SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-12293
BROADENGATE SYSTEMS, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 87-0394313
-------------------------------- -----------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation 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)
011-86-755-2671-6656
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(Issuer's Telephone Number, including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 [_]
As of December 9, 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 $1,439,300.
INDEX
BROADENGATE SYSTEMS INC. AND SUBSIDIARIES
Page No.
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
Condensed consolidated statements of operations -
Three months ended September 30,2001 and 2002 2
Condensed consolidated statements of operations -
Nine months ended September 30,2001 and 2002 3
Condensed consolidated statements of changes in shareholders'
equity (deficit) - Nine months ended September 30, 2002 4
Condensed consolidated balance sheets -
September 30,2002 and December 31,2001 4
Condensed consolidated statements of cash flows -
Nine months ended September 30,2001 and 2002 5
Notes to condensed consolidated financial statements-
September 30,2002 6
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Control and Procedures 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BROADENGATE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
(Unaudited)
2001 2002 2002
------------ ------------ ------------
Rmb Rmb US$
REVENUE 2,981,249 5,990,750 $ 721,777
COST OF SALES (2,075,994) (4,315,685) (519,962)
------------ ------------ ------------
GROSS PROFIT 905,255 1,675,065 201,815
SELLING AND ADMINISTRATIVE
EXPENSES (2,080,698) (1,948,544) (234,764)
------------ ------------ ------------
LOSS FROM OPERATIONS (1,175,443) (273,479) (32,949)
------------ ------------ ------------
OTHER INCOME(EXPENSE)
INTEREST EXPENSE (291,629) (319,962) (38,550)
OTHER INCOME,NET (2,871) 448,176 53,997
------------ ------------ ------------
TOTAL OTHER INCOME(EXPENSE), NET (294,500) 128,214 15,447
------------ ------------ ------------
LOSS BEFORE TAXES (1,469,943) (145,265) (17,502)
INCOME TAXES - - -
------------ ------------ ------------
LOSS BEFORE
MINORITY INTEREST (1,469,943) (145,265) (17,502)
MINORITY INTEREST IN LOSS 110,151 - -
------------ ------------ ------------
NET LOSS (1,359,792) (145,265) $ (17,502)
============ ============ ============
LOSS PER SHARE (0.11) (0.01) $ (0.001)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
12,920,000 14,393,000 14,393,000
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
- F-2 -
BROADENGATE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
(Unaudited)
2001 2002 2002
------------ ------------ -----------
Rmb Rmb US$
REVENUE 8,326,722 12,161,167 $ 1,465,201
COST OF SALES (6,067,244) (9,247,687) (1,114,179)
------------ ------------ -----------
GROSS PROFIT 2,259,478 2,913,480 351,022
SELLING AND ADMINISTRATIVE
EXPENSES (6,479,758) (8,319,546) (1,002,355)
------------ ------------ -----------
LOSS FROM OPERATIONS (4,220,280) (5,406,066) (651,333)
------------ ------------ -----------
OTHER INCOME(EXPENSE)
INTEREST EXPENSE (812,149) (867,878) (104,564)
DIVIDEND INCOME - 493,753 59,488
OTHER INCOME,NET 1,107,657 478,566 57,659
------------ ------------ -----------
TOTAL OTHER INCOME, NET 295,508 104,441 12,583
------------ ------------ -----------
LOSS BEFORE TAXES (3,924,772) (5,301,625) (638,750)
INCOME TAXES - - -
------------ ------------ -----------
LOSS BEFORE
MINORITY INTEREST (3,924,772) (5,301,625) (638,750)
MINORITY INTEREST IN LOSS 64,432 - -
------------ ------------ -----------
NET LOSS (3,860,340) (5,301,625) $ (638,750)
============ ============ ===========
LOSS PER SHARE (0.30) (0.37) $ (0.04)
============ ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
12,920,000 14,393,000 14,393,000
============ ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- F-3 -
BROADENGATE SYSTEMS, INC. AND SUBSIDIARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY(DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
Retained
Additional Earning
Common stock paid-in Subscription (Accumulated Reserve
capital receivable Deficit) funds Total
No. of share Rmb Rmb Rmb Rmb Rmb Rmb
------------- ------- ---------- ------------ ----------- --------- ----------
Balance at January 1, 2002 14,393,000 119,462 57,969,605 (767,411) (70,116,410) 347,148 (12,447,606)
Net loss - - - - (5,301,625) - (5,301,625)
Proceeds from
subscription receivable - - - 767,411 - - 767,411
---------- ------- ----------- ---------- ------------ --------- -----------
Balance at Sep. 30, 2002 14,393,000 119,462 57,969,605 - (75,418,035) 347,148 (16,981,820)
========== ======= =========== ========== ============ ========= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- F-4 -
BROADENGATE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(Unaudited)
2001 2002 2002
Rmb Rmb US$
----------- ----------- ---------
ASSETS
CURRENT ASSETS
Cash 7,995,053 797,097 $ 96,036
Accounts receivable 3,192,662 4,988,672 601,045
Deposits and other 555,987 380,407 45,832
Advances to employees 389,008 406,761 49,007
Costs & estimated earnings in excess
Of billings on uncompleted contracts - 51,526 6,208
----------- ----------- ---------
TOTAL CURRENT ASSETS 12,132,710 6,624,463 798,128
----------- ----------- ---------
NONCURRENT ASSETS
Long-term investment 2,800,000 2,800,000 337,349
Fixed assets 2,432,328 1,832,816 220,821
Advances to employees 326,000 356,185 42,914
Intangibles 1,508,106 1,102,944 132,885
----------- ----------- ---------
TOTAL NONCURRENT ASSETS 7,066,434 6,091,945 733,969
----------- ----------- ---------
TOTAL ASSETS 19,199,144 12,716,408 $1,532,097
=========== =========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings-bank 24,000,000 18,000,000 $2,168,675
Accounts payable - 18,706 2,254
Accrued expenses
Salaries, wages and other compensation 337,048 1,990,116 239,773
Employee fringe benefits 1,539,271 1,686,766 203,225
Taxes 17,458 226,654 27,308
Other 1,183,523 1,483,380 178,720
Customer deposits 15,000 71,868 8,659
Due to directors 4,163,531 3,757,230 452,678
Due to related parties 390,919 572,897 69,024
Due to employees - 92,200 11,108
Billings in excess of costs & estimated
earnings on uncompleted contracts - 1,798,411 216,676
----------- ----------- ---------
TOTAL CURRENT LIABILITIES 31,646,750 29,698,228 3,578,100
----------- ----------- ---------
MINORITY INTEREST - - -
----------- ----------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock,par value US$0.001;issued
and outstanding-14,393,000 shares as
of December 31,2001 and March 31,2002 119,462 119,462 14,393
Additional paid-in capital 57,969,605 57,969,605 6,984,290
Subscription receivable (767,411) - -
Reserve funds 347,148 347,148 41,825
Accumulated deficit (70,116,410) (75,418,035) (9,086,511)
----------- ----------- ---------
TOTAL SHAREHOLDERS' DEFICIT (12,447,606) (16,981,820) (2,046,003)
----------- ----------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY 19,199,144 12,716,408 $1,532,097
=========== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
- F-5 -
BROADENGATE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
(Unaudited)
2001 2002 2002
Rmb Rmb US$
----------- ----------- ------------
Cash Flows from Operating Activities
Net loss (3,860,340) (5,301,625) $ (638,750)
----------- ----------- ------------
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation 490,063 650,512 78,375
Loss on disposal of fixed assets - 49,350 5,946
Amortization of product development costs 441,960 - -
Amortization of Intangible assets - 405,162 48,815
Provision for losses on receivables
- Customers - 2,534,672 305,382
Minority interest (64,432) - -
(Increase) decrease in
Accounts receivable (3,463,160) (4,519,082) (544,468)
Deposits and other 261,147 5,580 672
Costs and estimated earnings in excess
of billings on uncompleted contracts 207,944 (51,526) (6,208)
Others 265,068 - -
Increase (decrease) in
Accounts payable and accrued expenses (465,284) 2,328,322 280,521
Customer deposits 2,092,989 56,868 6,852
Billings in excess of costs and estimated
earnings on uncompleted contracts 554,562 1,798,411 216,676
----------- ----------- -----------
Total Adjustments 320,857 3,258,269 392,563
----------- ----------- -----------
Net Cash Used in Operating Activities (3,539,483) (2,043,356) (246,187)
----------- ----------- -----------
Cash Flows from Investing Activities
Capital expenditures (6,104) (28,250) (3,404)
Cash received from disposal of fixed assets - 97,900 11,795
Capitalized expenditures for
product development costs (393,121) - -
Advance to employees - (47,938) (5,775)
----------- ----------- -----------
Net Cash (Used in) provided by
Investing Activity (399,225) 21,712 2,616
----------- ----------- -----------
Cash Flows from Financing Activities
Net change of short-term borrowing - bank - (6,000,000) (722,892)
Net borrowings from related parties 481,550 181,978 21,925
Net borrowings from (Repayments to)
Directors 1,718,020 (217,901) (26,253)
Net borrowings from employees - 92,200 11,108
Proceeds from subscription receivable - 767,411 92,459
----------- ----------- -----------
Net Cash Provided by (Used in)
financing Activities 2,199,570 (5,176,312) (623,653)
----------- ----------- -----------
Net Decrease in Cash (1,739,138) (7,197,956) (867,224)
Cash, Beginning of Period 3,221,718 7,995,053 963,260
----------- ----------- -----------
Cash, End of Period 1,482,580 797,097 $ 96,036
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- F-6 -
BROADENGATE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The Company believes that the interim financial statements contain all
adjustments necessary for a fair presentation of the results for such interim
periods. All of these adjustments are normal recurring adjustments. The results
of operations for interim periods do not necessarily predict the operating
results for the full year. The consolidated balance sheet as of December 31,2001
has been derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles as permitted by
interim reporting requirements. The information included in this report should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations, the audited financial statements and
related notes included in the Company's 2001 Form 10-KSB.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31,2001.
NOTE 2 - ACQUISITIONS
On March 31, 2000, Natural Way Technologies, Inc. (Natural Way) entered into an
Exchange agreement (the Exchange) with World Concept Development Limited
(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. In 2001, the Company changed its name to
Broadengate Systems, 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 acquirer 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.
World, a development stage enterprise, was incorporated on October 27, 1999, in
the British Virgin Islands. World incorporated its wholly owned subsidiary
ESOFTBANK Networks (Shenzhen) Co. Ltd. (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.
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
Xiangyou, 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."
NOTE 3 - SHORT-TERM BORROWINGS-BANK
On May 29, 2000 the Company entered into a one-year credit facility with
Shenzhen Commercial Bank for RMB 16 million at 5.3125%. The credit facility is
secured by shares in the Company owned by Dr. Lan, director and shareholder of
the Company.
On August 25, 2001, the one-year credit facility was extended to August 25, 2002
at 5.3125%. On September 28, 2002, it was extended to September 28, 2003 at
4.8675%
On May 13, 2002, the Company entered into another six-month credit facility with
the same bank mentioned above for RMB 1.6 million at 5.544%. The credit facility
is secured by Dr. Lan individually. During the third quarter of 2002, it was
repaid by RMB 0.6 million.
On September 5, 2002 another new credit facility was obtained from this bank,
which principal was RMB 0.8 million, with a term of six months and at the rate
of 4.62%.
NOTE 4 - FOREIGN CURRENCY CONVERSION
The Company's financial information is presented in U.S. dollars. Reminbi, the
functional currency of the Company, has been converted into U.S. dollars at
the exchange rate of 8.3 to 1.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
BroadenGate Systems, Inc. is a software outsourcing service provider operating
in the People's Republic of China. The Company develops comprehensive
outsourcing solutions for systems development and implementation projects and
provides consulting services in the telecom, network security, e-Business, ERP,
CRM EGIS sectors.
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 Management believes that 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
The Company continues to increase its business base by forming close
partnerships with some of the leading telecom companies in the PRC, including
Huawei Technology, which is among the largest manufacturers of
telecommunications equipment in Asia. Our revenues are based on the following
three project management centers (PMC).
1. Telecommunication & Internet Center: We have over 180 engineers currently
working in this PMC, and have in the aggregate, approximately 30 million in RMB
is either under contract, being negotiated, or in process with Huawei. We are
also negotiating with AsiaInfo, a company which is among the largest telecom
services and systems integration venders in China. 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. Development & International Center:
We have successfully finished a COBOL software development contract in Dalian
with SCM a subsidiary of Mitsubishi Corporation. Now, we are negotiating with
NEC China and Simens China for more contracts from Japan. 3. Project Management
Software & System Integration Center: both our project management products,
OnTeam, TZ-Project, have competitive advantages in many fields in China, such as
civil engineering and software industry.
During the third quarter of this year, one of the Company's subsidiaries that is
situated in Beijing entered into a series of outsourcing or producing contracts
with several well known corporations, such as WorldCom, Fangzhengaode,
Xingliduo, Zhongtaishuju and Saier.
Besides outsourcing services, we also develop software with ownership of
intellectual rights, such as BroadenGate Network Auditing System. We anticipate
it will increase our revenues and lower our operating risk.
We will continue focus on the Chinese and Japanese markets principally the
telecom industry. However, if the Company is to be a dominant player in the
industry, it is critical to establish a physical presence in the US.
RESULTS OF OPERATIONS
Three months ended September 30,2002 compared to three months ended September
30,2001
Revenues. Revenues increased by $362,590 or101% to $721,777 for the three months
ended September 30, 2002 from $359,187 for the period ended September 30, 2001.
This increase in revenue resulted primarily from software outsourcing.
Cost of Sales. Cost of sales increased by $269,842 or 108% to $519,962 for the
three months ended September 30, 2002 from $250,120 for the period ended
September 30, 2001. Cost of sales as a percent of revenue was 72% for the three
months ended September 30, 2002 compared to 70% for the period ended September
30, 2001. 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("SGA")
decreased by $15,923 or 7% to $234,764 for the three months ended September 30,
2002 from $250,687 for the period ended September 30, 2001. This decrease
resulted from stricter control over expenditures.
Other income, Net. Other income(expenses),net consists of interest income and
expense, bank charges, recovery of prior expense foreign exchange gains or
losses, other miscellaneous income, and investment income. Other income, net
totaled $15,447 for the three months ended September 30, 2002, compared to other
expenses, net totaling $35,482 for the period ended September 30, 2001. This
increase in other income, net resulted principally from a subsidy of loan
interest from the local government.
Income Taxes. No income tax was provided for either the three months ended
September 30, 2002 and 2001 because of operating loss in both periods.
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. The minority
interest has not been included in 2002 as the accumulated losses attributable to
the minority interest exceeded the cost of the investment.
As a result of the foregoing, the net loss decreased by $146,328 or 89% to
$17,502 for the three months ended September 30, 2002 from $163,830 for the
period ended September 30, 2001.
Nine months ended September 30,2002 compared to nine months ended September
30,2001
Revenues. Revenues increased by $461,981 or 46 % to $1,465,201 for the nine
months ended September 30, 2002 from $1,003,220 for the period ended September
30, 2001. This increase in revenues resulted from increases in software
outsourcing.
Cost of Sales. Cost of sales increased by $383,185 or 52% to $1,114,179 for the
nine months ended September 30, 2002 from $730,994 for the period ended
September 30, 2001. Cost of sales as a percent of revenues was 76% for the nine
months ended September 30, 2002 compared to 73% for the period ended September
30, 2001. This increase in cost of sales resulted from increased revenues and a
change in the mix of products sold. The decrease in cost of sales as a
percentage of revenue was attributable to stricter control over costs.
Selling and Administrative Expenses. Selling and administrative expenses("SGA")
increased by $221,661 or 28% to $1,002,355 for the nine months ended September
30, 2002 from $780,694 for the period ended September 30, 2001. This increase in
selling and administrative expenses generally resulted from increased marketing
expenses, training expenses for additional staff during the second quarter and
the write-off of a receivable totaling $285,735.
Other income, Net. Other income(expenses), net consists of interest income and
expense, bank charges, recovery of prior expenses, foreign exchange gains or
losses, other miscellaneous income, and investment income. Other income, net
totaled $12,583 for the nine months ended September 30, 2002, compared to other
income, net totaled $35,603 for the same period ended September 30, 2001. The
other income, net in 2001 generally represented the reversal of an overaccrual
of salary, while the amount in 2002 primarily represented the subsidy on loan
interest from the local government. The total amount of investment income was
$59,488 for the nine months of 2002, compared to zero for the corresponding
period in 2001. The increase resulted from the cash dividend distributed by
Xiangyou. Bank interest increased by $6,715 to $104,564 for the nine months
ended September 30, 2002 from $97,849 for the period ended September 30, 2001,
mainly because of increased credit facilities obtained in May and
September,2002.
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. The minority
interest has not been included in 2002 as the accumulated losses
attributable to the minority interest exceeded the cost of the investment.
As a result of the foregoing, the net loss increased by $173,649 or 37% to
$638,750 for the nine months ended September 30,2002 from $465,101 for the
period ended September 30,2001.
Liquidity and Capital Resources
As of September 30, 2002, we had cash of $96,036 and a deficit in working
capital of $2,779,972, compared with cash of $963,260 and negative working
capital of $2,351,089 as of September 30, 2001.
Net cash used in operating activities totaled $246,187 for the nine months ended
September 30, 2002, compared with net cash used in operations of $426,444 for
the period ended September 30, 2001. The change in cash flows from operating
activities resulted from an increased net operating loss, and increased
provisions for bad debts which was partially offset by other changes in the
current accounts.
Net cash provided by investing activities totaled $2,616 for the nine months
ended September 30, 2002, compared with cash used in investing activities of
$48,099 for the period ended September 30, 2001. This change mainly resulted
primarily from there being no capitalized expenditures during the current
period.
Net cash used in financing activities totaled $623,653 for the nine months ended
September 30, 2002, compared with cash provided by financing activities of
$265,008 for the period ended September 30, 2001. The net change is attributable
to a decrease in borrowings which was partially offset by sales of shares.
As of September 30, 2002, we have no plans for any future 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. In addition to negotiating with
its banks for more project finance to fund operations for the current year,
management is enhancing its efforts on recovering outstanding bills. 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Items 3. We have nothing to report under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Within the 90 days period prior to the filing of this report, an evaluation was
carried out under the supervision of the Company's management, including the
Chief Executive Officer and the Chief Financial Officer, of the effectiveness of
the Company's disclosure controls and procedures pursuant to Securities Exchange
Act Rule 13a-14. Based on the evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's current disclosure controls
and procedures are effective and timely, providing them with material
information required to be disclosed in the reports filed or submitted under the
Securities Exchange Act.
Changes in Internal Controls
Subsequent to the date of their evaluation, there were no significant changes in
the Company's internal controls in other factors that could significantly affect
the disclosure controls.
Item 5.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
[The remainder of this page intentionally left blank]
SIGNATURES
In accordance with the requirements 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
---------------------------
Lan Hongyu
Principal Accounting Officer
Dated: December 17, 2002
CERTIFICATION
I, Hongbing Lan, certify that :
1. I have reviewed this quarterly report on Form 10-Q of Broadengate
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statement made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, result
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have :
a. Designed such disclosure controls and procedures to ensure that
material information related to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regards
to significant deficiencies and material weaknesses.
Dated : December 17, 2002
By:/s/ Hongbing Lan
-----------------------------
Hongbing Lan
Chief Executive Officer
I, Hongyu Lan, certify that :
1. I have reviewed this quarterly report on Form 10-Q of Broadengate
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statement made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, result
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have :
a. Designed such disclosure controls and procedures to ensure that
material information related to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
d. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
e. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regards
to significant deficiencies and material weaknesses.
Dated : December 17, 2002
By:/s/ Hongyu Lan
-----------------------------
Hongyu Lan
Principal Accounting Officer