UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2000
----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from to
COMMISSION FILE NUMBER 000-28705
---------
CATHAYONLINE, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0346952
- -------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
570 LEXINGTON AVENUE, 18TH FLOOR, NEW YORK NEW YORK, 10017
----------------------------------------------------------
(Address of principal executive offices)
(212) 888-6822
Issuer's telephone number
(Former name, former address and former fiscal year, if changed since last
report.)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date: MARCH 31, 2000 25,858,913
--------------------------
Transitional Small Business Disclosure Format (check one).
YES ; NO X
---- ---
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANT'S REPORT
CathayOnline, Inc.
(a development stage company)
We have reviewed the accompanying balance sheets of CathayOnline, Inc.
(a development stage company) as of March 31, 2000, and the related statements
of operations, and cash flows for the three month period then ended. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statement taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
Respectfully submitted
/S/ ROBISON, HILL & CO.
Certified Public Accountants
Salt Lake City, Utah
May 12, 2000
<PAGE>
CATHAYONLINE, INC.
(A Development Stage Company)
BALANCE SHEETS
March 31, June 30,
2000 1999
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents .................. $ 1,505,333 $ 164,982
Restricted Cash ............................ -- 6,920
Receivables ................................ 2,500 --
Prepaid expense ............................ 125,777 --
----------- -----------
Total Current Assets .................. 1,633,610 171,902
----------- -----------
Property and equipment:
Equipment .................................. 711,341 3,680
Furniture & Fixtures ....................... 30,395 --
Kiosks ..................................... 477,165
Condominium ................................ 115,238 --
Leasehold improvements ..................... 189,528 --
----------- -----------
1,523,667 3,680
Less accumulated depreciation .............. (86,839) (64)
----------- -----------
1,436,828 3,616
----------- -----------
Other Assets:
Intangibles, Net .......................... 3,326,018 204,546
Deposits .................................. 96,323 --
----------- -----------
Total Assets .......................... $ 6,492,779 $ 380,064
=========== ===========
<PAGE>
CATHAYONLINE, INC.
(Formerly a Development Stage Company)
BALANCE SHEETS
(Continued)
March 31, June 30,
2000 1999
----------- -----------
LIABILITIES
Current Liabilities:
Accounts payable and accrued liabilities ....... $ 74,173 $ 79,726
----------- -----------
Total Current Liabilities ................. 74,173 79,726
----------- -----------
STOCKHOLDERS EQUITY
Common Stock - $0.001 par value ................
50,000,000 shares authorized ..................
25,858,913 and 11,752,700 issued and
outstanding March 31, 2000 and
December 31, 1999 ............................. 25,859 11,753
Additional paid-in capital ..................... 9,783,422 1,043,373
Stock Subscribed Receivable .................... -- (429,250)
Currency translation adjustment ................ -- --
Retained deficit ............................... (3,390,675) (325,538)
----------- -----------
Total Stockholders' Equity ................ 6,418,606 300,338
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 6,492,779 $ 380,064
=========== ===========
See accompanying notes and accountants' report.
<PAGE>
CATHAYONLINE, INC.
(Formerly a Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
March 31, March 31,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ................... $ 232,044 $ -- $ 241,996 $ --
Cost of Revenues ........... -- -- -- --
------------ ------------ ------------ ------------
Gross Margin ............... 232,044 -- 241,996 --
Expenses
General & Administrative 2,272,599 80,412 3,292,575 241,235
------------ ------------ ------------ ------------
Net Loss from Operations ... (2,040,555) (80,412) (3,050,579) (241,235)
------------ ------------ ------------ ------------
Other Income (Expense)
Interest, Net ........... (9,632) (98) (14,558) (293)
Currency Exchange, Net .. -- -- -- --
------------ ------------ ------------ ------------
Net Loss Before Income Taxes (2,050,187) (80,510) (3,065,137) (293)
Income Tax Expense ......... -- -- -- --
------------ ------------ ------------ ------------
Net Loss ................... $ (2,050,187) $ (80,510) $ (3,065,137) $ (241,528)
============ ============ ============ ============
Basic and Diluted
LOSS PER COMMON SHARE .... $ (0.12) $ (0.01) $ (0.21) $ (0.05)
============ ============ ============ ============
Weighted Average Number of
Common Shares ............ 17,534,602 8,334,156 14,664,567 4,493,818
============ ============ ============ ============
</TABLE>
See accompanying notes and accountants' report.
<PAGE>
CATHAYONLINE, INC.
(Formerly a Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended
March 31,
-------------------------
2000 1999
----------- -----------
Cash Flows From Operating Activities
<S> <C> <C>
Net loss for the period .............................. $(3,065,137) $ (241,528)
Adjustments to reconcile net loss to net cash
Provided by operating activities
Depreciation and Amortization ...................... 87,275 48
Issuance of stock for services ..................... -- 42,105
Decrease (Increase) in Restricted Cash ............. 6,920 --
Decrease (Increase) in Receivables ................. (2,500) --
Decrease (Increase) in prepaid expense ............. (125,777) --
Decrease (Increase) in Deposits .................... (96,323) --
Decrease in accounts payable and accrued liabilities (5,553) (6,325)
----------- -----------
Net Cash Provided by (Used in) Operating Activities ..... (3,201,095) (205,700)
----------- -----------
Cash Flows From Investing Activities
Purchase of property and equipment ................... (1,519,987) (3,680)
Purchase of intangibles .............................. (3,121,972) (204,546)
Investment in subsidiaries ........................... -- --
----------- -----------
Net Cash Provided by Investing Activities ............... (4,641,959) (208,226)
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of stock ...................... 9,183,405 --
Capital contributed by shareholder ................... -- 2,526
----------- -----------
Net Cash Provided by Financing Activities ............... 9,183,405 2,526
----------- -----------
Increase (Decrease) in Cash ............................. 1,340,351 --
Cash at beginning of period ............................. 164,982 --
----------- -----------
Cash at End of Period ................................... $ 1,505,333 $ --
=========== ===========
Supplemental Disclosure of Interest and Income Taxes Paid
Interest paid during the period ...................... $ 14,558 $ --
=========== ===========
Income taxes paid during the period .................. $ -- $ --
=========== ===========
</TABLE>
Supplemental Disclosure of Non-cash Investing
and Financing Activities: None
See accompanying notes and accountants' report.
<PAGE>
CATHAYONLINE, INC.
(Formerly a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for CathayOnline, Inc. (formerly a
development stage company) 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.
The unaudited financial statements as of March 31, 2000 and for the
nine months then ended reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly state the
financial position and results of operations for the nine months. Operating
results for interim periods are not necessarily indicative of the results which
can be expected for full years.
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, 1999
is in the development stage, and has only recently commenced planned principal
operations.
PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements for March 31, 2000 and
the nine months then ended include the accounts of Cathayonline, Inc. and its
wholly-owned subsidiaries, CathayOnline Ltd., a British Virgin Islands
corporation, CathayOnline Technologies (Hong Kong) Ltd., a British Virgin
Islands corporations, TorchMail.com Inc., a Turks & Caicos, BWI corporation,
Sichuan CathayOnline Technologies Co. Ltd., a Chengdu (PRC) corporation, and
Lazarra Financial Asset Recovery, Inc., a Nevada corporation. All significant
inter-company accounts and transactions have been eliminated.
NATURE OF BUSINESS
ON THE 30TH of June the Company announced its exclusive partnership
with Sichuan Guo Xun Xin ChanYe You Xian Gong Si, a licensed Internet Service
Provider employing 28 industry professionals, through its wholly owned
subsidiary Sichuan CathayOnline Information Technologies Co. Ltd., of Chengdu,
China.
<PAGE>
CATHAYONLINE, INC.
(Formerly a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NATURE OF BUSINESS (CONTINUED)
Subsequent to June 30, 1999 CathayOnline, through a right to first
market partnership with USA.net, launched its English version of TorchMail.com,
a web based email and advanced messaging service for the Chinese speaking
markets, through its newly acquired wholly owned subsidiary, Torchmail.com, Inc.
These markets include but are not limited to Peoples Republic of China, Hong
Kong, Taiwan, Singapore, and Malaysia.
Furthermore, the Company through its wholly owned subsidiary
CathayOnline Technologies (Hong Kong) Ltd., through a partnership with Wan Rong
Services Co. Ltd., became the operator of 10 online lottery kiosks in Guangzhou,
China.
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.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required 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.
TRANSLATION OF FOREIGN CURRENCY
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
<PAGE>
CATHAYONLINE, INC.
(Formerly a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCY (CONTINUED)
of the U.S. operations, and the gain or loss resulting from remeasuring 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 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 from 3
to 30 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.
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 (undiscounted and without
interest charges) is less than the carrying amount of the asset, an impairment
loss is recognized.
<PAGE>
CATHAYONLINE, INC.
(Formerly a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 NINE MONTHS ENDED MARCH 31, 2000
----------------------------------------
Basic Loss per Share
Loss to common shareholders $ (3,065,137) 14,664,567 $ (0.21)
============ ============ =============
FOR THE NINE MONTHS ENDED MARCH 31, 1999
----------------------------------------
Basic Loss per Share
Loss to common shareholders $ (241,528) 4,493,818 $ (0.05)
============ ============ =============
The effect of outstanding common stock equivalents including 9,874,289
and 2,990,000 as of March 31, 2000 and June 30, 1999, respectively, would be
anti-dilutive and are thus not considered.
<PAGE>
CATHAYONLINE, INC.
(Formerly a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(Continued)
NOTE 2 - INCOME TAXES
As of March 31, 2000, the Company had a net operating loss carryforward
for income tax reporting purposes of approximately $3,300,000 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 carry- forwards are offset by a valuation allowance of the same amount.
NOTE 3 - DEVELOPMENT STAGE COMPANY
As of June 30, 1999, the Company has not begun principal operations and
as is common with a development stage company, the Company has had recurring
losses during its development stage.
NOTE 4 - COMMITMENTS
As of March 31, 2000 all activities of the Company have been conducted
by corporate officers from their business offices. Currently, there are no
outstanding debts owed by the company for the use of these facilities and there
are no commitments for future use of the facilities.
NOTE 5 - PREFERRED STOCK
The Board of Directors of the Company has the authority to determine by
resolution the number of preferred shares to be issued by series, the rate and
terms for payment of cumulative or non-cumulative dividends, the conversion
features of the preferred stock, the redemption rights and prices, if any, the
terms of the sinking fund, if any, to be provided for the shares, the voting
powers of preferred shareholders and any other special rights, qualifications,
limitations, or restrictions. As of March 31, 2000, no preferred stock had been
issued.
NOTE 6 - STOCK OPTIONS AND WARRANTS
Employee and Consultants Warrants: During October 1999, the Company
issued to employees and consultants (or their designees) in consideration for
services rendered warrants to purchase up to 21,700,000 shares of our common
stock. The warrants are exercisable for a period of 3 years commencing on
October 26, 1999 at an exercise price of $.33 per share. The shares of common
stock issuable upon exercise of these warrants are subject to registration as
described below. These warrants provide for cash-less exercise by the holders.
These warrants are not redeemable. As of the date hereof, none of these warrants
have been exercised.
<PAGE>
CATHAYONLINE, INC.
(Formerly a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(Continued)
NOTE 6 - STOCK OPTIONS AND WARRANTS (CONTINUED)
Investor Warrants: During April and June 1999, the Company issued an
aggregate of 2,990,000 common stock purchase warrants to eight investors,
including 50,000 warrants to our President. These warrants are exercisable for a
period of 2 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, 200,000 warrants have been exercised.
Regulation S Warrants: During the first quarter of 2000 the Company
sold and issued 6,884,289 redeemable Common Stock purchase warrants to purchase
a like number of shares of Common 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 $.77 per share. We may redeem these warrants at a
price of US$.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.
All options have been granted at exercise prices greater than the
market value on the date of granting. All options vest 100% at date of grant.
March 31, December 31,
2000 1999
--------- ---------
Options outstanding, beginning of year ............... 2,990,000 --
Granted .............................................. 6,884,289 2,990,000
Expired .............................................. -- --
Exercised ............................................ -- --
--------- ---------
Options and warrants outstanding, end of year ........ 9,874,289 2,990,000
========= =========
Price for options and warrants outstanding, end of year $0.35-.77 $0.35-.07
<PAGE>
CATHAYONLINE, INC.
(Formerly a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(Continued)
NOTE 7 - SUBSEQUENT EVENTS
The Company entered into a Cooperation Agreement effective March 29,
2000, whereby the Company; China Aerospace Machinery and Electric Group
Institute; and Qizhengton Scientific and Technological Development Corporation
jointly agree to incorporate a Beijing Company which will provide full Internet
Service Provider ("ISP") services to the existing customers and other customers.
As part of the agreement the Company will contribute approximately 2.5 million
in the form of necessary equipment and provision of operating capital required
for marketing and development of the services.
On April 1, 2000, the Company, through its wholly owned subsidiary,
CathayOnline Technologies (Hong Kong) Ltd., has acquired controlling interest in
CMD Capital Limited ("CMD"), a Hong Kong enterprise. The purchase price for the
62.5% ownership was $4,280,200, which is to be paid as follows: $1,000,000 cash
and 2,000,000 shares valued at $3,280,200 based on the closing price of the
Company's stock on April 3, 2000. As of March 31, 2000, the Company has advanced
$149,940 and 300,000 shares in connection with the acquisition agreement.
CMD has entered into a cooperation agreement with China Investment
Publishing House to manage the Hong Kong edition of the China Investment Journal
and to develop a financial Website, WWW.PRCINVEST.COM. Under the agreement the
parties agree to set up a joint venture limited liability company in Beijing
(the "Joint Venture Company"), which will require CMD to invest approximately
$3,000,000 . The Investment is to be paid at various time from the date of the
agreement to within 280 days of the receipt of the business license. The Company
estimates the business license will be issued about June 2000. As of March 31,
2000 the Company has advanced $100,000 as investment in the Joint Venture
Company.
On April 5, 2000, the Company completed a private placement of
$6,820,000 ($2,001,000 subsequent to March 31, 2000) of 9,742,860 Units at $.70
per Unit, consisting of one share of common stock and one redeemable common
stock purchase warrants.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-QSB. The following discussion contains forward-looking statements. Our
actual results may differ significantly from those projected in the
forward-looking statements. Factors that might cause future results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, those discussed in "Risk Factors" and elsewhere in this
document.
Overview
CathayOnline, Inc. was incorporated in September of 1995. In December
of 1998 the management of the Company changed, with the objective of analyzing
and implementing a strategy with respect to the long term opportunities in the
Internet within the People's Republic of China and other Chinese speaking
markets including the Internet Service Providing market and collateral operating
and Web based services such as Web based e-mail, advanced messaging services,
and integration of Internet services with other forms and means of
communication. From January 2000 through March 2000, the Company's operating
activities consisted primarily of continuing to identifying opportunities,
negotiating Letters of Understanding with several of those opportunities,
planning and development of operations, planning corporate structure, recruiting
personnel, raising capital and purchasing operating assets. During this same
period we finalized a number of agreements including: the appointment of Mr. Ken
Levy as a Director of the Company; the opening of an office in Beijing, China;
the appointment of Mr. Keli Wu as Chairman of the Beijing operations; the launch
of the co-branded Website with register.com; and, signing of the agreement with
the National Library of China by TorchMail.com. Subsequent to the end of March
2000 we announced: the acquisition of a controlling interest in CMD Capital
Limited, the parent company of ChinaNet Publishing Co. Ltd.; the closing of a
$6.82 million financing; the completed construction of our state-of-the-art
Internet facility in Sichuan Province; the appointment of Mr. David Ng as
Director of Corporate Finance and Special Projects; an agreement with Sichuan
Famous Brand Product Enterprises to act as its exclusive business-to-business
marketer for its Website and products online; and, 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. During the period of
January through March 2000, we having invested over $2,900,000 in our PRC
subsidiary, Sichuan CathayOnline Technologies, to provide technological and
personnel support.
Presently, we generate insignificant 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 and, more specifically, targeting and operating in the Greater China and
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. With these requirements in mind, we finalized the raising
of $6.82 million to fund our anticipated expenses and the growth of operations.
We will seek to raise additional funds in the near future to continue to build
upon our established base of operations. There is no guarantee that we will be
able to raise the funds and there
<PAGE>
are no guarantees that we will not be required to raise further capital for
operations and expansion in the near future.
We expect to expand our employee base, from the existing 78 employees,
by an additional 25 over the next 6 months, including sales, marketing,
operational, technical and customer support resources. In particular, we intend
to continue 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. The primary targets of the ISP are medium to large sized
corporations and government institutions in the Sichuan Province desiring to
establish or expand their online presence. We will also provide training,
service, technical support and Web site development to our growing client base.
We intend to further develop existing strategic partnerships and
identify new opportunities to expand our distribution channels of the Chinese
language Web based e-mail and advanced messaging services to the Chinese
speaking markets, in particular partnerships with ISP's, portals, Web hosting
companies and government institutions in the People's Republic of China, Hong
Kong, Taiwan, Malaysia, Singapore and Indonesia.
Currently, our principal office is in New York. Our administrative and
accounting office is located in Vancouver, Canada. Our operational offices are
located in Chengdu, and Beijing, China.
Additionally, we have entered into a letter of intent with CleanWay
Corp. Upon the finalization of this agreement, it will permit TorchMail to offer
live stock quotes, create its own financial Website on which viewers could
obtain live stock quotes and have the first right of refusal to provide Web
based email to all other sites or companies using the live quotes as provided by
StockSecrets. Though we are continuing the discussions with CleanWay as to the
nature of a definitive agreement, in addition to discussing the technical
aspects of implementing the service, no definitive agreement has been concluded
and there can be no assurance that we will be able to offer these services in
the near future.
SICHUAN ISP PROJECT:
On August 10, 1999, we organized, in accordance with the laws of the
PRC, 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 (the "Agreement") with Sichuan Guo Xun Xin Xi Chan Ye You Xian Gong Si
("Sichuan Guo Xun"), an 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 that Agreement, Sichuan
CathayOnline and Guo Xun will work jointly in providing Internet services and
Sichuan CathayOnline is entitled to 90% of the profit generated from such
services.
In May we announced the signing of an agreement with Sichuan Famous
Brand Product Enterprises to act as its exclusive business-to-business marketer
for its Website and products online. We, in conjunction with Sichuan Guo Xun,
developed the Website for Sichuan Famous Brands,
<PAGE>
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 facilitate the provincial economy by promoting products in
the international market and to expand sales of the products in the Chinese
market via the Internet. The Website 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 THE 27TH of April 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. They currently serve approximately 70,000 telecom users. It is the
intention of the cooperation agreement to be able to build out the
infrastructure to be able to provide full Internet servers to their existing
user base that they intend to expand.
TORCHMAIL.COM, INC.
CathayOnline, through its wholly owned subsidiary TorchMail.com, Inc.
and its partnership with USA.NET, has budgeted to sell in excess of 360,000 Web
based professional advanced messaging services Seats to the Chinese speaking
markets through November 30, 2000. During the ramp-up period of reaching the
target, the costs payable to USA.NET drop significantly to TorchMail,
substantially increasing the profit margin to our operations. We intend to seek
out and train strategically located sales teams to promote the product and
services to the Chinese speaking markets in the People's Republic of China, Hong
Kong, Taiwan, Singapore, Indonesia, Malaysia and the Philippines.
The Company recently announced a partnership agreement to supply
co-branded Web-based e-mail services with the National Library of China ("NLC"),
the largest library in Asia and a national general repository of publications.
The NLC also provides services for the central government priority readers in
research, educational and production institutions throughout China, as well as
the general population. The NLC 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 NLC Website 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.com will provide the NLC with Web Messaging services and help
co-ordinate additional applications with the objective of becoming the
communication portal for NLC members on the Web by integrating e-mail, fax,
voicemail, calendars, address books and other related tools and services. It is
TorchMail.com'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 schools. We will also continue
to seek to acquire strategic businesses and technology that will help us serve
these markets.
<PAGE>
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 March 31, 2000 the Company had 65 employees, in comparison with three full
time employees just one year earlier. CathayOnline does not believe that its
historical growth rates for revenues, expenses, capital investments or personnel
are indicative of future results.
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, 1999
the Company was in the development stage and as of March 31, 2000, has only
recently commenced planned principal operations.
Since inception, we have incurred significant losses and, as of March,
2000, had an accumulated deficit of approximately $3,391,000. 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.
INCOME TAXES
No provision for federal and state incomes taxes has been recorded as
we have incurred net operating losses from inception through March 31, 2000. As
of March 31, 2000, we had approximately $3,300,000 of federal and state net
operation loss carryforwards available to offset future taxable income which
expire in varying amounts beginning in 2010. 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 March 31, 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 its market
area. Many of these firms have long-standing customer relationships and are
well-staffed and well financed. The Company believes that competition in the
Internet industry is based on competitive pricing, although the ability,
reputation and support of a marketing network is also significant. The Company
does not believe that any recently enacted or presently pending proposed
legislation will have a material adverse effect on its results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Management's Discussion and Analysis and other parts of this
registration statement contain information based on management's beliefs and
forward-looking statements that involve a number of risks, uncertainties, and
assumptions. There can be no assurance that actual results will not differ
<PAGE>
materially from the forward-looking statements as a result of various factors,
including but not limited to the following:
The markets for many of our product offerings are characterized by
rapidly changing technology, evolving industry standards, and frequent new
product introductions. Our operating results will depend to a significant extent
on our ability to design, develop, or otherwise obtain and introduce new
products, services, systems, and solutions and to reduce the costs of these
offerings. The success of these and other new offerings is dependent on many
factors, including proper identification of customer needs, cost, timely
completion and introduction, differentiation from offerings of our competitors,
and market acceptance. The ability to successfully introduce new products and
services could have an impact on future results of operations.
FLUCTUATIONS IN QUARTERLY RESULTS
We have incurred operating losses since inception, and cannot be
certain that we will achieve profitability on a quarterly or annual basis in the
future. We believe that future operating results will be subject to quarterly
fluctuations due to a variety of factors, including, but not limited to:
o Continued growth of the Internet in China;
o Continued growth of the Internet and e-mail usage in Asia;
o Our ability to attract and retain customers and maintain
customer satisfaction;
o Technical difficulties or system outages;
o Government regulation surrounding the Internet;
o Fulfilling contractual obligations under the agreement with
USA.NET;
o Pricing policies of competitors;
o Ability to attract and retain qualified personnel with Chinese
language and Internet industry expertise, in particular
technical, sales and marketing personnel;
o The amount and timing of operating costs and capital
expenditures relating to expansion of our business and
infrastructure;
o The ability to upgrade, develop and maintain our systems and
infrastructure; and o Potential inability to increase sales.
In addition to the factors set forth above, the Company's operating
results will be impacted by the extent to which the Company incurs non-cash
charges associated with stock-based arrangements with the employees and
non-employees.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, operations have been funded from the net proceeds of
the sale of common stock. For the nine months ended March 31, 1999, cash
provided by financing activities was approximately $3,000. For the nine months
ended March 31, 2000, cash provided by financing activities was approximately
$9,183,000.
We have no debt.
<PAGE>
Our current cash balances will not be sufficient to meet our working
capital and capital expenditure requirements for the next 12 months. It is
anticipated that with the further expansion of the operations we will incur
negative cash flows, therefore requiring us to seek additional financing 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 its 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. There is no guarantee that we will be
able to raise the funds. 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.
If we cannot obtain outside financing, we will consider scaling back
our expansion plans for TorchMail 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
nominal up to March 31, 2000. Installation of infrastructure equipment in
Chengdu, Vancouver and NewYork, 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 the Company seeks to increase capacity and services.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
During the first quarter of 2000 the Company sold and issued 6,884,289
redeemable Common Stock purchase warrants to purchase a like number of shares of
Common 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 $.77 per share. We may redeem these warrants at a price of US$.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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed a report on Form 8-K reporting "Item 1. Changes in
Control of the registrant " on April 3, 2000.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CATHAYONLINE, INC.
------------------
(Registrant)
DATE: MAY 19, 2000 BY: /S/ BRIAN W. RANSOM
-------------------- ----------------------
Brian W. Ransom
President and Director
DATE: MAY 19, 2000 BY: /S/ PETER LAU
-------------------- ----------------
Peter Lau
Chief Financial Officer and
Secretary
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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