 30, 1999. A total of 650
automobiles from the rental fleet (400) and taxi fleet (250) were disposed
during the period of first six months of 1999, with a subsequent deployment of
250 new rental automobiles and 250 new taxi automobiles. New rental automobiles
or taxis are estimated to have a service life of six years from now on before
disposal.
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 the current six months period, other operating
expenses were $4,740,000, compared with $2,337,000 during the comparable prior
period, an increase of $2,403,000. During the current six months period, other
operating expenses, as a percentage of revenue, net, increased to 47.4%,
compared with 21.0% for the comparable prior period. The increase in operating
expenses as a percentage of revenue, net, was due primarily to extraordinary
legal and consulting fees incurred during the first six months of 1999. The
increase in the amount of other operating expenses was primarily due to a
$1,546,000 cost of legal and consulting charges resulting from the Company's
unusual legal matter of re-claiming ownership of its own taxi licenses.
Provision for loss on non-fulfillment of car purchase agreement amounts
to $2,696,000 during the first six months of 1999, from $0 during the comparable
prior quarter. In early 1998, the Company has contracted with a car
manufacturing company to acquire 3,000 automobiles. The contracted amount for
such agreement was $47,475,000 and the outstanding commitment was $36,000,000
after deduction of deposits paid by the Company of $11,475,000 as of June 30,
1999. As a result of non-fulfillment of the contract due to insufficient working
capital in paying off the outstanding
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<PAGE>
commitment, the Company had to cancel the contract. 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 operation during the quarter ended June 30, 1999.
Income before provision for income tax and minority interest was a loss
of $5,275,000 in the current six months, as compared with income of $6,398,000
in the comparable prior period. Before deducting $1,486,000 (consisting of
$1,434,000 in professional and general and administrative expenses, and $52,000
in interest expense) and $925,000 (consisting of $754,000 in professional and
general and administrative expenses, and $141,000 in interest expense) of
expenses of the parent company during the current quarter and the comparable
prior quarter, respectively, the Rental, Taxi and Repair Businesses contributed
($2,952,000), ($1,152,000), and $321,000, respectively, to total income before
provision for income tax and minority interest, compared with $4,494,000,
$2,494,000, and $335,000, respectively, in the comparable prior period. The
decrease in income before provision for income tax and minority interest is
primarily attributable to the following few identifiable higher-than-normal
expenses : the loss on disposal of rental and taxi automobiles, the adjustment
on depreciation of all automobiles to conform to a six years life period, and
the additional legal and consulting fees incurred during the current period.
Additionally, the decrease in income before provision for income tax and
minority interest is further affected by the one-time extraordinary provision
for loss on non-fulfillment of the 3,000 automobiles purchase agreement.
Provision for income tax was $133,000 in the current six months period
(-2.5% of loss before provision for income tax and minority interest), compared
with $568,000 in the comparable prior period (8.9% of income before provision
for income tax and minority interest). The Company enjoys preferential tax
treatment as a result of its location in Shenzhen, a Special Economic Zone.
Certain other provincial governments have also stipulated similar incentive
programs. The Company's subsidiaries are in different stages of enjoying the
aforementioned income tax incentive programs. However, 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.
Minority interest was ($54,000) in the current quarter, compared with
$410,000 in the comparable prior period, which reflects the Company's having
generated a loss of income during the current period.
As a result of the foregoing, net income was a net loss of $5,354,000
in the current quarter, compared with net income of $5,420,000 in the comparable
prior period.
Currently, the exchange rate for conversion of Renminbi to U.S. Dollars
is RMB 8.278 to $1.00. The Financial position and results of operations of
Jinzhenghua Transport are determined using Renminbi. Assets and liabilities are
translated at the exchange rate in effect at each year or period end. Income
statement amounts are translated at the average rate of exchange prevailing
during the year. Any significant
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<PAGE>
devaluation of the Renminbi relative to U.S. dollars would materially and
adversely affect the Company's reported earnings and assets as reported in U.S.
dollars.
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 June 30, 1999, the Company had trade receivables of $136,000, cash
and cash equivalents of $12,071,000, and other receivables of $1,343,000,
aggregating $13,550,000. The Company's liabilities due within a year aggregated
$13,793,000. Accordingly, at June 30, 1999, liabilities due within a year
exceeded cash (including cash equivalents) and receivables by $243,000. At
December 31, 1998, liabilities due within a year exceeded cash (including cash
equivalents) and receivables by $3,534,000. This $3,291,000 increase in working
capital was primarily attributable to an overall increase in cash (including
cash equivalents) and receivables of approximately $8,535,000, partially offset
by an overall increase in liabilities due within a year of approximately
$5,244,000, consisting primarily of increased other payable of $3,843,000,
partially offset by a $501,000 decrease in trades payable.
As the Company's financial resources permit, the Company intends to
make capital expenditures, primarily for the purchase of new automobiles for the
Rental and Taxi Business and the completion of construction of the Company's
hotel project.
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 commitment was
$36,000,000 after deduction of deposits paid of $11,475,000. As of June 30,
1999, the Company had not performed its obligations under the contract.
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.
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 June 30, 1999, the estimated cost of completing construction of the
hotel project was approximately $4.0 million, of which $2.2 million has been
paid to date. The Company has suspended construction of the hotel project, as
the Company does
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<PAGE>
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 $2.4 million, that was originally due and payable in March, 1999.
The Company has negotiated an agreement to extend to April 2000 the time for
payment for this $2.4 million in indebtedness, as the Company was unable to
repay this indebtedness by the due date.
As described under Part II, Item 1, "Legal Proceedings," based on
settlement discussions with respect to the class action lawsuit against the
Company, 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 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, which would dilute the
interests of the Company's stockholders. 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 $9,200,000 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 $4,600,000, 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 $9,200,000 obligation to the capital of Jinzhenghua Transport.
Accordingly, the Company has not performed on its obligation to contribute
$4,200,000 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
$4,450,000, 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.
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<PAGE>
The Company expects that it will be required to make the remaining
capital contribution to Yunrun Transport ($8,900,000) 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 $8,900,000 to the capital of Yunrun Transport 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 Transport's business license,
which would materially and adversely affect the Company.
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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two-digits entries in the date code field and cannot
distinguish dates after the year 2000. These date code fields will need to
distinguish "Year 2000" dates from earlier dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with "Year 2000" requirements.
The Company believes that its computerized systems are Year 2000
compliant.
If the Company's computerized systems are not in fact Year 2000
compliant, the failure of the Company to make its systems Year 2000 compliant in
a timely manner will have a material adverse effect on the Company.
The Company relies upon various vendors, utility companies,
telecommunications service companies, delivery service companies and other
service providers, which are outside of the Company's control. The failure of
such service providers to make their systems Year 2000 compliant could have a
material adverse effect on the Company's financial condition and results of
operations. The Company has not yet determined the extent to which the computer
systems of such service providers are Year 2000 compliant, if at all. The
failure of the Company's vendors to make their systems Year 2000 compliant in a
timely manner will have a material adverse effect on the Company.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Government Control of Currency Conversion and Exchange Rate Risks
The Renminbi currently is not a freely convertible currency. The State
Administration for Foreign Exchange ("SAFE"), under the authority of the
People's Bank of China (the "PBOC"), controls the conversion of Renminbi into
foreign currency. Prior to January 1, 1994, Renminbi could be converted to
foreign currency through designated banks or other authorized institutions at
official rates fixed daily by the SAFE. Renminbi also could be converted at swap
centers ("swap centers") open to Chinese enterprises and foreign invested
enterprises ("FIEs"), subject to SAFE approval of each foreign currency trade,
at exchange rates negotiated by the parties for each transaction. Effective
January 1, 1994, a unitary exchange rate system was introduced in China,
replacing the dual-rate system previously in effect. In connection with the
creation of a unitary exchange rate, the Chinese government announced the
establishment of an inter-bank foreign exchange market, the China Foreign
Exchange Trading System ("CFETS"), and the phasing out of the swap centers.
However, the swap centers have been retained as an interim measure.
In general, under existing foreign exchange regulations, domestic
enterprises operating in China must price and sell their goods and services in
China in Renminbi. Any foreign exchange reserves received by such enterprises
must be sold to authorized foreign exchange banks in China.
Jinzhenghua Transport is an FIE. Jinzhenghua Transport has obtained a
foreign currency account with a designated bank and is able to exchange foreign
currency for settlement of foreign currency transactions (as defined in the
applicable regulations) and, subject to satisfaction of certain conditions, may
pay dividends. However, the Company has not made certain capital contributions
to Jinzhenghua Transport necessary to enable Jinzhenghua Transport to pay
dividends to the Company. See Part 1, Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." Accordingly, Jinzhenghua Transport's ability to pay
dividends to the Company is currently restricted. There can be no assurance that
Jinzhenghua Transport will be able to maintain FIE status, that the current
authorizations for FIEs to retain their foreign exchange in the future to
satisfy foreign exchange liabilities or to pay dividends will not be limited or
eliminated or that Jinzhenghua Transport will be able to obtain sufficient
foreign exchange to pay dividends or satisfy its foreign exchange liabilities.
The value of the Renminbi is subject to changes in central government
policies and to international economic and political developments affecting
supply and demand in the CFETS market. Over the last five years, the Renminbi
has experienced a devaluation against most major currencies. A significant
devaluation of the Renminbi occurred on January 1, 1994 in connection with the
adoption of the new unitary exchange rate. On that date, the official exchange
rate for conversion of Renminbi to U.S. dollars changed from approximately RMB
5.8000 to $1.00 to approximately RMB 8.7000 to $1.00, representing a devaluation
of approximately 50%. Since 1994, the official exchange rate for the conversion
of Renminbi to U.S. dollars has been stable,
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and the Renminbi has appreciated slightly against the U.S. dollar. However,
there can be no assurance that the exchange rate will not become volatile again
or that there will be no further devaluation of the Renminbi.
Currently, the exchange rate for conversion of Renminbi to U.S. Dollars
is RMB 8.278 to $1.00. The Financial position and results of operations of
Jinzhenghua Transport are determined using Renminbi. Assets and liabilities are
translated at the exchange rate in effect at each year or period end. Income
statement amounts are translated at the average rate of exchange prevailing
during the year. Any significant devaluation of the Renminbi relative to U.S.
dollars would materially and adversely affect the Company's reported earnings
and assets as reported in U.S. dollars.
PART II OTHER INFORMATION
ITEM 1. 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 in 1994 to 1996. These loans had been secured by
various assets of Zhenghua Group, which included 378 taxi licenses. 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 the 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 Jinzhengua Transport had any
responsibility or obligation to SCB in connection with any loans made by SCB to
Zhenghua. The Company also
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<PAGE>
obtained written confirmation from the Shenzhen Vehicle Registration Bureau that
the 378 taxi licenses are owned by the Company 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 would result in a material adverse effect on the financial position
of the Company.
DAWSON SCIENCE CORPORATION
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.
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.
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<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 26, 1999, the Company raised $400,000, before deducting a
finder's fee of approximately $40,000, through the private sale of 152,381
shares of common stock at a price of $2.625 per share. As additional finder's
compensation, the Company issued immediately exercisable warrants to purchase
240,000 shares of common stock for a five year term at an exercise price of
$2.00 per share. The shares of Common Stock and Warrants were sold in
transactions exempt from Section 5 of the Act, pursuant to Rule 506. The shares
were sold to Yeung Shu Kin, a non-U.S. resident and an "accredited investor."
The finder's warrants were also issued to a non-U.S. resident and "accredited
investor." There was no general solicitation.
On January 29, 1999, the Company issued 3,000 shares of common stock to
a business and financial consultant as consideration for consulting services.
The shares of Common Stock were issued in a transaction exempt from Section 5 of
the Act, pursuant to Rule 506. There was no general solicitation.
On February 10, 1999 the Company raised $2,000,000 through the private
sale of a Convertible Note in the principal amount of $2,000,000 with a two year
maturity and a right to convert into shares of common stock at a conversion
price of $2.00. As finder's compensation, the Company paid $30,000 in cash and
agreed to issue 15,000 shares of common stock. The Convertible Note and shares
of common stock were sold in transactions exempt from Section 5 of the Act,
pursuant to Rule 506. The Convertible Note was sold to Kwok Kee Billy Yung and
the shares of common stock were issued to Zhong Hua Chen, each a non-U.S.
resident and an "accredited investor." There was no general solicitation.
On March 12, 1999, the Company issued 20,000 shares of common stock and
warrants to purchase 30,000 shares of common stock to Orient Financial Services
Limited, a business and financial consultant, as consideration for consulting
services. The shares of common stock and warrants were issued in a transaction
exempt from Section 5 of the Act, pursuant to Rule 506. There was no general
solicitation.
On March 25, 1999, the Company issued warrants to purchase 30,000
shares of common stock to Virtual Financial Corp., a business and financial
consultant, as consideration for consulting services. The warrants were issued
in a transaction exempt from Section 5 of the Act, pursuant to Rule 506. There
was no general solicitation.
On March 26, 1999, the Company through a private sale sold 500,000 and
1,500,000 shares of common stock to Mr. Kwok Kee Billy Yung and Dr. Yung Yau,
respectively, at a price of $2.00 per share, for an aggregate purchase price of
$4,000,000. The shares of Common Stock were sold in transactions exempt from
Section 5 of the Act, pursuant to Rule 506. Each of the purchasers are non-U.S.
residents and "accredited investors." There was no general solicitation.
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See Part 1. Financial Information, Item 3. Quantitative and Qualitative
Disclosures About Market Risk for a description of restrictions on Jinzhenghua
Transport's ability to pay dividends to the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Listing of Exhibits
<S> <C>
----------------- ------------------------------------------------------------------------------------------------
Exhibit No. Description of Exhibit
----------------- ------------------------------------------------------------------------------------------------
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.
----------------- ------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
----------------- ------------------------------------------------------------------------------------------------
4.14* Subscription Agreement, dated January 26, 1999, between Integrated Transportation Network
Group Inc. and Yeung Shu Kin.
----------------- ------------------------------------------------------------------------------------------------
4.15* Subscription Agreement, dated January 29, 1999 between Integrated Transportation Network Group
Inc. and Roy Lerman.
----------------- ------------------------------------------------------------------------------------------------
4.16* Subscription Agreement, dated February 10, 1999 between Integrated Transportation Network
Group, Inc. and Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
4.17* 5% Convertible Note, dated February 10, 1999, issued to Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
4.18* Subscription Agreement, dated March 12, 1999, between Integrated Transportation Network Group
Inc. and Zhong Hua Chen.
----------------- ------------------------------------------------------------------------------------------------
4.19* Subscription Agreement, dated March 5, 1999, between Integrated Transportation Network Group
Inc. and Orient Financial Services Limited.
----------------- ------------------------------------------------------------------------------------------------
4.20* Stock Purchase Warrant, dated March 5, 1999 in favor of Orient Financial Services Limited.
----------------- ------------------------------------------------------------------------------------------------
4.21* Subscription Agreement, dated March 25, 1999, between Integrated Transportation Network Group
Inc. and Virtual Financial Corp.
----------------- ------------------------------------------------------------------------------------------------
4.22* Stock Purchase Warrant, dated March 25, 1999 in favor of Virtual Finance Corp.
----------------- ------------------------------------------------------------------------------------------------
4.23* Subscription Agreement, dated March 26, 1999, between Integrated Transportation Network Group
Inc. and Dr. Yung Yau.
----------------- ------------------------------------------------------------------------------------------------
4.24* Subscription Agreement, dated March 26, 1999, between Integrated Transportation Network Group
Inc. and Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
10.1(1) Letter 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.
----------------- ------------------------------------------------------------------------------------------------
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.
----------------- ------------------------------------------------------------------------------------------------
10.13* Consulting Agreement, dated January 29, 1999, between Integrated Transportatin Network Group
Inc. and Roy Lerman.
----------------- ------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
----------------- ------------------------------------------------------------------------------------------------
10.14* 1999 Combination Stock Option Plan.
----------------- ------------------------------------------------------------------------------------------------
10.15* Consulting Agreement, dated March 12, 1999, between Integrated Transportation Network Group
Inc., and Orient Financial Services Limited.
----------------- ------------------------------------------------------------------------------------------------
10.16* Consulting Agreement, dated February 16, 1999 between Integrated Transportation Network Group
Inc., and Virtual Financial Corp.
----------------- ------------------------------------------------------------------------------------------------
10.17* Consulting Agreement, dated March 12, 1999, between Integrated Transportation Network Group
Inc., and Orient Financial Services Limited.
----------------- ------------------------------------------------------------------------------------------------
21(2) 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
Registrant's Form 10-K filed with the Securities and Exchange
Commission on April 15, 1999 and incorporated herein by
reference.
* Filed herewith.
(b) The Company did not file a Current Report on Form 8-K during the 1st Quarter
of 1999.
-38-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: November 22, 1999 INTEGRATED TRANSPORTATION
NETWORK GROUP, INC.
By: /s/ Andrew Lee
-------------------
Andrew Lee
President
By: /s/ Willy Wu
-------------------
Willy Wu
Chief Financial Officer
-39-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: November __, 1999 INTEGRATED TRANSPORTATION
NETWORK GROUP, INC.
By:
-------------------
Andrew Lee
President
By:
-------------------
Willy Wu
Chief Financial Officer
-40-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
----------------- ------------------------------------------------------------------------------------------------
Exhibit No. Description of Exhibit
----------- ----------------------
----------------- ------------------------------------------------------------------------------------------------
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.
----------------- ------------------------------------------------------------------------------------------------
4.14(3) Subscription Agreement, dated January 26, 1999, between Integrated Transportation Network
Group Inc. and Yeung Shu Kin.
----------------- ------------------------------------------------------------------------------------------------
4.15(3) Subscription Agreement, dated January 29, 1999 between Integrated Transportation Network Group
Inc. and Roy Lerman.
----------------- ------------------------------------------------------------------------------------------------
4.16(3) Subscription Agreement, dated February 10, 1999 between Integrated Transportation Network
Group, Inc. and Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
4.17(3) 5% Convertible Note, dated February 10, 1999, issued to Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
4.18(3) Subscription Agreement, dated March 12, 1999, between Integrated Transportation Network Group
Inc. and Zhong Hua Chen.
----------------- ------------------------------------------------------------------------------------------------
4.19(3) Subscription Agreement, dated March 5, 1999, between Integrated Transportation Network Group
Inc. and Orient Financial Services Limited.
----------------- ------------------------------------------------------------------------------------------------
4.20(3) Stock Purchase Warrant, dated March 5, 1999 in favor of Orient Financial Services Limited.
----------------- ------------------------------------------------------------------------------------------------
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
----------------- ------------------------------------------------------------------------------------------------
4.21(3) Subscription Agreement, dated March 25, 1999, between Integrated Transportation Network Group
Inc. and Virtual Financial Corp.
----------------- ------------------------------------------------------------------------------------------------
4.22(3) Stock Purchase Warrant, dated March 25, 1999 in favor of Virtual Finance Corp.
----------------- ------------------------------------------------------------------------------------------------
4.23(3) Subscription Agreement, dated March 26, 1999, between Integrated Transportation Network Group
Inc. and Dr. Yung Yau.
----------------- ------------------------------------------------------------------------------------------------
4.24(3) Subscription Agreement, dated March 26, 1999, between Integrated Transportation Network Group
Inc. and Kwok Kee Billy Yung.
----------------- ------------------------------------------------------------------------------------------------
10.1(1) Letter 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.
----------------- ------------------------------------------------------------------------------------------------
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.
----------------- ------------------------------------------------------------------------------------------------
10.13(3) Consulting Agreement, dated January 29, 1999, between Integrated Transportatin Network Group
Inc. and Roy Lerman.
----------------- ------------------------------------------------------------------------------------------------
10.14(3) 1999 Combination Stock Option Plan.
----------------- ------------------------------------------------------------------------------------------------
10.15(3) Consulting Agreement, dated March 12, 1999, between Integrated Transportation Network Group
Inc., and Orient Financial Services Limited.
----------------- ------------------------------------------------------------------------------------------------
10.16(3) Consulting Agreement, dated February 16, 1999 between Integrated Transportation Network Group
Inc., and Virtual Financial Corp.
----------------- ------------------------------------------------------------------------------------------------
10.17(3) Consulting Agreement, dated March 12, 1999, between Integrated Transportation Network Group
Inc., and Orient Financial Services Limited.
----------------- ------------------------------------------------------------------------------------------------
21(2) 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
Registrant's Form 10-K filed with the Securities and Exchange
Commission on April 15, 1999 and incorporated herein by
reference.
(3) Files as an Exhibit, with the same Exhibit Number to
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on May 15, 1999 and incorporated herein by
reference.
* Filed herewith.
-42-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF INTEGRATED TRANSPORTATION GROUP INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 12,071
<SECURITIES> 0
<RECEIVABLES> 136,000
<ALLOWANCES> 0
<INVENTORY> 52,000
<CURRENT-ASSETS> 0
<PP&E> 1,908
<DEPRECIATION> (895)
<TOTAL-ASSETS> 74,445
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 127,000
<OTHER-SE> 47,762
<TOTAL-LIABILITY-AND-EQUITY> 74,445
<SALES> 0
<TOTAL-REVENUES> 10,006
<CGS> 0
<TOTAL-COSTS> 12,332
<OTHER-EXPENSES> 2,696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253,000
<INCOME-PRETAX> (5,275,000)
<INCOME-TAX> 133,000
<INCOME-CONTINUING> (5,405,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,354,000)
<EPS-BASIC> (.44)
<EPS-DILUTED> (.44)
</TABLE>
