As filed with the Securities and Exchange File No. 333-51342
Commission on May 30, 2001.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
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 Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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 telephone (Name, address, including zip
number, including area code, of registrant's code, and telephone number,
principal executive offices) including area code, of agent for
service)
----------------
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
MAY 30, 2001
5,531,457
[LOGO]
CHINA BROADBAND CORP.
COMMON STOCK
This is a public offering of 5,531,457 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 15 through 16. The selling
shareholders are offering:
o 5,330,667 shares of common stock; and
o 200,790 shares of common stock issuable on 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 May 21, 2001 was $1.50 per share.
INVESTING IN THE SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
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.
The date of this prospectus is May 30, 2001.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................................................3
China Broadband.......................................................................................3
The Offering..........................................................................................5
RISK FACTORS...................................................................................................7
Risks Relating to our Busines.........................................................................7
Risks Relating to our Markets.........................................................................10
Risks Relating to Changing Internet Technologies......................................................12
Other Risks...........................................................................................13
USE OF PROCEEDS................................................................................................14
CAPITALIZATION.................................................................................................14
Dilution .............................................................................................15
Selling Shareholders..................................................................................15
EXCHANGE RATES.................................................................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATION......................................................................................17
Selected Financial Data...............................................................................17
Summary Financial Data................................................................................17
Overview............................................................................................. 18
Results of Operations.................................................................................18
Liquidity and Capital Resources.......................................................................22
Plan of Operation.....................................................................................24
Stock Option and Warrant Grants.......................................................................25
CHANGES IN AUDITORS............................................................................................26
Our Appointment of Arthur Anderson LLP as Auditor.....................................................26
Our Appointment of Deloitte & Touche LLP as Auditor...................................................27
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......................................................28
BUSINESS...................................................................................................... 28
Overview of Corporate Structure.......................................................................28
Overview of Business Strategy.........................................................................29
Growth of Internet Usage in China.....................................................................30
Shekou Joint Venture..................................................................................31
Chengdu Joint Venture.................................................................................32
Deyang Joint Venture..................................................................................33
Proposed Joint Ventures...............................................................................34
Regulation of the Chinese Telecommunications Industry.................................................35
China's Entry into the WTO............................................................................39
Transactions with SoftNet.............................................................................40
Sales and Marketing...................................................................................40
Procurement Contracts.................................................................................40
Research and Development..............................................................................41
Competition...........................................................................................41
Intellectual Property.................................................................................42
Employees.............................................................................................43
Facilities............................................................................................43
LEGAL PROCEEDINGS............................................................................................. 43
EXECUTIVE OFFICERS AND DIRECTORS...............................................................................44
Board Committees......................................................................................46
Director Compensation.................................................................................46
Executive Compensation................................................................................47
Option Grants.........................................................................................47
Option Exercises......................................................................................48
Stock Option Plan.....................................................................................49
Indemnification of Directors, Officers and Others.....................................................50
Employment and Consulting Contracts...................................................................50
1
RELATED PARTY TRANSACTIONS.....................................................................................52
PRINCIPAL SHAREHOLDERS.........................................................................................53
TAXATION...................................................................................................... 55
United States Federal Income Taxation of United States Holders........................................55
Distributions.........................................................................................56
Capital Gains and Losses..............................................................................56
Chinese Taxation......................................................................................56
Description of Capital Stock..........................................................................57
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON STOCK AND RELATED
STOCKHOLDER MATERIALS.................................................................................58
ANTI-TAKEOVER EFFECTS OF CHARTER AND BYLAWS PROVISIONS AND
THE NEVADA BUSINESS CORPORATION ACT...................................................................58
TRANSFER AGENT AND REGISTRAR...................................................................................59
SHARES ELIGIBLE FOR FUTURE SALE................................................................................59
PLAN OF DISTRIBUTION...........................................................................................60
LEGAL MATTERS..................................................................................................61
EXPERTS........................................................................................................61
SIGNATURES.....................................................................................................71
2
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 March 31, 2001, we had an accumulated deficit of
$4,869,359. 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 ongoing business.
We, through our wholly-owned subsidiary, Big Sky Network Canada Ltd., a
British Virgin Islands corporation, establish cooperative joint ventures with
various Chinese joint venture partners controlled by Chinese municipal
government agencies. Our Chinese partners provide Internet access services to
subscribers for monthly Internet access fees. Our joint ventures provide,
install and maintain the equipment that our Chinese partners' subscribers
require for Internet access, and receive separate installation fees and monthly
maintenance fees from such subscribers.
Our joint ventures generally require a capital investment of between $3
million and $5.5 million each. For each joint venture, we are responsible for
providing the required capital, and our Chinese partner is responsible for
obtaining the necessary Chinese permits, approvals and licenses to operate the
joint venture's business. From previous experience, the process of obtaining
required permits, approvals and licenses takes approximately three to six
months. Under our joint venture agreements, we are not obliged to invest any
capital in a joint venture until our Chinese partner has secured the following:
o Approval from the applicable Department of Foreign Trade and
Economic Cooperation approving the establishment of the joint
venture;
o A Business License from the State Administration of Industry and
Commerce confirming the establishment of the joint venture; and
o Permits from the applicable Posts and Telecommunications
Administration Bureau or other delegate of the Ministry of
Information Industries authorizing our Chinese partner to engage in
the business of providing connections to international computer
information networks.
We are entitled to appoint a majority of the directors to the board of
our Chinese joint ventures for at least the first five years of their respective
operations. The day-to-day operations of each joint venture are managed by a
General Manager who is appointed by its Board of Directors. These terms provide
us with operational control over the joint ventures during the first five years
of the joint venture.
As of May 21, 2001, we have formed the following joint ventures:
o SHEKOU JOINT VENTURE: Shenzhen China Merchants Big Sky Network Ltd.,
a joint venture with China Merchants Shekou Industrial Zone Ltd.,
based in Shekou, Shenzhen, Guangdong Province;
o CHENGDU JOINT VENTURE: Sichuan Huayu Big Sky Networks Ltd., a joint
venture with Chengdu Huayu Information Industry Co. Ltd., based in
Chengdu, Sichuan Province.
We have also reached an agreement to establish a third joint venture,
which is in the process of obtaining government approval:
o DEYANG JOINT VENTURE: Deyang Guangshi Big Sky Ltd., a joint venture
with Deyang Guangshi Network Development Ltd., based in Deyang,
Sichuan Province.
We entered into a preliminary joint venture agreement with Changsa
Guang Da Television Broadcast Network Ltd. to form a joint venture to provide
Internet technology services in Hunan Province.
3
We have also signed letters of intent with five other potential joint
venture partners to establish additional joint ventures in other Chinese
locations.
Our Shekou Joint Venture started business operations in June 2000, and
our Chengdu Joint Venture started business operations in October 2000. As of
March 31, 2001, our Shekou Joint Venture had 1,884 subscribers and our Chengdu
Joint Venture had 11 subscribers. To date, our joint ventures have generated
only nominal revenues from operations, and we do not anticipate receiving any
dividends or distributions from them until they are profitable.
We estimate that our capital contributions to our existing joint
ventures and two new joint ventures will be approximately $3,000,000 for the
twelve month period ending March 31, 2002. This amount does not include
contributions of equipment or technical services, which is anticipated to be
approximately $1 million during the twelve month period ending March 31, 2002.
We are in the process of seeking vendor financing for the equipment
contributions, but have no firm commitments for such financing. We entered into
an agreement with Nortel Networks to allow us to purchase up to $250 million of
equipment, software and services at special pricing for our joint ventures, but
have no vendor financing arrangements with Nortel.
The payment of dividends and distributions from our joint ventures are
subject to restrictions under Chinese law. Our operations in China are also
subject to significant legal and operational uncertainties, such as the
potential application of regulations that prohibit foreign investment in the
telecommunications industry in China or that restrict the payment of dividends
and distributions to foreign entities and the uneven quality and reliability of
telecommunications networks in China.
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.
4
THE OFFERING
This prospectus covers up to 5,531,457 shares of China Broadband Corp.
common stock to be sold by selling stockholders identified in this prospectus.
SHARES OFFERED BY THE SELLING 5,531,457 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
MAY 21, 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 28.11% of
our issued and outstanding common
stock as of May 21, 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 selling shareholder will sell all of
its shares available for sale during the effectiveness of the registration
statement that includes this prospectus. Selling shareholders are not required
to sell their shares. See "Plan of Distribution."
Unless otherwise specifically stated, information throughout this
prospectus excludes:
o 5,325,000 shares issuable upon the exercise of outstanding options;
and
o 2,675,000 shares reserved for future issuance under our stock option
plan.
5
SUMMARY FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
---------------------------------------- - -------------------------- -------------------------
THREE MONTH PERIOD ENDED CUMULATIVE PERIOD FROM
MARCH 31, 2001 INCEPTION
FEBRUARY 1, 2000 THROUGH
MARCH 31, 2001
---------------------------------------- - -------------------------- -------------------------
Net sales.......................... $0 $ 208,333
---------------------------------------- - -------------------------- -------------------------
Loss from operations............... $1,219,849 $4,696,914
---------------------------------------- - -------------------------- -------------------------
Net loss........................... $1,272,179 $4,869,359
---------------------------------------- - -------------------------- -------------------------
Basic loss per common share ....... $(0.07) -
---------------------------------------- - -------------------------- -------------------------
Basic weighted average common shares 19,474,517 -
outstanding .......................
---------------------------------------- - -------------------------- -------------------------
AS OF MARCH 31, 2001
---------------------------------------- - --------------------------
Cash and cash equivalents.......... $3,865,181
---------------------------------------- - --------------------------
Working capital.................... $1,739,906
---------------------------------------- - --------------------------
Total assets....................... $ 18,120,442
---------------------------------------- - --------------------------
Long-term obligations.............. -
---------------------------------------- - --------------------------
Total stockholders' equity......... $ 15,834,591
---------------------------------------- - --------------------------
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 acquirer 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.
6
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 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. We began our
current business activities in April 2000. We have no operating history, no
history of revenues and a history of losses. 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.
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 conduct our business
in China. Our lack of an operating history makes it difficult for you to
evaluate our business and ability to effectively compete in the new and rapidly
evolving market for Internet related 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 at December 31, 2000 and $4,869,359 at March 31, 2001. 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 requirements 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. Our ability to earn a
profit will depend on the commercial acceptance and profitability of our
services, which has not yet been acheived. We may never achieve profitability.
WE MAY BE UNABLE 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 and joint venture
capital contribution obligations. At March 31, 2001, we had working capital of
$1,739,906. We estimate that we will be required to raise approximately $5
million in 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. Our ability
to raise capital may be further adversely affected by a pending litigation suit.
See "Legal Proceedings".
WE WILL NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS
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, and additional capital after 2001, which is anticipated to vary
depending on the number of joint ventures we establish in China. Our capital
requirements are difficult to plan in
7
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 $3.9
million and $4.5 million, respectively, over the next three years. In addition,
we will require additional capital to fund the establishment of new joint
ventures, the expansion of services provided by our joint ventures 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 new joint venture will require us to make an
initial capital contribution of at least $1 million.
Our inability to obtain sufficient capital to make these initial
capital contributions to these joint ventures or to fund our obligations under
our existing joint ventures may cause us to default on one or more of our joint
venture agreements and cause us to lose our capital investment in such joint
venture. A loss of our joint venture interest may 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."
FOREIGN-INVESTED ENTITIES ARE PROHIBITED FROM OPERATING
TELECOMMUNICATIONS SERVICES IN CHINA AND WE MIGHT BE CONSIDERED TO BE OPERATING
A TELECOMMUNICATIONS SERVICE.
Current Chinese regulations prohibit foreign-invested entities from
operating or participating in the operation of telecommunications services in
China without the approval of China's State Council. Foreign-invested entities
have attempted to operate or participate in the operation of telecommunication
services in China without State Council approval, but the Chinese government has
required a significant number of them to be restructured or terminated. Our
joint ventures in China provide equipment and technical services that help
support the activities of licensed Chinese operators and do not operate or
participate in the operation of telecommunication services in China. However, if
the relevant authorities take the view that our joint ventures operate or
participate in the operation of telecommunications services in China, they could
require us to restructure or terminate our joint ventures. Such an action would
have a material adverse effect on the way we conduct our business in China.
WE ARE DEPENDENT UPON OUR CHINESE JOINT VENTURE PARTNERS WHO MAY HAVE
INTERESTS DIFFERENT FROM OUR INTERESTS
Establishing and maintaining good relationships with Chinese joint
venture partners is critical to our ability to generate sufficient revenues to
achieve commercial success, but we may have conflicts of interests with them.
Under current Chinese laws and regulations, foreign-invested entities
are permitted to provide technical services to Chinese providers of broadband
services or to their customers, but are not permitted to own or operate
broadband networks in China. Our strategy is to form joint ventures with Chinese
entities that are licensed to own and operate broadband networks in China. Our
Chinese joint venture partners will share in the profits generated by our joint
ventures. Conflicts of interest may arise between us and our Chinese joint
venture partners with respect to a number of issues, including the amounts of
the separate service fees that our Chinese joint venture partners and our joint
ventures will charge to our mutual customers, the distribution of the profits of
our joint ventures and other business, management or strategic matters. In
addition, under the terms of our 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
management decisions if any joint venture over the entire joint venture term.
If we are unable to maintain good relationships with our Chinese joint
venture partners or if we are unable to resolve conflicts with them in a
mutually acceptable manner, our ability to operate our joint ventures and our
business profitably will be materially adversely affected.
8
WE WILL BE UNABLE TO OFFER OUR SERVICES IF OUR JOINT VENTURE PARTNERS
ARE UNABLE TO OBTAIN THE NECESSARY PERMITS FOR PROVISION OF INTERNET ACCESS.
Our Chinese joint venture partners must obtain and maintain Internet
operating permits to offer Internet services and must lease bandwidth from China
Telecom or another international gateway to provide subscribers with access to
the Internet. Our Chinese joint venture partners in the Shekou and Chengdu joint
ventures, respectively, received permits to engage in the business of providing
connections to international computer information networks from the Posts and
Telecommunications Administration Bureau of Guangdong Province and Sichuan
Province, respectively. The permits are valid for five years. Regulatory
requirements may change and Internet operating permits may not continue to be
available to our Chinese partners, which could adversely affect our ability to
operate in China. In addition, China Telecom or another international gateway
may compete with us in certain markets and may not lease bandwidth to our
Chinese joint venture partners in those areas on acceptable terms or at all,
which could prevent those joint ventures from operating.
THE CHINESE GOVERNMENT MAY FORCE OUR JOINT VENTURE PARTNERS TO PERMIT
COMPETITORS TO USE THEIR BROADBAND NETWORKS, WHICH COULD ELIMINATE ANY ADVANTAGE
THAT OUR PARTNERS MAY HAVE IN DELIVERING THEIR SERVICES
Our business model is based on entering into exclusive agreements to
provide equipment and technical services to customers of our joint venture
partners. Our Chinese joint venture partners may be required by law to grant
their competitors access to their broadband networks systems and their
customers. In that event, our competitors could potentially provide services
that compete with our joint venture partners' services, and eliminate any
competitive advantage we have of being an exclusive service provider.
WE MUST MANAGE OUR GROWTH OR WE WILL BE UNABLE TO SUCCESSFULLY
COMMERCIALIZE OUR INTERNET-RELATED SERVICES
Our business strategy is to grow through entering into joint venture
relationships throughout China. We recently entered into the Shekou and Chengdu
Joint Ventures and anticipate that the joint ventures with Deyang and Changsa
will receive governmental approval during 2001. In addition, we may enter into
other joint ventures in geographically dispersed locations throughout China. The
expansion of our organization could place a significant strain on our ability to
deliver quality support services to our customers. Specifically, the following
factors may affect our ability to manage our growth:
o we may not have adequate resources to expand our operational,
financial and management information systems to accommodate the
growth of our organization;
o the process of locating and hiring qualified, bilingual technical,
engineering and management personnel is time consuming and expensive
and we may be unable to hire, train and retain additional qualified
personnel with sufficient experience to assist us in developing and
managing our joint ventures in China as we grow; and
o as our organization expands, our management team may not have
sufficient time to effectively manage our relationships with joint
venture partners, governmental agencies, suppliers, service
providers and other third parties.
If we are unable to manage our growth, we will not be able to fully
exploit the market opportunities for broadband-related services in China.
OUR JOINT VENTURES MIGHT NOT BECOME PROFITABLE ENOUGH TO DISTRIBUTE
DIVIDENDS THAT WE CAN USE FOR OUR CASH REQUIREMENTS
Our joint ventures may never become profitable. If our joint ventures
are not profitable, or we do not receive distributions from our joint ventures,
we may be unable to meet our financial obligations or to continue as a going
business concern.
9
At December 31, 2000, our joint ventures generated only nominal
revenues from their operations. At March 31, 2001, the Shekou Joint Venture had
1,884 subscribers and the Chengdu Joint Venture had only 11 subscribers. We
estimate that our Shekou Joint Venture must maintain a subscriber base of at
least 3,000 users to reach profitability and our Chengdu Joint Venture must
maintain a subscriber base of at least 4,000 users to reach profitability. We do
not anticipate that we will receive any distribution from these joint ventures
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 the joint venture's ability to pay dividends or make other
distributions to us.
CHINESE LEGAL RESTRICTIONS AFFECT OUR JOINT VENTURES' ABILITY TO
DISTRIBUTE DIVIDENDS TO US
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. 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 Chinese accounting standards and regulations.
Under Chinese 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.
RISKS RELATING TO OUR MARKETS
OUR SUCCESS WILL DEPEND ON PUBLIC ACCEPTANCE OF INTERNET SERVICES IN
CHINA, WHICH REMAINS UNPROVEN
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.
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. Businesses
and consumers in China may be deterred from purchasing Internet-related 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.
OUR CHINESE PARTNERS FACE INTENSE COMPETITION WHICH COULD ADVERSELY
AFFECT THEIR ABILITY TO PENETRATE THE MARKET FOR INTERNET-RELATED SERVICES IN
CHINA
The market for Internet access and Internet-related services in China
is intensely competitive and the Internet industry is constantly evolving. Some
of the competitors of our Chinese joint venture partners are major Chinese
telecommunications operators, such as China Telecom, Jitong and Unicom.
These competitors may have advantages over our Chinese partners,
including:
o substantially greater financial and technical resources, which may
allow them to expand their operations more quickly, offer a broader
range of services and offer services at more competitive prices;
o more extensive and well developed marketing and sales networks,
which may allow them to grow their subscriber bases more quickly and
efficiently than our Chinese joint ventures;
o greater brand recognition, which may influence a subscriber's
purchase decision;
9
o larger subscriber bases, which may provide economies of scale and
operating efficiencies not available to our Chinese joint ventures
partners;
o longer operating histories; and
o more established relationships with government officials, joint
venture partners, equipment specialists and/or other strategic
partners.
Our Chinese partners may be unable to successfully compete with these
established competitors, which may adversely affect the ability of our joint
ventures to gain market share and operate profitably.
OUR GROWTH DEPENDS ON THE ESTABLISHMENT OF AN ADEQUATE
TELECOMMUNICATIONS INFRASTRUCTURE BY THE CHINESE GOVERNMENT
The Internet infrastructure in China may be unable to support the
demands associated with continued growth. 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 Chinese
government-controlled enterprises, 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 venture's customers
can access the Internet.
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.
WE MAY NOT BE ABLE TO FREELY CONVERT RENMINBI INTO FOREIGN CURRENCY,
WHICH COULD LIMIT THE ABILITY OF OUR JOINT VENTURES IN CHINA TO OBTAIN
SUFFICIENT FOREIGN EXCHANGE TO SATISFY THEIR FOREIGN EXCHANGE REQUIREMENTS OR TO
PAY DIVIDENDS TO US
Our joint ventures may not be able to obtain sufficient foreign
exchange to satisfy their foreign exchange requirements or pay dividends to us.
Substantially all of our revenues and operating expenses are denominated in
Renminbi while a portion of our capital expenditures are denominated in US
dollars.
Under current Chinese regulations, the payment of dividends, trade and
service-related foreign transactions to a foreign investor of a foreign-invested
enterprise such as our joint ventures, is treated as a "current account" payment
for which the approval of the State Administration of Foreign Exchange is not
required. However, in order to distribute dividends our joint ventures must file
documentation to a designated foreign exchange bank that certifies that all
requirements have been met such as payment of the joint venture's taxes, board
of directors' approval and a capital verification report issued by an accounting
firm. A return of capital, which includes foreign direct investment, upon the
dissolution of a foreign-invested enterprise such as our joint ventures, is
treated as a "capital account" payment and requires the State Administration of
Foreign Exchanges' approval in addition to the filing of documentation.
Our joint ventures may currently convert Renminbi for transactions
under the "current account" without the approval of the State Administration of
Foreign Exchange for settlement of "current account" transactions, including
payment of dividends, by providing commercial documents evidencing these
transactions. They may also retain foreign exchange in their current accounts
(subject to a ceiling approved by the State Administration of Foreign Exchange)
to satisfy foreign exchange liabilities or to pay dividends. However, the
relevant Chinese governmental authorities may limit or eliminate the ability of
our joint ventures to purchase and retain foreign currencies in the future. Such
change of policy would materially and adversely affect our business, financial
condition and results of operations.
11
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 or RMB. Our assets and
revenues 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 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.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY THE RELATIONSHIP BETWEEN
CHINA AND THE UNITED STATES
We are a Nevada corporation and subject to the laws of the United
States. Our principal business is conducted through joint ventures in China and
our business is directly affected by political and economic conditions in China.
Our business may be adversely affected by the diplomatic and political
relationships between the U.S. and China and by the Chinese public perception of
U.S. companies. The diplomatic and political relationships between the U.S. and
China have recently been strained by the mid-air collision between a U.S.
surveillance aircraft and a Chinese military plane in April 2001 and the U.S.
sale of arms to Taiwan. These incidences may adversely affect Chinese government
and public opinion of U.S. corporations conducting business in China and may
affect our joint venture partners' ability to obtain regulatory approval to
operate in China or affect their ability to market services to customers. In
addition, boycotts, protests, governmental sanctions and other actions that
affect the ability of our joint venture partners to offer services in China
could adversely affect our ability to operate profitably in China.
RISKS RELATING TO CHANGING INTERNET TECHNOLOGIES
THE MARKET FOR INTERNET-RELATED SERVICES IS CHARACTERIZED BY RAPID
TECHNOLOGICAL CHANGES, AND OUR TECHNOLOGIES MAY NOT BE POPULAR OR MAY BECOME
OBSOLETE
If the technologies or standards applicable to the services offered by
our joint ventures become obsolete or fail to gain widespread consumer
acceptance, our joint ventures may be unable to obtain a sufficient number of
subscribers to operate profitably. 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 broadband Internet access service and may
become more popular with subscribers in the future. The introduction of new
products or services or the emergence of new technologies may allow competitors
to provide Internet access to subscribers at a lower cost, higher speed or with
greater reliability than our joint ventures are able to provide. Our joint
ventures have invested substantial capital for equipment and technology to
enable Internet access and may not be able to recover these investments if
technological changes render this equipment or technology obsolete. We cannot
predict the likelihood of these changes and we cannot assure you that any
technological changes will not materially adversely affect our ability to
compete.
WE DEPEND ON THIRD PARTIES TO PROVIDE THE HARDWARE AND SOFTWARE
REQUIRED TO OFFER OUR SERVICES
We do not manufacture or develop any of the hardware and technology
necessary for our Chinese joint ventures partners to offer Internet broadband
services. As such, we currently depend on Nortel Networks and other suppliers
for hardware and technical support. If our relationships with Nortel and our
other suppliers are not maintained or if they do not offer us hardware, software
and/or technical support services on acceptable terms, we may be forced to
locate alternative suppliers. If this occurs, we could experience substantial
delay in offering our services or may be required to replace some of the systems
that we have installed in Shekou and Chengdu.
12
OTHER RISKS
WE MAY ADVERSELY AFFECTED BY A LAWSUIT FILED AGAINST US AND OUR CHIEF
EXECUTIVE OFFICER
On March 29, 2001, a legal action was filed against us and our Chief
Executive Officer by certain investors, seeking among other things, damages in
the amount of $7,000,000, an accounting of profits and a order which may
prohibit us from expending funds to fund our business. See "Legal Proceedings."
If the court grants the order prohibiting us from expending funds to fund our
operations, we will be unable to meet our obligations as they become due and may
be forced to suspend our operations. In addition, if the plaintiffs are
successful and are awarded damages, we may be required to sell some or all of
our assets or liquidate our business in order to pay the awarded damages. Our
defense of the legal action is expected to require us to spend resources that we
would otherwise use in the development of our business and may adversely affect
our ability to raise additional financing.
OUR SHAREHOLDERS MAY NOT BE ABLE TO ENFORCE U.S. CIVIL LIABILITIES
CLAIMS 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.
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 May 21, 2001 was
$1.50. 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.
13
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;
o our expectations related to growth of the Internet in China;
o our joint venture partners' ability 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.
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 the Selling Shareholders holding Warrants
exercise their right to acquire common shares, we could receive proceeds of
$1,180,925. There can be no assurance that such Warrants will be exercised.
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 March 31, 2001:
MARCH 31, 2001
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..................................... 21,433,734
Deferred compensation.......................................... (807,720)
---------
Accumulated deficit............................................ (4,869,359)
-----------
Total stockholders' equity..................................... $15,834,591
Total capitalization........................................... $18,120,442
=============================
14
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. Prospective 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 PERCENTAGE OF OWNED UPON
OWNED BEFORE NUMBER OF SHARES SHARES OWNED PRIOR COMPLETION OF
NAME OFFERING OFFERED TO OFFERING(20) OFFERING(20)
Wallace Nesbitt 562,500 562,500 2.86% --
Western Capital (1) 562,500 562,500 2.86% --
Fevzi Ogelman 900,000 900,000 4.57% --
Lombard Odier & Cie (2) 868,000 868,000 4.41% --
BBL (Ref. Aureus Capital) (3) 130,000 130,000 0.66% --
Transatlantic Securities Ltd. (4) 130,000 130,000 0.66% --
Martin Maurel Gestion 30,000 30,000 0.15% --
Luxembourg (5) 1,800 1,800 0.01% --
Gutzwiller SA (6) 20,000 20,000 0.10% --
Pictet & Cie, Banquiers (7) 10,000 10,000 0.05% --
CCF Capital Management (8) 50,000 50,000 0.25% --
Banque Privee Edmond de Rothschild (9) 25,000 25,000 0.13% --
Clariden Bank (10) 70,000 70,000 0.36% --
Gestor Finance (11) 24,000 24,000 0.12% --
Lobsinger Management Inc. (21) 1,050,000 250,000 5.13% (23) 800,000
David Beatty 360,000 360,000 1.83% --
Somangest Vesigest (12) 11,000 11,000 0.06% --
Banque Cantonale
Vaudevoise (13) 7,000 7,000 0.04% --
Pinnaton Ref. Innoven
FCPI 1997 no. 1 (14) 4,000 4,000 0.02% --
Pinnaton Ref. Innoven
FCPI 1998 no. 2 (14) 18,200 18,200 0.09% --
Kenneth Barnes (15) 50,000 50,000 0.25% --
Canaccord Capital
International, Ltd. (16) 50,790 50,790 0.26% --
Tibor Gajdics (17) 47,500 47,500 0.24% --
Alan Charuk (18) 47,500 47,500 0.24% --
Bo Wan International Ltd. (19) 5,000 5,000 0.03% --
Michael Lauer 400,000 400,000 2.03% --
The Orbiter Fund, Ltd. (13) 80,000 80,000 0.40% --
The Viator Fund, Ltd. (13) 40,000 40,000 0.20% --
Lancer Offshore Inc. (13) 496,667 496,667 2.52% --
Lancer Partners Limited
Partnership(22) 250,000 250,000 1.27% --
15
Signet Management Limited (24) 10,000 10,000 0.05%
Value Investors International (25) 20,000 20,000 0.10%
TOTAL 6,330,457 5,531,457 28.11% --
<FN>
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 Cochrane has ultimate voting power and control over these shares.
(2) K. Feller exercises ultimate voting and investment power over these shares.
(3) J.H. Le Tarmec has ultimate voting and investment power over these shares.
(4) Graeme Witts has ultimate voting and investment power over these shares.
(5) Jaupez Nechezi has ultimate voting and investment power over these shares.
(6) A. Lunchinger has ultimate voting and investment power over these shares.
(7) Pascal Decoppel has ultimate voting and investment power over these shares.
(8) O. Aneo has ultimate voting and investment power over these shares.
(9) Philippe Anstett has ultimate voting and investment power over these shares.
(10) M. Osborne has ultimate voting and investment power over these shares.
(11) J. De Gressor has ultimate voting and investment power over these shares.
(12) Bauvin Remi 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) Roland Cohen has ultimate voting and investment power over these shares.
(15) Consisting of warrants exercisable to acquire shares of common stock.
Mr. Barnes received such warrants as consideration for consulting
services rendered to the Company.
(16) Consisting of warrants exercisable to acquire shares, issued in
connection with investment banking services provided to the Company.
Elizabeth Watkins has ultimate voting and investment power over these
shares.
(17) Consisting of warrants exercisable to acquire common stock. Such warrants
were issued as consideration for consulting services provided to the Company.
(18) Consisting of warrants exercisable to acquire common stock. Such warrants
were issued as consideration for consulting services provided to the Company.
Mr. Charuk is the brother of James Charuk, our former President.
(19) 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.
(20) Unless otherwise annotated in this column, all percentages are based on
19,675,307 shares of common stock consisting of 19,474,517 shares of
common stock issued and outstanding on May 21, 2001 and warrants
representing 200,790 common shares being registered under this
registration statement. Assumes that all shares registered for resale
by this prospectus have been sold. Does not include shares underlying
issued stock options.
(21) Michael Lobsinger has ultimate voting and investment power over these
shares. Mr. Lobsinger received options, which vested on the date of
grant, exercisable to acquire 800,000 shares of common stock at $1.00
per share in consideration of management and consulting services
provided to the Company.
(22) Bauvin Remi has ultimate voting and investment power over these shares.
(23) Based on 20,475,307 shares of common stock consisting of 19,474,517
shares of common stock issued and outstanding on May 21, 2001, warrants
representing 200,790 common shares being registered under this
registration statement and 800,000 shares underlying options granted to
Mr. Lobsinger which vested on the date of grant.
(24) Phillip Boylan has ultimate voting and investment power over these shares.
(25) Franklin Gary has ultimate voting and investment power over these shares.
</FN>
Based on information provided to us, except as otherwise provided, none
of the selling shareholders are or are affiliated with any Broker-Dealer in the
United States.
Except as otherwise provided, none of the selling shareholders are
affiliated or have been affiliated with us, any of our predecessors or
affiliates during the past three years.
EXCHANGE RATES
This Registration Statement contains conversions of certain amounts in
Renminbi ("RMB") into United States dollars ("US$"). The Renminbi has been a
stable currency over the last 24 months. Conversions in this Registration
Statement are based upon an exchange rate of RMB 8.3 to US$1.00. These
translations should not be construed as representations that the RMB amounts
actually represent such U.S. dollar amounts or that RMB could be converted into
U.S. dollars at the rate indicated or at any other rate.
16
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.
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.
SUMMARY FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
---------------------------------------- ------------------------- --------------------------
THREE MONTH PERIOD CUMULATIVE PERIOD FROM
ENDED MARCH 31, 2001 INCEPTION
FEBRUARY 1, 2000 THROUGH
MARCH 31, 2001
---------------------------------------- ------------------------- --------------------------
Net sales.......................... $0 $ 208,333
---------------------------------------- ------------------------- --------------------------
Loss from operations............... $1,219,849 $4,696,914
---------------------------------------- ------------------------- --------------------------
Net loss........................... $1,272,179 $4,869,359
---------------------------------------- ------------------------- --------------------------
Basic loss per common share ....... $(0.07) -
---------------------------------------- ------------------------- --------------------------
Basic weighted average common shares 19,474,517 -
outstanding .......................
---------------------------------------- ------------------------- --------------------------
AS OF MARCH 31, 2001
---------------------------------------- -------------------------
Cash and cash equivalents.......... $3,865,181
---------------------------------------- -------------------------
Working capital.................... $1,739,906
---------------------------------------- -------------------------
Total assets....................... $ 18,120,442
---------------------------------------- -------------------------
Long-term obligations.............. -
---------------------------------------- -------------------------
Total stockholders' equity......... $ 15,834,591
---------------------------------------- -------------------------
17
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.
Following our acquisition of China Broadband (BVI) Corp., SoftNet
Systems Inc. acquired an additional 40,000 common shares of China Broadband
(BVI) Corp.'s subsidiary, Big Sky Network Canada Ltd. at a price of $2 million.
The 40,000 shares of Big Sky Network, when added to 10,000 shares of Big Sky
Network previously acquired by SoftNet for $500,000, increased SoftNet's
ownership in Big Sky Network to 50%. The original $500,000 invested in Big Sky
Network was used for working capital and the further $2.0 million was used to
fund Big Sky Network's Shekou joint venture. On September 29, 2000, we purchased
SoftNet's 50% interest in Big Sky Network through China Broadband (BVI) Corp.,
bringing our indirect ownership interest in Big Sky Network to 100%. See
"Transactions with SoftNet".
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.
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
THREE MONTH PERIOD ENDED MARCH 31, 2001
The following management's discussion relates to the three month fiscal
period ended March 31, 2001. We began operations on February 1, 2000 (date of
inception) and had no significant activities from February 1, 2000 through March
31, 2000. Management believes that a comparative period discussion of the three
month period ended March 31, 2001 to the period from inception to March 31,
2000, would not be meaningful.
REVENUES. During the three month period ended March 31, 2001, we earned
no revenues from sales. We earned interest income of $56,423 from cash and
short-term deposits.
During the three months ended March 31, 2001, the Shekou Joint Venture
received revenues from subscribers of approximately $110,000. During the three
month period ended March 31, 2001, the Shekou Joint Venture connected
approximately 670 subscribers, and as a result, the Shekou Joint Venture had
approximately 1,884 subscribers with Internet connection. The Shekou Joint
Venture has 3,300 subscribers waiting to be connected as of March 31, 2001. We
anticipate that the Shekou Joint Venture will connect approximately 2,000
additional subscribers during the quarter ended June 30, 2001.
18
The Chengdu Joint Venture began commercial operations near the end of
2000, and as of March 31, 2001, had approximately 11 subscribers with Internet
connection. The Chengdu Joint Venture does not currently have any additional
subscribers awaiting connection. The Chengdu Joint Venture did not generate any
material revenues during the quarter ended March 31, 2001.
Our joint ventures generate revenues through charging an access fee to
the subscriber for use of the equipment that enables their access to the
Internet through their cable television system. Under the terms of the existing
Joint Venture Contracts, the net profits will be distributed to each of the
joint venture parties each year after the joint venture has paid applicable
taxes and set aside the reserve, expansion and staff welfare and bonus funds
mandated by the joint venture contract and Chinese law. These dividends and
distributions are paid to Big Sky Network. These payments may be exchanged into
US currency and repatriated under Chinese law and with the Department of Foreign
Trade and Economic Cooperation approval. The payment of dividends and
distributions from our joint ventures are subject to restrictions under Chinese
law. Our operations in China are also subject to significant legal and
operational uncertainties, such as the potential application of regulations that
prohibit foreign investment in the telecommunications industry in China or that
restrict the remittance of foreign exchange outside of China and the uneven
quality and reliability of telecommunications networks in China.
EXPENSES: During the three month period ended March 31, 2001, we
incurred general operating expenses of $1,219,849. These expenses included the
following:
Calgary office $154,899
Beijing office 240,000
Professional services 148,879
Investor relations 19,613
Amortization 533,681
Non-cash stock compensation 52,665
Miscellaneous 70,112
----------
$1,219,849
==========
Calgary office expenses consist primarily of costs associated with
maintaining our principal business office in North America. These expenses
including hiring costs, consulting expenses related to 1 administrative and 5
management consultants in Canada, rent expense, insurance expenses and general
office expenses. Calgary office expenses are anticipated to remain stable during
the balance of 2001.
Beijing office expenses consist primarily of costs associated with
maintaining our business operations office in China. These expenses including
hiring costs, accommodations for contract personnel on short-term assignments,
consulting expenses related to 5 non-joint venture management consultants in
China, other consulting fees, rent expense related to our office in Beijing,
travel expenses, insurance expenses and general and other operating costs not
related to the joint ventures. Beijing office expenses are anticipated to
increase during 2001 as we concentrate efforts on assisting our joint ventures
in expanding their subscriber base in Shekou and Chengdu and as our Deyang Joint
Venture commences operation once Chinese regulatory approval is received, which
is anticipated in the second quarter of 2001.
Professional services consist of expenses for professional fees in the
amount of $94,365 associated with our year-end accounting and audit review and
legal fees in the amount of $22,518 for services related to our Securities and
Exchange Commission filings, legal research related to our business and the
preparation of joint venture related legal documents. In addition, we paid
consulting fees in the amount of $31,996 for consulting services related to
corporate governance. We anticipate that professional fees related to accounting
and review will remain stable for the remainder of 2001; however, we expect our
legal expenses to increase as we defend a legal action filed against us. See
"Legal Proceedings".
Investor Relations expenses are related to public relations and
investor relations activities. During the quarter ended March 31, 2001, we
entered into an investor relations arrangement with Armour Capital, under which
we agreed to pay a fee of $10,000 per month for investor relations services
beginning September 2000. During the
19
three month period ended March 31, 2001, we paid Canaccord Capital $15,000 under
an investor relations arrangement, which expired on March 31, 2001.
Amortization and depreciation expenses resulted primarily from the
acquisition of 50% of Big Sky Network. Non-cash stock compensation related to
550,000 options issued on February 2, 2001 and $10,896 related to the
amortization of Warrants issued in 2000. Miscellaneous expenses include web site
maintenance, office supplies and professional development expenses.
Overall, 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 We intend to support our joint ventures' efforts as they begin
extensive marketing and promotional campaigns to build subscription
bases in Shekou and Chengdu;
o We will incur expenses related to the launch of joint venture
services in Deyang and other potential areas;
o We will incur costs associated with finance raising activities;
o We will incur costs related to hiring additional
personnel/consultants to provide management, technical and support
services to our growing organization; and
o We will incur other costs related to implementing our business plan
and financing our joint venture obligations.
LOSSES. During the three-month period ended March 31, 2001, we incurred
a loss from our operations of $1,219,849 and an equity loss of $108,753 related
to Big Sky Network's ongoing operating expenses. Our loss for the three-month
period ended March 31, 2001, after interest income of $56,423, was $1,272,179.
We anticipate that we will continue to incur losses for the foreseeable future
until our joint ventures are able to generate profits.
Since we are in the development stage, all losses accumulated since
inception have been considered as part of our development stage activities.
PERIOD FROM INCEPTION (FEBRUARY 1, 2000) THROUGH DECEMBER 31, 2000
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.
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, we acquired the 50%
interest (50,000 shares) which we did not hold in Big Sky Network from SoftNet
Systems, Inc., bringing our ownership to 100%. As consideration for the 50,000
shares of Big Sky Network Canada, Ltd., we paid SoftNet Systems, Inc. $12.7
million as follows: $2,500,000 in cash, a promissory note in the principal
amount of $1,700,000, forgiveness of debt if any, and issued 1,133,000 shares of
our common stock at the fair market value of $8,497,500. At the closing date of
the transaction SoftNet had no debt owed to us. We are required to pay principal
and accrued interest, at a rate of 8% per annum under the promissory note, on
September 30, 2001. As a result of our purchase of SoftNet's interest in Big Sky
Network, we had additional non-cash expenses related to the inclusion of the
equity share of losses in our Chinese joint ventures and depreciation and
amortization of capital and intangible assets in our financial statements.
20
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 and earned operating revenue
of approximately RMB600,000 (US$72,288) during the quarter.
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
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 included insurance, rent, telephone, utilities,
office supplies and short term contract assignments not relating to the joint
ventures. Beijing office expenses similarly included office rent, insurance,
accommodations for contract personnel on short-term assignments, travel and
promotion and compensation and operating costs not related to the joint
ventures.
Professional services included legal expenses of $355,064 related to
U.S. reporting requirements, Chinese legal and regulatory requirements, legal
fees related to our acquisition of SoftNet's interest in Big Sky Network,
preparation of joint venture related documents, legal actions relating to
trademark protection. Also included in professional services are accounting and
audit expenses of $131,336 and executive management fees of $512,315 relating
the negotiations of various joint venture agreements in China.
The significant expenses underlying investor relations costs included
fees of $282,047 paid to an investment-banking firm for services in connection
with the acquisition of SoftNet's 50% interest in Big Sky Network, fees of
$361,659 relating the launch of commercial operations and our lighting up
ceremonies at our Chengdu and Shekou locations and services of an investor
relations firm of $62,289.
Consulting expenses and travel expenses incurred during the period from
inception (February 1, 2000) to December 31, 2000 were 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;
21
o We will incur expenses related to the launch of our joint venture
services in 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 our business plan
and financing our joint venture obligations.
LOSSES. We had a loss of $3,477,065 from operations during the period.
We also recorded the following equity losses:
o $181,471 related to Big Sky Network's ongoing operating expenses
before it became a wholly owned subsidiary;
o $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;
o $43,706 from the expenses related to establishing the Chengdu Joint
Venture.
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 March 31, 2001, we had cash and cash equivalents of $3,865,181
and working capital, including cash and cash equivalents, of $1,739,906. 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. On a consolidated basis, our current operating cash expenditures are
expected to be approximately $150,000 to $200,000 per month through March 31,
2002. Our future capital requirements may increase based on a number of factors,
including:
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 joint venture partners' ability to lease additional bandwidth as
our subscriber base expands, and
o price competition in our markets.
Our auditors have expressed considerable doubt that we will be able to
continue as an ongoing business. Our ability to continue as a going concern is
dependent upon our ability to generate profitable operations in the future and
to obtain the necessary financing to meet our obligations and repay our
liabilities arising from normal business operations when they come due. The
outcome of these matters cannot be predicted with any certainty at this time.
22
We anticipate that we will be required to raise an additional $2 to $5
million to fund our current plan of operation through March 31, 2002. See "Plan
of Operation." In addition, on March 8, 2001, Big Sky Network Canada Ltd.
entered into a preliminary agreement to form a joint venture with Changsa Guang
Da Television Broadcast Network Ltd. to provide Internet technology service in
Hunan Province. The term of the contract is 18 years, and Big Sky Network 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. Our initial investment during 2001 is
anticipated to be $1 million, with subsequent investments in amounts to be
determined through our negotiations of the definitive joint venture agreements
with our Chinese joint venture partner. We cannot assure you that the joint
venture will receive government regulatory approval or that sufficient financing
will be available to meet our investment commitment.
On March 29, 2001, a legal action was filed against us and our Chief
Executive Officer by certain investors, seeking among other things, damages in
the amount of $7,000,000, an accounting of profits and a order which may
prohibit us from expending funds to fund our business. See "Legal Proceedings."
Although we believe the claim is without merit and will vigorously defend
ourselves against the claims, we cannot assure you that the court will not grant
the plaintiffs interim relief, which could affect our ability to fund our plan
of operation. The lawsuit may adversely affect our ability to obtain additional
financing.
Our principal source of capital has been equity financing from
investors and our founders. We are exploring opportunities for equity financing,
vendor financing, bank credit facilities and export credit agency arrangements.
Meeting our future financing requirements is expected to be dependent on access
to equity capital markets. We may not be able to raise additional equity when
required or on favorable terms that are not dilutive to existing shareholders.
The growth of our business in China will require capital investments in
China for the foreseeable future. The joint ventures have generated nominal
revenues to date and any future profits will likely be re-invested in additional
joint ventures. At a future date when surplus earnings in the joint ventures
occurs, there can be no assurance that the joint ventures will be able to pay
dividends from China due to restrictions under Chinese law. We estimate that the
operating cash break even point for the facilities in Shekou will require the
equivalent of 3,000 subscribers at present pricing structures. The Chengdu Joint
Venture efforts to obtain paying subscribers has been slower than anticipated,
and we estimate that operating cash break even point for the facilities in
Chengdu will require the equivalent of 4,000 subscribers at present pricing
structures. We cannot assure you that our joint ventures will attract a
sufficient number of subscribers to become commercially profitable or that our
projections will not change as a result of changes in the economic or other
conditions.
We are in discussions with prospective investors to raise additional
financing through equity and or debt financing. We are also negotiating with
equipment suppliers to arrange vendor financing or equipment leasing. We cannot
assure you that any additional financing can be finalized in the near future, if
at all.
OUTLOOK
Our Shekou and Chengdu joint ventures demonstrated that providing
equipment and technical services to users of broadband Internet services can be
operational with investment of capital, equipment and technical skills. We
believe that the demand for Internet access and services for individuals,
schools and businesses in China will continue to increase. 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 it requires approximately $1 million of capital,
equipment and technical services to commence commercial Internet service in a
new joint venture. Our current capital resources are limited. There can be no
assurance that we will have sufficient financial, technical and human resources
to undertake new joint ventures or maintain the joint ventures currently in
service.
23
PLAN OF OPERATION
As of March 31, 2001, our management anticipates that we currently have
sufficient working capital to fund our plan of operation through the third
quarter of 2001.
ESTIMATED CAPITAL REQUIREMENTS
To fund our operations for the twelve months ending March 31, 2002,
management estimates the Company will require additional capital of
approximately $5 million. Our current capital and any additional funds raised
are intended to fund the business operations of Big Sky Network, including the
following:
ESTIMATED FINANCIAL
REQUIREMENTS FOR THE TWELVE
MONTH PERIOD ENDING
DESCRIPTION MARCH 31, 2002
Shekou Joint Venture - Capital Contributions $0
Chengdu Joint Venture - Capital Contributions1 500,000 2
Deyang Joint Venture - Capital Contributions1 1,000,000 3
Changsa Guang Da Joint Venture - Capital Contributions1 1,000,000 4
New Joint Venture - Capital Contributions1 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
SoftNet Promissory Note Payment 5 1,700,000
---------
TOTAL $7,100,000
==========
<FN>
1) These estimates represent capital investments only and do not
represent contributions of equipment or technical services. We intend
to obtain vendor financing for the equipment required for these joint
ventures.
2) Under the terms of the Chengdu joint venture agreement, of the total
investment of $3,000,000 required over the term of the agreement, we
were required to provide $500,000 within 15 days of the joint venture
partner obtaining all approvals and permits.
3) Under the terms of the Deyang joint venture agreement, of the total
investment of $4,500,000 required over the term of the agreement, we
must provide $500,000 within 10 days of the joint venture partner
obtaining all approvals and permits.
4) The payment terms of our obligation of investing $18,000,000 is to be
determined through our negotiations of the definitive joint venture
agreement with our Chinese joint venture partner. We estimate our
initial contribution will be $1 million in 2001.
5) The principal and accrued interest, calculated at 8% per annum, is
payable in full on September 29, 2001.
</FN>
The amount and timing of expenditures during the twelve months ending
March 31, 2002 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 funds will be available, and
if funds are raised, that they will be sufficient to achieve our objective, or
result in commercial success.
We have entered into an agreement with Nortel Networks to allow us to
purchase up to $250 million of equipment, software and services at special
pricing for our joint ventures.
We anticipate that we will hire additional technical, administrative
and sales and marketing personnel during the twelve months ending March 31,
2002, 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.
24
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. At the time
of this issuance, there was no market for our shares. We determined the fair
market value of the stock to be equal to a proposed financing in May at $1.00
per share. The options were granted to the following persons:
NAME # OF OPTIONS NAME # OF OPTIONS
---- ------------ ---- ------------
Michael Lobsinger 800,000 Qifeng Xue 100,000
Danai Suksiri 500,000 Donghe Xue 100,000
Matthew Heysel 500,000 Lu Wang 100,000
Daming Yang 500,000 WRW Investments Ltd. 250,000
Wei Yang 500,000 Ken Barnes 50,000
Ian Aaron 100,000 Jodi Larmour 50,000
Bing Ho 100,000 Rob Phare 25,000
Bernie Poznanski 100,000 Larry Timluck 25,000
Richard Hurwitz 100,000 Michael Morrison 25,000
Thomas Milne 100,000 Xinhua Duang 25,000
Kai Yang 100,000 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. We determined the
fair market value of the stock based on the closing price of our common stock on
the day of the grant. As such, the closing price of our stock on November 1,
2000 was $7.50. The options were granted to the following persons:
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 had been
issued to Ken Barnes, a consultant, on April 13, 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.
25
On February 2, 2001, we granted options exercisable to acquire 550,000
common shares at $7.50 per share, to officers, directors and consultants. We
determined the fair market value of the stock based on the closing price of our
common stock on the day of the grant. As such, the closing price of our stock on
February 2, 2001 was $5.875. The options were granted to the following persons:
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.
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
(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.
26
We provided 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.
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
(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.
27
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 our expenses and capital costs are denominated in US dollars.
The official exchange rate for the conversion of 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.".
Following our acquisition of China Broadband (BVI) Corp., Softnet
Systems Inc. acquired an additional 40,000 common shares of China Broadband
(BVI) Corp.'s subsidiary, Big Sky Network Canada Ltd. at a price of $2 million.
The 40,000 shares of Big Sky Network, when added to 10,000 shares of Big Sky
Network previously acquired by SoftNet for $500,000, increased SoftNet's
ownership in Big Sky Network to 50%.
28
The original $500,000 invested in Big Sky Network was used for working capital
and the further $2.0 million was used to fund Big Sky Network's Shekou joint
venture. On September 29, 2000, we purchased SoftNet's 50% interest in Big Sky
Network through China Broadband (BVI) Corp., bringing our indirect ownership
interest in Big Sky Network to 100%. 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.
Subject to receiving government approval, we will also hold 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 that will be established under
the laws of the People's Republic of China.
The following figure sets forth our corporate structure.
-----------------------------------------------------------
China Broadband Corp.
a Nevada corporation
-----------------------------------------------------------
|
|
| 100%
|
|
-----------------------------------------------------------
Big Sky Network Canada Ltd.
a British Virgin Islands corporation
-----------------------------------------------------------
50% | | 50% |
| | | 50%
| | |
- ----------------------------------- -------------------------------- ------------------------------
Shenzhen China Merchants Big Sky Sichuan Huayu Big Sky Network Deyang Guangshi Big
Network Ltd. Ltd. Sky Ltd.
a Chinese limited liability a Chinese limited liability a Chinese limited liability
corporation corporation corporation
- ----------------------------------- -------------------------------- ------------------------------
(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 will have 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. (subject to final
government approval)
Neither we nor any of our subsidiaries have been subject to any
bankruptcy, receivership or similar proceedings.
OVERVIEW OF BUSINESS STRATEGY
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 and continue to
enter into joint ventures with Chinese government approved joint venture
partners. Our joint venture partners are municipally owned broadband networks
with access to fibre optic cable systems. Our Chinese partners provide Internet
access services to and receive Internet access fees from their customers. Our
joint ventures provide, install and maintain the equipment that our Chinese
partners' customers require and receive installation fees and monthly
maintenance fees from such customers. Through their broadband networks, our
Chinese partners intend to provide Internet access that is more reliable,
cheaper and faster than Chinese subscribers can obtain through dial up access
over currently existing telephone lines.
29
China currently has an online population of approximately 22.5 million
people, most using slow and expensive dial-up systems. However, it has more than
90 million cable TV subscribers. We feel that China's move toward entry into the
World Trade Organization and the government's commitment to expanding the use of
the Internet, will support the demand for broadband Internet service growing
more rapidly than dial up service.
Of the estimated 22.5 million Internet users, we believe that
approximately 2.2 million are in Guangdong Province where our Shekou Joint
Venture resides and 1.1. million are in Sichuan Province where our Chengdu joint
Venture resides. Our Shekou and Chengdu joint venture partners have 35,000 and
150,000 cable television subscribers, respectively, from which our joint
ventures can draw subscribers for their Internet service base. Our near term
expectations were to achieve a 5% to 10% penetration rate in our joint venture
partners' subscriber base. As of May 25, 2001, our Shekou Joint Venture had
2,160 subscribers with 3,500 subscriber awaiting connection, representing a 16%
penetration rate. As well, our Chengdu joint Venture had 41 subscribers with 50
subscribers awaiting connection. This represents a penetration rate of less than
1%. Although our Chengdu Joint Venture had a slow start, over the last four
months, it has seen an average monthly growth rate of 11%. We believe that our
Shekou Joint Venture has the added advantage of being situated in a special
economic zone where generally the per capita income is higher whereas outside of
the special economic zones, the economic conditions are more diversified and per
capita income is lower. Our Shekou Joint Venture has seen an average monthly
growth rate of 5% over the last seven months. We cannot guarantee that these
growth rates will be representative of future growth.
In the future when permitted under prevailing Chinese regulations, we
expect to provide the following services should they be economically viable at
that time:
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 authorized Chinese securities trading houses; and
o voice over Internet protocol (VOIP): to permit voice over Internet.
GROWTH OF INTERNET USAGE IN CHINA
In 1999, China's population was approximately 1.26 billion with only
22.5 million Internet users which represents less than 2% of China's population.
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. These projected growth
rates may not reflect the actual growth rates of our joint ventures.
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 an Internet service provider was the connection speed. The
cost of the service ranked as the third most important factor by 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 believe that the strategy
that we and our Chinese partners have adopted under which Internet access is
provided through broadband networks will allow us to address both of these
impediments and will attract existing and new Internet users to use our joint
ventures services. 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.
30
In addition, 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 ranging between 18-24 years old
(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 RMB 501 to 1,000 ($60-120) per month.
38.82% of respondents indicated that they had an education level of a Bachelor's
degree.
Categories of acceptable monthly Internet expenses per month had the
largest portion of respondents (30.62%) indicating that RMB 200 ($24) was
acceptable. An additional 27.47% indicating acceptable expenses higher than RMB
200. Only 25.27% of respondents felt expenses of less than RMB 100 ($12) per
month were acceptable with 16.64% of respondents stating that RMB 100 per month
was acceptable. Our joint ventures and joint venture partners currently charge a
combined fee of between RMB 120 ($15) and RMB 180 ($22) per month dependent on
the service area. We believe that our joint venture's are priced to compete in
the market and our joint ventures' prices are within the range a large portion
of the Chinese consumers are willing to pay for Internet access.
Our joint ventures currently target our Chinese joint venture partners'
subscriber base and it is the joint ventures' objective to achieve a penetration
rate of 5% to 10% of the subscriber base within the first year of operation. Our
partners also provide free Internet access to one or more schools in a target
area to build student interest in the Internet and to demonstrate the value of
high-speed, reliable Internet service, which we expect will assist in persuading
parents to subscribe to our joint venture partners' services. Our joint venture
partners have also partnered with Chinese securities dealers with the goal of
marketing on-line trading capabilities to their clients.
SHEKOU JOINT VENTURE
Our first Chinese joint venture, the Shekou Joint Venture, was
established in November 1999 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 was 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.
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 Investment. The
establishment of our Shekou Joint Venture was approved by the Department of
Foreign Trade and Economic Cooperation and the Municipal Government of Shenzhen,
and a Business License confirming its establishment was issued by the State
Administration of Industry and Commerce in November, 1999. The joint venture
term is 15 years, extendable upon approval of both joint venture parties and the
original approval authorities. The Shekou Joint Venture has been granted the
exclusive right to provide equipment and technical services to our Chinese joint
venture partner's subscribers to enable these subscribers to access the
Internet.
We agreed to provide up to $3,000,000 in financing for the joint
venture 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. obtained a
permit from the Posts and Telecommunications Administration Bureau of Guangdong
Province to engage in the business of providing connections to international
computer information networks. The permit is valid for five years until February
2005. As of March 31, 2001, we made capital and equipment contributions of
approximately $3,000,000 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,
31
Daming Yang, Qifeng Xue, Lu Wang, Guang Zhenghai, Tao Xin and Shen Wenjian. The
General Manager of the joint venture is Qifeng Xue.
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%
------------------- ---------------------------- ------------------------
The Shekou Joint Venture launched its services in June 2000 and, as of
March 31, 2001, had 1,884 subscribers. The Shekou Joint Venture charges each
subscriber a one-time installation fee of RMB 500 (US$60) and a monthly
maintenance fee of between RMB 150 (US$18) and RMB 180 (US$22) per month. This
maintenance fee includes a charge of for Internet access of RMB 38 ($4.50) which
is collected on behalf of the joint venture partner.
CHENGDU JOINT VENTURE
We established the Chengdu Joint Venture in October 2000 with Chengdu
Huayu Information Co. Ltd., the municipal broadband network company controlled
by the Chengdu Municipal Government of Chengdu, the capital of Sichuan Province.
Chengdu Huayu Information Co. Ltd. has developed an integrated broadband
information network servicing more than 600,000 users.
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 Huayu Big Sky Network Ltd.,
under the Law of the People's Republic of China on Cooperative Joint Ventures
using Chinese Foreign Investment. The establishment of our Chengdu Joint Venture
was approved by the Department of Foreign Trade and Economic Cooperation and the
Provincial Government of Sichuan, and a Business License confirming its
establishment was issued by the State Administration of Industry and Commerce in
October 2000. The joint venture term is 20 years, extendable upon approval of
both joint venture parties and the original approval authorities. The Chengdu
Joint Venture has been granted the exclusive right to provide equipment and
technical services to our Chinese joint venture partner's subscribers to enable
these subscribers to access the Internet.
We agreed to provide up to $5,500,000 in financing for the joint
venture, in the form of cash and equipment. We made an initial investment in the
amount of $500,000 after Chengdu Huayu Information Co. Ltd. obtained a permit in
September, 2000, from the Posts and Telecommunications Administration Bureau of
Sichuan Province to engage in the business of providing connections to
international computer information networks. The permit is valid for five years
until September 2005. As of March 31, 2001, we had made capital and equipment
contributions of approximately $1,900,000 to the Chengdu Joint Venture.
Under the terms of the cooperative joint venture contract, Sichuan
Huayu Big Sky Network Ltd. is managed by a board of seven directors, of which we
are 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.
32
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%
------------------- ---------------------------- -----------------------
The Chengdu Joint Venture launched its services in October 2000 and, as
of March 31, 2001, had 11 subscribers. The Chengdu Joint Venture charges each
subscriber a one-time installation fee of RMB 500 (US$60) and a monthly
maintenance fee of RMB 120 (US$15) per month. This maintenance fee includes a
charge of for Internet access of RMB 25 ($3) which is collected on behalf of the
joint venture partner.
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. 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 executed a cooperative joint venture contract for the establishment
of the Deyang Joint Venture on November 25, 2000 with Deyang Guangshi Network
Development Ltd., the municipal broadband network company controlled by the
Deyang Municipal Government. Under the terms of the cooperative joint venture
contract, 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 have a joint venture term of
twenty years, extendable upon approval of both joint venture parties and the
original approval authorities. The Deyang Joint Venture will be granted the
exclusive right to provide equipment and technical services to our Chinese joint
venture partner's subscribers to enable these subscribers to access the
Internet.
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 $1,000,000
after the establishment of the joint venture has been approved by the Department
of Foreign Trade and Economic Cooperation and the Provincial Government of
Sichuan Province, a business license confirming the establishment of the joint
venture has been issued by the State Administration of Industry and Commerce,
and after Deyang Guangshi Network Development Ltd. has obtained a permit from
the Posts and Telecommunications Administration Bureau of Sichuan Province to
engage in the business of providing connections to international computer
information networks. As of May 21, 2001, Deyang Guangshi Network Development
Ltd. was still in the process of seeking final approval for the joint venture
arrangement and we have not contributed any capital to the joint venture.
Under the terms of the cooperative joint venture contract, Deyang
Guangshi Big Sky Ltd. will be managed by a board of seven directors, of which we
will be 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. will be 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. will be entitled to appoint the
chairman of the board and we will be 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.
33
Under the terms of the cooperative joint venture contract, profits from
the Deyang Joint Venture will be 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 May 21, 2001, Deyang Guangshi Network Development Ltd. was still
in the process of obtaining the necessary governmental approvals and permits. We
can not assure you that any of these approvals will be obtained by our joint
venture partner.
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 May 21, 2001.
On May 27, 1999, Big Sky Network and Zhuhai Cable Television Station
entered into an Agreement for the Establishment of a Cooperative 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 Economic 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 related 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
related 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
related 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 provide access to their data transmission channels on the cable network and
exclusive access of their subscriber base to the proposed joint venture and Big
Sky Network would contribute a staged investment of $18,000,000 to the proposed
joint venture. 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 a number of potential joint venture partners throughout
China regarding additional joint venture opportunities.
34
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.
REGULATION OF THE CHINESE TELECOMMUNICATIONS INDUSTRY
The telecommunications 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. The provision of Internet connectivity is
subject to China's telecommunications regulations. Telecommunications regulators
have very wide discretion to formulate and apply their own standards in deciding
the 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.
China's data communications industry is regulated by the Ministry of
Information Industry and other relevant authorities, and licenses must be
obtained 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 possess 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.
For each joint venture, our Chinese partner is responsible for
obtaining the following necessary Chinese permits, approvals and licenses to
operate the joint venture's business:
o Approval from the applicable Department of Foreign Trade and
Economic Cooperation approving the establishment of the joint
venture;
o A Business License from the State Administration of Industry and
Commerce confirming the establishment of the joint venture; and
o Permits from the applicable Posts and Telecommunications
Administration Bureau or other delegate of the Ministry of
Information Industries authorizing our Chinese partner to engage in
the business of providing connections to international computer
information networks.
Both our Shekou and Chengdu joint venture partners have obtained the
relevant permits and approvals.
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 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;
35
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.
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 promulgate 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 or
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 must 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
36
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.
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. 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;
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 permits
from the Ministry of Information Industry while value-added telecommunications
providers must receive permits 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.
37
ENTRY INTO THE INDUSTRY. The regulations specify the threshold
requirements for applicants for basic telecommunications and value-added
telecommunications permits. Applicants for basic telecommunications permits
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 permits 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 permits. We believe that services that our
Chinese joint venture partners intend to offer in the future will require
permits from the Ministry of Information Industry. See "Overview of Business
Strategy." We cannot assure you that such permits will be issued.
FOREIGN INVESTMENT IN TELECOMMUNICATIONS IN CHINA
Current regulations in China prohibit foreign investors and
foreign-invested enterprises from investing in, operating or participating in
the operation of telecommunications services in China without approval from the
State Council. As discussed under "China's Entry into the WTO" below, this
prohibition will be gradually lifted upon China's accession to the World Trade
Organization, an event that is widely expected to take place as early as the end
of 2001.
Starting approximately four years ago, numerous foreign investors and
Unicom (one of China's largest telecommunications operators) began establishing
investment structures commonly known as "Chinese-Chinese-Foreign" or "CCF"
structures to provide wireless telecommunications services in China. We
understand that in a typical project, the foreign investor and Unicom would
first establish a joint venture authorized to provide management, consulting,
technical and other services to telecommunications operators. The joint venture
would then enter into a series of contracts with Unicom under which the joint
venture would provide equipment, management expertise and technical services to
Unicom relating to the construction and operation of a wireless
telecommunications network. Typically, the foreign investor would install and
own all or almost all of the network equipment, exercise extensive management
rights over the operation of the network and receive various technical,
consulting, management or service fees from Unicom. We also understand that
these fees were typically based on the revenues or profits that Unicom obtained
from the provision of wireless services to its customers using the
telecommunication assets owned by the joint venture. These CCF structures were
declared illegal by the Chinese Ministry of Information Industries on the basis
that foreign investors were, in fact, operating wireless telecommunications
services in China, an industry closed to foreign investment. The foreign parties
to these joint ventures were required to sell their joint venture interests to
Unicom, and to terminate their joint ventures.
The provision of Internet access services is a telecommunications
service that foreign investors and foreign-invested enterprises may not operate.
However, it is our Chinese joint venture partners--and not our joint
ventures--that provide such Internet access services. Our Chinese joint venture
partners obtain permits from the Chinese telecommunications authorities
authorizing them to engage in the business of providing connections to
international computer information networks. Based on these permits, our Chinese
joint venture partners provide Internet access services to their customers and
receive Internet access fees from such customers. Our joint ventures do not
provide Internet access services or operate or participate in the operation of
any other telecommunications service. In addition--unlike the foreign investors
in the dismantled Unicom CCF joint ventures--we do not have or
38
exercise management control over the networks of our Chinese partners or receive
any fees from them. Rather, our joint ventures provide equipment and
installation and maintenance services to our Chinese partners' customers and
receive installation and maintenance fees from such customers.
Accordingly, although the risk cannot be completely ruled out, we do
not believe that the Chinese telecommunications authorities will consider our
joint ventures to be engaging in non-permitted telecommunications activities in
China. As a precaution, we engaged Jun He Law Office, one of the largest law
firms in China, to review the documentation and approvals relating to the
establishment of the Shekou Joint Venture, our first joint venture. In February,
2000, the Jun He Law Office rendered an opinion stating, amongst other things,
that:
o the Shekou Joint Venture Contract and Articles of Association are
legal, valid, and binding obligations enforceable under the laws of
China, based 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 end users to the Internet
through equipment owned and supplied by the Joint Venture Company
and pursuant to the Shekou Joint Venture Contract;
o 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
o 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 end users 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 end users; (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.
CHINA'S ENTRY INTO THE WTO
China's telecommunications regulatory framework could change
dramatically upon China's entry into the World Trade Organization or "WTO".
China already reached agreement with the United States in November of 1999 and
subsequently 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.
Under the terms of the agreements, China will 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 in the cities of Beijing, Shanghai, and Guangzhou.
It will allow up to 49% foreign ownership within one year of the accession date,
and up to 50% within two years of the accession date.
In addition, the agreements 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 China's accession to WTO, up to 35%
within five years of the accession date, and up to 49% within six years of the
accession date.
Foreign investment will be allowed in China's mobile voice 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 that will
provide clarification on the exact scope of the telecommunications services to
be opened for foreign investment. 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.
39
TRANSACTIONS WITH SOFTNET
We formed Big Sky Network for the purposes of deploying cable-based
broadband related services in China. SoftNet Systems, Inc., 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.
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;
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, if any, as at the closing date of the
transaction. No debt was owed as of the closing date; and
o 1,133,000 shares of our common stock at a deemed value of $7.50 per
share.
As a result of the acquisition, we own all of Big Sky Network, our
operating subsidiary.
As of May 21, 2001, SoftNet owned approximately 5.82% of our issued and
outstanding share capital. At the time of the above transaction, SoftNet was at
arm's length to us.
SALES AND MARKETING
Exclusive Franchise - We seek to enter into exclusive arrangements with
Chinese broadband network operators in cities where competing Internet companies
have not deployed similar services. Provincial capital cities are our initial
target but we do not intend to restrict our marketing efforts solely to such
cities. By offering to provide the improved equipment and technical services to
the customers of the broadband network operators, we enhance their ability to
provide competitive Internet access services.
Residential - After installing and testing equipment, our joint venture
sales force concentrate sales efforts 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.
Business - Our marketing programs target large businesses with import
and export focus. We anticipate that cable-based Internet access will enhance
such businesses' ability to conduct business over the Internet, and eventually
increase demand for our related services. Our Chinese joint venture partners
have also partnered with Chinese securities dealers to market on-line trading
capabilities to their clients.
PROCUREMENT CONTRACTS
We entered into a Purchase and License Agreement dated September 28,
2000, as 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 are anticipated to be used in connection with our joint
ventures in China.
As of May 21, 2001, we have purchased approximately $350,000 in
services and products from Nortel Networks under the agreement.
40
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 will rely on the technologies and systems of
broadband network operators as the foundation for our joint ventures to provide
equipment and services to users of the Internet access services that the network
operators will provide. These broadband network operators generally use
technologies that are comparable to those used in 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 broadband network operators 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 and to, install
equipment which will permit high-speed Internet access.
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 Chinese demand for broadband Internet service will
increasingly attract foreign investors' attention. When China accedes to the
WTO, it will liberalize its rules on foreign investment, ownership of
telecommunications facilities and Internet access. We believe we can enter into
joint ventures to obtain a number of additional exclusive franchises before
China joins the WTO. 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 and the market
for our services.
Currently, domestic Chinese telecommunications companies have exclusive
right to offer Internet service. Chinese telecommunications companies have a
competitive advantage in terms of size, acceptance, subscriber base,
marketing resources and regulatory licenses to offer a broad range of services.
Relative to the Chinese telecommunications companies, we believe our
joint ventures can differentiate their services from typical dial-up Internet
services due to the advantages in speed of service and price made possible by
the equipment and service, which supports fibre optic cable access to the
Internet.
Our joint ventures are structured and operate in a manner which
complies with Chinese law and which has been approved by government regulators
in China. This may create a competitive advantage over other companies seeking
to provide Internet-related service using other business structures and related
services.
The size of the Chinese market for Internet services attracts
increasing attention from foreign investors seeking to expand the market for
their goods and services. We believe our primary competitors at present are
Chinese telecommunications companies, which currently provide dial-up Internet
access.
While a number of entities, including Chinese, foreign and
Chinese-foreign joint ventures, have announced their intention to offer
broadband Internet-related services, we have not encountered any direct
competition in the areas where our Chinese partners 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 opportunities which
offer the highest probability of successful negotiations, profitable return,
highest number of subscribers, and most modern facilities.
41
To date, we have not been able to identify any direct competitors who
are attempting to enter into the market in the same manner, through cable
television fibre optic cable networks, and using the same technologies.
Currently, we and our Chinese partners must compete against companies that offer
other methods of Internet access, such as digital subscriber lines (DSL),
Integrated Services Digital Network (ISDN) and T1 connections. We believe that
our Chinese partners have an advantage over companies deploying these other
methods of transmission. 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
generally cost prohibitive to individuals and are typically used by businesses
that require the capability to have multiple users accessing large quantities 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 cable's
higher bandwidth, a wider arena of accessibility to streaming video,
video-conferencing and other dense transmissions is available to the end-user.
With respect to direct competitors to our Chinese partners, there are
many companies that provide Internet access and related services to users in
China using DSL, ISDN or T1 connections, including major Chinese
telecommunications operators, such as China Telecom, Jitong, and Unicom. These
competitors have established customer bases, reputations and brand names, as
well as substantial financial and technical resources. In addition, most of our
partners' competitors offer other services, which provide them with a list of
potential clients to solicit, a larger market presence and reputation to draw
upon.
Our joint venture partners purchase bandwidth capacity from the major
telecom companies. The contracted costs for bandwidth have decreased
significantly since commencement of operations due to the excess capacity in
China. However, the major telephone companies, with established fiber optic
networks, will always be able to compete with us on price and availability of
bandwidth. Our initial cost in 2000 was approximately $10,000 per megabit per
month. Broadband capacity costs continue to decline, we are currently paying
approximately $1,400 per megabit per month. While our cost structure is
improving, China has also mandated lower telephone toll charges in 2001 compared
to 2000, serving to improve the cost of dial up Internet access.
Investment companies such as CITIC-Taifu, Juyou and Galaxy Tech are
said to have set up cooperative joint venture agreements with CATV stations in
China. Greatwall Broadband has advertised a competing Internet service in
Chengdu. Various forms of wireless Internet access has also been discussed in
the media. To date, we have not observed market acceptance in our areas of
interest for any other broadband Internet service except dial up.
We believe that our Chinese partners will be able to secure a
significant portion of the Internet service market due to the enhanced
connection speeds and higher service reliability of their broadband networks. As
increasing numbers of customers move to our partners' broadband Internet access
services, our joint ventures will have an expanded customer base. We believe our
joint ventures' exclusive right to supply our partners' customers with equipment
and services will create a strong competitive position in the market.
Chinese telephone companies also offer DSL capabilities in a limited
number of markets. 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.
42
EMPLOYEES AND CONSULTANTS
We have seven full-time consultants and three part-time consultants,
consisting of six executives and four 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 equipment and provide the supporting 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 and
consultants 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.
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
On April 18, 2001, we were served with a Statement of Claim which was
filed on March 29, 2001, in the Court of Queen's Bench of Alberta, Judicial
District of Calgary (Action No. 0101-07232), naming China Broadband Corp. and
Matthew Heysel as defendants. The Orbiter Fund Ltd., The Viator Fund Ltd.,
Lancer Offshore Inc. and Lancer Partners Limited Partnership (collectively, the
"Plaintiffs") allege that Mr. Heysel made certain misrepresentations to the
Plaintiffs in connection with the Plaintiffs' purchase of 500,000 shares of
China Broadband Corp.'s common stock at $1.00 per share and 866,667 shares of
China Broadband Corp.'s common stock at $7.50 per share. The Plaintiffs are
seeking, among other things, damages in the amount of $7,000,000, an accounting
of profits and a preservation order preserving the funds obtained from the
Plaintiffs.
We believe the claim against ourselves and Mr. Heysel is without merit.
On May 18, 2001, we filed our Statement of Defence and have submitted a request
to the Court of Queen's Bench of Alberta for acceleration of process.
43
EXECUTIVE OFFICERS AND DIRECTORS
We employ our executive officers as consultants under the terms of
individual consulting agreements. See "Employment and Consulting Agreements".
The following table sets forth information, as of May 21, 2001, regarding our
directors, executive officers and key employees:
- ------------------------------ ----------- -------------------------------------------------- -------------------
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
- ------------------------------ ----------- -------------------------------------------------- -------------------
Thomas 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. 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 an Investment Banker at
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 1987 to 1997, Mr. Heysel was with Sproule Associates
Limited, an independent economic evaluator of oil and natural gas reserves.
During his tenure with Sproule, Mr. Heysel held the positions of Petroleum
Engineer and Associate, Engineering Manager and Senior Associate and Manager -
International Projects and Senior Associate. 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 private junior oil and gas company.
DAMING YANG - DIRECTOR AND PRESIDENT
Mr. 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 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. 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 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
44
company. Mr. Milne currently serves on the board of directors of 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
Investment Committee of the University of Calgary Pension and Endowment Funds
IAN AARON - DIRECTOR
Mr. Aaron has been the President and CEO of TVN Entertainment
Corporation, a leading digital distribution services company since August 2000.
Mr. Aaron joined TVN after leaving 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. Mackie 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. 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
45
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 convicted 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 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."
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.
46
EXECUTIVE COMPENSATION
We employ our executive officers as consultants to the Company. 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 $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------------------------------------------------------
AWARDS PAYOUTS
-----------------------------------------
OTHER SECURITIES RESTRICTED
FISCAL ANNUAL UNDER SHARES OR
YEAR COMPEN- OPTION/SAR RESTRICTED LTIP ALL OTHER
NAME AND PRINCIPAL ENDED SALARY BONUS SATION GRANTED (#) SHARE UNITS PAYOUTS COMPENSATION
POSITION (1) (US$) (US$) (US$) (US$) (US$)
- ---------------------------------------------------------------------------------------------------------------------
Matthew Heysel, 2000 75,000(2) 0 0 550,000 0 0 0
Chief Executive 1999(3) 0 0 0 0 0 0 0
Officer
Daming Yang, 2000 30,000(2) 0 0 550,000 0 0 0
President 1999(3) 0 0 0 0 0 0 0
Thomas Milne, Chief 2000 60,000(2) 0 0 250,000 0 0 0
Financial Officer 1999(3) 0 0 0 0 0 0 0
James Charuk 2000(4) 0(4) 0 0 0 0 0 0
1999 0(5) 0 0 0 0 0 0
<FN>
(1) December 31
(2) From March 1, 2000 through December 31, 2000. Monies represent
consulting fees paid during this period to the executive officers.
(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 consultants 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 $7.50 per share. See "Stock
Option and Warrant Grants".
47
The following table sets forth information regarding stock option
grants to our executive officers and directors:
OPTION GRANTS
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ---------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL ($/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
Thomas 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% $7.50 11/1/2003 118,200 248,250
<FN>
(1) Based on options exercisable to acquire a total 5,325,000 shares to executive officers, directors and
employees.
(2) The exercise price per share was equal to or greater than the fair
market value of the common stock on the date of grant as determined by
the Board of Directors.
</FN>
The potential realizable value is calculated based on the assumption
that the common stock appreciates at the annual rate shown, compounded annually,
from the date of grant until the expiry of the term of the option. These numbers
are calculated based on SEC requirements and do not reflect our projection or
estimate of future stock price growth. Potential realizable values are computed
by:
o multiplying the number of shares of common stock subject to a given
option by the exercise price;
o assuming that the aggregate stock value derived from that
calculation compounds at the annual 5% or 10% rate shown in the
table for the entire term of the option; and
o subtracting from that result the aggregate option exercise price.
OPTION EXERCISES
None of the Named Executive Officers have exercised options to purchase
shares of our common stock as of May 21, 2001.
The following table sets forth details of each exercise of stock
options during the financial year ended December 31, 2000 by any of the Named
Executive Officers, and the financial year-end value of unexercised options on
an aggregate basis.
48
AGGREGATED OPTIONS EXERCISED
DURING THE FINANCIAL YEAR ENDED DECEMBER 31, 2000
AND FINANCIAL YEAR-END OPTION VALUES
- -------------------------- ----------------- ---------------- ----------------------- -------------------------------
NAME SECURITIES AGGREGATE UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN THE
ACQUIRED ON VALUE REALIZED AT FY-END (#) MONEY-OPTIONS AT FY-END
EXERCISE (#) ($) EXERCISABLE(2)/ ($) 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)
- -------------------------- ----------------- ---------------- ----------------------- -------------------------------
Thomas 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 May 21, 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 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 status 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.
49
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 CONTRACTS
We, through our subsidiaries, have entered into consulting agreements
with key individuals, including our executive officers, 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 September 30, 2001, with renewal at the discretion of
the board of directors. The agreement contains non-compete provisions that
restricts Mr. 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:
50
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 Company 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 Company, and
o the exercise of such effective control to cause or result in the
election or appointment of two or more directors of the Company, or
of the successor to the Company, who were not previously directors
of the Company.
Daming Yang Consulting Agreement: Daming Yang provides services as our
President on a full-time basis under the terms of a consulting agreement. Mr.
Yang's consulting contract expired on April 1, 2001 and we are currently
negotiating a renewal of Mr. Yang's consulting contract to be effective April 1,
2001. Until such time as a new contract can be negotiated, we continue to
operate under the terms of Mr. Yang's previous contract. 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
expires on September 30, 2001. 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 September 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: Mr. Lam provides services as our Vice
President, Network Engineering on a full-time basis under the terms of a
consulting agreement. Mr. Lam's consulting contract expired on April 1, 2001 and
we are currently negotiating a renewal of Mr. Lam's consulting contract to be
effective April 1, 2001. Until such time as a new contract can be negotiated, we
continue to operate under the terms of Mr. Lam's previous contract. 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
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.
51
Teddy Yung Consulting Agreement: Mr. Yung provides services as our Vice
President, Systems Engineering on a full-time basis under the terms of a
consulting agreement with YungPC AP. Mr. Yung's consulting contract expired on
April 1, 2001 and we are currently negotiating a renewal of Mr. Yung's
consulting contract to be effective April 1, 2001. Until such time as a new
contract can be negotiated, we continue to operate under the terms of Mr. Yung's
previous contract. 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 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. Matthew Heysel
and Daming Yang were shareholders, directors and officers of China Broadband
(BVI) Corp. prior to the transaction and became directors of China Broadband
Corp. As a result of the transaction, both Mr. Heysel and Mr. Daming exchanged
their shares of China Broadband (BVI) Corp. for 1,923,750 shares of China
Broadband 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 Thomas Milne were appointed as the members of our Board
of Directors.
On April 13, 2000, China Broadband Corp. granted options to officers,
directors, employees 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. At the time of this issuance, there was no
market for our shares. We determined the fair market value of the stock to be
equal to the price of a proposed private placement financing expected to close
in May 2000 at $1.00 per share. Options were granted to the following persons:
NAME # OF OPTIONS NAME # OF OPTIONS
- ---- ------------ ---- ------------
Michael Lobsinger 800,000 Qifeng Xue 100,000
Danai Suksiri 500,000 Donghe Xue 100,000
Matthew Heysel 500,000 Lu Wang 100,000
Daming Yang 500,000 WRW Investments Ltd. 250,000
Wei Yang 500,000 Ken Barnes 50,000
Ian Aaron 100,000 Jodi Larmour 50,000
Bing Ho 100,000 Rob Phare 25,000
Bernie Poznanski 100,000 Larry Timluck 25,000
Richard Hurwitz 100,000 Michael Morrison 25,000
Thomas Milne 100,000 Xinhua Duang 25,000
Kai Yang 100,000 Greg Bawdon 25,000
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. 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. In addition, 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 members of Mr. Milne's family for estate planning purposes in
a private transaction. 10,000 of these shares were transferred to Mr. Milne and
5,000 of these shares were gifted and transferred for no consideration to Mr.
Milne's spouse.
52
We acquired SoftNet Systems Inc.'s 50% interest in Big Sky Network by
paying $2.5 million in cash, issuing a promissory note in the principal amount
of $1.7 million and issuing SoftNet 1,133,000 shares of our common stock, which
was approximately 5.82% of our issued and outstanding share capital as of May
21, 2001. See "Transactions with SoftNet". At the time of this transaction,
SoftNet was at arm's length to us.
Ian Aaron, a director, previously served as President of SoftNet
Systems, Inc. (1994-1999).
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. We determined the fair market value of the stock to be equal
to the closing price of our common stock on the day of the grant. As such, the
closing price of our stock on November 1, 2000 was $7.50. Options were granted
to the following persons:
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 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. We determined the fair market value of the stock to be equal
to the closing price of our common stock on the day of the grant. As such, the
closing price of our stock on February 2, 2001 was $5.875. Options were granted
to the following persons:
NAME # OF OPTIONS
---- ------------
Jodi Larmour 50,000
Qun He 100,000
Barry Mackie 300,000
John Brooks 100,000
We have entered into consulting agreements with Matthew Heysel, Daming
Yang, Thomas 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 May 21, 2001 for:
o each of our directors and executive officers individually;
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
53
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 May 21, 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 2,473,750(2) 12.35%(2) 12.35%(2)
2080, 440-2 Avenue SW
Calgary, Alberta T2P 5E9
Daming Yang 2,473,750(3) 12.35%(3) 12.35%(3)
2080, 440-2 Avenue SW
Calgary, Alberta T2P 5E9
Thomas Milne 275,200(4) 1.40%(4) 1.40%(4)
2080, 440-2 Avenue SW
Calgary, Alberta T2P 5E9
Ian Aaron 100,000(5) 0.51%(5) 0.51%(5)
7th Floor, 2901 West Alameda Avenue
Burbank, CA 91505
John Brooks 100,000(5) 0.51%(5) 0.51%(5)
16650 Chesterfield Grove Road
Chesterfield, MO 63005
Richard Hurwitz 200,000(6) 1.02%(6) 0.51%(6)
370-1610 des peres Road
St. Louis, MO 63131-1850
Barry Mackie 300,000(5) 1.52%(5) 1.52%(5)
16680 - 85A Avenue
Surrey, BC V4N 5A7
Richard Lam 100,000(5) 0.51%(5) 0.51%(5)
4 Ayrmont Lane
Aberdeen, New Jersey 07747
Teddy Yung 200,000(5) 1.02%(5) 1.02%(5)
Apartment 3C
136-35 Maple Avenue
Flushing, New York 11355
5% SHAREHOLDERS
Wei Yang 2,423,750(7) 12.13%(7) 12.13%(7)
Room 837, China Merchant Building
Shenzhen, Guong Dong
China 518067
54
Kai Yang 2,023,750(8) 10.34%(8) 10.34%(8)
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 May 21,
2001.
(2) Includes 1,923,750 shares of common stock and options exercisable within 60
days of May 21, 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 May 21, 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 May
21, 2001 to acquire 250,000 shares of common stock.
(5) Consisting of options exercisable within 60 days of May 21, 2001 to acquire
common stock.
(6) Includes 100,000 common shares and options exercisable within 60 days of May
21, 2001.
(7) Includes 1,923,750 shares of common stock and options exercisable within 60
days of May 21, 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 May 21, 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 May 21, 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.
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.
55
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 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.
56
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 May 21, 2001, we were authorized to issue 50,000,000 shares of
common stock, of which 19,474,517 shares were issued and outstanding held by 83
shareholders of record. 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 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.
57
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 $6.50 $3.06
Second Quarter (April 1 through May 21, 2001) $3.75 $1.20
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, $3.25 on March 30, 2001 and $1.50 on May 21, 2001.
We have never paid dividends on our common shares. We do not anticipate
paying any dividends in the foreseeable future.
As of May 21, 2001 we had 83 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:
58
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 May
21, 2001, of which 1,509,850 are freely tradable. Subject to the registration
statement being declared and remaining effective, 5,330,667 issued 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.
59
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 became available for sale in the public markets on April 14,
2001 and 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 1% of the number of shares of common stock then outstanding, which equals
approximately 19,474 shares as of May 21, 2001.
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 May 21, 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 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
60
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.
The financial statements of Shenzhen China Merchants Big Sky Network
Ltd. and the financial statements of Sichuan Huayu Big Sky Network Ltd. included
in this prospectus and in the registration statement have been audited by
Deloitte Touche Tohmatsu, independent auditors, as stated in their reports
(which contain an explanatory paragraph regarding our joint ventures' 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.
61
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.
62
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENT LOCATION
China Broadband Corp. (March 31, 2001 unaudited)........................................................F-1
Condensed Consolidated Balance Sheet as of March 31, 2001 and December 31, 2000....................F-1
Condensed Consolidated Statement of Operations for the Three Month Period ended March 31, 2001.... F-2
Condensed Consolidated Statement of Stockholders' Equity as of March 31, 2001......................F-3
Condensed Consolidated Statement of Cash Flow for the Three Month Period ended March 31, 2001..... F-5
Notes to the Condensed Consolidated Financial Statements...........................................F-6
China Broadband Corp. (December 31, 2000 audited).......................................................F-11
Independent Auditors' Report.......................................................................F-11
Consolidated Balance Sheets........................................................................F-12
Consolidated Statements of Operations..............................................................F-13
Consolidated Statement of Stockholders' Equity.....................................................F-14
Consolidated Statements of Cash Flows..............................................................F-16
Notes to Consolidated Financial Statements.........................................................F-17
Big Sky Network Canada, Ltd. (March 31, 2000 audited)...................................................F-31
Independent Auditors' Report.......................................................................F-31
Balance Sheets.....................................................................................F-32
Statements of Operations...........................................................................F-33
Statement of Stockholders' Equity..................................................................F-34
Statements of Cash Flows...........................................................................F-35
Notes to Financial Statements......................................................................F-36
Big Sky Network Canada, Ltd. (June 30, 2000 and December 31, 1999 unaudited)............................F-42
Condensed Balance Sheets...........................................................................F-41
Condensed Statements of Operations.................................................................F-43
Condensed Statement of Stockholders' Equity........................................................F-44
Condensed Statements of Cash Flows.................................................................F-45
Notes to Condensed Financial Statements............................................................F-46
Shenzhen China Merchants Big Sky Network Ltd............................................................F-52
Independent Auditors' Report.......................................................................F-52
Balance Sheets.....................................................................................F-53
Statements of Operations...........................................................................F-54
Statement of Stockholders' Equity..................................................................F-55
Statements of Cash Flows...........................................................................F-56
Notes to Financial Statements......................................................................F-57
Sichuan Huayu Big Sky Network Ltd.......................................................................F-63
Independent Auditors' Report.......................................................................F-63
Balance Sheets.....................................................................................F-64
Statements of Operations...........................................................................F-65
Statement of Stockholders' Equity..................................................................F-66
Statements of Cash Flows...........................................................................F-67
Notes to Financial Statements......................................................................F-68
63
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEET
(EXPRESSED IN UNITED STATES DOLLARS)
- ---------------------------------------------------------------------------------------------------- -----------------------
MARCH 31, 2001
(UNAUDITED) DECEMBER 31, 2000
$ $
---------------------- -----------------------
ASSETS
CURRENT
Cash and cash equivalents 3,865,181 4,668,128
Interest and Goods and Services Tax receivable 93,457 64,201
Prepaid expenses 67,119 117,119
---------------------- -----------------------
4,025,757 4,849,448
Investment in Shekou joint venture 2,428,275 2,482,018
Investment in Chengdu joint venture 1,836,874 1,321,884
Property and equipment, net 219,159 220,799
Intangible assets:
Intellectual property (Note 5) 789,057 819,402
Shekou joint venture (Note 5) 2,294,325 2,421,788
Chengdu joint venture (Note 5) 4,588,650 4,843,575
Goodwill (Note 5) 1,938,345 2,046,031
---------------------- -----------------------
18,120,442 19,004,945
====================== =======================
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 585,851 250,840
Promissory note (Note 5) 1,700,000 1,700,000
---------------------- -----------------------
2,285,851 1,950,840
---------------------- -----------------------
CONTINUING OPERATIONS (Note 3)
CONTINGENCIES (Note 6)
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY
Common stock
$0.001 par value, shares authorized: 50,000,000; 77,936 77,936
shares issued and outstanding: 19,474,517
Additional paid-in capital 21,433,734 20,631,344
Deferred compensation (807,720) (57,995)
Accumulated deficit (4,869,359) (3,597,180)
---------------------- -----------------------
15,834,591 17,054,105
---------------------- -----------------------
18,120,442 19,004,945
====================== =======================
See notes to condensed consolidated financial statements.
F-1
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(EXPRESSED IN UNITED STATES DOLLARS)
- ---------------------------------------------------------------------------------------------------- -----------------------
CUMULATIVE PERIOD
FROM DATE OF
THREE MONTHS ENDED INCEPTION (FEBRUARY 9,
MARCH 31, 2001 2000) TO MARCH 31,
2001
$ $
---------------------- -----------------------
REVENUE
Technical consulting - 208,333
GENERAL AND ADMINISTRATIVE EXPENSES (including non-cash compensation of 1,219,849 4,905,247
$52,665 and $119,758, respectively)
---------------------- -----------------------
(1,219,849) (4,696,914)
EQUITY LOSS IN BIG SKY NETWORK CANADA LTD. - (181,471)
EQUITY LOSS IN SHEKOU JOINT VENTURE (53,743) (256,164)
EQUITY LOSS IN CHENGDU JOINT VENTURE (55,010) (98,716)
INTEREST INCOME 56,423 363,906
---------------------- -----------------------
NET LOSS (1,272,179) (4,869,359)
====================== =======================
LOSS PER SHARE
Basic and Diluted (0.07)
======================
SHARES USED IN COMPUTATION - BASIC AND DILUTED 19,474,517
======================
See notes to condensed consolidated financial statements.
F-2
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(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
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
============= ============== =============== ================ =============== ================
F-3
Deferred compensation - - 802,390 (802,390) - -
Amortization of deferred
compensation - - - 52,665 - 52,665
Net loss - - - - (1,272,179) (1,272,179)
------------- -------------- --------------- ---------------- --------------- ----------------
Balance,
March 31, 2001 (unaudited) 19,474,517 77,936 21,433,734 (807,720) (4,869,359) 15,834,591
============= ============== =============== ================ =============== ================
See notes to condensed consolidated financial statements.
F-4
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(EXPRESSED IN UNITED STATES DOLLARS)
- ------------------------------------------------------------------------------------------------------- ----------------------
CUMULATIVE PERIOD
FROM DATE OF
INCEPTION (FEBRUARY 9,
THREE MONTHS ENDED 2000) TO MARCH 31,
MARCH 31, 2001 2001
$ $
------------------------- ----------------------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net loss (1,272,179) (4,869,359)
Adjustments for:
Amortization 533,679 1,112,692
Equity loss in Big Sky Network Canada Ltd. - 181,471
Equity loss in Shekou joint venture 53,743 256,164
Equity loss in Chengdu joint venture 55,010 98,716
Non-cash stock compensation 52,665 119,758
Changes in operating assets and liabilities
Interest and Goods and Services Tax receivable (29,256) (93,457)
Prepaid expenses 50,000 (67,119)
Accounts payable 335,011 (67,947)
------------------------- ----------------------
(221,327) (3,329,081)
------------------------- ----------------------
FINANCING
Issue of common stock for cash (net of issuance costs) - 11,816,692
------------------------- ----------------------
INVESTING
Purchases of property and equipment (11,620) (291,012)
Acquisition of Big Sky Network Canada Ltd. (net of cash acquired) - (2,395,828)
Investment in Chengdu joint venture (570,000) (1,935,590)
------------------------- ----------------------
(581,620) (4,622,430)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
(802,947) 3,865,181
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
4,668,128 -
CASH AND CASH EQUIVALENTS, END OF PERIOD 3,865,181 3,865,181
========================= ======================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes - -
========================= ======================
Cash paid for interest - -
========================= ======================
See notes to condensed consolidated financial statements.
F-5
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of China
Broadband Corp. (the "Corporation") and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally
accepted accounting principles for annual financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2001
are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001. For further information, refer to
the consolidated financial statements and notes thereto included in the
Corporation's 2000 Annual Financial Statements herein.
2. INCORPORATION AND BACKGROUND
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 equipment and technical services
to support Internet usage in major urban markets throughout The
People's Republic of China (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 are deemed to be a continuation of
CBB - BVI's historical financial statements.
3. 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-6
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
3. CONTINUING OPERATIONS (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's Chinese joint venture partners may not be able to attract
and retain subscribers to their Internet access services to whom the
Corporation could sell equipment and technical services, or our Chinese
joint venture partners 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 Joint Venture's
("Shekou JV") services were launched on June 30, 2000. The
Corporation's Chengdu Joint Venture's ("Chengdu JV") services were
launched on October 26, 2000 and as of March 31, 2001 it had connected
a small number of subscribers. The Shekou JV and Chengdu JV are
currently expanding their subscriber base in the Shekou Industrial Zone
and Chengdu. Services in Deyang are expected to commence upon receipt
of approvals required for the establishment of the Deyang Joint Venture
and for our Chinese partner to provide Internet access services.
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
of the Corporation's joint ventures in the PRC will be denominated in
Chinese Renminbi. Such currency is now convertible into foreign
exchange for "current account" payments, such as the remittance of
dividends to the Corporation and the purchase of imported equipment,
however, there can be no assurance that such convertibility 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-7
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
3. CONTINUING OPERATIONS (CONTINUED)
Management anticipates that the Corporation currently has sufficient
working capital to fund the Corporation's plan of operation through the
quarter ended September 30, 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 Big Sky Network Canada Ltd. ("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 before September 30,
2001 to fund the implementation of BSN's business of entering into
joint ventures.
The consolidated operations of the Corporation requires cash of
$150,000 to $200,000 per month to operate in the PRC and in Canada. The
operating cash break even point for the facilities in Shekou and
Chengdu is estimated by the Corporation to be the equivalent of 3,000
to 4,000 subscribers at present pricing structures. The Corporation is
in discussions with various equipment suppliers for vendor financing or
lease packages for capital equipment. However, failing any new debt or
equity financing, the Corporation could continue the Shekou and Chengdu
joint ventures as they are and inaugurate one additional joint venture
with existing capital and modest growth in the subscriber base. Other
low cost value added services may 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.
4. ACCOUNTING POLICIES
PER SHARE INFORMATION
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 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. There was no impact on the Corporation's consolidated financial
position, results of operations or cash flows as a result of adopting
these statements.
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-8
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
4. ACCOUNTING POLICIES
NEW ACCOUNTING PRONOUNCEMENTS (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.
5. 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 US $12.7 million, consisting of $2.5 million cash, a
$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
=================
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 during the commencement of operations
of the joint ventures to ensure the assumptions used in the analysis of
their valuations are supported and adjustments may be made to the
values ascribed to the intangible assets of the joint ventures and
goodwill.
F-9
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
6. CONTINGENCIES
On March 29, 2001, The Orbiter Fund Ltd., The Viator Fund Ltd., Lancer
Offshore Inc. and Lancer Partners Limited Partnership (collectively,
the "Plaintiffs") filed an action in the Court of Queen's Bench of
Alberta, Judicial District of Calgary (Action No. 0101-07232), naming
Matthew Heysel, CEO, and China Broadband Corp. as defendants. The
action alleges that Mr. Heysel made certain misrepresentations to the
Plaintiffs in connection with the Plaintiffs' purchase of 500,000
shares of the Corporation's common stock at $1.00 per share and 866,667
shares of China Broadband Corp.'s common stock at $7.50 per share. The
Plaintiffs are seeking, among other things, damages in the amount of
$7,000,000, an accounting of profits and a preservation order
preserving the funds obtained from the Plaintiffs.
The Corporation believes the claims are without merit and intends to
vigorously defend against the claims.
7. COMMITMENTS
a) 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.
b) 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-10
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 equipment and technical
services to users of 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-11
- ----------------------------------------------------------------------------------------------
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-12
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-13
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)
------------- -------------- --------------- ---------------- --------------- ----------------
F-14
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-15
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-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)
- --------------------------------------------------------------------------------
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 equipment
and technical services to support Internet usage in major urban markets
throughout The People's Republic of China (the "PRC"). The Corporation
was incorporated for the purpose of implementing a business strategy to
provide equipment and services to users of 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.
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).
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)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
INVESTMENT IN BIG SKY NETWORK CANADA LTD. (CONTINUED)
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 customer 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.
On July 8, 2000, BSN signed a joint venture agreement with Chengdu
Huayu Information Industry Co., Ltd. ("Chengdu Huayu") to establish
Sichuan Huayu Big Sky Network Ltd. ("Chengdu JV"). The purpose of the
Chengdu JV is to develop an advanced broadband software and hardware
platform for data transmission and Internet related business in the
Sichuan Province, the PRC. Under the terms of the joint venture
agreement, Chengdu Huayu agreed to provide the joint venture with
exclusive access to the customers of its data transmission 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 provide equipment and
services in support of customers requiring Internet access in the
Deyang area of Sichuan Province. Under the terms of the joint venture
agreement, Deyang Guangshi agreed to provide the joint venture with
exclusive access to the customers of its data transmission 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-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)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (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. In negotiating
new joint ventures, the Corporation seeks to minimize the initial
capital investment while maximizing the proportion of net revenue
attributable to the Corporation. An initial cash investment of $500,000
and capital equipment investment of $500,000 will be sufficient to
commence commercial operation of a new joint venture. Subsequent
capital investment would be made out of the cash flow of the joint
venture as the subscriber base grows. To recover the initial $1 million
over five years requires a subscriber base of approximately 3,000
customers paying $15 per month with a 60% allocation of net revenues to
the Corporation. 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 the right to receive a higher percentage of earnings
for the Chengdu joint venture and an even greater interest in the
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
provision of online access and related 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 and related services, which remains unproven in the
PRC. The Corporation's Chinese joint venture partners may not be able
to attract and retain subscribers to their internet access services to
whom the Corporation could sell equipment and technical services, or
our Chinese joint venture partners 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 generated 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 are expected to commence upon receipt of approvals required for
the establishment of the Deyang Joint Venture and for our Chinese
partner to provide Internet access services.
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)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
CONTINUING OPERATIONS (CONTINUED)
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 is also 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
of the Corporation's joint ventures in the PRC will be denominated in
Chinese Renminbi. Such currency is now convertible into foreign
exchange for "current account" payments, such as the remittance of
dividends to the Corporation and the purchase of imported equipment.
However, there can be no assurance that such convertibility 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.
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.
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)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL STATEMENTS ESTIMATES
The consolidated operations of the Corporation requires cash of
$125,000 to $150,000 per month to operate in China 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 China, 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.
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 December 31, 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.
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)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 carry forwards
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-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)
- --------------------------------------------------------------------------------
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.
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.
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)
- --------------------------------------------------------------------------------
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
=================
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 during the commencement of operations
for the joint ventures to ensure the assumptions used in the analysis
of their valuations are supported and adjustments may be made to the
values ascribed to the intangible assets of the joint ventures and
goodwill.
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 September 29, 2000
is as follows:
-----------------
$
-----------------
Revenue --
=================
Net loss (2,679,942)
=================
Basic and diluted loss per share (0.14)
=================
F-24
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)
- --------------------------------------------------------------------------------
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
=================
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
=================
Gross Revenue 116,608
=================
Gross Loss (277,351)
=================
Net loss (615,734)
=================
F-25
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 (CONTINUED)
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
=================
Gross Revenue ---
=================
Gross Loss --
=================
Net loss (67,240)
=================
The services in Deyang have not commenced at December 31, 2000.
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.
F-26
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)
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.
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 foremployee 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.
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.
F-27
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)
- --------------------------------------------------------------------------------
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.
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.
F-28
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)
BSN has entered into an investment commitment for capital contributions
to the joint venture with Chengdu Huayu, 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.
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
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.
F-29
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 (CONTINUED)
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
equipment and technical services to support users of high capacity,
high speed Internet broadband services in major urban markets
throughout the PRC. The business focus of the Corporation involves
investments in the joint ventures to provide this equipment and
services. As such, these operating activities are conducted through the
joint ventures and are entirely within the territory of China. 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.
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
non-employee grants was $802,390 and will be recognized as
compensation expense. The fair value of the options granted to
employees was $178,309.
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 equipment and technical services to support
users of the Internet in 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-30
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 equipment and technical
services to users of 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-31
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
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 -
================= ==================
The accompanying notes are an integral part of these financial statements.
F-32
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.
F-33
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.
F-34
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-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)
- --------------------------------------------------------------------------------
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 equipment and technical services to support Internet usage 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 equipment and
services to users of 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).
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-36
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 and related equipment and services. The
demand for these services 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
of the Corporation's joint ventures in the PRC will be denominated in
Chinese Renminbi. Such currency is now convertible into foreign
exchange for "current account" payments, such as the remittance of
dividends to the Corporation and the purchase of imported equipment.
However, there can be no assurance that such convertibility 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.
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.
F-37
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 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-related business prior to
the PRC's accession 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.
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 carry forwards
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.
F-38
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)
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:
i. On May 20, 1999 the Corporation issued 50,000 founder (bearer)
shares for no consideration;
ii. On February 22, 2000, the Corporation issued an additional 10,000
shares to a third party for cash consideration of $500,000.
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.
F-39
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)
- --------------------------------------------------------------------------------
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.
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
equipment and technical service to support users of high capacity, high
speed Internet broadband 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 conducted 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-40
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
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.
b) On July 8, 2000, BSN signed a joint venture agreement with Chengdu
Huayu Information Industry Co., Ltd. ("Chengdu Huayu") to
establish Sichuan Huayu 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 Sichuan Province, the PRC. Under the terms of the
joint venture agreement, Chengdu Huayu agreed to provide the joint
venture with exclusive access to the customers of its data
transmission platform of its Huayu 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"), to provide
equipment and services in support of customers requiring Internet
access in the Deyang area of Sichuan Province. Under the terms of
the joint venture agreement, Deyang Guangshi agreed to provide the
joint venture with exclusive access to the customers of its 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-41
BIG SKY NETWORK CANADA LTD.
- -------------------------------------------------------------------------------------------------------
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEET
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- ------------------------------------------------------------------- ----------------- ------------------
2000 1999
(Unaudited)
$ $
----------------- ------------------
ASSETS
CURRENT
Cash and cash equivalents 1,148,543 -
Interest receivable 631 -
Prepaid expenses 416,666 -
----------------- ------------------
1,565,840 -
Investment in Shekou joint venture (Note 1) 2,769,408 -
----------------- ------------------
4,335,248 -
================= ==================
LIABILITIES
CURRENT
Due to officers and directors (Note 5) 19,604 19,604
Due to China Broadband Corp. (Note 6) 1,995,465 -
----------------- ------------------
2,015,069 19,604
----------------- ------------------
CONTINUING OPERATIONS (Note 1)
COMMITMENTS (Notes 1 and 8)
SHAREHOLDERS' EQUITY
Common shares
$1.00 par value, shares authorized: 100,000;
shares issued and outstanding: 100,000 50,000 -
Additional paid-in capital 2,450,000 -
Accumulated deficit (179,821) (19,604)
----------------- ------------------
2,320,179 (19,604)
----------------- ------------------
4,335,248 -
================= ==================
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
F-42
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS
SIX-MONTH PERIOD ENDED JUNE 30, 2000 (UNAUDITED) AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------- ------------------- ----------------
Cumulative
Period From
Date of
Incorporation,
May 20,
Six Month 1999
Period Ended to
June 30, June 30,
2000 2000
(Unaudited) (Unaudited)
$ $
------------------- ----------------
GENERAL AND ADMINISTRATIVE
EXPENSES 83,402 103,006
------------------- ----------------
EQUITY LOSS IN SHEKOU JOINT
VENTURE (82,049) (82,049)
INTEREST INCOME 5,234 5,234
------------------- ----------------
NET LOSS (160,217) (179,821)
=================== ================
LOSS PER SHARE
Basic and diluted (2.05)
===================
SHARES USED IN COMPUTATION,
BASIC AND DILUTED 78,187
===================
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
F-43
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX-MONTH PERIOD ENDED JUNE 30, 2000 (UNAUDITED) 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 50,000 50,000 2,450,000 - 2,500,000
NET LOSS - - - (160,217) (160,217)
--------------- ------------- ------------------ --------------- -----------------
BALANCE, JUNE 30, 2000 (UNAUDITED) 100,000 50,000 2,450,000 (179,821) 2,320,179
=============== ============= ================== =============== =================
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
F-44
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENT OF CASH FLOWS
SIX-MONTH PERIOD ENDED JUNE 30, 2000 (UNAUDITED) AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------- -------------------
Cumulative
Period From
Date of
Incorporation,
May 20,
Six Month 1999
Period Ended to
June 30, June 30,
2000 2000
(Unaudited) (Unaudited)
$ $
-------------------- -------------------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net loss (160,217) (179,821)
Adjustments for:
Equity loss in Shekou Joint Venture 82,049 82,049
-------------------- -------------------
(78,168) (97,772)
Changes in operating assets and liabilities
Due to officers and directors - 19,604
Interest receivable (631) (631)
Prepaid expenses (416,666) (416,666)
-------------------- -------------------
(495,465) (495,465)
-------------------- -------------------
FINANCING
Issue of common shares for cash 2,500,000 2,500,000
-------------------- -------------------
INVESTING
Investment in Shekou joint venture (2,851,457) (2,851,457)
Increase in due to China Broadband Corp. 1,995,465 1,995,465
-------------------- -------------------
(855,992) (855,992)
-------------------- -------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,148,543 1,148,543
==================== ===================
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes - -
==================== ===================
Cash paid for interest - -
==================== ===================
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
F-45
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
SIX-MONTH PERIOD ENDED JUNE 30, 2000 (UNAUDITED) 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
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for annual financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the six months ended June 30, 2000 are
net necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
The results of operations of the comparative period from May 20, 1999
to June 30, 1999 has not been presented as the amounts are immaterial.
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 equipment and technical services to support Internet usage 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 equipment and
services to users of 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.
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-46
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
SIX-MONTH PERIOD ENDED JUNE 30, 2000 (UNAUDITED) 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's Chinese joint venture partners may not be able to attract
and retain subscribers to their Internet access services to whom the
Corporation could sell equipment and technical services, or our Chinese
joint venture partners may face intense competition which could have an
adverse effect on the Corporation's business, financial condition and
results of operations. The Corporation'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
of the Corporation's joint ventures in the PRC will be denominated in
Chinese Renminbi. Such currency is now convertible into foreign
exchange for "current account" payments, such as the remittance of
dividends to the Corporation and the purchase of imported equipment.
However, there can be no assurance that such convertibility 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.
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. 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.
F-47
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
SIX-MONTH PERIOD ENDED JUNE 30, 2000 (UNAUDITED) AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
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.
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 VENTURE
The joint venture in Shekou is accounted for under the equity method of
accounting.
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 carry forwards
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.
F-48
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
SIX-MONTH PERIOD ENDED JUNE 30, 2000 (UNAUDITED) AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 believes 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 its revenue recognition practices are in conformity with SAB 101.
3. COMMON SHARES
The Corporation has issued the following shares:
i. On May 20, 1999 the Corporation issued 50,000 founder (bearer)
shares for no consideration;
ii. On February 22, 2000, the Corporation issued an additional 10,000
shares to a third party for cash consideration of $500,000.
iii. On April 25, 2000, the Corporation issued a further 40,000 shares
to the third party for cash consideration of $2,000,000. As a
result of this transaction, China Broadband (BVI) Corp. ("CBB -
BVI") no longer controlled BSN.
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 $179,821 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.
F-49
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
SIX-MONTH PERIOD ENDED JUNE 30, 2000 (UNAUDITED) AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
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.
6. DUE TO CHINA BROADBAND CORP.
The advance from China Broadband Corp. is unsecured, non-interest
bearing and payable on demand.
7. 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 cash and cash equivalents and due to officers
and directors are a reasonable estimate of their fair values.
8. SEGMENTED INFORMATION
The Corporation operates in one reportable segment: provider of
equipment and technical services to support users of high capacity,
high speed Internet broadband services in major urban markets
throughout the PRC. The Corporation's operating activities are
conducted 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-50
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
SIX-MONTH PERIOD ENDED JUNE 30, 2000 (UNAUDITED) AND THE PERIOD FROM
DATE OF INCORPORATION, MAY 20, 1999 TO DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
9. SUBSEQUENT EVENTS
a) On July 8, 2000, BSN signed a joint venture agreement with Chengdu
Huayu Information Industry Co., Ltd. ("Chengdu Huayu") to
establish Sichuan Huayu 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 Huayu 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.
b) On September 29, 2000, CBB - BVI purchased the shares held by the
third party (see Note 3). As a result of this transaction, CBB -
BVI owns 100% of BSN.
c) 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 provide
equipment and services in support of customers requiring Internet
access 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-51
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Shenzhen China Merchants Big Sky Network Ltd.
We have audited the accompanying balance sheet of Shenzhen China
Merchants Big Sky Network Ltd. (the "Joint Venture"), a Development
Stage Enterprise, as of December 31, 2000, and the related statements
of operations, owners' equity and cash flows for the year ended
December 31, 2000. These financial statements are the responsibility of
the Joint Venture's management. Our responsibility is to express an
opinion on these 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Joint Venture as of
December 31, 2000, and the results of its operations and its cash flows
for the year ended 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 Joint Venture will continue as a going concern. The Joint Venture
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 Joint Venture'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.
Hong Kong, /S/ DELOITTE TOUCHE TOHMATSU
February 19, 2001 Certified Public Accountants
F-52
SHENZHEN CHINA MERCHANTS BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
AT DECEMBER 31, 2000
- ------------------------------------------------------------------------
(EXPRESSED IN RENMINBI)
ASSETS
Current assets:
Cash and cash equivalents 12,794,175
Accounts receivable 179,531
Other current assets 124,694
Inventories (Note 4) 2,295,310
----------
Total current assets 15,393,710
Property and equipment, net (Note 5) 5,667,773
----------
TOTAL 21,061,483
==========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable 787,360
Other payable 119,450
Accrued liabilities 356,414
Amount due to joint venturer 57,942
----------
Total current liabilities 1,321,166
----------
Owners' equity:
Contributed capital (Note 6) 24,832,200
Additional paid-in capital (Note 6) 4,800
Deficit accumulated during the development stage (5,096,683)
----------
Total owners' equity 19,740,317
----------
TOTAL 21,061,483
==========
The accompanying notes are an integral part of these financial statements.
F-53
SHENZHEN CHINA MERCHANTS BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
- ------------------------------------------------------------------------
(EXPRESSED IN RENMINBI)
Revenue (Note 3) 965,210
Cost of goods sold (3,260,960)
---------
Gross loss (2,295,750)
Interest income 303,625
General and administrative expenses (3,104,558)
---------
Net loss (5,096,683)
=========
The accompanying notes are an integral part of these financial statements.
F-54
SHENZHEN CHINA MERCHANTS BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000
- -------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN RENMINBI)
Deficit
accumulated
Additional during the Total
Contributed paid-in development owners'
capital capital stage equity
Balance at January 1, 2000 - - - -
Capital contributions by joint venturer 24,832,200 4,800 - 24,837,000
Net loss - - (5,096,683) (5,096,683)
--------------- ---------------- --------------- ---------------
Balance at December 31, 2000 24,832,200 4,800 (5,096,683) 19,740,317
=============== ================ =============== ===============
The accompanying notes are an integral part of these financial statements.
F-55
SHENZHEN CHINA MERCHANTS BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
- -----------------------------------------------------------------------------------------------
(EXPRESSED IN RENMINBI)
Cash flows from operating activities
Net loss (5,096,683)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 277,351 Changes in operating assets and
liabilities:
Accounts receivable and other current assets (304,225)
Inventories (2,295,310)
Accounts and other payable 906,810
Accrued liabilities 356,414
Amount due to joint venture 57,942
----------
Net cash used in operating activities (6,097,701)
Cash flows from investing activities
Purchases of property and equipment (2,587,894)
Cash flows from financing activities
Capital contributions by joint venturer 21,479,770
----------
Cash and cash equivalents at December 31, 2000 12,794,175
==========
Supplemental information:
Cash received from interest income 303,625
Non-cash investing activities:
Contributed property and equipment 3,357,230
==========
The accompanying notes are an integral part of these financial statements.
F-56
SHENZHEN CHINA MERCHANTS BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
1. FORMATION AND NATURE OF BUSINESS
FORMATION AND BACKGROUND
Shenzhen China Merchants Big Sky Network Ltd. (the "Joint Venture" or
"Shekou JV") was established under the laws of the People's Republic of
China on Co-operative Joint Ventures and other relevant laws of China
and regulations of Shekou. The Joint Venture is a development stage
enterprise and is seeking to become a leading facilities based provider
of equipment and technical services to support Internet usage in an
urban market in the People's Republic of China (the "PRC").
A joint venture agreement was signed on September 21, 1999 between Big
Sky Network Canada Ltd. ("BSN") and China Merchants Shekou Industrial
Zone, Limited ("China Merchants") to establish the Shekou JV. The
purpose of the Shekou JV 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 USD3,000,000
to the Shekou JV as cash or equipment. BSN is also responsible for
providing technical support to the Shekou JV. Over the Shekou 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.
Upon the expiration of the joint venture term, and if the joint
ventures decide not to extend the term, all the remaining property and
equipment will be attributable to China Merchants and the remaining
assets and liabilities of the Joint Venture will be distributed in
accordance with the BSN's 40% in the Joint Venture.
CONTINUING OPERATIONS
The Joint Venture'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-57
SHENZHEN CHINA MERCHANTS BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
1. FORMATION AND NATURE OF BUSINESS (CONTINUED)
CONTINUING OPERATIONS - 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 Joint Venture,
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 Joint
Venture's business, financial condition and results of operations.
The success of the Joint Venture will depend on the acceptance of
broadband Internet services, which remains unproven in the PRC. The
Joint Venture may not be able to attract and retain subscribers, or it
may face intense competition which could have an adverse effect on the
Joint Venture's business, financial condition and results of
operations. The Shekou JV's services were launched on June 30, 2000 and
is currently expanding its subscriber base in the Shekou Industrial
Zone.
Substantially all of the Joint Venture's revenues and operating
expenses are denominated in the Chinese Renminbi ("RMB").
These financial statements have been prepared on a going concern basis.
The Joint Venture'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 Joint Venture be unable to continue as a going
concern.
Management anticipates that the Joint Venture currently has sufficient
working capital to fund the Joint Venture's plan of operation through
the year ending December 31, 2001. The Joint Venture'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 the Joint Venture, including funding the capital
requirements, funding additional technical, management and
marketing/sales personnel and funding comprehensive joint venture
marketing and promotional programs to increase market awareness and
subscription sales. The Joint Venture was established on November 11,
1999.
The results of operations for the comparative period from November 11,
1999 (date of establishment) to December 31, 1999 has not been
presented as the amounts are immaterial.
During the year ended December 31, 2000, the Joint Venture commenced
its principal business operations. The revenues for the period from the
commencement of principal operations was not significant.
F-58
SHENZHEN CHINA MERCHANTS BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash accounts,
interest-bearing savings accounts, and time certificates of deposit
with a maturity at purchase date of three months or less.
INVENTORIES
Inventories represent cable modem which are stated at the lower of cost
and market. Cost is calculated using the weighted average method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less depreciation and
amortization. Depreciation and amortization are computed using the
straight-line method as follows:
Motor vehicles 10%
Plant and machinery 10%
Furniture and fixtures 20%
Computer hardware 20%
Leasehold improvements 20%
Cable modems 331/3%
The amortization of leasehold improvements is based on the shorter of
the lease term or the estimated useful lives of the improvement.
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. If the fair value is less than the
carry amount of the asset, a loss is recognised for the difference. 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.
REVENUE RECOGNITION
Revenue represents the net amount received and receivable from sale and
rental of cable modems, monthly subscription fees and maintenance fees.
Sales of cable modems are recognised when the goods are delivered and
title has passed.
Rentals of cable modems are recognised on a straight line basis over
the period of the respective leases.
Subscription fees and maintenance fees are recognised when services
rendered.
F-59
SHENZHEN CHINA MERCHANTS BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Joint Venture 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 carry forwards
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.
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.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("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 assessed the new standards and does not expect
that there will be material impact on the Joint Venture's financial
position, results of operations or cash flows.
3. REVENUE
Sales of cable modems 616,995
Rentals of cable modems 7,929
Subscription fees 182,290
Maintenance fees 157,996
-------
965,210
4. INVENTORIES
At December 31, 2000
Finished goods 3,517,795
Less: Reserve for decline to market value (1,355,063)
---------
2,295,310
=========
F-60
SHENZHEN CHINA MERCHANTS BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
Motor vehicles 280,499
Plant and machinery 2,914,767
Furniture and fixtures 404,205
Computer hardware 1,908,997
Leasehold improvements 293,663
Cable modems 142,993
---------
5,945,124
Accumulated depreciation and amortization (277,351)
---------
5,667,773
=========
6. CONTRIBUTED CAPITAL
The Joint Venture's registered and contributed capital was
USD3,000,000. This was contributed by cash of RMB21,479,770 and
property and equipment of RMB3,357,230 where the excess of RMB4,800 was
recorded as additional paid-in capital.
7. INCOME TAXES
The Joint Venture did not provide any current or deferred tax provision
or benefit because it has experienced an operating loss since
establishment.
The Joint Venture had net operating losses of approximately
RMB5,096,683 which was not yet agreed with the PRC tax authority for
future deduction to the Joint Venture's profit. For financial purposes,
based on the effective statutory rate of 33%, a valuation allowance of
RMB1,681,905 was provided to offset fully the future deferred tax
asset.
8. COMMITMENTS
The Joint Venture leases office premises under operating leases. Total
expense for the operating lease in the current period ended December
31, 2000 amounted to RMB243,488. At December 31, 2000, the Joint
Venture has operating lease commitment of RMB63,769 in 2001. At
December 31, 2000, the Joint Venture also has commitments for the
purchase of property and equipment which amounted to RMB33,399.
F-61
SHENZHEN CHINA MERCHANTS BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- -------------------------------------------------------------------------------
9. FINANCIAL INSTRUMENTS
Revenue from future operations in the PRC are denominated in RMB and
most of the Joint Venture's expenses are also denominated in RMB. 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
Joint Venture does not expect to use any foreign exchange hedges or
derivative instruments in the near future. The Joint Venture is
exploring credit financing opportunities but does not currently require
any interest rate risk management, hedging or derivative instruments.
The estimated fair value of financial instruments is made in accordance
with the requirements of SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments". The estimated fair value amounts have been
determined by the Company, using available market information. The
carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, other payable, accrued liabilities and amount due to
joint venturer are reasonable estimates of their fair value.
F-62
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sichuan Huayu Big Sky Network Ltd.:
We have audited the accompanying balance sheet of Sichuan Huayu Big Sky Network
Ltd. (the "Joint Venture"), a Development Stage Enterprise, as of December 31,
2000, and the related statements of operations, owners' equity and cash flows
for the period from October 12, 2000 (date of establishment) to December 31,
2000. These financial statements are the responsibility of the Joint Venture's
management. Our responsibility is to express an opinion on these 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Joint Venture as of December 31, 2000,
and the results of its operations and its cash flows for the period from October
12, 2000 (date of establishment) 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 Joint
Venture will continue as a going concern. The Joint Venture 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 Joint Venture'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.
Hong Kong, /S/ DELOITTE TOUCHE TOHMATSU
February 19, 2001 Certified Public Accountants
F-63
SICHUAN HUAYU BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
AT DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents 5,967,637
Other receivables 183,000
Prepaid expense 111,729
Amount due from joint venturer 200,000
------------
Total current assets 6,462,366
------------
Property and equipment, net (Note 3) 756,717
Deposits made on acquisition of property and equipment 529,000
------------
TOTAL 7,748,083
============
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Other payables 26,324
Accrued liabilities 6,700
------------
Total current liabilities 33,024
------------
Owners' equity
Contributed capital (Note 4) 8,271,500
Deficit accumulated during the development stage (556,441)
------------
Total owners' equity 7,715,059
------------
TOTAL 7,748,083
============
The accompanying notes are an integral part of these financial statements.
F-64
SICHUAN HUAYU BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 12, 2000 (DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
General and administrative expenses (556,441)
----------
Net loss (556,441)
==========
The accompanying notes are an integral part of these financial statements.
F-65
SICHUAN HUAYU BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OWNERS' EQUITY
FOR THE PERIOD FROM OCTOBER 12, 2000 (DATE OF ESTABLISHMENT) TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- ---------------------------------------------------------------------------------------------------
Deficit
accumulated
during the Total
Contributed development Owners'
Capital stage Equity
----------- ------------- -----------
Capital contributions by
joint venturer 8,271,500 - 8,271,500
Net loss - (556,441) (556,441)
----------- ------------- -----------
Balance at December 31, 2000 8,271,500 (556,441) 7,715,059
=========== ============= ===========
The accompanying notes are an integral part of these financial statements.
F-66
SICHUAN HUAYU BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 12, 2000 (DATE OF ESTABLISHMENT) TO DECEMBER 31,2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
$
------------
Cash flows from operating activities
Net loss (556,441)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 5,219
Changes in operating assets and liabilities:
Other receivables (183,000)
Prepaid expense (111,729)
Other payables 26,324
Accrued liabilities 6,700
------------
Net cash used in operating activities (812,927)
------------
Cash flows from investing activities
Purchases of property and equipment (761,936)
Deposit paid (529,000)
Advance to joint venturer (200,000)
------------
Net cash used in investing activities (1,490,936)
------------
Cash flows from financing activities
Capital contributions by joint venturer 8,271,500
------------
Cash and cash equivalents at December 31, 2000 5,967,637
============
The accompanying notes are an integral part of these financial statements.
F-67
SICHUAN HUAYU BIG SKY NETWORK LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS
INCORPORATION AND BACKGROUND
Sichuan Huayu Big Sky Network Ltd. (the "Joint Venture" or "Chengdu JV")
was established under the laws of the People's Republic of China on
Co-operative Joint Ventures and other relevant laws of China and
regulations of Chengdu. The Joint Venture is a development stage enterprise
and is seeking to become a leading facilities based provider of equipment
and technical services to support Internet usage in the People's Republic
of China (the "PRC").
A joint venture agreement was signed on July 8, 2000, between Big Sky
Network Canada Ltd. ("BSN") and Chengdu Huayu Information Industry Co.,
Ltd. ("Chengdu Huayu") to establish the Chengdu JV. The purpose of the
Chengdu JV is to develop an advanced broadband software and hardware
platform for data transmission and Internet related business in the Sichuan
Province, the PRC. Under the terms of the joint venture agreement, Chengdu
Huayu agreed to provide the entire software and hardware data transmission
platform of its Huayu HFC network and the rights to use all of its
facilities and equipment. BSN is required to contribute a total of
USD2,890,000 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. Upon the expiration of the joint venture term, and if the joint
venturers decide not to extend the term, all the remaining property and
equipment will be attributable to Chengdu Huayu and the remaining assets
and liabilities of the Joint Venture will be distributed in accordance with
the BSN's 35% interest in the Joint Venture.
CONTINUING OPERATIONS
The Joint Venture'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-68
SICHUAN HUAYU BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
CONTINUING OPERATIONS (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 Joint Venture, 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 Joint Venture's business, financial condition and
results of operations.
The success of the Joint Venture will depend on the acceptance of broadband
Internet services, which remains unproven in the PRC. The Joint Venture may
not be able to attract and retain subscribers, or it may face intense
competition which could have an adverse effect on the Joint Venture's
business, financial condition and results of operations.
Substantially all of the Joint Venture's revenues and operating expenses
will be denominated in the Chinese Renminbi ("RMB").
These financial statements have been prepared on a going concern basis. The
Joint Venture'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
Joint Venture be unable to continue as a going concern.
Management anticipates that the Joint Venture currently has sufficient
working capital to fund the Joint Venture's plan of operation through the
year ending December 31, 2001. The Joint Venture'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 the Joint Venture, including funding the capital requirements, funding
additional technical, management and marketing/sales personnel and funding
comprehensive joint venture marketing and promotional programs to increase
market awareness and subscription sales.
During the year ended December 31, 2000, the Joint Venture had not
commenced its principal business operations.
F-69
SICHUAN HUAYU BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENT
Cash and cash equivalent include cash on hand, cash accounts,
interest-bearing savings accounts and time certificates of deposit with a
maturity at purchase date of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less depreciation. Depreciation
is computed using the straight-line method as follows:
Machinery 10%
Furniture and fixtures 20%
Computer hardware 20%
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. If the fair value is less than the
carry amount of the asset, a loss is recognised for the difference. 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 Joint Venture 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 carry forwards 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.
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.
F-70
SICHUAN HUAYU BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 assessed the new
standards and does not expect that there will be material impact on the
Joint Venture's financial position, results of operations or cash flows.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
Machinery 112,200
Furniture and fixtures 100,000
Computer hardware 549,736
-------
761,936
-------
Accumulated depreciation (5,219)
-------
756,717
=======
4. CONTRIBUTED CAPITAL
The Joint Venture's registered and contributed capital was USD1,000,000.
This was contributed by cash from BSN.
F-71
SICHUAN HUAYU BIG SKY NETWORK LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 11, 1999(DATE OF ESTABLISHMENT)TO DECEMBER 31, 2000
(EXPRESSED IN RENMINBI)
- --------------------------------------------------------------------------------
5. INCOME TAXES
The Joint Venture did not provide any current or deferred tax provision or
benefit because it has experienced an operating loss since establishment.
The Joint Venture had net operating losses of amounted to RMB556,441 which
was not yet agreed with the PRC tax authority for future deduction to the
Joint Venture's profit. For financial purposes, based on the effective
statutory rate of 33%, a valuation allowance of RMB183,626 was provided to
offset fully the future deferred tax asset.
6. COMMITMENTS
The Joint Venture's facility leases office premises under operating leases.
Total expenses for the lease in the current period ended December 31, 2000
amounted to RMB43,258. At December 31, 2000, the Joint Venture has
operating lease commitment of approximately RMB131,000 in 2001. At December
31, 2000, the Joint Venture also has commitments for the purchase of
property and equipment which amounted to approximately RMB634,000.
7. FINANCIAL INSTRUMENTS
Revenue from future operations in the PRC are denominated in RMB and many
of the Joint Venture's expenses are denominated in RMB. 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 Joint Venture does
not expect to use any foreign exchange hedges or derivative instruments in
the near future. The Joint Venture is exploring credit financing
opportunities but does not currently require any interest rate risk
management, hedging or derivative instruments.
The estimated fair value of financial instruments is made in accordance
with the requirements of SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments". The estimated fair value amounts have been
determined by the Company, using available market information. The carrying
amounts of cash and cash equivalents, other receivables, prepaid expenses,
amount due from joint venturer, other payables and accrued liabilities are
reasonable estimates of their fair value.
F-72
5,531,457 SHARES TO BE SOLD
BY CURRENT SHAREHOLDERS
[LOGO]
COMMON STOCK
PROSPECTUS
MAY 30, 2001
===============================================================================
64
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 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 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.
65
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 Thomas 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. The options were granted to the following
officers, directors and consultants:
NAME # OF OPTIONS NAME # OF OPTIONS
- ---- ------------ ---- ------------
Michael Lobsinger 800,000 Qifeng Xue 100,000
Danai Suksiri 500,000 Donghe Xue 100,000
Matthew Heysel 500,000 Lu Wang 100,000
Daming Yang 500,000 WRW Investments Ltd. 250,000
Wei Yang 500,000 Ken Barnes 50,000
Ian Aaron 100,000 Jodi Larmour 50,000
Bing Ho 100,000 Rob Phare 25,000
Bernie Poznanski 100,000 Larry Timluck 25,000
Richard Hurwitz 100,000 Michael Morrison 25,000
Thomas Milne 100,000 Xinhua Duang 25,000
Kai Yang 100,000 Greg Bawdon 25,000
These securities were issued to non U.S. persons outside the United
States pursuant to exemptions from registration available under Regulation S and
under Section 4(2) of the Securities Act of 1933. 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.
66
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. The options were granted to the following
officers, directors and consultants:
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
These securities were issued to non U.S. persons outside the United
States pursuant to exemptions from registration available under Regulation S and
under Section 4(2) of 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.
On February 2, 2001, China Broadband Corp. granted options exercisable
to acquire 550,000 common shares at $7.50 per share to officers, directors and
consultants. The options were granted to the following officers, directors and
consultants:
NAME # OF OPTIONS
---- ------------
Jodi Larmour 50,000
Qun He 100,000
Barry Mackie 300,000
John Brooks 100,000
These securities were issued to non U.S. persons outside the United States
pursuant to exemptions from registration available under Regulation S and under
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:
67
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
68
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
23.3 Consent of Deloitte Touche Tohmatsu
23.4 Consent of Deloitte Touche Tohmatsu
<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) Previously filed on Form 10-QSB on March 15, 2001, excluding schedules
and exhibits, which the Registrant will provide to the staff of the
United States Securities and Exchange Commission upon written request.
(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>
69
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.
70
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 May 30, 2001.
CHINA BROADBAND CORP.
By: /S/ MATTHEW HEYSEL
--------------------------------
Matthew Heysel, Chief Executive
Officer and Director
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 May 30, 2001.
SIGNATURE TITLE DATE
/S/ MATTHEW HEYSEL
- ----------------------------------------
Matthew Heysel Chief Executive Officer and Director May 30, 2001
(Principal Executive Officer)
*
- ----------------------------------------
Daming Yang President and Director May 30, 2001
/S/ THOMAS MILNE
- ----------------------------------------
Thomas Milne Chief Financial Officer and Director May 30, 2001
(Principal Accounting Officer)
*
- ----------------------------------------
Ian Aaron Director May 30, 2001
*
- ----------------------------------------
John Brooks Director May 30, 2001
*
- ----------------------------------------
Richard Hurwitz Director May 30, 2001
*By: /S/ THOMAS MILNE
--------------------------------
Thomas Milne
As Attorney in Fact
71
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
72
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
23.3 Consent of Deloitte Touche Tohmatsu
23.4 Consent of Deloitte Touche Tohmatsu
<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) Previously filed on Form 10-QSB on March 15, 2001, excluding schedules
and exhibits, which the Registrant will provide to the staff of the
United States Securities and Exchange Commission upon written request.
(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>