SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF EARLIEST REPORTED EVENT - July 30, 2000
YIFAN COMMUNICATIONS, INC.
(Exact name of Issuer as specified in its charter)
Delaware 0 - 23672 34-1692323
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification Number)
41-60 Main Street, Suite 210
Flushing, Queens, New York 11355
(Address of Issuer's principal executive offices)
727 443 3434
(Issuer's telephone number, including area code)
727 443 5240
(Issuer's facsimile number, including area code)
1612 North Osceola
Clearwater, Florida 33075
(Former name or former address, if changed since last report)
<PAGE>
Introductory Note
This Current Report on Form 8-K (the "Report") discusses the impact of a
series of transactions that culminated in a business combination between Yifan
Communications, Inc., a Delaware corporation formerly known as Smart Games
Interactive, Inc., and Yifan.com, Inc, a New York corporation. This business
combination (the "Yifan Transaction") closed on July 30, 2000. References to the
"Issuer" shall refer to the activities of Yifan Communications, Inc. and its
predecessor before the Yifan Transaction. References to "Yifan" shall refer to
the activities of Yifan.com, Inc. and its predecessor Yifan LLC before the Yifan
Transaction. References to the "Company," "we," "us" and "our" shall refer to
the Company and our subsidiary after the Yifan Transaction.
Our quarterly and annual operating results will be affected by a wide
variety of factors that could materially and adversely affect our future
operating performance. These factors include, but are not limited to:
o Changes in general economic conditions;
o Changes in the demand for online information services;
o Changes in the nature of our business resulting from the introduction
of new services;
o Changes in the nature of our business resulting from our entry into
new markets;
o Competition from other firms who offer competitive services; and
o Changing regulatory requirements in the markets we serve.
As a result of these factors and others, our future operating results may
fluctuate on a quarterly or annual basis. Such fluctuations could materially and
adversely affect our business, financial condition, operating results, and stock
price.
This report and other documents that we file with the Securities and
Exchange Commission (the "SEC") contain forward-looking statements about our
business containing the words "believes," "anticipates," "expects" and words of
similar import. These forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results or
performance to be materially different from the results or performance
anticipated or implied by such forward-looking statements. Given these
uncertainties, stockholders are cautioned not to place undue reliance on
forward-looking statements. Except as specified in SEC regulations, we have no
duty to publicly release information that updates the forward-looking statements
contained in this Report. An investment in our stock involves various risks and
uncertainties, including those described elsewhere in this Report. Additional
risks will be disclosed from time to time in our future SEC filings.
Documents Incorporated by Reference
The Issuer's Current Report on Form 8-K dated April 17, 2000 (the "April
8-K"), which discloses a change in control and a plan to restructure the
Issuer's affairs, is incorporated by reference.
The Issuer's Current Report on Form 8-K dated July 31, 2000 (the "July
8-K"), which discloses a change in the Issuer's name and the effect of a pending
amendment to the Issuer's Certificate of Incorporation, is incorporated by
reference.
Our Information Statement Pursuant to Section 14(f) of the Securities
Exchange Act of 1934 dated August 2, 2000 (the "Section 14(f) Information
Statement"), which discloses our plan to appoint four additional members to our
board of directors (the "Board") in connection with the Yifan Transaction, is
incorporated by reference.
<PAGE>
ITEM 1.
CHANGES IN CONTROL OF THE ISSUER
INTRODUCTION AND CORPORATE HISTORY
Sports Sciences, Inc. ("Sports Sciences") was incorporated under the laws
of the State of Ohio in October 1991. In April 1994, Sports Sciences completed
an initial public offering of securities pursuant to a effective registration
statement under the Securities Act of 1933 (the "Securities Act"). In connection
with the listing of its securities on the Nasdaq system, Sports Sciences
registered its common stock under Section 12(g) of the Securities Exchange Act
of 1934 (the "Exchange Act"). Sports Sciences and its successors have been a
reporting issuer under the Exchange Act since 1994.
At its 1996 Annual Meeting, the stockholders of Sports Sciences approved a
plan to change its corporate domicile by merging Sports Sciences into Smart
Games Interactive, Inc. ("Smart Games"), a newly formed wholly-owned subsidiary
of Sports Sciences that was incorporated under the laws of the State of
Delaware. This merger was completed on October 11, 1996 and as a result of the
merger, Smart Games became the successor to Sports Sciences' Exchange Act
registration.
In July 2000, Smart Games effected a name change by means of a statutory
merger between Smart Games and Yifan Communications, Inc., a newly formed
wholly-owned subsidiary of Smart Games that was also incorporated under the laws
of the State of Delaware. This merger was completed on July 28, 2000. While
Smart Games was the surviving corporation, the Certificate of Ownership and
Merger provided for a change of the Issuer's name from Smart Games Interactive,
Inc. to Yifan Communications Inc.
Originally, the Issuer created, designed, developed and assembled
interactive electronic game simulators that incorporated proprietary hardware
and software technology. However, the cash flow generated from these operations
was not sufficient to pay the Issuer's operating costs. Accordingly, the
Issuer's Board elected to terminate all ongoing business operations in the third
quarter of 1997. During the year ended December 31, 1998, the Issuer liquidated
substantially all its assets and used the proceeds therefrom to reduce its
outstanding liabilities. At December 31, 1999, the Issuer had no material assets
and unpaid liabilities of approximately $700,000.
MARCH 30, 2000 CHANGE IN CONTROL
On March 30, 2000, the Issuer's Board unanimously approved the sale of
15,000,000 shares of the Issuer's $0.0002 par value common stock (the "Old
Common") to Tobem Investments Limited ("Tobem") for a price of $0.005 per share,
or $75,000 in the aggregate. After giving effect to the Tobem transaction, the
Issuer had a total of 27,648,244 shares of Old Common issued and outstanding on
March 20, 2000 and the shares held by Tobem represented approximately 54% of the
total voting power held by stockholders. Concurrently, the Board appointed
Tobem's nominee, Sally A. Fonner of Clearwater, Florida, to serve as a member of
the Board until the next annual meeting of the stockholders. After appointing
Ms. Fonner to the Board, James Chuma, Peter Waite and Donald Miller resigned,
and Ms. Fonner has been the Issuer's sole Director since March 30, 2000.
On March 31, 2000, the Company and Tobem entered into a Project Management
Agreement (the "PMA") with Capston Network Company ("Capston"), a Delaware
corporation owned by Ms. Fonner. Under the PMA, Capston was specifically
authorized and obligated to:
o manage the ministerial accounting and administrative functions
associated with preparing and filing the Company's required reports
under the Exchange Act;
o negotiate the payment and/or compromise of the outstanding liabilities
of the Company;
o negotiate a business combination agreement with a suitable privately
held company; and
o pay, at its sole risk, the costs and expenses associated with
maintaining the Issuer's status as a reporting issuer under the
Exchange Act and locating and investigating business combination
opportunities.
Capston was also specifically authorized to purchase additional shares of
Old Common for its own account, at a price of not less than $.01 per share, if
such purchases were necessary to provide sufficient cash resources for the
satisfaction of the Issuer's debts.
Between March 30, 2000 and July 28, 2000, Capston and Ms. Fonner devoted
substantial time and effort to negotiations with the Issuer's creditors. As a
result of these negotiations, the Issuer's creditors agreed to accept aggregate
cash payments of $88,107 in full and final settlement of all outstanding
indebtedness. During this same period, the Issuer incurred aggregate operating
expenses of $35,179, for an aggregate cash outflow of $123,286. Of this amount,
$75,000 was paid from the cash contributed by Tobem. The $48,286 balance was
paid by Capston and accounted for as a purchase of 3,500,000 shares of Old
Common. The Issuer also issued 1,351,756 shares of Old Common to its former
legal counsel in settlement of claims for unpaid fees. After giving effect to
all of the foregoing transactions, the Issuer had 32,500,000 shares of Old
Common issued and outstanding on the date of the Yifan Transaction.
The following table provides summary information concerning the beneficial
ownership of the Issuer's Old Common on the date of the Yifan Transaction.
Stockholder Shares Percentage
Group Owned Ownership
Original stockholders of Issuer 12,648,244 38.92%
Tobem Investments Limited (1)(2) 15,000,000 46.15%
Sally A. Fonner (1)(2)(3) 3,500,000 10.77%
Former legal counsel for Issuer 1,351,756 4.15%
---------- ------
Total 32,500,000 100.00%
(1) As compensation for services to be rendered under the PMA, Tobem
agreed to sell Capston 12,000,000 shares of Old Common at a price of
$0.005 per share ($60,000 in the aggregate).
(2) In connection with the Yifan Transaction, Capston has notified Tobem
that it intends to purchase 11,000,000 shares of Old Common from Tobem
for $55,000 in cash and relinquish its rights with respect to
1,000,000 shares of Old Common.
(3) The stock attributed to Ms. Fonner in the foregoing table includes
3,500,000 shares of Old Common owned by Capston but excludes the
12,000,000 shares of Old Common owned by Tobem that are subject to a
stock purchase right in favor of Capston.
The transactions between the Issuer, Tobem, Ms. Fonner and Capston are
described more fully in the April 8-K, the July 8-K and our Section 14(f)
Information Statement, all of which are incorporated herein by reference. At the
date of this Report, all amounts due under the settlement agreements with the
Issuer's creditors have been paid in full.
NAME CHANGE
On July 21, 2000, the Issuer filed a "Certificate of Ownership and Merger"
with the Secretary of State of the State of Delaware that merged Yifan
Communications, Inc., a newly formed wholly owned subsidiary, into the Issuer.
This Certificate of Ownership and Merger provided the Issuer would be the
surviving corporation in the merger. It also provided that from and after the
effective date of the merger, the name of the combined companies would be Yifan
Communications, Inc. The merger and name change became effective at 12:01 a.m.
on July 28, 2000, and our Old Common began trading on the OTC Bulletin Board
under its new symbol "YFNC" on July 31, 2000.
The merger of the Issuer and its subsidiary was effected for the purpose
of changing the Issuer's name in preparation for the Yifan Transaction described
elsewhere herein. No substantive changes were made in the rights of stockholders
in connection with the merger. Accordingly, each stockholder of record is
entitled to one vote for each share held at each meeting of the stockholders in
respect to any matter on which stockholders have the right to vote. Stockholders
have no cumulative voting rights, nor do they have any preemptive rights.
Stockholders are entitled to receive, when and as declared by the Issuer's Board
of Directors, out of legally available earnings and surplus, any dividends
payable either in cash, in property or in shares of the capital stock of the
Issuer. Stockholders will not be asked to return their stock certificates for
replacement with new certificates bearing the Issuer's new name.
REVERSE SPLIT AND CHANGE IN AUTHORIZED CAPITAL
On July 27, 2000, Tobem and Capston executed written consents to a proposed
amendment to the Issuer's Certificate of Incorporation (the "Amendment"). The
Amendment was a negotiated element of the Yifan Transaction and will not take
effect until September 30, 2000. The Amendment was filed with the Secretary of
State of the State of Delaware on July 27, 2000. When the Amendment becomes
effective, it will (a) implement a 1 for 40 reverse split of the Old Common and
(b) increase the Issuer's authorized capitalization to 100,000,000 shares of
$0.008 par value common stock ("New Common") and 10,000,000 shares of $0.008 par
value preferred stock ("New Preferred"). The operative text of the Amendment is
set forth below:
ARTICLE IV
CAPITAL STOCK
4.1 Reverse Split of Outstanding Common Stock. Effective at 12:01 a.m. EST on
September 30, 2000, and without any further action by the holders of the
Common Stock of the Corporation, the THIRTY TWO MILLION, FIVE HUNDRED
THOUSAND (32,500,000) issued and outstanding shares of the Corporation's
$0.0002 par value common stock ("Old Common"), together with any additional
shares of the Corporation's Old Common that are or may be issued prior to the
effective time set forth above, shall be consolidated or "reverse split" in
the ratio of one (1) share of $0.008 par value common stock ("New Common")
for every forty (40) shares of Old Common currently held by a stockholder so
that the total issued and outstanding capital stock of the Corporation shall
consist of EIGHT HUNDRED TWELVE THOUSAND FIVE HUNDRED (812,500) shares, more
or less, as adjusted for any additional issuances of Old Common prior to the
effective time set forth above. No fractional shares of New Common shall be
issued in connection with the reverse split. In the event that the foregoing
reverse split would result in the issuance of a fractional share of New
Common to any stockholder, the Corporation shall pay the Stockholder entitled
thereto an amount in cash equal to the fair market value of such fractional
shares, determined as of the close of business on September 29, 2000.
4.2 Authorized Capital. From and after 12:01 a.m. EST on September 30, 2000,
the Corporation shall be authorized to issue a total of One Hundred Ten
Million (110,000,000) shares of capital stock which shall be subdivided into
classes as follows:
(a) One Hundred Million (100,000,000) shares of the Corporation's capital
stock shall be denominated as Common Stock, have a par value of $0.008
per share, and have the rights, powers and preferences set forth in this
paragraph. The Holders of Common Stock shall share ratably, with all
other classes of common equity, in any dividends that may, from time to
time, be declared by the Board of Directors. No dividends may be paid
with respect to the Corporation's Common Stock, however, until dividend
distributions to the holders of Preferred Stock, if any, have been paid
in accordance with the certificate or certificates of designation
relating to such Preferred Stock. The holders of Common Stock shall
share ratably, with all other classes of common equity, in any assets of
the Corporation that are available for distribution to the holders of
common equity securities of the Corporation upon the dissolution or
liquidation of the Corporation. The holders of Common Stock shall be
entitled to cast one vote per share on all matters that are submitted
for a vote of the stockholders.
(b) Ten Million (10,000,000) shares of the Corporation's authorized capital
stock shall be denominated as Preferred Stock, par value of $0.008 per
share. Shares of Preferred Stock may be issued from time to time in one
or more series as the Board of Directors, by resolution or resolutions,
may from time to time determine, each of said series to be distinctively
designated. The voting powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations
or restrictions thereof, if any, of each such series of Preferred Stock
may differ from those of any and all other series of Preferred Stock at
any time outstanding, and the Board of Directors is hereby expressly
granted authority to fix or alter, by resolution or resolutions, the
designation, number, voting powers, preferences and relative,
participating, optional and other special rights, and the
qualifications, limitations and restrictions thereof, of each such
series of Preferred Stock.
Reason for Amendment. At December 31, 1999, the Issuer had no material
assets, no active management and no ongoing operations, and its liabilities
exceeded its total assets by approximately $700,000. Nevertheless, it was
believed that it might be possible to recover some value for the stockholders
through the implementation of a plan whereby the Issuer would be restructured as
a "public shell" for the purpose of effecting a business combination transaction
with a suitable privately-held company. In its April 8-K the Issuer disclosed
the terms of a related series of transactions whereby
o Tobem purchased 15,000,000 shares, or approximately 54%, of the
Issuer's Old Common for $75,000 in cash.
o The Board of Directors appointed Tobem's nominee, Ms. Sally A. Fonner,
to serve as the sole member of the Issuer's Board during the
restructuring period.
o The Issuer executed a PMA that authorized Capston to negotiate
compromise agreements with the Issuer's creditors, negotiate the terms
of a business combination agreement between the Issuer and a suitable
privately-held company and take such other action as may be necessary
to restructure the Issuer's affairs.
The April 8-K also disclosed that if Capston was able to negotiate
settlement agreements with the Issuer's creditors and negotiate a business
combination agreement, it would probably be necessary for the Issuer to effect a
reverse split of at least 1 for 40 and increase its authorized capital.
Since the date of the April 8-K, Capston has been actively managing the
Issuer's affairs and negotiating settlement agreements with the Issuer's
creditors. In connection with these activities, Capston has spent the entire
$75,000 contributed by Tobem, and contributed an additional $48,286 in cash from
its own funds. In accordance with the terms of the PMA, Capston's cash
contributions have been accounted for as a purchase of 3,500,000 shares of Old
Common.
In July 2000, Capston negotiated terms for the Yifan Transaction that would
require the Issuer to issue more shares of stock than would have been
permissible under its Certificate of Incorporation. The agreements relating to
the Yifan Transaction also required the Issuer to effect a 1 for 40 reverse
split of the Old Common. The Amendment was adopted for the primary purpose of
facilitating the prompt closing of the Yifan Transaction.
No Right to Vote, Dissent or Exercise Appraisal Rights. The Amendment was
proposed by the Issuer's Board, approved by the written consent of the holders
of a majority of the Issuer's outstanding shares and filed in the office of the
Delaware Secretary of State on July 28, 2000. Under the General Corporation Law
of Delaware, the stockholders of the Issuer who were not afforded an opportunity
to consent or otherwise vote with respect to the Amendment have no right to
dissent or require a vote of all the Issuer's stockholders. Moreover, the Yifan
Transaction has been structured as a reverse takeover transaction and the
stockholders will have no right to vote with respect to the approval of the
Yifan Transaction or the terms thereof. The provisions of the General
Corporation Law of Delaware that grant stockholders appraisal rights in
connection with certain merger transactions will not be applicable to the Yifan
Transaction.
Legal Status of Amendment. The Amendment has been proposed, approved and
filed in accordance with the requirements of the General Corporation Law of
Delaware. While a Delaware corporation may withdraw a filed amendment prior to
its effective date if such withdrawal is approved by the requisite stockholder
vote, the Issuer does not intend to alter the terms of the Amendment, although
it may elect to change the effective date thereof.
Effectiveness of Amendment. Under Section 14(c) of the Exchange Act, the
Amendment cannot become operative until 20 days after the Issuer mails an
"Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934" to all its stockholders (the "Section 14(c) Information Statement").
The rules of the SEC require that a Section 14(c) Information Statement contain
all of the information that would have been included in a Proxy Statement. We
filed our Section 14(c) Information Statement with the SEC on August 14, 2000.
When we have responded to comments from the SEC's staff and are legally
authorized to mail the Section 14(c) Information Statement to our stockholders,
we intend to change the effective date of the Amendment to the 20th day after
the mailing date of the Section 14(c) Information Statement.
Acquisition of Yifan.com, Inc
Overview of Acquisition Terms. On July 30, 2000, the Issuer entered into a
reorganization agreement with Yifan and all of its stockholders. In connection
with the Yifan Transaction:
o the Issuer changed its name to Yifan Communications, Inc.;
o the Issuer filed the Amendment which will reduce its issued and
outstanding common stock to 812,500 shares of New Common and increase
its authorized capital to 100,000,000 shares of New Common and
10,000,000 shares of New Preferred;
o the stockholders of Yifan contributed all of their interest in Yifan
to the Issuer solely in exchange for the right to receive 11,994,750
shares of New Common;
o the Issuer agreed to issue 179,921 shares of New Common to certain
finders who assisted in the negotiation of the Yifan Transaction; and
o Capston agreed to transfer 89,961 shares of New Common to such
finders.
Taking all of the foregoing into account, there will be approximately
12,987,171 shares of New Common issued and outstanding on September 30, 2000,
the effective date of the Amendment. No shares of Preferred Stock will be issued
and outstanding.
New Principal Stockholders. The Amendment will not become effective until
September 30, 2000 and shares of New Common cannot be issued to the former
stockholders of Yifan until that date. The following table contains pro forma
information on the beneficial ownership of the Company's New Common after giving
effect to the Yifan Transaction. The table identifies (i) each owner of more
than 5 percent of the New Common; (ii) all directors and executive officers of
the Company; and (iii) all directors and executive officers of the Company as a
group.
Amount and
Nature of
Name and Address Beneficial Percent
of Beneficial Owner Ownership(1) of Class
==============================================================================
Yifan He (1) 3,093,313 23.83%
Jeffery Wu (1)(2) 3,293,100 25.36%
Michael Yung (1)(3) 2,167,088 16.69%
Ahn Tran (1) 585,000 4.50%
Sally A. Fonner (4)(5) 228,116 1.73%
Jeff Kraft (6) 25,000 0.19%
Tobem Investments (7) 100,000 0.77%
Executive Officers and Directors
as a Group (5 persons) 9,392,616 71.33%
(1) 41-60 Main Street, Suite 210, Flushing, Queens, New York 11355.
(2) Includes 2,843,100 shares owned by Mr. Wu and 450,000 shares owned by
Mr. Wu as custodian for his minor child.
(3) Includes 1,154,588 shares of New Common owned by Mr. Yung's wife
Michelle Yung and 1,012,500 shares owned by Michelle Yung as custodian
for their minor children.
(4) Gives effect to (a) Capston's purchase of 11,000,000 shares of Old
Common from Tobem, (b) the 1 for 40 reverse split, (c) the assignment
of 204,424 shares of New Common to certain individuals who assisted
Capston in the restructuring of the Company's affairs, (d) the
assignment of 89,961 shares of New Common to certain finders who
assisted in the Yifan Transaction, (e) the issuance of 180,000 shares
of New Common to Ms. Fonner under the terms of her employment
agreement, and (f) the assignment of 20,000 shares of New Common to
Mr. Kraft by Ms. Fonner as compensation for his services as the
Company's Interim Chief Financial Officer.
(5) Capston has agreed to refund a $350,000 acquisition fee to the Company
if on the first anniversary of the Yifan Transaction, the New Common
is listed on the Nasdaq Stock Market and the average closing bid price
of the New Common has been at least $10 per share for a period of 45
consecutive trading days. To secure its obligations under this
Agreement, Capston has agreed to deposit 35,000 shares of New Common
in a bank escrow.
(6) Includes 5,000 shares that will be assigned to Mr. Kraft by Capston as
compensation for his involvement in the restructuring of the Company's
affairs. Also includes 20,000 shares that will be assigned to Mr.
Kraft by Ms. Fonner as compensation for his services as Interim Chief
Financial Officer of the Company.
(7) Gives effect to Capston's purchase of 11,000,000 shares of Old Common
from Tobem and the 1 for 40 reverse split.
The Issuer knows of no arrangements that will result in a change in
control at a date after this Current Report on Form 8-K.
Copies of the Certificate of Ownership and Merger and the Amendment to the
Issuer's Certificate of Incorporation accompany the Issuer's July 8-K and are
incorporated herein by reference. Copies of the documents used to effect the
Yifan Transaction accompany this Report and are incorporated herein by
reference. See Item 7.
Item 2.
ACQUISITION OF ASSETS.
History of Yifan.com, Inc
Yifan LLC, a New York limited liability company, was organized on January
22, 1999 to finance the further development and expansion of the "yifan.com,"
web site. In connection with the formation of Yifan, LLC, Mr. He contributed all
his right title and interest in the yifan.com web site to Yifan LLC in exchange
for membership interests. During 1999, two individuals contributed $145,298 in
cash to Yifan LLC in exchange for membership interests. During 1999, three
individuals contributed consulting services valued at $18,170 and five
individuals contributed software development services valued at $18,020 to Yifan
LLC in exchange for membership interests.
Yifan.com, Inc., a New York corporation, was organized on January 5, 2000 as
the corporate successor to Yifan LLC. In connection with the organization of the
Company, Yifan LLC conveyed all of its business operations and properties to the
Company and the members of Yifan LLC received a total of 4,750,000 shares of
Yifan's common stock.
Business of Yifan.com, Inc
We are a leading Chinese language Internet communications, e-commerce and
software development company. We established our first Chinese language Internet
portal, "yifan.com," in May 1997. Our site was written entirely in simplified
Chinese, the standard written language in the Peoples Republic of China (the
"PRC"), and focused primarily on the needs of the Chinese community in the New
York Metropolitan area. Concurrently, we established "E-omninet," a free service
that gives our registered users free access to a variety of online features
including a file manager, address book, bookmarks, solar and lunar calendars,
event reminders, POP3 e-mail and personal web page hosting. E-Omninet permits
our registered users to record and access personal and business information from
any location, and if desired, share that information with others.
In late 1998, we began to seek third-party financing to enhance the
yifan.com site, expand the scope of our service to the Chinese community and
create proprietary Chinese language software products that will make the
Internet more accessible to the one-quarter of the world's population that reads
and writes Chinese. After obtaining financial and business assistance from
several leading members of the Chinese community in the New York Metropolitan
area, we embarked on an ambitious software development project that has resulted
in several proprietary software products:
o Search Engine - provides the fastest Chinese language search of any
engine on the Internet;
o Web Crawler - uses both Simplified Chinese and Traditional Chinese to
search and categorize Chinese language web pages;
o Translation Utility - converts between Simplified Chinese and
Traditional Chinese characters on the fly while a page is downloading;
o Content Provider Shell ("CPS") - provides all of the core programming
modules needed by users who want to establish a wide variety of
Chinese language "content" sites;
o E-commerce Shell ("ECS") - provides all of the core programming
modules needed by merchants who want to establish a wide variety of
business to business ("B2B") and business to consumer ("B2C")
e-commerce sites;
o Tollgate Utility - allows users to download encrypted copies of
copyrighted books and other documents that can only be read on the
computer that downloaded the document, thereby protecting the
copyright owners;
o Distance Learning Products - facilitate the development of
Internet-based education programs for Chinese populations world-wide;
and
o Chinese language chat room software.
We also provide a variety of value-added business services designed to
enhance the Internet presence of our clients, including store hosting and
management, and web site tools and services. We are not engaged in the business
of designing, building, maintaining or operating specific web sites on a
contract basis because we believe such fee for service activities are not likely
to generate recurring revenues comparable to those experienced by software
developers. Rather, we are focusing our efforts on the software tools and
business systems that will become essential as the Internet becomes an important
communications medium in Chinese speaking communities worldwide.
Since 1997, our business has grown, adapted and changed significantly as we
evolved from a student's hobby to a portal network that operates under four
principal domain names "yifan.com," "yifan.net," "yifannet.com" and
"gotofind.com." We presently serve approximately 100,000 registered users and
generate approximately 1 million page impressions per day from our four Internet
portal sites (our "Portals"). The bulk of our traffic comes from members of the
Chinese community in North America.
While rapid growth is to be expected in Internet related businesses, we
have grown to over 100,000 registered users with virtually no advertising or
promotion, other than word of mouth. Where other Internet companies have relied
on expensive advertising and promotion to develop and retain a user base, we
have developed an "Online Community" where responsiveness to the needs of a
carefully targeted audience and reliance on user feedback is the foundation for
success. By focusing on developing a content-rich Internet destination and
portal network that satisfies the specific needs of our users, our Company has
become a market leader in North America.
While over one-quarter of the world's population reads and writes Chinese,
Internet sites written in Chinese are relatively rare and the number of
companies that are focusing their attention on Chinese communities is relatively
small. We believe that over the next 15 to 20 years, the Internet will become an
important communications medium in Chinese communities worldwide. We also
believe underdeveloped communications infrastructures, unpredictable regulatory
policies and immature markets may impede the growth and development of the
Internet in the PRC and other Chinese speaking countries for many years. Since
we believe the market for Chinese language Internet services will develop at
different rates in different parts of the world, we intend to grow our business
by focusing first on the needs of Chinese communities in North America and other
industrialized nations. Then, when the communications infrastructure, regulatory
policies and market potential in the PRC and other less-developed Chinese
speaking countries justifies the anticipated cost of expansion, we intend to
develop additional Online Communities in these larger markets.
Industry Background
Development of the Internet. The Internet is a global network of
interconnected, separately administered public and private computer networks
that enables commercial organizations, educational institutions, government
agencies 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, or IDC, estimates that the number of Internet
users worldwide will grow from approximately 196.1 million at the end of 1999 to
approximately 502.4 million by the end of 2003. The rapidly growing number of
users and the ability of corporations to effectively target them has led to a
variety of online advertising and e-commerce opportunities. The rapid growth in
the popularity of the Internet is due in large part to increasing computer and
modem penetration, development of the World Wide Web, the introduction of
easy-to-use navigational tools and utilities, and the growth in the number of
informational, entertainment and commercial applications available on the
Internet. Technological advances relating to the Internet have occurred and
continue to occur rapidly, resulting in more robust and lower cost
infrastructures, improved security and increased value-added services and
content.
Growth in client/server computing, multimedia personal computers and online
computing services and the proliferation of networking technologies have
resulted in a large and growing group of people who are accustomed to using
networked computers for a variety of purposes, including e-mail, electronic file
transfers, online computing and electronic financial transactions. These trends
have led businesses increasingly to explore opportunities to provide Internet
based applications and services within their organization and to customers and
business partners.
World Wide Web. An important factor in the widespread adoption of the
Internet has been the emergence of a network of servers and information
available called the World Wide Web. The Web is a network medium rich in
content, activities and services. A few examples of what is available on the Web
include magazines, news feeds, radio broadcasts, and corporate, product,
educational, research, and political information, as well as activities,
including chat and web communities and customer services, including
reservations, banking, games and discussion groups.
The rapid deployment of the Web has introduced fundamental changes in the
way information can be produced, distributed and consumed, lowering the cost of
publishing information and extending its potential reach. Companies from many
industries are publishing product and company information or advertising
materials and collecting customer feedback and demographic information
interactively. The structure of web documents allows an organization to publish
significant quantities of information while simultaneously allowing each user to
view selected information that is of particular interest in a cost effective and
timely fashion.
The Internet as a New Business Medium
The growth in the number of Internet users, the amount of time users spend
on the Internet, the increase in the number of web sites and the rate of
Internet and PC penetration is being driven by the increasing importance of the
Internet as a content resource, advertising medium and platform for consumer
services.
Content Resource. New software-based authoring tools have lowered the cost
of publishing content on the Internet relative to conventional publishing
methods and enable new, exciting forms of multimedia content. The cost of
accumulating, storing and delivering content to a large audience is lower than
that of conventional media, consisting only of the cost of maintaining and
operating computer equipment. Content is readily accessible by any Internet user
and most information is available free of charge. The Internet is also achieving
increasing popularity as an entertainment alternative. Through the wide array of
content offerings available from different web sites, Internet users are able to
view photographs, video clips, listen to music, play interactive, real-time
games with third parties and communicate with friends.
Advertising. Advertisers have identified the Internet as a means for mass
communication of their messages, similar in many respects to the use of
advertising in traditional media such as television and radio broadcasting and
print publishing. We believe advertisers have also recognized that web-based
advertising may be more effective in a number of respects than traditional media
advertising. The Internet allows advertisers to present messages to specific,
targeted audiences, and to enable users to interact with advertising information
presented in web pages. This characteristic of the Internet also permits
advertisers to measure more precisely the number of impressions, or times that
an advertisement appears in page views downloaded by users, through verification
by an independent third-party auditor. Advertisers can also measure the
effectiveness of advertising in generating "click-throughs," or user requests
for additional information made by clicking on the advertiser's banner linking
the user to the advertiser's web site. We believe increases in transmission
bandwidth through higher speed Internet connections, and wider adoption of
advanced content delivery technologies for the Internet, such as Java, VRML and
other multimedia enabling technologies, will increase the functionality of
advertising, and will make the Internet an even more attractive advertising
medium. We also believe technological developments may result in greater ability
to provide information and analysis about the effectiveness of Internet
advertising, the demographic profiles of users, as well as the ability of
advertisers to frequently modify and more closely tailor their messages. This
should result in more targeted, higher impact advertising opportunities, and
greater integration of web-based advertising into the range of marketing
channels available to advertisers. According to Forrester Research, the dollar
value of Internet advertising worldwide is expected to increase from
approximately $3.3 billion in 1999 to approximately $24.1 billion in 2003.
E-commerce. The Internet is dramatically affecting the methods by which
consumers and businesses are evaluating and buying goods and services, and by
which businesses are providing customer service. Businesses have sought to
capitalize on the Internet as a platform for consumer services through the
establishment of Web sites devoted exclusively to the dissemination of
information relating to their products and services. According to IDC Internet
e-commerce is expected to increase from approximately $111.4 billion in 1999 to
approximately $1.3 trillion in 2003.
Unique Challenges of Chinese Language Internet
We believe that the development of comprehensive Internet services in the
Chinese language presents a number of unique challenges that require unique
solutions:
o Two written languages. There are two principal forms of written
Chinese. In North America, Taiwan, Hong Kong and other areas, the
principal form of written Chinese uses traditional Chinese characters.
The PRC, on the other hand, uses a simplified set of the Chinese
characters. In order to accommodate different reading habits and
provide a truly user-friendly online experience, we have developed a
utility that allows the user to select either the traditional or
simplified Chinese character set. When activated, this utility
automatically converts Chinese language web pages into the selected
character set on the fly while the page is downloading.
o Several different cultures. The needs of Chinese communities in
different parts of the world vary significantly and each of the
principal Chinese language markets will ultimately demand content and
services that are distinct from those offered in other markets. The
distinct cultural and historical background of Chinese communities in
different parts of the world also translates into viewing and thinking
habits that are distinct from those in other markets. This requires
not only that online directories and content contain different
information, but that such information be structured to best reflect
regional differences in viewing and thinking habits. Our current
service offerings have been structured to meet the needs of the
Chinese community in North America. As we expand our portal network to
other regions, we will be required to modify our content and service
offerings to be truly responsive to local cultural differences. We
believe the cultural differences between the principal Chinese
communities may limit the advantages Internet-based businesses might
otherwise obtain by leveraging identical content across the PRC and
overseas Chinese markets.
o Consumer and business buying habits. Family, personal relationships,
culture and tradition have a substantial influence on consumer and
business behavior in the world's principal Chinese communities. As a
result, business relationships can be less dynamic than in other
cultures and being a low-cost alternative does not necessarily mean a
business will be an acceptable alternative. Therefore we believe that
the task of developing e-commerce opportunities in Chinese communities
worldwide will more be difficult than developing e-commerce
opportunities for other population groups.
o Chinese language searches are technically difficult. Key word searches
in the Chinese language are more complicated than searches in English.
Frequently, thoughts that would be expressed by a single word in
English consist of several Chinese characters grouped together as a
phrase. Additionally, unlike English where words in a sentence are
separated by spaces, Chinese phrases with varying numbers of
characters are not separated out in a sentence. Therefore, Chinese
text must be indexed to separate out the phrases before it can be
subjected to key word/phrase searches. The fact that each character in
Chinese requires twice the number of bytes needed for a letter in
English can create additional software complications. To overcome
these structural difficulties with the Chinese language, we have
developed a proprietary Chinese language search engine that uses both
simplified and traditional Chinese character sets to provide the
fastest Chinese language search of any engine on the Internet. We have
also developed a proprietary web crawler that uses both simplified and
traditional Chinese character sets to search and categorize Chinese
language web pages.
o Infrastructure limitations. The telecommunications infrastructure in
the PRC and many developing Asian countries lags far behind North
America and Europe. In particular, bandwidth remains relatively
expensive and scarce, posing significant challenges for both providers
and users of Internet services. In addition, the quality of service
provided by network backbone operators and server hosting facilities
in the PRC and many developing Asian countries is still relatively
poor. As a result, Internet companies offering content and services in
these areas must adapt their operations to function within these
technological constraints and execute their business strategies
accordingly.
o Underdeveloped distribution networks and payment systems. The most
important factors affecting the potential for e-commerce are the
availability of efficient distribution channels and reliable payment
systems. With a few notable exceptions, the distribution channels in
the PRC and many developing Asian countries are antiquated and
inefficient. Similarly, credit cards and other electronic payment
systems are not prevalent in many Chinese communities. Even in North
America, the Chinese community generally prefers cash to credit cards
and other electronic payment facilities.
o Uncertain business and regulatory environment. The business and
regulatory environment in the PRC and many developing Asian countries
can be uncertain and subject to rapid change. Business relationships
are often defined by past practices and mutual understandings as
opposed to precise contracts. Similarly, the regulatory environment is
frequently uncertain and subject to a wide range of potential
interpretations. Without extensive knowledge about the regulatory
environment, businesses often fail to effectively interact with
regulators and such failure may result in significant delays.
o Challenges of a new and rapidly developing market. The market for
Chinese language Internet content and services is relatively new and
immature. While IDC estimates that the number of Internet users in the
PRC will grow from approximately 3.9 million at the end of 1999 to
approximately 25.2 million by the end of 2003, this represents less
than 2% of the population of the PRC. In contrast, IDC estimates that
the total number of Internet users in the non-Chinese world will grow
to 10% of the population by the end of 2003.
Our Business Model
We offer a comprehensive suite of Internet products, services and solutions
to our users and believe that by offering an integrated platform of content,
community and commerce and related services, we are well positioned to
capitalize on the growth of the Chinese language Internet. Our integrated
platform includes the following:
o Online Community. Our fundamental business strategy is based on
developing an active community of Internet users who share a common
language, culture and heritage. We will continue to rely on user
feedback, word of mouth advertising and responsiveness to community
needs as a foundation for future growth and believe our focus on the
needs of our users will foster the organic growth of our existing and
proposed Online Communities.
o Portal Network. Our portal network is committed to content, community
and commerce, and provides a platform for a rich variety of online
products that cater to the needs of our users and provide easy access
to information resources on the Internet.
o Advertising Network. Our portal network provides a desirable platform
for ad hosting and targeted advertising to the Chinese communities we
serve.
o Software Solutions. Our proprietary Chinese language software
solutions facilitate the development of web-based businesses in a
variety of fields ranging from content and information services to B2B
and B2C e-commerce.
Since inception, our business has been dedicated to the Online Community
concept. We carefully focus our content offerings on areas of interest to the
Chinese community in such a way that our users actively contribute to both the
content and dialogue within our community. We believe that as users become
involved with our Online Community, they will be inclined to return to our
Portals repeatedly and stay for longer periods. We seek to develop an active,
loyal user base by integrating important community features into our portals,
including the following free services:
o E-mail. We offer users a free personal e-mail account that can be
accessed from any computer with an Internet connection. As our users
do not need to change their e-mail addresses when they move or change
service providers, the same e-mail address can be used indefinitely.
As of July 2000, our free e-mail system included over 100,000
accounts.
o File Manager. We offer users a free file manager that can be accessed
from any computer with an Internet connection. This allows our users
to store personal and business information on our servers, access
their information from any location, and if desired, share that
information with others.
o Calendars and Event Reminders. We provide online solar and lunar
calendars and offer users a free service that automatically sends
reminder notices on important events a user has entered in his event
reminder database.
o Message Boards. We offer users the ability to post messages for
general viewing to promote dialogue on relevant issues, topics or
events of interest. Instead of participating in real-time dialogue,
users are able to enjoy the freedom of posting and retrieving messages
at their convenience.
o Online Chat. Our chat rooms create a "virtual community" where a
participant can interact in real-time group or one-on-one discussions.
Our chat rooms are arranged around multiple topics of interest
including romance, entertainment, sports and current events. Many
users find that chat rooms are an attractive alternative to the
telephone since online chat is inexpensive and facilitates the process
of "meeting" other users who share similar interests.
o Dating Service. Our online dating service makes it easy for our users
to meet other users with similar backgrounds who share similar
interests. It also provides a non-threatening forum where people can
get to know each other before agreeing to a personal meeting.
o Personal web-page hosting. We offer users the opportunity to create
free personal homepages. Using a variety of personal publishing tools,
users are able to quickly and easily create fully personalized
homepages that allow users to post materials to the public on a
variety of subjects. This service, in turn, creates additional content
for our Portals and may increase traffic and user loyalty.
Our business goal is to capitalize on the growth of the Internet among
Chinese users worldwide. We believe Chinese users represent one of the fastest
growing and potentially one of the largest user groups on the Internet. We
believe that our success to date is attributable to the following factors, and
we believe that these factors will continue to be our competitive strengths:
Initial Focus on North America. Our operations to date have focused
primarily on serving the Chinese communities in North America. Our products and
services are tailored to the specific interests, needs and viewing habits of our
users. We began our operations in the New York Metropolitan area and the bulk of
our key employees still call the New York Metropolitan area home. We also
contract with a number of independent programmers in Taiwan, Hong Kong and the
PRC. Our local presence allows us to better understand the needs of both
Internet users and Internet-based businesses, and our commitment to community
helps us build and maintain strong relationships. While the Chinese communities
in North America represent less than one percent of the world's Chinese
population, they have a disproportionately large share of the total purchasing
power. In general, people of Chinese extraction who live in North America are
more affluent, better educated and more technically proficient than the general
population. The Chinese community is also more insular than many ethnic groups
and clearly identifiable "China-Town" districts, busy centers of commerce,
culture and community, can be found in most major American cities. For these
reasons and others, we believe the Chinese community in North America is a
particularly desirable and cohesive niche market.
Easy Access to Information. We produce, collect, translate, enhance and
supplement content for our portal network. As online Chinese language content
improves, we expect our portal network to generate increasing traffic and become
a highly desirable forum for directed advertising. Each of our Portals provides
easy access to content, community and e-commerce offerings that appeal to
individual users. We seek to make our Portals the first and most frequent
destination for Chinese language Internet users through Online Communities
which, in turn, results in increased user affinity for our portal network. Our
products and services such as free personal web pages, personalized e-mail,
topic-based chat services, dating services and efficient Chinese language
searches are designed to create this sense of community among our users. We
believe our Online Communities will be a major source of traffic and user
loyalty as the Internet becomes an integral part of the Chinese lifestyle.
First Mover Advantage and Brand Leadership. We are a pioneer of the
Internet industry and introduced our first Chinese language portal site in May
1997. Our business has grown, adapted and changed significantly as we evolved
from a student's hobby to a portal network that registers over 1 million page
impressions per day. We maintain our position as one of the top Chinese language
sites in North America by continually expanding the scope of our service to the
Chinese community. A significant part of our business development strategy
revolves around the maintenance of the "Yifan" name. It is highly unusual for a
public company to incorporate its president's first name in its corporate name.
But we believe that in so doing, we have become synonymous with the natural and
organic evolution and development of the Chinese language Internet.
Proprietary Online Directory. Our Yifan online directory, the centerpiece
of our portal network, was carefully designed and has been continuously refined
to reflect the unique cultural characteristics and thinking and viewing habits
of our users. Our editorial staff reviews and classifies web pages according to
content and integrates that information into a hierarchical directory structure.
As a result, most web pages lie at the end point of at least 3 distinct search
paths. As of July 31, 2000, our online directory contained links to over 160,000
Chinese language web pages. We currently receive approximately 300 requests per
day from Chinese language web sites that want to be included in our directory.
Our directory is highly complex, proprietary and specific, and we believe it
would be very difficult for our competitors to duplicate our directory.
Superior Search Capabilities. Our proprietary search engine is an unique
Java Servelet application that has been written entirely in Chinese and is
designed to meet the challenges posed by the Chinese language and its
pictographic characters. We have found that the use of Java technology for our
search engine results in superior execution speed and more comprehensive
searches. At the date of this Report, we believe our search engine provides the
fastest Chinese language searches of any engine on the Internet. We have also
developed a proprietary web crawler that is written in Visual C++, and
automatically searches the Web to identify and classify Chinese language web
pages.
Attractive Platform for Advertising and e-Commerce. We believe that our
Portals will provide a highly attractive platform for advertisers and merchants
because we have become a leading Internet brand in North America and provide
direct access to the Chinese community, a user group with a highly desirable
demographic profile. We are currently developing a client service group that
will be dedicated to developing and enhancing relationships with advertisers and
maximizing the effectiveness of their advertising campaigns. We will also
provide advertisers with detailed and timely data regarding the number of
advertisements displayed and the number of users who clicked through for
additional information. Moreover, we intend to take advantage of our high
visitor traffic by developing a user-friendly e-commerce platform that will
allow a wide variety of merchants to easily establish B2B and B2C e-commerce
capabilities. We also plan to facilitate e-commerce activity by providing order
tracking and product database management services.
Unique Chinese Language Web Solutions. We are actively developing Chinese
language software products that facilitate the creation, operation, maintenance
and management of Chinese language Internet sites. These products range from
Chinese language search and translation tools to content provider and e-commerce
provider shells that contain all the programming modules necessary to develop a
web-based business serving the Chinese language community. Our strategy is to
differentiate ourselves based on the breadth of our integrated services, the
caliber of our resources, and our responsiveness to user needs. Through our
portal network, we intend to offer our clients the distribution channels they
require for bringing traffic to their Web site, while also enabling us to track
and measure our success in directing viewers to our clients web sites. Our
e-commerce strategy is conducive to multiple revenue streams, including software
sales, professional services, advertising fees, and e-commerce fees.
Our Growth Strategy
Our Company's target market could be broadly described as the Chinese
speaking population of the world, but that broad description would be overly
simplistic. We believe that the larger Chinese speaking market actually consists
of several distinct communities:
o Chinese communities of North America;
o Chinese communities of industrialized Europe;
o Chinese exporters in Hong Kong, Taiwan the PRC and developing Asian
nations;
o Chinese consumers in Hong Kong, Taiwan and developing Asian nations;
o Chinese business in the PRC; and
o Chinese consumers in the PRC.
We believe the telecommunications infrastructure in the PRC and other developing
Asian nations will not be adequate to service an Online Community or B2C
e-commerce for several years. In addition, since active user involvement and the
free and unrestricted flow of information, ideas and opinions are core features
of our Online Communities, we believe the PRC and other developing Asian nations
will present limited opportunities until there are substantial changes in the
prevailing regulatory regimes. Therefore, we do not intend to establish Online
Communities or B2C e-commerce facilities in the PRC and other developing Asian
nations for an extended period of time.
While all of our target markets share a common language, history and
culture, the demographic characteristics, geographic dispersion, relative size
and near-term commercial potential of the various Chinese communities vary
considerably. Therefore, we believe each of the principal Chinese communities
presents a different risk/reward profile and our overall business strategy has
been carefully developed to take these fundamental differences into account,
maximize our potential operating revenue and minimize our exposure to developing
and unpredictable markets. The principal milestones in our overall growth
strategy are:
o Enhance North American Leadership. Our current user base includes
approximately 100,000 registered users and the bulk of thes users are
located in the northeast. We are actively seeking to expand our user
base on the West Coast and enhance our leadership position in the
North American market. We intend to grow our North American market
share by acquiring other Chinese language Internet companies that have
established West Coast appeal and by continuing to emphasize the
value, utility and functionality of our Online Community. We also
intend to expand our product and service offerings to more fully
satisfy the information and e-commerce needs of our users. We believe
that as our user base and our e-commerce activities expand, we will
become a particularly attractive platform for advertisers who wish to
target the Chinese community in North America.
o Leverage North American Leadership into Industrialized Europe. We
believe most of the lessons we have learned with respect to the
creation and development of an Online Community will be readily
transferable to Industrialized Europe. In general, the Chinese
communities in Europe are similar to the Chinese communities in North
America in terms of size, affluence, education, technical
sophistication and cohesiveness. Therefore, we intend to pursue
European expansion as the second step in our corporate development. We
are currently working to establish a base of operations in Fribourg,
Switzerland and believe we will be able to negotiate agreements with
the Swiss government that will give us favorable income tax rates and
substantial economic development incentives. If our negotiations are
successful, we intend to base our proposed import-export e-commerce
center in Switzerland, thereby maximizing the long-term advantage of
the available incentives.
o Leverage Leadership into Import-Export e-Commerce. We believe a
leadership position in the North American and European markets can be
readily leveraged across international borders to attract B2B
e-commerce in the import-export sector. In particular, we believe our
sophisticated portal network and our affluent and technically
proficient user base will be particularly attractive to merchants in
Taiwan, Hong Kong, the PRC and other developing Asian nations that
want to establish e-commerce facilities for exports directed to
Chinese communities in North America and Europe. We are presently
pursuing negotiations with a number of food product exporters in
Taiwan, Hong Kong and the PRC and hope to conclude the first of these
negotiations within 30 days. If we are able to develop a critical mass
of import-export e-commerce in the food distribution business, we
believe we can become the B2B e-commerce Portal of choice for other
import-export transactions between Chinese owned companies.
o Leverage Experience with Online Communities and e-Commerce into Asia.
We believe many of the lessons we have learned with respect to the
creation and development of Online Communities will also be
transferable to Chinese communities in Asian countries other than the
PRC that have adequate communications infrastructure and predictable
regulatory regimes. While the Chinese communities in Asia are more
diverse and generally less technically sophisticated than the Chinese
communities in North America and Europe, these Chinese communities are
significantly larger and represent a much greater potential for Online
Community development and B2C e-commerce.
o Leverage Leadership into B2B e-Commerce in the PRC. As the final step
in our development, we will attempt to enter the B2B e-commerce market
within the PRC itself. Since the PRC presents numerous technical and
regulatory challenges, there can be no assurance that our efforts to
establish B2B e-commerce capabilities in this market will ever be
successful. Moreover, there can also be no assurance that the bulk of
the B2B e-commerce in the PRC will not ultimately go to other portal
networks that provide a broader array of Internet services to
businesses and consumers in the PRC.
Principal Risk Factors of Our Business
We have limited financial resources and we will need substantial additional
capital, which we may not be able to obtain.
After giving effect to the payment of the Issuer's debts, the completion
of the Yifan Transaction and the payment of the expenses associated with the
Yifan Transaction, our Company had total stockholders' equity of approximately
$1,217,500 at the date of this Report, including $395,300 in cash. We believe
these cash resources will be adequate to provide for our operating expenses for
a period of not more than three to six months from the date of this Information
Statement. Thereafter, we will need additional capital to pay our operating
expenses and finance our planned expansion.
We will need at least $3 to $5 million in additional capital in the
immediate future to fund our current operating expenses and our planned
expansion. In addition, long term capital requirements are difficult to plan in
the rapidly changing Internet industry. We currently expect that we will need
capital to pay our ongoing operating costs, fund additions to our portal network
and computer infrastructure, pay for the expansion of our sales and marketing
activities and finance the acquisition of complementary assets, technologies and
businesses. We intend to pursue additional financing as opportunities arise.
Our ability to obtain additional financing in the future will be subject
to a variety of uncertainties, including:
o changes in the demand for online information services;
o changes in the nature of our business resulting from the introduction
of new services;
o changes in the nature of our business resulting from our entry into
new markets;
o changes in our future results of operations, financial condition and
cash flows;
o changes in investors' perceptions of and appetite for Internet-related
securities;
o changes in capital markets in which we may seek to raise financing;
and
o changes in general economic, political and other conditions in our
target markets;
The inability to raise additional funds on terms favorable to us, or at
all, would have a material adverse effect on our business, financial condition
and results of operations. If we are unable to obtain additional capital when
required, we will be forced to scale back our planned expenditures, which would
adversely affect our growth prospects.
We have a history of losses and we anticipate future losses
Yifan has never generated revenues from advertising, web hosting, software
sales or business services. The $8,000 in revenue Yifan received in 1999 was a
partial payment on a web site development project that was ultimately abandoned
by the client prior to completion. During the period from inception (January 5,
1999) through June 30, 2000 Yifan had cumulative operating losses of ($112,417).
In addition, Yifan spent approximately $433,000 on software development, all of
which was capitalized. To date, all of Yifan's operating expenses have been paid
from capital contributed by its founders and private placement investors. We
anticipate that the Company will continue to incur operating losses for the
foreseeable future due to a high level of planned operating and capital
expenditures, increased sales and marketing costs, additional personnel costs,
greater levels of product development and our overall expansion strategy. It is
likely that our operating losses will increase in the future and we may never
achieve or sustain profitability.
Our need to acquire the necessary skills, staff and systems to operate as a
public company could substantially increase our operating expenses and occupy
our senior management's time. The historical and pro forma financial statements
included in this Report do not reflect the anticipated future costs of operating
as a public company.
The market for our outstanding shares is limited and the current market price of
the Old Common bears no relationship to our assets, earnings or any other
established criteria of value.
The pro forma book value per share of the Old Common is approximately $.002
per share at the date of this Report and the fully diluted book value of the New
Common will be approximately $.09 per share after the completion of our pending
1 for 40 reverse split. According to OTC Bulletin Board records, trading in the
stock of the Issuer before the Yifan Transaction was generally less than 20,000
shares per day and the market price of such shares was generally in the $.10
range. Since the completion of the Yifan Transaction, trading volume has
increased and the closing prices for the Old Common were $.17 bid and $.18 asked
on August 11, 2000. These trading values represent a multiple of 85 to 90 times
the pro forma book value per share of the Old Common and bear no relationship to
our assets, earnings or any other established criteria of value. At this time an
investment in the Company must be considered an investment based on the
perceived value of our strategic plan and the track record of our officers and
directors. None of these factors can be quantified.
There is no active, sustained and liquid public market for our Old Common
at the date of this Report and there can be no assurance that a market for the
New Common will develop in the future. There is also no assurance that the New
Common will trade at a price that approximates the current market price of the
Old Common, as adjusted for the reverse split. If a market for the New Common
does develop, the price of the New Common may be highly volatile. Therefore, our
stockholders may experience difficulty in selling their shares should they
desire to do so. The stock markets in general and the OTC Bulletin Board in
particular are subject to periods of extreme volatility during which the market
prices of securities can fluctuate substantially. The price of our securities
may be adversely affected by such volatility notwithstanding our actual
operating performance.
We are subject to the SEC's Penny Stock Rules
The SEC's "Penny Stock Rules" govern trading of our Old Common. These
rules apply to all Bulletin Board stocks that cost less than $5.00 per share and
are issued by companies having less than $5,000,000 in net tangible assets.
While the New Common may trade at a price of $5 per share or more if the market
price increases in direct proportion to the reverse split, the Company does not
have more than $5,000,000 in net tangible assets. Since reverse splits do not
necessarily result in a proportional increase in market prices, there is no
assurance that the Company will ever be exempt from the Penny Stock Rules. The
Penny Stock Rules impose substantial sales practice burdens and requirements
upon broker-dealers who sell such securities to persons other than established
customers and accredited investors. Before effecting transactions covered by the
Penny Stock Rules, a broker-dealer must make a special suitability determination
for each purchaser and receive the purchaser's written agreement to the
transaction prior to the sale. Consequently, the Penny Stock Rules may affect
the ability of broker-dealers to effect market transactions in our New Common.
The Penny Stock Rules may also affect the ability of persons now owning or
subsequently acquiring our securities to resell such securities in any trading
market that may develop. Such factors may have a material adverse impact on the
market price of the New Common.
We will probably issue additional equity securities to raise additional capital
and acquire other companies or operating assets.
Under the terms of the Amendment, we will have the authority to issue
100,000,000 shares of New Common and 10,000,000 shares of New Preferred without
a vote of the stockholders. After giving pro forma effect to the completion of
the Yifan Transaction, approximately 12,987,171 shares of New Common will be
issued and outstanding and no shares of Preferred Stock will be issued and
outstanding.
The Board will have the authority to issue all or any part of our
authorized and unissued capital stock to raise additional capital or finance
acquisitions. The Board will also have the authority to fix the rights,
privileges and preferences of the holders of New Preferred, which may be
superior to the rights of holders of the New Common. It is likely that we will
seek additional equity capital and attempt to acquire other companies or
operating assets in the future as we develop our business and implement our
growth strategy. A future issuance of additional shares of New Common or New
Preferred will probably dilute the percentage ownership interest of our current
shareholders and may dilute the book value per share of the Company's
outstanding equity securities.
We commenced operations in 1997 and have never generated any operating revenue.
When our president Yifan He established our first Chinese language web-site
in May 1997, Mr. He was pursuing a personal interest in Internet technology and
had no intention to create a commercial venture. As a result of rapid growth in
the popularity of the yifan.com web site, Mr. He began to seek outside financing
in 1998. These funds were used to enhance the yifan.com Portal, expand the scope
of its service to the Chinese community and create a variety of proprietary
Chinese language software products that are designed to make the Internet more
accessible to people who read and write Chinese. During the development stage,
we implemented restrictive operating policies that were designed to maximize the
speed and performance of our Portals and minimize the potential for complaints.
As a result, we did not enter into our first advertising agreement until June
2000 and we have never generated any operating revenue. To date, all of our
operating expenses have been paid from capital contributed by our founders and
private placement investors.
In order to execute the business plan described in this Report, we will
need to continue to provide high levels of service to our existing Online
Community while making several fundamental changes in the way we do business:
o We will be required to initiate a program to market advertising space
on our Portals. While we entered into our first advertising contract
with DoubleClick, Inc. in June 2000, the revenue from this contract
will be limited and we will need to enter into additional advertising
or sponsorship agreements in order to maximize our advertising
revenue. If we are successful in our efforts to generate advertising
revenue, our average download times will increase significantly and
there is no assurance that our users will not find our Portals less
desirable.
o We will be required to initiate a program to market our proprietary
Chinese language software products. While we believe our software
products will have considerable value and utility to content providers
and merchants who want to develop a Chinese language Internet
presence, we have not yet sold or licensed any of our software
products to third-parties. There is no assurance that our efforts to
commercialize our software products will be successful or that
potential users will find our products superior to competitive
software developed by others.
o We will be required to establish new Online Communities in Europe and
other locations. In connection with each new Online Community, we will
need to modify our content and service offerings in order to obtain
and maintain high levels of user loyalty. There can be no assurance
that we will be able to successfully transfer our current business
model across international borders.
o We will be required to develop and introduce specialized venues for
B2B e-commerce activities in the import-export sector. Two of our new
Directors have significant experience in the import grocery business
and diverse contacts among specialty food exporters in Taiwan, Hong
Kong and the PRC. However, there is no assurance that their experience
and contacts will translate into B2B e-commerce in the import-export
sector or that such activities, if successfully commenced, will expand
beyond specialty food products.
o We will be required to develop and introduce specialized venues for
other types of B2B e-commerce including vendors who want to sell to a
local audience, vendors who want to sell to a national audience and
vendors who want to sell products to an international audience. There
can be no assurance that vendors will find our proposed B2B e-commerce
venues superior to competitive venues sponsored by others.
o We will be required to develop and introduce specialized venues for
B2C e-commerce activities, including retail merchants who want to sell
to a local audience, retail merchants who want to sell to a national
audience and retail merchants who want to sell products to an
international audience. There can be no assurance that merchants will
find our proposed B2C e-commerce venues superior to competitive venues
sponsored by others.
As a result of our limited operating history, our business model and our
growth strategy are unproven. We cannot be certain that our business model and
our growth strategy will be successful or that we will be able to compete
effectively, achieve market acceptance or otherwise address the risks associated
with our existing and proposed business activities.
Our growth strategy and plans for expansion through acquisitions may not be
effective
Our growth strategy is expected to place a significant strain on our
managerial, operational and financial resources. To effectively manage our
planned growth and diversification, we must improve our existing operational and
financial control systems, implement additional management control systems,
expand our operating staff and effectively train and manage our employees. All
of our executive officers, except Mr. He, are involved in other pursuits that
will limit the amount of time they can devote to the business of the Company.
Since it is not expected that Mr. Kraft and Ms. Fonner will ever become
full-time employees of the Company, we will probably be required to make
substantial additions to our executive staff within the next 12 months. There
can be no assurance that we will be able to hire suitable executive officers or
employees, or that we will be able to effectively train and manage our staff.
There can also be no assurance that our systems, procedures and internal
controls will be adequate to support our future operations or that our
management will be able to fully exploit potential market opportunities. If we
are unable to effectively manage growth, our business, results of operations and
financial condition will be adversely effected.
As a key component of our growth strategy, we intend to acquire companies
and assets that we feel will enhance our revenue growth, operations and
profitability. Any future acquisitions may require the use of significant
amounts of cash, potentially dilutive issuances of equity securities and
amortization expenses related to goodwill and other intangible assets, each of
which could materially and adversely affect our business. Any future
acquisitions will involve numerous business and financial risks, including:
o difficulties in integrating new operations, technologies, products and
staff;
o diversion of management attention from other business concerns;
o cost and availability of acquisition financing; and
o potential loss of key employees.
We will need to be able to successfully integrate any businesses we may
acquire in the future, and the failure to do so could have a material adverse
effect on our business, results of operations and financial condition. Moreover,
our expansion into new markets could result in:
o unexpected changes in regulatory requirements;
o potentially adverse tax and regulatory consequences;
o export restrictions and controls such as those relating to encryption
technology;
o tariffs and other trade barriers; and
o political instability and fluctuations in currency exchange rates.
Any of the above could have a material adverse effect on the success of our
future expansion.
Although we expect to generate revenue from advertising in the future,
such revenue may not be substantial
Online advertising is a key component of our business strategy, and we
anticipate that a substantial portion of our future revenues will be derived
from online advertising. We expect to derive an increasingly significant amount
of revenue from hosting online advertising that is directed to the Chinese
communities we serve. We have only recently entered into our first online
advertising contract and have not yet received any advertising revenues.
Therefore, our proposed online advertising activities are unproven and our
ability to generate and maintain significant advertising revenue will depend,
among other things, on:
o expansion of our existing Online Community in North America;
o acceptance of our Portals as effective and sustainable advertising
venues;
o retention of a large user base with attractive demographics; and
o implementation of effective advertising delivery, tracking and
reporting systems.
The development of software that blocks Internet advertisements before they
appear on a user's screen may hinder the growth of online advertising. The
expansion of ad blocking on the Internet may decrease our revenues because when
an ad is blocked, it is not downloaded from our ad server, which means that such
advertisements are not tracked as a delivered advertisement. In addition,
advertisers may choose not to advertise on the Internet and on our Portal
network because of the use of Internet advertisement blocking software. The use
of software that blocks Internet advertisements may materially and adversely
affect our business. Any reduction in traffic on our Portals or in the frequency
of completed advertising downloads may cause advertisers to withdraw from
advertising relationships, which, in turn, could reduce our future advertising
revenues.
We rely on software and hardware systems that are susceptible to failure
Any system failure or inadequacy that causes interruptions in the
availability of our services, or increases the response time of our services, as
a result of increased traffic or otherwise, could reduce user satisfaction,
future traffic and our attractiveness to advertisers and consumers. In addition,
as the amount of traffic increases, there can be no assurance that we will be
able to scale our systems proportionately. There also can be no assurance that
our ad serving technology can properly track the number of impressions if
traffic increases substantially. We are also dependent upon Web browsers, ISPs,
and other Web site operators. Therefore we may suffer from system failures
unrelated to our systems and services.
We have limited backup systems and redundancy and we have experienced
system failures in the past, which have disrupted our operations. We do not
presently have a disaster recovery plan in the event of damage from fire,
floods, earthquakes, power loss, telecommunications failures, break-ins and
similar events. If any of the foregoing occurs, we may experience a complete
system shut-down. To improve performance and to prevent disruption of our
services, we may have to make substantial investments to deploy additional
servers or one or more copies of our Portals to mirror our online resources.
Although we carry property insurance with low coverage limits, our coverage may
not be adequate to compensate us for all losses that may occur. To the extent we
do not address the capacity restraints and redundancy described above, such
constraints could have a material adverse effect on our business, results of
operations and financial condition.
We rely on content provided by third parties to attract viewers and
advertisers
We rely on a number of third-party relationships to create traffic and
provide content in order to make our Portals more attractive to advertisers and
consumers. Third party content on our Portals include stock quotes, news,
essays, games. Most of these arrangements are not exclusive and are short-term
or may be terminated at the convenience of the other party. There can be no
assurance that our existing relationships will result in sustained business
partnerships, successful service offerings, significant traffic on our Portals
or significant revenues for us.
We are controlled by a small group of former Yifan shareholders, whose interests
may differ from other shareholders.
After giving pro forma effect to the Amendment and the issuance of New
Common to the former stockholders of Yifan.com, Inc our current officers and
directors will own approximately 71% of our outstanding New Common. Accordingly,
they will have significant influence in determining the outcome of any corporate
transaction or other matter submitted to the shareholders for approval,
including mergers, consolidations and the sale of all or substantially all of
our assets, election of directors and other significant corporate actions. They
will also have the power to prevent or cause a change in control. In addition,
without the consent of these shareholders, we could be prevented from entering
into transactions that could be beneficial to us. The interests of these
shareholders may differ from the interests of the other shareholders.
The sale or availability for sale of substantial amounts of our New Common could
adversely affect its market price.
Sales of substantial amounts of our New Common in the public market, or
the perception that these sales could occur, could adversely affect the market
price of our New Common and could materially impair our future ability to raise
capital through offerings of our equity securities. There will be approximately
12,987,000 shares of New Common outstanding immediately after the implementation
of the reverse split and the issuance of New Common to the former stockholders
of Yifan. Of this total, approximately 316,000 shares of New Common will be
freely transferable in the open market and the remaining 12,671,000 shares will
be "restricted securities" as defined in Rule 144 and may not be sold in the
absence of registration other than in accordance of Rule 144. For purposes of
calculating their holding period under Rule 144, Capston and Tobem have agreed
that their holding period did not begin until July 30, 2000, the closing date of
the Yifan Transaction
In addition, certain selling agents who were involved in a 1996 offering of
common stock by the issuer hold selling agents' warrants that give them an
immediately exercisable right to purchase approximately 136,600 shares of New
Common at a price of approximately $1.04 per share. The terms of the warrant
agreement give these warrant holders the right to require us to register the
sale of shares issuable upon exercise of the warrants.
The reorganization agreement with Yifan provides that all former Yifan
stockholders who are not officers, directors or 10% stockholders after the
closing of the Yifan Transaction will be entitled have their shares of New
Common registered under certain circumstances. If the Company files a
registration statement under the Securities Act to register shares issuable upon
exercise of the selling agent's warrants, former Yifan shareholders who are not
affiliates will be entitled to include shares of New Common held by them in the
registration statement. Such a registration statement, if filed, could involve
approximately 2,992,000 shares of New Common. The former Yifan stockholders do
not have any right to require the Company to file such a registration statement
on their behalf. But if such a registration statement is filed on behalf of the
holders of selling agents' warrants, then the former Yifan stockholders will be
entitled to join in such registration statement. Registration of these shares of
New Common would permit the sale of these shares without regard to the
limitations of Rule 144.
Item 3.
BANKRUPTCY OR RECEIVERSHIP.
Not applicable.
Item 4.
CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
The Issuer's financial statements for the years ended December 31, 1998
and 1999 were audited by Harmon & Company, Certified Public Accountants,
Columbus, Ohio. The financial statements of Yifan.com, Inc. for the years ended
December 31, 1998 and 1999 were audited by Want & Ender, Certified Public
Accountants, New York, New York. As a result of the Yifan Transaction, Want &
Ender has been retained as the Company's auditor for the fiscal year ended
December 31, 2000. During the fiscal years December 31, 1998 and 1999, and the
subsequent interim periods, there were no reportable disagreements between the
Issuer and Harmon & Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
Item 5.
OTHER EVENTS
Not Applicable
Item 6.
RESIGNATIONS OF DIRECTORS.
No director has resigned or declined to stand for re-election to the Board
of Directors since the date of the last annual meeting of stockholders because
of any disagreement with the Issuer on any matter relating to operations,
policies or practices. The following information is provided as supplemental
disclosure respecting the composition of our Board.
In connection with the change of control described in the April 8-K (see
Item I of this Report), the Board of Directors amended Article II, Section 2 of
the Issuer's By-laws to read in its entirety as follows:
Section 2. Number, Method of Election Terms of Office of Directors. The total
number of Directors constituting the entire Board of Directors shall be not
less than one (1) nor more than nine (9), with the then-authorized number of
Directors being fixed from time to time solely by or pursuant to a resolution
passed by the Board of Directors, provided, however, that the total number of
Directors shall be not less than three (3) during any period when the total
stockholders' equity of the Corporation exceeds $100,000. Each Director shall
hold office until he resigns from office, is removed from office by the
affirmative vote of the holders of a majority in interest of the
Corporation's common stock or his successor is elected and qualified.
Immediately after taking such action, the Board of Directors appointed Sally A.
Fonner to serve as a Director until the next meeting of the stockholders. All
three of the original members of the Board then resigned, leaving Ms. Fonner as
the sole remaining Director. Ms. Fonner served as the sole Director of the
Issuer between March 31, 2000 and August 17, 2000.
On August 2, 2000, we filed our Section 14(f) Information Statement with
the SEC. This Section 14(f) Information Statement was mailed to our stockholders
on August 7, 2000. The Section 14(f) Information Statement disclosed that
effective August 17, 2000, Sally A. Fonner would appoint Yifan He, Michael Yung,
Jeffery Wu and Ahn Tran to serve as additional members of the Board until the
next annual meeting of the stockholders. The Section 14(f) Information Statement
further disclosed that Messrs. He, Yung, Wu and Tran are designees of the former
stockholders of Yifan and are being appointed to the Board in connection with
the Yifan Transaction described elsewhere herein.
From and after August 17, 2000, our Board will consist of the five
individuals identified in the following table who will serve as Directors of the
Company until the next annual meeting of the stockholders, or until their
successors are elected and qualified.
Name Age Positions
Yifan He 24 President, Chief Executive Officer and Director
Michael Yung 36 Director
Jeffery Wu 36 Director
Ahn Tran 48 Director
Sally A. Fonner 51 Secretary, Director
Jeff Kraft 48 Interim Chief Financial Officer
There are no family relationships among any of the Directors, however,
Messrs. Wu and Tran are involved in several joint business ventures. The
following paragraphs present certain biographical information on the Directors
of the Company:
Mr. Yifan He serves as our President and Chief Executive Officer, and will
also serve as a Director for a term commencing on August 17, 2000 and ending on
the date of the next annual meeting of the stockholders. Mr. He established the
original yifan.com web-site in 1997 while studying computer science at the State
University of New York at Stonybrook. For the last three years, Mr. He has been
responsible for daily management, operations, strategy development, technical
design, product development and quality assurance. Mr. He has managed the growth
of the Company from a sole proprietorship through the formation of an LLC, a
reorganization of the LLC into Yifan.com, Inc and the subsequent combination of
Yifan.com, Inc with the Company. During this development period, Mr. He
supervised the expansion of the Company's staff to over 30 consultants and
employees, including a total of 7 PhDs. In addition to daily management
responsibilities, Mr. He is primarily responsible for administration of the
Company, including hiring of personnel. Mr. He's education also includes a Major
in International Business with a Minor in Computer Science from Northwestern
Polytechnic University in Xi'an, China. Mr. He was born in Xi'an, China, and has
been resident in the U.S. since 1996.
Mr. Michael Yung is part-time consultant to the Company and will also
will serve as a Director for a term commencing on August 17, 2000 and ending
on the date of the next annual meeting of the stockholders. Mr. Yung is
employed full-time as Senior Vice President, Asian Markets for Paine Webber
Inc., a position he has held since 1997. Mr. Yung's duties at Paine Webber
include developing Asian markets in the United States and overseas for that
company. Before joining Paine Webber, Mr. Yung held a similar position with
Citigroup as Vice President, Asia Development. Prior to Citigroup, Mr. Yung
held positions in sales and marketing, including two years as Vice President,
International Marketing, with Highfu International, a producer and marketer
of police equipment, where he was in charge of developing and marketing new
products. Mr. Yung holds investment licenses Series 7, 24 and 63, and is a
graduate of The New York Institute of Technology, where he earned a Bachelor
of Science degree in Marketing. Mr. Yung was born in Taipei, Taiwan and
relocated to the U.S. as a teenager in 1977.
Mr. Jeffery Wu is part-time consultant to the Company and will also
serve as a Director for a term commencing on August 17, 2000 and ending on
the date of the next annual meeting of the stockholders. Mr. Wu is employed
full-time as Chief Executive Officer of Hong Kong Supermarket, the largest
chain of Chinese specialty supermarkets in the Northeast. Mr. Wu is also
President of Moo Chung Loong (MCL) Trading, Inc., a $50 million wholesale
food distributor that services the Hong Kong Supermarket chain and other
retail grocers. MCL trading is currently the largest Asian food distributor
in the Northeast. MCL has recently expanded to San Francisco and Houston. Mr.
Wu is also actively involved in real estate investments and has expanded his
holdings from 3 thousand square feet in 1985 to over 2 million square feet.
Mr. Ahn Tran is part-time consultant to the Company and will also serve
as a Director for a term commencing on August 17, 2000 and ending on the date
of the next annual meeting of the stockholders. Mr. Tran, has been president
of Hong Kong Supermarket since 1994 and is responsible for the daily
operations of six supermarkets averaging nearly $120 million in annual
revenue. Mr. Tran is also a principal stockholder of MCL Trading. Mr. Tran
brings key strategic alliance and partnership expertise to the Company. Mr.
Tran immigrated to the U.S. in 1980 and has quickly adapted to the
entrepreneurial environment.
Ms. Sally A. Fonner serves as our Secretary and has been the sole member
of the Company's Board since March 30, 2000. Ms. Fonner will continue to serve
as a Director until the next annual meeting of the stockholders. For most of the
last 15 years, Ms. Fonner has worked as an independently employed business
consultant. She graduated from Stephens University in 1969 with a Bachelor of
Arts degree in Social Systems. After a stint in the private sector, Ms. Fonner
returned to further her education and obtained her MBA degree from the Executive
Program of the University of Illinois in 1979. For the past five years Ms.
Fonner has been engaged in the business of restructuring public companies and
arranging business combination transactions. In addition to her work on behalf
of the Company, Ms. Fonner has previously served as the sole director of and
arranged business combinations for a total of four other inactive public
companies:
Telemetrix, Inc. (TLXT), formerly Arnox Corporation.
eNote.com, Inc. (ENOT), formerly Webcor Electronics, Inc.
Dupont Direct Financial Holdings, Inc. (DIRX) formerly Marci International
Imports, Inc.
Liberty Group Holdings, Inc. (LGHI), formerly Bio Response, Inc.
Mr. Jeff Kraft will serve as our Interim Chief Financial Officer until
December 31, 2000. In this capacity, Mr. Kraft will be responsible for the
overall financial management of the Company, and developing the accounting and
financial reporting systems. Mr. Kraft is currently the Controller of Capston
and manages all financial aspects of Capston's operations. It is not anticipated
that Mr. Kraft will ever become a full time employee of our Company. Mr. Kraft
received his Bachelor of Science degree in Accounting from Florida State
University. Before joining Capston, Mr. Kraft was employed as the Controller for
Thermacell Technologies, a public corporation that manufactured and sold
specialty paints throughout the Southeast. Mr. Kraft has held executive
accounting positions in manufacturing, retailing, banking, real estate
development and auditing.
Board Of Directors Committee Structure and Meetings
The Company has no standing audit, nominating or compensation committees.
During the year ended December 31, 1999, the Board did not hold any
meetings. During the subsequent period ended March 30, 2000, the Board held one
meeting, attended by all members, to approve the Tobem stock purchase and the
appointment of Ms. Fonner to serve as a Director of the Issuer. Between March
30, 2000 and the date of this Report, Ms. Fonner, acting in her capacity as the
sole Director of the Company, consented in writing to eight different corporate
actions.
Section 16(A) Beneficial Ownership Reporting Compliance
None of the Issuers principal stockholders or former directors and
officers filed any of the reports required by Section 16(a) of the Exchange Act
during the year ended December 31, 1999. Based on a review of its stock transfer
records, the Issuer does not believe that any of its principal stockholders or
former directors and officers engaged in any reportable transactions during the
year ended December 31, 1999.
Executive Compensation
Yifan He established the yifan.com web-site in 1997 and has been the
principal executive officer of Yifan since that date. No executive officer or
director of Yifan received any cash compensation during the year ended December
31, 1999. Yifan has never had any option, stock appreciation, deferred
compensation or pension plans and Mr. He has no received no non-cash benefits
from Yifan.
The Company has recently entered into a three-year employment agreement
with Mr. He who will be entitled to receive an annual salary of $80,000
commencing August 1, 2000. Mr. He's salary will increase to $100,000 during the
second year of the agreement and to $120,000 during the third year. In addition,
Mr. He will be entitled to receive certain performance bonuses, annual incentive
bonuses and annual cost of living increases, at the discretion of the Board of
Directors, plus any fringe benefits offered generally to all the Company's
employees, and reimbursement for expenses incurred for the benefit of the
Company. Under the terms of his Employment Agreement, Mr. He is required to
devote substantially all of his business time to the affairs of the Company.
Ms. Fonner served as the sole officer of the Company during the period
from March 30, 2000 through July 30, 2000. She received no cash compensation
from the Company for such services. Notwithstanding the foregoing, Capston was
granted the right to purchase up to 12,000,000 shares of Old Common from Tobem
at a price of $.005 per share and subsequently exercised its right with respect
to 11,000,000 shares. In addition, Capston received a $350,000 merger and
acquisition fee from Yifan in connection with the Yifan Transaction. Capston has
agreed to refund this acquisition fee to the Company if, prior to the first
anniversary of the Yifan Transaction, the New Common is listed on the Nasdaq
Stock Market and the average closing bid price of the New Common has been at
least $10 per share for a period of 45 consecutive trading days. To secure its
obligations under this Agreement, Capston has agreed to deposit 35,000 shares of
New Common in escrow with a bank selected by the Company.
Ms. Fonner has agreed to remain a member of the Company's Board and work
as the Company's Secretary and Director of Regulatory Affairs for a one-year
term commencing on August 1, 2000. In this capacity, Ms. Fonner will manage,
operate and maintain all required internal accounting and external financial
reporting systems on behalf of the Company until such operations have expanded
to a point where it is economically feasible for the Company to retain its own
in-house accounting and financial reporting staff. Ms. Fonner will also manage
the preparation and filing of all required reports and registration statements
with the Commission, the NASD and other regulatory authorities, and manage all
of the Company's relationships with its transfer agents, financial printers,
public relations firms and investor communications firms. Under the terms of her
employment agreement, Ms. Fonner is obligated to pay all expenses associated
with the operation and maintenance of her office, including the cost of any
required support staff, and the Company will have no obligation to make any
contribution to such costs. Ms. Fonner's sole compensation will be 180,000
shares of New Common that will be issued to her on the effective date of the
Amendment. Under the terms of her Employment Agreement, Ms. Fonner is required
to devote such time to the affairs of the Company as may be reasonably required
under the circumstances.
The other executive officers of the Company serve without regular
compensation but may, from time to time, be entitled to receive performance
bonuses and incentive bonuses at the discretion of the Board of Directors. All
of the Company's employment agreements prohibit direct competition with the
Company during their term, and for a period of two years after termination.
Except as set forth above, the Company's executive officers are required to
devote such time to the affairs of the Company as may be reasonably required
under the circumstances. Notwithstanding the foregoing, each of the Company's
officers has retained the right to pursue other business interests to the extent
that such interests are not competitive with the Company and do not adversely
affect their performance as officers. Accordingly, the Company may not have a
first right to exploit all opportunities that may come to the attention of its
officers.
Pension and Long-Term Incentive Plans
The Company did not have a pension plan in the year ended December 31,
1999. No stock options or long-term incentive awards were issued to any
executive officer or director by the Company in the year ended December 31,
1999.
ITEM 7.
FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
Audited consolidated financial statements of the Issuer as of December 31,
1998 and 1999 are incorporated herein by reference from the Issuer's Annual
Report on Form 10-KSB. Such financial statements have been incorporated herein
in reliance on the report of Harmon & Company, independent certified public
accountants, and upon the authority of said firm as experts in accounting and
auditing.
Unaudited financial statements of the Issuer as of June 30, 2000 and for
the six month periods ended June 30, 1999 and 2000 are incorporated herein by
reference from the Issuer's Quarterly Report on Form 10-QSB. These unaudited
financial statements reflect all adjustments, consisting of adjustments of a
normal recurring nature, which are, in the opinion of management, necessary for
a fair presentation of the interim periods.
Audited financial statements of Yifan LLC as of December 31, 1999,
attached hereto have been included in reliance on the report of Want & Ender,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
Unaudited financial statements of Yifan.com, Inc as of June 30, 2000 and
for the six month periods ended June 30, 1999 and 2000 are also attached hereto.
Such unaudited financial statements reflect all adjustments, consisting of
adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair presentation of the interim periods.
(b) Pro forma financial information.
An unaudited pro forma consolidated balance sheet at June 30, 2000,
together with the related unaudited pro forma consolidated statements of income
for the six months ended June 30, 2000 and the year ended December 31, 1999,
together with the related notes thereto are attached hereto and incorporated
herein by this reference.
(c) Exhibits.
2.1 Reorganization Agreement (without exhibits) between Yifan
Communications, Inc, Yifan.com, Inc and all of the stockholders of
Yifan.com, Inc dated July 30, 2000
3.1 Amendment to the By-laws of Smart Games Interactive, Inc.
dated March 30, 2000 *
3.2 Certificate of Ownership and Merger merging Yifan
Communications, Inc. into Smart Games Interactive Inc.
dated July 21, 2000 **
3.3 Amendment to the Certificate of Incorporation of Yifan
Communications, Inc. dated July 27, 2000 **
10.1 Stock Purchase Agreement and Investment Representation
Letter between Tobem Investments Limited and Smart Games
Interactive, Inc dated March 28, 2000 *
10.2 Project Management Agreement between Smart Games
Interactive, Inc, Tobem Investments Limited and Capston
Network Company dated March 31, 2000 *
10.4 Employment Agreement between Yifan Communications, Inc,
and Sally A. Fonner dated July 30, 2000
10.5 Agreement between Yifan.com, Inc and the law firm of
Petersen & Fefer dated July 3, 2000
10.6 Year 2000 Incentive Stock Plan of Yifan Communications,
Inc. dated August 3, 2000
16.1 Letter from Harmon & Company, Certified Public
Accountants
Re: Change in Certifying Accountant ***
* Incorporated by reference from Current Report on Form 8-K dated April 17,
2000.
** Incorporated by reference from Current Report on Form 8-K dated July 31,
2000.
*** Will file by amendment.
Item 8.
CHANGE IN FISCAL YEAR.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Yifan
Communications, Inc. has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
YIFAN COMMUNICATIONS, INC.
August 14, 2000
By: /s/
----------------
Yifan He, Chief Executive Officer
<PAGE>
AUDITED FINANCIAL STATEMENTS OF YIFAN LLC
============================================
Independent Auditors' Report
To the Members and Managers of
Yifan LLC
We have audited the accompanying balance sheet of Yifan LLC at December
31, 1999, and the related statements of income, member's equity, and cash flow
for the period January 22 1999 (inception) through December 31, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. These 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 our audit provides 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 Yifan LLC at
December 31, 1999, and the results of its operations and its cash flows for the
period January 22 1999 (inception) through December 31, 1999, in conformity with
generally accepted accounting principles.
Want & Ender
Certified Public Accountants
New York, New York
August 14, 2000
<PAGE>
Yifan LLC
Balance Sheet
As at December 31, 1999
Assets
--------------------------------------------------------------------------------
Current Assets
Cash ................................ $ 139,141
---------
Total Current Assets ....................... 139,141
Fixed Assets
Computer and office equipment, net .. 29,972
---------
Total Fixed Assets ......................... 29,972
Other Assets ............................... --
Capitalized software development .... 182,320
---------
Total Assets ............................... $ 351,433
=========
Liabilities and Members' Equity
--------------------------------------------------------------------------------
Current Liabilities ........................ $ 10
---------
Total Liabilities .......................... 10
---------
Pre-incorporation subscriptions received for
common stock of Yifan.com, Inc. ..... 231,000
---------
Paid in members' equity .................... 181,506
Accumulated Income (Loss) .................. (61,083)
---------
Total members' equity ...................... 120,423
---------
Total Liabilities and Members' Equity ...... $ 351,433
=========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Yifan LLC
Statement of Members' Equity
As at December 31, 1999
--------------------------------------------------------------------------------
Beginning balance ................................ $ --
Cash contributions from members .................. $ 145,316
Non-cash contributions from members .............. 36,190
---------
Total contributions from members ............ $ 181,506
Net Income (loss) for year ended December 31, 1999 (61,083)
---------
Balance at December 31, 1999 ..................... $ 120,423
=========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Yifan LLC
Statement of Income (Loss)
For the Period January 22, 1999(inception)
through December 31, 1999
--------------------------------------------------------------------------------
Revenue:
Web site development fees ..... $ 8,000
Operating Expenses
Advertising ................... 2,000
Business consulting fees ...... 18,170
Bank and finance charges ...... 724
Network expenses .............. 39,058
Professional fees ............. 600
Telephone expenses ............ 1,374
Office expenses ............... 55
Office supplies ............... 206
Licenses and permits .......... 951
Dues and subscriptions ........ 2,416
Books and periodicals ......... 124
Travel, meals and entertainment 75
--------
Total Operating Expenses ........... 65,753
--------
Net ordinary income ................ (57,753)
--------
Other Expense
Depreciation .................. 3,330
Taxes ......................... --
--------
Net Income (Loss) .................. ($61,083)
========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Yifan LLC
Statement of Cash Flows
For the Period January 22, 1999(inception)
through December 31, 1999
--------------------------------------------------------------------------------
Cash Provided By (Used in)
Operating Activities
Net Income (Loss) .......................... ($ 61,083)
=========
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation ............................... 3,330
Increase (decrease) in current liabilities . 10
Capitalized software development ........... (182,320)
---------
Total Adjustments ............................... (178,980)
Net cash provided by (used in)
operating activities ....................... ($240,063)
Investing Activities
Purchase computer and office equipment ..... (33,302)
Purchase of goodwill ....................... --
---------
Net cash used in investing activities ........... (33,302)
Financing Activities
Pre-incorporation subscriptions received for
common stock of Yifan.com, Inc. ........ 231,000
Member capital contributions ............... 181,506
Net cash provided by (used in)
financing activities ....................... 412,506
Net increase (decrease) in cash ................. 139,141
Cash at end of period ........................... 139,141
The accompanying notes are an integral part of these financial statements.
<PAGE>
YIFAN LLC
NOTES TO FINANCIAL STATEMENTS
1 Nature of Business
Yifan LLC (the "Company") is an Internet communications and software
development company that delivers content, community and commerce targeted to
the needs of the Chinese community in North America. The Company provides a free
service that gives its registered users access to a variety of online features.
The Company also provides Internet advertising and value-added business services
designed to enhance the Internet presence of its clients. The Company currently
operates under four principal Internet domain names "yifan.com," "yifan.net,"
"yifannet.com" and "gotofind.com." All of the Company's Internet products and
services are written in the Chinese language. The Company's business goal is to
capitalize on the growth of the Internet among Chinese users and become a
worldwide leader in the Chinese language market.
2 Organization
The Internet web site "yifan.com" was created by Yifan He in May 1997.
Mr. He operated the yifan.com web site as a sole proprietorship and personal
hobby until January 1999.
The Company is a New York limited liability company organized on January
22, 1999 to finance the further development and expansion of the "yifan.com,"
web site.
In connection with the formation of the Company Mr. Yifan He contributed
all his right title and interest in the yifan.com web site to the Company in
exchange for a membership interest. During 1999, two individuals contributed
$145,298 in cash to the Company in exchange for membership interests. During
1999, three individuals contributed consulting services valued at $18,170 and
five individuals contributed software development services valued at $18,020 to
the Company in exchange for membership interests. The valuation of these
personal service contributions is based on the cash consideration paid for
similar interests at the time the services were rendered.
On December 20, 1999, all of the Company's members executed an "Agreement
Respecting Allocation of Limited Liability Company Interests and Conversion to
Corporation" that authorized the creation of a successor corporation named
Yifan.com, Inc. and the transfer of the Company's assets and operations to such
corporation. The Articles of Incorporation of Yifan.com, Inc. were filed with
the Division of Corporations and State Records of the Department of State of the
State of New York on January 5, 2000 and Yifan.com, Inc. succeeded to the
business and operations of the Company on that date.
The balance sheet reflects the financial position of the Company as of
December 31, 1999. The related statements of operations, cash flow and
stockholders' equity reflect the operations of the Company for the period
January 22, 1999 (Inception) through December 31, 1999.
3. Summary of Significant Accounting Policies
(a) Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(b) Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
maintains cash balances in bank deposit accounts which at times may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
(c) Property and equipment
Property and equipment are recorded at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets, which
range from two to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The principal annual depreciation rates used are
as follows:
Furniture and fixtures 20.0%
Office equipment 20.0%
Computer equipment 33.3%
(d) Pre incorporation subscriptions
During 1999, the members of the Company decided to reorganize the Company
into a corporation in order to facilitate future capital raising activities. On
December 21, 1999, counsel prepared Articles of Incorporation for Yifan.com,
Inc. and forwarded them to the New York Department of State for filing. After
mailing of the Articles of Incorporation, the Company accepted subscriptions for
115,500 shares of Yifan.com common stock at a price of $2 per share. Since the
Articles of Incorporation for Yifan.com were delayed in the mail and ultimately
not processed until January 5, 2000, the pre-incorporation subscriptions are
separately stated in the mezzanine.
(e) Non-cash compensation
During 1999, three individuals contributed consulting services valued at
$18,170 and five individuals contributed software development services valued at
$18,020 to the Company in exchange for membership interests. The valuation of
these personal service contributions is based on the cash consideration paid for
similar interests at the time the services were rendered. The non-cash
consulting payments were charged to expense in the current period and the
non-cash software development payments were aggregated with the Company's other
software development costs.
(f) Software Development Costs
The Company accounts for software development costs in compliance with
the requirements of FASB 86, which requires the capitalization of software
development costs once the technological feasibility of a software product is
established. During the year ended December 31, 1999, the Company capitalized a
total of $182,320 in software development costs, including $18,020 in non-cash
software development costs that were paid through the issuance of membership
interests. Capitalized software development costs will be amortized in future
periods in accordance with the requirements of FASB 86.
(g) Revenue recognition
The Company has never generated revenues from advertising, web hosting,
software sales or business services. The Company derived 100% its 1999 revenues
from a web site development contract that was abandoned by the client prior to
completion.
(h) Net loss per share
The Company maintains the ownership accounts of its members based on a
percentage interest for each member rather than on the basis of shares.
Accordingly, net loss per share is not calculated.
4. Subsequent Events
(a) Conversion to corporation
Yifan.com, Inc., a New York corporation, was organized on January 5, 2000
as the corporate successor to the Company. In connection with the organization
of Yifan.com, Inc. the Company conveyed all of its properties and business
operations to Yifan.com, Inc. and the members of the Company received a total of
4,750,000 shares of Yifan.com, Inc.'s $.01 par value common stock. Concurrently,
the pre-incorporation subscriptions were accepted and 115,500 shares were issued
to the subscribers.
(b) Private placements of common stock by Yifan.com, Inc.
Between January 1 and July 30, 2000, Yifan.com, Inc. accepted
subscriptions to purchase 465,500 shares of its common stock at a price of $2
per share from private placement investors. The net cash proceeds associated
with these private sales of securities were $931,000.
As of July 30, 2000, Yifan.com, Inc. had received and accepted fully paid
subscriptions for 313,500 shares of common stock more than the limits authorized
by its charter. In connection with the acceptance of these subscriptions, the
holders of a majority of the issued and outstanding common stock consented to an
amendment to the Articles of Incorporation of Yifan.com, Inc. This Amendment
became unnecessary when the Company entered into a business combination with
Yifan Communications, Inc.
(c) Business combination with Yifan Communications, Inc.
On July 30, 2000, Yifan.com, Inc. and all its stockholders and
subscribers, entered into a business combination agreement with Yifan
Communications, Inc., a Delaware corporation formerly known as Smart Games
Interactive, Inc. In connection with this Agreement:
o Yifan Communications took action to effect a 1 for 40 reverse split of
its common stock and increase its authorized capital;
o the stockholders and subscribers of Yifan.com, Inc. contributed all of
their interest in Yifan.com, Inc. to Yifan Communications solely in
exchange for the right to receive 11,955,375 shares of post-reverse split
common stock of that company;
o Yifan Communications agreed to issue 179,331 shares of post-reverse split
common stock to certain finders who assisted in the negotiation of the
transaction; and
o A principal stockholder of Yifan Communications agreed to transfer 89,665
shares of post-reverse split common stock to such finders.
(d) Reverse merger method of accounting
Following the acquisition, the former management of Yifan.com, Inc.
became the management of Yifan Communications. The former stockholders of
Yifan.com will be issued 92% of the outstanding shares of Yifan Communications
on the effective date of an amendment to that company's Certificate of
Incorporation.
In accordance with generally accepted accounting principles, the
acquisition of Yifan.com will be accounted for as a reverse merger. As a result,
Yifan.com will be considered to be the acquiring entity and Yifan Communications
the acquired entity for accounting purposes, even though Yifan Communications is
the acquiring entity for legal purposes.
In connection with the acquisition, Yifan.com, Inc. paid a $350,000
merger and acquisition fee to Capston Network Company. Capston has agreed to
refund this acquisition fee to the Company on the first anniversary of the Yifan
acquisition if:
o the New Common is listed on the Nasdaq Stock Market; and
o the average closing bid price of the New Common has been at least $10 per
share for a period of at least 45 consecutive trading days.
To secure its obligations under this Agreement, Capston has agreed to
deposit 35,000 shares of post-reverse split common stock in a bank escrow.
The historical financial information of Yifan LLC and Yifan.com, Inc.
will become the historical financial information of Yifan Communications in
connection with the acquisition. Similarly, the historical equity and earnings
of Yifan LLC and Yifan.com, Inc. prior to the acquisition will be retroactively
restated for the equivalent number of shares to be received in connection with
the acquisition.
<PAGE>
UNAUDITED FINANCIAL STATEMENTS OF YIFAN.COM, INC
===================================================
Yifan.com, Inc.
Unaudited Interim Balance Sheet
Assets June 30, 2000
--------------------------------------------------------------------------------
Current Assets
Cash ..................................... $ 366,185
---------
Total Current Assets ............................ 366,185
Fixed Assets
Computer and office equipment, net ....... 40,154
---------
Total Fixed Assets .............................. 40,154
Other Assets
Deposit on merger and acquisition fee .... 150,000
Capitalized software development ......... 432,939
---------
Total Other Assets .............................. 582,939
---------
Total Assets .................................... $ 989,278
=========
Liabilities and Equity
--------------------------------------------------------------------------------
Current Liabilities ............................. ($ 3,793)
Total Liabilities ............................... (3,793)
---------
Subscriptions received for 212,000 shares of
common stock in excess of authorized capital 424,000
---------
Common Stock, $.01 par value 5,000,000 shares
issued and outstanding at June 30, 2000 .... 50,000
Additional paid-in capital ...................... 570,405
Retained earnings (defecit) ..................... (51,334)
---------
Total stockholders' equity ...................... 569,071
---------
Total Liabilities and Equity .................... $ 989,278
=========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Yifan.com, Inc.
Statement of Changes in Stockholders' Equity
June 30, 2000
(Unaudited)
--------------------------------------------------------------------------------
Common Stock, 4,750,000 shares $.01 par value
issued at inception (January 5, 2000) ............ $ 47,500
Common Stock issued in satisfaction of
pre incorporation subscriptions for 115,500 shares 1,155
Additional Common Stock sold to investors during
six-months ended June 30, 2000 (134,500 shares) .. 1,345
Common Stock Balance at June 30, 2000 ................. $ 50,000
========
Additional paid-in capital at inception ............... $ 72,923
Additional paid-in capital associated with stock issued
in satisfaction of pre incorporation subscriptions 229,845
Additional paid-in capital associated with stock issued
to investors during six-months ended June 30, 2000 267,637
Additional paid-in capital Balance at June 30, 2000 ... $570,405
========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Yifan LLC
Unaudited Interim Statements of Income (Loss)
<TABLE>
<CAPTION>
Three-months Ended Six-months Ended
June 30 June 30 June 30 June 30
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenue -- -- -- --
Operating Expenses
Advertising 1,850 -- 1,850 --
Automobile expense 5,647 -- 7,072 --
Business consulting fees 3,225 -- 3,225 --
Bank and finance charges (11) 738 (287) 557
Network expenses 15,061 180 27,268 380
Professional fees 500 600 500 600
Telephone expenses 1,309 -- 2,319 --
Office expenses 205 -- 366 --
Office rent 313 -- 959
Office supplies 297 51 297 171
Licenses and permits -- 250 -- 250
Books and periodicals -- 70 -- 124
Travel, meals and entertainment 1,885 -- 2,961 --
Depreciation 2,550 -- 4,805 --
Total Operating Expenses 32,527 1,040 51,334 2,082
------- ------ ------- ------
Income (Loss) before taxes ( 32,527) ( 1,040) ( 51,334) ( 2,082)
Taxes -- -- -- --
-- -- -- --
Income (loss) after taxes ($32,527) ($1,040) ($51,334) ($2,082)
========= ======== ========= ========
Number of shares used to calculate
Income (loss) per share 5,212,000 4,750,000 5,025,000 4,750,000
Income (loss) per share ($.01) * ($.01) *
* less than ($.01) per share
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Yifan LLC
Unaudited Interim Statement of Cash Flows
Six-months Ended
June 30, 2000
--------------------------------------------------------------------------------
Cash Provided By (Used in)
Operating Activities
Net Income (Loss) ........................ ($ 51,334)
=========
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation ............................. 4,805
Increase (decrease) in current liabilities (3,803)
Capitalized software development ......... (250,619)
---------
Total Adjustments ............................... (249,617)
Net cash provided by (used in)
operating activities
Investing Activities
Purchase computer and office equipment ... (14,987)
Deposit on merger and acquisition fee .... (150,000)
---------
Net cash used in investing activities ........... (164,987)
Financing Activities
Sale of common stock ..................... 268,982
Subscriptions received for common stock
in excess of authorized capital ...... 424,000
---------
Net cash provided by (used in)
financing activities ..................... 692,982
Net increase (decrease) in cash ................. 227,044
Cash at beginning of period ..................... 139,141
Cash at end of period ........................... 366,185
The accompanying notes are an integral part of these financial statements.
<PAGE>
YIFAN LLC
NOTES TO INTERIM FINANCIAL STATEMENTS
1 Nature of Business
Yifan.com, Inc. (the "Company") is an Internet communications and
software development company that delivers content, community and commerce
targeted to the needs of the Chinese community in North America. The Company
provides a free service that gives its registered users access to a variety of
online features. The Company also provides Internet advertising and value-added
business services designed to enhance the Internet presence of its clients. The
Company currently operates under four principal Internet domain names
"yifan.com," "yifan.net," "yifannet.com" and "gotofind.com." All of the
Company's Internet products and services are written in the Chinese language.
The Company's business goal is to capitalize on the growth of the Internet among
Chinese users and become a worldwide leader in the Chinese language market.
2 Organization
The Internet web site "yifan.com" was created by Yifan He in May 1997.
Mr. He operated the yifan.com web site as a sole proprietorship and personal
hobby until January 1999.
On January 22, 1999 Mr. He contributed all his right title and interest
in the yifan.com web site to Yifan LLC, a New York limited liability company. On
December 20, 1999, all of the members of Yifan LLC executed an "Agreement
Respecting Allocation of Limited Liability Company Interests and Conversion to
Corporation" that authorized the creation of the Company and the transfer of
Yifan LLC's assets and operations to the Company. On December 21, 1999, counsel
prepared Articles of Incorporation for the Company and forwarded them to the New
York Department of State for filing. After mailing of the Articles of
Incorporation, Yifan LLC accepted subscriptions for 115,500 shares of the
Company's common stock at a price of $2 per share. Since the Company's Articles
of Incorporation were delayed in the mail and ultimately not processed until
January 5, 2000, the pre-incorporation subscriptions were separately stated in
the mezzanine on the financial statements of Yifan LLC for the year ended
December 31, 1999.
The balance sheet reflects the financial position of the Company as of
June 30, 2000 and the related statements of operations, cash flow and
stockholders' equity reflect the operations of the Company for the three- and
six-month periods then ended. Yifan LLC is deemed the predecessor business of
the Company. Accordingly, the accompanying financial statements include the
results of operations of Yifan LLC for the period from January 1, 2000 to
January 5, 2000.
3. Summary of Significant Accounting Policies
(a) Interim financial statements
The financial statements as of June 30, 2000 and for the three- and
six-month periods ended June 30, 1999 and 2000 are unaudited, but in the opinion
of management include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position and results of operations.
(b) Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(c) Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
maintains cash balances in bank deposit accounts which at times may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
(d) Property and equipment
Property and equipment are recorded at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets, which
range from two to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The principal annual depreciation rates used are
as follows:
Furniture and fixtures 20.0%
Office equipment 20.0%
Computer equipment 33.3%
(e) Software Development Costs
The Company accounts for software development costs in compliance with
the requirements of FASB 86, which requires the capitalization of software
development costs once the technological feasibility of a software product is
established. During the six-month period ended June 30, 2000, the Company
capitalized a total of $268,982 in software development costs. Capitalized
software development costs will be amortized in future periods in accordance
with the requirements of FASB 86.
(f) Subscriptions in excess of authorized capital
As of June 30, 2000, the Company had received and accepted fully paid
subscriptions for 212,000 shares of common stock more than the limits authorized
by its charter. In connection with the acceptance of these subscriptions, the
holders of a majority of the issued and outstanding common stock consented to an
amendment to the Articles of Incorporation of Yifan.com, Inc. Since the required
amendment to the Company's Articles of Incorporation had not been filed as of
June 30, 2000, the subscriptions for shares in excess of authorized capital are
separately stated in the mezzanine.
(g) Net loss per share
Loss per share is computed on the basis of the weighted average number of
shares of common stock and common stock equivalents outstanding during each
period. For purposes of calculating earnings per share, subscriptions in excess
of the Company's authorized capital are treated as issued and outstanding.
6. Subsequent Events (Audited)
(a) Private placements of common stock.
Between January 1 and June 30, 2000, the Company accepted subscriptions
to purchase 465,500 shares of its common stock at a price of $2 per share from
private placement investors. The net cash proceeds associated with these private
sales of securities were $931,000.
As of July 30, 2000, Yifan.com, Inc. had received and accepted fully paid
subscriptions for 331,000 shares of common stock more than its authorized
capital. In connection with the acceptance of these subscriptions, an amendment
to the Articles of Incorporation of Yifan.com, Inc. was consented to in writing
by the holders of a majority of the issued and outstanding common stock but the
Amendment has not yet been filed.
(c) Business combination with Yifan Communications, Inc.
On July 30, 2000, Yifan.com, Inc. and all its stockholders entered into a
business combination agreement with Yifan Communications, Inc., a Delaware
corporation formerly known as Smart Games Interactive, Inc. In connection with
this Agreement:
(a) Yifan Communications has taken action to effect a 1 for 40 reverse split
of its common stock and increase its authorized capital;
(b) the stockholders of Yifan.com, Inc. have contributed all of their
interest in Yifan.com, Inc. to the Yifan Communications solely in
exchange for the right to receive 11,994,750 shares of post-reverse split
common stock;
(c) Yifan Communications has agreed to issue 179,921 shares of post-reverse
split common stock to certain finders who assisted in the negotiation of
the transaction; and
(d) A principal stockholder of Yifan Communications has agreed to transfer an
additional 89,961 shares of post-reverse split common stock to such
finders.
(d) Reverse merger method of accounting
Following the acquisition of Yifan.com, Inc., the former management of
Yifan.com became the management of Yifan Communications. The former stockholders
of Yifan.com will be issued 92% of the outstanding shares of the New Common of
Yifan Communications on the effective date of an amendment to that company's
Certificate of Incorporation.
In accordance with generally accepted accounting principles, the
acquisition of Yifan.com will be accounted for as a reverse merger. As a result,
Yifan.com will be considered to be the acquiring entity and Yifan Communications
the acquired entity for accounting purposes, even though Yifan Communications is
the acquiring entity for legal purposes.
In connection with the acquisition, Yifan.com, Inc. paid a $350,000
merger and acquisition fee to Capston Network Company.
Capston has agreed to refund this acquisition fee to the Company if,
prior to the first anniversary of the acquisition, the New Common of Yifan
Communications is listed on the Nasdaq Stock Market and the average closing bid
price of the New Common has been at least $10 per share for a period of 45
consecutive trading days. To secure its obligations under this Agreement,
Capston has agreed to deposit 35,000 shares of New Common in escrow with a bank
selected by Yifan Communications.
The merger and acquisition free described above has been capitalized as
goodwill and will be amortized over a period of 60 months.
The historical financial information of Yifan.com will become the
historical financial information of Yifan Communications and historical
stockholders' equity and earnings per share of Yifan.com prior to the
acquisition will be retroactively restated for the equivalent number of shares
to be received in connection with the acquisiton.
(e) Unaudited Balance Sheet at July 31, 2000
As supplemental information, the Company has prepared an unaudited
balance sheet at July, 31, 2000.
<PAGE>
Yifan.com, Inc.
Interim Audited Balance Sheet
Assets July. 31, 2000
--------------------------------------------------------------------------------
Current Assets
Cash ........................................ $ 395,300
Fixed Assets
Computer and office equipment, net .......... 39,304
Other Assets
Capitalized software development ............ 432,939
Goodwill associated with business combination 350,000
-----------
Total Other Assets ................................. 782,939
-----------
Total Assets ....................................... $ 1,217,543
===========
Liabilities and Members' Equity
--------------------------------------------------------------------------------
Current Liabilities ................................ (3,793)
-----------
Subscriptions received for 313,500 shares of
common stock in excess of authorized capital .. 662,000
-----------
Common Stock, $.01 par value 5,000,000 shares
issued and outstanding at July 31, 2000 ....... 50,000
Additional paid-in capital ......................... 570,405
Retained earnings (defecit) ........................ (61,069)
-----------
Total stockholders' equity ......................... 559,336
-----------
Total Liabilities and Equity ....................... $ 1,217,543
===========
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
===================================================
YIFAN COMMUNICATIONS INC
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
Historical Yifan Subsequent
Yifan.Com Yifan Acquisition Event Combined
Inc. Communications Adjustments Adjustments Company
<S> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash 366,185 13,473 (13,473)
29,115 395,300
Receivables - Trade And Other 0 0 0
Other Current Assets 0 0 0
Total Current Assets 366,185 13,473 29,115 (13,473) 395,300
Propert,Plant And Equipment (Net) 40,154 0 (850) 39,304
Other Assets
Capitalized Research & Development 432,939 0 432,939
Goodwill 150,000 0 200,000 350,000
Total Other Assets 582,939 0 0 200,000 782,939
`
Total Assets 989,278 13,473 28,265 186,527 1,217,543
Liabilities & Equity
Current Liabilities
Accounts Payable (3,793) 339,282 (339,282) (3,793)
Other Accrued Expenses 46,828 (46,828) 0
Total Current Liabilities (3,793) 386,110 0 (386,110) (3,793)
Total Liabilities (3,793) 386,110 0 (386,110) (3,793)
Stockholders' Equity
Preferred Stock 0 0 0
Common Stock 50,000 5,530 (5,530) 50,000
Subscriptions In Excess Of Authorized Capital424,000 238,000 (662,000) 0
Additional Paid In Capital 570,405 6,334,943 (6,334,943) 662,000 1,232,405
Accumulated Deficit (51,334) (6,763,110) 6,763,110
(9,734) (61,068)
Total Equity 993,071 (422,637) 660,637 (9,734) 1,221,337
Total Liabilities & Equity 989,278 (36,527) 660,637 (395,844) 1,217,544
</TABLE>
See accompanying to these unaudited pro forma consolidated financial statements.
<PAGE>
YIFAN COMMUNICATIONS INC
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Historical Yifan Subsequent
Yifan.Com Yifan Acquisition Event Combined
Inc. Communications Adjustments Adjustments Company
<S> <C> <C> <C> <C> <C>
Revenues 8,000 0 8,000
Total Revenues 8,000 0 0 8,000
Costs And Expenses
Operating Expensess 59,952 59,952
General And Administrative 5,801 6,967 12,768
Depreciation And Amortization 3,330 3,330
Operating Income (Loss) (61,083) (6,967) 0 (68,050)
Other Income (Expenses) 0 (51,700) (51,700)
Income (Loss) Before Extraordinary Items (61,083) (58,667) 0 (119,750)
Extraordinary Items 0 (453,376) (453,376)
Income (Loss) Before Income Taxes (61,083) (512,043) (573,126)
Income Tax Expense (Benefit) 0 0
Net Income (Loss) (122,166) (512,043) 0 (573,126)
</TABLE>
See accompanying to these unaudited pro forma consolidated financial statements.
<PAGE>
YIFAN COMMUNICATIONS INC
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Historical Yifan Subsequent
Yifan.Com Yifan Acquisition Event Combined
Inc. Communications Adjustments Adjustments Company
<S> <C> <C> <C> <C> <C>
Revenues 0 0 0
Total Revenues 0 0 0 0
Costs And Expenses
Operating Expensess 39,128 39,128
General And Administrative 7,402 8,815 16,217
Depreciation And Amortization 4,805 4,805
Operating Income (Loss) (51,335) (8,815) 0 (60,150)
Other Income (Expenses) 0 0 0
Income (Loss) Before Extraordinary Items (51,335) (8,815) 0 (60,150)
Extraordinary Items 0 197,970 422,637 620,607
Income (Loss) Before Income Taxes (51,335) 189,155 0 422,637 560,457
Income Tax Expense (Benefit) 0 0
Net Income (Loss) (102,670) 189,155 0 422,637 560,457
</TABLE>
See accompanying to these unaudited pro forma consolidated financial statements.
<PAGE>
YIFAN COMMUNICATIONS INC
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA
FINANCIAL STATEMENTS AS OF JUNE 30, 2000 AND FOR THE YEAR ENDED
DECEMBER 31, 1999 AND THE SIX MONTHS ENDED JUNE 30, 2000
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated balance sheet is presented assuming the
acquisition of Yifan.com, Inc. and the Subsequent Events occurred on June 30,
2000. The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1999 and the six months ended June 30, 2000 are presented as
if the Yifan Acquisition and the Subsequent Events occurred at the beginning of
each period presented. The Unaudited Pro Forma Consolidated Financial Statements
may not necessarily be indicative of the results which would actually have
occurred if the Yifan Acquisition and the Subsequent Events had been in effect
on the date or for the periods indicated or which may result in the future.
2. DESCRIPTION OF YIFAN ACQUISITION
On July 30, 2000, the Company entered into a business combination agreement
Yifan.com, Inc., a New York corporation, and all its stockholders. In connection
with this Agreement:
(a) The Company has taken action to effect a 1 for 40 reverse split of its
common stock and increase its authorized capital;
(b) the stockholders of Yifan.com, Inc. have contributed all of their interest
in Yifan.com, Inc. to the Company solely in exchange for the right to
receive 11,994,750 shares of post-reverse split common stock;
(c) The Company has agreed to issue 179,921 shares of post-reverse split common
stock to certain finders who assisted in the negotiation of the
transaction;
(d) Between June 30 and July 31, 2000, Yifan.com received and accepted fully
paid subscriptions for 119,000 shares of its common stock, resulting in net
cash proceeds of $238,000.
(e) In July 2000, Yifan.com incurred an operating loss of $9,734, including
$850 in depreciation. It also paid the $200,000 balance of Capston's merger
and acquisition fee.
3. DESCRIPTION OF SUBSEQUENT EVENTS
(a) Between June 30 and July 30, 2000, the Company negotiated a series of
settlement agreements whereby all of its remaining creditors, who
collectively held $330,385 of the Company's accounts and notes payable,
agreed to accept $38,107 in cash in full and final discharge of those
debts. Of this amount, $26,916 was paid prior to July 30, 2000. In
connection with the Yifan Acquisition, Capston Network Company, an
affiliate of the Company's sole director, agreed to fully indemnify the
Company, Yifan.com, Inc. and the stockholders of Yifan.com, Inc. from any
debts or other losses arising from the ordinary business operations of the
Company prior to July 28, 2000. Prior to the date of this Report, Capston
paid all remaining amounts due under the settlement agreements with the
Company's creditors.
(b) On July 27, 2000, the Company issued 1,351,756 shares of common stock to
its former legal counsel in settlement of claims for unpaid fees.
(c) Capston contributed $13,107 in cash to the Company in connection with the
settlement of the Company's debts. It also paid $35,179 in cash operating
expenses of the Company during the period between March 30, and July 30,
2000. These cash contributions from Capston have been accounted for as a
purchase of 3,500,000 shares of common stock.
(d) In connection with the Yifan Acquisition, Yifan.com, Inc. paid Capston a
$350,000 merger and acquisition fee. Capston has agreed to refund this fee
to the Company if, on the first anniversary of the acquisition:
o the New Common of the Company is listed on the Nasdaq Stock Market; and
o the average closing bid price of the New Common has been at least $10 per
share for a period of 45 consecutive trading days.
To secure its obligations under this Agreement, Capston has agreed to
deposit 35,000 shares of New Common in escrow with a bank selected by the
Company.
4. PRO FORMA ADJUSTMENTS - BALANCE SHEET
The pro forma adjustments to the unaudited pro forma consolidated balance sheet
reflect the following:
(a) The adjustments reflect the recording of the Yifan Acquisition using the
reverse merger method of accounting and the allocation of the merger and
acquisition fee paid by Yifan.com, Inc. to goodwill.
(b) The adjustments reflect the recording of the Subsequent Events.
