U.S. SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
September 30, 2003 2-98997-NY
CHINA CABLE AND COMMUNICATION, INC.
- --------------------------------------------------------------------------------
(Exact name of Company as specified in its charter)
DELAWARE 11-2717273
------------------------------ ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
Suite 805, One Pacific Place,
88 Queensway, Hong Kong
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(Address of Principal Executive Offices) (Zip Code)
(852) 2591 1221
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(Company's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Company (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 Company was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
--- ---
The number of shares of Common Stock outstanding as of September 30, 2003 was
72,057,760.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
CHINA CABLE AND COMMUNICATION, INC.
FORM 10-QSB
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..............................................1
Item 2. Management's Discussion and Analysis or Plan of Operations.......11
Item 3. Controls and Procedures..........................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................17
Item 2. Changes in Securities; Recent Sales of Unregistered Securities...17
Item 3. Defaults Upon Senior Security Holders............................18
Item 4. Submission of Matters to a Vote of Security Holders..............18
Item 5. Other Information................................................18
Item 6. Exhibits and Reports on Form 8-K.................................19
SIGNATURES .................................................................20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
(unaudited) (audited)
CURRENT ASSETS
Cash at bank $ 3,911,399 $ --
Deferred merger cost -- 20,468
Deferred consulting fees 3,412,735 --
------------ ------------
Total current assets 7,324,134 20,468
------------ ------------
NON-CURRENT ASSETS
Equity investment 7,394,510 7,218,860
------------ ------------
Total assets $ 14,718,644 $ 7,239,328
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 363,466 $ 20,468
Amount due to a shareholder 127,276 --
Amount due to a director 2,500 --
------------ ------------
Total liabilities 493,242 20,468
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock, $0.0001 par value, 20,000,000 shares
authorized, 2,758,621 8% convertible shares
issued and outstanding 276 --
Common Stock, $.00001 par value; 100,000,000 shares
authorized, 72,057,760 shares issued and outstanding 721 1,000
Additional paid-in capital 20,345,152 5,874,892
Retained earnings (deficit) (6,120,747) 1,342,968
------------ ------------
Total stockholders' equity 14,225,402 7,218,860
------------ ------------
Total liabilities and stockholders' equity $ 14,718,644 $ 7,239,328
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
1
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
2003 2002
REVENUE $ -- $ --
EXPENSES
Directors' compensation (755,437) --
Professional fees (79,909) --
Consulting fees (1,543,377) --
------------ --------------
LOSS FROM OPERATIONS (2,378,723) --
OTHER INCOME (EXPENSES)
Interest income 542 --
Equity in earnings of investment (64,911) (126,687)
------------ --------------
LOSS BEFORE TAXES (2,443,092) (126,687)
PROVISION FOR INCOME TAXES -- --
------------ --------------
NET LOSS (2,443,092) $ (126,687)
============ ==============
Net loss per share - basic $ (0.04) $ (0.00)
============ ==============
- diluted $ (0.04) $ (0.00)
------------ --------------
Weighted average no. of shares outstanding - basic 62,864,347 49,567,002
------------ --------------
- diluted 62,924,976 49,567,002
============ ==============
Note: The number of weighted average shares outstanding as at September 30,
2002 is the amount of shares issued for the reverse merger and is for
comparison purposes only.
The accompanying notes are an integral part of these
consolidated financial statements.
2
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
2003 2002
REVENUE $ -- $ --
EXPENSES
Directors' compensation (995,970) --
Professional fees (138,883) --
Consulting fees (2,734,842) --
------------ ------------
LOSS FROM OPERATIONS (3,869,695) --
OTHER INCOME (EXPENSES)
Merger costs (3,770,416) --
Interest income 867 --
Bank charges (121) --
Equity in earnings of investment 175,650 77,655
------------ ------------
PROFIT (LOSS) BEFORE TAXES (7,463,715) 77,655
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET INCOME (LOSS) $ (7,463,715) $ 77,655
============ ============
Net income (loss) per share - basic $ (0.12) $ 0.00
============ ============
- diluted (0.12) 0.00
------------ ------------
Weighted average no. of shares outstanding - basic 62,864,347 49,567,002
------------ ------------
- diluted 62,924,976 49,567,002
============ ============
Note: The number of weighted average shares outstanding as at September 30,
2002 is the amount of shares issued for the reverse merger and is for
comparison purposes only.
The accompanying notes are an integral part of these
consolidated financial statements.
3
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
2003 2002
Cash flows from operating activities:
Net (loss) income $(7,463,715) $ 77,655
Adjustments to reconcile net loss to net cash used in operating
activities:
Stock issued for consulting fees 2,734,842 --
Stock issued for directors' compensation 931,080 --
Stock issued for financial advisory services 10,350 --
Merger costs paid by the issue of shares 3,689,000 --
Equity in earnings of investment (175,650) (77,655)
Changes in operating assets and liabilities:
Decrease in deferred merger costs 20,468 --
Increase in accounts payable and accrued liabilities 342,998 --
----------- -----------
Net cash generated from operating activities 89,373 --
----------- -----------
Cash flows from financing activities:
Cash received from exercise of options 50,000 --
Cash received from issuance of 8% convertible preferred stock,
net of direct expenses 3,642,150
Cash received in merger 1,809
Increase in amounts due to a shareholder and a director 129,776 --
Repayment of short term loan from related party (1,709) --
----------- -----------
Net cash provided by financing activities 3,822,026 --
----------- -----------
Net increase in cash 3,911,399 --
Cash at beginning of period -- --
----------- -----------
Cash at end of period $ 3,911,399 $ --
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Common shares issued for consulting and directors' fees $ 7,078,657 $ --
Common shares issued for merger costs $ 3,689,000 $ --
The accompanying notes are an integral part of these
consolidated financial statements.
4
CHINA CABLE AND COMMUNICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
(UNITED STATES DOLLARS)
1. DESCRIPTION OF BUSINESS AND BUSINESS COMBINATION
China Cable and Communication, Inc., formerly Nova International Films,
Inc. (the "Company"), was incorporated on November 27, 1984 in the State of
Delaware. During February 2003, the Company acquired (the "Acquisition") all of
the issued and outstanding shares of Solar Touch Limited ("Solar Touch") from
Kingston Global Co. Limited ("Kingston") in a reverse merger. As consideration
for Solar Touch's shares, the Company issued 49,567,002 shares of its common
stock to Kingston and Sino Concept Enterprises Limited (the "Sellers"). In
addition to the common stock issued to the Sellers, the Company also issued
4,760,931 shares to the Seller's financial consultants. The consideration for
the Acquisition was determined through arms' length negotiations between the
management of the Company and the Sellers. Solar Touch is a British Virgin
Islands corporation which owns a 49% equity interest in Baoding Pascali
Broadcasting Cable TV Integrated Information Networking Co., Limited
("Baoding"). Baoding is a Sino-foreign joint venture. Baoding Pascali
Multimedia Transmission Networking Co. Limited ("Baoding Multimedia"), which is
a subsidiary of Baoding Pascali Group Limited, a state-owned enterprise
established in the Peoples Republic of China ("PRC"), owns the remaining 51%
interest in the joint venture.
Baoding, a company established in the PRC and located in the city of
Baoding, was formed pursuant to a joint venture agreement dated July 23, 1999
and signed between Baoding Multimedia and Solar Touch. Baoding is to operate for
a period of 20 years and is principally engaged in the construction and
operation of a cable integrated TV transmission network system in the same area.
2. BASIS OF PRESENTATION
The interim consolidated financial statements have been prepared by the
Company and include all material adjustments which in the opinion of management
are necessary for a fair presentation of financial results for the nine months
ended September 30, 2003 and 2002. All adjustments and provisions included in
these statements are of normal recurring nature. The December 31, 2002 audited
balance sheet only includes the balances of Solar Touch Limited and is for
comparative purposes only. The information contained herein is condensed from
that which would appear in the annual financial statements; accordingly, the
financial statements included herein should be reviewed in conjunction with the
Solar Touch financial statements and related notes thereto included in the Form
8-K dated February 28, 2003 filed by the Company with the Securities and
Exchange Commission. In addition, the financial statements included herein
should be read in conjunction with the financial statements of the Company
included in the Form 10-KSB for the year ended October 31, 2002 and the Forms
10-QSB for the quarters ended January 31, 2003, March 31, 2003 (as amended), and
June 30, 2003 (as amended). The results of operations for the interim period
presented are not necessarily indicative of the results that can be expected for
the entire year.
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 amount of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made. However, actual results could differ materially
from those results.
5
CHINA CABLE AND COMMUNICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMEBR 30, 2003 AND 2002
(UNAUDITED)
(UNITED STATES DOLLARS)
3. EQUITY INVESTMENT
The equity investment represents a 49% equity interest in Baoding, a
company established in the PRC and principally engaged in the construction and
operation of a cable integrated TV transmission network system in Baoding, the
PRC.
Baoding maintains its books and records in Renminbi ("RMB"), the PRC's
currency. Translation of amounts in United States dollars ("US$") has been made
at the single rate of exchange of US$1.00:RMB8.3. No representation is made that
RMB amounts have been or could be, converted into US$ at that rate. On January
1, 1994, the PRC government introduced a single rate of exchange as quoted daily
by the People's Bank of China (the "Unified Exchange Rate"). This quotation of
exchange rates does not imply free convertibility of RMB to other foreign
currencies. All foreign exchange transactions continue to take place either
through the Bank of China or other banks authorized to buy and sell foreign
currencies at the exchange rate quoted by the People's Bank of China. Approval
of foreign currency payments by the Bank of China or other institutions requires
submitting a payment application form together with suppliers' invoices,
shipping documents and signed contracts.
As of September 30, 2003, the unaudited condensed balance sheet of Baoding
was as follows:
Current assets $ 2,331,055
Non-current assets 16,998,463
-----------
Total assets $19,329,518
===========
Current liabilities $ 4,182,107
Capital and reserves 15,147,411
-----------
Total liabilities and equity $19,329,518
===========
The unaudited results of operations of Baoding for the three months ended
September 30, 2003 and 2002 are summarized as follows:
2003 2002
Net sales $ 464,697 $ 451,976
========= =========
Loss from operations $(175,702) $(256,717)
Other income (expenses) 5,869 (1,827)
--------- ---------
Income (Loss) before tax provision (169,833) (258,544)
Income tax 37,361 --
--------- ---------
Net income (loss) $(132,472) $(258,544)
========= =========
The Company's equity in earnings of Baoding (49%) $ (64,911) $(126,687)
========= =========
6
The unaudited results of operations of Baoding for the nine months ended
September 30, 2003 and 2002 are summarized as follows:
2003 2002
Net sales $ 2,691,755 $ 2,395,462
=========== ===========
Income from operations $ 481,440 $ 161,819
Other income (expenses) 5,956 (3,339)
----------- -----------
Income before tax provision 487,396 158,480
Income tax (128,927) --
----------- -----------
Net income $ 358,469 $ 158,480
=========== ===========
The Company's equity in earnings of Baoding (49%) $ 175,650 $ 77,655
=========== ===========
4. AMOUNTS DUE TO A SHAREHOLDER AND A DIRECTOR
The amounts due to a shareholder and a director are unsecured, non-interest
bearing and repayable on demand.
5. 8% CONVERTIBLE PREFERRED STOCK
On September 25, 2003, the Company completed the sale of 2,758,621 shares
of the Company's restricted 8% Convertible Preferred Stock, par value $.0001 per
share (the "Preferred Stock"), to Gryphon Master Fund, L.P., a Bermuda limited
partnership (the "Purchaser"), for $1.45 per share or an aggregate purchase
price of $4,000,000. The purchase price is equal to 90% of the moving average
closing price of the Company's common stock for the 60 trading days immediately
prior to the entering into of the agreement. In connection with this
transaction, the Company also issued to the Purchaser warrants to purchase up to
827,586 shares of the Company's restricted common stock for $2.18 per share
until September 24, 2008 (the "Warrants"). The sale of the Preferred Stock and
the Warrants to the Purchaser was made in a private placement transaction in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act of 1933. The Company intends to use the proceeds from this
transaction for working capital purposes, and for possible future acquisitions,
of which there is no assurance.
The Preferred Stock accrues dividends at the rate of 8% of the purchase
price per share per annum, payable when, as and if declared by the Board of
Directors on September 30 and March 31 of each year commencing with March 31,
2004. The Preferred Stock is senior to the common stock with respect to the
payment of dividends, redemption payments and rights upon liquidation,
dissolution or winding up of the affairs of the Company. Upon liquidation, the
7
Preferred Stock is entitled to receive a liquidation preference equal to the
purchase price plus the amount of accrued and unpaid dividends. The Company may
redeem the Preferred Stock at any time after September 25, 2004 if the market
price of the common stock for a period of any 20 out of 30 trading days equals
or exceeds 200% of the conversion price then in effect. The conversion price
currently in effect is equal to the purchase price of $1.45 per share. Until
redeemed, the Preferred Stock can be converted into common stock at a rate per
share equal to the purchase price, subject to adjustment.
6. INCOME TAXES
Solar Touch is a British Virgin Islands investment holding company and does
not carry on any business and does not maintain any offices in the United States
of America. No provision for income taxes or tax benefits for the Company has
been made.
Boading is a Sino-foreign joint venture established in PRC. Boading is
subject to 33% income tax on the results for the year after adjusting for items
which are non-assessable or disallowed. Certain items of income and expense are
recognized for tax purposes in a different accounting period from that in which
they are recognized in the income statement. No provision for income tax has
been made in 2002 as Boading was granted a tax benefit and was exempted from
income tax for the years of 2001 and 2002.
The Company provides for deferred income taxes using the liability method,
by which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences are classified as current
or non-current based upon the classification of the related asset and
liabilities in the financial statements. No provision for deferred taxation has
been made, as there are no temporary differences at the balance sheet date.
7. EARNINGS (LOSS) PER COMMON SHARE
Basic EPS amounts are based on the weighted average shares of common stock
outstanding. Diluted EPS assumes the conversion, exercise or issuance of all
potential common stock instruments such as options, warrants and convertible
preferred stock, unless the effect is to reduce a loss or increase earnings per
share. For presentation and comparative purposes, the Company has assumed
49,567,002 shares were outstanding during 2002 to the date of the reverse merger
of the Company and Solar Touch Limited.
8. OPTION AGREEMENT
On February 28, 2003, the Company granted an option to DSS Associates,
Carter Fleming International Ltd., Grand Unison Limited, and Emerging Growth
Partners, Inc. (the "Optionees") to purchase an aggregate of 4,750,000 shares of
common stock of the Company for $50,000. The optionees facilitated the
acquisition of the Company and Solar Touch. On April 30, 2003, the optionees
exercised the 4,750,000 options. In accordance with Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation ("SFAS
123") and the Emerging Issues Task Force Consensus in Issue No. 96-18
"Accounting for Equity Investments that are Issued to Other than Employees for
Acquiring, or in Conjunction with selling, Goods or Services" ("EIFT 96-18"),
the Company expensed $2,945,000 associated with these options and included this
expense in "Merger Costs" for the nine months ended September 30, 2003.
9. DIRECTORS' COMPENSATION
During the nine months ended September 30, 2003, 280,000 shares of the
Company's common stock were issued in lieu of cash to three of its directors,
Mr. George Raney, Mr. Raymond Ying-Wai Kwan, and Mr. Yau-Sing Tang as
compensation for their services rendered to the Company. In addition, on August
8, 2003, the Company approved another director's compensation agreement with Mr.
Jun-Tang Zhao to compensate him for acting as a director and head of project
development in China for a period of two years starting from February 28, 2003
by issuing 1,000,000 shares of the Company's common stock. The director
compensation agreement with Mr. Zhao was terminated on October 27, 2003 and the
remaining director's compensation of $516,668 was expensed immediately in the
three months ended September 30, 2003. In accordance with SFAS 123 and EITF
96-18, the Company has accounted for the directors' compensation based on the
approximate fair market value of the Company's stock for the periods the
services were rendered. For the three months and nine months ended September 30,
2003, the Company expensed $755,437 and $995,970 respectively, as directors'
compensation.
10. CONSULTING AGREEMENTS
On February 28, 2003, the Company entered into one-year consulting
agreements with GCA Consulting Limited ("GCA") and Orient Financial Services,
Inc. ("Orient"). The services to be rendered include consultation and advisory
services relating to administrative and corporate development of the Company and
other managerial assistance as mutually agreed upon between the parties hereto.
As consideration for the services to be rendered, the Company issued 2,960,931
and 1,800,000 shares of common stock to GCA and Orient, respectively.
8
On May 3, 2003, the Company entered into a one-year consulting agreement
with Mr. Patrick J. Ko. The services to be rendered include consultation and
advisory services relating to management and identification of potential
strategic partners in the United States. As consideration for the services to be
rendered, the Company issued 500,000 shares of common stock and five-year
warrants to purchase 250,000 shares of common stock, with an exercise price
equal to $0.45 per share.
On May 30, 2003, the Company entered into a one-year consulting agreement
with Mr. Rong-song Ni. The services to be rendered include consultation and
advisory services relating to the strategic planning of the Company and
identification of a potential joint venture partner in China. As consideration
for the services to be rendered, the Company issued 1,000,000 shares of common
stock and five-year warrants to purchase 1,000,000 shares of common stock, with
an exercise price of $0.45 per share.
On June 26, 2003, the Company entered into a one-month consulting agreement
with Mr. Jason M. Genet who is primarily focused on identification of potential
merger and acquisition activities and strategic partnership. As consideration
for the services rendered, the Company issued 75,000 shares of common stock to
him.
On July 3, 2003 and July 7, 2003, the Company entered into one-year
consulting agreements with each of Mr. Chiu-wing Chiu and Mr. Wai Tam,
respectively. The services to be rendered include identifying targets for the
acquisition by using the Company's equity securities. As consideration for the
services to be rendered, the Company issued 600,000 and 2,200,000 shares of
common stock to Mr. Chiu and Mr. Tam, respectively.
On September 2, 2003, the Company entered into another one-year consulting
agreement with Mr. Jason M. Genet, who is primarily focused on identification of
potential merger and acquisition activities and strategic partnerships. As
consideration for these services, the Company issued 65,000 shares of common
stock to him.
On August 22, 2003 the Company entered into an agreement with Friedland
Capital Inc. ("Friedland") pursuant to which Friedland agreed to provide
financial advisory services to the Company for a monthly fee. On August 22,
2003, the Company issued 5,000 shares of restricted common stock to Friedland,
in consideration for services performed. Pursuant to Friedland's engagement
letter with the Company, Friedland's fees are payable in cash or registered
shares of Company common stock only. On October 6, 2003, the Company cancelled
the 5,000 shares of common stock and paid the outstanding fees payable to
Friedland in cash of $15,000.
In accordance("SFAS 123") and ("EITF 96-18"), the Company has accounted for
the consulting agreements based on the fair market value of the Company's stock
at the commencement date of the agreement. For the three months and nine months
ended September 30, 2003, the Company expensed $1,543,377 and $2,734,842,
respectively associated with these agreements and recorded deferred consulting
fees of $3,412,735 at September 30, 2003.
9
11. SHARES ISSUED TO MR. YAU-SING TANG
By a directors' resolution dated August 8, 2003, the Company's board of
directors approved the issuance of 1,200,000 shares of the Company's common
stock to Mr. Yau-Sing Tang for his services rendered in connection with the
acquisition of Solar Touch Limited on February 28, 2003. In accordance with SFAS
123 and EITF 96-18, the Company expensed $744,000 associated with the issuance
of these shares and recorded this expense in "Merger Costs" for the nine months
ended September 30, 2003.
12. SHARES ISSUED IN CONNECTION WITH GRYPHON TRANSACTION
On September 25, 2003, the Company issued 2,758,621 shares of Preferred
Stock to Gryphon Master Fund, L.P. ("Gryphon") for a purchase price of $1.45 per
share and also issued five year warrants to purchase 827,586 shares of Common
Stock at a price per share of $2.18 until September 25, 2008.
13. RELATED PARTY TRANSACTIONS
During the nine month period ended September 30, 2003, the Company did not
have any full-time employees. However, two full-time employees of the Company's
holding company, China Convergent Corporation Limited ("CCCL"), work for the
Company at the direction of CCCL. Their salaries are paid by CCCL.
In addition, the Company shares offices with CCCL. The monthly lease
payments are paid by CCCL.
10
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This quarterly report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, and Section 21E
of the Securities Exchange Act of 1934. These statements relate to future events
or the Company's future financial performance. The Company has attempted to
identity forward-looking statements by terminology including "anticipates,"
"believes," "expects," "can," "continue," "could," estimates," "intends," "may,"
"plans," "potential," "predict," "should" or "will" or the negative of these
terms or other comparable terminology. Although the Company believes that the
expectation reflected in the forward-looking statements are reasonable, the
Company cannot guarantee future results, level of activity, performance or
achievements. The Company expectations are as of the date this Form 10-QSB is
filed, and the Company does not intend to update any of the forward-looking
statements after the date this quarterly report on Form 10-QSB is filed to
confirm these statements to actual results, unless required by law.
Overview
China Cable and Communication, Inc., formerly Nova International Films,
Inc. (the "Company") was incorporated on November 27, 1984 in the State of
Delaware. Prior to May 1993, the Company was principally engaged in the business
of developing, financing and producing motion pictures for distribution. Since
May 1993, however, the Company did not have current business operations until
February 2003 when, pursuant to a Share Exchange Agreement (the "Exchange
Agreement"), the Company acquired a 100% ownership interest in Solar Touch
Limited ("Solar Touch") in exchange for 49,567,002 (post-split) shares of the
Company's common stock. In addition, the Exchange Agreement provided for the
issuance of approximately 4,760,931 (post-split) shares to certain financial
consultants. Solar Touch is a British Virgin Islands corporation, which owns a
49% equity interest in Baoding Pascali Broadcasting Cable TV Integrated
Information Networking, Co., Ltd. ("Baoding"). Baoding is a Sino-foreign joint
venture. Baoding Pascali Multimedia Transmission Networking Co. Limited
("Baoding Multimedia"), which is a subsidiary of Baoding Pascali Group Limited,
a state-owned enterprise established in the PRC, owns the remaining 51% interest
in the joint venture Baoding, a company established in the People's Republic of
China ("PRC"), owns and operates an exclusive cable TV network ("Baoding
network") in the municipality of Baoding, near Beijing, in the PRC. Baoding
network is one of the major backbone cable television networks in Hebei Province
in the PRC. Located 85 miles south of Beijing, Baoding network currently has
200,000 subscribers within a population of approximately 10 million, comprising
approximately 1.9 million households. With its fiber optic network, Baoding
network is capable of transmitting 37 analog television programs, 6 digital
signals and 1 FM music program. Baoding currently offers 39 channels within
Baoding city and 8 channels to the Baoding metropolitan area.
Pursuant to the Exchange Agreement, on February 28, 2003 (the "Closing
Date"), the Company acquired (the "Acquisition") from Kingston Global Co.
Limited ("Kingston") all of the issued and outstanding equity interests of Solar
Touch (the "Solar Touch Shares"). As consideration for the Solar Touch Shares,
the Company issued 49,567,002 shares of its common stock to Kingston and Sino
Concept Enterprises Limited (the "Sellers"). In addition to the common stock
issued to the Sellers, the Company also issued 4,760,931 shares to the Seller's
financial consultants. The consideration for the Acquisition was determined
through arms' length negotiations between the management of the Company and the
Sellers.
On the Closing Date, Mr. Martin Rifkin resigned as President, Treasurer and
a Director of the Company. On the same day, Mr. William Rifkin resigned as
Chairman of the Board, Secretary and a Director of the Company. Effective March
1, 2003, Messrs. Jun-Tang Zhao, Raymond Ying-Wai Kwan, Yau-Sing Tang and George
Raney began serving their terms as members of the Board of Directors of the
Company. The newly elected directors appointed Mr. Raymond Ying-Wai Kwan as
Chief Executive Officer and Mr. Yau-Sing Tang as Chairman of the Board of
Directors and Chief Financial Officer.
11
On February 28, 2003, the Company granted an option to DSS Associates,
Carter Fleming International Ltd, Grand Unison Ltd, and Emerging Growth Partners
Inc. (the "Optionees") to purchase an aggregate of 4,750,000 (post-split) shares
of common stock in the Company for a total of $50,000. On April 30, 2003, the
Optionees exercised the option in full by delivering to the Company a duly
executed Notice of Exercise and by wire transferring the aggregate exercise
price for the shares to the Company.
On July 1, 2003, the Company changed its name from Nova International
Films, Inc. to China Cable and Communication, Inc.
Results of operations
Three months ended September 30, 2003 and 2002:
Revenue
The Company had no revenue for the three months ended September 30, 2003
and 2002 respectively (See Equity in earnings of investment below).
Loss from operations
For the three months ended September 30, 2003, the Company had a loss from
operations of $2,378,723 as compared to a loss from operation of $0 for the
three months ended September 30, 2002. The loss is attributable to directors'
compensation of $755,437, professional fees of $79,909 and consulting fees of
$1,543,377.
Merger costs
For the three months ended September 30, 2003 and 2002, there were no
additional merger costs incurred.
Equity in earnings of investment
This represents the Company's 49% share of undistributed earnings of its
investment in Baoding. For the three months ended September 30, 2003, the
Company's 49% share of losses of its investment in Baoding was $64,911 which was
a $61,776 or 48.8% decrease from $126,687 for the three months ended September
30, 2002. The decrease in the Company's 49% share of losses of its investment in
Baoding is primarily attributable to the decrease in Baoding's net loss from
$258,544 for the three months ended September 30, 2002 to $132,472 for the three
months ended September 30, 2003. The decrease in Baoding's net loss results from
the decrease in provision for doubtful accounts over the prior year.
Net income (loss)
The Company recorded a net loss of $2,443,092 for the three months ended
September 30, 2003 as compared to a net loss of $126,687 for the three months
ended September 30, 2002. This is primarily due to directors' compensation of
$755,437, professional fees of $79,909 and consulting fees of $1,543,377.
Nine months ended September 30, 2003 and 2002:
Revenue
The Company had no revenue for the nine months ended September 30, 2003 and
2002 respectively (See Equity in earnings of investment below).
12
Loss from operations
For the nine months ended September 30, 2003, the Company had a loss from
operations of $3,869,695 as compared to a loss from operation of $0 for the nine
months ended September 30, 2002. The loss is attributable to directors'
compensation of $995,970, professional fees of $138,883 and consulting fees of
$2,734,842.
Merger costs
For the nine months ended September 30, 2003, the Company incurred merger
costs of $3,770,416 as a result of the Company's acquisition of Solar Touch in a
reverse merger whereas there was no such expense for the nine months ended
September 30, 2002.
Equity in earnings of investment
This represents the Company's 49% share of undistributed earnings of its
investment in Baoding. For the nine months ended September 30, 2003, the
Company's 49% share of earnings of its investment in Baoding was $175,650 which
was a $97,995 or 126% increase from $77,655 for the nine months ended September
30, 2002. This is primarily due to the increase in net sales of Baoding by
$296,293 or 12% from $2,395,462 for the nine months ended September 30, 2002 to
$2,691,755 for the nine months ended September 30, 2003 and accordingly, the
increase in net income of Baoding by $199,989 or 126% from $158,480 for the nine
months ended September 30, 2002 to $358,469 for the nine months ended September
30, 2003. The increase in net income is primarily attributable to the decrease
in provisions for doubtful accounts over the prior period.
Net income (loss)
The Company recorded a net loss of $7,463,715 for the nine months ended
September 30, 2003 as compared to a net profit of $77,655 for the nine months
ended September 30, 2002. This is primarily due to the merger costs of
$3,770,416 incurred in relation to the Company's acquisition of Solar Touch in a
reverse merger, directors' compensation of $995,970, professional fees of
$138,883 and consulting fees of $2,734,842.
Financial condition, liquidity, capital resources
For the nine months ended September 30, 2003, we received $50,000 from the
issuance of 4,750,000 shares of common stock due to the exercise of 4,750,000
options by the optionees on April 30, 2003 and $4,000,000 from the issuance of
2,758,621 shares of the Company's restricted 8% convertible preferred stock, par
value of $0.0001 per share, to Gryphon Master Fund, L.P. for $1.45 per share. We
also generated cash of $89,373 during the nine months ended September 30, 2003
in operating activities.
As of September 30, 2003, the Company has cash at bank of $3,911,399. Our
current assets include deferred consulting fees of $3,412,735 and our current
liabilities include accrued expenses of $298,576, accrued directors'
compensation of $64,890, the amount due to a shareholder of $127,276 and the
amount due to a director of $2,500.
We had no significant capital expenditure commitments outstanding as of
September 30, 2003.
Plan of Operation
With a cash balance of $3,911,399, the Company has sufficient working
capital to fund its future operations and finance its intended acquisition of
additional 2% of Baoding from Baoding Multimedia.
13
Exchange rate
Fluctuations of currency exchange rates between Renminbi and United States
dollar could adversely affect our business since our sole investment conducts
its business primarily in China, and its revenue from operations is settled in
Renminbi. The Chinese government controls its foreign reserves through
restrictions on imports and conversion of Renminbi into foreign currency.
Although the Renminbi to United States dollar exchange rate has been stable
since January 1, 1994 and the Chinese government has stated its intention to
maintain the stability of the value of Renminbi, there can be no assurance that
exchange rates will remain stable. The Renminbi could devalue against the United
States dollar. Exchange rate fluctuations may adversely affect our revenue
arising from the sales of products in China and denominated in Renminbi and our
financial performance when measured in United States dollar.
Recent accounting pronouncements
In April 2002, The Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Recission of FASB Statements No. 4, 22 and 64. Amendment of FASB
Statement No. 13, and Technical Corrections." The Statement addresses the
accounting for extinguishment of debt, sale-leaseback transactions and certain
lease modifications. The Statement is effective for transactions occurring after
May 15, 2002. The adoption of SFAS No. 145 did not have material impact on the
Company's financial statement presentation or disclosure.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." The provisions of SFAS
No. 146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 did not have a material impact
on the Company's financial statement presentation or disclosure.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions. The Company does not expect this standard will have any
effect on its financial statement presentation or disclosure.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 is not expected to have a material effect on the
Company's financial position, results of operations, or cash flows.
14
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation. Transition and Disclosure" SFAS No. 148 amends SFAS No. 123
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The company has consistently used the fair value recognition method in
accounting for stock-based compensation. Therefore, the Company does not expect
the adoption of SFAS No. 148 to have a material effect on our financial
position, results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities (an interpretation of ARB No. 51) ("FIN-46")." FIN46
addresses consolidation by business enterprises of certain variable interest
entities, commonly referred to as special purpose entities. The Company will be
required to implement the other provisions of FIN46 in 2003. The adoption of
FIN46 is not expected to have a material impact on the Company's consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." It is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designed after June 30, 2003.
All provisions of SFAS No. 149 should be applied prospectively. The adoption of
SFAS 149 is not expected to have a material impact on the Group's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
15 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classifies a financial instrument that is within its
scope as a liability (or as an asset in some circumstances). It is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. It is to be implemented by reporting the cumulative effect of a change
in an accounting principle for financial instruments created before issuance
date of SFAS No. 150 and still existing at the beginning of the interim period
of adoption. Restatement is permitted. The adoption of SFAS No. 150 is not
expected to have a material impact on the Company's consolidated financial
statements.
15
ITEM 3. CONTROLS AND PROCEDURES
1) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
of 1934 is accumulated and communicated to the Company's management, including
its principal executive and financial officers, as appropriate, to allow timely
decisions regarding required disclosure.
As of the end of the period covered by this report, the Company conducted
an evaluation under the supervision and with the participation of the principal
executive officer and principal financial officer of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d- 15(e) under the
Exchange Act. Based on this evaluation, the principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
2) Changes in Internal Control
There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds.
On February 28, 2003, we issued 49,567,002 shares of our common stock as
consideration for the acquisition of all of the issued and outstanding equity
interests of Solar Touch Limited. These shares were issued to two parties
located in the People's Republic of China pursuant to Section 4(2) of the
Securities Act of 1933, as amended. In addition, we also issued 4,760,931 shares
to the Sellers' financial consultants. The consideration for the acquisition was
determined through arms length negotiations between the management of the
Company and the Sellers.
On April 30, 2003, we issued 4,750,000 shares of our common stock pursuant
to the exercise of options by DSS Associates, Carter Fleming International Ltd.,
Grand Unison Limited, and Emerging Growth Partners, Inc. (the "Optionees") for
$50,000. The Optionees facilitated the acquisition of Solar Touch by the
Company.
During the nine months ended September 30, 2003, compensation to three of
our directors, Mr. George Raney, Mr. Yau-Sing Tang and Mr. Raymond Ying-Wai
Kwan, were paid by the issuance of 280,000 shares in lieu of cash.
On July 3, 2003 and July 7, 2003, the Company entered into one-year
consulting agreements with each of Mr. Chiu-wing Chiu and Mr. Wai Tam,
respectively. The services to be rendered include identifying targets for the
acquisition by using the Company's equity securities. As consideration for the
services to be rendered, the Company issued 600,000 and 2,200,000 shares of
common stock to Mr. Chiu and Mr. Tam, respectively. On August 22, 2003, the
Company entered into another one-year consulting agreement with Mr. Jason M.
Genet, who is primarily focused on identification of potential merger and
acquisition activities and strategic partnerships. As consideration for these
services, the Company issued 65,000 shares of common stock to him.
On August 8, 2003, we issued 1,000,000 shares of common stock to Mr.
Jun-Tang Zhao, a director of the Company, as compensation for services to the
Company. On October 27, 2003, the Company terminated the director's compensation
agreement with Mr. Zhao. As a result of such termination, all the services for
this agreement were expensed for the nine months ended September 30, 2003 (see
Note 9 to the consolidated financial statements). Also on August 8, 2003, the
Company issued 1,200,000 shares of common stock to Mr. Yau-Sing Tang, a director
of the Company, for his services rendered in connection with the acquisition of
Solar Touch Limited on February 28, 2003 (see Note 11 to the consolidated
financial statements).
On August 22, 2003 the Company entered into an agreement with Friedland
Capital Inc. ("Friedland") pursuant to which Friedland agreed to provide
financial advisory services to the Company for a monthly fee. On August 22,
2003, the Company issued 5,000 shares of restricted common stock to Friedland,
in consideration for services performed. Pursuant to Friedland's engagement
letter with the Company, Friedland's fees are payable in cash or registered
shares of Company common stock only. On October 6, 2003, the Company cancelled
the 5,000 shares of common stock and paid the outstanding fees payable to
Friedland in cash of $15,000.
17
On September 25, 2003, the Company completed the sale of 2,758,621 shares
of the Company's restricted 8% Convertible Preferred Stock, par value $.0001 per
share (the "Preferred Stock"), to Gryphon Master Fund, L.P., a Bermuda limited
partnership (the "Purchaser"), for $1.45 per share or an aggregate purchase
price of $4,000,000. The purchase price is equal to 90% of the moving average
closing price of the Company's common stock for the 60 trading days immediately
prior to the entering into of the agreement. In connection with this
transaction, the Company also issued to the Purchaser warrants to purchase up to
827,586 shares of the Company's restricted common stock for $2.18 per share
until September 24, 2008 (the "Warrants").
The Preferred Stock accrues dividends at the rate of 8% of the purchase
price per share per annum, payable when, as and if declared by the Board of
Directors on September 30 and March 31 of each year commencing with March 31,
2004. The Preferred Stock is senior to the common stock with respect to the
payment of dividends, redemption payments and rights upon liquidation,
dissolution or winding up of the affairs of the Company. Upon liquidation, the
Preferred Stock is entitled to receive a liquidation preference equal to the
purchase price plus the amount of accrued and unpaid dividends. The Company may
redeem the Preferred Stock at any time after September 25, 2004 if the market
price of the common stock for a period of any 20 out of 30 trading days equals
or exceeds 200% of the conversion price then in effect. The conversion price
currently in effect is equal to the purchase price of $1.45 per share. Until
redeemed, the Preferred Stock can be converted into common stock at a rate per
share equal to the purchase price, subject to adjustment.
The Warrants may be exercised until September 24, 2008 at an exercise price
of $2.18 per share. If the Company fails to have a registration statement in
effect covering the resale of the shares underlying the Preferred Stock and
issuable upon exercise of the Warrants, then beginning after September 25, 2004,
the Purchaser may exercise the Warrants on a "cashless" basis utilizing the
equity value of a portion of the Warrants to pay the Purchase Price for the
exercise of other portions of the Warrants.
In connection with the sale of the Preferred Stock and Warrants, the
Company and the Purchaser entered into a Registration Rights Agreement. Pursuant
to this agreement, the Company agreed to file and to use its best efforts to
become effective a registration statement covering the resale of the shares of
common stock issuable upon conversion of the Preferred Stock and exercise of the
Warrants. If the registration statement is not filed within 30 days after
September 25, 2003 and is not declared effective by the Securities and Exchange
Commission within 120 days after September 25, 2003, the Company agrees to pay
the Purchaser liquidated damages equal to 2% of the purchase price of the
Preferred Stock for each 30-day period after that date until the registration
statement is declared effective. The Company will pay all expenses incurred in
connection with the registration statement.
On September 25, 2003, the Company issued 18,391 shares of restricted
Common Stock and warrants to purchase 91,954 shares of Common Stock at a price
per share of $2.18 until September 25, 2008 as a finder's fee to the party that
introduced Gryphon to the Company.
All issuances described above were made pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and pursuant to Regulation D promulgated
thereunder.
Item 3. Defaults Upon Senior Securities
None.
18
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
(a) Exhibits:
Exhibit
number Description
------ -----------
31 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certifications of the Chief Executive Officer and the
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
During the three months ended and subsequent to September 30, 2003, the
Company filed the following reports on the Form 8-K:
Form Filing date Items reported
---- ----------- --------------
8-K September 29, 2003 Items 5 and 7
8-K October 3, 2003 Items 4 and 7
8-K October 9, 2003 Item 5
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA CABLE AND COMMUNICATION, INC.
Date: November 18, 2003
/s/ Raymond Ying-Wai Kwan
---------------------------------------
Name: Raymond Ying-Wai Kwan
Title: Chief Executive Officer
Date: November 18, 2003 /s/ Yau-Sing Tang
---------------------------------------
Name: Yau-Sing Tang
Title: Chief Financial Officer
20