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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 September 30, 2001.
COL China Online International Inc.
(Exact name of small business issuer as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
333-39208 52-2224845
(Commission File Number) (IRS Employer Identification Number)
3177 South Parker Road
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)
Not Applicable
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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 [ ]
As of January 24, 2002, the Registrant had outstanding 50,155,000 shares of its
common stock, par value $0.0005.
Transitional Small Business Disclosure Format (Check One):
Yes [ ] No [X]
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COL China Online International Inc.
(A Development Stage Company)
FORM 10-QSB
September 30, 2001
Table of Contents
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 2001 and June 30, 2001 1
Condensed Consolidated Statements of Operations
for the three months ended September 30, 2001 and 2000 2
Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
--------------------------
PAGE NO.
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds;
Recent Sales Of Unregistered Securities 14
Item 5 Other Events 14
Item 6 Exhibits and Reports on Form 8-K 19
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
COL CHINA ONLINE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001
JUNE 30, 2001 (unaudited)
------------- --------------------------
(Rmb) (Rmb) (US$)
ASSETS (Illustrative Only)
------
CURRENT ASSETS:
Cash 1,858,434 514,964 63,170
Accounts receivable, with no allowance for doubtful
accounts 231,487 101,396 12,438
Inventories 45,000 34,500 4,232
Prepaid expense and other receivables 184,779 542,207 66,513
Due from minority stockholders 136,967 219,061 26,872
----------- ----------- -----------
Total current assets 2,456,667 1,412,128 173,225
PROPERTY, OFFICE SPACE AND EQUIPMENT, net of accumulated
depreciation of Rmb9,745,641 and Rmb10,954,487
(US$1,343,779), respectively 9,847,085 9,049,795 1,110,132
OTHER ASSETS:
Intangibles, net of accumulated amortization and
impairment of Rmb10,000,000 (US$1,226,693) -- -- --
Goodwill, net of accumulated amortization and
impairment of Rmb1,159,920 (US$142,287) -- -- --
----------- ----------- -----------
Total other assets -- -- --
----------- ----------- -----------
TOTAL ASSETS 12,303,752 10,461,923 1,283,357
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of mortgage loans payable 313,271 317,517 38,950
Accounts payable and accrued expenses 1,699,522 2,427,923 297,832
Billings in excess of costs and estimated earnings on
uncompleted contracts 86,265 -- --
Taxes payable 175,693 186,768 22,911
----------- ----------- -----------
Total current liabilities 2,274,751 2,932,208 359,693
NOTES PAYABLE:
Majority Stockholder 39,585,464 43,119,987 5,289,498
Mortgage loans payable - net of current portion 1,191,141 1,110,155 136,182
----------- ----------- -----------
Total notes payable 40,776,605 44,230,142 5,425,680
Minority Interest In Subsidiaries -- -- --
STOCKHOLDERS' DEFICIENCY:
Preferred stock, US$0.001 par value, 5,000,000 shares
authorized, none outstanding -- -- --
Common stock, US$0.001 par value, 100,000,000 shares
authorized, 40,200,000 and 50,155,000 shares
issued and outstanding, respectively 327,710 408,864 50,155
Additional paid-in capital 79,890 1,214,118 148,935
Accumulated deficit (31,161,454) (38,329,659) (4,701,873)
Accumulated other comprehensive income 6,250 6,250 767
----------- ----------- -----------
Total stockholders' deficiency (30,747,604) (36,700,427) (4,502,016)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY 12,303,752 10,461,923 1,283,357
=========== =========== ===========
See accompanying notes to these condensed consolidated financial statements
1
COL CHINA ONLINE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED
-----------------------------------------
SEPTEMBER
30, 2000 SEPTEMBER 30, 2001
----------- --------------------------
(Rmb) (Rmb) (US$)
(Illustrative Only)
NET REVENUES:
Computer network installations -- 147,311 18,071
Transaction fee -- 13,021 1,597
Business services revenue -- 651 80
Sale of software -- 22,378 2,745
Marketing fees, minority stockholder 79,185 73,123 8,970
----------- ----------- -----------
Total revenues 79,185 256,484 31,463
COST OF SALES:
Computer network installations -- 109,521 13,435
Transaction costs -- 11,300 1,386
Business services costs -- 4,440 545
Cost of software sold -- 10,500 1,288
Communication costs 100,582 234,511 28,767
----------- ----------- -----------
100,582 370,272 45,421
----------- ----------- -----------
Gross Margin (21,397) (113,788) (13,958)
OPERATING EXPENSES:
Research and development 142,030 -- --
General and administrative 1,193,810 2,217,378 272,004
Amortization and depreciation 1,708,797 1,208,846 148,288
----------- ----------- -----------
Total operating expenses 3,044,637 3,426,224 420,292
----------- ----------- -----------
OPERATING LOSS (3,066,034) (3,540,012) (434,250)
Other income -- 1,817 223
----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST (3,066,034) (3,538,195) (434,027)
Minority interest 53,582 -- --
----------- ----------- -----------
NET LOSS (3,012,452) (3,538,195) (434,027)
=========== =========== ===========
Basic Net Loss Per Share (0.07) (0.08) (0.01)
------------------------ =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES 40,200,000 42,195,814 42,195,814
=========== =========== ===========
See accompanying notes to these condensed consolidated financial statements
2
COL CHINA ONLINE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------------------
SEPTEMBER
30, 2000 SEPTEMBER 30, 2001
---------- ------------------------
(Rmb) (Rmb) (US$)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (3,012,452) (3,538,195) (434,027)
Adjustments to reconcile net loss to net cash used
in operating activities:
Minority interest (53,582) -- --
Amortization and depreciation 1,708,797 1,208,846 148,288
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivables 60,626 130,091 15,958
Other assets (119,751) (357,428) (43,845)
Inventories -- 10,500 1,288
Increase (decrease) in:
Accounts payable and accrued expenses (44,377) 267,086 32,763
Taxes payable (28,857) 11,075 1,359
Billings in excess of costs and estimated
earnings on uncompleted contracts -- (86,265) (10,582)
---------- ---------- ----------
Net cash used in operating activities (1,489,596) (2,354,290) (288,798)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (142,605) (411,556) (50,485)
Purchase of Construction Net (281,964) -- --
Net cash acquired in acquisition of COL
International under reverse acquisition -- 63,308 7,766
---------- ---------- ----------
Net cash used in investing activities (424,569) (348,248) (42,719)
CASH FLOWS FROM FINANCING ACTIVITIES:
Mortgage loans (repayments) (9,286) (76,740) (9,414)
Advances from Majority Stockholder 1,622,021 1,520,979 186,577
Minority stockholders interest and advance 374,427 (82,094) (10,070)
---------- ---------- ----------
Net cash provided by financing activities 1,987,162 1,362,145 167,093
---------- ---------- ----------
Effect Of Exchange Rate Changes On Cash -- (3,077) (378)
--------------------------------------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH 72,997 (1,343,470) (164,802)
---------- ---------- ----------
CASH, beginning of period 661,002 1,858,434 227,972
---------- ---------- ----------
CASH, end of period 733,999 514,964 63,170
========== ========== ==========
Cash Paid For Interest 3,780 20,196 2,477
========== ========== ==========
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
3
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 to be used in the business
of Migration. 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. However, for accounting purposes, this transaction is
treated as a reverse acquisition, whereby Migration is considered as an
acquirer. No goodwill is recorded in the merger. The accompanying condensed
consolidated financial statements of the Company have been prepared to
reflect 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. It has two subsidiaries, 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 have 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
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.
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 except for certain
accounting policies used by Migration as detailed below. 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 which was filed
November 15, 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 September 30, 2001 and the results
of its operations and cash flows for the quarter 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 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, 2001 represent the financial statements
of Migration. The historical stockholders' equity accounts of the Company
as of June 30, 2001 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 September 30, 2001 and condensed
consolidated statement of operations for the three months ended September
30, 2001 have been translated into US dollars at approximately 8.152 Rmb to
the dollar, which was the exchange rate at September 30, 2001.
Property, Office Space and Equipment - Property, office space and equipment
are recorded at cost. Depreciation is computed using the straight-line
method over the estimated useful life of the assets, generally twenty years
for property, three years for computer equipment and five years for office
space and other equipment. Repairs and maintenance are charged to expense
as incurred. Material expenditures, which increase the life of an asset,
are capitalized and depreciated over the estimated remaining useful life of
the asset. The cost of equipment sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current operations.
Depreciation expense charged to operations was Rmb1,159,326 and
Rmb1,208,846 (US$148,288) for the three months ended September 30, 2000 and
September 30, 2001, respectively.
Software Development - The Company is engaged in the development of
software in the design and development of its current websites. In
accordance with Emerging Issues Task Force (EITF) 00-2, Accounting for Web
Site Development Costs, the Company expenses all preliminary stage costs
associated with its website development as research and development
expense, capitalizes application development costs (excluding training and
data conversion) and will expense all operating costs after preliminary and
development stages are complete.
5
COL CHINA ONLINE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition - The Company recognizes revenue at the time the
service is rendered or product is delivered and collection is reasonably
assured, which generally approximates the time it is accepted by the
customer. For website development and hosting, the Company follows EITF
00-3, Application of AICPA Statement of Position 97-2, Software Revenue
Recognition, to Arrangements That include the Right to Use Software Stored
on Another Entity's Hardware, whereby revenues will be recognized over the
life of contract or the expected life of the customer relationship,
whichever is longer.
Revenues from computer network installation contracts are recognized on the
percentage-of-completion method for individual contracts, commencing when
progress reaches a point where experience is sufficient to estimate final
results with reasonable accuracy. Management estimates percentage of
completion based on units installed to date to total units to be installed
for each contract. Units generally are computer network "jacks". Changes in
job performance, estimated profitability, and final contract settlements
may result in revisions to costs and income, and are recognized in the
period in which the revisions are determined. The liability, "Billings in
excess of costs and estimated earnings on uncompleted contracts",
represents amounts billed in excess of revenues recognized.
Contract costs relating to computer network installations include all
direct materials, subcontracts, labor costs and those indirect costs
related to contract performance. General and administrative costs are
charged to expense as incurred.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss on both short and long-term contracts is accrued.
Business services revenue includes fees for subscription-based hosting
services and membership programs. Revenues are recognized in the period in
which the service is performed.
Transaction fee is generated from the sale of merchandise placed on the
websites and is recognized when the service is rendered.
Intangibles and Goodwill - Intangibles represent the amount paid for the
rights to market certain internet provider services and the rights to use
the name "COL China Online". This amount is being amortized, using the
straight-line method, over its estimated useful life of five years.
Amortization expense was Rmb500,001 and nil for the three months ended
September 30, 2000 and September 30, 2001, respectively. Impairment loss
had been fully provided for in the net book value as of June 30, 2001.
Goodwill recognized in acquisitions accounted for as purchases is being
amortized on a straight-line basis over a 5 year period. Amortization
expense was Rmb49,470 and nil for the three months ended September 30, 2000
and September 30, 2001, respectively. Impairment loss has been fully
provided for in the net book value as of June 30, 2001.
Impairment of Long-Lived Assets - In the event that facts and circumstances
indicate that the carrying value of long-lived assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is required.
Inventories - Inventories are finished goods, which are stated at the lower
of cost or market. Cost is determined by the use of weighted average cost
method.
6
COL CHINA ONLINE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Translation of foreign currencies - All asset and liability accounts of
foreign subsidiaries are translated into Renminbi at appropriate year-end
current rates and all income and expense accounts are translated at rates
that approximate those rates prevailing at the time of the transactions.
The resulting transaction adjustments are accumulated as a component of
accumulated other comprehensive income.
Foreign currency receivables and payables are translated at appropriate
year-end current rates and the resulting translation gains or losses are
taken into income currently.
Use of Estimates - The preparation of the Company's condensed consolidated
financial statements in conformity with generally accepted accounting
principles requires the Company's management to make estimates and
assumptions that affect the amounts reported in these financial statements
and accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments under Statement of Financial Accounting Standards
(SFAS) No.107, Disclosures about Fair Value of Financial Instruments, are
determined at discrete points in time based on relevant market information.
These estimates involve uncertainties and cannot be determined with
precision. The estimated fair values of the Company's financial
instruments, which includes cash, accounts receivable and accounts payable,
approximates their carrying value in the financial statements. The fair
value of advances from the Company's major stockholder, which are without
interest, cannot be estimated due to the relationship between the entities.
7
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 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.
8
COL CHINA ONLINE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Comprehensive Income
--------------------
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 for the quarter ended September 30, 2001 represented
foreign currency translation adjustments.
5. Net Loss Per Share
------------------
Basic 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, 2001, no options had been granted under the 2000 plan.
6. Accumulated Deficit
-------------------
The acquisition of Migration by COL International on September 24, 2001 has
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, the
accumulated deficit of COL International of RMB3,630,010 (US$445,291) at
the date of acquisition has been recorded in the accumulated deficit of the
combined entities.
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 our 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.
9
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 differences include those discussed
below.
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.
Gong 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 as
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 reflect 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 systems (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.
10
Plan of operations - During the next 12 months, COL International intends to
pursue the followings:
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.
Results of Operations
Revenues for the three months ended September 30, 2001 include installation
revenue of Rmb147,311 (US$18,071) and marketing fees received from Shenzhen
Rayes Group Co., Ltd. ("Rays Group") of Rmb73,123 (US$8,970) compared to
installation revenues of nil and marketing fees of Rmb79,185 for the three
months ended September 30, 2000. 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 September 30, 2001, the Company had
a gross margin of approximately 26 percent based on costs of Rmb109,521
(US$13,435), whereas for the three months ended September 30, 2000, the Company
did not derive any revenue from installation contracts. In addition,
Construction Net and Education Net have contributed transaction fees of
Rmb13,021 (US$1,597) and business services revenue of Rmb651 (US$80)
respectively for the three months ended September 30, 2001. Both Construction
Net and Education Net were launched during the year ended June 30, 2001,
however, no significant revenues have been generated to date. For the three
months ended September 30, 2001, the Company began to derive revenue from sales
of design software in the amount of Rmb22,378 (US$2,745) with a gross profit of
53 percent.
11
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 Rmb100,582 and Rmb234,511 (US$28,767) during the three
months ended September 30, 2000 and September 30, 2001, 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.
During the three months ended September 30, 2000 and September 30, 2001,
Migration incurred Rmb142,030 and nil of research and development costs. 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 September 30, 2000 and September 30,
2001, general and administrative costs totaled Rmb1,193,810 and Rmb2,217,378
(US$272,004), respectively. These costs are increasing as the Company continues
to expand its business services.
Amortization and depreciation expense for the three months ended September
30, 2000 and September 30, 2001 was Rmb1,708,797 and Rmb1,208,846 (US$148,288),
respectively. The decrease represents the impairment loss provision of
intangibles for 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,
Rmb53,582 of losses is offset against the minority interest's capital
contribution of Rmb446,581 for the three months ended September 30, 2000. No
share of loss has been absorbed by Shangyi's minority interest holder for the
three months ended September 30, 2001 as its initial capital contribution was
fully absorbed.
No share of loss has been absorbed by the Joint Venture's minority interest
holder, Rayes Group, for the three months ended September 30, 2001 and September
30, 2000 as its initial capital contribution was fully absorbed.
The above has resulted in net losses of Rmb3,012,452 and Rmb3,538,195
(US$434,027) for the three months ended September 30, 2000 and September 30,
2001 respectively. The Company expects to continue to incur losses until its
services are more fully developed and accepted in China.
12
Liquidity And Capital Resources
As of September 30, 2001 and June 30, 2001, the Company had negative and
positive working capital of Rmb1,520,080 (US$186,468) and Rmb181,916,
respectively. As of September 30, 2001, advances from the majority stockholder
totaled Rmb43,119,987 (US$5,289,498). 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 September 30, 2001 and June 30, 2001 is Rmb1,427,672 (US$175,132)
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 three month period ended
September 30, 2001 was Rmb2,354,290 (US$288,798) as compared with Rmb1,489,596
for the three months ended September 30, 2000. The cash used in operations was
to fund operating losses of Rmb3,012,452 and Rmb3,538,195 (US$434,027),
generally offset by non-cash expenses related to amortization and depreciation
of Rmb1,708,797 and Rmb1,208,846 (US$148,288) for the three months ended
September 30, 2000 and September 30, 2001, respectively.
Cash flows from investing activities for the three months ended September
30, 2000 and September 30, 2001 was Rmb424,569 and Rmb348,248 (US$42,719),
respectively. For the three months ended September 30, 2000, after receiving
regulatory approval, the purchase of a company developing a website
(Construction Net) in which the Company has 70 percent interest, was completed.
The total purchase price for this entity was Rmb 1,457,140 (or approximately US$
176,000). A purchase deposit of Rmb1,020,000 (or approximately US$123,000) was
advanced during the period ended June 30, 2000 and an additional net amount of
Rmb 281,964 (or approximately US$ 34,000) 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 three months ended September
30, 2000 and September 30, 2001, the majority stockholder has advanced
Rmb1,622,021 and Rmb1,520,979 (US$186,577), respectively.
13
PART II. OTHER INFORMATION
--------------------------
Item 2. Changes in Securities and Use of Proceeds; Recent Sales Of Unregistered
Securities
In July 2001, the Corporation completed its self-underwritten initial
public offering of common stock. The Corporation sold 1,655,000 shares of common
stock in this offering at $.05 per share for total proceeds of $82,750. All net
proceeds from this offering were used to pay costs associated with the offering.
Approximately $146,000 of expenses were incurred that were directly related to
the public offering. Costs in excess of the offering proceeds were expensed in
operations as incurred. The offering expenses were primarily professional fees
paid for attorneys and accountants. No payments for expenses were made to
directors or officers of the Corporation or their affiliates, to other persons
owning more than 10 percent of the Corporation's stock, or to affiliates of the
Corporation.
The public offering was undertaken pursuant to the Corporation's
registration statement on Form SB-2 (SEC File Number 333-39208) that was
declared effective by the SEC on February 8, 2001. The registration statement
covered the sale of up to 2,000,000 shares of common stock by the Corporation
and the resale of 1,250,000 shares of common stock by selling stockholders.
Item 5. Other Events
Recent Business Developments
The Company is a provider of a wide range of Information Technology (IT)
solutions to Small and Medium Size Enterprises (SMEs) in China. Its offerings
include network engineering services, broadband Internet Service Provider (ISP)
services, web hosting through its internet data center, business-to-business
e-commerce and strategic business information.
The Company continues to develop the following six business lines:
1. Business Solutions Provider
Recently, the Company has been further developing its focus on providing a
system of "Total IT Solutions" to small and medium sized enterprises, or SMEs.
The Company initiated a new program to "bundle" its various products into
useful and economical IT packages. These packages will give SMEs broadband
connectivity to the internet, together with value-added services that range from
web hosting to software applications to the ability to conduct e-commerce
online.
Initial sales of these new services began in late September 2001 in several
price ranges to meet differing corporate needs. They are designed to suit
Chinese enterprises ranging from start-up companies with simple connection and
maintenance needs to more established firms requiring e-commerce applications
and ISDN connectivity.
The program was inaugurated during the quarter, and negotiations are still
underway with some applications providers for the provision of software for
Enterprise Resources Planning or Voice over VPN (Virtual Private Networks).
14
The Company initially rolled out three bundled programs, with more
currently being developed. The packages are sold as memberships. The Memberships
combine an ISDN internet connection with other services such as web hosting,
building a corporate website, installing the physical corporate network, onsite
maintenance, e-commerce software and business information.
The first membership packages ranged from Rmb 580 (US$69.90) to Rmb 980
(US$118) monthly. Paying members include two Shanghai companies, Yi Bo
Electrical Technology Co., Ltd. and Vancouver Food Co., Ltd.
The Company is working to expand its product offerings in the coming months
to meet the needs of companies that are looking for more sophisticated
applications, such as Enterprise Resource Planning (ERP) software.
The Company is continuing negotiations with leading hardware and software
developers to be a reseller of their software. The software companies range from
Intuit Inc., developer of QuickBooks accounting software, to Multiactive
Software Inc., the builder of popular Maximizer Customer Relationship Management
(CRM) software. To date, no agreements have been finalized with these companies.
COL is also focused on improving its broadband connectivity offering, and
is currently negotiating with major telecommunications providers to offer ADSL
and wire networks as part of Fiber to the Building (FTTB) programs.
2. Network Engineering
The Company has expanded its business to develop and install network
systems for corporate and government offices. COL has technical teams in the
cities of Shanghai and Wuhan to build and maintain these networks.
COL is able to develop and install network systems, together with the
related hardware and software applications. The technical department, which
consists of information technology professionals, can design specialized
software or personnel and financial administration systems for enterprises. It
designs, installs and maintains office network systems.
In Wuhan, during the quarter ended September 30, 2001, the Company signed a
contract with Evergreen Secondary School for a broadband network for Rmb 1.6
million (US$ 192,770). The Company also completed a contract to build a network
for East Lake School for Rmb 211,000 (US$25,420).
The Company intends to pursue additional school contracts in the future due
to its close partnership with the Wuhan Education Commission in one of the
largest educational websites in China (www.whedu.com.cn). There is no assurance
that any such contracts can be consummated. The website, developed by the
Company, allows students to follow their courses online. The municipal
government has decreed that all of Wuhan's 440 secondary schools and its 1,200
primary schools will have broadband connections by 2005. Most of those
connections have yet to be installed.
The Company expanded its network engineering business into Shanghai in late
2000. Business expanded during the September quarter, when the Company signed
contracts for new network engineering projects. New clients during the quarter
include Shanghai Railway Transportation, which contracted with COL to build an
intranet for Rmb 50,944 (US$ 6,140) for its management office, Tokyo Precision
Ltd., and Shanghai Yong Xin Machinery Technology Co., Ltd.
15
The Company intends to build on this in Shanghai, where the municipal
government plans to have all major buildings in the city center linked by
fiber-optic cable by the end of 2002. By next year, Shanghai also aims to raise
the number of internet users to 30 percent of the population, or four million
people, a four-fold increase from 2000.
3. Web Hosting
The Company increased its web hosting business in Shanghai during the past
quarter. It has also carried out physical and technical improvements to its data
center during the relevant quarter following a major expansion in its bandwidth
capacity earlier this year.
The Company has the ability to design sophisticated web sites and then to
house them in its own data center. The Company offers packages that allow
business owners to put their website on one of COL's servers, or house their
servers in COL's data center. For example, the data center houses servers of the
Shanghai Fire Protection Bureau as well as one of the University of Finance and
Economy in Shanghai.
The data center offers secure server storage with technical staff on duty
24 hours a day, seven days a week. During the last quarter, additional
improvements were made to the center, which improved security and virus
protection for the hosted servers.
The data center is an important segment of the "Total IT Solutions" package
being promoted by the Company, as the packages include a website that will be
hosted in COL's data center. Companies that do not have their own technical
staff can outsource their networking and web hosting requirements to COL.
Examples of new web hosting clients during the quarter include a Shanghai
electrical supplies company and a Shanghai technology company, which both began
paying Rmb 9,600 (US$1,160) monthly for hosting services. COL also builds
websites. One typical new client during the quarter was a Shanghai plastics
company, which paid Rmb 20,000 (US$2,410) to have COL build its corporate
website.
As well, negotiations are currently underway regarding co-operation with a
data center company in another Chinese city that could result in additional
servers' being housed in COL's data center. No contacts were signed by the end
of the quarter.
4. Internet Service Provider (ISP) services
The China Online internet connections are offered through the ISP license
provided by the joint venture's Chinese partner, the Rayes Group. The growth of
this business had historically been limited by relatively low bandwidth, as
private ISP operators had in recent years faced restrictions on bandwidth
available from dominant China Telecom.
With the gradual relaxation of regulatory controls and the proliferation of
bandwidth in China over the past year, the bandwidth availability problem eased
significantly starting in mid-2001, giving the Company far better growth
opportunities. The Company now has a 100 mbps connection, up from just 1 mbps a
year earlier, with additional capacity available.
16
While COL's ISP had for years been a simple dial-up services, the Company
has been moving to add higher-speed connections. Its new bundled IT packages
include an ISDN (Integrated Services Digital Network) line for the ISP
connection.
The Company has also begun offering DDN (Digital Data Network) connections,
which offer higher bandwidth and synchronous communications. They are useful for
applications such as multimedia and high-speed internetworking. New customers
contracted during the relevant quarter include a major advertising agency and an
electrical company, which pays Rmb 9,800 (US$1,180) per month for the broadband
connection.
The Company is in negotiations to add additional broadband technologies to
its lineup, including ADSL (Asymmetric Digital Subscriber Line) and FTTB
(Fiber-to-the-Building). The purpose is to give COL the Company the latest
technology and keep it competitive. No commitments have been entered into at
this time.
5. Construction Net
The joint venture is the majority shareholder of an online and offline
platform for trading construction materials, known as Construction Net. The
website is www.col173.com, which complements offline sales outlets being
developed in six major cities in China.
The Joint Venture holds this business through its 70 percent equity
holdings in Shanghai Shangyi Science and Trade Information Consulting Co., Ltd.
Shangyi owns and operates the www.col173.com website, which offers building
materials for sale. Through a co-operation agreement with a Korean software
developer, Shangyi has started to sell software for interior design modeling in
China.
In July, Shangyi reached agreement with the owners of five major
construction materials markets in China to develop an integrated construction
materials marketplace in some Chinese cities. If revenues in each marketplace
reach levels set in the agreement, all parties will seek to create a publicly
listed company in which Shangyi would hold a 25 percent stake.
The first two marketplaces opened during the current quarter in two cities,
Chengdu in Sichuan province and Changchun in Jilin province. The Chengdu market
is focusing on selling wood in Sichuan, which has a population of 100 million
people. The Changchun market is selling general construction materials in the
large northeastern-Chinese city.
Markets are due to open in early 2002 in Zhengzhou, in central Henan
province, and Jingzhou, Hubei province, which is near the giant Three Gorges Dam
project on the Yangtze River.
Construction is currently underway on new markets in Hefei, Anhui province,
and Changzhou, in Jiangsu province.
6. Online Education And Training
The joint venture has created one of the largest educational websites in
China called Education Net (www.whedu.com.cn). It is operating in the city of
Wuhan where the students at the city's secondary schools are able to follow
their classroom studies with additional material offered through the website.
17
The municipal government has decreed that all of Wuhan's 440 secondary
schools and its 1,200 primary schools will be linked to the system by a
broadband connection by 2005.
The website is currently being completed by a development team working in
the joint venture's Wuhan office. They are working on course materials provided
by about 25 leading local teachers.
The site currently holds more than 10,000 pages of course materials. It
carries lessons such as mathematics and science prepared by the teachers,
together with sample local examinations.
The joint venture currently is preparing access cards, which it will begin
selling to the students. The access cards provide access to the internet and to
www.whedu.com.cn and will be sold directly to the students. As the access cards
are still being prepared, the joint venture has received no revenues from this
business to date. The business is expected to be further developed in 2002 as
the marketing campaign develops.
Students will be charged Rmb 50 per month to connect to this service. The
joint venture will receive 50 percent of the revenues from internet access fees
through telephone modems and 50 percent of the revenues for internet access fees
through cable modems.
Disclosure Regarding Forward-Looking Statements And Cautionary Statements
Forward-Looking Statements
This Quarterly Report on Form 10-QSB includes "forward-looking statements."
All statements other than statements of historical fact included in this
Quarterly Report, including without limitation under Part I, Item 2:
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Part II, Item 5: "Other Events", regarding the Company's
financial position, business strategy, plans and objectives of the Company's
management for future operations and capital expenditures, and other matters,
other than historical facts, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements and the assumptions upon which the forward-looking statements are
based are reasonable, the Company can give no assurance that such expectations
will prove to have been correct.
Additional statements concerning important factors that could cause actual
results to differ materially from the Company's expectations are disclosed in
the "Cautionary Statements" section and elsewhere in the Company's Annual Report
on Form 10-KSB for the year ended June 30, 2001 filed with the Securities and
Exchange Commission. All written and oral forward-looking statements
attributable to the Company or persons acting on the Company's behalf subsequent
to the date of this Quarterly Report are expressly qualified in their entirety
by those Cautionary Statements.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
---------
None.
(b) Reports on Form 8-K.
--------------------
On November 9, 2001, which was subsequent to the quarter ended
September 30, 2001, the Company filed a Current Report on Form 8-K
reporting the completion of the acquisition of Migration Developments
Limited, which acquisition was consummated on September 24, 2001. On
January 29, 2002, the Company filed an amendment to that Form 8-K
which amendment included financial statements and pro forma financial
information concerning the effect of the acquisition.
18
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: January 28, 2002 By: /s/ Brian M. Power
--------------------------------------
Brian M. Power
Chief Executive Officer
19