Annual Report of a Foreign Private Issuer — Form 20-F Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 20-F Annual Report of a Foreign Private Issuer HTML 1.26M
2: EX-12.1 Statement re: Computation of Ratios HTML 16K
3: EX-12.2 Statement re: Computation of Ratios HTML 16K
4: EX-13.1 Annual or Quarterly Report to Security Holders HTML 11K
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨ Yes x No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
¨ Yes x No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
¨ Large Accelerated filer
¨ Accelerated 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
¨ International Financial Reporting Standards as issued by the International Accounting Standards Board
¨ Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
¨ Item 17 ¨ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of the securities under a plan confirmed by a court.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
57
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
58
PART II
59
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
59
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
59
ITEM 15.
CONTROLS AND PROCEDURES
59
ITEM 16.
[RESERVED]
60
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT.
60
ITEM 16B.
CODE OF ETHICS.
60
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
60
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
61
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
61
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
61
ITEM 16G.
CORPORATE GOVERNANCE.
61
PART III
62
ITEM 17.
FINANCIAL STATEMENTS
62
ITEM 18.
FINANCIAL STATEMENTS
62
ITEM 19.
EXHIBITS
62
ii
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 British Virgin Islands subsidiary of China Cablecom Holdings, and the entity, along with China Cablecom Company Limited, a wholly-owned Hong Kong subsidiary of China Cablecom (“HKZ”), 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.
3
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 years ended December 31, 2008, 2009 and 2010 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 period from October 1, 2007 to December 31, 2007 and the selected historical balance sheet data as of December 31, 2007 have been derived from the audited financial of the
Company not included in this annual report.
The following selected historical statements of income data for the year ended December 31, 2006 and for the period from January 1, 2007 to September 30, 2007 and the selected historical balance sheet data as of December 31, 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.
Certain factors that affect the comparability of the information set forth in the following table are described in the “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
1,921
1,998
9,618
9,482
-
-
Accounts payable
9,624
8,736
2,461
8,872
17,504
21,403
Note payable – non-controlling interest
-
-
17,218
55,420
27,627
26,786
Liabilities to be settled by minority interest
-
-
12,461
-
-
-
Total current liabilities
12,543
13,895
43,247
83,067
57,575
66,439
Convertible notes, net of discounts
-
-
-
16,684
-
-
Senior secured notes, net of discounts
-
-
-
-
7,973
10,634
Junior secured notes, net of discounts
-
-
-
-
17,063
16,159
Unsecured notes, net of discounts
-
-
-
-
5,135
4,218
Notes payable – non-controlling interest, net of current portion
-
-
17,047
51,778
64,348
58,644
Notes payable, net of discount and current portion
-
-
7,478
-
-
Total liabilities
12,543
13,895
67,772
151,528
152,094
156,093
Total shareholders equity
11,297
10,917
1,724
31,547
38,677
23,586
5
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 2010 at US$1.00: RMB6.6227, which was the middle rate on December 31, 2010. The published middle rate on June 27, 2011 was US$1.00: RMB6.4426. 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 2006, 2007, 2008, 2009 and 2010:
Year
Renminbi Average(1)
2006
7.9579
2007
7.6040
2008
6.9451
2009
6.8314
2010
6.6227
(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.
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.
7
We must make significant intercompany loans to Binzhou Broadcasting 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 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 Binzhou Broadcasting, which in turn is dependent on the significant level of intercompany debt we have extended to Binzhou Broadcasting. 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, January 31, 2009, December 31, 2009 and ultimately to June
30, 2010. 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 will be jeopardized. Based on a government decree in an initiative in 2010 of “forming one consolidated broadcasting network within one province”, the Shandong party committee and government announced plans on the development and reform of provincial Radio and TV broadcasting network, in such that, the municipal, county (county level city or district) Radio and TV broadcasting network shall freeze headcounts and assets and maintain the current organization to suspend any pending financing activities. In this regard, a government document issued by Shandong SARFT regarding the “freezing of investment and head count” was provided to us by Bingzhou SARFT / Binzhou SOE. They explained to us that they cannot sign any amendment or agreement with us during the “freezing”
period and all agreements would be frozen until later notice. As a result, our Binzhou JV has temporarily suspended any current obligations until further notification from the government While we have received several extensions from Binzhou SOE and anticipate amending the Framework Agreement once the “freezing” is lifted, our control and economic interest over Binzhou Broadcasting did not change before and after June 30, 2010, nor was there any change in Binzhou Broadcasting’s board composition, senior management, or its Article of Association.
We will be required to seek additional financing and to amend or modify the terms of our existing debts to meet the obligations upon the lifting of the freezing described above. Although we have orally agreed previous extensions with the SOE, there can be no assurance that future negotiations will result in the amendment of the asset transfer agreements involved or prevent us or our independent public accounting firm from concluding that consolidation of the financial results of Binzhou Broadcasting is no longer appropriate under US GAAP. In addition, there can be no assurance that any additional financing will be available on acceptable terms or at all. Absent amendment of the framework agreement governing the establishment of Binzhou Broadcasting, any such failure to secure additional financing by us will create a default under the terms of the joint venture agreement between Jinan Youxiantong Network Technology Co., Ltd.
(“JYNT”) and Binzhou SOE and likely result in us no longer being entitled to consolidate the financial position and results of operations of Binzhou Broadcasting.
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.
8
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.
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 and Hubei Chutian have applied for and have acquired approval for a subscription fee raise from the Price Bureau in year 2009 and 2005, respectively, there is no guarantee that any future partnership networks will succeed in getting approval for subscription fee raises for digital television services.
9
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.
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.
10
Failure to comply with PRC regulations relating to registration requirements for employee stock ownership plans or share option plans may subject PRC plan participants or us to fines or other legal or administrative sanctions.
On December 25, 2006, the People’s Bank of China issued the Administration Measures on Individual Foreign Exchange Control. These measures set forth the requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or capital account. The related implementation rules were issued by SAFE on January 5, 2007. The implementation rules specify approval requirements for certain capital account transactions, including a PRC citizen’s participation in the employee stock ownership plan or stock option plan of an overseas publicly-listed company. On March 28, 2007, SAFE promulgated the Foreign Exchange Administration Application Procedure for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option
Plan of an Overseas Listed Company, or the “Stock Option Rule”. Under these regulations, PRC citizens who are granted stock options or restricted share units, or issued restricted shares by an overseas publicly listed company, are required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures. As we have granted certain stock options to our PRC employees, we and our PRC employees who have been granted stock options are subject to these regulations. We are now in the process of applying for such registration with the local SAFE. Compliance with these regulations has not had a material adverse effect on our financial condition or results of operations. However, if we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may face sanctions imposed by SAFE or any other PRC government authorities, including restriction on foreign currency conversions
and additional capital contributions to our PRC subsidiaries.
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 244,000,000.
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.
11
Being a foreign private issuer exempts 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:
·
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.
Techniques employed by manipulative short sellers in Chinese small cap stocks may drive down the market price of our ordinary shares
Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. While traditionally these disclosed shorts were limited in their
ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firm and independent research analysts. These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base. Issuers with business operations based in China and who have limited trading volumes and are susceptible to higher volatility levels than U.S. domestic large-cap stocks, can be particularly vulnerable to such short attacks.
12
These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts. In light of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed shorts will continue to issue such reports.
While we intend to strongly defend our public filings against any such short seller attacks, often times we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy – oftentimes blogging from outside the U.S. with little or no assets or identity requirements – should we be targeted for such an attack, our stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.
A recent SEC investor bulletin regarding reverse mergers may drive down the market price of our Ordinary Shares.
On June 9, 2011, the SEC issued an investor bulletin in which it explained the process by which company becomes a public company by means of a reverse merger, described the potential risks of investing in a reverse merger company and detailed recent enforcement actions taken by it against certain reverse merger companies. In particular the investor bulletin raised specific concerns with respect to foreign companies that access the U.S. markets through the reverse merger process, as we did. The SEC investor bulletin could lead investors in our ordinary shares to sell their shares and may cause other investors not to invest in us, thus driving down the market price of our ordinary shares or making it more difficult for us to raise funds in the future.
Risks Relating to our Corporate Structure
We rely on contractual arrangements with Jinan Youxiantong Network Technology Co., Ltd. (“JYNT”) and its shareholders to exercise control over the management and operations of JYNT. These contractual arrangements may not be as effective as direct ownership in providing us with control over JYNT. JYNT and its shareholders may fail to take certain actions required for our business or follow our instructions to comply with the relevant PRC regulations despite their contractual obligations to do so. On the other hand, if we had direct ownership of JYNT, we would be able to directly exercise our rights as a shareholder to effect changes in the board of directors of JYNT, which in turn could effect changes at the management level, subject to any applicable fiduciary obligations on the board of directors.
13
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 55% economic interest in the financial results of Hubei Chutian. JYNT and its shareholders are generally speaking not permitted to terminate the contractual agreements prior to the expiration date. The shareholders of JYNT, however, may not act in the best interest of our company or perform their contractual obligations.
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, JYNT and its shareholders may fail to take certain actions required for our business or follow our instructions to comply with the relevant PRC regulations despite their contractual obligations to do so. On the other hand, if we had direct ownership of JYNT, we would be able to directly exercise our rights as a shareholder to effect changes in the board of directors of JYNT, which in turn could effect changes at the management level, subject
to any applicable fiduciary obligations.
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, are found to be in violation of any existing PRC laws or regulations, the relevant regulatory authorities would have broad discretion to punish us for such violation, including, but not limited to the following:
·
levying fines;
·
confiscating income; and/or
·
requiring a restructure of ownership or operations.
Any failure by JYNT’s shareholders to perform their obligations under our contractual arrangements with them may have a material adverse effect on our business.
JYNT and its shareholders may fail to take certain actions required for our business or in that case, our business operations will be significantly disrupted, and our business and financial condition and operations will be materially and adversely affected.
14
If JYNT and/or its shareholders fail to perform their obligations under their respective agreements with us, we may have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, exercising the pledge by JNYT’s shareholders of their equity in JNYT, which may not be effective.
All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in certain other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over JYNT or its subsidiaries, and our ability to conduct our business may be adversely affected.
We have not yet registered the equity pledges made by JYNT’s shareholders of their equity in JYNT, which means that these pledges have not been officially validated. Accordingly, the contractual arrangements among the two nominee shareholders, JYNT, and our subsidiaries, HZNT and HKZ, designed to control JYNT’s operations and extract its profits, may be undermined.
PRC Property Law provides that all equity pledges under equity pledge agreements must be registered to be validated. Our subsidiary, HZNT, has entered into equity pledge agreements with the two nominee shareholders, Pu Yue and Liang Yuejing, whereby Pu Yue and Liang Yuejing are obligated to promptly take necessary steps to register and perfect the equity pledges to secure the service fees under the Exclusive Service Agreements and the loans under the Loan Agreements between HZNT and them. HZNT is now coordinating with Pu Yue and Liang Yuejing to prepare various equity pledge registration application documents (including the Chinese versions of the equity pledge agreements and other application forms) in accordance with the
requirements of the local competent branch of the State Administration for Industry and Commerce. However, until the equity pledges are registered and perfected, we may not enforce these pledges in PRC courts, and accordingly the contractual arrangements among the two nominee shareholders, JYNT, and our subsidiaries, HZNT and HKZ, designed to control JYNT’s operations and extract its profits, will be undermined. Moreover, it is possible that, in the absence of a validated pledge, the two nominee shareholders may pledge or otherwise dispose of their equity interests in JYNT to third parties.
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 or a disagreement regarding the proper accounting for these arrangements with regulatory authorities or otherwise, 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 55% 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.
In order to consolidate the two joint ventures Binzhou Broadcasting and Hubei Chutian under applicable accounting literature, we concluded that we have the power to direct the activities of each joint venture and that we have the obligation to absorb losses and right to receive benefits that could be significant to the relevant joint venture. We made this determination based on the facts that we have the obligation to absorb 49% of the losses and has right to receive 49% of any residual benefits of each joint venture. Furthermore, JYNT receives 11% of the net profits of Binzhou Broadcasting and 6% of the net profits of Hubei Chutian through exclusive service agreements. In addition, JYNT has a veto right regarding the appointment of the general manager of Binzhou Broadcasting and Hubei Chutian, the right to appoint their chief financial officer, and an obligation to provide continued financial resources for investment and
capital expenditures for the future expansion of their 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. After performing an evaluation subsequent to the adoption of ASU 2009-17 (ASU 2009-17), which had the effect of modifying the accounting principles involved in this analysis subsequent to our initial acquisition of both joint ventures, we continue to believe the consolidation of Binzhou Broadcasting and Hubei Chutian is appropriate. Should the Securities and Exchange Commission (“SEC”) or any other relevant regulatory authority disagree with our conclusion regarding the application of US GAAP, however, we may be required to account for the joint ventures under the “equity method” of accounting, which
would have the effect of substantially decreasing the net assets (and liabilities) on our balance sheet and net income we reflect from the operations of each joint venture. Any such change may also require that we retroactively apply the equity method of accounting to our consolidated financial statements, requiring the restatement of our financial statements and substantial amendments to the reports we file with the SEC.
16
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.
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.
17
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 and HKZ may each be classified as a “resident enterprise” of the PRC. Such classification could result in PRC tax consequences to us, China Cablecom and HKZ and our non-PRC shareholders.
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.
On April 22, 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 domestically controlled 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, it is still unclear whether PRC tax authorities would require us, China Cablecom and/or HKZ to be treated as a PRC resident enterprise.
18
If the PRC tax authorities determine that we, China Cablecom and HKZ are each a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we, China Cablecom and HKZ may be subject to enterprise income tax at a rate of 25% on our or their 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 our PRC subsidiaries through China Cablecom and HKZ, our Hong Kong sub-holding company, assuming we, China Cablecom and HKZ 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 PRC tax is imposed on dividends we pay to our non-PRC shareholders and gains derived by our non-PRC shareholders from transferring our ordinary shares, if such income is considered PRC-sourced income by the relevant PRC tax authorities.
If any such PRC income tax applies to a non-PRC shareholder, such shareholder may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty and/or a dedution for such PRC tax against such shareholder’s domestic taxable income or a foreign tax credit in respect of such PRC tax against such share 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 deductions or 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.
19
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.
20
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 British Virgin Islands 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.
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.
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.
21
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 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.
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,
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 2010, we do not anticipate that we will be treated as a PFIC in 2010. Notwithstanding the foregoing, our view that we will not be treated as a PFIC in 2010 is not free from doubt because of, among other things, our significant cash position and uncertainties relating to the actual values of the other assets of us and our subsidiaries in 2010. 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 2010 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—U.S. Holders—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.
On April 9, 2008, pursuant to the terms of an Agreement and Plan of Merger, dated October 30, 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.
23
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.
As a result of the Redomestication Merger and Business Combination, China Cablecom Holdings succeeded to the registration of Jaguar’s common stock under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which was suspended upon its listing on the NASDAQ Capital Market and re-instated through the filing of a registration statement on Form 8-A on July 28, 2011.
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 $19 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 pre payment. 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.
Debt Restructure and Private Financings, October 2009
Debt Restructure
Due to a default in repayment of principal and interest on certain of its outstanding promissory notes in April 2009, the Company negotiated a comprehensive restructuring of its outstanding capital markets debt obligations which closed in October 2009.
24
Pursuant to the Restructuring, the Company entered into a waiver agreement and consent with all note holders pursuant to which the note holders agreed to exchange approximately $47 million in aggregate principal amount of current debt obligations for an aggregate of $5.5 million in unsecured notes, $18 million in secured notes and 65,799,286 newly issued shares of Series A Convertible Preferred Shares, each share convertible into one ordinary share and representing in aggregate approximately 66.2% of the Company’s ordinary shares outstanding after the closing of the Restructuring and the private financing referred to below.
Until fourteen months after the issue date, principal on the new notes is subject to cancellation in the event that (i) the Company’s ordinary shares close at a daily volume weighted average price greater than $0.85 for 30 consecutive days with daily dollar volume of 500,000 or more and all of the conversion shares issuable upon conversion of the Series A Preferred Shares could have been sold by the noteholder during such 30 day period; or (ii) noteholders convert the Series A Convertible Preferred Shares into ordinary shares within 14 months after the issue date, such cancellation in proportion to the amount converted. Since the Restructuring, an aggregate of $1,840,965 in principal amount of the secured notes and $365,205 in principal amount of the unsecured notes has been cancelled as a result of such conversions.
The unsecured and secured notes are due April 2016 and bear non-cash interest at 5% per annum payable semi-annually in the form of the Company’s Ordinary Shares valued at 95% of the volume-weighted average price for the 10 trading days prior to the required payment date. Amortizing principal repayments with respect to both the unsecured and secured notes commence in 2012.
Private Financing
In October 2009, the Company also completed a private placement of $33 million in aggregate principal amount of 12% Senior Secured Notes (the “New Notes”) due October 2015. The holders of New Notes have been issued 23,158,080 Series B Convertible Preferred Shares, representing approximately 23.3% of the Company’s total outstanding ordinary shares after the Restructuring and issuance of the New Notes. Immediately following the issuance, the Company redeemed approximately $13.9 million of the New Notes, resulting in approximately $19.1 million of New Notes remaining outstanding.
The New Notes are due October 2015 and bear cash interest at 12% per annum payable semi-annually commencing October 2012. Amortizing principal repayments with respect to the New Notes were commence in 2014 as a result of the redemption described above.
The net proceeds from the private financing were used to satisfy the Company’s remaining obligations to the Hubei SOE under its supplementary framework agreement.
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:
25
·
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”). In September 2009, the Framework Agreement was revised by Supplement Agreement II. China Cablecom reduced it’s economic interest to 55% in 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.
26
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 6% 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 55% of the economic benefits of the joint venture through its 6% fee of net profit combined with its 49% ownership interest.
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 Room 458, North Building, Wenjiao Plaza No. 1 Qingnian Dong Road, Jinan, People’s Republic of China 250001. The telephone number of our principal executive office is (86) 531 8712-9000.
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 networks 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 companies organized by SOEs owned directly or indirectly by local branches of SARFT to serve as holding companies 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% and 55% of the results of operations, financial position and cash flows of Binzhou Broadcasting and Hubei Chutian respectively by us. These contractual arrangements with Binzhou SOE have an initial term of 20 years. The parties may mutually seek to extend these agreements upon the expiry of the current term. The contractual agreements with Hubei SOE have a fixed term of 30 years and China Cablecom agreed to transfer the remaining economic interest in the Joint Venture to Hubei SOE after the 30 years period for free.
27
We are not aware of any legal impediments that may affect the renewal of the agreements with Binzhou SOE and to sign the new agreements with Hubei Chutian after the 30 years period 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 with Binzhou SOE and sign new agreements with Hubei SOE after the first 30 year co-operation period. Binzhou Broadcasting operates a cable network with 477,439 paying subscribers as of December 31, 2010 and Hubei Chutian operates a cable network with approximately 1,270,253 paying subscribers as of December 31, 2010 . 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 December 31, 2010, China had 175 million cable subscribers, including 86 million digital TV subscribers. We expect to benefit from the following additional trends affecting the PRC and the Chinese cable TV industry:
·
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. According to the provisions of SARFT, China will carry out digital broadcast and television roundly in 2010, and will halt analog TV programs in 2015. With the approaching deadline, the pace of conversion to DTV speeds up in China.
·
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.
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, 2010, the two networks we operate served 1,747,692 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 $1.86 to $2.33 for analog service and $3.72 to $4.35 for digital service.
28
Landing service for satellite TV broadcasters. Satellite broadcasters in China have no network and must pay a ‘‘landing fee’’ to local cable operators.
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, 2010, the networks we operate had 26,095 broadband households, representing 1.5% of service penetration.
We operate cable network systems through Binzhou Broadcasting and Hubei Chutian as summarized in the table below:
Binzhou Broadcasting
Hubei Chutian
Location
Shandong province, China
Hubei province, China
Number of networks
5
23
Subscribers (2010/2009)
477,439/482,016
1,270,253/1,191,679
Revenues (2010/2009)
$11.5 million/$10.5 million
$42.4 million/$35 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.
29
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 4.5 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 22 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 and Wuhan, the capital city of Hubei Province.
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.
On January 13, 2010 the State Council of People’s Republic of China announced a decision to accelerate the convergence of three networks: telecom, broadcasting and internet. As a result, cable operators will face competition from the PRC telecom companies for broadcasting revenue, although the Company management believes this also provides opportunities for cable operates to tap the broadband access and VoIP markets. China Cablecom believes the 3-Net convergence plan will not have immediate impact on its business since the plan sets a 3-year trial run in limited sites for convergence service to firm up relevant regulatory policies and framework. Given the fact that content is still under the control of SARFT, management believes telecom operators are unlikely to attract a lot of IPTV subscribers
with the same content now provided by cable operators.
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.
30
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.
·
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.
31
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
District & county
Province SARFT
City SARFT (e.g.
SARFT (e.g.
Central SARFT
(e.g. Shandong)
Binzhou, Jining)
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
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.
32
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 has arranged for two nominees, Pu Yue, our CEO, and his wife, Liang Yuejing, to hold 95% and 5% equity interest in JYNT respectively on behalf of our subsidiaries, which structure is subject to a series of contractual arrangements. China Cablecom Company Limited and HZNT, through these contractual arrangements with Pu
Yue, Liang Yuejing and JYNT, contractually control and enjoy the economic benefits derived from JYNT. Please see “PRC Corporate Structure”.
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.
33
Note:
① Pu Yue and Liang Yuejing own respectively 95% and 5% equity in JYNT.
②HKZ and HZNT can contractually control JYNT through the contractual arrangement. Please see “Organizational Structure”.
34
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 following is a summary of the currently effective contracts among our wholly owned subsidiaries HZNT and HKZ, our VIE JYNT, and the VIE’s two nominee shareholders, Pu Yue and Liang
Yuejing.
l
Loan Agreements: pursuant to loan agreements dated June 30, 2007, HKZ extended loans of RMB 484,500 and 25,500 respectively to Pu Yue and Liang Yuejing. Upon the occurrence of an event of default or otherwise, HKZ may at its discretion, issue a repayment notice to Pu Yue and/or Liang Yuejing requesting repayment of all or any portion of the loans (as applicable). Pu Yue and Liang Yuejing may only repay the loan by transferring their equity interests in JYNT to HKZ or HKZ’s designees within 5 business days.
l
Exclusive Service Agreements: pursuant to exclusive service agreements between JYNT and HZNT, JYNT engages HZNT to be its sole and exclusive provider of management, consulting, training and technical services. Service fees are to be paid monthly by JYNT to HZNT in an amount equal to JYNT’s net profits minus the profit to be retained by JYNT as determined by a reputable CPA agreed to by both parties. The exclusive service agreements shall continue indefinitely unless terminated by HZNT with 30 days’ prior written notice or by a non-breaching party after the breaching party has not rectified the breach for within 30 days of its receipt of notice from the non-breaching party. As of December 31, 2010, JYNT has not paid any service fees to HZNT, since JYNT, as a passive company, had not received any dividends from the two joint ventures, Binzhou Broadcasting and Hubei Chutian
by the end of 2010. On the contrary, JYNT incurred a loss of $63,900 in fiscal year 2010.
l
Equity Option Agreements: pursuant to equity option agreements dated July 20, 2007, the shareholders of JYNT have granted HZNT an exclusive and irrevocable option to purchase all or part of their equity interests in JYNT at any time. The option may only be terminated by mutual consent or at the direction of HZNT. HZNT may exercise this option at any time until it has acquired all equity interests of JYNT and it can set off the purchase price against the loan repayment under the loan agreement. The shareholders of JYNT covenant that they will not approve any plan by JYNT to distribute dividends or otherwise seek to influence JYNT’s management, and must approve any action requested by HZNT in writing to the extent permitted by law.
l
Equity Pledge Agreements: pursuant to equity pledge agreements entered into between HZNT and each of Pu Yue and Liang Yuejing, respectively, dated July 20, 2007, Pu Yue and Liang Yuejing pledge their entire equity interests in JYNT to guarantee JYNT’s payment obligation under the exclusive service agreement between JYNT and HZNT, and the loan agreement, and their performance of their own obligations under the Option Agreement. HZNT is entitled to (i) collect dividends and other distributions, if any, arising from the pledged equity interests; and (ii) in an event of default, freely sell the pledged equity interests and collect the proceeds therefrom. Without HZNT’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 (iii) make any material adjustment or change to JYNT’s business or operations. We have duly signed the equity pledge agreements, but have not yet registered the equity pledges under the equity pledge agreements with the local competent branch of the State Administration for Industry and Commerce. Thus, the equity pledge agreements are contractually binding but the equity pledges thereunder have not yet been validated. Please see “Risk Factor - Risks Relating to Our Corporate Structure”.
l
Power of Attorney: pursuant to a power of attorney signed by Pu Yue and Liang Yuejing, Pu Yue and Liang Yuejing appointed HKZ’s designee as their attorneys-in-fact to exercise all voting rights as shareholders of JYNT, including the ability to vote as a shareholder of JYNT, sell or transfer their equity interest in JYNT and designate and appoint the directors, general manager, chief financial officer and other senior officers of JYNT. This power of attorney is effective until the earlier of 2027 or the termination of
the loan agreement between HKZ and the two nominee shareholders.
35
Property, plant and equipment
D. Binzhou Broadcasting has 310 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 include 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.
We invested $30 million, through vendor financing and operating cash flows, in 2010 on upgrading the networks and on digital TV set-up-boxes (“STB”) and related electronic equipment to convert 300,000 existing subscribers to digital subscribers.
ITEM 4A.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
China Cablecom Ltd., a British Virgin Islands company, was incorporated on October 6, 2006. On April 9, 2008, China Cablecom Ltd. and Jaguar Acquisition Corporation (“Jaguar”), a special purpose acquisition company, completed both the previously announced redomestication merger of Jaguar in the British Virgin Islands as China Cablecom Holdings and the concurrent business combination merger with China Cablecom Ltd.
In accordance with the merger agreement, the following occurred with respect to the outstanding Class A Preference shares and common shares of China Cablecom Ltd. and the common shares and warrants of Jaguar:
i)
all of the Class A preference shares and common shares of China Cablecom Ltd. were cancelled and each registered owner of outstanding preference shares and common shares of China Cablecom Ltd. automatically become the registered owner of one and 0.6842 shares of our ordinary shares, respectively.
ii)
all of the common shares of Jaguar were cancelled and each registered owner of outstanding common shares of Jaguar automatically become the registered owner of one share of our ordinary shares.
iii)
all the outstanding warrants were assumed by the Company and became exercisable for our ordinary shares at the original exercise price, US$ 5.00.
China Cablecom Ltd. is the 100% shareholder of China Cablecom Company Limited, formerly known as Hong Kong Zhongyouxiantong Co., Ltd. (“HKZ”), incorporated in Hong Kong on May 22, 2007. HKZ 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 FASB ASC 810-10:
·
Jinan Youxiantong Network Technology Co., Ltd. (“JYNT”) incorporated under the laws of the PRC on July 16, 2007.
·
Binzhou Broadcasting and Television Information Network Co., Ltd. (“Binzhou Broadcasting”) incorporated under the laws of the PRC on September 10, 2007.
36
·
Hubei Chutian Video Communication Network Co., Ltd. (“Hubei Chutian”) incorporated under the laws of the PRC on May 15, 2008.
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. JYNT had only contributed $10 million to Binzhou Broadcasting and there was a further capital contribution of $16.5 million which had been due but not yet settled. 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.
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.
On June 16, 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.
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’’).
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.
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 received 60% of economic benefits of Hubei Chutian.
On September 30, 2009 JYNT and Hubei SOE signed a supplement to the Framework which reduces the service fee from 11% to 6% of the net profits and the effective economic benefit received by JYNT to 55%.
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.
37
Fiscal year ended 2010 compared to fiscal year ended 2009
Revenue
During the fiscal year ended December 31, 2010, our revenues were $53.9 million, which is an increase of $8.3 million, or 18%, compare to the same period of 2009. The increase was attributable to the organic growth of paying subscribers and the increase of average ARPU resulting from rapid digitalization of television services. As of December 31, 2010, the Company had more than 1.7 million paying subscribers, who pay on average $1.67 to $2.45 per month.
Cost of revenue
Cost of revenue for the year ended December 31, 2010 was $40 million, an increase of $10.1 million or 34%, from $29.9 million for the year ended December 31, 2009. The increase was attributable to higher depreciation cost on set-up-boxes for digital subscribers.
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 of employees, including temporary staff.
Gross Profit
As a percentage of net sales, gross margin was 26% for the year ended December 31, 2010 compared to 34% for the year ended December 31, 2009.
The decrease in gross profit percentage is primarily due to the higher depreciation costs with the addition of electronic equipment (including set-up-boxes) with shorter estimated useful life than other property, plant and equipment.
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, 2010 were $24.5 million, an increase of $1.9 million from $22.6 million for the year ended December 31, 2009. 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.
Amortization expenses for the year ended December 31, 2010 were $3.2 million, including amortization of intangible assets of $2.8 million and amortization of deferred financing costs of $0.4 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.
Interest expenses
Interest expense for the year ended December 31, 2010 was $4.4 million, a decrease of $5.6 million from $10 million for the year ended December 31, 2009. The significant decrease of interest expenses was a result of the debt restructures completed in 2009.
38
Impairment loss on intangible assets
We performed a valuation by an external appraiser on the intangible assets on December 31, 2010. An impairment loss of $13.3 million was charged to the income statement.
Loss from operations before non-controlling interest
Loss from operations before non-controlling interest for the year ended December 31, 2010 was $27 million, a decrease of $29.2 million, from $56.2 million for the year ended December 31, 2009. China Cablecom suffered a one time loss on intangible assets impairment of $13.3 million. In 2009, the Company incurred a loss on debt extinguishment of $39.7 million
Liquidity and Capital Resources
As of December 31, 2010, the Company had cash and cash equivalents in the amount of $14.5 million, of which $13.6 million were Binzhou Broadcasting and Hubei Chutian’s working capital, which are sufficient for their operation.
As of December 31, 2010, the Company had cash and cash equivalents approximately $0.9 million available for investment and corporate overhead. As we discussed under the risk factor - We must make significant intercompany loans to Binzhou Broadcasting to preserve our consolidation of the operating results of Binzhou Broadcasting for financial reporting purposes, we are required to seek additional financing and to amend or modify the terms of our existing debt to meet the obligations of providing loan financial to Binzhou Broadcasting. The amount of the required financing is approximately $16.5 million.
$4.2 million unsecured notes with 5% annual interest rate. The repayment was scheduled in 8 installments to be paid every 6 months starting from October 15, 2012
l
$16.2 million secured notes with 5% annual interest rate. The repayment was scheduled in 7 installments to be paid every 6 months starting from October 15, 2012.
l
$19.1 million ($10.7M after discount) Senior Secured Notes with 12% annual interest rate. The repayment was scheduled in 6 installments to be paid every 6 months starting from October 15, 2012.
l
$19.3 million due to Binzhou SOE which is to be paid over a 20-year period.
l
$66.1 million due to Hubei SOE of which $26.8 million is repayable on demand and $39.3 million does not have a fixed repayment date.
Capital expenditures
Capital expenditures, excluding the assets acquired under the assets transfer agreements with Binzhou SOE and Hubei SOE, for 2010 and 2009 were approximately $35 million and $28 million. The vast majority of these expenditures related to digital set-up boxes, 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, 2010 and the effect those commitments are expected to have on our liquidity and cash flow in future periods:
ASC 810. We adopted ASC 810 on January 1, 2010, which amended the consolidation guidance for variable-interest entities include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. The adoption did not have an impact on the Company’s financial statements.
In February 2010, the FASB issued Accounting Standards Update 2010-09 “Subsequent Events (Topic 855)” allowing SEC filers to remove the date through which subsequent events have been reviewed. ASU 2010-09 became effective upon issuance, and the adoption of this guidance did not have a material impact on CTHG Group’s financial statements.
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.
40
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and senior management
Our board of directors and executive officers are as follows:
Mr. Olympitis resigned from his position as an independent director of the Company on June 27, 2011.
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.
41
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.
Richard Eu was our Independent Director from May 2008 until June 2011. 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 was our independent director from October 2007 until June 2011. 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.
Emmanuel J. Olympitis was our independent director from October 2009 until June 2011. Mr. Olympitis currently serves as Executive Chairman of Petrocapital Resources Plc., a UK-listed company with investments in the oil sector. He is also a non-executive Director of Canoel International Energy Ltd., a Toronto-listed exploration oil and gas company. From 1999 to 2004, Mr. Olympitis was formerly Executive Chairman of Pacific Media Plc., a London Stock Exchange listed retail, media, and e-commerce company focused on Asia. Previously, he held numerous executive positions including Group Chief Executive of Aitken Hume International Plc., a London Stock Exchange listed banking, insurance and fund management group. Subsequently, Mr. Olympitis was Executive Chairman and Managing Director of Johnson & Higgins Ltd., during which time the
company won the Queens Award for Exports in 1994. Mr. Olympitis’ background includes investment banking where he was appointed head of all Eurodollar syndicated loan activities for Bankers Trust International Limited in London. There he served as Executive Director where he managed international initiatives of several billion dollars into South America, Greece and Eastern Europe. More recently, he has held positions as a non-executive Director and member of Audit Committees on several UK-listed companies including Matica Plc., Secure Fortress Plc., Bulgarian Land Development Plc., Norman 95 Plc., and served as Chairman for Bella Media Plc.
42
Mark Nordlicht brings over 20 years of experience in the investment industry and is responsible for oversight of all trading, asset allocation and risk management of Platinum Partners Value Arbitrage Fund, L.P. From 1997 to 2001, Mr. Nordlicht was a Founder and Managing Partner of West End Capital, a New York based money management firm. From 1991 to 2000, Mr. Nordlicht founded and acted as general partner for Northern Lights Trading, a proprietary options firm based in New York which employed traders in the cotton, coffee, natural gas, crude oil, gold, and silver option trading pits. Mr. Nordlicht graduated from Yeshiva University with a B.A. in Philosophy.
Robi Hartman has over 27 years as entrepreneur and executive in leading technology companies and vast experience in public markets, fundraising, M&A, finance and accounting. Most recently, Mr. Hartman serves as Chief Executive Officer for West End Technology Investments Ltd., a private advisory and investment company. From 2004 to 2010, he was the Vice-Chairman of Teledata Networks, Ltd., a leading global provider of innovative Access Network solutions and products for telecom service providers. From 1999 to 2006, he was founder and Chairman of StoreAge Networking Technologies, Ltd. and from 1998 to 2008 he was Chairman and Chief Executive Officer of IIS Intelligent Information Systems Ltd. (IISLF.OB), a company engaged in the development, manufacturing, marketing and service of data communication and intelligent peripheral products targets at International Business Machines (“IBM”). Mr. Hartman
has an MBA from Bentley College.
Jacob Weiss, CPA, comes from a background of 30 years in the financial field spanning across high-tech, consumer goods and services. He has served as Chief Financial Officer and Executive Vice President of Power Paper Ltd., a leading provider of micro-electric patch solutions to the cosmetic and pharmaceutical industries. From 2006 to 2007, he was a Chief Financial Officer to Executive Financial Services Consultants, providing high-level financial, legal and fundraising services. Mr. Weiss was Chief Financial Officer and Executive Vice President of SmarTeam Corporation, Ltd. a subsidiary of Dassault Systemes (NASDAQ: DASTY), a multinational multibillion software sales company. He received his BA and MBA from Bar-Ilan University in Israel.
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.
Our directors who are also our employees receive compensation in the form of salaries, housing allowances, other allowances and benefits in kind in their capacity as our employees. Our directors do not receive any compensation in their capacity as directors in addition to their salaries and other remunerations as members of our management team. We pay their expenses related to attending board meetings and participating in board functions.
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, 2010 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.
43
·
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.
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
Kerry Propper
October 2007
Mark Nordlicht
November 2010
Robi Hartman
November 2010
Jacob Weiss
November 2010
Board Committees
Due to the recent resignations of Emmanuel J. Olympitis, Richard Eu and Shan Li, we currently do not have an Audit Committee, Nominating and Corporate Governance Committee or Compensation Committee.
44
D.
Employees
We had 3,568 and 3,564 employees as of December 31, 2009 and 2010, respectively. As of December 31, 2010, we had 3,564 employees, including 2,182 in customer service, 403 in maintenance and engineering and 979 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 27, 2011 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.
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.
All directors and executive officers as a group (six individuals)
1,493,415
10.9
%
Platinum Partners Value Arbitrage Fund L.P.(8)
1,000,498
7.3
%
* Less than one percent
(1)
Unless otherwise indicated, the business address of each of the individuals is Suite 4612, Tower 1, Plaza 66, No.1266 Nanjing West Road, 200040, People’s Republic of China.
(2)
The business address for Mr. Ng is 80 Broad Street, 5th Floor, New York, NY10004.
(3)
After giving effect to delivery of 130,000 ordinary shares by the shareholder pursuant to the terms of a settlement agreement. See “Settlement Agreement with China Broadband”. Excludes 378,889 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 2,506,667 shares that can be earned in connection with the grant of the Performance Shares.
45
(4)
The business address for Mr. Pu is Room 458, North Building, Wenjiao Plaza, No. 1 Qingnian Dong Road, Jinan, People’s Republic of China, 25000.
(5)
The business address of Mr. Propper is Chardan Capital Markets, LLC, 17 State Street, Suite 2575, New York, New York10004.
(6)
Includes 15,833 shares issuable upon exercise of warrants. Does not include 66,667 shares that can be earned in connection with the grant of the Performance Shares.
(7)
The business address for Mr. Nordlicht is 152 West 57th Street, 4th Floor, New York, New York10019. Includes 39,029 ordinary shares held by Platinum Partners Liquid Opportunity Master Fund L.P. (“PPLO”) and 1,000,498 ordinary shares owned by Platinum Partners Value Arbitrage Fund LLP (“PPVA”). Mr. Nordlicht is the Chief Investment Officer of PPLO and PPVA and may be deemed to be a beneficial owner of all the ordinary shares directly or indirectly held by PPVA and PPLO. This information was derived from a Schedule 13D filed on March 7, 2011.
(8)
The business address for Platinum Partners Value Arbitrage Fund LLP (“PPVA”) is 152 West 57th Street, 4th Floor, New York, New York10019. The number of shares beneficial owned by PPVA exclude ordinary shares underlying 10,991,685 Series A Convertible Preferred Shares and 1,169,600 Series B Convertible Preferred Shares. The holder of such Preferred Shares may not convert any of the Preferred Shares to the extent that such conversion would result in the holder and its affiliates together beneficially owning more than 4.99% of the outstanding ordinary shares, except on 61 days’ prior written notice to the
company that the holder waives such limitation. Platinum Management (NY) LLC, as the investment manager, and Platinum Partners Value Arbitrage, LP, as the general partner are deemed to beneficially own the ordinary shares owned by PPVA. Mr. Mark Nordlicht, one of our directors, as the controlling person of PPVA is deemed to be the beneficial owner of the ordinary shares owned by PPVA and has the sole power to vote or direct the vote of the shares owned by PPVA. This information was derived from a Schedule 13D filed on March 7, 2011.
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 June 26, 2008, we issued 106,666 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 and was paid a broker fee of $1,400,000. Kerry Propper, a member of our board of directors, is the chief executive officer of Chardan Capital Markets, LLC.
In October 2009, we consummated a senior secured debt financing involving the issuance of an aggregate of $33 million secured notes and approximately 23 million preferred series B shares. Chardan Capital Markets, LLC, acted as lead placement agent in the convertible debt financing and was paid a broker fee of $1,494,000 along with 250,000 ordinary shares of the Company. Kerry Propper, a member of our board of directors, is the chief executive officer of Chardan Capital Markets, LLC.
46
In July 2011, Platinum Partners Value Arbitrage Fund LP (“Platinum”) issued us a promissory note in the amount of $389,651.73 (the “Note”). The Note is due on November 15, 2011 or on demand together with interest on the unpaid principal balance of the Note from July 15, 2011 until paid at 8% per anum. Mark Nordlicht, a member of our board of directors, is the chief investment officer of Platinum.
On April 28, 2011, the Company issued 351,852 ordinary shares to Platinum for an aggregate purchase price of $94,500. Mark Nordlicht, a member of our board of directors, is the chief investment officer of Platinum.
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 years ended December 31, 2009 and 2010 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.
ITEM 9.
THE OFFER AND LISTING
A.
Offer and Listing Details
Our ordinary shares, are quoted on the Nasdaq Capital Market under the symbol CABL. The closing price for the securities on July 27, 2011, the most recent trading day practicable before the date of this Annual Report, was $0.195. On July 18, 2011, we notified the Nasdaq Capital Market that we were effecting a voluntary delisting and on July 28, 2011 filed a Form 25 with the SEC in this connection. The effectiveness of the voluntary delisting will be ten days from July 28, or August 8, 2011.
47
Prior to the Business Combination, Jaguar’s units commenced public trading on April 6, 2006, and common stock and warrants commenced public trading on June 26, 2006. The Business Combination occurred on April 9, 2008 and we began trading as China Cablecom Holdings, Ltd. on the OTC Bulletin Board on April 10, 2008. Our ordinary shares, warrants and units commenced trading on the Nasdaq Capital Market on July 30, 2008.
The table below sets forth, for the calendar quarters indicated, the high and low bid prices for the securities as reported on the OTC Bulletin Board and Nasdaq Capital Market in U.S. dollars. These quotations reflect inter-dealer prices, without markup, markdown or commissions, and may not represent actual transactions.
On February 19, 2010, we announced that our Board of Directors authorized a one-for-three reverse share split of our ordinary shares effective March 2, 2010, at the open of trading.
On March 1, 2010, we announced that effective April 4, 2010, our units will be separated into its component securities, consisting of one ordinary share and two warrants. As a result, beginning April 4, 2010, the Units and Warrants ceased trading. The warrants expired on April 4, 2010 and the reverse stock split was applied to each ordinary share resulting from the expired unit.
The Company expects that upon the voluntary delisting of its ordinary shares from the NASDAQ Capital Market, such shares will commence quotation on the OTC Bulletin Board (OCTBB).
Ordinary Shares
High
Low
(US$)
(US$)
2008
First Quarter
22.35
19.29
Second Quarter
19.05
17.70
Third Quarter
21.00
6.51
Fourth Quarter
7.65
1.77
2009
First Quarter
2.61
0.45
Second Quarter
5.82
0.78
Third Quarter
4.14
1.14
Fourth Quarter
3.30
1.41
2010
First Quarter
2.37
1.40
Second Quarter
1.68
0.77
Third Quarter
0.83
0.36
Fourth Quarter
0.80
0.44
2011
First Quarter
0.60
0.38
Second Quarter
0.43
0.21
Third Quarter (through July 22)
0.28
0.16
Holders of ordinary shares 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 27, 2011, we had a total of 13,693,780 ordinary shares issued and outstanding.
Holders. As of July 27, 2011 there were, of record, 42 holders of ordinary shares. We believe the number of beneficial holders of each of these securities is significantly greater than the number of record holders.
48
B.
Plan of Distribution
Not Applicable.
C.
Markets
Our ordinary shares, are quoted on the Nasdaq Capital Market under the symbols CABL.
On March 1, 2010, we announced that effective April 4, 2010, our units (CABLU) will be separated into its component securities, consisting of one ordinary share (CABL) and two warrants. As a result, beginning April 4, 2010, the Units (CABLU) and Warrants (CABLW) ceased trading. The warrants expired on April 4, 2010 and the reverse stock split was applied to each ordinary share resulting from the expired unit.
During the fiscal years ended December 31, 2009 and 2010, the Company has not entered into any material agreements which are not described elsewhere in this Annual Report.
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.
49
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.
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
The following is a summary of the material British Virgin Islands and U.S. federal income tax consequences of owning and disposing of our ordinary shares. As used in this discussion, references to “we,”“us,”“our” or the “Company” refer only to China Cablecom Holdings, Ltd.
British Virgin Islands 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. 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.
50
United States Federal Income Taxation
General
The following is a summary of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares. 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 that is for U.S. federal income tax purposes:
·
an individual citizen or resident of the United States;
·
a corporation (or other entity treated as a corporation) 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.
A beneficial owner of our ordinary shares that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of our ordinary shares 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 material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders are 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 any particular holder based on such holder’s individual circumstances. In particular, this discussion considers only holders that own and hold our ordinary shares as capital assets within the meaning of Section 1221 of the Code, and does not discuss 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;
·
persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
·
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;
51
·
persons that actually or constructively own 5% or more of our voting shares;
·
persons that acquired our ordinary shares pursuant to an exercise of employee options, in connection with employee incentive plans or otherwise as compensation;
·
persons that hold our ordinary shares 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 or, except as discussed herein, any tax reporting obligations applicable to a holder of our ordinary shares. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our ordinary shares 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, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made) to a holder in respect of our ordinary shares and any consideration received (or deemed received) by a holder in connection
with the sale or other disposition of our ordinary shares will be in U.S. dollars.
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.
THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.
U.S. Holders
Taxation of Cash Distributions Paid on Ordinary Shares
Subject to the passive foreign investment company (“PFIC”) rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary income the amount of any cash dividend paid on our ordinary shares. A cash distribution on such ordinary shares generally 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), although we do not intend to calculate such earnings and profits. Such dividend generally 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. The portion of such cash distribution, if any, in excess of such earnings and profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in our
ordinary shares. Any remaining excess generally will be treated as gain from the sale or other taxable disposition of such ordinary shares.
52
With respect to non-corporate U.S. Holders for taxable years beginning before January 1, 2013, any such dividends may be subject to U.S. federal income tax at the lower applicable regular long term capital gains tax rate (see “—Taxation on the Disposition of Ordinary Shares” below) provided that (1) our ordinary shares are readily tradable on an established securities market in the United States or, in the event we are deemed to be a PRC “resident enterprise” under the PRC Enterprise Income Tax Law (“EIT Law”), we are eligible for the benefits of the Agreement between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “U.S.-PRC Tax Treaty”), (2) we are not a PFIC, as discussed below, for either
the taxable year in which such dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Under published IRS authority, ordinary shares are considered for purposes of clause (a) 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. For taxable years beginning on or after January 1, 2013, the regular U.S. federal income tax rate applicable to such dividends currently is scheduled to return to the regular U.S. federal income tax rate generally applicable to ordinary income.
If a PRC income tax applies to any cash dividends paid to a U.S. Holder on our ordinary shares, such tax should be treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to any such dividends, a U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty, if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty.
Taxation on the Disposition of Ordinary Shares
Upon a sale or other taxable disposition of our ordinary shares, 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.
The regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at a maximum regular rate of 15% for taxable years beginning before January 1, 2013 (but currently scheduled to increase to 20% for taxable years beginning on or after January 1, 2013). 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 a PRC income tax applies to any gain from the disposition of our ordinary shares by a U.S. Holder, such tax should be treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to any such gain, such U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty, if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty.
Passive Foreign Investment Company Rules
A foreign (i.e., non-U.S.) corporation will be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income, or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any corporation 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.
Based on the composition (and estimated values) of the assets and the nature of the income of us and our subsidiaries in 2010, we do not expect that we will be treated as a PFIC for 2010. Notwithstanding the foregoing, our view that we will not be treated as a PFIC in 2010 is not free from doubt because of, among other things, our significant cash position and uncertainties relating to the actual values of the other assets of us and our subsidiaries in 2010. 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 in respect to our status as a PFIC for 2010 or any subsequent taxable year.
53
If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our ordinary shares, and such U.S. Holder did not make either a timely qualified electing fund (“QEF”) election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) our ordinary shares, or a mark-to-market election, as described below, such holder generally will be subject to special rules in respect to:
·
any gain recognized by the U.S. Holder on the sale or other disposition of its ordinary shares; and
·
any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder 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 of such U.S. Holder 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;
·
the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution, or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we qualified as a PFIC, will be taxed as ordinary income;
·
the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period 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 other taxable year of the U.S. Holder.
In general, if we are determined to be a PFIC, 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, in the taxable year of the U.S. Holder in which or with which our taxable year ends. 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.
The QEF election is made on a shareholder-by-shareholder 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 taxable 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.
54
If a U.S. Holder has made a QEF election in respect to our ordinary shares, and the special tax and interest charge rules do not apply to such ordinary shares (because of a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such ordinary shares or a purge of the PFIC taint pursuant to a purging election, as described below), any gain recognized on the sale or other taxable disposition of such 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 the QEF’s earnings and profits, whether or not distributed. In such case, a subsequent distribution of such earnings and profits that were previously included in income should not be taxable as a dividend to such U.S. Holders. The adjusted tax basis of a U.S. Holder’s ordinary 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 ordinary shares in a QEF.
Although a determination as to our PFIC status will be made annually, an initial determination that we are a PFIC generally will apply for subsequent years to a U.S. Holder who held our ordinary shares while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent years. A U.S. Holder who makes the QEF election discussed above for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) our ordinary shares, however, will not be subject to the PFIC tax and interest charge rules discussed above in respect to such ordinary shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime in respect to such ordinary shares for any of our taxable years that end within or with a taxable year of the U.S. Holder and in which we are not a PFIC. On the other hand, if the QEF election is not effective for each of our taxable years in which we are a PFIC and during
which 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” in respect to such ordinary shares. A purging election generally creates a deemed sale of such ordinary shares at their fair market value. The gain recognized by the purging election generally 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 generally will increase the adjusted tax basis in its ordinary shares by the gain recognized and also will have a new holding period in its ordinary shares for purposes of the PFIC rules.
Alternatively, if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election in respect to such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for the first taxable year of the U.S. Holder 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, 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 tax 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 tax 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 adjusted tax 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.
The mark-to-market election is available only for stock that is 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 foreign subsidiary that is classified as a PFIC, a U.S. Holder of our ordinary shares generally should 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, or the U.S. Holder otherwise were deemed to have disposed of an 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 in respect to the lower-tier PFIC. However, there is no assurance that we will have timely knowledge of the status of any such lower-tier PFIC or will be able to cause the lower-tier PFIC to provide the required information. A mark-to-market election generally
would not be available in respect to such lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs.
55
Under recently enacted legislation, a U.S. Holder that owns (or is deemed to own) ordinary shares in a PFIC may have to file an IRS Form 8621 (whether or not a QEF election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide such other information as may be required by the U.S. Treasury Department.
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 under their particular circumstances.
Additional Taxes After 2012
For taxable years beginning after December 31, 2012, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned income, including, among other things, cash dividends, and capital gains from the sale or other taxable disposition of our ordinary shares, subject to certain limitations and exceptions. U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition of our ordinary shares.
Non-U.S. Holders
Cash dividends paid (or deemed paid) to a Non-U.S. Holder in respect to our ordinary shares generally will not be subject to U.S. federal income tax unless such 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 or maintained 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 taxable disposition of our ordinary shares 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 or maintained 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 taxable disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).
Cash 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 that such holder maintains or maintained in the United States) generally will be subject to U.S. federal income tax (but not the Medicare contribution tax) at the same regular U.S. federal income tax rates as applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, also may be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S. federal income tax purposes will apply to cash distributions made on our ordinary shares within the United States to a U.S. Holder (other than an exempt recipient) and to the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt recipient) 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, pursuant to recently enacted legislation, certain information concerning a U.S. Holder’s adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether any gain or loss with respect to such ordinary shares is long-term or short-term also may be required to be reported to the IRS.
Moreover, backup withholding of U.S. federal income tax at a rate of 28% for taxable years beginning before January 1, 2013 (but currently scheduled to increase to 31% for taxable years beginning on or after January 1, 2013), generally will apply to cash dividends paid on our ordinary shares to a U.S. Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt recipient), in each case who:
56
·
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. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
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 Room 458, North Building, Wenjiao Plaza, No. 1 Qingnian Dong Road, Jinan, People’s Republic of China ,250001.
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, New York10279 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.
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.
57
We do not use derivative financial instruments.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
58
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable
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, 2010. 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, 2010 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
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our management evaluated the effectiveness of our internal control over financials reporting based on criteria established in the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management has identified certain material weaknesses in connection with the preparation of our consolidated financial statements as of and for the fiscal year ended December 31, 2010 and have thus concluded that our internal controls over financial reporting were not effective. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
This material weakness and control deficiency identified primarily related to lack of sufficient accounting personnel with appropriate knowledge of U.S. GAAP.
The persons responsible for the preparation of our books and records and financial statements, principally our Chief Financial Officer, Sikan Tong, and the accountants under his supervision, do not have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP. In this regard, Mr. Tong and the other accountants do not hold a license such as Certified Public Accountant in the US., have not attended U.S. institutions or extended educational programs that would provide a sufficient relevant education in U.S. GAAP, and most of their US. GAAP audit experience, if any, primarily consists of audits of subsidiary financial information that supports or is included in the U.S. GAAP financial statements of parent registrants. The fact that we hired consultants to assist us in assessing our internal control over financial reporting
does not mitigate the fact that the accounting department does not possess the requisite U.S. GAAP knowledge to prepare financial statements in accordance with U.S. GAAP.
59
Following the identification of the material weakness and other control deficiencies, we have taken measures and plan to continue to take measures to remedy the weakness and deficiencies, including (1) hiring additional accounting personnel with understanding of U.S. GAAP and experience with SEC reporting requirements, and (2) providing external and internal training to our accounting personnel. However, the implementation of these measures may not fully address this material weakness and other control deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. We are not able to estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve our internal control over financial reporting. If we fail to establish an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud,
and investor confidence and the market price of our equity and/or debt may be adversely impacted.
Because of its inherent limitations, any system of internal controls over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financing reporting due to rules of the SEC for a non-accelerated filer that permit us to provide only management’s report in this annual report.
(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 December 31, 2010 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.
Due to the recent resignations of all of its members, we do not currently have an 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, 2009 and 2010, 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.
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.
61
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
China Cablecom Holdings Amended and Restated Memorandum of Association
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
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
62
Exhibit
Number
Description of Exhibit
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
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
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.
63
Exhibit
Number
Description of Exhibit
4.50 (5)
Offshore Loan Agreement between China Cablecom and Rich Dynamic Limited, dated June 10, 2008.
4.51 (6)
Offshore Loan Agreement between China Cablecom and Rich Dynamic Limited, dated July 29, 2008.
4.52 (7)
Onshore Loan Agreement between Dong Wanling and JYNT, dated June 10, 2008.
4.53 (8)
Onshore Loan Agreement between Dong Wanling and JYNT, dated June 10, 2008.
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
F-3
Consolidated Statements of Comprehensive Loss
F-4
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency)
F-5 – F-6
Consolidated Statements of Cash Flows
F-7 – F-8
Notes to Consolidated Financial Statements
F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
China Cablecom Holdings, Ltd.
We have audited the accompanying consolidated balance sheets of China Cablecom Holdings, Ltd and Subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity (deficiency) and comprehensive loss and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. 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 are 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 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 China Cablecom Holdings, Ltd and Subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company has incurred significant losses during 2010 and 2009, and has relied on debt and equity financings to fund their operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Value assigned to shares issued as payment for broker fee
$
-
$
585,000
$
-
Value assigned to shares issued as payment for legal fee
$
326,251
$
-
$
-
Value assigned to shares issued as payment for interest expense
$
1,092,052
$
-
$
-
Non-cash financing activities related to restructuring of debt (Note 2):
Cancellation of promissory note and interest
$
-
$
11,851,678
$
-
Cancellation of convertible note and interest
$
-
$
23,308,298
$
-
Issuance of secured notes
$
-
$
18,000,000
$
-
Issuance of unsecured notes
$
-
$
5,500,000
$
-
Issuance of Series A Convertible Preferred Shares
$
-
$
51,323,443
$
-
Non-cash financing activities related to private financings (Note 2):
Issuance of Series B Convertible Preferred Shares
$
-
$
15,045,953
$
-
Reduction of Notes as the result of conversion of Preferred Shares to Ordinary Shares
$
1,820,195
$
1,302,642
$
-
F-8
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 April 9, 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 merger with the Company, Jaguar issued 4,950,000 units (“Units”), each representing one ordinary share 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 became exercisable for the Company’s current shares at the original exercise price, US$ 5.00 per share.
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 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 FASB ASC 810-10:
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-9
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Basis of Preparation of Financial Statements (Continued)
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. JYNT had only contributed $10 million to Binzhou Broadcasting and there was a further capital contribution of $16.5 million had been due but not yet settled. 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.
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 expiration 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.
On June 16, 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.
On October 1, 2009, the Company, through JYNT, revised the Hubei Framework Agreement and the terms of technical service agreement with Hubei SOE. JYNT changed the service charge for providing marketing, strategic consulting and technical support and service from 11% to 6% of the net profits of Hubei Chutian. Together with its original 49% equity interest, JYNT, after the revision, effectively receives 55% of economic benefits of Hubei Chutian which applies retrospectively from July 1, 2008. The change in percentage of economic benefits would affect the net profit and net asset value shared by non-controlling interest (Hubei SOE) in Hubei Chutian, which were increased by $18,919 respectively. In addition, the increase in share of Hubei Chutian
by Hubei SOE will be reflected by the increase of note payable to non-controlling interest – long-term portion of $5,047,845 while the decrease in share of Hubei Chutian by JYNT will be reflected by the decrease of note payable to non-controlling interest – short-term portion of the same amount. As the agreement was changed in 2009, all adjustments are recorded for the year ended December 31, 2009.
F-10
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Basis of Preparation of Financial Statements (Continued)
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.
The term of this technical services agreement is 30 years. JYNT and Hubei Chutian may mutually seek to extend this agreement upon the expiry of the current term, China Cablecom is not aware of any legal impediments that may affect the renewal of this agreement 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.
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 FASB ASC 810-10. 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 FASB ASC 810-10, Consolidation of Variable Interest Entities, regarding 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. FASB ASC 810-10 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 FASB ASC 810-10, China Cablecom has evaluated its economic relationships with Hubei Chutian, Binzhou Broadcasting and has determined that it is required to consolidate Hubei Chutian and Binzhou Broadcasting. Therefore Binzhou Broadcasting and Hubei Chutian are considered to be a VIE, as defined by FASB ASC 810-10, 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.
F-11
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies (Continued)
In accordance with the Amendment to Framework Agreement signed between JYNT and Binzhou SOE signed on December 23, 2009, JYNT agreed to repaid shareholder loan of approximately $16.5 million to Binzhou Broadcasting due on June 30, 2010. On February 1, 2010, Shandong government announced its initiative to consolidate its provincial cable assets, a decree backed by the government and State Administrative of Radio, Film and Television (SARFT). Under the view of this consolidation, all municipal cable operators including Binzhou Broadcasting have been instructed to maintain the current organization structure and suspend financing activities on assets until further notification from the government. As a result, JYNT has been granted a temporary deferment of its obligation to deliver
cash payments of approximately $16.5 million to Binzhou Broadcasting. Although JYNT had defaulted in payment of shareholder loan in accordance with the said agreement, JYNT will seek to obtain new supplementary agreement with Binzhou SOE and commit the payment of shareholder loan once Shandong government lifts the temporary freezing of investment. Therefore, the management of China Cablecom assessed the impact of the default and believe that there is no effect on the status of primary beneficiary of Binzhou Broadcasting.
The current economic benefit over Binzhou Broadcasting based on the assumption that JYNT can renew the supplementary agreement with Binzhou SOE and commit payment of $16.5 million to Binzhou Broadcasting. But such arrangements are under discussion with Binzhou Broadcasting. Any failure will affect the current economic benefit that China Cablecom shared in Binzhou Broadcasting and subject to the penalty of approximately $755,000 to Binzhou SOE. The percentage of economic benefit will be proportionally adjusted to reflect the actual fund provided. Reflected in the December 31, 2010 and 2009 Balance Sheets are consolidated Binzhou Broadcasting’s assets of approximately $ 44,055,332 and $ 50,238,711 respectively. The condensed financial information of Binzhou Broadcasting as at December
31, 2010 and 2009 is as follows:
BINZHOU BROADCASTING AND TELEVISION INFORMATION NETWORK CO., LTD
Cash and cash equivalents include all cash and deposits in banks. As of December 31, 2010, over 95% 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 and Convertible Notes are being fully amortized due to debt restructure during the year ended December 31, 2009. Deferred financing costs related to the Company’s Senior Secured Note are being amortized over the life of the notes payable of 6 years.
Amortization for the year ended December 31, 2010 and 2009 was $343,272 and $636,299 respectively. Indirect costs of financing activities are expensed as incurred.
Inventories
Inventories consist of set-top boxes, 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.
F-13
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies (Continued)
Fair value of financial instruments
FASB ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amounts of financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and other current assets, accounts payable, and other current liabilities, approximate their fair values because of the short maturity of these instruments and market rates of interest.
Valuation 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 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 value of the long-lived asset. Fair 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 values are reduced for the cost to dispose.
Accounts Receivable
Accounts receivable is recorded at the invoiced amount after deduction of trade discounts, and allowance, if any.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation and impairment, if any. In accordance with FASB ASC 922, Financial Reporting by Cable Television Companies, the Company capitalizes 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.
F-14
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies (Continued)
Property, Plant and Equipment (Continued)
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
Land, buildings 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.
Land use rights represent the prepayments for the use of the parcels of land in the PRC where the Company’s production facilities located, and are charged to expense over their respective lease periods of 30 years. According to the laws of the PRC, the government owns all of the land in the PRC. Companies or individuals are authorized to use the land only through land use rights granted by the PRC government for a certain period.
Pursuant to FASB ASC 410, Accounting for Asset Retirement Obligations, an asset retirement obligation would be reasonably estimable if (a) it is evident that the fair value of the obligation is embodied in the acquisition price of the asset, (b) an active market exists for the transfer of the obligation, or (c) sufficient information exists to apply an expected present value technique. An expected present value technique incorporates uncertainty about the timing and method of settlement into the fair value measurement.
As of December 31, 2010 and 2009, the Company did not have any asset retirement obligations and thus no such liabilities need to be provided.
F-15
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies (Continued)
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
Comprehensive Income
The Company has adopted FASB ASC 220, “Comprehensive Income”. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statements of Income and the Consolidated Statements of Equity.
Stock-Based Compensation
The Company awards stock options and other equity-based instruments to its employees and directors (collectively “share-based payments”). Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date and is recognized on a straight-line basis over the requisite service period, which generally equals the vesting period. All of the Company’s stock-based compensation is based on grants of equity instruments and no liability awards have been granted.
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 useful lives for depreciation and amortization, deferred tax provisions and valuation allowances, purchase price allocations, contingencies. 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.
The determination of the primary beneficiary of a VIE based on whether the Company has the power to direct the activities that most significant impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits of the VIE. It require the Company to make an ongoing assessment of the primary beneficiary of a VIE. The Company may require to deconsolidate certain VIE when there is information indicate that the Company lost the primary beneficiary to a VIE. For the consolidation of Variable Interest Entities, please refer to note 2 of the financial
statements.
Summary of Significant Accounting Policies (Continued)
Debt Restructure
Due to the default in payment of both principal and interest of promissory notes in April 2009, the Company negotiated with the promissory note holders and convertible note holders and completed the debt restructure in October 2009.
In connection with the debt restructure, the Company entered into a waiver agreement with the consent from all the promissory note holders on October 9, 2009. The Company issued $5.5 million in Unsecured Notes due October 8, 2015 bearing a fixed interest rate of 5% per annum along with 15,397,204 shares of Series A Convertible Preferred Shares to the note holders in settlement of their current debt and accrued interest obligations. The debt restructure reduced the overall principal amount of its long-term debt obligations and eliminated cash interest obligations on the new debt securities issued. Under the debt restructure, the difference between carrying amount of the
notes payable and the fair value of the equity instruments issued together with the new Notes issued are accounted for as debt extinguishments resulting in a loss of $5,658,140, which was recognized in the Statement of Operations for the year ended December 31, 2009.
In addition, the Company also entered into a waiver agreement with the consent from all the convertible note holders on October 9, 2009. The Company issued $18 million in Secured Notes due October 8, 2016 bearing fixed interest rate of 5% per annum along with 50,402,082 shares of Series A Convertible Preferred Shares to the note holders in settlement of their current debt and accrued interest obligations. The debt restructure reduced the overall principal amount of its long-term debt obligations and eliminated cash interest obligations on the new debt securities issued. Under the debt restructure, the difference between carrying amount of convertible notes and the fair
value of the equity instruments issued together with the new Notes issued are accounted for as debt extinguishments resulting in a loss of $34,005,326, which was recognized in the Statement of Operations for the year ended December 31, 2009.
Each Series A Convertible Preferred Share may be converted, at the option of the share holder, into one ordinary share, which represents approximately 66.2% of the Company's ordinary shares outstanding after the closing of the debt restructuring and a concurrent offering of new senior secured notes described below.
The debt restructure strengthens the Company's balance sheet by reducing the overall principal amount of its long-term debt obligations and eliminating cash interest obligations on the new debt securities issued.
Private Financings
On October 2009, the Company also completed a private placement of $33 Million in aggregate principal amount of 12% Senior Secured Notes (the “New Notes”) due October 2015. The holders of New Notes have been issued 23,158,080 Series B Convertible Preferred Shares. Each Series B Convertible Preferred Share may be converted, at the option of the share holder, into one ordinary share, which representing approximately 23.3% of the Company's total outstanding shares after a concurrent debt-for-equity restructuring of its outstanding debt obligations.
The Net proceeds from the private financing will be used to satisfy the Company's remaining obligations to the Hubei SOE under its supplementary framework agreement.
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.
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 rental income – Fiber cable rental income represents the income received from customers for use of the Company’s fiber cable network and is recognized as revenue on a pro-rata basis over the contracted service period.
In accordance with FASB ASC 605, “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 FASB ASC 605, 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.
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 FASB ASC 260, “Earnings Per Share”. At December 31, 2010 and 2009, due to net losses the Company’s share equivalents were anti-dilutive and excluded in the loss per share computations.
F-17
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company accounts for income taxes under FASB ASC Topic 740 "Income Taxes". Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income in the period that includes the enactment date.
FASB ASC Topic 740 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.
Non-controlling interest in consolidated financial statements
FASB ASC 810 requires us to classify noncontrolling interests in a subsidiary as part of consolidated net income and to include the accumulated amount of noncontrolling interests as part of total equity. The calculation of earnings per share continues to be based on income amounts attributable only to shareholders. Similarly, in our presentation of total equity, we distinguish between equity amounts attributable to shareholders and amounts attributable to the noncontrolling interests (previously classified as minority interest outside of shareholders’ equity).
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 FASB ASC 830 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:
We describe below recent pronouncements that have had or may have a significant effect on our financial statements. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, or disclosures.
ASC 810. We adopted ASC 810 on January 1, 2010, which amended the consolidation guidance for variable-interest entities include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. The adoption did not have an impact on the Company’s financial statements.
In February 2010, the FASB issued Accounting Standards Update 2010-09 “Subsequent Events (Topic 855)” allowing SEC filers to remove the date through which subsequent events have been reviewed. ASU 2010-09 became effective upon issuance, and the adoption of this guidance did not have a material impact on Company’s financial statements.
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.
4.
Going Concern and Management’s Plans
The accompanying financial statements are presented on a going concern basis. At December 31, 2010, the Company had a working capital deficit of approximately $34.9 million. The Company generated a net loss of approximately $27 million and $56.1 million during the years ended December 31, 2010 and 2009, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company's
continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required and ultimately to attain profitability. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's independent registered public accounting firm's report on the financial statements as of and for the year ended December 31, 2010, contained an explanatory paragraph regarding the Company's ability to continue as a going concern.
Management plans to continue its efforts to raise additional funds through debt or equity offerings. In 2011, the Company plans to raise fund through the issuance of promissory note and ordinary share.
5.
Stock Based Compensation
In April 2008, the Company adopted the China Cablecom Holdings, Ltd. 2007 Omnibus Securities and Incentive Plan (the “Plan”), which provides for the grant of up to 3,333,333 shares option for the benefit of its directors, officers and employees. The Company granted 1,350,000 share options and 1,460,000 share options on October 9, 2009 and December 20, 2009, respectively, to its directors, officers and employees under the plan. These shares options are exercisable at $2.34 and $1.83 per share, respectively, and may be exercised by the optionee no later than the tenth anniversary of the date of option agreement. As of December
31, 2010, 2,810,000 options have been issued under the plan and 523,333 shares remain available to be issued.
F-19
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.
Stock Based Compensation (Continued)
The Company accounts for its stock option awards pursuant to the provisions of FASB ASC 718, “Stock Compensation”. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line attribution method over the service period, which is generally the vesting period.
The Black-Scholes model incorporates the following assumptions:
·
Expected volatility - the Company estimates the volatility of common stock at the date of grant using historical volatility.
·
Expected term - the Company estimates the expected term of options granted based on a combination of vesting schedules, term of the option and historical experience.
·
Risk-free interest rate - the Company estimates the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect at the time of grant.
·
Dividends - the Company uses an expected dividend yield of zero. The Company intends to retain any earnings to fund future operations and, therefore, does not anticipate paying any cash dividends in the foreseeable future.
The fair value of the total options granted in the year measured as at the date of grant on October 9, 2009 was $2,727,755 and December 20, 2009 was $2,260,874. The following table outlines the variables used to derive the fair value using in the Black-Scholes option-pricing model:
Risk free interest rate
1.3177% - 1.4864%
Volatility
163.46% - 170.57%
Dividend yield
-
Expected option life
10 years
Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:
2010
2009
Shares
Weighted
average
exercise
price
Shares
Weighted
average
exercise
price
Options outstanding at beginning of year
2,810,000
$
2.07
-
-
Granted
-
-
2,810,000
$
2.07
Options outstanding at end of year
2,810,000
$
2.07
2,810,000
$
2.07
Options exercisable at end of year
2,810,000
2,810,000
Options available for issuance
523,333
523,333
During the year ended December 31, 2010 and 2009, the Company recorded stock based compensation of $1,679,368 and $217,538, respectively, in connection with the issuance of stock options.
F-20
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.
Stock Based Compensation (Continued)
As of December 31, 2010 and 2009, the Company had total unrecognized compensation expense related to options granted of $3,091,723 and $4,771,091, respectively which will be recognized over a remaining service period of approximately 3 years.
6.
Cash and cash equivalents
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, 2010 and 2009, majority 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.
7.
Prepaid Expenses and Advances
Prepaid expenses and other receivables consist of the following:
The loan advance included offshore loan amounting to approximately $1.2 million and bridge financing to third parties amounting to approximately $1 million which was unsecured, interest-free and repayable within a year.
The advanced payments include loan advanced to staff, which are unsecured, interest-free and repayable on demand. Others are cash advanced to staff for daily operations, advances for purchase of materials.
8.
Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following:
At the incorporation of Binzhou Broadcasting (VIE) and Hubei Chutian (VIE), Binzhou SOE and Hubei SOE agreed to transfer assets into Binzhou Broadcasting and Hubei Chutian, respectively in accordance with the Assets Transfer Agreement made between VIEs and SOEs. Therefore, the titles of assets will be transferred from both SOE to the VIEs in stages. Although parts of assets are in the process of changing the title, it does not affect the ownership because both agreements were signed between both VIEs and SOE to confirm such transfer of assets.
At December 31, 2010, the land, buildings and motor vehicles approximately of $7,089,599 and $1,404,718 respectively, are still in the process of applying the title certificates.
There were no impairment provisions made at December 31, 2010 and 2009. Depreciation expense for the years ended December 31, 2010 and 2009 was $23,061,390 and $15,417,101, respectively.
Included in the land, buildings and building improvements are three pieces of land use rights. For the year ended December 31, 2010 and 2009, the amortization charge was $7,247 and $5,845 respectively. As of December 31, 2010 and 2009, the carrying value of the land use right was $320,134 and $166,613 respectively.
Estimated amortization expenses of the existing land use right for the next five years and thereafter are as follows:
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 $6,297,803 and $3,967,552 at December 31, 2010 and 2009, respectively.
10.
Intangible Assets, Net
The following table summarizes the lives and carrying values of the Company's intangible assets by category:
Amortization expense for the years ended December 31, 2010 and 2009 was $2,807,733 and $2,807,733, respectively.
The Company expected a higher conversion ratio of its existing analog TV subscribers to digital TV subscribers which pay significantly higher fees when it acquired the networks. The intangible assets were a result of the purchase price allocation performed with the assumption of higher conversion ratio. The actual conversion ratio is much lower than we previously estimated.
The Company engaged an independent qualified surveyor to assess the impairment of intangible asset. After completing the assessment, the Company recognized an impairment loss of approximately $13.3 million under U.S. GAAP for the year ended December 31, 2010.
Estimated amortization expenses of the existing intangible assets for the next five years and thereafter are as follows:
The Company engaged an independent qualified surveyor to assess the carrying value of goodwill. After completing the assessment, there was no impairment for goodwill under U.S. GAAP for the year ended December 31, 2010.
F-23
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.
Income Taxes
The entities within the Company file separate tax returns in the respective tax jurisdictions that they operate.
British Virgin Islands
The Company, being incorporated in the British Virgin Islands as an exempted company, is not subject to any income tax in the British Virgin Islands.
Hong Kong
China Cablecom Company Limited is generally subject to Hong Kong income tax on its taxable income derived from trade or businesses carried out in Hong Kong at 16.5% for the years ended December 31, 2010 and 2009. However, as the Company has not generated any revenue or income, no provision for Hong Kong income tax has been made.
The PRC
The VIEs being established in the PRC was subject to the PRC Enterprise Income Tax (“EIT”) at 33% prior to January 1, 2008. In March 2007, the PRC government enacted the PRC Enterprise Income Tax Law, or the New EIT Law, and promulgated related regulation, Implementing Regulations for the PRC Enterprise Income Tax Law, which became effective from January 1, 2008. The PRC Enterprise Income Tax Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises registered in the PRC.
In accordance with CAISHUI(2007) No.27 issued by Shandong Provincial State Tax Bureau on January 18, 2007, Binzhou Broadcasting was granted the tax exemption since the date of incorporation to December 31, 2009.
In accordance with ERFA(2008) No.7 issued by Hubei Provincial State Tax Bureau on June 18, 2008, Hubei Chutian was granted the tax exemption since the date of incorporation to December 31, 2009.
In accordance with ERCAIJIAOFA(2010) No.71 issued by Hubei Provincial State Tax Bureau on May 26, 2010, Hubei Chutian was granted the profits tax exemption since the date of incorporation to December 31, 2013. Therefore, the Company reversed all tax provision previously made in the financial statement.
The amount of income tax charged to the consolidated statement of comprehensive income represents:
Loss before income taxes and non-controlling interest
$
(27,387,866
)
$
(55,210,138
)
$
(12,844,482
)
Tax calculated at the domestic tax rate of 25%
(6,846,966
)
(13,802,535
)
(3,211,121
)
Tax effect of expenses not deductible for tax purposes
5,967,339
18,876,725
4,522,744
Income exempted under preferential treatment
(180,157
)
(6,183,774
)
(1,246,770
)
Tax effect of tax losses not recognised
683,169
1,681,565
276,895
Income tax (credit)/expense
$
(376,615
)
$
571,981
$
341,748
As of December 31, 2010 and 2009, the Company did not have any significant temporary differences and carryforwards that may result in deferred tax. The Company has analyzed the tax positions taken or expected to be taken in its tax filings and has concluded it has no material liability related to uncertain tax positions or unrecognized tax benefits. The Company classifies interest and/or penalties related to income tax matters in income tax expense. For the year ended December 31, 2010 and 2009,
the Company has not recognized any amount of interest and penalties related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.
The New EIT Law also imposes a withholding tax of 10% unless reduced by a tax treaty, for dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC for earnings accumulated beginning on January 1, 2008 and undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. The Company has not provided for income taxes on accumulated earnings of its PRC subsidiary as of December 31, 2010 and 2009 because these earnings are intended to be reinvested indefinitely in the overseas jurisdictions. It is not practicable to estimate the amount of additional taxes that might be payable
on such undistributed earnings.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational or other errors made by the taxpayer or the withholding agent. The statute of limitations extends to five years under special circumstances. In the case of transfer pricing issues, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion.
F-25
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.
Other Current Liabilities
Other current liabilities consist of the following:
Other payables are related to loan advance from others, guarantee deposit received from staff and set-top TV rental deposits received from users.
14.
Noncontrolling Interest
Noncontrolling interest represents Binzhou SOE and Hubei SOE’s equity contributions made to Binzhou Broadcasting and Hubei Chutian together with their respective 40% and 45% proportionate share of the total economic benefits in the Joint Ventures through December 31, 2010.
The short-term portion of note payable was unsecured, interest-free and payable on demand.
The due date of long-term note payable of approximately Rmb128 million (equivalent to approximately $18.7 million) is to be paid over a 20-year period from the date of the assets transfer.
The short-term portion of note payable was unsecured, interest-free and payable on demand.
The due date of long-term note payable of Rmb311 million (equivalent to approximately $45.6 million) is not specified in the contract and the Company does not expect to make any repayment for the long-term notes payable during the next year. The Company has received from oral representation from Hubei SOE that Hubei SOE will never seek repayment of the long-term portion of the note payable at any time before December 31, 2011.
The note payable has been classified as a long-term payable because the Company considers that a demand for repayment of the note within one year is remote. Although in most circumstances US GAAP would require documentation necessary to support such a classification, the fact that the counterparty to the note is a Chinese governmental entity makes such documentation difficult to obtain in practice and therefore the Company has not obtained such documentation. Nevertheless, in spite of such lack of documentation, the Company believes that that the probability that the Chinese governmental entity will demand repayment of the note within a year to be remote, and the
Company considers that remoteness of probability of demand for repayment to be the decisive factor in determining the classification of the note.
On October 9, 2009, under the debt restructure, the Company issued $5.5 million Unsecured Notes due October 8, 2015 bearing fixed interest rate of 5% per annum and 15,397,204 Series A Convertible Preferred Shares to promissory note holders. Each Series A Convertible Preferred Shares can be convertible, at the option of the holder, into one ordinary share. The repayment was scheduled in 8 instalments to be paid every 6 months starting from October 15, 2012.
Until fourteen months after the issue date, principal on the new notes is subject to the cancellation in the event that the Company's ordinary shares close at a daily volume weighted average price greater than $0.85 for 30 consecutive days with daily dollar value of the trading volume of $500,000 or more. All of the shares issuable upon conversion of the Series A Preferred Shares could have been sold by the note holder according to the terms of the notes and permitted to sell during such 30 consecutive trading days, then the principal amount of the note will be deemed satisfied and paid in full. Interest accrued on this note shall be payable on the immediately following interest due date. The principal on the new notes is also subject to the reduction in the event that the note holders convert the Series A Convertible Preferred Shares into
ordinary shares within 14 months after the issued date.
During the year ended December 31, 2010 and 2009, there were 2,566,201 and 1,022,389 Series A Convertible Preferred Shares converted into ordinary shares, resulting in the reduction of $916,667 and $365,205 in principal amount of the Unsecured notes and an increase in ordinary shares and additional paid-in capital. The interest expense for the year ended December 31,2010 and 2009, totally $36,120 and $63,288 were included in accrued expenses.
F-27
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17.
Secured notes
Secured notes, net of discount consists of the following:
On October 9, 2009, under the debt restructure, the Company issued $18 million Secured Notes due October 8, 2016 bearing fixed interest rate of 5% per annum and 50,402,082 Series A Convertible Preferred Shares to convertible note holders. Each Series A Convertible Preferred Shares may be converted, at the option of the holder, into one ordinary share. The repayment was scheduled in 7 instalments to be paid every 6 months starting from October 15, 2012.
Until fourteen months after the issue date, principal on the new notes is subject to the cancellation in the event that the Company's ordinary shares close at a daily volume weighted average price greater than $0.85 for 30 consecutive days with daily dollar value of the trading volume of $500,000 or more. All of the shares issuable upon conversion of the Series A Preferred Shares could have been sold by the note holder according to the terms of the notes and permitted to sell during such 30 consecutive trading days, then the principal amount of the note will be deemed satisfied and paid in full. Interest accrued on this note shall be payable on the immediately following interest due date. The principal on the new notes is also subject to the reduction in the event that the note holders convert the Series A Convertible Preferred Shares into
ordinary shares within 14 months after the issued date. The collaterals of secured notes include all owned and acquired right, title and interest of the Company.
During the year ended December 31, 2010 and 2009, there were 3,979,984 and 2,624,931 Series A Convertible Preferred Shares converted into Ordinary Shares, resulting in the reduction of $903,528 and $937,437 in principal amount of the Secured notes and an increase in ordinary shares and additional paid-in capital. The interest expense for the year ended December 31, 2010 and 2009, totally $138,371 and $207,123 were included in accrued expenses.
18. Senior secured notes
On October 9, 2009, the Company completed a private placement of $33 million Senior Secured Notes (“New Notes”) due October 8, 2015 bearing fixed interest rate of 12% per annum combined with 23,158,080 shares of Series B Convertible Preferred Shares to the holders of New Notes. Each share of Series B Convertible Preferred Shares is convertible into one share of the Company’s ordinary shares. The repayment was scheduled in 6 instalments to be paid every 6 months starting from October 15, 2012. The net proceeds from the issuance will be used to satisfy the
Company’s remaining obligations to the Hubei SOE under its supplementary framework agreement.
On the same date, the Company immediately redeemed $13,860,000 of the New Notes due October 2015 reducing the aggregate principal amount of the New Notes outstanding from $33,000,000 to $19,140,000. The value of $11,673,530 was allocated to Series B Convertible Preferred Shares using the relative fair value method and the balance of $7,466,470 was recognized as the value of New Notes.
F-28
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18.
Senior secured notes (Continued)
According to the New Notes agreement, the early redemption of principal prior to the third anniversary of the issue date, the interest otherwise payable on a regularly scheduled payment date prior to the 36 month anniversary of the issue date will be deferred (“Deferred Interest”) and accrue and be payable commencing with the payment date that coincides with the third anniversary of the issue date in equal instalments over the remaining regularly scheduled payment dates. Payments of principal amount will resume on the payment date set forth on the amortization schedule of the New Notes. The collaterals of senior secured notes include all owned and acquired right, title and interest of the Company.
Issuance cost totaled $3,197,205, of which $1,130,990 was allocated to the issuance cost of preferred shares and recorded as a reduction to additional paid-in capital and $2,066,215 was recorded as deferred financing costs and is being amortized over the six-year term of the Senior Secured Note.
For the year ended December 31, 2010 and 2009, $2,660,815 and $506,625 were charged to interest expense using the effective interest rate and $343,272 and $79,000 was amortized to finance costs.
19.
Stockholders’ Equity
Pursuant to the debt restructure in October 2009, the Company issued 15,397,204 and 50,402,082 Series A Convertible Preferred Shares, par value $.0005, to the previous Promissory notes holders and Convertible note holders, respectively.
The Company also issued 23,158,080 Series B Convertible Preferred Shares, par value $.0005, as the incentive shares to the New Notes subscribers. As part of the transaction, 250,000 ordinary shares were issued to the Broker for its fees.
Holders of ordinary shares, Series A Convertible Preferred Shares and Series B Convertible Preferred Shares have equal rights on any dividend to be paid by the Company. However, the holders of Series A Convertible Preferred Shares and Series B Convertible Preferred Shares have no right to vote at a meeting of the members of the Company or on any resolution of the members of the Company.
In the event of the liquidation, winding up or dissolution of the Company, holders of Series B Preferred Shares have the preference rights, over the holders of Series A Preferred Shares and ordinary shares, of distribution of the surplus assets, in the amount up to an aggregate amount equal to the number of issued and outstanding Series B Preferred Shares multiplied by the closing price of the ordinary shares on the Nasdaq Capital Market on 7 October, 2009.
The holders of Series A Convertible Preferred Shares and Series B Convertible Preferred Shares have rights to convert one Preferred Shares to one ordinary share at any time.
For the year ended December 31, 2010 and 2009, 6,546,185 and 3,637,320 Series A Preferred Shares and 8,333,397 and nil Series B Preferred Shares had been converted into Ordinary Shares, respectively.
F-29
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20.
Operating Lease Commitments
The Company has entered into certain leasing arrangements relating to the lease of office premises. The offices and facilities are located in numerous cities in China. Total future minimum lease payments under non-cancellable operating leases are 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.
22.
Segment Reporting
Management considers the Company to have one business segment, consisting of 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.
23.
Warrants
The Company issued warrants to investors and service providers to purchase ordinary share of the Company. The following table outlines the warrants outstanding as of December 31, 2010 and 2009:
Name
Number of
Warrants Issued
Exercise Price
Expiration Date
Warrants
700,000
$
9.10
5/4/2011
Warrants
2,115,385
$
0.858
8/10/2014
2,815,385
F-30
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24.
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 dated 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 Chengdu Chuanghong. 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 dated 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 approximately $38 million (Rmb254,600,000). By the end of December 31, 2010, the Company received repayment of approximately $36.8 million (Rmb244,000,000) from the shareholder of RDL.
The unsettled offshore loan balance amounting to approximately $1.2 million is included in the prepaid expenses and advances as at December 31, 2010 (2009: approximately $2.3 million).
25.
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 $2,649,840 and $2,402,591 for the years ended December 31, 2010 and 2009, respectively.
26.
Commitments and Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal
proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
27.
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, 2010, 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 $14 million in cash, bank deposits and money market funds in the PRC, which constitute over 95% of total cash and cash equivalents. Historically, deposits in Chinese banks are secured due to the state policy on protecting
depositors’ interests.
F-31
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27.
Operating Risk (Continued)
Concentrations of credit risk (Contined)
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.
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.
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.
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.
Consolidation of Variable Interest Entities (VIE)
The consolidation of Binzhou Broadcasting and Hubei Chutian based on the assumption that China Cablecom is the primary beneficiary of both VIE and can exercise the power to direct the activities that most significant impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits of the VIE. Any failure to obtain the control will cause China Cablecom lost the economic benefit in the VIE and may require to deconsolidate the VIE that the Company currently consolidated. The impact will be applied retrospectively with a cumulative-effect adjustment to retained earnings as of the beginning of first year restated, or through a cumulative-effect adjustment on the date of applied.
F-32
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28.
Subsequent Event
In April and July, 2011, the Company issued promissory note of $27,500 and $389,652, respectively to Platinum Partners Value Arbitrage Fund LP to raise fund for financing the operations of the Company. Mark Nordlicht, a member of our board of directors, is the Chief Executive Officer of Platinum Partners Value Arbitrage Fund LP.
In addition, on April 28, 2011, the Company issued 351,852 ordinary shares at a consideration of $94,500 to Platinum Partners Value Arbitrage Fund LP to raise fund for financing the operations of the Company. Mark Nordlicht, a member of our board of directors, is the Chief Executive Officer of Platinum Partners Value Arbitrage Fund LP.
The Company expects that upon the voluntary delisting of its ordinary shares from the NASDAQ Capital Market, such shares will commence quotation on the OTC Bulletin Board (OCTBB). The Form 25 was filed on July 28, 2011.
29.
Condensed Parent Company Financial Information
Basis of presentation
The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of the subsidiaries of the Company exceed 25% of the consolidated net assets of the Company. The ability of the Company’s Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability
of cash balances of the Chinese operating subsidiaries. Because substantially all of the Company’s operations are conducted in China and a substantial majority of its revenues are generated in China, a majority of the Company’s revenue being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict its ability to convert RMB into US Dollars.
The condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Refer to the consolidated financial statements and notes presented above for additional information and disclosures with respect to these financial statements.
F-33
CHINA CABLECOM HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29.
Condensed Parent Company Financial Information (Continued)
