U.S. SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
September 30, 2004 2-98997-NY
CHINA CABLE AND COMMUNICATION, INC.
-------------------------------------------------
(Exact name of Company as specified in its charter)
DELAWARE 11-2717273
------------------------------ --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
No. 22 Bei Xin Cun Hou Street, Xiang Shan, Haidian District,
Beijing 100093, the People's Republic of China
-------------------------------------- --------
(Address of Principal Executive Offices) (Zip Code)
(86) 10-8259 9426
-----------------------------------------------
(Company's telephone number, including area code)
Not applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
----- -----
The number of shares of Common Stock outstanding as of September 30, 2004 was
73,753,760.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
CHINA CABLE AND COMMUNICATION, INC.
FORM 10-QSB
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements...............................................F-1
Item 2. Management's Discussion and Analysis or Plan of Operations..........15
Item 3. Controls and Procedures.............................................23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................23
Item 2. Changes in Securities...............................................24
Item 3. Default Upon Senior Securities......................................24
Item 4. Submission of Matters to a Vote of Security Holders.................24
Item 5. Other Information...................................................24
Item 6. Exhibits............................................................24
SIGNATURES....................................................................25
Exhibit 31.1 Certification
Exhibit 31.2 Certification
Exhibit 32.1 Certification
Exhibit 32.2 Certification
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
September 30, December 31,
2004 2003
----------- -----------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 109,188 $ 173,967
Cash held in trust account -- 150,703
Deposit 3,000,000 3,000,000
Accounts and other receivables 574,393 --
Inventories 211,441 --
Deferred consulting fees 337,534 1,934,192
Other current assets 113,587 18,892
----------- -----------
Total current assets 4,346,145 5,277,754
----------- -----------
NON-CURRENT ASSETS
Property, plant and equipment, net 15,821,732 --
Intangible asset 1,860,546 --
Investment in joint venture -- 7,668,477
Amount due from the PRC joint venture partner 1,948,788 --
Amount due from the holding company of PRC joint venture partner 498,587 --
----------- -----------
Total non-current assets 20,129,653 7,668,477
----------- -----------
Total assets $24,475,798 $12,946,231
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,582,260 $ 85,753
Amount due to the preferred stockholders 4,702,801 --
Income tax payable 34,597 --
Amounts due to shareholders 263,882 75,923
Amount due to a director 2,634 2,500
----------- -----------
Total current liabilities 9,586,174 164,176
----------- -----------
MINORITY INTEREST 8,527,535 --
----------- -----------
REDEEMABLE CONVERTIBLE PREFERRED STOCK,
at minimum redemption amount, nil and 2,758,621 shares issued
and outstanding at September 30, 2004 and December 31, 2003
(mandatory redemption value of $4,000,000) -- 3,372,465
----------- -----------
(To be continued)
The accompanying notes are an integral part of
these consolidated financial statements.
F-1
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBR 30, 2004 AND DECEMBER 31, 2003
(Continued)
September 30, December 31,
2004 2003
------------ ------------
(Unaudited) (Audited)
STOCKHOLDERS' EQUITY
Preferred Stock, $0.0001 par value, 20,000,000 shares
authorized -- --
Common Stock, $.00001 par value; 100,000,000 shares
authorized, 73,753,760 and 72,312,760 shares issued
and outstanding at September 30, 2004 and
December 31, 2003, respectively 738 723
Additional paid-in capital 22,353,724 21,356,799
Foreign exchange reserve 27,723 --
Accumulated deficit (16,020,096) (11,947,932)
------------ ------------
Total stockholders' equity 6,362,089 9,409,590
------------ ------------
Total liabilities and stockholders' equity $ 24,475,798 $ 12,946,231
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(unaudited)
Three months ended Sept. 30, Nine months ended Sept. 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
NET SALES $ 1,172,349 $ -- 3,215,260 --
----------- ----------- ----------- -----------
COST AND EXPENSES
Consulting fees (195,608) (1,543,377) (2,332,658) (2,734,842)
Directors' compensation (82,810) (755,437) (419,505) (995,970)
Professional fees (66,633) (79,909) (332,357) (138,883)
Operating expenses (exclusive of
depreciation shown separately below) (220,039) -- (779,518) --
Administrative expenses (105,082) -- (351,764) --
Depreciation (365,878) -- (1,091,079) --
Amortization (30,171) -- (90,514) --
----------- ----------- ----------- -----------
Total expenses (1,066,221) (2,378,723) (5,397,395) (3,869,695)
----------- ----------- ----------- -----------
PROFIT (LOSS) FROM OPERATIONS 106,128 (2,378,723) (2,182,135) (3,869,695)
OTHER INCOME (EXPENSES)
Merger costs -- -- -- (3,770,416)
Interest income (expenses), net (95,633) 542 (95,301) 867
Other income (expenses), net (69,358) -- 8,155 (121)
Equity in earnings of joint venture -- (64,911) -- 175,650
----------- ----------- ----------- -----------
Total other expenses (164,991) (64,369) (87,146) (3,594,020)
----------- ----------- ----------- -----------
LOSS ON EXTINGUISHMENT OF DEBT -- -- (1,174,183) --
----------- ----------- ----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (58,863) (2,443,092) (3,443,464) (7,463,715)
PROVISION FOR INCOME TAXES -- -- (51,248) --
----------- ----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST (58,863) (2,443,092) (3,494,712) (7,463,715)
MINORITY INTEREST (194,434) -- (517,203) --
----------- ----------- ----------- -----------
NET LOSS (253,297) (2,443,092) (4,011,915) (7,463,715)
DEEMED DIVIDENDS -- -- (60,249) --
----------- ----------- ----------- -----------
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS $ (253,297) $(2,443,092) (4,072,164) (7,463,715)
=========== =========== =========== ===========
Net loss per share - basic and diluted $ (0.003) $ (0.039) (0.056) (0.119)
Weighted average number of shares
outstanding - basic and diluted 73,641,912 62,864,347 73,175,935 62,864,347
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND THE YEAR ENDED DECEMBER 31, 2003
Common Stock Additional Foreign Retained Total
at 0.00001 par value Paid-in Exchange Earnings Stockholders'
No.of Shares Amount In Capital Reserve (Deficit) Equity
----------- ----------- ----------- ----------- ----------- -----------
Balances, January 1, 2003 49,567,002 496 $ 5,875,396 $ 0 $ 1,159,857 $ 7,035,749
Record effects of reverse merger 6,036,436 60 40 0 0 100
Shares issued to Yau-Sing Tang
in connection with reverse
merger 1,200,000 12 743,988 0 0 744,000
Shares issued to consultants upon
completion of reverse merger 4,760,931 48 2,951,729 0 0 2,951,777
Warrants issued in conjunction
with issuance of redeemable
convertible preferred stock 0 0 1,000,000 0 0 1,000,000
Deemed dividend arising from
beneficial conversion
feature of redeemable
convertible preferred s tock 0 0 3,000,000 0 (4,033,028) (1,033,028)
Shares and warrants issued to
Trenchant Operating LLC in
connection with the sale of
redeemable convertible
preferred stock 18,391 0 302,713 0 0 302,713
Exercise of options granted to
DSS Associates, Carter Fleming
International Ltd., Grand
Unison Limited, and Emerging
Growth Partner 4,750,000 48 2,944,952 0 0 2,945,000
Shares and warrants issued to
consultants for financial
advisory services 4,490,000 44 3,354,356 0 0 3,354,400
Shares issued to directors as
directors' compensation 1,490,000 15 1,183,625 0 0 1,183,640
Net loss for the year ended
December 31, 2003 0 0 0 0 (9,074,761) (9,074,761)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 2003 72,312,760 723 21,356,799 0 (11,947,932) 9,409,590
Shares issued to directors
as directors' compensation 441,000 5 296,935 0 0 296,940
Shares issued to consultant
for financial advisory
services 1,000,000 10 699,990 0 0 700,000
Foreign exchange difference
arising from consoli0ation 0 0 0 27,723 0 27,723
Net loss for the nine months
ended Sept. 30, 2000 0 0 0 0 (4,072,164) (4,072,164)
----------- ----------- ----------- ----------- ----------- -----------
Balances, September 30, 2004 73,753,760 723 $22,353,724 $ 27,723 (16,020,096) $ 6,362,089
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(unaudited)
Cash flows from operating activities: 2004 2003
----------- -----------
Net loss $(4,011,915) $(7,463,715)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss on extinguishment of debt 1,174,183 --
Interest on debt 95,904 --
Common stock and warrants issued for consulting fees 2,296,658 2,734,842
Common stock issued for directors' compensation 296,940 931,080
Common stock issued for financial advisory services -- 10,350
Merger costs paid by the issuance of common stock -- 3,689,000
Depreciation and amortization 1,181,593 --
Share of income of joint venture by minority interest 517,203 --
Equity in earnings of joint venture -- (175,650)
Changes in operating assets and liabilities:
Decrease in cash held in trust account 150,703 --
Increase in accounts and other receivable (486,826) --
Increase in inventories (33,696) --
Decrease in deferred merger costs -- 20,468
Increase in other current assets (92,286) --
Increase in accounts payable and accrued liabilities 1,032,497 342,998
Decrease in income tax payable (80,783) --
----------- -----------
Net cash generated from operating activities 2,040,175 89,373
----------- -----------
Cash flows from investing activities:
Increase in cash in connection with the consolidation of joint venture 45,859 --
Increase in amount due from the PRC joint venture partner (483,677) --
Purchase of property, plant and equipment (1,855,229) --
----------- -----------
Net cash used in investing activities (2,293,047) --
----------- -----------
Cash flows from financing activities:
Cash received from exercise of options -- 50,000
Cash received from issuance of 8% convertible preferred stock, net -- 3,642,150
Increase in amounts due to shareholders 187,959 127,276
Increase in amount due to a director 134 2,500
Cash received in connection with reverse merger of Solar Touch Ltd. -- 100
----------- -----------
Net cash provided by financing activities 188,093 3,822,026
----------- -----------
Net (decrease) increase in cash and cash equivalents (64,779) 3,911,399
Cash and cash equivalents at beginning of period 173,967 --
----------- -----------
Cash and cash equivalents at end of period $ 109,188 $ 3,911,399
=========== ===========
Supplementary disclosures of cash flow information
Income taxes paid $ 132,031 $ --
=========== ===========
Supplemental Schedule of non-cash financing activities:
Common stock and warrants issued for consulting and directors' fees $ 996,940 $ 7,078,657
=========== ===========
Common stock and warrants issued for merger costs $ -- $ 3,689,000
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated unaudited financial statements have been prepared
by the Company and include all material adjustments which, in the opinion of the
management, are necessary for a fair presentation of financial results for the
three months and nine months ended September 30, 2004. All adjustments and
provisions included in these statements are of a normal recurring nature.
Certain information and footnote disclosures made in the most recent annual
consolidated financial statements included in the Form 10-KSB for the year ended
December 31, 2003 have been condensed or omitted for the interim financial
statements; accordingly, the interim financial statements should be read in
conjunction with the December 31, 2003 consolidated financial statements. The
results of operations for the interim period presented are not necessarily
indicative of the results that can be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amount of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made. However, actual results could differ materially
from those results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pursuant to a Share Exchange Agreement dated as of November 1, 2002, as
amended on February 21, 2003, between the Company and Martin Rifkin and William
Rifkin on the one hand; and Kingston Global Co., Ltd. ("Kingston") and Sino
Concept Enterprises Limited (collectively the "Sellers"); and Solar Touch
Limited ("Solar Touch"), on the other hand, on February 28, 2003 (the "Closing
Date"), the Company acquired (the "Acquisition") from Kingston all of the issued
and outstanding equity interests of Solar Touch. As a result of the Acquisition,
the Company continued the operations of Solar Touch.
Solar Touch was incorporated in the British Virgin Islands on April 26,
1999. Solar Touch owns 49% of the issued and outstanding shares of capital stock
on a fully diluted basis of Baoding Pascali Broadcasting Cable Television
Integrated Information Networking Co., Ltd. (the "Joint Venture" or "Baoding").
The Joint Venture is a Sino-foreign joint venture established in the People's
Republic of China (the "PRC"), between Solar Touch and Baoding Pascali
Multimedia Transmission Networking Co., Ltd. ("Baoding Multimedia"), which is a
subsidiary of Baoding Pascali Group Co., Ltd., a Chinese state-owned enterprise.
The accounting policies adopted in these interim consolidated unaudited
financial statements are consistent with those set out in the Company's audited
consolidated financial statements for the year ended December 31, 2003, except
that Baoding has been consolidated on the following basis and that certain
accounting policies as follows have been adopted upon consolidation of the
accounts of Baoding with the Company's effective January 1, 2004.
F-6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of consolidation
- ----------------------
The interim consolidated financial statements include the financial
statements of the Company, its wholly owned subsidiaries Solar Touch and
Broadway and its effective 49% interest in Baoding, collectively its
"subsidiaries". All significant inter-company balances and transactions,
including inter-company profits and unrealized profits and losses, are
eliminated on consolidation.
Prior to December 31, 2003, Baoding's Joint Venture partners consisted of
the Company and Baoding Pascali Multimedia Transmission Networking Company
Limited ("BPMTNC") with ownership interests of 49% and 51%, respectively. In
addition, BPMTNC had the majority of the Joint Venture's board seats of the
Board of Directors. In December 2003, the Joint Venture agreement was amended
whereby BPMTNC granted 3% of its 51% interest in the Joint Venture to Baoding
Cable Television Employees' Shareholding Association ("BCTESA"), as well as one
seat on the Board of Directors.
Effective January 1, 2004, the Joint Venture agreement between the Company
and Baoding was further amended whereby the Company assumed effective control of
the board of directors of Baoding by appointing five out of nine of its
directors. The other four directors consist of three directors for BPMTNC and
one director for BCTESA. In addition, the Company filled key management
positions at the Joint Venture, including the position of Chief Financial
Officer and General Manager, with persons affiliated with the Company.
The Board of Directors of the Joint Venture serves a term of four years
with no term limits. Changes in the Board of Director members can only be made
after a unanimous vote of the Board. The Board of Directors is the highest
authority of the Joint Venture and executes policy, operational matters and
passes resolutions of the Joint Venture.
Under EITF 96-16, "Investor's Accounting for an Investee When the Investor
Has a Majority of the Voting Interest but the Minority Shareholder or
Shareholders Have Certain Approval or Veto Right," the Company has determined
that control of the Board of Directors of the Joint Venture enables the Company
to significantly influence the operations of the Joint Venture. Accordingly, the
Company has accounted for Baoding as a subsidiary and its accounts are
consolidated.
Inventories
- -----------
Inventories, being consumables and network replacement parts, are stated at
cost. Cost is determined on a first-in, first-out basis, and includes all costs
of purchase, costs of conversion, and other costs incurred in bringing the
inventories to their present location and condition.
Property and equipment
- ----------------------
Property, and equipment are stated at cost, less accumulated depreciation
and impairment losses, and are depreciated at rates sufficient to write off
their cost, after taking into account their estimated residual value, over their
estimated useful lives on a straight-line basis. The expected useful lives are
as follows:
Leasehold improvements 25 years
Machinery and equipment 7 to 15 years
Furniture, fixtures and equipment 7 to 10 years
Motor vehicles 7 years
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The useful lives of assets and depreciation and amortization methods are
reviewed periodically.
The gain or loss on disposal of property, plant and equipment is the difference
between the net sales proceeds and the carrying amount of the relevant asset,
and is recognized in the income statement.
Construction in progress
- ------------------------
Construction in progress includes direct costs of construction of other
equipment and new networks. Interest incurred during the period of construction
has not been capitalized as such amounts are not material. Construction in
progress is not depreciated until such time as the assets are completed and put
into operational use.
Intangible assets
- -----------------
The intangible asset is an exclusive right to operate a cable TV network and is
amortized on a straight-line basis over a period of twenty years.
Impairment
- ----------
The Company accounts for property and equipment, construction-in-progress and
amortizable intangible assets in accordance with SFAS No. 121, Accounting for
Impairment of Long-Lived Assets to be Disposed Of which requires an impairment
loss to be recognized on long-lived assets when the sum of the expected future
cash flows (undiscounted and without interest charges) resulting from the use of
the assets and its eventual disposition is less than the carrying amount of the
asset. Otherwise, an impairment loss is not recognized. Measurement of the
impairment loss for long-lived assets is based on the fair value of the asset.
Revenue recognition
- -------------------
Installation fee income is recognized upon completion of the related
installation work.
Revenue from the provision of subscription television services is recognized at
the time when the services are provided. Customers are billed on a monthly basis
through an automated billing system.
F-8
3. PROPERTY AND EQUIPMENT
September 30, December 31,
2004 2003
(Unaudited) (Audited)
Leasehold improvements $ 98,609 $ --
Machinery and equipment 16,392,306 --
Furniture, fixtures and equipment 125,265 --
Motor vehicles 295,659 --
------------ ------------
16,911,839 --
Less: Accumulated depreciation (5,007,094) --
------------ ------------
11,904,745 --
Construction in progress 3,916,987 --
------------ ------------
$ 15,821,732 $ --
============ ============
Depreciation expense was $365,878 and $1,091,079 for the three and nine months
ended September 30, 2004, respectively.
Depreciation for the next five years and remainder of life of the property and
equipment is as follows:
2005.......................$ 1,450,402
2006....................... 1,450,402
2007....................... 1,450,402
2008....................... 1,450,402
2009....................... 1,449,201
Thereafter................. 8,570,923
------------
$ 15,821,732
============
4. INTANGIBLE ASSETS
September 30, December 31,
2004 2003
(Unaudited) (Audited)
Exclusive right to operate cable TV network $ 2,413,687 $ --
Less: Accumulated amortization (553,141) --
----------- -----------
$ 1,860,546 $ --
=========== ===========
Amortization expense was $30,171 and $90,514 for the three and nine months ended
September 30, 2004, respectively annual amortization for each of the next five
years is expected to be $120,686.
F-9
5. INVESTMENT IN JOINT VENTURE
On and before December 31, 2003, the Company accounted for its 49%
ownership interest in Baoding using the equity method of accounting. However,
effective on January 1, 2004, the Company assumed control of the board of
directors of Baoding by appointing five out of nine of its directors and filled
key management positions at the Joint Venture, including the position of Chief
Financial Officer and General Manager, with persons affiliated with the Company.
Accordingly, effective on January 1, 2004, the Company has accounted for Baoding
as a subsidiary and its accounts are consolidated.
The condensed balance sheets and statements of operations of Baoding were
as follows:
Condensed Balance Sheets as of September 30, December 31,
------------------------------ ----------- -----------
2004 2003
---- ----
----------- -----------
(Unaudited) (Audited)
Current assets $ 1,061,658 $ 2,170,280
Non-current assets 20,076,183 17,115,642
----------- -----------
Total assets $21,137,841 $19,285,922
=========== ===========
Current liabilities $ 4,417,186 $ 3,579,390
Non-current liabilities -- --
Capital 16,720,655 15,706,532
----------- -----------
Total liabilities and equity $21,137,841 $19,285,922
---------------------------- =========== ===========
Condensed Statement of Operations
For the nine months ended September 30 2004 2003
-------------------------------------- ---- ----
(Unaudited) (Unaudited)
Net sales $ 3,215,260 $ 2,691,755
=========== ===========
Profit from operations $ 1,056,567 $ 481,440
Other income (expenses), net 8,804 5,956
----------- -----------
Profit before provision for income taxes 1,065,371 487,396
Provision for income taxes (51,248) (128,927)
----------- -----------
Net income $ 1,014,123 $ 358,469
=========== ===========
The Company's equity in earnings (49%) $ 496,920 $ 175,650
=========== ===========
The Board of Directors of Baoding has agreed to distribute a cash dividend
to its joint venture partners in an amount equivalent to Baoding's accumulated
earnings as of December 31, 2004. However, the payment of this dividend is
contingent upon the approval of MOFTEC and local PRC tax bureau. Accordingly,
Baoding has not reorganized a liability for declaring the dividend until the
approvals from MOFTEC and the local PRC tax bureau have been obtained or it is
probable that such approvals will be obtained.
F-10
6. AMOUNTS DUE FROM THE PRC JOINT VENTURE PARTNER AND ITS HOLDING COMPANY
As of September 30, 2004, the PRC joint venture partner of Baoding, Baoding
Pascali Multimedia Transmission Networking Co., Ltd., and its holding company
owed $1,948,788 and $498,587, respectively to Baoding. These amounts were not
trade in nature, and were unsecured, interest free and are due for repayment on
December 31, 2005.
7. AMOUNTS DUE TO STOCKHOLDERS AND A DIRECTOR
The amounts due to stockholders and a director are unsecured, non-interest
bearing and repayable on demand.
8. 8% REDEEMABLE CONVERTIBLE PREFERRED STOCK
On September 24, 2003, the Company completed the sale of 2,758,621 shares
of the Company's restricted 8% Redeemable Convertible Preferred Stock, par value
$0.0001 per share (the "Preferred Stock"), to Gryphon Master Fund, L.P., a
Bermuda limited partnership (the "Purchaser"), for $1.45 per share (the
"Purchase Price"), or an aggregate purchase price of $4,000,000. The Purchase
Price for the Preferred Stock was calculated based upon 90% of the moving
average closing price of the Company's common stock for the 60 trading days
immediately prior to entering into the agreement. The fair market value of the
Company's common stock as of September 24, 2003 was $2.85 per share. In
connection with this transaction, the Company also issued warrants to the
Purchaser to purchase up to 827,586 shares of the Company's restricted common
stock for at an exercise price $2.18 per share until September 24, 2008 (the
"Warrants"). The sale of the Preferred Stock and the Warrants to the Purchaser
was made in a private placement transaction in reliance upon an exemption from
registration under Section 4(2) of the Securities Act of 1933.
The Preferred Stock accrues dividends at the rate of 8% of the Purchase
Price per share per annum, payable when, as and if declared by the Board of
Directors on September 30 and March 31 of each year commencing on March 31,
2004.
The Company is required to redeem all then outstanding shares of Preferred
Stock on September 24, 2008, the fifth anniversary of the date on which the
preferred stock was issued, at a redemption price equal to the Purchase Price,
plus accrued but unpaid dividends. However, if the "Current Market Price"
(defined as the volume weighted average price of the Company's common stock on
the 10 consecutive trading days immediately preceding such date as reported on
the Over-the-Counter Bulletin Board of the Company's Common Stock is equal to or
less than $0.70 for a period of 10 consecutive trading days), the holders of the
Preferred Stock have the right to require the Company to redeem all or any
portion of the Preferred Stock at a redemption price, in cash, equal to $1.67
per share, plus all accrued but unpaid dividends.
The fair value of the Preferred Stock with conversion feature and the
warrants, calculated based on available market data using appropriate valuation
models, were determined to be in excess of the net proceeds of $3,642,150
received by the Company from the Purchaser, and the minimum Preferred Stock
redemption amount of $4,000,000. Therefore, the Preferred Stock has been
recorded at the minimum redemption amount of $4,000,000, less related
transactions costs of $660,563 to be adjusted for in subsequent periods for
accretion adjustments and accrued and unpaid dividends.
F-11
8. 8% REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
On September 24, 2003, the Company issued 18,391 shares of restricted
common stock to Trenchant Operating LLC ("Trenchant"), in consideration for
services performed by Trenchant in finding the Purchaser. In addition, the
Company issued warrants to Trenchant to purchase 91,954 shares of common stock,
with an exercise price equal to $2.18 per share until September 25, 2008. The
fair market value of the Company's commons stock as of September 24, 2003 was
$2.85. The fair value of the warrants was determined to be $250,299 as of the
date of grant using the Black-Scholes pricing option valuation model, which
assumed a risk free interest rate of approximately 3.07%, an expected life of 5
years, and a volatility rate of 171%.
On July 26, 2004, the Purchaser filed a complaint in the United States
District Court for the Northern District of Texas, Dallas Division alleging that
the Company breached its contract by failing to redeem the Preferred Stock. The
Purchaser is seeking the redemption price of $4,606,897; accrued unpaid
dividends equal to $220,226; interest of $888 per day from June 14, 2004 until
the date of redemption; pre-judgment and post-judgment interest; attorneys'
fees; court costs; and other such relief. The Company retained counsel to
represent it in this matter and filed its answer to the complaint.
Although the Company cannot yet assess the probable outcome of the
litigation, it has accounted for the redemption price of the Preferred Stock of
$4,606,897 and its interest of $95,904 for the period from June 14, 2004 to
September 30, 2004 as a current liability on its consolidated balance sheet. The
Company currently believes that this accounting accrual is conservative and
reflects the probable maximum amount that the Company would be required to pay
to the Purchaser should the Purchaser be successful in its lawsuit. The Company
does not believe that it would be required to pay unpaid dividends to the
Purchaser because the terms of the Preferred Stock provide that the holders of
Preferred Stock receive dividends only when and if declared by the Board of
Directors of the Company. The Company's Board of Directors has not declared
dividends on the Preferred Stock to date.
The Company does not believe that the existence of the lawsuit will hamper
its ability to conduct its business because Mr. Hong-Tao Li, a director, officer
and a beneficial owner of the Company, has personally agreed to pay any
obligation that may or may not arise out of the Company's litigation with
Gryphon. Mr. Li will receive shares of common stock in the Company if he is
required to make payment to the Company under this agreement. The price per
share of the stock to be issued to Mr. Li will be a reasonable price mutually
acceptable to both parties. If Mr. Li receives a large number of shares pursuant
to his agreement with the Company, existing shareholders' interests in the
Company will be proportionally diluted.
9. INCOME TAXES
Solar Touch and Broadway Offshore are both British Virgin Islands
investment holding companies that do not carry on any business and do not
maintain any offices in the United States of America. Therefore, no provision
for United States income taxes or tax benefits for the Company has been made.
F-12
9. INCOME TAXES (CONTINUED)
Baoding is a Sino-foreign joint venture established in the PRC. Baoding was
subject to a 3% local income tax for the year ended December 31, 2002 and 18%
(15% federal income tax plus 3% local income tax) for the year ended December
31, 2003 and 13% (10% federal income tax plus 3% local income tax) for future
years, on the results of its operations after adjusting for items which are
non-assessable or disallowed. Certain items of income and expense are recognized
for PRC income tax purposes in a different accounting period from that in which
they are recognized for financial accounting purposes. Baoding's operation in
PRC for the nine months ended September 30, 2004 results in a profitable
operation, while loss was incurred on the Company level.
10. DIRECTORS' COMPENSATION IN SHARES AND WARRANTS
The Company signed two-year directors' stock compensation agreements (the
"Agreements") with three of its directors, Mr. George Raney, Mr. Raymond
Ying-Wai Kwan, and Mr. Yau-Sing Tang on February 28, 2003. Pursuant to the
Agreements, the Company will issue an aggregate of 49,000 shares of common stock
each month in consideration for their services rendered through February 2005.
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Issues
Task Force Consensus Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18"), the Company accounted for the
directors' compensation in shares and warrants based on the fair market value of
the Company's common stock at the date of the individual issue of the stock to
the directors. During the three and nine months ended September 30, 2004,
147,000 and 441,000 shares of the Company's common stock under the Company's
2003 Stock Compensation Plan were issued to the directors, respectively.
11. CONSULTING AGREEMENTS AND DEFERRED CONSULTING FEES
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Issues
Task Force Consensus Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18"), the Company has accounted for the
consulting agreements based on the fair market value of the Company's common
stock at the commencement date of the individual consulting agreements. For the
three and nine months ended September 30, 2004, the Company charged to expense a
total of $195,608 and $2,296,658, respectively associated with consulting
agreements and recorded deferred consulting fees of $337,534 at September 30,
2004. No warrants granted to consultants were exercised during the three and
nine months ended September 30, 2004.
12. MINORITY INTEREST
For the three and nine months ended September 30, 2004, the Company charged
to expense $194,434 and $517,203, respectively representing the other partners'
share in the income of the joint venture. The Company recorded a minority
interest of $8,527,535 as of September 30, 2004, representing the other
partners' share in the net assets of the joint venture.
F-13
13. EARNINGS (LOSS) PER COMMON SHARE
Basic EPS amounts are determined based on the weighted average number of
shares of common stock outstanding. Diluted EPS assumes the conversion, exercise
or issuance of all potential common stock instruments such as options, warrants
and convertible securities, unless the effect is to reduce a loss or increase
earnings per share. All potentially dilutive financial instruments as of
September 30, 2004 had the effect of reducing the reported net loss per share,
and, therefore, were excluded from the calculation. For presentation and
comparative purposes of computing EPS only, the Company has assumed that
49,567,002 common shares were outstanding during throughout the period until
February 2003, due to the reverse merger of the Company and Solar Touch Limited.
14. LITIGATION
On July 26, 2004, the Purchaser filed a complaint in the United States
District Court for the Northern District of Texas, Dallas Division alleging that
the Company breached its contract by failing to redeem the Preferred Stock. The
Purchaser is seeking the redemption price of $4,606,987; accrued unpaid
dividends equal to $220,226; interest of $888 per day from June 14, 2004 until
the date of redemption; pre-judgment and post-judgment interest; attorneys'
fees; court costs; and other such relief. The Company has retained counsel to
represent it in this matter and the Company has not yet filed its answer to the
complaint.
Although the Company cannot yet assess the probable outcome of the
litigation, it has accounted for the redemption price of the Preferred Stock of
$4,606,897 and its interest of $95,904 for the period from June 14, 2004 to
September 30, 2004 as a current liability on its consolidated balance sheet. The
Company currently believes that this accounting accrual is conservative and
reflects the probable maximum amount that the Company would be required to pay
to the Purchaser should the Purchaser be successful in its lawsuit. The Company
does not believe that it would be required to pay unpaid dividends to the
Purchaser because the terms of the Preferred Stock provide that the holders of
Preferred Stock receive dividends only when and if declared by the Board of
Directors of the Company. The Company's Board of Directors has not declared
dividends on the Preferred Stock to date.
The Company does not believe that the existence of the lawsuit will hamper
its ability to conduct its business because Mr. Hong-Tao Li, a director, officer
and a beneficial owner of the Company, has personally agreed to pay any
obligation that may or may not arise out of the Company's litigation with
Gryphon. Mr. Li will receive shares of common stock in the Company if he is
required to make payment to the Company under this agreement. The price per
share of the stock to be issued to Mr. Li will be a reasonable price mutually
acceptable to both parties. If Mr. Li receives a large number of shares pursuant
to his agreement with the Company, existing shareholders' interests in the
Company will be proportionally diluted.
F-14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This discussion and analysis should be read in conjunction with the
accompanying Consolidated Financial Statements and related notes. Our discussion
and analysis of our financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of any contingent liabilities at the financial statement date and
reported amounts of revenue and expenses during the reporting period. On an
on-going basis, we review our estimates and assumptions. Our estimates were
based on our historical experience and other assumptions that we believe to be
reasonable under the circumstances. Actual results are likely to differ from
those estimates under different assumptions or conditions, but we do not believe
such differences will materially affect our financial position or results of
operations. Our critical accounting policies, the policies we believe are most
important to the presentation of our consolidated financial statements and
require the most difficult, subjective and complex judgments, are outlined in
the notes to our Consolidated Financial Statements.
In addition, certain statements made in this report may constitute
"forward-looking statements". These forward-looking statements involve known or
unknown risks, uncertainties and other factors that may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. You can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "intends," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continues" or
the negative of these terms or other comparable terminology. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
Overview
- --------
The Company was incorporated in the State of Delaware on November 27, 1984.
Prior to May 1993, the Company was principally engaged in the business of
developing, financing and producing motion pictures for distribution. From May
1993 to February 28, 2003, however, the Company had no business operations and
sought other business opportunities.
Pursuant to a Share Exchange Agreement dated as of November 1, 2002, as
amended on February 21, 2003, between the Company and Martin Rifkin and William
Rifkin on the one hand; and Kingston Global Co., Ltd. ("Kingston") and Sino
Concept Enterprises Limited (collectively the "Sellers"); and Solar Touch
Limited ("Solar Touch"), on the other hand, on February 28, 2003 (the "Closing
Date"), the Company acquired (the "Acquisition") from Kingston all of the issued
and outstanding equity interests of Solar Touch (the "Solar Touch Shares"). As
consideration for the Solar Touch Shares, the Company issued 49,567,002 shares
of its Common Stock to the Sellers. In addition to the Common Stock issued to
the Sellers, the Company issued 4,760,931 shares to the Sellers' financial
consultants. The consideration for the Acquisition was determined through
arms-length negotiations between the management of the Company and the Sellers.
As a result of the Acquisition, the Company continued the operations of Solar
Touch.
Solar Touch was incorporated in the British Virgin Islands on April 26,
1999. Solar Touch owns 49% of the issued and outstanding shares of capital stock
on a fully diluted basis of Baoding Pascali Broadcasting Cable Television
Integrated Information Networking Co., Ltd. (the "Joint Venture"). The Joint
Venture is a Sino-foreign joint venture established in the People's Republic of
China (the "PRC"), between Solar Touch and Baoding Pascali Multimedia
Transmission Networking Co., Ltd. ("Baoding Multimedia"), which is a subsidiary
of Baoding Pascali Group Co., Ltd., a Chinese state-owned enterprise.
* The Company's independent accountants did not complete their review of the
Company's interim financial statements as of the date of this report.
15
The Joint Venture was formed on July 23, 1999, when Baoding Multimedia and
Solar Touch signed a joint venture contract (the "JV Agreement") and the
articles of association of the Joint Venture (the "JV Articles"). The JV
Agreement and JV Articles provide that the total amount of investment of the
Joint Venture was RMB122.425 million (or approximately US$14.8 million); and
that the registered capital stock of the Joint Venture was RMB70 million (or
approximately US$8.46 million). The JV Agreement and JV Articles also provide
that Baoding Multimedia's contribution to the Joint Venture was Baoding
Multimedia's network and related facilities with a value of RMB21.7 million,
plus intangible assets (including licenses, business goodwill) valued at RMB14
million which was equal to 51% of the registered capital of the Joint Venture
and that Solar Touch's contribution was an investment of US$4.14 million (or
RMB34.3 million) in cash which was equal to 49% of the registered capital. On
July 28, 1999, the Management Commission of the Baoding Hi-Tech Industrial
Development Area approved the JV Agreement and JV Articles as well as the
members of the board of directors of the Joint Venture. On August 5, 1999, a
Certificate of Approval for Establishment of Enterprises with Foreign Investment
in the PRC for the Joint Venture was issued and on August 16, 1999, the Business
License for the Joint Venture was issued for the operation of the Joint Venture.
On February 23, 2000, Baoding Multimedia and Solar Touch signed another
agreement to increase the Joint Venture's registered capital from RMB70 million
to RMB100 million, provided, however, that the parties' respective percentage of
equity interests in the Joint Venture shall remain the same. On February 24,
2000, the Management Commission of the Development Area approved the increase in
the Joint Venture's registered capital from RMB70 million to RMB100 million. On
September 6, 2000, a revised Business License was issued to reflect the increase
in the Joint Venture's registered capital.
On May 6, 2003, Solar Touch transferred its 49% interest in the Joint
Venture to its wholly-owned subsidiary, Broadway Offshore Limited ("Broadway
Offshore"), a company incorporated in the British Virgin Islands. On December
29, 2003, Baoding Multimedia transferred a 3% interest in the Joint Venture to
the Baoding Pascali Cable Television Network Workers Stockholding Association.
On the same date, the JV Agreement and JV Articles were amended to reflect the
correct shareholdings of Broadway Offshore, Baoding Multimedia and Baoding
Pascali Cable Television Network Workers Stockholding Association. Also, the
total number of board of directors of the Joint Venture increased to nine
pursuant to the Amended Joint Venture Agreement dated December 29, 2003 (the
"Amended JV Agreement").
The Joint Venture operates a cable television network in the municipality
of Baoding, near Beijing in the PRC. The Joint Venture has over 200,000
subscribers in a market with a population of over 10 million. The Company
believes that the Joint Venture is at present the only Sino-foreign joint
venture approved by the State Administration of Radio, Film and Television to be
licensed as a cable television network operator in the PRC. The Company believes
that it is the first and only joint venture allowed to have a foreign investor
invest in and to operate the cable television network in the PRC.
The board of directors of the Joint Venture currently has nine members,
five of whom were appointed by the Company. Pursuant to the Amended JV
Agreement, Broadway Offshore has the right to appoint five of the nine members
of the Board of the Joint Venture. Through those five appointed directors, the
Company has obtained control of the board of directors of the Joint Venture and
the Company's Board of Directors has filled key management positions at the
Joint Venture, including Chief Financial Officer and General Manager, with
persons affiliated with the Company. As a foreign investor, the Company, through
its predecessor, has been the single largest interest holder of the Joint
Venture since formation of the Joint Venture in 1999 and HAS actively
participated in the management of the Joint Venture.
16
In view of China's accession to the World Trade Organization, it is
expected that further opening of the cable television market in China will take
place in the near future. Being the first foreign investor to be allowed to own
an interest in a Chinese cable operator and with the experience gained through
the years, the Company believes it is at an advantageous position to increase
its ownership interest in the Joint Venture beyond the current 49% level, should
it be allowed to do so in the future.
According to its business license and the current relevant rules and
regulations, the Joint Venture is allowed to acquire and own networks in areas
other than Baoding. Therefore, when opportunities arise, the Joint Venture may
try to expand its business beyond Baoding, in which case, the Company may assist
the Joint Venture in raising capital for such expansion, although there cannot
be any assurance of such expansion.
On July 1, 2003, the Company changed its name from Nova International Film,
Inc. to China Cable and Communication, Inc.
Results of operations
- ---------------------
Three months ended September 30, 2004 and 2003
- ----------------------------------------------
Revenue
- -------
Our revenue of $1,172,349 for the three months ended September 30, 2004
represent the installation and subscription fees, premium digital service fees
and added value services fees of our Baoding joint venture received and to be
received, net of service tax. The Company reported no revenue for the three
months ended September 30, 2003 because Baoding was accounted for using the
equity method of the accounting in 2003.
Cost and Expenses
Total cost and expenses decreased by 55.2% to $1,066,221 for the three
months ended September 30, 2004 from $2,378,723 for the corresponding period in
2003 and represent expenses incurred by the Company and our Baoding joint
venture. The decrease was primarily due to net effect of the decrease in
consulting fees of $1,347,769, directors' compensation of $672,627 and
professional fees of $13,276, and the increase in operating expenses of
$220,039, administrative expenses of $105,082 and depreciation and amortization
of $365,878 and $30,171, respectively. The decrease in consulting fees and
directors' compensation was primarily because the Company did not issue any
common stock as compensation for consultants for the three months ended
September 30, 2004. The decrease in directors' compensation was purely because
of the significant decrease in the market price of common stock over the year,
so that the value of monthly shares issued as compensation to directors dropped.
Total cost and expenses for the three months ended September 30, 2003 represent
expenses incurred by the Company only.
Interest income (expenses), net
Interest expenses, net for the three months ended September 30, 2004 was
$95,633, as compared to other income, net of $542 for the same corresponding
period in 2003. The significant change was primarily resulted from the inclusion
of an interest on debt of $95,904 owing to the preferred stockholders. The
interest was accrued at $888 per day for the period from June 14, 2004, the date
of redemption, to September 30, 2004.
17
Other income (expenses), net
Other expenses, net for the three months ended September 30, 2004 was
$69,358, as compared to the zero balance for the same corresponding period in
2003. The significant change was primarily because of the reverse of the
recovery of the amount due from a related company of $69,507, which was
previously recorded in the six months ended June 30, 2004.
Equity in earnings of investment
For the three months ended September 30, 2003, Baoding was accounted for by
us as an investment in a joint venture using the equity method of accounting.
The equity in earnings of investment in 2003 represented the Company's 49% share
of undistributed earnings of its investment in Baoding. As discussed above,
starting as of January 1, 2004, the Baoding accounts have been consolidated with
ours and, therefore, no equity in earnings of investment has been recorded.
Minority interest
For the three months ended September 30, 2004, minority interest
represented the profit of Baoding attributable to the 51% equity interest not
owned by the Company. No minority interest was recorded for 2003 as the Baoding
accounts had not yet been consolidated with ours.
Net loss available for common stockholders
Net loss decreased to $253,297 for the three months ended September 30,
2004 from $2,443,092 for the corresponding period in 2003, representing an
decrease of $2,189,795 or 89.6%. This decrease is due to the combined effect of
the increase in profit attributable to our Baoding joint venture of $251,718 and
the decrease in operating expenses attributable by the Company only of $851,
consulting fees of $1,347,769, directors' compensation of $672,627; professional
fees of $13,276 and the increase in interest expenses, net of $96,175 and other
expenses, net of $69,358.
The profit attributable to the Baoding joint venture for the three months
ended September 30, 2004 was $186,807 (net profit of the Baoding joint venture
less minority interest), as compared to the equity in loss of the Baoding joint
venture of $64,911 for the corresponding period in 2003.
Nine months ended September 30, 2004 and 2003
- ---------------------------------------------
Revenue
Our revenue of $3,215,260 for the nine months ended September 30, 2004
represent the installation and subscription fees, premium digital service fees
and added value services fees of our Baoding joint venture received and to be
received, net of service tax. The Company had no revenue for the three months
ended September 30, 2003 because Baoding was accounted for using the equity
method in the last year.
Cost and Expenses
Total cost and expenses increased by 39.5% to $5,397,395 for the nine
months ended September 30, 2004 from $3,869,695 for the corresponding period in
2003 and represent expenses incurred by the Company and our Baoding joint
venture. The increase was primarily due to the combined effect of the decrease
of consulting fees of $402,184 and directors' compensation of $576,465, and the
18
increase of professional fees of $193,474, operating expenses of $779,518,
administrative expenses of $351,764 and depreciation and amortization of
$1,091,079 and $90,514, respectively. Total cost and expenses for the nine
months ended September 30, 2003 represent expenses incurred by the Company only.
Merger costs
For the nine months ended September 30, 2004, the Company reported no
merger costs whereas for the corresponding period in 2003, the Company incurred
merger costs of $3,770,416 as a result of the reverse merger taken place in
2003.
Interest income (expenses), net
Interest expenses, net for the nine months ended September 30, 2004 was
$95,301, as compared to other income, net of $867 for the same corresponding
period in 2003. The significant change was primarily resulted from the inclusion
of an interest on debt of $95,904 owing to the preferred stockholders. The
interest was accrued at $888 per day for the period from June 14, 2004, the date
of redemption, to September 30, 2004.
Other income, net
Other income, net for the nine months ended September 30, 2004 was $8,155,
as compared to the negative balance of $121 for the same corresponding period in
2003. The significant change was primarily caused by the inclusion of a service
income of $8,374 charged to other Baoding network operator in 2004. There was no
such income in the corresponding period of 2003.
Equity in earnings of investment
For the nine months ended September 30, 2003, Baoding was accounted for by
us as an investment in a joint venture using the equity method of accounting.
The equity in earnings of investment in 2003 represented the Company's 49% share
of undistributed earnings of its investment in Baoding. As discussed above,
starting as of January 1, 2004, the Baoding accounts have been consolidated with
ours and, therefore, no equity in earnings of investment has been recorded.
Loss on extinguishment of debt.
For the nine months ended September 30, 2004, the Company recorded a loss
on extinguishment of debt of $1,174,183. This represented the premium recognized
on the Preferred Stock requested by its holders to be redeemed by the Company.
Provision for income taxes
As Baoding recorded income whereas the Company on its own level incurred a
loss, provision for income taxes for the nine months ended September 30, 2004,
represented the PRC income taxes incurred by Baoding only. Baoding is subject to
total taxes at 13% (10% federal income tax plus 3% local income tax). No
provision for income taxes was recorded for 2003 because the Company was not
subject to any tax and the Baoding accounts had not yet been consolidated with
ours.
19
Minority interest
For the nine months ended September 30, 2004, minority interest represented
the profit of Baoding attributable to the 51% equity interest not owned by the
Company. No minority interest was recorded for 2003 as the Baoding accounts had
not yet been consolidated with ours.
Deemed dividends
For the nine months ended September 30, 2004, the Company recorded deemed
dividends of $60,249 on its redeemable convertible preferred stock. Because the
preferred stock was issued by the Company on September 24, 2003, there were no
deemed dividends for the corresponding period in 2003.
Net loss available for common stockholders
Net loss decreased to $4,011,915 for the nine months ended September 30,
2004 from $7,463,715 for the corresponding period in 2003, representing a
decrease of $3,451,800 or 46.2%. This decrease is primarily due to the combined
effect of the increase in profit attributable to our Baoding joint venture of
$321,270, professional fee of $193,474, operating expenses of $154,182, interest
expenses, net of $96,168 and other income, net of $8,276, and the decrease in
merger costs of $3,770,416, consulting fees of $402,184, and directors'
compensation of $576,465, and the loss on extinguishment of debt of $1,174,183,
and deemed dividends on preferred stock of $60,249.
The profit attributable to the Baoding joint venture for the nine months
ended September 30, 2004 was $517,203, as compared to the equity in earnings of
joint venture of $194,434 for the corresponding period in 2003, that represents
an increase of $321,270, or 182.9%. The significant improvement in the results
of our Baoding joint venture has been caused by the launch of digital premium
services to subscribers since October 2003 and successful marketing of our
set-top boxes. Since the beginning of the year, the Company has sold
approximately 30,000 set-top boxes to the digital premium services subscribers.
Subscribers for these new services have paid extra subscription fees, that has
resulted in the increase in revenue of our Baoding joint venture in 2004.
However, the operating and administrative expenses of our Baoding did not
increase in line with the increase in revenue and, therefore, it resulted in
increase in net profit of our Baoding.
Financial condition, liquidity, capital resources
- -------------------------------------------------
For the nine months ended September 30, 2004, we generated $2,040,175 from
operating activities and we used $1,855,229 to purchase property, plant and
equipment.
As of September 30, 2004, the Company has cash and cash equivalents of
$109,188. Our current assets were $4,346,145 and our current liabilities were
$9,586,174, which resulted in a current ratio of 0.46. We had no capital
expenditure commitments outstanding as of September 30, 2004. Although the
Company has a negative working capital, management believes that there is
currently not a going concern issue because management believes that Mr.
Hong-Tao Li, a director, officer and a beneficial owner of the Company will
continue to provide financial support to the Company to meet its liabilities as
they are incurred. However, there can be no assurance that Mr. Li will continue
to provide financial support to the Company.
As described in the "Legal Proceedings" section in this Form 10-QSB, the
Company is currently involved in litigation with Gryphon Master Fund, L.P.
("Gryphon") regarding Gryphon's investment in the Company's 8% Redeemable
Convertible Preferred Stock (the "Preferred Stock"). Gryphon has filed a
complaint alleging that the mandatory redemption feature of the Preferred Stock
has been triggered and that the Company is required to redeem the Preferred
20
Stock at the redemption price of $4,606,987 plus accrued unpaid dividends,
interest and costs. The Company has retained counsel to represent it in this
matter.
Although the Company cannot yet assess the probable outcome of the
litigation, it has accounted for the redemption price of the Preferred Stock of
$4,606,897 and its interest of $95,904 for the period from June 14, 2004 to
September 30, 2004 as a current liability on its consolidated balance sheet. The
Company currently believes that this accounting accrual is conservative and
reflects the probable maximum amount that the Company would be required to pay
to the Purchaser should the Purchaser be successful in its lawsuit. The Company
does not believe that it would be required to pay unpaid dividends to the
Purchaser because the terms of the Preferred Stock provide that the holders of
Preferred Stock receive dividends only when and if declared by the Board of
Directors of the Company. The Company's Board of Directors has not declared
dividends on the Preferred Stock to date.
The Company does not believe that the existence of the lawsuit will hamper
its ability to conduct its business because Mr. Hong-Tao Li, a director, officer
and a beneficial owner of the Company, has personally agreed to pay any
obligation that may or may not arise out of the Company's litigation with
Gryphon. Mr. Li will receive shares of common stock in the Company if he is
required to make payment to the Company under this agreement. The price per
share of the stock to be issued to Mr. Li will be a reasonable price mutually
acceptable to both parties. If Mr. Li receives a large number of shares pursuant
to his agreement with the Company, existing shareholders' interests in the
Company will be proportionally diluted.
Plan of Operation
- -----------------
While our projection of future cash requirements is affected by numerous
factors, including but not limited to changes in customer receipts, cable TV
industry trends, operating cost fluctuations, and unplanned capital spending, we
anticipate, based on the scale of our existing operations, that our projected
cash flows from operations will be sufficient to support our planned operations
for the next twelve months.
Exchange rate
- -------------
Fluctuations of currency exchange rates between Renminbi and the United
States dollar could adversely affect our business since our sole investment
conducts its business primarily in China, and its revenue from operations is
settled in Renminbi. The Chinese government controls its foreign reserves
through restrictions on imports and conversion of Renminbi into foreign
currency. Although the Renminbi to United States dollar exchange rate has been
stable since January 1, 1994 and the Chinese government has stated its intention
to maintain the stability of the value of the Renminbi, there can be no
assurance that exchange rates will remain stable. The Renminbi could devalue
against the United States dollar. Exchange rate fluctuations may adversely
affect our revenue arising from the sales of products in China and denominated
in Renminbi and our financial performance when measured in United States dollar.
Recent accounting pronouncements
- --------------------------------
In April 2002, The Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 22 and 64. Amendment of FASB
Statement No. 13, and Technical Corrections." The Statement addresses the
accounting for extinguishment of debt, sale-leaseback transactions and certain
21
lease modifications. The Statement is effective for transactions occurring after
May 15, 2002. The adoption of SFAS No. 145 did not have material impact on the
Company's financial statement presentation or disclosure.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." The provisions of SFAS
No. 146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 did not have a material impact
on the Company's financial statement presentation or disclosure.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions. The Company does not expect this standard will have any
effect on its financial statement presentation or disclosure.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 is not expected to have a material effect on the
Company's financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation. Transition and Disclosure" SFAS No. 148 amends SFAS No. 123
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The Company does not expect the adoption of SFAS No. 148 to have a
material effect on our financial position, results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities (an interpretation of ARB No. 51) ("FIN-46")." FIN46
addresses consolidation by business enterprises of certain variable interest
entities, commonly referred to as special purpose entities. The Group will be
required to implement the other provisions of FIN46 in 2003. The adoption of
FIN46 is not expected to have a material impact on the Group's consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." It is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designed after June 30, 2003.
All provisions of SFAS No. 149 should be applied prospectively. The adoption of
SFAS 149 is not expected to have a material impact on the Group's consolidated
financial statements.
22
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
15 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or as an asset in some circumstances). It is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. It is to be implemented by reporting the cumulative effect of a change
in an accounting principle for financial instruments created before issuance
date of SFAS No. 150 and still existing at the beginning of the interim period
of adoption. Restatement is permitted. The adoption of SFAS No. 150 is not
expected to have a material impact on the Group's consolidated financial
statements.
ITEM 3. CONTROLS AND PROCEDURES
1) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports filed under the Exchange Act is
accumulated and communicated to the Company's management, including its
principal executive and financial officers, as appropriate, to allow timely
decisions regarding required disclosure.
As of the end of the period covered by this report, the Company conducted
an evaluation under the supervision and with the participation of the principal
executive officer and principal financial officer of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d- 15(e) under the
Exchange Act. Based on this evaluation, the principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
2) Changes in Internal Control
There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently in litigation with the purchaser of its 8%
Redeemable Convertible Preferred Stock. See Note 9 to the Company's Consolidated
Financial Statements in this Quarterly Report and also the Company's Quarterly
Report on Form 10-QSB filed with the Securities and Exchange Commission on
August 24, 2004 for detailed information regarding the litigation.
23
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 2004, compensation to three of
our directors, Mr. George Raney, Mr. Yau-Sing Tang and Mr. Raymond Ying-Wai
Kwan, were paid by the issuance of 147,000 shares in lieu of cash.
All issuances described above were made pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and pursuant to Regulation D promulgated
there-under.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit
Number Description
- ------ -----------
3(i)(a) Certificate of Incorporation of CCCI. (1)
3(i)(b) Certificate of Amendment of Certificate of Incorporation
(filed November 17, 1989). (2)
3(i)(c) Certificate of Amendment of Certificate of Incorporation
(filed July 1, 2003). (3)
3(ii) Bylaws of CCCI. (1)
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
- --------------------------
(1) Incorporated by reference from CCCI's Registration Statement on Form S-18,
effective November 12, 1985.
(2) Incorporated by reference from CCCI's Annual Report on Form 10-K for the
fiscal year ended October 31, 1989.
(3) Incorporated by reference from CCCI's Current Report on Form 8-K filed on
September 29, 2003.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA CABLE AND COMMUNICATION, INC.
Date: November 19, 2004 /s/ Raymond Ying-Wai Kwan
-----------------------------------
Name: Raymond Ying-Wai Kwan
Title: Chief Executive Officer
Date: November 16, 2004 /s/ Yau-Sing Tang
-----------------------------------
Name: Yau-Sing Tang
Title: Chief Financial Officer
25