SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number 1-12293
ESOFTBANK.COM INC.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0394313
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Flat A, United Plaza, 5022 Binhe Main Street
Futian District Shenzhen, PRC 518026
(Address of principal executive offices)
011-86-755-255-1130
(Issuer's Telephone Number, including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X[ No [_]
As of May 14, 2000, 12,800,000 shares of our common stock, par value $.001
per share, and 600 shares of our Series A convertible preferred stock, par value
$0.001 per share, were outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
[The remainder of this page intentionally left blank]
<PAGE>
ESOFTBANK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Unaudited)
<TABLE>
<CAPTION>
1999 2000 2000
------------ ------------ ------------
Rmb Rmb US$
<S> <C> <C> <C>
REVENUE 378,875 -- $ --
COST OF SALES (211,952) (371,322) (44,737)
------------ ------------ ------------
GROSS PROFIT (LOSS) 166,923 (371,322) (44,737)
SELLING AND ADMINISTRATIVE
EXPENSES (106,044) (2,947,130) (355,076)
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 60,879 (3,318,452) (399,813)
TOTAL OTHER INCOME, NET 3,232 13,021 1,568
------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES 64,111 (3,305,431) (398,245)
TAXES 17,662 -- --
------------ ------------ ------------
INCOME (LOSS) BEFORE
MINORITY INTEREST 46,449 (3,305,431) (398,245)
MINORITY INTEREST -- 658,674 79,358
------------ ------------ ------------
NET INCOME (LOSS) 46,449 (2,646,757) $ (318,887)
============ ============ ============
INCOME (LOSS) PER SHARE -- (.21) $ (.03)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 12,800,000 12,800,000 12,800,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 1 -
<PAGE>
ESOFTBANK.COM, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Unaudited)
<TABLE>
<CAPTION>
Retained
Additional Foreign Earnings
Common paid-in Currency (Accumulated
Stock capital Translation Deficit) Total
Rmb Rmb Rmb Rmb Rmb
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 2000 106,240 51,423,060 -- (51,521,000) 8,300
Net loss -- -- -- (2,646,757) (2,646,757)
Foreign currency translation -- -- (73,196) -- (73,196)
Purchase price in excess of book
value -- 69,676 -- -- 69,676
Assumption of liabilities by
shareholder contributed to capital -- 137,432 -- -- 137,432
Elimination of minority shareholder
portion of contributed capital -- (33,166) -- -- (33,166)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 2000 106,240 51,597,002 (73,196) (54,167,757) (2,537,711)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 2 -
<PAGE>
ESOFTBANK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
1999 2000 2000
Rmb Rmb US$
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash 629,351 9,691,707 $ 1,167,675
Accounts receivable 2,014,330 2,063,330 248,594
Deposits and other 1,047,357 2,310,875 278,419
Advances to employees 433,878 425,467 51,261
Due from SiTech Holding (Hainan) Company Limited 1,485,426 -- --
----------- ----------- -----------
TOTAL CURRENT ASSETS 5,610,342 14,491,379 1,745,949
----------- ----------- -----------
NONCURRENT ASSETS
Product development costs, net 822,272 860,883 103,721
Fixed assets 759,533 1,281,368 154,382
----------- ----------- -----------
TOTAL NONCURRENT ASSETS 1,581,805 2,142,251 258,103
----------- ----------- -----------
TOTAL ASSETS 7,192,147 16,633,630 $ 2,004,052
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 364,448 657,144 $ 79,174
Accrued expenses 303,951 142,980 17,226
Customer deposits 105,098 6,091,827 733,955
Due to SiTech Holding (Hainan) Company Limited -- 1,508,161 181,706
Taxes payable 467,734 102,141 12,306
Short-term borrowings 2,977,432 8,122,427 978,606
Due to director 260,494 227,479 27,407
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 4,479,157 16,852,159 2,030,380
----------- ----------- -----------
MINORITY INTEREST 2,704,690 2,319,182 279,420
----------- ----------- -----------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, Series A convertible and redeemable, par
value US$0.001; issued and outstanding - 600 shares -- -- --
Preferred stock, Series C convertible and redeemable, par
value US $0.001; issued and outstanding - nil -- -- --
Common stock - Par value US$.001; issued and
outstanding - 12,800,000 shares 106,240 106,240 12,800
Additional paid-in capital 51,423,060 51,597,002 6,216,506
Foreign currency translation -- (73,196) (8,819)
Accumulated deficit (51,521,000) (54,167,757) (6,526,235)
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 8,300 (2,537,711) (305,748)
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY 7,192,147 16,633,630 $ 2,004,052
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 3 -
<PAGE>
ESOFTBANK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(Unaudited)
<TABLE>
<CAPTION>
1999 2000 2000
Rmb Rmb US$
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) 46,449 (2,646,757) $ (318,886)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 27,354 37,840 4,559
Amortization of product development costs 44,748 85,152 10,259
Provision for losses on receivables - Customers -- 75,653 9,115
Minority interest -- (658,674) (79,358)
(Increase) decrease in
Accounts receivable (21,500) (124,653) (15,019)
Deposits and other (180,591) (1,263,518) (152,231)
Costs and estimated earnings in excess of
billings on uncompleted contracts 398,692 -- --
Advances to employees 39,021 8,411 1,013
Increase (decrease) in
Accounts payable and accrued expenses 158,169 (233,868) (28,177)
Customer deposits 68,131 5,986,729 721,293
Billings in excess of costs and estimated
earnings on uncompleted contracts (377,098) -- --
Net repayments to director (19,924) (33,015) (3,978)
----------- ----------- -----------
Total Adjustments 137,002 3,880,057 467,476
----------- ----------- -----------
Net Cash Provided by Operating Activities 183,451 1,233,300 148,590
----------- ----------- -----------
Cash Flows from Investing Activities
Capital expenditures (193,643) (559,675) (67,431)
Capitalized expenditures for product development costs (94,629) (123,763) (14,911)
Net repayments from shareholders 115,424 1,485,426 178,967
Initial Investment of minority shareholder -- 240,000 28,916
Other -- (73,196) (8,819)
----------- ----------- -----------
Net Cash (Used in) Provided by Investing
Activities (172,848) 968,792 116,722
----------- ----------- -----------
Cash Flows from Financing Activities
Net borrowings from SiTech Holding -- 1,508,161 181,706
Net short-term borrowings -- 5,144,995 619,879
Capital contributions -- 207,108 24,953
----------- ----------- -----------
Net Cash Provided by Financing Activities -- 6,860,264 826,538
----------- ----------- -----------
Net Increase in Cash 10,603 9,062,356 1,091,850
Cash, Beginning of Period 34,687 629,351 75,825
----------- ----------- -----------
Cash, End of Period 45,290 9,691,707 $ 1,167,675
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 4 -
<PAGE>
ESOFTBANK.COM, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated interim financial statements included in this report are
unaudited. The Company believes the interim financial statements are presented
on a basis consistent with the audited financial statements. The Company also
believes that the interim financial statements contain all adjustments necessary
for a fair presentation of the results for such interim periods. All of these
adjustments are normal recurring adjustments. The results of operations for
interim periods do not necessarily predict the operating results for the full
year. The consolidated balance sheet as of December 31, 1999 has been derived
from audited financial statements but does not include all disclosures required
by generally accepted accounting principles as permitted by interim reporting
requirements. The information included in this report should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations, the audited financial statements and related notes
included in the Company's 1999 Form 10-KSB and the attached audited financial
statements of World Concept Development Limited and Subsidiary and SiTech Hainan
Limited. Certain reclassifications have been made to prior periods' financial
statements to conform to the 2000 presentation and the accounting for the
acquisitions, as more fully described below in Note 2.
NOTE 2 - ACQUISITIONS
On March 31, 2000, Natural Way Technologies, Inc. (Natural Way) entered into an
Exchange agreement (the Exchange) with World Concept Development Limited
(World), an independent third party. In accordance with the Exchange, Natural
Way acquired 100% of the issued and outstanding shares of World in exchange for
9,300,000 post reverse split shares of Natural Way. Prior to closing, Natural
Way effected a one for five reverse stock split and changed the name of the
Company to eSoftbank.com, Inc.
The Exchange has been accounted for using the purchase method of accounting as a
reverse acquisition, whereby the company issuing its shares to effect the
business combination is determined to be the acquiree in the business
combination. This occurs when the shareholders of the issuer have less than a
majority of voting control of the combined entity. The company whose
shareholders retain the majority voting interest in the combined entity is
presumed the acquirer. In the current Exchange, the existing shareholders of
Natural Way will retain a 27% voting interest in the combined entity on
completion of the Exchange. Accordingly, World is deemed to be the acquirer and
the assets of Natural Way were required to be fair valued at acquisition. As
Natural Way had no assets, as of the date of the Exchange, no fair value
adjustment was required. The historical financial information prior to the
Exchange are those of World.
World, a development stage enterprise, was incorporated on October 27, 1999, in
the British Virgin Islands. World incorporated its wholly owned subsidiary
eSoftbank Networks (Shenzhen) Co. Ltd. (Shenzhen) on December 30, 1999, in the
Peoples' Republic of China (PRC). World and Shenzhen were incorporated to effect
a merger, exchange of capital stock, asset acquisition or other business
combination with a domestic or foreign, private or publicly held business. As of
December 31, 1999, World had not commenced any formal business operations and
the only activity related to the Company's formation.
- 5 -
<PAGE>
ESOFTBANK.COM, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - ACQUISITIONS (Continued)
On February 21, 2000, World, via Shenzhen, acquired 9.52% of the outstanding
capital of SiTech Hainan Limited. (SiTech), a company related through common
ownership and management from Dr. Hongbing Lan, a director and shareholder of
both World and SiTech for approximately $62,650. On the same date, Shenzhen
acquired an additional 42.86% of SiTech from SiTech Hainan Holding Co., Ltd.
(Holdings), a company related through common ownership and management, for
approximately $280,000. SiTech is a software designer and markets both packaged
and custom designed Internet-related software applications. Since both entities
involved in the acquisition were under common control, the transaction was
accounted for at historical cost in a manner similar to that in
pooling-of-interests accounting. The consolidated financial statements include
the results of operations for World and its subsidiary from their inception.
On February 21, 2000, Shenzhen also acquired an 80% of the newly issued and
outstanding stock of eSoftbank (Beijing) Software Systems Co., Ltd. (Beijing), a
PRC company, from Holdings for an initial capital investment of approximately
$116,000. The remaining 20% of Beijing is owned by Mr. Hongyu Lan, the brother
of Dr. Hongbing Lan.
- 6 -
<PAGE>
SITECH HAINAN LIMITED
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
YEARS ENDED DECEMBER 31, 1998 AND 1999
<PAGE>
SITECH HAINAN LIMITED
Index to Financial Statements
C O N T E N T S
Pages
-----
Independent Auditor's Report 1
Statements of Income 2
Statements of Changes in Shareholders' Equity 3
Balance Sheets 4
Statements of Cash Flows 5
Notes To Financial Statements 6 - 12
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Shareholders and the Board of Directors
SiTech Hainan Limited
We have audited the accompanying balance sheets of SiTech Hainan Limited as of
December 31, 1998 and 1999, and the related statements of income, changes in
shareholders' 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 financial statements referred to above present fairly, in
all material respects, the financial position of SiTech Hainan Limited as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Blackman Kallick Bartelstein, LLP
------------------------------------
Chicago, Illinois
March 31, 2000
- 1 -
<PAGE>
SITECH HAINAN LIMITED
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1999
1998 1999 1999
Rmb Rmb US$
---------- ---------- ----------
REVENUE 2,219,719 4,085,198 $ 492,192
COST OF SALES (608,131) (959,890) (115,649)
---------- ---------- ----------
GROSS PROFIT 1,611,588 3,125,308 376,543
SELLING AND ADMINISTRATIVE
EXPENSES (451,532) (914,900) (110,229)
---------- ---------- ----------
INCOME FROM OPERATIONS 1,160,056 2,210,408 266,314
TOTAL OTHER INCOME (EXPENSE),
NET 22,305 (1,915) (231)
---------- ---------- ----------
INCOME BEFORE TAXES 1,182,361 2,208,493 266,083
TAXES 124,646 249,921 30,111
---------- ---------- ----------
NET INCOME 1,057,715 1,958,572 $ 235,972
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
- 2 -
<PAGE>
SITECH HAINAN LIMITED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
Additional
Share paid-in Reserve Retained
capital capital funds Earnings Total
Rmb Rmb Rmb Rmb Rmb
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 2,100,000 207,274 106,000 252,561 2,665,835
Net income -- -- -- 1,057,715 1,057,715
Reserve fund -- -- 159,707 (159,707) --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 2,100,000 207,274 265,707 1,150,569 3,723,550
Net income -- -- -- 1,958,572 1,958,572
Reserve fund -- -- 319,000 (319,000) --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 2,100,000 207,274 584,707 2,790,141 5,682,122
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 3 -
<PAGE>
SITECH HAINAN LIMITED
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999 1999
Rmb Rmb US$
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash 34,687 621,051 $ 74,825
Accounts receivable 1,312,830 2,014,330 242,690
Deposits and other 995,839 1,047,357 126,188
Advances to employees 546,201 433,878 52,275
Costs and estimated earnings in excess of billings on
uncompleted contracts 398,692 -- --
Due from shareholder 1,084,038 1,485,426 178,967
--------- --------- ---------
TOTAL CURRENT ASSETS 4,372,287 5,602,042 674,945
--------- --------- ---------
NON-CURRENT ASSETS
Product development costs, net 348,796 822,272 99,069
Fixed assets 671,097 759,533 91,510
--------- --------- ---------
TOTAL NON-CURRENT ASSETS 1,019,893 1,581,805 190,579
--------- --------- ---------
TOTAL ASSETS 5,392,180 7,183,847 $ 865,524
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable -- 159,900 $ 19,265
Accrued expenses
Employee fringe benefits 178,200 274,888 33,119
Other 28,931 29,063 3,502
Customer deposits 124,445 105,098 12,662
Billings in excess of costs and estimated
earnings on uncompleted contracts 555,708 -- --
Taxes payable 261,076 467,734 56,354
Other payable 215,476 204,548 24,644
Due to director 304,794 260,494 31,385
--------- --------- ---------
TOTAL CURRENT LIABILITIES 1,668,630 1,501,725 180,931
--------- --------- ---------
SHAREHOLDERS' EQUITY
Registered capital - No par value; issued and outstanding -
2,100,000 shares 2,100,000 2,100,000 253,012
Additional paid-in capital 207,274 207,274 24,973
Reserve funds 265,707 584,707 70,447
Retained earnings 1,150,569 2,790,141 336,161
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 3,723,550 5,682,122 684,593
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 5,392,180 7,183,847 $ 865,524
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 4 -
<PAGE>
SITECH HAINAN LIMITED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999 1999
Rmb Rmb US$
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income 1,057,715 1,958,572 $ 235,972
---------- ---------- ----------
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation 134,326 169,273 20,394
Amortization of product development costs 93,558 123,364 14,863
(Increase) decrease in
Accounts receivable (310,423) (701,500) (84,518)
Deposits and other (694,849) (51,518) (6,207)
Costs and estimated earnings in excess of
billings on uncompleted contracts 156,037 398,692 48,035
Advances to employees 216,672 112,323 13,533
Increase (decrease) in
Accounts payable and accrued expenses 152,638 452,450 54,512
Customer deposits (1,076,955) (19,347) (2,331)
Billings in excess of costs and estimated
earnings on uncompleted contracts 124,744 (555,708) (66,952)
Net borrowings from (repayments to) director 304,794 (44,300) (5,337)
---------- ---------- ----------
Total Adjustments (899,458) (116,271) (14,008)
---------- ---------- ----------
Net Cash Provided by Operating Activities 158,257 1,842,301 221,964
---------- ---------- ----------
Cash Flows from Investing Activities
Capital expenditures (309,649) (257,709) (31,049)
Capitalized expenditures for product development costs (211,483) (596,840) (71,909)
Net advances to shareholders (892,713) (401,388) (48,360)
Net repayments from directors 66,052 -- --
---------- ---------- ----------
Net Cash Used in Investing Activities (1,347,793) (1,255,937) (151,318)
---------- ---------- ----------
Net (Decrease) Increase in Cash (1,189,536) 586,364 70,646
Cash, Beginning of Year 1,224,223 34,687 4,179
---------- ---------- ----------
Cash, End of Year 34,687 621,051 $ 74,825
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 5 -
<PAGE>
SITECH HAINAN LIMITED
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
SiTech Hainan Limited ("the Company") was incorporated in the People's
Republic of China ("the PRC") and is owned 47.6% by Hainan Economic
Information Centre, 42.9% by SiTech Holding (Hainan) Company Limited and
9.5% by Dr. Lan Hongbing Lan.
The Company is engaged in the businesses of network system design and
software development in the PRC.
2. BASIS OF PRESENTATION
The financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America ("US GAAP"). The
basis of accounting differs from that used in the statutory financial
statements in the PRC which are prepared in accordance with the accounting
principles generally accepted in the PRC.
The following material adjustments were made to present the financial
statements to conform with US GAAP:
- All projects were recorded on the percentage of completion method.
- All costs related to software projects are expensed up to the date of
technological feasibility. After that date, all associated costs are
capitalized until the software is available for use or sale. The
capitalized costs are then amortized over a three year period.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash
Substantially all of the Company's cash is held at China Construction
Bank as of December 31, 1999. The Company believes it is not exposed
to any significant credit risk on cash.
(b) Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation.
Depreciation of fixed assets is calculated on the straight-line basis
to write off the costs less estimated residual value of each asset
over its estimated useful life. The principal annual rates used for
this purpose are as follows:
Office and computer equipment 20%
Furniture and fixtures 20%
- 6 -
<PAGE>
SITECH HAINAN LIMITED
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Land lease rights and depreciation
Land lease rights in the PRC are stated at cost less accumulated
amortization. Amortization of land lease rights is calculated on the
straight-line basis over the lesser of their estimated useful life or
the lease term. The principal annual rate used for this purpose is
1.5%.
(d) Product development costs
The Company capitalizes costs incurred for the production of computer
software developed for sale to outside parties. Capitalized costs
include direct labor and related overhead for software produced by the
Company. All costs in the software development process which are
classified as research and development are expensed as incurred until
technological feasibility has been established. Once technological
feasibility has been established, such costs are capitalized until the
software has completed beta testing and is generally available for
sale. Amortization, a cost of revenue, is provided on a
product-by-product basis, using the straight-line method over three
years, commencing the month after the date of product release.
Annually, the Company reviews and expenses the unamortized cost of any
feature identified as being impaired. The Company also reviews
recoverability of the total unamortized cost of all features and
software products in relation to estimated relevant other revenues
and, when necessary, makes an appropriate adjustment to net realizable
value.
Capitalized product development costs consist of the following:
1998 1999 1999
Rmb Rmb US$
------- ------- --------
Balance, beginning of year 230,871 348,796 $ 42,023
Costs capitalized 211,483 596,840 71,909
Costs amortized (93,558) (123,364) (14,863)
------- ------- --------
Balance, end of year 348,796 822,272 $ 99,069
======= ======= ========
The accumulated amortization of product development costs related to
the production of computer software totalled Rmb 216,922 and Rmb
93,558 at December 31, 1999 and 1998, respectively.
Included in cost of sales are research and development costs totalling
Rmb 389,375 and Rmb 297,118 in the years ended December 31, 1999 and
1998, respectively.
- 7 -
<PAGE>
SITECH HAINAN LIMITED
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Revenue recognition
Long-term contracts
The Company reports income from contracts on the
percentage-of-completion method of accounting. The determination of
completion is based upon the proportion of costs incurred to total
estimated costs for such contracts. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Administrative and general costs are expensed in the
period incurred and are not allocated to contracts in process.
Software
The Company recognizes income from the sale of computer software when
the merchandise is shipped.
(f) Income taxes
Income taxes are provided under the provisions of Statement of
Financial Accounting Standards No. 109.
(g) Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(h) Advertising
Advertising is expensed the first time the advertising takes place.
Advertising expense was Rmb 116,062 and Rmb 0 for 1999 and 1998,
respectively.
(i) Foreign currency translation
Foreign currency transactions denominated in foreign currencies are
translated into Renminbi ("Rmb") at the respective applicable rates of
exchange. Monetary assets and liabilities denominated in foreign
currencies are translated into Rmb at the applicable rate of exchange
at the balance sheets date. The resulting exchange gains or losses are
credited or charged to the statements of income.
Translation of amounts from Rmb into United States dollars ("US$") for
the convenience of the reader has been made at the unified exchange
rate (see Note 10) on December 31, 1999 of US$ 1.00 : Rmb 8.30. No
representation is made that the Rmb amounts could have been, or could
be, converted into US$ at that rate on the above dates or at any other
date.
- 8 -
<PAGE>
SITECH HAINAN LIMITED
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999
4. TAXATION
The Company is subject to PRC business tax at the applicable effective tax
rate (5% for both 1999 and 1998) for income derived from services rendered.
The Company enjoys profits tax exemptions for two years from 1997 which was
the first adjusted-for-tax profitable year and a 50% reduction on the
standard tax rate of 15% for the consecutive three years in accordance with
provincial and national regulations on certain industries.
5. FIXED ASSETS
<TABLE>
<CAPTION>
1998 1999 1999
Rmb Rmb US$
--------- --------- ---------
<S> <C> <C> <C>
Cost
Land lease rights 211,225 211,225 $ 25,449
Office and computer equipment 815,509 1,020,052 122,898
Furniture and fixtures 107,085 160,252 19,307
--------- --------- ---------
1,133,819 1,391,529 167,654
--------- --------- ---------
Less : Accumulated depreciation and amortization
Land lease rights 13,876 16,960 2,043
Office and computer equipment 427,429 561,568 67,659
Furniture and fixtures 21,417 53,468 6,442
--------- --------- ---------
462,722 631,996 76,144
--------- --------- ---------
Net book value 671,097 759,533 $ 91,510
========= ========= =========
</TABLE>
The land lease rights are held in the PRC for 67 years from March 1, 1995.
- 9 -
<PAGE>
SITECH HAINAN LIMITED
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
1998 1999 1998
Rmb Rmb US$
---------- ------------ ------------
<S> <C> <C> <C>
Costs incurred on uncompleted contracts 466,290 -- $ --
Estimated earnings 1,540,634 -- --
---------- ------------ ------------
2,006,924 -- --
Less billings to date (2,163,940) -- --
---------- ------------ ------------
(157,016) -- $ --
========== ============ ============
Included in the accompanying balance sheets
under the following captions:
Costs and estimated earnings in
excess of billings on uncompleted
contracts 398,692 -- $ --
Billings in excess of costs and
estimated earning on uncompleted
contracts (555,708) -- --
---------- ------------ ------------
(157,016) -- $ --
========== ============ ============
</TABLE>
7. RELATED PARTY BALANCES AND TRANSACTIONS
<TABLE>
<CAPTION>
Name of related party Existing relationship with the Company
----------------------------------------- ---------------------------------------------
<S> <C>
Hainan Economic Information Centre Government agency in Hainan Province and
is controlled by provincial government.
SiTech Holding (Hainan) Company Limited Common ownership - Dr. Hongbing Lan
Dr. Hongbing Lan Director and shareholder
SoftBank (Shenzhen) Networks Co., Ltd. Subsidiary of World Concept Development, Ltd.
</TABLE>
<TABLE>
<CAPTION>
Name of parties and 1998 1999 1999
nature of transactions Rmb Rmb US$
----------------------- -------- -------- ----------
<S> <C> <C> <C>
Dr. Hongbing Lan, director and
shareholder - Travel and trip expenses
paid on behalf of the Company (304,794) (260,494) $ (31,385)
========== ========== ==========
SiTech Holding (Hainan) Company
Limited, Shareholder - Cash advances 1,084,038 1,485,426 $ 178,967
========== ========== ==========
</TABLE>
- 10 -
<PAGE>
SITECH HAINAN LIMITED
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999
7. RELATED PARTY BALANCES AND TRANSACTIONS (Continued)
The balances with the director and a shareholder are unsecured,
interest-free and repayable on demand.
The Company jointly developed and designed two projects with its
shareholder, SiTech Holding (Hainan), which generated gross revenue of Rmb
199,310 and Rmb 81,961 in 1999 and 1998, respectively.
8. RESERVE FUNDS
In accordance with the PRC Companies Law, the Company is required to
transfer a percentage of its profit after taxation, as determined in
accordance with PRC accounting standards and regulations, to the surplus
reserve funds. The surplus reserve funds are comprised of the statutory
surplus reserve fund and the public welfare fund. Subject to certain
restrictions set out in the PRC Companies Law, the statutory surplus
reserve fund may be distributed to shareholders in the form of share bonus
issues and/or cash dividends. The public welfare fund is non-distributable
and must be used for capital expenditures on staff welfare facilities.
9. MAJOR CUSTOMERS
For the year ended December 31, 1999, sales to each of two major customers
amounted to more than 10% of total sales. The amount of revenue from each
such customer was Rmb 1,955,000 and Rmb 800,000. For the year ended
December 31, 1998, there were three such customers and the revenue from
each amounted to Rmb 850,000, Rmb 400,000 and Rmb 249,601. The receivable
balances for major customers were Rmb 0 and Rmb 770,000 as of December 31,
1999 and 1998, respectively.
10. OPERATING RISKS
(a) Country risk
As substantially all of the Company's activities were conducted in the
PRC, the Company is subject to special considerations and significant
risks not typically associated with companies operating in North
America and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign
currency exchange. The Company's results may be adversely affected by
changes in the political and social conditions in the PRC, and by
changes in governmental policies with respect to laws and regulations,
inflationary measures, currency conversion and remittance abroad, and
rates and methods of taxation, among other things. In addition, a
significant portion of the Company's prior revenue was denominated in
Rmb, which must be converted into other currencies before remittance
outside the PRC. Both the conversion of Rmb into foreign currencies
and the remittance of foreign currencies abroad require approvals of
the PRC government.
- 11-
<PAGE>
SITECH HAINAN LIMITED
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999
10. OPERATING RISKS (Continued)
(b) On January 1, 1994, the PRC government introduced a single rate of
exchange as quoted daily by the People's Bank of China (the "Unified
Exchange Rate").
The quotation of the exchange rates does not imply free convertibility
of Rmb into Hong Kong dollars or other foreign currencies. All foreign
exchange transactions continue to take place either through the
Peoples' Bank of China or other banks authorized to buy and sell
foreign currencies at the exchange rates quoted by the People's Bank
of China. Approval of foreign currency payments by the People's Bank
of China or other institutions requires submitting a payment
application form together with suppliers' invoices, shipping documents
and signed contracts.
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1998 1999 1999
Rmb Rmb US$
------ ------ ------
Cash payments of taxes 81,777 36,176 $4,359
------ ------ ------
12. SUBSEQUENT EVENT (Unaudited)
On February 21, 2000, e SoftBank (Shenzhen) Networks Co., Ltd. acquired
42.9% of the stock of the Company from SiTech Holding (Hainan) Company
Limited for Rmb 2,320,000 and 9.5% from Dr. Hongbing Lan for Rmb 520,000.
The Company's receivable from SiTech Holding (Hainan) Company Limited of
Rmb 1,485,426 was fully repaid at that time from the proceeds of this sale.
- 12 -
<PAGE>
WORLD CONCEPT DEVELOPMENT LIMITED
AND SUBSIDIARY
(Development Stage Enterprise)
consolidated financial statements and
independent auditor's report
Period From October 27, 1999 (Inception)
to December 31, 1999
<PAGE>
WORLD CONCEPT DEVELOPMENT LIMITED
AND SUBSIDIARY
(Development Stage Enterprise)
Period from October 27, 1999 (Inception) to
December 31, 1999
================================================================================
C O N T E N T S
Page
----
Independent Auditor's Report F-1
Consolidated Balance Sheet F-2
Consolidated Statement of Operations F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statement of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-8
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholders and the Board of Directors
World Concept Development Limited and Subsidiary
(Development Stage Enterprise)
We have audited the accompanying consolidated balance sheet of World Concept
Development Limited and Subsidiary (Development Stage Enterprise) as of December
31, 1999, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the period from October 27, 1999
(inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. 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 financial position of World Concept
Development Limited and Subsidiary (Development Stage Enterprise) as of December
31, 1999, and the results of its operations and its cash flows for the period
from October 27, 1999 (inception) to December 31, 1999, in conformity with
generally accepted accounting principles in the United States of America.
/s/ Blackman Kallick Bartelstein, LLP
-------------------------------------
Chicago, Illinois
May 1, 2000
<PAGE>
WORLD CONCEPT DEVELOPMENT LIMITED
AND SUBSIDIARY
(Development Stage Enterprise)
Consolidated Balance Sheet
December 31, 1999
================================================================================
ASSETS
Cash $1,000
------
Total Assets $1,000
======
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 issued and
outstanding - 1,000 shares $1,000
------
Total Stockholders' Equity $1,000
======
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
WORLD CONCEPT DEVELOPMENT LIMITED
AND SUBSIDIARY
(Development Stage Enterprise)
Consolidated Statement of Operations
Period from October 27, 1999 (Inception)
to December 31, 1999
================================================================================
No Activity.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
WORLD CONCEPT DEVELOPMENT LIMITED
AND SUBSIDIARY
(Development Stage Enterprise)
Consolidated Statement of Stockholders' Equity
Period from October 27, 1999 (Inception)
to December 31, 1999
================================================================================
Common Stock Total
-------------------- Stockholders'
Shares Amount Equity
------ ------ ------
Issuance of Common Stock 1,000 $1,000 $1,000
------ ------ ------
Balance December 31, 1999 1,000 $1,000 $1,000
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
WORLD CONCEPT DEVELOPMENT LIMITED
AND SUBSIDIARY
(Development Stage Enterprise)
Consolidated Statement of Cash Flows
Period from October 27, 1999 (Inception)
to December 31, 1999
================================================================================
Cash Flows from Financing Activities:
Proceeds from issuance of common stock to founding
and other stockholders $1,000
------
Net Cash Provided by Financing Activities 1,000
------
Net Increase in Cash 1,000
Cash, Beginning of Period --
------
Cash, End of Period $1,000
======
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
WORLD CONCEPT DEVELOPMENT LIMITED
AND SUBSIDIARY
(Development Stage Enterprise)
Notes to Consolidated Financial Statements
Period from October 27, 1999 (Inception)
to December 31, 1999
================================================================================
1. Organization and Principal Activities
World Concept Development Limited (the "Company"), a development stage
enterprise, was incorporated on October 27, 1999, in the British Virgin Islands
(BVI). The company incorporated its wholly owned subsidiary eSoftbank Networks
(Shenzhen) Co. Ltd. (Shenzhen) on December 30, 1999 in the Peoples' Republic of
China (PRC). The company and its wholly owned subsidiary were incorporated with
a corporate purpose to effect a merger, exchange of capital stock, asset
acquisition or other business combination with a domestic or foreign private or
publicly held business. As of December 31, 1999, the Company had not commenced
any formal business operations and the only activity to date related to the
Company's formation.
The company's ability to commence operations is contingent upon its ability to
execute the acquisitions as more fully described in Note 4.
2. Summary of Significant Accounting Policies
a. Basis of presentation
The consolidated financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 7, "Accounting and Reporting by Development Stage
Enterprises," which requires development stage enterprises to employ
the same accounting principles as operating companies.
F-6
<PAGE>
WORLD CONCEPT DEVELOPMENT LIMITED
AND SUBSIDIARY
(Development Stage Enterprise)
Notes to Consolidated Financial Statements
Period from October 27, 1999 (Inception)
to December 31, 1999
================================================================================
b. Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
3. Stockholders' Equity
Capital Stock
In October of 1999, the Company's Board of Directors authorized capital stock
consisting of 50,000 shares of common stock, $1.00 par value per share. On
December 11, 1999, the founding stockholders and other investors of the Company
purchased 1,000 shares of common stock for $1,000 in cash.
4. Subsequent Events
On February 21, 2000, the Company via its wholly owned subsidiary, Shenzhen,
acquired 9.52% of the outstanding capital of SiTech Hainan Ltd. (SiTech), a
company related through common ownership and management, from Dr. Hongbing Lan,
a director and shareholder of both the Company and SiTech, for approximately
$62,650. On the same date the Company acquired an additional 42.86% of SiTech
via Shenzhen, from SiTech Hainan Holding Co., Ltd. (Holdings), a company related
through common ownership and management, for approximately $280,000.
On February 21, 2000, the Company also acquired, via Shenzhen, 80% of the newly
issued and outstanding stock of eSoftBank (Beijing) Software Systems Co., Ltd.
(Beijing), a PRC company, for its initial capital investment of approximately
$116,000. The remaining 20% is owned by Mr. Hongyu Lan, the brother of Dr.
Hongbing Lan.
F-7
<PAGE>
WORLD CONCEPT DEVELOPMENT LIMITED
AND SUBSIDIARY
(Development Stage Enterprise)
Notes to Consolidated Financial Statements
Period from October 27, 1999 (Inception)
to December 31, 1999
================================================================================
4. Subsequent Events (Continued)
On March 27, 2000, the Company entered into an Exchange Agreement (Exchange)
with Natural Way Technologies, Inc. (Natural Way). Natural Way will acquire 100%
of the issued and outstanding shares of the Company in exchange for 9,300,000
post reverse split shares of Natural Way common stock. Natural Way is a listed
company traded on the Over the Counter Bulletin Board, who as of December 31,
1999 had no current operations, except for general and administrative expenses.
Prior to closing, Natural Way effected a one for five reverse split stock and
changed the name of the company to eSoftbank.com, Inc.
The Exchange has been accounted for using the purchase method of accounting as a
reverse acquisition whereby the company issuing its shares to effect a business
combination is determined to be the acquiree in the business combination. This
occurs when the shareholders of the issuer have less than a majority of voting
control of the combined entity. The company whose shareholders retain the
majority voting interest in the combined entity is presumed the acquirer. In the
current exchange, the existing shareholders of Natural Way will retain a 27%
voting interest in the combined entity on completion of the Exchange.
Accordingly, the Company is deemed to be the acquirer and the assets of Natural
Way are required to be fair valued on acquisition. As Natural Way has no assets,
other than due from stockholder, no fair value adjustments are required.
F-8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
The following presentation contains 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. These statements are
based on our current expectations and relate to anticipated future events that
are not historical facts, such as our business strategies and their intended
results. Our actual results could differ materially from those set forth in the
forward-looking statements as a result of (i) changes in general economic
conditions, (ii) changes in the assumptions used in making these statements,
(iii) our lack of a long-term operating history, (iv) competition generally, and
in the technology sector in particular, (v) our ability to attract, hire, train
and retain competent personnel in a variety of functions, (vi) our ability to
raise sufficient capital to fund our expansion, and (vii) our ability to attract
visitors to our website and sustain a high transaction volume on our website.
Overview
eSoftBank.com, Inc. is a leading software development company in China. Our
focus is on various e-commerce, network management and resource control systems
for business and government enterprises. As one of the first Application Service
Providers (ASP) in China, eSoftBank.com is an interactive and integrated virtual
software community offering technical databank, knowledge exchange, job
subcontracting, software testing and supporting services. Our website,
http://www.eSoftBank.com, is a registry for Chinese web page designers and
e-commerce developers, as well as institutions requiring the services of these
people on which we provide a cost-efficient platform for job exchanges and
assignments. We offer independent software engineers a source of business
opportunities and web space, while companies are able to select from a variety
of software engineers and software companies. Our revenues are derived from
commissions on transaction volume consummated on the platform, as well as
handling fees and service charges for software engineering and technical support
services. Our headquarters are in Shenzhen, China.
We changed our company's name from Natural Way Technologies, Inc. to
eSoftBank.com, Inc. on March 31, 2000, when we acquired all of the issued and
outstanding shares of World Concept Development Limited ("WCD"). WCD owns the
software development and Internet-based software subcontracting platform
operations conducted in China under the name eSoftBank.com (the "Acquisition").
The Acquisition has been accounted for using the purchase method of
accounting as a reverse acquisition, whereby the company issuing its shares to
effect a business combination is determined to be the acquiree in the business
combination. This occurs when the shareholders of the issuer have less than a
majority of voting control of the
32
<PAGE>
combined entity. The company whose shareholders retain the majority voting
interest in the combined entity is presumed the acquirer. In the Acquisition,
the then-existing shareholders of Natural Way retained a 27% voting interest in
the combined entity on completion of the Acquisition. Accordingly, WCD is deemed
to be the acquirer and the assets of Natural Way are required to be fair valued
at acquisition. As Natural Way had no assets (other than as were due from a
shareholder) or operations during 1999 and 2000, no fair value adjustments were
required and there are no changes to the WCD financials that would require a pro
forma analysis. Additionally, because WCD is deemed to be the acquirer, the
historical financial statements of Natural Way (now eSoftbank.com Inc.) have
been restated, and now reflect the historical operations of WCD and its
subsidiaries, of which SiTech Hainan is the only operating company.
SiTech Hainan Ltd. is the only company that existed prior to 1999 that is
reflected in our consolidated financial statements. All amounts presented below
for the first quarter of 1999 are historical results for SiTech Hainan. WCD was
formed in the fourth quarter of 1999 and only became operational in the first
quarter of 2000. Accordingly, the discussion and analysis below compares the
results of operations of SiTech Hainan for the first quarter of 1999 and the
consolidated results of operations of WCD for the first quarter of 2000.
The business of eSoftbank.com is currently conducted in Renminbi, the
currency of China ("RMB"), which for purposes of this section and our financials
are converted at an exchange rate of $1.00 = RMB 8.30.
First Three Months of 2000 against First Three Months of 1999
eSoftBank.com did not have revenues for the first quarter of 2000. This
decrease in revenues from $45,648 in the first quarter of 1999 was primarily due
to a shift in our focus to pursuing an Internet-based platform to offer
technical databank, knowledge exchange, job subcontracting, software testing and
supporting services. Revenues in the first quarter of 1999 were primarily
generated by software development projects, which were all completed prior to
the end of calendar 1999. We expect revenues to increase in the following
quarters due to the launching of our eSoftBank.com website and revenues from our
other software development operations.
Our cost of sales was $44,737 for the first quarter of 2000, an increase of
$19,201, or 75% over the first quarter of 1999. This increase in our cost
resulted from the implementation of the strategy described above and our
developing of a number of smaller components, including an interactive learning
center, a software collaborative center, a credit assessment center, a virtual
software workspace and a human resource center. Within cost of sales, the
salaries and related research and development expenses increased from $20,146 to
$25,096, an increase of 25%, almost all of which was attributable to the
research and development of our new platform. Amortization of software products
included within cost of sales were $10,259 in the first quarter of 2000,
33
<PAGE>
an increase of $4,868, or 90%, from the first quarter of 1999. This is due to
the increased number of projects being amortized.
Gross margin as a percentage of sales were 44% in the first quarter of
1999. Due to the aforementioned reduction in revenues and increased costs, this
gross margin disappeared in the first quarter of 2000. We expect our gross
margin to increase in the following quarters due to the launching of our
eSoftBank.com website and revenues from our other software development
operations.
Our selling and administrative expenses increased to $355,076, an increase
of $342,300 from $12,776 in the first quarter of 1999. This increase in selling
and administrative expenses was primarily the result of three components. First,
we increased our employee base from 50 persons to approximately 120 persons (as
of April 30, 2000), including individuals whose salaries are included in the
research and development portion of cost of sales above. Our increase in
staffing and concurrent commencement of operations in Beijing and Shenzhen,
which have significantly higher pay scales than Hainan, resulted in an increase
in salaries and wages for our selling and administrative employees from $1,713
in the first quarter of 1999 to $34,695 in the first quarter of 2000. Over half
of this personnel increase was in our marketing team, which now consists of 40
persons, up from 3 during the first quarter of 1999. We plan to add 30 more
employees in the next three months, including 20 in software maintenance and
development and 10 for our marketing team.
Second, the increase in our selling and administrative expenses is also the
result of $65,333 incurred for promotion and marketing activities in the first
quarter of 2000. We incurred no such expenses in 1999. Third, we also incurred
expenses of $91,014 in connection with setting up our new offices in the first
quarter of 2000. We did not have corresponding expenses in the first quarter of
1999.
We incurred losses for the first quarter of 2000 of $18,887 (after giving
effect to the minority interest held by others in SiTech Hainan, which decreased
the operating loss by $79,358). We had profits of $5,596 in the first quarter of
1999. As indicated above, the operating losses in the first quarter of 2000 were
due to our marketing campaign, the costs of setting up our offices, and the
decrease in our revenues and increased cost of sales as we developed and
launched our eSoftBank.com website. Our shift in focus from a pure software
development company to a worldwide on-line software subcontracting platform is
expected to reverse these negative trends in the future.
Outlook
We acquired 100% of WCD on March 31, 2000. WCD is the holding company for
all of the outstanding shares of eSoftBank Network Systems (Shenzhen) Co. Ltd.,
80% of eSoftBank (Beijing) Software System Co. Ltd. and 52.38% of SiTech Hainan
Ltd.
34
<PAGE>
We believe that we are well-positioned for growth in the rapidly developing
information technology ("IT") industry in China and, eventually, beyond. We
anticipate an increase in our business as we are developing from a regional
software development company in Hainan to a group of companies with extensive
geographical coverage. We anticipate that our web site will be visited and
utilized by individuals and companies in Beijing, Shenzhen, Hainan and other
cities in China. The three named cities are of particular significance to us
because (i) Beijing is the center for IT talent and markets in China, (ii)
Shenzhen has relatively easy access to Hong Kong and can be used as a capital
channel for future fund raising, and (iii) Hainan is our current technology
base. In the near future, we plan to set up a representative office in the
United States and establish an American Programmer Club. We are also in
preparation to launch a complete English version of our website.
To strengthen our operations, we have increased our number of employees
from 50 people to approximately 120 people as of April 30, 2000. The employees
added are primarily in the areas of sales (37), software design (12) and
software maintenance (8), and finance and investment management (10). Because we
believe that the eSoftbank.com brand is one of the key success factors in our
participation in the e-commerce industry growth, we anticipate that we will
remain committed to a strong marketing campaign.
We believe that our growth strategy has been successful thus far. Through
April 28, 2000, the total value of the contracts entered into through
eSoftBank.com has exceeded $ 1,169,052 (including on-line transaction volume of
$ 446,160 and business-to-business service charges of $ 722,892). The numbers of
registered programmers and registered company members have reached 21,407 and
665, respectively.
We are engaged to undertake the projects listed below. We anticipate that
these projects and others under consideration will have a positive impact on our
revenues and cash flows in later quarters.
1. We will be providing technical services to China Huayin Electric Power Co.,
Ltd., a listed company on the Shanghai Stock Exchange, China. These
technical services include development and services of application software
and networks for electricity generation, distribution and usage by
end-users. We anticipate total revenues of about $600,000.
2. eSoftBank.com will provide service to Shenzhen Wanli Aoxiang Investment
Development Co., Ltd. (hereinafter referred to as "Swaid") to carry out the
development of Swaid's Web System and e-Commerce System (Shenzhen
Investment Information Web Site). We have received a prepayment from Swaid
of an aggregate of approximately $722,892 for designing web pages,
preparing their business plan, developing their client database and related
software, and providing and installing a SiTech software system.
35
<PAGE>
We plan to build upon our presence in China and expand our presence
overseas in the future.
Liquidity and Capital Resources
At the end of the first quarter of 2000, we had cash on hand of $1,167,675,
in contrast to $75,825 on December 31, 1999. This increased cash is primarily
due to funds provided by investors. We believe that in the next few months we
will need additional financing, but that this need will diminish as our website,
subcontracting platform and other services become more familiar to those in
China's IT community. Without these contributions in the near future, we will
find it difficult to satisfy our cash requirements during the next 12 months.
Year 2000 Issues
To date, we have not experienced any difficulties related to Year 2000
compliance and none of our customers has informed us of any Year 2000 problems
with their systems and hardware. We do not believe Year 2000 compliance issues
will have any effect on our business, results of operations or financial
condition.
36
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
(a) None
(b) None
(c) On July 31, 1999, we (as Natural Way) issued 2,180,000 (on a
post-reverse-split basis) shares of our common stock, par value $0.001 (the
"common stock") to a corporation and various individual stockholders in
connection with a private placement. We relied upon the exemption from
registration provided in Regulation S under the Securities Act.
In 1997 and 1999, 2,300 and 3,100 shares of our Series A convertible and
redeemable preferred stock were converted into an aggregate of 5,400,000 shares
of common stock for a price of $1.00 per share. This transaction was exempt from
registration under Section 4(2) of the Securities Act. The small number of
holders acquiring the common stock were holders of our convertible preferred
stock. We believe that no solicitation was made by the previous management in
connection with the conversion of the shares.
We approved and, effective March 27, 2000, completed a 1:5 reverse share
split. Fractional shares resulting from the split were rounded to the next
highest whole number of shares. Shareholders owning less than 100
(pre-reverse-split) shares were not affected by the reverse share split.
Effective March 31, 2000, we issued 9,300,000 shares of our common stock to
the former shareholders of WCD as part of the Acquisition. We also issued to the
parties named below warrants to purchase shares of common stock having the terms
and conditions summarized below:
The following warrants were issued to Pacific Winner Development Limited,
an affiliate of ours, (post-Acquisition) Chief Executive Officer and largest
shareholder:
(i) warrants to purchase from the Company 2,400,000 shares of our common
stock at an exercise price equal to $3.00 for a period commencing
March 31, 2000 and expiring on March 31, 2001;
37
<PAGE>
(ii) warrants to purchase from us 1,600,000 shares of our common stock at
an exercise price equal to $4.00 for a period commencing on March 31,
2001 and expiring March 31, 2002; and
(iii) warrants to purchase from us 1,600,000 shares of our common stock at
an exercise price equal to $3.00 for a period commencing on March 31,
2002 and expiring on March 31, 2003.
The following warrants to World Concept Holding Limited, an affiliate of
WCD:
(i) warrants to purchase 2,400,000 shares of our common stock at an
exercise price equal to $3.00 for a period commencing March 31, 2000
and expiring on March 31, 2001;
(ii) warrants to purchase from us 1,600,000 shares of our common stock at
an exercise price equal to $4.00 for a period commencing on March 31,
2001 and expiring March 31, 2002; and
(iii) warrants to purchase from us 1,600,000 shares of our common stock at
an exercise price equal to $3.00 for a period commencing on March 31,
2002 and expiring on March 31, 2003.
All of these securities were issued pursuant to the terms of the
Acquisition on March 31, 2000. We received all of the issued and outstanding
share capital in WCD in consideration for our issuance of the above-described
9,300,000 shares of common stock and warrants to purchase 7,000,000 additional
shares of our common stock.
We relied upon Regulation S in issuing the unregistered securities
described in the preceding paragraphs to the WCD shareholders. All of the
recipients of our common stock and warrants under the Exchange Agreement were at
the time of the Acquisition located in China or Hong Kong. None of the persons
or legal entities that acquired shares in the Company were U.S. persons, as
defined in Regulation S. The sale was an offshore transaction, and there were no
directed selling efforts in the United States in connection with the sales of
these securities. To our knowledge and belief, all of the recipients of these
securities still hold the securities issued to them.
Item 3. None
Item 4. Submission of Matters to a Vote of Security Holders.
The shareholders of Natural Way approved (a) the acquisition of WCD (and
related issuance of shares of Natural Way to the shareholders of WCD), (b) the
reorganization of our authorized capital and 1:5 reverse share split that became
effective prior to the issuance of the shares of common stock and warrants
described in Item 2, (c)
38
<PAGE>
an amendment to the By-laws regarding the number of directors and
indemnification of officers and directors. Our three current directors were also
elected effective as March 31, 2000.
In lieu of a special meeting, Natural Way obtained written consents from
holders of a majority of the securities entitled to vote on all of these
actions, which consent was effective as of March 27, 2000. For each of the
matters described in the immediately preceding paragraph, shareholders voted an
aggregate of 14,301,860 shares in favor, 0 against, with the balance of shares
not voted. The number of shares that were voted does not reflect the 1:5 reverse
share split.
Item 5. Other Information.
None
Item 6.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8K - A Current Report on Form 8-K was filed by the Company
on February 11, 2000 to disclose under Item 4 the resignation of Arthur
Andersen & Co. as the Company's auditor on September 29, 1999 and the
engagement on October 15, 1999 of Blackman Kallick Bartelstein, LLP as the
new certifying accountants to audit the Company's financial statements.
[The remainder of this page intentionally left blank]
39
<PAGE>
Signature
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eSoftbank.com Inc.
(Name of Registrant)
Dated: May 12, 2000 By: /s/ Tang Chunlin
-------------------------------------
Name: Tang Chunlin
Title: Chief Financial Officer (Authorized
Person and Principal Accounting
Officer)
40
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ESOFTBANK.COM INC. DATED AS OF MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,446
<SECURITIES> 0
<RECEIVABLES> 249
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,746
<PP&E> 154
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,004
<CURRENT-LIABILITIES> 2,030
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 6,217
<TOTAL-LIABILITY-AND-EQUITY> 2,004
<SALES> 0
<TOTAL-REVENUES> 2
<CGS> 45
<TOTAL-COSTS> 45
<OTHER-EXPENSES> 355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (398)
<INCOME-TAX> 0
<INCOME-CONTINUING> (398)
<DISCONTINUED> 0
<EXTRAORDINARY> 79<F1>
<CHANGES> 0
<NET-INCOME> (319)
<EPS-BASIC> (0.03)
<EPS-DILUTED> 0
<FN>
(1) "Extraordinary" relates to an amount added back into the company's earnings
to reflect the minority interest of another company in one or more of the
Company's subsidiaries.</FN>
</TABLE>
