SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File No. 1-12293
BROADENGATE SYSTEMS, INC.
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(Name of small business issuer in its charter)
Nevada 87-0394313
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(State or other jurisdiction of (I.R.S. Employer incorporation
Identification Number) or organization)
3/F, Block 2, Cyber City, South Hi-tech Industrial Park,
Shenzhen, Guangdong Province
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: 011-86-755-671-6656
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
--------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (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 ninety (90)
days. Yes X No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $1,230,211.
As of March 25, 2002, 14,393,000 shares of our common stock, $.001 par
value were outstanding. As of such date, the aggregate market value of the
common stock held by non-affiliates, based on the closing bid price on the NASD
Bulletin Board, was approximately $1,529,901.
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format: Yes No X
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.........................................3
ITEM 2. DESCRIPTION OF PROPERTIES.......................................5
ITEM 3. LEGAL PROCEEDINGS...............................................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.............................................5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.............................................5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS............................6
ITEM 7. FINANCIAL STATEMENTS............................................9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..........................9
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT.......................................9
ITEM 10. EXECUTIVE COMPENSATION........................................10
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.........................................11
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS..................................................12
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K..............................13
SIGNATURES.............................................................13
FINANCIAL STATEMENTS...................................................13
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Corporate History
World Concept Development Limited (World), a development stage enterprise,
was incorporated on October 27, 1999, in the British Virgin Islands. World
incorporated a wholly owned subsidiary, eSoftBank Networks (Shenzhen) Co. Ltd.
(Shenzhen) on December 30, 1999, in the Peoples' Republic of China (PRC). World
and Shenzhen were formed to effect a merger, exchange of capital stock, asset
acquisition or other business combination with a domestic or foreign, private or
publicly held business.
On February 21, 2000, World, via Shenzhen, acquired 9.52% of the
outstanding capital of SiTech Hainan Limited. (SiTech), a company related
through common ownership and management from Dr. Hongbing Lan, a director and
shareholder of both World and SiTech for approximately $62,650. On the same
date, Shenzhen acquired an additional 42.86% of SiTech from SiTech Hainan
Holding Co., Ltd. (Holdings), a company related through common ownership and
management, for approximately $280,000. SiTech is a software designer and
markets both packaged and custom designed Internet-related software
applications. Since both entities involved in the acquisition were under common
control, the transaction was accounted for at historical cost in a manner
similar to that in pooling-of-interests accounting. The consolidated financial
statements include the results of operations for World and its subsidiary from
their inception.
On February 21, 2000, Shenzhen also acquired an 80% of the newly issued and
outstanding stock of eSoftBank (Beijing) Software Systems Co., Ltd. (Beijing), a
PRC company, from Holdings for an initial capital investment of approximately
$116,000. The remaining 20% of Beijing is owned by Mr. Hongyu Lan, the brother
of Dr. Hongbing Lan.
On March 31, 2000, Natural Way Technologies, Inc. (Natural Way) entered
into an Exchange agreement (the Exchange) with World, an independent third
party. In accordance with the Exchange, Natural Way acquired 100% of the issued
and outstanding shares of World in exchange for 9,300,000 post reverse split
shares of Natural Way. Prior to closing, Natural Way effected a one for five
reverse stock split and changed the name of the Company to eSoftBank.com, Inc.
The Exchange has been accounted for using the purchase method of accounting
as a reverse acquisition, whereby the company issuing its shares to effect the
business combination is determined to be the acquiree in the business
combination. This occurs when the shareholders of the issuer have less than a
majority of voting control of the combined entity. The company whose
shareholders retain the majority voting interest in the combined entity is
presumed the acquirer. In the current Exchange, the existing shareholders of
Natural Way will retain a 27% voting interest in the combined entity on
completion of the Exchange. Accordingly, World is deemed to be the acquirer and
the assets of Natural Way were required to be fair valued at acquisition. As
Natural Way had no assets, as of the date of the Exchange, no fair value
adjustment was required. The historical financial information prior to the
Exchange are those of World.
On October 15, 2001, Shenzhen acquired 70% of the outstanding capital of
Tongzhou (Dalian) Computer Co., Ltd. (Dalian), a PRC company for 307,000 shares
of eSoftBank.com, Inc. common stock, from Holdings. The remaining 30% of Dalian
is owned by Leasci Technologies Co., Ltd., which is a subsidiary of Dalian
University of Technologies.
On November 13, 2001, the Company changed its name from eSoftBank.com, Inc.
to BroadenGate Systems, Inc. to better describe out business model
Business of the Company
BroadenGate Systems, Inc. was among the first software outsourcing
service providers in China information technology industry. From its inception,
the company has worked to develop comprehensive outsourcing solutions for
systems development and implementation projects and provide consulting services
in the telecom, network security, e-Business, ERP, CRM and GIS sectors. The
company also offers a diverse array of related products and services.
BroadenGate has offices in Beijing, Shenzhen, our headquarters, Haikou and
Dalian, the People Republic of China (PRC). The Company employs over 200
software-development and system-consulting professionals and more than 30
project managers. BroadenGate objective is to be the leading Chinese provider of
comprehensive outsourcing solutions and project management tools, using
industry-leading technical standards and business practices.
To develop core infrastructure for the Chinese information technology
outsourcing market, BroadenGate offers complete solutions to its outsourcing
clients as well as providing project management tools. We have a professional
outsourcing team, a Chinese collaborative information technology website, the
exclusive rights to software engineering management tools, and outsourcing
experience and standardized management processes.
We changed our company's name from Natural Way Technologies, Inc. to
eSoftBank.com, Inc. on March 31, 2000 when we acquired (the "Acquisition") all
of the issued and outstanding shares of World Concept Development Limited
("WCD"). WCD owns the software development and Internet-based software
subcontracting platform operations conducted in China under the name
eSoftBank.com. This platform is a facilitator to make experienced personnel
available to companies needing software expertise. The company charges a fee
from the participants for this service.
eSoftBank.com built the first software outsourcing infrastructure in
China. Currently, we have in excess of 75,000 individual and corporate members
who are available to develop software or assist those who need advice using the
eSoftBank.com platform. There are also approximately 1200 Chinese software
companies who contract with members for software collaboration and development.
Market Strategy
To gain greater visibility with Japan outsourcing businesses, we formed
a new business operation in Dalian, PRC, a city much closer to Japan. This
visibility has assisted the Company in its international marketing efforts.
The Company is concentrating its efforts on developing strategic
alliances with both Chinese information technology (IT) companies and American
consulting companies. These strategic alliances will have a dual benefit (1)
they help develop expertise in major software programming fields and (2)
generated outsourcing engagements for the Company.
The Company continues to develop its position in online software
outsourcing by serving as an e-market, to bring buyers and sellers of
information technology services together. During the fourth calendar quarter of
2001, we upgraded and expanded the Software Outsourcing Platform to provide a
matching of information technology service providers and information technology
service contractors not just for the Chinese market, but also for the
international market.
The Company is continuing its effects to establish more outsourcing
partnerships which should produce more recurring projects and a more stable
source of revenue.
Competition
Competition in software outsourcing market is intense. We have
competitors in China such as NEU-Apline and TopSoft as well as foreign
competitors. However our business model is unique. While NEU-Alpine and TopSoft
provide software development by using their own technical resources but have no
core technologies. We believe that we have the following advantages:
professional software outsourcing services for an international clientele;
experienced project managers and software developers; industry-leading project
management and collaborative software development platforms, good business
practices in management and software development, competency groups with
industry and technical focuses, and diverse partners for both software
development and marketing.
Because we are a service company, we are not dependant on any suppliers
for raw materials, nor do we have any principal suppliers for our operating
requirements.
Research and Development
Research and development has a high priority:
* We continue to develop our core project management platform n Team which
assists software companies in improving their software project management.
A new version will be launched in 2002.
* We continue to develop and upgrade roject Management Center the software
outsourcing business model of BroadenGate. We have successfully formed a
close relationship with Huawei, one of the largest telecom equipment
manufacturers in Asia to assist us with this development and upgrade.
* We are developing and expanding our network and project management
solutions. BroadenGate and TZ-Project, now we have over 1000 clients in the
PRC.
For the year ended December 31, 2000, we expended US$134,188 on research
and development and an additional $134,475 during calendar year 2001.
Patents and Trademarks
OnTeam is our leading project management platfor m for the CMMII and
ISO 9000 series users. This platform integrates the functions including project
management, development process, quality assurance, communication, configuration
management and bug report. Now we are applying for patents for On Team in both
China and the United States.
We have the following trademarks in the PRC:
* ESOFTBANK: the brand of our company, as well as the collaborative
development and software outsourcing;
* ONTEAM: a standardized project management platform, which can manage the
whole process of software development. It provides an integrated software
development and project environment;
* BROADENGATE and E*LINUX the product trademarks for our internet service
package/platform;
Government Regulation
We are not subject to any government regulations other than copyright
and trademarks laws.
Employees
We have over 200 employees; 30 of which are managerial and more than
170 of which are software engineers.
ITEM 2. DESCRIPTION OF PROPERTIES
We do not own any real estate, but lease three separate offices in
Beijing, Shenzhen, Haikou and Dalian.
In Beijing, we lease 400 square meters (approximately 5,166 square fee)
of office space at 7/F, Beiji Building, No.249, South Dongsi Street, Dongcheng,
Beijing, 100005, the People's Republic of China. The rent for this facility is
$4,216 per month and the lease extends through March 2003.
In Shenzhen, we lease 300 square meters (approximately 3,875 square feet)
of office space at 3/F, Block 2, Cyber City, South Hi-tech Industrial Park,
Shenzhen, Guangdong Province, 518057, the People's Republic of China. The rent
for this facility is $1,300 per month and the lease extends through April 30,
2001. This facility also serves as our corporate headquarters.
In Haikou we lease 700 square meters (approximately 9,042 square feet) of
office space at Room 1001, Haikou International Commercial Center, No. 38,
Datong Road, Haikou, Hainan, The People's Republic of China. The rent for this
facility is $3,500 per month and the lease extends through August 2005.
In Dalian we lease 400 square meters (approximately 5,167 square feet)
office space at Room 409,No.1,LinBei Road, Hi-tech Industrial Park, DaLian,
Liaoning, The People's Republic of China. The rent for this office is $2,500 per
month and the lease will expire in May, 2002 with an option to renew.
All of our officers are located in class A office buildings.
ITEM 3. LEGAL PROCEEDINGS
To the best of management's knowledge, there are no legal proceedings
threatened or pending against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders during
the fourth quarter of our fiscal year, nor were any voted upon other than at a
meeting of shareholders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
There is limited trading in our Common Stock. The following table
sets forth the high and low bid price by calendar quarter of the Company's
common stock.
Quarter Ended High Low Quarter Ended High Low
------------- ---- --- ------------- ---- ---
March 30, 2001 $0.563 $0.563 March 31, 2000 $ - $ -
June 30, 2001 0.37 0.37 June 30, 2000 9.50 .937
September 28 2001 0.25 0.25 September 30, 2000 3.125 1.25
December 31, 2001 0.15 0.15 December 31, 2000 1.50 .469
Shareholders of Record
As of March 20, 2002, there were approximately 301 record holders of
our common stock. Our common stock trades on the OTC:BB under the symbol BROG.
Dividends
Apart from a deemed dividend in 2000, we have never declared or paid
any cash dividend on our Common Stock nor do we expect to declare or pay any
dividend on our Common Stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We believe that we are well positioned for growth in the developing
information technology ("IT") industry in the PRC and internationally. With the
PRC joining the WTO and the Beijing's 2008 Olympics, the IT outsourcing demand
should increase during the next several years.
Since its inception in 1996, the company has grown with the Chinese domestic
IT industry. BroadenGate is now leveraging its domestic expertise to enter the
global outsourcing market, and to co-op with leading multinational software
vendors in the Chinese market, such as Oracle and IBM. Building on the synergy
between the Chinese and global markets, BroadenGate hopes to continue to
increase its market share at home and win higher-margined contracts abroad.
Recent Developments
In 2001, the company increased its business base by forming close partnerships
with some of the leading companies in the PRC, including Huawei Technology,
which is among the largest manufacturers of telecommunications equipment in
Asia. As a result of Huawei outsourcing projects, we have substantially improved
our project management framework, and establish four project management centers
(PMCS).
1. A Telecommunication & Internet Center: We have over 100 engineers currently
working in this PMC, and have outstanding contracts for over 30 million RMB
in 2002 with Huawei. We have reached an agreement of cooperation with the
China Policy Security Bureau, to use our solutions in Internet access,
network management and security, which should produce significant marketing
potential in China.
2. A Development & International Center: We recently won a COBOL software
development contract for approximately 15 million Yen (US1,150,000) in
Dalian with SCM a subsidiary of Mitsubishi Corporation.
3. A Project Management Software & System Integration Center: This division is
based on the Dalian Tongzhou Computer Software Co., Ltd. System (Tongzhou),
and serves more than 1000 clients in architectural, chemical,
metallurgical, transportation, manufacturing and energy;
4. An E-Business and E-Banking Center: This center is new, but during the
coming year, we anticipate building a local e-banking system in Hainan
island.
In 2002, we will focus on the Chinese and Japanese markets. However, if the
Company is to be a dominent player in the industry, it is critical to
establish a physical presence in the US.
The business of BroadenGate Systems is currently conducted in Renminbi, the
currency of China ("RMB"), which for purposes of this section and our financial
statements are converted at an exchange rate of $1.00 = RMB 8.30.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000.
Revenues. Revenues increased by $89,988 or 7.89% to $1,230,211
for the year ended December 31, 2001 from $1,140,223 for the year ended
December 31, 2000. This increase in revenues resulted from software
outsourcing.
Cost of Sales. Cost of sales increased by $251,956 or 49.21% to
$763,997 for the year ended December 31, 2001 from $512,041 for the year
ended December 31, 2000. Cost of sales as a percent of revenues was
62.10% for the year ended December 31, 2001 compared to 44.91% for the
year ended December 31, 2000. This increase in cost of sales resulted
from increased revenues and a change in the mix of products sold. The
increase in cost of sales as a percentage of revenue is attributable to
an increased percentage of sales from human resource outsourcing which
has a lower profit margin than software development.
Selling and Administrative Expenses. Selling and administrative
expenses decreased by $813,787 or 39.27% to $1,258,711 for the year ended
December 31, 2001 from $2,072,498 for the year ended December 31, 2000.
This decrease in selling and administrative expenses resulted from
decreased marketing expenses, decreased research and development expenses
and decreased professional fees.
Other Expenses, Net. Other expenses consists of interest income
and expense, bank charges, recovery of prior expenses foreign exchange
gains or losses and other miscellaneous income. Other expenses, net
increased by $933 or 3.20% to $30,130 for the year ended December 31,
2001 from $29,197 for the year ended December 31, 2000. This increase in
other expenses, net resulted principally from increased interest expense
which was partially offset by interest and miscellaneous income.
Income Taxes. Income tax decreased by $60,188 or 100% to $0 for
the year ended December 31, 2001 from $60,188 for the year ended December
31, 2000. Although the income of the Company increased, our company has
been certificated as Hi-Tech company by local authority, and the
government has refunded all necessary taxes.
Minority Interest. Minority interest represents the 20% interest
in eSoftBank (Beijing) Software Systems Co. Ltd., the 47.6% of SiTech
Hainan Ltd. and 30% of Tongzhou (Dalian) Computer Co., Ltd., not owned by
the Company.
As a result of the foregoing, the net loss of the Company
decreased by $333,009 or 27.72% from net loss of $1,201,244 for the year
ended December 31, 2000 to a net loss of $868,235 for the year ended
December 31, 2001.
Liquidity and Capital Resources
As of December 31, 2001, we had cash of $963,259 and a deficit
in working capital of $2,351,089. This compares with cash of $388,159 and
negative working capital of $1,967,031 as of December 31, 2000. Our cash
increased because of increased borrowings and the sale of common stock.
However, our working capital derived principally as a result of our net
operating loss.
Cash used by operating activities totaled $977,747 for the year
ended December 31, 2001. This compares with cash used by operations of
$1,038,548 for the year ended December 31, 2000. The change in cash flows
from operating activities resulted from a reduced net operating loss for
current year and increased depreciation, amortization and abandonment of
product which was offset by changes in the current accounts, principally
an increase in accounts receivable.
Cash used in investing activities decreased to $29,927 for the
year ended December 31, 2001 from $511,276 for the year ended December
31, 2000. This decrease resulted from an decrease in capital expenditures
, a reduction in capital expenditures for product development and
purchases of long-term investments which was partially offset by advances
to employees.
Cash provided by financing activities totaled $1,582,775 for the
year ended December 31, 2001 compared to $1,862,158 for the year ended
December 31, 2000. The net change in cash provided by financing
activities is attributable to a decrease in borrowings partially offset
by an increase in issuance of common stock and a decrease in dividends
paid.
For the year ended December 31, 2002, we have no plans for any
major capital expenditures.
Based on the current level of cash, the deficit in working
capital and current level of expenditures in our business, it will be
necessary to seek additional sources of funding over the next twelve
months. Management is negotiating with its banks for more project finance
to fund operations for the current year. However, without outside
financing or the sale of stock the Company has insufficient resources to
continue its business operation for the next twelve months. No assurance
can be given that the Company will be able to obtain any financing or
sell any of its shares.
Cautionary Statements
In addition to the other information in this Annual Report on
Form 10-KSB, the following factors should be considered carefully in
evaluating the Company.
Demand for our products softens in a weakened economy. In a
general economic downturn, our customers generally curtail information
technology expenses. This can result in lower sales revenues and a
lengthening of sales cycles during these periods. If we experience a
decrease in demand for our products, we can't assure you that we will be
able to cut costs quickly and effectively in response to decreased sales
or increased returns.
Our Quarterly and Annual Revenues. Expenses and Operating Results
May Fluctuate Significantly. These fluctuations may be due to a number of
factors, including:
* demand for our products;
* size and timing of significant orders and their fulfillment;
* our ability to develop and upgrade our technology;
* changes in our level of operating expenses;
* our ability to compete in a highly competitive market
* undetected software errors and other product quality problems;
* changes in our sales incentive plans and staffing of sales
territories; and
* change in the mix of domestic and international revenues and the
level of international expansion.
Intra-Quarter Fluctuations. Orders booked throughout a quarter
may substantially impact product revenues in that quarter. Our sales also
fluctuate throughout the quarter as a result of customer buying patterns.
In addition, we base our expenses to a significant extent on our
expectations of future revenues. Most of our expenses are fixed in the
short term, and we may not be able to reduce spending quickly if our
revenues are lower than we had projected. If our revenue levels do not
meet our projections, we expect our operating results to be adversely and
disproportionately affected.
Fixed Expenses. We base our expenses to a significant extent on
our expectations of future revenues. Most of our expenses are fixed in
the short term, and we may not be able to reduce spending quickly if our
revenues are lower than we had projected. If our revenue levels do not
meet our projections, we expect our operating results to be adversely and
disproportionately affected.
Our Markets are Highly Competitive and Rapidly Changing. Our
markets are highly competitive and rapidly changing. We face competition
from small companies with niche offerings as well as public companies
with a breadth of offerings. New competitors have arisen and can be
expected to continue to arise in a rapidly evolving market.
Our Products are Subject to Rapid Technological Change. The
market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards.
Our products could be rendered obsolete if new products based on new
technologies are introduced or new industry standards emerge.
Limited Protection of Proprietary Technology: Risks of
Infringement. Our success depends to a significant degree upon our
software and other proprietary technology. The software industry has
experienced widespread unauthorized reproduction of software products. We
rely on a combination of copyright and trade secret law as well as
contractual restrictions to protect our technology. However, we may not
be able to detect unauthorized use or take appropriate steps to enforce
our intellectual property rights. If we litigated to enforce our rights,
litigation would be expensive, would divert management resources and may
not be adequate to protect our business. We also could be subject to
claims alleging infringement of third-party intellectual property rights.
In addition, we may be required to indemnify our distribution partners
and end-users for similar claims made against them. Any claims against us
could require us to spend significant time and money in litigation , pay
damages, develop non-infringing intellectual property or acquire licenses
to intellectual property that is the subject of the infringement claims.
As a result, claims against us could materially adversely affect our
business.
Risks Associated with Completed and Potential Acquisitions. We
have made and may continue to make investments in complementary
companies, technologies, services or products if we find appropriate
opportunities. If we buy a company, we could have difficulty assimilating
the personnel and operations of the acquired company. If we make other
types of acquisitions, assimilating the technology, services or products
into our operations could be difficult. Acquisitions can disrupt our
ongoing business, distract management and other resources and make it
difficult to maintain our standards, controls and procedures. We may not
succeed in overcoming these risks or in any other problems we might
encounter in connection with any future acquisitions. We may be required
to incur debt or issue equity securities to pay for any future
acquisitions. In addition, there can be no assurance that we will be able
to successfully integrate our recent acquisition of Dalian Tongzhou or
that we will be able to integrate the products and technology we acquired
into our sales model or product offerings.
Risks of Undetected Software Errors. Our software products are
complex and may contain certain undetected errors, particularly when
first introduced or when new versions or enhancements are released. We
have previously discovered software errors in certain of our new products
after their introduction. We cannot be certain that, despite our testing,
such errors will not be found in current versions, new versions or
enhancements of our products after commencement of commercial shipments.
Such undetected errors could result in adverse publicity, loss of
revenues, delay in market acceptance or claims against us by customers,
all of which could materially adversely affect our business.
Country Risk. Substantially all of the Company operations are conducted
in the PRC and accordingly, the Company is subject to special
considerations and significant risks not typically associated with
companies operating in North America and Western Europe. These include
risks associated with the political, economic and legal environments and
with foreign currency exchange, among others. The Company's results may
be affected by, among other things by changes in the political and social
conditions in the PRC and changes in government policies with respect to
laws and regulations, anti-inflation measures, currency conversion,
remittance abroad and rates and method of taxation. The PRC government
has implemented economic reform policies in recent years, and these
reforms may be refined or changed by the government at any time. It is
possible that a change in the PRC leadership could lead to changes in
economic policy. In addition, a substantial portion of the Company
revenue is denominated in Renminbi, which must be converted into other
currencies before remittance outside the PRC. Both the conversion of the
Reminbi and other foreign currencies and remittance of foreign currencies
abroad require approval of the PRC government.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, together
with the independent auditors' report on these statements by Blackman
Kallick Bartelstein LLP are included on pages F-2 through F-20 of this
Form 10-KSB. (See Index to Financial Statements on page F-1 of this Form
10-KSB.)
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with the certifying
accountants or on any accounting or financial disclosure item during any
period covered by this Form 10-KSB.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following are the names, ages and positions held by each of
our officers and directors:
Name
Director Since Age Title Date of First Election or Appointment
-------------- --- ----- -------------------------------------
Dr. Hongbing Lan 35 Chairman, Chief Executive
Officer and Director 2001
Mr. Hongyu Lan 29 Chief Financial Officer
Mr. Xinmin Gao 63 Director 2001
Mr. Fa Ding Liu 39 Director 2001
Mr. Daniel A. Norcross 28 Chief Marketing Officer 2001
The term of office of each director is one year, subject to removal
by the shareholders, or until his successor is elected and qualified at
our annual meeting of shareholders. The term of office for each officer
is for one year, subject to removal by the Board of Directors, or until a
successor is elected. None of our directors serves on the board of
directors of any other listed company.
Biographical Information
Dr. Hongbing Lan. Dr. Hongbing Lan, Chairman, Chief Executive Officer and
director received a doctorate degree in Automation Control from Wuhan HuaZhong
Science University. In 1995, he established the State Information Center
Software Laboratory. In 1996, Dr. Lan formed SiTech Hainan Co. Ltd. where he
worked until 1999 when he formed eSoftBank Networks (Shenzhen) Co., Ltd.
Mr. Daniel A. Norcross. Mr. Daniel Norcross joined the Company in May 2001
and serves as our Chief Marketing Officer and director. Prior to joining the
Company, Mr. Norcross was employed by QwikQuote Development, Inc. as a Project
Manager from 2000 to 2001. He also acted as a software developer in Atlantic
Media Corporation from 1998 to 2000 and in Great Easter Reinsurance Inc. from
1997 to 1997. He the a Bachelor's degree of Computer in Williams College in 1997
and a Master's degree from Harvard University in 2000.
Mr. Hongyu Lan. He joined the Company in 1998 and serves as our Chief
Technical Officer. Prior to joining the Company, Mr. Lan was employed by Hainan
Telecom from 1997 to 1998. From 1990 to 1997, he finished his bachelor and
master study plan. Mr. Lan holds a Masters Degree in Computer Science from
Huazhong University of Science and Technology. Mr. Hongyu Lan is the brother of
Dr. Hongbing Lan.
Mr. Xinmin Gao. Mr. Xinmin Gao was selected as a director of our Company in
April 2001 and is the Chief Scientist of the Company. Prior to joining the
Company, Mr. Gao was employed by China Information Association as the deputy
Director from 2000. He also acted as the director of State Information Center of
China for nearly 8 years from the year 1991.
Mr. FaDing Liu. Mr. FaDing Liu was selected as a director of our Company in
April 2001. Prior to joining the Company, Mr. Liu had been employed by New York
Office, Nanfang Security Co., Ltd as the office manager for over 5 years.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the Securities laws of the United States, our Executive Officers,
Directors and beneficial owners of more than ten percent (10%) of any class of
our securities are required to report their initial ownership of our securities
and any subsequent changes in that ownership to the Securities and Exchange
Commission. However, none of these persons has yet filed the forms as required
with the Securities and Exchange Commission.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain summary information concerning the
compensation paid or accrued for each of the Company's last completed fiscal
years to the Company's or its principal subsidiaries chief executive officer and
each of its other executive officers that received compensation in excess of
$100,000 during such period (as determined at December 31, 2001, the end of the
Company's last completed fiscal year):
Summary Compensation Table
Long-Term Compensation
--------------------- ----------------------------------------------- --------------------------------------- ---------- -----------
Payouts
Annual Compensation Awards
--------------------- ----------------------------------------------- ------------ ------------ ------------- ---------- -----------
Salary Bonus(1) Other Annual Restricted Securities Securities LTIP All Other
Name and Principal Year Compensation Stock Underlying Underlying Compensation
Position Awards Options) Options
--------------------- -------- ---------- ---------- ---------------- ------------ ------------ ------------- ---------- -----------
Dr. Hongbing Lan 1998 $10,200 0 0 0 0 0 0 0
Chairman, Chief 1999 11,800 0 0 0 0 0 0 0
Executive Officer 2000 14,200 0 0 0 0 0 0 0
and Director 2001 14,200 0 0 0 0 0 0 0
Options /SAR Grants in Last Fiscal Year
The Company has never granted options or stock appreciation rights.
Bonuses and Deferred Compensation
None
Compensation Pursuant to Plans
The Company does not have any compensation or option plans.
Pension Plans
Not applicable
Other Compensation
Warrants Guaranteed Exercise Price Term
Pacific
1-30-01 2,400,000 $3.00 1-31-00
1-30-02 1,600,000 $4.00 1-31-00
1-31-03 1,600,000 $5.00 1-31-00
Directors who are not officers of the Company receive $2,000 per year as
compensation.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's Common
Stock, par value $0.01, held by each person who is believed to be the beneficial
owner of 5% or more of the shares of the Company's common stock outstanding at
March 22, 2002, based on the Company's transfer agent's list, representations
and affidavits from shareholders and beneficial shareholder lists provided by
the Depository Trust and securities broker dealers, and the names and number of
shares held by each of the Company's officers and directors and by all officers
and directors as a group.
Title and Name and Address of Amount and Nature of
Class Beneficial Owner Beneficial Ownership Percent
------------ -------------------- --------------------- --------
Common Dr. Hongbing Lan (1)(2) 4,193,660 29.13%
Common Pacific Winner Development 4,193,660 29.13%
Ltd. (1)(2)
Common World Concept Holding
2/F, Flat D & E, Cheong Ming
Bldg.
80-86 Argyle Street, Mongkok 1,120,800 7.78%
Kowloon, Hong Kong
Common Shenzhen Commercial Bank 1,020,000 7.09%
No. 1099, Shen Nan Zhonghu
Shenzhen Commercial Bank
Building
Shenzhen, PRC
Common Hunan Huayin Electric Power Co. Ltd 1,000,000 6.94%
No. 428, Shaoshanbei Road
Changsha, PRC
Common Greatime Management Corp 1,000,000 6.94%
2/F, Flat D&E, Cheong Ming Building
Kowloon, Hong Kong
All officers and Directors, and as a Group
(5 Person) 4,193,660 29.14%
(1) Address for all persons and entities is 3/F, Block 2, Cyber City,
South Hi-Tech Industrial Park, Shenzhen, P.R.China, 518057
(2) Beneficially owned by Dr. Hongbing Lan
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Name of related party Existing relationship with the Company
--------------------- --------------------------------------
National Communication Centre Stockholder
Hong Yu Lan Officer and brother of Dr. Hongbing Lan
Dr. Hongbing Lan Director and stockholder
Leasci Technologies Co., Ltd. (Leasci) Stockholder of a subsidiary
Sitech Holding (Hainan)
Company Limited Common ownership - Dr. Hongbing Lan
Name of parties and 2000 2001 2001
nature of amounts (due to) due from Rmb Rmb US$
----------------------------------- ------------- ------------- -------------
National Communication Centre -
Cash advance - ( 33,271) $( 4,009)
============= ============ ============
Dr. Hongbing Lan - Travel and trip
expenses paid on behalf of the
Company and cash advances (2,316,408) (4,163,531) $( 501,630)
============= ============= =============
Leasci - Cash advance - ( 200,000) $( 24,096)
============= ============= =============
Lan Hong Yu - Cash advance - ( 157,118) $( 18,930)
============= ============= =============
The balance with Leasci is secured, interest bearing at 3% and
repayable on demand.
The balances with Dr. Hongbing Lan, National Communication Centre and
Hong Yu Lan are unsecured, interest-free and repayable on demand.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1* Exchange Agreement by and among Natural Way Technologies, Inc. and the
shareholders of World Concept Development Limited
3.1* Amended and Restated Articles of Incorporation
3.2* Certificate of Decrease and Increase in Authorized Shares 3.3 Bylaws, as
amended to date (1)
21.1* Subsidiaries of Registrant
* As previously filed with the Form 10-KSB for year ended December 31, 2000
(b) Reports on Form 8-K
1. Form 8-K dated November 13, 2001 reporting the change in the Company name
from eSoftBank.com, Inc. to BroadenGate Systems, Inc. and the change in the
Company trading symbol to ROG
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BroadenGate Systems, Inc.
By: /s/ Dr. Hongbing Lan
---------------------------
Dr. Hongbing Lan
Chief Executive Officer
By: /s/ Hongyu Lan
----------------------------
Hongyu Lan
Principal Accounting Officer
Dated: April 19, 2002
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Name Title Date
------ ------- ---------
/s/ Hongbing Lan Chairman, Chief Executive Officer April 19, 2002
----------------
Dr. Hongbing Lan
/s/ Xinmin Gao Director April 19, 2002
--------------
Mr. Xinmin Gao
/s/ Fa Ding Liu Director April 19, 2002
---------------
Mr. Fa Ding Liu
Broadengate Systems, Inc. and Subsidiaries
Years Ended December 31, 2000 and 2001
================================================================================
C o n t e n t s
Pages
Independent Auditor's Report 1-2
Consolidated Balance Sheets 3-4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity (Deficit) 6-7
Consolidated Statements of Cash Flows 8-9
Notes to Consolidated Financial Statements 10-24
Independent Auditor's Report
Stockholders and the Board of Directors
Broadengate Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Broadengate
Systems, Inc. and Subsidiaries (the Company) as of December 31, 2000 and 2001,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Broadengate Systems,
Inc. and Subsidiaries as of December 31, 2000 and 2001, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred a significant loss
from operations and has a deficit that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
S/Blackman Kallick Bartelstein, LLP
Chicago, Illinois
January 29, 2002
Broadengate Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2000 and 2001
================================================================================
Assets
2000 2001 2001
Rmb Rmb US$
----------- ---------- -----------
Current Assets
Cash 3,221,718 7,995,053 $ 963,259
Accounts receivable 640,900 3,192,662 384,658
Deposits and other 1,000,271 555,987 66,986
Advances to employees 427,395 389,008 46,869
Costs and estimated earnings in excess of
billings on uncompleted contracts 207,944 - -
---------- ------------ ------------
Total Current Assets 5,498,228 12,132,710 1,461,772
---------- ------------ ------------
Noncurrent Assets
Long-term investment 2,800,000 2,800,000 337,349
Product development costs, net 852,995 - -
Fixed assets 2,929,976 2,432,328 293,052
Other 265,068 - -
Advances to employees - 326,000 39,277
Intangibles - 1,508,106 181,700
------------ ------------ ------------
Total Noncurrent Assets 6,848,039 7,066,434 851,378
------------ ------------ ------------
Total Assets 12,346,267 19,199,144 $ 2,313,150
============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
Liabilities and Stockholders' Deficit
2000 2001 2001
Rmb Rmb US$
------------ ----------- ----------
Current Liabilities
Short-term borrowings - Bank 16,000,000 24,000,000 $ 2,891,566
Accounts payable 159,900 - -
Accrued expenses
Salaries, wages and other compensation 669,171 337,048 40,608
Employee fringe benefits 635,988 1,539,271 185,454
Taxes 355,713 17,458 2,104
Other 1,588,513 1,183,523 142,593
Customer deposits 41,000 15,000 1,807
Billings in excess of costs and estimated
earnings on uncompleted contracts 57,890 - -
Due to directors 2,316,408 4,163,531 501,630
Due to related parties - 390,919 47,099
------------ ------------ ------------
Total Current Liabilities 21,824,583 31,646,750 3,812,861
------------ ------------ ------------
Minority Interest 261,925 - -
------------ ------------ ------------
Stockholders' Equity (Deficit)
Common stock, par value US$0.001; issued
and outstanding - 14,393,000 shares and
12,920,000 shares as of December 31, 2001 and
2000, respectively 107,236 119,462 14,393
Additional paid-in capital 52,715,431 57,969,605 6,984,290
Subscription receivable - (767,411) (92,459)
Reserve funds 347,148 347,148 41,825
Accumulated deficit (62,910,056) (70,116,410) (8,447,760)
-------------- ------------- -------------
Total Stockholders' Deficit (9,740,241) (12,447,606) (1,499,711)
-------------- ------------- -------------
Total Liabilities and Stockholders'
Deficit 12,346,267 19,199,144 $ 2,313,150
============== ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
Broadengate Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2000 and 2001
================================================================================
2000 2001 2001
Rmb Rmb US$
------------ ------------- ------------
Revenue 9,463,849 10,210,749 $ 1,230,211
Cost of Sales (5,045,379) (6,341,176) (763,997)
------------- ------------- -----------
Gross Profit 4,418,470 3,869,573 466,214
Selling and Administrative Expenses (16,406,295) (10,447,304) (1,258,711)
Abandonment of Product Development - (545,902) (65,772)
------------- ------------- -----------
Loss from Operations (11,987,825) (7,123,633) (858,269)
-------------- ------------- -----------
Other Expense (Income)
Interest expense 497,640 1,057,202 127,374
Other income, net (255,304) (807,121) (97,244)
-------------- -------------- -----------
Total Other Expense, Net 242,336 250,081 30,130
-------------- -------------- -----------
Loss before Income Taxes (12,230,161) (7,373,714) (888,399)
Income Taxes 499,561 - -
-------------- -------------- -----------
Loss before Minority Interest (12,729,722) (7,373,714) (888,399)
Minority Interest in Loss (2,759,393) (167,360) (20,164)
--------------- -------------- -----------
Net Loss (9,970,329) (7,206,354) $ (868,235)
Loss per Share - Basic and Diluted (.78) (.53) $ (.06)
Weighted Average Common Shares
Outstanding - Basic and Diluted 12,845,699 13,712,979 13,712,979
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
Broadengate Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 2000 and 2001
================================================================================
Common Stock Series A Convertible Common Stock
Par Value and Redeemable Par Value
US $1.00 Preferred Stock US $0.001
---------------------- --------------------- --------------------------------
No. No. No.
of Amount of Amount of Amount
Shares Rmb Shares Rmb Shares Rmb
--------- --------- -------- -------- ------------- -------------
Balance as of January 1, 2000 1,000 8,300 - - - -
Reclassification of Reserve Funds - - - - - -
Effect of Merger (1,000) (8,300) 600 5 17,500,000 145,320
One for Five Reverse Stock Split - - - - (14,000,000) (116,270)
Issuance of Common Stock - - - - 9,300,000 77,190
Conversion of Preferred Stock - - (600) (5) 120,000 996
Assumption of Liabilities by
Stockholder Contributed to Capital - - - - - -
Net Loss - - - - - -
Deemed Dividends - - - - - -
--------- --------- -------- -------- ------------- -------------
Balance as of December 31, 2000 - - - - 12,920,000 107,236
Issuance of Common Stock - - - - 1,473,000 12,226
Net Loss - - - - - -
--------- --------- -------- -------- ------------- -------------
Balance as of December 31, 2001 - - - - 14,393,000 119,462
The accompanying notes are an integral part of the
consolidated financial statements.
-6-
Additional Retained Earnings
Paid-in Subscription (Accumulated Reserve
Capital Receivable Deficit) Funds Total
Rmb Rmb Rmb Rmb Rmb
------------------ --------------- ------------------ ------------- ------------
1,209,012 - 1,462,034 306,386 2,985,732
- - (40,762) 40,762 -
51,383,974 - (51,520,999) - -
116,270 - - - -
(77,190) - - - -
(991) - - - -
84,356 - - - 84,356
- (9,970,329) - (9,970,329)
- - (2,840,000) - (2,840,000)
-------------- ---------------- ---------------- ------------- -------------
52,715,431 - (62,910,056) 347,148 (9,740,241)
5,254,174 (767,411) - - 4,498,989
- - (7,206,354) - (7,206,354)
-------------- ---------------- ---------------- ------------- -------------
57,969,605 (767,411) (70,116,410) 347,148 (12,447,606)
The accompanying notes are an integral part of the
consolidated financial statements.
-7-
Broadengate Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2000 and 2001
================================================================================
2000 2001 2001
Rmb Rmb US$
----------- ---------- ----------
Cash Flows from Operating Activities
Net loss (9,970,329) (7,206,354) $ (868,235)
------------ ------------- -----------
Adjustments to reconcile net loss to
to net cash used in operating activities
Depreciation 400,808 688,579 82,961
Amortization of product development costs
and intangibles 327,049 448,437 54,028
Abandonment of product development - 545,902 65,772
Provision for losses on receivables -
Customers 1,675,881 958,959 115,537
Minority interest (2,759,393) (167,360) (20,164)
(Increase) decrease in
Accounts receivable (302,451) (3,330,421) (401,256)
Deposits and other (217,984) 325,404 39,205
Other - 375,987 45,300
Costs and estimated earnings in
excess of billings on uncompleted
projects (207,944) 207,944 25,053
Increase (decrease) in
Accounts payable and accrued expenses 2,434,138 (878,485) (105,841)
Customer deposits (64,098) (26,000) (3,132)
Billings in excess of costs and
estimated earnings on uncompleted
contracts 57,890 (57,890) (6,975)
------------- ----------- ------------
Total Adjustments 1,343,896 (908,944) (109,512)
------------- ----------- ------------
Net Cash Used in Operating
Activities (8,626,433) (8,115,298) (977,747)
------------- ----------- ------------
The accompanying notes are an integral part of the
consolidated financial statements.
-8-
Broadengate Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2000 and 2001
================================================================================
2000 2001 2001
Rmb Rmb US$
----------- ---------- -----------
Cash Flows from Investing Activities
Capital expenditures (2,571,251) (16,792) $ (2,023)
Capitalized expenditures for product
development costs (357,772) - -
Purchase of long-term investment (2,800,000) - -
Net repayments from stockholders 1,485,426 - -
Repayment of (advances to) employees 6,483 (286,218) (34,484)
Cash from Dalian acquisition - 54,612 6,580
------------ ------------ -----------
Net Cash Used in
Investing Activities (4,237,114) (248,398) (29,927)
------------ ------------ -----------
Cash Flows from Financing Activities
Net short-term borrowings 16,000,000 8,000,000 963,856
Issuance of common stock - 3,098,989 373,372
Net borrowings from directors
and related parties 2,055,914 2,038,042 245,547
Initial investment of minority stockholder 240,000 - -
Dividends (2,840,000) - -
------------ ------------ -----------
Net Cash Provided by
Financing Activities 15,455,914 13,137,031 1,582,775
------------ ------------ -----------
Net Increase in Cash 2,592,367 4,773,335 575,101
Cash, Beginning of Year 629,351 3,221,718 388,158
------------ ------------ -----------
Cash, End of Year 3,221,718 7,995,053 $ 963,259
============ ============ ===========
The accompanying notes are an integral part of the
consolidated financial statements.
-9-
Broadengate Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2000 and 2001
================================================================================
1. Organization and Principal Activities
Broadengate Systems, Inc. (formerly known as eSoftBank.com, Inc.) and
Subsidiaries (the "Company") is incorporated under the laws of the
State of Nevada, in the United States of America. The parent company's
principal business activity is a 100% investment in World Concept
Development Limited (World), primarily a holding company for
investments in operating companies. World is incorporated under the
laws of the British Virgin Islands. The Company is a software designer
and markets both packaged and custom-designed Internet related software
applications. Custom-designed applications represent the primary source
of the Company's revenue.
The consolidated financial statements include the accounts of the
Company, World and its wholly owned subsidiary eSoftBank Networks
(Shenzhen) Co. Ltd. (Shenzhen) and its majority owned subsidiaries
eSoftBank (Beijing) Software Systems Co. Ltd. (Beijing) (80% owned),
SiTech Hainan Limited (SiTech) (52.38% owned) and Dalian Tong Zhou
Computer Limited (Dalian) (70% owned) as more fully described below.
All material intercompany balances and transactions have been
eliminated on consolidation.
On March 31, 2000, Natural Way Technologies, Inc. (Natural Way) entered
into an Exchange agreement (the Exchange) with World, an independent
third party. In accordance with the Exchange, Natural Way acquired 100%
of the issued and outstanding shares of World in exchange for 9,300,000
post-reverse split shares of Natural Way. Prior to closing, Natural Way
affected a one for five reverse stock split and changed the name of the
Company to eSoftBank.com, Inc. and Subsidiaries. In addition, Natural
Way issued warrants to two parties for future purchases of common stock
in the Company. See Note 8.
The Exchange has been accounted for using the purchase method of
accounting as a reverse acquisition, whereby the company issuing its
shares to effect the business combination is determined to be the
acquiree in the business combination. A reverse acquisition occurs when
the stockholders that retain the majority voting interest in the
combined entity are presumed to be the acquirer. In the current
Exchange, the existing stockholders of Natural Way will retain a 27%
voting interest in the combined entity on completion of the Exchange.
Accordingly, World is deemed to be the acquirer and the assets of
Natural Way were required to be fair valued at acquisition. As Natural
Way had no assets, as of the date of the Exchange, no fair value
adjustment was required. The historical financial information prior to
the Exchange is that of World and subsidiaries.
World, then a development stage enterprise, was incorporated on October
27, 1999, in the British Virgin Islands. World incorporated its wholly
owned subsidiary Shenzhen on December 30, 1999, in the Peoples'
Republic of China (PRC). World and Shenzhen were incorporated to effect
a merger, exchange of capital stock, asset acquisition or other
business combination with a domestic or foreign, private or publicly
held business.
-10-
1. Organization and Principal Activities (Continued)
On February 21, 2000, World via Shenzhen, acquired 9.52% of the
outstanding capital of SiTech, a company related through common
ownership and management from Dr. Hongbing Lan, a director and
stockholder of both World and SiTech for approximately $62,650. On the
same date, Shenzhen acquired an additional 42.86% of SiTech from SiTech
Hainan Holding Co., Ltd. (Holdings), a company related through common
ownership and management, for approximately $280,000. Since both
entities involved in the acquisition were under common control, the
transaction was accounted for at historical cost in a manner similar to
that in pooling-of-interests accounting. The cash consideration paid in
these transactions was classified as a deemed dividend in the amount of
Rmb 2,840,000. The consolidated financial statements include the
results of operations for World and its subsidiaries from their
inception.
On February 21, 2000, Shenzhen also acquired 80% of the newly issued
and outstanding stock of Beijing, a PRC company, from Holdings for an
initial capital investment of approximately $116,000. The remaining 20%
of Beijing is owned by Mr. Lan Hong Yu, the brother of Dr. Hongbing
Lan.
During August of 2000, Shenzhen acquired a 2.67% interest for Rmb
2,800,000 in a newly formed entity, whose primary stockholder and
initiator is the Hunan Post Office (governmental agency). The new
entity's development projects are to include: a postage computing
system, telecommunication technology development, a postage machinery
manufacturing line and other various technology related systems. The
acquisition will be accounted for at the lower of cost or net
realizable value.
On October 14, 2001, Shenzhen acquired 70% of the outstanding capital
of Dalian, an unrelated PRC company, in exchange for 307,000 shares of
the Company valued at $.55 per share or approximately $168,675. Dalian
is a software company in Northeastern China focusing on project
management software and system integration. This acquisition was
accounted for as a purchase in accordance with the SFAS No. 141,
"Business Combinations." The accompanying statement of operations
includes the activity of Dalian from the purchase date through December
31, 2001.
2. Going Concern
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
As shown in the accompanying consolidated financial statements, the
Company incurred a net loss of Rmb 9,970,329 and Rmb 7,206,354 during
the years ended December 31, 2000 and 2001, and has an accumulated
deficit of Rmb 62,910,056 and Rmb 70,116,410 as of December 31, 2000
and 2001.
-11-
2. Going Concern (Continued)
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its
ability to (a) generate sufficient cash flow to meet its obligations on
a timely basis, (b) obtain additional financing as may be required, and
(c) ultimately sustain profitability. Management's plan to continue as
a going concern relies heavily on returning to profitability in 2002.
This return to profitability is based upon expense control, cost
reductions, and increased revenue growth. Management may also seek
additional funding sources should the need arise. There is no assurance
that management's plans will be successful or, if successful, that they
will result in the Company continuing as a going concern.
3. Summary of Significant Accounting Policies
(a) Cash
Substantially all of the Company's cash is held at Shenzhen
Commercial Bank as of December 31, 2001. The Company believes it
is not exposed to any significant credit risk on cash.
(b) Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation.
Depreciation of fixed assets is calculated on the straight-line
basis to write off the costs less estimated residual value of each
asset over its estimated useful life. The principal annual rates
used for this purpose are as follows:
Land lease rights 1.5%
Leasehold improvements 20%
Furniture and office equipment 20%
Automobiles 20%
Computer equipment 20%
Land lease rights in the PRC are stated at cost less accumulated
amortization. Amortization of land lease rights is calculated on
the straight-line basis over the lesser of their estimated useful
life or the lease term. The principal annual rate used for this
purpose is 1.5%.
-12-
3. Summary of Significant Accounting Policies (Continued)
(c) Product development costs
The Company capitalizes costs incurred for the production of
computer software developed for sale to outside parties.
Capitalized costs include direct labor and related overhead for
software produced by the Company. All costs in the software
development process which are classified as research and
development are expensed as incurred until technological
feasibility has been established. Once technological feasibility
has been established, such costs are capitalized until the
software has completed beta testing and is generally available for
sale. Amortization, a cost of revenue, is provided on a
product-by-product basis, using the straight-line method over
three years, commencing the month after the date of product
release. Annually, the Company reviews and expenses the
unamortized cost of any feature identified as being impaired.
During 2001, the Company decided to no longer support this
software developed for sale and the remaining capitalized costs
were written off. The Company also reviews recoverability of the
total unamortized cost of all features and software products in
relation to estimated relevant other revenues and, when necessary,
makes an appropriate adjustment to net realizable value.
Capitalized product development costs consist of the following:
2000 2001 2001
Rmb Rmb US$
------------- ------------- -------------
Balance, beginning of year 822,272 852,995 $ 102,770
Costs capitalized 357,772 28,799 3,471
Costs amortized (327,049) (335,892) (40,469)
Costs abandoned - (545,902) (65,772)
------------- ------------- -------------
Balance, end of year 852,995 - $ -
The accumulated amortization of product development costs related
to the production of computer software totalled Rmb 0 and Rmb
543,971 as of December 31, 2001 and 2000, respectively.
Included in selling and administrative expenses are research and
development costs totalling Rmb 1,719,794 and Rmb 1,113,761 in the
years ended December 31, 2001 and 2000, respectively.
(d) Intangibles
The cost of an acquired customer list and software is being
amortized over three years, using the straight-line method.
-13-
3. Summary of Significant Accounting Policies (Continued)
(e) Employee fringe benefits
All companies registered in the PRC must appropriate the following
percentage of staff salary for employee fringe benefits: 14% for staff
welfare, 2% for labor union fees and 1.5% for the education fund. The
accrued benefit is decreased by actual cash payments.
(f) Revenue recognition
Contracts
The Company reports income from contracts on the percentage-of-completion
method of accounting. The determination of completion is based upon the
proportion of costs incurred to total estimated costs for such contracts.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Administrative and general
costs are expensed in the period incurred and are not allocated to
contracts in process.
Software
The Company recognizes income from the sale of computer software when the
merchandise is shipped.
(g) Income taxes
Income taxes are provided under the provisions of Statement of Financial
Accounting Standards No. 109.
(h) Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(i) Advertising
Advertising is expensed the first time the advertising takes place.
Advertising expense was Rmb 166,231 and Rmb 3,171,852 for 2001 and 2000,
respectively.
-14-
3. Summary of Significant Accounting Policies (Continued)
(j) Foreign currency translation
Foreign currency transactions denominated in foreign currencies are
translated into Renminbi (Rmb) at the respective applicable rates of
exchange. Monetary assets and liabilities denominated in foreign currencies
are translated into Rmb at the applicable rate of exchange at the balance
sheets date. The resulting exchange gains or losses are credited or charged
to the statements of income.
Translation of amounts from Rmb into United States dollars (US$) for the
convenience of the reader has been made at the unified exchange rate (see
Note 14) on December 31, 2001 of US$ 1.00: Rmb 8.30. No representation is
made that the Rmb amounts could have been or could be converted into US$ at
that rate on the above dates or at any other date.
(k) Fair value of financial instruments
The carrying amounts of certain financial instruments, including cash,
accounts receivable and accounts payable approximate their fair values as
of December 31, 2001 and 2000 because of the relatively short-term maturity
of these instruments. The fair value of the Company's related party
receivables and payables cannot be determined due to the nature of the
transactions.
(l) Related party
A related party is an entity that can control or significantly influence
the management or operating policies of another entity to the extent one of
the entities may be prevented from pursuing its own interests. A related
party may also be any party the entity deals with that can exercise that
control.
(m) Earnings per share
Basic and diluted net earnings (loss) per share were computed in accordance
with SFAS No. 128, "Earnings per Share." Basic net earnings per share is
computed by dividing net earnings available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period and excludes the dilutive effect of stock
options and convertible debentures. Diluted net earnings per share gives
effect to all dilutive potential common shares outstanding during a period.
In computing diluted net earnings per share, the average stock price for
the period is used in determining the number of shares assumed to be
reacquired under the treasury stock method from the exercise of stock
options and the if converted method to compute the dilutive effect of
convertible debentures.
The 9,300,000 shares issued as consideration for the reverse merger are
considered outstanding for all periods presented.
-15-
3. Summary of Significant Accounting Policies (Continued)
(n) New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires
companies to recognize all derivative contracts as either assets or
liabilities in the balance sheets and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 as amended by SFAS No. 137 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Based on its
current and planned future activities relative to derivative instruments,
the Company believes that the adoption of SFAS No. 133 as amended has not
had and will not have a significant effect on its financial statements.
On December 3, 1999, the SEC issued Staff Accounting Bulleting 101 (SAB
101), "Revenue Recognition in Financial Statements." SAB 101 summarizes
some of the SEC's interpretations of the application of accounting
principles generally accepted in the United States of America to revenue
recognition. Revenue recognition under SAB 101 was initially effective for
the Company's first quarter 2000 financial statements. However, SAB 101B,
which was released on June 26, 2000, delayed adoption of SAB 101 until no
later than the fourth fiscal quarter of 2000. Changes resulting from SAB
101 require that a cumulative effect of such changes for 1999 and prior
years be recorded as an adjustment to net income on January 1, 2000, plus
an adjustment of the statement of operations for the three months ended in
the quarter of adoption.
The Company believes that its revenue recognition practices are in
substantial compliance with SAB 101 and that the adoption of its provisions
was not material to its annual or quarterly results of operations.
-16-
3. Summary of Significant Accounting Policies
(n) New accounting pronouncements (Continued)
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets," effective for
acquisitions after June 30, 2001 and for years beginning after December 15,
2001, respectively. Under the new rules, goodwill and certain other
intangible assets will no longer be amortized, but will be subject to
annual impairment tests in accordance with the standards. Other intangible
assets will continue to be amortized over their useful lives. The pooling
of interests method is no longer permitted for business combinations after
June 30, 2001. See Note 1 regarding the company's October 14, 2001
acquisition. Early adoption of SFAS No. 142 is permitted for companies with
fiscal years beginning after March 15, 2001, provided that their first
quarter financial statements have not been issued prior to the adoption.
The Company is not required to adopt this new standard until its fiscal
year ended December 31, 2002. Based upon management's preliminary analysis,
no impairment of goodwill under the new SFAS No. 142 is expected.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Requirement Obligations," effective for the years beginning after June 15,
2002. Under this standard asset retirement obligations will be recognized
at a discounted fair value basis and capitalized and allocated to expense
over the asset's useful life. The Company does not expect that adoption of
SFAS No. 143 will have a material impact on its consolidated financial
position or results of operation.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective for years beginning
after December 15, 2001. the new rules for long-lived assets to be disposed
by sale excludes the allocation of goodwill to be tested for impairment of
such assets, establishes a primary asset approach to be used for the
estimation of future cash flows and allows for probability-weighted future
cash flow estimation for impairment testing. Adoption is required for
fiscal years beginning after December 15, 2001. Based upon management's
preliminary analysis, the Company does not expect any material implications
for the Company's financial statements.
4. Taxation
The Company is subject to PRC business tax at the applicable effective tax
rate (5% for both 2001 and 2000) for income derived from services rendered.
The Company enjoyed profits tax exemptions for two years from 1997 which
was the first adjusted-for-tax profitable year and a 50% reduction on the
standard tax rate of 15% for the three consecutive years in accordance with
provincial and national regulations on certain industries. In addition, the
income earned from providing high-technology service by the Company has
been deemed business tax exempt by the PRC. This is determined on a
project-by-project basis.
-17-
4. Taxation (Continued)
It is management's intention to reinvest all the income attributable to the
Company as earned by its operations, outside the United States.
Accordingly, no United States corporate income taxes have been provided in
these financial statements.
Under the current law of the British Virgin Islands, any dividends the
Company may distribute in the future, and capital gains arising from the
Company's investments are not subject to income tax in the British Virgin
Islands.
5. Fixed Assets
2000 2001 2001
Rmb Rmb US$
------------ ----------- -------------
Cost
Land lease rights 211,225 211,225 $ 25,449
Leasehold improvements 330,865 564,665 68,032
Furniture and office equipment 683,411 709,009 85,423
Automobiles 662,173 1,045,126 125,919
Computer equipment 2,075,105 2,523,670 304,057
------------ ------------- -------------
3,962,779 5,053,695 608,880
------------ ------------- -------------
Less: Accumulated Depreciation and
Amortization
Land lease rights 18,390 21,543 2,596
Leasehold improvements 21,396 280,417 33,785
Furniture and fixtures 286,184 444,715 53,580
Automobiles 95,800 514,687 62,011
Computer equipment 611,033 1,360,005 163,856
------------ ------------- -------------
1,032,803 2,621,367 315,828
------------ ------------- -------------
Net book value 2,929,976 2,432,328 $ 293,052
The land lease rights are held in the PRC for 67 years from March 1, 1995.
-18-
6. Costs and Estimated Earnings on Uncompleted Contracts
2000 2001 2001
Rmb Rmb US$
------------- ----------- ---------
Costs incurred on uncompleted contracts 676,313 - $ -
Estimated earnings 710,291 - -
------------- ---------- ----------
1,386,604 - -
Less billings to date (1,236,550) - -
------------- ---------- ----------
150,054 - $ -
Included in the accompanying balance sheets
under the following captions:
Costs and estimated earnings in
excess of billings on uncompleted
contracts 207,944 - $ -
Billings in excess of costs and
estimated earnings on uncompleted
contracts (57,890) - -
------------- ---------- ----------
150,054 - $ -
============= ========== ==========
7. Intangibles
Intangible assets consist of the following:
2000 2001 2001
Rmb Rmb US$
------------- ------------- -------------
Customer list - 859,651 $ 103,572
Acquired software - 761,000 91,687
------------- ------------- -------------
- 1,620,651 195,259
Less accumulated amortization - 112,545 13,559
------------- ------------- -------------
- 1,508,106 $ 181,700
-19-
8. Short-Term Borrowings - Bank
As of December 31, 2000, the Company was obligated under a line of
credit with Shenzhen Commercial Bank for Rmb 16,000,000. Borrowings
under this line of credit bear interest at 5.36% and are secured by
3,193,660 shares of stock in the Company owned by Dr. Hongbing Lan. As
of December 31, 2000, no additional borrowings were available on this
line of credit. The agreement expires on May 29, 2002, but it is
management's expectation that this agreement will be renewed by the
bank or that a similar arrangement with another lender will be
concluded.
During December of 2001, the Company obtained another line of credit
with Shenzhen Commercial Bank for Rmb 8,000,000 for one month bearing
interest at 6.138% per annum. The borrowing was fully settled in
January 2002.
9. Warrants
In connection with the Exchange agreement between Natural Way and
World, Natural Way issued stock warrants to Pacific Winner Development
Limited (Pacific), owned by Dr. Hongbing Lan, and World Concept Holding
Limited (World Holding), an unrelated third party, for the purchase of
shares of common stock in the Company for the following terms:
Warrants Exercise
Granted Price Term
-------------- ------------- --------------------
Pacific 2,400,000 $3.00 1/31/00 - 1/30/01
1,600,000 $4.00 1/31/01 - 1/31/02
1,600,000 $5.00 1/31/02 - 1/31/03
World Holding 600,000 $3.00 1/31/00 - 1/31/01
400,000 $4.00 1/31/01 - 1/31/02
400,000 $5.00 1/31/02 - 1/31/03
-20-
10. Related Party Balances and Transactions
Name of related party Existing relationship with the Company
----------------------------------- -----------------------------------------------
National Communication Centre Stockholder
Hong Yu Lan Officer and brother of Dr. Hongbing Lan
Dr. Hongbing Lan Director and stockholder
Leasci Technologies Co., Ltd. (Leasci) Stockholder of a subsidiary
Sitech Holding (Hainan)
Company Limited Common ownership - Dr. Hongbing Lan
Name of parties and 2000 2001 2001
nature of amounts (due to) due from Rmb Rmb US$
----------------------------------- ------------- ------------- -------------
National Communication Centre -
Cash advance - ( 33,271) $( 4,009)
============= ============ ============
Dr. Hongbing Lan - Travel and trip
expenses paid on behalf of the
Company and cash advances (2,316,408) (4,163,531) $( 501,630)
============= ============= =============
Leasci - Cash advance - ( 200,000) $( 24,096)
============= ============= =============
Lan Hong Yu - Cash advance - ( 157,118) $( 18,930)
============= ============= =============
The balance with Leasci is secured, interest bearing at 3% and
repayable on demand.
The balances with Dr. Hongbing Lan, National Communication Centre and
Hong Yu Lan are unsecured, interest-free and repayable on demand.
-21-
11. Operating Leases
The Company has entered into leases for its office and production
facilities. The leases are with unrelated third parties. Total rental
expense for all operating leases, except those with terms of one month
or less that were not renewed, were Rmb 1,231,779 and Rmb 1,032,545 for
2001 and 2000, respectively.
The following is a schedule by year of future minimum rental payments
required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year, as of December 31,
2001:
Year ending December 31:
2002 924,279
2003 676,485
2004 446,188
2005 161,040
-------
Total minimum payments required 2,207,992
12. Reserve Funds
In accordance with the PRC Companies Law, the Company is required to
transfer a percentage of its profit after taxation, as determined in
accordance with PRC accounting standards and regulations, to the
surplus reserve funds. The surplus reserve funds are comprised of the
statutory surplus reserve fund and the public welfare fund. Subject to
certain restrictions set out in the PRC Companies Law, the statutory
surplus reserve fund may be distributed to stockholders in the form of
share bonus issues and/or cash dividends. The public welfare fund is
nondistributable and must be used for capital expenditures on staff
welfare facilities.
13. Major Customers
For the year ended December 31, 2001, sales to two major customers
amounted to more than 10% of total sales. The amount of revenue from
each customer was Rmb 4,744,383 and Rmb 2,869,129.
For the year ended December 31, 2000, sales to a major customer
amounted to more than 10% of total sales. The amount of revenue from
the customer was Rmb 5,985,185. The receivable balances for major
customers as of December 31, 2001 and 2000 were Rmb 2,638,000 and Rmb
0, respectively.
-22-
14. Operating Risks
(a) Country risk
As substantially all of the Company's activities were conducted
in the PRC, the Company is subject to special considerations and
significant risks not typically associated with companies
operating in North America and Western Europe. These include
risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Company's
results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, inflationary
measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things. In addition, a
significant portion of the Company's prior revenue was
denominated in Rmb, which must be converted into other currencies
before remittance outside the PRC. Both the conversion of Rmb
into foreign currencies and the remittance of foreign currencies
abroad require approvals of the PRC government.
(b) On January 1, 1994, the PRC government introduced a single rate
of exchange as quoted daily by the Peoples' Bank of China (the
Unified Exchange Rate).
The quotation of the exchange rates does not imply free
convertibility of Rmb into Hong Kong dollars or other foreign
currencies. All foreign exchange transactions continue to take
place either through the Peoples' Bank of China or other banks
authorized to buy and sell foreign currencies at the exchange
rates quoted by the Peoples' Bank of China. Approval of foreign
currency payments by the Peoples' Bank of China or other
institutions requires submitting a payment application form
together with suppliers' invoices, shipping documents and signed
contracts.
-22-
15. Supplemental Disclosures of Cash Flow Information
2000 2001 2001
Rmb Rmb US$
--------- ----------- -----------
Cash payments of taxes 599,749 - $ -
Cash payments of interest 497,640 1,072,400 129,205
On October 14, 2001, Shenzhen acquired a 70% interest in Dalian in
exchange for 307,000 shares of the Company. As a result, the following
noncash transaction was recorded:
Rmb
-----------------
Cash 54,612
Accounts receivable 300
Deposits and other 61,120
Advances to employees 1,395
Product development costs 28,799
Fixed assets 285,058
Intangibles 1,620,651
Accrued expenses (546,500)
Due to related party (200,000)
Minority interest 94,565
Common stock (2,548)
Additional paid-in capital (1,397,452)
-------------
Total -
16. Reclassification
For comparability, the 2000 financial statements reflect
reclassifications where appropriate to conform to the financial
statement presentation used in 2001.