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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10 - QSB
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2002
COL China Online International Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
333-39208 52-2224845
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(Commission File Number) (IRS Employer Identification Number)
3176 South Peoria Court, Suite 100
Aurora, Colorado, 80014
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(Address of principal executive offices including zip code)
(303) 695-8530
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(Small Business Issuer telephone number, including area code)
3177 South Parker Road
Aurora, Colorado, 80014
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(Former Name or Former Address, if Changed Since Last Report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of May 13, 2002, the Registrant had outstanding 50,155,000 shares of its
common stock, par value $0.0005.
Transitional Small Business Disclosure Format (Check One):
Yes No X
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COL China Online International Inc.
(A Development Stage Company)
FORM 10-QSB
March 31, 2002
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
as of March 31, 2002 (unaudited) and June 30, 2001 1
Condensed Consolidated Statements of Operations
for the three and nine months ended March 31, 2002
and 2001 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for
the nine months ended March 31, 2002 and 2001 (unaudited) 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
COL CHINA ONLINE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 MARCH 31, 2002 (unaudited)
------------- -----------------------------
(Rmb) (Rmb) (US$)
Assets (Illustrative Only)
------
CURRENT ASSETS:
Cash 1,858,434 938,716 113,270
Accounts receivable, with no allowance for doubtful
accounts 231,487 81,645 9,852
Inventories 45,000 28,500 3,439
Prepaid expense and other receivables 184,779 765,320 92,348
Costs and estimated earnings in excess of billings on
uncompleted contracts -- 335,161 40,442
Due from minority stockholders 136,967 384,869 46,440
----------- ----------- -----------
Total current assets 2,456,667 2,534,211 305,791
PROPERTY, OFFICE SPACE AND EQUIPMENT, net of accumulated
depreciation of Rmb9,745,641 and Rmb12,564,707
(US$1,516,122), respectively 9,847,085 6,707,645 809,379
OTHER ASSETS:
Intangibles, net of accumulated amortization and
impairment of Rmb10,000,000 (US$1,206,651) -- -- --
Goodwill, net of accumulated amortization and impairment
of Rmb1,159,920 (US$139,962) -- -- --
----------- ----------- -----------
Total other assets -- -- --
----------- ----------- -----------
TOTAL ASSETS 12,303,752 9,241,856 1,115,170
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
- ----------------------------------------
CURRENT LIABILITIES:
Current portion of mortgage loans payable 313,271 326,144 39,354
Accounts payable and accrued expenses 1,699,522 2,255,746 272,190
Billings in excess of costs and estimated earnings on
uncompleted contracts 86,265 -- --
Taxes payable 175,693 249,199 30,070
----------- ----------- -----------
Total current liabilities 2,274,751 2,831,089 341,614
NOTES PAYABLE:
Majority Stockholder 39,585,464 50,097,637 6,045,037
Mortgage loans payable - net of current portion 1,191,141 944,903 114,017
----------- ----------- -----------
Total notes payable 40,776,605 51,042,540 6,159,054
MINORITY INTEREST IN SUBSIDIARIES -- -- --
STOCKHOLDERS' DEFICIENCY:
Preferred stock, US$0.001 par value, 5,000,000 shares
authorized, none outstanding -- -- --
Common stock, US$0.001 par value, 100,000,000 shares
authorized, 40,200,000 and 50,155,000 shares
issued and outstanding, respectively 327,710 408,864 50,155
Additional paid-in capital 79,890 1,214,118 146,502
Accumulated deficit (31,161,454) (46,198,797) (5,575,403)
Accumulated other comprehensive income (loss) 6,250 (55,958) (6,752)
----------- ----------- -----------
Total stockholders' deficiency (30,747,604) (44,631,773) (5,385,498)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY 12,303,752 9,241,856 1,115,170
=========== =========== ===========
See accompanying notes to these condensed consolidated financial statements
Page 1
COL CHINA ONLINE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED
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MARCH 31, 2001 MARCH 31, 2002
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(Rmb) (Rmb) (US$)
(Illustrative Only)
NET REVENUES:
Computer network installations 232,774 216,296 26,099
Transaction fee 9,919 2,564 309
Business services revenue -- 647 78
Sale of software -- -- --
Marketing fees, minority stockholder 53,459 102,834 12,409
----------- ----------- -----------
Total revenues 296,152 322,341 38,895
COST OF SALES:
Computer network installations 202,313 184,007 22,203
Transaction costs -- -- --
Business services costs 9,669 284 34
Cost of software sold -- -- --
Communication costs 345,460 244,600 29,515
----------- ----------- -----------
557,442 428,891 51,752
----------- ----------- -----------
Gross Margin (261,290) (106,550) (12,857)
OPERATING EXPENSES:
General and administrative 1,429,018 2,602,712 314,057
Amortization and depreciation 1,703,721 1,072,004 129,354
----------- ----------- -----------
Total operating expenses 3,132,739 3,674,716 443,411
----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST (3,394,029) (3,781,266) (456,268)
Minority interest 58,106 -- --
----------- ----------- -----------
NET LOSS (3,335,923) (3,781,266) (456,268)
=========== =========== ===========
BASIC AND FULLY DILUTED NET LOSS PER SHARE (0.08) (0.08) (0.01)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES 40,200,000 50,155,000 50,155,000
=========== =========== ===========
See accompanying notes to these condensed consolidated financial statements
Page 2
COL CHINA ONLINE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED
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MARCH 31, 2001 MARCH 31, 2002
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(Rmb) (Rmb) (US$)
(Illustrative Only)
NET REVENUES:
Computer network installations 229,506 1,371,702 165,517
Transaction fee 9,919 15,727 1,898
Business services revenue -- 7,977 963
Sale of software -- 33,181 4,004
Marketing fees, minority stockholder 229,028 269,007 32,460
----------- ----------- -----------
Total revenues 468,453 1,697,594 204,842
COST OF SALES:
Computer network installations 203,929 973,535 117,472
Transaction costs -- 11,677 1,409
Business services costs 9,669 57,967 6,995
Cost of software sold -- 16,500 1,991
Communication costs 562,492 753,822 90,960
----------- ----------- -----------
776,090 1,813,501 218,827
----------- ----------- -----------
Gross Margin (307,637) (115,907) (13,985)
OPERATING EXPENSES:
Research and development 142,030 -- --
General and administrative 4,023,676 7,792,360 940,266
Amortization and depreciation 5,114,452 3,499,066 422,215
----------- ----------- -----------
Total operating expenses 9,280,158 11,291,426 1,362,481
----------- ----------- -----------
OPERATING LOSS (9,587,795) (11,407,333) (1,376,466)
Other income 14,546 -- --
----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST (9,573,249) (11,407,333) (1,376,466)
Minority interest 165,287 -- --
----------- ----------- -----------
NET LOSS (9,407,962) (11,407,333) (1,376,466)
=========== =========== ===========
BASIC AND FULLY DILUTED NET LOSS PER SHARE (0.23) (0.24) (0.03)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES 40,200,000 47,482,571 47,482,571
=========== =========== ===========
See accompanying notes to these condensed consolidated financial statements
Page 3
COL CHINA ONLINE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED
-------------------------------------------------------------
MARCH 31, 2001 MARCH 31, 2002
------------------------ ----------------------------------
(Rmb) (Rmb) (US$)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (9,407,962) (11,407,333) (1,376,466)
Adjustments to reconcile net loss to net cash used
in operating activities:
Minority interest (165,287) -- --
Amortization and depreciation 5,114,452 3,499,066 422,215
Loss on disposal of equipment -- 120,000 14,480
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivables 90,044 149,842 18,081
Other assets (71,078) (716,630) (86,472)
Inventories -- 16,500 1,991
Increase (decrease) in:
Accounts payable and accrued expenses 123,788 (107,240) (12,940)
Taxes payable (107) 73,506 8,870
Billings in excess of costs and estimated
earnings on uncompleted contracts -- (86,265) (10,409)
----------- ----------- -----------
Net cash used in operating activities (4,316,150) (8,458,554) (1,020,650)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (619,111) (479,626) (57,874)
Purchase of Construction Net (281,964) -- --
Net cash acquired in acquisition of COL
International under reverse acquisition -- 63,308 7,639
----------- ----------- -----------
Net cash used in investing activities (901,075) (416,318) (50,235)
CASH FLOWS FROM FINANCING ACTIVITIES:
Mortgage loans repayments (204,882) (233,365) (28,159)
Advances from Majority Stockholder 5,006,383 8,498,629 1,025,488
Minority stockholders interest and advance 253,082 (247,902) (29,913)
----------- ----------- -----------
Net cash provided by financing activities 5,054,583 8,017,362 967,416
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (62,208) (7,506)
----------- ----------- -----------
NET DECREASE IN CASH (162,642) (919,718) (110,975)
----------- ----------- -----------
CASH, beginning of period 661,002 1,858,434 224,245
----------- ----------- -----------
CASH, end of period 498,360 938,716 113,270
=========== =========== ===========
CASH PAID FOR INTEREST 28,064 47,297 5,707
=========== =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for acquisition
of subsidiaries -- 67,662 8,300
=========== =========== ===========
See accompanying notes to these condensed consolidated financial statements
Page 4
COL CHINA ONLINE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Business
-------------------
Nature of Operations - COL China Online International Inc. (COL
International or the "Company") was incorporated as a Delaware corporation
on February 22, 2000, for the purpose of acquiring Migration Developments
Limited ("Migration") and raising equity capital. Prior to the acquisition
of Migration, COL International was considered to be in the development
stage, due to its limited operations and lack of revenues.
In July 2001, the Company completed its initial public offering of common
stock. The Company issued 1,655,000 shares of common stock in this offering
at US$0.05 per share (approximately US$83,000). All net proceeds from this
offering were used to pay costs associated with the offering.
COL International was formed for the purpose of acquiring and conducting
the engineering services and the internet related business of Migration. On
September 24, 2001, the acquisition of Migration by the Company through the
exchange of the Company's shares was completed. In this transaction, the
Company acquired all the outstanding shares of common stock of Migration in
exchange for 40.2 million shares of the Company's common stock. As a result
of the acquisition, Migration became a wholly owned subsidiary of COL
International.
Migration is a British Virgin Islands (BVI) corporation incorporated on May
18, 1998. It has two subsidiaries, Shenzhen Knowledge & Communications Co.,
Ltd. (formerly Shenzhen Rayes Electronic Systems Co., Ltd.) ("Joint
Venture") and Shanghai Shangyi Science and Trade Information Consulting
Co., Ltd. ("Shangyi"), in which it has 90% and 70% equity interests,
respectively. The Joint Venture and Shangyi are sino-foreign equity joint
ventures in the People's Republic of China (PRC). Most of the operations of
Migration are through the Joint Venture, which did not commence substantive
operations until the Spring of 1999. The acquisitions of Joint Venture and
Shangyi had been accounted for as purchases by Migration.
Migration has been providing marketing and technical services for the
Internet Service Provider (ISP) and value added services generally related
to the installation of computer network systems (i.e., Local Area Networks
or LANs) in the PRC.
Migration is also developing proprietary websites in which it markets
services and products of other companies and receives subscriber and/or
transactional fees for its services. Migration designs websites and
provides hosting services to other companies.
Page 5
COL CHINA ONLINE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements have been
prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such SEC rules and regulations; nevertheless, the Company
believes that the disclosures are adequate to make the information
presented not misleading. These financial statements have been prepared on
the same basis as the annual financial statements except for certain
accounting policies used by Migration as detailed in the Form 10-QSB for
the quarter ended September 30, 2001. These financial statements and the
notes hereto should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB
for the year ended June 30, 2001 and Current Report on Form 8-K and
amendment on Form 8-K/A concerning the acquisition of Migration on
September 24, 2001. In the opinion of the Company, all adjustments,
including normal recurring adjustments necessary to present fairly the
financial position of the Company as of March 31, 2002 and the results of
its operations and cash flows for the quarter and nine month periods then
ended, have been included. The results of operations for the interim period
are not necessarily indicative of the results for the full year.
For financial reporting purposes, the acquisition of Migration by the
Company on September 24, 2001 had been treated as a reverse acquisition.
Migration is the continuing entity for financial reporting and the
acquisition of COL International is considered a recapitalization and
restructuring of Migration. On this basis, the historical financial
statements prior to September 24, 2001 represent the financial statements
of Migration. The historical shareholders' equity accounts of the Company
have been retroactively restated to reflect the issuance of 40,200,000
shares of common stock since inception of Migration and the issuance of
9,955,000 shares of stock upon the merger with COL International.
The amounts included in the financial statements are presented in Renminbi
("Rmb") which is COL International's functional currency, unless otherwise
indicated as US dollars, because COL International's operations are
primarily located in the PRC. For illustrative purposes, the condensed
consolidated balance sheet as of March 31, 2002, condensed consolidated
statements of operations for the three months and nine months ended March
31, 2002, respectively, and condensed consolidated statement of cash flows
for the nine months ended March 31, 2002 have been translated into US
dollars at approximately 8.2874 Rmb to the dollar, which was the exchange
rate at March 31, 2002.
Page 6
COL CHINA ONLINE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for under the purchase method. For all business combinations for
which the date of acquisition is after June 30, 2001, SFAS No. 141 also
establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain, rather than deferred and
amortized. SFAS No. 142 changes the accounting for goodwill and other
intangible assets after an acquisition. The most significant changes made
by SFAS No. 142 are: (1) goodwill and intangible assets with indefinite
lives will no longer be amortized; (2) goodwill and intangible assets with
indefinite lives must be tested for impairment at least annually; and (3)
the amortization period for intangible assets with finite lives will no
longer be limited to forty years. At this time, the Company does not
believe that the adoption of either of these statements will have a
material effect on its financial position, results of operations, or cash
flows.
In June 2001, the FASB also approved for issuance SFAS No. 143 "Asset
Retirement Obligations". SFAS No. 143 establishes accounting requirements
for retirement obligations associated with tangible long-lived assets,
including (1) the timing of the liability recognition, (2) initial
measurement of the liability, (3) allocation of asset retirement cost to
expense, (4) subsequent measurement of the liability and (5) financial
statement disclosures. SFAS No. 143 requires that an asset retirement cost
should be capitalized as part of the cost of the related long-lived asset
and subsequently allocated to expense using a systematic and rational
method. The adoption of SFAS No. 143 is not expected to have a material
effect on the Company's financial position, results of operations, or cash
flows.
In August 2001, the FASB also approved SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS
No. 121. The new accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued
operations, and replaces the provisions of Accounting Principles Board
(APB) Opinion No. 30, "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business", for the disposal of
segments of a business. SFAS No. 144 requires that those long-lived assets
be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured
at net realizable value or include amounts for operating losses that have
not yet occurred. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can
be distinguished from the rest of the entity and that will be eliminated
from the ongoing operations of the entity in a disposal transaction. The
provisions of SFAS No. 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, are to
be applied prospectively. At this time, the Company cannot estimate the
effect of this statement on its financial position, results of operations,
or cash flows.
Page 7
COL CHINA ONLINE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Comprehensive Income (Loss)
--------------------------
The Company accounts for comprehensive income in accordance with SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial
statements. Comprehensive income, as defined therein, refers to revenues,
expenses, gains and losses that are not included in net income but rather
are recorded directly in stockholders' equity. Accumulated other
comprehensive income (loss) for the quarter and nine months period ended
March 31, 2002, respectively, represented foreign currency translation
adjustments.
5. Net Loss Per Share
------------------
Basic and diluted net loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding.
Pursuant to the Company's 2000 Stock Option Plan, options may be granted to
purchase an aggregate of 4,000,000 shares of common stock to key employees
and other persons who have or are contributing to the Company's success. As
of March 31, 2002, no options had been granted under the 2000 plan.
6. Accumulated Deficit
-------------------
The acquisition of Migration by COL International on September 24, 2001 had
been treated as a reverse acquisition. As a result, accumulated deficit
prior to the acquisition should reflect that of Migration only. However, no
goodwill was recorded on this acquisition as COL International had limited
operations and was formed for the sole purpose of merging with Migration
and raising limited funding prior to the acquisition. Therefore,
accumulated deficit of COL International of RMB3,630,010 (US$438,016) at
the date of acquisition has also been recorded in the accumulated deficit
of the Company.
7. Legal Proceedings
-----------------
On July 27, 2000, ChinaOnline Inc., a provider of business news and
information regarding China in the United States, sent the Company a letter
claiming that the Company's use of the CHINAONLINE mark constitutes an
infringement and dilution of the trademark rights of ChinaOnline Inc. in
its CHINAONLINE trademark, which they claimed had been registered in the
United States. ChinaOnline Inc. demanded that the Company cease and desist
all use of the CHINAONLINE mark, including as a company name. On August 21,
2000, ChinaOnline Inc. sent a second letter stating that it will take
appropriate action in the event that we fail to cease and desist all use of
the CHINAONLINE mark. The Company has responded to these claims by stating
that, under relevant legal principles, the use of the name "COL China
Online International Inc." does not infringe on, dilute or otherwise injure
any trademark rights of the claimant.
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This document contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. When used in this document, the words "expects",
"anticipates", "intends" and "plans" and similar expressions are intended to
identify certain of these forward-looking statements. The cautionary statements
made in this document should be read as being applicable to all related
forward-looking statements wherever they appear in this document. The Company's
actual results could differ materially from those discussed in this document.
Factors that could cause or contribute to such difference include those
discussed below and in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 2001.
Overview
COL International was incorporated for the purpose of acquiring Migration and
raising equity capital. Prior to the acquisition of Migration on September 24,
2001, COL International was considered to be in the development state, due to
its limited operations and lack of revenues.
Initial Public Offering - In July 2001, the Company completed its initial public
offering of common stock. The Company issued 1,655,000 shares of common stock in
this offering at US$0.05 per share (approximately US$83,000). All net proceeds
from this offering were used to pay costs associated with the offering.
Going concern - The ability of COL International to continue operations as a
going concern is dependent upon the continued support from Honview International
Limited ("Honview"), a former shareholder of Migration, which is now a major
stockholder of COL International, until such time as, when or if, the combined
entity of COL International and Migration achieve profitable operations and/or
additional funds are raised in future private and public offerings.
Acquisition - COL International was formed for the purpose of acquiring and
conducting the engineering services and the internet related business of
Migration. In September 2001, the acquisition of Migration by the Company
through the exchange of the Company's shares was completed. In this transaction,
the Company acquired all the outstanding shares of common stock of Migration in
exchange for 40.2 million shares of the Company's common stock. As a result of
the acquisition, Migration became a wholly owned subsidiary of COL
International. However, for accounting purposes, this transaction is treated a
reverse acquisition, whereby Migration is considered as an acquirer. No goodwill
is recorded in the merger. The condensed consolidated financial statements of
the Company reflected the operations of Migration prior to the merger and the
combined entity after the merger.
Migration is a British Virgin Islands (BVI) corporation incorporated on May 18,
1998. Migration has been providing marketing and technical services for an
Internet Service Provider (ISP) and value added services generally related to
the installation of computer network system (i.e. Local Area Networks LANs) in
the PRC. Migration is also developing proprietary websites in which it markets
services and products of other companies and receives subscriber and/or
transactional fees for its services. Migration designs websites and provides
hosting services to other companies.
Page 9
Plan of operations - During the next 12 months, COL International intends to
pursue the following:
o marketing packages of information technology and value added internet
services to small and medium-sized enterprises in China;
o continue operating a website (www.colexports.com) under an agreement
with the China Council for Promotion of International Trade to assist
export-related companies to carry out obtaining certificates of origin
required to enable export companies to cash letters of credit and to
apply for overseas product standards approvals through the Council's
authorization by the U.S. Food and Drug Administration and
Underwriter's Laboratory;
o marketing network engineering projects in China with design and
installation of networking and communication solutions in office
complexes, airports and hospitals;
o offering web hosting and home page development services through COL
International's data center in Shanghai;
o promoting and trading building materials among construction industry
participants in China through a business-to-business website
(www.col173.com);
o marketing on-line education and trading programs in China through its
Education Net website (www.whedu.com.cn).
The Company currently is operating on a negative cash flow basis and is seeking
additional financing in order to satisfy its cash requirements. The Company
anticipates that it will require Rmb7,336,800 (or approximately US$900,000) in
financing during the next 12 months to satisfy its cash requirements. COL
International, through its Migration subsidiary, currently employs approximately
70 employees in China. As COL International pursues its plan of operations, it
anticipates hiring up to 30 additional employees in the next 12 months.
We anticipate making no purchases or sales of plant and significant equipment in
the coming year, apart from the possible addition of more servers to keep pace
with future growth. We do not expect the costs of additional servers to be
material.
Page 10
Results of Operations
Revenues for the three months ended March 31, 2002 include installation
revenue of Rmb216,296 (US$26,099) and marketing fees received from Shenzhen
Rayes Group Co., Ltd. ("Rayes Group") of Rmb102,834 (US$12,409) compared to
installation revenues of Rmb232,774 and marketing fees of Rmb53,459 for the
three months ended March 31, 2001. Installation revenue and marketing fees
received from Rayes Group for the nine months ended March 31, 2002 was
Rmb1,371,702 (US$165,517) and Rmb269,007 (US$32,460), respectively, compared to
Rmb229,506 and Rmb229,028, respectively, for the nine months ended March 31,
2001. The Company has entered into only a limited number of installation
contracts, and revenue is recognized as project phases are completed and
accepted by the customer. However, because there have been only a limited number
of contracts, the Company's gross margin on installation revenue, which can vary
between contracts based on negotiated price and materials installed (where lower
margins are received), is not consistent between periods. For the three months
ended March 31, 2002, the Company had a gross margin of approximately 15 percent
based on costs of Rmb184,007 (US$22,203), whereas for the three months ended
March 31, 2001, the Company had a gross margin of 13 percent. For the nine
months ended March 31, 2002, the Company had a gross margin of approximately 29%
based on costs of Rmb973,535 (US$117,472), whereas for the nine months ended
March 31, 2001, the Company had a gross margin of 11%. In addition, Construction
Net and Education Net have contributed transaction fee of Rmb2,564 (US$309) and
business services revenue of Rmb647 (US$78) respectively for the three months
ended March 31, 2002, compared to Rmb15,727 (US$1,898) and Rmb7,977 (US$963),
respectively, for the nine months ended March 31, 2002. Both Construction Net
and Education Net were launched during the year ended June 30, 2001, however, no
significant revenues have been generated to date. The Company began to derive
revenue from sales of design software amounting to Rmb33,181 (US$4,004) with a
gross profit of 50 percent for the nine months ended March 31, 2002.
Marketing fees are related to the Joint Venture's share of 50 percent of
the revenues generated from ISP services owned by a minority shareholder, Rayes
Group, and computer hosting of web sites for customers. The Company has not yet
generated significant revenues from these lines of business, but is devoting
substantial resources to developing this business. To date, most ISP services
are paid by a limited number of individual dial-up customers and internet games
centers in Shanghai, as well as a limited number of companies whose web sites
are hosted by the Company. The Company also designs web sites for companies,
however, insignificant revenue has been generated from this activity to date. To
the extent that the Company designs and hosts a customer's web sites, the
related revenue from the design will generally be deferred and recognized over
the hosting term of the contract or expected life of the customer, if longer.
In connection with these services, the Company has an agreement with Rayes
Group to reimburse Rayes Group for its actual transmission (i.e., telephone
line) costs, provided that Rayes Group will pay all incremental costs related to
expansion of the telecommunications facilities related to the ISP operations.
These amounts totaled Rmb345,460 and Rmb244,600 (US$29,515) during the three
months period of March 31, 2001 and March 31, 2002, respectively, compared to
Rmb562,492 and Rmb753,822 (US$90,960) during the nine months period of March 31,
2001 and 2002, respectively. The Joint Venture has no long-term commitments in
connection with its telecommunication costs other than management fees payable
to the Rayes Group for providing services.
Page 11
During the three months ended March 31, 2001 and March 31, 2002, the
Company did not incur any research and development costs. The Company incurred
Rmb142,030 and nil of research and development costs for the nine months ended
March 31, 2001 and 2002, respectively. These costs represent software
development costs associated with the Company's development of its Education Net
and Small and Medium Sized Enterprises web sites. The web sites are currently
functioning and can be accessed, but no significant revenues have been generated
to date.
General and administrative costs include salaries, rent, travel and other
overhead costs. For the three months ended March 31, 2001 and March 31, 2002,
general and administrative costs totaled Rmb1,429,018 and Rmb2,602,712
(US$314,057), respectively. For the nine months ended March 31, 2001 and March
31, 2002, general and administrative costs totaled Rmb4,023,676 and Rmb7,792,360
(US$940,266), respectively. These costs are increasing as the Company continues
to expand its business services.
Amortization and depreciation expense for the three months ended March 31,
2001 and March 31, 2002 was Rmb1,703,721 and Rmb1,072,004 (US$129,354),
respectively, compared to Rmb5,114,452 and Rmb3,499,066 (US$422,215) for the
nine months ended March 31, 2001 and March 31, 2002, respectively. The decrease
represents the impairment loss provision of intangibles which accrued in the
fourth quarter of the fiscal year ended June 30, 2001.
The Company has not recognized any future tax benefits resulting from its
operating losses due to the uncertainty of future realization.
Based on the minority shareholder's thirty percent interest in Shangyi,
Rmb58,106 and Rmb165,287 of losses is offset against the minority interest's
capital contribution of Rmb446,581 for the three months ended March 31, 2001 and
for the nine months ended March 31, 2001, respectively. No share of loss has
been absorbed by Shangyi's minority interest holder for the three months ended
March 31, 2002 and for the nine months ended March 31, 2002 as its initial
capital contribution was fully absorbed.
The above has resulted in net losses of Rmb3,335,923 and Rmb3,781,266
(US$456,268) for the three months ended March 31, 2001 and March 31, 2002,
respectively, compared to Rmb9,407,962 and Rmb11,407,333 (US$1,376,466) for the
nine months ended March 31, 2001 and March 31, 2002, respectively. The Company
expects to continue to incur losses until its services are more fully developed
and accepted in China.
Page 12
Liquidity and Capital Resources
As of March 31, 2002 and June 30, 2001, the Company had a negative and
positive working capital of Rmb296,878 (US$35,823) and Rmb181,916, respectively.
As of March 31, 2002, advances from the majority stockholder totaled
Rmb50,097,637 (US$6,045,037). The Company's management believes the majority
stockholder will continue to provide financial support to the Company, and the
majority stockholder has signed a note agreement to provide up to US$8,000,000.
Migration's ability to continue operations is currently dependent upon continued
financial support from its majority stockholder. Also included in liabilities at
March 31, 2002 and June 30, 2001 is Rmb1,271,047 (US$153,371) and Rmb1,504,412,
respectively, incurred in connection with the purchase of office space and staff
quarters in Wuhan, China.
Cash used in operating activities for the nine months period ended March
31, 2002 was Rmb8,458,554 (US$1,020,650) as compared with Rmb4,316,150 for the
nine months ended March 31, 2001. The cash used in operations was to fund
operating losses of Rmb9,407,962 and Rmb11,407,333 (US$1,376,466), generally
offset by non-cash expenses related to amortization and depreciation of
Rmb5,114,452 and Rmb3,499,066 (US$422,215) for the nine months ended March 31,
2001 and March 31, 2002, respectively.
Cash used in investing activities for the nine months ended March 31, 2001
and March 31, 2002 was Rmb901,075 and Rmb416,318 (US$50,235), respectively. For
the nine months ended March 31, 2001, after receiving regulatory approval, the
purchase of a company developing a website (Construction Net) in which the
Company has 70 percent interest, was completed. The total purchase price for
this entity was Rmb1,457,140 (or approximately US$179,000). A purchase deposit
of Rmb1,020,000 (or approximately US$125,000) was advanced during the period
ended June 30, 2000 and an additional net amount of Rmb 281,964 (or
approximately US$35,000) was paid in July 2000. The predecessor entity was a
development stage company and has not recognized any significant revenues from
its web site development.
Cash flows from financing activities have generally come from advances by
the majority stockholder of the Company. During the nine months ended March 31,
2001 and March 31, 2002, the majority stockholder has advanced Rmb5,006,383 and
Rmb8,498,629 (US$1,025,488), respectively.
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Item 5. Other Information
Effective as of March 31, 2002, Brian Power resigned as Chief Executive Officer,
Secretary and a Director of the Company. The Board of Directors elected Anthony
Ng as Chief Executive Officer, Secretary and a Director to fill the vacancies in
these positions while the Corporation seeks another Chief Executive Officer.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
---------
None.
(b) Reports on Form 8-K.
--------------------
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act Of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
COL CHINA ONLINE INTERNATIONAL INC.
Date: May 15, 2002 By: /s/ Anthony Ng
--------------------------------
Anthony Ng
Chief Executive Officer
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