As filed with the Securities and Exchange
Commission on April 6, 2001. File No. 333-51342
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------------------------
CHINA BROADBAND CORP.
(Exact name of registrant as specified in its charter)
NEVADA 4899 72-13812
(STATE OR JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
CODE NUMBER)
2080, 440-2 Avenue SW Michael J. Morrison
Calgary, Alberta, Canada T2P 5E9 1495 Ridgeview Drive
(403) 234-8885 Reno, Nevada 89509
(775) 827-6300
(Address, including zip code, and (Name, address, including zip code,
telephone number, including area code, and telephone number,including area
of registrant's principal executive code, of agent for service)
offices)
----------------
COPIES TO:
Bernard G. Poznanski Randal R. Jones
Koffman Kalef, Business Lawyers Kenneth G. Sam
19th Floor, 885 West Georgia Street Dorsey & Whitney LLP
British Columbia V6C 3H4 1420 Fifth Avenue, Suite 3400
(604) 891-3688 Seattle, Washington 98101
(206) 903-8800
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF
1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
APRIL 6, 2001
6,900,657
[LOGO]
CHINA BROADBAND CORP.
COMMON STOCK
This is a public offering of 6,900,657 shares of the common stock of
China Broadband Corp.
All of the shares being offered, when sold, will be sold by selling
shareholders as listed in this prospectus on pages 12 through 14. The selling
shareholders are offering:
- 6,699,867 shares of common stock
- 200,790 shares of common stock issuable upon exercise of the
warrants
We will not receive any of the proceeds from the sale of the shares.
Our common stock is currently quoted on the National Association of
Securities Dealers (NASD) Over-the-Counter Bulletin Board under the symbol
"CBBD." The last price of our common stock on the NASD Over-the-Counter Bulletin
Board on March 30, 2001 was $3.25 per share.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Investing in the shares involves risks. See "Risk Factors" beginning on
page 5.
The date of this prospectus is April 6, 2001.
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................................1
CHINA BROADBAND...................................................................................................1
THE OFFERING......................................................................................................3
RISK FACTORS......................................................................................................5
_RISKS RELATING TO OUR MARKETS................................................................................8
_RISKS RELATING TO CHANGING INTERNET TECHNOLOGIES............................................................10
_OTHER RISKS.................................................................................................10
USE OF PROCEEDS..................................................................................................11
DIVIDEND POLICY..................................................................................................12
CAPITALIZATION...................................................................................................12
DILUTION.........................................................................................................12
SELLING SHAREHOLDERS.............................................................................................12
SELECTED FINANCIAL DATA..........................................................................................15
SUMMARY FINANCIAL DATA...........................................................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION............................16
_PERIOD FROM INCEPTION (FEBRUARY 1, 2000) THROUGH DECEMBER 30, 2000..........................................17
_LIQUIDITY AND CAPITAL RESOURCES.............................................................................19
_PLAN OF OPERATION...........................................................................................20
_STOCK OPTION AND WARRANT GRANTS.............................................................................21
CHANGES IN AUDITORS..............................................................................................22
_OUR APPOINTMENT OF ARTHUR ANDERSON LLP AS AUDITOR...........................................................22
_OUR APPOINTMENT OF DELOITTE & TOUCHE LLP AS AUDITOR.........................................................23
_RECENT ACCOUNTING PRONOUNCEMENTS............................................................................24
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........................................................24
_INTEREST RATE SENSITIVITY...................................................................................24
_FOREIGN EXCHANGE RATE RISK..................................................................................24
BUSINESS.........................................................................................................25
_OVERVIEW OF CORPORATE STRUCTURE.............................................................................25
_OVERVIEW OF BUSINESS........................................................................................26
_GROWTH OF INTERNET USAGE IN CHINA...........................................................................27
_OUR CABLE TELEVISION INTERNET SERVICE STRATEGY..............................................................28
_SHEKOU JOINT VENTURE........................................................................................28
_TERMS OF THE COOPERATIVE JOINT VENTURE CONTRACT.............................................................28
_CHENGDU JOINT VENTURE.......................................................................................29
_TERMS OF THE COOPERATIVE JOINT VENTURE CONTRACT.............................................................29
_DEYANG JOINT VENTURE........................................................................................30
_TERMS OF THE COOPERATIVE JOINT VENTURE CONTRACT.............................................................30
_MODEL JOINT VENTURE TERMS...................................................................................31
_CHINESE REGULATION OF THE COMMUNICATIONS INDUSTRY...........................................................32
_CHINESE GOVERNMENTAL APPROVALS..............................................................................36
_SHEKOU JOINT VENTURE........................................................................................36
_CHENGDU JOINT VENTURE.......................................................................................37
_PROPOSED JOINT VENTURES.....................................................................................37
_TRANSACTIONS WITH SOFTNET...................................................................................38
_SALES AND MARKETING.........................................................................................39
_RESEARCH AND DEVELOPMENT....................................................................................39
_COMPETITION.................................................................................................40
_INTELLECTUAL PROPERTY.......................................................................................41
_EMPLOYEES...................................................................................................41
_FACILITIES..................................................................................................41
_LEGAL PROCEEDINGS...........................................................................................42
i
EXECUTIVE OFFICERS AND DIRECTORS.................................................................................42
BOARD COMMITTEES.................................................................................................44
DIRECTOR COMPENSATION............................................................................................45
EXECUTIVE COMPENSATION...........................................................................................45
_EMPLOYMENT AND CONSULTING CONTACTS..........................................................................48
_OPTION GRANTS...............................................................................................45
_OPTION EXERCISES............................................................................................46
_STOCK OPTION PLAN...........................................................................................47
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS................................................................48
RELATED PARTY TRANSACTIONS.......................................................................................50
PRINCIPAL SHAREHOLDERS...........................................................................................50
TAXATION.........................................................................................................52
_UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS..............................................53
_DISTRIBUTIONS...............................................................................................53
_CAPITAL GAINS AND LOSSES....................................................................................53
_CHINESE TAXATION............................................................................................53
_DESCRIPTION OF CAPITAL STOCK................................................................................54
_COMMON STOCK................................................................................................54
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON STOCK AND RELATED STOCKHOLDER MATERIALS..............................55
ANTI-TAKEOVER EFFECTS OF CHARTER AND BYLAWS PROVISIONS AND THE NEVADA............................................55
_BUSINESS CORPORATION ACT....................................................................................55
_TRANSFER AGENT AND REGISTRAR................................................................................56
_SHARES ELIGIBLE FOR FUTURE SALE.............................................................................56
PLAN OF DISTRIBUTION.............................................................................................57
LEGAL MATTERS....................................................................................................58
EXPERTS..........................................................................................................58
WHERE YOU CAN FIND MORE INFORMATION..............................................................................59
_FINANCIAL STATEMENT SCHEDULES...............................................................................66
_SIGNATURES..................................................................................................67
_POWERS OF ATTORNEY..........................................................................................67
ii
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus.
CHINA BROADBAND
We, China Broadband Corp., are a development stage company, which means
we are in the process of developing our business. We have incurred losses since
our inception, and as of December 31, 2000, we had an accumulated deficit of
$3,597,180. We anticipate that we will continue to incur losses in the
foreseeable future. Our auditors have expressed considerable doubt that we will
be able to continue as an on going business.
We, through our wholly-owned subsidiary, Big Sky Network Canada Ltd., a
British Virgin Islands corporation, are in the process of entering into
cooperative joint venture relationships with government approved Chinese
partners. These joint ventures plan to install hardware and equipment to permit
reliable high capacity, high speed Internet access and services in major urban
markets throughout the People's Republic of China. Each of our Chinese joint
venture partners are expected to obtain the required licenses, regulatory
approvals and access to existing cable television cable systems for the joint
venture. We are an Internet technology service provider and provide financing
and equipment, software, installation, training and technical support services
to each joint venture. Our Chinese joint venture partners are expected to
provide high capacity, high speed data transport and dedicated Internet access
to businesses, individuals, educational institutions and others through existing
cable television systems in China.
As of March 30, 2001, we have formed the following joint ventures:
- SHEKOU JOINT VENTURE: Shenzhen China Merchants Big Sky Network Ltd.,
a joint venture with Shenzhen, China Merchants Shekou Industrial Zone
Ltd., to permit high-speed Internet access in Shekou, Shenzhen,
Guangdong Province;
- CHENGDU JOINT VENTURE: Sichuan Huayu Big Sky Networks Ltd., a joint
venture with Chengdu Huayu Information Industry Co. Ltd., to permit
high-speed Internet access in Chengdu, Sichuan Province.
- DEYANG JOINT VENTURE: Deyang Guangshi Big Sky Ltd., a joint venture
with Deyang Guangshi Network Development Ltd., to permit high-speed
Internet access in Deyang, Sichuan Province.
We have also signed letters of intent with five potential joint venture
partners to install hardware and equipment to permit high-speed Internet access
through cable television networks, and
This prospectus is part of a registration statement filed with the
Securities and Exchange Commission related to the first public offering of China
Broadband securities.
Our head office address is 2080, 440 -2 Avenue SW., Calgary, Alberta,
Canada, T2P 5E9, and our telephone number is (403) 234-8885. We also have
offices for our joint ventures located at Room 808, Zhaoshang Building,
Shaoshang Road, 518067 Shekou, Shenzhen, Guangdong, China; and Zongnan
Residential Area, Tai D4, Shenglong Street, Consulate Road, Chengdu, Sichuan
610041 Chengdu, Sichuan Province, China.
We maintain a World Wide Web site address at www.chinabroadband.com.
Information on our web site is not part of this prospectus.
We have applied for registration of the trademark "China Broadband" in
the United States. We have also applied for registration of the "China
Broadband" trademark in Canada. All other trademarks or service marks appearing
in this prospectus are trademarks or service marks of the companies that use
them.
Until December 19, 2000, there was another company operating under the
name "China Broadband Corporation Limited", which changed its name after we
threatened a trademark infringement legal action. We are not associated with
that company.
1
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 6, 2001.
2
THE OFFERING
This prospectus covers up to 6,900,657 shares of China Broadband Corp.
common stock to be sold by selling stockholders identified in this prospectus.
SHARES OFFERED BY THE SELLING 6,900,657 shares of common stock,
SECURITYHOLDERS OFFERING PRICE $0.001 par value per share
Determined at the time of sale by
the selling shareholders
COMMON STOCK OUTSTANDING AS OF 19,474,517 shares
MARCH 30, 2001
COMMON STOCK OUTSTANDING ASSUMING 19,675,307 shares.
THE MAXIMUM NUMBER OF SHARES ARE SOLD
PURSUANT TO THIS OFFERING
Assuming conversion of the
warrants into shares of common
stock registered under this
prospectus, the shares of common
stock subject to this prospectus
represent approximately 35.07% of
our issued and outstanding common
stock as of March 30, 2001.
NUMBER OF SHARES OWNED BY THE SELLING 0 shares. (1)
SHAREHOLDERS AFTER THE OFFERING
USE OF PROCEEDS We will not receive any of the
proceeds of the shares offered by
the selling shareholders.
We intend to use the proceeds
from the exercise of the
warrants, if exercised, held by
certain selling shareholders for
working capital purposes.
DIVIDEND POLICY We currently intend to retain any
future earnings to fund the
development and growth of our
business. Therefore, we do not
currently anticipate paying cash
dividends. See "Dividend Policy."
OTC BULLETIN BOARD SYMBOL CBBD
(1) This number assumes that each shareholder will sell all of its
shares available for sale during the effectiveness of the registration statement
that includes this prospectus. Shareholders are not required to sell their
shares. See "Plan of Distribution."
Unless otherwise specifically stated, information throughout this
prospectus excludes:
- 5,325,000 shares issuable upon the exercise of outstanding options;
- 200,790 shares issuable upon the exercise of outstanding warrants;and
- 2,675,000 shares reserved for future issuance under our stock option
plan.
3
SUMMARY FINANCIAL DATA
PERIOD FROM INCEPTION (FEBRUARY 1, 2000)
THROUGH DECEMBER 31, 2000
- ------------------------------
STATEMENT OF OPERATIONS DATA:
--------------------------------------------------- -- --------------------------- ----------------------------
PERIOD FROM INCEPTION THREE MONTH PERIOD ENDED
FEBRUARY 1, 2000 THROUGH DECEMBER 31, 2000
DECEMBER 31, 2000
--------------------------------------------------- -- --------------------------- ----------------------------
Net sales...................................... $ 208,333 $0
--------------------------------------------------- -- --------------------------- ----------------------------
Loss from operations........................... $3,477,065 $2,578,910
--------------------------------------------------- -- --------------------------- ----------------------------
Net loss....................................... $3,597,180 $2,520,603
--------------------------------------------------- -- --------------------------- ----------------------------
Basic and diluted loss per common share ....... $ (0.20) $(0.14)
--------------------------------------------------- -- --------------------------- ----------------------------
Book and diluted weighted average common shares 17,696,752 17,696,752
outstanding....................................
--------------------------------------------------- -- --------------------------- ----------------------------
AS OF DECEMBER 31, 2000
BALANCE SHEET DATA:
------------------------------------------------ -- --------------------
Cash and cash equivalents.......... $ 4,668,128
------------------------------------------------ -- --------------------
Working capital.................... $ 2,898,608
------------------------------------------------ -- --------------------
Total assets....................... $ 19,004,945
------------------------------------------------ -- --------------------
Long-term obligations.............. -
------------------------------------------------ -- --------------------
Total stockholders' equity......... $ 17,054,105
------------------------------------------------ -- --------------------
We acquired all of the issued and outstanding shares of China
Broadband (BVI) Corp. in exchange for 13,500,000 shares of our common stock on
April 14, 2000. Because we had only 1,509,850 (post reverse-split) shares issued
and outstanding on the date of our acquisition, the former shareholders of China
Broadband (BVI) Corp. acquired 90% control of us. In instances like this,
accounting principles require that the transaction be reflected in financial
statements as a reverse acquisition of us by the shareholders of China Broadband
(BVI) Corp. Consequently, under the principles of reverse acquisition
accounting, China Broadband (BVI) Corp., was deemed to be the acquiror and our
consolidated financial statements are presented as a continuation of the
financial position and results from operations of China Broadband (BVI) Corp.
On April 14, 2000, we completed a reverse-split of our common stock,
and all information in this prospectus gives effect to the reverse-split.
There were no cash dividends declared or paid since inception.
4
RISK FACTORS
RISKS RELATING TO OUR BUSINESS
OUR LACK OF AN OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE
OUR BUSINESS AND PROSPECTS.
We were incorporated in Nevada in February 1993 and did not engage in
our current business activities until April 2000. We have no operating history,
no history of revenues and a history of losses, which makes it difficult for you
to evaluate our business and prospects. During 2000, we had revenues of
$208,333, derived entirely from technical consulting fees. We do not believe our
results for 2000 will reflect our future results.
We are a development stage company, which means that we are in the
process of developing our business and have not established all of the systems
and infrastructure necessary to implement our business plan. In addition, our
senior management, consultants and employees have worked together only a short
period of time and we have only recently established the joint ventures through
which we intend to offer Internet services in China.
Because we do not yet have an operating history, we cannot determine if
aspects of our business strategy will be commercially viable in China,
including:
o the willingness of subscribers to subscribe to our services at our
subscription rates,
o the viability of cable television subscribers as a target market for
our services;
o the accuracy of estimates related to our working capital
requirements;
o the accuracy of estimates related to our capital investment
requirements for our joint ventures;
o estimates related to the revenues we will earn from our operations;
and
o other economic aspects of conducting business in China.
Based on our lack of operating history, we cannot assure you that we
will be able to effectively compete in the new and rapidly evolving market for
Internet services in China.
WE HAVE INCURRED NET LOSSES SINCE INCEPTION AND ANTICIPATE THAT LOSSES
WILL CONTINUE.
We have incurred losses since inception and had an accumulated deficit
of $3,597,180 as of December 31, 2000. We anticipate that we will continue to
incur net losses due to a high level of planned operating and capital
expenditures, increased sales and marketing costs, additional personnel hires
and our general growth objectives. We anticipate that our net losses will
increase in the near future as we implement our business strategy and
commercialize our services. We may never achieve profitability.
Our ability to earn a profit will depend on the commercial acceptance
and profitability of our services. If we are unsuccessful in executing our
business strategy, we may never earn a profit and we will not be able to
continue as a going concern.
OUR AUDITORS HAVE ISSUED AN OPINION STATING THAT THERE IS CONSIDERABLE
DOUBT THAT WE WILL BE ABLE TO CONTINUE AS A GOING CONCERN
In light of the risks described in this section and other factors, our
auditors have expressed considerable doubt as to our ability to continue as a
going concern. We will be unable to continue as a going concern if we are unable
to earn sufficient revenues from our operations or to raise additional capital
through debt or equity financings to meet our working capital obligations. At
December 31, 2000, we had working capital of $2,898,608. We
5
estimate that we will be required to raise additional capital during 2001 to
meet our working capital requirements for 2001. If we do not raise this capital,
we will be unable to continue as a going concern and you may lose your entire
investment.
WE WILL NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS
Our capital requirements are difficult to plan in light of our current
obligations to the Shekou joint venture, the Chengdu joint venture and the
Deyang joint venture and our intent to enter into new joint ventures on similar
terms. Currently, the Chengdu joint venture and the Deyang joint venture
obligate us to make additional capital expenditures of $4.1 million and $4.5
million over the next three years, respectively. In addition, we will require
additional capital to fund the establishment of new joint ventures, the
expansion of services provided by our joint venture and our business development
and marketing activities. We have signed letters of intent with five potential
joint venture partners on similar terms. We anticipate that we will enter into
final joint venture agreements with Changsa Guang Da in the second quarter of
2001 and up to 4 joint venture partners during the second half of 2001. We
anticipate that each joint venture will require us to make an initial capital
contribution of at least $1million.
Based on our plan of operation, we estimate we may require an
additional $5 million in financing during 2001 to meet our capital requirements
through 2001, an additional capital during 2002.
Our inability to obtain sufficient working capital to make these
capital contributions or to fund our obligations under our existing joint
ventures will have a material adverse effect on our business, financial
condition and results of operations. For more information on our capital and
financing requirements, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
WE MAY BE ADVERSELY AFFECTED BY CHINA'S GOVERNMENT REGULATION OF
INTERNET COMPANIES
Our business in China will be conducted through joint ventures
established with Chinese enterprises. We are considered foreign persons under
Chinese law. Foreign investment in the China Internet sector and the businesses
and activities of Internet companies in China are subject to various legal
issues, risks and uncertainties. In the past, the Chinese government has
declared some telecommunications industry joint ventures illegal and required
those entities to cease operations. In addition, China Ministry of Information
Industry, the agency that regulates the telecommunications industry in China,
has adopted regulations which limit investment by foreign companies in China
Internet businesses, unless they are approved by the ministry. Our joint
ventures in Shekou and Chengdu have received permits to operate their
businesses, but we cannot assure you that additional joint ventures will receive
permits to operate their businesses.
In October 2000, China adopted new laws and regulations governing
Internet access and the provision of online business, economic and financial
information. These new laws are subject to interpretation and result in
significant uncertainty. We may face significant costs and technological
challenges to comply with the statutory or regulatory requirements imposed by
the Chinese government. Legislation and regulations may be enacted by the
Chinese government which could have an adverse affect on our business, financial
condition and results of operations.
OUR INABILITY TO ESTABLISH AND MAINTAIN JOINT VENTURES WITH GOVERNMENT
APPROVED CHINESE JOINT VENTURE PARTNERS WILL AFFECT OUR ABILITY TO OPERATE OUR
BUSINESS
Establishing and maintaining joint ventures with government
approved Chinese joint venture operators with the ability to gain access to
cable television networks is critical to our ability to generate sufficient
revenues to achieve commercial success. Under existing Chinese law and
regulations, foreign parties are not eligible to own cable networks or to obtain
the licenses necessary to deliver broadband services in China. Our Chinese joint
venture partners obtain access to cable television networks and government
regulatory approval, licenses and permits that allow us to deliver our Internet
services. Given the contractual nature of our relationship with our joint
venture partners, our interests may be inconsistent, which may result in
conflicts of interest concerning service fees, services management and business
objectives. In addition, under the terms of our standard
6
joint venture agreements, we will lose the right to appoint a majority of the
directors of the joint venture in or about the fifth year of the joint venture
term and will not be able to control any joint venture over the entire joint
venture term. If we are unable to maintain good relationships with our
joint-venture partners, our ability to deliver broadband services and to
generate revenues from subscriptions may be materially adversely affected.
IF OUR JOINT VENTURE PARTNERS ARE UNABLE TO OBTAIN INTERNET ACCESS, WE
MAY BE UNABLE TO OFFER OUR SERVICES.
Our subscribers access the Internet through the cable television
networks of our joint venture partners, who, in turn, must lease bandwidth from
China Telecom or another international gateway to the Internet to provide
Internet access. If our joint venture partners fail to obtain or maintain
Internet operating permits or connection to an Internet gateway, we would not be
able to serve our subscribers. We cannot assure you that Internet operating
permits or access will continue to be available on acceptable terms or at all.
THE CHINESE GOVERNMENT MAY FORCE OUR JOINT VENTURE PARTNERS TO
TERMINATE OUR EXCLUSIVE RIGHT TO PROVIDE INTERNET SERVICES OVER THEIR CABLE
TELEVISION NETWORKS, WHICH COULD ELIMINATE ANY ADVANTAGE WE MAY HAVE IN
DELIVERING OUR SERVICES
Our business model is based on entering into exclusive agreements to
install hardware and equipment to permit Internet services access over existing
cable television networks in China. Our Chinese joint venture partners may be
required by law to grant our competitors access to their cable systems. In that
event, our competitors could potentially provide services over these cable
systems that compete with our services, and any advantage we may have would be
lost. A change in the Chinese law that eliminates exclusive arrangements would
have a material affect on our business, financial condition and results of
operations.
IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO SUCCESSFULLY
COMMERCIALIZE OUR INTERNET SERVICES WILL BE ADVERSELY AFFECTED
Our business strategy is to grow through entering into joint venture
relationships throughout China. The expansion of our organization could place a
significant strain on our ability to deliver quality support services to our
joint venture partnerships. We anticipate that each joint venture will establish
its own marketing, sales, subscriber support and administrative systems, and
that we will provide training and support for such systems. We could experience
difficulties providing training and support to our joint ventures as our
organization expands and as each joint venture grows.
To manage our anticipated growth, we must:
o implement and improve our operational, financial and management
information systems;
o hire, train and retain additional qualified personnel, including
management with experience in developing and managing an
organization consisting of a number of joint venture partnerships
and operating under in a highly regulated industry;
o continue to expand and upgrade core technologies; and
o effectively manage our relationships among joint venture partners,
governmental agencies, suppliers, service providers and other third
parties.
There can be no assurance that we will successfully manage the growth
of our business or that our management will be capable of fully exploiting the
market opportunities for broadband services in China.
IN FUTURE,WE WILL RELY ON INCOME FROM DIVIDENDS AND OTHER DISTRIBUTIONS
PAID BY OUR JOINT VENTURE TO FUND OUR CASH REQUIREMENTS AND TO CONTINUE AS A
GOING CONCERN
We will rely on dividends and other distributions paid by our Chinese
joint ventures for our cash requirements, including the funds necessary to
service any debt we may incur. At December 31, 2000, our joint ventures
generated only nominal revenues from their operations. At March 30, 2001, the
Shekou Joint Venture had 1,884 subscribers with Internet connection and the
Chengdu Joint Venture had only 11 subscribers with Internet
7
connection. We estimate that Shekou must maintain a subscriber base of at least
3,000 users to reach profitability and Chengdu must maintain a subscriber base
of at least 4,000 users to reach profitability. We do not anticipate we will
receive any distribution from these joint ventures at least until they are
profitable. In addition, if any of our existing or future joint ventures incurs
debt on its own behalf in the future, the instruments governing the debt may
restrict its ability to pay dividends or make other distributions to us.
In addition, Chinese legal restrictions permit payment of dividends by
a sino-foreign joint venture only out of its net income, if any, determined in
accordance with China accounting standards and regulations. Under China law, a
sino-foreign joint venture will also be required to set aside a portion of its
net income each year to fund certain reserve funds. These reserves are not
distributable as cash dividends.
We cannot assure you that any of our joint ventures will achieve
profitability. If we do not receive distributions from our joint ventures or if
our joint ventures are not profitable, we may be unable to meet our financial
obligations or to continue as a going business concern.
RISKS RELATING TO OUR MARKETS
OUR SUCCESS WILL DEPEND ON PUBLIC ACCEPTANCE OF INTERNET SERVICES IN
CHINA, WHICH REMAINS UNPROVEN
The market for Internet services in China has only recently begun to
develop. Only a small percentage of the population in China has Internet access.
See "Growth of Internet Usage in China." Our future results of operations will
depend substantially upon the increased use of the Internet in China. Despite
growing interest in the commercial possibilities for the Internet, businesses
and consumers in China may be deterred from purchasing Internet access services
for the following reasons:
o inconsistent quality of service;
o lack of availability of cost-effective service; and
o a lack of tools to simplify Internet access and use in China.
If there is a lack of acceptance or slow growth of the Internet in
China the number of subscribers to our service and our revenues could be
adversely affected.
WE FACE INTENSE COMPETITION WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
PENETRATE THE INTERNET MARKET IN CHINA
The market for Internet services in China is intensely competitive and
the Internet industry is constantly evolving. Some of our major competitors in
China are major Chinese Internet service providers, such as China Telecom,
Jitong, and Unicom, as well as large foreign Internet service providers
companies such as AT&T, some who are affiliated with large Chinese corporations.
These competitors may have advantages over us, including:
o substantially greater financial and technical resources;
o more extensive and well developed marketing and sales networks;
o greater brand recognition;
o larger subscriber bases;
o longer operating histories; and
8
o more established relationships with joint venture partners,
equipment specialists and/or other strategic partners.
We may be unable to successfully compete with these established
competitors, which may have a material adverse affect on our business and
results of operations.
OUR GROWTH DEPENDS ON THE ESTABLISHMENT OF AN ADEQUATE
TELECOMMUNICATIONS INFRASTRUCTURE BY THE CHINESE GOVERNMENT
The telecommunications infrastructure in China is not well developed.
In addition, access to the Internet is made primarily through Internet backbones
of separate national interconnecting networks that connect through several
international gateways. The Internet backbones and international gateways are
owned and operated by the Chinese government and are the only channels through
which the domestic Chinese Internet network can connect to the international
Internet network. As a result, we will continue to depend on the Chinese
government and state-owned enterprises to establish and maintain a reliable
Internet and telecommunications infrastructure through which our joint ventures
can access the Internet and connect their subscribers.
We cannot assure you that the Internet infrastructure in China will
support the demands associated with continued growth. If the necessary
infrastructure standards or protocols or complementary products, services or
facilities are not developed by the Chinese government and state-owned
enterprises, our business, financial condition and results of operations could
be materially and adversely affected.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO DISTRIBUTE
PROFITS, IF ANY, OR TO USE REVENUES FROM OUR CHINESE OPERATIONS EFFECTIVELY,
WHICH MAY ADVERSELY AFFECT OUR ABILITY TO MEET OUR OBLIGATIONS OUTSIDE OF CHINA
Substantially all of the revenues and operating expenses of our Chinese
operations are denominated in Renminbi. Renminbi is a restricted currency in
that the Chinese government does not allow it to leave China and only in
connection certain transactions as outlined later in this paragraph. In order to
obtain our profits, we maintain a "current account" where we may convert
Renminbi into US dollars. The Renminbi is currently freely convertible under the
"current account" designation, which includes dividends, trade and
service-related foreign exchange transactions, but not under the "capital
account" designation, which includes foreign direct investment.
Currently, foreign joint ventures, such as our Shekou and Chengdu joint
ventures, may purchase foreign exchange for settlement of "current account
transactions", including payment of dividends, without the approval of the State
Administration for Foreign Exchange. Foreign joint ventures may also retain
foreign exchange in its current account (subject to a ceiling approved by the
government) to satisfy foreign exchange liabilities or to pay dividends.
However, we cannot assure you that the relevant Chinese governmental authorities
will not limit or eliminate our ability to purchase and retain foreign
currencies in the future.
Since a significant amount of our future revenues will be in the form
of Renminbi, the existing and any future restrictions on currency exchange may
limit our ability to utilize revenue generated in Renminbi to fund our business
activities outside China, if any, or expenditures denominated in foreign
currencies.
Foreign exchange transactions under the capital account are still
subject to limitations and require government approvals. This could affect the
ability of our existing or future Chinese joint ventures to obtain foreign
exchange through debt or equity financing, including by means of loans or
capital contributions from us.
WE MAY SUFFER CURRENCY EXCHANGE LOSSES IF THE RENMINBI DEPRECIATES
RELATIVE TO THE U.S. DOLLAR
Our reporting currency is the U.S. Dollar. However, substantially all
of our assets and revenues are denominated in Renminbi. Our assets and revenues
are expressed in our U.S. Dollar financial statements will decline in value if
the Renminbi depreciates relative to the U.S. Dollar. Any such depreciation
could adversely affect the market price of our common stock. Very limited
hedging transactions are available in China to reduce our exposure to exchange
rate fluctuations. To date, we have not entered into any hedging transactions in
an effort to
9
reduce our exposure to foreign currency exchange risk. While we may decide to
enter into hedging transactions in the future, the availability and
effectiveness of these hedges may be limited and we may not be able to
successfully hedge our exposure at all. In addition, our currency exchange
losses may be magnified by Chinese exchange control regulations that restrict
our ability to convert Renminbi into U.S. Dollars.
RISKS RELATING TO CHANGING INTERNET TECHNOLOGIES
THE INTERNET MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES,
AND OUR TECHNOLOGIES MAY NOT BE POPULAR AND MAY BECOME OBSOLETE
The Internet services industry is characterized by rapid technological
advances, evolving industry standards, changes in user requirements and frequent
new service introductions and enhancements. For example, a number of broadband
technologies, such as asymmetrical digital subscriber line services, have
demonstrated competing technological advantages against the broadband Internet
access services offered by us and may become more popular with subscribers in
the future. If our technologies or standards applicable to the services we offer
become obsolete or fail to gain widespread consumer acceptance, our business and
our financial results will be materially and adversely affected. We cannot
assure you that the introduction of new products or services or the emergence of
new technologies will not enable competitors to provide Internet access to our
subscribers at a lower cost, higher speed or with greater reliability than we
are able to provide. We cannot predict the likelihood of these changes and we
cannot assure you that any technological changes will not materially adversely
affect our business and operating results.
WE DEPEND ON THIRD PARTIES TO PROVIDE THE HARDWARE AND SOFTWARE
REQUIRED TO OFFER OUR SERVICES
We currently depend on Nortel Networks and others for the hardware,
software and technical support that allows us to offer our services. If we are
required to locate alternative suppliers for Nortel, we could experience
substantial delay in offering our services and may be required to replace some
of the systems that we have installed in Shekou and Chengdu. Such a replacement
may also substantially increase the cost of installing equipment and servicing
our joint ventures. The loss our relationships with these third parties could
have a material adverse effect on our business, financial condition and results
of operations.
OTHER RISKS
THERE IS UNCERTAINTY AS TO OUR SHAREHOLDERS' ABILITY TO ENFORCE CIVIL
LIABILITIES IN THE BRITISH VIRGIN ISLANDS AND CHINA
Our assets are located outside the United States and are held through
companies incorporated under the laws of the British Virgin Islands and joint
ventures established in China. Our current operations are conducted in China. In
addition, a majority of our directors and officers are nationals and/or
residents of countries other than the United States. All or a substantial
portion of the assets of these persons are located outside the United States. As
a result, it may be difficult for you to effect service of process within the
United States upon these persons. In addition, there is uncertainty as to
whether the courts of the British Virgin Islands or China, respectively, would
recognize or enforce judgments of United States courts obtained against us or
such persons predicated upon the civil liability provisions of the securities
laws of the United States or any state thereof, or be competent to hear original
actions brought in the British Virgin Islands or China, respectively, against us
or such persons predicated upon the securities laws of the United States or any
state thereof.
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FILING MAY NOT BE ACCURATE
Included in this prospectus are various forward-looking statements
which can be identified by the use of forward looking terminology such as "may,"
"will," "expect," "anticipate," "estimate," "continue," "believe" or other
similar words. We have made forward-looking statements with respect to the
following, among others:
o our goals and strategies;
10
o our expectations related to growth of the Internet in China;
o our joint venture partners' to obtain licenses and permits to
operate as Internet service providers in China;
o our ability to earn sufficient revenues from offerings;
o the importance and expected growth of Internet technology;
o the pace of change in the Internet marketplace;
o the demand for Internet services; and
o our revenues.
These statements are forward-looking and reflect our current
expectations. They are subject to a number of risks and uncertainties, including
but not limited to, changes in the economic and political environments in China,
changes in technology and changes in the Internet marketplace. In light of the
many risks and uncertainties surrounding China Broadband, China and the Internet
marketplace, prospective purchasers of our shares should keep in mind that we
cannot guarantee that the forward-looking statements described in this
prospectus will transpire.
BROKER-DEALERS MAY BE DISCOURAGED FROM EFFECTING TRANSACTIONS IN OUR
SHARES BECAUSE THEY ARE CONSIDERED PENNY STOCKS AND ARE SUBJECT TO THE PENNY
STOCK RULES
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act
of 1934, as amended, impose sales practice and disclosure requirements on NASD
broker-dealers who make a market in "a penny stock". A penny stock generally
includes any non-NASDAQ equity security that has a market price of less than
$5.00 per share. Our shares are quoted on the OTCBB, and the price of our shares
ranged from $4.19 (low) to $10.00 (high) during the period from September 25,
2000 to December 31, 2000. The closing price of our shares on March 30, 2001 was
$3.25. Purchases and sales of our shares are generally facilitated by NASD
broker-dealers who act as market makers for our shares. The additional sales
practice and disclosure requirements imposed upon broker-dealers may discourage
broker-dealers from effecting transactions in our shares, which could severely
limit the market liquidity of the shares and impede the sale of our shares in
the secondary market.
Under the penny stock regulations, a broker-dealer selling penny stock
to anyone other than an established customer or "accredited investor"
(generally, an individual with net worth in excess of $1,000,000 or an annual
income exceeding $200,000, or $300,000 together with his or her spouse) must
make a special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the
broker-dealer or the transaction is otherwise exempt.
In addition, the penny stock regulations require the broker-dealer to
deliver, prior to any transaction involving a penny stock, a disclosure schedule
prepared by the Commission relating to the penny stock market, unless the
broker-dealer or the transaction is otherwise exempt. A broker-dealer is also
required to disclose commissions payable to the broker-dealer and the registered
representative and current quotations for the securities. Finally, a
broker-dealer is required to send monthly statements disclosing recent price
information with respect to the penny stock held in a customer's account and
information with respect to the limited market in penny stocks.
USE OF PROCEEDS
This prospectus is part of a registration statement that permits
selling shareholders to sell their shares. Because this prospectus is solely for
the purpose of selling shareholders, we will not receive any proceeds from the
sale of stock being offered. If Warrant holders exercise their right to acquire
common shares, we could receive proceeds of $1,180,925. We cannot assure you
that these warrants will be exercised.
11
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain any future earnings to fund the development and
growth of our business and we do not anticipate paying any cash dividends in the
foreseeable future.
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
2000:
DECEMBER 31, 2000
-----------------
Stockholders' equity:
Common stock, $0.001 par value, 50,000,000 shares authorized;
19,474,517 issued and outstanding.............................. $77,936
Additional paid-in capital..................................... 20,631,344
Deferred compensation.......................................... (57,995)
--------
Accumulated deficit............................................ (3,597,180)
-----------
Total stockholders' equity..................................... $17,054,105
Total capitalization........................................... $19,004,945
=============================
DILUTION
This offering is for sales of stock by existing China Broadband
shareholders on a continuous or delayed basis in the future. Sales of common
stock by shareholders will not result in any substantial change to the net
tangible book value per share before and after the distribution of shares by the
selling shareholders. There will be no change in net tangible book value per
share attributable to cash payments made by purchasers of the shares being
offered. Prospectus investors should be aware, however, that the price of our
shares may not bear any rational relationship to net tangible book value per
share.
SELLING SHAREHOLDERS
The following are the shareholders for whose accounts the shares are
being offered; the number of shares beneficially owned by each selling
shareholder prior to this offering; the number of shares to be offered for each
selling shareholder's account; and the number of shares to be owned by each
selling shareholder following completion of the offering:
NUMBER OF SHARES
NUMBER OF SHARES OWNED UPON
OWNED BEFORE NUMBER OF SHARES PERCENTAGE OF COMPLETION OF
NAME OFFERING OFFERED SHARES OWNED* OFFERING
Wallace Nesbitt 562,500 562,500 - 2.89% - --
Western Capital(1) 562,500 562,500 - 2.89% - --
Pamela Hallisey 45,000 45,000 - 0.23% - --
R. Scott Hutcheson 65,000 65,000 - 0.33% - --
David Beatty 360,000 360,000 - 1.85% - --
Fevzi Ogelman 900,000 900,000 - 4.62% - --
Malcolm Albery 90,000 90,000 - 0.46% - --
Lombard Odier & Cie (2) 868,000 868,000 - 4.46% - --
Precise Details, Inc. (3) 10,000 10,000 - 0.05% - --
Thomas Milne (4) 275,200 10,000 - 0.05% - 250,000
Susan A. Milne (5) 5,000 5,000 - 0.03% - --
Sarah Anderson (6) 2,500 2,500 - 0.01% - --
12
Christopher M. Milne (7) 2,500 2,500 - 0.01% - --
Greg Anderson (8) 2,500 2,500 - 0.01% - --
Christopher H. Hopkins 2,000 2,000 - 0.01% - --
Shelley Gatto 2,000 2,000 - 0.01% - --
Terry Kent 2,500 2,500 - 0.01% - --
Janys M. Milne & Benjamin J.
Thomas (9) 2,500 2,500 - 0.01% - --
Don Cooper 1,000 1,000 - 0.01% - --
Kathleen J. Gathercole 500 500 - 0.01% - --
850015 Alberta Ltd. (10) 180,000 180,000 - 0.92% - --
728871 Alberta Ltd. (11) 90,000 90,000 - 0.46% - --
588063 Alberta Ltd. (12) 90,000 90,000 - 0.46% - --
FTCG Enterprises (13) 1,000 1,000 - 0.01% - --
GCI Investments (13) 1,000 1,000 - 0.01% - --
John Harvey 1,000 1,000 - 0.01% - --
Stuart Crombie 2,000 2,000 - 0.01% - --
Lynn Dufort 2,000 2,000 - 0.01% - --
Richard M. Hurwitz (14) 100,000 100,000 - 0.51% - --
Patrimer Investments Inc. (15) 125,000 125,000 - 0.64% - --
Lobsinger Management Inc. (16) 250,000 250,000 - 1.28% - --
Julie Poznanski (17) 25,000 25,000 - 0.13% - --
Carmen Kwan 25,000 25,000 - 0.13% - --
Michael B. Beatty 10,000 10,000 - 0.05% - --
Richard Hallisey 100,000 100,000 - 0.51% - --
Quarry Bay Investments Inc.(16) 125,000 125,000 - 0.64% - --
David Doritty 30,000 30,000 - 0.15% - --
Signet Management Limited (18) 10,000 10,000 - 0.05% - --
Value Investors International (19) 20,000 20,000 - 0.10% - --
Michael Lauer 400,000 400,000 - 2.05% - --
Martin Garvey 50,000 50,000 - 0.26% - --
Eric Hauser 50,000 50,000 - 0.26% - --
James C. Kennedy 20,000 20,000 - 0.10% - --
BBL (Ref. Aureus Capital) (20) 130,000 130,000 - 0.65% - --
Transatlantic Securities Ltd. (21) 130,000 130,000 - 0.66% - --
James Pasieka (22) 50,000 50,000 - 0.26% - --
Allen Wu 10,000 10,000 - 0.05% - --
Martin Maurel Gestion 30,000 30,000 - 0.15% - --
Michael Binnion 5,000 5,000 - 0.03% - --
Luxembourg (23) 1,800 1,800 - 0.01% - --
Gutzwiller SA (24) 20,000 20,000 - 0.10% - --
Pictet & Cie, Banquiers (25) 10,000 10,000 0.05% - --
CCF Capital Management (26) 50,000 50,000 - 0.26% - --
Banque Privee Edmond de
Rothschild (27) 25,000 25,000 - 0.13% - --
The Orbiter Fund, Ltd. (13) 80,000 80,000 - 0.41% - --
The Viator Fund, Ltd. (13) 40,000 40,000 - 0.21% - --
Lancer Offshore Inc. (13) 496,667 496,667 - 2.55% - --
Lancer Partners
Limited Partnership (30) 250,000 250,000 - 1.28% - --
Elizabeth C. Kennedy 20,000 20,000 - 0.10% - --
Clariden Bank (28) 70,000 70,000 - 0.36% - --
Gestor Finance (29) 24,000 24,000 - 0.12% - --
Somangest Vesigest (30) 11,000 11,000 - 0.06% - --
Banque Cantonale
Vaudevoise (13) 7,000 7,000 - 0.04% - --
Pinnaton Ref. Innoven
13
FCPI 1997 no. 1 (31) 4,000 4,000 - 0.02% - --
Pinnaton Ref. Innoven
FCPI 1998 no. 2 (31) 18,200 18,200 - 0.09% - --
Kenneth Barnes (32) 50,000 50,000 - 0.26% - --
Canaccord Capital
International, Ltd. (33) 50,790 50,790 - 0.26% - --
Tibor Gajdics (34) 47,500 47,500 - 0.26% - --
A Charuk (35) 47,500 47,500 - 0.26% - --
Bo Wan International Ltd. (36) 5,000 5,000 - 0.003% - --
TOTAL 7,150,657 6,885,457 - 34.40% - --
This table assumes that each shareholder will sell all of its shares available
for sale during the effectiveness of the registration statement that includes
this prospectus. Shareholders are not required to sell their shares. See "Plan
of Distribution." Other than described in footnotes below, no other selling
shareholder has held any position or office or had any material relationship
with China Broadband during the past three years.
(1) Peter Cocmrase has ultimate voting power and control over these shares.
(2) K. Feller exercises ultimate voting and investment power over these
shares.
(3) Thomas Milne, a Director and Chief Financial Officer of China
Broadband, exercises voting and investment power over these shares.
(4) Thomas Milne is the Chief Financial Officer and a director of China
Broadband Corp. Consists of 10,2000 shares owned directly by Mr. Milne,
5,000 shares owned by his spouse, and 10,000 shares owned by Precise
Details, Inc. in which Mr. Milne exercises voting and investment power
over, and options exercisable to acquire 250,000 common shares.
(5) Susan Milne is the spouse of Thomas Milne.
(6) Sarah Anderson is the daughter of Thomas Milne
(7) Christopher Milne is the son of Thomas Milne.
(8) Greg Anderson is the son-in-law of Thomas Milne
(9) Janys Milne is the sister of Thomas Milne.
(10) Marilyn Hunt has ultimate voting and investment power over these shares
(11) Barry Hunt has ultimate voting and investment power over these shares.
(12) Terry Yuck has ultimate voting and investment power over these shares.
(13) The selling shareholder has not provided the Company with sufficient
information to determine who has ultimate voting and investment control
over these shares.
(14) Mr. Hurwitz is a member of board of directors.
(15) Brian Wheatley has ultimate voting and investment power over these
shares.
(16) Michael Lobsinger has ultimate voting and investment power over these
shares. Mr. Lobsinger received options exercisable to acquire 800,000
shares of common stock at $1.00 per share in consideration of
management and consulting services provided to the Company.
(17) Julie Poznanski is the wife of Bernard Poznanski, a partner at the law
firm of Koffmann Kalef, which provides legal services to the Company.
(18) Phillip Boylan has ultimate voting and investment power over these
shares.
(19) Franklin Gary has ultimate voting and investment power over these
shares.
(20) J.H. Le Tarmec has ultimate voting and investment power over these
shares.
(21) Graeme Witts has ultimate voting and investment power over these
shares.
(22) Mr. Pasieka is a member of our advisory board.
(23) Jaupez Nechezi has ultimate voting and investment power over these
shares.
(24) A. Lunchinger has ultimate voting and investment power over these
shares.
(25) Pascal Decoppel has ultimate voting and investment power over these
shares.
(26) O. Aneo has ultimate voting and investment power over these shares.
(27) Philippe Anstett has ultimate voting and investment power over these
shares.
(28) M. Osborne has ultimate voting and investment power over these shares.
(29) J. De Gressor has ultimate voting and investment power over these
shares.
(30) Bauvin Remi has ultimate voting and investment power over these shares.
(31) Roland Cohen has ultimate voting and investment power over these
shares.
14
(32) Consisting of warrants exercisable to acquire shares of common stock.
Mr. Barnes received such warrants as consideration for consulting
services rendered to the Company. (33) Consisting of warrants
exercisable to acquire shares, issued in connection with investment
banking services provided to the Company.
(34) Consisting of warrants exercisable to acquire common stock. Such
warrants were issued as consideration for consulting services provided
to the Company.
(35) Mr. Charuk is the brother of James Charuk, our former President.
(36) Consisting of warrants exercisable to acquire common stock. The selling
shareholder has not provided the Company with sufficient information to
determine who has ultimate voting and investment control over these
shares.
* Based on 19,474,517 shares of common stock issued and outstanding on
April 6, 2001. Assumes that all shares registered for resale by this
prospectus have been sold.
Based on information provided to us, except as otherwise provided, none
of the selling shareholders are or are affiliated with any Broker-Dealer in the
United States.
Except as otherwise provided, none of the selling shareholders are
affiliated or have been affiliated with us, any of our predecessors or
affiliates during the past three years.
SELECTED FINANCIAL DATA
The following selected financial data are qualified in their entirety
by reference to, and you should read them in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements and notes to such financial statements included
in this prospectus. We have derived the statements of operations data from our
audited financial statements that appear in this prospectus, and these data are
qualified by reference to the financial statements.
China Broadband Corp. acquired all of the issued and outstanding shares
of China Broadband (BVI) Corp. in exchange for 13,500,000 shares of its common
stock on April 14, 2000. Because China Broadband Corp. had only 1,509,850 shares
issued and outstanding on the date of our acquisition, the former shareholders
of China Broadband (BVI) Corp. acquired 90% control of China Broadband Corp. In
instances like this, accounting principles require that the transaction be
reflected in financial statements as a reverse acquisition of the parent, China
Broadband Corp., by the shareholders of China Broadband (BVI) Corp. as the
shareholders of China Broadband (BVI) Corp. owned a majority of the combined
company at acquisition date. In this case, common control started immediately
after the completion of the acquisition, effectively April 14, 2000.
Consequently, under the principles of reverse acquisition accounting China
Broadband (BVI) Corp. was deemed to be the acquiror of the company and the
consolidated financial statements of the company, the legal parent, are
presented as a continuation of the financial position and results from
operations of China Broadband (BVI) Corp., the legal subsidiary.
15
SUMMARY FINANCIAL DATA
PERIOD FROM INCEPTION (FEBRUARY 1, 2000)
THROUGH DECEMBER 31, 2000
- ------------------------------
STATEMENT OF OPERATIONS DATA:
--------------------------------------------------- -- --------------------------- ----------------------------
PERIOD FROM INCEPTION THREE MONTH PERIOD ENDED
FEBRUARY 1, 2000 THROUGH DECEMBER 31, 2000
DECEMBER 31, 2000
--------------------------------------------------- -- --------------------------- ----------------------------
Net sales.......................... $ 208,333 $0
--------------------------------------------------- -- --------------------------- ----------------------------
Loss from operations............... $3,477,065 $2,578,910
--------------------------------------------------- -- --------------------------- ----------------------------
Net loss........................... $3,597,180 $2,520,603
--------------------------------------------------- -- --------------------------- ----------------------------
Basic and diluted loss per common share $ (0.20) $(0.14)
--------------------------------------------------- -- --------------------------- ----------------------------
Book and diluted weighted average common shares 17,696,752 17,696,752
outstanding........................
--------------------------------------------------- -- --------------------------- ----------------------------
AS OF DECEMBER 31, 2000
BALANCE SHEET DATA:
------------------------------------------------ -- --------------------
Cash and cash equivalents.......... $ 4,668,128
------------------------------------------------ -- --------------------
Working capital.................... $ 2,898,608
------------------------------------------------ -- --------------------
Total assets....................... $ 19,004,945
------------------------------------------------ -- --------------------
Long-term obligations.............. -
------------------------------------------------ -- --------------------
Total stockholders' equity......... $ 17,054,105
------------------------------------------------ -- --------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATION
You should read the following discussion and analysis in conjunction
with the audited financial statements and notes thereto appearing elsewhere in
this prospectus.
OVERVIEW
We were inactive from the date of our incorporation on February 9, 1993
through December 31, 1997. Through December 31, 1997, no significant capital was
raised and no significant expenses incurred. Our share capital at December 31,
1997 consisted of 100 common shares which was paid in capital of $100. During
our fiscal year ended December 31, 1998, we raised $59,971 in capital by selling
2,319,000 common shares, and incurred start up expenses of $25,095.
On April 14, 2000, we completed a reverse-split of our common stock on
a .65104 for 1 basis reducing our issued and outstanding share capital to
1,509,850 shares of common stock. All information contained in this prospectus
gives effect to the reverse-split.
On April 14, 2000, we acquired all of the issued and outstanding shares
of China Broadband (BVI) Corp., in exchange for 13,500,000 shares of our common
stock. Because we had only 1,509,850 (post reverse-split) shares issued and
outstanding on the date of our acquisition, the former shareholders of China
Broadband (BVI) Corp., acquired control over the predecessor company. In
instances like this, accounting principles require that the transaction be
reflected in financial statements as a reverse acquisition. In this case, common
control started immediately after the completion of the acquisition, effectively
April 14, 2000. Consequently, under the principles of reverse acquisition
accounting China Broadband (BVI) Corp. was deemed to be the acquirer and our
consolidated financial statements are presented as a continuation of the
financial position and results from operations of China Broadband (BVI) Corp.
16
Subsequent to our acquisition of China Broadband (BVI) Corp., China
Broadband Corp. completed three private placements totaling 3,331,667 shares of
common stock for net proceeds of $11,316,692.
On September 29, 2000, we issued 1,133,000 shares of our common stock,
plus other consideration as detailed below, to acquire the remaining 50%
interest held by SoftNet in Big Sky Network, our operating subsidiary, bringing
our ownership of Big Sky Network to 100%.
We, China Broadband Corp., are a development stage company, which means
we are in the process of developing our business. We have incurred losses since
our inception, and we anticipate that we will continue to incur losses in the
foreseeable future. Our auditors have expressed considerable doubt that we will
be able to continue. Management is addressing this concern with a plan of equity
and debt financing and profits from future dividends from our joint ventures.
RESULTS OF OPERATIONS
This review will be limited to activities and operations during the
2000 fiscal year, as, in prior years, we were inactive. Therefore, year-to-year
comparisons would not provide any additional relevant information.
PERIOD FROM INCEPTION (FEBRUARY 1, 2000) THROUGH DECEMBER 31, 2000.
We had no business activities prior to February 1, 2000. On April 25,
2000, Big Sky Network issued 40,000 shares to SoftNet Systems, Inc., a third
party, and, as a result, we no longer controlled Big Sky Network. As a result,
we deconsolidated the accounts of Big Sky Network from April 25, 2000 onward.
For the period from April 26, 2000 to September 28, 2000, we account for our
investment in Big Sky Network using the equity method, resulting in an equity
loss of $181,471 for the period. On September 29, 2000, China Broadband (BVI)
Corp. acquired SoftNet's interest in Big Sky Network, and as a result, we own
100% of Big Sky Network's issued and outstanding share capital.
The third and fourth quarters of the year were notable in two major
areas, we launched our commercial operations in China and we acquired 100% of
the ownership of Big Sky Network. We saw our first subscriber revenues in Shekou
Joint Venture, as the operating facilities transitioned from start up to
operation. In October, we launched our first commercial operations in a major
metropolitan area in Chengdu. As a result of our purchase of SoftNet's 50%
interest in Big Sky Network, we incurred additional non-cash expenses related to
the inclusion of the equity share of losses in the joint ventures and
depreciation and amortization of capital and intangible assets in its financial
statements.
Revenues. During the period from inception (February 1, 2000) through
December 31, 2000, we generated revenues of $208,333 from management fees by
providing technical consulting services to Big Sky Network for the period. Since
Big Sky Network became a wholly owned subsidiary on September 29, 2000,
management fees earned after this date are eliminated on consolidation. We
earned interest income of $307,483 from cash and short-term deposits.
During the three months ended December 31, 2000, the Shekou joint
venture began receiving revenues from subscribers. Operating revenue was
approximately 600,000 RMB. The Chengdu joint venture began commercial operations
near the end of the year and did not earn commercial revenue.
Expenses. We incurred general operating expenses of $3,685,398. These
expenses included:
GENERAL AND ADMINISTRATIVE EXPENSES
Calgary Office $466,830
Beijing Office 572,999
Professional Services 988,148
Investor Relations 911,945
Amortization 579,011
17
Non-Cash Stock Compensation 67,093
Miscellaneous 99,373
------
$3,685,398
During the fourth quarter, general and administrative expenses where
higher, primarily due to increased public relations and strategic relations
activities, including travel and expenses, in connection with the launch of our
Chengdu operations. Amortization and depreciation expenses resulted primarily
from the acquisition of 50% of Big Sky Network.
Calgary office expenses include travel, rent, compensation, utilities
and day-to-day operations from inception. Beijing office expenses similarly
include office rent, accommodations for contract personnel on short-term
assignments, travel, entertainment, compensation and operating costs not related
to the joint ventures. Professional services included legal expenses of
$355,064, accounting and audit expenses of $131,336. Investor relations costs
included fees paid to an investment-banking firm for services in connection with
the acquisition of SoftNet's 50% interest in Big Sky Network.
Accounting and audit expenses and legal expenses were related to the
preparation of our reports under the Securities Exchange Act of 1934, as
amended, and preparation of joint venture related legal documents, Chinese legal
and regulatory compliance, and documents related to the acquisition of SoftNet's
interest in Big Sky Network. Consulting expenses and travel expenses were
incurred during the period from inception (February 1, 2000) to December 31,
2000 primarily related to the negotiation of various joint venture agreements in
China. All working costs of operating our office in Beijing, such as consulting
fees, office space costs, entertainment and travel are expressed as Beijing
Office expenses.
We anticipate that expenses will increase during 2001 for the following
reasons:
o We intend to continue to negotiate and finalize letters of intent
and definitive agreements to form joint ventures;
o Our joint ventures will begin extensive marketing and promotional
campaigns to build subscription bases in Shekou and Chengdu;
o We will incur expenses related to the launch of our joint venture
services in Chengdu, Deyang and Changsa and other potential areas;
o We will incur costs associated with finance raising activities;
o We will incur costs related to hiring additional personnel to
provide management, technical and support services to its growing
organization; and
o We will incur other costs related to implementing its business plan
and financing its joint venture obligations.
o Loss. We had a loss of $3,477,065 from operations during the period.
We also recorded the following equity losses:
- $181,471 related to Big Sky Network's ongoing operating
expenses before it became a wholly owned subsidiary;
- $202,421 incurred by the Shekou Joint Venture related to
leased office space, hiring employees to commence signing
up subscribers and technical support staff in Shekou, China;
- $43,706 from the expenses related to establishing the Chengdu
Joint Venture.
18
o Our loss for the period from inception (February 1, 2000) through
December 31, 2000, after interest income of $307,483 was $3,597,180.
Since we are in the development stage, all losses accumulated since
inception have been considered as part of our development stage activities.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, we had cash and cash equivalents of $4,668,128
and working capital, including cash and cash equivalents, of $2,898,608. Since
inception, we have financed operations primarily through sales of equity
securities and have raised a total of $11,316,692, net of share issuance costs
of $75,811.
Our principal source of capital has been equity financing. We are
exploring opportunities for vendor financing, bank credit facilities and export
credit agency agreements. Our joint ventures receive revenue from subscribers,
for cable Internet service; however, such revenue does not constitute a
significant source of capital. Meeting our future financing requirements may be
dependent on access to equity capital markets. We may not be able to raise
additional common equity when required or on favorable terms that are not
dilutive to existing shareholders.
The growth of our business in China will require net capital
investments in China for the foreseeable future. Profits from the joint
ventures, if any, will likely be re-invested in additional joint ventures. We
anticipate that we will earn revenues from our joint ventures from the
distribution of joint venture profits. We cannot assure you that any of our
joint ventures will be commercially successful.
On a consolidated basis, our operating cash expenditures are
approximately $150,000 per month. Our future cash requirements will depend on:
o rate of expansion of existing joint ventures;
o rate of signing new joint ventures;
o capital equipment requirements for new joint ventures;
o the level of marketing required to expand our service offerings;
o our ability to lease additional bandwidth as our subscriber base
expands; and
o price competition in our markets.
Subsequent to December 31, 2000, we invested $300,000 cash for purchase
and installation of primary operating equipment, in the Chengdu joint venture.
Subsequent to December 31, 2000, we completed the following
transactions:
o On February 2, 2001, we issued an additional 550,000 stock
options under the 2000 Stock Option Plan (See Note 7). The
Options were granted at an exercise price of $7.50, fully
vested, for a term of three years.
o On February 13, 2001, we announced that we had entered into
an agreement with Nortel Networks to purchase equipment and
services for our joint ventures in China. Under the terms
of the agreement, we have the option to purchase up to $250
million in equipment and services at discounted prices over
the five-year term.
o On March 8, 2001, we entered into a preliminary agreement
to form a joint venture with Changsa Guang Da Television
Broadcast Network Ltd. ("Changsa Guang Da") to provide
19
Internet technology service in Hunan Province. The
agreement, subject to government approvals, commits Changsa
Guang Da to provide exclusive access to its cable network,
facilities and frequencies to allow the joint venture to
provide Internet connectivity services to cable TV
subscribers of Changsa Guang Da. The contract duration is
18 years. We will receive 65% of the net revenue during the
first five years, 50% for the next five years and 40%
thereafter. Under the terms of the agreement, we have
committed to invest $18 million of capital and equipment,
staged over the life of the joint venture agreement.
OUTLOOK
Our Shekou and Chengdu joint ventures demonstrated that cable
television based Internet service can be operational in China with investment of
capital, equipment and technical skills. We believe that the business climate in
China is open to greater use of the Internet by individuals, schools and
businesses. We estimate that our operational facilities in Shekou and Chengdu
can be profitable with a subscriber base of approximately 3,000 and 4,000 users,
respectively. Our third joint venture in Deyang is expected to receive
governmental approval and permits in the second quarter of 2001. Our preliminary
agreement to form a joint venture with Changsa Guang Da is also expected to
receive governmental approval and permits in the second quarter of 2001. We
believe that our marketing efforts in China will result in increased
opportunities to expand our services to other key cities. Our goal is to enter
into exclusive arrangements in provincial capital cities and other strategic
locations in China
We estimate that we will invest approximately $1 million of capital,
equipment and technical services. Our current capital resources are limited, and
we cannot assure you that we will have sufficient financial, technical and human
resources to undertake new joint ventures or maintain the joint ventures
currently in service.
PLAN OF OPERATION
As of March 30, 2001, our management anticipates that we currently have
sufficient working capital to fund our plan of operation through the third
quarter of 2001. Our costs to fund our plan of operation for the year ending
December 31, 2001 is estimated to be approximately $3 million to $5 million.
These funds are intended to fund our business operations, including the
following:
--------------------------------------------------------------- -------------------------------
ESTIMATED FINANCIAL
DESCRIPTION OF OBLIGATION OBLIGATION FOR YEAR ENDING
DECEMBER 31, 2001
--------------------------------------------------------------- -------------------------------
Shekou Joint Venture - Capital Contributions $0
--------------------------------------------------------------- -------------------------------
Chengdu Joint Venture - Capital Contributions $500,000
--------------------------------------------------------------- -------------------------------
Deyang Joint Venture - Capital Contributions $1,000,000
--------------------------------------------------------------- -------------------------------
New Joint Venture - Capital Contributions $500,000
--------------------------------------------------------------- -------------------------------
Technical Consulting Expenditures $100,000
--------------------------------------------------------------- -------------------------------
Management Consulting Expenditures $500,000
--------------------------------------------------------------- -------------------------------
Sales and Marketing Expenses $600,000
--------------------------------------------------------------- -------------------------------
Legal and Professional Expenses $200,000
--------------------------------------------------------------- -------------------------------
General Administrative Expenses $700,000
--------------------------------------------------------------- -------------------------------
Capital Raising Expenditures $100,000
--------------------------------------------------------------- -------------------------------
Overhead Expenses $100,000
--------------------------------------------------------------- -------------------------------
Miscellaneous $100,000
--------------------------------------------------------------- -------------------------------
TOTAL $4,400,000
--------------------------------------------------------------- -------------------------------
The amount and timing of expenditures during the year ending December
31, 2001 will depend on the success of any contracts we secure, and there is no
assurance we will receive significant revenues or operate profitably. We
anticipate that our current working capital is sufficient to satisfy our cash
requirements through approximately the third quarter of 2001, thereafter we will
require additional financing to continue as a going concern. Current cash
resources are not anticipated to be sufficient to fund the next phase of our
development and management intends to seek additional private equity or debt
financing. There can be no assurances that any such
20
funds will be available, and if funds are raised, that they will be sufficient
to achieve our objective, or result in commercial success.
We anticipate that we will make capital contributions to our joint
ventures, which will in turn, purchase equipment and systems to operate their
broadband services. We have entered into an agreement with Nortel Networks to
purchase up to $250 million of equipment, software and services at special
pricing for our joint ventures. We cannot assure you that we will be able to
obtain sufficient capital to satisfy all of our obligations under our joint
venture agreements or that any of our joint ventures will be commercially
successful.
We anticipate that we will hire additional technical, administrative
and sales and marketing personnel during 2001, although we have no current plans
to do so. We also anticipate that our joint ventures will hire technical,
administrative and sales and marketing personnel during 2001 to support their
operations and to launch their services. We estimate that each joint venture
will hire between 8 and 15 employees during 2001, subject to the joint venture's
needs and the development stage of their business.
We do not engage in research and development activities.
STOCK OPTION AND WARRANT GRANTS
On April 13, 2000, we granted options to officers, directors and
consultants to acquire 4,175,000 common shares at $1.00 per share.
NAME # OF OPTIONS
---- ------------
Michael Lobsinger 800,000
Danai Suksiri 500,000
Matthew Heysel 500,000
Daming Yang 500,000
Wei Yang 500,000
Ian Aaron 100,000
Bing Ho 100,000
Bernie Poznanski 100,000
Richard Hurwitz 100,000
Thomas Milne 100,000
Kai Yang 100,000
Qifeng Xue 100,000
Donghe Xue 100,000
Lu Wang 100,000
WRW Investments Ltd. 250,000
Ken Barnes 50,000
Jodi Larmour 50,000
Rob Phare 25,000
Larry Timluck 25,000
Michael Morrison 25,000
Xinhua Duang 25,000
Greg Bawdon 25,000
On November 1, 2000, we granted options to officers, directors and
employees to acquire 650,000 common shares at $7.50 per share.
21
NAME # OF OPTIONS
---- ------------
Rolland Long 100,000
Teddy Yung 200,000
Richard Lam 100,000
Matthew Heysel 50,000
Daming Yang 50,000
Thomas Milne 150,000
On November 1, 2000, we issued warrants exercisable to acquire 50,790
shares at $7.50 per share as a financial advisory fee in connection with the
acquisition of Big Sky Network. The warrants are exercisable for two years from
September 30, 2000. In addition, the fee includes cash consideration of $253,950
of which $219,950 was paid on November 24, 2000 and the remainder is due on
September 30, 2001.
On November 1, 2000, cancelled 50,000 stock options that were issued to
Ken Barnes, a consultant, on April 14, 2000. The options were replaced with
50,000 warrants with the same terms and conditions.
On November 1, 2000, we issued warrants to purchase 100,000 of our
common shares at an exercise price of $7.50 per common share, for a term of 18
months from the date of issue, in return for investor relations services.
On February 2, 2001, we granted exercisable to acquire 750,000 common
shares at $7.50 per share, to officers, directors and consultants.
NAME # OF OPTIONS
---- ------------
Jodi Larmour 50,000
Qun He 100,000
Barry Mackie 300,000
John Brooks 100,000
CHANGES IN AUDITORS
OUR APPOINTMENT OF ARTHUR ANDERSON LLP AS AUDITOR
On August 24, 2000, we dismissed Amisano Hanson, Chartered Accountants
as our independent auditor. None of Amisano Hanson's reports for either of the
past two years ended December 31, 1999 or thereafter contained an adverse
opinion or disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope, or accounting principle. We engaged Arthur Andersen
LLP as our independent auditors on August 24, 2000. Our decision to change
auditors was approved by our Board of Directors.
During our fiscal year ended December 31, 1999, and through the date of
this prospectus, there were no disagreements with the Amisano Hanson on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of the Amisano Hanson would have caused it to make reference
thereto in its report on the financial statements for such year. Our decision to
change auditors was approved by our Board of Directors.
During the fiscal year ended December 31, 1999, and through the date of
this report Amisano Hanson did not advise us with respect to any of the matters
described below:
(a) lack of internal controls necessary for us to develop reliable
financial statements;
(b) any information that has come to the attention of our auditors
that has led them to no longer be able to rely on management's
representations or that has made them unwilling to be associated
with the financial statements prepared by management; or
22
(c) any need to expand significantly the scope of our auditors' audit
or information that has come to our auditors' attention during the
two financial years prior to and preceding the change in our
independent auditors that, if further investigated, would:
(i) materially impact the fairness or reliability of the
previously issued audit report or the financial
statements issued or covering that period; or
(ii) cause our auditors to become unwilling to rely on
management's representations or that has made them
unwilling to be associated with our financial statements,
or due to the replacement of Amisano Hanson or any other
reason, our auditors did not so expand the scope of the
audit or conduct such further investigation; or
(d) any information that has come to their attention that has led them
to conclude that such information materially impacts the fairness
or reliability of the audit reports or the financial statements
issued covering the two financial years prior to and preceding the
change in our independent auditors (including information that,
unless resolved, to the satisfaction of such auditors, would
prevent it from rendering an unqualified audit report on those
financial statements) and due to the replacement of Amisano Hanson
or any other reason, any issue has not been resolved to such
auditors' satisfaction prior to Amisano Hanson replacement.
We provided the Amisano Hanson with a copy of the disclosures contained
in the registration statement in which this prospectus is a part, and we
requested in writing that Amisano Hanson furnish us with a letter addressed to
the Securities and Exchange Commission stating whether or not it agrees with
such disclosures. A copy of that letter was filed as an exhibit to the
registration statement.
OUR APPOINTMENT OF DELOITTE & TOUCHE LLP AS AUDITOR
On September 22, 2000, we dismissed Arthur Andersen LLP as our
independent auditor. Arthur Andersen LLP did not issue any reports for either of
the past two years ended December 31, 1999 or thereafter. We engaged Deloitte &
Touche LLP as our independent auditors on September 22, 2000. Our decision to
change auditors was approved by our Board of Directors.
Through the date of this prospectus, there were no disagreements with
the Arthur Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of the Arthur Andersen would
have caused it to make reference thereto in its report on the financial
statements for such year. Our decision to change auditors was approved by our
Board of Directors.
Through the date of this report Arthur Andersen did not advise us with
respect to any of the matters described below:
(a) lack of internal controls necessary for us to develop reliable
financial statements;
(b) any information that has come to the attention of our auditors
that has led them to no longer be able to rely on management's
representations or that has made them unwilling to be associated
with the financial statements prepared by management; or
(c) any need to expand significantly the scope of our auditors' audit
or information that has come to our auditors' attention during the
two financial years prior to and preceding the change in our
independent auditors that, if further investigated, would:
(i) materially impact the fairness or reliability of the
previously issued audit report or the financial
statements issued or covering that period; or
23
(ii) cause our auditors to become unwilling to rely on
management's representations or that has made them
unwilling to be associated with our financial statements,
or due to the replacement of Arthur Andersen or any other
reason, our auditors did not so expand the scope of the
audit or conduct such further investigation; or
(d) any information that has come to their attention that has led them
to conclude that such information materially impacts the fairness
or reliability of the audit reports or the financial statements
issued covering the two financial years prior to and preceding the
change in our independent auditors (including information that,
unless resolved, to the satisfaction of such auditors, would
prevent it from rendering an unqualified audit report on those
financial statements) and due to the replacement of Arthur
Andersen or any other reason, any issue has not been resolved to
such auditors' satisfaction prior to Arthur Andersen replacement.
We provided the Arthur Andersen with a copy of the disclosures
contained in the registration statement in which this prospectus is a part, and
we requested in writing that Arthur Andersen furnish us with a letter addressed
to the Securities and Exchange Commission stating whether or not it agrees with
such disclosures. A copy of that letter was filed as an exhibit to the
registration statement.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was subsequently amended by SFAS No.
137 and 138, established accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value for fiscal quarters of fiscal years
beginning after June 15, 2000. We have determined that these statements will not
have a significant impact on our consolidated financial position, results of
operations or cash flows.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition" to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. We believe that our revenue recognition policy is in
compliance with the provisions of SAB 101 and that the adoption of SAB 101 had
no material effect on our financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation (FIN) No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." FIN 44
clarifies the application of Accounting Principles Board Opinion No. 25 for
certain issues relating to stock compensation. FIN 44 was effective July 1,
2000, but certain conclusions in it cover specific events that occur after
either December 15, 1998, or January 12, 2000. To the extent that FIN 44 covers
events occurring during the period after December 15, 1998, or January 12, 2000,
but before the effective date of July 1, 2000, the effects of applying FIN 44
are recognized on a prospective basis from July 1, 2000. Our adoption of FIN 44
had no material effect on our financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
We maintain our cash with two major Canadian banks, on short-term
deposits of less than two months duration. While the interest rates vary on
these deposits with each maturity, we do not consider the principal of these
deposits at risk.
We have one fixed interest rate obligation as a result of the SoftNet
transaction. A fluctuation in interest rates will not have a material impact on
the value of this obligation. We do not hedge any of our interest rate risk.
FOREIGN EXCHANGE RATE RISK
Revenue from current and future operations in China is denominated in
Renminbi. Many of the Companies expenses and capital costs are denominated in US
dollars. The official exchange rate for the conversion of
24
Renminbi to US dollars
has been stable, with the Renminbi increasing slightly, in recent years. We do
not expect to use any foreign exchange hedges or derivative instruments in the
near future and do not believe that we are exposed to significant exchange risk.
BUSINESS
OVERVIEW OF CORPORATE STRUCTURE
We were incorporated in February 1993 as "Institute for Counseling,
Inc." under the laws of the State of Nevada. On April 14, 2000, we acquired
China Broadband (BVI) Corp., a British Virgin Islands company incorporated in
February 2000, by issuing 13,500,000 shares of our common stock in exchange for
all of the issued and outstanding common stock of China Broadband (BVI) Corp.
The former shareholders of China Broadband (BVI) Corp. became our controlling
shareholders. On April 27, 2000, we changed our name to "China Broadband Corp.".
As a result of our acquisition of China Broadband (BVI) Corp., we
indirectly owned 50% of the issued and outstanding shares of Big Sky Network
Canada Ltd., a British Virgin Islands company, which was incorporated in May
1999. SoftNet Systems, Inc., a Delaware company, publicly traded on the NASDAQ
(SOFN) owned the remaining 50% interest. SoftNet Systems acquired its 50%
interest in Big Sky Network by committing $2 million to fund Big Sky Network's
Shekou joint venture and by providing $500,000 to Big Sky Network for working
capital. On September 29, 2000, we purchased SoftNet's 50% interest in Big Sky
Network. See "Transactions with SoftNet".
We, through Big Sky Network, hold the following joint venture
interests:
o a 50% interest in Shenzhen China Merchants Big Sky Network Ltd.,
known as the Shekou Joint Venture, a cooperative joint venture for a
term of 15 years established under the laws of the People's Republic
of China; and
o a 50% interest in Sichuan Huayu Big Sky Network Ltd., known as the
Chengdu Joint Venture, a cooperative joint venture for a term of 20
years established under the laws of the People's Republic of China;
and
o a 50% interest in Deyang Guangshi Big Sky Ltd., known as the Deyang
Joint Venture, a cooperative joint venture for a term of 20 years
established under the laws of the People's Republic of China.
25
The following figure sets forth our corporate structure.
-----------------------------------------------------
China Broadband Corp.
a Nevada corporation
-----------------------------------------------------
| 100%
|
-----------------------------------------------------
China Broadband (BVI) Corp.
a British Virgin Islands corporation
-----------------------------------------------------
| 100%
|
-----------------------------------------------------
Big Sky Network Canada Ltd.
a British Virgin Islands corporation
-----------------------------------------------------
|
|------------|----------------------------------------|
|50%(1) |50%(2) |50%(2)
| | |
- ------------------ | | ---------------- | ------------------
China Merchants | | Chengdu Huayu | Deyang Guangshi
Shekou Industrial | | Information | Network
Zone Ltd. | | Industry Co. | Development Ltd.
(China) | | (China) | (China)
- ------------------ | | ------|--------- | ------------------
| 50%(1) | | | 50%(2) | |50%(3)
|----| |----------| |--| |---------| | |-----------------|
| | | | | |
---------------- --------------------- -----------------------
Shenzhen China
Merchants Big Sichuan Huayu Big Deyang Guangshi Big
Sky Network Sky Network Ltd. Sky Ltd.
Ltd. (China) (China)
(China)
---------------- --------------------- -----------------------
<FN>
(1) Big Sky Network has a 50% interest in the joint venture and a profit interest of
60% from 2000 through 2004; 50% from 2005 through 2009; and 40% from 2010 through 2014.
(2) Big Sky Network has a 50% interest in the joint venture and a profit interest of 65%
from 2001 through 2007; 50% from 2008 through 2014; and 35% from 2015 through 2020.
(3) Big Sky Network has a 50% interest in the joint venture and a profit interest of 80%
from 2001 through 2005; 60% from 2006 through 2010; 50% from 2011 to 2015 and 40% from
2015 through 2020.
</FN>
Neither we nor any of our subsidiaries have been subject to any
bankruptcy, receivership or similar proceedings.
OVERVIEW OF BUSINESS
Our business strategy is to enter into joint ventures with government
approved joint venture partners with access to the fibre-optic networks of
Chinese cable television stations to provide Internet access to residential and
business subscribers in China. Under these joint ventures, the Chinese joint
venture partners obtain government approvals, licenses and access to cable
television station fibre optic networks to use non-broadcast bandwidth on their
cable systems to deliver broadband services to residential and business
subscribers. We contribute capital, management, technology and Internet
technology services. Through these cable television networks, we intend to
provide Internet access that is more reliable, cheaper and faster than Chinese
subscribers can obtain by dial-up access over currently existing telephone
lines. Initially, our joint ventures will focus on installing hardware and
equipment to permit Internet access to residential and business subscribers.
Ultimately, as our business evolves and Chinese regulations permit, we may
provide residential and business subscribers with a full array of value added
services including web hosting, Internet/intranet business solutions, e-mail,
on-line Internet content services (such as shopping, games, medicine,
education), e-commerce, interactive video on demand, music on demand and
Internet Protocol telephony telephone services over the Internet.
26
In the future, we expect to provide the following services:
o WEB HOSTING: servicing third-party web sites on our systems and
providing web site design services allowing third parties to offer
Internet web sites with a minimum investment in hardware and
software;
o CO-LOCATING: housing and servicing third-party servers and hardware
at our facilities;
o FACILITIES-BASED DATA TRANSPORT SERVICES: allowing clients to
connect from remote locations to their network, through our
facilities, without substantial investments in hardware and network
systems;
o ON-LINE EDUCATION AND THIRD-PARTY WEB SITE FACILITIES: to deliver
education to a broad range of students;
o ON-LINE SECURITIES TRADING: to provide on-line trading services
through China's authorized securities trading houses; and
o VOICE OVER INTERNET PROTOCOL (VOIP): to permit voice over Internet
in the future, subject to regulatory approval.
GROWTH OF INTERNET USAGE IN CHINA
In 1998, China's population was approximately 1.2 billion and the
Internet penetration rate in China was approximately 0.2%. Given China's large
population and the commitment of the Chinese government to the rapid development
of the Internet in China, we believe that China represents enormous potential
for Internet use in the long-term. In recent years, Internet use in China has
grown rapidly. According to International Data Corporation's "Internet
Environment in China, 2000" report of December 2000, the number of Internet
users in China grew from approximately 2.4 million in 1998 to approximately 4.46
million in 1999, representing an annual growth rate of 85%. International Data
Corporation projects that the number of Internet users in China will grow to
approximately 36.83 million in 2003.
In the China Internet Network Information Center's seventh survey
entitled "Semi Annual Survey Report on Internet Development in China", issued on
January 17, 2001, 42.25% of the respondents indicated that the most important
factor in choosing a service provider was the connection speed. The cost of the
service ranked as the third most important factor at 25.15% of respondents. When
polled about which aspects were least satisfactory with their current service,
speed was the number one complaint among 46.41% of respondents with the cost of
service being ranked number two (20.83%). Based on this survey, we believe that
slow speed and the high cost of obtaining Internet access via conventional
dial-up over telephone lines are the two major impediments hindering the growth
of Internet usage in China. We also believe that China's interest in the
Internet will grow during the next five years due to the active role the Chinese
government is taking in promoting the development of the Internet. We believe
that our strategy of providing Internet access through fibre optic cables will
allow us to addresses both of these impediments and will attract existing and
new Internet users to use our services.
As well, according to the results of the "Semi Annual Survey Report on
Internet Development in China", the Internet was utilized mainly by men (69.56%
of respondents) with an average age of user being in the 18-24 years range
(41.18% of respondents). 10.86% of the respondents indicated that their most
frequent use of the Internet was to complete on-line trading. Of the
respondents, 60.27% indicated that their main venue for Internet access was
their home computer with 43.92% of respondents using their computer at work as
their main access to the Internet. The largest number of respondents (25.94%)
indicated their salary range to be between 501 to 1,000 Renminbi (approximately
USD$60-121) per month. 38.82% of respondents indicated that they had an
education level of a Bachelor's degree. We believe that our strategy of
providing free Internet access to one or more schools in a target area will
cause students to recognize the value of high speed, reliable service, which we
expect will be used to persuade parents to subscribe. We have also partnered
with securities dealers to market on-line trading capabilities to their clients.
27
OUR CABLE TELEVISION INTERNET SERVICE STRATEGY
Over the last three years, China has installed approximately 12 million
kilometres of fibre optic cable, providing cable television to approximately 80
million paying subscribers in 22 Chinese provinces. China's broadcast and
television network is owned by regional cable television stations, which are in
turn controlled by local governments. Foreign companies are not permitted to
operate telecommunication businesses, own broadcast rights or hold Internet
operating permits in China. We, through our subsidiary, Big Sky Network, have
entered into joint ventures with Chinese government approved joint venture
partners with access to cable television stations with fibre optic cable
technology to provide Internet access through these cable television networks.
Our joint ventures obtain "non-broadcast rights" through structured joint
venture agreements in a manner that is designed to comply with Chinese laws and
regulations. We anticipate that our joint ventures will provide Chinese
subscribers with Internet access via the existing optical fibre-coaxial
television cable network of Chinese joint venture partners. In addition to
providing higher reliability than the current dial-up alternative, we believe
that over time our joint ventures will be able to deliver Internet access at
substantially higher speed and at a lower cost than traditional dial-up Internet
services.
SHEKOU JOINT VENTURE
We established the Shekou Joint Venture, our first Chinese joint
venture, in the Shekou Industrial Area within the Special Economic Zone of
Shenzhen, a city in Guangdong Province separated from Hong Kong by a 2-mile
strip of water. The Shenzhen Special Economic Zone is the first special economic
zone established by China and was the site for China's first cellular telephone
and first Internet dial-up access trials. The Shekou Industrial Area was
established in 1979 and is administered by China Merchants Group of Hong Kong,
one of China's oldest banking groups. Our Chinese partner in the Shekou Joint
Venture is Shenzhen China Merchants Shekou Industrial Zone Ltd., an agency of
the municipal government and a member of the China Merchants Group, which
operates the Shekou Cable Television Station, otherwise known as Shekou CATV.
According to Shekou CATV, it has one of the most advanced high-frequency cable
networks in China with a bandwidth of 860MHz and two-way transmission
capability. It has more than 35,000 residential subscribers and approximately
2,000 business subscribers. Based on a survey conducted by Shekou CATV,
approximately 78% of these cable television subscribers have computers, and 68%
of these computer owners (53% of the total number of cable television
subscribers) currently have access to the Internet via dial-up.
TERMS OF THE COOPERATIVE JOINT VENTURE CONTRACT
Under the terms of the cooperative joint venture contract dated
September 29, 1999, Big Sky Network, our subsidiary, and China Merchants Shekou
Industrial Zone Ltd. agreed to form a joint venture company, Shenzhen China
Merchants Big Sky Network Ltd., under the Law of the People's Republic of China
on Cooperative Joint Ventures using Chinese Foreign Investments. Shenzhen China
Merchants Big Sky Network Ltd. was formed under Articles of Association dated
September 29, 1999, for a term of fifteen years, extendable upon an application
to and approval by the State Administration of Industry and Commerce, Taxation
Bureau and Customs. The capitalization of Shenzhen China Merchants Big Sky
Network Ltd. is $3,000,000. China Merchants Shekou Industrial Zone Ltd. agreed
to:
o contribute the exclusive operating right of current cable television
for certain frequencies, which are required to offer broadband
services, for the duration of the joint venture in the Shekou
Industrial Zone; and
o obtain all regulatory approvals and licenses required to conduct the
business of developing a world-class software and hardware platform
to provide Internet-related business via the cable television
network in the Shekou Industrial Zone.
We agreed to provide up to $3,000,000 in financing in the form of cash
and equipment. We made an initial investment in the amount of $500,000 after
China Merchants Shekou Industrial Zone Ltd. received governmental approval for
the joint venture and a license was issued to Shenzhen China Merchants Big Sky
Network Ltd. to
28
conduct its business. As of December 31, 2000, we had made capital and equipment
contributions of approximately $3 million to the Shekou Joint Venture.
Under the terms of the cooperative joint venture contract, Shenzhen
China Merchants Big Sky Network Ltd. is managed by a board of seven directors,
of which we are entitled to appoint four during the first five years of the term
of the joint venture and three for the remainder of the term. China Merchants
Shekou Industrial Zone Ltd. is entitled to appoint three directors during the
first five years of the term of the joint venture and four for the remainder of
the term. China Merchants Shekou Industrial Zone Ltd. is entitled to appoint the
chairman of the board and is entitled to appoint the vice chairman. The day to
day operations of the joint venture is managed by a general manager who is
appointed by the board of directors.
The members of the Board of Directors are Matthew Heysel, Daming Yang,
Qifeng Xue, Lu Wang, Guang Zhenghai, Tao Xin and Shen Wenjian. The Joint Venture
is currently in the process of filling the position of General Manager.
Under the terms of the cooperative joint venture contract, profits from
the joint venture are shared as follows:
----------------------- ---------------------------- ------------------------
CHINA MERCHANTS SHEKOU
INDUSTRIAL ZONE LTD. - BIG SKY NETWORK
PERIOD PROFIT INTEREST PROFIT INTEREST
----------------------- ---------------------------- ------------------------
Years 1 -5 40% 60%
----------------------- ---------------------------- ------------------------
Years 6-10 50% 50%
----------------------- ---------------------------- ------------------------
Years 11-15 60% 40%
----------------------- ---------------------------- ------------------------
China Merchants Shekou Industrial Zone Ltd. received approval for the
joint venture arrangement and the joint venture launched its Internet service on
June 30, 2000.
As of March 30, 2001, the Shekou Joint Venture had 1,884 subscribers
with Internet connection and 3,300 subscribers waiting to be connected.
CHENGDU JOINT VENTURE
We established the Chengdu Joint Venture on July 8, 2000 with Chengdu
Huayu Information Co. Ltd., the municipal network company and an agency of the
municipal government, to provide high-speed Internet access via the cable
television architecture in Chengdu, the provincial capital of Sichuan Province.
The Chengdu Cable Television Station has developed an integrated broadband
information network servicing more than 600,000 users.
TERMS OF THE COOPERATIVE JOINT VENTURE CONTRACT
Under the terms of the cooperative joint venture contract dated July 8,
2000, Big Sky Network, our subsidiary, and Chengdu Huayu Information Co. Ltd.
agreed to form a joint venture company, Sichuan Huaya Big Sky Network Ltd.,
under the Law of the People's Republic of China on Cooperative Joint Ventures
using Chinese Foreign Investments. Sichuan Huaya Big Sky Network Ltd. was formed
under Articles of Association dated July 8, 2000, for a term of twenty years,
extendable upon an application to and approval by the State Administration of
Industry and Commerce, Taxation Bureau and Customs. The capitalization of
Sichuan Huaya Big Sky Network Ltd. is $4,500,000. Chengdu Huayu Information Co.
Ltd. agreed to:
o contribute the exclusive operating right of current cable television
for certain frequencies for the duration of the joint venture in
Chengdu, and
o obtain all regulatory approvals and licenses required to conduct the
business of developing a world-class software and hardware platform
to provide Internet-related business via the cable television
network in Chengdu.
29
We agreed to provide up to $4,500,000 in financing in the form of cash
and equipment. We made an initial investment in the amount of $500,000 after
Chengdu Huayu Information Co. Ltd. received governmental approval for the joint
venture and a license was issued to Sichuan Huaya Big Sky Network Ltd. to
conduct its business. As of December 31, 2000, we had made capital contributions
of approximately $1,365,590 to the Chengdu Joint Venture.
Under the terms of the cooperative joint venture contract, Sichuan
Huaya Big Sky Network Ltd. is managed by a board of seven directors, of which we
are is entitled to appoint four during the first thirteen years of the term of
the joint venture and three for the remainder of the term. Chengdu Huayu
Information Co. Ltd. is entitled to appoint three directors during the first
thirteen years of the term of the joint venture and four for the remainder of
the term. Chengdu Huayu Information Co. Ltd. is entitled to appoint the chairman
of the board and we are entitled to appoint the vice chairman. The day-to-day
operations of the joint venture are managed by a general manager who is
appointed by the board of directors. The Board of Directors are Yuanlin Wang,
Matthew Heysel, Daming Yang, Wei Yang, Yongrong Gong, Xiancheng Hu and Rolland
Long. The General Manger of the Joint Venture is Rolland Long.
Under the terms of the cooperative joint venture contract, profits from
the joint venture are shared as follows:
---------------------- ---------------------------- -------------------------
CHENGDU HUAYU INFORMATION
CO. LTD. BIG SKY NETWORK
PERIOD PROFIT INTEREST PROFIT INTEREST
---------------------- ---------------------------- -------------------------
Years 1 -6 35% 65%
---------------------- ---------------------------- -------------------------
Years 7-14 50% 50%
---------------------- ---------------------------- -------------------------
Years 15-20 65% 35%
---------------------- ---------------------------- -------------------------
Chengdu Huayu Information Co. Ltd. received approval for the joint
venture arrangement and the joint venture launched its Internet service on
October 26, 2000.
As of March 30, 2001, the Chengdu Joint Venture had 11 subscribers with
Internet connection.
We also entered into a strategic alliance on July 21, 2000 with Chengdu
Huayu Information Co. Ltd. The agreement outlines Chengdu Huayu Information Co.
Ltd.'s current efforts to build a province-wide cable network. We have partnered
with them to assist their efforts in building this network. Chengdu Huayu
Information Co. Ltd. is required to obtain all governmental approvals and
operating permits, to obtain the legal rights to use and commercially operate
the telecommunication backbones in Sichuan Province and to invest their existing
cable network and relevant equipment for the project. We have committed to
invest an undetermined amount of cash and equipment, to assist in developing an
international strategic partnership, to assist in the market development and
provide training to technical personnel.
DEYANG JOINT VENTURE
We established the Deyang Joint Venture on November 25, 2000 with
Deyang Guangshi Network Development Ltd., the municipal network company and an
agency of the municipal government, to provide high-speed Internet access via
the cable television architecture in Deyang, in the Sichuan Province.
TERMS OF THE COOPERATIVE JOINT VENTURE CONTRACT
Under the terms of the cooperative joint venture contract dated
November 25, 2000, Big Sky Network and Deyang Guangshi Network Development Ltd.
agreed to form a joint venture company, Deyang Guangshi Big Sky Ltd., under the
Law of the People's Republic of China on Cooperative Joint Ventures using
Chinese Foreign Investments. Deyang Guangshi Big Sky Ltd. is to be formed under
Articles of Association for a term of twenty years, extendable upon an
application to and approval by the State Administration of Industry and
Commerce, Taxation Bureau and Customs. The capitalization of Sichuan Deyang
Guangshi Big Sky Ltd. is $2,250,000. Deyang Guangshi Network Development Ltd.
agreed to:
30
o contribute the exclusive operating right of current cable television
for certain frequencies for the duration of the joint venture in
Deyang, and
o obtain all regulatory approvals and licenses required to conduct the
business of developing a world-class software and hardware platform
to provide Internet-related business via the cable television
network in Deyang.
We agreed to provide up to $4,500,000 in financing in the form of cash
and equipment. We will make an initial investment in the amount of $500,000
after Deyang Guangshi Network Development Ltd. receives governmental approval
for the joint venture and a license is issued to Deyang Guangshi Big Sky Ltd. to
conduct its business. As of March 30, 2001, Deyang Network Development Ltd. was
still in the process of seeking approval for the joint venture arrangement and
we have not contributed any capital.
Under the terms of the cooperative joint venture contract, Deyang
Guangshi Big Sky Ltd. is managed by a board of seven directors, of which we are
entitled to appoint four during the first ten years of the term of the joint
venture and three for the remainder of the term. Deyang Guangshi Network
Development Ltd. is entitled to appoint three directors during the first ten
years of the term of the joint venture and four for the remainder of the term.
Deyang Guangshi Network Development Ltd. is entitled to appoint the chairman of
the board and we are entitled to appoint the vice chairman. The day-to-day
operations of the joint venture will be managed by a general manager who will be
appointed by the board of directors.
Under the terms of the cooperative joint venture contract, profits from
the joint venture are shared as follows:
----------------------- ------------------------------ ----------------------
DEYANG GUANGSHI NETWORK
DEVELOPMENT LTD. BIG SKY NETWORK
PERIOD PROFIT INTEREST PROFIT INTEREST
----------------------- ------------------------------ ----------------------
Years 1 -5 20% 80%
----------------------- ------------------------------ ----------------------
Years 5-10 40% 60%
----------------------- ------------------------------ ----------------------
Years 10-15 50% 50%
----------------------- ------------------------------ ----------------------
Years 15-20 60% 40%
----------------------- ------------------------------ ----------------------
As of March 30, 2001, Deyang Guangshi Network Development Ltd. was
still in the process of obtaining the governmental approvals and permits. Deyang
Guangshi Network Development Ltd. will be required to obtain further approvals
from provincial and municipal governments. We can not assure you that any of
these approvals will be obtained by our joint venture partner.
MODEL JOINT VENTURE TERMS
The following summarizes the model upon which we intend to structure
additional joint ventures throughout China:
o Our Chinese joint venture partners will obtain all necessary Chinese
governmental approvals, licenses and permits. Our obligation to
invest capital will be made conditional upon all such approvals,
licenses and permits being obtained and confirmed by our legal
counsel in China.
o Our Chinese joint venture partners will hold the Internet operating
permits and conduct the Internet and telecommunication related
operations.
o We will contribute the requisite management, technology and capital
to upgrade and connect the joint venture subscribers to the cable
television network infrastructure accessed by the Chinese joint
venture partner.
o Our joint ventures will install multi-user modems that will connect
the personal computers of our subscribers to the cable television
networks accessed by the Chinese joint venture partners who
31
will, in turn, provide the joint venture subscribers with Internet
access via bandwidth leased from licensed Chinese backbone Internet
service providers.
o Our joint venture subscribers will pay a combined fee for Internet
access comprising an initial installation fee and a monthly
maintenance fee that will be paid to Big Sky Network's joint
venture, and a separate monthly subscription fee that will be paid
to Big Sky Network's Chinese joint venture partners. Fees are
anticipated to be collected by our joint venture partners by direct
debit from subscribers bank accounts.
o Our joint ventures will have a term of 15 to 20 years.
o We will provide Internet technology services to the joint venture
and receive a profit interest equal to 60% of the distributable
joint venture profits and maintain control of the boards of
directors of the joint ventures for the first 5 years of the joint
venture term. Our share of the distributable joint venture profits
will decline to 50% in the sixth year and to 40% in the tenth year
of the joint venture terms.
CHINESE REGULATION OF THE COMMUNICATIONS INDUSTRY
The communications industry in China is highly regulated by the Chinese
government. China currently prohibits foreign investment enterprises in China
and foreign entities (including individuals) from investing in, operating and
participating in the operation of telecommunications services without special
approval from the government. In the past, the provision of Internet
connectivity has been subject to China's telecommunications regulations.
Telecommunications regulators have very wide discretion to formulate and apply
their own standards in deciding types of equipment that may be connected to the
national telecommunications systems, the forms and types of services that may be
offered to the public, and the content of materials that may be made available
in China over the Internet. This regulatory environment restricts the scope and
manner of our operations and constrains our business planning and development.
Since China has not yet adopted a national telecommunications law, the
telecommunications industry is governed by regulations issued by the State
Council, the Ministry of Information Industry and various government
authorities. Regulations issued or implemented by the State Council, the
Ministry of Information Industry and other relevant government authorities,
including the Ministry of Foreign Trade and Economic Cooperation and the State
Development Planning Commission, encompass virtually every aspect of network
operations, including entry into the telecommunications service industry, scope
of permissible business, tariff policy and foreign investment. In particular,
current regulations in China prohibit foreign-invested enterprises and foreign
entities (including individuals) from investing in, operating or participating
in the operation of telecommunications services in China without approval from
the State Council.
China's data communications industry is regulated by the Ministry of
Information Industry and other relevant authorities, and licenses are required
to provide Internet access services. In China, Internet service providers are
classified into three separate classes, as defined by the scope of their
business. The three classes are network service provider, Internet service
provider and Internet content provider. There are currently only five commercial
network service providers in China, all of which require approvals from the
State Council. In addition, only network service providers are allowed to build,
operate and manage their own data network infrastructure and directly connect to
the Internet outside of China.
We entered joint ventures with Chinese partners that have approval and
permits to offer to install hardware, software and wiring that enable customers
to haveInternet service access over cable television network systems in Shekou
and Chengdu.
REGULATORY FRAMEWORK
The Ministry of Information Industry was created in March 1998 to
assume, among other things, the regulatory, administrative and other
governmental duties of, and rights previously exercised by, the former Ministry
of Posts and Telecommunications and the former Ministry of Electronics Industry.
The Ministry of Information
32
Industry has broad authority to regulate all aspects of the telecommunication
and information technology industries in China, which includes the power to:
o formulate and enforce industry policy, standards and regulations;
o grant licenses to provide telecommunications and Internet access
services;
o formulate tariff and service charge policies for telecommunications
and Internet access services;
o supervise the operations of telecommunications and Internet access
service providers;
o maintain fair and orderly market competition among operators; and
o manage the day-to-day administration of the national
telecommunications sector.
In order to provide a uniform regulatory framework to encourage the
orderly development of the telecommunications industry, the Chinese government
is currently preparing a draft telecommunications law. If and when the
telecommunications law is adopted by the National People's Congress, it is
expected to become the basic telecommunications statute and the legal source of
telecommunications regulations in China. In addition, the Ministry of
Information Industry is currently preparing a draft of the administrative
telecommunications regulations for foreign invested telecommunications
enterprises, which will be subject to approval by the State Council. Although we
expect that the telecommunications law and the regulations would have a positive
effect on the overall development of the telecommunications industry in China,
we do not know the final nature and scope of what the telecommunications law and
the regulations will be.
In February 1999, the State Council approved a restructuring plan for
the telecommunications industry in China. According to the plan, the
telecommunications operations of the China Telecom system controlled by the
Ministry of Information Industry are being separated along four business lines:
fixed-line communications, mobile communications, paging and satellite
communications services.
China Mobile was established in July 1999 as a state- owned company to
hold the mobile communications assets resulting from this separation and to
operate mobile communications nationwide. A separate company will be responsible
for satellite networks following the restructuring, while the paging operations
have been merged into Unicom. As a result of the restructuring, the China
Telecom system now operates only fixed-line networks and provides only
fixed-line telephone and data communications services. China Telecom Group
Corporation was established in April 2000 as a state-owned enterprise controlled
by the Ministry of Information Industry. It is expected to become the holding
company of the China Telecom system.
ENTRY INTO THE INDUSTRY
Until 1993, telecommunications regulations and policies in China did
not permit entities outside of the China Telecom system to engage in public
telecommunications operations in China. In August 1993, the government opened
some non-basic sectors of the telecommunications industry, such as paging and
satellite communications, to Chinese entities not affiliated with the Ministry
of Information Industry. Internet protocol telephony operators, Internet service
providers and providers of other data communications or value-added service must
obtain operating licenses or approvals from the Ministry of Information Industry
in order to provide services.
Current regulations in China prohibit foreign-invested enterprises and
foreign entities (including individuals) from investing in, operating or
participating in the operation of telecommunications services in China without
government approval. Our joint ventures are foreign-invested enterprises and
have received approvals and permits that allow them to install hardware,
software and wiring that enable customers to have Internet acess over cable
television network systems in Shekou and Chengdu.
33
INTERNET REGULATION
The Internet industry is regulated by the Ministry of Information
Industry in the same manner that it regulates the telecommunications industry
generally. The State Council and the Ministry of Information Industry
periodically promulgates regulations relating to the Internet to address public
policy considerations. Internet service providers must obtain operating licenses
from the Ministry of Information Industry in order to provide Internet access
service. Existing regulations require all Chinese commercial Internet service
providers to interconnect their computer networks with one of the five licensed
commercial network service providers, China Telecom, Jitong, Unicom, Netcom and
China Mobile, in order to provide Internet access.
Internet service providers and Internet content providers must register
their users with the Ministry of Public Security and block websites (including
those maintained outside China) that the ministry identifies as publishing
information damaging to public security. Periodically, the ministry has stopped
the distribution over the Internet of information that it believes to be
socially destabilizing, or to violate Chinese laws and regulations. In addition,
the State Secrets Bureau has recently issued regulations authorizing the
blocking of any website it deems to be disclosing state secrets or failing to
meet the relevant regulations regarding the protection of state secrets in the
distribution of online information. Specifically, Internet companies in China
with bulletin board systems, chat rooms or news services must apply for the
approval of the State Secrets Bureau. As the implementing rules for the
regulations have not been issued, however, details concerning how network
service providers should comply with the regulations remain to be clarified.
Our joint ventures are Internet technology providers that install
hardware, software and wiring that permit customers to have access to the
Internet over cable television network systems. The Chinese joint venture
partners are responsible for obtaining required licenses and permits to provide
Internet services.
ADMINISTRATIVE TELECOMMUNICATIONS REGULATIONS
The Ministry of Information Industry has prepared administrative
telecommunications regulations that were promulgated effective September 25,
2000. The regulations provide and clarify the regulatory rules and guidelines
for the telecommunications industry in the interim period prior to the adoption
of the telecommunications law. The material changes that the regulations make to
the regulatory environment described above are summarized below. However, the
regulations give wide discretionary authority to the Ministry of Information
Industry and have been so recently promulgated that we do not yet know how they
will be administered or interpreted by the Ministry of Information Industry or
whether they are intended to supplant or merely supplement current regulatory
practice. Accordingly, the regulations and their administration and
interpretation may have unexpected consequences upon our business.
REGULATORY AUTHORITY. The regulations confirm that the Ministry of
Information Industry will continue to be the regulatory body responsible for the
Chinese telecommunications industry, extending this authority to broadcasting
and television transmission networks. This authority is to be administered based
upon the principles of the separation of the government and enterprises,
abolishment of monopoly, encouragement of competition and the promotion of
development, openness and fairness.
SERVICE PROVIDERS. The regulations divide service providers into those
who provide basic telecommunication services and those who provide value-added
telecommunication services.
Basic telecommunication providers are those who provide:
o domestic long-distance and local telephone services through fixed
networks;
o Internet protocol telephony; mobile network telephone and data
services;
o satellite communications and mobile satellite communication
services;
o Internet and other public data transmission services;
o leasing and sales of transmission capacity (which may be bandwidth,
wavelengths or fiber optic capacity), fiber optic cable, pipelines
and other network elements;
o network access, and outsourcing;
34
o international telecommunications infrastructure and services;
o wireless paging services; or
o resale of basic telecommunications services.
Value-added telecommunication providers are those who provide:
o web hosting and co-location; o virtual private networks;
o e-mail;
o voice messaging;
o online information data base storage and retrieval;
o electronic data exchange;
o on-line data processing and transaction processing;
o value-added facsimile services;
o Internet access services;
o Internet information services; or
o video conference telephone services.
Basic telecommunications providers must receive operational licenses
from the Ministry of Information Industry while value-added telecommunications
providers must receive licenses from either the Ministry of Information Industry
or, if they operate in only a single province, the local telecommunications
office under the Ministry of Information Industry.
ENTRY INTO THE INDUSTRY. The regulations specify the threshold
requirements for applicants for basic telecommunications and value-added
telecommunications licenses. Applicants for basic telecommunications licenses
must:
o be duly established companies in the basic telecommunications
business, and have majority state ownership;
o have a feasibility study and technical network plan;
o possess the requisite funding and personnel to carry out operations;
o possess the requisite sites and other resources to carry out
operations;
o have the reputation or ability to provide long-term services to
customers; and
o meet other conditions imposed by the Chinese government.
Applicants for value-added telecommunication licenses must:
o be duly established companies under Chinese law;
o possess the requisite funding and personnel to carry out operations;
o have the reputation or ability to provide long-term services to
customers; and
o meet other conditions imposed by the Chinese government.
The regulations do not specify the criteria that will be used by
regulatory authorities in awarding licenses. We believe that services that our
Chinese joint venture partners intend to offer in the future will require
licenses from the Ministry of Information Industry. See "Overview of Business."
We cannot assure you that such licenses will be issued.
CHINA'S ENTRY INTO THE WTO
China's telecommunications regulatory framework could change
dramatically upon China's entry into the WTO. China has already reached
agreement with the United States and the European Union regarding the terms of
its entry into the WTO. Although the parties have not disclosed the substance of
all their negotiations, China could accede to the WTO rapidly.
35
Under the agreement with the United States, China would allow up to 30%
foreign ownership in all value-added telecommunications services, including
electronic mail, on-line information, database retrieval and data processing,
immediately upon its entry into the WTO, up to 49% within one year of the
accession date and up to 50% within two years of the accession date. Such an
agreement could permit our joint ventures to offer expanded services on a
limited basis
In addition, the agreement with the U.S. liberalized foreign equity
ownership in domestic and international voice, circuit-switching and packet-
switching data transmission services. The schedule states that foreign equity
ownership will be allowed up to 25% within three years of the accession date, up
to 35% within five years of the accession date and up to 49% within six years of
the accession date.
The agreement with the European Union would add additional market
openings. In particular, foreign investment would be allowed in China's mobile
telephone sector at 25% upon China's accession, 35% after one year and 49% after
three years. China would also permit foreign firms to rent data transmission
capacity from Chinese companies for resale inside and outside China.
The State Council is expected to promulgate new regulations in that
will provide clarification on the exact scope of the telecommunications services
to be further opened for foreign investment and other economic reforms related
to our business if China joins the WTO. Until the new regulations are enacted,
we cannot be sure what the regulatory or competitive environment will be after
China's entry into the WTO.
CHINESE GOVERNMENTAL APPROVALS
Shekou Joint Venture
China Broadband selected Shenzhen as the location of its first joint
venture because the Shenzhen Special Economic Zone was established as China's
first special economic zone in 1979 and the Shenzhen Government has foreign
joint venture experience. Shenzhen China Merchants Big Sky Network Ltd. was
formed as a joint venture between us and Shenzhen, China Merchants Shekou
Industrial Zone Ltd., to install hardware and equipment to allow our Chinese
joint venture partners to provide high-speed Internet access in Shekou,
Shenzhen, Guangdong Province. The Shekou Joint Venture was formed and the
issuance of governmental approvals took place as follows:
o We signed a Joint Venture Contract and Articles of Association in
September 1999.
o The Shenzhen Foreign Investment Bureau approved the Shekou Joint
Venture in November 1999.
o The State Administration of Industry and Commerce issued a business
license to the Shekou Joint Venture in November 1999.
o The Guangdong Bureau of Administration of Telecommunications issued
an Internet operating permit to the joint venture to offer Internet
access in February 2000.
o Jun He Law Office rendered an opinion in February 2000, stating
amongst other things that:
- the Shekou Joint Venture Contract and Articles of
Association are legal, valid, and binding obligations
enforceable under the laws of China, relied on the written
explanation of Big Sky Network Canada, Ltd. on January 20,
2000 evidencing that the Chinese party is not required to
transfer the cable television frequency resources (a
bandwidth of 5-56 MHz upstream and a bandwidth of 600-860
MHz downstream) currently owned or controlled by the
Chinese party to the Shekou Joint Venture, such bandwidths
shall be used exclusively for the purpose of connecting
Chinese endusers to the Internet through equipment owned
and supplied by the Joint Venture Company and pursuant to
the Shekou Joint Venture Contract;
- the Shekou Joint Venture is a Chinese-foreign co-operative
joint venture and has been duly organized and validly
exists as a limited liability company; and
36
- the Shekou Joint Venture has the corporate capacity and
power and has received all governmental approvals and
licenses necessary for conducting such business activities
as (i) acquiring certain equipment that will make it
possible for endusers to access the Internet with their
personal computers through the cable television networks;
(ii) providing the services of installation of modems,
technical support and maintenance to the endusers; (iii)
providing technical assistance to the Chinese party or the
Shekou Television Station relating to their Internet and
cable services and (iv) retaining ownership and control of
all the equipment.
o Based upon the receipt of such approvals, licenses, permits and
legal opinion, we contributed US$500,000 in capital to the Shekou
Joint Venture in February, 2000 and an additional US$2,000,000 of
capital in May, 2000, fulfilling all of our capital contribution
obligations. In addition to the capital contributions, we
contributed $500,000 in equipment to the Shekou Joint Venture.
o Using these funds, the Shekou Joint Venture completed installation
work and began offering broadband services in Shekou on June 30,
2000.
Chengdu Joint Venture
We formed a second joint venture, Sichuan Huayu Big Sky Network Ltd.,
with Chengdu Huayu Information Industry Co. Ltd., to install hardware and
equipment to permit our Chinese joint venture partners to provide high-speed
Internet access in Chengdu, Sichuan Province. The Chengdu joint venture was
formed and the issuance of governmental approvals took place as follows:
o We signed a Joint Venture Contract and Articles of Association in
September 2000.
o The Chengdu Foreign Investment Bureau approved the Chengdu Joint
Venture in October 2000.
o The State Administration of Industry and Commerce issued a business
license to the Chengdu Joint Venture in October 2000.
o An Internet operating permit was issued to Chengdu Huayu Information
Industry Co. Ltd. to permit the Joint Venture to offer Internet
access in October 2000.
o Based upon the receipt of such approvals, licenses and permits, we
contributed $1,365,590 in capital to the Chengdu Joint Venture in
October 2000 and we anticipate we will make an additional $300,000
of capital in the first quarter of 2001. Further contributions will
be made, as required, to fulfill its capital contribution
obligations under the Chengdu joint venture contract.
o Using these funds, the Chengdu joint venture completed installation
work and began offering broadband services in Chengdu on October 25,
2000.
Deyang Joint Venture
We entered into a Joint Venture Contract with Deyang Guangshi Network
Development Ltd. in November 2000.
As of March 30, 2001, Deyang Guangshi Network Development Ltd. was
seeking regulatory approval and permits for joint venture business. Once all
required approvals and permits are obtained, the joint venture are anticipated
to proceed.
PROPOSED JOINT VENTURES
We have signed agreements with five cable television stations in other
parts of China to establish additional joint ventures. Described below are
summaries of the letters of intent we have entered into as of March 30, 2001.
37
On May 27, 1999, Big Sky Network and Zhuhai Cable Television Station
entered into an Agreement to the Establishment of Cooperation Joint Venture. The
Agreement calls for Zhuhai Cable Television to contribute its right of using
data transmission channels on the cable network in exchange for an aggregate
investment by us of $4,500,000 to $5,000,000 in capital. The first installment
of $500,000 is payable within 15 days of obtaining approval for the Joint
Venture from the Foreign Economy and Trade Commission. The term of the joint
venture would be 15 years with Big Sky Network receiving 60% of net income in
years 1 to 4, 50% of net incomes in years 5 to 9 and 40% of net incomes in years
10 to 14.
On March 1, 2000, Big Sky Network and Dalian Metropolitan Area Network
Center entered into a Letter of Intent. The Letter calls for both parties to
jointly develop Internet related business and broadband data transmission
business. The joint venture will be for a term of 20 years. Our investment,
registered capital and the distribution of profits are to be negotiated prior to
the final contract.
On September 15, 2000,Big Sky Network and Jitong Network Communications
Co., Ltd. entered into a Joint Development Agreement of City Wide Area High
Speed Broadband and Data Transmission Services. The Agreement calls for both
parties to jointly develop Internet related business and broadband data
transmission business. Our investment, registered capital and the distribution
of profits are to be negotiated prior to the final contract.
On November 8, 2000, Big Sky Network and Hunan Provincial Television
and Broadcast Media Co. Ltd. entered into a Letter of Intent. The Letter calls
for both parties to jointly develop Internet related business and broadband data
transmission business. The joint venture will be for a term of 20 years. Our
investment, registered capital and the distribution of profits are to be
negotiated prior to the final contract.
On March 8, 2001, Big Sky Network and Changsa Guang Da Television
Broadcasting Broadband Network Ltd. entered into a Preliminary Agreement to Form
a Contractual Joint Venture. The Agreement calls for Changsa Guang Da Television
to contribute its right of using data transmission channels on the cable network
in exchange for a staged investment by us of $18,000,000 in capital. The term of
the joint venture would be 18 years with Big Sky Network receiving 65% of net
income in years 1 to 6, 50% of net income in years 7 to 12 and 40% of net
incomes in years 13 to 18. Changsa Guang Da Television currently has
approximately 450,000 registered cable TV subscribers.
Currently, we are concentrating our efforts on our Shekou, Chengdu and
Deyang joint ventures and intend to pursue these potential joint ventures in the
future subject to the available additional financing. Our management has also
had discussions with approximately 20 potential joint venture partners
throughout China regarding additional joint venture opportunities.
We cannot assure you that we will finalize joint venture agreements
with the parties in which we have entered into agreements with or that we will
have sufficient funding to finance future joint venture arrangements.
TRANSACTIONS WITH SOFTNET
We formed Big Sky Network for the purposes of deploying cable-based
broadband services in China. SoftNet, a Delaware corporation, publicly traded on
the NASDAQ (SOFN), acquired a 50% interest in Big Sky Network for an aggregate
purchase price of $2,500,000. The proceeds of the sale were used for working
capital and to fund the Shekou joint venture, a joint venture to install
hardware and equipment to permit our Chinese joint venture partners to deploy
Internet broadband services in the Shekou Industrial Area within the Special
Economic Zone of Shenzhen, a city in Guangdong Province.
In the third Quarter of 2000, SoftNet informed us that they intended to
divest certain businesses including their China Internet investments. We
negotiated to acquire SoftNet's interest in Big Sky Network, our operating
subsidiary, in order to obtain 100% control of our business and to remove
uncertainty related to SoftNet's divestment of its interest in Big Sky Networks.
On September 29, 2000, we paid SoftNet the following consideration for its 50%
interest in Big Sky Network for the following consideration:
o $2,500,000 in cash;
38
o a promissory note in the principal amount of $1,700,000, due
September 29, 2001, with interest payable at maturity at the rate of
8% per annum;
o forgiveness of debt owed by SoftNet to us, which was nil; and
o 1,133,000 shares of our common stock.
As a result of the acquisition, we own all of Big Sky Network, our
operating subsidiary.
As of March 30, 2001, SoftNet owned approximately 5.82% of our issued
and outstanding share capital. SoftNet is at arm's length to us.
SALES AND MARKETING
Exclusive Franchise - We seek to enter into exclusive franchises with
municipally owned and operated cable television facilities in cities where
competing Internet companies have not deployed. Provincial capital cities are
our initial target but we do not restrict our marketing solely to such cities.
We establish relationships with the municipal governments and the management of
the local cable television stations. By offering the municipalities a
competitive Internet service, we enhance their ability to attract foreign
investment in local industry.
Residential - After installing and testing equipment, our sales force
concentrates on the multiple unit residential buildings in the area.
Installation is readily available, as many buildings have cable lines already in
place. Our Chinese joint venture partners also provide free Internet access to
one or more schools in a target area. Students recognize the value of high
speed, reliable service, which we expect will be used to persuade parents to
subscribe. Our Chinese joint venture parnters have also partnered with
securities dealers to market on-line trading capabilities to their clients.
Business - Our marketing programs target large businesses with import
and export focus. We anticipate that our cable-based Internet access will
enhance such businesses' ability to conduct business over the Internet.
PROCUREMENT CONTRACTS
We entered into a Purchase and License Agreement dated September 28,
2000, and amended January 19, 2001, with Nortel Networks Limited. Under the
terms of the Purchase and License Agreement, we received special/fixed pricing
to purchase up to $250,000,000 in services and products from Nortel Networks.
The services and equipment is anticipated to be used in connection with our
joint ventures in China.
As of March 30, 2001, we have purchased approximately $350,000 in
services and products from Nortel Networks under the agreement.
RESEARCH AND DEVELOPMENT
We do not invest in proprietary technology or research and development.
Instead, we intend to use technologies that are available from third-party
vendors and the technologies developed by Big Sky Network's joint venture
partners and affiliated entities.
Our joint ventures are expected to rely on the technologies and systems
of major cable television stations in which such ventures intend to offer
broadband services through. These cable television stations generally use
technologies that are comparable to most western cities. Our contribution to the
joint ventures includes the acquisition and installation of routers, switches
head-end equipment and modems that we plan to acquire from third-party
providers. We do not anticipate that we will be required to conduct any material
research and development to provide equipment or technologies required to
convert cable television stations to Internet capable facilities.
Our implementation strategy for each joint venture includes providing
an assessment of each facility, using contractors, employees and third-party
providers to design required upgrades, supply technicians, install equipment and
activate the Internet high-speed access service.
39
We do not depend on any one equipment supplier, although negotiations
with suppliers may lead to exclusivity agreements if significant benefits accrue
to us from entering into such agreements.
COMPETITION
We believe the demand for broadband Internet service will increasingly
attract foreign attention. As China gains acceptance into the World Trade
Organization, known as "WTO", it is expected to liberalize its rules on foreign
investment, ownership of telecommunications facilities and Internet access. We
believe we can enter into joint ventures to enter into a number of exclusive
franchises before WTO takes effect. We are constrained by limited financial and
human resources and cannot expect to dominate the Internet industry. However, we
do expect that by entering into exclusive franchises in selected provincial
capitals and other key cities, we will be well positioned to partner with other
companies on competitive terms to grow the Chinese broadband Internet market.
Currently, the resident Chinese telecommunications companies have
exclusive right to offer Internet service. New entrants such as our joint
ventures must secure license agreements with one or more of the authorized
Internet access providers. Chinese telecommunications companies have a
competitive advantage in terms of size, acceptance, subscriber base, marketing
and sales force and license.
Relative to the Chinese telecommunications companies, we believe our
joint ventures can differentiate its services from typical dial-up Internet
services because of the advantages in speed of service and price offered by
fibre optic cable service.
Our joint ventures are structured in a manner that has been approved by
government regulators in China, which may create a competitive advantage over
other companies seeking to provide broadband Internet service using other
business structures.
The size of the Chinese market for Internet services attracts attention
from foreign companies seeking to expand the market for their goods and
services. We believe our primary competitors are Chinese telecommunications
companies, which currently provide dial-up Internet access.
While a number of entities, Chinese, foreign and Chinese-foreign joint
ventures, have announced their intention to enter into cable TV based Internet
services, we have not encountered any direct competition in the areas where we
are currently active. We expect that some of our letter agreements will not
result in operating joint ventures as other entities may offer more attractive
financial terms than we may provide. With our limited capital and human
resources, we intend to prioritize our marketing and development activities to
concentrate on the highest probability of successful negotiations, profitable
return, highest number of cable subscribers, and most modern cable facilities.
To date, we have not been able to identify any direct competitors who
are attempting to enter into the cable network market in the same manner using
the same technologies. Currently, we must compete against companies that offer
Internet access through methods of connection such as digital subscriber lines
(DSL), Integrated Services Digital Network (ISDN) and T1 connections. We believe
we have an advantage over these other methods of transmission as ISDN is
typically two to three times more expensive than either DSL or cable
alternatives and does not offer the speed that DSL or cable does. T1
connections, which are basically large DSL connections are very cost prohibitive
to individuals and are typically used by businesses that require the capability
to have multiple users access large quantatities of information at the same
time. DSL and cable access are generally comparable in cost, however, cable
offers a higher bandwidth which allows a greater amount of information to be
downloaded in a similar period of time. Also, due to cables higher bandwidth, a
wider arena of accessibility to streaming video, video-conferencing and other
dense transmissions is available to the enduser.
There are many companies that provide Internet access and related
services to users in China using DSL, ISDN or T1 connections. Some of these
competitors are major Chinese Internet service providers, such as China Telecom,
Jitong, and Unicom, as well as large foreign Internet service providers such as
AT&T. These competitors have established customer bases, reputations and brand
names, as well as substantial financial and technical resources. In addition,
most of these competitors offer other services, which provides them with a list
of potential clients to solicit and a larger market presence and reputation to
draw upon. We believe that by remaining in the
40
cable television network industry, we may be able to secure a significant
portion of the Internet service access market due to our enhanced connection
speeds and higher service reliability.
Competition from Chinese telephone companies includes a limited amount
of DSL capability. DSL in China relies on standard telephone lines to connect
users to the Internet. While China is upgrading much of its infrastructure, the
cost of DSL service limits its use to businesses that must have Internet access.
INTELLECTUAL PROPERTY
Our success is dependent upon our ability to protect our intellectual
property rights. We rely principally on a combination of copyright, trademarks,
trade secret non-disclosure agreements and other contractual provisions to
establish and maintain our proprietary rights. We have submitted a trademark
application to register the name "China Broadband" with the United States Patent
and Trademark Office.
As part of our confidentiality and operating procedures, we generally
enter into nondisclosure and confidentiality agreements with each of our key
employees and consultants and limit access to and distribution of our core
technology, documentation and other proprietary information.
Policing the unauthorized use of our technology is difficult. We will
use all viable and cost-permissive methods for defending and prosecuting any
suspected violators of our technology.
EMPLOYEES
We have 7 full-time consultants and 3 part-time consultants consisting
of 6 executives and 4 administrative consultants. Our subsidiary, Big Sky
Network, employs a total of 9 employees in general, administrative and marketing
functions on a full-time basis. We anticipate that Big Sky Network will hire
additional employees in sales, marketing, and administration on an as-needed
basis over the next fiscal year. Each joint venture engages local staff as
required to manage its business, market the product and install the Internet
service. We do not employ the joint venture employees. Set forth below are the
numbers of employees employed by our joint ventures:
JOINT VENTURE NUMBER OF EMPLOYEES
SALES TECHNICAL ADMINISTRATIVE
Shekou 9 2 7
Chengdu 9 12 6
We maintain a small group of technical specialists contracted to the
joint ventures to install, integrate and service major components, such as
routers and head-end equipment. We plan to hire additional employees in sales,
marketing, and administration over the current fiscal year and plan to hire
additional management and service employees on an as-needed basis. If the need
arises for additional technical employees and we are unable to hire qualified
employees in a timely manner, we may outsource projects to third parties.
FACILITIES
Our principal corporate, administrative and marketing facilities are
located in Calgary, Alberta, and consist of approximately 4,000 square feet of
office space held under a lease that expires on June 31, 2005 subject to certain
early termination provisions after one year. This space is located at 2080,
440-2 Avenue SW., Calgary, Alberta, Canada, T2P 5E9.
41
Our subsidiary, Big Sky Network, has offices located at Room 808,
Zhaoshang Building, Shaoshang Road, 518067 Shekou, Shenzhen, Guangdong, China,
and Zongnan Residential Area, Tai D4, Shenglong Street, Consulate Road, Chengdu,
Sichuan 610041 Chengdu, Sichuan Province, China.
LEGAL PROCEEDINGS
We are not currently a party to any pending legal proceedings.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information, as of March 30, 2001,
regarding our executive officers and directors:
- ------------------------------ ----------- -------------------------------------------------- -------------------
NAME AGE POSITION SINCE
- ------------------------------ ----------- -------------------------------------------------- -------------------
Matthew Heysel 44 Chairman of the Board, Chief Executive Officer April 14, 2000
- ------------------------------ ----------- -------------------------------------------------- -------------------
Daming Yang 43 Director and President April 14, 2000
- ------------------------------ ----------- -------------------------------------------------- -------------------
Tom Milne 54 Director and Chief Financial Officer April 14, 2000
- ------------------------------ ----------- -------------------------------------------------- -------------------
Barry Mackie 57 Chief Technology Officer February 2, 2000
- ------------------------------ ----------- -------------------------------------------------- -------------------
Ian Aaron 40 Director February 2, 2000
- ------------------------------ ----------- -------------------------------------------------- -------------------
John Brooks 40 Director February 2, 2000
- ------------------------------ ----------- -------------------------------------------------- -------------------
Richard Hurwitz 37 Director February 2, 2000
- ------------------------------ ----------- -------------------------------------------------- -------------------
Teddy Ping Chang Yung 32 Vice President, Systems Engineering February 2, 2000
- ------------------------------ ----------- -------------------------------------------------- -------------------
Richard Wing Kit Lam 24 Vice President, Network Engineering February 2, 2000
- ------------------------------ ----------- -------------------------------------------------- -------------------
MATTHEW HEYSEL - CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER
Mr. Matthew Heysel has served as Chairman of the Board of Directors and
Chief Executive Officer of China Broadband Corp. from April 14, 2000 to the
present. He also serves as the Chairman of Big Sky Network Canada Ltd., (a
subsidiary of China Broadband Corp.) and has held that position since May of
1999. Mr. Heysel is also a director of both of Big Sky Networks' joint ventures,
Shenzhen China Merchants Big Sky Network Ltd. and Sichuan Huayu Big Sky Network
Ltd., and has been a board member since each joint ventures' formation,
September 1999 and July 2000 respectively. Previously, he served as Vice
President of Corporate Finance of Yorkton Securities, a Canadian independent
securities firm, where he was responsible for corporate finance in the oil and
gas sector from April 1997 through April 1999. From October 1999 to the present,
Mr. Heysel also served as President and a director of New Energy West Corp., a
junior oil and gas exploration company which trades on the Canadian Venture
Exchange under "NEC". In February 2001, Mr. Heysel was elected to the Board of
Directors of M3 Energy Ltd., a junior oil and gas company.
DAMING YANG - DIRECTOR AND PRESIDENT
Mr. Daming Yang has served on our Board of Directors and as our
President since April 14, 2000. He has also served as the President and a member
of the board of directors of Big Sky Network Canada Ltd., our subsidiary, since
May of 1999. Mr. Yang is also a director of Shenzhen China Merchants Big Sky
Network Ltd. and Sichuan Huayu Big Sky Network Ltd., and has been a board member
since each joint ventures' formation, September 1999 and July 2000,
respectively. From 1995 through 1998, Mr. Yang served as Vice President and then
President of Tongli Energy Technical Service Co. Ltd., an importer of
high-technology equipment to China where he was responsible for the day to day
administration of the company and managed a staff of six. From 1989 to 1993, Mr.
Yang was with Tri-City Survey Limited as a GIS Engineer. Mr. Yang holds a Master
Degree in Geographical Information Systems from the University of Regina and a
Masters Degree in Aerial Photography and Remote Sensing from the Netherlands
International Institute for Aerospace Survey and Earth Sciences.
THOMAS MILNE - DIRECTOR AND CHIEF FINANCIAL OFFICER:
Mr. Thomas Milne has served on our Board of Directors, and as Vice
President of Finance and Chief Financial Officer since April 14, 2000. He has
also served as the Chief Financial Officer of Big Sky Network
42
Canada Ltd, our subsidiary, since May of 1999. From 1985 through 1997, Mr. Milne
was Vice President and Treasurer of NOVA Corporation, and director of NOVA
Finance International. He was the Vice President, Finance and Chief Financial
Officer of Arakis Energy, which was acquired by Talisman Energy Corp., from
September, 1997 to October, 1998, an oil and gas company traded on the NASDAQ.
Since March 1998, Mr. Milne has served as Chief Executive Officer of Precise
Details, Inc., a consulting, investment management, real estate and automotive
services company. Mr. Milne currently serves on the board of directors of
Caspian Oil Tools Limited, Longview Petroleum Limited and Synenco Energy
Limited. Mr. Milne also currently serves as Director and the Chief Financial
Officer for M3 Energy Ltd, a junior oil and gas company and NoMatterWare, Inc.,
an application service provider. Mr. Milne is also a director of The Alberta
Performing Arts Stabilization Fund and the Pension and Investment Committee of
the University of Calgary Pension and Endowment Funds
IAN AARON - DIRECTOR
Mr. Ian Aaron has been the President and CEO of TVN Entertainment
Corporation, a leading digital distribution services company since August 2000.
Mr. Aaron joined TVN from SoftNet Systems, Inc., which trades on the NASDAQ
(SOFN), a global broadband and cable modem, satellite and wireless services
company. Mr. Aaron served, from 1994-1999, as President of SoftNet, President of
SoftNet's subsidiary ISP Channel and as SoftNet's Chief Technology Officer. Mr.
Aaron is a seasoned telecommunications executive from Fujitsu GTE Communications
(June 1982 to August 1987). He was President and founder of Communicate Direct,
from August 1987 to October 1994, a leading telecom and datacom services company
and is a member of the Board of Directors of TVN, Dot Cast, and China Motion. He
earned two Bachelor of Science degrees from the University of Illinois in
Electrical Engineering and Business and Communications.
JOHN BROOKS - DIRECTOR
Mr. Brooks is an experienced telecommunications entrepreneur. In 1996,
Mr. Brooks co-founded Brooks Fiber Properties (BFP), a provider of competitive
local and long distance telecommunications services in 44 states across the
United States. BFP completed an initial public offering in 1996 and was
subsequently acquired by WorldCom in January 1998. Mr. Brooks also co-founded
Millennium Digital Media, an early provider of full service competitive
broadband access in various major metropolitan areas across the United States,
where he served as the company's Chief Operating Officer and Vice Chairman from
1997. Mr. Brooks stepped down from the position of Chief Operating Officer in
2001 and continues in his role as Vice Chairman. Mr. Brooks is currently the
Chairman of Brooks Investments, Inc.
RICHARD HURWITZ - DIRECTOR
Mr. Hurwitz is a partner with Bancorp Services LLC, a nationally
recognized consulting firm providing structured investments directed to
financial institutions, since March 1996. As well, Mr. Hurwitz has served as the
Chief Executive of Benefit Finance Securities, a broker-dealer based in St.
Louis, Missouri, since November 1998. Previously, Mr. Hurwitz acted as the
Managing Director Europe with Bridge Information Systems Inc. a New York based
financial information vendor, from 1990 to 1995.
BARRY MACKIE - CHIEF TECHNOLOGY OFFICER
Mr. Mackie has served as our Chief Technology Officer since February 2,
2001. Prior to joining us, Mr. Mackie was employed by Nortel Networks as Vice
President - Network Development & Technical Operations, Cannect Communications.
During 1997, Mr. Mackie was employed as Implementation Prime for a new traffic
utilization and capacity planning project for MCI Communications. In 1996, Mr.
Mackie served as a managing consultant for Telos. Mr. Makie has also been
employed by Nippon Telecommunications Consulting in 1995 and was a project
manager for Mitel Equipment in 1994.
TEDDY PING CHANG YUNG - VICE PRESIDENT, SYSTEMS ENGINEERING
Mr. Yung has served as our Vice President, Systems Engineering since
February 2, 2001. Prior to joining us, Mr. Yung was employed with Compaq as a
Deployment Engineer from May 2000 to October 2000. From September 1999 to May
2000, Mr. Yung was employed as a Network Engineer at Credit Suisse First Boston.
Mr.
43
Yung was a Network Engineer for Morgan Stanley Dean Witter from August 1997 to
April 1999. Mr. Yung was a Network Engineer with Citicorp from November 1995 to
August 1997.
RICHARD WING KIT LAM - VICE PRESIDENT, NETWORK ENGINEERING
Mr. Lam has served as our Vice President, Network Engineering since
February 2, 2001. Prior to joining us, Mr. Lam was employed by SoftNet Systems
as a Senior Systems Architect from April 2000 to November 2000. From June 1998
to March 2000, Mr. Lam was a consultant with KPMG Consulting. Prior to KPMG, Mr.
Lam spent 4 years with Columbia University Telecommunications Services as a
Senior Tech.
None of our executive officers or directors have been involved in any bankruptcy
proceeding, been converted in or has pending any criminal proceeding, been
subject to any order, judgment or decree enjoining, barring, suspending or
otherwise limiting involvement in any type of business, securities or banking
activity or been found to have violated any federal, state or provincial
securities or commodities laws.
BOARD COMMITTEES
On February 2, 2001, our board of directors established an Audit
Committee and a Human Resources and Compensation Committee.
AUDIT COMMITTEE
The Audit Committee of the board of directors reviews our internal
accounting procedures and consults with and reviews the services provided by our
independent auditors. Messrs. Aaron, Brooks and Hurwitz are members of this
committee. The Audit Committee is responsible for reviewing our financial
reporting procedures and internal controls, the scope of annual and any special
audit examinations carried out by our auditors, the performance of our auditors,
systems and controls established to comply with financial regulatory
requirements and our annual financial statements before they are reviewed and
approved by our board of directors. Such reviews are carried out with the
assistance of our auditors and our senior financial management. The Audit
Committee adopted, and the board of directors approved, an Audit Committee
Charter, consistent with SEC policy, outlining its policy and procedures for the
exercise of its oversight responsibilities on March 27, 2001.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Human Resources and Compensation Committee of the board of
directors reviews and recommends to the board of directors the compensation and
benefits of all our executive officers and establishes and reviews general
policies relating to compensation and benefits of our employees. Messrs. Heysel,
Yang, Brooks and Aaron are members of this committee. Mr. Heysel is a director
and Chief Executive Officer. Mr. Yang is a director and our President. None of
our executive officers served as a director, executive officer or member of a
compensation committee of another entity of which one of its executive officers
served on our Human Resources and Compensation Committee. Except as described in
"Related Party Transactions," no interlocking relationships exist between our
board of directors or compensation committee and the board of directors or
compensation committee of any other company, nor has any interlocking
relationship existed in the past.
In the past, our board of directors has negotiated all executive
salaries of our employees, including our Chief Executive Officer. Directors do
not participate in approving or authorizing their own salaries as executive
officers. Compensation for our Chief Executive Officer was determined by the
Board after considering his efforts in assisting in the development of our
business strategy, the salaries of executives in similar positions, the
development of our joint ventures, the implementation of our joint venture
Internet services in Shekou and Chengdu, and our general financial condition.
Our Board of Directors believes that the use of direct stock awards is at times
appropriate for employees, and in the future intends to use direct stock awards
to reward outstanding service or to attract and retain individuals with
exceptional talent and credentials. The use of stock options and other awards is
intended to strengthen the alignment of interests of executive officers and
other key employees with those of our stockholders. See "Stock Option Plan."
44
DIRECTOR COMPENSATION
We do not currently pay any cash compensation to directors for serving
on our board, but we do reimburse directors for out-of-pocket expenses for
attending board and committee meetings. Our independent directors receive stock
options to purchase shares of our common stock as compensation for their service
as directors. The terms of stock option grants made to independent directors are
determined by the board of directors. See "Option Grants." We do not provide
additional compensation for committee participation or special assignments of
the board of directors.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our chief
executive officer and two other most highly compensated executive officer for
the years indicated. No other executive officer of China Broadband earned a
salary and bonus for such fiscal year in excess of $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------------------------------------------------------
AWARDS PAYOUTS
-----------------------------------------
OTHER SECURITIES RESTRICTED
FISCAL ANNUAL UNDER SHARES OR
YEAR COMPEN- OPTION/SAR RESTRICTED LTIP
NAME AND PRINCIPAL ENDED SALARY BONUS SATION GRANTED (#) SHARE UNITS PAYOUTS ALL OTHER
POSITION (1) (US$) (US$) (US$) (US$) (US$) COMPENSATION
- ---------------------------------------------------------------------------------------------------------------------
Matthew Heysel, 2000 75,000(2) 0 0 550,000 0 0 0
Chief Executive 1999(3) nil
Officer
Daming Yang 2000 30,000(2) 0 0 550,000 0 0 0
1999(3) nil
Tom Milne 2000 60,000(2) 0 0 250,000 0 0 0
1999(3) nil
James Charuk 2000(4) nil(4) - -
1999 nil(5)
<FN>
(1) December 31
(2) From March 1, 2000 through December 31, 2000.
(3) Mr. Heysel, Mr. Yang and Mr. Milne were not employed by us in 1999.
No compensation was paid to officers and directors during the year
ended December 31, 1999.
(4) Mr. Charuk served as our President and sole director of Institute for
Counseling, Inc., the predecessor corporation to the company, from June
22, 1998 through March 1, 2000. No compensation was paid to any officer
or director of China Broadband during this period.
(5) No compensation was paid to any officer or director of China Broadband
during this period. Big Sky did not pay any salaries and did not issue
any options in 1999.
</FN>
OPTION GRANTS
We did not grant any stock options to our Chief Executive Officer or
other most highly compensated executive officers during the fiscal year ended
December 31, 1999.
On April 13, 2000, China Broadband Corp. granted options to officers,
directors and consultants exercisable to acquire a total of 4,175,000 shares at
$1.00 per share. We cancelled 50,000 options and issued 50,000 warrants with
identical terms and conditions. On November 1, 2000, China Broadband Corp.
granted options to officers, directors and employees exercisable to acquire a
total of 650,000 common shares at $7.50 per share. On February 2, 2001, China
Broadband Corp. granted options to officers, directors and consultants
exercisable to acquire a total of 550,000 shares at $7.50 per share. See "Stock
Option and Warrant Grants".
45
The following table sets forth information regarding stock option
grants to our executive officers and directors:
OPTION GRANTS
INDIVIDUAL GRANTS POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
FOR OPTION TERM
- --------------------------------------------------------------------------------------------- -----------------------
(A) (B) (C) (D) (E) (F) (G)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL ($/SH)(2) DATE 5% ($) 10% ($)
YEAR(1)
- ------------------------------- ----------------- -------------- ------------ --------------- ------------ ----------
Matthew Heysel 500,000 9.39% $1.00 4/13/2005 138,150 305,250
50,000 0.10% $7.50 11/1/2003 59,100 124,125
Daming Yang 500,000 9.39% $1.00 4/13/2005 138,150 305,250
50,000 0.10% $7.50 11/1/2003 59,100 124,125
Tom Milne 100,000 1.88% $1.00 4/13/2005 27,630 61,050
150,000 2.82% $7.50 11/1/2003 177,300 372,375
Barry Mackie 300,000 5.63% $7.50 2/2/04 354,600 744,750
John Brooks 100,000 1.88% $7.50 2/2/04 118,200 248,250
Ian Aaron 100,000 1.88% $1.00 4/13/2005 27,630 61,050
Richard Hurwitz 100,000 1.88% $1.00 4/13/2005 27,630 61,050
Teddy Ping Chang Yung 200,000 3.76% $7.50 11/1/2003 236,400 496,500
Richard Wing Kit Lam 100,000 1.88% $7.50 11/1/2003 118,200 248,250
<FN>
(1) Based on options exercisable to acquire a total 5,325,000 shares to
officers, directors, employees and consultants.
(2) The exercise price per shares was equal to or greater than the fair
market value of the common stock on the date of grant as determined
by the Board of Directors.
</FN>
The potential realizable value is calculated based on the assumption
that the common stock appreciates at the annual rate shown, compounded annually,
from the date of grant until the expiry of the term of the option.
These numbers are calculated based on SEC requirements and do not
reflect our projection or estimate of future stock price growth. Potential
realizable values are computed by:
o multiplying the number of shares of common stock subject to a given
option by the exercise price;
o assuming that the aggregate stock value derived from that
calculation compounds at the annual 5% or 10% rate shown in the
table for the entire term of the option; and
o subtracting from that result the aggregate option exercise price.
OPTION EXERCISES
None of the Named Executive Officers have exercised options to purchase
shares of our common stock as of March 30, 2001.
46
The following table sets forth details of each exercise of stock
options during the financial year ended December 31, 2000 by any of the Named
Executive Officers, and the financial year end value of unexercised options on
an aggregate basis.
AGGREGATED OPTIONS EXERCISED
DURING THE FINANCIAL YEAR ENDED DECEMBER 31, 2000
AND FINANCIAL YEAR-END OPTION VALUES
- -------------------------- ----------------- ---------------- ----------------------- -------------------------------
NAME SECURITIES AGGREGATE UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN THE
ACQUIRED ON VALUE REALIZED AT FY-END (#) MONEY-OPTIONS AT FY-END
EXERCISE (#) ($) EXERCISABLE/ ($) EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE (1)
- -------------------------- ----------------- ---------------- ----------------------- -------------------------------
Matthew Heysel Nil Nil 550,000 (exercisable) $3,000,000 (exercisable)
0 (unexercisable) $0 (unexercisable)
- -------------------------- ----------------- ---------------- ----------------------- -------------------------------
Daming Yang Nil Nil 550,000 (exercisable) $3,000,000 (exercisable)
0 (unexercisable) $0 (unexercisable)
- -------------------------- ----------------- ---------------- ----------------------- -------------------------------
Tom Milne Nil Nil 250,000 (exercisable) $1,500,000 (exercisable)
0 (unexercisable) $0 (unexercisable)
- -------------------------- ----------------- ---------------- ----------------------- -------------------------------
<FN>
(1) Based on NASD OTCBB closing price of $7.00 on December 29, 2000. (2)
Includes Options to purchase common shares within 60 days after December 31,
2000.
</FN>
STOCK OPTION PLAN
Our board of directors approved the creation of the 2000 Stock Option
Plan. Under the plan, the board of directors may grant incentive and
non-qualified options to acquire up to a total of 8,000,000 common shares to our
directors, officers, employees and consultants. As of March 30, 2001, our board
has granted options exercisable to acquire 5,325,000 common shares.
The plan is intended to retain the services of our valued key employees
and consultants and others that the plan administrator may select to:
o encourage our employees and consultants to acquire a greater
proprietary interest in China Broadband;
o serve as an aid and inducement in the hiring of new employees; and
o provide an equity incentive to consultants and others selected by
the Board of Directors and the plan administrator.
The primary difference between "incentive stock options" and
non-qualified options is the tax treatment of the option holder. If a holder
complies with Internal Revenue Service rules regarding incentive stock options,
a holder of an incentive stock can defer recognition of income for tax purposes
until the shares underlying the options are sold. A holder of a non-qualified
option generally recognizes income on the date of exercise. Incentive stock
options may be granted to any individual who, at the time the option is granted,
is an employee of China Broadband or any related corporation. Non-qualified
stock options may be granted to employees and to others at the discretion of the
plan administrator. The plan administrator fixes the exercise price for options
in the exercise of its sole discretion, except that the exercise price for an
incentive stock option must be at least the fair market value per share of the
common stock at the date of grant (as determined by the plan administrator in
good faith), or in the case of greater-than ten percent shareholders, at least
one hundred ten percent of the fair market value per share. The exercise price
may be paid in cash or, with the approval of the plan administrator, by other
means, including
47
withholding of option shares or delivery of previously held shares. Options
granted under the plan vest over a four-year period, with one-quarter becoming
exercisable at the end of one year of continuous stats as an employee or
consultant and the remaining 75% vest pro rata monthly over the following 36
months of continuous status as an employee or consultant. The plan administrator
may accelerate the vesting of options in its sole discretion.
Options are non-transferable except by will or the laws of descent and
distribution or subject to a qualified domestic relations order. With some
exceptions, vested but unexercised options terminate upon the earlier of:
o the expiration of the option term specified by the plan
administrator at the date of grant (generally 10 years; or, with
respect to incentive stock options granted to greater-than ten
percent shareholders, a maximum of five years);
o the expiration of 3 months from the date of an optionee's
termination of services with us or any related corporation; or
o the expiration of one year from the date of death or disability (as
defined in the plan) of the optionee.
If an optionee's services are terminated by death, any option held by
the optionee is exercisable only by the person or persons to whom such
optionee's rights under the option pass by the optionee's will or by the laws of
descent and distribution of the state or county of the optionee's domicile at
the time of death. Unless accelerated in accordance with the plan, unvested
options terminate immediately upon termination of services of the optionee by us
for any reason, including death or disability. The plan administrator may amend
or modify the plan, except that no amendment with respect to an outstanding
option may be made over the objection of the holder of the option (other than
those provisions triggering acceleration of vesting of outstanding options).
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
Our articles of incorporation provide that we shall have the right to
indemnify any person for any liability or expenses incurred by that person by
reason of the fact that he was a director, officer, employee or agent and has
the right to advance or pay the expenses of directors and officers in defending
civil or criminal suit or proceeding to the full extent provided by the General
Corporation Law of Nevada.
Our bylaws provide that to the fullest extent permitted by law we may
indemnify our directors, officers and others who were or are a party or are
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding.
We maintain director and officer liability insurance in the amount of
$5,000,000.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
EMPLOYMENT AND CONSULTING CONTACTS
We, through our subsidiaries, have entered into consulting agreements
with key individuals, who perform services for us, as specified in the
agreements. We use a standard form of consulting agreement, which defines terms
of the agreement, services to be performed, compensation and benefits,
confidentiality and individual specific benefits based on the requirements of
the position. We have entered into the following consulting agreements:
Mathew Heysel Consulting Agreement: Mathew Heysel provides services as
our Chief Executive Officer on a full-time basis under the terms of a consulting
agreement with MH Financial Management. We pay a base consulting fee in the
annual amount of $120,000, subject to annual adjustments at the discretion of
our board of directors, for Mr. Heysel's services. The agreement is for a term
of six months, expiring April 30, 2001, with renewal at the discretion of the
board of directors. The agreement contains non-compete provisions that restricts
Mr.
48
Heysel from doing any business whatsoever with our clients or doing
substantially similar work for a period of one year in the event Mr. Heysel is
no longer contracted by us for any reason. Should we terminate the consulting
agreement, Mr. Heysel would be paid $60,000 at the time of termination. The
agreement provides that in the event of a change of control, Mr. Heysel is to be
paid five percent (5%) of the value of the sale of our assets or the value of
the transaction which would constitute a takeover of the company. This amount is
to be paid within 10 days of the transaction. Takeover of the company is defined
as:
o any change in the holding, either direct or indirect, of shares of
the company, or any reconstruction, reorganization,
recapitalization, consolidation, amalgamation, merger, arrangement
or other transaction, that results in a person who was, or a group
of persons acting in concert who were, not previously in a position
to exercise effective control of the Corporation in excess of the
number that would entitle the holders thereof to cast twenty (25%)
percent or more of the votes attaching to all shares of the
Corporation, and
o the exercise of such effective control to cause or result in the
election or appointment of two or more directors of the Corporation,
or of the successor to the Corporation, who were not previously
directors of the Corporation.
Daming Yang Consulting Agreement: Daming Yang provides services as our
President on a full-time basis under the terms of a consulting agreement. We pay
a consulting fee in the annual amount of $60,000, subject to annual adjustments
at the discretion of our board of directors, for Mr. Yang's services. The
agreement is for a term of six months, with renewals at the discretion of the
board of directors and expired on October 31, 2000. The agreement contains
non-compete provisions that restricts Mr. Yang from doing any business
whatsoever with our clients or doing substantially similar work for a period of
one year in the event Mr. Yang is no longer contracted by us for any reason. The
agreement has no change of control provisions.
Thomas Milne Consulting Agreement: Thomas Milne provides services as
our Chief Financial Officer on a full-time basis under the terms of a consulting
agreement with Precise Details Inc. We pay a consulting fee in the annual amount
of $96,000, subject to annual adjustments at the discretion of our board of
directors, for Mr. Milne's services. The agreement is for a term of six months
and expires on April 30, 2001. The agreement contains non-compete provisions
that restricts Mr. Milne from doing any business whatsoever with our clients or
doing substantially similar work for a period of one year in the event Mr. Milne
is no longer contracted by us for any reason. The agreement has no change of
control provisions.
Barry Mackie Consulting Agreement: Barry Mackie provides services as
our Chief Technical Officer on a full-time basis under the terms of a consulting
agreement. We pay a consulting fee in the annual amount of $120,000, subject to
annual adjustments at the discretion of our board of directors, for Mr. Mackie's
services. The agreement is for a term of six months and expires on July 1, 2001.
The agreement contains non-compete provisions that restricts Mr. Mackie from
doing any business whatsoever with our clients or doing substantially similar
work for a period of one year in the event Mr. Mackie is no longer contracted by
us for any reason. The agreement has no change of control provisions. In
connection with Mr. Mackie's engagement, we agreed to grant Mr. Mackie options
exercisable to acquire 300,000 shares of our common stock, vesting on the date
of grant. On February 2, 2001, we granted Mr. Mackie options exercisable to
purchase 300,000 shares of our common stock at an exercise price of $7.50, which
vested immediately and expire on February 2, 2004.
Richard Lam Consulting Agreement: Richard Lam provides services as our
Vice President, Network Engineering on a full-time basis under the terms of a
consulting agreement. We pay a consulting fee in the annual amount of $84,000,
subject to annual adjustments at the discretion of our board of directors, for
Mr. Lam's services. The agreement is for a term of six months and expires on
April 1, 2001. The agreement contains non-compete provisions that restricts Mr.
Lam from doing any business whatsoever with our clients or doing substantially
similar work for a period of one year in the event Mr. Lam is no longer
contracted by us for any reason. The agreement has no change of control
provisions. In connection with Mr. Lam's engagement, we agreed to grant Mr. Lam
options exercisable to acquire 100,000 shares of our common stock, vesting on
the date of grant. On November 1, 2000, we granted Mr. Lam options exercisable
to purchase 100,000 shares of our common stock at an exercise price of $7.50,
which vested immediately and which expire on November 1, 2003.
49
Teddy Yung Consulting Agreement: Teddy Yung provides services as our
Vice President, Systems Engineering on a full-time basis under the terms of a
consulting agreement with YungPC AP. We pay a consulting fee in the annual
amount of $100,000, subject to annual adjustments at the discretion of our board
of directors, for Mr. Yung's services. The agreement is for a term of six months
and expires on April 1, 2001. The agreement contains non-compete provisions that
restricts Mr. Yung from doing any business whatsoever with our clients or doing
substantially similar work for a period of one year in the event Mr. Yung is no
longer contracted by us for any reason. The agreement has no change of control
provisions. In connection with Mr. Yung's engagement and under separate contract
with Mr. Yung directly, we agreed to grant Mr. Yung options exercisable to
acquire 200,000 shares of our common stock, vesting on the date of grant. On
November 1, 2000, we granted Mr. Yung options exercisable to purchase 200,000
shares of our common stock at an exercise price of $7.50, which vested
immediately and which expire on November 1, 2003.
RELATED PARTY TRANSACTIONS
On April 14, 2000, we entered into an exchange agreement with the
shareholders of China Broadband (BVI) Corp., including certain officers and
members of our board of directors. In exchange, we issued 13,500,000 shares of
common stock to the shareholders of China Broadband (BVI) Corp. Under the terms
of the exchange agreement, Brent Shaw, Michael Kang and James Charuk resigned as
members of our Board of Directors and Matthew Heysel, Daming Yang and Tom Milne
were appointed as the members of our Board of Directors.
On April 13, 2000, China Broadband Corp. granted options to officers,
directors and consultants to China Broadband Corp. exercisable to acquire a
total of 4,175,000 shares at $1.00 per share. These options were fully vested
and expire on April 13, 2005. See "Stock Option and Warrant Grants".
In May 2000, China Broadband issued 500,000 shares at $0.20 per share;
1,530,000 shares at $1.00 per share and 1,301,667 shares at $7.50 per share for
gross proceeds of $11,392,503.
Precise Details, Inc., a company over which Thomas Milne, our Chief
Financial Officer and a director, has control, purchased 50,000 at $0.20 per
share. Precise Details subsequently transferred 40,000 of these shares to
sixteen persons/entities. 10,000 of these shares were transferred into Mr.
Milne's name and 5,000 of these shares were transferred to Mr. Milne's spouse.
Richard Hurwitz, a director, purchased 50,000 shares at $0.20 per share
and 50,000 shares at $1.00 per share in these offerings.
We acquired SoftNet's 50% interest in Big Sky Network by issuing
SoftNet 1,133,000 shares of our common stock, which was approximately 5.82% of
our issued and outstanding share capital as of March 30, 2001. See "Transactions
with SoftNet". SoftNet is at arm's length to us.
On November 1, 2000, China Broadband Corp. granted options to officers,
directors, consultants and employees exercisable to acquire 650,000 common
shares at $7.50 per common share. These options are fully vested and expire on
November 1, 2003. See "Stock Option and Warrant Grants".
On February 2, 2001, China Broadband Corp. granted options to officers,
directors, consultants and employees exercisable to acquire 550,000 common
shares at $7.50 per common share. These options vested immediately and expire on
February 2, 2004. See "Stock Option and Warrant Grants".
We have entered into consulting agreements with Matthew Heysel, Daming
Yang, Tom Milne, Teddy Yung, Richard Lam and Barry Mackie. See "Employment and
Consulting Agreements."
PRINCIPAL SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of our outstanding common stock as of March 30, 2001 for:
o each of our directors and executive officers individually;
50
o each person or group that we know owns beneficially more than 5% of
our common stock; and
o all directors and executive officers as a group.
Rule 13d-3 under the Securities Exchange Act defines the term,
"beneficial ownership". Under this rule, the term includes shares over which the
indicated beneficial owner exercises voting and/or investment power. The rules
also deem common stock subject to options currently exercisable, or exercisable
within 60 days, to be outstanding for purposes of computing the percentage
ownership of the person holding the options but do not deem such stock to be
outstanding for purposes of computing the percentage ownership of any other
person. The applicable percentage of ownership for each shareholder is based on
19,474,517 shares of common stock outstanding as of March 30, 2001, together
with applicable options for that shareholder. Except as otherwise indicated, we
believe the beneficial owners of the common stock listed below, based on
information furnished by them, have sole voting and investment power over the
number of shares listed opposite their names.
PERCENT OF
NAME AND ADDRESS NUMBER OF SHARES SHARES OUTSTANDING(1) PERCENTAGE AFTER
OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING
OFFICERS AND DIRECTORS
Matthew Heysel, Director, CEO 2,473,750(2) 12.35%(2) 12.35%
2080, 440-2 Avenue SW
Calgary, Alberta T2P 5E9
Daming Yang, Director and President 2,473,750(3) 12.35%(3) 12.35%
2080, 440-2 Avenue SW
Calgary, Alberta T2P 5E9
Thomas Milne 275,200(4) 1.40%(4) 1.26%
2080, 440-2 Avenue SW
Calgary, Alberta T2P 5E9
Ian Aaron 100,000(5) 0.51%(5) 0.51%
7th Floor, 2901 West Alameda Avenue
Burbank, CA 91505
John Brooks 100,000(5) 0.51%(5) 0.51%
16650 Chesterfield Grove Road
Chesterfield, MO 63005
Richard Hurwitz 200,000(6) 1.02%(6) 0.51%
370-1610 des peres Road
St. Louis, MO 63131-1850
Barry Mackie 300,000(5) 1.52%(5) 1.52%
16680 - 85A Avenue
Surrey, BC V4N 5A7
Richard Lam 100,000(5) 0.51%(5) 0.51%
4 Ayrmont Lane
Aberdeen, New Jersey 07747
51
Teddy Yung 200,000(5) 1.02%(5) 1.02%
Apartment 3C
136-35 Maple Avenue
Flushing, New York 11355
5% SHAREHOLDERS
Wei Yang 2,423,750(7) 12.13%(7) 12.13%
Room 837, China Merchant Building
Shenzhen, Guong Dong
China 518067
Kai Yang 2,023,750(8) 10.34%(8) 10.34%
1002 Building C, Huiyuan Apart.
Asia Game Village
Beijing
China 100101
SoftNet, Inc. 1,133,000 5.82% 5.82%
225-650 Townsend Street
San Francisco, CA 94103
OFFICERS AND DIRECTORS AS A GROUP 6,222,700(9) 28.64%(9) 28.60%
<FN>
(1) Based on 19,474,517 issued and outstanding shares of common stock at March
30, 2001.[
(2) Includes 1,923,750 shares of common stock and options exercisable within 60
days of March 30, 2001 to acquire 550,000 shares of common stock.
(3) Includes 1,923,750 shares of common stock and options exercisable within 60
days of March 30, 2001 to acquire 550,000 shares of common stock.
(4) Includes 25,200 shares of common stock of which 10,000 shares are owned by
Precise Details, Inc., a company over which Mr. Milne has control, 10,000
shares owned directly by Mr. Milne and 5,000 shares owned by Mr. Milne
indirectly through his spouse; and options exercisable within 60 days of
March 30, 2001 to acquire 250,000 shares of common stock.
(5) Consisting of options exercisable within 60 days of March 30, 2001 to
acquire common stock.
(6) Includes 100,000 common shares and options exercisable within 60 days of
March 31, 2001.
(7) Includes 1,923,750 shares of common stock and options exercisable within 60
days of March 30, 2001 to acquire 500,000 shares of common stock.
(8) Includes 1,923,750 shares of common stock and options exercisable within 60
days of March 30, 2001 to acquire 100,000 shares of common stock.
(9) Includes 3,972,700 shares of common stock and 2,250,000 shares of common
stock acquirable upon exercise of options within 60 days of March 30, 2001.
</FN>
TAXATION
The following discussion describes the material United States federal
income tax consequences of the ownership of common shares of China Broadband
Corp. by an investor that purchases and holds them as capital assets.
The discussion does not address any aspects of United States taxation
other than federal income taxation. Prospective investors are urged to consult
their tax advisors regarding the United States federal, state and local tax
consequences of the purchase, holding or disposal of common shares.
52
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
The discussion below is based on the Internal Revenue Code of 1986, as
amended, its legislative history, Treasury Regulations and published judicial
and administrative interpretations, all as in effect on the date hereof and all
of which are subject to change, possibly retroactively. The tax treatment of a
holder of common shares may vary depending upon the holder's particular
situation. This discussion does not address all of the tax consequences relating
to the ownership of the common shares, and does not take into account holders
subject to special rules including, but not limited to, dealers in securities or
currencies, financial institutions, tax-exempt entities, banks, life insurance
companies, traders in securities that elect to mark-to-market their securities,
persons that hold common shares as a part of a straddle or a hedging, or
conversion transaction, persons liable for the alternative minimum tax, persons
that actually or constructively own 10% or more of our voting stock, or persons
whose "functional currency" is not the U.S. dollar. In addition, the following
discussion is limited to United States holders who will hold the common shares
as capital assets within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended.
A United States holder is a holder of common shares that is an
individual who is a citizen or resident of the United States, a partnership,
corporation or other entity organized in or under the laws of the United States
or any political subdivision thereof (unless, in the case of a partnership,
Treasury Regulations otherwise provide), an estate that is subject to United
States federal income taxation without regard to the source of its income or a
trust subject to the primary supervision of a United States court and the
control of one or more United States persons.
The discussion below does not address the effect of any state or local
tax law on a holder of the common shares.
DISTRIBUTIONS
The gross amount of a distribution (including a deemed or constructive
distribution) with respect to the common shares will be treated as a dividend
taxable as ordinary income on the date of receipt, to the extent of our current
or accumulated earnings and profits as determined for United States federal
income tax purposes. Distributions, if any, in excess of these current and
accumulated earnings and profits will first constitute a non-taxable return of
capital to the extent thereof, and then a capital gain realized on the
disposition of the common shares. The portion of any distribution treated as a
non-taxable return of capital will reduce a holder's tax basis in the common
shares. Corporate United States holders will be eligible for the dividends
received deduction allowed for distributions to domestic corporations,
multiplied by the relevant percentage based on their percentage shareholding.
If a distribution is paid with respect to the common shares in any
currency other than U.S. dollars, the amount of the distribution will be
translated into U.S. dollars at the spot rate on the date the distributions are
paid or deemed paid to a United States holder, regardless of whether the
distributions are in fact converted on that date. Any subsequent gain or loss in
respect of that non-US currency arising from exchange rate fluctuations will be
ordinary income or loss.
CAPITAL GAINS AND LOSSES
A United States holder will generally recognize gain or loss on the
sale or other disposition of common shares in an amount equal to the difference
between the amount realized on the sale or other disposition and the holder's
adjusted tax basis in the common shares. This will result in a long-term or
short-term capital gain or loss, depending on whether the common shares have
been held for more than one year. The deductibility of capital losses may be
subject to limitation.
CHINESE TAXATION
The following is a summary of the material income tax provisions,
including withholding provisions, to which the China Broadband companies are
subject under existing Chinese laws and regulations. The summary is
53
subject to changes in Chinese law, including changes that could have a
retroactive effect. The China Broadband group is currently looking at ways to
restructure the tax affairs so as to minimize the foreign taxes payable.
There are no Chinese taxes that would be levied directly on a
shareholder of China Broadband Corp. on the disposition of shares of China
Broadband Corp.
The income earned by subsidiaries of China Broadband operating in
China, in the form of Chinese-foreign cooperative joint ventures, is subject to
Chinese tax at a general rate of 33%. Certain operations may qualify for a
reduction in Chinese taxes under certain regional tax incentives. Further, China
levies a 20% withholding tax on profit allocations (i.e. dividends) received
from Chinese-foreign cooperative joint ventures operations - however, a
temporary exemption from this withholding tax has been granted to foreign
investors. The Chinese-foreign cooperative joint ventures entered into by the
China Broadband group typically have a fixed lifespan of 15 to 20 years. Upon
the termination of the joint ventures, proceeds on liquidation received by China
Broadband or its subsidiaries will be regarded as dividends for Chinese tax
purposes, and therefore (under the current exemption) not be subject to Chinese
withholding taxes. There is no indication as to when the exemption will fall
away. Should the exemption fall away, the proceeds on liquidation will be
subject to the 20% withholding tax on dividends. Should China Broadband's
interest in the joint ventures be transferred or realized prior to the
termination of the joint venture, any capital gains derived on the transfer or
realization will be subject to 20% Chinese tax on capital gains.
For U.S. tax purposes, the Chinese taxes payable on China Broadband's
portion of the joint venture income and dividends are eligible for credit
against U.S. taxes imposed on China Broadband Corp. in respect of dividends
distributed by the joint ventures, subject to certain general limitations."
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 50,000,000 shares of common stock, $0.001
par value per share. The following is a summary of provisions of the common
stock.
COMMON STOCK
As of March 30, 2001, we were authorized to issue 50,000,000 shares of
common stock, of which 19,474,517 shares were issued and outstanding held of
record by 84 shareholders. This public offering consists solely of shares of
common stock being resold by selling shareholders. Therefore, this offering will
not affect the total number of shares of common stock issued and outstanding.
A quorum for a general meeting of shareholders is one shareholder
entitled to attend and vote at the meeting who may be represented by proxy and
other proper authority, holding at least a majority of the outstanding shares of
common stock. Holders of shares of common stock are entitled to one vote per
share on all matters to be voted on by the shareholders. Action by the
shareholders requires a vote by holders of a majority of the shareholders
present, in person or by proxy, at a meeting of the shareholders. The holders of
shares of common stock are entitled to receive any dividends the board of
directors declares out of funds legally available for the payment of dividends.
There are no limitations on the payment of dividends.
In addition, there are no pre-emptive rights, no subscription rights,
no sinking fund provisions, no conversion rights, no redemption provisions, no
voting as a class, and no restrictions on alienability relating to the shares of
common stock and none of the shares of common stock carry any liability for
further calls. There are no provisions discriminating against any existing or
prospective holder of common stock as a result of such shareholder owning a
substantial amount of securities.
Upon any liquidation, dissolution, or winding up of our business, if
any, after payment or provision for payment of all of our debts, obligations, or
liabilities, the proceeds will be distributed to the holders of shares of common
stock.
The rights of holders of shares of common stock may not be modified
other than by vote of majority of the shares of common stock voting on the
modification. Because a quorum for a general meeting of shareholders can exist
with less than all of the shareholders (or proxyholders) personally present at a
meeting of the shareholders, the
54
rights of holders of shares of common stock may be modified by less than a
majority of the issued shares of common stock.
There are no change of control provisions contained in our articles of
incorporation or bylaws.
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON STOCK AND RELATED STOCKHOLDER
MATERIALS
Our common stock, par value $.001 per share (the "Common Stock"), is
traded in the over-the-counter market and is quoted on the National Association
of Securities Dealers Over-the-Counter Bulletin Board ("NASDAQ-OTC-BB"), under
the symbol "CBBD".
2000 HIGH LOW
Third Quarter (September 25 through September 30, $10.00 $7.00
2000)
Fourth Quarter $9.50 $4.19
2001
First Quarter (January 1, 2001 through March 30, $6.50 $3.06
2001)
Quotations commenced on the NASDAQ-OTC-BB on September 25, 2000. These
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
The price of our common stock on the NASDAQ-OTC-BB on December 29, 2000
was $7.00. On March 30, 2001, the price of our common stock on the NASDAQ-OTC-BB
was $3.25.
We have never paid dividends on our common shares. We do not anticipate
paying any dividends in the foreseeable future.
As of March 30, 2001 we had 84 shareholders of record.
ANTI-TAKEOVER EFFECTS OF CHARTER AND BYLAWS PROVISIONS AND THE NEVADA
BUSINESS CORPORATION ACT
Nevada law provides that any agreement providing for the merger,
consolidation or sale of all or substantially all of the assets of a corporation
be approved by the owners of at least the majority of the outstanding shares of
that corporation, unless a different vote is provided for in our articles of
incorporation. Our articles of incorporation do not provide for a super-majority
voting requirement in order to approve any such transactions. Nevada law also
gives appraisal rights for some mergers, plans of reorganization, or exchanges
or sales of all or substantially all of the assets of a corporation. Under
Nevada law, a shareholder does not have the right to dissent with respect to:
o a sale of assets or reorganization, or
o any plan of merger or any plan of exchange, if the shares held by
the shareholder are part of a class of shares which are listed on a
national securities exchange or the Nasdaq National Market Systems,
or are held of record by note less than 2,000 shareholders, and the
shareholder is not required to accept for his shares any
consideration other than shares of a corporation that, immediately
after the effective time of the merger or exchange, will be part of
a class of shares which are listed on a national securities exchange
or the Nasdaq National Market System, or are held of record by not
less than 2,000 holders.
The Nevada Private Corporation Law also has three provisions designed
to deter take-over attempts:
55
Control Share Acquisition Program. Under Nevada law, when a person has
acquired or offers to acquire one-fifth, one-third or a majority of the stock of
a corporation, a shareholders meeting must be held after delivery of an
"offerors" statement, at the offerors expense, so that the shareholders of the
corporation can vote on whether the shares proposed to be acquired can exercise
voting rights. Except as otherwise provided in a corporation's article of
incorporation, the approval of the majority of the outstanding stock not held by
the offerors is required so that the stock held by the offerors will have voting
rights. The control share acquisition provisions are applicable to any
acquisition of a controlling interest, unless the articles of incorporation or
by-laws of a corporation in effect on the tenth day following the acquisition of
a controlling interest by an acquiring person provides that the control share
acquisition provisions do not apply. We have not elected out of the control
share acquisition provisions of Nevada law.
Combination Moratorium Provision. Nevada law provides that a
corporation may not engage in any "combinations," which is broadly defined to
include mergers, sales and leases of assets, issuances of securities and similar
transactions with an "interested stockholder," which is defined as the
beneficial owner of 10% or more of the voting power of the corporation, and
affiliates of their associates for three years after an interested shareholder's
date of acquiring the shares, unless the combination or the purchase of the
shares by the interested shareholder is first approved by the board of
directors. After the initial three-year period, any combination must still be
approved by a majority of the voting power not beneficially owned by the
interested shareholder or the interested shareholders affiliates or associates,
unless the aggregate amount of cash and the market value of the consideration
other than cash that could be received by shareholders as a result of the
combination is at least equal to the highest of the highest bid per share of
each class or series of shares, including the common shares, on the date of the
announcement of the combination or on the date the interested shareholder
acquired the shares, or for holders of preferred stock, the highest liquidation
value of the preferred stock.
Other Provisions. Under Nevada law, the selection of a period for
achieving corporate goals is the responsibility of the directors. In addition,
the directors and officers, in exercising their respective powers with a view to
the interest of the corporation may consider the interest of the corporation's
employees, suppliers, credits and customers, the economy of the state and the
nation, the interest of the economy and of society and the long-term, as well as
short-term, interests of the corporation and its shareholders, including the
possibility that those interest may be best served by the continued independence
of the corporation. The directors may also resist any change or potential change
of control of the corporation if the directors, by majority vote of a quorum,
determine that a change or potential change is opposed to or not in the best
interest of the corporation "upon consideration of the interest of the
corporation's shareholders," or for one of the other reasons described above.
The directors may also take action to protect the interests of the corporation's
shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent for our shares of common stock is:
Interwest Transfer Co., Inc.
1981 East 4800 South, Suite 100
Salt Lake City, UT. 84117
Phone (801) 272-9294
Fax (801) 277-3147
Our registered agent is:
Michael J. Morrison
1495 Ridgeview Drive
Reno, Nevada 89509
Phone (775) 827-6300
SHARES ELIGIBLE FOR FUTURE SALE
There are 19,474,517 shares of our common stock outstanding as of March
30, 2001, of which 1,509,850 are freely tradable. Subject to the registration
statement being declared and remaining effective, 6,706,667 issued
56
and outstanding shares and 200,790 shares acquirable upon the exercise of
warrants, all of which are offered for resale under this prospectus will be
immediately tradable without restriction or further registration under the
Securities Act.
We cannot predict as to the effect, if any, that sales of shares of
common stock by the selling shareholders, or even the availability of such
shares for sale, will have on the market prices of our common stock from time to
time. The possibility that substantial amounts of common stock may be sold in
the public market may adversely affect prevailing market prices for our common
stock and could impair our ability to raise capital through the sale of our
equity securities.
Subject to the provisions of Rule 144, 10,125,000 additional shares of
our common stock will be available for sale in the public markets on April 14,
2001; an additional 1,133,000 shares of our common stock will be available for
sale in the public markets on September 29, 2001
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
o 1% of the number of shares of common stock then outstanding, which
equals approximately 19,474 shares as of March 30, 2001; or
o the average weekly trading volume of the common stock on the OTC
Bulletin Board during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately.
As of March 30, 2001, options to purchase 5,325,000 shares of common
stock were issued and outstanding under our 2000 Stock Option Plan. We intend to
file a registration statement on Form S-8 to register all of the shares of
common stock reserved for issuance under our 2000 Stock Option Plan (including
shares subject to outstanding options). Accordingly, shares registered under
such registration statement are, subject to vesting provisions and Rule 144
volume limitations applicable to our affiliates, available for sale in the open
market.
PLAN OF DISTRIBUTION
We are registering the shares on behalf of the selling shareholders.
When we refer to selling shareholders, we intend to include donees and pledgees
selling shares received from a named selling shareholder after the date of this
prospectus. All costs, expenses and fees in connection with the registration of
the shares offered under this registration statement will be borne by us.
Brokerage commissions and similar selling expenses, if any, attributable to the
sale of shares will be borne by the selling shareholders. Sales of shares may be
effected by selling shareholders from time to time in one or more types of
transactions (which may include block transactions) in the over-the-counter
market, in negotiated transactions, through put or call options transactions
relating to the shares, through short sales of shares, or a combination of such
methods of sale, at market prices prevailing at the time of sale, or at
negotiated prices. Such transactions may or may not involve brokers or dealers.
The selling shareholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares by the selling shareholders.
The selling shareholders may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in
57
the form of discounts, concessions, or commissions from the selling shareholders
and/or purchasers of shares for whom such broker-dealers may act as agents or to
whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The selling shareholders and any broker-dealers that act in connection
with the sale of shares might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of shares sold by them while acting
as principals might be deemed to be underwriting discounts or commissions under
the Securities Act. We have agreed to indemnify each selling shareholder against
some liabilities arising under the Securities Act. The selling shareholders may
agree to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the shares against some liabilities arising
under the Securities Act.
Because selling shareholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the selling shareholders
will be subject to the prospectus delivery requirements of the Securities Act.
We have informed the selling shareholders that the anti-manipulative provisions
of Regulation M promulgated under the Exchange Act may apply to their sales in
the market.
Selling shareholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.
Upon being notified by a selling shareholder that any material
arrangement has been entered into with a broker-dealer for the sale of Shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, we will file a supplement to
this prospectus, if required, under Rule 424(b) of the Act, disclosing
o the name of each selling shareholder and of the participating
broker-dealer(s),
o the number of shares involved,
o the price at which the shares were sold,
o the commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable,
o that the broker-dealer(s) did not conduct any investigation to
verify information set out or incorporated by reference in this
prospectus; and
o other facts material to the transaction.
In addition, upon being notified by a selling shareholder that a donee
or pledgee intends to sell more than 500 shares, we will file a supplement to
this prospectus.
LEGAL MATTERS
Michael J. Morrison, Chartered, has acted as special counsel on matters
of Nevada law with respect to the legality of the shares offered by this
prospectus.
EXPERTS
The consolidated financial statements of China Broadband Corp. and the
financial statements of Big Sky Network Canada Ltd. included in this prospectus
and in the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports (which contain an explanatory
paragraph regarding our ability to continue as a going concern), herein and
elsewhere in the registration statement, and is included in reliance upon such
reports of such firm given upon the authority as experts in accounting and
auditing.
58
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 covering the shares being sold in this
offering. We have not included in this prospectus some information contained in
the registration statement, and you should refer to the registration statement,
including exhibits and schedules filed with the registration statement, for
further information. You may review a copy of the registration statement from
the public reference section of the Securities and Exchange Commission in Room
1024, Judiciary Plaza, 450 - 5th Street, N.W., Washington, D.C. 20549; and at
the SEC's Regional Office located at: 7 World Trade Center, Suite 1300, New
York, New York 10048 and 1400 Citicorp Center, 500 West Madison Street, Chicago,
IL 60661. You may also obtain copies of such materials at prescribed rates from
the public reference section at the Commission, Room 1024, Judiciary Plaza, 450
- - 5th Street, N.W., Washington, D.C. 20549. In addition, the Securities and
Exchange Commission maintains a Web site on the Internet at the address
http://www.sec.gov that contains reports, proxy information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission.
59
INDEX TO FINANCIAL STATEMENTS
Financial Statement LOCATION*
--------
China Broadband Corp.
Independent Auditors' Report F - 1
Consolidated Balance Sheets F - 2
Consolidated Statements of Operations F - 3
Consolidated Statement of Stockholders' Equity F - 4
Consolidated Statements of Cash Flows F - 5
Notes to Consolidated Financial Statements F - 6
Big Sky Network Canada, Ltd.
Independent Auditors' Report F - 25
Consolidated Balance Sheets F - 26
Consolidated Statements of Operations F - 27
Consolidated Statement of Stockholders' Equity F - 28
Consolidated Statements of Cash Flows F - 29
Notes to Consolidated Financial Statements F - 30
60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CHINA BROADBAND CORP.:
We have audited the consolidated balance sheet of CHINA BROADBAND CORP. (A
DEVELOPMENT STAGE ENTERPRISE) as of December 31, 2000 and the related
consolidated statement of operations, stockholders' equity and cash flows for
the period from February 1, 2000 (date of incorporation) to December 31, 2000.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether these
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, such consolidated financial
statements present fairly, in all material respects, the financial position of
the Corporation as of December 31, 2000 and the results of its operations and
its cash flows for the period from February 1, 2000 (date of incorporation) to
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. The Corporation is a
development stage enterprise engaged in providing high speed Internet, data and
voice services in The People's Republic of China. As discussed in Note 1 to the
financial statements, the Corporation's operating losses since inception raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
Calgary, Alberta, Canada /S/ DELOITTE & TOUCHE LLP
March 12, 2001 Chartered Accountants
F-1
- ---------------------------------------------------------------------------------------------------------------
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- ---------------------------------------------------------------------------------------------------------------
$
------------------
ASSETS
CURRENT
Cash and cash equivalents 4,668,128
Interest and Goods and Services Tax receivable 64,201
Prepaid expenses 117,119
------------------
4,849,448
Investment in Shekou joint venture (Notes 1 and 5) 2,482,018
Investment in Chengdu joint venture (Notes 1 and 5) 1,321,884
Property and equipment, net (Note 4) 220,799
Intangible assets:
Intellectual property (Note 3) 819,402
Shekou joint venture (Note 3) 2,421,788
Chengdu joint venture (Note 3) 4,843,575
Goodwill (Note 3) 2,046,031
------------------
19,004,945
==================
LIABILITIES
CURRENT
Accounts payable 250,840
Accrued liabilities -
Promissory note (Note 3) 1,700,000
------------------
1,950,840
------------------
CONTINUING OPERATIONS (Note 1)
COMMITMENTS (Note 11)
STOCKHOLDERS' EQUITY
Common stock
$0.001 par value, shares authorized: 50,000,000; 77,936
shares issued and outstanding: 19,474,517
Additional paid-in capital 20,631,344
Deferred compensation (57,995)
Accumulated deficit (3,597,180)
------------------
17,054,105
------------------
19,004,945
==================
The accompanying notes are an integral part of this consolidated financial
statement.
F-2
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- ---------------------------------------------------------------------------------------------------------------
$
------------------
REVENUE
Technical consulting (Note 10) 208,333
GENERAL AND ADMINISTRATIVE EXPENSES
(including non-cash stock compensation of $67,093) 3,685,398
------------------
(3,477,065)
EQUITY LOSS IN BIG SKY NETWORK CANADA LTD. (181,471)
EQUITY LOSS IN SHEKOU JOINT VENTURE (202,421)
EQUITY LOSS IN CHENGDU JOINT VENTURE (43,706)
INTEREST INCOME 307,483
------------------
NET LOSS AND DEFICIT, END OF PERIOD (3,597,180)
==================
LOSS PER SHARE
Basic and diluted (0.20)
==================
SHARES USED IN COMPUTATION, BASIC AND DILUTED 17,696,752
==================
The accompanying notes are an integral part of this consolidated financial
statement.
F-3
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- ----------------------------------------------------------------------------------------------------------------------------
Additional TOTAL
Common Stock Paid-in Deferred Accumulated STOCKHOLDERS'
Shares Amount Capital Compensation Deficit EQUITY
$ $ $ $ $
------------- -------------- --------------- ---------------- --------------- ----------------
Balance, 1,509,850 59,971 - - - 59,971
February 1, 2000 (Note 6)
Issue of common stock
for the outstanding shares
of China Broadband
(BVI) Corp. 13,500,000 13,500 696,529 - - 710,029
Stock issued pursuant to
private placement
agreements at $0.20 per
share 500,000 500 98,835 - - 99,335
Stock issued pursuant to
private placement
agreements at $1.00 per
share 1,530,000 1,530 1,518,289 - - 1,519,819
Stock issued pursuant to
private placement
agreements at $7.50 per
share 1,301,667 1,302 9,696,236 - - 9,697,538
Acquisition of the shares
of Big Sky Network
Canada Ltd. 1,133,000 1,133 8,496,367 - - 8,497,500
Issuance of warrants - - 44,472 - - 44,472
Non-cash compensation - - 15,235 - - 15,235
Deferred compensation - - 65,381 (65,381) - -
Amortization of deferred
compensation - - - 7,386 - 7,386
Net loss - - - - (3,597,180) (3,597,180)
------------- -------------- --------------- ---------------- --------------- ----------------
Balance,
December 31, 2000 19,474,517 77,936 20,631,344 (57,995) (3,597,180) 17,054,105
============= ============== =============== ================ =============== ================
The accompanying notes are an integral part of this consolidated financial
statement.
F-4
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- ---------------------------------------------------------------------------------------------------------------
$
------------------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net loss (3,597,180)
Adjustments for:
Amortization 579,013
Equity loss in Big Sky Network Canada Ltd. 181,471
Equity loss in Shekou joint venture 202,421
Equity loss in Chengdu joint venture 43,706
Non-cash stock compensation 67,093
------------------
(2,523,476)
Changes in operating assets and liabilities
Interest and Goods and Services Tax receivable (64,201)
Prepaid expenses (117,119)
Accounts payable (402,958)
------------------
(3,107,754)
------------------
FINANCING
Issue of common stock for cash (net of issuance costs) 11,816,692
------------------
INVESTING
Purchases of property and equipment (279,392)
Acquisition of Big Sky Network Canada Ltd. (net of cash acquired) (2,395,828)
Investment in Chengdu joint venture (1,365,590)
------------------
(4,040,810)
NET INCREASE IN CASH AND
CASH EQUIVALENTS, END OF PERIOD 4,668,128
==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes -
==================
Cash paid for interest -
==================
The accompanying notes are an integral part of this consolidated financial
statement.
F-5
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS
INCORPORATION AND BACKGROUND
China Broadband Corp. (the "Corporation") was incorporated in Nevada in
February 1993 under the name "Institute for Counselling, Inc." On April
27, 2000, Institute for Counselling, Inc. changed its name to China
Broadband Corp. The Corporation is a development stage enterprise and
is seeking to become a leading facilities based provider of high
capacity, high-speed Internet and data services in major urban markets
throughout The People's Republic of China (the "PRC"). The Corporation
was incorporated for the purposes of implementing a business strategy
involving joint ventures to provide high-speed Internet broadband
services in major urban markets through the PRC.
On April 14, 2000, the Corporation, a public shell company, acquired
China Broadband (BVI) Corp. ("CBB - BVI") through a reverse
acquisition, which was accounted for as a recapitalization. This
recapitalization was effected through the issuance of 13,500,000 common
shares of the Corporation, constituting approximately 90% of its shares
outstanding after the acquisition, in exchange for all of the
outstanding shares of CBB - BVI.
As a result of the application of the accounting principles governing
recapitalization, CBB - BVI (incorporated on February 1, 2000) is
treated as the acquiring or continuing entity for financial accounting
purposes.
The recapitalization of CBB - BVI was affected through the issuance of
stock by CBB - BVI in exchange for the acquisition of the tangible net
assets of the Corporation at fair value, which approximates the
Corporation's net assets historical costs. As a result, the
consolidated financial statements will be deemed to be a continuation
of CBB - BVI's historical financial statements.
F-6
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
INVESTMENT IN BIG SKY NETWORK CANADA LTD.
CBB - BVI acquired 50,000 shares representing all of the outstanding
shares of Big Sky Network Ltd. ("BSN"), a company incorporated under
the laws of the territory of the British Virgin Islands from officers,
directors and persons related to the officers and directors for
12,500,000 common shares of CBB - BVI. CBB - BVI was incorporated for
the purpose of acquiring the shares of BSN. BSN did not have any
substantial operations prior to February 1, 2000. This transaction was
accounted for as a recapitalization of BSN. This recapitalization was
effected through the issuance of 12,500,000 common shares of CBB - BVI
constituting all of its issued and outstanding shares.
On February 22, 2000, BSN issued an additional 10,000 shares to a third
party for cash consideration of $500,000. As the Corporation controlled
BSN, the financial statements of the Corporation included the accounts
of BSN. On April 25, 2000, BSN issued a further 40,000 shares to the
third party for cash consideration of $2,000,000. As a result of the
April 25, 2000 transaction, the Corporation no longer controlled BSN
and therefore for the period from April 26, 2000 to September 28, 2000,
the Corporation's investment in BSN is accounted for using the equity
method. On September 29, 2000, the Corporation purchased the shares of
BSN held by the third party (see Note 3).
BSN signed a joint venture agreement on September 21, 1999 with China
Merchants Shekou Industrial Zone, Ltd. ("China Merchants") to establish
Shenzhen China Merchants Big Sky Network Ltd. ("Shekou JV"), the
purpose of which is to provide Internet access to Chinese residential
and business customers through the existing cable television
infrastructure. Under the terms of the joint venture agreement, China
Merchants agreed to provide all the non-broadcast rights on the cable
network of a cable television station controlled by China Merchants.
BSN is required to contribute a total of $3,000,000 to the Shekou JV as
cash or equipment. BSN is also responsible for providing technical
support to the Shekou JV. Over the Shenzhen JV's 15 year duration, BSN
will be entitled to receive 60% of the profits earned between 2000 and
2004, 50% of the profits earned between 2005 and 2009 and 40% of the
profits earned between 2010 and 2014. BSN is entitled to appoint four
of the seven directors on the Board of Directors of the Shekou JV for
the first five years of its operations and is thereafter, entitled to
appoint three of the seven directors.
F-7
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
INVESTMENT IN BIG SKY NETWORK CANADA LTD. (CONTINUED)
On July 8, 2000, BSN signed a joint venture agreement with Chengdu
Huayu Information Industry Co., Ltd. ("Chengdu Huayu") to establish
Sichuan Huaya Big Sky Network Ltd. ("Chengdu JV"), the purpose of which
is to develop an advanced broadband software and hardware platform for
data transmission and Internet related business in the Chengdu area.
Under the terms of the joint venture agreement, Chengdu Huayu agreed to
provide the entire software and hardware data transmission platform of
its Huaya HFC network and the rights to use all of its facilities and
equipment. BSN is required to contribute a maximum of $5,500,000 to the
Chengdu JV in cash or equipment. Over the Chengdu JV's 20 year term,
BSN will be entitled to receive 65% of the profits earned between 2001
and 2007, 50% of the profits between 2008 and 2013 and 35% of the
profits earned between 2014 and 2020. BSN is entitled to appoint four
of the seven Board of Directors of the Chengdu JV for the first seven
years of its operations and is thereafter entitled to appoint three of
the seven directors.
On November 25, 2000, BSN signed a joint venture agreement with Deyang
Guangshi Network Development Ltd. ("Deyang Guangshi") to establish
Deyang Guangshi Big Sky Ltd. ("Deyang JV"), to act as the exclusive
Internet service provider and to develop an advanced broadband software
and hardware platform for data transmission and Internet related
business in the Deyang area. Under the terms of the joint venture
agreement, Deyang Guangshi agreed to provide the entire software and
hardware data transmission platform of its Deyang HFC network and the
rights to use all of its facilities and equipment. BSN is required to
contribute $4,500,000 to the Deyang JV in cash or equipment staged over
the life of the agreement. Over the Deyang JV's 20 year term, BSN will
be entitled to receive 80% of the profits earned between 2001 and 2005,
60% of the profits between 2006 and 2010, 50% of the profits earned
between 2011 and 2015, and 40% of the profits earned between 2016 and
2020. BSN is entitled to appoint four of the seven Board of Directors
of the Deyang JV for the first ten years of its operations and is
thereafter entitled to appoint three of the seven directors.
F-8
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
INVESTMENT IN BIG SKY NETWORK CANADA LTD. (CONTINUED)
The joint venture contracts for Shekou, Chengdu and Deyang contemplate
that the business will be turned over to the Chinese joint venture
partner at the end of the contract term. The Corporation anticipates
that it will be able to renegotiate an extension of the contracts at
some point in the life of the contract but does not rely on any
extension of the contract to meet its long-term goals. Each joint
venture contract is structured to recapture our investment and be
profitable in its first five years. The Shekou joint venture is the
test case of the concept to show that Internet over cable TV
architecture is feasible and can be profitable within the PRC. Shekou
was chosen as the first location as it is a concentrated, business
oriented area, run by the PRC's oldest bank, China Merchants Group. The
successful Shekou JV deployment will be rolled out to other locations
in the PRC with greater population bases and cable TV subscriber bases,
such as Chengdu. The Corporation was able to negotiate a higher earning
interest in Chengdu and even greater interest in Deyang.
CONTINUING OPERATIONS
The Corporation's operations may be adversely affected by significant
political, economic and social uncertainties in the PRC. Although the
government of the PRC has been pursuing economic reform policies, no
assurance can be given that it will continue to pursue such policies or
that such policies may not be significantly altered, especially in the
event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRC's political, economic and
social conditions. There is also no guarantee that the pursuit of
economic reforms by the government of the PRC will be consistent or
effective.
The PRC has recently enacted new laws and regulations governing
Internet access and the provision of online business, economic and
financial information. Current or proposed laws aimed at limiting the
use of online services could, depending upon interpretation and
application, result in significant uncertainty to the Corporation,
additional costs and technological challenges in order to comply with
any statutory or regulatory requirements imposed by such legislation.
Additional legislation and regulations that may be enacted by the
government of the PRC could have an adverse effect on the Corporation's
business, financial condition and results of operations.
F-9
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
CONTINUING OPERATIONS (CONTINUED)
The success of the Corporation will depend on the acceptance of
broadband Internet services, which remains unproven in the PRC. The
Corporation may not be able to attract and retain subscribers, or it
may face intense competition, which could have an adverse effect on the
Corporation's business, financial condition and results of operations.
The Corporation's Shekou JV's services were launched on June 30, 2000.
The services in Chengdu were launched on October 26, 2000 and had
connected a small number of subscribers by year end. The Corporation is
currently expanding its subscriber base in the Shekou Industrial Zone
and Chengdu. Services in Deyang will commence when the Ministry of
Information Industries' approval is received.
PRC legal restrictions permit payment of dividends by a sino-foreign
joint venture only out of its net income, if any, determined in
accordance with PRC accounting standards and regulations. Under PRC
law, a sino-foreign joint venture will also be required to set aside a
portion of its net income each year to fund certain reserve funds.
These reserves are not distributable as cash dividends. If the
Corporation does not receive distributions from the joint ventures or
if the joint ventures are not profitable, the Corporation may be unable
to meet its financial obligations or to continue as a going concern.
Substantially all of the Corporation's revenues and operating expenses
will be denominated in the Chinese Renminbi, which is currently freely
convertible, however, there can be no assurance that this will continue
or that the ability to purchase or retain foreign currencies will
continue in the future.
These consolidated financial statements have been prepared on a going
concern basis. The Corporation's ability to continue as a going concern
is dependent upon its ability to generate profitable operations in the
future and to obtain the necessary financing to meet its obligations
and repay its liabilities arising from normal business operations when
they come due. The outcome of these matters cannot be predicted with
any certainty at this time. These consolidated financial statements do
not include any adjustments to the amounts and classification of assets
and liabilities that may be necessary should the Corporation be unable
to continue as a going concern.
F-10
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
CONTINUING OPERATIONS (CONTINUED)
Management anticipates that the Corporation currently has sufficient
working capital to fund the Corporation's plan of operation through the
year ended December 31, 2001. The Corporation's costs to fund its plan
of operation for the fiscal year ending December 31, 2001 is expected
to increase (primarily for salaries, travel, office and other similar
expenses). The working capital is intended to fund the business
operations of BSN, including funding the capital requirements of new
and existing joint ventures, funding additional technical, management
and marketing/sales personnel and funding comprehensive joint venture
marketing and promotional programs to increase market awareness and
subscription sales. Management believes that additional funding will be
required to fund the implementation of BSN's business of entering into
joint ventures.
FINANCIAL STATEMENTS ESTIMATES
The consolidated operations of the Corporation requires cash of
$125,000 to $150,000 per month to operate in the PRC and in Canada. The
operating cash break even for the facilities in Shekou and Chengdu is
estimated by the Corporation to be the equivalent of 3,000 to 3,500
subscribers at present pricing structures. The Corporation is in
discussions with various equipment suppliers for vendor financing or
lease packages for capital equipment. The Corporation has been offered
vendor financing for cable modems, with further discussions to take
place. No agreements have been signed. In the PRC, consumers cannot
lease cable modems so must purchase them outright. Consequently, if the
Corporation can conclude a lease financing for cable modems, a
significant positive cash flow will result from leasing to acquire and
selling for cash to customers in China. However, failing any new debt
or equity financing, the Corporation could continue the Shekou and
Chengdu joint ventures as they are and inaugurate the Deyang joint
venture (see Note 1) with existing capital and modest growth in the
subscriber base. Other low cost value added services will be added to
the revenue mix with minimal capital requirements, primarily by
outsourcing to a variety of potential partners seeking access to the
Chinese market.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Such estimates include the
allowance for potentially uncollectible accounts receivable and a
valuation allowance for deferred tax assets. Actual results could
differ from those estimates.
F-11
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
These consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, CBB - BVI. The equity
method of accounting is used for companies in which the Corporation has
significant influence; generally this represents common stock ownership
of at least 20% and not more than 50%. BSN was accounted for as a
majority-controlled subsidiary until April 25, 2000. For the period
April 26, 2000 to September 28, 2000, BSN is accounted for using the
equity method. For the period September 29 to September 30, 2000, BSN
is accounted for as a wholly-owned subsidiary (see Note 1). All
material inter-company accounts and transactions have been eliminated.
CASH EQUIVALENTS
The Corporation considers all highly liquid debt instruments with
maturities at the date of purchase of three months or less to be cash
equivalents.
INVESTMENT IN JOINT VENTURES
The joint ventures in Shekou, Chengdu and Deyang are accounted for
under the equity method of accounting.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the declining balance method as follows:
Furniture and fixtures 20%
Computer hardware 30%
Amortization of leasehold improvements and assets recorded under
capital lease agreements are computed using the straight-line method
over the shorter of the lease term or the estimated useful lives of the
related assets.
F-12
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill will be provided using the straight line
method over the estimated useful life of five years. Acquired
intangible assets consist of intellectual property, Shekou joint
venture and the Chengdu joint venture, and are amortized using the
straight line method over estimated useful lives ranging from five to
seven years.
LONG-LIVED ASSETS
The carrying value of long-lived assets, include goodwill, is evaluated
whenever events or changes in circumstances indicate that the carrying
value of the asset may be impaired. An impairment loss is recognized
when estimated undiscounted future cash flows expected to result from
the use of the asset including disposition, is less than the carrying
value of the asset.
INCOME TAXES
The Corporation accounts for income taxes under an asset and liability
approach. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, and operating loss and tax credit carryforwards
measured by applying currently enacted tax laws. Valuation allowances
are provided when necessary to reduce net deferred tax assets to an
amount that is more likely than not to be realized.
REVENUE RECOGNITION
The Corporation recognizes revenue from consulting services rendered to
BSN on a ratable basis over the term of the services agreement.
The joint ventures derive revenue from sale and rental of cable modems,
monthly subscription fees and maintenance fees. Sales of cable modems
are recognized when the goods are delivered and title has passed.
F-13
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Corporation accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees". The
Corporation accounts for stock-based awards to non-employees in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation".
NET LOSS PER SHARE
Basic loss per share ("EPS") excludes dilution and is computed by
dividing net loss attributable to common stockholders by the weighted
average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (warrants to purchase common stock and
common stock options using the treasury stock method) were exercised or
converted into common stock. Potential common shares in the diluted EPS
computation are excluded in net loss periods as their effect would be
antidilutive.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which as subsequently amended by
SFAS No. 137 and 138, established accounting and reporting standards
requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair
value for fiscal quarters of fiscal years beginning after June 15,
2000. Management has determined that these statements will not have a
significant impact on the Corporation's consolidated financial
position, results of operations or cash flows.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin 101 ("SAB 101"), "Revenue
Recognition" to provide guidance on the recognition, presentation and
disclosure of revenues in financial statements. Management believes
that the Corporation's revenue recognition policy is in compliance with
the provisions of SAB 101 and that the adoption of SAB 101 had no
material effect on the financial position or results of operations of
the Corporation.
F-14
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS (CONTINUED)
In March 2000, the FASB issued FASB Interpretation (FIN) No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." FIN
44 clarifies the application of Accounting Principles Board Opinion No.
25 for certain issues relating to stock compensation. FIN 44 is
effective July 1, 2000, but certain conclusions in it cover specific
events that occur after either December 15, 1998, or January 12, 2000.
To the extent that FIN 44 covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective
date of July 1, 2000, the effects of applying FIN 44 are recognized on
a prospective basis from July 1, 2000. The adoption of FIN 44 by the
Corporation had no material effect on the financial position or results
of operations of the Corporation.
3. ACQUISITION OF BIG SKY NETWORK CANADA LTD.
On September 29, 2000, the Corporation closed a common stock purchase
agreement to buy 50,000 common shares of BSN, increasing its ownership
to 100% of BSN. The acquisition was accounted for as a purchase. The
purchase price was U.S. $12.7 million, consisting of $2.5 million cash,
$1.7 million promissory note and 1,133,000 common shares of the
Corporation valued at the fair market value of the common shares of
$8,497,500. The purchase price has been allocated as follows:
-----------------
$
-----------------
Assets acquired, excluding cash
Net working capital deficiency (742,327)
Investment in Shekou joint venture 2,684,438
Intellectual property 849,750
Chengdu joint venture 5,098,500
Shekou joint venture 2,549,250
Goodwill 2,153,717
-----------------
12,593,328
Cash acquired 104,172
-----------------
Net assets acquired 12,697,500
=================
F-15
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
3. ACQUISITION OF BIG SKY NETWORK CANADA LTD. (CONTINUED)
The promissory note bears interest at 8% per annum and is payable at
maturity. The principal is due on September 29, 2001.
The values ascribed to the acquired intangibles including intellectual
property, Shekou joint venture and Chengdu joint venture were based on
an estimation of fair value. The Shekou joint venture and Chengdu joint
venture intangibles represent government approved contracts to provide
Internet services in the PRC. The Corporation is reviewing the
valuation of the assets acquired and adjustments may be made to the
values ascribed above.
The Corporation incurred a fee under the agency agreement (see Note 11)
in connection with this transaction. The fee was comprised of $253,950
of cash and 50,790 warrants exchangeable to common shares on payment of
$7.50 per share. The fair value of the warrants of $44,472 and cash
consideration of $253,950 was expensed in 2000.
The results of operations of BSN for the period from September 29 to
December 31, 2000 have been included in the consolidated statement of
operations.
Supplemental unaudited pro forma information as though the companies
had combined at the beginning of the period through June 30, 2000 is as
follows:
-----------------
$
-----------------
Net loss (1,309,820)
=================
Basic and diluted loss per share (0.08)
=================
4. PROPERTY AND EQUIPMENT
Property and equipment consist of:
-----------------
$
-----------------
Furniture and fixtures 145,855
Computer hardware 81,245
Leasehold improvements 52,292
-----------------
279,392
Accumulated amortization (58,593)
-----------------
220,799
=================
F-16
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
5. INVESTMENT IN JOINT VENTURES
As discussed in Note 1, BSN participates in both the Shekou JV and the
Chengdu JV.
Summarized financial information for the Shekou JV is as follows:
-----------------
$
-----------------
Current assets 1,859,728
Other assets 684,729
-----------------
Total assets 2,544,457
=================
Current liabilities 159,611
Capital 2,384,846
-----------------
Total liabilities and capital 2,544,457
=================
Net loss (615,734)
=================
Summarized financial information for the Chengdu JV is as follows:
-----------------
$
-----------------
Current assets 780,654
Other assets 155,314
-----------------
Total assets 935,968
=================
Current liabilities 3,989
Capital 931,979
-----------------
Total liabilities and capital 935,968
=================
Net loss (67,240)
=================
The services in Deyang have not commenced at December 31, 2000.
F-17
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
6. COMMON SHARES
On April 14, 2000, the Corporation completed a reverse split of its
common stock on a 0.65104-for-1 basis reducing its issued and
outstanding common stock to 1,509,850 (pre split- 2,319,000). The
reverse split has been recorded in these financial statements on a
retroactive basis.
The Corporation has issued the following shares in a series of private
placement agreements:
i) On April 14, 2000 the Corporation issued 500,000 common shares at
$0.20 per share for total proceeds of $100,000;
ii) On May 12, 2000 the Corporation issued 1,530,000 common shares at
$1.00 per share for total proceeds of $1,530,000; and
iii) On May 12, 2000 the Corporation issued 1,301,667 common shares at
$7.50 per share for total proceeds of $9,762,503.
7. STOCK OPTION PLAN
The Board of Directors of the Corporation adopted the 2000 Stock Option
Plan (the "Plan") during April 2000. Under the Plan, the Corporation
has reserved 8,000,000 common shares for issuance under options granted
to eligible persons.
Under the Plan, options to purchase common shares may be granted to
employees, directors and certain consultants at prices not less than
the fair market value at date of grant for incentive stock options and
not less than 110% of fair market value for incentive stock options
where the employee who, at the time of grant, owns stock representing
more than 10% of the total combined voting power of all classes of
stock of the Corporation. These options expire three to five years from
the date of grant and may be fully exercisable immediately, or may be
exercisable according to a schedule or conditions specified by the
Board of Directors.
F-18
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
7. STOCK OPTION PLAN (CONTINUED)
Option activity under the Plan is as follows:
-----------------
Number of
Shares
-----------------
Outstanding, February 1, 2000 -
Granted (weighted average grant date fair value of $0.32 for
employee grants) 4,825,000
Cancelled (50,000)
-----------------
Outstanding, December 31, 2000 4,775,000
=================
Additional information regarding options outstanding as of December 31,
2000 is as follows:
Options Outstanding and Exercisable
-------------------------------- -------------------------------------------------------------------------------
Weighted Average Weighted
Remaining Average
Range of Number Contractual Life Exercise
Exercise Prices Outstanding (Years) Price
-------------------------------- -------------------- ------------------------------ ---------------------------
$1.00 4,125,000 4.3 $1.00
$7.50 650,000 2.8 $7.50
--------------------
$1.00 - $7.50 4,775,000 4.1 $1.88
====================
As discussed in Note 2, the Corporation accounts for its employee
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees and its Related Interpretations". Had compensation expense
been recognized based on the fair value of the options on the date they
were granted for employees, the Company's net income (loss) and net
income (loss) per common share would have been $(4,433,834) and $(0.25)
per share.
F-19
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
7. STOCK OPTION PLAN (CONTINUED)
The Company estimated the fair value of each option grant using the
Black-Scholes option pricing method while using the following weighted
average assumptions: expected life, 2.9 years from date of grant; stock
volatility, 50%; risk-free interest rate, 6.32%; and no dividends
during the expected term.
Compensation expense of $15,235 has been recognized in the consolidated
financial statements for non-employee stock option grants. No amounts
have been recognized for stock-based employee compensation awards.
8. WARRANTS
The Corporation has warrants to acquire common shares at December 31,
2000 as follows:
Number
of Exercise Expiry
Warrants Price Date
------------------ ---------- ------------------
50,790 $7.50 November, 2002
100,000 $7.50 April, 2002
50,000 $1.00 April, 2005
The 50,790 warrants were granted in connection with the agency
agreement (see Note 3).
The 100,000 warrants were granted for investor relation services. The
fair value of these warrants was $65,381 and is recorded as deferred
compensation and is being amortized over the term of the service
agreement being 18 months.
The remaining 50,000 warrants were granted to a consultant. The fair
value of these warrants was $351 and was expensed in 2000.
F-20
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
9. INCOME TAXES
The Corporation did not provide any current or deferred U.S. federal or
foreign income tax provision or benefit because it has experienced an
operating loss since inception. The Corporation is not liable for any
state taxes. The Corporation has provided a full valuation allowance on
the deferred tax asset, consisting primarily of a net operating loss,
because of uncertainty regarding its realizability.
At December 31, 2000, the Corporation had a net operating loss of
approximately $2,480,132 for U.S. federal purposes. Utilization of the
net operating loss, which begins to expire at various times starting in
2007, may be subject to certain limitations under Section 382 of the
Internal Revenue Code of 1986, as amended.
10. UNEARNED REVENUE
The Corporation received a $500,000 advance payment from BSN for
technical consulting services to be provided by the Corporation to BSN
over a 12 month period, commencing in May 2000 (see Note 1). As a
result of the acquisition (see Note 3), the remaining unearned revenue
of $291,667 is eliminated on consolidation.
11. COMMITMENTS
BSN has entered into an investment commitment for capital contributions
to the joint venture with Chengdu Huaya, located in the PRC. Future
maximum capital contributions are $5,500,000. To date, $1,365,590 has
been contributed to this joint venture. The remaining $4,134,410 is
required to be spent over the life of the joint venture, funded from
the cash flow of the joint venture.
BSN has also entered into an investment commitment for capital
contributions to the joint venture with Deyang Guangshi, located in the
PRC. Future maximum contributions are $4,500,000. No funds have been
contributed to this joint venture at December 31, 2000. The funding is
required to be spent over the life of the joint venture, funded from
the cash flow of the joint venture.
F-21
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
11. COMMITMENTS (CONTINUED)
On July 25, 2000, the Corporation entered into an agency agreement for
financial advisory services. The Corporation paid a commencement fee of
$200,000. As compensation for the services, the Corporation will pay
monthly advances of $5,000 for 12 months and a success fee, payable at
the conclusion of any transaction. A success fee would be payable in
respect of any a) acquisition of another company or assets, b) sale of
the Corporation or significant asset to a third party, c) additional
financing by way of debt, equity, vendor financing, leasing or
convertible securities, d) general corporate structuring, tax planning
or investor relations advisory work. The success fee would be
negotiated in advance based on the nature of the transaction, risk
factors, probability of success and convention in the market place for
like services for similar sized companies.
Net rent expense incurred under operating leases was $12,561 for the
period ended December 31, 2000.
Minimum lease payments under the Corporation's facility lease are as
follows for the years ending December 31:
---------------
$
---------------
2001 32,081
2002 32,081
2003 32,081
2004 32,081
2005 13,367
F-22
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
12. FINANCIAL INSTRUMENTS
Revenue from current and future operations in the PRC are denominated
in Chinese Renminbi ("RMB") and many of the Corporation's expenses are
denominated in U.S. dollars. The official exchange rate for the
conversion of RMB to U.S. dollars has been stable, with the RMB
increasing slightly in recent years. The Corporation does not expect to
use any foreign exchange hedges or derivative instruments in the near
future. The Corporation is exploring credit financing opportunities but
does not currently require any interest rate risk management, hedging
or derivative instruments.
Financial instruments which potentially subject the Corporation to
concentrations of credit risk consist primarily of cash and cash
equivalents. Cash and cash equivalents are held primarily with two
financial institutions and consist primarily of commercial paper and
cash in bank accounts.
The carrying amounts for cash and cash equivalents, interest and Goods
and Services Tax receivable, accounts payable, accrued liabilities, and
the promissory note are a reasonable estimate of their fair values.
13. SEGMENTED INFORMATION
The Corporation operates in one reportable segment: provider of high
capacity, high speed Internet, and data services in major urban markets
throughout the PRC. The business focus of the Corporation involves
investments in the joint ventures to provide these activities. As such,
these Internet activities are operated through the joint ventures and
are entirely in the PRC. It is not expected that commercial operations
will be carried on in any other country. The Corporation's
administrative and corporate activities are carried on in the United
States and Canada.
F-23
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM DATE OF INCORPORATION,
FEBRUARY 1, 2000 TO DECEMBER 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
14. SUBSEQUENT EVENTS
a) On February 2, 2001, the Corporation issued 550,000 stock options
under the 2000 Stock Option Plan (see Note 7). The options were
fully vested upon grant at an exercise price of $7.50 and expire in
three years. The fair value of the options relating to employee and
non-employee grants was $178,309 and $802,390, respectively.
b) On February 13, 2001, the Corporation announced that it had entered
into an agreement with a supplier to purchase equipment and services
relating to the Internet services provided by the joint ventures in
the PRC. Under the terms of the agreement, the Corporation has the
option of purchasing up to $250 million in equipment and services at
discounted prices over the five year term.
c) On March 8, 2001, BSN entered into a cooperative joint venture
agreement with Changsa Guang Da Television Broadcast Network Ltd.
("Changsa Guang Da") to provide Internet technology service in Hunan
Province, PRC. The agreement, subject to government approvals,
commits Changsa Guang Da to provide exclusive access to its HFC
network, facilities and frequencies to allow the joint venture to
provide Internet connectivity services to cable TV subscribers of
Changsa Guang Da. The contract duration is 18 years. BSN will
receive 65% of the net revenue during the first five years, 50% for
the next five years and 40% thereafter. Under the terms of the
agreement BSN is required to invest $18 million of capital and
equipment, staged over the life of the joint venture agreement.
F-24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
BIG SKY NETWORK CANADA LTD.:
We have audited the balance sheets of BIG SKY NETWORK CANADA LTD. (A DEVELOPMENT
STAGE ENTERPRISE) as of March 31, 2000 and December 31, 1999, and the related
statements of operations, shareholders' equity and cash flows for the three
months ended March 31, 2000 and the period from May 20, 1999 (date of
incorporation) to December 31, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, such financial statements present
fairly, in all material respects, the financial position of the Corporation as
of March 31, 2000 and December 31, 1999, and the results of its operations and
its cash flows for the three months ended March 31, 2000 and the period from May
20, 1999 (date of incorporation) to December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. The Corporation is a
development stage enterprise engaged in providing high speed internet, data and
voice services in The People's Republic of China. As discussed in Note 1 to the
financial statements, the Corporation's operating losses since inception raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
Calgary, Alberta, Canada /S/ DELOITTE & TOUCHE LLP
December 5, 2000 Chartered Accountants
F-25
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------------- ----------------- ------------------
2000 1999
$ $
----------------- ------------------
ASSET
Investment in Shekou joint venture (Note 1) 500,000 -
================= ==================
LIABILITY
CURRENT
Due to officers and directors (Note 5) 19,604 19,604
----------------- ------------------
CONTINUING OPERATIONS (Note 1)
COMMITMENTS (Note 1 and 8)
SHAREHOLDERS' EQUITY
Common shares
$1.00 par value, shares authorized: 100,000;
shares issued and outstanding: 60,000 10,000 -
Additional paid-in capital 490,000 -
Accumulated deficit (19,604) (19,604)
----------------- ------------------
480,396 (19,604)
----------------- ------------------
500,000 -
================= ==================
F-26
The accompanying notes are an integral part of these financial statements.
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- -------------------------------------------------------------- -------------------- ------------------- --------------------
Cumulative
Period From Period From
Date of Date of
Incorporation Incorporation,
May 20 May 20,
Three Month 1999 1999
Period Ended to to
March 31, December 31, March 31,
2000 1999 2000
$ $ $
-------------------- ------------------- --------------------
GENERAL AND ADMINISTRATIVE
EXPENSES - 19,604 19,604
-------------------- ------------------- --------------------
NET LOSS - (19,604) (19,604)
==================== =================== ====================
LOSS PER SHARE
Basic and diluted - (0.39)
==================== ===================
SHARES USED IN COMPUTATION,
BASIC AND DILUTED 55,889 50,000
==================== ===================
The accompanying notes are an integral part of these financial statements.
F27
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' EQUITY
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- -----------------------------------------------------------------------------------------------------------------------------
Additional TOTAL
Common Shares Paid-in Accumulated SHAREHOLDERS'
Number of Amount Capital Deficit EQUITY
Shares $ $ $ $
--------------- ------------- ------------------ --------------- -----------------
BALANCE, MAY 20, 1999 - - - - -
Issue of common shares to founding
shareholders 50,000 - - - -
NET LOSS - - - (19,604) (19,604)
--------------- ------------- ------------------ --------------- -----------------
BALANCE, DECEMBER 31, 1999 50,000 - - (19,604) (19,604)
Issue of common shares for cash 10,000 10,000 490,000 - 500,000
--------------- ------------- ------------------ --------------- -----------------
BALANCE, MARCH 31, 2000 60,000 10,000 490,000 (19,604) 480,396
=============== ============= ================== =============== =================
The accompanying notes are an integral part of these financial statements.
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- -------------------------------------------------------------- -------------------- ------------------- --------------------
Cumulative
Period From Period From
Date of Date of
Incorporation Incorporation,
May 20 May 20,
Three Month 1999 1999
Period Ended to to
March 31, December 31, March 31,
2000 1999 2000
$ $ $
-------------------- ------------------- --------------------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net loss - (19,604) (19,604)
Changes in operating assets and liabilities
Due to officers and directors - 19,604 19,604
-------------------- ------------------- --------------------
- - -
-------------------- ------------------- --------------------
FINANCING
Issue of common shares for cash 500,000 - 500,000
-------------------- ------------------- --------------------
INVESTING
Investment in Shekou joint venture (500,000) - (500,000)
-------------------- ------------------- --------------------
NET CASH FLOW - - -
==================== =================== ====================
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes - - -
==================== =================== ====================
Cash paid for interest - - -
==================== =================== ====================
The accompanying notes are an integral part of these financial statements.
F-29
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS
INCORPORATION AND BACKGROUND
Big Sky Network Canada Ltd. (the "Corporation" or "BSN") was
incorporated under the laws of the territory of the British Virgin
Islands on May 20, 1999. The Corporation is a development stage
enterprise and is seeking to become a leading facilities based provider
of high capacity, high speed internet, data and voice services in major
urban markets throughout The People's Republic of China (the "PRC").
The Corporation was incorporated for the purposes of implementing a
business strategy involving joint ventures to provide high speed
internet broadband services in major urban markets through the PRC.
BSN signed a joint venture agreement on September 21, 1999 with China
Merchants Shekou Industrial Zone, Ltd. ("China Merchants") to establish
Shenzhen China Merchants Big Sky Network Ltd. ("Shekou JV"), the
purpose of which is to provide internet access to Chinese residential
and business customers through the existing cable television
infrastructure. Under the terms of the joint venture agreement, China
Merchants agreed to provide all the non-broadcast rights on the cable
network of a cable television station controlled by China Merchants.
BSN is required to contribute a total of $3,000,000 to the Shekou JV as
cash or equipment. BSN is also responsible for providing technical
support to the Shekou JV. Over the Shenzhen JV's 15 year duration, BSN
will be entitled to receive 60% of the profits earned between 2000 and
2004, 50% of the profits earned between 2005 and 2009 and 40% of the
profits earned between 2010 and 2014. BSN is entitled to appoint four
of the seven directors on the Board of Directors of the Shekou JV for
the first five years of its operations and is thereafter, entitled to
appoint three of the seven directors.
The joint venture contract for Shekou contemplates that the business
will be turned over to the joint venture partners at the end of the
contract term. The Corporation expects that it will be able to
renegotiate an extension of the contract at some point in the life of
the contract but does not rely on any extension of the contract to meet
its long-term goals. Each joint venture contract is structured to
recapture investment and be profitable in its first five years. The
Shekou joint venture is the test case of the concept to show that
Internet over cable architecture is feasible and can be profitable.
Shekou was chosen as the first location as it is a prosperous,
concentrated, business oriented area, run by the PRC's oldest bank,
China Merchants Group. The successful Shekou deployment is then rolled
out to other locations in the PRC with greater population bases and
cable TV subscriber bases, such as Chengdu (see Note 8). After Shekou,
the Corporation was able to negotiate a much higher stronger earning
interest in Chengdu and even greater interest in Deyang (see Note 8).
hile
CONTINUING OPERATIONS
The Corporation's operations may be adversely affected by significant
political, economic and social uncertainties in the PRC. Although the
government of the PRC has been pursuing economic reform policies, no
assurance can be given that it will continue to pursue such policies or
that such policies may not be significantly altered, especially in the
event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRC's political, economic and
social conditions. There is also no guarantee that the pursuit of
economic reforms by the government of the PRC will be consistent or
effective.
F-30
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
The PRC has recently enacted new laws and regulations governing
internet access and the provision of online business, economic and
financial information. Current or proposed laws aimed at limiting the
use of online services could, depending upon interpretation and
application, result in significant uncertainty to the Corporation,
additional costs and technological challenges in order to comply with
any statutory or regulatory requirements imposed by such legislation.
Additional legislation and regulations that may be enacted by the
government of the PRC could have an adverse effect on the Corporation's
business, financial condition and results of operations.
The success of the Corporation will depend on the acceptance of
broadband internet services, which remains unproven in the PRC. The
Corporation may not be able to attract and retain subscribers, or it
may face intense competition which could have an adverse effect on the
Corporation's business, financial condition and results of operations.
The Corporation's Shekou JV's services were launched on June 30, 2000
and is currently expanding its subscriber base in the Shekou Industrial
Zone. The services in Chengdu were launched on October 26, 2000.
Substantially all of the Corporation's revenues and operating expenses
will be denominated in the Chinese renminbi, which is currently freely
convertible, however, there can be no assurance that this will continue
or that the ability to purchase or retain foreign currencies will
continue in the future.
These financial statements have been prepared on a going concern basis.
The Corporation's ability to continue as a going concern is dependent
upon its ability to generate profitable operations in the future and to
obtain the necessary financing to meet its obligations and repay its
liabilities arising from normal business operations when they come due.
The outcome of these matters cannot be predicted with any certainty at
this time. These financial statements do not include any adjustments to
the amounts and classification of assets and liabilities that may be
necessary should the Corporation be unable to continue as a going
concern.
F-31
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
CONTINUING OPERATIONS (CONTINUED)
Management anticipates that the Corporation currently has sufficient
working capital to fund the Corporation's plan of operation through the
year ended December 31, 2000. The Corporation's costs to fund its plan
of operation for the fiscal year ending December 31, 2000 and the next
two fiscal quarters ending June 30, 2001 is expected to increase
(primarily for salaries, travel, office and other similar expenses).
The working capital is intended to fund the business operations of BSN,
including funding the capital requirements of new and existing joint
ventures, funding additional technical, management and marketing/sales
personnel and funding comprehensive joint venture marketing and
promotional programs to increase market awareness and subscription
sales. Management believes that additional funding will be required to
fund the implementation of BSN's business of entering into joint
ventures.
The operations of the Corporation requires cash of $125,000 to 150,000
per month to operate in the PRC and in Canada. The operating cash break
even for the facilities in Shekou and Chengdu is estimated by the
Corporation to be the equivalent of 3,000 to 3,500 subscribers at
present pricing structures. The Corporation is in discussions with
various equipment suppliers for vendor financing or lease packages for
capital equipment. The Corporation has been offered vendor financing
for cable modems, with further discussions to take place. In the PRC,
consumers cannot lease cable modems so must purchase them outright.
Consequently, if the Corporation can conclude a lease financing for
cable modems, a significant positive cash flow will result from leasing
to acquire and selling for cash to customers in China. The Corporation
is nominating a number of prominent industry people to its board of
directors. Amongst these individuals are current common stock investors
and industry participants who wish to become investors in a
well-positioned company in a Chinese Internet business prior to the
PRC's ascension to the World Trade Organization. However, failing any
new debt or equity financing, the Corporation could continue the Shekou
and Chengdu joint ventures as they are and inaugurate the Deyang joint
venture (see Note 8) with existing capital and modest growth in the
subscriber base. Other low cost value added services will be added to
the revenue mix without capital requirements, primarily by outsourcing
to a variety of potential partners seeking access to the Chinese
market.
2. SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENTS ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Such estimates include the
valuation allowance for deferred tax assets. Actual results could
differ from those estimates.
INVESTMENT IN JOINT VENTURE
The joint venture in Shekou is accounted for under the
equity method of accounting.
F-32
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Corporation accounts for income taxes under an asset and liability
approach. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, and operating loss and tax credit carryforwards
measured by applying currently enacted tax laws. Valuation allowances
are provided when necessary to reduce net deferred tax assets to an
amount that is more likely than not to be realized.
NET LOSS PER SHARE
Basic loss per share ("EPS") excludes dilution and is computed by
dividing net loss attributable to common shareholders by the weighted
average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants
to purchase convertible preferred stock and common stock options and
warrants using the treasury stock method) were exercised or converted
into common stock. Potential common shares in the diluted EPS
computation are excluded in net loss periods as their effect would be
antidilutive.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which as subsequently amended by
SFAS No. 137 and 138, established accounting and reporting standards
requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair
value for fiscal quarters of fiscal years beginning after June 15,
2000. Management has determined that these statements will not have a
significant impact on the Corporation's consolidated financial
position, results of operations or cash flows.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin 101 ("SAB 101"), "Revenue
Recognition" to provide guidance on the recognition, presentation and
disclosure of revenues in financial statements. Management believes
that the Corporation's revenue recognition policy is in compliance with
the provisions of SAB 101 and that the adoption of SAB 101 had no
material effect on the financial position or results of operations of
the Corporation.
3. COMMON SHARES
The Corporation has issued the following shares:
iv) On May 20, 1999 the Corporation issued 50,000 founder (bearer)
shares for no consideration;
v) On February 22, 2000, the Corporation issued an additional 10,000
shares to a third party for cash consideration of $500,000.
F-33
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
3. COMMON SHARES (CONTINUED)
China Broadband (BVI) Corp. ("CBB - BVI") acquired 50,000 founder
shares representing all of the outstanding shares of BSN, from
officers, directors and persons related to the officers and directors
for 12,500,000 common shares of CBB - BVI. CBB - BVI was incorporated
for the purpose of acquiring the shares of BSN. BSN did not have any
substantial operations prior to February 1, 2000. This transaction was
accounted for as a recapitalization of BSN. This recapitalization was
effected through the issuance of 12,500,000 common shares of CBB - BVI
constituting all of its issued and outstanding shares.
4. INCOME TAXES
The Corporation did not provide any current or deferred U.S. federal or
foreign income tax provision or benefit because it has experienced an
operating loss since inception. The Corporation is not liable for any
state taxes. The Corporation has provided a full valuation allowance on
the deferred tax asset, consisting primarily of a net operating loss,
because of uncertainty regarding its realizability.
The Corporation had net operating losses of approximately $19,604 for
U.S. federal purposes. Utilization of the net operating loss, which
begins to expire at various times starting in 2007, may be subject to
certain limitations under Section 382 of the Internal Revenue Code of
1986, as amended.
5. DUE TO OFFICERS AND DIRECTORS
The amounts due to officers and directors are advances to the
Corporation to fund expenses. They are non-interest bearing and payable
on demand.
F-34
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
Revenue from future operations in the PRC are denominated in Chinese
Renminbi ("RMB") and many of the Corporation's expenses are denominated
in U.S. dollars. The official exchange rate for the conversion of RMB
to U.S. dollars has been stable, with the RMB increasing slightly in
recent years. The Corporation does not expect to use any foreign
exchange hedges or derivative instruments in the near future. The
Corporation is exploring credit financing opportunities but does not
currently require any interest rate risk management, hedging or
derivative instruments.
The carrying amounts for due to officers and directors are a reasonable
estimate of their fair values.
7. SEGMENTED INFORMATION
The Corporation operates in one reportable segment: provider of high
capacity, high speed internet, and data services in major urban markets
throughout the PRC. The business focus of the Corporation involves
investments in the joint ventures to provide these activities. As such,
these internet activities are operated through the joint ventures and
are entirely in the PRC. It is not expected that commercial operations
will be carried on in any other country. The Corporation's
administrative and corporate activities are carried on in the United
States and Canada.
8. SUBSEQUENT EVENTS
a) On April 25, 2000, BSN issued a further 40,000 shares to the third
party for cash consideration of $2,000,000. As a result of this
transaction, CBB - BVI no longer controlled BSN.
F-35
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
8. SUBSEQUENT EVENTS (CONTINUED)
b) On July 8, 2000, BSN signed a joint venture agreement with Chengdu
Huayu Information Industry Co., Ltd. ("Chengdu Huayu") to establish
Sichuan Huaya Big Sky Network Ltd. ("Chengdu JV"), the purpose of
which is to develop an advanced broadband software and hardware
platform for data transmission and internet related business in the
Chengdu area. Under the terms of the joint venture agreement,
Chengdu Huayu agreed to provide the entire software and hardware
data transmission platform of its Huaya HFC network and the rights
to use all of its facilities and equipment. BSN is required to
contribute a maximum of $5,500,000 to the Chengdu JV in cash or
equipment. Over the Chengdu JV's 20 year term, BSN will be entitled
to receive 65% of the profits earned between 2001 and 2007, 50% of
the profits between 2008 and 2013 and 35% of the profits earned
between 2014 and 2020. BSN is entitled to appoint four of the seven
Board of Directors of the Chengdu JV for the first seven years of
its operations and is thereafter entitled to appoint three of the
seven directors.
c) On September 29, 2000, CBB - BVI purchased the shares held by the
third party (see Note 8(a)). As a result of this transaction, CBB -
BVI owns 100% of BSN.
d) On November 25, 2000, BSN signed a joint venture agreement with
Deyang Guangshi Network Development Ltd. ("Deyang Guangshi") to
establish Deyang Guangshi Big Sky Ltd. ("Deyang JV"), the purpose of
which is to develop an advanced broadband software and hardware
platform for data transmission and internet related business in the
Deyang area. Under the terms of the joint venture agreement, Deyang
Guangshi agreed to provide the entire software and hardware data
transmission platform of its Deyang HFC network and the rights to
use all of its facilities and equipment. BSN is required to
contribute $4,500,000 to the Deyang JV in cash or equipment. Over
the Deyang JV's 20 year term, BSN will be entitled to receive 80% of
the profits earned between 2001 and 2005, 60% of the profits between
2006 and 2010, 50% of the profits earned between 2011 and 2015, and
40% of the profits earned between 2016 and 2020. BSN is entitled to
appoint four of the seven Board of Directors of the Deyang JV for
the first ten years of its operations and is thereafter entitled to
appoint three of the seven directors.
F-36
6,900,657 SHARES TO BE SOLD
BY CURRENT SHAREHOLDERS
[LOGO]
COMMON STOCK
PROSPECTUS
APRIL 6, 2000
================================================================================
61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
AMOUNT TO BE PAID
SEC registration fee $13,094
Printing and engraving expenses $10,000
Legal fees and expenses $125,000
Accounting fees and expenses $125,000
Blue Sky qualification fees and expenses $5,000
Miscellaneous fees $20,000
-------
TOTAL: $298,094
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Nevada Revised Statutes Section 78.7502 and 78.751, our articles
of incorporation and bylaws provide for the indemnification of our officers and
directors. Mandatory indemnification is required for present and former
directors. However, the director must have conducted himself in good faith and
reasonably believes that his conduct was in, or not opposed to, our best
interests. In a criminal action he must not have had a reasonable cause to
believe his conduct was unlawful. Advances for expenses may be made if the
director affirms in writing that he believes he has met the standards and that
he will personally repay the expense if it is determined he did not meet the
standards. We provide permissive indemnification for officers, employees or
agents. Our Board must approve such indemnification and the standards and
limitations are the same as for a director.
We will not indemnify a director or officer adjudged liable due to his
negligence or willful misconduct toward us, adjudged liable to us, or if he
improperly received personal benefit. Indemnification in a derivative action is
limited to reasonable expenses incurred in connection with the proceeding. Also,
we are authorized to purchase insurance on behalf of an individual for
liabilities incurred whether or not we would have the power or obligation to
indemnify him under our bylaws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On March 1, 1993, Institute for Counseling, Inc. (now China Broadband
Corp.) issued 2,000,000 shares of our common stock on a private placement basis
pursuant to Section 4(2) of the Securities Act of 1933, to our founder, Phillip
Herr, for an aggregate offering price of $100 in cash.
On September 30, 1998, Institute for Counseling, Inc. (now China
Broadband Corp.) issued a total of 200,000 shares of our common stock to two
investors, MDI Small Cap Fund (100,000) and Murdoch & Company (100,000), at
$0.15 per share for proceeds of $30,000. The offer and sale was made pursuant to
an exemption from registration available under Rule 504 of Regulation D of the
Securities Act.
On February 15, 1999, Institute for Counseling, Inc. (now China
Broadband Corp.) issued a total of 200,000 shares of our common stock to two
investors, MDI Small Cap Fund (100,000) and Murdoch & Company (100,000), at
$0.15 per share for proceeds of $30,000. The offer and sale was made pursuant to
an exemption from registration available under Rule 504 of Regulation D of the
Securities Act.
On February 15, 1999, Institute for Counseling, Inc. (now China
Broadband Corp.) issued a total of 119,000 shares of our common stock to 100
investors at $0.25 per share for proceeds of $29,750. The offer and sale was
made pursuant to an exemption from registration available under Rule 504 of
Regulation D of the Securities Act.
On April 14, 2000, China Broadband Corp. issued 13,500,000 shares of
common stock for all of the issued and outstanding stock of China Broadband
(BVI) Corp. to 18 shareholders of China Broadband (BVI) Corp., including Matthew
Heysel, our Chief Executive Officer, Daming Yang, our President, Wei Yan, Kai
Yeng, Qifeng
62
Xue, Donghe Xue, Lu Wang, Wallace Nesbitt, Western Capital, Pamela Hallisey, R.
Scott Hutcheson, David Beatty, Fevzi Ogelman, Malcolm Albery, Lombard Odier &
Cie, 850015 Alberta Ltd., 728871 Alberta Ltd. and 588063 Alberta Ltd. No offer
or sale was made by any form of general solicitation or general advertising.
These shares were issued pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933.
On April 14, 2000, China Broadband Corp. issued 500,000 shares to
accredited investors at $0.20 per share for gross proceeds of $100,000. No offer
or sale was made by any form of general solicitation or general advertising.
These securities were issued pursuant to an exemption from registration under
Regulation S promulgated under the Securities Act of 1933 to the following
Non-U.S. persons outside the United States: Precise Details, Inc., a company
beneficially owned by Tom Milne, our Chief Financial Officer, Patrimer
Investments Inc., Lobsinger Management Inc., Julie Poznanski, Carmen Kwan and
Lombard Odier & Cie. We issued 50,000 shares to Richard M. Hurwitz, a director,
in a private placement, pursuant to Section 4(2) of the Securities Act of 1933.
On April 13, 2000, China Broadband Corp. granted options to officers,
directors and consultants to China Broadband Corp. exercisable to acquire a
total of 4,175,000 at $1.00 per share. No offer or sale was made by any form of
general solicitation or general advertising.
On May 12, 2000, China Broadband Corp. issued 1,530,000 shares to
accredited investors at $1.00 per share for gross proceeds of $1,530,000. These
securities were issued pursuant to an exemption from registration under Rule 506
of Regulation D promulgated under the Securities Act of 1933. These securities
were issued pursuant to an exemption from registration under Section 4(2) the
Securities Act of 1933, to the following persons: R. Scott Hutcheson, Michael B.
Beatty, Richard Hallisey, Richard Hurwitz, a director, Quarry Bay Investments
Inc., Lobsinger Management Inc., David Doritty, Lombard Odier & Cie, Signet
Management Limited, Value Investors International, Michael Lauer, Martin Garvey,
Eric Hauser, James C. Kennedy, BBL (Ref. Aureus Capital), Transatlantic
Securities Ltd., James Pasieka, Allen Wu, Martin Maurel Gestion and Michael
Binnion.
On May 12, 2000, China Broadband Corp. issued 1,301,667 shares to
accredited investors at $7.50 per share for gross proceeds of $9,762,503. These
securities were issued pursuant to an exemption from registration under Rule 506
of Regulation D promulgated under the Securities Act of 1933 to the following
investors: David Doritty, Banque Privee Edmond de Rothschild Luxembourg,
Gutzwiller SA, Pictet & Cie,Banquiers, CCF Capital Management, The Orbiter Fund,
Ltd., The Viator Fund, Ltd., Lancer Offshore Inc., Lancer Partners Limited
Partnership, Elizabeth C. Kennedy, Clariden Bank, Gestor Finance, Somangest
Vesigest, BBL Ref.: Somangest, Banque Cantonale Vaudevoise, Pinnaton Ref.
Innoven FCPI 1997 no. 1, Pinnaton Ref. Innoven FCPI 1998 no. 2, Credit Agriole,
Indosuez, Lombard Odier & Cie and Transatlantic Securities Ltd.
On September 29, 2000, China Broadband Corp. issued 1,133,000 shares to
SoftNet at a deemed value of $7.50 per share as partial consideration for 50,000
shares of Big Sky Network. These securities were issued pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933.
In November 1, 2000, China Broadband Corp. granted options to officers,
directors and employees to China Broadband Corp. exercisable to acquire a total
of 650,000 at $7.50 per share. These securities were issued pursuant to an
exemption from registration under Section 4(2) the Securities Act of 1933.
On November 1, 2000, China Broadband Corp. issued warrants exercisable
to acquire 100,000 shares at $7.50 per share to Tibor Gajdics, Al Charuk and Bo
Wan International Ltd., each a non-U.S. Person outside the United States, in
connection with consulting and investor relations services. These securities
were issued pursuant to an exemption from registration under Regulation S
promulgated under the Securities Act of 1933.
On November 1, 2000, China Broadband Corp. issued warrants exercisable
to acquire 50,790 shares at $7.50 per share to Canaccord International Ltd., a
non-U.S. Person outside the United States, as a Financial Advisory Fee in
connection with our acquisition of SoftNet's 50% interest in Big Sky Network.
These securities were issued pursuant to an exemption from registration under
Regulation S promulgated under the Securities Act of 1933.
On November 1, 2000, China Broadband Corp. issued warrants to Kenneth
Barnes, a non-U.S. Person outside the United States, exercisable to acquire a
total of 50,000 at $1.00 per share. These securities were issued pursuant to an
exemption from registration under Regulation S promulgated under the Securities
Act of 1933.
63
On February 2, 2001, China Broadband Corp. granted options exercisable
to acquire 750,000 common shares at $7.50 per share to officers, directors and
consultants. See "Stock Option and Warrant Grants". The securities were issued
pursuant to an exemption from registration available under Regulation S and
Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Except for contracts made in the ordinary course of business, the
following are the material contracts that have been entered into by China
Broadband within the two years preceding the date of this registration
statement:
EXHIBIT NO. DESCRIPTION
3.1 (1) Certificate of Incorporation of the Company consisting of the Articles of
Incorporation filed with the Secretary of the State of Nevada on February 9, 1993
3.2 (5) Certificate of Amendment to Articles of Incorporation of Institute For Counseling,
Inc. filed with the Secretary of the State of Nevada on March 22, 2000
3.3 (3) Certificate of Amendment to Articles of Incorporation of Institute For Counseling,
Inc. filed with the Secretary of the State of Nevada on April 14, 2000
3.4 (1) By-Laws of the Company, dated November 9, 1993
5.1 Opinion of Counsel Re: Legality
10.1(2) Purchase Agreement for the Acquisition of China Broadband (BVI) Corp. among Institute
For Counseling, Inc. and China Broadband (BVI) Corp.
10.2 (2) Cooperative Joint Venture Contract For Shenzhen China Merchants Big Sky Network Ltd.
10.3 (4) Common Stock Purchase Agreement dated September 29, 2000, among SoftNet Systems,
Inc., China Broadband Corp. and Big Sky Network Canada Ltd.
10.4 (4) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd. and Matthew Heysel, for himself and as
attorney-in-fact for Daming Yang, Kai Yang, Wei Yang, Jeff Xue, Donghe Xue, Lu Wang,
Wallace Nesbitt and Western Capital Corp.
10.5 (4) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd., China Broadband (BVI) Corp., Matthew
Heysel and Daming Yang.
10.6 (5) Cooperative Joint Venture Contract For Sichuan Huayu Big Sky Network Ltd. dated July
8, 2000
10.7 (5) Strategic Partnership Agreement Between Chengdu Huayu Information Industry Co., Ltd.
and Big Sky Network Canada Ltd.
10.8 (5) Cooperative Joint Venture Contract For Deyang Guangshi Big Sky Ltd. dated November
25, 2000
10.9 (5) Consulting Agreement MH Financial Management, for the services of Matthew Heysel
10.10 (5) China Broadband Stock Option Plan
10.11 (5) Form of Stock Option Agreement
10.12 (5) Form of Restricted Stock Purchase Agreement
10.13 (5) Letter Agreement dated July 25, 2000 by and between China Broadband Corp. and
Canaccord International Ltd.
64
10.14 (5) Joint Development Agreement of City-Wide-Area High Speed Broadband and Data
Transmission Services Networks of China Between Big Sky Network Canada Ltd. and
Jitong Network Communications Co. Ltd.
10.15 (5) Consulting Agreement Daming Yang
10.16 (5) Consulting Agreement and Precise Details Inc. for the services of Thomas Milne
10.17 (8) Agreement to the Establishment of Cooperation Joint Venture between Big Sky Network
Canada Ltd. and Zhuhai Cable Television Station, dated May 27, 1999
10.18 (8) Letter of Intent, dated March 1, 2000, between Big Sky Network Canada Ltd. and Dalian
Metropolitan Area Network Center
10.19 (8) Letter of Intent, dated November 8, 2000, between Big Sky Network Canada Ltd. and
Hunan Provincial Television and Broadcast Media Co. Ltd.
10.20 (8) Preliminary Agreement to Form a Contractual Joint Venture, dated March 8, 2001
between Big Sky Network Canada Ltd. and Changsa Guang Da Television
10.21 (6) Purchase and License Agreement, dated September 28, 2000, between China Broadband
Corp. and Nortel Networks Limited
10.22 (6) Amendment, dated January 1, 2001, to the Purchase and License Agreement between China
Broadband Corp. and Nortel Networks Limited
10.23 (8) Consulting Agreement, dated December 22, 2000, between China Broadband Corp and Barry
L. Mackie
10.24 (8) Consulting Agreement, dated October 1, 2000, between China Broadband Corp and Richard
Lam
10.25 (8) Consulting Agreement, dated October 1, 2000, between China Broadband Corp and Ping
Chang Yung
10.26 (8) Consulting Agreement, dated October 1, 2000, between China Broadband Corp and YungPC
AP
10.27 (7) Common Stock Purchase Agreement dated September 29, 2000, among SoftNet Systems,
Inc., China Broadband Corp. and Big Sky Network Canada Ltd.
10.28 (7) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd. and Matthew Heysel, for himself and as
attorney-in-fact for Daming Yang, Kai Yang, Wei Yang, Jeff Xue, Donghe Xue, Lu Wang,
Wallace Nesbitt and Western Capital Corp.
10.29 (7) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd., China Broadband (BVI) Corp., Matthew
Heysel and Daming Yang
16.1 (9) Change in Auditor Letter of Amisano Hanson
16.2 (10) Change in Auditor Letter of Arthur Anderson LLP
21.1 (5) List of subsidiaries of registrant
23.1 Consent of Jun He Law Office
23.2 Consent of Deloitte & Touche LLP
<FN>
(1) Previously filed on Form 10-SB on December 2, 1999.
(2) Previously filed on Form 8-K filed on April 28, 2000.
(3) Previously filed on Form 10-KSB on July 11, 2000.
(4) Previously filed on Form 8-K filed on September 29, 2000.
(5) Previously filed on Form S-1 filed on December 6, 2000.
65
(6) To be filed by amendment. The Company intends to file a request with
respect to certain portions of the agreement pursuant to an application
for confidential treatment to be filed with the Commission under Rule
24(b) - 2(b) of the Securities Exchange Act of 1934, as amended.
(7) Previously filed on Form 8-K/A on December 12, 2000.
(8) Previously filed on Form 10-KSB on March 28, 2001.
(9) Previously filed on Form 8K on August 25, 2000.
(10) Previously filed on Form 8K on September 26, 2000.
</FN>
FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or not material, or the information
called for thereby is otherwise included in the financial statements and
therefore has been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names by the
underwriter to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be a part of this Registration Statement as of the time it was
declared effective.
b) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
66
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Calgary, Alberta,
Canada on April 6, 2001.
CHINA BROADBAND CORP.
By: /S/ MATTHEW HEYSEL
-----------------------
Matthew Heysel, Chief Executive
Officer and Director
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mathew Heysel and Thomas Milne, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this registration
statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intends and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents or each of them or their substitute or substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities indicated on April6, 2001.
SIGNATURE TITLE DATE
/S/ MATTHEW HEYSEL
- ---------------------------
Matthew Heysel Chief Executive Officer and Director April 6, 2001
(Principal Executive Officer)
/S/ DAMING YANG
- ---------------------------
Daming Yang President and Director April 6, 2001
/S/ THOMAS MILNE
- ---------------------------
Thomas Milne Chief Financial Officer and Director April 6, 2001
(Principal Financial Officer)
/S/ IAN AARON
- ---------------------------
Ian Aaron Director April 6, 2001
/S/ JOHN BROOKS
- ---------------------------
John Brooks Director April 6, 2001
/S/ RICHARD HURWITZ
- ---------------------------
Richard Hurwitz Director April 6, 2001
67
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 (1) Certificate of Incorporation of the Company consisting of the Articles of
Incorporation filed with the Secretary of the State of Nevada on February 9, 1993
3.2 (5) Certificate of Amendment to Articles of Incorporation of Institute For Counseling,
Inc. filed with the Secretary of the State of Nevada on March 22, 2000
3.3 (3) Certificate of Amendment to Articles of Incorporation of Institute For Counseling,
Inc. filed with the Secretary of the State of Nevada on April 14, 2000
3.4 (1) By-Laws of the Company, dated November 9, 1993
5.1 Opinion of Counsel Re: Legality
10.1(2) Purchase Agreement for the Acquisition of China Broadband (BVI) Corp. among Institute
For Counseling, Inc. and China Broadband (BVI) Corp.
10.2 (2) Cooperative Joint Venture Contract For Shenzhen China Merchants Big Sky Network Ltd.
10.3 (4) Common Stock Purchase Agreement dated September 29, 2000, among SoftNet Systems,
Inc., China Broadband Corp. and Big Sky Network Canada Ltd.
10.4 (4) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd. and Matthew Heysel, for himself and as
attorney-in-fact for Daming Yang, Kai Yang, Wei Yang, Jeff Xue, Donghe Xue, Lu Wang,
Wallace Nesbitt and Western Capital Corp.
10.5 (4) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd., China Broadband (BVI) Corp., Matthew
Heysel and Daming Yang.
10.6 (5) Cooperative Joint Venture Contract For Sichuan Huayu Big Sky Network Ltd. dated July
8, 2000
10.7 (5) Strategic Partnership Agreement Between Chengdu Huayu Information Industry Co., Ltd.
and Big Sky Network Canada Ltd.
10.8 (5) Cooperative Joint Venture Contract For Deyang Guangshi Big Sky Ltd. dated November
25, 2000
10.9 (5) Consulting Agreement MH Financial Management, for the services of Matthew Heysel
10.10 (5) China Broadband Stock Option Plan
10.11 (5) Form of Stock Option Agreement
10.12 (5) Form of Restricted Stock Purchase Agreement
10.13 (5) Letter Agreement dated July 25, 2000 by and between China Broadband Corp. and
Canaccord International Ltd.
10.14 (5) Joint Development Agreement of City-Wide-Area High Speed Broadband and Data
Transmission Services Networks of China Between Big Sky Network Canada Ltd. and
Jitong Network Communications Co. Ltd.
10.15 (5) Consulting Agreement Daming Yang
10.16 (5) Consulting Agreement and Precise Details Inc. for the services of Thomas Milne
10.17 (8) Agreement to the Establishment of Cooperation Joint Venture between Big Sky Network
Canada Ltd. and Zhuhai Cable Television Station, dated May 27, 1999
10.18 (8) Letter of Intent, dated March 1, 2000, between Big Sky Network Canada Ltd. and Dalian
Metropolitan Area Network Center
68
10.19 (8) Letter of Intent, dated November 8, 2000, between Big Sky Network Canada Ltd. and
Hunan Provincial Television and Broadcast Media Co. Ltd.
10.20 (8) Preliminary Agreement to Form a Contractual Joint Venture, dated March 8, 2001
between Big Sky Network Canada Ltd. and Changsa Guang Da Television
10.21 (6) Purchase and License Agreement, dated September 28, 2000, between China Broadband
Corp. and Nortel Networks Limited
10.22 (6) Amendment, dated January 1, 2001, to the Purchase and License Agreement between China
Broadband Corp. and Nortel Networks Limited
10.23 (8) Consulting Agreement, dated December 22, 2000, between China Broadband Corp and Barry
L. Mackie
10.24 (8) Consulting Agreement, dated October 1, 2000, between China Broadband Corp and Richard
Lam
10.25 (8) Consulting Agreement, dated October 1, 2000, between China Broadband Corp and Ping
Chang Yung
10.26 (8) Consulting Agreement, dated October 1, 2000, between China Broadband Corp and YungPC
AP
10.27 (7) Common Stock Purchase Agreement dated September 29, 2000, among SoftNet Systems,
Inc., China Broadband Corp. and Big Sky Network Canada Ltd.
10.28 (7) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd. and Matthew Heysel, for himself and as
attorney-in-fact for Daming Yang, Kai Yang, Wei Yang, Jeff Xue, Donghe Xue, Lu Wang,
Wallace Nesbitt and Western Capital Corp.
10.29 (7) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd., China Broadband (BVI) Corp., Matthew
Heysel and Daming Yang
16.1 (9) Change in Auditor Letter of Amisano Hanson
16.2 (10) Change in Auditor Letter of Arthur Anderson LLP
21.1 (5) List of subsidiaries of registrant
23.1 Consent of Jun He Law Office
23.2 Consent of Deloitte & Touche LLP
<FN>
(1) Previously filed on Form 10-SB on December 2, 1999.
(2) Previously filed on Form 8-K filed on April 28, 2000.
(3) Previously filed on Form 10-KSB on July 11, 2000.
(4) Previously filed on Form 8-K filed on September 29, 2000.
(5) Previously filed on Form S-1 filed on December 6, 2000.
(6) To be filed by amendment. The Company intends to file a request with
respect to certain portions of the agreement pursuant to an application
for confidential treatment to be filed with the Commission under Rule
24(b) - 2(b) of the Securities Exchange Act of 1934, as amended.
(7) Previously filed on Form 8-K/A on December 12, 2000.
(8) Previously filed on Form 10-KSB on March 28, 2001.
(9) Previously filed on Form 8K on August 25, 2000.
(10) Previously filed on Form 8K on September 26, 2000.
</FN>