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:
March 31, 2004 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 Identification Number)
incorporation or organization)
No. 22 Bei Xin Cun Hou Street, Xiang Shan, Haidian District,
Beijing 100093, the People's Republic of China
----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(86) 10-8259 9426
-----------------
(Company's telephone number, including area code)
Not applicable
--------------
(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 March 31, 2004 was
73,459,760.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
CHINA CABLE AND COMMUNICATION, INC.
FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2004
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...................................................16
Item 2. Changes in Securities...............................................17
Item 3. Default Upon Senior Securities......................................17
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 5. Other Information...................................................17
Item 6. Exhibits and Reports on Form 8-K....................................17
SIGNATURES....................................................................18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
March 31, December 31,
2004 2003
----------- -----------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 53,714 $ 173,967
Cash held in trust account 33,351 150,703
Deposit 3,000,000 3,000,000
Accounts and other receivables 78,834 --
Inventories 117,374 --
Deferred consulting fees 1,345,354 1,934,192
Other current assets 23,293 18,892
----------- -----------
Total current assets 4,651,920 5,277,754
----------- -----------
NON-CURRENT ASSETS
Property, plant and equipment, net 15,488,379 --
Intangible assets 1,920,888 --
Investment in joint venture -- 7,668,477
Amount due from the PRC joint venture partner 1,465,111 --
Amount due from the holding company of PRC joint venture partner 498,587 --
----------- -----------
Total non-current assets 19,372,965 7,668,477
----------- -----------
Total assets $24,024,885 $12,946,231
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,462,407 $ 85,753
Other current liabilities 333,792 --
Income tax payable 43,703 --
Amount due to a shareholder 12,419 75,923
Amount due to a director 2,500 2,500
----------- -----------
Total current liabilities 3,854,821 164,176
----------- -----------
MINORITY INTEREST 8,132,240 --
----------- -----------
REDEEMABLE CONVERTIBLE PREFERRED STOCK,
at minimum redemption amount, 2,758,621 shares issued and
outstanding at March 31, 2004 and December 31, 2003 (mandatory
redemption value of $4,000,000) 3,405,493 3,372,465
----------- -----------
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
1
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004 AND DECEMBER 31, 2003 (Continued)
March 31, December 31,
2004 2003
------------ ------------
(Unaudited) (Audited)
STOCKHOLDERS' EQUITY
Preferred Stock, $0.0001 par value, 20,000,000 shares authorized -- --
Common Stock, $.00001 par value; 100,000,000 shares authorized,
73,459,760 and 72,312,760 shares issued and outstanding at
March 31, 2004 and December 31, 2003, respectively 735 723
Additional paid-in capital 22,233,187 21,356,799
Foreign exchange reserve 27,723 --
Accumulated deficit (13,629,314) (11,947,932)
------------ ------------
Total stockholders' equity 8,632,331 9,409,590
------------ ------------
Total liabilities and stockholders' equity $ 24,024,885 $ 12,946,231
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
2
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
------------ ------------
NET SALES $ 933,751 $ --
COST OF SALES (27,971) --
------------ ------------
GROSS PROFIT 905,780 --
------------ ------------
EXPENSES
Consulting fees (1,306,838) (245,981)
Directors' compensation (224,926) --
Professional fees (135,485) (11,926)
Other operating expenses (574,278) --
Administrative expenses (170,408) --
------------ ------------
Total expenses (2,411,935) (257,907)
------------ ------------
LOSS FROM OPERATIONS (1,506,155) (257,907)
OTHER INCOME (EXPENSES)
Merger costs -- (3,014,277)
Interest income 208 --
Other income, net 8,410 --
Equity in earnings of joint venture -- 56,523
------------ ------------
Total other income (expenses) 8,618 (2,957,754)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,497,537) (3,215,661)
PROVISION FOR INCOME TAXES (28,909) --
------------ ------------
LOSS BEFORE MINORITY INTEREST (1,526,446) (3,215,661)
MINORITY INTEREST (121,908) --
------------ ------------
NET LOSS (1,648,354) (3,215,661)
DEEMED DIVIDENDS (33,028) --
------------ ------------
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS $ (1,681,382) $ (3,215,661)
============ ============
Net loss per share - basic and diluted $ (0.02 $ (0.06)
Weighted average number of shares outstanding - basic
and diluted 72,412,936 53,286,289
The accompanying notes are an integral part of these consolidated financial statements.
3
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(1,648,354) $(3,215,661)
Adjustments to reconcile net loss to net cash used in operating
activities:
Common stock and warrants issued for consulting fees 1,288,838 245,981
Common stock issued for directors' compensation 176,400 --
Merger costs paid by the issuance of common stock -- 2,945,000
Depreciation and amortization 392,761 --
Net loss attributable to minority interest 121,908 --
Equity in earnings of joint venture -- (56,523)
Changes in operating assets and liabilities:
Decrease in cash held in trust account 117,352 --
Decrease in accounts and other receivable 8,735 --
Decrease in inventories 60,371 --
Decrease in deferred merger costs -- 20,468
Increase in other current assets (1,991) --
Increase in accounts payable and accrued liabilities 246,435 60,735
Decrease in income tax payable (71,677) --
----------- -----------
Net cash generated from operating activities 690,778 --
----------- -----------
Cash flows from investing activities:
Cash acquired from subsidiary 45,859 --
Purchase of property plant and equipment (793,386) --
----------- -----------
Net cash used in investing activities (747,527) --
----------- -----------
Cash flows from financing activities:
Decrease in amount due to a shareholder (63,504) --
Cash received in connection with reverse merger of Solar Touch
Limited -- 100
----------- -----------
Net cash (used in) provided by financing activities (63,504) 100
----------- -----------
Net (decrease) increase in cash and cash equivalents (120,253) 100
Cash and cash equivalents at beginning of period 173,967 --
----------- -----------
Cash and cash equivalents at end of period $ 53,714 $ 100
=========== ===========
Supplementary disclosures of cash flow information
Income taxes paid $ 100,586 $ --
=========== ===========
Supplemental Schedule of non-cash financing activities:
Common stock and warrants issued for consulting and directors' fees $ 876,400 $ --
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
4
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated unaudited financial statements have been prepared
by the Company and include all material adjustments which in the opinion of the
management are necessary for a fair presentation of financial results for the
three months ended March 31, 2004. All adjustments and provisions included in
these statements are of a normal recurring nature. Certain information and
footnote disclosures made in the most recent annual consolidated financial
statements included in the Form 10-KSB for the year ended December 31, 2003 have
been condensed or omitted for the interim financial statements; accordingly, the
interim financial statements should be read in conjunction with the December 31,
2003 consolidated financial statements. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pursuant to a Share Exchange Agreement dated as of November 1, 2002, as
amended on February 21, 2003, between the Company and Martin Rifkin and William
Rifkin on the one hand; and Kingston Global Co., Ltd. ("Kingston") and Sino
Concept Enterprises Limited (collectively the "Sellers"); and Solar Touch
Limited ("Solar Touch"), on the other hand, on February 28, 2003 (the "Closing
Date"), the Company acquired (the "Acquisition") from Kingston all of the issued
and outstanding equity interests of Solar Touch. As a result of the Acquisition,
the Company continued the operations of Solar Touch.
Solar Touch was incorporated in the British Virgin Islands on April 26,
1999. Solar Touch owns 49% of the issued and outstanding shares of capital stock
on a fully diluted basis of Baoding Pascali Broadcasting Cable Television
Integrated Information Networking Co., Ltd. (the "Joint Venture" or "Baoding").
The Joint Venture is a Sino-foreign joint venture established in the People's
Republic of China (the "PRC"), between Solar Touch and Baoding Pascali
Multimedia Transmission Networking Co., Ltd. ("Baoding Multimedia"), which is a
subsidiary of Baoding Pascali Group Co., Ltd., a Chinese state-owned enterprise.
The accounting policies adopted in these interim consolidated unaudited
financial statements are consistent with those set out in the Company's audited
consolidated financial statements for the year ended December 31, 2003, except
that the accounts of the Joint Venture has been consolidated with the accounts
of the Company on the following basis and certain accounting policies as
described below have been adopted upon consolidation of the accounts of the
Joint Venture effective January 1, 2004.
5
Basis of consolidation
----------------------
The interim consolidated financial statements include the financial
statements of the Company, Broadway Offshore Limited, a British Virgin Islands
company, and the Joint Venture. All significant inter-company balances and
transactions, including inter-company profits and unrealized profits and losses,
are eliminated on consolidation. During the three months ended March 31, 2004,
Solar Touch was dissolved.
Effective January 1, 2004, the Company assumed control of the board of
directors of the Joint Venture by appointing five out of nine of its directors
and filling key management positions at the Joint Venture, including the
position of Chief Financial Officer and General Manager, with persons affiliated
with the Company. Accordingly, the Company has accounted for the Joint Venture
as a subsidiary and its accounts are consolidated.
Property, plant and equipment
-----------------------------
Property, plant and equipment are stated at cost, less accumulated
depreciation and impairment losses, and are depreciated at rates sufficient to
write off their cost, after taking into account their estimated residual value,
over their estimated useful lives on a straight-line basis. The expected useful
lives are as follows:
Leasehold property 25 years
Machinery and equipment 7 to 15 years
Furniture, fixtures and equipment 7 to 10 years
Motor vehicles 7 years
The useful lives of assets and depreciation method are reviewed
periodically.
The gain or loss on disposal of property, plant and equipment is the
difference between the net sales proceeds and the carrying amount of the
relevant asset, and is recognized in the income statement.
Construction in progress
------------------------
Construction in progress represents plant and properties under construction
and is stated at cost. This includes cost of construction, plant and equipment
and other direct costs. Construction in progress is not depreciated until such
time as the assets are completed and put into operational use.
Intangible assets
-----------------
The intangible asset is an exclusive right to operate cable TV network and
is amortized on a straight-line basis over a period of twenty years.
Inventories
-----------
Inventories, which consist of consumables and network replacement parts,
are stated at cost. Cost is determined on a first in, first out basis, and
includes all costs of purchase, costs of conversion, and other costs incurred in
bringing the inventories to their present location and condition.
Revenue recognition
-------------------
Installation fee income is recognized upon completion of the related
installation work.
6
Revenue from the provision of subscription television is recognized at the
time when the services are provided.
Interest income is recognized on a time proportion basis, taking into
account the principal amounts outstanding and the interest rates applicable.
3. PROPERTY, PLANT AND EQUIPMENT
March 31, December 31,
2004 2003
------------ ------------
(Unaudited) (Audited)
Leasehold improvements $ 3,614 $ --
Machinery and equipment 17,852,309 --
Furniture, fixtures and equipment 109,180 --
Motor vehicles 285,285 --
------------ ------------
18,250,388 --
Less: Accumulated depreciation (5,823,300) --
------------ ------------
12,427,088 --
Construction in progress 3,061,291 --
------------ ------------
$ 15,488,379 $ --
============ ============
Depreciation expense was $362,589 for the three months ended March 31,
2004.
4. INTANGIBLE ASSETS
March 31, December 31,
2004 2003
----------- -----------
(Unaudited) (Audited)
Exclusive right to operate cable TV network $ 2,413,687 $ --
Less: Accumulated amortization (492,799) --
----------- -----------
$ 1,920,888 $ --
=========== ===========
Amortization expense was $30,172 for the three months ended March 31, 2004.
5. INVESTMENT IN JOINT VENTURE
On and before December 31, 2003, the Company accounted for its 49% interest
in the Joint Venture on the equity method of accounting. However, effective
January 1, 2004, the Company assumed control of the board of directors of the
Joint Venture by appointing five out of nine of its directors and filling key
management positions at the Joint Venture, including the position of Chief
Financial Officer and General Manager, with persons affiliated with the Company.
Accordingly, effective January 1, 2004, the Company has accounted for the Joint
Venture as a subsidiary and its accounts are consolidated.
7
6. AMOUNTS DUE FROM THE PRC JOINT VENTURE PARTNER AND ITS HOLDING COMPANY
As of March 31, 2004, our PRC joint venture partner, Baoding Pascali
Multimedia Transmission Networking Co., Ltd., and its holding company owed
$1,465,111 and $498,587, respectively, to the Company. These amounts are not in
trade nature and were unsecured, interest free and due for repayment on December
31, 2005. Those amounts could also be offset by future dividends to be declared
by the Company.
7. 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.
8. 8% REDEEMABLE CONVERTIBLE PREFERRED STOCK
On September 24, 2003, the Company completed the sale of 2,758,621 shares
of the Company's restricted 8% Redeemable Convertible Preferred Stock, par value
$0.0001 per share (the "Preferred Stock"), to Gryphon Master Fund, L.P., a
Bermuda limited partnership (the "Purchaser"), for $1.45 per share (the
"Purchase Price"), or an aggregate purchase price of $4,000,000. The Purchase
Price for the Preferred Stock was calculated based upon 90% of the moving
average closing price of the Company's common stock for the 60 trading days
immediately prior to entering into the agreement. The fair market value of the
Company's common stock as of September 24, 2003 was $2.85 per share. In
connection with this transaction, the Company also issued warrants to the
Purchaser to purchase up to 827,586 shares of the Company's restricted common
stock for at an exercise price $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 on 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 at the Purchase Price plus accrued but unpaid dividends, 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 as
of March 31, 2004 was equal to the Purchase Price of $1.45 per share.
The Company is required to redeem all then outstanding shares of Preferred
Stock on September 24, 2008, the fifth anniversary of the date on which the
preferred stock was issued, at a redemption price equal to the Purchase Price,
plus accrued but unpaid dividends. However, if the "Current Market Price"
(defined as the volume weighted average price of the Company's common stock on
the 10 consecutive trading days immediately preceding such date as reported on
the Over-the-Counter Bulletin Board) of the Company's Common Stock is equal to
or less than $0.70 for a period of 10 consecutive trading days, the holders of
the Preferred Stock have the right to require the Company to redeem all or any
portion of the Preferred Stock at a redemption price, in cash, equal to $1.67
per share, plus all accrued but unpaid dividends.
8
Until redeemed, the Preferred Stock can be converted into common stock at
the option of the Purchaser, at a conversion price equal to the original
Purchase Price, subject to an anti-dilution adjustment upon certain events.
Pursuant to a Registration Rights Agreement between the Purchaser of the
Series shares and the Company, the Company agreed to use its best efforts to
keep a registration statement effective until September 25, 2005. Further, the
Company will be required to pay liquidated damages of 2% of the total purchase
price per month during which a registration default occurs.
The fair value of the Preferred Stock with conversion feature and the
warrants, calculated based on available market data using appropriate valuation
models, were determined to be in excess of the net proceeds of $3,642,150
received by the Company from the Purchaser, and the minimum Preferred Stock
redemption amount of $4,000,000. Therefore, the Preferred Stock has been
recorded at the minimum redemption amount of $4,000,000, less related
transactions costs of $660,563 to be adjusted for in subsequent periods for
accretion adjustments and accrued and unpaid dividends.
The Company shall redeem all outstanding shares of the preferred stock on
the fifth anniversary of the date on which shares were issued. In addition, upon
the written request of any holder from and after the time that the Current
Market Price for the common stock for a period of ten consecutive trading days
is equal to or less than $0.70, the Company shall redeem all or any of the
outstanding shares of the preferred stock held by each such holder. The Company
shall effect such redemption by paying in cash in exchange for the shares of the
preferred stock to be redeemed a sum equal to $1.67 per share.
On September 24, 2003, the Company issued 18,391 shares of restricted
common stock to Trenchant Operating LLC ("Trenchant"), in consideration for
services performed by Trenchant in finding the Purchaser. In addition, the
Company issued warrants to Trenchant to purchase 91,954 shares of common stock,
with an exercise price equal to $2.18 per share until September 25, 2008. The
fair market value of the Company's commons stock as of September 24, 2003 was
$2.85. The fair value of the warrants was determined to be $250,299 as of the
date of grant using the Black-Scholes pricing option valuation model, which
assumed a risk free interest rate of approximately 3.07%, an expected life of 5
years, and a volatility rate of 171%.
During the three months ended March 31, 2004, no preferred stock was
redeemed or converted, and no warrants granted were exercised.
9. INCOME TAXES
Solar Touch and Broadway Offshore are both British Virgin Islands
investment holding companies that do not carry on any business and do not
maintain any offices in the United States of America. Therefore, no provision
for United States income taxes or tax benefits for the Company has been made.
The Joint Venture is a Sino-foreign joint venture established in the PRC.
The Joint Venture was subject to a 3% local income tax for the year ended
December 31, 2002 and 18% (15% federal income tax plus 3% local income tax) for
the year ended December 31, 2003 and future years, on the results of its
operations after adjusting for items which are non-assessable or disallowed.
Certain items of income and expense are recognized for PRC income tax purposes
in a different accounting period from that in which they are recognized for
financial accounting purposes.
9
10. DIRECTORS' COMPENSATION IN SHARES AND WARRANTS
The Company signed two-year stock compensation agreements (the
"Agreements") with three of its directors, Mr. George Raney, Mr. Raymond
Ying-Wai Kwan, and Mr. Yau-Sing Tang on February 28, 2003. Pursuant to the
Agreements, the Company will issue an aggregate of 49,000 shares of common stock
each month in consideration for their services rendered through February 2005.
During the three months ended March 31, 2004, 147,000 shares of the
Company's common stock under the Company's 2003 Stock Compensation Plan were
issued to the directors.
11. CONSULTING AGREEMENTS AND DEFERRED CONSULTING FEES
On March 26, 2004, the Company entered into a one-year consulting agreement
with Li Wei, a consultant, for advising the Company on merger and acquisition
opportunities in China. As consideration for the services to be rendered, the
Company issued 1,000,000 shares of common stock under the Company's 2003 Stock
Compensation Plan. The fair market value of the Company's common stock as of
March 26, 2004 was $0.70.
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Issues
Task Force Consensus Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18"), the Company has accounted for the
consulting agreements based on the fair market value of the Company's common
stock at the commencement date of the individual consulting agreements. For the
three months ended March 31, 2004, the Company charged to expense a total of
$1,264,901 associated with consulting agreements and recorded deferred
consulting fees of $1,345,354 at March 31, 2004. No warrants granted to
consultants were exercised during the three months ended March 31, 2004.
12. MINORITY INTEREST
Minority interest expense of $121,908 during the three months ended March
31, 2004 was attributable to the 51% equity interest in Baoding owned by the
joint venture partner.
13. EARNINGS (LOSS) PER COMMON SHARE
Basic EPS amounts are determined based on the weighted average number of
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 securities, unless the effect is to reduce a loss or increase
earnings per share. All potentially dilutive financial instruments as of March
31, 2004 had the effect of reducing the reported net loss per share, and,
therefore, were excluded from the calculation. For presentation and comparative
purposes of computing EPS only, the Company has assumed that 49,567,002 common
shares were outstanding during throughout the period until February 2003, due to
the reverse merger of the Company and Solar Touch Limited.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
In addition to historical information, this quarterly report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such differences include, but are not limited to those
discussed in this section. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date thereof.
The following discussion and analysis should be read in conjunction with
the financial statements and the notes thereto, included as part of this
quarterly report.
Overview
- --------
The Company was incorporated in the State of Delaware on November 27, 1984.
Prior to May 1993, the Company was principally engaged in the business of
developing, financing and producing motion pictures for distribution. From May
1993 to February 28, 2003, however, the Company had no business operations and
sought other business opportunities.
Pursuant to a Share Exchange Agreement dated as of November 1, 2002, as
amended on February 21, 2003, between the Company and Martin Rifkin and William
Rifkin on the one hand; and Kingston Global Co., Ltd. ("Kingston") and Sino
Concept Enterprises Limited (collectively the "Sellers"); and Solar Touch
Limited ("Solar Touch"), on the other hand, on February 28, 2003 (the "Closing
Date"), the Company acquired (the "Acquisition") from 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 the Sellers. In addition to the Common Stock issued to
the Sellers, the Company 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.
As a result of the Acquisition, the Company continued the operations of Solar
Touch.
Solar Touch was incorporated in the British Virgin Islands on April 26,
1999. Solar Touch owns 49% of the issued and outstanding shares of capital stock
on a fully diluted basis of Baoding Pascali Broadcasting Cable Television
Integrated Information Networking Co., Ltd. (the "Joint Venture"). The Joint
Venture is a Sino-foreign joint venture established in the People's Republic of
China (the "PRC"), between Solar Touch and Baoding Pascali Multimedia
Transmission Networking Co., Ltd. ("Baoding Multimedia"), which is a subsidiary
of Baoding Pascali Group Co., Ltd., a Chinese state-owned enterprise.
The Joint Venture was formed on July 23, 1999, when Baoding Multimedia and
Solar Touch signed a joint venture contract (the "JV Agreement") and the
articles of association of the Joint Venture (the "JV Articles"). The JV
Agreement and JV Articles provide that the total amount of investment of the
Joint Venture was RMB122.425 million (or approximately US$14.8 million); and
that the registered capital stock of the Joint Venture was RMB70 million (or
approximately US$8.46 million). The JV Agreement and JV Articles also provide
that Baoding Multimedia's contribution to the Joint Venture was Baoding
Multimedia's network and related facilities with a value of RMB21.7 million,
plus intangible assets (including licenses, business goodwill) valued at RMB14
million which was equal to 51% of the registered capital of the Joint Venture
and that Solar Touch's contribution was an investment of US$4.14 million (or
11
RMB34.3 million) in cash which was equal to 49% of the registered capital. On
July 28, 1999, the Management Commission of the Baoding Hi-Tech Industrial
Development Area approved the JV Agreement and JV Articles as well as the
members of the board of directors of the Joint Venture. On August 5, 1999, a
Certificate of Approval for Establishment of Enterprises with Foreign Investment
in the PRC for the Joint Venture was issued and on August 16, 1999, the Business
License for the Joint Venture was issued for the operation of the Joint Venture.
On February 23, 2000, Baoding Multimedia and Solar Touch signed another
agreement to increase the Joint Venture's registered capital from RMB70 million
to RMB100 million, provided, however, that the parties' respective percentage of
equity interests in the Joint Venture shall remain the same. On February 24,
2000, the Management Commission of the Development Area approved the increase in
the Joint Venture's registered capital from RMB70 million to RMB100 million. On
September 6, 2000, a revised Business License was issued to reflect the increase
in the Joint Venture's registered capital.
On May 6, 2003, Solar Touch transferred its 49% interest in the Joint
Venture to its wholly-owned subsidiary, Broadway Offshore Limited ("Broadway
Offshore"), a company incorporated in the British Virgin Islands. On December
29, 2003, Baoding Multimedia transferred a 3% interest in the Joint Venture back
to the Baoding Pascali Cable Television Network Workers Stockholding
Association. On the same date, the JV Agreement and JV Articles were amended to
reflect the correct shareholdings of Broadway Offshore, Baoding Multimedia and
Baoding Pascali Cable Television Network Workers Stockholding Association. Also,
a total number of board of directors of the Joint Venture increased to nine
pursuant to the Amended Joint Venture Agreement dated December 29, 2003 (the
"Amended JV Agreement").
The Joint Venture operates a cable television network in the municipality
of Baoding, near Beijing in the PRC. The Joint Venture has over 200,000
subscribers in a market with a population of over 10 million. The Company
believes that the Joint Venture is at present the only Sino-foreign joint
venture approved by the State Administration of Radio, Film and Television to be
licensed as a cable television network operator in the PRC. The Company believes
that it is the first and only joint venture allowed to have a foreign investor
invest in and to operate the cable television network in the PRC.
The board of directors of the Joint Venture currently has nine members,
five of whom were appointed by the Company. Pursuant to the Amended JV
Agreement, Broadway Offshore has the right to appoint five of the nine members
of the Board of the Joint Venture. Through those five appointed directors, the
Company has obtained control of the board of directors of the Joint Venture and
the Company's Board of Directors has filled key management positions at the
Joint Venture, including Chief Financial Officer and General Manager, with
persons affiliated with the Company. As a foreign investor, the Company, through
its predecessor, has been the single largest interest holder of the Joint
Venture since formation of the Joint Venture in 1999 and actively participated
into the management of the Joint Venture.
In view of China's accession to the World Trade Organization, it is
expected that further opening of the cable television market in China will take
place in the near future. Being the first foreign investor to be allowed to own
49% interest in a Chinese cable operator and with the experience gained through
the years, the Company believes it is at an advantageous position to increase
its investment in the Joint Venture beyond the 49% threshold should it be
allowed to do so in the future.
According to its business license and the current relevant rules and
regulations, the Joint Venture is allowed to acquire and own networks in areas
other than Baoding. Therefore, when opportunities arise, the Joint Venture may
try to expand its business beyond Baoding, in which case, the Company may assist
the Joint Venture in raising capital for such expansion, although there cannot
be any assurance of such expansion.
12
On July 1, 2003, the Company changed its name from Nova International Film,
Inc. to China Cable and Communication, Inc.
Results of operations
- ---------------------
Three months ended March 31, 2004 and March 31, 2003
- ----------------------------------------------------
Net Sales
The net sales represents the installation and subscription fees of our
Baoding joint venture received and to be received for the three months ended
March 31, 2004, net of service tax, of $933,751. The Company had no revenue for
the three months ended March 31, 2003 because Baoding was accounted for using
the equity method in 2003.
Gross Profit
The gross profit of our Baoding joint venture for the three months ended
March 31, 2004 was $905,780 representing a gross profit margin of 97%. There was
no corresponding gross profit for the first quarter of 2003 because Baoding was
accounted for using the equity method.
Expenses
Total expenses increased by 835% to $2,411,935 for the three months ended
March 31, 2004 from $257,907 for the corresponding period in 2003 because of the
significant increases in consulting fees by $1,060,857, directors' compensation
by $224,926, professional fees by $123,559, other operating expenses by $574,278
and administrative expenses by $170,408.
Merger costs
For the three months ended March 31, 2003, the Company incurred merger
costs of $3,014,277 as a result of the Company's acquisition of Solar Touch in a
reverse merger whereas no such expense was incurred for 2004.
Equity in earnings of investment
For the three months ended March 31, 2003, Baoding was accounted for as an
associate using the equity method. The equity in earnings of investment in 2003
represented the Company's 49% share of undistributed earnings of its investment
in Baoding. As discussed above, starting January 1, 2004, the Baoding accounts
have been consolidated and thus no equity in earnings of investment has been
recorded.
Provision for income taxes
For the three months ended March 31, 2004, provision for income taxes
represented the PRC income taxes incurred by Baoding. Baoding is subject to
total taxes at 18% (15% federal income tax plus 3% local income tax). No
provision for income taxes was recorded for 2003 because the Company was not
subject to any tax whereas Baoding accounts had not been consolidated until
January 1, 2004.
13
Minority interest
For the three months ended March 31, 2004, minority interest represented
the profit of Baoding attributable to the 51% equity interest not owned by the
Company. No minority interest was recorded for 2003 as Baoding accounts were not
consolidated until January 1, 2004
Net income (loss)
Net loss decreased to $1,648,354 for the three months ended March 31, 2004
from $3,215,661 for the corresponding period in 2003. This decrease results from
the combined effect of the significant merger costs in 2003 as compared to none
in 2004, and the significant increase in expenses as discussed above.
Financial condition, liquidity, capital resources
- -------------------------------------------------
For the three months ended March 31, 2004, we generated $236,336 from
operating activities. During the same period, we used $388,944 to purchase
property plant and equipment.
As of March 31, 2004, the Company has cash and cash equivalents of
$3,087,065. Our current assets were $4,999,362 whereas our current liabilities
were $3,854,821, which resulted in a current ratio of 1.30. We had no capital
expenditure commitments outstanding as of March 31, 2004.
Plan of Operation
- -----------------
While our projection of future cash requirements is affected by numerous
factors, including but not limited to, changes in customer receipts, cable TV
industry trends, operating cost fluctuations, and unplanned capital spending, we
anticipate, based on the scale of our existing operations, that our projected
cash flows from operations would be sufficient to support our planned operations
for the next twelve months.
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, "Rescission 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.
14
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.
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 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 Group 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 Group'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.
15
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 Group's consolidated financial
statements.
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
required to be disclosed in the reports filed under the Exchange Act 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any pending or, to the best of our knowledge, any
threatened legal proceedings. No director, officer or affiliate of the Company,
or owner of record or of more than five percent (5%) of the securities of the
Company, or any associate of any such director, officer or security holder is a
party adverse to the Company.
16
ITEM 2. CHANGES IN SECURITIES
During the three months ended March 31, 2004, 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 147,000 shares in lieu of cash.
On March 26, 2004, the Company entered into a one-year consulting agreement
with Li Wei, a consultant, for advising the Company on merger and acquisition
opportunities in China. As consideration for the services to be rendered, the
Company issued 1,000,000 shares of unrestricted common stock under the Company's
2003 Stock Compensation Plan.
On May 4, 2004, the Company granted to each of Messrs. Tang and Kwan
options to purchase 1,000,000 shares of the Company's common stock at a price
per share of $0.72 until May 4, 2014 in consideration for services rendered. The
closing price of the Company's common stock on May 4, 2004 was $0.72 per share.
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.
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 March 31, 2004, the Company filed the
following report on the Form 8-K:
Form Filing date Items reported
---- ----------- --------------
8-K January 2, 2004 1,5
17
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: May 20, 2004 /s/ Raymond Ying-Wai Kwan
--------------------------------------
Name: Raymond Ying-Wai Kwan
Title: Chief Executive Officer
Date: May 20, 2004 /s/ Yau-Sing Tang
--------------------------------------
Name: Yau-Sing Tang
Title: Chief Financial Officer
18