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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
333-39208
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(Commission File Number)
For the quarterly period ended September 30, 2003
COL China Online International Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 52-2224845
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(State or other jurisdiction (IRS Employer
of incorporation) 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)
N/A
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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 1, 2003, the Registrant had outstanding 50,155,000 shares of its
common stock, par value $.001.
Transitional Small Business Disclosure Format (Check One):
Yes No X
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COL China Online International Inc.
FORM 10-QSB
March 31, 2003
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 2003 (unaudited) and June 30, 2003 1
Condensed Consolidated Statements of Operations
for the three months ended September 30, 2003
and 2002 (unaudited) 2
Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 2003
and 2002 (unaudited) 3
Notes to Condensed Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 Controls and Procedures 12
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
Signature Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
COL CHINA ONLINE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 SEPTEMBER 30, 2003 (unaudited)
------------- -----------------------------
(Rmb) (Rmb) (US$)
(Illustrative
Only)
Assets
CURRENT ASSETS:
Cash 548,405 226,039 27,276
Accounts receivable, net of allowance for doubtful
accounts of Rmb553,014 (US$64,316) 46,520 103,377 12,475
Inventories -- -- --
Prepaid expense and other receivables 299,952 528,507 63,776
Prepayment 1,504,354 -- --
Net investment in the lease, current portion -- 988,294 119,258
----------- ----------- -----------
Total current assets 2,399,231 1,846,217 222,785
PROPERTY, OFFICE SPACE AND EQUIPMENT, net of accumulated
depreciation and impairment of Rmb10,193,012 and
Rmb1,506,999 (US$181,851), respectively 3,718,632 3,566,937 430,426
NET INVESTMENT IN THE LEASE, long term portion -- 741,219 89,444
----------- ----------- -----------
TOTAL ASSETS 6,117,863 6,154,373 742,655
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
- ----------------------------------------
CURRENT LIABILITIES:
Current portion of mortgage loans payable 348,543 341,665 41,229
Accounts payable and accrued expenses 1,985,795 1,558,548 188,072
Advance deposit received 642,987 317,980 38,371
Due to a minority stockholder 221,830 214,660 25,903
Taxes payable 190,542 188,682 22,768
----------- ----------- -----------
Total current liabilities 3,389,697 2,621,535 316,343
NOTES PAYABLE:
Majority Stockholder 63,077,865 66,103,237 7,976,740
Mortgage loans payable - net of current portion 512,069 433,531 52,315
----------- ----------- -----------
Total notes payable 63,589,934 66,536,768 8,029,055
STOCKHOLDERS' DEFICIENCY:
Preferred stock, US$0.001 par value, 5,000,000 shares
authorized, none outstanding -- -- --
Common stock, US$0.001 par value, 100,000,000 shares
respectively authorized, 40,000,000 and 50,155,000
shares issued and outstanding 408,864 408,864 50,155
Additional paid-in capital 1,214,118 1,214,118 146,507
Accumulated deficit (62,450,820) (64,593,011) (7,795,230)
Accumulated other comprehensive loss (33,930) (33,901) (4,175)
----------- ----------- -----------
Total stockholders' deficiency (60,861,768) (63,003,930) (7,602,743)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY 6,117,863 6,154,373 742,655
=========== =========== ===========
See accompanying notes to these condensed consolidated financial statements
Page 1
COL CHINA ONLINE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED
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SEPTEMBER 30, 2002 SEPTEMBER 30, 2003
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(Rmb) (Rmb) (US$)
(Illustrative
Only)
NET REVENUES:
Business services revenue 898 -- --
Marketing fees, minority stockholder 133,729 57,286 6,913
----------- ----------- -----------
Total revenues 134,627 57,286 6,913
COST OF SALES:
Business services costs 392 -- --
Telecommunication 302,829 165,928 20,203
----------- ----------- -----------
303,221 165,928 20,203
----------- ----------- -----------
Gross Margin (168,594) (108,642) (13,290)
OPERATING EXPENSES:
General and administrative 2,693,022 1,945,732 234,596
Amortization and depreciation 133,610 176,490 21,297
----------- ----------- -----------
Total operating expenses 2,826,632 2,122,222 255,893
----------- ----------- -----------
OPERATING LOSS (2,995,226) (2,230,864) (269,183)
Rental income -- 54,000 6,516
Other income 834,803 34,673 4,184
----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST (2,160,423) (2,142,191) (258,483)
Minority interest -- -- --
----------- ----------- -----------
NET LOSS (2,160,423) (2,142,191) (258,483)
=========== =========== ===========
OTHER COMPREHENSIVE LOSS (13,092) 29 4
----------- ----------- -----------
COMPREHENSIVE LOSSES (2,173,515) (2,142,162) (258,479)
=========== =========== ===========
BASIC AND FULLY DILUTED NET LOSS PER SHARE (0.04) (0.04) (0.005)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES 50,155,000 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 THREE MONTHS ENDED
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SEPTEMBER 30, 2002 SEPTEMBER 30, 2003
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(Rmb) (Rmb) (US$)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (2,160,423) (2,142,191) (258,483)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization and depreciation 133,610 176,490 21,297
Loss(Gain) on disposal of equipment (395,991) -- --
Provision for staff welfare written back (436,479) -- --
Bad debts written off -- 17,713 2,137
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivables (33,494) (56,856) (6,861)
Other assets 41,908 (471,426) (56,888)
Inventories 19,840 -- --
Increase (decrease) in:
Accounts payable and accrued expenses (112,311) (752,255) (90,775)
Taxes payable 27,866 (1,860) (224)
---------- ---------- ----------
Net cash used in operating activities (2,915,474) (3,230,385) (389,797)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (152,401) (24,794) (2,992)
Sales of Education Net 750,000 -- --
---------- ---------- ----------
Net cash provided (used) in investing activities 597,599 (24,794) (2,992)
CASH FLOWS FROM FINANCING ACTIVITIES:
Mortgage loans repayments (80,985) (85,416) (10,307)
Advances from Majority Stockholder 2,623,589 3,025,372 365,056
Minority stockholders interest and advance -- (7,172) (865)
---------- ---------- ----------
Net cash provided by financing activities 2,542,604 2,932,784 353,884
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 13,093 29 4
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH 237,822 (322,366) 43,901
---------- ---------- ----------
CASH, beginning of period 368,839 548,405 66,177
---------- ---------- ----------
CASH, end of period 606,661 226,039 22,276
========== ========== ==========
CASH PAID FOR INTEREST 16,638 10,983 1,325
========== ========== ==========
See accompanying notes to these condensed consolidated financial statements
Page 3
COL CHINA ONLINE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Company Organization and Operations
-----------------------------------
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 2002, 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, 2002, 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.
For financial reporting purposes, the acquisition of Migration by the
Company on September 24, 2002 has 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, 2002 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 Migration.
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.
During the quarter ended September 30, 2003, the Company acquired a system
of computer network and software for generating lease income with the cost
of approximately Rmb1,976,000 (US$238,456) and the corresponding net
investment in the lease is presented in the consolidated balance sheet with
long-term portion of Rmb741,219 (US$89,444) and current portion of
Rmb988,294 (US$119,258).
Page 4
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. 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, 2003 which was filed
October 14, 2003. In the opinion of the Company, all adjustments, including
normal recurring adjustments necessary to present fairly the financial
position of the Company as of September 30, 2003 and the results of its
operations and cash flows for the quarter and three 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.
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 September 30, 2003 and condensed
consolidated statement of operations for the three months ended September
30, 2003 and condensed consolidated statement of cash flows for the three
months ended September 30, 2003 have been translated into US dollars at
approximately 8.2870 Rmb to the dollar, which was the exchange rate at
September 30, 2003.
3. Recent Accounting Pronouncements
--------------------------------
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of FASB Statement 123" (SFAS148). For
entities that change their accounting for stock-based compensation from the
intrinsic method to the fair value method under SFAS 123, the fair value
method is to be applied prospectively to those awards granted after the
beginning of the period of adoption (the prospective method). The amendment
permits two additional transition methods for adoption of the fair value
method. In addition to the prospective method, the entity can choose to
either (i) restate all periods presented (retroactive restatement method)
or (ii) recognize compensation cost from the beginning of the fiscal year
of adoption as if the fair value method had been used to account for awards
(modified prospective method). For fiscal years beginning after December
31, 2003, the prospective method will no longer be allowed. The statement
is not expected to have a material impact on the Company as there is no
stock-based compensation granted.
Page 5
COL CHINA ONLINE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Recent Accounting Pronouncements (Continued)
--------------------------------
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). FIN No. 46 applies to
variable interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
December 15, 2003, to variable interest entities in which an enterprise
holds an interest that it acquired before February 1, 2003. The Company
currently has no interests in variable interest entities, and therefore
does not expect adoption of FIN No. 46 to have an impact on its
consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". The SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
Subject to certain exception, this statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003 and all provisions of this Statement should
be applied prospectively. The Company had no derivative instruments
outstanding and the adoption of SFAS No. 149 has no impact on the Company's
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
The SFAS No.150 improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity and
requires that those instruments be classified as liabilities in statements
of financial position. In addition to its requirements for the
classification and measurement of financial instruments in its scope, SFAS
No. 150 also requires disclosures about alternative ways of settling the
instruments and the capital structure of entities, all of whose shares are
mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective
for all financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company had no financial instruments
outstanding and the adoption of SFAS No. 150 has no impact on the Company's
consolidated financial statements.
4. Comprehensive Income (Loss)
--------------------------
The Company accounts for comprehensive income (loss) 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 three months period ended
September 30, 2003, respectively, represented foreign currency translation
adjustments.
Page 6
COL CHINA ONLINE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2003, no options had been granted under the 2000 plan.
Page 7
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. Our 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,
2003.
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 stage, 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 continuing 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. During the period ended March 31, 2003,
Migration provide project management service in a custom loyalty programme by
the application of kiosks solution for a shopping mall in Shanghai.
Disposal - COL International terminated the Education Net business in Wuhan by
disposal of its entire interest in and assets of Education Net for a total
consideration of Rmb750,000 (US$90,502) in July 2002 and since then the
operation of Education Net in Wuhan was ceased. Prior to the disposal of the
Wuhan operations, the Wuhan business, including Education Net, recorded an
operating loss of Rmb450,666 (US$54,380) from ordinary activities during the
year ended June 30, 2003, while the operating loss of the year ended June 30,
2001 and 2002 was Rmb3,284,835 and Rmb3,292,697, respectively. The non-recurring
transaction related to the disposal of Education Net resulted in gain on
disposal of equipment of Rmb385,690 (US$46,539) as well as a reduction of staff
welfare liabilities of Rmb436,479 (US$52,668), totaling Rmb822,169 (US$99,207),
which was included in the statement of operations, for the year ended June 30,
2003. COL International intends to dispose the two properties in Wuhan in near
future.
Page 8
Plan of Operations - Because the Company's past business model of
attempting to be the IT department for small and medium-sized businesses by
offering a broad range of IT services and of providing electronic commerce
services was not successful, the Company has been preparing a new business
model. Over the next 12 months, the Company intends to develop two IT businesses
through two divisions of the Company's Migration subsidiary.
The Company intends to offer IT and communications services to commercial
enterprises in and around Shanghai through its COL Convergence division. The COL
Convergence division is engaged in negotiations with Fibrelink, an
infrastructure network company owned by China Electric Corporation, to act as an
agent for the provider of IT and communications services. In addition, the
Company intends to offer kiosk solutions for customer loyalty programs for a
wide range of potential customers from retailers to multinational conglomerates
through its COL Interactive division. The COL Interactive division is engaged in
negotiations with the Shanghai lottery company to set up a loyalty program using
kiosk systems. When the Company's new business plan is formalized, and the above
negotiations processes are finalized, the Company intends to provide a
description of that plan in a report filed with the U.S. Securities and Exchange
Commission.
The Company has a negative cash flow from operating activities and is
seeking additional financing in order to satisfy its cash requirements. The
Company anticipates that it will require approximately Rmb6,000,000 (or
approximately US$724,000) in financing during the next 12 months to satisfy its
cash requirements for the development of the Company's new business plan. COL
International, through its Migration subsidiary, currently employs approximately
30 employees in China COL International may recruit more staff should the above
plan of operations are in place.
We anticipate purchases of equipment amounting up to approximately
Rmb2,000,000 (or approximately US$241,000) the coming year in order to implement
the Company's new business plan.
Results of Operations
Revenues for the three months ended September 30, 2003 include marketing
fees received from Shenzhen Rayes Group Co., Ltd. ("Rayes Group") of Rmb57,286
(US$6,913) compared to marketing fees of Rmb133,729 for the three months ended
September 30, 2002. For the three months ended September 30, 2003 and 2002, the
Company had no revenue generated from network installation. The Company had
business services revenue of Rmb898 for the three months ended September 30,
2002 but no revenues were derived for three months ended September 30, 2003. As
mentioned in the overview section above, Education Net was disposed during the
three months ended September 30, 2002 and, as a result, the business services
provided by the Education Net were terminated. No revenue was derived from
transaction fee from Construction Net or sale of software for the three month
periods ended September 30, 2003 and 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.
Page 9
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 Rmb302,829 and Rmb165,928(US$20,203) during the three
months period of September 30, 2002 and 2003, 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.
Other income for the three months ended September 30, 2003 was Rmb34,673
(US$4,184) as compared to Rmb834,803. Included in the other income for the three
months ended September 30, 2003, Rmb34,648 (US$4,181) represents the finance
income of a leased asset acquired during the quarter. During the quarter, the
Company acquired a system of computer network and software for generating lease
income with the cost of approximately Rmb1,976,000 (US$238,456) and the
corresponding net investment in the lease is presented in the consolidated
balance sheet with long-term portion of Rmb741,219 (US$89,444) and current
portion of Rmb988,294 (US$119,258).
General and administrative costs include salaries, rent, travel and other
overhead costs. For the three months ended September 30, 2002 and September 30,
2003, general and administrative costs totaled Rmb2,693,022 and Rmb1,945,732
(US$234,596), respectively. The decrease in these costs is due to the closing of
the Wuhan Branch of the Company, and the Company's ceasing to operate the
Construction Net site during the period.
Amortization and depreciation expense for the three months ended September
30, 2002 and September 30, 2003 was Rmb133,610 and Rmb176,490 (US$21,297),
respectively. The decrease represents the impairment loss provision of fixed
assets, mainly computer equipment, which accrued in the fourth quarter of the
fiscal year ended June 30, 2002.
The Company has not recognized any future tax benefits resulting from its
operating losses due to the uncertainty of future realization.
No share of loss has been absorbed by minority shareholder for the three
months ended September 30, 2003 as its initial capital contribution was fully
absorbed.
The above has resulted in net losses of Rmb2,160,423 and Rmb2,142,191
(US$258,483) for the three months ended September 30, 2002 and 2003,
respectively. The Company expects to continue to incur losses until its services
are more fully developed and accepted in China.
Liquidity and Capital Resources
As of September 30, 2003 and June 30, 2003, the Company had a negative
working capital of Rmb34,099 (US$4,114) and Rmb990,446, respectively. As of
September 30, 2003, advances from the majority stockholder totaled Rmb66,103,237
(US$7,976,740). The majority stockholder has signed a note agreement to provide
financial support up to US$8,000,000. Migration's ability to continue operations
is currently dependent upon continuing financial support from its majority
stockholder. The Company's management believes the majority stockholder will
continue to provide financial support to the Company even after the availability
under the note agreement is exhausted. Also included in liabilities at September
30, 2003 and June 30, 2003 is Rmb775,196 (US$93,544) and Rmb860,612,
respectively, incurred in connection with the purchase of office space and staff
quarters in Wuhan, China.
Page 10
Cash used in operating activities for the three months period ended
September 30, 2003 was Rmb3,230,385 (US$389,797) as compared with Rmb2,915,474
for the three months ended September 30, 2002. The cash used in operations was
to fund operating losses of Rmb2,160,423 and Rmb2,142,191 (US$258,483),
generally offset by non-cash expenses related to amortization and depreciation
of Rmb133,610 and Rmb176,490 (US$21,297), provision for staff welfare fund
written back of RmbNil and Rmb436,479 for the three months ended September 30,
2002 and 2003, respectively.
Cash used in investing activities for the three months ended September 30,
2002 was Rmb597,599 while a net outflow of cash for the three months ended
September 30, 2003 was Rmb24,794 (US$2,992) that was due to the purchase of
equipment.
Cash flows from financing activities have generally come from advances by
the majority stockholder of the Company. During the three months ended September
30, 2002 and 2003, the majority stockholder has advanced Rmb2,623,589 and
Rmb3,025,372 (US$365,056), respectively.
Critical Accounting Policies
The Company's significant accounting policies are described in note 2 to
the financial statements for the three months ended September 30, 2002 and 2003
included in the accompanying financial statements and notes to consolidated
financial statements. The Company believes its most critical accounting policies
include accounting for provision for doubtful debts and impairment loss
provision.
The Rmb533,014 (US$64,316) provision for doubtful debts as included in the
consolidated balance sheet as at September 30, 2003 are debts for which
recoverability are considered doubtful after due consideration and careful
assessment by the management of the Company. The provision was made for amounts
due from a minority stockholder of the Joint Venture. A specific write off of a
sundry debtor has been made during the quarter. The sundry debtor is a company
owned and controlled by Mr. Justin Jencks, the chief operating officer ("COO")
of the Company. Prior to Mr. Justin Jencks becoming the Company's COO, COL
intended to acquire his company, which was engaged in provision of technical
support for internet marketing business. In last year, COL intended to acquire
this company. RMB164,544 (US$19,854) and RMB558,265 (US$67,363) were then
advanced to that company in 2002 and 2003, respectively, for use in its
operations. However, due to adverse market condition, COL abandoned its plan of
acquisition and, instead, hired Mr. Justin Jencks as the chief operating officer
and consultant. These advances were then written off.
No provision for impairment loss on fixed assets is made for the three
months ended September 30, 2003, respectively, because the carrying value, net
of accumulated depreciation and impairment of Rmb10,193,012 (US$1,230,000) and
Rmb1,506,999 (US$181,851), respectively, of fixed assets are stated at its
recoverable amount at the period-end date estimated by the management.
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Item 3. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with participation of the Company's
management, including our Chief Executive Officer and Principal Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-14 (c) under the Securities Exchange Act of 1934). Based on
their evaluation, our Chief Executive Officer and Principal Financial Officer
have concluded that disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, there were not significant changes in the Company's internal
controls or in other factors that could significantly affect these controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
---------
-------------------- -------------------------------------------------
Exhibit No. Description
-------------------- ------------------------------------------------
31 Certifications of the Chief Executive Officer and
Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
-------------------- -------------------------------------------------
32 Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
-------------------- -------------------------------------------------
(b) Reports on Form 8-K.
--------------------
During the quarter ended September 30, 2003 the Company filed did not
file any Current Reports on Form 8-K.
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: December 10, 2003 By: /s/ Anthony Ng
---------------------------------
Anthony Ng
Chief Executive Officer
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