UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 000-28705
CATHAYONLINE INC.
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(Exact name of registrant as specified in its charter)
Nevada 88-0346952
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
437 Madison Avenue, 33rd Floor
New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 888-6822
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
(Title of class)
Common Stock, par value $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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As of September 22, 2000, the aggregate market value of voting stock held
by non-affiliates of the registrant, based upon the price at which the
registrant's common stock was sold as reported on the Nasdaq Bulletin Board, was
approximately $7.54 million.
The number of shares of registrant's common stock outstanding as of
September 22, 2000 is 30,184,201.
PART I
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or part thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Form 10-K is incorporated from the registrant's Proxy Statement for
its 2000 Annual Meeting of Shareholders.
This Annual Report on Form 10-K contains forward-looking statements based
on our current expectations about our company and our industry. You can identify
these forward-looking statements when you see us using words such as "expect,"
"anticipate," "estimate" and other similar expressions. These forward-looking
statements involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the risk factors described in this report. We undertake no obligation
to publicly update any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
As used herein, "CathayOnline" or the "Company" includes CathayOnline Inc.
and its subsidiaries, unless the context requires otherwise.
We publish our financial statements in United States dollars. In this Form
10-K, any figure which is denominated, by contract or otherwise, in Canadian
dollars or Chinese Renminbi has been converted into U.S. dollars at the exchange
rate on June 30, 2000. At June 30, 2000, CAN$1 was convertible into US$0.6750,
based on a fixed exchange rate of CAN$1.4798 for each U.S. dollar, and one
Chinese Renminbi was convertible into US$0.1208, based on a fixed exchange rate
of RMB 8.2782 for each U.S. dollar. (All Canadian currency information is based
on exchange rates reported by the Federal Reserve Statistical Release dated July
3, 2000.)
ITEM 1. BUSINESS.
OVERVIEW.
We are a fully integrated Internet company serving the global Chinese
community, with a primary focus on the People's Republic of China. We launched
our Internet initiatives in China in the Spring of 1999. To date, we made
significant inroads in developing our Internet infrastructure in China while
focusing on recruiting quality personnel, raising capital and developing strong
regional and local partners and global strategic relationships. Through the
leadership of our management team, our focus on execution of our business plan,
our attention to the market's needs, our local partnerships and strategic
acquisitions, joint ventures as well as alliances with leading global
corporations, we have established a solid foundation in China.
We focus on these lines of business:
o Internet connectivity and value-added Internet technology services in
Sichuan Province, Beijing, and Guangdong Province, China; and
o Internet communication services including Web-based e-mail, advanced
messaging services, Fax over Internet (FoIP) and Voice over Internet
(VoIP).
Our goal is to become a major Internet service and solutions provider in
China. We are pursuing this goal by developing recognition of our brands,
expanding our Internet connectivity and communications services to our
registered and potential customer base across China's major urban markets,
continuing to pursue strategic acquisitions and alliances, and acquiring
experienced and quality management and support teams.
Our network consists of the following branded Internet properties:
o CathayOnline.com, our flagship corporate Web site;
o TorchMail.com, our e-mail and advanced messaging service; and
o Guoxun.net and Torchnet.com, our Internet services partners in the Sichuan
Province and currently expanding into Beijing and Guangdong Province.
Through these established brand names, we intend to offer customers
Internet services and communications, other value-added Web-based commercial
services, business-to-business (B2B) tools and a variety of communication tools.
We currently provide Internet services in Sichuan, one of China's most
populated provinces with approximately 85 million residents. The technology
center for our Sichuan operations is located in Chengdu (Sichuan's capital), a
central hub for business and technology in southwestern China. In May 2000, we
took possession of office space for our China operations in the nation's
capital, Beijing, which represents a major step forward in the expansion of our
branded Internet services network and advanced e-mail services into China's
urban markets.
Summarized below are the milestones we achieved during the fiscal year
ended June 30, 2000.
- July 1999: We acquired TorchMail.com, Inc.
- August 1999: We established Sichuan CathayOnline Technologies Co. Ltd. to
provide Internet services.
- August 1999: Sichuan CathayOnline expanded its offices and Internet
services to markets in Chengdu, China.
- November 1999: We entered into an agreement with Register.com to provide
domain name registration services.
- December 1999: We launched a Chinese version of TorchMail.com.
- February 2000: Mr. Keli Wu of ChinaOnline joined Beijing operations as
Chairman of Beijing CathayOnline Technologies Co. Ltd.
- March 2000: TorchMail.com signed an agreement with the National Library of
China to provide e-mail and advanced messaging services.
- April 2000: We entered into a joint venture with CMD Capital Limited to
create PRCinvest.com, a financial news Internet content portal being
developed with China Investment Journal.
- April 2000: We completed a private placement of our shares which raised
$6.8 million (before financing costs).
- April 2000: We announced the signing of a cooperation agreement with the
Second Institution of the Aerospace Machine & Electronic Group to provide
Internet services in Beijing.
- May 2000: We completed phase one of upgrade of the Internet services
facilities in Chengdu, China.
- May 2000: We entered into a cooperation agreement with Wuyi University of
Jiangmen to expand Internet services to Guangdong Province.
- May 2000: Beijing CathayOnline took possession of its Beijing offices to
serve as our headquarters in China and began to set up its technology site
for Internet services.
- June 2000: We sold our interest in CMD Capital Limited and developed a
strategic alliance with Premier Brands Inc. (now known as CathayOne Inc.)
THE INTERNET MARKET IN CHINA
The Internet has become an important global medium that enables millions of
people to obtain and share information and conduct business electronically. In
China, improvements in technological infrastructure, the increase in access to
personal computers and a rapid increase of online Chinese language contents is
driving the growth of the Internet. The number of Web sites hosted in China has
grown from 3,700 in 1994 to 27,289 in 2000.
The number of people using the Internet in China, the world's most populous
nation, has increased more than 30 fold in just five years. According to "The
Internet in China", a study published in June 1999 by the Strategis Group and
BDA China, China is the fastest-growing Internet market in Asia. The study
estimated that, by the end of 1999, more than 6.7 million people in China had
Internet access, a number projected to grow to 33 million or more by 2003. Some
forecasts project up to 100 million users by 2010, at which time China would
surpass the United States as the country with the most Internet users. A recent
study by a U.S.-based research company, The Yankee Group, predicts that China
will have more Internet users than any other Asia-Pacific nation by 2001, with
about 40 million people online; and by 2005, China should surpass the United
States in having the most Internet users in the world. In addition, the Chinese
market for personal computers is expected to become the largest in the world
with personal computer sales anticipated to exceed those in the United States
this year.
ChinaNet, the first commercial Internet Services Provider (ISP) in China,
was established in June 1995 in Beijing to provide Internet dial-up service.
Within one year, its user-base increased from zero to 50,000 even though the
average subscription fee per subscriber was 20 times higher than that in North
America.
Access to the Internet in China is accomplished primarily through the
government owned infrastructure. China's Internet is primarily made up of five
largely separate national networks. Until March 1997, these networks had
virtually no interconnectivity - all inter-network traffic had to be routed via
the United States.
Over the last several years, due to China's central and provincial
governments' policies and initiatives to construct and modernize the
telecommunications industry and information distribution system, licenses have
been granted to private organizations to provide Internet-access services. In
October 1999, an estimated 150 private ISPs operated in China. Access services
in China are generally limited to dial-up modem access. Dial-up modem access,
unlike dedicated high-speed connections, requires a user's computer to dial a
number which connects the user to a network owned and maintained by the ISP. The
majority of commercial users access the network via dial-up accounts that
support speeds of up to 33.6K. All ISPs in China rely on the national
telecommunications companies, such as China Telecom and China Unicom, to provide
Internet access lines and to maintain local telecommunications lines.
According to the July 2000 report of China Internet Network Information
Center ("CNNIC"), a department of the Chinese Academy of Sciences, 88% of
Internet users cited e-mail as their favorite Internet service. According to a
1999 survey by Greenfield Online, 59% of online users now prefer sending an
e-mail to making a phone call. A United States Embassy report on the Internet in
China indicates that over 9% of information carried by Internet circuits in
China are devoted to e-mail.
The Chinese government has already invested over $28 billion on more than
100,000 kilometers of optical fiber that now links 85% of the country. The
China-U.S. Cable Network project, valued at $1.2 billion, will be the first
direct fiber-optic link between China and the United States and is expected to
be completed shortly.
CNNIC's latest report provides the following data for July, 2000:
- Total computers connected to the net: 6,500,000
- Total direct connections: 1,010,000
- Total dial-up connections: 5,490,000
- Total estimated dial-up users: 11,760,000
- Total estimated leased line users: 2,580,000
- Total estimated users with both leased line and dial-up: 2,560,000
- Total Internet users: 16,900,000
The Ministry of Information Industry of China is encouraging Chinese
language Web presence for electronic resources, ranging from search engines to
weather services. The Chinese government has also initiated a series of projects
that will employ state-of-the-art technology in areas such as education,
agricultural planning, healthcare and finance.
BUSINESS AND REVENUE MODEL
Our business model consists of basic, high demand Internet utility services
as well as a multitude of value-added Internet services and solutions targeting
large groups of Internet users from mid-size to large corporations, government
agencies and universities in urban areas in China. We are organized into three
service divisions which plans to generate revenues through fees by offering the
following services:
Connectivity: User fees for connection to the Internet.
Communications: User fees for providing outsourced e-mail and other
advanced communications products.
Value-added Internet Services: Fees for providing Web and data hosting
services.
CONNECTIVITY
We are committed to providing reliable connectivity to Internet users.
Through an exclusive Management and Consultancy Service Agreement with Sichuan
Guo Xun Xin Xi Chan Ye You Xian Gong Si ("Sichuan Guo Xun"), a local Internet
service provider, Sichuan CathayOnline provides a full range of Internet
connectivity services to the Sichuan market under the Sichuan Guo Xun brand. In
consideration of the services we render to Sichuan Guo Xun, we are entitled to
receive a fee equal to 90% of the net profits generated from Sichuan Guo Xun's
operations. The agreement with Sichuan Guo Xun extends through March 2003 and
will be automatically renewed for a period equal to the renewed term of the
license.
At October 31, 1999, under the Sichuan Guo Xun brand, Sichuan CathayOnline
served approximately 2,500 subscribers (including trial accounts). Because of
infrastructure and technical delays, we were unable to collect service fees nor
retain a substantial number of these subscribers.
COMMUNICATIONS
We recently announced the launch of a state-of-the-art messaging service,
the Personal Intelligent Messaging (PIM) service. This service gives users one
single number, which will be their contact number for all services ranging from
telephone calls to faxes to e-mails. The PIM service will be marketed through
our partner in Chengdu, Sichuan GuoXun. It is the only messaging service of its
kind available in China.
For phone messages, PIM users would give the service up to four numbers at
which they would like to be reached. The service takes the incoming call, and
attempts to reach the user at each number in the order the user specifies. If
the user does not answer at any of the numbers, the service prompts the caller
to leave a voicemail message. The system can be configured into home, office, or
remote profiles, or for time of day, and try to reach him where he is most
likely to be found. The PIM number can also accept digital information, and send
it to the user's fax, pager, or computer. (Callers are prompted to enter one key
to choose between phone, pager, fax, and e-mail.)
This messaging system is highly sophisticated, and should give Sichuan Guo
Xun's clients a means of enhancing, as well as simplifying, their business and
personal calls. We expect that premium services such as these may assist Sichuan
GuoXun to add more clients to its subscriber base.
TorchMail.com, Inc. ("TorchMail"), our wholly-owned subsidiary, provides
e-mail and advanced messaging services on the Internet for consumers, businesses
and Web portals in China. We acquired TorchMail in July 1999 for an initial
payment of 2,500,000 shares of our common stock plus cash of $10,000. (Brian
Ransom, our president, subsequently purchased such shares from the holder of
such shares.) Further payments possibly may have to be made for the acquisition
of TorchMail. Upon the resale of 360,000 mailboxes created within a Customer
Account through use of TorchMail's services by a user or "Seats", we will issue
an additional 2,500,000 shares; upon the resale of 500,000 Seats, we will issue
an additional 1,250,000 shares; and upon the resale of 750,000 Seats, we will
issue an additional 1,250,000 shares.
TorchMail's services are being designed to provide high level scalability,
reliability, and accessibility. TorchMail, when fully developed, will provide
our Internet connectivity customers with a full range of consumer services and
our other subsidiaries with a full range Web portal and business services
including:
Consumer Services Web Portal and Business
Services
Chinese language capabilities Chinese language capabilities
Permanent e-mail addresses Anytime, anywhere easy access
to e-mail
Anytime, anywhere access to e-mail Compatibility with existing
e-mail systems
Robust set of basic e-mail features Specialized applications
Optional advanced functionality Rapid deployment and reduced
costs Customized "look and
feel"
Account privacy and security Scalability to accommodate
growth
Reliability and security
Sophisticated customer service
and support
Consumer Market Services
TorchMail's consumer market communications services segment was launched in
August 1999 with the objective of becoming a major independent Web-based e-mail
service focused on the Chinese speaking community on the Internet. In the
consumer market, TorchMail expects to generate revenues from advertising and
related sales, including direct marketing and e-commerce promotion. Revenues are
also expected to be generated from subscription services, such as a service that
allows members to purchase increased storage capacity for their e-mails. In
addition, TorchMail anticipates generating revenue by offering fee-based premium
services such as virus scanning, e-mail forwarding and message notification.
TorchMail's strategy is to offer free e-mail services to individual
consumers which will allow TorchMail to quickly build a large user base and to
establish its brand name and reputation for providing quality service. Users of
TorchMail's Web-based e-mail and messaging services receive a permanent e-mail
address of their choice with a "torchmail.com" domain name (e.g.
[email protected]). Users can send or retrieve e-mail through TorchMail Web
site (www.torchmail.com) from any computer connected to the Internet with a
standard Web browser. Since TorchMail's system is Web-based, users do not need
to download or install special software to access the service.
Commercial Services
TorchMail offers a range of e-mail and fax services to businesses and is
expected to derive revenue from site license charges, monthly fees, and usage
charges. TorchMail connects existing e-mail systems to the Internet, monitors
Internet e-mails for viruses or specific content and hosts and manages e-mail
systems. Many corporate customers have implemented in-house e-mail systems that
require hardware, software and technical and administrative resources. TorchMail
sells commercial messaging services on a turnkey basis with a complete customer
service package, including both account management and technical support. The
business customers may select from a wide range of products and services that
are priced based upon the service package selected. TorchMail also provides
customers with broadcast fax, production fax and desktop fax services via the
Internet.
TorchMail's Web strategy is to develop strong regional partnerships in
various geographic areas, aligning the TorchMail brand with both major business
portals and consumer-oriented portals. Additional revenues for TorchMail may be
derived from fee-based premium services and selling advertising in select
situations. TorchMail will share a portion of the advertising and premium
service revenues with its partners.
TorchMail recently announced a partnership agreement to supply co-branded
Web-based e-mail services with the National Library of China, the largest
library in Asia and a national general repository of publications. The National
Library also provides services for the central government priority readers in
research, educational and production institutions throughout China, as well as
the general population. The National Library communicates with an estimated
4,000 libraries in China and 1,000 other libraries worldwide. With approximately
1 million hits per day, more than 200,000 publications available for viewing
online, and more than 49 million pages of information, the National Library's
Web site has been awarded "The Best Site under the category of Culture,
Entertainment and Sports" issued by the China Internet Competition Committee in
January 2000. Under the agreement, TorchMail will provide the National Library
with Web messaging services and will co-manage the National Library's e-mail Web
site.
TorchMail also offers its customers domain name registration services
through a strategic partnership with Register.com. Customers can register
domains across 29 domain name extensions, including ".com", ".net", ".org",
".co.uk" (UK) and ".co.nz" (New Zealand) and can access all of Register.com's
registration services such as multiple domain registration and transfers for
bulk registrations, one step registrations and on-line domain management tools.
IP PHONE (VoIP)
We are positioned to acquire a portion of the IP phone market in China.
Telephone users and telephony sets in China have experienced among the highest
growth rates in the world. In 1996, China had just 55 million telephone users
but, two years later, had more than 125 million users. The telephony market is
currently dominated by China Telecom. The recently formed China Unicom was
established to create competition. Since telephony networks are very capital
intensive, the competition generated by Unicom did not bring down phone rates
for users. Long-distance rates are still very high. Currently, the charge for an
international call to North America is approximately $1.80 per minute, while a
call from North America into China could cost as low as $0.30 per minute.
We have established a VoIP (Voice over Internet Protocol) gateway with high
quality equipment which we will initially market to our large corporate clients
in China. In the long term, reasonably priced services will also be offered to
individual users via a prepaid phone card system.
VALUE-ADDED SERVICES
Sichuan CathayOnline provides Sichuan Guo Xun the following value-added
consulting and management services: strategic planning, designing and
implementing computer networking, managing data processing operations,
developing and implementing computer and electronic communications and a full
range of administrative services.
In addition to providing consulting services with respect to technical
issues, management and administrative services to ISPs, CathayOnline provides
Web site consulting and development services. The Company was engaged to upgrade
the Sichuan Famous Brand Product Web site (http://www.scmp.gov.cn). This Web
site is the home to many well-known Chinese corporations with brand name
products and has been endorsed by the Government of Sichuan Province. The
updated Web site was re-launched in May, 2000 and currently has over 300
enterprises publishing their product materials online. The next phase of
development for Sichuan Famous Brand Product will be to leverage its content and
traffic as a platform for e-commerce with a mix of business-to-business and
business-to-consumers users. The site will allow detailed search and ordering of
the brand-named products and extend the market reach of these products within
China and worldwide. We expect to derive revenue from annual registration fees
and fees for Web site development paid by these Chinese corporations.
GEOGRAPHICAL MARKETS
We have targeted geographical markets in China which offer the best
investment potential based on economic and demographic profiles which support a
growing demand for Internet access, content and online services. Our primary
focuses are the regions of Sichuan, Beijing and Guangdong, with future expansion
into other areas.
<TABLE>
<CAPTION>
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Chengdu, Sichuan Sichuan Province Beijing Guangdong
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<S> <C> <C> <C> <C>
Population (2000) 10.04 million 84.93 million 12.46 million 71.2 million
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Gross Domestic Product (GDP) RMB119 billion RMB371 billion RMB217 billion RMB846 billion
(1999)(Renminbi)
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Foreign Direct Investment, N/A $ 2.74 billion $ 12.71 billion $ 86.91 billion
cumulative as of end of 1999
(U.S dollars)
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Internet Users (July 2000) N/A 556,150 3,163,680 2,166,580
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</TABLE>
Sichuan Province and Chengdu
The Province of Sichuan is situated in the western section of China and is
bordered on the south and west by the Yangtze River. It is one of the largest
province in China and has 85 million residents. GDP, which was approximately RMB
371 billion in 1999, ranks tenth among China's provinces. Sichuan Province also
has numerous universities, high-tech businesses and companies in heavy industry,
which are the primary users of the Internet in China.
Chengdu, the capital city of Sichuan Province, is the most important
hi-tech hub in the southwestern region of China. It is also an important
political, economic, and cultural center, and holds a strategic position in
China's economic development plan. In 1999, the city's GDP grew 10.25% from 1998
to RMB 119 billion (US $14.5 billion). The population of Chengdu is
approximately 10 million and there are more than 20 universities with over
150,000 full-time students within the city.
The Internet development in Chengdu, Sichuan began at the end of 1995. The
Sichuan Scientific Information Institute established the first ISP. Now, there
are approximately 200,000 Internet users in the area (more than 95% of them are
individual subscribers). This number is expected to grow exponentially.
We believe that we are well positioned to offer our Internet access service
to the approximately 3.44 million fixed line telephone subscribers and the
546,000 mobile telephone subscribers in Sichuan. We have developed a
growth-oriented marketing plan for Chengdu focusing on governmental
organizations, local foreign-owned corporations, major universities, research
institutes, and individuals. We believe that the small number of ISPs operating
in Sichuan, its demographic profile, and the technological and physical
infrastructure in the area, including telephone lines, are all positive factors
which will permit our subscriber base to grow significantly over the next
several years.
Beijing
As the national capital of China, Beijing is characterized as a highly
urban and affluent city. Beijing attracts large numbers of foreign visitors and
investors who contribute to this prosperity. The residents of Beijing place
great importance on education. As a result, Beijing's citizens have the lowest
illiteracy rate and highest percentage of college graduates in China. Beijing is
the only region in China where the service sector is a major contributor to the
economy. This sector, which includes financial services, computer services, real
estate services and media, attracts significant foreign investment. The rapid
shift to a service-based economy has resulted in a large concentration of
younger residents in this city, most of whom earn far above average incomes when
compared to the national average. Beijing is currently the "most wired" city in
China and is home to over 21% of China's Internet market.
We have entered into a cooperation agreement with the Second Institution of
the Aerospace Machine & Electronic Group ("AMEG"), to provide Internet services
for the region of Beijing. AMEG's current scope of business includes telephone
communications, computer network communications, cable television networks, and
fiber-optic cable networks. We will leverage AMEG's market penetration to
develop and expand a diverse customer base in this region.
Guangdong
Guangdong is China's fifth most populous province but has the largest
economy of all the provinces. Guangdong has continued to experience a rise in
urbanization in the past few years and has had increases in foreign investment
and trade, which can be attributed to Guangdong's proximity to Hong Kong. This
province receives approximately 28% of all foreign direct investment coming into
China. The residents of Guangdong recognize the need for education in order to
succeed in China's new economy and place an emphasis on educational
achievements. The region's economic growth has lead to increased levels of
personal income which has resulted in a growth of computer ownership as well as
Internet usage in Guangdong.
As with the other target markets, we will focus our efforts on the local
and foreign owned corporations and educational institutions, as well as
individuals.
COMPETITION
The Internet market in China is new and rapidly evolving. Competition is
intense and is expected to increase significantly in the future because barriers
to entry in our market are not insurmountable. While the Chinese government
tightly controls ISP licenses in Chengdu and throughout China, the Chinese
government has granted and will continue to grant licenses to competitors that
intend to enter our market. Currently, our competitors include China Telecom,
China Unicom and China Gitong Telecom.
A number of existing or new Internet service providers, including those
controlled or sponsored by Chinese government entities, may have competitive
advantages over us in terms of brand recognition, financial and technical
resources, and better access to capital needed to develop and expand their
infrastructure and technical capabilities.
However, we believe we have some competitive advantages over our
competitors. Our strong development team, advanced technology and strategic
partnerships provide us with the ability to provide reliable, consistent service
and support that surpass our competition in China.
Our existing competitors may in the future achieve greater market
acceptance and gain additional market share. It is also possible that new
competitors may emerge and acquire significant market share. We believe the
rapid increase in China's online population will draw more attention from these
multinational players to the Chinese Internet market.
STRATEGIC ALLIANCE WITH CATHAYONE INC.
On June 30, 2000, we sold CMD Capital Limited ("CMD") to Premier Brands
Inc. (now known as CathayOne Inc. or "CathayOne") in consideration for 1,750,000
of shares of common stock of Premier Brands. Through this transaction, we
received approximately 6% equity interest in CathayOne, enabling the two
companies to develop a strong strategic alliance.
CMD is the owner of PRCInvest.com, a bilingual financial portal to be
launched that will provide users with up-to-the-second financial information as
well as advanced services such as on-line stock trading. We estimated that a
significant amount of capital would be needed to fully develop this content
portal. We believe that this sale will relieve us from capital requirements
needed for such development. By significantly reducing our projected
expenditures for content development, we are able to focus our financial and
managerial resources on developing our Internet connectivity and communication
services. As a result of the sale of our interest in CMD, we are no longer
focusing on developing our own Internet content sites.
We may assist CathayOne in the implementation of a broad array of services,
including Web hosting, Web development and strategic planning.
EMPLOYEES
We presently have a growing team of approximately 80 experienced and
talented employees, including a senior management team experienced in the
Internet industry in China. The cultural diversity of the team allows
CathayOnline to function effectively in a multilingual, multicultural business
environment in Asia and the United States. Our emphasis on maintaining a strong
local presence in the markets in which we operate allows us to better understand
market needs, to stay close to customers and to maintain strong strategic
business relationships.
GOVERNMENT REGULATIONS
In order to take advantage of the tremendous flow of information, the
Chinese government is encouraging foreign investment and assistance in
developing its telecommunications and technology infrastructure. We are in a
select position to achieve a major role in the development of China's
telecommunication technology.
Internet services are treated as value-added information/telecommunications
services, which are subject to telecommunications regulations. The
telecommunications regulations explicitly state that foreign companies or
nationals are allowed to be involved in equipment manufacturing, system
installation, and management consultation. Foreign companies have and will
continue to have an active role in system integrating and equipped sales.
However, foreign companies or nationals are not permitted to directly own or
operate basic and value-added information/telecommunication services including
Internet content provider (ICP) and ISP.
Foreign corporations have in the past worked around these prohibitions by
forming a joint venture with the functioning operation of another Chinese
business entity. Many foreign companies have already adopted the joint venture
approach in the cellular and paging services markets. Foreign corporations, such
as Prodigy, have created a joint venture with China North Industries Corp.
Group, and there are dozens of smaller companies from North America that have
followed this approach.
With respect to foreign investments in Internet services, many foreign
companies entered into strategic alliance with Chinese ICPs or ISPs. The Chinese
regulations prohibit any foreign investments in ICPs or ISPs. However, foreign
companies are permitted to provide technology services or management consultancy
services to Chinese ICPs and ISPs. Foreign companies are also entitled to
receive payments from those ICPs and ISPs for the provision of such technology
and/or management consultancy services. This policy has provided foreign
companies a practical way to gain entry into China Internet services business
without undue regulatory risks.
In August 2000, LycosAsia, a foreign invested company, successfully
obtained an ICP license in Shanghai. It has been regarded by some IT business
and legal professionals as a positive signal that China will allow foreign
investments in ICPs.
On May 24, 2000, the United States House of Representatives voted to grant
China Permanent Normal Trade Relation (PNTR) status, a prelude to full
membership in the World Trade Organization ("WTO"). Recently, the U.S. Senate
also voted in favor of granting PNTR status to China. The PNTR and China's
pending entry into the WTO bodes well for China businesses and companies doing
business in China, particularly companies like us who have created strong
economic ties within China prior to its entry into the WTO.
WTO membership for China is expected to stimulate spending on China's
Internet and telecommunications infrastructure. China's current commitment to
developing its telecommunications and technology infrastructure contemplates
opening up the telecommunications sector to foreign direct investment and to
businesses providing telecommunication services of all types. China has agreed
to eliminate foreign equity restrictions and has agreed to accede to the Basic
Telecommunications & Financial Services Agreement while "grand fathering"
current market access for all U.S. service providers. This is expected to
benefit existing U.S. service providers in China.
By virtue of the Basic Telecommunication & Financial Service Agreement,
China will become a member of the Basic Telecommunications Agreement(BTA).
Chinese government also promises the following after its entry into WTO:
o China will phase out all geographic restrictions for (i) paging and
value-added services in two years; (ii) mobile/cellular in five years
and (iii) domestic wire line services in six years. China's key
telecommunication services corridors in Beijing, Shanghai, and
Guangzhou, which represents approximately 75% of all domestic traffic,
will open immediately on accession to the WTO in all telecommunications
services.
o China will allow up to 49% foreign investment in all telecommunication
services industry, and will allow up to 50% foreign ownership for value
added services in two years and paging services in three years.
Currently, China allows no foreign investment in telecommunications
services industry.
o China will allow up to 25% foreign investment in Chinese Internet
service providers, and the percentage will increase to 49% after three
years. Foreign investors are allowed to have 30% shareholdings in
Chinese ICP and other value-added services in Beijing, Shanghai and
Guangzhou. This percentage will increase to 50% after two years and the
geographic restrictions will be eliminated.
We believe that we are well positioned to seize the opportunity offered by
China's entry into the WTO and to expand our role and involvement in Chinese
telecommunications and Internet participation. Our management team has been
working within China for many years and has developed relationships in China
which will prove to be of immeasurable financial value to the Company in the
years ahead.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from
projected results. All statements other than statements of historical fact,
including statements regarding industry prospects and future results of
operations or financial position, made in this Annual Report on Form 10-K are
forward looking. We use words such as "anticipates," "believes," "expects,"
"future" and "intends" and similar expressions to identify forward-looking
statements. Forward-looking statements reflect management's current expectations
and are inherently uncertain. Some of the risks and uncertainties that could
cause the Company's actual results to differ significantly from management's
expectations are described below. These are not the only risks and uncertainties
we face. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business. If any of the following
risks actually occur, our business, operating results or financial condition
could be materially adversely affected.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE WE HAVE A
LIMITED OPERATING HISTORY. We began exploring the possibility of entering into
the Internet business in China in January 1999 and reached an agreement with
Sichuan Guo Xun in September 1999 to render the consulting services described in
the agreement between us. Accordingly, we have had only a very limited operating
history upon which to evaluate our business and prospects. As a young company,
we face risks and uncertainties relating to our ability to successfully
implement our business plan. Being a company in its early stage of development
and doing business in the new and rapidly evolving markets in China, we may
encounter great difficulties and incur substantial expenses in:
- building a subscriber base for the Internet services offered by
Sichuan Guo Xun or to be offered by Beijing CathayOnline;
- successfully marketing our Web-based e-mail and advanced messaging
services; and
- promptly addressing the challenges faced by early stage companies
which do not have an experience or performance base upon which to
draw.
If we do not successfully address these risks and uncertainties, our
business, operating results and financial condition will be materially adversely
affected.
WE HAVE A HISTORY OF LOSSES, WE EXPECT TO LOSE MONEY IN THE FUTURE AND WE
MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY. We have not generated any meaningful
revenues from our current business operations, and our operating costs have
exceeded our revenues for all quarters during which we have been engaged in the
Internet services and Web-base e-mail businesses. We expect to continue to lose
money at least through the end of fiscal year 2001. We incurred net losses from
operations of approximately $1.66 million for the fiscal year ended June 30,
2000. We may never generate revenues sufficient to offset expenses and we may
never become profitable. We have historically funded our operations by selling
stock and not by generating income from our business.
WE REQUIRE ADDITIONAL FUNDS TO IMPLEMENT OUR CURRENT PLANS AND FINANCE
FUTURE GROWTH. Our business model assumes that we will be able to raise
substantial additional funds to implement the full range of products and
services we plan to offer. We will seek to obtain additional funds through sales
of equity and/or debt securities, or other external financing in order to fund
our current operations and to achieve our business plan. We cannot be sure that
any additional capital resources will be available to us, or, if available, will
be on terms that will be acceptable to us. Any additional equity financing will
dilute the equity interests of existing security holders. If adequate funds are
not available or are not available on acceptable terms, our ability to execute
our business plan and our business could be materially and adversely affected.
OUR MANAGEMENT HAS LIMITED EXPERIENCE OPERATING A PUBLIC COMPANY. No member
of our current management team has ever operated a public company. We must
develop the skills and knowledge required to operate effectively as a public
company, and there can be no assurance that we will be able to do so. If we are
not successful in developing these skills or do not retain individuals who have
significant experience operating a public company, we may never be able to
implement all or any portion of our business plan and our business could be
materially and adversely affected.
WE MAY FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS, INVESTMENTS,
STRATEGIC PARTNERSHIPS OR OTHER VENTURES. As part of our long-term growth
strategy, we may seek to acquire or make investments in complementary
businesses, technologies, services or products or enter into strategic
relationships with parties who can provide access to those assets. We may not be
able to identify or complete such transactions. Moreover, acquisitions often
involve a number of special risks such as difficulty integrating acquired
operations, products, services and personnel; inability to retain acquired
subscribers; inability to successfully incorporate acquired technology and
rights into our service offerings and maintain uniform standards, controls,
procedures, and policies; inability to retain the key personnel of the acquired
company; failure by the acquired business to achieve the revenues and earnings
we anticipated; and liability for contingent and other liabilities, not
previously disclosed to us, of the companies that we acquire. We may not be able
to successfully overcome problems encountered in connection with potential
future acquisitions. These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses. Furthermore, we
may have to incur indebtedness or issue equity securities to pay for any future
acquisitions.
WE DEPEND ON OUR RELATIONSHIP WITH SICHUAN GUO XUN TO GENERATE REVENUES AND
OUR BUSINESS COULD SUFFER IF THIS RELATIONSHIP IS TERMINATED. Our agreement with
Sichuan Guo Xun extends through March 2003. This agreement may be terminated
early in certain circumstances. If this relationships is terminated early, we
will be unable to recover the costs and expenses associated with building our
operations in these markets. If Sichuan Guo Xun terminates our relationship
prior to or upon the expiration of our agreement with it, it is unlikely that we
could reach an agreement with an existing private ISP in China and our business
would be materially adversely affected.
IF WE FAIL TO EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS WILL SUFFER. If
the Internet and Web-based e-mail and messaging services become as widely used
in China as we expect and as estimates suggest and our business grows
correspondingly, this rapid growth will place a significant strain on our
managerial, operational, financial and information systems resources. To
accommodate any significant increase in our size and manage our growth, we must
implement and improve these systems and attract, train, manage and retain
qualified employees. These demands will require us to add new management
personnel and develop new expertise. If we fail to successfully manage our
growth, our ability to maintain and increase our subscriber base will be
impaired and our business will suffer.
WE RELY ON THIRD PARTIES TO PROVIDE SOFTWARE AND HARDWARE TO KEEP PACE WITH
TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS AND REMAIN COMPETITIVE.
Both the Internet services market and Web-based e-mail and advanced messaging
market are characterized by rapidly changing technology, evolving industry
standards, changes in subscriber needs and frequent new services and product
introductions. No assurance can be given that our software providers will
develop or offer to us new products and services to enhance our Web-based e-mail
and advanced messaging services. In addition, we depend on certain suppliers of
hardware and software components to build Sichuan Guo Xun's ISP business. We
acquire a majority of our networking service components, including terminal
servers and high-performance routers, from only a few companies, including Cisco
Systems, Sun Microsystems and Hewlett Packard, all of which are located in the
United States. We have experienced and may in the future experience delays in
delivery of new modems, terminal servers and other equipment. If delays are
severe, all of Sichuan Guo Xun's incoming modem lines may become full during
peak times, resulting in busy signals for subscribers who are trying to connect
to Sichuan Guo Xun. We have lost and may in the future lose customers as a
result.
ANY DECLINE IN OUR SUBSCRIBER RETENTION LEVELS WILL ADVERSELY AFFECT US.
Our new subscriber acquisition costs, both with respect to the Internet access
services provided by Sichuan Guo Xun and the Web-based e-mail and advanced
messaging services that we will provide, will be substantial relative to the
monthly fees we expect to charge. Accordingly, our long-term success largely
depends on our retention of existing members. While we have invested and will
continue to invest significant resources in our infrastructure and technical and
member support capabilities, it is relatively easy for Internet users and
Web-based e-mail and advanced messaging customers to switch to competing
providers. We have lost a substantial number of subscribers in Chengdu. Any
significant loss of members will substantially decrease our expected revenue and
cause our business to suffer.
WE MAY BE SUBJECT TO LIABILITY AND OUR REPUTATION MAY SUFFER BECAUSE OF
SPAMMING, LOST OR MISDIRECTED MESSAGES OR OTHER PROBLEMS. Even to the extent
these claims do not result in liability, we could incur significant costs in
investigating or defending against these claims, or in implementing measures to
reduce our exposure to such liability. These types of claims may also hurt our
reputation which is crucial to our business.
DISRUPTIONS CAUSED BY SYSTEM FAILURES COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS. We expect to derive the vast majority of our revenues for the
foreseeable future from our relationship with Sichuan Guo Xun, which provides
Internet access services to residents of Sichuan Province, China, and the
Web-based e-mail and advanced messaging services provided to our subscribers.
These services are provided over telecommunications lines leased from China's
national telecommunications monopolies such as China Telecom and China Unicom,
upon which we are dependent for physical repair and maintenance of the leased
lines. We have no or little control over how the Chinese telephone companies
conduct their business and cannot cause any of these entities to take steps
necessary to protect our interests, such as creating back-up systems to which we
could turn in the event of an interruption in service.
SICHUAN GUO XUN'S NETWORKS ARE SUBJECT TO SECURITY RISKS AND INAPPROPRIATE
USE BY INTERNET USERS THAT COULD INTERRUPT OUR SERVICES. The future success of
our business will depend on the security of the third-party networks. Despite
implementation of security measures, we remain vulnerable to computer viruses,
sabotage, break-ins and similar disruptive problems caused by subscribers or
other Internet users. Any breach of Sichuan Guo Xun's network security or other
inappropriate use of the network through which we conduct our businesses, such
as the sending of excessive volumes of unsolicited bulk e-mail or "spam," could
lead to interruptions, delays, or cessation of services to our subscribers. Our
subscribers, in turn, could terminate their membership or assert claims against
us. Third parties could also potentially jeopardize the security of confidential
information stored in the computer systems of Sichuan Guo Xun or our
subscribers' computer systems by their inappropriate use of the Internet (e.g.,
"cracking" or "hacking"), which could cause losses to our subscribers or us or
deter potential customers from subscribing to our services. Although we intend
to continue to implement security measures with respect to Sichuan Guo Xun,
"hackers" have circumvented measures taken by other ISPs in the past, and these
hackers may be able to circumvent the security measures in the future. To fix
problems caused by computer viruses or other inappropriate uses or security
breaches, we may have to interrupt, delay, or cease service to our subscribers.
OUR SERVICES AND REPUTATION MAY BE ADVERSELY AFFECTED BY SOFTWARE DEFECTS.
Our services depend on complex software developed by third parties. Software
often contains defects, particularly when first introduced or when new versions
are released. These defects could cause service interruptions that damage our
reputation, increase our service costs, cause us to lose revenue, delay market
acceptance or divert our development resources, any of which could materially
adversely affect our business, operating results and financial condition.
FAILURE TO PAY ROYALTIES MAY RESULT IN THE LOSS OF TORCHMAIL. We are
required to pay to the seller of TorchMail royalties based upon the number of
Seats (e-mail boxes) we service ranging from between $.01 to $.10 per Seat per
month. If we fail to make these payments, or otherwise breach our agreement with
the seller of TorchMail, we will lose our right to TorchMail and we would lose
the entire amount we have invested in this business through the date of any such
forfeiture. The loss of TorchMail would have an adverse effect on our business.
IF WE ARE UNABLE TO RETAIN KEY EXECUTIVES OR HIRE NEW QUALIFIED PERSONNEL,
OUR BUSINESS WILL BE ADVERSELY AFFECTED. Our success greatly depends on our
ability to attract and retain key technical, sales, marketing, information
systems, and financial and executive personnel. We are especially dependent on
the continued services of our senior management team, particularly Brian Ransom,
our President, and Owen Li, our General Manager of Chinese operations. We have
entered into employment agreements with each of Mr. Ransom and Mr. Li. However,
these agreements are terminable by us and each of these employees. All other
members of our senior management team can terminate their employment at any
time. If we fail to attract, hire or retain the necessary personnel, or if we
lose the services of any member of our senior management team, our business
could be adversely affected.
WE MUST ESTABLISH, MAINTAIN AND STRENGTHEN OUR BRANDS TO REMAIN
COMPETITIVE. To be successful, we believe that we must establish and maintain
our brands. We must succeed in our marketing efforts, provide high-quality
services and increase our user base to build our brand awareness. If consumers,
Web portals, businesses or advertisers do not perceive our services to be of
high quality, or if users reject our new services, the value of our brands would
be diluted. If we are unable to establish and maintain our brands, our business,
operating results and financial condition would be materially adversely
affected.
WE MUST COMPETE SUCCESSFULLY WITH OUR COMPETITORS IN ORDER TO MAINTAIN OUR
BUSINESS. Both the ISP industry and Web-based e-mail and advanced messaging
industries in the geographic areas where we do business are highly competitive.
The ISP industry in China is dominated nationally and in each province by
government-owned ISPs. These entities are significantly larger and possess
greater financial and personnel resources than do Sichuan Guo Xun or us.
Furthermore, these ISPs have access to inexpensive telecommunications lines and
can charge significantly lower prices than Sichuan Guo Xun. In order to be
competitive with and overcome the inherent advantages possessed by these
entities, we will have to offer higher quality Internet access services by
decreasing the subscriber-to-line ratio and providing faster and more reliable
services. In addition, if the Chinese government relaxes constraints on
licensing and other impediments to entering the provincial ISP market, we can
expect many new entrants into the market, both Western and Asian, most of which
will have substantially greater resources than we have at our disposal. We can
offer no assurance that we will be able to compete successfully against public
or private ISPs now existing or which may enter the market in the future. It's
also expected additional companies will offer Web-based e-mail and advanced
messaging services in China to avail themselves of the enormous potential which
exists. Many of the entities which we expect would enter the market are
substantially larger and have greater financial, technical and personnel
resources than we do. There can be no assurance that we will be able to compete
successfully against any of our competitors in the Web-based e-mail and advanced
messaging industry.
WE MUST DEVOTE SIGNIFICANT MANAGERIAL, TECHNICAL AND FINANCIAL RESOURCES TO
OUR STRATEGIC RELATIONSHIP WITH SICHUAN GUO XUN AND THIS RELATIONSHIP MAY NOT
PROVE TO BE PROFITABLE. Our strategic relationship with Sichuan Guo Xun requires
that we devote significant managerial, technical and financial resources to this
relationship. Our agreement with Sichuan Guo Xun requires us to support its
operations by contributing hardware and software to our Chinese subsidiary
(Sichuan CathayOnline), which will require a substantial capital contribution.
We have invested significant resources in our Chinese subsidiary to enable it to
purchase additional hardware and other capital equipment used in the provision
of Internet access services and to provide service and support in order to
achieve our expansion and growth objectives, and we expect to provide
substantial additional capital in the future. If we are unable to provide this
additional capital to purchase hardware and software on a timely basis, Sichuan
Guo Xun may terminate our relationship. We may fail to generate sufficient
revenues from these operations to offset the expenses and resources we devote to
developing, maintaining and enhancing such services. This relationship may also
divert our resources and our management's time and attention from our other
services, including our e-mail and advanced messaging services. These risks and
uncertainties could result in material adverse effects upon our business,
operating results and financial condition.
SICHUAN GUO XUN IS DEPENDENT ON NATIONAL TELECOMMUNICATIONS CARRIERS FOR
CONNECTIONS AND IS SUBJECT TO THEIR LINE CHARGES. Sichuan Guo Xun relies on
traditional telecommunications carriers to transmit its traffic over local and
long distance networks, both with respect to dial-up service for its subscriber
base as well as for line charges which connect it to China's Internet backbone.
Specifically, it relies on the Chinese telephone monopolies such as China
Telecom and China Unicom. The benefits of competition and alternative sources of
supply are not present in these markets. These entities can set rates and
charges for Sichuan Guo Xun's lines while competing only against themselves.
Although line rates and charges have been reduced since the break-up of China
Telecom into several government owned telecommunications carriers, there can be
no assurance that line rates will continue to decrease or that rates will not
increase in the future. Sichuan Guo Xun will have to pay the line rates charged
by these entities to continue in business. Although we have been assured that
additional lines are available, these entities may deny or delay the allocation
of leased lines to Sichuan Guo Xun for no reason. Any drastic increase in the
rates charged by the telecommunications monopolies for access lines or any
failure to obtain additional lines will adversely affect our business and
potentially slow our growth. In addition, these networks may experience
disruptions and capacity constraints that are not easily remedied. Sichuan Guo
Xun has no means of replacing these services.
IF SICHUAN GUO XUN DOES NOT SUCCEED IN DEVELOPING SUFFICIENT NETWORK
CAPACITY, IT MAY LOSE CUSTOMERS. The success of Sichuan Guo Xun will depend, in
part, on the capacity, reliability and security of its network. Sichuan Guo
Xun's network includes computers, servers, routers, modems and other related
hardware and software. While Sichuan Guo Xun has not experienced network
capacity constraints to date, such constraints (e.g., the ability to obtain
additional dial-up telephone numbers and telecommunications lines by which
subscribers access Sichuan Guo Xun) may occur in the future, if Sichuan Guo Xun
grows as we anticipate. These capacity constraints may result in slowdowns,
delays or inaccessibility when subscribers try to use a particular service. Poor
network performance could cause subscribers to terminate their membership with
us. To reduce the probability of such problems, we will be required to expand
and improve Sichuan Guo Xun's network. Such expansion and improvement will be
very costly and time consuming. We may not have sufficient funds or otherwise be
able to expand or adapt Sichuan Guo Xun's network to meet additional demand or
changing subscriber requirements on a timely basis or at a commercially
reasonable cost.
BECAUSE SICHUAN GUO XUN LACKS FULL BACK-UP OF ITS COMPUTER SYSTEMS, A
SYSTEMS FAILURE COULD PREVENT IT FROM OPERATING ITS BUSINESS. Sichuan Guo Xun
relies on the Internet and, accordingly, upon the continuous reliable and secure
operation of its Internet servers, hardware, software and infrastructure, such
as leased lines from telecommunications service providers operated by the
government of China. While Sichuan Guo Xun does have limited back-up capability,
it does not have full redundancy of all of its computer and telecommunications
systems. As a result, failure of key primary or back-up systems to operate
properly could lead to a loss of customers and damage Sichuan Guo Xun's
reputation. We are working to increase the extent of the redundancy of Sichuan
Guo Xun's systems to lessen the effects of any system failure, but we cannot
make any assurance that existing back-up systems or those implemented in the
future will be sufficient to avoid the problems which may result from a failure
of existing systems.
OUR BUSINESS DEPENDS ON CONTINUED GROWTH OF THE INTERNET IN CHINA. Although
we believe that computer and Internet usage and the popularity of Web-based
e-mail and advanced messaging services in China will continue to grow, we cannot
be certain that this growth will continue or that it will continue in its
present form. The growth of computer usage and the Internet in China is
constrained by the cost of computers and other Internet access devices to
Chinese people relative to their annual income and current technology
infrastructure. No assurance can be given that computers or other Internet
access devices will be offered at prices within the budget of the average
Chinese consumer or that the technological infrastructure will be enhanced. If
Internet usage declines in China or evolves away from our business, our growth
will slow or stop and our financial results will suffer.
RECENTLY ENACTED CHINESE LAWS RELATING TO THE ABILITY OF COMPANIES ENGAGED
IN INTERNET ACTIVITIES IN CHINA TO TRADE PUBLICLY COULD NEGATIVELY IMPACT OUR
BUSINESS. New rules adopted by the Chinese government which have not yet been
formally announced provide that companies (whether organized in China or
overseas) engaged in Internet activities in China would be required to secure
approval from Chinese authorities to list their shares in the overseas markets,
including the United States. We may be required to obtain approval of the
Chinese government to undertake an offering of our securities or for seeking a
listing on the NASDAQ market. We can provide no assurance that we will be
successful in obtaining the approval of the Chinese government to any offering
of securities we may wish to undertake or to the listing of our securities on
the NASDAQ Stock Market or other exchange. If we cannot obtain Chinese
government's approval to such offering or listing, we may have to forego
opportunities in this potentially lucrative field which could materially
adversely effect our future results of operations.
INCREASED GOVERNMENT REGULATION IN CHINA MAY INCREASE OUR COST OF DOING
BUSINESS OR CAUSE US TO CHANGE THE WAY WE CONDUCT OUR BUSINESS. Any new
legislation or regulation adopted by the Chinese government regarding the
Internet, or the uncertainty relating to the application of existing laws and
regulations to the Internet, could materially adversely affect our business,
operating results and financial condition. Legislation could impair the growth
of the Internet and decrease the acceptance of the Internet as a communications
and commercial medium. This could decrease the demand for our services, increase
our cost of doing business or otherwise have a material adverse effect on our
business, financial condition and operating results. Further, the growth and
development of the Internet messaging market may prompt calls for more stringent
consumer protection laws that may impose additional burdens on companies
conducting business online. These laws may impose additional burdens on our
business. For example, because we rely on the collection and use of personal
data from our users for targeted advertisements, any laws or regulations that
restrict our ability to collect or use such information may harm us. Hong Kong
has enacted laws or adopted regulations that prevent Internet companies or Web
portals from selling any information collected from users.
WE MAY BE SUBJECT TO CRIMINAL PENALTIES, INCLUDING REVOCATION OF OUR
LICENSE TO DO BUSINESS IN CHINA IF WE ARE SUBJECT TO CLAIMS BASED ON THE NATURE
AND CONTENT OF MATERIALS TRANSMITTED THROUGH OUR WEB-BASED E-MAIL AND MESSAGING
SERVICES. Online content restrictions in China are extremely broad and cover
many areas (e.g., national security, state secrets, infringement on State,
social or collective interests, or the legal rights and interests of citizens)
and prohibit the transmission of indecent or obscene information and content.
While we are unaware of any enforcement of these laws by the Chinese government
in connection with the content of e-mail and online messages, the Chinese
government could successfully use these laws to terminate operations of
Web-based e-mail and messaging providers licensed to operate in China. As a
provider of Web-based e-mail and messaging services, we may be subject to legal
claims based on the nature and content of the materials transmitted by e-mail.
We do not and cannot screen all of the content generated by our users and we
could be exposed to liability with respect to this content.
REGULATION OF THE INTERNET AND INFORMATION INDUSTRY IN CHINA MAY ADVERSELY
AFFECT OUR BUSINESS. The Chinese government has enacted regulations governing
the provision of ISP services, Internet access and the distribution of news and
other information. The Chinese government regulates access to the Internet by
imposing strict licensing requirements and requiring ISPs in China to use the
government operated international inbound and outbound Internet backbones (the
telephone lines which connect China's domestic Internet network with the
international Internet network). Sichuan Guo Xun has been issued the license
required to offer Internet access services in the Province of Sichuan. There can
be no assurance that Sichuan Guo Xun will retain its license. The Ministry of
Information Industry has published implementing regulations that subject online
information providers to potential liability for content included on their
portals and the actions of subscribers and others using their systems, including
liability for violation of Chinese laws prohibiting the distribution of content
deemed to be socially destabilizing. Because many Chinese laws, regulations and
legal requirements with regard to the Internet are relatively new and untested,
their interpretation and enforcement of what is deemed to be socially
destabilizing by Chinese authorities may involve significant uncertainty. In
addition, the Chinese legal system is a civil law system in which decided legal
cases have little precedential value. As a result, in many cases it is difficult
to determine the type of content that may result in liability. We cannot predict
the effect of further developments in the Chinese legal system, particularly
with regard to the Internet, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement thereof, or the preemption of
local regulations by national laws. Periodically, the Ministry of Public
Security has stopped the distribution of information over the Internet which it
believes to be socially destabilizing. The Ministry of Public Security has the
authority to cause any local ISP to block any Web site maintained outside of
China at its sole discretion. Web sites that are or have been blocked in China
include many major news-related Web sites such as www.cnn.com, www.latimes.com,
www.nytimes.com and www.appledaily.com.hk. The Chinese government also has
expressed its intention to closely control possible new areas of business
presented by the Internet, such as Internet telephony. We cannot provide
assurance that we will be able to obtain any necessary license required in the
future or that future changes in Chinese government policies affecting the
provision of ISP services, information services, including the provision of
online services, will not impose additional regulatory requirements on us or our
strategic partner, intensify competition in the Chinese information industry or
otherwise have a material adverse effect on our business, financial condition
and results of operations.
THERE ARE ECONOMIC RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA. The
Chinese economy has experienced significant growth in the past decade, but such
growth has been uneven across geographic and economic sectors and has recently
been slowing. There can be no assurance that such growth will not continue to
decrease or that any slow down will not have a negative effect on our business.
The Chinese economy is also experiencing deflation which may continue in the
future. The current economic situation may adversely affect our profitability
over time as expenditures for advertisements may decrease due to the results of
slowing domestic demand and deflation. In addition, the international financial
markets in which the securities of the Chinese government, agencies and private
entities are traded also have experienced significant price fluctuations upon
speculation that the Chinese government may devalue the Renminbi which could
increase our costs relative to our revenues from China.
CHANGES IN CHINA'S POLITICAL AND ECONOMIC POLICIES COULD HARM OUR BUSINESS.
The economy of China has historically been a planned economy subject to
governmental plans and quotas and has, in certain aspects, been transitioning to
a more market-oriented economy. Although we believe that the economic reform and
macroeconomic measures adopted by the Chinese government have had a positive
effect on the economic development of China, we cannot predict the future
directions of these economic reforms or the effects these measures may have on
our business, financial position or results of operations. In addition, the
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD. These
differences include economic structure, level of government involvement in the
economy, level of development, level of capital investment, control of foreign
exchange, inflation rates, methods of allocating resources, and balance of
payments position. As a result of these differences, our business may not
develop in the same way or at the same rate as might be expected if the Chinese
economy were similar to those of the OECD member countries.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO UTILIZE OUR
REVENUES EFFECTIVELY. We expect to derive a significant portion of revenues in
the form of Renminbi. Although Chinese governmental policies were introduced in
1996 to allow greater convertibility of the Renminbi, significant restrictions
still remain. We can provide no assurance that the Chinese regulatory
authorities will not impose greater restrictions on the convertibility of the
Renminbi. Any future restrictions on currency exchanges may limit our ability to
utilize revenue generated in Renminbi to fund our business activities outside
China.
A CHANGE IN CURRENCY EXCHANGE RATES COULD INCREASE OUR COSTS RELATIVE TO
OUR REVENUES. We expect to generate a significant portion of our revenues in
Renminbi and to incur a significant portion of our expenses and liabilities in
Renminbi and U.S. dollars. As a result, we are subject to the effects of
exchange rate fluctuations with respect to any of these currencies. We have not
entered into agreements or purchase instruments to hedge our exchange rate risks
although we may do so in the future.
THE UNCERTAINTY OF THE ENFORCEABILITY OF OUR CONTRACTUAL RIGHTS MAY HAVE A
SERIOUS ADVERSE IMPACT ON OUR BUSINESS. The legal system in China is still at a
developmental stage. There are uncertainties in terms of the predictability and
transparency of its laws and regulations. The judicial system is relatively
young. As a result, our contractual rights in China are subject to these
uncertainties. We may have serious disruptions and suffer significant losses in
terms of business opportunities and operations if our contractual rights cannot
be fully enforced.
CORPORATE HISTORY
We were incorporated in the State of Nevada on September 20, 1995 under the
name Kyocera Management, Ltd. We were initially incorporated to allow for the
issuance of up to 25,000 shares of no par value common stock. On January 5,
1998, we amended our Articles of Incorporation to allow for the issuance of up
to 50,000,000 shares of $0.001 par value common stock.
We were inactive from our inception through December 1998. In December
1998, we sold 5,785,500 shares of our common stock to a group of individuals,
including members of our current Board of Directors, in consideration of $57,850
in cash and services rendered. The members of the then Board of Directors
resigned and appointed Mr. Brian Ransom, our current President, as a Director.
We subsequently commenced our Internet services business. In April 1999, we
changed our company name to CathayOnline Inc.
On January 18, 2000, we entered into an Acquisition Agreement and Plan of
Merger whereby we acquired all of the outstanding shares of Lazzara Financial
Asset Recovery, Inc., an inactive Nevada corporation ("Lazzara"), in exchange
for 25,000 shares of our common stock. In connection with the merger, we also
incurred professional fees of $250,000 in cash and 225,000 shares issued for
services rendered. We are the surviving entity in the merger. Lazzara was
registered under the Securities Exchange Act of 1934 (the "Exchange Act") and
was required to file reports under the Exchange Act. We elected to succeed to
Lazzara's reporting requirements under the Exchange Act, as permitted by Section
12g-3(b) thereof, and as a result became a reporting company under the Exchange
Act on January 18, 2000. Accordingly, we now are required to file reports with
the Securities and Exchange Commission under the Exchange Act commencing upon
the filing of the Current Report on Form 8-K filed on January 18, 2000. As a
consequence of the merger and our election to succeed to Lazzara's reporting
requirements under the Exchange Act, our common stock remained eligible for
trading and continues to trade on the Over-the-Counter Electronic Bulletin
Board.
AVAILABLE INFORMATION
The Company files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. Any document
the Company files with the Commission may be read or copied at the Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Commission at 1-800-SEC-0330 for further information on the public
reference room. The Company's Commission filings are also available to the
public at the Commission's Web site at http://www.sec.gov.
ITEM 2. PROPERTIES.
We maintain our principal executive office at 437 Madison Avenue, 33rd
Floor, New York, New York 10022 where we lease approximately 2,500 square feet
of office space at a cost of $13,260 per month through June 30, 2005.
We lease approximately 4,200 square feet of office space at 543 Granville
Street, Vancouver, British Columbia, Canada. We have leased this space for a
term of five years through April 2005 at a monthly rent of approximately $6,818.
Our Sichuan operations are run from a 12,100 square foot office located in
the City of Chengdu, Sichuan Province. We have leased this space through August
2004 at a monthly rent of approximately $7,300.
We also entered into an agreement to lease approximately 3,300 square feet
of office space at No. 6, Ritian Road, Chao Yang District, Beijing for a period
of two years at a monthly rent of $6,311 and took possession of this space on
May 1, 2000. We have the right to extend the lease for five one-year periods on
terms to be agreed upon by the parties prior to each extension.
We believe that our offices in New York and Vancouver are sufficient for
our present and future needs. Should additional space be required, we believe
that additional space is available in each of these geographic areas at
competitive prices. If our business grows as we anticipate, we expect to require
additional office space in Chengdu, Beijing and Guangdong. We are confident that
sufficient additional office space is available in the respective areas on
commercially competitive terms.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently is not involved in any litigation the outcome of
which would have a material adverse effect on the Company's financial position,
results of operations and net cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a vote of shareholders of the Company during
the fourth quarter of the fiscal year ended June 30, 2000.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On June 30, 2000, the closing bid price per share of our common stock was
$.4375. The following table sets forth the quarterly high and low closing bid
and closing ask prices (in U.S. dollars) for our common stock for the period
August 26, 1998 through the last quarter of fiscal year ended June 30, 2000:
Closing Bid
For the quarter ended High Low
----------------------------- -------------- -------------
August 26 through September 30, 1998 UNPRICED
December 31, 1998 $1.50 $ .01
March 31, 1999 $1.25 $ .50
June 30, 1999 $1.25 $ .31
September 30, 1999 $ .99 $ .50
December 31, 1999 $3.37 $0.31
March 30, 2000 $2.00 $1.25
June 30, 2000 $1.93 $0.44
Source: National Quotation Bureau, LLC
The foregoing data represents prices between dealers and does not include
retail mark-ups, mark-downs or commissions, nor does such data represent actual
transactions or adjustments for stock-splits or dividends.
DIVIDEND
To date, we have not declared or paid dividends on our common stock. We
presently plan to retain earnings, if any, for use in our business.
TRADING MARKET
Our common stock trades on the NASD Electronic Bulletin Board under the
symbol "CAOL.BB".
PRINCIPAL MARKET MAKERS
On June 30, 2000, there were 22 active market makers of our common stock.
NUMBER OF SHAREHOLDERS OF RECORD
At June 30, 2000, there were approximately 400 shareholders of record of
our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended June 30, 2000, the Company issued 2,500,000
shares pursuant to Regulation S under the Securities Act of 1993, as amended
(the "Securities Act"). The shares were issued for the acquisition of TorchMail
at $0.53 per share.
During the fiscal year ended June 30, 2000, the Company issued 2,500,000
shares pursuant to Regulation S under the Securities Act. The shares were issued
for cash and at $0.375 per share.
During the fiscal year ended June 30, 2000, the Company issued 213,793
shares pursuant to Regulation S under the Securities Act. The shares were issued
for a cashless exercise of warrants at $0.35 per share.
During the fiscal year ended June 30, 2000, the Company issued 100,000
shares pursuant to Regulation S under the Securities Act. The shares were issued
for cash on the exercise of warrants at $0.35 per share.
During the fiscal year ended June 30, 2000, the Company issued 250,000
shares pursuant to Rule 701 under the Securities Act of 1933, as amended. The
shares were issued for the acquisition and merger of Lazzara Financial Asset
Recovery Inc. at $1.38 per share.
In March and April 2000, the Company issued 775,000 shares of common stock,
valued at $1.38, as part of the purchase price for a controlling interest in CMD
Capital Limited, a Hong Kong enterprise. The transaction was a private placement
and exempt from registration pursuant to Rule 701 under the Securities Act of
1933, as amended.
In April, 2000, the Company completed a private placement of 9,751,470
Units at $.70 per Unit, consisting of one share of common stock and one
redeemable common stock purchase warrants. The transaction was a private
placement and exempt from registration pursuant to Regulation S under the
Securities Act of 1933, as amended.
During the fiscal year ended June 30, 2000, the Company issued 1,136,301
shares pursuant to Regulation S, Rule 701 and Rule 144 promulgated by the United
States Securities and Exchange Commission. The shares were issued for services
at the market value of the shares at prices from $0.38 to $1.75 per shares.
ITEM 6. SELECTED FINANCIAL DATA.
The consolidated statement of income data set forth below with respect to
the years ended June 30, 1998, 1999 and 2000, and the consolidated balance sheet
data at June 30, 1999 and 2000, are derived from, and are qualified by reference
to, the audited consolidated financial statements included elsewhere in this
Form 10-K. The consolidated statement of income data for the years ended June
30, 1996 and 1997 and the consolidated balance sheet data at June 30, 1996, and
1997 are derived from audited consolidated financial statements of the Company
not included herein. The data presented below are qualified by reference to
Consolidated Financial Statements included elsewhere in this filing and should
be read in conjunction with such financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
--------------------------------------------------------------------------------------------
1996 (1) 1997 (1) 1998 (1) 1999 2000
----------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ - $ - $ - $ - $ -
Operating loss (507) (640) (2,353) (322,038) (4,876,905)
Other income, net - - - - 3,212,540
----------------- ----------------- ------------------ ----------------- -----------------
Net loss $(507) $(640) $(2,353) $(322,038) $(1,664,365)
================= ================= ================== ================= =================
Per Share Data:
Net loss $ - $ - $ - $ (0.06) $ (0.08)
================= ================= ================== ================= =================
Weighted average shares
outstanding 1,099,956 1,099,956 2,500,200 5,748,248 20,176,167
</TABLE>
<TABLE>
June 30,
--------------------------------------------------------------------------------------------
1996 (1) 1997(1) 1998(1) 1999 2000
----------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ - $ - $ - $92,176 $59,906
Total assets 2,693 2,053 - 380,064 10,124,153
Long-term debt - - - - -
Shareholders' equity 2,693 2,053 - 300,338 8,967,763
</TABLE>
The Company was dormant from September 25, 1995 to January 8, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-K.
OVERVIEW
We are a Nevada corporation incorporated in September 1995. In December
1998, we changed our management with the objective of analyzing and implementing
a strategy with respect to the long-term opportunities in the Internet sector in
the People's Republic of China and other Chinese-speaking markets, including the
provision of consulting and management services to Internet service providers in
China, collateral operating and Web-based services (e.g., Web-based e-mail and
advanced messaging services), and integration of Internet services with other
forms and means of communication. Additionally, we have explored opportunities
in online lottery kiosks.
From January 1999 through June 1999, our operating activities consisted
primarily of identifying opportunities, negotiating letters of understanding
with potential partners identified in our search, planning and developing the
operations, recruiting personnel, raising capital and purchasing operating
assets.
During the period from June through December 1999, we finalized a number of
agreements (including an agreement to acquire TorchMail.com and a
first-to-market Reseller Agreement with USA.Net, under which TorchMail.com, our
wholly-owned subsidiary, obtained the right to market a Chinese language version
of Web-based e-mail and advanced messaging services to the Chinese speaking
markets), established a wholly-owned subsidiary, Sichuan CathayOnline
Technologies Co. Ltd. (which, through a joint project with Sichuan Guo Xun Xin
Xi Chan Ye You Xian Gong Si, operates a government licensed Internet Service
Provider in the Sichuan Province in China), established a co-branded Web site
with Register.com under which TorchMail.com will sell primary level domains, and
indirectly acquired interests in ten lottery kiosks in Guangzhou, China (which
was subsequently written off.)
From January 2000 through March 2000, the Company's operating activities
consisted primarily of continuing to identify opportunities, negotiating Letters
of Understanding with potential partners identified in our search, planning and
developing operations, planning corporate restructuring, recruiting personnel,
raising capital and purchasing operating assets. During the same period, we
finalized a number of arrangements including:
o the appointment of Mr. Ken Levy as a Director of the Company;
o the appointment of Mr. Keli Wu as Chairman of the Beijing operations;
o the launch of the co-branded Web site with Register.com; and
o the signing of the agreement with the National Library of China by
TorchMail.com.
During this period, we invested over $3,000,000 in our Chinese subsidiary,
Sichuan CathayOnline, to provide technological and personnel support.
From March 2000 through June 2000, we announced:
o the acquisition of a controlling interest in CMD Capital Limited, the
parent company of ChinaNet Publishing Co. Ltd.;
o the closing of a $6.82 million financing;
o the completed construction of our state-of-the-art Internet facility
in Sichuan Province;
o the appointment of Mr. David Ng as Director of Corporate Finance and
Special Projects;
o an agreement with Sichuan Famous Brand Product Enterprises to act as
its exclusive business-to-business marketer for its Web site and
products online;
o a co-operation agreement with the Second Institution of the Aerospace
Machine & Electronic Group to provide Internet services to their
subscriber base of 70,000 users;
o the sale of our interest in CMD Capital Limited and a strategic
alliance with CathayOne Inc.
Subsequent to our fiscal year ended June 30, 2000, we appointed Mr. Glenn
Ohlhauser as our Chief Financial Officer. We also commenced the marketing of our
Personal Intelligent Messaging services and announced the opening of a new
satellite office in the city of Chongqing, an autonomous city-state situated in
Sichuan Province. Chongqing is China's largest city, with over 33 million
residents, and the fastest-growing city for Internet use in southwestern China
To date, we have invested over $3,000,000 in our Chinese subsidiary,
Sichuan CathayOnline, to provide technological and personnel support, which we
believe will allow Sichuan Guo Xun to expand its operations to accommodate up to
25,000 subscribers. Sichuan Guo Xun's primary target is providing ISP services,
training, service, technical support and Web site development to mid-sized and
large corporations and government institutions in the Sichuan Province desiring
to establish or expand their online presence.
Presently, we generate no significant income and have incurred net losses
since inception. Our prospects must be considered in light of the significant
risks, costs and difficulties often encountered by enterprises in their early
stages of development, in particular companies in the Internet sector targeting
and operating in the Chinese and East Asian markets.
Our capital and operating expenses will increase significantly in the near
future as the result of commitments and hiring requirements to meet marketing
objectives. We will need to raise additional funds required for our operations
and expansion in the near future. There is no guarantee that we will be able to
raise the funds successfully.
We believe that opportunities exist in the Internet industry in China.
Management believes that the combination of China and the Internet creates one
of the greatest opportunities ever for visionaries. We are well positioned to
aggressively seize our market position, acquire new customers and increase our
market share. Additionally, the combined effects of increased industry
deregulation coupled with a growing demand for Internet services, products and
applications are expected to create exciting investment opportunities in China.
We expect to expand our employee base. We currently have approximately 80
employees. With additional funding, we expect to increase our employee base to
over 100 in the next six months, including sales, marketing, operational,
technical and customer support resources. In particular, we intend to expand our
sales force to market the services provided by the ISP and the marketing of the
Web-based e-mail and advanced messaging services under the name TorchMail.
We intend to further develop existing strategic partnerships and identify
new opportunities to expand our distribution channels for Web-based e-mail and
advanced messaging services to the Chinese speaking markets, in particular
partnerships with other Internet service providers, portals, Web hosting
companies and government institutions in China.
Currently, our principal office is in New York. We maintain a technical and
administrative office in Vancouver, Canada. Our operational offices are located
in Chengdu and Beijing, China. We also maintain a representative office in
Jiangmen, China.
SICHUAN ISP PROJECT
On August 10, 1999, we organized, in accordance with the laws of China, a
wholly-owned subsidiary, Sichuan CathayOnline Technologies Co. Ltd. ("Sichuan
CathayOnline"), which operates in the City of Chengdu. On September 9, 1999,
Sichuan CathayOnline entered into a management and consultancy service agreement
with Sichuan Guo Xun Xin Xi Chan Ye You Xian Gong Si ("Sichuan Guo Xun"), a
local ISP in Sichuan Province licensed by the Sichuan Administrative Bureau for
Posts and Telecommunications for an initial term from September 8, 1999 to March
23, 2003. Pursuant to this agreement, Sichuan CathayOnline and Guo Xun work
jointly in providing Internet services and Sichuan CathayOnline is entitled to
90% of the profit generated from such services.
In May 2000, we announced the signing of an agreement with Sichuan Famous
Brand Product Enterprises to act as its exclusive business-to-business marketer
for its Web site and products online. We, in conjunction with Sichuan Guo Xun,
developed the Web site for Sichuan Famous Brands, which represents and contains
the equivalent of Sichuan Province's "Fortune 100". The main function of the
site, which contains more than 300 brand name enterprises, is to promote the
provincial economy by marketing products in the international market and to
expand sales of the products in the Chinese market via the Internet. The Web
site was designed to build a solid foundation for Sichuan Famous Brands and to
expand its role in e-business and e-commerce.
BEIJING ISP PROJECT
On April 27, 2000, we announced a cooperation agreement with the Second
Institution of the Aerospace Machine & Electronic Group ("AMEG") to provide
Internet services for the region of Beijing, the capital city of China. AMEG's
current scope of business includes telephone communications, computer network
communications, cable television networks and fiber-optic cable networks. It is
our intention, under the cooperation agreement, to be able to build out the
infrastructure so that we can provide full Internet service to AMEG's existing
user base which AMEG intends to expand.
TORCHMAIL.COM, INC.
We intend to seek out and train strategically located sales teams to
promote TorchMail's Web-based professional advanced messaging services in China.
In March 2000, the Company announced a partnership agreement to supply
co-branded Web-based e-mail services with the National Library of China, the
largest library in Asia and a national general repository of publications. The
National Library also provides services for the central government priority
readers in research, educational and production institutions throughout China,
as well as the general population. The National Library communicates with an
estimated 4,000 libraries in China and 1,000 other libraries worldwide. With
approximately 1 million hits per day, more than 200,000 publications available
for viewing online, and more than 49 million pages of information, the National
Library Web site has been awarded "The Best Site" under the category of
"Culture, Entertainment and Sports" issued by China Internet Competition
Committee in January 2000. Under the agreement TorchMail will provide the
National Library with Web messaging services.
It is TorchMail's intent to expand its international member base by adding
additional international partners and by providing new features to the services
offered. We are also exploring business opportunities and partnerships in other
market segments including the wireless market and education related markets. We
will also continue to seek to acquire strategic businesses and technology that
will help us serve these markets.
In July 1999, TorchMail entered into a reseller agreement with USA.Net Inc.
("USA.Net") pursuant to which USA.Net agreed to adapt and customize its
professional messaging services and e-mail applications to the Chinese language
for TorchMail to employ in our product offerings. However, USA.Net was unable to
adapt and provide such services in a manner which we considered acceptable for
the Chinese market. As a result, the reseller agreement was terminated, and we
are negotiating with USA.Net to settle their account. We are considering other
alternatives to replace the services which were supposed to be provided by
USA.Net.
MARKET STRATEGY
According to the statistics compiled by the China Internet Network
Information Center ("CNNIC") in 1999, the three most important factors
considered by Internet users when choosing an ISP are connection speed, service
quality and price. Our strategy is to aggressively ensure that all three of
these factors are delivered to our customers. We will provide more bandwidth for
Internet upstream connection, linking our system to both ChinaNet and Unicom and
making sure that if traffic on one side is congested, users' traffic can be
routed through another carrier. For customer quality, we provide 24-hour
service.
While our prices will be competitive with other providers, we will offer
value-added Internet services such as Internet Fax/Phone, systems integration,
on-site training, full customer support and other advanced Web features.
Additionally, we will hold seminars, on-site training at our customer's office,
offer the "Electronic Mall" for use by advertisers, provide trial accounts, have
dedicated lines and have virtual Web and domain names. We believe that we will
be able to stand out among our competitors and that our customers will be
completely satisfied with this full-service solution.
Our long-term objective is to become the communications portal for our
members on the Web by combining e-mail, fax, voicemail, calendars, address books
and related tools into one fully integrated service. We plan to expand our
international member base by adding additional international partners and by
providing new features such as e-mail language translation. We are also
exploring business opportunities and partnerships in other market segments such
as the wireless market and schools. We may also continue to seek to acquire
additional strategic businesses and technology that will help us to better serve
these markets.
GROWTH OF THE BUSINESS
As we become more fully established in Chengdu, we will quickly expand
services in other cities in China. As our Internet connectivity network expands
to cover a greater number of major urban markets, we will continue to focus upon
building a scalable network platform and forming strategic business and
technology partnerships. Under this strategy, we expect to achieve rapid growth
and to quickly become the leading brand name within our respective markets.
We anticipate that, by first quarter of 2001, we will have commenced
services in Beijing and Guangzhou. Services in MianYang and Shanghai are
expected to follow.
RESULTS OF OPERATIONS
During the period from September 20, 1995 to January 6, 1998, we did not
engage in any operations and were considered dormant. On January 6, 1998, we
obtained a Certificate of Renewal from the State of Nevada. As of June 30, 2000,
the Company was still in the development stage and, as of June 30, 2000, has
only recently commenced planned principal operations.
Since inception, we have incurred significant losses and, as of June 30,
2000, had an accumulated deficit of approximately $1.99 million. It is our
intention to invest heavily to expand network infrastructure and expand sales
and marketing. We expect to incur substantial operating losses in the
foreseeable future.
With the rapidly evolving nature of the technology industry, potential for
political uncertainty and our limited operating history, we believe that any
period to period comparisons of our revenues and operating results are not
meaningful and should not be relied upon as an indication of future performance.
As of June 30, 2000 the Company had approximately 80 employees, in comparison
with three full time employees in just fifteen months earlier. CathayOnline does
not believe that its historical growth rates for revenues, expenses, capital
investments or personnel are indicative of future results.
INCOME TAXES
No provision for federal and state incomes taxes has been recorded as we
have incurred net operating losses from inception through June 30, 2000. As of
June 30, 2000, we had approximately $1,990,000 of federal and state net
operation loss carryforwards available to offset future taxable income which
expire in varying amounts beginning in 2015. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Because there is significant doubt
as to whether we will realize any benefit from this deferred tax asset, we have
established a full valuation allowance as of June 30, 2000.
INFLATION AND REGULATION
Our operations have not been, and in the near term are not expected to be,
materially affected by inflation or changing prices. We will encounter
competition from a variety of firms selling Internet services in our market
area. Many of these firms have long-standing customer relationships and are
well-staffed and well financed. We believe that competition in the Internet
industry is based on competitive pricing, although the ability, reputation and
support of a marketing network is also significant. We do not believe that any
recently enacted or presently pending proposed legislation will have a material
adverse effect on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations from the net proceeds from
the sale of common stock and other securities convertible into common stock. For
the fiscal year ended June 30, 1999, cash provided by financing activities was
approximately $482,026. For the fiscal year ended June 30, 2000, cash provided
by financing activities was approximately $6,457,389.
As of June 30, 2000, we have no debt.
Our current cash balances will not be sufficient to meet our working
capital and capital expenditure requirements for the next twelve months. It is
anticipated that with the further expansion of the operations we will incur
negative cash flows, therefore requiring us to seek additional financings to
support the growth in operations, both on a short-term and long-term basis. We
expect to acquire or invest in businesses, products, services and technologies
that complement or augment our service offerings and customer base. We currently
are engaged in discussions with a number of companies regarding strategic
acquisitions or investments. Although these discussions are ongoing, no
definitive agreements have been signed and there can be no assurance that any of
these discussions will result in actual acquisitions. It is anticipated that
some of the acquisitions will be paid for by issuing additional common stock and
this could dilute our shareholders. In addition, there may be the requirement to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions, which would materially increase the
Company's operating expenses. In addition, we may seek to raise funds by
offering debt or equity to the public. Thereafter, we may need to raise
additional funds in order to meet funding requirements of a more rapid expansion
plan, potential acquisitions, development of new or enhanced products or
services, in response to competitive pressures or to acquire technologies or
complimentary products or businesses.
There is no guarantee that we will be able to raise the funds that we need.
In addition, unless we amend our Articles of Incorporation to increase the
number of authorized shares, we may not have sufficient authorized but unissued
shares to permit us to offer additional common stock to potential investors. As
of September 22, 2000, we have issued and outstanding 30,184,201 shares of
common stock and warrants to purchase 45,231,221 shares of common stock, while
we are currently authorized to issue only up to 50,000,000 shares of common
stock.
If we cannot obtain outside financing, we will consider scaling back our
expansion plans for TorchMail's and Sichuan Guo Xun's operations, and
re-evaluate certain potential acquisitions and, instead, rely upon internally
generated cash flow. Resources that would have been allocated to a more
aggressive expansion plan would then be diverted towards a broad based
advertising campaign to build upon the subscriber bases permitting an internally
financed growth.
Net of depreciation, our investment in property and equipment was
$1,592,419 as of June 30, 2000. In comparison, our investment in property and
equipment, net of depreciation, was nominal as of June 30, 1999. Installation of
infrastructure equipment in Chengdu, purchases of furniture and equipment for
new employees, and leasehold improvements related to office expansions accounted
for this increase. It is expected that our investments in property and equipment
will continue to grow as we seek to increase capacity and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are not exposed to a material level of market risks due to changes in
interest rates. We do not have outstanding debt instruments and we do not
maintain a portfolio of interest-sensitive debt instruments.
We expect to derive a significant portion of revenues in the form of
Renminbi and, therefore, may be exposed to significant foreign currency risks in
the future. During the fiscal year ended June 30, 2000, we did not engage in
hedging activities to mitigate the impact of changes in foreign exchange rates.
We may in the future use foreign currency forward exchange contracts as a
vehicle for hedging purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements listed under the heading "(a)
(1) Consolidated Financial Statements" of Item 14 hereof, which financial
statements are incorporated herein by reference in response to this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The response to this item is incorporated by reference from the Sections
titled "Management" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement for its 2000 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
The response to this item is incorporated by reference from the Section
titled "Executive Compensation" in the Registrant's Proxy Statement for its 2000
Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to this item is incorporated by reference from the Section
titled "Share Ownership" in the Registrant's Proxy Statement for its 2000 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this item is incorporated by reference from the Section
titled "Certain Relationships and Related Transactions" in the Registrant's
Proxy Statement for its 2000 Annual Meeting of Shareholders.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Consolidated Financial Statements
(a)(2) Financial Statement Schedules
(a)(3) Exhibits
The following Exhibits are incorporated herein by reference or are filed
with this report as indicated below. Copies of exhibits will be furnished, upon
request, to holders or beneficial owners of the Company's Common Stock as of
September 22, 2000, subject to payment in advance of a fee of 25 cents per page
to reimburse the Company for reproduction costs.
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -------------------------
2.1 Share Purchase Agreement dated as of June 30, 2000 among
CathayOnline Technologies (Hong Kong) Limited, SNet
Communications (HK) Limited, Ting Kan Nok, CMD Capital
Limited, CathayBancorp.com, Limited and Premier Brands, Inc. *
3.1 Articles of Incorporation of CathayOnline Inc. (Filed as
Exhibit 3.1 to Amendment No. 1 to the Company's Current Report
on Form 8-K dated January 18, 2000 and incorporated herein by
reference.)
3.2 Amended and Restated By-Laws of CathayOnline Inc. *
4.1 Specimen Form of Common Stock Certificate. (Filed as Exhibit
4.1 to Amendment No. 1 to the Company's Current Report on Form
8-K dated January 18, 2000 and incorporated herein by
reference.)
4.2 Form of Warrant issued to Employees and Consultants. (Filed as
Exhibit 4.2 to Amendment No. 1 to the Company's Current Report
on Form 8-K dated January 18, 2000 and incorporated herein by
reference.)
4.3 Form of Warrant issued in April 1999 Offering. (Filed as
Exhibit 4.3 to Amendment No. 1 to the Company's Current Report
on Form 8-K dated January 18, 2000 and incorporated herein by
reference.)
4.4 Form of Warrant issued in June 1999 Offering. (Filed as
Exhibit 4.4 to Amendment No. 1 to the Company's Current Report
on Form 8-K dated January 18, 2000 and incorporated herein by
reference.)
4.5 Form of Warrant Issued in Regulation S Offering. (Filed as
Exhibit 4.5 to Amendment No. 1 to the Company's Current Report
on Form 8-K dated January 18, 2000 and incorporated herein by
reference.)
10.1 Management and Consultancy Service Agreement with Sichuan Guo
Xun Xin Xi Chan Ye You Xian Gong Si. (Filed as Exhibit 10.1 to
Amendment No. 1 to the Company's Current Report on Form 8-K
dated January 18, 2000 and incorporated herein by reference.)
10.2 Agreement to Acquire TorchMail.com Inc. (Filed as Exhibit 10.2
to Amendment No. 1 to the Company's Current Report on Form 8-K
dated January 18, 2000 and incorporated herein by reference.)
10.3 Employment Agreement between CathayOnline Inc. and Brian
Ransom. (Filed as Exhibit 10.6 to Amendment No. 1 to the
Company's Current Report on Form 8-K dated January 18, 2000
and incorporated herein by reference.)
10.4 Management Agreement with Owen Li. (Filed as Exhibit 10.7 to
Amendment No. 1 to the Company's Current Report on Form 8-K
dated January 18, 2000 and incorporated herein by reference.)
10.5 Consulting Agreement with Peter Lau. (Filed as Exhibit 10.8 to
Amendment No. 1 to the Company's Current Report on Form 8-K
dated January 18, 2000 and incorporated herein by reference.)
10.6 Co-Branded Site Services Agreement dated as of October 27,
1999 between register.com, inc. and TorchMail.com, Inc. (Filed
as Exhibit 10.11 to Amendment No. 1 to the Company's Current
Report on Form 8-K dated January 18, 2000 and incorporated
herein by reference.)
10.7 Lease Agreement with Sichuan Dongfu Group Company. (Filed as
Exhibit 10.12 to Amendment No. 1 to the Company's Current
Report on Form 8-K dated January 18, 2000 and incorporated
herein by reference.)
10.8 Lease Agreement with Beijing Tongkai Development Co., Ltd. for
Office Space in Beijing, China. (Filed as Exhibit 10.14 to
Amendment No. 1 to the Company's Current Report on Form 8-K
dated January 18, 2000 and incorporated herein by reference.)
10.9 Cooperation Agreement dated as of May 11, 2000 among Wuyi
University of Jiangmen, CathayOnline Technologies (Hong Kong)
Limited, and Sichuan Guo Xun Xin Xi Chan Ye You Xian Gong Xi *
10.10 Cooperation Agreement with the Second Institution of the
Aerospace Machine & Electronic Group *
10.11 Cooperation Agreement dated February 16, 2000 between
TorchMail.com, Inc. and Digital Technology Co. Ltd. of
National Library of China *
21.1 List of Subsidiaries *
27.1 Financial Data Schedule *
-----------------------
* Filed with this report
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Brian W. Ransom
-------------------- Chairman of the Board, September 29, 2000
Brian W. Ransom President
/s/ Glenn R. Ohlhauser
-------------------- Chief Financial Officer September 29, 2000
Glenn R. Ohlhauser
/s/ Peter S. Lau
-------------------- Director September 29, 2000
Peter S. Lau
/s/ Owen L. Li
-------------------- Director September 29, 2000
Owen L. Li
/s/ Kenneth M. Levy
-------------------- Director September 29, 2000
Kenneth M. Levy
<PAGE>
CATHAYONLINE, INC.
AND
SUBSIDIARIES
(A Development Stage Company)
-:-
INDEPENDENT AUDITOR'S REPORT
JUNE 30, 2000, 1999 AND 1998
<PAGE>
CONTENTS
Page
Independent Auditor's Report..............................................F - 1
Consolidated Balance Sheets
June 30, 2000, 1999 and 1998............................................F - 2
Consolidated Statements of Operations for the
Years Ended June 30, 2000, 1999 and 1998...............................F - 4
Consolidated Statement of Stockholders' Equity
Since September 20, 1995 (Inception) to June 30, 2000..................F - 5
Consolidated Statements of Cash Flows for the
Years Ended June 30, 2000, 1999 and 1998...............................F - 7
Notes to Consolidated Financial Statements................................F - 9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
We have audited the accompanying consolidated balance sheets of
CathayOnline, Inc. and subsidiaries (a development stage company) as of June 30,
2000 and 1999, and the related consolidated statements of operations, and cash
flows for the three years ended June 30, 2000, 1999 and 1998, and the
consolidated statement of stockholders' equity since September 20, 1995
(inception) to June 30, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of CathayOnline, Inc.
and subsidiaries (a development stage company) as of June 30, 2000 and 1999, and
the results of its operations and its cash flows for the three years ended June
30, 2000, 1999 and 1998, in conformity with generally accepted accounting
principles.
Respectfully submitted
/s/ Robison, Hill & Co.
Certified Public Accountants
Salt Lake City, Utah
September 27, 2000
F - 1
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
BALANCE SHEETS
June 30,
-------------------------------
2000 1999
------------ ------------
ASSETS
Current Assets:
Cash & Cash Equivalents ............... $ 786,290 $ 164,982
Restricted Cash ....................... 82,497 6,920
Advances .............................. 22,122 --
Prepaid expenses & Deposits ........... 325,387 --
------------ ------------
Total Current Assets ................ 1,216,296 171,902
------------ ------------
Fixed Assets:
Office Equipment ...................... 133,753 3,680
Computer Equipment .................... 1,381,304 --
Furniture & Fixtures .................. 168,563 --
Leasehold Improvements ................ 229,925 --
------------ ------------
1,913,545 3,680
Less Accumulated Depreciation ............ (321,126) (64)
------------ ------------
Net Fixed Assets .................... 1,592,419 3,616
------------ ------------
Other Assets:
Intangible Assets ..................... 84,962 --
Condominium ........................... 230,476 --
Available-for-sale Investments ........ 7,000,000 --
Investment in Subsidiaries ............ -- 204,546
------------ ------------
Total Other Assets .................. 7,315,438 204,546
------------ ------------
Total Assets: ............................ $ 10,124,153 $ 380,064
============ ============
F - 2
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
BALANCE SHEETS
(Continued)
June 30,
----------------------------
2000 1999
------------ ------------
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable & Accrued Expenses ......... $ 1,156,390 $ 79,726
------------ ------------
Total Liabilities ......................... 1,156,390 79,726
------------ ------------
Stockholders' Equity:
Common Stock, Par value $.001
Authorized 50,000,000 shares,
Issued 28,979,201 and 11,752,700 shares
at June 30, 2000 and 1999 ................ 28,979 11,753
Paid-In Capital ............................. 11,337,437 1,043,373
Stock Subscribed Receivable ................. (408,750) (429,250)
Accumulated Unrealized Gains/Losses
On Investments ........................... -- --
Deficit Accumulated During the
Development Stage .......................... (1,989,903) (325,538)
------------ ------------
Total Stockholders' Equity ................ 8,967,763 300,338
------------ ------------
Total Liabilities and
Stockholders' Equity .................... $ 10,124,153 $ 380,064
============ ============
The accompanying notes are an integral part of these financial statements.
F - 3
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
since
inception
For the year ended of
June 30, development
-----------------------------------------
2000 1999 1998 stage
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues: ....................... $ -- $ -- $ -- $ --
Expenses:
General & Administrative ..... 4,876,905 322,038 2,353 5,202,443
----------- ----------- ----------- -----------
Net Operating Loss ......... (4,876,905) (322,038) (2,353) (5,202,443)
Other Income (Expense)
Interest, Net ................ (1,791) -- -- (1,791)
Gain on Sale of Assets ....... 5,238,394 -- -- 5,238,394
Loss on Abandonment of Assets (94,063) -- -- (94,063)
Loss on Write Down of Goodwill (1,930,000) -- -- (1,930,000)
----------- ----------- ----------- -----------
Net Other Income (Expense) . 3,212,540 -- -- 3,212,540
----------- ----------- ----------- -----------
Net Loss Before Taxes ...... (1,664,365) (322,038) (2,353) (1,989,903)
Income Taxes .................... -- -- -- --
Net Loss ................... $(1,664,365) $ (322,038) $ (2,353) $(1,989,903)
=========== =========== =========== ===========
Basic & Diluted loss per share .. $ (0.08) $ (0.06) $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 4
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
-----------------------------------
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
SINCE SEPTEMBER 20, 1995 (INCEPTION) TO JUNE 30, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Stock During
Common Stock Paid-In Subscribed Development
Shares Par Value Capital Receivable Stage
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of Stock at formation to
incorporators for services rendered 9,999 $ 200 $ -- $ -- $ --
Sale of common stock ................ 15,000 3,000 -- -- --
Effect of 44 for 1 stock split ...... 1,074,957 (2,100) 2,100 -- --
Net Loss for the period ............. -- -- -- -- (507)
---------- ---------- ---------- ---------- ----------
Balances at June 30, 1996 ........... 1,099,956 1,100 2,100 -- (507)
Net loss for the year ............... -- -- -- -- (640)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 ............ 1,099,956 1,100 2,100 -- (1,147)
January 5, 1998 Issuance of Stock
for services and payment of
accounts payable ................. 1,539,912 1,540 (1,240) -- --
Net Loss for the year ............... -- -- -- -- (2,353)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998 ............ 2,639,868 2,640 860 -- (3,500)
Cancellation of Officer Shares ...... (1,539,912) (1,540) 1,540 -- --
Retroactive adjustment for 2.273
to 1 stock split August 27, 1998 . 1,400,244 1,400 (1,400) -- --
---------- ---------- ---------- ---------- ----------
Restated balance June 30, 1998 ...... 2,500,200 2,500 1,000 -- (3,500)
Issuance of stock for cash .......... 5,785,000 5,785 52,065 -- --
Capital contributed by shareholder .. -- -- 2,526 -- --
Issuance of stock for payment of .... 202,500 203 (203) -- --
accounts payable
Issuance of stock for payment of .... 475,000 475 118,275 -- --
accounts payable
Issuance of Stock for cash .......... 700,000 700 349,300 -- --
Issuance of Stock for cash ......... 2,090,000 2,090 520,410 (429,250) --
Net Loss ............................ -- -- -- -- (322,038)
---------- ---------- ---------- ---------- ----------
</TABLE>
F - 5
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
-----------------------------------
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
SINCE SEPTEMBER 20, 1995 (INCEPTION) TO JUNE 30, 2000
Continued
<TABLE>
<CAPTION>
Deficit
Accumulated
Stock During
Common Stock Paid-In Subscribed Development
Shares Par Value Capital Receivable Stage
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1999 ............ 11,752,700 11,753 1,043,373 (429,250) (325,538)
Issuance of Stock to
acquire Torchmail.com Ltd. ....... 2,500,000 2,500 1,322,500 -- --
Issuance of Stock to acquire Lazzara
Financial Asset Recovery Services
Ltd .............................. 250,000 250 344,750 -- --
Issuance of Stock to
acquire CMD Capital Ltd. ......... 775,000 775 1,068,725 -- --
Issuance of Stock for cash .......... 2,500,000 2,500 935,000 (408,750) --
Issuance of Stock for cash,
net of issue costs $1,361,596 .... 9,751,407 9,752 5,454,637 -- --
Issuance of Stock on cashless
exercise of warrant .............. 213,793 213 74,786 -- --
Issuance of Stock on exercise of
warrants ......................... 100,000 100 34,900 -- --
Issuance of Stock for services ...... 1,136,301 1,136 1,058,766 -- --
Collection of Stock Subscribed
Receivable ....................... -- -- -- 429,250 --
Net Loss for the year ............... -- -- -- -- (1,664,365)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 2000 ............ 28,979,201 $ 28,979 $11,337,437 $ (408,750) $(1,989,903)
========== ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 6
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
-----------------------------------
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
Since
Inception
For the years ended of
June 30, Development
-----------------------------------------
2000 1999 1998 Stage
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Loss .................................... $(1,664,365) $ (322,038) $ (2,353) $(1,989,903)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............ 321,062 64 2,053 324,326
Issuance of common stock for expenses .... 1,114,339 140,350 300 1,254,989
Gain on Sale of Assets ................... (5,238,394) -- (5,238,394)
Loss on Abandonment of Assets ............ 94,063 -- -- 94,063
Loss on Write Down of Goodwill ........... 1,930,000 -- -- 1,930,000
Change in operating assets and liabilities:
Restricted cash .......................... (75,577) (6,920) -- (82,497)
Advances ................................. (22,122) -- -- (22,122)
Prepaid Expenses & Deposits .............. (325,387) -- -- (325,387)
Accounts Payable & Accrued Expense ....... 1,062,844 79,726 -- 1,142,570
----------- ----------- ----------- -----------
Net Cash Used in Operating Activities ....... (2,803,537) (108,818) -- (2,912,355)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of Equipment .................... (2,234,584) (3,680) -- (2,238,264)
Purchase of Intangible Assets ............ (60,400) -- -- (60,400)
Cash Payments for CMD .................... (692,106) -- -- (692,106)
Cash Payment for Goodwill ................ (250,000) -- -- (250,000)
Investment in Subsidiaries ............... 204,546 (204,546) -- --
----------- ----------- ----------- -----------
Net Cash Used in Investing Activities ....... (3,032,544) (208,226) -- (3,240,770)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common stock ...... 6,457,389 479,500 -- 6,936,889
Capital contributed by shareholder .......... -- 2,526 -- 2,526
----------- ----------- ----------- -----------
Net Cash Provided by Financing Activities ... 6,457,389 482,026 -- 6,939,415
----------- ----------- ----------- -----------
</TABLE>
F - 7
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
-----------------------------------
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Cumulative
Since
Inception
For the years ended of
June 30, Development
-----------------------------------------
2000 1999 1998 Stage
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net (Decrease) Increase in
Cash and Cash Equivalents ................. 621,308 164,982 -- 786,290
Cash and Cash Equivalents
at Beginning of Period .................... 164,982 -- -- --
----------- ----------- ----------- -----------
Cash and Cash Equivalents
at End of Period .......................... $ 786,290 $ 164,982 $ -- $ 786,290
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest .................................. $ 26,348 $ -- $ -- $ 26,348
Income taxes .............................. $ -- $ -- $ -- $ --
SUPPLEMENTAL DISCLOSURE OF NON-
CASH INVESTING AND FINANCING
ACTIVITIES:
Common Stock issued for Intangible Assets ... $ 20,562 $ -- $ -- $ 20,562
Common Stock issued for Subsidiaries ........ $ 2,739,500 $ -- $ -- $ 2,739,500
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 8
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for CathayOnline, Inc. (formerly
Kyocera Management, Ltd.) is presented to assist in understanding the Company's
financial statements. The accounting policies conform to generally accepted
accounting principles and have been consistently applied in the preparation of
the financial statements.
Organization and Basis of Presentation
The Company was incorporated under the laws of the State of Nevada on
September 20, 1995 using the name of Kyocera Management, Ltd. The name was
changed to CathayOnline, Inc. on April 14, 1999. The Company ceased all
operating activities during the period from September 20, 1995 to January 6,1998
and was considered dormant. On January 6, 1998, the Company obtained a
Certificate of renewal from the State of Nevada. The Company as of June 30, 2000
is in the development stage, and has not commenced planned principal operations.
Principles of Consolidation
The consolidated financial statements for June 30, 2000 and the year
ended include the accounts of CathayOnline, Inc. and the following wholly owned
subsidiaries:
* CathayOnline Technologies (Hong Kong) Ltd, a Hong Kong corporation
* CathayOnline (BVI) Ltd, a British Virgin Islands corporation
* Torchmail.com Inc, a Turks & Caicos, BWI corporation
* Sichuan CathayOnline Technologies Co. Ltd, a wholly owned foreign
enterprise corporation, PRC
* CathayOnline, Inc, a Canadian Corporation
* China Lottery (Hong Kong) Limited, a Hong Kong corporation
* Beijing CathayOnline Technologies Co. Ltd, a wholly owned foreign
enterprise, PRC
Nature of Business
Through its subsidiary companies and exclusive partnership and joint
venture arrangements with certain Chinese entities, the Company will be an
Internet Service Provider and provides web based email and advanced messaging
services for the Chinese speaking markets, principally in the areas of Sichuan
province, Beijing and Guangdong. During the year the Company has incurred
expenditures to build its required infrastructure and to complete various
strategic cooperation agreements for access to operating licenses and customer
base.
F - 9
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
During the year, through its wholly owned subsidiary CathayOnline
Technologies (Hong Kong) Ltd, the company acquired and operated ten online
lottery kiosks in Guangzhou, China. The kiosk and lottery operations were to be
transferred to China Lottery (Hong Kong) Limited (China Lottery) and the Company
had entered into an agreement to sell China Lottery to an unrelated third party
for $150,000. The sale was not completed and the Company abandoned the lottery
operations and wrote off the cost of the kiosks.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
Marketable Securities
The Company's securities investments that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities. Trading securities are recorded at fair value on the balance
sheet in current assets, with the change in fair value during the period
included in earnings. Securities investment that the Company has the positive
intent and ability to hold to maturity are classified as held-to-maturity
securities and recorded at amortized cost in investment and other assets.
Securities investments not classified as either held-to-maturity or trading
securities are classified as available-for-sale securities.
Available-for-sale-securities are recorded at fair value as investments and
other assets on the balance sheet, with the change in fair value during the
period excluded from earnings and recorded net of tax as a component of other
comprehensive income.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F - 10
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Translation of Foreign Currrency
The Companies functional currencies include U.S. Dollars, Canadian
Dollars and Chinese Renminbi. All balance sheet accounts of foreign operations
are translated into U.S. dollars at the year-end rate of exchange and statement
of operations items are translated at the weighted average exchange rates for
the year. The resulting translation adjustments are made directly to a separate
component of the stockholders' equity. Certain foreign activities are considered
to be an extension of the U.S. operations, and the gain or loss resulting from
re-measuring these transactions into U.S. dollars is included in income. Gains
or losses from other foreign currency transactions, such as those resulting from
the settlement of foreign receivables or payables, are included in the
Statements of Operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, principally
on a straight-line basis as follows:
Office Equipment 3-5 years
Computer Equipment 3-5 years
Furniture & Fixtures 5-7 years
Leasehold Improvements 7-10 years
Upon sale or other disposition of property and equipment, the cost and
related accumulated depreciation or amortization are removed from the accounts
and any gain or loss is included in the determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as
incurred. Major overhauls and betterments are capitalized and depreciated over
their useful lives.
Intangible assets are amortized over useful life of 5 to 10 years.
F - 11
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
The Company has adopted the Financial Accounting Standards Board SFAS
No., 121, "Accounting for the Impairment of Long-lived Assets." SFAS No. 121
addresses the accounting for (i) impairment of long-lived assets, certain
identified intangibles and goodwill related to assets to be held and used, and
(ii) long-live lived assets and certain identifiable intangibles to be disposed
of. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected future cash flows from the
used of the asset and its eventual disposition (un-discounted and without
interest charges) is less than the carrying amount of the asset, an impairment
loss is recognized.
Reclassifications
Certain reclassifications have been made in the 1999 financial
statements to conform with the 2000 presentation.
Loss per Share
The reconciliations of the numerators and denominators of the basic
loss per share computations are as follows:
Per-Share
Income Shares Amount
------------- ------------- --------------
(Numerator) (Denominator)
For the year ended June 30, 1998
Basic Loss per Share
Loss to common shareholders $ (2,353) 2,500,200 $ --
============= ============= ==============
For the year ended June 30, 1999
Basic Loss per Share
Loss to common shareholders $ (322,038) 5,748,248 $ (0.06)
============= ============= ==============
For the year ended June 30, 2000
Basic Loss per Share
Loss to common shareholders $ (1,664,365) 20,176,167 $ (0.08)
============= ============= ==============
F - 12
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
The effect of outstanding common stock equivalents would be
anti-dilutive for June 30, 2000, 1999 and 1998 and are thus not considered.
Concentration of Credit Risk
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements.
NOTE 2 - INVESTMENT IN MARKETABLE EQUITY SECURITIES
The Company's investments in marketable equity securities are held for
an indefinite period of time and are thus classified as
available-for-sale-securities. Unrealized holding gains on such securities, are
added to stockholders' equity. The Company's acquired $7,000,000 in marketable
equity securities on June 30, 2000. As of June 30, 2000 there are no gains or
losses, realized or unrealized on these securities.
NOTE 3 - ACQUISITION OF SUBSIDIARIES
On July 2, 1999 the Company completed an Acquisition (the
"Acquisition") in which it acquired 100% of the issued and outstanding capital
stock of TorchMail.com Inc., a Turks & Caicos, BWI corporation in exchange for
$10,000 and 2,500,000 shares of the Company's $.001 par value common stock,
valued at $0.53 per share comprising approximately 15% of the Company's issued
and outstanding common stock after giving effect to the Acquisition. Further,
upon the resale of 360,000 Seats (defined as a mailbox created within a Customer
Account for use of the Services by a User) the Company will issue an additional
2,500,000 shares, upon the resale of 500,000 Seats the Company will issue
1,250,000 shares and upon the resale of 750,000 Seats the Company will issue
1,250,000 shares. The transaction has been accounted for as a purchase. As at
the date of acquisition, Torchmail had not yet commenced operations and had no
assets or liabilities except for an email reseller agreement. The excess
purchase price paid of $1,335,000 over the net tangible assets acquired was
recorded as goodwill and has been written off. Ownership of Torchmail is held
through the Company's wholly owned subsidiary CathayOnline (BVI) Ltd.
F - 13
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 3 - ACQUISITION OF SUBSIDIARIES (Continued)
On January 18, 2000 the Company acquired all of the issued and
outstanding shares of Lazzara Financial Asset Recovery Inc. (Lazzara) and
executed a merger agreement with Lazzara. Lazzara was registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and was required to file
reports under said Exchange Act. The Company is the surviving entity under the
merger agreement and elected to succeed Lazzara's reporting requirements.
Consideration for the acquisition was the issue of 25,000 shares of Company
valued at $1.38 per share, paid to the existing shareholders of Lazzara, plus
225,000 shares valued at $1.38 per share and $250,000 cash paid for services
rendered in connection with the merger. The transaction has been accounted for
as a purchase. As at the date of the acquisition and merger, Lazzara had no
operations and no assets or liabilities. The excess of total consideration paid
of $595,000 over the net tangible assets acquired was recorded as goodwill and
has been written off.
On April 1, 2000 the Company, through its wholly owned subsidiary,
CathayOnline Technologies (Hong Kong) Ltd, acquired 62.5% of the issued and
outstanding shares of CMD Capital Ltd (CMD), a Hong Kong company. Consideration
is $1,000,000 plus the issue of 2,000,000 shares of the Company to be paid as
follows:
- $500,000 and 1,000,000 shares within 30 days of executing the
agreement
- $500,000 and 1,000,000 shares within six months upon
completion of certain transactions pursuant to underlying
agreements of CMD.
The transaction has been accounted for as a purchase. As at the date of
acquisition, CMD's only assets included 70% of the common stock of a Chinese
company, whose assets included 100% ownership of a website. Pursuant to
underlying agreements, CMD is required to provide funding of $3,000,000 for the
Chinese company for continued development of the website. Pursuant to another
underlying agreement CMD is required to provide $2,000,000 to be used to develop
a Hong Kong version of the website. As of June 30, 2000, the Company had paid
$558,600 and had issued 775,000 shares valued at $1,069,500. On June 30, 2000,
the Company sold all of its CMD shares to Cathay Bancorp.com Limited, a wholly
owned subsidiary of CathayOne, Inc.(formerly Premier Brands, Inc.), for an
agreed upon value of $10,500,000 which was paid by the receipt of 1,750,000
shares of CathayOne, Inc. which was valued for accounting purposes at the June
30, 2000 market value of $4.00 per share.
F - 14
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 4 - INCOME TAXES
As of June 30, 2000, the Company had a net operating loss carryforward
for income tax reporting purposes of approximately $1,990,000 that may be offset
against future taxable income through 2015. Current tax laws limit the amount of
loss available to be offset against future taxable income when a substantial
change in ownership occurs. Therefore, the amount available to offset future
taxable income may be limited. Accordingly, the potential tax benefits of the
loss carryforwards are offset by a valuation allowance of the same amount.
NOTE 5 - DEVELOPMENT STAGE COMPANY
The Company is in the development stage. The activities of the Company
as of June 30, 2000 have consisted primarily of identifying opportunities,
negotiating letters of understanding with potential partners, planning and
developing the operations, recruiting personnel, raising capital, and purchasing
assets. As is common with a development stage company, the Company has not
generated revenues from planned principal operations and has had recurring
losses during its development stage.
NOTE 6 - COMMITMENTS
During the year ended June 30, 2000 the Company entered into an
agreement to lease its Vancouver office for a period ending April 30, 2005 at a
monthly rent cost of $6,818.
Effective July 1, 2000 the Company entered into an agreement to lease
its New York office for a period ending June 30, 2005 at a monthly rent cost of
$13,260.
During the year ended June 30, 2000 the Company entered into an
agreement to lease its Chengdu, Sichuan office for a period ending August 30,
2004 at a monthly rent cost of $7,300.
During the year ended June 30, 2000 the Company entered into an
agreement to lease its Beijing office for a period ending April 30, 2002 at a
monthly rent cost of $6,311. The agreement contains a right for an annual
renewal up to an additional five years.
Subsequent to June 30, 2000 the Company subleased additional premises in
New York for a period ending December 31, 2001 at a monthly rent cost of $4,750.
It is expected that in the normal course of business, leases that
expire will be renewed or replaced by leases on other properties.
F - 15
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 6 - COMMITMENTS(Continued)
The minimum future lease payments under these leases for the next five
years are:
Year Ended June 30,
---------------------------------
2001 $ 461,268
2002 420,146
2003 328,536
2004 328,536
2005 248,324
-----------------
Total minimum future lease payments $ 1,786,810
=================
NOTE 7 - COMMON STOCK TRANSACTIONS
The Company was initially incorporated to allow for the issuance of up
to 25,000 shares of no par value common stock. On January 5, 1998, the Company
approved the amendment of its Articles of Incorporation to allow for the
issuance of up to 50,000,000 shares of $0.001 par value common stock. The
Amended Articles of Incorporation were filed with the State of Nevada on April
20, 1998. All amounts presented in the accompanying financial statements reflect
the effect of this change in the par value of the Company's stock as of the
first day of the first period presented.
On January 5, 1998, the Company's Board of Directors approved a 44 for
1 forward stock split on its issued and outstanding common stock. All issued and
outstanding share and per share amounts in the accompanying financial statements
reflect the effect of this stock split as of the first day of the first period
presented.
At inception, the Company issued approximately 9,999 shares of common
stock (439,956 post split shares) to its officers and directors for services
performed and payments made on the Company's behalf during its formation. This
transaction was valued at approximately $0.02 per share or an aggregate
approximate $200.
During 1996, to provide initial working capital, the Company completed
a private placement sale of an aggregate of approximately 15,000 shares of
common stock (660,000 post split shares) at approximately $0.20 per share. These
sales generated approximately $3,000 in proceeds to the Company, which were
primarily used to pay organizational expenses.
F - 16
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 7 - COMMON STOCK TRANSACTIONS (Continued)
On January 5, 1998, prior to the stock split, the Company issued
approximately 34,998 shares of common stock (1,539,912 post split shares) to
officers and directors of the Company for management services rendered to the
Company. This transaction was valued at approximately $300, which approximated
the fair value of the services rendered to the Company. On August 26, 1998 the
Officers surrendered these shares to the Company for cancellation.
On August 27, 1998 the Board of Directors authorized 2.273 to 1 forward
stock split on its issued and outstanding common stock. All references in the
accompanying financial statements to the number of common shares and per-share
amounts for 1998 and 1997 have been restated to reflect the stock split.
During the year ended June 30, 1999 the Company issued 5,785,000 shares
pursuant to Rule 504 of Regulation D promulgated by the United States Securities
and Exchange Commission. 3,625,000 shares were issued for cash at $0.01 per
share and 2,160,000 shares were issued for cash.
During the year ended June 30, 1999 the Company completed a private
placement sale of an aggregate of 202,500 common shares being issued for
payments made on the Company's behalf.
During the year ended June 30, 1999 the Company completed a private
placement sale of an aggregate of 475,000 shares of common stock for payments
made on the Company's behalf.
During the year ended June 30, 1999 the Company issued 700,000 shares
at $0.50 per share and 2,090,000 shares at $0.25 per share pursuant to
Regulation S promulgated by the United States Securities and Exchange
Commission. The shares were issued for cash.
During the year ended June 30, 2000 the Company issued 2,500,000 shares
pursuant to Regulation S promulgated by the United States Securities and
Exchange Commission. The shares were issued for the acquisition of Torchmail.com
Ltd at $0.53 per share.
During the year ended June 30, 2000 the Company issued 2,500,000 shares
pursuant to Regulation S promulgated by the United States Securities and
Exchange Commission. The shares were issued for cash and at $0.375 per share.
F - 17
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 7 - COMMON STOCK TRANSACTIONS (Continued)
During the year ended June 30, 2000 the Company issued 213,793 shares
pursuant to Regulation S promulgated by the United States Securities and
Exchange Commission. The shares were issued for a cashless exercise of warrants
at $0.35 per share.
During the year ended June 30, 2000 the Company issued 100,000 shares
pursuant to Regulation S promulgated by the United States Securities and
Exchange Commission. The shares were issued for cash on the exercise of warrants
at $0.35 per share.
During the year ended June 30, 2000 the Company issued 250,000 shares
pursuant to Rule 701 promulgated by the United States Securities and Exchange
Commission. The shares were issued for the acquisition and merger of Lazzara
Financial Asset Recovery Inc. at $1.38 per share.
During the year ended June 30, 2000 the Company issued 775,000 shares
pursuant to Rule 701 promulgated by the United States Securities and Exchange
Commission. The shares were issued for the acquisition of CMD Capital Ltd. at
$1.38 per share.
During the year ended June 30, 2000 the Company issued 9,751,407 shares
pursuant to Regulation S promulgated by the United States Securities and
Exchange Commission. The shares were issued for cash and at $0.70 per share.
During the year ended June 30, 2000 the Company issued 1,136,301 shares
pursuant to Regulation S, Rule 701 and Rule 144 promulgated by the United States
Securities and Exchange Commission. The shares were issued for services at the
market value of the shares at prices from $0.38 to $1.75 per shares.
F - 18
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 8 - STOCK OPTIONS AND WARRANTS
Employee and Consultants Warrants: The Company has issued to employees
and consultants (or their designees) in consideration for services rendered
warrants to purchase shares of the Company's common stock. These warrants
provide for cashless exercise by the holders. These warrants are not redeemable.
Details of these warrants are as follows:
<TABLE>
<CAPTION>
Granted Expiry Amount Price Exercised Canceled
---------------- ---------------- ------------------ -------- ------- ---------
<S> <C> <C> <C> <C> <C>
March 9, 1999 March 9, 2002 300,000 $ 0.25 213,793 86,207
March 31, 1999 March 31, 2002 1,000,000 $ 0.25 475,000 525,006
October 26, 1999 October 26, 2001 21,700,000 $ 0.33 -- --
March 1, 2000 March 1, 2002 25,000 per quarter $ 1.50 -- --
March 15, 2000 March 15, 2002 10,000 per month $ 1.50 -- --
April 1, 2000 April 1, 2002 25,000 per month $ 1.50 -- --
June 1, 2000 June 1, 2003 50,000 $ 1.00 -- --
May 1, 2000 May 1, 2002 20,000 $ 1.30 -- --
June 1, 2000 June 1, 2003 85,714 $ 0.70 -- --
May 27, 1999 May 27, 2002 415,000 $ 0.25 -- --
February 1, 2000 January 31, 2001 10,000 per month $ 1.00 -- --
February 3, 2000 February 3, 2005 2,389,100 $ 0.70 -- --
June 1, 2000 June 1, 2002 2,000,000 $ 1.00 -- --
June 1, 2000 June 1, 2002 1,000,000 $ 1.10 -- --
June 1, 2000 June 1, 2002 1,000,000 $ 1.60 -- --
June 1, 2000 June 1, 2002 800,000 $ 3.00 -- --
</TABLE>
During April 1999, the Company issued an aggregate of 700,000 common
stock purchase warrants to seven investors, including 50,000 warrants to our
President. These warrants are exercisable for a period of two years from the
date of issuance at an exercise price of $.60, if exercised during the first
year after issuance, and $.70 if exercised in the second year after issuance.
Theses warrants are not redeemable. As of the date hereof, none of these
warrants have been exercised. During June 1999, the Company issued an aggregate
of 2,090,000 common stock purchase warrants to thirteen investors. These
warrants are exercisable for a period of two years from the date of issuance at
an exercise price of $0.35 per share. These warrants are not redeemable. As of
the date hereof, 100,000 warrants have been exercised.
During February, March and April of 2000, the Company sold and issued
9,751,407 redeemable Common Stock purchase warrants to purchase a like number of
shares of Common
F - 19
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 8 - STOCK OPTIONS AND WARRANTS (Continued)
Stock. Each such warrant entitles the holder to purchase one share of Common
Stock, subject to adjustment in the event of any stock dividend, stock split,
subdivision or combination, or any reclassification of the outstanding shares of
Common Stock at any time after issuance until the expiration of these warrants,
a date two years after the date upon which the underlying shares of Common Stock
are registered for resale under the Securities Act of 1933, at a price of $0.77
per share. We may redeem these warrants at a price of US $0.10 per warrant
commencing one year after the effective date of the registration statement under
the Securities Act of 1933 covering the underlying Common Stock provided that
(i) a registration statement covering the underlying common stock is then
effective and (ii) the average closing bid price per share of Common Stock for
the thirty (30) day period ending five (5) days prior to the date of the
redemption notice of the Warrants is at least $1.05 per share. The Company also
granted an additional 250,000 common stock purchase warrants, having the same
terms as noted above, in consideration for bridge financing provided prior to
the completion of a private placement.
All options and warrants have been granted at exercise prices greater
than the market value on the date of granting. All options vest 100% at date of
grant.
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Options outstanding, beginning of year ................ 3,893,793 --
Granted ............................................. 38,537,428 4,505,000
Canceled ............................................ -- (611,207)
Exercised ........................................... (100,000) --
----------- -----------
Options and warrants outstanding, end of year ......... 42,331,221 3,893,793
=========== ===========
Price for options and warrants outstanding, end of year $0.25 - $3.00 $0.25 - 0.70
Options and warrants granted subsequent to year end ... 3,150,000 --
Option and warrant price granted subsequent to year end $0.25 - $1.00 $0.33 - .847
</TABLE>
F - 20
<PAGE>
CATHAYONLINE, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Continued)
NOTE 9 - RELATED PARTY TRANSACTIONS
During the year ended June 30, 2000 a director of the company was paid
$60,000 pursuant to an employment agreement and was issued 175,000 shares at
$1.38 per share for services rendered.
During the year ended June 30, 2000 a director of the Company was paid
$36,000 and issued 27,000 shares valued at $31,500 pursuant to a consulting
agreement. An additional 125,000 shares were issued at $1.38 per share for other
services rendered.
During the year ended June 30, 2000 a director of the Company was paid
$78,000 and issued 32,284 shares pursuant for a management services agreement.
An additional 120,000 shares at $0.50 and 50,000 shares at $1.38 per share were
issued for other services rendered.
As discussed in note 3, the Company sold a subsidiary to another public
company having directors in common.
During the year ended June 30, 2000, a private company controlled by a
relative of a director, was paid $156,750 for consulting services. During the
year this private company loaned the Company $790,000 which was repaid. The
repayment included interest of $13,857. Subsequent to June 30, 2000 as
additional consideration for the loan, the Company granted the private company
warrants to acquire up to 500,000 shares at $0.25 per share exercisable up to
September 1, 2003. This relative of a director also occupies premises, which
were leased by the Company subsequent to June 30, 2000 at a monthly rent cost of
$4,750.
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to June 30, 2000 the Company granted additional stock
options and warrants to employees and consultants as follows:
Granted Expiry Amount Price
----------------- ----------------- ----------- --------
September 1, 2000 May 1, 2003 150,000 $ 1.00
September 1, 2000 September 1, 2002 2,500,000 $ 0.40
September 1, 2000 September 1, 2003 500,000 $ 0.25
Subsequent to June 30, 2000 the Company issued 175,000 shares at $0.50
per share and 1,280,000 shares at $0.40 per share for services.
Subsequent to June 30, 2000 the Company collected $100,000 of the share
subscription receivable.
F - 21
