UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B) OR 12 (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
CHINAMALLUSA.COM, INC.
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(Name of Small Business Issuer in its Charter)
Utah 13-4083038
------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One World Trade Center, Suite 2201
New York, New York 10048
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(Address of Principal Executive Offices) (Zip Code)
(212) 938-0828
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(Issuer's Telephone Number)
with a copy to:
Mitchell S. Nussbaum, Esq.
Jenkens & Gilchrist Parker Chapin
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
212-704-6426
Securities to be registered pursuant to Section 12(b)of the Act:
None.
Securities to be registered pursuant to Section 12(g)of the Act:
Common Stock, par value $0.0001 per share
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AVAILABLE INFORMATION
Subsequent to the date of this Registration Statement, we will be
subject to the information requirements of the Securities Exchange Act of 1934,
as amended and in accordance therewith will file reports and other information
with the Securities and Exchange Commission. Reports and other information filed
by us with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington D.C. 20549, and at the Commission's New York Regional office at Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, Washington, DC 20549 at prescribed rates.
This Registration Statement, as well as all amendments thereto and
subsequent reports, have been and will be filed through the Electronic Data
Gathering, Analysis and Retrieval (*EDGAR*) system. Documents filed through
EDGAR are publicly available through the Commission's Web site at
http:/www.sec.gov.
We have filed with the Commission this Registration Statement on Form
10-SB under the Exchange Act, with respect to our common stock, par value $.001
per share. Statements contained herein as to the contents of any document are
summaries of such documents and, in each instance, reference is hereby made to
the copy of such document filed as an exhibit to the Registration Statement, and
each such statement is qualified in all respects by such reference. The
Registration Statement may be inspected and copied at the places set forth
above.
In addition to the foregoing, we will furnish to registered holders of
our common stock annual reports containing audited financial statements, with an
opinion expressed by our independent auditors. Such audited financial statements
will be prepared in conformity with generally accepted accounting principals. We
may furnish to registered holders of our common stock unaudited financial
statements on a quarterly basis, such unaudited financial statements to be
prepared in conformity with GAAP. We will also furnish to registered holders all
notices of our stockholder's meetings and other reports and communications.
Our principal executive offices are located at One World Trade Center,
Suite 2201, New York, New York 10048, and its telephone number is (212)
938-0828.
As of September 30, 2000, there were 18,225,184 shares of common stock
issued and outstanding held by 100 holders of record.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION.............................................................................................1
TABLE OF CONTENTS.................................................................................................i
PART I............................................................................................................1
ITEM 1. BUSINESS........................................................................................1
Special Note Regarding Forward Looking Statements...............................................1
Overview........................................................................................1
Industry Background.............................................................................2
The Internet...........................................................................2
Products & Services....................................................................2
Advantages of our service offerings.............................................................4
Our Strategies..................................................................................5
Revenues....................................................................................... 5
Initial Target Markets..........................................................................5
Our Current Customer............................................................................6
Hubei Tianfa Group..............................................................................6
Sales and Marketing.............................................................................6
Competition.....................................................................................6
Proprietary Rights and Licensing................................................................7
Government Regulations..........................................................................8
Property........................................................................................9
Employees.......................................................................................9
Risk Factors...................................................................................10
Risks Relating to our Company.........................................................10
Risks Relating to the Internet Industry...............................................13
Risks Relating to the China Internet Market...........................................14
Political, Economic and Regulatory Risks..............................................15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION............................................................................................16
Overview................................................................................................16
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Results of Operations..........................................................................16
Nine Months Ended September 30, 2000 compared with Nine Months
Ended September 30, 1999.......................................................................17
Revenue...............................................................................17
General and administrative expenses...................................................17
Product development expenses..........................................................17
Marketing and sales expenses..........................................................17
Amortization of deferred compensation.................................................17
Year Ended December 31, 1999 compared with December 31, 1998...................................17
Revenue...............................................................................17
General and administrative(G&A) expenses..............................................17
Product development expenses..........................................................18
Marketing and sales expenses..........................................................18
China Operations...............................................................................18
Taxation.......................................................................................18
Mandatory Contribution Plan and Profit Appropriation...........................................18
Foreign Currency Exchange Losses...............................................................19
Liquidity and Capital Resources................................................................19
Recent Accounting Pronouncements...............................................................20
ITEM 3. DESCRIPTION OF PROPERTY........................................................................20
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................20
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS...................................22
ITEM 6. EXECUTIVE COMPENSATION.........................................................................23
Compensation of Directors and Executive Officers...............................................23
Summary Compensation Table.....................................................................24
Option grants in fiscal Year 1999..............................................................24
Employment Agreements..........................................................................24
Non-Plan Options...............................................................................25
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................25
ITEM 8. DESCRIPTION OF SECURITIES......................................................................26
Our Securities.................................................................................26
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Shares Eligible For Resale.....................................................................26
Transfer Agent & Registrar.....................................................................27
PART II..........................................................................................................27
ITEM 1 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER
MATTERS27
Dividend Policy................................................................................27
ITEM 2. LEGAL PROCEEDINGS..............................................................................27
ITEM 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS.....................................................28
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES........................................................28
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS......................................................29
PART F/S........................................................................................................F-1 - F-12
PART III.........................................................................................................32
ITEM 1. INDEX TO EXHIBITS..............................................................................32
ITEM 2. DESCRIPTION OF EXHIBITS........................................................................32
SIGNATURES.......................................................................................................31
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PART I
ITEM 1. BUSINESS
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
-------------------------------------------------
Certain statements contained in this Registration Statement are
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended). This includes all analysis about future prospects including the
market of our securities, our strategy, our expansion plans, the market for our
technology in China, and successful business partnerships. The estimated growth
of our business contains risks and uncertainties regarding operations, economic
performance and financial conditions. Actual results may differ materially from
those expressed in any such forward-looking statement made by us in this
Registration Statement. Additional factors which may cause different results,
including, but are not limited to, those discussed under the section entitled
"Risk Factors." We do not undertakes an obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.
OVERVIEW
--------
ChinaMallUSA.com, Inc. is a development-stage company that through its
wholly-owned subsidiary B2B Beijing Information Technologies, Ltd. engages in
providing web-based software application and technical services. We are
currently providing our services to a major petroleum product company in China
and we intend to provide our services to other major public and private
institutions in China. B2B Beijing was incorporated in December 1999, commenced
operations in March 2000 and has had $309,157 in revenues to date.
Prior to April 2000, we were developing an on-line marketplace platform
for various industries in China. Prior to that, we were engaged in the business
of international trade between China and the US. In April 2000 we changed our
focus to providing web-based software application and technical services to
institutional clients in China.
We are currently engaged in providing various services to the Hubei
Tianfa Group Corporation, a petroleum products company, and are negotiating with
several industry leaders to use our products to improve their business
efficiency in their respective industries. These industries include cotton,
textiles, paper, electronics, transportation, and automotive industries.
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INDUSTRY BACKGROUND
-------------------
THE INTERNET
The Internet is a global network of interconnected public and private
computer networks that enables commercial organizations, non-commercial
institutions, and individuals to communicate, access and share information,
provide entertainment and conduct business remotely. Use of the Internet has
grown rapidly since the start of its commercialization in the early 1990's.
International Data Corporation estimated that there were approximately 12.9
million Internet users in Asia, excluding Japan, at the end of 1998 and
projected that the number of users would grow to 95.2 million by the end of
2004. This reflects a compound annual growth rate of 56%.
According to Forrester Research, Inc., 90% of firms described their
plans to buy and sell on the Internet. Forrester Research also predicted that
the size of the B2B e-commerce market in the US would increase to $2.7 trillion
in 2004.
The rapid adoption of the Internet by companies is not limited to the
US however. We believe the Internet is an especially useful tool in a country
such as China since geographic distances make the gathering of complete and
up-to-date information a more difficult job. In a country the size of China, we
believe that it is a daunting task to find suppliers, buyers, and production
information without an affordable and effective communications system.
Furthermore, because the lack of information about alternative
suppliers/products and the difficulties of substituting supplier/product
companies are generally required to maintain high levels of inventory for fear
of running out of manufacturing inputs or merchandise for resale, resulting in
eroded profit margins and waste of industry resources.
China's Internet user population is growing rapidly and according to
the China Internet Network Information Center China's Internet users reached 16
million, as of June 2000.
PRODUCTS & SERVICES
-------------------
We believe that our software and services allow companies in China to
use the Internet to provide a system which will solve many of their supply,
communication and other inefficiencies which commonly exist in China. Our
existing business provides software and engineering services to individual
enterprises on a case-by-case basis, according to their requirements. We plan to
expand our software solutions and to offer them in the form of hosted
applications and managed services, provided over the Internet. Our current suite
of Internet based software solutions include:
O CATALOG TRANSACTION SYSTEM
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Our system provides a platform to facilitate the e-commerce of our
customer's products by helping our clients market their products and services
effectively. Our system systematically organizes product and service
information, including prices, while using multi-media technology to accentuate
the advantages of our clients' products.
O REAL TIME TRANSACTION MANAGEMENT AND INFORMATION SYSTEM
---------------------------------------------------------
Our system provides real time tracking and management of inventory,
orders and sales through the use of a standard browser. This enables our clients
to monitor a transaction from its inception to receipt and payment. Our clients
can use this feature to enhance their customer service operations while better
managing their trading activities.
O MEMBERSHIP MANAGEMENT SYSTEM
------------------------------
Our system allows members to access information about potential buyers
or sellers. In addition to providing an easy method for finding business
partners, our system provides member profiles with company contact information,
transaction histories and credit rating.
O SHIPPING MANAGEMENT SYSTEM
----------------------------
Our system allows our customers easy door-to-door tracking of their
product shipments. Our system is flexible enough to be used by any participant
of the shipping process, including the seller, shipper and buyer.
O WAREHOUSE AND MATERIAL MANAGEMENT SYSTEM
------------------------------------------
Our Internet based system helps our customers to improve their
warehouse management to be efficient and reduce operating costs. Our system
easily tracks merchandise in a multi-location warehouse situation and assists in
inventory control. Our system is adaptable to manage materials for large-scale
engineering projects in the construction industry.
O ON-LINE SURVEY AND ANALYSIS SYSTEM
------------------------------------
Our system is a powerful marketing research tool. Our clients can
develop on-line surveys to better understand their target market in order to
develop effective marketing, sales and on-line plans. Our system is flexible
enough to be used by any web site for their research needs.
O ON-LINE TRAINING SYSTEM
-------------------------
Our system provides on-line e-commerce courses. Our system includes
curriculum, faculty and student management, testing and examination as well as
interactive functioning between faculty and students.
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O TRANSACTION HISTORIES
-----------------------
We allow our clients to archive and analyze all trading activities and
records. Through the use of our reporting services, we intend for clients to
easily manage their sales and purchase activities and support their planning,
forecasting and replenishment activities. Aggregate market data such as historic
prices and trading patterns can be provided to customers who need to research
the overall market and plan their business strategies.
O LOGISTICS
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We offer a logistics service which, we believe, represents an important
value-added service that will streamline the moving of goods from one location
to its intended destination. We intend to make arrangements with suppliers who
have in-house shipping capabilities and third-party logistics providers to make
a broad array of logistics services available to our customers.
ADVANTAGES OF OUR SERVICE OFFERINGS
Our services enable our clients to:
o use an easy and powerful catalog tool to publish information
about their products and services;
o update their catalog contents at will without adhering to a
fixed publishing cycle;
o receive more frequent use of their published contents by their
customers;
o be exposed to a large body of potential buyers and enjoy lower
customer acquisition costs;
o have access to a low-cost channel to complement their
traditional off-line selling channels; and
o reduce the costs of order processing by eliminating
miscommunication and mishandling often associated with
telephone and fax orders.
Our services allow customers of our prospective clients to:
o enjoy reduced costs in processing purchase orders;
o manage in-process orders easily through the use of our
reporting system; and
o maintain a lower inventory level with better information about
vendors' product availability.
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OUR STRATEGIES
ENTER INTO AGREEMENTS WITH INDUSTRY LEADERS. We intend to utilize our
mature relationships in China to enter into additional agreements with leaders
of various industries to provide our products and other value-added services.
ENTER INTO TECHNOLOGY PARTNERSHIPS. We intend to enter into technology
partnerships to develop and improve our technology.
ESTABLISH BRAND AWARENESS. We focus our marketing efforts toward
educating our target market, generating new sales opportunities, and creating
awareness for our electronic commerce services. We recently participated in a
trade show hosted by the China Ministry of Internal Trade and the United Nations
Development Bureau where we broadcasted the trade show on-line.
REVENUES
We earn revenue from several sources:
o WEB DEVELOPMENT AND SYSTEM INTEGRATION. We charge our clients
fees for providing web design, web development service and
system integration services.
o SOFTWARE LEASING AND SALES. We lease and sell our B2B commerce
software and logistic system software to our customers.
o PROVIDING APPLICATION SERVICE. We host and maintain certain
software applications for our clients for monthly fees.
o CONSULTING SERVICE FEE. We generate fees from customers who
retain our technical consulting services.
INITIAL TARGET MARKETS
----------------------
We are currently planning to enter into agreements with major suppliers
in seven industries. The initial industries we have targeted are:
o PETROLEUM
o COTTON
o TEXTILES
o PAPER
o ELECTRONICS
o AUTOMOTIVE AND AUTOMOTIVE PARTS
o LOGISTICS
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We intend to enter into strategic relationships with industry leaders.
Through these relationships, we seek to optimize our technology architecture and
operating capabilities, as well as promote the widespread adoption of our
system.
OUR CURRENT CUSTOMER
--------------------
HUBEI TIANFA GROUP CORPORATION
We created a website and logistic system for the Hubei Tianfa Group
Corporation, as well as the appropriate training for the logistic system. We
also provide maintenance for both the website and system.
Tianfa is a Shenzhen Stock Exchange-listed petroleum products company
with assets totaling $300 million. It owns and operates 80 gasoline stations,
all linked to the company's intranet. It is planning to build another 100
gasoline stations throughout China, with the goal of becoming one of the largest
gasoline retailers.
SALES AND MARKETING
We plan to be active in holding e-commerce seminars for both industry
and government, undertaking speaking engagements and building relationships with
business press and industry analysts, in an effort to publicize our brand and
project the image of an expert e-commerce enabler. We believe this serves an
important purpose of making the best industry incumbent, brick-and-mortar
companies to desire a partnership relationship with us.
In contrast to the general marketing approach described above, the
marketing team also supports our business development efforts in actively
recruiting JV partners after they have been identified in our business
development analysis. We do this either by:
o reaching out to our clients and potential clients and
prospecting for potential clients or JV partners in
pre-identified industries, or
o by calling on pre-identified clients or JV partners by way of
introduction from our extensive network of contacts in China.
We plan to extend our marketing efforts to assist our clients to
recruit their own dedicated marketing team and develop a marketing program. We
believe the assistance we provide to our clients will be critical in helping
them achieve success and build a defensible position in their industry.
COMPETITION
Our current and potential competitors may develop superior Internet
purchasing solutions that achieve greater market acceptance than our solution.
Many of our existing and potential competitors, including large traditional
distributors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater
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financial, technical and marketing resources than we do. We believe our current
competitors include China.com and Computer Associates International, who both
offer some or all of the services that we do.
Such competitors may undertake more extensive marketing campaigns for
their brands, products and services, adopt more aggressive pricing policies and
make more attractive offers to customers, potential employees, distribution
partners, commerce companies and third-party suppliers.
In addition, substantially all of our prospective customers may have
established long-standing relationships with some of our competitors or
potential competitors. Accordingly, we cannot be certain that we will be able to
expand our customer list and user base, or retain our current customers. We may
not be able to compete successfully against our current or future competitors
and competition could have a material adverse effect on our business, results of
operations and financial condition.
PROPRIETARY RIGHTS AND LICENSING
--------------------------------
Our success and ability to compete depends on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of copyright, trademark and trade secret laws and contractual protections to
establish and protect the proprietary aspects of our technology. We seek to
protect our source code for our software, documentation and other written
materials under trade secret and copyright laws. Finally, we seek to avoid
disclosure of our intellectual property by requiring employees and consultants
with access to our proprietary information to execute confidentiality agreements
with us and by restricting access to our source code.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade
secrets, and to determine the validity and scope of the proprietary rights of
others. Any resulting litigation could result in substantial costs and diversion
of resources and could have a material adverse effect on our business operating
results.
Our success and ability to compete also depends on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability to
license the infringed technology, our business and operating results would be
significantly harmed.
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GOVERNMENT REGULATIONS
----------------------
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CHINESE GOVERNMENT REGULATION OF
TECHNOLOGY-ORIENTED COMPANIES.
China has recently begun to regulate its Internet sector by making
pronouncements or enacting regulations regarding the legality of foreign
investment in the Chinese Internet sector, the existence and enforcement of
content restrictions on the Internet and the availability of securities
offerings by companies operating in the Chinese Internet sector.
BBIT is structured as a technology-oriented company engaged in the
development of Internet technologies and related software, as well as e-commerce
activities. BBIT is not currently a content provider and therefore not subject
to such regulations. Under current PRC law, the legal establishment of such a
technology company must be approved by the relevant local Commission for Foreign
Economic Relations and Trade, and may commence operations only upon the issuance
of a business license by the State Administration of Industry and Commerce, or
SAIC.
There are substantial uncertainties regarding the proper interpretation
of current and future Chinese Internet laws and regulations. Although we believe
and have been advised that many current regulations will not apply to us, we
cannot assure you that existing or future regulations will be interpreted
differently.
The existing issues, risks and uncertainties relating to Chinese
government regulation of the Chinese Internet sector include the following:
The Chinese Ministry of Information and Industry, or MII, has also
stated recently that it intends to adopt new laws or regulations governing
foreign investment in the Chinese Internet sector in the near future. If these
new laws or regulations forbid foreign investment in the Internet sector, our
business in China will be severely impaired.
The MII has also stated recently that the activities of Internet
content providers are also subject to regulation by various Chinese government
authorities, depending on the specific activities conducted by the Internet
content provider. Various government authorities have stated publicly that they
are in the process of preparing new laws and regulations that will govern these
activities. We do not intend to be an Internet content provider and, therefore,
do not expect to be subject to such regulations. In addition, the new laws and
regulations may require various Chinese government approvals for securities
offerings by companies engaged in the Internet sector in China.
The interpretation and application of existing Chinese laws and
regulations, the stated positions of the MII and the possible new laws or
regulations have created substantial uncertainties regarding the legality of
existing and future foreign investments in, and the businesses and activities
of, Chinese Internet businesses. Accordingly, it is
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possible that the relevant Chinese authorities could, at any time, assert that
any portion or all of our existing or future ownership structure and businesses
violates Chinese laws and regulations. It is also possible that the new laws or
regulations governing the Chinese Internet sector that may be adopted in the
future will prohibit or restrict foreign investment in, or other aspects of, any
of our current or proposed businesses and operations.
If we are found to be in violation of any existing or future Chinese
laws or regulations, the relevant Chinese authorities would have broad
discretion in dealing with such a violation, including, without limitation, the
following:
O levying fines;
O revoking our business license;
O requiring us to restructure our ownership structure or
operations; and
O requiring us to discontinue any portion or all of our Internet
business.
PROPERTY
Our executive offices are located in approximately 1,939 square feet of
leased office space located in New York City under a lease expiring August 2002.
The annual rent is $69,804. Our subsidiary, BBIT, leases a space of 1,325 square
feet at 241,830.75 Renminbi per year (approximately $29,207 U.S. Dollars) in
Beijing, China, under a lease that expires on December, 2000 and a second space
of approximately 2,413 square feet at 440,500.25 Renminbi per year
(approximately $53,200 U.S. Dollars), under a lease expiring in February 2001.
EMPLOYEES
As of September 30, 2000, we had 43 full-time employees, including 23
in research and development, 4 in supplier relations, 4 in sales and marketing,
5 in business development, and 7 in general and administrative functions. Eight
of our employees work in New York and we employ 35 people in Beijing. From time
to time, we also employ independent contractors to support our research and
development, web-site design, marketing, sales and support, and administrative
organizations. None of our employees are represented under collective bargaining
agreements. We consider our relations with our employees to be good and we have
never experienced a work stoppage.
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RISK FACTORS
------------
In addition to other information in this Registration Statement on Form
10-SB, the following important factors should be carefully considered in
evaluating our company and our business because such factors currently have a
significant impact on our business, prospects, financial condition and results
of operations.
RISKS RELATING TO OUR COMPANY
WE ARE A RECENTLY ORGANIZED COMPANY AND THEREFORE, HAVE LITTLE OR NO
OPERATING HISTORY.
Prior to April 2000, we were developing an on-line marketplace platform
for various industries in China. Prior to that, we were engaged in the business
of international trade between China and the US. In April 2000 we changed our
focus to providing web-based software application and technical services to
institutional clients in China. Therefore, we have a very short operating
history in a highly competitive environment. Because of our limited operating
history, our business model and strategies are unproven, we cannot be certain
that they will be successful. In addition, no assurance can be given that we
will ever be successful or be able to achieve profitable operations. We face the
risks inherent in a new business, including the absence of an operating history.
The likelihood of our success must be considered in light of the problems,
expenses, difficulties, complications and delays frequently encountered in
connection with the formation of a new business.
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE FUTURE LOSSES.
For the last two years, we have accumulated losses of $1,053,000. We
anticipate that we will continue to incur losses for the foreseeable future due
to increased operating costs for the expansion of our business. Our net losses
may increase in the future and we may never achieve or sustain profitability.
WE ARE UNCERTAIN THAT WE WILL ACHIEVE MARKET ACCEPTANCE.
There is no assurance that there will be continued demand for our
services.
WE DO NOT HAVE A DIVERSE CLIENT BASE.
Currently, most of our revenue comes from one customer, the Hubei
Tianfa Group Corporation of Hubei Province, China. Although we are working with
a number of other potential customers, there is no assurance that we will obtain
business from them. Our ability to garner additional business largely depends on
our reputation as an e-commerce solutions provider. With limited funds allocated
for marketing purposes, we cannot be sure that we can generate publicity or
promote our company adequately to instill customers' confidence in us.
WE WILL NEED ADDITIONAL FINANCING TO SUSTAIN OUR FUTURE OPERATIONS.
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Our available funds may not be adequate for us to fully realize our
business objectives. Accordingly, our ultimate success will depend upon our
ability to raise additional capital through our proposed private, initial and/or
secondary public offerings or to have other parties bear a portion of the
required costs to further develop or exploit our business objectives. The terms
of any capital raises are currently unknown and there can be no assurances that
we can obtain additional capital on favorable terms. There is no assurance that
we will ever be able to obtain necessary funds from any source or on favorable
terms. Our inability to raise additional funds will have a material adverse
effect on our business, results of operations and financial condition.
QUARTERLY RESULTS ARE NOT AN ACCURATE TOOL FOR FORECASTING BECAUSE OUR
OPERATIONS ARE UNSTABLE.
Our business is volatile and we may experience major fluctuations in
our quarterly operating results due to a variety of external factors including
the following:
o Attracting and maintaining new and current customers;
o Innovations in the services and products by us or our
competitors;
o System and Internet failures;
o Changes in laws and regulations;
o Inability to meet budgeted revenues because of unexpected
expenses; and
o Natural fluctuations in the economic conditions relating to
the Internet, electronic commerce and the market in China.
Due to these factors the price of our common stock could decrease thus resulting
in the potential loss of shareholder value.
PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON THE
MARKETABILITY OF OUR COMMON STOCK.
The Commission has adopted regulations which generally define a "penny
stock" to be any equity security that has a market price (as defined) of less
than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exceptions. As a result, our common stock is subject to rules that
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors,
generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse. For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock unless exempt, the rules require the
delivery, prior to the
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transaction, of a risk disclosure document mandated by the Commission relating
to the penny stock market. The broker-dealer must also disclose the commission
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent,
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Consequently, the "penny
stock" rules may restrict the ability of broker-dealers and shareholders to sell
our equity securities in the secondary market and affect the price at which such
securities are sold.
WE DO NOT PLAN ON PAYING DIVIDENDS.
We have not paid any dividends on our common stock since our inception
and do not intend to pay dividends on our common stock in the foreseeable
future. Any earnings we may realize in the foreseeable future will be retained
to finance our growth.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.
We have 18,225,184 shares of our common stock issued and outstanding,
13,167,162 of which are "restricted securities". Of such "restricted
securities", some may be sold pursuant to Rule 144 as described below.
Rule 144 provides, in essence, that a person holding "restricted
securities" for a period of one year may sell only an amount every three months
equal to the greater of (a) one percent of the issuer's issued and outstanding
shares, or (b) the average weekly volume of sales during the four calendar weeks
preceding the sale. The amount of "restricted securities" which a person who is
not an affiliate of the issuer may sell is not so limited, since non-affiliates
may sell without volume limitation their shares held for two years if there is
adequate current public information available concerning the issuer. In such an
event, "restricted securities" would be eligible for sale to the public at an
earlier date. The sale in the public market of our common stock may adversely
affect prevailing market prices of our common stock.
WE HAVE LIMITED THE LIABILITY OF OUR DIRECTORS.
As permitted by Utah law, our certificate of incorporation limits the
liability of our directors for monetary damages for breach of a director's
fiduciary duty except for liability in certain instances. As a result of our
charter provision and Utah law, stockholders may have limited rights to recover
against our directors for breach of fiduciary duty.
OUR FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE.
This Registration Statement contains forward-looking statements and
information that are based on our management's beliefs as well as assumptions
made by, and
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information currently available to, management. When used in this Registration
Statement (including Exhibits), words such as "anticipate", "believe",
"estimate", "expect", and, depending on the context, "will" and similar
expressions, are intended to identify forward-looking statements. Such
statements reflect our current views with respect to future events and are
subject to certain risks, and assumptions, including the specific risk factors
described above. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, believed, estimated or expected. We do not
intend to update these forward-looking statements and information.
RISKS RELATING TO THE INTERNET INDUSTRY
IF OUR CLIENTS CHOOSE TO DEVELOP INTERNET SOLUTIONS INTERNALLY, OUR WEB
SOLUTIONS BUSINESS MAY BE ADVERSELY AFFECTED.
Businesses may elect to design, develop and maintain their Web sites
internally and not to outsource their businesses to companies such as ours which
would adversely affect our business.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY,
WHICH COULD CAUSE US TO BE LESS COMPETITIVE.
Although we rely on a combination of copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights, unauthorized parties may attempt to copy or otherwise obtain and use our
technology. Monitoring unauthorized use of our products is difficult and costly,
and we cannot be certain that the steps we have taken will prevent
misappropriations of our technology. Occasionally, we may have to resort to
litigation to enforce our intellectual property rights, which could result in
substantial costs and diversion of our resources thus resulting in losses.
WE MAY ENCOUNTER COMPETITION FROM COMPANIES WITH SUBSTANTIALLY GREATER
FINANCIAL, MARKETING, AND TECHNOLOGICAL RESOURCES.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources than us,
significantly greater name recognition and a larger installed base of customers.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. In the past, we have lost potential customers to competitors for
various reasons, including lower prices and other incentives not matched by us.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. We also expect that competition will increase
as a result of industry consolidations.
13
<PAGE>
Such competitors may undertake more extensive marketing campaigns for
their brands, products and services, adopt more aggressive pricing policies and
make more attractive offers to customers, potential employees, distribution
partners, commerce companies and third-party suppliers.
We may not be able to compete successfully against our current and
future competitors.
RISKS RELATING TO THE CHINA INTERNET MARKET
OUR INDUSTRY IS INTENSELY COMPETITIVE.
The Chinese Internet market is characterized by an increasing number of
entrants. The Internet industry is relatively new and subject to continuing
definition and as a result, new competitors may better position themselves to
compete in this market as it matures. Our existing and potential new competitors
may have longer operating histories in the Internet market, greater name
recognition, larger customer bases and databases, and significantly greater
financial, technical and marketing resources than us. We may not be able to
compete successfully with these competitors. Internet usage in China may
increase thus resulting in the Chinese market becoming more attractive to
advertisers and for conducting electronic commerce. Large global competitors may
increasingly focus their resources on the Greater China market thereby creating
more competition. In addition, providers of Chinese language Internet tools and
services may be acquired by, receive investments from or enter into other
commercial relationships with large, well-established and well-financed
Internet, media or other companies.
THE CHINA INTERNET INDUSTRY IS A DEVELOPING MARKET AND HAS NOT BEEN
PROVEN AS AN EFFECTIVE COMMERCIAL MEDIUM.
The market for Internet services in China is a new development. Because
the Internet is an unproven medium for obtaining or marketing commercial
services, our future operating results will depend substantially upon the
increased use of the Internet for commercial activities. Many of our customers
will have limited experience with the Internet as a sales and distribution
channel and may not find the Internet to be effective for promotion their
products and services. Critical issues concerning the commercial use of the
Internet in China and Asia such as security reliability, cost, ease of
deployment, administration and quality of service may affect the adoption of the
Internet to solve business needs.
Our entry into the Peoples Republic of China Internet market depends on
the establishment of an adequate telecommunications infrastructure in the
Peoples Republic of China by the Chinese government. The telecommunications
infrastructure in the Peoples Republic of China (PRC) is not well developed.
Access to the Internet is accomplished primarily by means of the government's
backbone of separate national interconnection networks that connect with the
international gateway to the Internet. The Chinese government's interconnecting,
national networks connect to the Internet through
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<PAGE>
government-owned international gateways, which are the only channels through
which a domestic Chinese user can connect to the international Internet network.
This is owned and operated by the PRC government and it is the only channel
through which the domestic PRC Internet network can connect to the international
Internet network. We rely on this backbone to provide data communications
capacity primarily through local telecommunications lines. Because of this, we
will continue to depend on the PRC government to establish and maintain a
reliable Internet infrastructure. We will have no means of getting access to
alternative networks and services, on a timely basis or at all, in the event of
any disruption or failure. There can be no assurance that the Internet
infrastructure in China will support the demands associated with continued
growth. In addition, we have no guarantee that we will have access to
alternative networks and services in the event of any disruption or failure. If
the necessary infrastructure standards; protocols; or complementary products,
services or facilities are not developed by the PRC government, our business
could be materially and adversely affected.
POLITICAL, ECONOMIC AND REGULATORY RISKS
THE ECONOMIC CLIMATE IN ASIA IS VOLATILE.
China has experienced significant economic downturns and related
difficulties. As a result of the decline in the value of the region's
currencies, many Asian governments and companies have had difficulties servicing
foreign currency-denominated debt and many corporate borrowers defaulted on
their payments. As the economic crisis spread across the region, governments
raised interest rates to defend their weakening currencies, which adversely
impacted domestic growth rates. In addition, liquidity was substantially reduced
as foreign investors curtailed investments in the region and domestic banks
restricted additional lending activity. The currency fluctuations, as well as
higher interest rates and other factors, have materially and adversely affected
the economies of many countries in Asia. Estimated real gross domestic product
growth for many Asian countries have decreased. Economic developments in
countries throughout Asia could materially and adversely affect our business,
results of operation and financial condition.
A CHANGE IN CURRENCY EXCHANGE RATES COULD INCREASE OUR COSTS RELATIVE
TO OUR REVENUES.
Historically, substantially all of our revenues, expenses and
liabilities are denominated in Chinese Renminbi. We also generate revenues and
expenses and liabilities in U.S. dollars. In the future, we may also conduct
business in additional foreign countries and generate revenues, expenses and
liabilities in other foreign currencies. As a result, we are subject to the
effects of exchange rate fluctuations with respect to any of these currencies.
We have not entered into agreements or purchase instruments to hedge our
exchange rate risks although we may do so in the future.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO UTILIZE OUR
REVENUES EFFICIENTLY.
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<PAGE>
Although Chinese governmental policies were introduced in 1996 to allow
greater convertibility of the Renminbi, significant restrictions still remain.
We can provide no assurance that the Chinese regulatory authorities will not
impose greater restrictions on the convertibility of the Renminbi. Because a
significant amount of our future revenues may be in the form of Renminbi, any
future restrictions on currency exchanges may limit our ability to utilize
revenue generated in Renminbi to fund our business activities outside the PRC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our
consolidated financial statements and notes to those statements.
OVERVIEW
--------
The following discussion should be read in conjunction with the
accompanying financial statements.
ChinaMallUSA.com was created as a result of a reverse acquisition on
June 1, 1999. Comparative financial statements for the years ending December 31,
1999 and 1998 include those of the company before the reverse acquisition.
Prior to the reverse acquisition, ChinaMallUSA.com engaged in limited
B2C operations in China that generated virtually no revenue.
In December 1999, ChinaMallUSA.com created a wholly owned subsidiary,
BBIT, in Beijing and began operations. This operation began producing revenue in
the second quarter of 2000, and currently employs 30 people. Through BBIT, our
plan is to focus on providing web-based software application and technical
services to institutional clients in China.
RESULTS OF OPERATIONS
---------------------
The following table presents statements of operations comparative
expense data for the nine months ended September 30, 2000 and 1999, and for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Nine Months Years ended
ended September 30 December 31
---------------------------------- ------------------------------------
2000 1999 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $309,157 ---- ---- ----
General and administrative
Expenses 1,133,185 $225,259 $542,595 $351,546
Product development 95,709 106,269 12,200
Marketing and sales 1,120,009 38,041 25,693 24,387
Amortization of deferred
Compensation 586,106 ---- ----- ----
</TABLE>
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<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
Revenue
-------
ChinaMallUSA.com recognized its first significant operating revenue
during the second and third quarter of 2000. The $309,157 was earned from an
Internet consulting arrangement with Tianfa. All of our revenue producing
activity is performed by our 100% owned subsidiary in Beijing, BBIT.
General and administrative expenses
-----------------------------------
G&A expenses increased by nearly $910,000 in the first nine months of
2000 to $1,133,185 from $225,259 in 1999. The primary reason was the staffing of
our wholly owned subsidiary BBIT, which increased to about 35 employees as of
September 2000 from zero in 1999.
Product development expenses
----------------------------
Product development expenses of $95,709 increased in 2000 as the
company continued work on its eMarketplace platform which began in September
1999.
Marketing and sales expenses
----------------------------
The primary cause of the large increase in marketing and sales expenses
to $1,120,009 in the first nine months of 2000 from the nominal $38,041 in 1999
is $970,000 in stock awarded to China Township Enterprise Investment &
Development for consulting fees associated with facilitating our joint venture
agreements.
Amortization of deferred compensation
-------------------------------------
Amortization of deferred compensation for $586,106 is reclassified as
separate line item in 2000. In 1999, amortization of deferred compensation was
classified as part of G&A but there was none accounted for in the first nine
months of 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH DECEMBER 31, 1998
Revenue
-------
ChinaMallUSA.com had no operating revenue during 1999 and 1998.
General and administrative(G&A) expenses
----------------------------------------
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G&A expenses increased by $191,000 in 1999 as the company hired
executive management. Stock options were issued in 1999, which resulted in
$145,308 in amortization of deferred compensation compared to zero in 1998.
Product development expenses
----------------------------
Product development expenses increased sharply in 1999 as the company
began development of its technology platform in September 1999.
Marketing and sales expenses
----------------------------
Marketing and sales expenses remained low and stable between 1999 and
1998. Expenses in this category include the development of brochures and
ChinaMallUSA.com's home page.
CHINA OPERATIONS
To date, ChinaMallUSA.com has produced little revenue in the US.
Substantially most of revenue has been earned by our wholly owned subsidiary
BBIT in China. As a result, we rely on dividends and other distributions paid by
BBIT, including the funds necessary to service any debt we may incur. If BBIT
incurs debt on its own behalf in the future, the instruments governing the debt
may restrict BBIT's ability to pay dividends or make other distributions to us.
Additionally, PRC laws restrict the payment of dividends to ChinaMallUSA.com by
BBIT only out of BBIT's net income, if any, determined in accordance with PRC
accounting standards and regulations. Under PRC law BBIT is also required to set
aside a portion of its net income, if any, each year to fund certain reserve
funds. These reserves are not distributable as cash dividends. BBIT has not
declared any dividends to date and does not anticipate doing so during 2000.
TAXATION
ChinaMallUSA.com is subject to income taxes in the United States while
our PRC operating subsidiary, BBIT, is subject to PRC's Income Tax Law
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local tax laws. Under these tax laws, BBIT is subject to income tax at a
statutory rate of 33%, 30% state income taxes plus 3% local income taxes, on PRC
taxable income. Although BBIT's income is generally not taxable in the United
States, dividends distributed from BBIT to our company are subject to income tax
in the United States. Under the applicable PRC tax laws, these dividends are
exempt from withholding tax in China. Subject to certain limitations, the income
taxes paid by BBIT on its earnings are creditable against ChinaMallUSA.com's tax
liabilities in the United States.
MANDATORY CONTRIBUTION PLAN AND PROFIT APPROPRIATION
BBIT participates in a government-mandated, multi-employer defined
contribution plan, through which employees receive retirement, medical and other
welfare benefits. PRC labor regulations stipulate that BBIT must pay a monthly
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<PAGE>
contribution to the local labor bureau. The monthly contribution rate is based
on the monthly basic compensation amount of qualified employees. BBIT has no
further commitments beyond its monthly contribution, and the relevant local
labor bureau is responsible for meeting all retirement benefit obligations.
Under applicable PRC laws, BBIT is required to make appropriations from
after-tax profit to non-distributable reserve funds which are determined by its
board of directors. These reserve funds must include a general reserve, an
enterprise expansion fund and a staff bonus and welfare fund. Ten percent of
after-tax profit, as determined under PRC GAAP, must be held in the general
reserve fund per annum, while the other fund appropriations are at
ChinaMallUSA.com's discretion.
FOREIGN CURRENCY EXCHANGE LOSSES
While our reporting currency is the U.S. dollar, in the future
substantially all of our revenues and expenses will be denominated in Renminbi
and a significant portion of our assets and liabilities will also be denominated
in Renminbi. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be impacted by fluctuations in the
exchange rate between U.S. Dollars and Renminbi. If the Renminbi depreciates
against the U.S. Dollar, the value of our Renminbi revenues and assets as
expressed in our U.S. Dollar financial statements will decline. We do not hold
any derivative or other financial instruments that expose us to substantial
market risk.
See "Risk Factors - We may suffer currency exchange losses if the
Renminbi depreciates relative to the U.S. Dollar".
The Renminbi is currently freely convertible under the "current
account", which includes dividends, trade and service-related foreign exchange
transactions, but not under the "capital account", which includes foreign direct
investment. To date, we have not entered into any hedging transactions in an
effort to reduce our exposure to foreign currency exchange risk. While we may
decide to enter into hedging transactions in the future, the effectiveness of
these hedges may be limited and we may not be able to successfully hedge our
exposure at all. Accordingly, we may incur economic losses in the future due to
foreign exchange rate fluctuations which may have a negative impact on our
financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Current cash balances and cash flows from operations, if any, are not
sufficient to meet our present cash needs, including for working capital and
capital expenditures for the next twelve months.
Management currently anticipates the need to raise additional capital
through the issuance of debt or equity securities, prior to achieving positive
cash flows from operations. We cannot be certain that additional funds will be
available on satisfactory terms when needed, if at all. If we are unable to
raise additional necessary capital in the
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<PAGE>
future, we may be required to curtail our operations significantly. The
incurrence of indebtedness would result in increased debt service obligations
and could result in operating and financial covenants that would restrict our
operations. If additional funds are raised through the issuance of equity
securities, the percentage of ownership of our stockholders would be reduced.
Furthermore, these equity securities might have rights, preferences or
privileges senior to our common stock.
Since BBIT currently derives cash from its operations, it derives
sufficient cash to meet present cash needs for the next twelve months while it
receives payments under its arrangement with Tianfa. BBIT's future cash flow is
dependent on its ability to engage new consulting and application service
contracts.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS
No.133, Accounting for Derivative Instruments and Hedging Activities, which we
will be required to adopt for the year ending December 31, 2001. This statement
establishes a new model for accounting for derivatives and hedging activities.
FAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because we currently hold no derivative financial instruments and do
not currently engage in hedging activities, we do not expect the adoption of
this standard to have a significant impact on our consolidated financial
statements.
ITEM 3. DESCRIPTION OF PROPERTY
We lease from The Port Authority of NY and NJ approximately 1,939
square feet at One World Trade Center, Suite 2201, New York, New York 10048
which serves as our executive offices. The current lease term commenced in
August 1999 and expires in August 2002. The annual rent is $69,804.
Our subsidiary, BBIT, leases from China Township Enterprise Investment
& Development a space of 1,325 square feet at an annual rent of 241,830.75
Reminbi (approximately $29,207 US Dollars), with the lease term expiring
December 2000 and a second space of approximately 2,413 square feet at an annual
rent of 440,500.25 Reminbi (approximately $53,200 US Dollars), with the lease
term expiring in February 2001.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of September 30, 2000
with respect to the beneficial ownership of the outstanding shares of our common
stock by (i) any holder of more than five percent of the outstanding shares;
(ii) our officers and directors; and (iii) our directors and officers of the as
a group. Except as otherwise indicated, each person listed below has sole voting
and investment power with respect to the shares of common stock set forth
opposite such person's name.
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<PAGE>
Beneficial ownership has been determined in accordance with rules of
the Securities and Exchange Commission, and unless otherwise indicated,
represents shares for which the beneficial owner has sole voting and investment
power. The number of shares of common stock beneficially owned includes any
shares issuable pursuant to stock options that may be exercised within 60 days
after September 30, 2000. Shares issuable pursuant to such options are deemed
outstanding for computing the percentage of the person holding such options but
are not deemed to be outstanding for computing the percentage of any other
person.
<TABLE>
<CAPTION>
Name of Beneficial Owner(1) Number of Shares of Common Stock(2) Percentage (%) of Ownership(3)
<S> <C> <C> <C>
Max P. Chen(4) 5,654,073(5) 27.48%
ChinaMallUSA.com, Inc. 2,191,875 12.03%
Lion Capital Group 1,666,667 9.14%
China Township Enterprise
Investment & Development Corp. 1,333,333(6) 6.93%
Sheng Jia USA Inc. 1,111,112 6.10%
James Chyn 1,050,000(7) 5.46%
Zhang Duo 300,000 1.65%
Rong Quiang Lin 166,666(8) *
All officers and Directors as a group 7,170,739(9) 32.98%
(4 persons)
</TABLE>
* Less than 1%
(1) Unless otherwise indicated, the address of all persons listed in this
section is c/o ChinaMallUSA.com, Inc., One World Trade Center, Suite
2201, New York, New York, 10048.
(2) Under the rules of the SEC, a person is deemed to be the beneficial
owner of a security if such person has or shares the power to vote or
direct the voting of such security or the power to dispose or direct
the disposition of such security. A person is also deemed to be a
beneficial owner of any securities if that person has the right to
acquire beneficial ownership within 60 days of the date hereof. Unless
otherwise indicated by footnote, the named entities or individuals have
sole voting and investment power with respect to the shares of common
stock beneficially owned.
(3) Shares subject to options are considered outstanding only for the
purpose of computing the percentage of outstanding common stock which
would be owned by the optionee if the options were so exercised, but
(except for the calculation of beneficial ownership by all directors
and executive officers as a group) are not considered outstanding for
the purpose of computing the percentage of outstanding common stock
owned by any other person.
(4) Max P. Chen is the Chairman of the Board and President.
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<PAGE>
(5) Includes 1,950,000 shares of common stock issuable upon exercise of
currently exercisable options, 286,173 shares of common stock owned by
his wife, and 400,000 shares of common stock issuable upon exercise of
currently exercisable options owned by his wife.
(6) Includes 1,000,000 shares of common stock issuable upon exercise of
currently exercisable options.
(7) Includes 1,000,000 shares of common stock issuable upon exercise of
currently exercisable options.
(8) Includes 166,666 shares of common stock issuable upon exercise of
currently exercisable options.
(9) Includes Max P. Chen, James Chyn, Zhang Duo, and Rong Quiang Lin.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names and ages of the directors and executive officers of
ChinaMallUSA.com are set forth below. All directors are elected annually by the
stockholders to serve until the next annual meeting of the stockholders and
until their successors are duly elected and qualified. Officers are elected
annually by the board of directors to service at the pleasure of the board.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH CHINAMALLUSA.COM AND BBIT
<S> <C>
Max P. Chen 46 Chairman of the Board of Directors and President
James Chyn 46 Executive Vice President, Chief Operating Officer
and Director
Rong Qiang Lin 49 Director
Tingyu Lu 35 Director
Duo Zhang 40 General Manager of BBIT
Zhongkui Li 34 Vice General Manager of BBIT
</TABLE>
Mr. Max P. Chen served as our Chairman of the Board between June 1999
and June 2000. Additionally, Mr. Chen is the President of Harvard Management
Associates Inc., which he founded in 1997. From 1995 to 1997, Mr. Chen was
President of Cheng Xiang Trading USA Inc., an import/export trading company.
From 1993 to 1995, Mr. Chen was President of Norman Associates, an international
trading company. He has over 16 years of business experience.
Mr. James Chyn joined us in September 1999 as Vice President. From 1985
to 1999, Mr. Chyn was the owner and president of Windsor Gramercy Corp., a
costume jewelry and textile importer and a textile agent for Taiwanese mills. He
is an entrepreneur with 20 years of IT and international trade experience. He
has been
22
<PAGE>
working with China since 1987 and has accumulated considerable domain expertise
in many of the Chinese industries in which we are involved. Mr. Chyn holds an
MBA degree in Finance and International Trade from New York University.
Mr. Rongqiang Lin joined us as a director in July 2000. Since 1993, he
has been the president of Zhongyuan Economics and Technologies Development
Corporation and the Chairman of the Board of Beijing Xinyuan Real Estate
Development Corporation. He studied at the Graduate School of China Social
Sciences Academy between 1983 and 1986.
Mr. Tingyu Lu joined us as a director in July 2000. He joined China
Township Enterprise Investment & Development in 1995 and is currently its acting
president. He holds a BS degree in Civil Engineering from Huabei Institute of
Plumbing and Electrical Engineering.
Mr. Duo Zhang joined our wholly owned subsidiary BBIT in March 2000 as
its general manager. He is widely recognized as a leading expert in e-commerce
and logistics. In 1999, he founded FancyInNet, a company that specializes in the
development of logistics systems and web-based e-commerce certification
programs. In 1998, he was appointed as the director at the E-commerce Center at
Northern Jiaotong University. Prior to that, he was the deputy director of the
Logistics Research Center at the same university. He led the development of many
projects including the Logistics Market Infonet for the China Rail System
Resources Corporation. Mr. Zhang is a professor at Northern Jiaotong University
where he earned his MS degree in Logistics Management Engineering.
Mr. Zhongkui Li joined our wholly owned subsidiary BBIT in June 2000 as
its vice general manager. From 1998 to 1999 he was a manager of the system
project and market department at China Aviation and Space International Group in
Shenzhen, China. From 1989 to 1998 he worked for the 35 Research Institute of
the Third Academy of China Aviation and Space Corp. as the Director of Network
Division.
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the aggregate compensation paid by us
for the years ended December 31, 1997, 1998 and 1999 for its Chief Executive
Officer. No employee received compensation in excess of $100,000 during any
fiscal year. Each of our directors is entitled to receive reasonable
out-of-pocket expenses incurred in attending meetings of our Board of Directors
but are not compensated for services provided in their capacities as directors.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1) LONG-TERM COMPENSATION
AWARDS
SECURITIES UNDERLYING
NAME YEAR SALARY($) BONUS($) OPTIONS
<S> <C> <C> <C>
Max P. Chen 1999 43,999.98 -- 3,000,000
1998 22,000 -- --
1997 22,000 10,654 --
</TABLE>
(1) The column for "Other Annual Compensation" has been omitted because there is
no compensation required to be reported in that column.
OPTION GRANTS IN FISCAL YEAR 1999
The following table sets forth information regarding stock options
granted to our executive officers listed on the Summary Compensation Table for
1999. We have never granted any stock appreciation rights.
<TABLE>
<CAPTION>
Individual Grants
Number of
Securities Percent of Total
Underlying Options Granted to Market price
Options Granted Employees in Fiscal Exercise Price on Date of
Name (#) Year 1999 per Share ($/sh) Grant Expiration Date
<S> <C> <C> <C> <C> <C> <C>
Max P. Chen 3,000,000 62% 0.5625 .5625 10/22/2002
</TABLE>
EMPLOYMENT AGREEMENTS
We have entered into a three year employment agreement with Max Chen.
Pursuant to the agreement, Mr. Chen is entitled to $60,000 the first six months,
$96,000 the next six months, $192,000 the next twelve months and $384,000 the
last twelve months.
We have entered into a three year employment agreement with James Chyn.
Pursuant to the agreement, Mr. Chyn is entitled to $10,000 for the first four
months, $60,000 for the following twelve months and $200,000 for the last twenty
months. His base salary may be increased if so determined by us and at our sole
option.
Mr. Chen's and Mr. Chyn's employment agreements also provided that the
employee is entitled to a performance bonus based upon our financial performance
and the individual's performance as determined by the board of directors and
stock options.
The employment agreements may be terminated for cause. Mr. Chen would
also receive, depending on the reason for termination, options to purchase
100,000 shares of common stock which will be fully vested on the termination
date and exercisable for six months after the termination date.
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<PAGE>
If the employment agreements are terminated for reasons other than
cause or disability, Mr. Chen would receive severance compensation equal to the
base salary of the respective employee for the lesser of (i) the remainder of
the term of their employment contract or (ii) six months, 50% of which is
payable on the termination date and 50% of which is payable in equal monthly
installments during the period commencing sixty days following the termination
date and continuing for a period of twelve months thereafter. Mr. Chyn would
receive severance compensation equal to his base salary for twelve months, 50%
of which is payable on the termination date and 50% of which is payable in equal
monthly installments during the period commencing thirty days following the
termination date and continuing for a period of six months thereafter.
The employment agreements also contain confidentiality and
non-competition provisions prohibiting the employee from competing against us
and disclosing trade secrets and other proprietary information.
ChinaMallUSA.com has been making partial payments of approximately 50%
of the amounts due under the employment agreements since April 2000 to Max Chen
and James Chyn. ChinaMallUSA.com continues to owe the unpaid amounts to these
employees.
NON-PLAN OPTIONS
We have granted Max Chen options to purchase an aggregate 3,000,000
shares of Common Stock at an exercise price of $0.5625 per share which may be
exercisable in three tranches. Approximately 1/3 of the options become
exercisable on each of October 1999, 2000 and 2001.
We have granted Mr. Chyn options to purchase an aggregate of 1,000,000
shares of Common Stock in four tranches which are exercisable immediately.
Approximately 1/2 of the options have an exercise price of $0.30, approximately
1/4 of the option have an exercise price of $0.65 and approximately 1/4 of the
options have an exercise price of $1.06.
Other employees have received options for 5,998,250 shares of common
stock, of which 999,998 are presently exercisable.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
China Township Enterprise Investment Development Corp., or CTEIDC or
Zhong Fa Company. CTEIDC provides consulting services for ChinaMallUSA.com
including managerial services at BBIT, advocacy for ChinaMallUSA.com with
prospective partners, introductions, and negotiations on behalf of
ChinaMallUSA.com. In addition, BBIT leases its office space from CTEIDC. As of
September 30, 2000, ChinaMallUSA.com owes CTEIDC about 144,915.28 for past
services and rent. The
25
<PAGE>
President of CTEIDC is Mr. Jian Chen. Max Chen, Chairman and President of
ChinaMallUSA.com, is his brother.
On July 9, 2000, amended on July 9, 2000, ChinaMallUSA.com and CTEIDC
entered into an agreement to sell 400,000 shares of ChinaMallUSA.com's common
stock for $100,000.
On September 1, 2000, amended on September 8, 2000, ChinaMallUSA.com
and CTEIDC entered into an agreement to sell 1,000,000 shares of
ChinaMallUSA.com's common stock for $100,000.
In addition in May 2000, CTEIDC was awarded 1,000,000 stock options for
consulting services. None of the options were exercised as of the date of this
filing.
ITEM 8. DESCRIPTION OF SECURITIES
OUR SECURITIES
--------------
We are authorized to issue up to 50,000,000 shares of common stock, par
value $.001 per share, of which 18,225,184 shares were issued and outstanding as
of September 30, 2000. Holders of our common stock are entitled to share equally
on a per share basis in such dividends as may be declared by our Board of
Directors out of funds legally available for that purpose. We presently do not
have plans to pay dividends with respect to our common stock. Upon liquidation,
dissolution or winding up of our company, after payment of creditors and the
holders of any of our senior securities, including preferred stock, if any, our
assets will be divided pro rata on a per share basis among the holders of common
stock. The common stock is not subject to any liability for further assessments.
There are no conversion or redemption privileges nor any sinking fund provisions
with respect to the common stock and the common stock is not subject to call.
The holders of common stock do not have any preemptive or other subscription
rights.
Holders of shares of common stock are entitled to cast one vote for
each share held at all stockholders' meetings for all purposes, including the
election of directors. The common stock does not have cumulative voting rights.
All of the issued and outstanding shares of common stock are fully
paid, validly issued and non-assessable.
SHARES ELIGIBLE FOR RESALE
On the date hereof, we had an aggregate of 18,225,184 shares of common
stock issued and outstanding, 13,167,162 of which are "restricted securities"
which may be sold only in compliance with Rule 144 under the Securities Act of
1933, as amended. Rule 144 provides, in essence, that a person holding
restricted securities for a period of one year after payment therefore may sell,
in brokers' transactions or to market makers, an amount not exceeding 1% of the
outstanding class of securities being sold, or the average weekly reported
volume of trading of the class of securities being sold over a
26
<PAGE>
four-week period, whichever is greater, during any three-month period. (Persons
who are not an affiliate of ChinaMallUSA.com and who had held their restricted
securities for at least two years are not subject to the volume or transaction
limitations.) The sale of a significant number of these shares in the public
market may adversely affect prevailing market prices of our securities.
TRANSFER AGENT & REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
Our shares of common stock have been quoted on the NASDAQ Over the
Counter Bulletin Board (OTC BB) Market under the symbol "CHML" since June 1,
1999. However, we are not aware of any established trading market for our Common
Stock nor is there any record of significant trading in our Common Stock. The
following table sets forth the periods indicated, the high and low sales prices
per share for the Common Stock as reported by the NASDAQ OTC BB Market.
<TABLE>
<CAPTION>
Price Per Share of the Common Stock
High Sales Price Low Sales Price
1999:
<S> <C> <C> <C>
Third Quarter 3 13/16 31/32
Fourth Quarter 5 1/2 17/32
2000:
First Quarter 1 13/16 3/32
Second Quarter 1 1/16
Third Quarter 3/4 3/16
</TABLE>
We had issued options to purchase 9,838,450 shares of our common stock.
DIVIDEND POLICY
---------------
It is the policy of the Board of Directors to retain earnings for use
in the maintenance and expansion of the our business. We have not declared any
cash dividends to the shareholders of its capital stock and do not intend to
declare such dividends in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
There are no proceedings or to our knowledge contemplated proceedings
although we were subpenoed by the Securities and Exchange Commission to provide
documents and testimony pursuant to an investigation related to the trading of
internet securities
27
<PAGE>
ITEM 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
In March 2000, we received a resignation letter from our auditor Lazar,
Levine and Felix. No reasons were cited for its decision to resign. There were
no disagreements with Lazar, Levine and Felix regarding any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Lazar, Levine and Felix, would have caused Lazar, Levine and Felix to make
reference to the subject matter of the disagreements in connection with its
report.
We subsequently engaged the services of James T. Woo to continue the
audit of our financial statements for fiscal years ending December 31, 1999 and
1998. The audit report was completed and made available in September 2000. The
decision to engage James T. Woo was approved by the Board of Directors of
ChinaMallUSA.com, upon the recommendation of the Board of Directors.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has not issued or sold securities within the past three
years pursuant to offerings that were not registered under the securities Act of
1933, as amended, except as follows:
(a) On June 1, 1999, the Registrant sold 11,250,260 shares of its
common stock to IPDC for an aggregate of $450,000.00. The transaction was
undertaken in reliance upon the exemptions from the registration requirements of
the Securities Act afforded by Section 4(2) thereof and/or Regulation D
promulgated thereunder, as sales not involving a public offering. The purchasers
of the securities described above acquired them for their own account not with a
view to any distribution thereof to the public. The certificates evidencing the
securities bear legends stating that the shares may not be offered, sold or
transferred other than pursuant to an effective registration statement under the
Securities Act or an exemption from such registration requirements.
(b) In December 1999, the Registrant sold 1,011,586 shares of its
common stock to HLKT Holdings, LLC for an aggregate of $831,250. The transaction
was undertaken in reliance upon the exemptions from the registration
requirements of the Securities Act afforded by Section 3(b) thereof and/or
Regulation D promulgated thereunder.
(c) In July 2000, the Registrant sold 400,000 shares of its common
stock to China Township Enterprise Investment & Development Corp., or CTEIDC or
Zhong Fa Company, for an aggregate of $100,000. The transaction was undertaken
in reliance
28
<PAGE>
upon the exemptions from the registration requirements of the Securities Act
afforded by Section 4(2) thereof and/or Regulation D promulgated thereunder, as
sales not involving a public offering. The purchasers of the securities
described above acquired them for their own account not with a view to any
distribution thereof to the public. The certificates evidencing the securities
bear legends stating that the shares may not be offered, sold or transferred
other than pursuant to an effective registration statement under the Securities
Act or an exemption from such registration requirements.
(d) In September 2000, the Registrant sold 1,000,000 shares of its
common to stock to CTEIDC for an aggregate of $100,000. The transaction was
undertaken in reliance upon the exemptions from the registration requirements of
the Securities Act afforded by Section 4(2) thereof and/or Regulation D
promulgated thereunder, as sales not involving a public offering. The purchasers
of the securities described above acquired them for their own account not with a
view to any distribution thereof to the public. The certificates evidencing the
securities bear legends stating that the shares may not be offered, sold or
transferred other than pursuant to an effective registration statement under the
Securities Act or an exemption from such registration requirements.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of the Registrant state that:
"The Corporation eliminates and limits personal liability of directors,
officers, and shareholders of the Corporation for damages for breach of
fiduciary duty as a director or officer, to the extent allowed by Utah law. The
Corporation shall indemnify its officers and directors for any liability
including reasonable costs of defense arising out of any act or omission of any
officer or director on behalf of the corporation to the full extent allowed by
the laws of the State of Utah."
Further, Section 16-10a-841, Utah Code Annotated (U.C.A.), specifically
authorizes a Utah corporation to indemnify an individual made a party to a
proceeding because he is or was a director against liability incurred in the
proceeding if his conduct was in good faith; and he reasonably believed that his
conduct was in, or not opposed to, the corporation's best interests; and in the
case of any criminal proceeding, he had no reasonable cause to believe his
conduct was unlawful. In addition, it also authorizes a Utah corporation to
limit the liability of a director to the corporation or to its shareholders for
monetary damages for any action taken or any failure to take any action as a
director, except for: liability for the amount of a financial benefit received
by a director to which he is not entitled; an intentional infliction of harm on
the corporation or the shareholders; a violation section 16-10a-842, U.C.A.; or
an intentional violation of criminal law.
Sections 16-l0a-901 through 909 of the U.C.A. provides in relevant
parts as follows:
(1) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending,
or completed action,
29
<PAGE>
suit or proceeding, whether civil, criminal, administrative, or
investigative (other than an action by or in the right of the
corporation) by of the fact that he is or was a director, officer,
employee, or agent corporation, or is or was serving at the request of
the corporation as a director, employee, or agent of another
corporation, partnership, venture, trust, or other enterprise, against
expenses (including attorneys' fees), judgments, fines, and amounts
paid in settlement actually and reasonably incurred by him in
connection with such action, suit, or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or opposed to the
best interests of the corporation, and, with respect terminal action or
proceeding, had no reasonable cause to believe his was unlawful. The
termination of any action, suit, or proceeding by judgment, order,
settlement, conviction, or on a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation, and
with respect to any criminal action or proceeding, had reasonable cause
to believe that his conduct was unlawful.
(2) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party threatened, pending, or
completed action or suit by or in the right of action to procure a
judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense
or settlement action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of
the corporation and except that no indemnification s matter as to which
such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless and
only to the extent that the court in which such action or suit was
brought shall determine on application that, despite the adjudication
of liability but in view of all circumstances of the case, such person
is fairly and reasonably entitled to indemnify for such expenses which
such court shall deem proper.
(3) To the extent that a director, officer, employee, or agent of a
corporation has been successful on the merits or otherwise in defense
of any action, suit, or proceeding referred to in (1) or (2) of this
subsection, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
(4) The indemnification provided by this section shall not be deemed
exclusive of any other rights to which those seeking indemnification
may be entitled under any bylaws, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a
30
<PAGE>
director, officer, employee, or agent and shall inure to the benefit of
the heirs, executors, and administrators of such a person.
The foregoing discussion of indemnification merely summarizes certain aspects of
indemnification provisions and is limited by reference to the above discussed
sections of the Utah Revised Business Corporation Act.
31
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 1999 AND 1998 AND SEPTEMBER 30, 2000
-------------------------------------------------
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE
----
Independent Auditor's Report F-1 - F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1998 and September 30, 2000 F-3
Consolidated Statements of Operations for
the years ended December 31, 1999 and 1998
and September 30, 2000 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999 and 1998 and
nine months ended September 30, 2000 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1999 and 1998
and nine months ended September 30, 2000 F-6
Notes to Consolidated Financial Statements F-7 - F-12
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Stockholders of ChinaMallUSA.com, Inc.
We have audited the accompanying consolidated balance sheets of
ChinaMallUSA.com, Inc. and subsidiaries, as of December 31, 1999 and
1998 and the related consolidated statements of operations,
stockholders' (deficit) equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
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 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 consolidated financial
position of ChinaMallUSA.com, Inc. and subsidiaries, as of December 31,
1999 and 1998, and the consolidated results of their operations and
their cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Notes 1 and 5 to the consolidated financial statements,
the Company is actively engaged in pursuing new financing arrangements
to facilitate operations and development but can not assure that it
will be able to obtain such or that it will continue as a going
concern, and the Company has received inquiry by the United States
Securities and Exchange Commission into the trading of certain Internet
securities including those of the Company. The consolidated financial
statements do not include any adjustments that might result from any
outcome of these uncertainties.
/s/ James T.J. Woo, CPA
------------------------
James T.J. Woo, CPA
New York, New York
September 6, 2000
F-2
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, 1999 AND 1998 AND SEPTEMBER 30, 2000
-------------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
September 30,2000 December 31, December 31,
(unaudited) 1999 1998
---------------- ---------- ---------
CURRENT ASSETS
<S> <C> <C> <C>
Cash $ 336,780 $ 484,489 $ 90,999
Prepaid expenses 53,988 45,783 -
---------- ---------- ---------
Total current assets 390,768 530,272 90,999
PROPERTY AND EQUIPMENT, NET 208,999 44,173 10,288
OTHER ASSETS
Security deposits 7,340 7,340 7,340
Other, net of amortization 10,406 - 312
---------- ---------- ---------
Total assets $ 617,513 $ 581,785 $ 108,939
========== ========== =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
CURRENT LIABILITIES
Bank loans $ - $ - $ 163,658
Other loans - - 53,816
Accrued expenses and
other liabilities 562,563 95,529 169,544
Current portion of
loan-equipment 3,493 - -
--------- --------- --------
Total current liabilities 566,056 95,529 387,018
--------- --------- --------
LONG TERM LIABILITIES
Long-term portion of
Loan-equipment 106,545 - -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY
Common stock, $0.001 par value,
50,000,000 shares authorized;
16,585,184 and 14,775,184 and
2,513,338 shares issued and
outstanding, respectively 16,585 14,775 2,513
Additional paid-in capital 4,495,973 1,983,554 278,641
Deferred compensation (730,115) (290,617) -
Accumulated deficit (3,837,531) (1,221,456) (559,233)
----------- ----------- ---------
Total stockholders' (deficit)
equity (55,088) 486,256 (278,079)
----------- ----------- ---------
Total liabilities and
stockholders' (deficit)
equity $ 617,513 $ 581,785 $ 108,939
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND NINE MONTHS ENDED
--------------------------------------------------------------------
SEPTEMBER 30, 2000
------------------
<TABLE>
<CAPTION>
September 30,2000 December 31, December 31,
(unaudited) 1999 1998
---------------- ----------- -----------
<S> <C>
Revenues $ 309,157 - -
---------------- ----------- -----------
Operating expenses:
General and administrative
expenses 1,133,185 542,595 351,546
Product development 95,709 106,269 12,200
Marketing and sales 1,120,009 25,693 24,387
Amortization of deferred
Compensation 586,106 - -
---------- ---------- ---------
Loss from operations (2,625,852) (674,557) (388,133)
---------- ---------- ---------
Other income (expense)
Interest income 10,148 3,649 1,069
Interest expense (613) (10,620) (10,375)
Other income 242 23,305 3,286
---------- ---------- ---------
Total other income (expense) 9,777 16,334 (6,020)
Loss before provision for
income taxes (2,616,075) (658,223) (394,153)
Provision for income tax - 4,000 4,000
---------- --------- ---------
Net loss $ (2,616,075) $ (662,223) $ (398,153)
========== ========= =========
Basic and diluted loss
per share $ (0.16) $ (0.07) $ (0.16)
========== ========= =========
Weighted average number of shares
used in per share computation of
basic and diluted 15,932,191 9,244,588 2,509,448
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
---------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND AND NINE MONTHS ENDED
-------------------------------------------------------------------------
SEPTEMBER 30, 2000
------------------
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
-------------- PAID-IN DEFERRED ACCUMULATED (DEFICIT)
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
<S> <C> <C> <C> <C> <C>
Issuance of common
stock for subsidiaries
acquired in merger,
December, 1997 2,500,000 $ 2,500 $ 247,500 - - $250,000
Accumulated deficit
of subsidiaries
acquired, December,
1997 - - - - $(161,080) (161,080)
Issuance of common
stock at April,
1998, net of $8,860
issuance costs 13,338 13 31,141 - - 31,154
Net loss for the
year ended December
31, 1998 - - - - (398,153) (398,153)
Balance at
December 31, 1998 2,513,338 2,513 278,641 _ (559,233) (278,079)
Issuance of common
stock in June, 1999,
net of $13,500 *
issuance costs 11,250,260 11,250 438,750 - - 450,000
Issuance of common
stock in November,
1999, net of
$143,750 issuance
costs 1,011,586 1,012 830,238 - - 831,250
Deferred compensation
related to stock option
granted - - 435,925 $(435,925) -
Amortization of deferred
Compensation - - - 145,308 - 145,308
Net loss for the
year ended December
31, 1999 - - - - (662,223) (662,223)
Balance at December *
31, 1999 14,775,184 $14,775 $1,983,554 $(290,617) $(1,221,456) $486,256
Issurance of common
Stock from January to
June 30, 2000 1,810,000 1,810 1,486,815 - - 1,488,625
Deferred compensation
related to stock option
granted - - 1,025,604 (1,025,604) - -
amortization of deferred
compensation 586,106 586,106
net loss for the
period ended September (2,616,075) (2,616,075)
at September
Balance 30, 2000 16,585,184 $16,585 $ 4,495,973 $(730,115) $(3,837,531) $ (55,088)
</TABLE>
* These shares reflect a reduction of 2,191,875 shares due to the fact that
stock subscriptions pending at December 31, 1999, were not paid for and were
subsequently canceled effective, February 28, 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND AND NINE MONTHS ENDED
------------------------------------------------------------------------
September 30, 2000
------------------
<TABLE>
<CAPTION>
September 30,2000 December 31, December 31,
(unaudited) 1999 1998
---------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (2,616,075) $ (662,223) $ (398,153)
------------ ----------- -----------
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation & amortization 23,287 9,943 8,784
Amortization of deferred
compensation 586,106 145,308 -
Changes in operating assets and
liabilities
Prepaid expenses (8,205) (45,783) 23,000
Security deposits - - (7,340)
Accrued expenses & other current
liabilities 467,034 (74,015) 169,544
--------- --------- ---------
Total adjustments 1,068,222 (35,453) 193,988
--------- --------- ---------
Net cash used in operating
activities (1,547,853) (626,770) (204,165)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment (185,984) (43,516) (1,195)
Organization cost (12,535) - -
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loans - (163,658) 163,658
Other loans - (53,816) 53,816
Loan-equipment 110,038 - -
Proceeds from issuance of
common stock, net 1,488,625 1,281,250 31,154
--------- --------- ---------
NET INCREASE IN CASH (147,709) 393,490 43,268
CASH AT BEGINNING 484,489 90,999 47,731
--------- --------- ---------
CASH AT END $ 336,780 $ 484,489 $ 90,999
========= ========= =========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest $ 613 $ 10,620 $ 10,375
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 THE COMPANY
-------------------
ChinaMallUSA.com, Inc. (the "Company") is a development-stage company
that through its wholly-owned subsidiary B2B Beijing Information
Technologies, Ltd. engages in providing web-based software application
and technical services. We are currently providing our services to a
major petroleum product company in China and we intend to provide our
services to other major public and private institutions in China. B2B
Beijing was incorporated in December 1999, commenced operations in
March 2000.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------
Principles of Consolidation. The consolidated financial statements
include the accounts of ChinaMallUSA.com, Inc. and its wholly-owned
subsidiaries. All inter-company balances and transactions have been
eliminated in consolidation.
Use of 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, 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.
Prepaid Expenses. The Company prepaid $45,782 at December 31, 1999 for
operating expenses and others to develop China market.
Property and Equipment. Property and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful
lives of the assets, generally three to seven years. The Company,
effective January 1, 1999, adopted Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use." In accordance with SOP
F-7
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
-------------------------------------------------------------
98-1, the Company has capitalized certain internal use software and Web
site development costs totaling $13,646 during the year ended December
31, 1999. The estimated useful life of costs capitalized is three
years. During the year ended December 31, 1999, the amortization of
capitalized costs totaled $2,274.
Product Development. Product development includes costs to develop,
enhance and manage the Company's web site. These costs were expensed as
incurred except for certain internal use software and web site
development costs that were capitalized.
Income Taxes. The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method, deferred income
tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities
and are measured using the currently enacted tax rates and laws.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
Loss Per Share. The Company computed loss per share for the years ended
December 31, 1999 and 1998 in accordance with Statements of Financial
Accounting Standards ("SFAS") No. 128 "Earning Per Shares". Basic and
diluted loss per share is computed by using the weighted-average
numbers of common shares outstanding during the period. Since the
Company incurred losses for all periods presented, the inclusion of
options in the calculation of weighted average number of common shares
is anti-dilutive; and therefore there is no difference between basic
and diluted loss per share.
Stock-Based Compensation. The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and complies with the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Under APB Opinion
No.25, compensation expense is based on the difference, if any, between
the fair value of the Company's stock and the exercise price of the
option on the date of grant.
F-8
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
NOTE 3 BANK LOANS
------------------
The Company borrowed the following unsecured bank loans at December 31,
1998 and paid back in full during 1999.
(A) $90,676 from Bank of China, New York, New York at 1.25% per
annum over the prime rate of interest announced as such by
Bank of China, New York, New York.
(B) $72,982 from the Chase Manhattan Bank, New York, New York, at
the interest rate of 8.75% per annum.
NOTE 4 OTHER LOANS
-------------------
The Company borrowed unsecured loan of $53,816 from Max International
Licenses, Ridgewood, NY at the interest rate of 2% per annum. This loan
was paid back in full in 1999.
NOTE 5 COMMITMENTS AND CONTINGENCIES
------------------------------------
The Company leases premises under an operating lease that expires
August 31, 2002. Cost incurred under operating lease is recorded as
rent expense. Total rent expense amounted to $46,941 and $23,411 for
the years ended December 31, 1999 and 1998 respectively. In addition to
the basic fixed rental, the lease requires payment for repair,
maintenance and other expenses. Future minimum rental payments due
under existing lease as of December 31, 1999 are summarized as follows:
12 months ending December 31,
2000 $ 69,804
2001 69,804
2002 46,536
--------
$186,144
========
The Company and certain Officers and Directors of the Company have been
subpoenaed by the Commission to provide documents and testimony
pursuant to an investigation by the United States Securities and
Exchange Commission (the "Commission") into the trading of certain
Internet securities, including those of the Company. To the knowledge
of the Company and its Officers and Directors, neither the Company nor
its Officers and Directors are the subject of the investigation by the
Commission. The Company and its Officers and Directors have fully
cooperated in such investigation by the Commission. To the knowledge of
the Company and its Officers and
F-9
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
NOTE 5 COMMITMENTS AND CONTINGENCIES(CONTINUED)
-----------------------------------------------
Directors, such an investigation by the Commission has not been
concluded. The probable outcome of such investigation by the Commission
is unknown.
The Company is not currently aware of any other legal proceedings,
claims or investigations that it believes will have a material adverse
effect on its consolidated financial position or results of operations
or cash flows.
NOTE 6 STOCK OPTION PLAN
-------------------------
In July, 1999, the Company adopted the 1999 Stock Option Plan (the
"1999 Plan"), which provides for grants of options to employees,
officers and directors of the Company. The 1999 Plan provides the
grants of options to purchase up to 11,347,250 shares of Common Stock,
with vesting periods of, generally, three years and maximum option term
of ten years, at exercise price, generally, less than the fair market
value of the Company's Common Stock on the date of grant.
The following summarizes the Company's stock option activity:
Weighted Option
Average Price
Shares Exercise Price Range
--------- ---------------- ---------------
Granted during 1999 4,950,000 $0.75 $0.30-3.57
Exercised 0
Forfeited 0
0
---------
Balance at December
31, 1999 4,950,000
=========
Exercisable at December
31, 1999 2,032,000
=========
No options were granted during 1998.
The following summarizes the information about options outstanding at
December 31, 1999:
F-10
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
NOTE 6 STOCK OPTION PLAN (CONTINUED)
-------------------------------------
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ---------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AS OF REMAINING EXERCISE AS OF EXERCISE
PRICES 12-31-99 LIFE PRICE 12/31/99 PRICE
---------- ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$0.30-0.65 4,200,000 3.0 $0.66 1,495,000 $0.57
0.95-1.25 500,000 3.0 1.00 320,000 1.01
2.84-3.56 250,000 3.0 3.42 217,000 3.51
----------- --------- -------- ----------- ---------
$0.30-3.56 4,950,000 3.0 $0.75 2,032,000 $0.95
=========== ========= ======== =========== =========
</TABLE>
For the year ended December 31,1999, The Company granted 1,850,000
options at a weighted average price of $1.03; all of which were granted
at less than the fair value at the date of the grant. The Company
recorded deferred compensation of $435,925 for these options based on
the difference between the fair value of the Company's stock and the
exercise price of the option on the date of grant and amortized
$145,308.00 of deferred compensation for the year ended December 31,
1999 of which $137,454.00 was included in general and administrative
expenses and $7,854.00 was included in marketing and sales. The Company
expects to amortize the deferred compensation of $145,308.00 annually
through 2001.
Had compensation expenses been determined based on the fair value at
grant date, the Company's Pro Forma net loss and pro forma net loss per
share for the year ended December 31, 1999 would have been reported as
follows:
Net Loss -as reported $ (662,223)
Net Loss -Pro Forma $ (2,315,578)
Basic and diluted loss per share-as reported $ (0.07)
Basic and diluted loss per share-Pro Forma $ (0.25)
The fair value of option granted during 1999 was determined on the date
of grant using the Black-Scholes method. The weighted average fair
value of option granted during 1999 was estimated to be approximately
$0.55 based on the following assumptions: Risk-free interest rate of
5.6%, expected life of 3 years, expected volatility of 106% and no
dividends.
F-11
<PAGE>
CHINAMALLUSA.COM, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
NOTE 7 INCOME TAXES
--------------------
No income tax provision has been recorded except for state and local
minimum taxes for period presented, as the Company has incurred
operating losses. The components of the deferred tax assets and related
valuation allowance at December 31, 1999 and 1998 are as follows:
December 31,
-------------------
1999 1998
-------- --------
Net operating loss carryforwards $364,692 $189,648
Deferred compensation 49,405 -
-------- --------
Gross deferred tax assets 414,097 189,648
Valuation allowance (414,097) (189,648)
-------- --------
Net deferred tax assets - -
======== ========
The Company has provided a full valuation allowance against the
deferred tax assets, consisting primarily of net operating loss,
because of uncertainty regarding its realizability.
At December 31, 1999, the Company had net operating loss carryforwards
of approximately $1,072,600 available to reduce future federal, state
and local taxable incomes, which expire at various times through 2019.
Under Section 382 of the Internal Revenue Code and state and local tax
laws, the utilization of the net operating loss carryforwards may be
subject to certain limitations.
F-12
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
(a) Exhibits:
The following exhibits are filed as part of this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
2.1 Articles of Incorporation of the Registrant
2.2 Articles of Amendment to Articles of Incorporation of the Registrant
2.3 Articles of Amendment to Articles of Incorporation of the Registrant
2.4 Articles of Amendment to Articles of Incorporation of the Registrant
2.5 By-Laws for the Registrant
6.1 Supplemental Agreement by and between The Port Authority of New York and New Jersey and Chen
Xiang Trading USA Inc., dated as of August 11, 1999
6.2 Tenant Agreement No. 1 by and between China Township Enterprises Investment & Development Co.
Ltd. and Beijing B2B Information & Technology Co. Ltd., dated as of February 2, 2000
6.3 Tenant Agreement No. 2 by and between China Township Enterprises Investment & Development Co.
Ltd. and Beijing B2B Information & Technology Co. Ltd., dated as of February 2, 2000
6.4 Employee Agreement by and between the Registrant and Max Chen, dated as of October 22, 1999
6.5 Employee Agreement by and between the Registrant and James Chyn, dated as of September 13, 1999
15.1 Subsidiaries of the Registrant
15.2 Financial Data Schedule
</TABLE>
32
<PAGE>
ITEM 2. DESCRIPTION OF EXHIBITS
See Item 1 above.
33
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
ChinaMallUSA.com, Inc.
Date: December 21, 2000 By: /s/ Max P. Chen
----------------------------------- ----------------------------------
Name: Max P. Chen
Title: Chairman and President
34
