Annual Report of a Foreign Private Issuer — Form 20-F Filing Table of Contents
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2: EX-2.6 Plan of Acquisition, Reorganization, Arrangement, HTML 67K
Liquidation or Succession
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o
Yes
x
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registrant is not required to file reports pursuant to Section 13 or 15(d)
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o
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x
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preceding 12 months (or for such shorter period that the registrant was required
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o
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Accelerated filer
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filer
x
Non-accelerated filer
Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
x US
GAAP
o
International Financial Reporting
Standards
as issued by the International
Accounting
Standards Board
o
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If
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mark which financial statement item the registrant has elected to
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17
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18
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(APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
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2
TABLE
OF CONTENTS
PART
I
Page
Item
1.
Identity
of Directors, Senior Management and Advisers
Quantitative
and Qualitative Disclosure About Market Risk
65
Item
12.
Description
of Securities Other Than Equity Securities
65
PART
II
Item
13.
Defaults,
Dividend Arrearages and Delinquencies
66
Item
14.
Material
Modifications to the Rights of Security Holders and Use of
Proceeds
66
Item
15.
Controls
and Procedures
66
Item
16
[Reserved]
67
Item
16A
—
Audit Committee Financial Expert
67
Item
16B
—
Code of Ethics
67
Item
16C
—
Principal Accountant Fees and Services
67
Item
16D
—
Exemption from the Listing Standards for Audit Committees
68
Item
16E
—
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
68
Item
16F
—
Change in Registrant’s Certifying Accountant
68
Item
16G
—
Corporate Governance
68
PART
III
Item
17
Financial
Statements
69
Item
18.
Financial
Statements
69
Item
19
Exhibits
69
Signatures
73
4
CERTAIN
INFORMATION
As used
in this Annual Report on Form 20-F (the “Annual Report”), unless otherwise
indicated, “we,”“us,”“our,” the “Company,” the “Corporation,” and “China
Cablecom Holdings” refers to China Cablecom Holdings, Ltd., a company formed in
the British Virgin Islands and its subsidiaries. All references to
“China Cablecom,” and “China Cablecom Ltd.” refer to China Cablecom Ltd., a
wholly owned subsidiary of China Cablecom Holdings, and the entity through which
our operating businesses are held. All references to “China” or the “PRC” refer
to the People’s Republic of China.
See Item
3: “Key Information” for historical information regarding the average rate
between buying and selling as published by the people’s Bank of China with
respect to Chinese Renminbi. You should not construe these translations as
representations that the Chinese Renminbi amounts actually represent such US
dollar amounts or could have been or could be converted into US dollars at the
rates indicated or at any other rates. Such rates are the number Chinese
Renminbi per one United States dollar quoted by the People’s Bank of
China.
FORWARD-LOOKING
STATEMENTS
This
Annual Report contains ‘‘forward-looking statements’’ that represent our
beliefs, projections and predictions about future events. All statements other
than statements of historical fact are ‘‘forward-looking statements,’’ including
any projections of earnings, revenue or other financial items, any statements of
the plans, strategies and objectives of management for future operations, any
statements concerning proposed new projects or other developments, any
statements regarding future economic conditions or performance, any statements
of management’s beliefs, goals, strategies, intentions and objectives, and any
statements of assumptions underlying any of the foregoing. Words such as
‘‘may’’, ‘‘will’’, ‘‘should’’, ‘‘could’’, ‘‘would’’, ‘‘predicts’’,
‘‘potential’’, ‘‘continue’’, ‘‘expects’’, ‘‘anticipates’’, ‘‘future’’,
‘‘intends’’, ‘‘plans’’, ‘‘believes’’, ‘‘estimates’’ and similar expressions, as
well as statements in the future tense, identify forward-looking
statements.
These
statements are necessarily subjective and involve known and unknown risks,
uncertainties and other important factors that could cause our actual results,
performance or achievements, or industry results, to differ materially from any
future results, performance or achievements described in or implied by such
statements. Actual results may differ materially from expected results described
in our forward-looking statements, including with respect to correct measurement
and identification of factors affecting our business or the extent of their
likely impact, the accuracy and completeness of the publicly available
information with respect to the factors upon which our business strategy is
based or the success of our business.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of whether, or the times by
which, our performance or results may be achieved. Forward-looking statements
are based on information available at the time those statements are made and
management’s belief as of that time with respect to future events, and are
subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences
include, but are not limited to, those factors discussed under the headings
‘‘Risk Factors’’, ‘‘Operating and Financial Review and Prospects,’’
‘‘Information on Our Company” and elsewhere in this Annual
Report.
5
PART I
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A.
Directors and Senior
Management
Not
required.
B.
Advisers
Not
required.
C.
Auditors
Not
required.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
required.
ITEM
3. KEY INFORMATION
A. Selected financial
data
The
following summary consolidated financial data for the period ended December 31,2007 and the year ended December 31, 2008 have been derived from the Company’s
audited consolidated financial statements included in this Annual Report
beginning on page F-1. The following selected historical statement of
income data for the years ended December 31, 2005 and 2006 and for the period
from January 1, 2007 to September 30, 2007 and the selected historical balance
sheet data as of December 31, 2005 and 2006 and September 30,2007 have been
derived from the audited financial statements of Binzhou Guangdian Network Co.,
Ltd. (the “Predecessor Company”) not included in this Annual Report. This
information is only a summary and should be read together with the consolidated
financial statements, the related notes and other financial information included
in this Annual Report. Summary consolidated financial data for the year
ended December 31, 2004 could not be provided without unreasonable effort or
expenses, and has therefore not been included in this Annual
Report.
Certain
factors that affect the comparability of the information set forth in the
following table are described in the items “Operating and Financial Review and
Prospects,” and the Financial Statements and related notes thereto included
elsewhere in this Annual Report.
Current
portion of long term debt, net of discount
1,859
1,921
1,998
9,618
9,482
Accounts
payable
12,129
9,624
8,736
2,461
8,872
Note
payable – minority interest
-
-
-
17,218
55,420
Liabilities
to be settled by minority interest
-
-
-
12,461
-
Total
current liabilities
14,943
12,543
13,895
43,247
83,067
Convertible
notes, net of discounts
-
-
-
-
16,684
Notes
payable – minority interest, net of current portion
-
-
-
17,047
51,778
Notes
payable, net of discount and current portion
-
-
-
7,478
-
Total
liabilities
14,943
12,543
13,895
67,772
151,528
Total
stockholder’s equity
9,055
11,297
10,917
1,702
29,779
8
Exchange
Rate Information
Our
business is currently conducted in and from China in Renminbi. In this annual
report, all references to “Renminbi” and “RMB” are to the legal currency of
China and all references to U.S. dollars, dollars, $ and US$ are to the legal
currency of the United States. The conversion of Renminbi into U.S. dollars in
this annual report is based on the middle rate between buying and selling as
published by the People’s Bank of China of the PRC. For reader convenience, this
annual report contains translations of some Renminbi or U.S. dollar amounts for
2008 at US$1.00: RMB6.8346, which was the middle rate on December 31, 2008.
The published middle rate on June 30,
2009 was US$1.00: RMB
6.8319. We make no
representation that any Renminbi or U.S. dollar amounts could have been, or
could be, converted into U.S. dollars or Renminbi, as the case may be, at any
particular rate, the rates stated below, or at all. The Chinese government
imposes control over its foreign currency reserves in part through direct
regulation of the conversion of Renminbi into foreign currency and through
restrictions on foreign trade.
The
following table sets forth the average middle rates for Renminbi expressed as
per one U.S. dollar for the years 2004, 2005, 2006, 2007 and 2008:
Year
Renminbi Average(1)
2004
8.2768
2005
8.1826
2006
7.9579
2007
7.6040
2008
6.9451
(1)
Determined
by averaging the middle rate between buying and selling rates on the last
business day of each month during the relevant
period.
The
following table sets forth the high and low middle rates for Renminbi expressed
as per one U.S. dollar during the past six months.
Our
subsidiary China Cablecom Ltd. is in default under certain of its debt
obligations.
Our
subsidiary China Cablecom Ltd. received from one of its lenders a notice of
default as a result of China Cablecom Ltd.’s failure to make its scheduled April9, 2009 principal and interest payment of approximately $2.2 million under a
promissory note issued in connection with the $20.0 million bridge financing
that preceded our merger with Jaguar Acquisition Corporation (the “Bridge
Notes”). Accordingly, the lender gave notice that the April 2009
principal and interest payment and all other obligations under the promissory
note held by such lender were immediately due and payable together with related
penalties. As a result, China Cablecom Ltd. is currently in default
under the Bridge Note. Such default may have material adverse effect
on our operations, financial condition, and results of
operations. The Company sought tolling agreements from all of the
holders of the promissory notes issued in connection with the bridge financing
that funds consisting of outstanding principal amount together with any unpaid
and accrued interest (aggregating to approximately $11.0 million on the due
date, including the approximate $2.2 million owed to the lender mentioned
above), had been made available in a separate fund during the process of
arranging for the conversion of Renminbi in China. While most lenders provided
such tolling agreements, they were only effective until April 30, 2009 and as of
June 30, 2009, the full amount of principal, interest and penalty provisions are
now due and payable. We are currently working to resolve this matter
with investors holding the Bridge Notes of China Cablecom Ltd. by negotiating a
comprehensive debt restructuring package. However, there is no
assurance that we will be able to agree to such a restructuring package as may
be necessary to bring China Cablecom Ltd. out of default.
We
have a very limited operating history, which may make it difficult for you to
evaluate our business and prospects.
We
acquired Binzhou Broadcasting and Television Information Network Co., Ltd.
(“Binzhou Broadcasting”) in September 2007 and Hubei Chutian Video Communication
Network Co., Ltd. (“Hubei Chutian”) in June 2008. As a result, our operating
history is very limited and, accordingly, the revenue and income potential of
our business and markets are unproven. Binzhou Broadcasting’s and Hubei
Chutian’s historical operating results may not provide a meaningful basis for
evaluating our business, financial performance and prospects, particularly in
view of the fact that the networks comprising the operations of Binzhou
Broadcasting and Hubei Chutian have historically been operated
independently.
We also
face numerous risks, uncertainties, expenses and difficulties frequently
encountered by companies at an early stage of development. Some of these risks
and uncertainties relate to our ability to:
·
develop
new customers or new business from existing
customers;
·
expand
the technical sophistication of the products we
offer;
·
respond
effectively to competitive
pressures;
·
attract
and retain qualified management and employees;
and
·
adverse
effect on our business caused by the global financial
crisis.
We may
not meet internal or external expectations regarding our future performance. If
we are not successful in addressing these risks and uncertainties, our business,
operating results and financial condition may be materially adversely
affected.
10
We
must make significant intercompany loans to Binzhou Broadcasting and Hubei
Chutian to preserve our consolidation of the operating results of Binzhou
Broadcasting for financial reporting purposes.
Although
we are currently entitled to consolidate the financial position and operating
results of Binzhou Broadcasting and Hubei Chutian in our financial statements
under US GAAP, this is the result of the ratio of risk and rewards borne by us
regarding the operations of the two businesses, which in turn is dependent on
the significant level of intercompany debt we have extended to them. Pursuant to
the terms of the Asset Transfer Agreement with the local state-owned enterprise,
Binzhou Guangdian Network Co., Ltd. (“Binzhou SOE”), Binzhou Broadcasting must
complete the payment for all assets to be transferred not later than August
2008, which was later extended to December 31, 2008, further extended to January31, 2009 and further extended to December 31, 2009. Pursuant
to the terms of the Asset Transfer Agreement with the local state-owned
enterprise, Hubei Chutian Radio and Television Information Network Co., Ltd.
(“Hubei SOE”), Hubei Chutian must complete the payment for all assets to be
transferred not later than July 2009. To the extent the financing for
such payment is not in the form of an intercompany loan from us, our ability to
preserve the accounting treatment of Binzhou Broadcasting and Hubei Chutian will
be jeopardized.
We are
required to seek additional financing and to amend or modify the terms of our
existing debts to meet these obligations. There can be no assurance that any
such additional financing will be available on acceptable terms or at all or
that such lenders will be willing to amend or modify the terms of the
outstanding notes. Any such failure to secure additional financing by us will
create a default under the terms of the two joint venture agreements between
Jinan Youxiantong Network Technology Co., Ltd. (“JYNT”) and the Binzhou SOE and
Hubei SOE and likely result in us no longer being entitled to consolidate the
financial position and results of operations of Binzhou Broadcasting and Hubei
Chutian.
The
PRC television broadcasting industry may not digitalize as quickly as we expect,
as a result of which our revenues would be materially adversely
affected.
Our
future success depends upon the pace at which PRC television network operators
switch from analog to digital transmission. Various factors may cause PRC
television network operators to convert from analog to digital transmission at a
slow pace. The PRC government, which has strongly encouraged television network
operators to digitalize their networks and has set a target of 2015 for all,
except for up to six, analog channels to be switched off, may relax or cancel
the 2015 target. Also, PRC television viewers may fail to subscribe to digital
television services in sufficient numbers to support wide-scale
digitalization.
Existing
and emerging alternative platforms for delivering television programs, including
terrestrial networks, Internet protocol television and satellite broadcasting
networks present a significant competitive risk to our business.
We
compete with traditional terrestrial television networks for the same pool of
viewers. As technologies develop, other means of delivering information and
entertainment to television viewers are evolving. For example, some
telecommunications companies in the PRC are seeking to compete with terrestrial
broadcasters and cable television network operators by offering Internet
protocol television, or IPTV, which allows telecommunications companies to
stream television programs through telephone lines. While the PRC Ministry of
Information Industry, or the MII, so far has issued only five IPTV licenses, it
may issue significantly more licenses in the future. In addition, the State
Administration of radio, Film and Television (“SARFT”) issued a broadcast
license last year to the PRC’s first direct satellite broadcast company, which
is expected to begin commercial operation this year. To the extent that the
terrestrial television networks, telecommunications companies and direct
satellite television network operators compete successfully with us for viewers,
our ability to attract and retain subscribers may be adversely
affected.
Changes
in the regulatory environment of, and government policies towards, the PRC
television network industry could materially adversely affect our
revenues.
Strong
PRC government support has been a significant driver of the PRC television
broadcasting industry’s transition from analog to digital transmission. Although
the PRC government has set a target of 2015 for all television networks to
switch to digital transmissions, terminating all analog transmissions except for
up to six channels that will continue in service for the benefit of those unable
to afford digital television, there is no assurance that the government will not
change or adjust its digitalization policies at any time, including canceling or
relaxing the target date for digitalization. If the digitalization process in
the PRC were to be slowed down or otherwise adversely affected by any government
action or inaction, we may not be able to develop new customers or attract new
business from existing customers, and our revenues would be materially adversely
affected.
11
Furthermore,
the television broadcasting industry in the PRC is a highly regulated industry.
Government regulations with respect to television broadcasting content, the
amount and content of advertising, the pricing of pay-television subscriptions,
the role of private-sector investment and the role of foreign investment
significantly influence the business strategies and operating results of our
customers. Among other things, the SARFT must approve the creation of new
premium content channels and has the power to order television network operators
to stop airing programs or advertising that it considers illegal or
inappropriate. Any of such adverse government actions against television network
operators could in turn cause us to lose existing or potential
subscribers.
In China,
the basic subscription fee for cable television is regulated, municipal cable
television operators have to apply for approval at the local Price Bureau, which
will then arrange public hearings to approve any subscription price changes.
Although Binzhou Broadcasting has applied for and has acquired approval for a
subscription fee raise from the Price Bureau in year 2006, there is no guarantee
that any future partnership networks will succeed in getting approval for
subscription fee raises for digital television services.
If
significant numbers of television viewers in the PRC are unwilling to pay for
digital television or value-added services, we may not be able to sustain our
current revenue level.
We expect
a substantial majority of our future revenue growth to be derived from the
introduction of digital television subscriptions to viewers. However, we may be
unsuccessful in promoting digital television or value-added services. In 2008,
we expected 120,000 existing subscribers to upgrade to digital television,
whereas only 2,000 subscribers actually upgraded their service. While we believe
that this reduced rate of migration was due in part to transition issues and the
lack of an effective marketing and rollout plan, television viewers in the PRC
are accustomed to receiving television for free or for a very low price. Even
viewers who are accustomed to paying for cable television subscriptions have
historically paid very low rates and may not be willing to pay significantly
higher rates for digital television services, or additional fees for value-added
services. If we are unable to carry unique and compelling content to
differentiate us from direct satellite TV service providers and telecom
companies, or offer digital cable TV value-added services that meet viewers’
needs at an affordable price, we may find it difficult to persuade viewers to
accept the pay-television model or pay more for digital cable television or
value-added services than viewers have historically paid for analog cable
television. In that event, our customers’ digital subscriber numbers may not
grow and we may be unable to sustain our current revenue level.
Our
officers and directors may allocate their time to other businesses, and may be
affiliated with entities that may cause conflicts of interest. In particular,
our principal shareholder and Executive Chairman is subject to potentially
conflicting duties to another company he established to pursue business
opportunities in the PRC.
Messrs.
Ng and Pu and certain of our other officers and directors have the ability to
allocate their time to other businesses and activities, thereby causing possible
conflicts of interest in their determination as to how much time to devote to
our affairs.
These
individuals are engaged in several other business endeavors and are not
obligated to devote any specific number of hours to our affairs. If other
business affairs require them to devote more substantial amounts of time to such
affairs, it could limit their ability to devote time to our affairs and could
have a negative impact on our ongoing business. Certain of our officers and
directors are now, and all of them may in the future become, affiliated with
entities engaged in business activities similar to those intended to be
conducted by us or otherwise, and accordingly, may have conflicts of interest in
allocating their time and determining to which entity a particular investment or
business opportunity should be presented. Moreover, in light of our officers’
and directors’ existing affiliations with other entities, they may have
fiduciary obligations to present potential investment and business opportunities
to those entities in addition to presenting them to us, which could cause
additional conflicts of interest. While we do not believe that any of our
officers or directors has a conflict of interest in terms of presenting to
entities other than our investment and business opportunities that may be
suitable for us, conflicts of interest may arise in the future in determining to
which entity a particular business opportunity should be presented. We cannot
assure you that any conflicts will be resolved in our favor. These possible
conflicts may inhibit the activities of such officers and directors in seeking
acquisition candidates to expand our geographic reach or broaden our service
offerings. For a complete description of our management’s other affiliations,
see “Directors and Management.” In any event, it cannot be predicted with any
degree of certainty as to whether or not Mr. Ng, Mr. Pu or our other officers or
directors will have a conflict of interest with respect to a particular
transaction as such determination would be dependent upon the specific facts and
circumstances surrounding such transaction at the time.
12
Mr. Ng,
our Executive Chairman, entered into a settlement agreement with China
Broadband, Inc., another company he organized to pursue broadband cable
opportunities in the PRC, and certain of its shareholders and consultants,
relating to possible claims that China Broadband and such shareholders and
consultants suggested might be brought by China Broadband against Mr. Ng for his
activities in forming China Cablecom. If the parties to the settlement agreement
fail to observe the terms of the agreement, China Cablecom Holdings may be
involved in burdensome and time-consuming litigation in order to establish clear
entitlement to the Binzhou Broadcasting operations.
In
particular, notwithstanding the terms of the settlement and the amendment to Mr.
Ng’s employment agreement with China Broadband, Ltd., Mr. Ng’s continuing
relationship with China Broadband could lead to future claims of violation of
his duties to China Broadband in the event future acquisitions in the PRC are
offered to us rather than China Broadband, notwithstanding the express terms of
the revised employment agreement and provisions of the settlement agreement. Mr.
Ng’s revised employment agreement with China Broadband contains an express
provision permitting Mr. Ng to resign from China Broadband in the event an
acquisition arises that involves the business of China Cablecom, which is how
Mr. Ng currently intends to handle opportunities in the future that could create
a situation similar to that which led to the settlement agreement.
The
settlement agreement contains a provision recognizing that the provision of
integrated cable television services in the People’s Republic of China and
related activities is our business and the provision of stand-alone independent
broadband services is the business of China Broadband. However, notwithstanding
the terms of the settlement agreement and the amendment to Mr. Ng’s employment
agreement with China Broadband, Mr. Ng’s continuing relationship with China
Broadband could lead to future claims of violation of his duties to China
Broadband in the event future acquisitions in the PRC are offered to China
Cablecom Holdings rather than China Broadband, notwithstanding his current
intention to resign in such circumstances.
If
shareholders sought to sue our officers or directors, it may be difficult to
obtain jurisdiction over the parties and access to the assets located in the
PRC.
Because
most of our officers and directors reside outside of the U.S., it may be
difficult, if not impossible, to acquire jurisdiction over these persons in the
event a lawsuit is initiated against such officers and directors by shareholders
in the U.S. It also is unclear if extradition treaties now in effect between the
U.S. and the PRC would permit effective enforcement of criminal penalties of the
federal securities laws. Furthermore, because substantially all of our assets
are located in the PRC, it would also be extremely difficult to access those
assets to satisfy an award entered against us in U.S. court. Moreover, we have
been advised that the PRC does not have treaties with the U.S. providing for the
reciprocal recognition and enforcement of judgments of courts. As a result, it
may not be possible for investors in the U.S. to enforce their legal rights, to
effect service of process upon our directors or officers or to enforce judgments
of U.S. courts predicated upon civil liabilities and criminal penalties of our
directors and officers under federal securities laws.
The
Chinese government could change its policies toward, or even nationalize,
private enterprise, which could reduce or eliminate our interests.
Over the
past several years, the Chinese government has pursued economic reform policies,
including the encouragement of private economic activities and decentralization
of economic regulation. The Chinese government may not continue to pursue these
policies or may significantly alter them to our detriment from time to time
without notice. Changes in policies by the Chinese government that result in a
change of laws, regulations, their interpretation, or the imposition of high
levels of taxation, restrictions on currency conversion or imports and sources
of supply could materially and adversely affect our business and operating
results. The nationalization or other expropriation of private enterprises by
the Chinese government could result in the total loss of our investment in
China.
13
Foreign
exchange regulations in the PRC may affect our ability to pay dividends in
foreign currency or conduct other foreign exchange business.
Renminbi,
or RMB, is not presently a freely convertible currency, and the restrictions on
currency exchanges may limit our ability to use revenues generated in RMB or to
make dividends or other payments in U.S. dollars. The PRC government, through
the State Administration for Foreign Exchange (“SAFE”), regulates conversion of
RMB into foreign currencies. Currently, Foreign Invested Enterprises (such as
China Cablecom) are required to apply for “Foreign Exchange Registration
Certificates” and to renew those certificates annually. However, even with that
certification, conversion of currency in the “capital account” (e.g. for capital
items such as direct investments or loans) still requires the approval of SAFE.
There is no assurance that SAFE approval will be obtained, and if it is not, it
could impede our business activities.
The Onshore and Offshore Loan
Agreements may be scrutinized by the SAFE
In June
and July of 2008, China Cablecom entered into 2 loan agreements, whereby, China
Cablecom extended 2 loans in U.S. dollars to Rich Dynamic Limited, a Hong Kong
company, (“RDL”), which amount in aggregate, to U.S. dollars
38,000,000. These loans were utilized as payment to a shareholder
(“Shareholder”) of Chengdu Chuanghong Jinsha Real Estate Co., Ltd. (“Chengdu
Chuanghong”), for the purpose of acquiring 60% of the equity interest in this
company. After payment was made to the Shareholder, 2 RMB loans were
extended by the Shareholder to JYNT, pursuant to the loan agreements entered
into between the Shareholder and JYNT, which amount in aggregate to RMB
224,000,000.
Although
neither of the loan transactions contravenes PRC Law, we cannot ensure that the
SAFE will not regard the transactional arrangement (taken as a whole) as an
attempt to circumvent the SAFE’s scrutiny over foreign exchange. If the SAFE
deems the transactional arrangement to be illegal, it may levy fines and
restrict our ability to transfer funds to our PRC subsidiaries. As a result, the
development of our business may be adversely affected.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC, which could result in misconduct and difficulty in
complying with applicable laws and requirements.
As a
quasi-governmental business in the PRC, our networks have not historically
focused on establishing Western-style management and financial reporting
concepts and practices, as well as modern banking, computer and other internal
control systems. We may have difficulty in hiring and retaining a sufficient
number of qualified internal control employees to work in the PRC. As a result
of these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards, especially on the operation level of our
joint ventures with municipal cable TV network operators.
Being
a foreign private issuer may exempt us from certain Securities and Exchange
Commission requirements that provide shareholders the protection of information
that must be made available to shareholders of United States public
companies.
As a
foreign private issuer. we are exempt from certain provisions applicable to
United States public companies including:
14
·
The
rules requiring the filing with the SEC of quarterly reports on Form 10-Q
or current reports on Form 8-K;
·
The
sections of the Securities Exchange Act regulating the solicitation of
proxies, consents or authorizations with respect to a security registered
under the Securities Exchange Act;
·
Provisions
of Regulation FD aimed at preventing issuers from making selective
disclosures of material information;
and
·
The
sections of the Securities Exchange Act requiring insiders to file public
reports of their share ownership and trading activities and establishing
insider liability for profits realized from any “short swing” trading
transactions (i.e., a purchase and sale, or a sale and purchase, of the
issuer’s equity securities within less than six
months).
Because
of these exemptions, our shareholders may not be afforded the same protections
or information generally available to investors holding shares in public
companies organized in the United States.
Risks
Relating to our Corporate Structure
We
exercise voting and economic control over Jinan Youxiantong Network Technology
Co., Ltd. (“JYNT”) pursuant to contractual agreements with the shareholders of
JYNT that may not be as effective as direct ownership.
As a
result of the contractual agreements entered into between our indirect
subsidiary Heze Cablecom Network Technology Co., Ltd., a PRC company (“HZNT”),
and the shareholders of JYNT, we control and are considered the primary
beneficiary of JYNT, and are entitled to consolidate the financial results of
JYNT, which includes JYNT’s 60% economic interest in the financial results of
Binzhou Broadcasting and JYNT’s 60% economic interest in the financial results
of Hubei Chutian. While the terms of these contractual agreements are designed
to minimize the operational impact of governmental regulation of the media,
cultural and telecommunications industries in the PRC, and provide us with
voting control and the economic interests associated with the shareholders’
equity interest in JYNT, they are not accorded the same status at law as direct
ownership of JYNT and may not be as effective in providing and maintaining
control over JYNT as direct ownership. For example, we may not be able to take
control of JYNT upon the occurrence of certain events, such as the imposition of
statutory liens, judgments, court orders, death or capacity. If the PRC
government proposes new laws or amends current laws that are detrimental to the
contractual agreements with JYNT, such changes may effectively eliminate our
control over the JYNT and our ability to consolidate the financial results of
Binzhou Broadcasing and Hubei Chutian, JYNT’s sole operational assets. In
addition, if the shareholders of JYNT fail to perform as required under those
contractual agreements, we will have to rely on the PRC legal system to enforce
those agreements, and there is no guarantee that we will be successful in an
enforcement action.
Furthermore,
if we, or HZNT, were found to be in violation of any existing PRC laws or
regulations, the relevant regulatory authorities would have broad discretion to
deal with such violation, including, but not limited to the
following:
·
levying
fines;
·
confiscating
income; and/or
·
requiring
a restructure of ownership or
operations.
15
JYNT
has a 49% equity interest in each of Binzhou Broadcasting and Hubei Chutian and
the failure by the Binzhou SOE or the Hubei SOE to perform its obligations under
the respective joint venture agreements and services agreements may
negatively impact our ability to consolidate the financial operations of Binzhou
Broadcasting and Hubei Chutian.
JYNT has
entered into a joint venture agreement and a series of services agreements that,
pursuant to applicable accounting principles, entitles JYNT to consolidate 60%
of the operating results of Binzhou Broadcasting, although JYNT only has a 49%
equity interest and the Binzhou SOE has retained control of the joint
venture. JYNT has also entered into a joint venture agreement and a
series of services agreements that, pursuant to applicable accounting
principles, entitles JYNT to consolidate 60% of the operating results of Hubei
Chutian, although JYNT only has a 49% equity interest and the local state-owned
enterprise, Hubei Chutian Radio and Television Information Network Co., Ltd.
(“Hubei SOE”) has retained control of the joint venture. Because JYNT
lacks actual control over Binzhou Broadcasting and Hubei Chutian, JYNT, and us
through our contractual arrangements with the shareholders of JYNT, are
protected in our dealings with the Binzhou SOE and the Hubei SOE only to the
extent provided for in the joint venture agreement and the services agreements.
If either the Binzhou SOE or the Hubei SOE fails to observe the requirements of
its respective joint venture agreement and other services agreements
with JYNT, we may have to incur substantial costs and resources to enforce such
arrangement, and rely on legal remedies under PRC law, including seeking
specific performance or injunctive relief, and claiming damages, which may not
be effective. If the shareholders of JYNT and us are unable to compel the
Binzhou SOE or Hubei SOE to observe the requirements of its respective joint
venture agreement and the services agreements, we may be forced to account for
the financial results and position of Binzhou Broadcasting and Hubei Chutian
pursuant to different accounting principles, effectively eliminating our sole
operational assets.
The
agreements that establish the structure for operating our business may result in
the relevant PRC government regulators revoking or refusing to renew Binzhou
Broadcasting’s or Hubei Chutian’s operating permit.
Each of
Binzhou Broadcasting and Hubei Chutian obtains exclusive operating rights by
entering into exclusive service agreements with Binzhou SOEs and Hubei SOEs,
respectively, who are 100% owned by different levels of branches of SARFT in
Binzhou Municipality and Hubei Municipality, respectively. Binzhou SOEs and
Hubei SOEs enjoy the right to provide cable access services in their respective
territories. Any foreign-invested enterprise incorporated in the PRC, such as
our subsidiary, HZNT, is prohibited from conducting a business involving the
transmission of broadcast television or the provision of cable access services.
Our contractual arrangements with JYNT and its shareholders provide us with the
economic benefits of Binzhou Broadcasting and Hubei Chutian. If SARFT determines
that our control over JYNT, or our relationship with Binzhou Broadcasting or
Hubei Chutian through those contractual arrangements, is contrary to their
generally restrictive approach towards foreign participation in the PRC cable
television industry, there can be no assurance that SARFT will not reconsider
Binzhou Broadcasting’s or Hubei Chutian’s eligibility to hold exclusive rights
to provide operating services or cable access services to Binzhou SOEs or Hubei
SOEs. If that were to happen, we might have to discontinue all or a substantial
portion of our business pending the approval of exclusive service and operating
rights on the required operating permits held by Binzhou SOEs and Hubei SOEs. In
addition, if we are found to be in violation of any existing or futures PRC laws
or regulations, the relevant regulatory authorities, including the SARFT, would
have broad discretion in dealing with such violation, including levying fines,
confiscating our income, revoking the business licenses or operating licenses of
our PRC affiliates and Binzhou SOE and Hubei SOE, requiring us to restructure
the relevant ownership structure or operations, and requiring us to discontinue
all or any portion of our operations. Any of these actions could cause
significant disruption to our business operations and may materially and
adversely affect our business, financial condition and results of
operations.
16
Risks
Relating to the People’s Republic of China
Adverse
changes in economic policies of the PRC government could have a material adverse
effect on the overall economic growth of the PRC, which could reduce the demand
for our services and materially adversely affect our business.
All of
our assets are located in and all of our revenue is sourced from the PRC.
Accordingly, our business, financial condition, results of operations and
prospects will be influenced to a significant degree by political, economic and
social conditions in the PRC generally and by continued economic growth in the
PRC as a whole.
The PRC
economy differs from the economies of most developed countries in many respects,
including the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources. Although the PRC
government has implemented measures since the late 1970s emphasizing the
utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of improved corporate
governance in business enterprises, a substantial portion of productive assets
in the PRC is still owned by the PRC government. In addition, the PRC government
continues to play a significant role in regulating industry development by
imposing industrial policies. The PRC government also exercises significant
control over the PRC’s economic growth through the allocation of resources,
controlling payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or
companies.
While the
PRC economy has experienced significant growth over the past decade, growth has
been uneven, both geographically and among various sectors of the economy. The
PRC government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures benefit the overall
PRC economy, but may also have a negative effect on us. For example, our
operating results and financial condition may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us.
Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit
the legal protections available to you and us.
The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which legal decisions have limited value as
precedents. In 1979, the PRC government began to promulgate a comprehensive
system of laws and regulations governing economic matters in general. The
overall effect of legislation over the past three decades has significantly
increased the protections afforded to various forms of foreign or private-sector
investment in the PRC. These laws and regulations change frequently, and their
interpretation and enforcement involve uncertainties. For example, we may have
to resort to administrative and court proceedings to enforce the legal
protections that we enjoy either by law or contract. However, since PRC
administrative and court authorities have significant discretion in interpreting
and implementing statutory and contractual terms, it may be more difficult to
evaluate the outcome of administrative and court proceedings and the level of
legal protection we enjoy than in more developed legal systems. These
uncertainties may also impede our ability to enforce the contracts we have
entered into. As a result, these uncertainties could materially adversely affect
our business and operations.
Under
the EIT Law, we, China Cablecom Company Limited, and China Cablecom each
may be classified as a “resident enterprise” of the PRC. Such classification
could result in unfavorable tax consequences to us, China Cablecom Company
Limited, China Cablecom and our non-PRC security
holders.
On
March 16, 2007, the Fifth Session of the Tenth National People’s Congress
passed the Enterprise Income Tax Law of the People’s Republic of China (the “EIT
Law”), which became effective on January 1, 2008. Under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a “resident enterprise,” meaning that it can be treated in a
manner similar to a Chinese enterprise for enterprise income tax purposes,
although the dividends paid to one resident enterprise from another may qualify
as “tax-exempt income.” The implementing rules of the EIT Law define de facto
management as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise.
17
On April22, 2009, the State Administration of Taxation issued the Notice on the Issues Regarding Recognition of
Overseas Incorporated Domestically Controlled Enterprises as PRC Resident
Enterprises Based on the De Facto Management Body Criteria, which was
retroactively effective as of January 1, 2008. Under this notice, an overseas
incorporated enterprise will be recognized as a PRC resident enterprise if it
satisfies all of the following conditions: (i) the senior management responsible
for daily production/business operations is primarily located in the PRC, and
the location(s) where such senior management execute their responsibilities are
primarily in the PRC; (ii) strategic financial and personnel decisions are made
or approved by organizations or personnel located in the PRC; (iii) major
properties, accounting ledgers, company seals and minutes of board meetings and
shareholder meetings, etc., are maintained in the PRC; and (iv) 50% or more of
the board members with voting rights or senior management habitually reside in
the PRC. However, even under this new notice, it is still unclear whether
PRC tax authorities would require us, China Cablecom Company
Limited, and/or China Cablecom to be treated as a PRC resident
enterprise.
If the
PRC tax authorities determine that we, China Cablecom Company
Limited, and/or China Cablecom is a “resident enterprise” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we, China Cablecom Company Limited, and/or China
Cablecom may be subject to enterprise income tax at a rate of 25% on our and/or
China Cablecom’s worldwide taxable income, as the case may be, as well as PRC
enterprise income tax reporting obligations. Second, although under the EIT Law
and its implementing rules, dividends paid to us from China Cablecom’s PRC
subsidiaries through China Cablecom Company Limited, its Hong Kong sub-holding
company, assuming we, China Cablecom and China Cablecom Company Limited, are
each treated as a “resident enterprise” under the EIT Law, may qualify as
“tax-exempt income,” we cannot guarantee that such dividends will not be subject
to withholding tax generally at a rate of 10% (or, if the Double Tax Avoidance
Agreement between Hong Kong and Mainland China is applicable, 5%). Finally, the
new “resident enterprise” classification could result in a situation in which a
10% PRC tax is imposed on dividends we pay to our non-PRC security holders and
gains derived by our non-PRC security holders from transferring our securities,
if such income is considered PRC-sourced income by the relevant PRC tax
authorities.
If any
such PRC taxes apply to a non-PRC security holder, such security holder may be
entitled to a reduced rate of PRC taxes under an applicable income tax treaty
and/or a foreign tax credit against such security holder’s domestic income tax
liability (subject to applicable conditions and limitations). You should consult
with your own tax advisors regarding the applicability of any such taxes, the
effects of any applicable income tax treaties, and any available foreign tax
credits.
Risks
Relating to Being Incorporated in the British Virgin Islands
We
are a British Virgin Islands company and, because the rights of shareholders
under British Virgin Islands law differ from those under U.S. law, you may have
fewer protections as a shareholder.
Our
corporate affairs are governed by our Amended and Restated Memorandum and
Articles of Association, the BVI Business Companies Act, 2004 (as amended) of
the British Virgin Islands (the “Act”) and the common law of the British Virgin
Islands. The rights of shareholders to take action against the directors,
actions by minority shareholders and the fiduciary responsibility of the
directors under British Virgin Islands law are governed by the Act and the
common law of the British Virgin Islands. The common law of the British Virgin
Islands is derived in part from comparatively limited judicial precedent in the
British Virgin Islands as well as from English common law, which has persuasive,
but not binding, authority on a court in the British Virgin Islands. The rights
of shareholders and the fiduciary responsibilities of directors under British
Virgin Islands law are not as clearly established as they would be under
statutes or judicial precedent in some jurisdictions in the United States. In
particular, the British Virgin Islands has a less developed body of securities
laws as compared to the United States, and some states (such as Delaware) have
more fully developed and judicially interpreted bodies of corporate
law.
18
British
Virgin Islands companies may not be able to initiate shareholder derivative
actions, thereby depriving shareholders of the ability to protect their
interests.
British
Virgin Islands companies may not have standing to initiate a shareholder
derivative action in a federal court of the United States. The circumstances in
which any such action may be brought, and the procedures and defenses that may
be available in respect to any such action, may result in the rights of
shareholders of a British Virgin Islands company being more limited than those
of shareholders of a company organized in the United States. Accordingly,
shareholders may have fewer alternatives available to them if they believe that
corporate wrongdoing has occurred. The British Virgin Islands courts are also
unlikely to recognize or enforce against us judgments of courts in the United
States based on certain liability provisions of U.S. securities law, and to
impose liabilities against us, in original actions brought in the British Virgin
Islands, based on certain liability provisions of U.S. securities laws that are
penal in nature.
The
laws of the British Virgin Islands provide statutory protection for minority
shareholders.
Under the
laws of the British Virgin Islands, there is some statutory law for the
protection of minority shareholders under the Act. The principal protection
under statutory law is that shareholders may bring an action to enforce our
Amended and Restated Memorandum and Articles of Association. The Act sets forth
the procedure to bring such a claim. Shareholders are entitled to have the
affairs of the company conducted in accordance with the general law and the
Amended and Restated Memorandum and Amended and Restated Articles of
Association. Companies are not obligated to appoint an independent
auditor and shareholders are not entitled to receive the audited financial
statements of the company.
There are
common law rights for the protection of shareholders that may be invoked (such
rights have also now been given statutory footing under the Act), largely
dependent on English company law, since the common law of the British Virgin
Islands for business companies is limited. Under the general rule pursuant to
English company law known as the rule in Foss v. Harbottle, a
court will generally refuse to interfere with the management of a company at the
insistence of a minority of its shareholders who express dissatisfaction with
the conduct of the company’s affairs by the majority or the board of directors.
However, every shareholder is entitled to have the affairs of the company
conducted properly according to law and the constituent documents of the
corporation. As such, if those who control the company have persistently
disregarded the requirements of company law or the provisions of the company’s
memorandum or articles of association, then the courts will grant relief.
Generally, the areas in which the courts will intervene are the following: (i)
an act complained of which is outside the scope of the authorized business or is
illegal or not capable of ratification by the majority, (ii) acts that
constitute fraud on the minority where the wrongdoers control the company, (iii)
acts that infringe on the personal rights of the shareholders, such as the right
to vote, and (iv) where the company has not complied with provisions requiring
approval of a special or extraordinary majority of shareholders, which are more
limited than the rights afforded minority shareholders under the laws of many
states in the U.S.
The Act
has introduced a series of remedies available to members. Where a company
incorporated under the Act conducts some activity which breaches the Act or the
company's memorandum and articles of association, the court can issue a
restraining or compliance order. Members can now also bring derivative, personal
and representative actions under certain circumstances. The traditional English
basis for members' remedies have also been incorporated into the Act – where a
member of a company considers that the affairs of the company have been, are
being or are likely to be conducted in a manner likely to be oppressive,
unfairly discriminating or unfairly prejudicial to him, he may now apply to the
BVI court for an order on such conduct.
Any
member of a company may apply to the BVI court for the appointment of a
liquidator for the company and the court may appoint a liquidator for the
company if it is of the opinion that it is just and equitable to do
so.
The Act
provides that any member of a company is entitled to payment of the fair value
of his shares upon dissenting from any of the following: (a) a merger; (b) a
consolidation; (c) any sale, transfer, lease, exchange or other disposition of
more than 50 per cent in value of the assets or business of the company if not
made in the usual or regular course of the business carried on by the company
but not including (i) a disposition pursuant to an order of the court having
jurisdiction in the matter, (ii) a disposition for money on terms requiring all
or substantially all net proceeds to be distributed to the members in accordance
with their respective interest within one year after the date of disposition, or
(iii) a transfer pursuant to the power of the directors to transfer assets for
the protection thereof; (d) a redemption of 10 percent, or fewer of the issued
shares of the company required by the holders of 90 percent, or more of the
shares of the company pursuant to the terms of the Act; and (e) an arrangement,
if permitted by the court.
19
Generally
any other claims against a company by its shareholders must be based on the
general laws of contract or tort applicable in the British Virgin Islands or
their individual rights as shareholders as established by the company's
memorandum and articles of association.
If
outstanding warrants are exercised, the underlying ordinary shares will be
eligible for future resale in the public market. “Market overhang” from the
warrants results in dilution and has an adverse effect on the ordinary shares’
market price.
We have
outstanding warrants and unit purchase options to purchase an aggregate of up to
10,493,334 ordinary shares. If they are exercised, a substantial number of
additional ordinary shares will be eligible for resale in the public market,
which could adversely affect the market price.
Because
we do not intend to pay dividends shareholders will benefit from an investment
in our ordinary shares only if they appreciate in value.
We have
never declared or paid any cash dividends on our ordinary shares. We currently
intend to retain all future earnings, if any, for use in the operations and
expansion of the business. As a result, we do not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the
declaration and payment of cash dividends will be at the discretion of our Board
of Directors and will depend on factors our Board of Directors deems relevant,
including among others, our results of operations, financial condition and cash
requirements, business prospects, and the terms of China Cablecom Holdings’
credit facilities, if any, and any other financing arrangements. Accordingly,
realization of a gain on shareholders’ investments will depend on the
appreciation of the price of the ordinary shares. There is no guarantee that our
ordinary shares will appreciate in value.
There
is a risk that we could be treated as a U.S. domestic corporation for U.S.
federal income tax purposes, which could result in significantly greater U.S.
federal income tax liability to us.
Section
7874(b) of the Internal Revenue Code of 1986, as amended (the “Code”) generally
provides that a corporation organized outside the United States which acquires,
directly or indirectly, pursuant to a plan or series of related transactions
substantially all of the assets of a corporation organized in the United States
will be treated as a domestic corporation for U.S. federal income tax purposes
if shareholders of the acquired corporation, by reason of owning shares of the
acquired corporation, own at least 80% (of either the voting power or the value)
of the stock of the acquiring corporation after the acquisition. If Section
7874(b) were to apply to the Redomestication Merger and Business Combination (as
each such term is defined in the section of this Annual Report entitled
“Information on the Company”), then, among other things, we would be subject to
U.S. federal income tax on our worldwide taxable income following the
Redomestication Merger and Business Combination as if we were a domestic
corporation. Although it is not expected that Section 7874(b) will apply to
treat us as a domestic corporation for U.S. federal income tax purposes, this
result is not entirely free from doubt. As a result, shareholders and warrant
holders are urged to consult their tax advisors on this issue. The balance of
this discussion (including the discussion in the section of this Annual Report
entitled “Taxation—United States Federal Income Taxation”) assumes that we will
be treated as a foreign corporation for U.S. federal income tax
purposes.
20
We may qualify as a passive foreign
investment company, or “PFIC,” which could result in adverse U.S. federal income
tax consequences to U.S. investors.
In
general, we will be classified as a PFIC for any taxable year in which either
(1) at least 75% of our gross income (looking through certain corporate
subsidiaries) is passive income or (2) at least 50% of the average value of our
assets (looking through certain corporate subsidiaries) is attributable to
assets that produce, or are held for the production of, passive income. Passive
income generally includes, without limitation, dividends, interest, rents,
royalties, and gains from the disposition of passive assets. If we are
determined to be a PFIC for any taxable year during which a U.S. Holder (as
defined in the section of this Annual Report captioned ‘‘Taxation – United
States Federal Income Taxation – General’’) held our ordinary shares or
warrants, the U.S. Holder may be subject to increased U.S. federal income tax
liability and may be subject to additional reporting requirements. Based on the
composition (and estimated values) of the assets and the nature of the income of
us and our subsidiaries in 2008, we do not anticipate that we will be treated as
a PFIC in 2008. Notwithstanding the foregoing, our view that we will not be
treated as a PFIC in 2008 is not free from doubt because of, among other things,
the significant cash position and uncertainties relating to the actual values of
the other assets of us and our subsidiaries in 2008. Our actual PFIC status for
any subsequent taxable year will not be determinable until after the end of such
taxable year. Accordingly, there can be no assurance with respect to our status
as a PFIC for 2008 or any subsequent taxable year. We urge U.S. Holders to
consult their own tax advisors regarding the possible application of the PFIC
rules. For a more detailed explanation of the tax consequences of PFIC
classification to U.S. Holders, see the section of this Annual Report
captioned ‘‘Taxation—United States Federal Income Taxation—Tax Consequences to
U.S. Holders of Our Ordinary Shares and Warrants—Passive Foreign Investment
Company Rules.’’
China
Cablecom Holdings was formed on October 25, 2007, in the British Virgin Islands,
and operates through a wholly-owned subsidiary China Cablecom Ltd., a British
Virgin Islands company, which (through subsidiaries) is a joint-venture provider
of cable television services in the PRC, operating in partnership with a local
state-owned enterprise (“SOE”) authorized by the PRC government to control the
distribution of cable TV services. China Cablecom acquired the network it
currently operates in Binzhou, Shandong Province in September 2007 and in Hubei
Province in June 2008 by entering into a series of asset purchase and services
agreements with a company organized by SOEs owned directly or indirectly by
local branches of SARFT in five different municipalities to serve as a holding
company of the relevant businesses.
China
Cablecom Ltd.’s operating activity from October 6, 2006 (inception date) to
September 30, 2007, was limited and related to its formation, and professional
fees and expenses associated with its acquisition activities.
On
September 20, 2007, China Cablecom Ltd. entered into a Purchase Agreement with
several accredited investors (the “Purchase Agreement”), and consummated the
private placement of 20,000,000 units, each unit consisting of (i) a promissory
note in the face amount of $499,808, bearing interest at the rate of 10% per
annum (the “Note”), and (ii) 19,167 detachable shares of China Cablecom Ltd.’s
Class A Preferred Stock (the “Units”). As security for the Notes, Mr. Clive Ng
pledged and granted to the investors, on a pro rata basis, a first
priority lien on 50.1% of the ordinary shares of China Cablecom Ltd. owned by
him. The proceeds of the sale and issuance of the Units were used in the
following manner: (i) $12.0 million was used to finance the acquisition through
contractual arrangements of Binzhou Broadcasting and (ii) $8 million was used
for working capital, including payment of certain administrative, legal,
investment banking and accounting fees, repayment of loans in the aggregate
amount of $720,000 owed to Mr. Ng and a $475,000 loan made to Jaguar Acquisition
Corporation (“Jaguar”). Jaguar used the proceeds of this loan for working
capital expenses associated with completing its acquisition of China Cablecom
Ltd. After its merger with and into China Cablecom Holdings, Jaguar ceased to
exist and the loan was assumed by China Cablecom Holdings and continues to be in
effect an intercompany obligation.
21
On April9, 2008, pursuant to the terms of an Agreement and Plan of Merger, dated October30, 2007 (“Merger Agreement”), Jaguar merged with and into (the “Redomestication
Merger”) China Cablecom Holdings, its wholly-owned British Virgin Islands
subsidiary, for the purpose of redomesticating Jaguar to the British Virgin
Islands as part of the acquisition of China Cablecom Ltd., and China Cable
Merger Co., Ltd., a wholly-owned British Virgin Islands subsidiary of China
Cablecom Holdings (“China Cable Merger Co.”), merged with and into China
Cablecom Ltd., resulting in China Cablecom Ltd. becoming a wholly-owned
subsidiary of China Cablecom Holdings (the “Business Combination”).
At the
closing of the Business Combination, China Cablecom Holdings issued to China
Cablecom’s shareholders aggregate merger consideration of 2,066,680 of ordinary
shares and China Cablecom Holdings assumed approximately $20 million in
outstanding debt of China Cablecom.
In
connection with the approval of the merger at the April 9, 2008 Special Meeting
of Stockholders of Jaguar, the stockholders of Jaguar also approved (i) the
adoption of China Cablecom Holdings’ 2007 Omnibus Securities and Incentive Plan,
which provides for the grant of up to 10,000,000 ordinary shares of China
Cablecom Holdings or cash equivalents to directors, officers, employees and/or
consultants of China Cablecom Holdings and its subsidiaries; (ii) the grant of
up to 8,120,000 ordinary shares (‘‘Performance Shares’’), pursuant to consulting
and other arrangements to certain of Jaguar’s and China Cablecom’s insiders in
connection with the Business Combination upon the achievement of certain
financial goals of China Cablecom Holdings following the Business Combination;
and (iii) the payment of cash bonuses of up to $5,000,000 to certain officers
and directors of Jaguar and China Cablecom following the exercise of existing
warrants after the Business Combination.
The
Company consummated a convertible debt financing in May 2008 with current and
new investors involving the issuance of an aggregate of $43.175 million
principal amount at maturity of secured convertible notes and approximately
1.525 million ordinary shares to assist in securing its acquisition of Hubei
Broadcasting. Interest was prepaid at closing, resulting in net proceeds
(excluding existing investors who reinvested principal and interest repayments
in the new issuance) to the Company of approximately $25.8 million. Chardan
Capital Markets, LLC, Lazard Frères & Co. LLC and Roth Capital Partners
, LLC acted as co-placement agents.
The
3-year senior secured convertible notes bear an interest rate of 9.99% per annum
and are secured by a pledge of the stock of the Company’s wholly-owned
subsidiary, China Cablecom Ltd., and all other assets owned by the Company
outside of the People’s Republic of China. The notes are convertible into shares
of the Company’s ordinary shares at a conversion price of $9.50 per share and
are guaranteed by China Cablecom Ltd. as to the principal, interest and all
other amounts due thereunder. In addition, the Company issued approximately
1.525 million ordinary shares to the investors and is obligated to issue an
additional approximate 125,000 shares if the notes are not repaid upon the first
anniversary of the closing and an additional approximate 300,000 shares if
the notes are not repaid upon the second anniversary of the closing.
Additionally, the Company has the ability to prepay the notes for a total of $34
million upon the first anniversary of their issuance and any time thereafter at
prepayment amounts equal to such amount plus additional amounts equal to
approximately 10 5/8% of the principal amount of maturity per annum of such
notes, based on the number of days from such first anniversary to such date of
prepayment. To the extent that the Company calls its outstanding warrants and
such warrants are exercised, it is required to repay the notes with the net
proceeds from such warrant exercise.
Joint
Venture with Binzhou Guangdian Network Co., Ltd. and China
Cablecom.
In
September 2007, China Cablecom entered into a Framework Agreement through its
affiliated company, JYNT, to purchase a 49% equity interest and 60% economic
benefit in a newly created joint venture, Binzhou Broadcasting and Television
Information Network Co., Ltd. (“Binzhou Broadcasting”). The local state-owned
enterprise, Binzhou Guangdian Network Co., Ltd. (“Binzhou SOE”), agreed to
contribute certain assets and businesses for a 51% equity interest in Binzhou
Broadcasting. Binzhou SOE was organized in 2006 to aggregate various local
state-owned cable assets and businesses within the city of Binzhou, China. Prior
to the formation of Binzhou Broadcasting, Binzhou SOE consolidated the following
five cable operating companies and networks:
22
·
Binzhou
Guang Shi Network Co., Ltd.;
·
Huiming
Cable Network Co., Ltd.;
·
Boxing
Dian Guang Media Co., Ltd.;
·
Zouping
Cable Network Center; and
·
Binzhou
Guang Dian Cable Network Center.
In order
to comply with current PRC laws limiting foreign ownership in the cable
industry, Binzhou Broadcasting operates in a joint venture and China Cablecom
manages its interest in the joint venture through direct ownership of wholly
foreign owned entities and affiliated companies wholly owned by PRC citizens.
China Cablecom entered into contractual arrangements, through its affiliated PRC
company, JYNT, to provide marketing, strategic consulting and technical support
and services to Binzhou Broadcasting for a fee of 11% of the net profits of the
joint venture. In addition, in the Framework Agreement between JYNT and the
Binzhou SOE, JYNT has the ability to control certain aspects of the financing
and management of Binzhou Broadcasting arising from a veto right it holds
regarding the appointment of the general manager of Binzhou Broadcasting, the
right to appoint the chief financial officer of Binzhou Broadcasting and an
obligation to provide continued financial resources for investment and capital
expenditure for the future expansion of the joint venture’s operations. As a
result, China Cablecom has the ability to substantially influence the joint
venture’s daily operations and financial affairs, appoint their senior
executives and approve all matters requiring shareholder vote. In addition,
China Cablecom enjoys 60% of the economic benefits of the joint venture through
its 11% fee of net profit combined with its 49% ownership interest. The other
provisions of the Framework Agreement (including an appraisal of the assets of
Binzhou Broadcasting, the initial capitalization of Binzhou Broadcasting and a
prohibition on the Binzhou SOE establishing a competing network in the
cooperation area) have either been performed in full or are contained in the
formal agreement entered into subsequent thereto.
Joint
Venture with Hubei Chutian Radio and Television Information Network Co., Ltd.
and China Cablecom.
In June
2008, China Cablecom entered into a Framework Agreement through its affiliated
company, JYNT, to purchase a 49% equity interest and 60% economic benefit in a
newly created joint venture, Hubei Chutian Video Communication Network Co., Ltd.
(“Hubei Chutian”). The local state-owned enterprise, Hubei Chutian Radio and
Television Information Network Co., Ltd. (“Hubei SOE”), agreed to contribute
certain assets and businesses for a 51% equity interest in Hubei Chutian. Hubei
SOE was organized under the laws of the PRC to aggregate various local
state-owned cable assets and businesses within the Province of Hubei,
China.
In order
to comply with current PRC laws limiting foreign ownership in the cable
industry, Hubei Chutian operates in a joint venture and China Cablecom manages
its interest in the joint venture through direct ownership of wholly foreign
owned entities and affiliated companies wholly owned by PRC citizens. China
Cablecom entered into contractual arrangements, through its affiliated PRC
company, JYNT, to provide marketing, strategic consulting and technical support
and services to Hubei Chutian for a fee of 11% of the net profits of the joint
venture. In addition, in the Framework Agreement between JYNT and the Hubei SOE,
JYNT has the ability to control certain aspects of the financing and management
of Hubei Chutian arising from a veto right it holds regarding the appointment of
the general manager of Hubei Chutian, the right to appoint the chief financial
officer of Hubei Chutian and an obligation to provide continued financial
resources for investment and capital expenditure for the future expansion of the
joint venture’s operations. As a result, China Cablecom has the ability to
substantially influence the joint venture’s daily operations and financial
affairs, appoint their senior executives and approve all matters requiring
shareholder vote. In addition, China Cablecom enjoys 60% of the economic
benefits of the joint venture through its 11% fee of net profit combined with
its 49% ownership interest.
23
On
September 30, 2008, JYNT and Hubei SOE entered into a Supplementary Agreement to
amend the Framework Agreement. Pursuant to the amended Framework Agreement, JYNT
is obligated to: (a) contribute RMB 51 million to Hubei Chutian for its
registered capital and capital reserves within 6 months after the establishment
of Hubei Chutian; (b) contribute RMB 140 million in initial financial support to
Hubei Chutian after the establishment of Hubei Chutian; and (c) contribute
RMB 223 million in financial support, in addition to the initial financial
support (i.e., RMB 140
million), to Hubei Chutian through contractual arrangements, within 6 months
after the Closing (as defined in the Framework Agreement). To date, JYNT has not
met some of its abovementioned payment obligations. However, both parties wish
to cooperate and carry out the transactions set out under the Framework
Agreement. The parties are in negotiations to make certain modifications (i.e., payment schedule), but
the specific terms of any new amendments to the Framework Agreement have not yet
been concluded.
Our
registered office is located at Kingston Chambers, P. O. Box 173, Road Town,
Tortola, British Virgin Islands. Our principal executive office is
located at 1 Grand Gateway, 1 Hongqiao Road, Shanghai, 200030, People’s Republic
of China. The telephone number of our principal executive office is
(86) 21 6207-9731. We currently do not have an agent for service of
process in the United States.
B. Business Overview
Overview
We are a
joint-venture provider of cable television services in the PRC, operating in
partnership with a local state-owned enterprise authorized by the PRC government
to control the distribution of cable TV services (“SOE”). We acquired the
network we currently operate in Binzhou, Shandong Province in September 2007 and
in Hubei Province in June 2008 by entering into a series of asset purchase and
services agreements with a company organized by SOEs owned directly or
indirectly by local branches of SARFT in five different municipalities to serve
as a holding company of the relevant businesses. Due to restrictions on foreign
ownership of PRC media and broadcasting entities, our 49% joint venture interest
is held through a series of contractual arrangements intended to result in the
risks and benefits of Binzhou Broadcasting’s and Hubei Chutian’s operations
being primarily borne by us, rather than through a direct ownership of equity
securities. In addition to seeking to avoid a violation of PRC law, these
arrangements provide, under relevant principles of US GAAP, for the
consolidation of 60% of the results of operations, financial position and cash
flows of Binzhou Broadcasting and Hubei Broadasting by us. These contractual
arrangements each have an initial term of 20 years. The parties may mutually
seek to extend these agreements upon the expiry of the current term. We are not
aware of any legal impediments that may affect the renewal of these agreements
under current PRC laws. In order for us to continue to derive the economic
benefits from the operation of Binzhou Broadcasting and Hubei Chutian, it must
renew these agreements. Binzhou Broadcasting operates a cable network with
477,910 paying subscribers as of December 31, 2008 and Hubei Chutian operates a
cable network with over 1,000,000 paying subscribers as of December 31, 2008 .
China Cablecom’s strategy is to replicate the acquisition by operating
partnership model in other municipalities in the PRC and then introduce
operating efficiencies and increase service offerings in the networks it has
acquired.
The
PRC Cable Industry
China is
the world’s largest cable television market in subscriber volume. As of December31, 2006, China had 139 million cable households, or 38% of television-viewing
households, nearly twice that of the U.S. and over one-third of the global cable
user base. However, cable industry revenues in the PRC are less than 3% of the
U.S. cable industry and based on widely available industry information digital
cable penetration rates are reported to be very low compared to all
television-viewing households. We expect to benefit from the following
additional trends affecting the PRC and the Chinese cable TV
industry:
24
·
Rising
household incomes in the PRC. According to a report by
the McKinsey Global Institute, over the next 20 years more people will
migrate to China’s cities for higher-paying jobs. These working consumers
will create a new and significant middle class. McKinsey also notes that
the trend in China is toward a younger middle
class.
·
Government
mandates ensure proliferation of digital cable. SARFT has
mandated that China’s well-developed coastal areas must deploy digital
cable by 2008. This will result in cable networks switching off their
analog transmissions; the government has set a target of 2015 for
operators nationwide to complete the digital transition. The government
has placed further emphasis in major urban areas to complete the
digitalization conversion in time for the 2008 Beijing
Olympics.
·
New and
dynamic product offerings. The transition to digital
cable benefits cable operators by expanding their market for premium
product and service offerings to their customers. Examples that are more
fully describe below, include broadband Internet access; premium content
subscription; electronic programming guide, or EPG; video on-demand, VOD;
personal video recorder, or PVR; and
others.
·
Higher
ARPU. Digital cable offers cable network operators an
opportunity to create new revenue streams. In addition, SARFT has
authorized cable operators to apply for rate increases to cover the costs
associated with digitalization. Recently, the government approved rate
increase in excess of 70%. On average, subscribers in the PRC pay $1.50
per month for basic cable service compared to digital cable which averages
$3.50 per month.
The
following chart summarizes two recent studies on the impact of selected cable
operators throughout the PRC and the impact on ARPU after the digitalization
conversion. The average increase in ARPU for these 15 locations was
72%.
25
Monthly subscription fee before
and
after digitalization (USD)
City/Location
Analog
Digital
%
Increase
Chongqing
1.57
2.88
83
%
Dalian
1.57
3.14
100
%
Foshan
1.83
2.22
21
%
Fuzhou
1.83
3.40
86
%
Guangxi
Province
1.70
3.40
100
%
Guangzhou
2.22
3.46
56
%
Hainan
Province
2.09
3.40
63
%
Hangzhou
1.83
1.83
0
%
Hunan
Province
2.16
3.27
52
%
Jinan
1.70
3.66
115
%
Qingdao
1.57
2.88
83
%
Shanxi
Province
1.83
3.14
71
%
Shenzhen
2.09
3.66
75
%
Taiyuan
1.57
3.01
92
%
Zibo
1.70
3.66
115
%
Average
1.83
3.14
72
%
Source:
SYWG Consulting and Research, 2007; Skillnet MI, 2007
26
Products
and Service Offerings
Currently,
we operate two cable networks, Binzhou Broadcasting and Hubei Chutian, and offer
the following products and services to our customers: (i) basic analog and
digital cable subscription services (including installation), referred to as
video subscription services, (ii) landing service for satellite TV broadcasters,
(iii) network leasing, (iv) broadband Internet, and (v) other services,
including premium content and interactive.
Video subscription
services. The majority of the revenues are currently generated
from video subscription services and related installation fees. As of
December 31, 2008, the two networks we operate served 1,509,122 paying
subscribers. Subscribers typically pay Binzhou Broadcasting and Hubei Chutian on
an annual basis and generally may discontinue services at any time. Monthly
subscription rates were ranging from RMB12 to RMB15.
Landing service for satellite TV
broadcasters. Satellite broadcasters in China have no network
and must pay a ‘‘landing fee’’ to local cable operators. The landing fee for
satellite TV to reach one household is approximately $0.04 per channel per
year.
Network
leasing. Local enterprises in the PRC, such as hospitals,
schools, financial institutions and telecommunications companies, do not have
complete coverage within the region for their own local network. Accordingly,
they rent network bandwidth from local cable companies to operate their internal
communication networks among their subsidiaries and branches.
Broadband
Internet. Binzhou Broadcasting and Hubei Chutian offer to
residential, commercial and government broadband internet services. Key
customers for cable internet access include new buildings and the government. As
of December 31, 2008, the two networks we operate had 9,105 broadband
households, representing 1% of service penetration.
We
operate cable network systems through Binzhou Broadcasting and Hubei Chutian as
summarized in the table below:
27
Binzhou
Broadcasting
Hubei
Chutian
Location
Shandong
province, China
Hubei
province, China
Number
of networks
5
23
Subscribers
(2008/2007)
477,910
/ 411,246
1,031,212
/ 934,065
Revenues (2008/2007)
$9.1
million / $ 7.0 million
$27.5
million / $ 18.0
million
Most of
our revenues are from subscription fees and one time installation
charges.
Competition
and Threats of Substitution
Cable
operators in the PRC are local monopolies, similar to the U.S. in the past where
only one cable network operated in one municipal city or one county. China
Cablecom believes it is possible that current cable network operators may
ultimately lose their single monopoly status. Additionally, there are other
private sector investors seeking to explore the cable industry in the Shandong
and Hubei provinces, including CITIC Group, a publicly traded company listed in
Hong Kong.
There
are, however, emerging threats to traditional cable, such as Internet Protocol
TV, or IPTV, and Direct Broadcast Satellite, or DBS. Since media and media
content are strongly controlled by the PRC government, new entrants to the
market will face significant hurdles that are heavily government policy oriented
and not market-oriented. Foreign IPTV models cannot be copied in the PRC due to
the strict control by the government for censorship purposes. As a consequence,
cable operators will continue to be the dominant market force for the
foreseeable future. For example, industry experts forecast that in five years
cable network operators will still maintain 70% market share in the financially
lucrative pay TV content distribution market.
IPTV
rollout in the PRC has also been hampered by high service fees, which are $8.00
per month, as well as conflict of interest issues between local SARFT and local
telecommunications operators, which has slowed the licensing process for IPTV
operators. China Cablecom believes that these new entrants will not pose
significant threats of substitution to cable network operators in the
foreseeable future.
Similar
to the U.S., DBS poses even less of a threat to cable operators than IPTV. There
are very few DBS households in the PRC. Due to PRC policies, DBS typically
cannot be directly received into households, requiring retransmission through
terrestrial or cable networks. The transition to digital cable greatly
diminishes the competitive threat to cable from DBS.
Other
threats of substitution, such as mobile TV, are in the early stages of
development and customer acceptance of this technology is unknown. We believe
mobile TV does not represent a competitive threat.
Currently,
there are several large cable operators in the PRC. The cable market is highly
fragmented and the large operators are geographically centered. For example,
Beijing GeHau, a cable operator with 3.2 million households, focuses its efforts
in Beijing. Hangzhou Wasu, a cable operator with 1.0 million households, focuses
its efforts in Hangzhou. The largest consolidator in the PRC is CITIC Guoan, or
CITIC, with 6.4 million households. CITIC is a publicly listed company on the
Shenzhen stock exchange and is diversified across several industries, including
cable TV, real estate, energy and others. CITIC has focused its efforts in the
Hunan and Jiangxi provinces; however, they do operate one local cable network,
Weihai, in Shandong.
28
China
Cablecom believes that there are many attractive acquisition targets in PRC and
the presence of other cable operators in the PRC does not pose a competitive
threat, especially in the territories that we have already covered, given the
inherent monopolistic nature of the cable business in the PRC.
Marketing
and Sales
Our sales
and marketing strategy depends heavily on the monopolistic situation of cable in
the PRC. We do not intend to spend significant dollar amounts on marketing and
sales efforts other than for converting the analog signal to a digital signal.
The cost of marketing programs associated with premium content service offerings
will be mostly borne by the content providers and integrators.
Governmental
Regulation
The
media, cultural and telecommunications industries in China are highly regulated
by the PRC government, even though the past several years have seen
liberalization in this regard. Many foreign and domestic industry participants
operate by means of establishing flexible corporate and commercial relationships
that allow them to avoid regulatory restrictions while at the same time
achieving their business goals. As a result, in order to comply with current PRC
laws limiting foreign ownership in the cable industry, Binzhou Broadcasting and
Hubei Chutian operate in a joint venture and we manage our interest in the joint
venture through direct ownership of wholly foreign owned entities and affiliated
companies wholly owned by PRC citizens. This organization structure is designed
to minimize the operational impact of governmental regulation in the PRC,
although the contractual arrangements required in this regard are not accorded
the same status at law as direct ownership, which may affect our ability to
secure future financing and pursue its strategic growth plans. The effectiveness
of the current contractual arrangement is more dependent on there being no
change (or at least no substantial change) in the current PRC regulations,
rather than direct ownership. There is the possibility that the relevant PRC
authorities could, at any time, decide that this contractual arrangement
violates existing or future PRC laws, regulations or policies.
Cable
TV
Overall
responsibility for the administration of the cable TV sector is divided between
the Chinese Communist Party (“CCP”) and the central government. The CCP Central
Committee is responsible for censorship; the State Council, in co-operation with
the National People’s Congress (“NPC”), is the government body responsible for
promulgating new laws and regulations for the cable TV industry. Responsibility
for enforcing policies and laws set out by the CCP and State Council at the
local level lies with the relevant department of the State Administration of
Radio, Film and Television (“SARFT”).
Investments
in cable TV companies are subject to the supervision of the SARFT and other
relevant government agencies. The primary restrictions in this regard are as
follows:
·
Transmission
Network
·
Foreign Investment –
Prohibited – Foreign investors are prohibited from investing in all
levels of radio and TV transmission
networks.
·
Domestic Private Investment –
Limited Access – Private investors may invest in the construction
and operation of cable TV transmission networks and participate in the
reconstruction of digitalization of the receiving terminals of cable TV,
subject to a 49% shareholding ceiling. However, private investors are
allowed to hold majority shares in companies which only operate the
community access portion (terminal connection) of the cable TV
transmission networks.
29
·
TV Stations and
Channels
·
Foreign Investment/Domestic
Private Investment – Prohibited – Foreign and domestic private
investors are prohibited from investing in radio stations and TV stations
and channels.
Notwithstanding
the recent attempts at liberalization, the cable TV industry is still primarily
State owned. At the central government level, the SARFT is responsible for
approving the establishment of cable, radio and TV stations, the nationwide
administration of cable, radio and TV services, and developing and promulgating
policies, standards and regulations. At the local level, the radio and TV
administrative departments and bureau of provinces, municipalities and counties
are in charge of the administration of radio and TV services and of implementing
policies, standards and regulations within their jurisdiction. In accordance
with the Interim Measures on Administration of Fees for Basic Receipt and
Maintenance of Cable TV (jointly promulgated by the SARFT and the National
Development and Reform Commission on December 2, 2004 and effective as of
January 1, 2005), the standards governing the fees for basic receipt and
maintenance of cable TV shall be set by the authorities in charge of pricing. A
prior hearing is required before the authorities set or adjust the fees. Any
changes to the fee standards must comply with the principles of equality,
fairness, transparency, and efficiency. In addition, the service costs incurred
by providers, as well as the feasibility of the consumer market are considered
in making any changes.
As a
result of the above restrictions on foreign investment, we rely on the
contractual arrangements with these affiliated PRC companies to hold and
maintain the licenses necessary to operate our cable TV business in
China.
The chart
below reflects the division of authority.
Assets
of different SARFT
Central SARFT
Province SARFT
(e.g. Shandong)
City SARFT (e.g.
Binzhou, Jining)
District & county
SARFT (e.g.
Boxing/Binzhou)
Character
No
direct access to households but strong power due to central
authorities
No
direct access to households
Direct
access to households in its network
Direct
access to households in its network
Networks
Backbone
connected with province backbone
Backbone
in the province, from city to city
Backbone
in the city
Small
networks
Channels
–
Broadcasters
CCTV
Province
channels, satellite channels
Local
channels, network center
Local
channels, network center
30
As a
result of the control arrangements established by us through affiliated PRC
companies wholly owned by PRC citizens, we believe that we are in compliance
with the above prohibitions. As set forth in the chart above, however, there are
different authorities within the PRC that could seek to regulate the operations
of Binzhou Broadcasting, and the fact that one such authority does not impose
restrictions on Binzhou Broadcasting’s operations does not mean that any other
authority is foreclosed from doing so.
The
Measures for the Administration of Radio and Television Program Transmission
Services (promulgated on July 6, 2004 by the SARFT as Decree No. 33 and
effective as of August 10, 2004), require entities that wish to provide TV
program transmission and cable access services to obtain an operating permit for
Radio and Television Program Transmission Services.
Only the
following entities may apply for an Operating Permit: (i) radio and television
broadcasting entities which have been established with the permission of the
SARFT; (ii) radio, film and television groups and their affiliates which have
been established with the permission of the SARFT; and (iii) state-owned
entities that have the right to operate radio and television cable
networks.
The
Operating Permit contains information about the transmission content,
transmission range, transmission technology and transmission methods. The entity
holding the Operating Permit must operate in accordance with the details set
forth on the permit.
Legal
Proceedings
We are
not a party to any material legal proceedings nor are we aware of any
circumstance that may reasonably lead a third party to initiate legal
proceedings against us.
C. Organizational
Structure
PRC
Corporate Structure
China
Cablecom conducts substantially all of its business in the PRC through HZNT, and
Jinan Youxiantong Network Technology Co., Ltd. (“JYNT”), a PRC company and a
domestic variable interest entity (“VIE”). JYNT is controlled by the Company
through contractual arrangements. China Cablecom also owns 100% of the equity
interest of China Cablecom Company Limited, a Hong Kong holding company that, in
turn, directly owns 100% of the equity interest of HZNT.
In order
to comply with the PRC’s regulations on private investment in the cable
industry, China Cablecom operates its cable business in a joint venture with a
local state-owned enterprise. China Cablecom’s operations are conducted through
direct ownership of China Cablecom Company Limited and HZNT and contractual
arrangements with JYNT. China Cablecom does not have an equity interest in JYNT,
but instead enjoys the economic benefits derived from JYNT through a series of
contractual arrangements. JYNT is owned 95% by Pu Yue (95%), China Cablecom’s
Chief Executive Officer and 5% by Liang Yuejing, his spouse.
China
Cablecom operates its cable business in two joint ventures: Binzhou
Broadcasting, which is 49% owned by JYNT and 51% by Binzhou SOE, a PRC
state-owned enterprise and Hubei Chutian, which is 49% owned by JYNT and 51% by
Hubei SOE, a PRC state-owned enterprise.
31
We do not
directly or indirectly have an equity interest in JYNT, but HZNT and HKZ, our
wholly owned subsidiaries, have entered into a series of contractual
arrangements with JYNT and its shareholders. As a result of the following
contractual arrangements, we control and are considered the primary beneficiary
of JYNT and, accordingly, we consolidate JYNT’s results of operations in our
financial statements.
·
the
shareholders of JYNT have jointly granted HZNT an exclusive and
irrevocable option to purchase all or part of their equity interests in
JYNT at any time; this option may only be terminated by mutual consent or
at the direction of HZNT;
·
without
HKZ’s consent, the shareholders of JYNT may not (i) transfer or pledge
their equity interests in JYNT, (ii) receive any dividends, loan interest
or other benefits from JYNT, or (iv) make any material adjustment or
change to JYNT’s business or
operations;
·
the
shareholders of JYNT agreed to (i) accept the policies and guidelines
furnished by HKZ with respect to the hiring and dismissal of employees,
the operational management and the financial system of JYNT, and (ii)
appoint the candidates recommended by HKZ as directors of
JYNT;
·
each
shareholder of JYNT has appointed HKZ’s designee as their
attorneys-in-fact to exercise all its voting rights as shareholders of
JYNT. This power of attorney is effective until 2027;
and
·
each
shareholder of JYNT has pledged all of its respective equity interests in
JYNT to HZNT to secure the payment obligations of JYNT under certain
contractual arrangements between JYNT and HKZ, and HZNT and JYNT. This
pledge is effective until the later of (1) the date on which the last
surviving of the Service Agreements, the Loan Agreement and the Equity
Option Agreement terminates; and (2) the date on which all outstanding
Secured Obligations are paid in full or otherwise
satisfied.
32
JYNT,
Binzhou Broadcasting and Binzhou SOE have entered into the following contractual
arrangements that provide JYNT with the ability to control and consolidate the
results of operations of Binzhou Broadcasting. Also, as a result of these
agreements, Binzhou Broadcasting controls and consolidates Binzhou SOE in its
financial statements.
·
a
technical services agreement, pursuant to which JYNT exclusively performs
the following for Binzhou Broadcasting: (i) management, operation and
maintenance of relevant networks and equipment; (ii) consulting services
for operation, business development, sales and planning, market research,
data collection and analysis; (iii) training for management personnel;
(iv) international developments and advanced technology regarding the
cable business; (v) provide developed systems and financial support
software; and (vi) provide other technology troubleshooting plans, related
software and technical services. JYNT is paid a fee of 11% of the net
profits of Binzhou Broadcasting, which brings its effective economic
interest in Binzhou Broadcasting to 60%. The term of this technical
services agreement is 20 years. JYNT and Binzhou Broadcast may mutually
seek to extend this agreement upon the expiry of the current term, and we
are not aware of any legal impediments that may affect the renewal of this
agreement under current PRC laws. This agreement further provides that any
non-breaching party may early terminate this agreement in the event that a
breaching party has not made rectification 30 days after receipt of the
breaching notice from the non-breaching
party.
·
an
exclusive services agreement, pursuant to which Binzhou Broadcasting
exclusively performs marketing, strategic consulting and technical support
and services for Binzhou SOE.
·
under
PRC law, Binzhou SOE must maintain ownership of the broadcasting licenses
related to the assets that were contributed to Binzhou Broadcasting for a
51% equity interest. As a result and pursuant to an exclusive services
agreement, Binzhou Broadcasting will provide the following services in
operating the Binzhou SOE contributed assets: (i) collecting all cash
related to revenues generated including subscription fees, installation
fees, and channel landing fees; (ii) the marketing, promotion and sales of
digital TV set-top boxes; (iii) the building and maintenance of the cable
TV network; (iv) the marketing, promotion and sales of businesses in
relation to broadcast and television network broadband access; (v) the
operation of businesses in relation to wireless network transmission and
cable TV; (vi) various troubleshooting, software support and other
technology services; (vii) developments, updates and upgrades in relation
to the provider application software and user application software; (viii)
training services for technology staff and technology consulting services
in relation to the business; and (ix) other applicable technology
services. As the license holder, Binzhou SOE will collect all revenues
from customers and, in turn, remit the cash flows, net of business taxes,
to Binzhou Broadcasting. Binzhou Broadcasting will provide the necessary
resources including employees and other costs necessary to operate the
cable business. The term of the agreement is 20 years with an option to
extend for another 10 years. Binzhou SOE and Binzhou Broadcasting may
mutually seek to extend this agreement upon the expiry of the current
term, and we are not aware of any legal impediments that may affect the
renewal of this agreement under current PRC laws. This agreement further
provides that Binzhou SOE and Binzhou Broadcasting may early terminate
this agreement with the mutual written consent of the
parties.
In
addition, JYNT, Hubei Chutian and Hubei SOE have entered into the following
contractual arrangements that provide JYNT with the ability to control and
consolidate the results of operations of Hubei Chutian.
33
·
a
technical services agreement, pursuant to which JYNT exclusively performs
the following for Hubei Chutian: (i) management, operation and maintenance
of relevant networks and equipment; (ii) consulting services for
operation, business development, sales and planning, market research, data
collection and analysis; (iii) training for management personnel; (iv)
international developments and advanced technology regarding the cable
business; (v) provide developed systems and financial support software;
and (vi) provide other technology troubleshooting plans, related software
and technical services. JYNT is paid a fee of 11% of the net profits of
Hubei Chutian, which brings its effective economic interest in Hubei
Chutian to 60%. The term of this technical services agreement is 20 years.
JYNT and Hubei Chutian may mutually seek to extend this agreement upon the
expiry of the current term, and we are not aware of any legal impediments
that may affect the renewal of this agreement under current PRC laws. This
agreement further provides that any non-breaching party may early
terminate this agreement in the event that a breaching party has not made
rectification 30 days after receipt of the breaching notice from the
non-breaching party.
·
an
exclusive services agreement, pursuant to which Hubei Chutian exclusively
performs marketing, strategic consulting and technical support and
services for Hubei SOE.
·
under
PRC law, Hubei SOE must maintain ownership of the broadcasting licenses
related to the assets that were contributed to Hubei Chutian for a 51%
equity interest. As a result and pursuant to an exclusive services
agreement, Hubei Chutian will provide the following services in operating
the Hubei SOE contributed assets: (i) collecting all cash related to
revenues generated including subscription fees, installation fees, and
channel landing fees; (ii) the marketing, promotion and sales of digital
TV set-top boxes; (iii) the building and maintenance of the cable TV
network; (iv) the marketing, promotion and sales of businesses in relation
to broadcast and television network broadband access; (v) the operation of
businesses in relation to wireless network transmission and cable TV; (vi)
various troubleshooting, software support and other technology services;
(vii) developments, updates and upgrades in relation to the provider
application software and user application software; (viii) training
services for technology staff and technology consulting services in
relation to the business; and (ix) other applicable technology services.
As the license holder, Hubei SOE will collect all revenues from customers
and, in turn, remit the cash flows, net of business taxes, to Hubei
Chutian. Hubei Chutian will provide the necessary resources including
employees and other costs necessary to operate the cable business. The
term of the agreement is 20 years with an option to extend for another 10
years. Hubei SOE and Hubei Chutian may mutually seek to extend this
agreement upon the expiry of the current term, and we are not aware of any
legal impediments that may affect the renewal of this agreement under
current PRC laws. This agreement further provides that Hubei SOE and Hubei
Chutian may early terminate this agreement with the mutual written consent
of the parties.
D. Property, plant and
equipment
Binzhou
Broadcasting has 308 employees working in one headquarter facility and 5
operating subsidiary facilities located in Boxin, Huiming and Zoupin counties
and in Binzhou city. Hubei Chutian has 3,248 employees working in one
headquarter facility located in Wuhan city and 23 subsidiary facilities in Hubei
Province.
Our
property, plant and equipment mainly includes the following:
·
Fiber
infrastructures: fiber cable laid underground or laid through poles across
urban and suburban areas;
·
Electronic
equipment: distribution amplifier, decoders, mixers and fiber substations,
etc., which changes the fiber signal to electric signals that can be
distributed to householders’ TV sets;
and
·
Headend
facilities: distributes Cable TV
signals.
34
We plan
to invest $20 million, through vendor financing and operating cash flows, in
2009 on digital TV set-up-boxes (“STB”) and related electronic equipment to
convert 250,000 existing subscribers to digital subscribers.
ITEM
4A. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
China
Cablecom Ltd., a British Virgin Islands company, was incorporated on October 6,2006. On April 9, 2008, China Cablecom Ltd. and Jaguar Acquisition Corporation
("Jaguar"), a special purpose acquisition company, completed both the previously
announced redomestication merger of Jaguar in the British Virgin Islands as
China Cablecom Holdings and the concurrent business combination merger with
China Cablecom Ltd.
In
accordance with the merger agreement, the following occurred with respect to the
outstanding Class A Preference shares and common shares of China Cablecom Ltd.
and the common shares and warrants of Jaguar:
i)
all
of the Class A preferred stock and ordinary shares of China Cablecom Ltd.
were cancelled and each registered owner of outstanding preferred
stock and ordinary shares of China Cablecom Ltd. automatically become
the registered owner of one and 0.6842 shares of our ordinary shares,
respectively.
ii)
all
of the common shares of Jaguar were cancelled and each registered owner of
outstanding common shares of Jaguar automatically become the registered
owner of one share of our ordinary
shares.
iii)
all
the outstanding warrants were assumed by the Company and became
exercisable for our ordinary shares at the original exercise price, US$
5.00.
China
Cablecom Ltd. is the 100% shareholder of China Cablecom Company Limited,
incorporated in Hong Kong on May 22, 2007. China Cablecom Company Limited
owns 100% of Heze Cablecom Network Technology Co., Ltd ("HZNT") incorporated
under the laws of the PRC on October 9, 2007. We are also the primary
beneficiary of the following Variable Interest Entities (“VIE”) as defined under
FIN-46R:
l
Jinan
Youxiantong Network Technology Co., Ltd. ("JYNT") incorporated under the
laws of the PRC on July 16, 2007.
l
Binzhou
Broadcasting and Television Information Network Co., Ltd. (“Binzhou
Broadcasting”) incorporated under the laws of the PRC on September 10,2007.
l
Hubei
Chutian Video Communication Network Co., Ltd. (“Hubei Chutian”)
incorporated under the laws of the PRC on May 15,2008.
We were
the primary beneficiary of the following VIE as defined under
FIN-46R: The PRC cable companies (collectively, “Binzhou PRC”) which
hold the operating cable assets transferred to Binzhou Broadcasting before
December 31, 2008 are as follows:
o
Huiming
Cable Network Co., Ltd.;
o
Boxing
Dian Guang Media Co., Ltd.;
35
o
Zouping
Cable Network Center;
o
Binzhou
Guang Dian Cable Network Center;
and
o
Binzhou
Guang Shi Network Co., Ltd.
On
October 1, 2007 we, through JYNT, a company controlled through a series of
agreements and transactions by China Cablecom, acquired a 49% equity interest in
Binzhou Broadcasting, a joint-venture company. By entering into this
joint-venture agreement, we became a provider of cable television services in
the PRC, operating with our partner in the joint venture, Binzhou Guangdian
Network Co., Ltd. (‘‘Binzhou SOE’’). Binzhou SOE is a local state-owned
enterprise authorized by the PRC government to control the distribution of cable
television services in the PRC. China Cablecom and Binzhou Broadcasting acquired
the cable network it currently operates in Binzhou, Shandong Province, by
entering into a series of asset purchase and services agreements with Binzhou
SOE (note 4).
Binzhou
PRC was previously owned by the local branches of the PRC’s State Administration
of Radio, Film and Television (“SARFT”), located in five different PRC
municipalities. Binzhou SOE was formed by SARFT to serve as a holding company of
Binzhou PRC. Due to restrictions by the PRC government regarding foreign
ownership of PRC media and broadcasting entities, China Cablecom’s 49% joint
venture interest in Binzhou Broadcasting is held through a series of contractual
arrangements with other entities it controls. The intended result of these
contractual arrangements is that the economic risks and benefits of Binzhou
Broadcasting’s operations are being primarily borne by us, without having a
direct ownership of equity securities of Binzhou SOE or Binzhou PRC. These
contractual arrangements, in addition to the service agreements JYNT has with
Binzhou Broadcasting, provide under the relevant principles of United States
Generally Accepted Accounting Principles (“US GAAP”) for the consolidation of
the results of operations of Binzhou Broadcasting by China Cablecom, with 60% of
the Binzhou Broadcasting’s net income included in the accompanying financial
statements of China Cablecom.
The
contractual arrangements between JYNT and Binzhou Broadcasting have an initial
term of 20 years. The parties may mutually seek to extend these agreements upon
the expiry of the current term. China Cablecom is not aware of any legal
impediments that may affect the renewal of these agreements under current PRC
laws. In order for China Cablecom to continue to derive the economic benefits
from its joint venture interest in the operation of Binzhou Broadcasting, it
must renew these contractual agreements.
As
mentioned above, on October 1, 2007, JYNT entered into an operating partnership
through a joint venture with its partner Binzhou SOE, called Binzhou
Broadcasting. Binzhou SOE agreed to contribute all of the inventory
and property, plant and equipment of Binzhou PRC along with all of their cable
business operations in the PRC in exchange for a 51% equity interest in Binzhou
Broadcasting. JYNT agreed to acquire the remaining 49% equity interest in
Binzhou Broadcasting, as well as receive 60% of the economic benefits in Binzhou
Broadcasting, through an exclusive 11% service agreement, for total
consideration of approximately $26.5 million. This exclusive service agreement
provides marketing, strategic consulting and technical support and services for
11% of the net profits of Binzhou Broadcasting. Binzhou SOE receives 40% of the
economic benefits or net profits of Binzhou Broadcasting for its interest in the
joint venture.
In
addition, in accordance with the operating partnership and other agreements
(“Framework Agreement”) between JYNT and Binzhou SOE, JYNT was given the ability
to control certain aspects of the financing and management of Binzhou
Broadcasting. JYNT has a veto right regarding the appointment of the general
manager of Binzhou Broadcasting, the right to appoint the chief financial
officer of Binzhou Broadcasting and an obligation to provide continued financial
resources for investment and capital expenditures for the future expansion of
the Binzhou Broadcasting’s operations. The result of these rights and
obligations given to JYNT is that China Cablecom and JYNT have the ability to
substantially influence the joint venture’s daily operations and financial
affairs, appoint their senior executives and approve all matters requiring
shareholder vote.
On June16, 2008, we announced the phase one acquisition of Hubei Chutian network
through a contractual and joint venture agreement similar to that used in the
acquisition of Bingzhou network.
36
We,
through JYNT, acquired a 49% equity interest in Hubei Chutian, a joint-venture
company, operating with its partner in the joint venture, Hubei Chutian Radio
and Television Information Network Co., Ltd. (‘‘Hubei SOE’’). JYNT also enter
into a technical service agreement with Hubei Chutian, JYNT provides marketing,
strategic consulting and technical support and services for 11% of the net
profits. Together with its 49% equity interest, JYNT effectively receives 60% of
economic benefits of Hubei Chutian.
In
addition, in accordance with the operating partnership and other agreements
(“Framework Agreement”) between JYNT and Hubei SOE, JYNT was given the ability
to control certain aspects of the financing and management of Hubei Chutian.
JYNT has a veto right regarding the appointment of the general manager of Hubei
Chutian, the right to appoint the chief financial officer of Hubei Chutian and
an obligation to provide continued financial resources for investment and
capital expenditures for the future expansion of the Hubei Chutian’s operations.
The result of these rights and obligations given to JYNT is that China Cablecom
and JYNT have the ability to substantially influence the joint venture’s daily
operations and financial affairs, appoint their senior executives and approve
all matters requiring shareholder vote.
On June30, 2008 Hubei SOE completed the transfer of the operating network assets to
Hubei Chutian. Operations of Hubei Chutian are included in the consolidated
financial statements from July 1, 2008.
A.
Results
of operation
The
following discussion of our results of operations is based upon our audited
consolidated financial statements beginning on Page F-1 on this Annual
Report.
Fiscal
year ended 2008 compared to fiscal year ended 2007
Revenue
During
the fiscal year ended 31 December 2008, our revenue were $23.4 million, which is
an increase of $21.4 million, or 1170%, compare to the same period of 2007. The
increase was largely attributing to the consolidation of Hubei Chutian from July1, 2008 and a full year operation of Binzhou Broadcasting. As of 31 December
2008, the Company has more than 1.5 million paying subscribers which pay on
average RMB12 to RMB15 per month.
Cost
of revenue
Cost of
revenue for the year ended 31 December, 2008 were $13.4 million, an increase of
$12.4 million or 1320%, from $1 million for the year ended 31 December, 2007.
The increase was also attributable to the consolidation of Hubei Chutian from
within 2008 and a full year operation of Binzhou Broadcasting.
Cost of
revenue includes maintenance costs; depreciation expense related to network
property, plant and equipment; and costs associated with maintenance and
construction projects including replacing cable TV boxes at subscriber’s homes,
troubleshooting cable TV problems, and occasionally digging up cable lines to
determine network problems. Also included in cost of revenues are salaries and
related employee costs for the maintenance employees, including temporary
staff.
Gross
Profit
As a
percentage of net sales, the gross margin was 43% for the year ended December31, 2008 compared to 49% for the year ended December 31, 2007.
37
The
decrease in gross profit percentage is primarily due to the higher cost of
revenue of Hubei Chutian which operates a cable network which covers larger
rural areas than Binzhou Broadcasting.
Selling
expenses.
Selling
and marketing expenses are not significant because of the nature of cable TV in
the PRC.
General
and administrative expenses
General
and administrative expenses for the year ended December 31, 2008 were $15.1
million, an increase of $13.5 million from $1.6 million for the year ended
December 31, 2007. General and administrative expenses consist primarily of
amortization of intangible assets and deferred offering costs, and salary and
welfare expenses in administrative functions such as human resources, finance
and senior management. The increase was due to increased general administration
expenses associated with full year of operations in Binzhou Broadcasting of $2.2
million and six months of operations in Hubei Chutian of $5.5 million and
increase of general administration expenses associated with the set-up and
maintenance of all China Cablecom Ltd. Entities in US and in the PRC of $4
million.
Amortization
expenses for the year ended December 31, 2008 were $3.4 million, including
amortization of intangible assets of $2.2 million and amortization of deferred
offering costs of $1.2 million. Intangible assets with a definite useful life
are amortized using the straight line method over the estimated economic life of
the intangible assets. For the subscriber base, the useful life is 10 years
while the cable operating license is 20 years. Amortization of deferred offering
costs for the year ended December 31, 2008 was approximately $1.2 million. The
deferred offering costs are the costs directly attributed to China Cablecom’s
financing of anticipated business acquisition activities. Deferred offering
costs related to the China Cablecom’s Bridge Financing and Convertible Notes
approximated $1,463,000 and $1,265,678, respectively. The costs are being
amortized using the effective interest method over the life of the related notes
payable in 18 months and 36 months.
Interest
income
Interest
income for the year ended December 31, 2008 was $340,000, an increase of
$273,000 from $67,000 for the year ended December 31, 2008. The increase in
interest income is primarily attributable to higher average cash
balances.
Interest
expenses
Interest
expenses for the year ended December 31, 2008 was $8.7 million, an increase of
$7.2 million from $1.5 million for the year ended December 31,2008.
The $8.7
million interest expenses primarily comprised of (1) interest and amortization
of deferred financing costs on the promissory notes issued in connection with
the bridge financing in the amount of $3.7 million (2) interest and amortization
of deferred financing costs on the convertible notes issued in May 2008 in the
amount of $5 million.
Income
tax expense
Income
tax expense for the year ended December 31, 2008 was $342,000, an increase of
$302,000, from $40,000 for the year ended December 31, 2007. The increase in
income tax expenses is primarily attribute to the first full year operation of
Binzhou Broadcasting and the consolidation of Hubei Chutian starting from July1, 2008.
38
Loss
from operations before non-controlling interest
Loss from
operations before non-controlling interest for the year ended December 31, 2008
was $13.2 million, an increase of $11.1 million, from $2.1 million for the year
ended December 31, 2007.China Cablecom suffered a loss mainly due to the
amortization expenses of $3.4 million and interest expense of $8.7
million.
Noncontrolling
(‘‘minority’’) interest in income
Noncontrolling
(minority) interest in income for the year ended December 31, 2008 was $986,619,
representing the 40% noncontrolling (minority) interest on Binzhou SOE’s share
of the net income of Binzhou Broadcasting of $ 835,265 and the 40%
noncontrolling (minority) interest on Hubei SOE’s share of the net income of
Hubei Chutian of $151,354 noncontrolling (‘‘minority’’) interest in income for
the year ended December 31, 2007 was $20,551, representing the 40%
noncontrolling (‘‘minority’’) interest on Binzhou SOE’s share of the net income
of Binzhou Broadcasting.
Liquidity
and Capital Resources
As of
December 31, 2008, China Cablecom had cash and cash equivalents in the amount of
$29.2 million of which $19.8 million were Binzhou Broadcasting and Hubei
Chutian’s working capital.
China
Cablecom had cash and cash equivalents approximately $9.4 million available for
investment and corporate overhead.
$11
million related to the debt and equity bridge financing on April
9,2009.
l
$16
million related to JYNT’s payment obligations with Bingzhou SOE under the
asset transfer agreement is due by December 31,2009.
l
$37
million related to JYNT’s payment obligations with Hubei SOE under the
asset transfer agreement is due by July 1,2009.
l
$43.175
million convertible notes due May
2011.
China
Cablecom was not able to repay the $11 million bridge financing by April 9, 2009
and is in the course of discussions with the holders of these promissory notes.
The notes holders expressed to the Company a strong preference to have the
Company restructure its debt obligations of its joint venture partners with the
Hubei SOE in order to better reflect the current economic environment and the
anticipated cash flows of the Company's cable television business.
Capital
expenditures
Other
then the payment obligation under the assets transfer agreements with Binzhou
SOE and Hubei SOE, as discussed under “liquidity and
capital resource”, we have no additional contractual commitment relating
to capital expenditures, lease obligations or purchase obligations.
Capital
expenditures, excluding the assets acquired under the assets transfer agreements
with Binzhou SOE and Hubei SOE, for 2008 and 2007 were approximately $10 million
and $1.7million. The vast majority of these expenditures related to underground
fiber cable and related distribution equipment necessary to decode and send
electric signals to household TV sets.
Trend
information
Other
than as disclosed elsewhere in this Annual Report, we are not aware of any
trends, uncertainties, demands, commitments or events that are reasonably likely
to have a material effect on our net sales, profitability, liquidity or capital
resources, or that caused the disclosed financial information to not necessarily
be indicative of future operating results or financial conditions.
39
Off-balance
sheet arrangements
We do not
have any off-balance sheet arrangements, any outstanding derivative financial
instruments, interest rate swap transactions or foreign currency forward
contracts.
Tabular
disclosure of contractual obligations
The
following table summarizes our contractual commitments as of December 31, 2008
and the effect those commitments are expected to have on our liquidity and cash
flow in future periods:
Payments
due by period
US$ Million
Total
Less than one
year
1-3 years
3-5 years
More than 5
years
Long-term
Debt Obligations
26.2
9.5
16.7
Capital
(Finance) Lease Obligations
-
-
-
-
-
Operating
Lease Obligations
-
-
-
-
-
Purchase
Obligations
-
-
-
-
-
Other
Long-Term Liabilities Reflected on the Company's Balance Sheet under the
GAAP of the primary financial statements
107.2
55.4
51.8
Total
133.4
64.9
16.7
-
51.8
Recent
Accounting Pronouncements
In June
2006, FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”), which
clarifies the accounting for uncertainty in income taxes recognized in the
Company’s consolidated financial statements in accordance with SFAS No.109,
Accounting from Income Taxes. FIN 48 provides guidance on the measurement,
recognition, classification and disclosure of tax positions, along with
accounting for the related interest and penalties. FIN 48 is effective for
fiscal years beginning after December 15, 2006, and is to be applied to all open
tax years as of the date of effectiveness. The Company has no material
unrecognized tax benefit which would favorably affect the effective income tax
rate in future periods and does not believe there will be any significant
increases or decreases within the next twelve months. The Company has elected to
classify interest and penalties related to unrecognized tax benefits, if and
when required, as part of interest expenses and administrative expenses in the
statements of income, respectively. No interest or penalties have been accrued
at the date of adoption.
In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
40
The new
Statement allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item’s fair value in subsequent reporting
periods must be recognized in current earnings. FAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes for similar assets and
liabilities. On January 1, 2008, the Company elected not to adopt the option
statement.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”. This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling (minority) interest in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 will be effective for the Company’s fiscal
year beginning October 1, 2009. Management is currently evaluating the effect of
this pronouncement on financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for how
the acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquisition; b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after Company’s fiscal year beginning January 1, 2009.
While the Company has not yet evaluated this statement for the impact, if any,
that SFAS No. 141(R) will have on its consolidated financial statements, the
Company will be required to expense costs related to any acquisitions after
September 30, 2009.
On March19, 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 161, Disclosures about Derivative Instruments and Hedging Activities. The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. “Use and complexity of derivative instruments
and hedging activities have increased significantly over the past several years.
This has led to concerns among investors that the existing disclosure
requirements in FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, do not provide enough information about how these
instruments and activities affect the entity’s financial position and
performance,” explained Kevin Stoklosa, project manager. “By requiring
additional information about how and why derivative instruments are being used,
the new standard gives investors better information upon which to base their
decisions.” The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB Statement
No. 161 achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. It
also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. Management is
currently evaluating the effect of this pronouncement on financial
statements.
In May of
2008, FASB issued SFASB No.162, “The Hierarchy of Generally Accepted Accounting
Principles”. The pronouncement mandates that the GAAP hierarchy reside in the
accounting literature as opposed to the audit literature. This has the practical
impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP
hierarchy. This pronouncement will become effective 60 days following SEC
approval. The Company does not believe this pronouncement will impact its
financial statements.
41
In May of
2008, FASB issued SFASB No. 163, “Accounting for Financial Guarantee Insurance
Contracts-an interpretation of FASB Statement No. 60”. The scope of the
statement is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning after
December 31, 2008. The Company does not believe this pronouncement will impact
its financial statements.
On
December 30, 2008 FASB issued FIN 48-3, “Effective Date of FASB Interpretation
No. 48 for Certain Nonpublic Enterprises”. This FSP defers the effective date of
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, for
certain non-public enterprises as defined in paragraph 289, as amended, of FASB
Statement No. 109, Accounting for Income Taxes, including non-public
not-for-profit organizations. However, non-public consolidated entities of
public enterprises that apply U.S. GAAP are not eligible for the deferral.
Nonpublic enterprises that have applied the recognition, measurement, and
disclosure provisions of Interpretation 48 in a full set of annual financial
statements issued prior to the issuance of this FSP also are not eligible for
the deferral. This FSP will be effective upon issuance. The Company does not
believe this pronouncement will impact its financial statements.
On
January 12, 2009 FASB issued FSP EITF 99-20-01, “Amendment to the Impairment
Guidance of EITF Issue No. 99-20”. This FSP amends the impairment guidance in
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to be Held
by a Transferor in Securitized Financial Assets,” to achieve more consistent
determination of whether an other-than-temporary impairment has occurred. The
FSP also retains and emphasizes the objective of an other-than-temporary
impairment assessment and the related disclosure requirements in FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
other related guidance. The FSP will be effective for interim and annual
reporting periods ending after December 15, 2008, and will be applied
prospectively. Retrospective application to a prior interim
or annual reporting period is not permitted. The Company does not
believe this pronouncement will impact its financial statements.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and senior
management
Our board
of directors and executive officers are as follows:
Clive Ng
has served as Executive Chairman of the board of China Cablecom since its
inception on October 6, 2006 and as a director and Executive Chairman of China
Cablecom Holdings since October 2007. From 2000 to 2003, he was the Chief
Executive Officer of Pacific Media PMC, a home shopping company, Mr. Ng
co-founded TVB Superchannel Europe in 1992, which has grown to become Europe’s
leading Chinese language broadcaster. He also owned a 50% stake in HongKong
SuperNet, the first Hong Kong based ISP which was then sold to Pacific Internet
(NASDAQ:PCNTF). He was Chairman and founder of Asia content (NASDAQ:IASIA), one
of the first Asian internet companies to list in the United States, that has
been a joint venture partner with NBCi, MTVi, C-NET, CBS Sportsline and
DoubleClick in Asia. Mr. Ng was also one of the initial investors and founder of
E*TRADE Asia, a partnership with E*TRADE Financial Corp (NYSE: ET). He is also a
founding shareholder of MTV Japan, with H&Q Asia Pacific and MTV Networks (a
division of Viacom Inc). Currently he serves as a Senior Advisor to Warner Music
Group Inc. (NYSE: WMG) and as Chairman and a director of China Broadband, Inc.,
a company that operates a broadband cable internet company based in the city of
Jinan in the Shandong region of China pursuant to contractual arrangements
similar to those between JZNT and China Cablecom.
Pu Yue has
served as general manager and Chief Executive Officer of China Cablecom since
its inception in 2006 and Chief Executive Officer of China Cablecom Holdings
since October 2007. Mr. Pu also serves as Chief Executive Officer and a director
of China Broadband, Inc., a company that operates a broadband cable internet
company based in the city of Jinan in the Shandong region of China pursuant to
contractual arrangements similar to those between JZNT and China Cablecom. Mr.
Pu was an intelligence officer with China’s National Security Service from 1993
to 1995. He then worked as a logistics specialist with the joint venture between
Crown Cork & Seal and John Swire & Sons in Beijing. In 1997, he joined
Economic Daily, where he spent a two-year journalism career with China
Entrepreneur Magazine. From 1999 to 2000, he oversaw the inception of Macau
5-Star Satellite TV, a mainland China satellite TV channel venture in which his
family took significant investment. From 2004 to 2006, Mr. Pu was in charge of
business development for a TV advertising consolidation venture under HC
International. Mr. Pu holds MBA from Jesse H. Jones Graduate School of
Management of Rice University, and Bachelor of Law from University of
International Relations in Beijing, China.
Sikan Tong
has served as Chief Financial Officer of China Cablecom since March 31,2009. From March 2008 to February 2009, Mr. Tong was the Senior Vice
President of the Company where he was responsible for the Company’s internal
control over financial reporting. From September 2006 to February 2008, Mr. Tong
was the Chief Financial Officer of Merrylin International Holding, which manages
Merrylin restaurants and Motel 168 hotel chains in China, where he spearheaded
Merrylin’s IPO and closely managed fundraising activities through private
placements. Mr. Tong served as Head of Accountancy Training at The Financial
Training Company, a leading provider of professional qualifications and business
training in the United Kingdom and Asia, which later became part of Kaplan Inc.
from November 2005 to August 2006. From May 2003 to October 2005, Mr. Tong
served as the learning and education manager of the Shanghai office of
PriceWaterhouseCoopers where he began his career in the audit practice and was
responsible for lecturing and organization of the training courses. Mr. Tong
received his Bachelor degree from Shanghai University in 1995 in Mechanic and
Robotic.
Kerry
Propper has been a director of China Cablecom Holdings since October 2007
and the chief financial officer, secretary and a member of the board of
directors of Chardan North China Acquisition Corporation and has been the chief
executive officer, secretary and a member of the board of directors of Chardan
South China Acquisition Corp. since their inception in March 2005. Chardan North
China Acquisition Corp. and Chardan South China Acquisition Corp. are blank
check companies seeking to acquire an operating business north and south,
respectively, of the Yangtze River in the People’s Republic of China. Mr.
Propper has been the owner and chief executive officer of Chardan Capital
Markets LLC, a New York based broker/dealer, since July 2003. He has also been a
managing director of SUJG, Inc., an investment company, since April 2005. From
its inception in December 2003 until November 2005, Mr. Propper served as the
executive vice president and a member of the board of directors of Chardan China
Acquisition Corp., an OTC Bulletin Board listed blank check company that was
seeking to acquire an operating business in the People’s Republic of China. In
November 2005, Chardan China Acquisition Corp. completed its business
combination with State Harvest Holdings Ltd. and changed its name to Origin
Agritech Ltd. Mr. Propper has continued to serve as a member of the board of
directors of Origin Agritech since its merger. Mr. Propper also sits on the
board of directors of Source Atlantic Inc., a health care consulting company
based in Massachusetts. Mr. Propper was a founder, and from February 1999 to
July 2003 owner and managing director of Windsor Capital Advisors, a full
service brokerage firm also based in New York. Mr. Propper also founder The
Private Capital Group LLC, a small private investment firm specializing in hard
money loans and convertible preferred debt and equity offerings for small
companies, in May 2000 and was affiliated with it until December 2003. From July
1997 until February 1999, Mr. Propper worked at Aegis Capital Corp., a broker
dealer and member firm of NASD. Mr. Propper received his B.A. (with honors) in
Economics and International Studies from Colby College and studied at the London
School of Economics.
43
Su-Mei Thompon
has been a director of China Cablecom Holdings since December 2008. Ms.
Thompson was a Senior Vice President of Strategic Business Development for Asia
at Christie's Asia, Art and Auction Business from April 2007 to July 2008. From
April 2003 to April 2007, Ms. Thompson served as the Managing Director of the
Financial Times, Asia Pacific during which she oversaw the launch of the
Financial Times Asian edition, and the Financial Times luxury title "How To
Spend It" in Asia, and its Chinese language website, FTChinese.com. She was a
member of the board of directors of the Financial Times Global Management and on
the board of directors of Business Standard in India. Previously, she served as
General Counsel and Senior Vice-President for Business Development and Corporate
Development at Asiacontent.com, a NASDAQ-listed Asia joint venture partner for
leading websites such as CNET.com and MTVi.com. She also served as Regional
Director, Business and Legal Affairs, at Walt Disney Television Asia-Pacific
from 1996 to 2000 where she was involved in negotiating and concluding joint
venture and licensing arrangements for Disney TV in China and across the region.
Prior to joining Disney, Ms. Thompson was a senior associate in corporate
finance at Linklaters and served in the firm's London, Paris and Hong Kong
offices. Ms. Thompson earned her undergraduate degree in law at Trinity College,
Cambridge in 1987 and her Masters degree in law (BCL) at Christchurch College,
Oxford in 1989. She also received her MBA from IMD, Switzerland in
2001.
Pierre
Suhandinata has been served as our Independent Director since May 2008.
He currently serves as Chairman and Chief Executive Officer and Co-founder of
ACCESS China Inc., a global provider of mobile content delivery and access
technologies for information appliances. He has more than 15 years of successful
investment and management experience in multinational companies across several
countries. Prior to ACCESS, he worked several years as an engineer in Japan, and
as a Management Consultant with The Boston Consulting Group in South-East
Asia
Richard Eu
has been our Independent Director since May 2008, Ltd. He is Group CEO of Eu
Yang Sang International Ltd, an investment holding company that engages in the
manufacture, distribution, and sale of Chinese herbs, Chinese proprietary
medicines, and health foods. He Serves on the boards of the Hong Kong Singapore
Business Association, Broadway Industrial Group Limited, Harry’s Holdings Ltd
and Governing Council for the Singapore Institute of Management. He has
Leadership and management expertise through his appointments at Haw Par Brothers
International Ltd, Dataprep Group, Metro Holdings Ltd and Intervest Capital
Management Pte Ltd, among many other companies.
Shan Li
has been a director of China Cablecom Holdings since October 2007. Mr. Li is a
founding principal of San Shan Capital Partners, a Hong Kong-based private
equity firm focusing on asset-based alternative investments in the Greater China
region where he has been employed since November 2005. From April 2001 until
October 2005, Dr. Li was the Chief Executive Officer of Bank of China
International Holdings (“BOCI”). Prior to joining BOCI and from 1999, Dr. Li was
the managing director and head of China investment banking at Lehman Brothers,
from April 1998 to September 1999 he was the Deputy Head of the Investment Bank
Preparation Committee at the China Development Bank. From November 1993 to April
1998, Dr. Li was the Executive Director of Investment Banking and Economic
Research at Goldman Sachs and from April 1993 until October 1993, he was an
Associate of Global Foreign exchange trading at Credit Suisse First Boston. Dr.
Li is Vice Chairman of China Overseas-Educated Scholars Development Foundation
and a regular commentator and author of various influential local and
international mass media and publications on areas concerning China’s economic
development policy. He is deputy head of the National Center of Economic
Research and a member of the board of alumni at Tsinghua University in Beijing.
Mr. Li holds a B.E. in management information systems from Tsinghua University,
an M.A. in economics from University of California at Davis and a Ph.D. in
economics from Massachusetts Institute of Technology.
44
There is
no family relationship between any of our executive officers or
directors.
B. Compensation
Compensation
of Directors and Executive Officers
All
directors receive reimbursements from us for expenses which are necessary and
reasonably incurred by them for providing services to us or in the performance
of their duties.
The
aggregate cash compensation and benefits that we paid to our directors and
executive officers, a group of eight persons for the year ended December 31,2008 was approximately RMB5,000,000. No executive officer is entitled to any
severance benefits upon termination of his or her employment with our
company.
Employment
Agreements
The
following discussion summarizes the material terms of current employment
agreements between us and our executive officers:
We have
entered into an agreement with Clive Ng on the following terms:
·
Annual
Salary – $500,000; minimum bonus of
$250,000.
·
Principal
Benefits will include Health Insurance, Life Insurance, Company Car, Tax
Advisory Services, Annual Leave of Four Weeks and Stock Option Employment
Commencement Package with vesting over ten (10)
years.
·
Benefits
Upon Termination For Cause or Resignation For Other Than Good Reason will
include Earned Compensation, Earned Benefits, Vested Stock
Options.
·
Severance
Pay – The greater of six (6) times monthly compensation or twelve (12)
months base salary less any compensation paid to the employee during the
period between change of control and
termination.
We have
entered into an agreement with Pu Yue on the following terms:
·
Annual
Salary – RMB 900,000.
·
Principal
Benefits will include Health Insurance, Life Insurance, Annual Leave of
Four Weeks.
·
Benefits
Upon Termination For Cause or Resignation For Other Than Good Reason will
include Earned Compensation, Earned
Benefits.
·
Severance
Pay – The greater of six (6) times monthly compensation or twelve (12)
months base salary less any compensation paid to the employee during the
period between change of control and
termination.
45
Other
than as described above for Mr. Ng and Mr. Pu, there have been no employment
agreements negotiated or drafted between us and our executive officers of
although it is anticipated that such agreements may be put in place with our
executive offices.
C. Board
Practices
All of
our directors serve for an indefinite term until their respective successor
takes office or until his or her earlier death, resignation or removal by the
members at a meeting called for the purpose of removing the directors or for
purposes including the removal of a director; or by a resolution passed by the
majority of the remaining directors. The following table sets forth the number
of years our current directors and executive officers have held their positions
and the expiration of their current term.
Name
Appointed
on
Clive
Ng
October
2006
Jonathan
Kalman (1)
October
2007
Kerry
Propper
October
2007
Simon
Bax (2)
October
2007
Shan
Li
October
2007
Alejandro
Zubillaga (3)
October
2007
Pierre
Suhandinata
May
2008
Richard
Eu
May
2008
Su-Mei
Thompson (4)
December
2008
(1) Mr.
Kalman resigned from his position as a director of the Company on September
2008.
(3) Mr.
Zubillaga resigned from his position as a director of the Company on May 7,2008.
(4) Ms.
Thompson resigned from her position as a director of the Company on July 4,2009.
Director
Independence
The Board
of Directors has determined that Pierre Suhandinata, Richard Eu and Shan Li are
independent under the Nasdaq Marketplace Rules, because they do not currently
own a significant percentage of our ordinary shares, are not currently employed
by us, have not been actively involved in the management of China Cablecom and
do not fall into any of the enumerated categories of people who cannot be
considered independent under the Nasdaq Marketplace Rules. We have an Audit
Committee, Nominating and Corporate Governance Committee and Compensation
Committee. We have appointed independent directors to each of our
committees.
46
Compensation
Committee Interlocks and Insider Participation
During
the last fiscal year, no officer and employee of China Cablecom Holdings, and no
former officer of China Cablecom Holdings, during the last completed fiscal
year, participated in deliberations of the Board of Directors concerning
executive officer compensation.
Meetings
and Committees of the Board of Directors
To date,
the Board has only taken formal action solely by unanimous consent. Although we
do not have any formal policy regarding director attendance at annual
shareholder meetings, in the future we will attempt to schedule our annual
meetings so that its directors can attend. In addition, we expects our directors
to attend all Board and committee meetings and to spend the time needed and meet
as frequently as necessary to properly discharge their
responsibilities.
Audit
Committee
The Audit
Committee was established on June 2, 2008. Our Audit Committee currently
consists of Pierre Suhandinata, Richard Eu and Shan Li, who are independent
directors and are also “financially literate.” The Nasdaq rule defines
“financially literate” as being able to read and understand fundamental
financial statements, including a company’s balance sheet, income statement and
cash flow statement.
Audit Committee Financial
Expert. Pierre Suhandinata has been qualified by the board as
an “audit committee financial expert” within the meaning of all applicable
rules. The Audit Committee is responsible for, among other things:
·
reviewing
and approving all transactions with affiliates, related parties, directors
and executive officers;
·
reviewing
the procedures for the receipt and retention of, and the response to,
complaints received regarding accounting, internal control or auditing
matters; and
·
reviewing
with management and the independent auditors, at least once
annually.
Nominating
Committee
The
Nominating and Corporate Governance Committee was established on June 2, 2008.
Our Nominating and Corporate Governance Committee currently consists of Pierre
Suhandinata, Richard Eu and Shan Li. The Nominating and Corporate Governance
Committee is responsible for, among other things:
·
reviewing
with the board from time to time the appropriate skills and
characteristics required of board
members;
·
establishing
and administering a periodic assessment procedure relating to the
performance of the board as a whole and its individual members;
and
·
making
recommendations to the board regarding corporate governance matters and
practices, including formulating and periodically reviewing corporate
governance guidelines to be adopted by the
board.
Compensation
Committee
The
Compensation Committee was established on June 2, 2008. Our Compensation
Committee currently consists of Pierre Suhandinata, Richard Eu and Shan
Li. The Committee is responsible for, among other
things:
47
·
assisting
the board in determining the compensation of the Chief Executive Officer,
Chief Financial Officer and other officers of the
Company;
·
reviewing
and making recommendations to the board with respect to non-CEO and
non-CFO compensation; and
·
making
recommendations to the board regarding approval, disapproval,
modification, or termination of existing or proposed employee benefit
plans.
Settlement
with China Broadband
Following
Jaguar’s original filing, on October 31, 2007, of its prospectus/proxy statement
on Form S-4 with the Securities and Exchange Commission relating to the
Redomestication Merger and Business Combination, investors in China Broadband
informed Mr. Ng that they viewed our activities as violative of Mr. Ng’s
employment agreement with China Broadband. China Broadband is another company
organized by Mr. Ng to pursue broadband cable opportunities in the PRC.
Currently, it operates a broadband cable internet company that is pursuing
opportunities in stand-alone, independent broadband services, including
electronic program/television program-type publications, and is based in the
city of Jinan in the Shandong province of the PRC.
Although
Mr. Ng disagreed that our activities violated his employment agreement with
China Broadband, in order to avoid the possibility of time consuming and costly
litigation, Mr. Ng, Mr. Pu, China Broadband, Jaguar, us and certain of China
Broadband’s shareholders and consultants entered into a settlement agreement
dated as of January 11, 2008, pursuant to which the potential claims were
resolved. As a result of this settlement, the parties agreed, among other
things, as follows:
·
Each
of Mr. Ng and Mr. Pu agreed with a subsidiary of China Broadband to
modifications to his employment agreement to reflect the original intent
of the parties, and allow them to continue as executives and directors of
China Cablecom Holdings. In addition, the amendment to Mr. Ng’s employment
agreement provides that (i) until such time as China Broadband hires a new
Chief Executive Officer, Mr. Ng would remain an executive of China
Broadband and take commercially reasonable efforts to assure that his
activities with us would not materially interfere with his obligations to
China Broadband and (ii) when China Broadband hires a new Chief Executive
Officer, Mr. Ng’s work requirements for China Broadband would be
appropriately reduced and he would no longer be an executive of China
Broadband, although he will remain the non-executive Chairman and a member
of the board of directors of China Broadband until the expiration of the
employment agreement in July 2009, and (iii) requiring that he assist the
Chief Executive Officer, the Board and management of China Broadband in
identifying, negotiating with and entering into agreements with potential
acquisition candidates that are in the stand-alone, independent broadband
business in the People’s Republic of China. A new Chief Executive Officer
was appointed by China Broadband. The amendment to Mr. Pu’s employment
agreement provides that when China Broadband hires a new Chief Financial
Officer and Principal Financial Officer, Mr. Pu’s work requirements for
China Broadband shall be appropriately reduced although he will remain
Vice Chairman and a member of the board of directors of China Broadband.
The settlement agreement contains a provision recognizing that the
provision of integrated cable television services in the People’s Republic
of China and related activities is our business and the provision of
stand-alone independent broadband services is the business of China
Broadband. Mr. Ng’s revised employment agreement contains an express
provision permitting Mr. Ng to resign from China Broadband in the event an
acquisition arises that involves our business, which is how Mr. Ng
currently intends to handle opportunities in the future that could create
a situation similar to that which led to the settlement agreement. (Mr.
Pu’s revised employment agreement does not include a similar provision).
The resignation of Mr. Ng under his revised employment agreement with
China Broadband should not result in a violation of such agreement for
actions occurring prior to his resignation provided he complies with the
terms of such agreement. However, notwithstanding the terms of the
settlement agreement and the amendment to Mr. Ng’s employment agreement
with China Broadband, Mr. Ng’s continuing relationship with China
Broadband could lead to future claims of violation of his duties to China
Broadband in the event future acquisitions in the PRC are offered to us
rather than China Broadband, notwithstanding his current intention to
resign in such circumstances.
48
·
The
revised China Broadband employment agreements with Messrs. Ng and Pu
expressly allow for them to engage in certain “permitted activities”,
including serving as an officer, director and/or board committee member or
being a securityholder of us pursuant to an employment agreement or
otherwise and all activities undertaken in connection with the business of
acting as a joint venture provider of integrated cable television services
in the PRC and related activities (not including the provision of
stand-alone broadband services).
·
Mr.
Ng agreed, subject to the terms of the settlement agreement, to transfer
390,000 of our ordinary shares and make certain transfers of shares of
China Broadband to or for the benefit of certain securityholders of China
Broadband.
·
China
Broadband, for itself and on behalf of any person or entity claiming by or
through China Broadband, together with the securityholders and consultants
who are parties to the settlement agreement, Mr. Ng, Mr. Pu, Jaguar and us
all agreed to mutual releases of claims against each other (except that no
release was provided by Jaguar or us to Mr. Ng or Mr. Pu and that certain
investors have been asked to provide releases subsequent to the settlement
agreement having been entered
into).
Director
Compensation
Our
current directors do not currently receive any compensation for their
services.
D. Employees
We had
258 and 3,566 employees as of December 31, 2007 and 2008, respectively. The
increase of our employees in 2008 was due to the acquisition of Hubei Chutian.
As of December 31, 2008, we had 3,566 employees, including 2,182 in customer
service, 391 in maintenance and engineering and 993 in administration. None of
our employees are represented under collective bargaining agreements. We
consider our relations with our employees to be good.
E. Share
Ownership
See Item
7.A below.
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major
shareholders
The
following table sets forth information with respect to the beneficial ownership
of the ordinary shares as of July 10, 2009 by each person who beneficially owns
more than 5% of ordinary shares and each officer, each director and all officers
and directors as a group.
49
Ordinary
shares which an individual or group has a right to acquire within 60 days
pursuant to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group, but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
Name and Address of Beneficial Owner(1)
Amount and
Nature of
Beneficial
Ownership
Approximate
Percentage of
Outstanding
Ordinary
Shares
Clive
Ng(2)
910,000
(3)
9.84
%
Pu
Yue(4)
—
—
%
Sikan
Toang
—
—
%
Kerry
Propper(5)
297,500
(6)
3.2
%
Pierre
Suhandinata
—
—
%
Shan
Li(7)
—
—
%
Richard
Eu
—
—
%
Craig
Samuels(8)
1,403,500
13.83
%
JLF
Offshore Fund, Ltd(9)
393,021
4.25
%
JLF
Partners I, L.P.(9)
286,873
3.10
%
Globis
Capital Partners, L.P.(10)
516,536
5.58
%
Globis
Capital Advisors., L.L.C.(10)
516,536
5.58
%
Globis
Overseas Fund, Ltd.(10)
82,211
0.88
%
Globis
Capital Management, L.P.(10)
598,747
6.47
%
Globis
Capital, L.L.C.(10)
598,747
6.47
%
Paul
Packer(10)
598,747
6.47
%
Jack
Silver(11)
1,266,557
12.4
%
Sherleigh
Associates Inc. Profit Sharing Plan(11)
1,266,557
12.4
%
Spinner
Global Technology Fund, Ltd.(12)
572,975
6.19
%
Spinner
Asset Management, LLC(12)
572,975
6.19
%
Arthur
C. Spinner(12)
572,975
6.19
%
China
Broadband, Inc. (13)
390,000
4.21
%
Jeffrey
Keswin(14)
492,580
5.27
%
Lyrical
Corp. I, LLC(14)
492,580
5.27
%
Lyrical
Partners, L.P.(14)
492,580
5.27
%
All
directors and executive officers as a group (seven
individuals)
1,207,500
(14)
12.92
%
____________
(1)
Unless
otherwise indicated, the business address of each of the individuals is
27
Union Square West, Suite 501-502, New York, NY10003.
(2)
The
business address for Mr. Ng is 17 State Street, Suite 1600, New York, NY10004.
(3)
After
giving effect to delivery of 390,000 ordinary shares by the shareholder
pursuant to the terms of a settlement agreement. See “Settlement Agreement
with China Broadband”. Excludes 1,136,668 ordinary shares which are
subject to voting agreements China Cablecom Holdings and Mr. Ng entered
into with certain shareholders who were issued shares of China Cablecom
Holdings in connection with the Business Combination. Pursuant to the
voting agreements, such shareholders agreed, for a period of three years
following the Business Combination, to vote their shares in favor of the
Board nominees presented at a meeting of stockholders. Mr. Ng. disclaims
beneficial ownership of the shares held by such shareholders. Does not
include up to 7,520,000 shares that can be earned in connection with the
grant of the Performance Shares.
(4)
The
business address for Mr. Pu is 17 State Street, Suite 1600, New York, NY10004.
(5)
The
business address of Mr. Propper is Chardan Capital Markets, LLC, 17 State
Street, Suite 2575, New York, New York10004.
(6)
Includes
47,500 shares issuable upon exercise of warrants. Does not include 200,000
shares that can be earned in connection with the grant of the Performance
Shares.
50
(7)
The
business address of Mr. Li is Two IFC, 8 Finance Street, Central, Hong
Kong.
(8)
The
business address of Mr. Samuels is 13990 Rancho Dorado Bend, San Diego, CA92130. Includes 900,000 shares issuable upon exercise of warrants. The
information was derived from a Schedule 13D filed with the SEC on February13, 2009.
(9)
The
business address of JLF Partners I, L.P. is 2775 Via de la Valle, Suite
204, Del Mar, CA92014. The business address of JLF Offshore Fund, Ltd. is
c/o Goldman Sachs (Cayman) Trust Limited, PO Box 896, Harbour Centre,
2nd
Floor, North Church Street, Grand Cayman KY1-1103, Cayman
Islands. The information was derived from a Schedule 13G/A
filed with the SEC on July 24,2008.
(10)
The
principal office and business address is 60 Broad Street, 38th
floor, New York, NY10004. The Schedule 13G, as amended, on March 13,2009, was jointly filed by each of the following persons pursuant to Rule
13d-1 promulgated by the Securities and Exchange Commission pursuant to
Section 13 of the Securities Exchange Act of 1934, as amended: (i) Globis
Capital Partners, L.P., a Delaware limited partnership (“Globis
Partners”), with respect to shares of Common Stock directly held by it;
(ii) Globis Capital Advisors, L.L.C., a Delaware limited liability company
(“Globis Advisors”), serves as the general partner of Globis Partners,
with respect to shares of Common Stock directly held by Globis Partners;
(iii) Globis Overseas Fund, Ltd., a Cayman Islands exempted company
(“Globis Overseas”), with respect to shares of Common Stock directly held
by it; (iv) Globis Capital Management, L.P., a Delaware limited
partnership (the “Investment Manager”), which serves as investment manager
to, and has investment discretion over the securities held by, Globis
Partners and Globis Overseas, with respect to shares of Common Stock
directly held by Globis Partners and Globis Overseas; (v) Globis Capital,
L.L.C., a Delaware limited liability company (“GC”), which serves as the
general partner of the Investment Manager, with respect to shares of
Common Stock directly held by Globis Partners and Globis Overseas; and
(vi) Mr. Paul Packer (“Mr. Packer”), who is the Managing Member of Globis
Advisors, and GC, with respect to shares of Common Stock directly held by
Globis Partners and Globis Overseas. The information was derived from a
Schedule 13G/A filed on March 13,2009.
(11)
The
principal office and business address is c/o SIAR Capital LLC, 660 Madison
Avenue, New York, NY10021. Represents 1,266,557 shares issuable upon the
exercise of outstanding warrants held by Sherleigh Associates Inc. Profit
Sharing Plan, a trust of which Mr. Silver is the trustee. This information
was derived from a Schedule 13G filed on February 17,2009.
(12)
The
principal office and business address of Spinner Asset Management, LLC and
Arthur C. Spinner is 730 Fifth Avenue, Suite 1601, New York, NY10019. The
principal office and business address of Spinner Global Technology Fund,
Ltd. is c/o ATC Fund Services (Curacao) N.V., Bon Bini Business Center
Units 2B2K/2B2L, Schottegatweg Oost 10, Willemstad, Curacao. The Schedule
13G was jointly filed by each of the following persons pursuant to Rule
13d-1 promulgated by the Securities and Exchange Commission pursuant to
Section 13 of the Securities Exchange Act of 1934, as amended: (i) Spinner
Global Technology Fund, Ltd. (the “Fund”), Spinner Asset Management, LLC
(the “Manager”) and Arthur C. Spinner. The Manager is the
investment manager of the Fund and Mr. Spinner is the managing member of
the Manager. Each of the Fund and the Manager has the shared
power to vote and to dispose of the shares reported above and Mr. Spinner,
by virtue of his position as the managing member of the Member, has shared
authority to vote and to dispose of such shares. The information was
derived from a Schedule 13G filed with the SEC on January 22,2009.
(13)
The
principal office and business address is 1900 Ninth Street, 3rd Floor
Boulder, Colorado80302. Marc Urbach, President, or such other person as
designated by the board of directors of China Broadband, Inc. has
dispositive and voting power over the
shares.
(14)
Includes
100,000 shares issuable upon exercise of warrants. The principal office
and business address of Jeffrey Keswin, Lyrical Corp. I, LLC (“Lyrical
Corp.”) and Lyrical Partners, L.P. (“Lyrical”) is 405 Park Avenue, 6th
Floor, New York, NY10022. Lyrical serves as principal investment manager
to a number of investment funds with respect to which it has voting and
dispositive authority over the shares. Lyrical Corp. serves as
the general partner of Lyrical. As such, Lyrical Corp. may be
deemed to control Lyrical and therefore may be deemed to be the beneficial
owner of the shares. Mr. Jeffrey Keswin is the Managing Partner
of Lyrical Corp. and may be deemed to control Lyrical Corp. and be the
beneficial owner of the shares. The information was derived from a
Schedule 13G filed with the SEC on February 11,2009.
51
B. Related Party
Transactions
We have
not, during the three most recently completed financial years and the subsequent
period up to the date of this Annual Report, entered into transactions or loans
with any (a) enterprises that are directly or indirectly controlled by or under
common control with us; (b) our associates; (c) individuals directly or
indirectly owning voting right which give them significant influence over us or
close members of their respective families, (d) our directors, senior management
or close members of their respective families or (e) enterprises in which a
substantial interest in the voting power is held or significantly influenced by
any of the foregoing individuals, except as indicated below.
On June26, 2008, we issued
320,000 shares of our ordinary shares to
ClearMedia Limited, a company owned by our executive Chairman, Clive Ng, as
finder’s fee in connection with the acquisition of Hubei Chutian.
We
consummated a convertible debt financing in May 2008 with current and new
investors involving the issuance of an aggregate of $43.175 million principal
amount at maturity of secured convertible notes and approximately 1.525
million ordinary shares to assist in securing our acquisition of Hubei
Broadcasting. Chardan Capital Markets, LLC, acted as lead placement agent in the
convertible debt financing. Kerry Propper, a member of our board of directors,
is the chief executive officer of Chardan Capital Markets, LLC.
C. Interests
of Experts and Counsel
Not
Applicable.
ITEM
8. FINANCIAL INFORMATION
A. Consolidated Statements and Other
Financial Information
The
Company’s consolidated financial statements are stated in U.S dollars and are
prepared in accordance with US GAAP.
Audited
Financial Statements
Our
consolidated financial statements for the 2008/2007/2006 periods ended December
31st
as required under Item 17 are included immediately following the text of this
Annual Report. The audit reports of the Company are included herein immediately
preceding the financial statements.
Legal/Arbitration
Proceedings
The
Directors and the management of the Company do not know of any material, active
or pending, legal proceedings against them; nor is the Company involved as a
plaintiff in any material proceeding or pending litigation.
Policy
on Dividend Distributions
The
Company has not paid any dividends on its outstanding common shares since its
incorporation and does not anticipate that it will do so in the foreseeable
future. The payment of dividends in the future, if any, is within the discretion
of the Board of Directors of Dynasty and will depend upon our earnings, our
capital requirements and financial condition and other relevant factors. We do
not anticipate declaring or paying any dividends in the foreseeable
future.
B. Significant
Changes
None.
52
ITEM
9. THE OFFER AND LISTING
A. Offer and Listing
Details
Our
ordinary shares, warrants and units are quoted on the Nasdaq Capital Market
under the symbols CABL, CABLW and CABLU, respectively. The closing
price for the securities on July 10, 2009, the most recent trading day
practicable before the date of this Annual Report, was $0.50, $0.06 and $0.638,
respectively.
Prior to
the Business Combination, Jaguar’s units commenced public trading on April 6,2006, and common stock and warrants commenced public trading on June 26, 2006.
The Business Combination occurred on April 9, 2008 and we began trading as China
Cablecom Holdings, Ltd. on the OTC Bulletin Board on April 10, 2008. Our
ordinary shares, warrants and units commenced trading on the Nasdaq Capital
Market on July 30, 2008.
The table
below sets forth, for the calendar quarters indicated, the high and low bid
prices for the securities as reported on the OTC BB in U.S. dollars. These
quotations reflect inter-dealer prices, without markup, markdown or commissions,
and may not represent actual transactions.
53
Common
Stock/Ordinary Shares
Warrants
Units
High
Low
High
Low
High
Low
(US$)
2007
7.40
5.35
1.20
0.80
7.83
7.10
First
Quarter
5.57
5.35
1.20
0.80
7.83
7.10
Second
Quarter
5.90
5.53
1.22
1.04
8.35
7.65
Third
Quarter
6.00
5.63
1.65
1.00
9.37
7.70
Fourth
Quarter
7.44
6.00
2.59
1.67
12.44
9.25
2008
First
Quarter
7.45
6.43
2.67
1.70
12.70
10.55
Second
Quarter
6.35
5.90
2.00
1.46
10.00
8.90
Third
Quarter
7.00
2.17
1.99
0.22
9.5
5.0
Fourth
Quarter
2.55
0.59
0.47
0.02
5.5
0.25
2009
First
Quarter
0.87
0.15
0.10
0.02
1.98
0.21
Second
Quarter
1.94
0.26
0.19
0.02
0.71
0.35
*
The
share prices from the Second Quarter of 2006 begin on the dates which our
securities first commenced
trading.
54
Holders
of ordinary shares, warrants and units should obtain current market quotations
for their securities. There can be no assurance that a trading market will
develop for these securities.
Status of Outstanding Ordinary
Shares. As of July 10, 2009, we had a total of 9,244,469
ordinary shares issued and outstanding.
Units, Options and Warrants.
We have issued and outstanding warrants to purchase 8,518,774
ordinary shares. In addition, we have issued a unit purchase option issued and
outstanding which is exercisable for 350,000 units, consisting of one ordinary
share and two warrants to purchase one ordinary share at an exercise price of
$9.10 per unit. The securities underlying the representative’s unit purchase
option and underlying securities have registration rights and may be sold
pursuant to Rule 144.
Holders. As of July10, 2009 there were, of record, 34 holders of ordinary shares, 3 holders of
warrants, and 7 holders of units. We believe the number of beneficial holders of
each of these securities is significantly greater than the number of record
holders.
B. Plan of
Distribution
Not
Applicable.
C. Markets
Our
ordinary shares, warrants and units are quoted on the Nasdaq Capital Market
under the symbols CABL, CABLW and CABLU, respectively.
During
the fiscal years ended December 31, 2008 and 2007, the Company has not entered
into any material agreements which are not described elsewhere in this Annual
Report except that:
In June and July of 2008, China Cablecom
and JYNT entered into a set of loan agreements which are detailed
below.
Offshore
Loan Agreements. China Cablecom and
Rich Dynamic
Limited, a Hong Kong company (“RDL”), entered into two loan agreements respectively on June10, 2008 and July 29, 2008 (“Offshore Loan Agreements”), whereby China Cablecom
agreed to extend loans to RDL. RDL’s loan repayment obligations under
the Offshore Loan Agreements were secured under share pledge agreements, in
which RDL agreed to pledge its equity interest in Chengdu Chuanghong to China
Cablecom as security for RDL’s performance of its loans repayment obligations
under the Offshore Loan Agreements.
Onshore
Loan Agreements. Dong Wanling and JYNT
entered into two loan agreements respectively on June10, 2008 and July 29, 2008 (“Onshore Loan Agreements“), whereby Dong Wanling
agreed to extend two loans to JYNT which amount in aggregate
to RMB 254,600,000. To
date, we have received a payment of RMB224,000,000 in aggregate for the Onshore
Loan Agreement and the Offshore Loan Agreement. We will settle the Onshore Loan
Agreement and the Offshore Loan Agreement once the payment under the Onshore
Loan Agreement has been made in full.
D. Exchange controls
China’s
government imposes control over the convertibility of RMB into foreign
currencies. Under the current unified floating exchange rate system, the
People’s Bank of China publishes a daily exchange rate for RMB, or the PBOC
Exchange Rate, based on the previous day’s dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC Exchange Rate according to market
conditions.
Pursuant
to the Foreign Exchange Control Regulations issued by the State Council on
January 29, 1996 and effective as of April 1, 1996 (and amended on January 14,1997) and the Administration of Settlement, Sale and Payment of Foreign Exchange
Regulations which came into effect on July 1, 1996 regarding foreign exchange
control, or the Regulations, conversion of Renminbi into foreign exchange by
foreign investment enterprises for current account items, including the
distribution of dividends and profits to foreign investors of joint ventures, is
permissible upon the proper production of qualified commercial vouchers or legal
documents as required by the Regulations. Foreign investment enterprises are
permitted to remit foreign exchange from their foreign exchange bank account in
China upon the proper production of, inter alia, the board resolutions declaring
the distribution of the dividend and payment of profits. Conversion of RMB into
foreign currencies and remittance of foreign currencies for capital account
items, including direct investment, loans, security investment, is still subject
to the approval of the State Administration of Foreign Exchange, or SAFE, in
each such transaction. On January 14, 1997, the State Council amended the
Foreign Exchange Control Regulations and added, among other things, an important
provision, as Article 5 provides that the State shall not impose restrictions on
recurring international payments and transfers.
56
Under the
Regulations, foreign investment enterprises are required to open and maintain
separate foreign exchange accounts for capital account items (but not for other
items). In addition, foreign investment enterprises may only buy, sell and/or
remit foreign currencies at those banks authorized to conduct foreign exchange
business upon the production of valid commercial documents and, in the case of
capital account item transactions, document approval from SAFE.
Currently,
foreign investment enterprises are required to apply to SAFE for “foreign
exchange registration certificates for foreign investment enterprises.” With
such foreign exchange registration certificates (which are granted to foreign
investment enterprises, upon fulfilling specified conditions and which are
subject to review and renewal by SAFE on an annual basis) or with the foreign
exchange sales notices from the SAFE (which are obtained on a
transaction-by-transaction basis), foreign-invested enterprises may enter into
foreign exchange transactions at banks authorized to conduct foreign exchange
business to obtain foreign exchange for their needs.
E.
Taxation
BVI Tax
Considerations
The
Government of the British Virgin Islands, will not, under existing legislation,
impose any income, corporate or capital gains tax, estate duty, inheritance tax,
gift tax or withholding tax upon the Company or its shareholders or warrant
holders. The British Virgin Islands are not party to any double
taxation treaties.
The
Company and all distributions, interest and other amounts paid by the Company to
persons who are not persons resident in the British Virgin Islands are exempt
from the provisions of the Income Tax Act in the British Virgin Islands and any
capital gains realized with respect to any shares, debt obligations or other
securities of the Company by persons who are not resident in the British Virgin
Islands are exempt from all forms of taxation in the British Virgin
Islands. As of January 1, 2007, the Payroll Taxes Act, 2004 came into
force. It will not apply to the Company except to the extent the Company has
employees (and deemed employees) rendering services to the Company wholly or
mainly in the British Virgin Islands. The Company at present has no
employees in the British Virgin Islands and has no intention of having any
employees in the British Virgin Islands.
No
estate, inheritance, succession or gift tax, rate, duty, levy or other charge is
payable by persons who are not persons resident in the British Virgin Islands
with respect to any shares, debt obligations or other securities of the
Company.
All
instruments relating to transactions in respect of the shares, debt obligations
or other securities of the Company and all instruments relating to other
transactions relating to the business of the Company are exempt from the payment
of stamp duty in the British Virgin Islands.
There are
currently no withholding taxes or exchange control regulations in the British
Virgin Islands applicable to the Company or its shareholders or warrant
holders.
United States Federal Income
Taxation
General
The
following is a summary of the material U.S. federal income tax consequences of
owning and disposing of our ordinary shares and warrants, sometimes referred to
as our securities, to us and to holders of our securities. Because the
components of a unit are separable at the option of the holder, the holder of a
unit should be treated, for U.S. federal income tax purposes, as the owner of
the underlying ordinary share and warrant components of the unit, as the case
may be. As a result, the discussion below of the U.S. federal income tax
consequences with respect to actual holders of ordinary shares and warrants
should also apply to the holder of a unit (as the deemed owner of the underlying
ordinary share and warrant components of the unit). The discussion below of the
U.S. federal income tax consequences to “U.S. Holders” will apply to a
beneficial owner of our ordinary shares or warrants that is for U.S.
federal income tax purposes:
57
·
an
individual citizen or resident of the United
States;
·
a
corporation (or other entity treated as a corporation for U.S. federal
income tax purposes) that is created or organized (or treated as created
or organized) in or under the laws of the United States, any state thereof
or the District of Columbia;
·
an
estate whose income is includible in gross income for U.S. federal income
tax purposes regardless of its source;
or
·
a
trust if (i) a U.S. court can exercise primary supervision over the
trust’s administration and one or more U.S. persons are authorized to
control all substantial decisions of the trust, or (ii) it has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
If a
beneficial owner of our ordinary shares and warrants is not described as a U.S.
Holder and is not an entity treated as a partnership or other pass-through
entity for U.S. federal income tax purposes, such owner will be considered a
“Non-U.S. Holder.” The U.S. federal income tax consequences applicable
specifically to Non-U.S. Holders is described below under the heading “Non-U.S.
Holders.”
This
summary is based on the Internal Revenue Code of 1986, as amended (the “Code”),
its legislative history, Treasury regulations promulgated thereunder, published
rulings and court decisions, all as currently in effect. These authorities are
subject to change or differing interpretations, possibly on a retroactive
basis.
This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to us or to any particular holder based on such holder’s individual
circumstances. In particular, this discussion considers only holders that own
our ordinary shares and warrants as capital assets within the meaning of Section
1221 of the Code, and does not address the potential application of the
alternative minimum tax or the U.S. federal income tax consequences to holders
that are subject to special rules, including:
·
financial
institutions or financial services
entities;
·
broker-dealers;
·
taxpayers
who have elected mark-to-market
accounting;
·
tax-exempt
entities;
·
governments
or agencies or instrumentalities
thereof;
·
insurance
companies;
·
regulated
investment companies;
·
real
estate investment trusts;
·
certain
expatriates or former long-term residents of the United
States;
·
persons
that actually or constructively own 5% or more of our voting
shares;
·
persons
that acquired our ordinary shares or warrants pursuant to an exercise of
employee stock options, in connection with employee stock incentive plans
or otherwise as compensation;
58
·
persons
that hold our ordinary shares or warrants as part of a straddle,
constructive sale, hedging, conversion or other integrated transaction;
or
·
persons
whose functional currency is not the U.S.
dollar.
This
discussion does not address any aspect of U.S. federal non-income tax laws, such
as gift or estate tax laws, or state, local or non-U.S. tax laws. Additionally,
the discussion does not consider the tax treatment of partnerships or other
pass-through entities or persons who hold our ordinary shares or warrants
through such entities. If a partnership (or other entity classified as a
partnership for U.S. federal income tax purposes) is the beneficial owner of our
ordinary shares or warrants, the U.S. federal income tax treatment of a partner
in the partnership will generally depend on the status of the partner and the
activities of the partnership.
We have
not sought, and will not seek, a ruling from the Internal Revenue Service
(“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the description herein, and its
determination may be upheld by a court. Moreover, there can be no assurance that
future legislation, regulations, administrative rulings or court decisions will
not adversely affect the accuracy of the statements in this
discussion.
BECAUSE
OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO US OR TO
ANY PARTICULAR HOLDER OF OUR SECURITIES MAY BE AFFECTED BY MATTERS NOT DISCUSSED
HEREIN, EACH HOLDER OF OUR SECURITIES IS URGED TO CONSULT WITH ITS TAX ADVISOR
WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION AND THE
OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES AND WARRANTS, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S.
FEDERAL TAX LAWS.
Tax
Consequences to U.S. Holders of Our Ordinary Shares
and Warrants
Taxation
of Distributions Paid on Ordinary Shares
Subject
to the passive foreign investment company, or “PFIC”, rules discussed below, a
U.S. Holder will be required to include in gross income as ordinary income the
amount of any dividend paid on our ordinary shares. A distribution on our
ordinary shares will be treated as a dividend for U.S. federal income tax
purposes to the extent the distribution is paid out of our current or
accumulated earnings and profits (as determined for U.S. federal income tax
purposes). Such dividend will not be eligible for the dividends-received
deduction generally allowed to U.S. corporations in respect of dividends
received from other U.S. corporations. Distributions in excess of such earnings
and profits will be applied against and reduce the U.S. Holder’s basis in its
ordinary shares and, to the extent in excess of such basis, will be treated as
gain from the sale or exchange of such ordinary shares.
With
respect to non-corporate U.S. Holders for taxable years beginning before January1, 2011, dividends may be taxed at the lower applicable long term capital gains
rate (see “— Taxation on the Disposition of ordinary shares and Warrants” below)
provided that (1) our ordinary shares are readily tradable on an established
securities market in the United States, (2) we are not a PFIC, as discussed
below, for either the taxable year in which the dividend was paid or the
preceding taxable year, and (3) certain holding period requirements are met.
Under recently published IRS
authority, shares are considered for purposes of clause (1) above to be readily
tradable on an established securities market in the United States only if they
are listed on certain exchanges, which presently include the Nasdaq Capital
Market. While our ordinary shares are currently listed and traded on
the Nasdaq Capital Market, U.S. Holders nevertheless should consult their
own tax advisors regarding the availability of the lower rate for any dividends
paid with respect to our ordinary shares.
59
If PRC
taxes apply to dividends paid to a U.S. Holder on our ordinary shares, such
taxes may be treated as foreign taxes eligible for credit against such holder’s
U.S. federal income tax liability (subject to certain limitations), and a U.S.
Holder may be entitled to certain benefits under the income tax treaty
between the United States and the PRC. U.S. Holders should consult their own tax
advisors regarding the creditability of any such PRC tax and their eligibility
for the benefits of the income tax treaty between the United States and the
PRC.
Taxation
on the Disposition of Ordinary Shares and Warrants
Upon a
sale or other taxable disposition of our ordinary shares or warrants, and
subject to the PFIC rules discussed below, a U.S. Holder generally will
recognize capital gain or loss in an amount equal to the difference between the
amount realized and the U.S. Holder’s adjusted tax basis in the ordinary shares
or warrants. See “— Exercise or Lapse of a Warrant” below for a discussion
regarding a U.S. Holder’s basis in the ordinary shares acquired pursuant to the
exercise of a warrant.
Capital
gains recognized by U.S. Holders generally are subject to U.S. federal income
tax at the same rate as ordinary income, except that long-term capital gains
recognized by non-corporate U.S. Holders are generally subject to U.S. federal
income tax at a maximum rate of 15% for taxable years beginning before January1, 2011 (and 20% thereafter). Capital gain or loss will constitute long-term
capital gain or loss if the U.S. Holder’s holding period for the ordinary shares
exceeds one year. The deductibility of capital losses is subject to various
limitations.
If PRC
taxes apply to any gain from the disposition of our ordinary shares or warrants
by a U.S. Holder, such taxes may be treated as foreign taxes eligible for credit
against such holder’s U.S. federal income tax liability (subject to certain
limitations), and a U.S. Holder may be entitled to certain benefits under the
income tax treaty between the United States and the PRC. U.S. Holders should
consult their own tax advisors regarding the creditability of any such PRC tax
and their eligibility for the benefits of the income tax treaty between the
United States and the PRC.
Exercise
or Lapse of a Warrant
Subject
to the discussion of the PFIC rules below, a U.S. Holder generally will not
recognize gain or loss upon the exercise of a warrant for cash. Ordinary shares
acquired pursuant to the exercise of a warrant for cash generally will have a
tax basis equal to the U.S. Holder’s tax basis in the warrant, increased by the
amount paid to exercise the warrant. The holding period of such ordinary shares
generally would begin on the day after the date of exercise of the warrant. The
terms of a warrant provide for an adjustment to the number of ordinary shares
for which the warrant may be exercised or to the exercise price of the warrant,
in certain events. Such adjustment may, under certain circumstances, result in
constructive distributions that could be taxable to the U.S. Holder of the
warrants. Conversely, the absence of an appropriate adjustment similarly may
result in a constructive distribution that could be taxable to the U.S. Holders
of the ordinary shares. See “—Taxation of Distributions Paid on Ordinary
Shares,” above. If a warrant is allowed to lapse unexercised, a U.S. Holder
generally will recognize a capital loss equal to such holder’s tax basis in the
warrant. If a warrant is exercised other than by the payment of the exercise
price in cash, the tax treatment of such an exercise may vary from that
described above. U.S. Holders should consult their own tax advisors regarding
the tax treatment of such an exercise.
Passive
Foreign Investment Company Rules
A foreign
corporation will be a passive foreign investment company, or PFIC, if at least
75% of its gross income in a taxable year, including its pro rata share of the
gross income of any company in which it is considered to own at least 25% of the
shares by value, is passive income. Alternatively, a foreign corporation will be
a PFIC if at least 50% of its assets in a taxable year, ordinarily determined
based on fair market value and averaged quarterly over the year, including its
pro rata share of the assets of any company in which it is considered to own at
least 25% of the shares by value, are held for the production of, or produce,
passive income. Passive income generally includes dividends, interest, rents and
royalties (other than certain rents or royalties derived from the active conduct
of a trade or business), and gains from the disposition of passive
assets.
60
Based on
the composition (and estimated values) of the assets and the nature of the
income of us and our subsidiaries in 2008, we do not anticipate that we will be
treated as a PFIC in 2008. Notwithstanding the foregoing, our view that we will
not be treated as a PFIC in 2008 is not free from doubt because of, among other
things, the significant cash position and uncertainties relating to the actual
values of the other assets of us and our subsidiaries in 2008. Our actual PFIC
status for any subsequent taxable year will not be determinable until after the
end of such taxable year. Accordingly, there can be no assurance with respect to
our status as a PFIC for 2008 or any subsequent taxable year.
If we
qualified as a PFIC for any taxable year during which a U.S. Holder held our
ordinary shares or warrants and the U.S. Holder did not make either a
timely qualified electing fund (“QEF”) election for the first taxable year of
its holding period for our ordinary shares or a mark-to-market election, as
described below, such holder will be subject to special rules with respect
to:
·
any
gain recognized by the U.S. Holder on the sale or other disposition of its
ordinary shares or warrants; and
·
any
“excess distribution” made to the U.S. Holder (generally, any
distributions to such U.S. Holder during a taxable year that are greater
than 125% of the average annual distributions received by such U.S. Holder
in respect of the ordinary shares during the three preceding taxable years
or, if shorter, such U.S. Holder’s holding period for the ordinary
shares).
Under
these rules,
·
the
U.S. Holder’s gain or excess distribution will be allocated ratably over
the U.S. Holder’s holding period for the ordinary shares or
warrants;
·
the
amount allocated to the taxable year in which the U.S. Holder recognized
the gain or received the excess distribution, or to any taxable year prior
to the first taxable year in which we qualified as a PFIC, will be taxed
as ordinary income;
·
the
amount allocated to other taxable years will be taxed at the highest tax
rate in effect for that year and applicable to the U.S. Holder;
and
·
the
interest charge generally applicable to underpayments of tax will be
imposed in respect of the tax attributable to each such
year.
In
addition, if we are a PFIC, a U.S. Holder who acquires our ordinary
shares or warrants from a deceased U.S. Holder who dies before January 1,2010 and who had not made a timely QEF election for the ordinary shares
generally will be denied the step-up of U.S. federal income tax basis in such
shares or warrants to their fair market value at the date of the deceased
holder’s death. Instead, such U.S. Holder would have a tax basis in such shares
or warrants equal to the deceased holder’s tax basis, if lower.
In
general, a U.S. Holder may avoid the PFIC tax consequences described above in
respect to our ordinary shares by making a timely QEF election to include in
income its pro rata share of our net capital gains (as long-term capital gain)
and other earnings and profits (as ordinary income), on a current basis, in each
case whether or not distributed. A U.S. Holder may make a separate election to
defer the payment of taxes on undistributed income inclusions under the QEF
rules, but if deferred, any such taxes will be subject to an interest
charge.
61
A U.S.
Holder may not make a QEF election with respect to its warrants. As a result, if
a U.S. Holder sells or otherwise disposes of a warrant (other than upon exercise
of a warrant), any gain recognized generally will be subject to the special tax
and interest charge rules treating the gain as an excess distribution, as
described above, if we were a PFIC at any time during the period the U.S. Holder
held the warrants. If a U.S. Holder that exercises such warrants properly makes
a QEF election with respect to the newly acquired ordinary shares (or has
previously made a QEF election with respect to our ordinary shares), the QEF
election will apply to the newly acquired ordinary shares, but the adverse tax
consequences relating to PFIC shares will continue to apply with respect to such
ordinary shares (which generally will be deemed to have a holding period for the
purposes of the PFIC rules that includes the period the U.S. Holder held the
warrants), unless the U.S. Holder makes a purging election. The purging election
creates a deemed sale of such shares at their fair market value. The gain
recognized by the purging election will be subject to the special tax and
interest charge rules treating the gain as an excess distribution, as described
above. As a result of the purging election, the U.S. Holder will have a new
basis and holding period in the ordinary shares acquired upon the exercise of
the warrants for purposes of the PFIC rules.
The QEF
election is made on a stockholder-by-stockholder basis and, once made, can be
revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF
election by attaching a completed IRS Form 8621 (Return by a Shareholder of a
Passive Foreign Investment Company or Qualified Electing Fund), including the
information provided in a PFIC annual information statement, to a timely filed
U.S. federal income tax return for the tax year to which the election relates.
Retroactive QEF elections generally may be made only by filing a protective
statement with such return and if certain other conditions are met or with the
consent of the IRS.
In order
to comply with the requirements of a QEF election, a U.S. Holder must receive
certain information from us. Upon request from a U.S. Holder, we will endeavor
to provide to the U.S. Holder no later than 90 days after the request such
information as the IRS may require, including a PFIC annual information
statement, in order to enable the U.S. Holder to make and maintain a QEF
election. However, there is no assurance that we will have timely knowledge of
our status as a PFIC in the future or of the required information to be
provided.
If a U.S.
Holder has elected the application of the QEF rules to our ordinary shares, and
the special tax and interest charge rules do not apply to such shares (because
of a timely QEF election for the first tax year of the U.S. Holder’s holding
period for our ordinary shares or a purge of the PFIC taint pursuant to a
purging election), any gain recognized on the appreciation of our ordinary
shares generally will be taxable as capital gain and no interest charge will be
imposed. As discussed above, U.S. Holders of a QEF are currently taxed on their
pro rata shares of its earnings and profits, whether or not distributed. In such
case, a subsequent distribution of such earnings and profits that were
previously included in income generally will not be taxable as a dividend. The
tax basis of a U.S. Holder’s shares in a QEF will be increased by amounts that
are included in income, and decreased by amounts distributed but not taxed as
dividends, under the above rules. Similar basis adjustments apply to property if
by reason of holding such property the U.S. Holder is treated under the
applicable attribution rules as owning shares in a QEF.
Although
a determination as to our PFIC status will be made annually, an initial
determination that our company is a PFIC will generally apply for subsequent
years to a U.S. Holder who held ordinary shares or warrants while we were a
PFIC, whether or not we meet the test for PFIC status in those years. A U.S.
Holder who makes the QEF election discussed above for our first tax year in
which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for
which we are determined to be a PFIC, however, will not be subject to the PFIC
tax and interest charge rules (or the denial of basis step-up at death)
discussed above in respect to such shares. In addition, such U.S. Holder will
not be subject to the QEF inclusion regime with respect to such shares for the
tax years in which we are not a PFIC. On the other hand, if the QEF election is
not effective for each of our tax years in which we are a PFIC and the U.S.
Holder holds (or is deemed to hold) our ordinary shares, the PFIC rules
discussed above will continue to apply to such shares unless the holder makes a
purging election, as described above, and pays the tax and interest charge with
respect to the gain inherent in such shares attributable to the pre-QEF election
period.
62
Alternatively,
if a U.S. Holder owns ordinary shares in a PFIC that is treated as marketable
stock, the U.S. Holder may make a mark-to-market election. If the U.S. Holder
makes a valid mark-to-market election for the first tax year in which the U.S.
Holder holds (or is deemed to hold) ordinary shares in us and for which we are
determined to be a PFIC, such holder generally will not be subject to the PFIC
rules described above in respect to its ordinary shares. Instead, in general,
the U.S. Holder will include as ordinary income each year the excess, if any, of
the fair market value of its ordinary shares at the end of its taxable year over
the adjusted basis in its ordinary shares. The U.S. Holder also will be allowed
to take an ordinary loss in respect of the excess, if any, of the adjusted basis
of its ordinary shares over the fair market value of its ordinary shares at the
end of its taxable year (but only to the extent of the net amount of previously
included income as a result of the mark-to-market election). The U.S. Holder’s
basis in its ordinary shares will be adjusted to reflect any such income or loss
amounts, and any further gain recognized on a sale or other taxable disposition
of the ordinary shares will be treated as ordinary income. Currently, a
mark-to-market election may not be made with respect to warrants.
The
mark-to-market election is available only for stock that is regularly traded on
a national securities exchange that is registered with the Securities and
Exchange Commission (including the Nasdaq Capital Market), or on a foreign
exchange or market that the IRS determines has rules sufficient to ensure that
the market price represents a legitimate and sound fair market value. While our
ordinary shares are currently listed and traded on the Nasdaq Capital Market,
U.S. Holders nevertheless should consult their own tax advisors regarding the
availability and tax consequences of a mark-to-market election in respect to our
ordinary shares under their particular circumstances.
If we are
a PFIC and, at any time, have a non-U.S. subsidiary that is classified as a
PFIC, U.S. Holders generally would be deemed to own a portion of the shares of
such lower-tier PFIC, and generally could incur liability for the deferred tax
and interest charge described above if we receive a distribution from, or
dispose of all or part of our interest in, the lower-tier PFIC. Upon request, we
will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later
than 90 days after the request the information that may be required to make or
maintain a QEF election with respect to the lower-tier PFIC. U.S. Holders are
urged to consult their own tax advisors regarding the tax issues raised by
lower-tier PFICs.
If a U.S.
Holder owns (or is deemed to own) shares during any year in a PFIC, such holder
may have to file an IRS Form 8621 (whether or not a QEF election or
mark-to-market election is made).
The rules
dealing with PFICs and with the QEF and mark-to-market elections are very
complex and are affected by various factors in addition to those described
above. Accordingly, U.S. Holders of our ordinary shares should consult their own
tax advisors concerning the application of the PFIC rules to our ordinary shares
and warrants under their particular circumstances.
Tax
Consequences to Non-U.S. Holders of Our Ordinary Shares and
Warrants
Dividends
paid to a Non-U.S. Holder in respect to its ordinary shares generally will not
be subject to U.S. federal income tax, unless the dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the
United States (and, if required by an applicable income tax treaty, are
attributable to a permanent establishment or fixed base that such holder
maintains in the United States).
In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain attributable to a sale or other disposition of our ordinary
shares or warrants unless such gain is effectively connected with its conduct of
a trade or business in the United States (and, if required by an applicable
income tax treaty, is attributable to a permanent establishment or fixed base
that such holder maintains in the United States) or the Non-U.S. Holder is an
individual who is present in the United States for 183 days or more in the
taxable year of sale or other disposition and certain other conditions are met
(in which case, such gain from United States sources generally is subject to tax
at a 30% rate or a lower applicable tax treaty rate).
Dividends
and gains that are effectively connected with the Non-U.S. Holder’s conduct of a
trade or business in the United States (and, if required by an applicable income
tax treaty, are attributable to a permanent establishment or fixed base in the
United States) generally will be subject to tax in the same manner as for a U.S.
Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S.
federal income tax purposes, may also be subject to an additional branch profits
tax at a 30% rate or a lower applicable tax treaty rate.
63
Backup
Withholding and Information Reporting
In
general, information reporting for U.S. federal income tax purposes will apply
to distributions made on our ordinary shares within the United States to a
non-corporate U.S. Holder and to the proceeds from sales and other dispositions
of our ordinary shares or warrants by a non-corporate U.S. Holder to or through
a U.S. office of a broker. Payments made (and sales and other dispositions
effected at an office) outside the United States will be subject to information
reporting in limited circumstances.
In
addition, backup withholding of United States federal income tax, currently at a
rate of 28%, generally will apply to dividends paid on our ordinary shares to a
non-corporate U.S. Holder and the proceeds from sales and other dispositions of
shares or warrants by a non-corporate U.S. Holder, in each case
who:
·
fails
to provide an accurate taxpayer identification
number;
·
is
notified by the IRS that backup withholding is required;
or
·
in
certain circumstances, fails to comply with applicable certification
requirements.
A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status, under penalties of perjury, on a duly executed applicable IRS Form W-8
or by otherwise establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS.
F.
Dividends and paying agents
Not
applicable.
G.
Statement by experts
Not
applicable.
H. Documents on
display
Documents
concerning us that are referred to in this document may be inspected at our
principal executive offices at 1 Grand Gateway, 1 Hongqian Road, Shanghai,
200030, People’s Republic of China.
In
addition, we will file annual reports and other information with the Securities
and Exchange Commission. We will file annual reports on Form 20-F and
submit other information under cover of Form 6-K. As a foreign private
issuer, we are exempt from the proxy requirements of Section 14 of the
Exchange Act and our officers, directors and principal shareholders are exempt
from the insider short-swing disclosure and profit recovery rules of
Section 16 of the Exchange Act. Annual reports and other information
we file with the Commission may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington,
D.C. 20549, and at its regional offices located at 233 Broadway, New York, NewYork10279 and 500 West Madison Street, Suite 1400, Chicago, Illinois60661, and copies of all or any part thereof may be obtained from such offices
upon payment of the prescribed fees. You may call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms and you can request copies of the documents upon payment of a duplicating
fee, by writing to the Commission. In addition, the Commission maintains a
web site that contains reports and other information regarding registrants
(including us) that file electronically with the Commission which can be
assessed at http://www.sec.gov.
64
I. Subsidiary
Information
Not
required.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The
Company anticipates its primary market risk, if any, will be related to
fluctuations in exchange rates. Exchange rate risk may arise if the
Company is required to use different currencies for various aspects of its
operations. Although the principal currency of our primary revenue source
will be the Chinese RMB, the corporate expenses of the Company (e.g., rent,
telephone, payroll, professional fees etc.) are likely to be paid in US Dollars.
The Company intends to monitor its exchange rate risk and take necessary actions
to reduce its exposure, though the Company is not currently exploring hedging
opportunities.
We do not
use derivative financial instruments.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES
Not
applicable.
65
PART
II
ITEM
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
The
Company’s subsidiary China Cablecom Ltd. received from one of its lenders a
notice of default as a result of the failure of China Cablecom Ltd. to make its
scheduled April 9, 2009 principal and interest payment of approximately $2.2
million under a promissory note issued in connection with the $20.0 million
bridge financing that preceded our merger with Jaguar Acquisition Corporation
(the “Bridge Notes”). Accordingly, the lender gave notice that the
April 2009 principal and interest payment and all other obligations under the
promissory note held by such lender were immediately due and payable together
with related penalties. As a result, China Cablecom Ltd. is currently
in default under the Bridge Note. The Company sought tolling
agreements from all of the holders of the promissory notes issued in connection
with the bridge financing that funds consisting of outstanding principal amount
together with any unpaid and accrued interest (aggregating to approximately
$11.0 million on the due date, including the approximate $2.2 million owed to
the lender mentioned above), had been made available in a separate fund during
the process of arranging for the conversion of Renminbi in China. While most
lenders provided such tolling agreements, they were only effective until April30, 2009 and as of June 30, 2009, the full amount of principal, interest and
penalty provisions are now due and payable. The Company is currently
working to resolve this matter with investors holding the Bridge Notes of China
Cablecom Ltd. by negotiating a comprehensive debt restructuring
package.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS
OF SECURITY HOLDERS AND USE OF PROCEEDS
Not
applicable
ITEM
15. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
An
evaluation was performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
regarding the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the December 31, 2008. Based on that
evaluation, our management, including our Chief Executive Officer and Chief
Financial Officer, have concluded that our disclosure controls and procedures as
of December 31, 2008 were effective and that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b)
Management’s annual report on internal control over financial
reporting
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Given the size of our Company
in terms of capital and personnel, the controls generally involve direct
observations by the CFO and CEO, and the review of all financial reporting
documents by the CFO. Management has concluded that our internal controls over
financial reporting are effective.
66
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can only
provide reasonable assurances with respect to financial statement preparation
and presentation. In addition, any evaluation of effectiveness for future
periods is subject to the risk that controls may become inadequate because of
changes in conditions in the future.
(c)
Attestation report of the register public accounting firms
Not
applicable.
(d)
Changes in Internal Controls over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act) that occurred during the year ended December31, 2008 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. It should be noted that
while our management believes that our disclosure controls and procedures
provide a reasonable level of assurance; our management does not expect that our
disclosure controls and procedures or internal financial controls will prevent
all errors or fraud. A control system, no matter how well conceived or operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met.
ITEM
16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL
EXPERT.
Our Board
of Directors has determined that Pierre Sunhandinata, is an independent
financial expert serving on our audit committee.
ITEM 16B. CODE OF ETHICS.
The
Company has adopted a Code of Conduct that applies to its Chief Executive
Officer and all of its directors, officers and employees, or persons performing
similar functions. A copy of our Code of Conduct is available at its corporate
office in the PRC. Any future changes to the Code of Conduct will be posted on
the Company’s website or filed as an exhibit to a report filed with the SEC
within five business days of the change being effective.
The audit
fees for the years ended December 31, 2008 and 2007, respectively, were paid for
professional services rendered for the audits of our consolidated financial
statements, quarterly reviews, consents, and assistance with review of documents
filed with the SEC.
Tax
Fees
Tax fees
for the years ended December 31, 2008 and 2007, respectively, were paid for
services related to tax compliance, including the preparation of tax returns and
tax planning and tax advice.
Other
Fees
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS
FOR AUDIT COMMITTEES.
Not
applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE
ISSUER AND AFFILIATED PURCHASERS.
Not
applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING
ACCOUNTANT.
Not
applicable.
ITEM 16G. CORPORATE
GOVERNANCE.
Not applicable.
68
PART
III
ITEM
17. FINANCIAL STATEMENTS
Our
audited Financial Statements are included as the “F” pages attached to this
report.
All
financial statements in this Annual Report, unless otherwise stated, are
presented in accordance with US GAAP.
ITEM
18. FINANCIAL STATEMENTS
The
Company has elected to provide financial statements pursuant to ITEM
17.
ITEM
19. EXHIBITS
Exhibit
Number
Description
of Exhibit
1.1
(1)
China
Cablecom Holdings Amended and Restated Memorandum of
Association
1.2
(1)
China
Cablecom Holdings Amended and Restated Articles of
Association
2.1
(1)
Specimen
Unit Certificate
2.2
(1)
Specimen
Ordinary Share Certificate
2.3
(1)
Form
of Unit Purchase Option
2.4
(1)
Form
of Warrant
2.5
(2)
Form
of Warrant Agreement
2.6
Form
of Secured Convertible Note.
4.1
(1)
The
China Cablecom Holdings 2007 Omnibus Securities and Incentive
Plan
4.2
(1)
Warrants
Exercise Proceeds Award Agreement between China Cablecom Holdings and
James S. Cassano
4.3
(1)
Warrants
Exercise Proceeds Award Agreement between China Cablecom Holdings and
Kerry Proper
4.4
(1)
Warrants
Exercise Proceeds Award Agreement between China Cablecom Holdings and
Jonathan Kalman
4.5
(1)
Warrants
Exercise Proceeds Award Agreement between China Cablecom Holdings and
Clive Ng
4.6
(1)
Incentive
Share Agreement between China Cablecom Holdings and James S.
Cassano
4.7
(1)
Incentive
Share Agreement between China Cablecom Holdings and Kerry
Proper
4.8
(1)
Incentive
Share Agreement between China Cablecom Holdings and Jonathan
Kalman
4.9
(1)
Form
of Consulting Agreement between China Cablecom Holdings and China Cablecom
Holdings Limited, a Cayman Islands limited company
4.10
(1)
Form
of Employment Agreement between China Cablecom Holdings and Clive
Ng
4.11
(1)
Promissory
Note from China Cablecom to Jaguar in the initial principal amount of
$475,000
69
4.12
(1)
Purchase
Agreement, dated as of September 19, 2007, by and among China Cablecom
Ltd. and the entities listed on the Schedule of Investors attached thereto
as Schedule I
4.13
(1)
Form
of First Closing Promissory Note
4.14
(1)
Registration
Rights Agreement, dated September 19, 2007, by and among China Cablecom
Ltd. and the entities listed on the Schedule A attached
thereto
4.15
(1)
Share
Pledge Agreement, dated as of September 19, 2007, by Clive Ng in favor of
the persons and entities listed on the Schedule of Investors attached
thereto as Schedule III
Form
of Stock Escrow Agreement between the Registrant, Continental Stock
Transfer & Trust Company and the Initial
Stockholders
4.18
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and Jonathan
Kalman
4.19
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and C. Richard
Corl
4.20
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and James S.
Cassano
4.21
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and John J.
Hoey
4.22
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and William J.
Westervelt, Jr.
4.23
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and David W.
Tralka
4.24
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and Robert
Moreyra
4.25
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and Peter
Collins
4.26
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and Sapphire
Canyon Investments LLC
4.27
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and Corl
LLC
4.28
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and JSC Group
Holdings LLC
4.29
(2)
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and PA Holdings,
LLC
4.30
(1)
Framework
Agreement by and between Binzhou Broadcasting and Television Network Co.,
Ltd. and Jinan Youxiantong Network Technology Co., Ltd., August
2007
4.31
(1)
Asset
Transfer Agreement by and between Binzhou Broadcasting and Television
Network Co., Ltd. and Binzhou Broadcast and Television Information Network
Co., Ltd., September 2007
4.32
(1)
Exclusive
Service Agreement between Binzhou Broadcasting and Television Network Co.,
Ltd. and Binzhou Broadcast and Television Information Network Co., Ltd.,
September 2007
4.33
(1)
Technical
Services Agreement between Binzhou Broadcast and Television Information
and Network Co., Ltd. and Jinan Youxiantong Network Technology Co., Ltd.,
September 2007
4.34
(1)
Equity
Option Agreement by and between Heze Cablecom Network Technology Co., Ltd.
and Liang Yue Jing, July 2007
4.35
(1)
Equity
Option Agreement by and between Heze Cablecom Network Technology Co., Ltd.
and Pu Yue, July 2007
4.36
(1)
Equity
Pledge Agreement by and between Heze Cablecom Network Technology Co., Ltd.
and Lian Yue Jing, July
2007
70
4.37
(1)
Equity
Pledge Agreement by and between Heze Cablecom Network Technology Co., Ltd.
and Pu Yue, July 2007
4.38
(1)
Loan
Agreement by and between China Cablecom Co. Ltd. (Hong Kong) and Liang
Yue-Jing, June 2007
4.39
(1)
Loan
Agreement by and between China Cablecom Co. Ltd. (Hong Kong) and Pu Yue,
June 2007
4.40
(1)
Power
of Attorney granted by Lian Yue Jing, July 16, 2007
Trustee
Arrangement Letter, by and between China Cablecom Co., Ltd. (Hong Kong)
and Lian Yue Jing, June 30, 2007
4.43
(1)
Trustee
Arrangement Letter, by and between China Cablecom Co., Ltd. (Hong Kong)
and Pu Yue, June 30, 2007
4.44
(1)
Supplementary
Agreement to the Framework Agreement, by and between Binzhou Broadcasting
and Television Network, Co., Ltd. and Jinan Youxiantong Network Technology
Co. Ltd., dated August 6, 2007
4.45
(3)
Settlement
Agreement by and between China Broadband, Inc., China Broadband, Ltd.,
China Broadband, Inc., Stephen P. Cherner, Maxim Financial Corporation,
Mark L. Baum, BCGU, LLC, Mark I. Lev, Wellfleet Partners, Inc., Pu Yue,
Clive Ng, Chardan Capital Markets, LLC, Jaguar Acquisition Corporation and
China Cablecom Holdings, Ltd. dated January 9, 2008
4.46
(1)
Form
of Voting Agreement by and between Jaguar Acquisition Corporation, China
Cablecom Holdings, Ltd., Certain Shareholders of Jaguar Acquisition
Corporation and Clive Ng.
4.47
(1)
Form
of Employment Agreement by and between China Cablecom Holdings, Ltd. and
Pu Yue.
4.48
(4)
Unit
Purchase Option Clarification Agreement dated as of January 30, 2008 by
Jaguar Acquisition Corporation.
4.49
(4)
Warrant
Clarification Agreement dated January 30, 2008 by and between Jaguar
Acquisition Corporation and Continental Stock Transfer & Trust
Company.
4.50
Offshore Loan Agreement between
China Cablecom and Rich Dynamic Limited, dated June 10,2008.
4.51
Offshore Loan Agreement between
China Cablecom and Rich Dynamic Limited, dated July 29,2008.
4.52
Onshore
Loan Agreement between Dong
Wanling and JYNT, dated June 10, 2008.
4.53
Onshore
Loan Agreement between Dong
Wanling and JYNT, dated July 29, 2008.
4.54
Security
Agreement between China Cablecom Holdings and Collateral Agents, LLC for
the benefit of certain lenders party thereto, dated May 8,2008.
4.55
Guaranty
entered into by China Cablecom Ltd. for the benefit of Collateral Agents,
LLC and certain lenders party thereto, dated May 8,2008.
4.56
Collateral
Agent Agreement among Collateral Agents, LLC, China Cablecom Ltd., China
Cablecom Holdings and the lenders party thereto, dated as of May 8,2008.
4.57
Subscription
Agreement among China Cablecom Holdings and subscribers party thereto,
dated May 8, 2008.
Incorporated
by reference to the Current Report on Form 6-K filed with the SEC by the
Company on June 24, 2008.
72
SIGNATURES
The
Registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
Report
of Independent Registered Public Accounting Firm
F-1
Consolidated
Balance Sheets
F-2
Consolidated
Statements of Operations and Comprehensive Loss
F-3
Consolidated
Statements of Changes in Stockholders’ Equity (Deficiency)
F-4
Consolidated
Statements of Cash Flows
F-5
Notes
to Consolidated Financial Statements
F-6
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders of
China
Cablecom Holdings, Ltd.
We have
audited the accompanying consolidated balance sheets of China Cablecom Holdings,
Ltd. (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations and comprehensive loss, changes in
stockholders’ equity (deficiency) and cash flows for the years then
ended. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December31, 2008 and 2007, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. At December 31, 2008, the Company has a
working capital deficit of approximately $39 million, and as discussed in Notes
25 and 26 to the financial statements, subsequent to year end the Company was in
default under its obligation to make principal and interest payments under a
promissory note. These conditions raise substantial doubt about its ability to
continue as a going concern. Management’s plans regarding those matters also are
described in Notes 25 and 26. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Adjustments
to reconcile net loss to net cash provided by operating
activities:
Depreciation
8,213,143
555,178
Amortization
of intangible assets
2,152,882
374,507
Amortization
of deferred financing costs
1,209,775
274,980
Amortization
of note payable discount – note 16
2,382,632
670,588
Amortization
of convertible note discount
4,910,547
-
Noncontrolling
(“minority”) interest in income
986,619
20,551
Changes
in operating assets and liabilities:
Accounts
receivable
(1,628,710
)
-
Inventories
(2,978,625
)
(213,015
)
Prepaid
expenses and advances
(8,567,507
)
(657,977
)
Accounts
payable
6,411,301
1,351,918
Service
performance obligation-deferred revenue
1,550,566
108,821
Other
current liabilities
6,252,789
751,308
Net
cash provided by operating activities
6,722,563
1,081,455
Cash
Flows From Investing Activities:
Purchase
of property, plant and equipment
(34,202,234
)
(1,102,753
)
Purchase
of construction in progress
-
(556,828
)
Issuance
/ (Repayment) of note receivable – related party
475,000
(475,000
)
Acquisition
of Binzhou PRC
-
(4,239,758
)
Net
cash used in investing activities
(33,727,234
)
(6,374,339
)
Cash
Flows From Financing Activities:
Proceeds
from reverse merger with Jaguar, net
23,105,232
-
Proceeds
from issuance of convertible notes
19,050,610
-
Proceeds
from issuance of ordinary shares
9,325,930
950
Proceeds
from issuance of Class A preferred stock
-
3,575,120
Proceeds
from issuance / (repayments) of notes payable
(9,996,160
)
16,424,880
Contribution
from noncontrolling (“minority”) interest
759,502
-
Repayment
of shareholder advances
-
(107,025
)
Deferred
financing costs incurred
-
(863,000
)
Deferred
shell merger costs incurred
-
(971,623
)
42,245,114
18,059,302
Cash
flows from financing assets/liabilities held and settled by noncontrolling
("minority") interest
-
(239,916
)
Net
cash provided by financing activities
42,245,114
17,819,386
Effect
of exchange rate changes on cash
1,303,234
112,072
Net
increase in cash
16,543,677
12,638,574
Cash
at beginning of the period
12,638,574
-
Cash
at the end of the period
$
29,182,251
$
12,638,574
Supplemental
Disclosure of cash paid during the period :
Interest
paid
$
1,146,836
$
38,820
Income
taxes paid
$
12,316
$
9,404
Supplemental
Disclosure Of Non-Cash Investing And Financing Activities:
Investment
in Binzhou PRC financed by note payable - relating to assets
transfer
$
-
$
34,265,429
F-5
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization
and Basis of Preparation of Financial
Statements
China
Cablecom Ltd. was incorporated under the laws of the British Virgin Islands on
October 6, 2006.
On April9, 2008, China Cablecom Ltd. and Jaguar Acquisition Corporation ("Jaguar"), a
special purpose acquisition company, completed a redomestication merger of
Jaguar in the British Virgin Islands as China Cablecom Holdings, Ltd. (the
“Company” or “China Cablecom”) and the concurrent business combination merger
with China Cablecom Ltd.
Prior to
the merge with the Company, Jaguar issued 4,950,000 units (“Units”), each
represent one ordinary shares and two warrants.
In
accordance with the merger agreement, the following occurred with respect to the
outstanding Class A Preferred stock and Ordinary shares of China Cablecom Ltd.
and the ordinary shares and warrants, including those under the Units, of
Jaguar:
i)
all
of the Class A preferred stock and ordinary shares of China Cablecom Ltd.
were cancelled and each registered owner of outstanding preferred stock
and ordinary shares of China Cablecom Ltd. automatically become the
registered owner of one and 0.6842 shares of the
Company, respectively
ii)
all
of the common shares of Jaguar were cancelled and each registered owner of
outstanding common shares of Jaguar automatically become the
registered owner of one ordinary share of the
Company
iii)
all
of the outstanding warrants were assumed by the Company and become
exercisable for the Company’s current shares at the original exercise
price, US$ 5.00.
For
financial reporting purposes, this merger transaction was recorded as a
recapitalization of China Cablecom Ltd. whereby China Cablecom Ltd. is deemed to
be the continuing, surviving entity for accounting purpose, but through
reorganization, has deemed to have adopted the capital structure of the
Company.
The
Company is the 100% shareholder of China Cablecom Company Limited (“HK
Cablecom”) incorporated in the Hong Kong on May 22, 2007. HK Cablecom owns 100%
of Heze Cablecom Network Technology Co., Ltd ("HZNT") incorporated under the
laws of the People’s Republic of China (“PRC”) on October 9, 2007.
The
Company is also the primary beneficiary of the following Variable Interest
Entities (“VIE”) as defined under FIN-46R:
l
Jinan
Youxiantong Network Technology Co. Ltd ("JYNT") incorporated under the
laws of the PRC on July 16, 2007.
l
Binzhou
Broadcasting and Television Information Network Co., Ltd. (“Binzhou
Broadcasting”) incorporated under the laws of the PRC on September 10,2007.
l
Hubei
Chutian Video Communication Network Co., Ltd. (“Hubei Chutian”)
incorporated under the laws of the PRC on May 15,2008.
F-6
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Basis of Preparation of Financial Statements
(Continued)
l
The
PRC cable companies (collectively, “Binzhou PRC”) which hold the operating
cable assets to be transferred to Binzhou Broadcasting before December 31,2008:
o
Huiming
Cable Network Co., Ltd.
o
Boxing
Dian Guang Media Co., Ltd.
o
Zouping
Cable Network Center
o
Binzhou
Guang Dian Cable Network Center
o
Binzhou
Guang Shi Network Co., Ltd
On
October 1, 2007, the Company, through JYNT, a company controlled through a
series of agreements and transactions by China Cablecom, acquired a 49% equity
interest in Binzhou Broadcasting, a joint-venture company. By entering into this
joint-venture agreement, China Cablecom became a provider of cable
television services in the PRC, operating with its partner in the joint venture,
Binzhou Guangdian Network Co., Ltd (‘‘Binzhou SOE’’). Binzhou SOE is a local
state-owned enterprise authorized by the PRC government to control the
distribution of cable television services in the PRC. China Cablecom and Binzhou
Broadcasting acquired the cable network it currently operates in Binzhou,
Shandong Province, by entering into a series of asset purchase and services
agreements with Binzhou SOE (note 4).
Binzhou
PRC was previously owned by the local branches of the PRC’s State Administration
of Radio, Film and Television (“SARFT”), located in five different PRC
municipalities. Binzhou SOE was formed by SARFT to serve as a holding company of
Binzhou PRC. Due to restrictions by the PRC government regarding foreign
ownership of PRC media and broadcasting entities, China Cablecom’s 49% joint
venture interest in Binzhou Broadcasting is held through a series of contractual
arrangements with other entities it controls. The intended result of these
contractual arrangements is that the economic risks and benefits of Binzhou
Broadcasting’s operations are being primarily borne by China Cablecom, without
China Cablecom having a direct ownership of equity securities of Binzhou SOE or
Binzhou PRC. These contractual arrangements, in addition to the service
agreements JYNT has with Binzhou Broadcasting, provide under the relevant
principles of United States Generally Accepted Accounting Principles (“U.S.
GAAP”) for the consolidation of the results of operations of Binzhou
Broadcasting by China Cablecom, with 60% of the Binzhou Broadcasting’s net
income included in the accompanying financial statements of China
Cablecom.
The
contractual arrangements between JYNT and Binzhou Broadcasting have an initial
term of 20 years. The parties may mutually seek to extend these agreements upon
the expiry of the current term. China Cablecom is not aware of any legal
impediments that may affect the renewal of these agreements under current PRC
laws. In order for China Cablecom to continue to derive the economic benefits
from its joint venture interest in the operation of Binzhou Broadcasting, it
must renew these contractual agreements.
F-7
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Basis of Preparation of Financial Statements
(Continued)
As
mentioned above, on October 1, 2007, JYNT entered into an operating partnership
through a joint venture with its partner Binzhou SOE, called Binzhou
Broadcasting. Binzhou SOE agreed to contribute all of the inventory
and property, plant and equipment of Binzhou PRC along with all of their cable
business operations in the PRC in exchange for a 51% equity interest in Binzhou
Broadcasting. JYNT agreed to acquire the remaining 49% equity interest in
Binzhou Broadcasting, as well as receive 60% of the economic benefits in Binzhou
Broadcasting, through an exclusive 11% service agreement, for total
consideration of approximately $26.5 million. This exclusive service agreement
provides marketing, strategic consulting and technical support and services for
11% of the net profits of Binzhou Broadcasting. Binzhou SOE receives 40% of the
economic benefits or net profits of Binzhou Broadcasting for its interest in the
joint venture.
In
addition, in accordance with the operating partnership and other agreements
(“Framework Agreement”) between JYNT and Binzhou SOE, JYNT was given the ability
to control certain aspects of the financing and management of Binzhou
Broadcasting. JYNT has a veto right regarding the appointment of the general
manager of Binzhou Broadcasting, the right to appoint the chief financial
officer of Binzhou Broadcasting and an obligation to provide continued financial
resources for investment and capital expenditures for the future expansion of
the Binzhou Broadcasting’s operations. The result of these rights and
obligations given to JYNT is that China Cablecom and JYNT have the ability to
substantially influence the joint venture’s daily operations and financial
affairs, appoint their senior executives and approve all matters requiring
shareholder vote.
On June16, 2008, the Company announced the phase one acquisition of Hubei Chutian
network through a contractual and joint venture agreement similar to that used
in the acquisition of Binzhou network.
The
Company, through JYNT, acquired a 49% equity interest in Hubei Chutian, a
joint-venture company, operating with its partner in the joint venture, Hubei
Chutian Radio and Television Information Network Co., Ltd. (‘‘Hubei SOE’’). JYNT
also entered into a technical service agreement with Hubei Chutian whereby JYNT
provides marketing, strategic consulting and technical support and services for
11% of the net profits. Together with its 49% equity interest, JYNT effectively
receives 60% of economic benefits of Hubei Chutian.
In
addition, in accordance with the operating partnership and other agreements
(“Framework Agreement”) between JYNT and Hubei SOE, JYNT was given the ability
to control certain aspects of the financing and management of Hubei Chutian.
JYNT has a veto right regarding the appointment of the general manager of Hubei
Chutian, the right to appoint the chief financial officer of Hubei Chutian and
an obligation to provide continued financial resources for investment and
capital expenditures for the future expansion of the Hubei Chutian’s operations.
The result of these rights and obligations given to JYNT is that China Cablecom
and JYNT have the ability to substantially influence the joint venture’s daily
operations and financial affairs, appoint their senior executives and approve
all matters requiring shareholder vote.
On June30, 2008, Hubei SOE completed the transfer of the operating network assets to
Hubei Chutian. Operations of Hubei Chutian are included in the consolidated
financial statements from July 1, 2008.
F-8
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Basis of Preparation of Financial Statements
(Continued)
Basis of
Presentation
The
consolidated financial statements, prepared in accordance with U.S. GAAP,
include the financial statements of China Cablecom Holdings, Ltd., and its
wholly owned or controlled subsidiaries and its consolidated variable interest
entities as listed above. A consolidated variable interest entity is a variable
interest entity of which the Company is the primary beneficiary under FIN 46R.
All significant inter-company transactions and balances between the Company, its
subsidiaries and VIEs are eliminated upon consolidation. The Company has
included the results of operations of its subsidiaries and consolidated variable
interest entities from the dates of acquisition.
The
Company, its subsidiaries and VIEs referenced above are hereinafter collectively
referred to as the “Company”.
2.
Summary of Significant Accounting Policies
Consolidation of Variable
Interest Entities
VIEs are
entities that lack one or more voting interest entity characteristics. The
Company consolidates VIEs in which it is the primary beneficiary of its economic
gains or losses. The FASB has issued Interpretation No. 46 (FIN-46R) (Revised
December 2004), Consolidation of Variable Interest Entities. FIN-46R clarifies
the application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. It separates entities into
two groups: (1) those for which voting interests are used to determine
consolidation and (2) those for which variable interests are used to determine
consolidation (the subject of FIN-46R). FIN-46R clarifies how to identify a
variable interest entity and how to determine when a business enterprise should
include the assets, liabilities, noncontrolling (“minority”) interests and
results of activities of a variable interest entity in its consolidated
financial statements.
In
accordance with FIN-46R, China Cablecom has evaluated its economic relationships
with Hubei Chutian, Binzhou Broadcasting and has determined that it is required
to consolidate Hubei Chutian, Binzhou Broadcasting pursuant to the rules of
FIN-46R. Therefore Binzhou Broadcasting and Hubei Chutian are considered to be a
VIE, as defined by FIN-46R, of which China Cablecom is the primary
beneficiary. China Cablecom, as mentioned above, absorbs a majority
of the economic risks and rewards of all of these VIEs that are being
consolidated in the accompanying financial statements.
For the
year ended December 31, 2007, Binzhou PRC was considered to be a VIE, as defined
by FIN-46R, of which China Cablecom is the primary beneficiary. Binzhou PRC’s
assets, liabilities and noncontrolling (“minority”) interests and results of
activities are included in 2007’s consolidated financial statements. From
January 1, 2008, Binzhou PRC ceased business operation to prepare for the
transfer of certain assets to Binzhou Broadcast (note 4) and the assets transfer
was completed before December 31, 2008. Binzhou PRC is not considered as a VIE
for the year ended December 31, 2008.
F-9
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies
(Continued)
Fundamental
Uncertainty
The
financial statements have been prepared in conformity with the principles
applicable to a going concern. The applicability of these principles is
dependent upon continued availability of adequate finance, particularly from
continuing availability of banking facilities or attaining profitable operations
in the future in view of the excess of current liabilities over current
assets.
Cash and Cash
Equivalents
Cash and
cash equivalents include all cash and deposits in banks. As of
December 31, 2008, approximately 90% of total cash and cash equivalents were
denominated in Renminbi (“RMB”) with its deposits placed with banks in the
PRC. This cash is not freely convertible into foreign currencies and
the remittance of these funds out of the PRC is subject to exchange control
restrictions imposed by the PRC government. The remaining balance of
cash and cash equivalents were denominated in US dollars and in deposits with
reputable financial institutions in the United States.
Deferred Financing
Costs
Deferred
financing costs represent costs directly attributable to the Company’s financing
of anticipated business acquisition activities. Deferred financing costs related
to the Company’s Bridge Financing (Note 16) and Convertible Notes (Note 17) are
being amortized using the effective interest method over the life of the related
notes payable, 18 months and 36 months, respectively. Amortization for the year
ended December 31, 2008 approximated $1,210,000. Indirect costs of
financing activities are expensed as incurred.
Deferred Shell Merger
Costs
Deferred
Shell Merger costs consisted of professional fees and other costs directly
attributable to China Cablecom Ltd.’s shell merger with Jaguar. Deferred costs
related to the shell merger have been included as part of the total cost of the
business acquired.
Inventories
Inventories
consist of cable, parts and accessories. Inventories are stated at the lower of
cost or market value. Cost is determined using the first-in, first-out (FIFO)
method.
Inventories
include maintenance materials, such as spare parts, fiber cable and connection
device. Inventory items are removed when they are consumed in construction
relating to maintaining or repairing the current cable distribution
network.
Accounts
Receivable
Accounts
receivable is recorded at the invoiced amount after deduction of trade
discounts, and allowance, if any.
F-10
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies (Continued)
Property, Plant and
Equipment
Property,
plant and equipment is stated at cost less accumulated depreciation and
impairment, if any. In accordance with SFAS No. 51, Financial
Reporting by Cable Television Companies (SFAS 51), the Company capitalized
costs associated with the construction of new cable transmission and
distribution facilities and the installation of new cable services. Capitalized
construction and installation costs include materials, labor and applicable
overhead costs. Installation activities that are capitalized include
(i) the initial connection (or drop) from our cable system to a customer
location, (ii) the replacement of a drop, and (iii) the installation
of equipment for additional services, such as digital cable, telephone or
broadband Internet service. The costs of other customer-facing activities such
as reconnecting customer locations where a drop already exists, disconnecting
customer locations and repairing or maintaining drops, are expensed as incurred.
Interest capitalized with respect to construction activities was not material
during any of the periods presented in the accompanying financial
statements.
Depreciation
of property, plant and equipment is computed using the straight-line method over
the following estimated useful lives of the assets: -
Years
Furniture
and office equipments
5
Headend
facilities
3-7
Motor
vehicles
4-10
Fiber
infrastructure and electric appliances
8-30
Building
and building improvements
20-40
Headend
facilities are special CATV facilities to receive and distribute cable TV
signals. Through the headend, TV signals transferred by trunk cable between
municipalities or by satellite are received and transmitted to other sub
headends.
Fiber
infrastructure means fiber cable laid underground or laid through poles across
urban and suburban areas. Cable operators also own cable pipelines and cable
poles in some areas and may lease the pipeline and poles in other
areas.
Electronic
equipment refers to distributor amplifiers, decoders, address modems, mixers and
fiber sub stations etc., which changes the fiber signal to electric signals that
can be distributed to households TV sets.
Additions,
replacements and improvements that extend the asset life are capitalized.
Repairs and maintenance are charged to operations when the expense is
incurred.
Pursuant
to SFAS No. 143, Accounting for Asset Retirement Obligations, as
interpreted by FASB Interpretation No. 47, the Company recognizes a
liability for asset retirement obligations in the period in which it is incurred
if sufficient information is available to make a reasonable estimate of fair
values.
F-11
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies (Continued)
Property, Plant and
Equipment (continued)
Asset
retirement obligations may arise from rights of way that the Company obtained
from local municipalities or other relevant authorities. Under certain
circumstances, the authorities may cause the Company to remove our network, such
as if the Company discontinued using the equipment or the authority does not
renew our access rights. The Company expects to maintain our rights of way for
the foreseeable future as these rights are necessary to remain a going concern.
In addition, the authorities have the incentive to indefinitely renew our rights
of way and in our past experience, renewals have always been granted. The
Company also has obligations in lease agreements to restore the property to its
original condition or remove our property at the end of the lease term.
Sufficient information is not available to estimate the fair value of our asset
retirement obligations in certain of our lease arrangements. This is the case in
long-term lease arrangements in which the underlying leased property is integral
to our operations. There is not an acceptable alternative to the leased property
and the Company has the ability to indefinitely renew the lease. Accordingly,
for most of the rights of way and certain lease agreements, the possibility is
remote that the Company will incur significant removal costs in the foreseeable
future, and as such, the Company does not have sufficient information to make a
reasonable estimate of fair value for these asset retirement
obligations.
The
Company periodically evaluates the carrying value of long-lived assets to be
held and used, including intangible assets subject to amortization, when events
and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash
flows from such asset is less than its carrying value. In that event, an
impairment loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset. Fair market value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to
be disposed of are determined in a similar manner, except that fair market
values are reduced for the cost to dispose.
Intangible
Assets
Intangible
assets consist of goodwill, Subscriber Base and Cable Operating
License.
Intangible
assets which are considered to have an indefinite life are not amortized but are
tested for impairment at least annually or more frequently if events or
circumstances indicate that the asset may be impaired.
Intangible
assets which have a finite life are amortized over their estimated useful lives
as follows:
Years
Subscriber
Base
10
Cable
Operating License
20
F-12
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies (Continued)
Revenue
Recognition
The
Company recognizes revenue based on the following:
Cable
Network Revenue –The Company
recognizes revenue from the basic analog and digital cable subscription services
(including installation), referred to as subscription services, over our cable
network to customers in the period the related services are provided.
Subscription services are offered for basic video service (over 90% of the total
revenue), extended basic video service, digital video service, and pay TV
service. All revenue is collected for the calendar year in advance, with the
amount collected depending on when the sale is made during the year. The balance
sheet caption service performance obligation-deferred revenue for cable network
revenue represents amounts received in advance of the service period and
totalled $1,661,311 at December 31, 2008. There was no deferred revenue at
December 31, 2007 for Cable Network Revenue.
Installation
revenue –Installation
revenue, including reconnect fees, related to these services over our cable
network is recognized as revenue in the period in which the installation
services are completed. Costs related to connections and reconnections are
recognized in the consolidated statement of operations as incurred.
Fiber
cable leasing revenue – Cable leasing revenue represents the leasing income
received relating to the fiber cable and network leasing income and is
recognized as revenue on a pro-rata basis over the contracted service period.
The balance sheet caption, service performance obligation-deferred revenue
assumed for fiber cable leasing revenue totalled $110,745 at December 31, 2007,
which is the remaining deferred income liability at the date of the acquisition
of assets from Binzhou SOE (note 4) relating to the unexpired contract service
period of the fiber cable leasing. There was no deferred revenue at December 31,2008 for Fiber Cable Leasing Revenue.
In
accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue
Arrangements with Multiple Deliverables”, when more than one element such as
equipment, installation and other services are contained in a single
arrangement, the Company allocates revenue between the elements based on
acceptable fair value allocation methodologies, provided that each element meets
the criteria for treatment as a separate unit of accounting. An item is
considered a separate unit of accounting if it has value to the customer on a
stand alone basis and there is objective and reliable evidence of the fair value
of the undelivered items. The fair value of the undelivered elements is
determined by the price charged when the element is sold separately, or in cases
when the item is not sold separately, by using other acceptable objective
evidence. Management applies judgment to ensure appropriate application of
EITF 00-21, including the determination of fair value for multiple
deliverables, determination of whether undelivered elements are essential to the
functionality of delivered elements, and timing of revenue recognition, among
others. For those arrangements where the deliverables do not qualify as a
separate unit of accounting, revenue from all deliverables are treated as one
accounting unit and recognized rateably over the term of the
arrangement.
F-13
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies (Continued)
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 “Accounting for Income Taxes”. Under the
asset and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the financial statements carrying amounts of existing assets and
liabilities and their respective tax bases and tax loss carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
Off-balance Sheet
Arrangements
The
Company does not have any off-balance sheet arrangements at December 31,2008.
Comprehensive
Income
The
Company has adopted SFAS 130, “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Components of comprehensive income (loss)
include net income (loss) and foreign currency translation
adjustments.
Foreign Currency
Translation
China
Cablecom Holdings, Ltd.’s functional currency is the US dollar. The Company’s
subsidiaries and VIEs determine their functional currencies based on the
criteria of SFAS 52 Foreign Currency Translation and have determined their
functional currency to be their respective local currency. The Company uses the
average exchange rate for the period and the exchange rate at the balance sheet
date to translate its operating results and financial position respectively. Any
translation gains (losses) are recorded in accumulated other comprehensive
income (loss) as a component of shareholders’ equity. Transactions denominated
in foreign currencies are translated into the functional currency at the
exchange rates prevailing on the transaction dates. Assets and liabilities
denominated in foreign currencies are translated into the functional currency at
the exchange rates prevailing at the balance sheet date. Exchange gains and
losses are included in the consolidated statements of income.
Translation
of amounts from RMB into United States dollars (“US$”) has been made at the
following exchange rates for the respective periods:
2.
Summary of Significant Accounting Policies (Continued)
Employee
Benefits
Full time
employees of subsidiaries of the Company in the PRC participate in a government
mandated multi-employer defined contribution plan pursuant to which certain
pension benefits, medical care, unemployment insurance, employee housing fund
and other welfare benefits are provided to employees. Chinese labour regulations
require that the subsidiaries of the Company make contributions to the
government for these benefits based on certain percentages of the employee’s
salaries. Other than the employee defined contribution plan, neither the Company
nor its subsidiaries provide any other employee benefits.
Basic Income/Loss Per
Ordinary Share
The
computation of income/loss per share is based on the weighted average number of
shares outstanding during the period presented in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings Per Share”. At December 31,2008 and December 31, 2007, the Company’s share equivalents were anti-dilutive
and excluded in the loss per share computations.
Use of
Estimates
The
preparation of the Company’s financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect 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. Actual results could differ from those estimates.
The
financial statements include some amounts that are based on management’s best
estimates and judgments. The most significant estimates relate to allowance for
uncollectible accounts receivable, inventory work in process valuation and
obsolescence, useful lives for depreciation and amortization, deferred tax
provisions and valuation allowances, purchase price allocations under SFAS 141,
contingencies and deferred revenue. These estimates may be adjusted
as more current information becomes available to the Company and any adjustment
could be significant to the accompanying financial statements.
3.
Recent Changes in Accounting Standards
SFAS 155,
“Accounting for Certain Hybrid Financial Instruments”
In
February 2006, the FASB issued FASB Statement No. 155 (SFAS 155),
“Accounting for Certain Hybrid Financial Instruments” an amendment of FASB
Statements No. 133 and 140. SFAS 155 simplifies the accounting for
certain hybrid financial instruments by permitting fair value remeasurement for
any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation. SFAS 155 also clarifies and amends
certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is
effective for all financial instruments acquired or issued after the beginning
of an entity’s first fiscal year that begins after September 15, 2006.
Earlier adoption is permitted as of the beginning of an entity’s fiscal year,
provided the entity has not yet issued financial statements, including financial
statements for any interim period for that fiscal year. This Statement was
adopted by the Company in the first quarter of fiscal 2007. The adoption of
SFAS 155 did not have a material impact on our combined results of
operations and financial condition.
F-15
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
Recent Changes in Accounting Standards (Continued)
FIN 48,
“Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109”
In June
2006, the FASB issued FASB Interpretation No. (FIN) 48, “Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement
No. 109”. This Interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109, “Accounting for Income Taxes”. This
Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation is effective for
fiscal years beginning after December 15, 2006 and was adopted by the
Company in the first quarter of fiscal 2007. The adoption of FIN 48 did not
have a material impact on our combined results of operations and financial
condition.
SFAS 157,
“Fair Value Measurements” -
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years and was adopted by the Company in the first quarter of fiscal 2008. The
adoption of SFAS 157 did not have a material impact on our combined results
of operations and financial condition.
SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” -
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS
No. 159 permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to be
measured at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15,2007 and was adopted by the Company in the first quarter of fiscal 2008. The
adoption of SFAS 159 did not have a material impact on our combined results
of operations and financial condition.
F-16
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
Recent Changes in Accounting Standards (Continued)
SFAS
141R, “Business Combinations” -
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).
SFAS 141R replaces Statement of Financial Accounting Standards
No. 141, “Business Combinations” (“SFAS 141”), although it retains the
fundamental requirement in SFAS 141 that the acquisition method of
accounting be used for all business combinations. SFAS 141R establishes
principles and requirements for how the acquirer in a business combination
(a) recognizes and measures the assets acquired, liabilities assumed and
any noncontrolling (“minority”) interest in the acquiree, (b) recognizes
and measures the goodwill acquired in a business combination or a gain from a
bargain purchase and (c) determines what information to disclose regarding
the business combination. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
Company’s 2009 fiscal year. The Company is currently assessing the potential
effect of SFAS 141R on its financial statements.
SFAS 160,
“Noncontrolling (“Minority”) Interests in Consolidated Financial Statements”
-
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling (“minority”) Interests in Consolidated Financial
Statements” (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards for the noncontrolling (“minority”) interest in a
subsidiary, commonly referred to as minority interest. Among other matters,
SFAS 160 requires (a) the noncontrolling (“minority”) interest be
reported within equity in the balance sheet and (b) the amount of
consolidated net income attributable to the parent and to the noncontrolling
(“minority”) interest to be clearly presented in the statement of income.
SFAS 160 is effective for the Company’s 2009 fiscal year. SFAS 160 is
to be applied prospectively, except for the presentation and disclosure
requirements, which shall be applied retrospectively for all periods presented.
The Company is currently assessing the potential effect of SFAS 160
on its financial statements.
SFAS 161,
“Disclosures about Derivative Instruments and Hedging Activities” -
On March19, 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 161, Disclosures about Derivative Instruments and Hedging Activities. The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. “Use and complexity of derivative instruments
and hedging activities have increased significantly over the past several years.
This has led to concerns among investors that the existing disclosure
requirements in FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, do not provide enough information about how these
instruments and activities affect the entity’s financial position and
performance,” explained Kevin Stoklosa, project manager. “By requiring
additional information about how and why derivative instruments are being used,
the new standard gives investors better information upon which to base their
decisions.” The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows.
F-17
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
Recent Changes in Accounting Standards (Continued)
SFAS 161,
“Disclosures about Derivative Instruments and Hedging Activities” -
(Continued)
FASB
Statement No. 161 achieves these improvements by requiring disclosure of the
fair values of derivative instruments and their gains and losses in a tabular
format. It also provides more information about an entity’s liquidity by
requiring disclosure of derivative features that are credit risk-related.
Finally, it requires cross-referencing within footnotes to enable financial
statement users to locate important information about derivative instruments.
Management is currently evaluating the effect of this pronouncement on financial
statements.
SFAS 162,
“The Hierarchy of Generally Accepted Accounting Principles” -
In May of
2008, FASB issued SFAS No.162, “The Hierarchy of Generally Accepted Accounting
Principles”. The pronouncement mandates that the GAAP hierarchy reside in the
accounting literature as opposed to the audit literature. This has the practical
impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP
hierarchy. This pronouncement will become effective 60 days following SEC
approval. The Company does not believe this pronouncement will impact its
financial statements.
SFAS 163,
“Accounting for Financial Guarantee Insurance Contracts-an interpretation of
FASB Statement No. 60” -
In May of
2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance
Contracts-an interpretation of FASB Statement No. 60”. The scope of the
statement is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning after
December 31, 2008. The Company does not believe this pronouncement will impact
its financial statements.
FSP EITF
99-20-01, “Amendment to the Impairment Guidance of EITF Issue No. 99-20”
-
On
January 12, 2009 FASB issued FSP EITF 99-20-01, “Amendment to the Impairment
Guidance of EITF Issue No. 99-20”. This FSP amends the impairment guidance in
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to be Held
by a Transferor in Securitized Financial Assets,” to achieve more consistent
determination of whether an other-than-temporary impairment has occurred. The
FSP also retains and emphasizes the objective of an other-than-temporary
impairment assessment and the related disclosure requirements in FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
other related guidance.
FSP EITF
99-20-01, “Amendment to the Impairment Guidance of EITF Issue No. 99-20” –
(Continued)
The FSP
will be effective for interim and annual reporting periods ending after December15, 2008, and will be applied prospectively. Retrospective application to a
prior interim or annual reporting period is not permitted. The Company does
not believe this pronouncement will impact its financial
statements.
F-18
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
Business Acquisition – Binzhou Broadcasting
Acquisition of 49% Equity
Interest in The Joint Venture - Binzhou Broadcasting
In
September 2007, the Company entered into a series of agreements and transactions
to acquire a 49% interest in the joint venture called Binzhou Broadcasting for
approximately $26.5 million.
Pursuant
to the asset transfer agreement and Framework Agreement, the local state-owned
enterprise and other partner in the joint venture, Binzhou SOE, agreed to sell
tangible and intangible, certain assets and the businesses it held in Binzhou
PRC to Binzhou Broadcasting for a total consideration of Rmb289,090,000
(equivalent to $38,505,187) in asset transfer instalments within
2008.
The total
consideration of Rmb 289,090,000 million will be partially settled by cash and a
note payable after offset the equity contribution to be made by Binzhou SOE of
Rmb5.1 million (equivalent to approximately $747,000 at December 31, 2008)
representing Binzhou SOE’s 51% equity interest in Binzhou
Broadcasting.
In
accordance with FIN 46-R, the consolidated balance sheets include 100% of the
assets to be transferred over to Binzhou Broadcasting by Binzhou SOE in 2008 as
the Company consolidates Binzhou PRC for the year ended December 31, 2008. In
accordance with the Framework Agreement, certain assets will not be transferred
and certain liabilities of Binzhou PRC were not assumed by Binzhou Broadcasting.
However, such assets and liabilities are recorded in the accompanying balance
sheets as Binzhou PRC is obligated to settle the liabilities and then receive
the reimbursement from Binzhou SOE.
The
assets and liabilities in Binzhou PRC that are part of this consolidation but
will be retained by Binzhou SOE in accordance with the Framework Agreement, are
reported under the captions in the accompanying balance sheets, “assets to be
used by noncontrolling ("minority") interest” and “liabilities to be settled by
noncontrolling ("minority") interest”.
The
following table summarizes the assets to be used by noncontrolling ("minority")
interest and liabilities to be settled by noncontrolling ("minority") interest,
reported on the accompanying balance sheet as of December 31, 2007. In
accordance with the Framework Agreement to set up the joint venture Binzhou
Broadcasting, these assets and liabilities were not transferred to or assumed by
Binzhou Broadcasting and therefore were retained or effectively settled by
Binzhou SOE in 2008.
F-19
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
Business Acquisition – Binzhou Broadcasting (Continued)
Total
assets to be used by noncontrolling ("minority") interest
$
1,883,769
Accounts
payable
$
1,819,827
Dividend
payable
73,830
Due
to related parties
6,856,090
Other
current liabilities
1,934,289
Notes
payable-bank
1,777,389
Total
liabilities to be settled by noncontrolling ("minority")
interest
$
12,461,425
Deemed
receivable from noncontrolling ("minority") interest for settlement of
certain net liabilities
$
10,577,656
Statement
of Financial Accounting Standards No. 144 “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS 144”) applies to long-lived assets to be
disposed of by a company.
It is
permissible, for financial reporting purposes, to group the current assets and
current liabilities to be disposed of or (assets to be used by noncontrolling
("minority") interest and liabilities to be settled by noncontrolling
("minority") interest) as separate line items on the accompanying balance sheets
and the statements of cash flows at December 31, 2007, as shown
above.
The
acquisition of the Binzhou PRC assets from Binzhou SOE were recorded at fair
value using the purchase method of accounting of SFAS 141 at the date of
acquisition, October 1, 2007.
Inventories
$
658,204
Property,
plant and equipment, net
19,596,915
Construction
in progress
535,182
Intangible
asset - subscriber base
11,223,334
Intangible
asset – cable operating license
7,513,902
Service
performance obligation-deferred revenue assumed
(1,022,350
)
Net
assets acquired from Binzhou SOE
$
38,505,187
Of the
$38,505,187 of acquired assets, $11,223,334 was assigned to subscriber base and
$7,513,902 was assigned to cable license, which both are subject to amortization
over their respective useful lives. The purchase price was less than
the total estimated fair market value of the assets. The excess was applied
against the tangible and intangible assets on a pro rata basis at the date of
acquisition, in accordance with FASB Interpretation No. 4 and FASB Statement No.
141, Business Combinations.
F-20
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
5.
Business
Acquisition - Hubei Chutian
In June
2008, the Company entered into a series of agreements and transactions to
acquire a 49% interest in the joint venture called Hubei Chutian for
approximately $60.4 million.
Pursuant
to the asset transfer agreement and Framework Agreement, Hubei SOE agreed to
sell tangible and intangible, certain assets and the businesses it held to Hubei
Chutian for a total consideration of Rmb640,000,000 (equivalent to
$93,306,702).
The total
consideration of $93.3 million will be partially settled by cash and a note
payable. The total consideration will be offset by a future equity contribution
to be made by Hubei SOE of Rmb51 million (equivalent to approximately $7.4
million U.S. dollars at June 30, 2008) representing Hubei SOE’s 51%
equity interest contribution to be made in 2008, in Hubei Chutian, once the
asset transfers are completed in 2008.
The
acquisition of the assets from Hubei SOE was recorded at fair value using the
purchase method of accounting of SFAS 141 at the date of acquisition, July 1,2008.
Property,
plant and equipment and other operating assets
52,390,547
Intangible
asset - subscriber base
4,553,513
Intangible
asset - cable operating license
17,087,081
Goodwill
19,275,561
Net
assets acquired from Hubei SOE
$
93,306,702
Of the
$93,306,702 of acquired assets, $4,553,513 was assigned to subscriber base and
$17,087,081 was assigned to cable license, which both are subject to
amortization over their respective useful lives.
6. Cash
and cash equivalents
Cash and cash equivalents are
summarized as follows:
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents and pledged deposits.
As of December 31, 2008 and 2007, substantially all of the Company’s cash and
cash equivalents were held by major banks located in the PRC and United States,
which management believes are high credit quality financial
institutions.
F-21
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7.
Prepaid Expenses and Advances
Prepaid
expenses and other receivables consist of the following:
The
advanced payments include unsettled offshore loan amounting to approximately
$5.2 million and bridge financing to third parties amounting to approximately
$1.2 million which would be recoverable within 2009. They also include loan
advanced to staffs, cash advanced to local branches for daily operation,
advances for purchase of materials and construction payments.
8. Inventories
Inventories
by major categories are summarized as follows:
There were no impairment provisions
made at December 31, 2008 and 2007. Depreciation expense for the years ended
December 31, 2008 and 2007 was $8,213,143 and $555,178,
respectively.
F-22
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10.
Construction in Progress
Construction
in progress represents costs incurred in connection with construction of fiber
infrastructure. The construction in progress that was completed during the year
was transferred to Property, Plant and Equipment on a monthly basis, with
monthly completion and inspection reports. Total construction in progress was
$1,036,667 and $1,242,289 at December 31, 2008 and 2007, respectively.
Capitalized interest was not significant for the years ended December 31, 2008
and 2007.
11.
Intangible Assets, Net
The
following table summarizes the lives and carrying values of the Company's
intangible assets by category, at December 31, 2008:
Useful
Life
Gross
Amount
Accumulated
Amortization
Net
Carrying
Amount
Intangibles
subject to amortization
Subscriber
base - Binzhou Broadcasting
10
$
11,223,334
$
1,402,916
$
9,820,418
Cable
operating license- Binzhou Broadcasting
20
7,513,901
469,619
7,044,282
Subscriber
base - Hubei
Chutian
10
4,553,513
227,676
4,325,837
Cable
operating license- Hubei Chutian
20
17,087,081
427,177
16,659,904
Intangibles
not subject to amortization
Goodwill
$
19,275,561
-
19,275,561
Total
$
59,653,390
$
2,527,388
$
57,126,002
Amortization
expense for the year ended December 31, 2008 was $2,152,882. Estimated
amortization expense of the existing intangible assets for the five years from
2009 are as follows:
Noncontrolling
(“minority”) interest represents Binzhou SOE and Hubei SOE’s equity
contributions made to Binzhou Broadcasting and Hubei Chutian together with their
40% proportionate share of the total economic benefits in the Joint Ventures
through December 31, 2008.
13. Income
Taxes
British
Virgin Islands
The Company was incorporated in the
British Virgin Islands and is not subject to income taxes under the current laws
of the British Virgin Islands.
Hong
Kong
China Cablecom Company Limited, a
wholly owned subsidiary of the Company, was incorporated in Hong Kong and is
subject to Hong Kong profits tax. The Company is subject to Hong Kong
taxation on its activities conducted in Hong Kong and income arising in or
derived from Hong Kong. No provision for profits tax has been made as
the subsidiary has no assessable income for the periods
presented. The applicable statutory tax rate for the year ended
December 31, 2008 is 16.5% (2007: 17.5%).
The
PRC
Enterprises income tax in the PRC is
charged at 25% (2007: 33%) of the assessable profits. The subsidiaries and the
VIEs incorporated in the PRC are subject to the PRC enterprises income tax at
the applicable tax rates on the taxable income as reported in their PRC
statutory accounts in accordance with the relevant enterprises income tax laws
applicable to foreign enterprises.
Deferred
tax liabilities relate to cable network and installation income received in
Binzhou Broadcasting that in accordance to local tax regulations is taxable over
an 8-year period. For financial reporting purposes, the installation income is
recognized in the period that the installation services are
completed.
The
provision for income taxes consists of the following:
Pursuant
to the original terms of the Asset Transfer Agreement with Binzhou SOE
(noncontrolling (“minority”) interest), Binzhou Broadcasting must complete the
payment for all assets to be transferred by installments in 2008, no later than
August 2008. Binzhou SOE subsequently agreed to extend the payment date to
December 31, 2009.
Due to
the circumstances that the legal title to these assets was transferred to
Binzhou Broadcasting after December 31, 2008, no interest has been accrued on
this note at December 31, 2008 and 2007. The note payable will bear 5% interest
per annum. The repayment terms of this note require Binzhou Broadcasting to pay
approximately Rmb59 million (equivalent to approximately $8.6 million at
December 31, 2008) within 2009, representing the current portion of this note
payable, approximately 128 million RMB (equivalent to approximately $18.7
million U.S. dollars at December 31, 2008) to be paid over a 20-year period from
the date of the assets transfer.
Pursuant
to the terms of the Framework Agreement with Hubei SOE (noncontrolling
(“minority”) interest), Hubei Chutian will make the payments of Rmb364 million
(equivalent to approximately $53.3 million U.S. dollars) and recognize Hubei
SOE’s capital contribution of Rmb51 million (equivalent to approximately $7.5
million U.S. dollar) within 6 months after Hubei SOE transfers the assets to
Hubei Chutian.
Hubei SOE
has transferred all the relevant assets to Hubei Chutian by September 30, 2008.
Hubei Chutian paid Rmb96 million (equivalent to approximately $14 million U.S.
dollars) to Hubei SOE by December 31, 2008.
Hubei
Chutian will transfer $7.5 million short-term notes payable to minority interest
as Hubei SOE’s equity contribution within 2009. The remaining short-term notes
payable will be repaid within six months.
The
repayment date of long-term notes payable of Rmb226 million (equivalent to
approximately $33.1 million U.S. dollars) is not specified in the contract and
the company do not expect to make any repayment for the long-term notes payable
within 2009. The notes are interest-free.
16.
Note payable - long-term debt
Note
payable - long-term debt consists of the following:
Principal
rolled over to convertible notes (note 16)
(4,165,067
)
-
Note
payable - net of original issue discount
$
9,481,940
$
17,095,468
Short-term
portion - net of original issue discount
9,481,940
9,617,646
Long-term
portion - net of original issue discount
$
-
$
7,477,822
In
September 2007, China Cablecom Ltd. issued an aggregate of $19.99 million in
promissory notes and 766,680 shares of Class A preferred stock to 10 investors
in exchange for proceeds of approximately $20 million (the “Bridge
Financing”). Each share of Class A preferred stock was converted into
one share of the Company’s ordinary shares in April 2008. The proceeds
from the Bridge Financing were used to fund the acquisition price of Binzhou
Broadcasting (Note 4) and for working capital purposes. The promissory notes
bear interest at a stated interest rate of 10% and are collateralized by a
pledge of approximately 650,000 ordinary shares of the Company, held by the
Company’s Chairman. The Company allocated the proceeds based on the
relative fair value of the promissory notes and the Class A preferred stock, the
resulting discount on the promissory notes is being amortized using the
effective interest method to interest expense over the term of the promissory
notes. For the year ended December 31, 2008 approximately
$2,383,000 was amortized and charged to interest expense. In addition, the
interest expense on these
promissory notes approximated $1,359,000 for the year ended December 31, 2008,
resulting in total interest expense of approximately $3,742,000. Upon the merger
between China Cablecom Ltd. and Jaguar, 50% of the promissory notes plus accrued
interest was repaid in April 2008. The remaining balance of the promissory notes
plus accrued interest was due in April 2009 (Note 24).
F-26
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
17.
Convertible notes
On May 9,2008, China Cablecom Holdings, Ltd. issued convertible notes with a principal
(“face”) value of $43,175,000, along with 1,524,994 shares of ordinary shares
(labeled “incentive shares” in the agreement) to several
investors. The gross proceeds of this transaction were $30,000,000
(“purchase price”), consisting of $25,793,283 cash and $4,206,717 from the
cancellation of the principal amount and accrued interest of promissory notes
issued by China Cablecom Ltd. in September 2007.
Interest
on the convertible notes is due at maturity at 9.99% per annum. The
interest through maturity has been prepaid and is equal to the difference
between the face value of the convertible notes and the gross
proceeds. In substance, the note is a zero coupon note (except
for the shares to be issued as described in the next paragraph) with a maturity
value of $43,175,000 issued for $30,000,000 with a $13,175,000 discount. The
convertible notes mature on May 9, 2011 at which point the face value of the
notes are due. The notes are convertible, at the holders’ option,
into the Company’s ordinary shares, which have a par value of $0.0005 per share,
at a per share conversion price of $9.5.
If there
is a principal amount outstanding on the tenth business day following the first
anniversary of the closing date of the convertible notes, the Company will issue
to the holders of the convertible notes additional incentive shares of up to
124,994 shares, in proportion to the initial principal amount. An
additional pro-rata portion of up to 299,997 incentive shares will be issued by
the Company to the holders if a principal amount remains outstanding on the
tenth business day following the second anniversary of the closing
date.
Through
May 9, 2009, the Company has the right, subject to certain conditions, to redeem
the convertible notes for 78.75% of the outstanding principal amount being
redeemed. After May 9, 2009, the Company can redeem the convertible
notes for 100% of the purchase price being redeemed and imputed interest on the
purchase price being redeemed.
In total,
$9,683,712 of the $30,000,000 gross proceeds was allocated to the incentive
shares and added to the discount on the convertible notes that had been created
by the prepaid interest, resulting in $20,316,288 as the net balance originally
recorded for the convertible notes.
The
convertible feature creates an intrinsic value as a result of the fair value of
the ordinary shares from the assumed conversion of the notes being greater than
the allocated value of the convertible notes as of the issuance
date. Such feature is normally characterized as a “beneficial
conversion feature” (“BCF”). Pursuant to Emerging Issues Task Force
(“EITF”) Issue No. 98-5, “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratio” and
EITF No. 00-27, “Application of EITF Issue No. 98-5 to Certain
Convertible Instruments”, the intrinsic value of the embedded BCF of $8,542,791
is recorded as additional debt discount from the face amount of the convertible
notes on May 9, 2008, increasing the total discount on the debt to $31,401,503
for a net $11,773,497 payable recorded for the convertible notes. In
the period May 9, 2008 to December 31, 2008, $4,910,547 of the discount was
amortized to interest expense on the effective interest method, resulting in a
remaining discount of $26,490,956 and net convertible notes principal of
$16,684,044. The amortization is calculated on the assumption that
the additional shares will be issued at the May 9, 2008 per share
value. Amortization will be adjusted prospectively if the actual
values on the issuance dates differ from the May 9, 2008 per share value and the
actual number of shares issue is different.
F-27
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
17.
Convertible notes (Continued)
As part
of the transaction, cash of 7% of the cash portion of the purchase price was
paid as broker’s fee and $150,000 paid as due diligence fee. In
addition, on the first and second anniversaries of the closing date, up to
$150,000 and $200,000 will be paid as an additional due diligence fee and will
be recorded as deferred financing cost when the fee is due. The
amount of the due diligence fee payable in connection with the first and second
anniversaries of the closing date, will be paid in the same proportion as the
amount of principal amount outstanding on each such anniversary date compared to
the original principal amount. Issuance costs totalled $1,868,960, of which
$603,282 was allocated to the incentive shares and recorded as a reduction of
paid-in capital. $1,265,678 was recorded as deferred financing costs and is
being amortized over the three-year term of the convertible notes using the
effective interest method. The amortization is calculated on the
assumption that the additional due diligence fees will be paid on the first and
second anniversaries. In the period May 9, 2008 to December 31, 2008,
amortization expense was $232,663, resulting in unamortized deferred
financing costs of $1,033,015 as of December 31, 2008.
18.
Stockholders’ Equity
On the
completion of Jaguar’s redomestication merger with the Company and the
concurrent business combination merger with China Cablecom Holdings, Ltd. in
April 2008, the Company issued 2,066,680 ordinary shares and 5,716,357 ordinary
shares, par value $.0005, to the previous shareholders of China Cablecom
Holdings, Ltd. and Jaguar, respectively.
In May
2008, the Company issued 1,524,994 ordinary shares as the incentive shares to
the convertible notes subscribers (Note 17).
In July
2008, the Company issued 320,000 ordinary shares, to an entity owned by the
Company’s executive chairman, as the fee to the finder of Hubei
project.
In
October 2008, certain warrants holders exercised 49,100 shares with total
proceeds of $245,500.
19.
Statutory Reserves
The
Company’s statutory reserves are comprised as follows:
Under the
PRC regulations, the Company’s PRC subsidiaries and VIEs may pay dividends only
out of their accumulated profits, if any, determined in accordance with the PRC
GAAP. In addition, these companies are required to set aside at least 10% of
their after-tax net profits each year, if any, to fund the statutory reserves
until the balance of the reserves reaches 50% of their registered
capital. The statutory reserves are not distributable in the form of
cash dividends to the Company and can be used to make up cumulative prior year
losses.
F-28
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
20.
Employee Benefits
The
Company contributes to a state pension scheme organized by municipal and
provincial governments in respect of its employees in the PRC. The expense
related to this plan, was $1,076,430 and $35,527 for the years ended December31, 2008 and 2007, respectively.
21.
Operating Risk
Concentrations of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk primarily consist of cash and cash equivalents, and accounts
receivable. As of December 31, 2008, substantially all of the Company’s cash and
cash equivalents were managed by several financial institutions that management
believes are high credit quality financial institutions. The Company has
approximately $26 million in cash, bank deposits and money market funds in the
PRC, which constitute approximately 90% of total cash and cash equivalents.
Historically, deposits in Chinese banks are secured due to the state policy on
protecting depositors’ interests. However, the PRC promulgated a new Bankruptcy
Law in August 2006, which went into effect on June 1, 2007, which contains a
separate article expressly stating that the State Council may promulgate
implementation measures for the bankruptcy of Chinese banks based on the
Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go into
bankruptcy. In addition, since the PRC’s concession to WTO, foreign banks have
been gradually permitted to operate in the PRC and have been severe competitors
against Chinese banks in many aspects, especially since the opening of Renminbi
business to foreign banks in late 2006. Therefore, the risk of bankruptcy of
those banks in which the Company has deposits has increased. In the event of
bankruptcy of one of the banks, which holds the Company’s deposits, it is
unlikely to claim its deposits back in full since it is unlikely to be
classified as a secured creditor based on the PRC laws.
Foreign exchange
risk
Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible into foreign currencies. On January 1, 1994, the PRC government
abolished the dual rate system and introduced a single rate of exchange as
quoted daily by the People’s Bank of China. However, the unification of the
exchange rates does not imply the convertibility of RMB into US$ or other
foreign currencies. All foreign exchange transactions continue to take place
either through the People’s Bank of China or other banks authorized to buy and
sell foreign currencies at the exchange rates quoted by the People’s Bank of
China. Approval of foreign currency payments by the People’s Bank of China or
other institutions requires submitting a payment application form together with
suppliers’ invoices, shipping documents and signed contracts.
Company’s operations are
substantially in foreign countries
All of the Company provided cable
networks businesses are in the PRC. The Company’s operations are subject to
various political, economic, and other risks and uncertainties inherent in the
PRC. Among other risks, the Company’s operations are subject to the risks of
restrictions on transfer of funds; export duties, quotas, and embargoes;
domestic and international customs and tariffs; changing taxation policies;
foreign exchange restrictions; and political conditions and governmental
regulations.
F-29
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
21.
Operating Risk (Continued)
Restrictions on transfer of
assets out of the PRC
Dividend
payments by the Company, are limited by certain statutory regulations in the
PRC. The Company shall not pay any dividend without receiving first prior
approval from the Foreign Currency Exchange Management Bureau. Dividend payments
are restricted to 85% of profits, after tax.
22.
Onshore and offshore loan agreements with Rich Dynamic Limited
The
Company advanced $38,000,000 to Rich Dynamic Limited, a Hong Kong company
(“RDL”) in 2008, according to two loan agreements respectively on June 10, 2008
and July 29, 2008 (“Offshore Loan Agreements”), whereby China Cablecom agreed to
extend loans to RDL. These loans were utilized by RDL as payment to a
shareholder of Chengdu Chuanghong Jinsha Real Estate Co., Ltd. (“Chengdu
Chuanghong”), for the purpose of acquiring 60% of the equity interest in this
company. RDL’s loan repayment obligations under the Offshore Loan Agreements
were secured under share pledge agreements, in which RDL agreed to pledge its
equity interest in Chengdu Chuanghong to China Cablecom as security for RDL’s
performance of its loans repayment obligations under the Offshore Loan
Agreements.
The
shareholder of RDL and JYNT entered into two loan agreements respectively on
June 10, 2008 and July 29, 2008 (“Onshore Loan Agreements“), whereby the
shareholder of RDL agreed to extend two loans to JYNT which amount in aggregate
to Rmb254,600,000. By the end of December 31, 2008, the Company received
Rmb224,000,000 from the shareholder of RDL.
The loans
under the Offshore Loan Agreements have been partially settled together with the
loans under the Onshore Loan Agreements. The unsettled offshore loan balance
amounting to approximately $5,200,000 is included in the prepaid expenses and
advances as at December 31, 2008.
23.
Related Party Transactions
Except as
disclosed in Note 18, the Company had no significant related party transactions
carried out with related parties during the financial reporting periods shown in
the accompanying financial statements.
24.
Segment reporting
Management
considers the Company to have one business segment, consisting of the cable
network services and support. The information presented in the consolidated
statement of operations reflects the revenues and costs associated with this
business segment that management uses to make operating decisions and assess
performance.
25.
Management plan with respect to working capital deficit
As of
December 31, 2008, the Company did not have sufficient resources to repay
obligations due under the notes payable to Hubei SOE and Binzhou SOE. In
addition, the Company’s obligation under the Bridge Financing note payable of
approximately $10 million was due in April 2009. The Company is currently
negotiating with the bridge financing providers and the joint venture partners
to extend and restructure the debts. The Company also is planning an equity
offering when the condition of capital market is favourable. There can be no
assurances that the debt holders will extend or restructure the debt nor that
additional equity can be raised.
F-30
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
26.
Subsequent event
Subsequent
to year end, a subsidiary, China Cablecom Limited, received from one of its
lenders a notice of default due to China Cablecom Limited’s failure to make its
required principal and interest payment of approximately $2.2 million due under
a promissory note as scheduled April 19, 2009. Accordingly the lender gave
notice that the April 2009 principal and interest payment and all other
obligations under the promissory note held by such lender were immediately due
and payable together with related penalties.
As a
result, the Company is in default under the bridge note which consists of
outstanding principal amount together with any unpaid and accrued interest
(aggregating to approximately $11 million on the due date including the
approximately $2.2 million owed to the lender). The Company are working to
resolve this matter by negotiating a comprehensive debt restructuring
package.
F-31
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
Report
of Independent Registered Public Accounting Firm
Combined
Balance Sheets
F-34
Combined
Statements of Operations
F-35
Combined
Statements of Changes in Equity
F-36
Combined
Statements of Cash Flows
F-37
Notes
to the Combined Financial Statements
F-38
- F-51
F-33
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
TO
THE MEMBERS AND BOARD OF DIRECTORS
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
We have
audited the accompanying combined carve-out balance sheets of Hubei Chutian
Radio & Television Information Network Co., Ltd. (17 Branches) (the
“Company”) as of December 31, 2007 and 2006 and the related combined carve-out
statements of operations, combined carve-out changes in equity and combined
carve-out cash flows for each of the years in the two-year period ended December31, 2007. These combined carve-out financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these combined carve-out financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (the United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
combined carve-out financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined carve-out financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined carve-out financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the combined carve-out financial statements referred to above present
fairly, in all material respects, the financial position of Hubei Chutian Radio
& Television Information Network Co., Ltd. (17 Branches) as of December 31,2007 and 2006 and the results of the combined carve-out operations and the
combined carve-out cash flows for each of the years in the two-year period ended
December 31, 2007 in conformity with accounting principles generally accepted in
the United States of America.
Hubei
Chutian Radio & Television Information Network Co., Ltd. (‘‘Hubei SOE’’) was
organized in 2002 to be a holding company, in order to aggregate the local
state-owned enterprises (‘‘SOE’’) in the Hubei province of China. Hubei SOE is
authorized by the Peoples Republic of China (‘‘PRC’’) government to control the
distribution of cable TV services owned by local branches of the State
Administration of Radio, Film and Television (‘‘SARFT’’) in Hubei
Province.
Since
incorporation, the Company has established more than 20 branch cable entities in
Hubei. The Company intends to enter into a joint venture agreement with a
potential investor. The assets and operations of 17 branches will be
transferred to the joint venture which including Xiantao, Qianjiang, Jingshan,
Qujialing, Zhongxiang, Shayang, Yingshan, Longganhu, Guangshui, Tongcheng,
Gong'an, Dangyang, Yuan'an, Jingxiang, Yicheng, Baokang and Shengnongjia. The
branches to be transferred to the joint venture are referred to through the
financial statements as the "17 Branches".
NOTE
2 - BASIS OF PRESENTATION
Basis
of preparation of financial statements
The
accompanying combined financial statements represent the combined financial
position, results of income, changes in equity and cash flows of the 17 cable
entities (the "17 Branches").
The
accompanying combined financial statements are presented in accordance with
accounting principles generally accepted in the United States of America
(‘‘GAAP’’). The combined financial statements reflect the assets, liabilities,
revenues and expenses directly attributable to the 17 Branches, as well as
expense allocations deemed reasonable by management, to present the combined
financial position, results of operations, changes in equity and cash flows of
each of the 17 Branches on a stand-alone basis. The financial information
included herein may not necessarily reflect the combined financial position,
results of operations, changes in equity and cash flows of the 17 Branches in
the future or what they would have been had each of the 17 Branches been
separate, stand-alone entities during the periods presented.
Use
of estimates
The
preparation of the combined financial statements of the 17 Branches requires
management to make estimates and assumptions that affect 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. Actual results could differ from those
estimates. The financial statements include some amounts that are based on
management’s best estimates and judgments. These accounts and estimates include,
but are not limited to, the valuation of accounts receivable, other receivables,
inventories, deferred revenue, deferred income taxes and the estimation on
useful lives of property, plant and equipment and allocation of expenses. These
estimates may be adjusted as more current information becomes available, and any
adjustment could be significant.
F-38
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Inventories
Inventories
consist of raw material, parts and accessories. Inventories are stated at the
lower of cost or market value. Cost is determined using the first-in, first-out
(FIFO) method.
Raw
materials include maintenance materials, such as spare parts, fiber cable and
connection devices. Such items are removed from inventory when the items are
consumed in construction, relating to maintaining or repairing the current cable
distribution network.
(b)
Accounts
receivable
Accounts
receivable are recorded at the invoiced amount after deduction of trade
discounts and allowances, if any, and do not bear interest. The allowance for
doubtful accounts is management's best estimates of the amount of probable
credit losses in the existing accounts receivable. Management determines the
allowance based on historical write-off experience, customer specific facts and
economic condition. Management believes that all trade receivables are
collectible within its normal operating cycle.
(c)
Bad
debt provision
The
Company makes specific bad debts provision on an individual basis for
third-party receivables that are distinctively different from any other
receivable in recoverability. A general provision is made for the remaining
third-party receivables that have not been specifically provided
for.
(d)
Property,
plant and equipment
Property
and equipment is stated at cost less accumulated depreciation. In accordance
with SFAS No. 51, Financial Reporting by Cable Television Companies
(SFAS 51), the Branches capitalize costs associated with the construction
of new cable transmission and distribution facilities and the installation of
new cable services. Capitalized construction and installation costs include
materials, labor and applicable overhead costs. Installation activities that are
capitalized include (i) the initial connection (or drop) from our cable
system to a customer location, (ii) the replacement of a drop, and
(iii) the installation of equipment for additional services, such as
digital cable, telephone or broadband Internet service. The costs of other
customer-facing activities such as reconnecting customer locations where a drop
already exists, disconnecting customer locations and repairing or maintaining
drops, are expensed as incurred. Interest capitalized with respect to
construction activities was not material during any of the periods
presented.
F-39
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont'd)
(d)
Property,
plant and equipment (.../Cont'd)
Depreciation
of property, plant and equipment is computed using the straight-line method over
the following estimated useful lives of the assets:
Years
Furniture
and fixtures
5
Headend
facilities
8
Motor
vehicles
8
Fiber
infrastructure and electric appliances
8 -
12
Building
and building improvements
5 -
20
Headend
facilities are special CATV facilities to receive and distribute cable TV
signals. Through the headend, TV signals transferred by trunk cable between
municipalities or by satellite, are received and transmitted to other sub
headends.
Fiber
infrastructure meaning fiber cable laid underground or laid through poles across
urban and suburb areas. Cable operators also own cable pipelines and cable poles
in some areas and may lease the pipeline and poles in other areas.
Electronic
equipment refers to distributor amplifiers, decoders, address modems, mixers and
fiber sub stations etc., which changes the fiber signal to electric signals that
can be distributed to households TV sets.
Additions,
replacements and improvements that extend the asset life are capitalized.
Repairs and maintenance expenses are charged as an expense to operations when
incurred.
Pursuant
to SFAS No. 143, Accounting for Asset Retirement Obligations, as
interpreted by FASB Interpretation No. 47, we recognize a liability for
asset retirement obligations in the period in which it is incurred, if
sufficient information is available to make a reasonable estimate of fair
values.
Asset
retirement obligations may arise from rights of way that the Branches obtain
from local municipalities or other relevant authorities. Under certain
circumstances, the authority can cause us to have to remove our network, such as
if we discontinue using the equipment or the authority does not renew our access
rights. We expect to maintain our rights of way for the foreseeable future as
these rights are necessary to remain a going concern. In addition, the
authorities have the incentive to indefinitely renew our rights of way and in
our past experience, renewals have always been granted. We also have obligations
in lease agreements to restore the property to its original condition or remove
our property at the end of the lease term. Sufficient information is not
available to estimate the fair value of our asset retirement obligations in
certain of our lease arrangements. This is the case in long-term lease
arrangements in which the underlying leased property is integral to our
operations, there is not an acceptable alternative to the leased property and we
have the ability to indefinitely renew the lease. Accordingly, for most of our
rights of way and certain lease agreements, the possibility is remote that we
will incur significant removal costs in the foreseeable future, and as such, we
had not recorded any asset retirement obligations.
F-40
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont'd)
(e)
Construction
in progress
Construction
in progress represents property, plant and equipment under construction and
pending installation and is stated at cost.
No
provision for depreciation is made on construction in progress until the asset
is completed and placed in service. When the assets concerned are placed in
service, the costs are transferred to property, plant and equipment and
depreciated in accordance with the Company policy.
(f)
Impairment
of long-lived assets
The
Company periodically evaluates the carrying value of long-lived assets to be
held and used, including intangible assets subject to amortization, when events
and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than its carrying
value. In that event, a loss is recognized based on the amount by
which the carrying value exceeds the fair market value of the long-lived
asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk
involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair market values are reduced for
the cost to dispose.
(g)
Impairment
of property and equipment
SFAS 144
requires that we periodically review the carrying amounts of our property and
equipment and our intangible assets (other than goodwill and indefinite-lived
intangible assets) to determine whether current events or circumstances indicate
that such carrying amounts may not be recoverable. If the carrying amount of the
asset is greater than the expected undiscounted cash flows to be generated by
such asset, an impairment adjustment is recognized. Such adjustment is measured
by the amount that the carrying value of such assets exceeds their fair value.
We generally measure fair value by considering sale prices for similar assets or
by discounting estimated future cash flows using an appropriate discount rate.
For purposes of impairment testing, long-lived assets are grouped at the lowest
level for which cash flows are largely independent of other assets and
liabilities. Assets to be disposed of are carried at the lower of their
financial statement carrying amount or fair value less costs to
sell.
F-41
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont'd)
(h)
Intangible
assets
Intangible
assets represent land use rights of the Branches. Land use rights are stated at
cost, representing the fair value at the time of acquisition. Fair values are
supported by valuation reports prepared by independent valuators. After
acquisition, the Company does not make registration for the land from Bureau of
Land Resources. Intangible assets are stated at cost less accumulated
amortization and impairment losses if any. Amortization expense is recognized on
the straight-line basis over the estimated useful life of the intangible assets
as follows:
Years
Land
use right
70
(i)
Income
taxes
The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 “Accounting for Income Taxes”. Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between
the financial statements carrying amounts of existing assets and liabilities and
loss carry forwards and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
(j)
Revenue
recognition
Cable
Network Revenue- The Branches recognize revenue from basic analog and digital
cable subscription services (including installation) in the period the related
services are provided. Subscription services are offered for basic video
service, extended basic video service and digital video service. All revenue is
collected for the calendar year in advance, with the amount collected depending
on when the sale is made during the year. Amounts collected in advance are
initially recorded as deferred revenue (a liability) and are recognized as
income over the service period.
Installation
revenue- Installation revenue (including reconnect fees) related to
these services over our cable network, is recognized as revenue in the period in
which the installation occurs, to the extent these fees are equal to or less
than direct selling costs which are expensed as incurred. To the extent
installation revenue exceeds direct selling costs, the excess revenue is
deferred and amortized over the average expected subscriber life. Costs related
to reconnections and disconnections are recognized in the combined statement of
operations as incurred.
Subscriber
advance payments - Payments received in advance for distribution services are
deferred and recognized as revenue when the associated services are
provided.
F-42
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont'd)
(k)
Off-balance
sheet arrangements
The
Company does not have any off-balance sheet arrangements.
(l)
Comprehensive
income
The
Company has adopted SFAS 130, “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Components of comprehensive income (loss)
include net income and foreign currency translation adjustments.
(m)
Foreign
currency translation
Assets
and liabilities of foreign operation are translated at the rate of exchange in
effect on the balance sheet dates, income and expenses are translated at the
average rate of exchange prevailing during the year. The related translation
adjustments are reflected in "Accumulated other comprehensive income" in the
stockholders' equity section of our balance sheets. As of December 31, 2007 and
2006, the accumulated foreign currency translation gain was USD$399,577 and
USD$81,882, respectively. Foreign currency gains and losses resulting from
transactions are included in earnings.
(n)
Post-retirement
and post-employment benefits
The
Company contributes to a state pension scheme in respect of its employees. Full
time employees of the Company in the PRC participate in a government mandated
multi-employer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to employees. Chinese labour regulations require
that the Company make contributions to the government for these benefits based
on certain percentages of the employee's salaries. Other than the employee
defined contribution plan, the Company has not provided any other employee
benefits.
(o)
Recently
issued accounting standards
In July
2006, the FASB issued FASB Interpretation No. (FIN) 48, “Accounting for
Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109”. This Interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109, “Accounting for Income Taxes”. This
Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation is effective for
fiscal years beginning after December 15, 2006 and was adopted by the
Company in the first quarter of fiscal 2007. The adoption of FIN 48 did not
have a material impact on our combined results of operations and financial
condition.
F-43
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont'd)
(o)
Recently
issued accounting standards
(.../Cont'd)
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact of adopting
SFAS 157 on its combined financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to
measure many financial instruments and certain other items at fair value. SFAS
No. 159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The adoption of SFAS No. 159 did not have a material
impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No.
141 (R) requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. SFAS No. 160 clarifies that a
noncontrolling interest in a subsidiary should be reported as equity in the
consolidated financial statements. The calculation of earnings per share will
continue to be based on income amounts attributable to the parent. SFAS No. 141
(R) and SFAS No. 160 are effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early adoption is prohibited. The
Company has not yet determined the effect on our consolidated financial
statements, if any, upon adoption of SFAS No. 141 (R) or SFAS No.
160.
F-44
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont'd)
(o)
Recently
issued accounting standards
(.../Cont'd)
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51 (“SFAS 160”),
which establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No.
160 clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS No. 160 also requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. SFAS No.
160 also provides guidance when a subsidiary is deconsolidated and requires
expanded disclosures in the consolidated financial statements that clearly
identify and distinguish between the interests of the parent’s owners and the
interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company is currently evaluating the impact this
statement will have on its financial position and results of
operations.
In
February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of
FASB Statement No. 157 (“FSP 157-2”), which delays the effective date of SFAS
157 for nonfinancial assets and nonfinancial liabilities. Therefore, the Company
has delayed application of SFAS 157 to its nonfinancial assets and nonfinancial
liabilities, which include assets and liabilities acquired in connection with a
business combination, goodwill, intangible assets and asset retirement
obligations recognized in connection with final capping, closure and
post-closure landfill obligations, until January 1, 2009. The Company is
currently evaluating the impact of SFAS 157 for nonfinancial assets and
liabilities on the Company's financial position and results of
operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (“SFAS 161”), which amends and expands the disclosure
requirements of FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities (“SFAS 133”), with the intent to provide users of
financial statements with an enhanced understanding of: (a) how and why an
entity uses derivative instruments; (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
SFAS 161 requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative instruments. This
statement applies to all entities and all derivative instruments. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company has not yet determined the effect
on our consolidated financial statements, if any, upon adoption of SFAS No.
161.
F-45
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
Cash
represents cash at bank and cash in hand as of December 31, which summarized as
follows:
2007
2006
USD
USD
Cash
at bank
$
1,682,431
$
1,764,902
Cash
in hand
250,826
227,407
$
1,933,257
$
1,992,309
Renminbi
is not a freely convertible currency and the remittance of funds out of the PRC
is subject to the exchange restrictions imposed by the PRC
government.
NOTE
5 - ACCOUNTS RECEIVABLE, NET
The
Company performs ongoing credit evaluations of its customers' financial
conditions. Management determines the allowance based on historical write-off
experience, customer specific facts and economic condition. The accounts
receivable, net is as follows:
2007
2006
USD
USD
Accounts
receivable
$
356,055
$
234,377
Less:
allowances for doubtful accounts
(83,555
)
(11,999
)
$
272,500
$
222,378
NOTE
6 – PREPAYMENTS AND OTHER RECEIVABLES
Prepayments
and other receivables consist of the following:
2007
2006
USD
USD
Temporary
advance
$
336,015
$
352,739
Prepayment
8,143
-
Other
receivables,net
895,811
1,226,573
$
1,239,969
$
1,579,312
The other
receivable and temporary advance are mainly the loan advance to staffs, cash
advance to local branchs for daily business operations, advance for purchase of
raw materials and advance for construction payments.
Prepayments
and other receivables are stated net of an allowance for doubtful accounts of
USD$157,826 and USD$88,877 at December 31, 2007 and 2006,
respectively.
F-46
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
The
Company reviewed the carrying value of property, plant, and equipment for
impairment. The factors considered by management in performing this assessment
include current operating results, trends, and prospects, as well as the effects
of obsolescence, demand, competition, and other economic factors. There was no
impairment provision at December 31, 2007
and 2006.
Depreciation
expense, related to our property, plant and equipment, was USD$3,889,433 and
USD$2,749,705 for the year ended December 31, 2007 and 2006,
respectively.
F-47
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
Amortization
expense for the years ended December 31, 2007 and 2006 was USD$3,364 and
USD$3,209, respectively.
NOTE
10 - CONSTRUCTION IN PROGRESS
Construction
in progress represents costs incurred in connection with construction of fiber
infrastructure. The construction in progress were completed and charged on
monthly basis with monthly completion and inspection reports. Total construction
in progress was USD$345,020 and USD$500,638 at December 31, 2007and
2006, respectively.
NOTE
11 - ACCRUED EXPENSES AND OTHER PAYABLES
Accrued
liabilities and other payables as of December 31, 2007 and 2006 consist of the
following:
2007
2006
USD
USD
Accrued
expenses
$
421,686
$
460,544
Accruals
for salaries and welfare
551,742
379,636
Other
payables
3,165,283
4,464,752
Receipts
in advance
683,648
652,171
$
4,822,359
$
5,957,103
Other
payables are related to cash advance from others, guarantee deposits received
from staffs, short term loan due to third party and set-top TV rental deposit
received from users.
Receipt
in advance represent the cable network service fees received from customers in
advance.
F-48
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
The
Company uses the asset and liability method, where deferred tax assets and
liabilities are determined based on the expected future tax
consequences of temporary differences between the carrying amounts of assets and
liabilities for financial and income tax
reporting purposes.
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets as of December 31, 2006 and 2007 are presented
below.
2007
2006
USD
USD
Deferred
tax assets
Provisions
for bad debts
$
73,371
$
22,886
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible or
utilized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon an assessment of the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are tested whether they are deductible
or can be utilized, management believes that the deferred tax assets as of
December 31, 2007 are more likely than not that it will not be
realized.
The
amount of the deferred tax assets considered realizable, however, could be
reduced in the near term if estimates of future taxable income are
reduced.
NOTE
13 - AMOUNT DUE TO HUBEI CHUTIAN
The
amount due is unsecured, non-interest bearing and without fixed term of
repayment.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
In the
normal course of business, the Company is subject to contingencies, including
legal proceedings and claims arising out of the business that relate to a wide
range of matters, including among others, product liability. The Company records
accruals for such contingencies based upon the assessment of the probability of
occurrence and, where determinable, an estimate of the liability. Management
considers many factors in making these assessments including past history,
scientific evidence and the specifics of each matter. As management has not
become aware of any product liability claims arising from any incident over the
last two years, the Company has not recognized a liability for product liability
claims.
F-49
HUBEI
CHUTIAN RADIO & TELEVISION INFORMATION NETWORK CO., LTD.
All
companies, being a domestic enterprise in the PRC, were subject to enterprise
income tax at 33%, in which 30% for national tax and 3% for local tax, of the
assessable profits as reported in the statutory financial statements prepared
under China Accounting regulations.
The
following two entities, being a center in the PRC, were exempted from enterprise
income tax:
(1)
Hubei
Chutian Radio & Television Information Network Co., Ltd - Xiantao
Branch
(2)
Hubei
Chutian Radio & Television Information Network Co., Ltd - Dangyang
Branch
The
Companies received cable network subscription income and installation income
mainly from urban and rural area. According to the income tax regulations of
PRC, the net income arising from cable network subscription and installation of
rural area are exempt from enterprise income tax for three years from January 1,2007 to December 31, 2009.
Income
tax expense for the years ended December 31, 2007 and 2006 consist of the
following:
The
amount of general and administrative expenses for the years ended December 31,2007 and 2006 was USD$5,224,119 and USD$3,812,870, respectively. The significant
components of general and administrative expenses for the years ended December31, 2007 and 2006 are as follows:
2007
2006
USD
USD
Depreciation
$
711,646
$
612,346
Entertainment
542,725
344,998
Salaries
and wages
1,582,263
1,009,260
Welfare
and allowance
319,490
224,026
$
3,156,124
$
2,190,630
NOTE
18 - SALES AND MARKETING EXPENSES
The
amount of sales and marketing expenses for the years ended December 31, 2007 and
2006 was USD$8,169,038 and USD$5,676,668, respectively. The significant
components of sales and marketing expenses for the years ended December 31, 2007
and 2006 are as follows:
2007
2006
USD
USD
Depreciation
$
3,177,787
$
2,137,359
Entertainment
268,083
263,847
Repair
and maintenance
489,893
235,001
Salaries
and wages
3,017,647
2,249,872
$
6,953,410
$
4,886,079
NOTE
19 - PENSION AND OTHER POSTRETIREMENT BENEFITS
Pursuant
to the relevant laws and regulations in the PRC, the Company participates in
defined contribution retirement plans for its employees arranged by a
governmental organization. The Company makes contributions to the retirement
plan at the applicable rate based on the employees' salaries. The required
contributions under the retirement plans are charged to the statements of
operations on an accrual basis. The Company's contributions totaled USD$592,319
and USD$436,973 for the years ended December 31, 2007 and 2006
respectively.
The
Company has no other obligation to make payments in respect of retirement
benefits of its employees.
F-51
Dates Referenced Herein and Documents Incorporated by Reference