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, 2000
[ ] 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
eSOFTBANK.COM, INC.
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(Name of small business issuer in its charter)
Nevada 87-0394313
-------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Flat A, United Plaza, 5022 Binhe Main Street, Futian District,
Shenzhen, PRC 518026
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: 011-86-755-255-1130
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 $1,140,223
As of May 4, 2001, 12,920,000 shares of our common stock, $.001 par
value and 600 shares of our Series A convertible preferred 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 $1,161,448.
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
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.
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.
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. As of December 31, 1999, World had not commenced any formal business
operations and the only activity related to the Company's formation.
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.
Business of the Company
eSoftBank.com, Inc. is a leading Chinese web-based software development
& sub-contracting services provider. We offer a wide range of value-added
services including IT consulting, project outsourcing, quality control and
software releasing. Our focus is on various e-commerce, network management and
resource control systems for business and government enterprises. Our website,
HTTP://WWW.ESOFTBANK.COM, is a registry for Chinese web page designers and
e-commerce developers, as well as institutions requiring the services of these
people, on which we provide a cost-efficient platform for job exchanges and
assignments. It is an interactive and integrated virtual software community
offering technical databank, knowledge exchange, job subcontracting, software
testing and support services. Through the website, we offer independent software
engineers a source of business opportunities and web space, while companies are
able to select from a variety of software engineers and software companies. Our
revenues are derived from commissions on transaction volume on the platform, as
well as handling fees and service charges for software engineering and technical
support services. Our headquarters are in Shenzhen, China.
3
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.
eSoftBank has built the first software outsourcing infrastructure in
China. Current, we have in excess of 70,000 individual and corporate members who
are available to perform software development, outsourcing or collaberation on
the eSoftBank.com platform. There are also approximately 900 Chinese software
companies who are contracting with members for software collaberation and
development.
Market Strategy
To gain greater visibility in China, we relocated our headquarters from
Hainan to Shenzhen, the Silicon Valley of the People's Republic of China, and
substantial operations to Beijing, the capital city of China, the home to a
number of universities as well as Li-tech companies. This visibility has
assisted the Company in its marketing efforts.
The Company has also concentrated on developing strategic alliances
with both Chinese information technology (IT) companies and American IT
consulting companies. These strategic alliances have had a dual benefit in that
they have both helped the Company develop expertise in major software
programming fields and have generated outsourcing engagements for the Company.
The Company continues to strengthen its positive in online software
outsourcing by serving as an e-market place to bring together buyer and seller
of IT services. During the fourth calendar quarter of 2000, we upgraded and
expanded the Software Outsourcing Platform to provide for a matching of IT
service providers and IT service contractors not just for the Chinese market,
but for the international market as well.
On a prospective basis, we hope to establish outsourcing partnerships
which will produce more recurring projects and more stable revenue sources.
Competition
Competition in software outsourcing market ins inevitable. We have
competitors in China such as NEU-Apline, eNet and CCIDNET as well as foreign
competitors. However our business model is different. NEU-Alpine provides
software development by using their own technical resources. eNet and CCIDNET
provide only a portal for software companies. However we are both our own
technicians and a wide array of outside professionals already associated with
us. TLL provides great flexibility and scaleability; we provide a software
portal; and can also finish the software development by organizing our technical
resources.
Research and Development
Research and development has a high priority:
* We continue to develop our core project management platform-OnTeam, which
assists software companies in improving their software project management.
We have now released the (beta)th version of this platform;
* We continue to develop and upgrade Project Management Center, the software
outsourcing business model of eSoftBank;
* We are developing and expanding our network solutions, BroadenGate, which
can assist clients do easily access the internet, monitor website visits
and provide the mechanism to charge for internet service.
Patents and Trademarks
OnTeam is our leading project management platform conforming CMMII and
ISO 9000 series. This platform integrates the functions including project
management, development process, quality assurance, communication, configuration
management, bug report etc. Now we are applying patents in both China and the
United States.
Now we have the trademarks of:
4
* ESOFTBANK (in China): 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 (both in China): the product trademarks for our
internet service package/platform;
* DEVELOPMATRIX (in China): the solution for optimizing and reorganizing the
resources management in IT outsourcing.
Government Regulation
We are not subject to any government regulations other than those that
normally apply to other software developers, such as copyright and trademarks
laws.
Employees
We have 180 employees; 20 of which are managerial, 110 of which are
software engineers and 50 of which are clerical.
ITEM 2. DESCRIPTION OF PROPERTIES
We do not own any real estate, but lease three separate offices in
Beijing, Shenzhen and Haikou.
In Beijing, we lease 400 square meters (approximately 5,166 square fee)
of office space at Room 706, Tower B, COFCO Plaza, No. 8, Jianguomennei Street,
Dongcheng District, Beijing, 100005, the People's Republic of China. The rent
for this facility is $10,650 per month and the lease extends through March 2002.
In Shenzhen, we lease 300 square meters (approximately 3,875 square
feet) of office space at Room 2111, Flat A, United Plaza, 5022 Binhe Main
Street, Futian District, Shenzhen, 518026, 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 facililty 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 Commerical 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.
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 for vote to 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 currently 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. There was no trading in our common stock prior to the
second quarter of 2000.
5
Quarter Ended High Low
-------------- ------- ------
March 31, 2000 $ - $ -
June 30, 2000 9.50 .937
September 30, 2000 3.125 1.25
December 31, 2000 1.50 .469
Shareholders of Record
As of April 20, 2001, there were approximately 301 record holders of
our common stock. Our common stock trades on the OTC:BB under the symbol ESFB.
Dividends
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
forseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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.
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. As of December 31, 1999, World had not commenced any formal business
operations and the only activity related to the Company's formation.
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.
SiTech Hainan Ltd. is the only company that existed prior to 1999 that
is reflected in our consolidated financial statements. All amounts presented
below for the third quarter and the first nine months of 1999 are historical
results for SiTech Hainan. WCD was formed in the fourth quarter of 1999 and only
became operational in the first quarter of 2000. Accordingly, the discussion and
analysis below compares the results of operations of SiTech Hainan for the third
quarter and first nine months of 1999 with the consolidated results of
operations of WCD for the third quarter and first nine months of 2000.
6
The business of eSoftbank.com 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, 2000 Compared to Year Ended December 31, 1999.
Revenues. Revenues increased by $648,030 or 131.66% to $1,140,223 for
the year ended December 31, 2000 from $492,193 for the year ended December 31,
1999. This increase in revenues resulted from an aggressive marketing plan
initiated in the early part of the year along with the increased visability from
opening offices in Shenzhen and Beijing.
Cost of Sales. Cost of sales increased by $396,392 or 342.75% to
$512,041 for the year ended December 31, 2000 from $115,649 for the year ended
December 31, 1999. Cost of sales as a percent of revenues was 44.91% for the
year ended December 31, 2000 compared to 23.50% for the year ended December 31,
1999. 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
web-based software subcontracting which has a lower profit margin than software
development.
Selling and Administrative Expenses. Selling and administrative
expenses increased by $1,962,269 or 1,780.17% to $2,072,498 for the year ended
December 31, 2000 from $110,229 for the year ended December 31, 1999. This
increase in selling and administrative expenses resulted from costs associated
with opening two additional offices, increased marketing expenses increased
research and development expenses and increased 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 $28,966
or 125.39% to $29,197 for the year ended December 31, 2000 from $231 for the
year ended December 31, 1999. This increase in other expenses, net resulted
principally from interest expense which was partially offset by interest and
miscellaneous income.
Income Taxes. Income tax increased by $30,077 or 99.99% to $60,188 for
the year ended December 31, 2000 from $30,111 for the year ended December 31,
1999. Although the income of the Company decreased and there is a net operating
loss for the current year, income taxes in the People's Republic of China are a
function of gross sales and not of net income. Since sales more than doubled in
the year ended December 31, 2000, the income taxes also increased.
Minority Interest. Minority interest represents the 20% interest
in eSoftBank (Beijing) Software Systems Co. Ltd. and the 47.6% of SiTech Hainan
Ltd. not owned by the Company.
As a result of the foregoing, the net income of the Company decreased
by $1,324,894 from net income of $123,650 for the year ended December 31, 1999
to a net loss of $1,201,244 for the year ended December 31, 2000.
Liquidity and Capital Resources
As of December 31, 2000, we had cash of $388,159 and a deficit in
working capital of $1,967,031. This compares with cash of $75,825 and working
capital of $495,014 as of December 31, 1999.
Cash used by operating activities totaled $1,038,548 for the year ended
December 31, 2001. This compares with cash provided by operations of $103,855
for the year ended December 31, 2001. The charge in cash provided by (used in)
operating activities is to the net operating loss for the current year compared
to an operating profit in the prior year which was partially offset by increased
depreciation and amortization in the current year and changes in current
accounts.
Cash used by investing activities increased to $511,277 for the year
ended December 31, 2000 from $151,318 for the year ended December 31, 1999. This
increase resulted from an increase in capital expenditures and purchases of
long-term investments which was partially offset by a reduction in capital
expenditures for product development and advances from shareholders.
7
Cash provided by financing activities totaled $1,862,158 for the year
ended December 31, 2000 compared to cash used in financing activities of $4,337
for the year ended December 31, 1999. The net change in cash provided by
financing activities is attributable to an increase in borrowings and
investments which was partially offset by the payment of a dividend.
Based on the current level of expenditures, it will be necessary for us
to seek additional funding over the next twelve months. Without such funding, we
will be unable to implement our business plan.
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 Weakend Economy. In a general
economic downturn, our customers are apt to curtail information technology
expenses. This can result in lower sales, 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 Flucuate Significantly. These flucuations 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 flucuate
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.
Quarter-to-Quarter Comparisons. We believe quarter-to-quarter
comparisons of our revenues, expenses and results of operations are not
necessarily meaningful. You should not rely on our quarterly revenues, expenses
and results of operations to predict our future performance.
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. These legal protections provide only information. 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.
8
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 acquisitions of Netect and Entevo 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 pubicity, loss of revenues, delay in market acceptance or claims against
us by customers, all of which could materilly 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
--------------- ------- ---------------------------------
Dr. Hongbing Lan 34 Chairman, Chief Executive Officer and
Director 1999
Mr. Chunlin Tang 30 Chief Financial Officer
Ms. Ling Wen 40 Vice-President
9
Mr. Henry Lan 28 Chief Technical Officer
Mr. Xinmin Gao 62 Director 2000
Mr. Fa Ding Liu 38 Director 2000
Mr. Daniel A. Norcross 27 Chief Marketing Officer 2000
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.
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 Si Tech Hainan Co. Ltd. where he
worked until 1999 when he formed eSoftBank.com, Inc., the predecessor of our
Company.
Mr. Chunlin Tang. Mr. Chunlin Tang joined the Company in March, 2000 as our
Chief Financial Officer. Prior to joining the Company, Mr. Tang worked in
Johnson and Johnson Medical Co., Ltd as Finance Manager from March 1999 to March
2000. He received his Bachelor from Tsinghua University in 1994 and a Master in
accounting from the same university in 1997. He also studied in France at
College Des Ingeniurs in 1998 and then worked as instructor in Economics &
Management School, Tsinghua University till March 1999. He is a Chinese CPA.
Ms. Ling Wen. Ms. Ling Wen joined the Company in January 2000 and is our
Vice President in charge of business strategic partnerships. Prior to joining
the Company, Ms. Wen was employed by Hainan 1st Investment Co., Ltd from March
1995 till January 2000. Ms. Wen holds an MBA degree from Shanghai Fudan
University.
Mr. Daniel A. Norcross. Mr. Daniel Norcross joined the Company in May 2000
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 1999 to 2000. He also acted as a software developer in Atlantic
Media Corporation from 1998 to 1999 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 1999.
Mr. Henry Lan. Mr. Henry Lan 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. Xinmin Gao. Mr. Xinmin Gao was selected as a director of our Company in
April 2000 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 1999. 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 2000. 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 from
the
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
$100,000 during such period (as determined at December 31, 1998, the end of the
Company's last completed fiscal year):
10
Summary Compensation Table
Annual Compensation Long Term Compensation
Awards Restricted Payouts
------ -------
Name and Other Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards / SARS Payout compensation
------------------ ------ ------ -------- -------------- -------- --------- ------- -------------
Dr. Hongbing Lan 1998 $10,200 0 0 0 0 0 0
Chairman, Chief 1999 11,800 0 0 0 0 0 0
Executive Officer 2000 14,200 0 0 0 0 0 0
and Director
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
None
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 $0.01, held by each person who is believed to be the
beneficial owner of 5% or more of the shares of the Company's common stock
outstanding at April 13, 2001, based on the Company's transfer agent's list,
representations and affidavits from shareholders and beneficial shareholder
lists provided by the Depository Trust and securities broker dealers, and the
names and number of shares held by each of the Company's officers and directors
and by all officers and directors as a group.
Title of Name and Address of Amount and Nature of
Class Beneficial Owner Beneficial Ownership Percent of Class
---------- ------------------- --------------------- -----------------
Common Dr. Hongbing Lan (1)(2) 4,193,660 32.46%
Common Mr. Chunlin Tang (1) - -
Common Ms. Ling Wen (1) - -
Common Mr. Henry Lan (1) - -
Common Mr. Xinmin Gao (1) - -
Common Mr. Fa Ding Liu (1) - -
11
Common Pacific Winner Development 4,193,660 32.46%
Ltd. (1)(2)
Common China Enterprise Confederation
No. 17, Zizhuyuan Nanzu
Beijing, PRC 647,480 5.01%
Common World Concept Holding
2/F, Flat D & E, Cheong Ming
Bldg.
80-86 Argyle Street, Mongkok 978,100 7.57%
Kowloon, Hong Kong
Common Shenzhen Commercial Bank 1,020,000 7.89%
No. 1099, Shen Nan Zhonghu
Shenzhen Commercial Bank
Building
Shenzhen, PRC
All officers and Directors, and as a Group
(6 Person) 4,193,660 32.46%
(1) Address for all persons and entities is Flat A, United Plaza, 5022 Binhe
Main Street, Futian District, Shenzhen, PRC 518026
(2) Beneficially owned by Dr. Hongbing Lan
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Name of parties and 1999 2000 2000
Nature of transaction Rmb Rmb US$
--- --- ---
Dr. Hongbing Lan - Travel and trip (260,494) 2,316,408 279,085
expenses paid on behalf of the Company
SiTech Holding (Hainan) Company Limited 1,485,426 - -
- Cash advances
Sitech Holding (Hainan) Company Limited is an entity controlled by Dr.
Hongbing Lan an officer, director and controlling shareholder of the Company.
The balances with Dr. Hongbing Lan are unsecured, interest-free and
repayable on demand.
The Company jointly developed and designed two projects with SiTech Holding
(Hainan) Company, which generated gross revenue of Rmb 199,310 in 1999.
The 20% equity interest of eSoftBank (Beijing) Software Systems Co., Ltd.
not owned by us, is owned by Hongyu Lan, the brother of Dr. Hongbing Lan an
officer of our Company.
12
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,
1999
(b) Reports on Form 8-K
None
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.
eSoftBank.com, Inc.
By: /s/ Dr. Hongbing Lan
--------------------------
Dr. Hongbing Lan
Chief Executive Officer
By: /s/ Chunlin Tang
--------------------------
Chunlin Tang
Principal Accounting Officer
Dated: May 4, 2001
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 May 4, 2001
-------------------------
Dr. Hongbing Lan
/s/ Xinmin Gao Director May 4, 2001
-------------------------
Mr. Xinmin Gao
/s/ Fa Ding Liu Director May 4, 2001
-------------------------
Mr. Fa Ding Liu
eSoftBank.com, Inc.
Index to Consolidated Financial Statements
Page
-------
Report of Independent Public Accountants
Balance Sheets as of December 31, 2000 and 1999 F-2
Statements of Operations for the Years Ended
December 31, 2000 and 1999 F-3
Statements of Cash Flows for the Years Ended
December 31, 2000 and 1999 F-4
Statements of Shareholders' Equity for the Years
Ended December 31, 2000 and 1999 F-5
Notes to Financial Statements F-6 - F-20
Independent Auditor's Report
Stockholders and the Board of Directors eSoftBank.com, Inc.
We have audited the accompanying consolidated balance sheets of eSoftBank.com,
Inc. (the Company) as of December 31, 1999 and 2000, and the related
consolidated statements of operations, of 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 generally accepted auditing
standards. 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 eSoftBank.com, Inc.
as of December 31, 1999 and 2000, 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
March 31, 2000
eSoftBank.com, Inc.
Consolidated Balance Sheets
December 31, 1999 and 2000
================================================================================
The accompanying notes are an integral part of the consolidated
financial statements.
Assets
1999 2000 2000
Rmb Rmb US$
------------ ------------- -------------
Current Assets
Cash 629,351 3,221,718 388,159
Accounts receivable 2,014,330 640,900 77,217
Deposits and other 1,047,357 1,000,271 120,515
Advances to employees 433,878 427,395 51,493
Costs and estimated earnings in excess of
billings on uncompleted contracts - 207,944 25,053
Due from related party 1,485,426 - -
----------- ------------- -------------
Total Current Assets 5,610,342 5,498,228 662,437
----------- ------------- -------------
Noncurrent Assets
Long-term investment - 2,800,000 337,349
Product development costs, net 822,272 852,995 102,770
Fixed assets 759,533 2,929,976 353,009
Other - 265,068 31,936
------------ ------------- ------------
Total Noncurrent Assets 1,581,805 6,848,039 825,065
------------ ------------- ------------
Total Assets 7,192,147 12,346,267 1,487,502
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
================================================================================
Liabilities and Stockholders' Equity (Deficit)
1999 2000 2000
Rmb Rmb US$
------------ ----------- ------------
Current Liabilities
Short-term borrowings - Bank - 16,000,000 1,927,711
Accounts payable 159,900 159,900 19,265
Accrued expenses
Salaries, wages and other compensation - 669,171 80,623
Employee fringe benefits 274,888 635,988 76,625
Taxes 467,734 355,713 42,857
Other 233,611 1,588,513 191,387
Customer deposits 105,098 41,000 4,940
Billings in excess of costs and estimated
earnings on uncompleted contracts - 57,890 6,975
Due to directors 260,494 2,316,408 279,085
------------ ------------- ------------
Total Current Liabilities 1,501,725 21,824,583 2,629,468
------------ ------------- ------------
Minority Interest 2,704,690 261,925 31,557
------------ ------------- ------------
Stockholders' Equity (Deficit)
Common stock, Par value US$0.001; issued
and outstanding - 12,920,000 shares and
0 shares as of December 31, 2000 and
1999, respectively - 107,236 12,920
Common stock, par value US$1.00; issued
and outstanding - 0 shares and 1,000 shares
as of December 31, 2000 and 1999,
respectively 8,300 - -
Additional paid-in capital 1,209,012 52,715,431 6,351,257
Reserve funds 306,386 347,148 41,825
Retained earnings (accumulated deficit) 1,462,034 (62,910,056) (7,579,525)
---------- ------------- -------------
Total Stockholders' Equity (Deficit) 2,985,732 (9,740,241) (1,173,523)
---------- ------------- -------------
Total Liabilities and Stockholders
Equity 7,192,147 12,346,267 1,487,502
========== ============= =============
F-3
eSoftBank.com, Inc.
Consolidated Statements of Operations
Years Ended December 31, 1999 and 2000
================================================================================
1999 2000 2000
Rmb Rmb US$
------------- -------------- --------------
Revenue 4,085,198 9,463,849 1,140,223
Cost of Sales (959,890) (4,249,939) (512,041)
-------------- ------------- -------------
Gross Profit 3,125,308 5,213,910 628,182
Selling and Administrative Expenses (914,900) (17,201,735) (2,072,498)
---------------- ------------- --------------
Income (Loss) from Operations 2,210,408 (11,987,825) (1,444,316)
---------------- ------------- --------------
Other (Expense) Income
Interest expense - (497,640) (59,957)
Other (expense) income, net (1,915) 255,304 30,760
---------------- ------------- --------------
Total Other Expense, Net (1,915) (242,336) (29,197)
---------------- ------------- --------------
Income before Income Taxes 2,208,493 (12,230,161) (1,473,513)
Income Taxes 249,921 499,561 60,188
---------------- ------------- --------------
Income (Loss) before Minority Interest 1,958,572 (12,729,722) (1,533,701)
Minority Interest in Income (Loss) 932,280 (2,759,393) (332,457)
---------------- ------------- --------------
Net Income (Loss) 1,026,292 (9,970,329) (1,201,244)
================ ============= ==============
Earnings (Loss) per Share - Basic and Diluted .08 (.78) (.09)
================ ============= ==============
Weighted Average Common Shares
Outstanding - Basic and Diluted 12,800,000 12,845,699 12,845,699
================ ============= ==============
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
eSoftBank.com, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1999 and 2000
================================================================================
Common Stock Series A Convertible and
par value US$1.00 Redeemable Preferred Stock
--------------------------- --------------------------------
Number of Amount Number of Amount
Shares Rmb Shares Rmb
----------- ---------- ------------ ----------
Balance as of January 1, 1999 - - - -
Issuance of Common Stock 1,000 8,300 - -
Reserve Fund - - - -
Net Income - - - -
---------- ------------ ------------- ------------
Balance as of December 31, 1999 1,000 8,300 - -
Reclassification of Reserve Funds - - - -
Effect of Merger (1,000) (8,300) 600 5
One for Five Reverse Stock Split - - - -
Issuance of Common Stock - - - -
Conversion of Preferred Stock - - (600) (5)
Assumption of Liabilities by Stockholder
Contributed to Capital - - - -
Net Loss - - - -
Deemed Dividends - - - -
---------- ------------ ------------- ------------
Balance as of December 31, 2000 - - - -
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
================================================================================
Retained
Common Stock Additional Earnings
Par value US $0.001 paid-in Accumulated Reserve
-----------------------------
Number of capital Deficit) Funds Total
Shares Amount Rmb Rmb Rmb Rmb
------------- ------------ ---------------- ------------- -------------- ---------------
- - 1,209,012 602,898 139,230 1,951,140
- - - - - 8,300
- - - (167,156) 167,156 -
- - - 1,026,292 - 1,026,292
----------- ----------- --------------- ------------ -------------- ------------
- - 1,209,012 1,462,034 306,386 2,985,732
- - - (40,762) 40,762 -
17,500,000 145,320 51,383,974 (51,520,999) - -
(14,000,000) (116,270) 116,270 - - -
9,300,000 77,190 (77,190) - - -
120,000 996 (991) - - -
- - 84,356 - - 84,356
- - - (9,970,329) - (9,970,329)
- - - (2,840,000) - (2,840,000)
----------- ----------- --------------- ------------ -------------- ------------
12,920,000 107,236 52,715,431 (62,910,056) 347,148 (9,740,241)
=========== =========== =============== ============ ============== ============
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
eSoftBank.com, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 and 2000
================================================================================
1999 2000 2000
Rmb Rmb US$
------------ ----------- ------------
Cash Flows from Operating Activities
Net Income (Loss) 1,026,292 (9,970,329) $ (1,201,244)
------------ ----------- ------------
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities
Depreciation 169,273 400,808 48,290
Amortization of product development costs 123,364 327,049 39,403
Provision for losses on receivables -
Customers - 1,675,881 201,913
Minority interest 932,280 (2,759,393) (332,457)
(Increase) decrease in
Accounts receivable (701,500) (302,451) (36,440)
Deposits and other (51,518) (217,984) (26,263)
Costs and estimated earnings in
excess of billings on uncompleted
projects 398,692 (207,944) (25,053)
Repayment of advances to employees 112,323 6,483 781
Increase (decrease) in
Accounts payable and accrued expenses 452,450 2,434,138 293,270
Customer deposits (19,347) (64,098) (7,723)
Billings in excess of costs and
estimated earnings on uncompleted
contracts (555,708) 57,890 6,975
------------ ----------- ------------
Total Adjustments (860,309) 1,350,379 162,696
------------ ----------- ------------
Net Cash Provided by (Used in)
Operating Activities 1,886,601 (8,619,950) (1,038,548)
------------ ----------- ------------
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
eSoftBank.com, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 and 2000
================================================================================
1999 2000 2000
Rmb Rmb US$
----------- ------------- -------------
Cash Flows from Investing Activities
Capital expenditures (257,709) (2,571,251) $ (309,789)
Capitalized expenditures for product
development costs (596,840) (357,772) (43,105)
Purchase of long-term investment - (2,800,000) (337,349)
Net (advances to) repayments from
stockholders (401,388) 1,485,426 178,967
----------- ------------- -------------
Net Cash Used in Investing
Activities (1,255,937) (4,243,597) (511,276)
----------- ------------- -------------
Cash Flows from Financing Activities
Net short-term borrowings - 16,000,000 1,927,711
Issuance of common stock 8,300 - -
Net (repayments to) borrowings from directors (44,300) 2,055,914 247,700
Initial investment of minority stockholder - 240,000 28,916
Dividends - (2,840,000) (342,169)
----------- ------------- -------------
Net Cash (Used in) Provided by
Financing Activities (36,000) 15,455,914 1,862,158
----------- ------------- -------------
Net Increase in Cash 594,664 2,592,367 312,334
Cash, Beginning of Year 34,687 629,351 75,825
----------- ------------- -------------
Cash, End of Year 629,351 3,221,718 $ 388,159
=========== ============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
1. Organization and Principal Activities
eSoftBank.com, Inc. (the "Company") is incorporated under the laws of
the State of Utah, in the United States of America, and its 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 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) and
SiTech Hainan Limited (SiTech) (52.36% 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. 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. This occurs when the stockholders
retain the majority voting interest in the combined entity is presumed
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, 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. As of December 31, 1999, World had not commenced any
formal business operations and the only activity related to the
Company's formation.
F-9
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
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. SiTech is a
software designer and markets both packaged and custom designed
Internet-related software applications. The custom-designed application
represents the primary source of the Company's revenue. 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. Hong Yu Lan, 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.
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 during the year ended
December 31, 2000, and has an accumulated deficit of Rmb 62,910,056 as
of December 31, 2000.
F-10
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
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 2001.
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, 2000. 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:
Office and computer equipment 20%
Furniture and fixtures 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%.
F-11
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
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. 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:
1999 2000 2000
Rmb Rmb US$
----------- ----------- ----------
Balance, beginning of year 348,796 822,272 $ 99,068
Costs capitalized 596,840 357,772 43,105
Costs amortized (123,364) (327,049) (39,403)
--------- ----------- ----------
Balance, end of year 822,272 852,995 $ 102,770
The accumulated amortization of product development costs related
to the production of computer software totalled Rmb 543,971 and
Rmb 216,922 as of December 31, 2000 and 1999, respectively.
Included in cost of sales are research and development costs
totalling Rmb 1,113,761 and Rmb 389,375 in the years ended
December 31, 2000 and 1999, respectively.
F-12
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
3. Summary of Significant Accounting Policies (Continued)
(d) 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.
(e) Income taxes
Income taxes are provided under the provisions of Statement of Financial
Accounting Standards No. 109.
(f) Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
(g) Advertising
Advertising is expensed the first time the advertising takes place.
Advertising expense was Rmb 3,171,852 and Rmb 116,062 for 2000 and 1999,
respectively.
(h) 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.
F-13
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
3. Summary of Significant Accounting Policies
(h) Foreign currency translation (Continued)
Translation of amounts from Rmb into United States dollars (US$)
for the convenience of the reader has been made at the unified
exchange rate (see Note 12) on December 31, 2000 of US$ 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.
(i) 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, 2000 and 1999 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.
(j) 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.
(k) 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 shareholders (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.
F-14
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
3. Summary of Significant Accounting Policies (Continued)
(l) 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 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
generally accepted accounting principles 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.
F-15
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
4. Taxation
The Company is subject to PRC business tax at the applicable effective
tax rate (5% for both 2000 and 1999) 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.
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
1999 2000 2000
Rmb Rmb US$
------------- ------------- -------------
Cost
Land lease rights 211,225 211,225 25,449
Leasehold improvements - 330,865 39,863
Furniture and office equipment 160,252 683,411 82,339
Automobiles - 662,173 79,780
Computer equipment 1,020,052 2,075,105 250,013
------------- ------------- -------------
1,391,529 3,962,779 477,444
------------- ------------- -------------
Less: Accumulated Depreciation and
Amortization
Land lease rights 16,960 18,390 2,216
Leasehold improvements - 21,396 2,578
Furniture and fixtures 53,468 286,184 34,480
Automobiles - 95,800 11,542
Computer equipment 561,568 611,033 73,618
------------- ------------- -------------
631,996 1,032,803 124,435
------------- ------------- -------------
Net book value 759,533 2,929,976 353,009
The land lease rights are held in the PRC for 67 years from March 1,
1995.
F-16
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
6. Costs and Estimated Earnings on Uncompleted Contracts
1999 2000 2000
Rmb Rmb US$
---------- ---------- -----------
Costs incurred on uncompleted contracts - 676,313 81,483
Estimated earnings - 710,291 85,577
---------- ---------- -----------
- 1,386,604 167,060
Less billings to date - (1,236,550) (148,982)
---------- ---------- -----------
- 150,054 18,078
Included in the accompanying balance
sheets under the following captions:
Costs and estimated earnings in
excess of billings on uncompleted
contracts - 207,944 25,053
Billings in excess of costs and
estimated earnings on uncompleted
contracts - (57,890) (6,975)
---------- ---------- -----------
- 150,054 18,078
7. 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, 2001, 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.
F-17
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
8. 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 $5.00 1/31/02 - 1/31/03
9. Related Party Balances and Transactions
Name of related party Existing relationship with the Company
---------------------------------- -------------------------------------------
SiTech Holding (Hainan) Company Limited Common ownership - Dr. Hongbing Lan
Dr. Hongbing Lan Director and stockholder
Name of parties and 1999 2000 2000
nature of transactions Rmb Rmb US$
---------------------- ----------- ---------- ----------
Dr. Hongbing Lan - Travel and trip
expenses paid on behalf of the Company 260,494 2,316,408 279,085
SiTech Holding (Hainan) Company
Limited - Cash advances 1,485,426 - -
The balances with Dr. Hongbing Lan are unsecured, interest-free and
repayable on demand.
The Company jointly developed and designed two projects with Hainan,
which generated gross revenue of Rmb 199,310 in 1999.
F-18
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
10. 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.
11. Major Customers
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. For the year ended December 31, 1999,
there were two such customers and the revenue from each amounted to Rmb
1,955,000, and Rmb 800,000. There were no receivable balances for major
customers as of December 31, 2000 and 1999.
12. 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.
F-19
eSoftBank.com, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 2000
================================================================================
13. Supplemental Disclosures of Cash Flow Information
1999 2000 2000
Rmb Rmb US$
---------- --------- ----------
Cash payments of taxes 36,176 599,749 72,259
Cash payments of interest - 497,640 59,957
F-20