-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BHeswGdjU+y6R3VGNXaTv4X3cYwbpKOknmqCYDNGVhojYEI1EnqYcGXktFp8ADjl 6zaQRbARtQORGO0beXfPsQ== 0001108890-04-000700.txt : 20041123 0001108890-04-000700.hdr.sgml : 20041123 20041123141702 ACCESSION NUMBER: 0001108890-04-000700 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041123 DATE AS OF CHANGE: 20041123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHINA CABLE & COMMUNICATION INC CENTRAL INDEX KEY: 0000773394 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 112717273 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 002-98997-NY FILM NUMBER: 041163354 BUSINESS ADDRESS: STREET 1: SUITE 805, ONE PACIFICE PLACE CITY: 88 QUEENSWAY STATE: K3 ZIP: XXXXX BUSINESS PHONE: 852 2591 1221 MAIL ADDRESS: STREET 1: SUITE 805, ONE PACIFICE PLACE CITY: 88 QUEENSWAY STATE: K3 ZIP: XXXXX FORMER COMPANY: FORMER CONFORMED NAME: CHINA CABLE & COMMUNICATIONS INC DATE OF NAME CHANGE: 20030801 FORMER COMPANY: FORMER CONFORMED NAME: NOVA INTERNATIONAL FILMS INC DATE OF NAME CHANGE: 19920703 10QSB/A 1 chinacable10qsba093004.txt PERIOD ENDED 09-30-04 U.S. SECURITIES EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A No.1 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: Commission File Number: September 30, 2004 2-98997-NY CHINA CABLE AND COMMUNICATION, INC. ------------------------------------------------- (Exact name of Company as specified in its charter) DELAWARE 11-2717273 ------------------------------ -------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) No. 22 Bei Xin Cun Hou Street, Xiang Shan, Haidian District, Beijing 100093, the People's Republic of China -------------------------------------- -------- (Address of Principal Executive Offices) (Zip Code) (86) 10-8259 9426 ----------------------------------------------- (Company's telephone number, including area code) Not applicable --------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports) and (2) has been subject to filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of Common Stock outstanding as of September 30, 2004 was 73,753,760. Transitional Small Business Disclosure Format (check one): Yes No X ----- ----- CHINA CABLE AND COMMUNICATION, INC. AMENDMENT NO. 1 TO FORM 10-QSB INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements...............................................F-1 Item 2. Management's Discussion and Analysis or Plan of Operations..........15 Item 3. Controls and Procedures.............................................23 PART II - OTHER INFORMATION Item 1. Legal Proceedings...................................................23 Item 2. Changes in Securities...............................................24 Item 3. Default Upon Senior Securities......................................24 Item 4. Submission of Matters to a Vote of Security Holders.................24 Item 5. Other Information...................................................24 Item 6. Exhibits............................................................24 SIGNATURES....................................................................25 Exhibit 31.1 Certification Exhibit 31.2 Certification Exhibit 32.1 Certification Exhibit 32.2 Certification
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 September 30, December 31, 2004 2003 ----------- ----------- ASSETS (Unaudited) (Audited) CURRENT ASSETS Cash and cash equivalents $ 109,188 $ 173,967 Cash held in trust account -- 150,703 Deposit 3,000,000 3,000,000 Accounts and other receivables 574,393 -- Inventories 211,441 -- Deferred consulting fees 337,534 1,934,192 Other current assets 113,587 18,892 ----------- ----------- Total current assets 4,346,145 5,277,754 ----------- ----------- NON-CURRENT ASSETS Property, plant and equipment, net 15,821,732 -- Intangible asset 1,860,546 -- Investment in joint venture -- 7,668,477 Amount due from the PRC joint venture partner 1,948,788 -- Amount due from the holding company of PRC joint venture partner 498,587 -- ----------- ----------- Total non-current assets 20,129,653 7,668,477 ----------- ----------- Total assets $24,475,798 $12,946,231 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 4,582,260 $ 85,753 Amount due to the preferred stockholders 4,702,801 -- Income tax payable 34,597 -- Amounts due to shareholders 263,882 75,923 Amount due to a director 2,634 2,500 ----------- ----------- Total current liabilities 9,586,174 164,176 ----------- ----------- MINORITY INTEREST 8,527,535 -- ----------- ----------- REDEEMABLE CONVERTIBLE PREFERRED STOCK, at minimum redemption amount, nil and 2,758,621 shares issued and outstanding at September 30, 2004 and December 31, 2003 (mandatory redemption value of $4,000,000) -- 3,372,465 ----------- ----------- (To be continued) The accompanying notes are an integral part of these consolidated financial statements. F-1
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 (Continued) September 30, December 31, 2004 2003 ------------ ------------ (Unaudited) (Audited) STOCKHOLDERS' EQUITY Preferred Stock, $0.0001 par value, 20,000,000 shares authorized -- -- Common Stock, $.00001 par value; 100,000,000 shares authorized, 73,753,760 and 72,312,760 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively 738 723 Additional paid-in capital 22,353,724 21,356,799 Foreign exchange reserve 27,723 -- Accumulated deficit (16,020,096) (11,947,932) ------------ ------------ Total stockholders' equity 6,362,089 9,409,590 ------------ ------------ Total liabilities and stockholders' equity $ 24,475,798 $ 12,946,231 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-2
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (unaudited) Three months ended Sept. 30, Nine months ended Sept. 30, 2004 2003 2004 2003 ----------- ----------- ----------- ----------- NET SALES $ 1,172,349 $ -- 3,215,260 -- ----------- ----------- ----------- ----------- COST AND EXPENSES Consulting fees (195,608) (1,543,377) (2,332,658) (2,734,842) Directors' compensation (82,810) (755,437) (419,505) (995,970) Professional fees (66,633) (79,909) (332,357) (138,883) Operating expenses (exclusive of depreciation shown separately below) (220,039) -- (779,518) -- Administrative expenses (105,082) -- (351,764) -- Depreciation (365,878) -- (1,091,079) -- Amortization (30,171) -- (90,514) -- ----------- ----------- ----------- ----------- Total expenses (1,066,221) (2,378,723) (5,397,395) (3,869,695) ----------- ----------- ----------- ----------- PROFIT (LOSS) FROM OPERATIONS 106,128 (2,378,723) (2,182,135) (3,869,695) OTHER INCOME (EXPENSES) Merger costs -- -- -- (3,770,416) Interest income (expenses), net (95,633) 542 (95,301) 867 Other income (expenses), net (69,358) -- 8,155 (121) Equity in earnings of joint venture -- (64,911) -- 175,650 ----------- ----------- ----------- ----------- Total other expenses (164,991) (64,369) (87,146) (3,594,020) ----------- ----------- ----------- ----------- LOSS ON EXTINGUISHMENT OF DEBT -- -- (1,174,183) -- ----------- ----------- ----------- ----------- LOSS BEFORE PROVISION FOR INCOME TAXES (58,863) (2,443,092) (3,443,464) (7,463,715) PROVISION FOR INCOME TAXES -- -- (51,248) -- ----------- ----------- ----------- ----------- LOSS BEFORE MINORITY INTEREST (58,863) (2,443,092) (3,494,712) (7,463,715) MINORITY INTEREST (194,434) -- (517,203) -- ----------- ----------- ----------- ----------- NET LOSS (253,297) (2,443,092) (4,011,915) (7,463,715) DEEMED DIVIDENDS -- -- (60,249) -- ----------- ----------- ----------- ----------- NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS $ (253,297) $(2,443,092) (4,072,164) (7,463,715) =========== =========== =========== =========== Net loss per share - basic and diluted $ (0.003) $ (0.039) (0.056) (0.119) Weighted average number of shares outstanding - basic and diluted 73,641,912 62,864,347 73,175,935 62,864,347 The accompanying notes are an integral part of these consolidated financial statements. F-3
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND THE YEAR ENDED DECEMBER 31, 2003 Common Stock Additional Foreign Retained Total at 0.00001 par value Paid-in Exchange Earnings Stockholders' No.of Shares Amount In Capital Reserve (Deficit) Equity ----------- ----------- ----------- ----------- ----------- ----------- Balances, January 1, 2003 49,567,002 496 $ 5,875,396 $ 0 $ 1,159,857 $ 7,035,749 Record effects of reverse merger 6,036,436 60 40 0 0 100 Shares issued to Yau-Sing Tang in connection with reverse merger 1,200,000 12 743,988 0 0 744,000 Shares issued to consultants upon completion of reverse merger 4,760,931 48 2,951,729 0 0 2,951,777 Warrants issued in conjunction with issuance of redeemable convertible preferred stock 0 0 1,000,000 0 0 1,000,000 Deemed dividend arising from beneficial conversion feature of redeemable convertible preferred s tock 0 0 3,000,000 0 (4,033,028) (1,033,028) Shares and warrants issued to Trenchant Operating LLC in connection with the sale of redeemable convertible preferred stock 18,391 0 302,713 0 0 302,713 Exercise of options granted to DSS Associates, Carter Fleming International Ltd., Grand Unison Limited, and Emerging Growth Partner 4,750,000 48 2,944,952 0 0 2,945,000 Shares and warrants issued to consultants for financial advisory services 4,490,000 44 3,354,356 0 0 3,354,400 Shares issued to directors as directors' compensation 1,490,000 15 1,183,625 0 0 1,183,640 Net loss for the year ended December 31, 2003 0 0 0 0 (9,074,761) (9,074,761) ----------- ----------- ----------- ----------- ----------- ----------- Balances, December 31, 2003 72,312,760 723 21,356,799 0 (11,947,932) 9,409,590 Shares issued to directors as directors' compensation 441,000 5 296,935 0 0 296,940 Shares issued to consultant for financial advisory services 1,000,000 10 699,990 0 0 700,000 Foreign exchange difference arising from consoli0ation 0 0 0 27,723 0 27,723 Net loss for the nine months ended Sept. 30, 2000 0 0 0 0 (4,072,164) (4,072,164) ----------- ----------- ----------- ----------- ----------- ----------- Balances, September 30, 2004 73,753,760 723 $22,353,724 $ 27,723 (16,020,096) $ 6,362,089 =========== =========== =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-4
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (unaudited) Cash flows from operating activities: 2004 2003 ----------- ----------- Net loss $(4,011,915) $(7,463,715) Adjustments to reconcile net loss to net cash used in operating activities: Loss on extinguishment of debt 1,174,183 -- Interest on debt 95,904 -- Common stock and warrants issued for consulting fees 2,296,658 2,734,842 Common stock issued for directors' compensation 296,940 931,080 Common stock issued for financial advisory services -- 10,350 Merger costs paid by the issuance of common stock -- 3,689,000 Depreciation and amortization 1,181,593 -- Minority interest share of income of joint venture 517,203 -- Equity in earnings of joint venture -- (175,650) Changes in operating assets and liabilities: Decrease in cash held in trust account 150,703 -- Increase in accounts and other receivable (486,826) -- Increase in inventories (33,696) -- Decrease in deferred merger costs -- 20,468 Increase in other current assets (92,286) -- Increase in accounts payable and accrued liabilities 1,032,497 342,998 Decrease in income tax payable (80,783) -- ----------- ----------- Net cash generated from operating activities 2,040,175 89,373 ----------- ----------- Cash flows from investing activities: Increase in cash in connection with the consolidation of joint venture 45,859 -- Increase in amount due from the PRC joint venture partner (483,677) -- Purchase of property, plant and equipment (1,855,229) -- ----------- ----------- Net cash used in investing activities (2,293,047) -- ----------- ----------- Cash flows from financing activities: Cash received from exercise of options -- 50,000 Cash received from issuance of 8% convertible preferred stock, net -- 3,642,150 Increase in amounts due to shareholders 187,959 127,276 Increase in amount due to a director 134 2,500 Cash received in connection with reverse merger of Solar Touch Ltd. -- 100 ----------- ----------- Net cash provided by financing activities 188,093 3,822,026 ----------- ----------- Net (decrease) increase in cash and cash equivalents (64,779) 3,911,399 Cash and cash equivalents at beginning of period 173,967 -- ----------- ----------- Cash and cash equivalents at end of period $ 109,188 $ 3,911,399 =========== =========== Supplementary disclosures of cash flow information Income taxes paid $ 132,031 $ -- =========== =========== Supplemental Schedule of non-cash financing activities: Common stock and warrants issued for consulting and directors' fees $ 996,940 $ 7,078,657 =========== =========== Common stock and warrants issued for merger costs $ -- $ 3,689,000 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-5
CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS The interim consolidated unaudited financial statements have been prepared by the Company and include all material adjustments which, in the opinion of the management, are necessary for a fair presentation of financial results for the three months and nine months ended September 30, 2004. All adjustments and provisions included in these statements are of a normal recurring nature. Certain information and footnote disclosures made in the most recent annual consolidated financial statements included in the Form 10-KSB for the year ended December 31, 2003 have been condensed or omitted for the interim financial statements; accordingly, the interim financial statements should be read in conjunction with the December 31, 2003 consolidated financial statements. The results of operations for the interim period presented are not necessarily indicative of the results that can be expected for the entire year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Pursuant to a Share Exchange Agreement dated as of November 1, 2002, as amended on February 21, 2003, between the Company and Martin Rifkin and William Rifkin on the one hand; and Kingston Global Co., Ltd. ("Kingston") and Sino Concept Enterprises Limited (collectively the "Sellers"); and Solar Touch Limited ("Solar Touch"), on the other hand, on February 28, 2003 (the "Closing Date"), the Company acquired (the "Acquisition") from Kingston all of the issued and outstanding equity interests of Solar Touch. As a result of the Acquisition, the Company continued the operations of Solar Touch. Solar Touch was incorporated in the British Virgin Islands on April 26, 1999. Solar Touch owns 49% of the issued and outstanding shares of capital stock on a fully diluted basis of Baoding Pascali Broadcasting Cable Television Integrated Information Networking Co., Ltd. (the "Joint Venture" or "Baoding"). The Joint Venture is a Sino-foreign joint venture established in the People's Republic of China (the "PRC"), between Solar Touch and Baoding Pascali Multimedia Transmission Networking Co., Ltd. ("Baoding Multimedia"), which is a subsidiary of Baoding Pascali Group Co., Ltd., a Chinese state-owned enterprise. The accounting policies adopted in these interim consolidated unaudited financial statements are consistent with those set out in the Company's audited consolidated financial statements for the year ended December 31, 2003, except that Baoding has been consolidated on the following basis and that certain accounting policies as follows have been adopted upon consolidation of the accounts of Baoding with the Company's effective January 1, 2004. F-6 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of consolidation - ---------------------- The interim consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries Solar Touch and Broadway and its effective 49% interest in Baoding, collectively its "subsidiaries". All significant inter-company balances and transactions, including inter-company profits and unrealized profits and losses, are eliminated on consolidation. Prior to December 31, 2003, Baoding's Joint Venture partners consisted of the Company and Baoding Pascali Multimedia Transmission Networking Company Limited ("BPMTNC") with ownership interests of 49% and 51%, respectively. In addition, BPMTNC had the majority of the Joint Venture's board seats of the Board of Directors. In December 2003, the Joint Venture agreement was amended whereby BPMTNC granted 3% of its 51% interest in the Joint Venture to Baoding Cable Television Employees' Shareholding Association ("BCTESA"), as well as one seat on the Board of Directors. Effective January 1, 2004, the Joint Venture agreement between the Company and Baoding was further amended whereby the Company assumed effective control of the board of directors of Baoding by appointing five out of nine of its directors. The other four directors consist of three directors for BPMTNC and one director for BCTESA. In addition, the Company filled key management positions at the Joint Venture, including the position of Chief Financial Officer and General Manager, with persons affiliated with the Company. The Board of Directors of the Joint Venture serves a term of four years with no term limits. Changes in the Board of Director members can only be made after a unanimous vote of the Board. The Board of Directors is the highest authority of the Joint Venture and executes policy, operational matters and passes resolutions of the Joint Venture. Under EITF 96-16, "Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Right," the Company has determined that control of the Board of Directors of the Joint Venture enables the Company to significantly influence the operations of the Joint Venture. Accordingly, the Company has accounted for Baoding as a subsidiary and its accounts are consolidated. Inventories - ----------- Inventories, being consumables and network replacement parts, are stated at cost. Cost is determined on a first-in, first-out basis, and includes all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. Property and equipment - ---------------------- Property, and equipment are stated at cost, less accumulated depreciation and impairment losses, and are depreciated at rates sufficient to write off their cost, after taking into account their estimated residual value, over their estimated useful lives on a straight-line basis. The expected useful lives are as follows: Leasehold improvements 25 years Machinery and equipment 7 to 15 years Furniture, fixtures and equipment 7 to 10 years Motor vehicles 7 years F-7 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The useful lives of assets and depreciation and amortization methods are reviewed periodically. The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognized in the income statement. Construction in progress - ------------------------ Construction in progress includes direct costs of construction of other equipment and new networks. Interest incurred during the period of construction has not been capitalized as such amounts are not material. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. Intangible asset - ---------------- The intangible asset is an exclusive right to operate a cable TV network and is amortized on a straight-line basis over a period of twenty years. Impairment - ---------- The Company accounts for property and equipment, construction-in-progress and amortizable intangible assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets to be Disposed Of which requires an impairment loss to be recognized on long-lived assets when the sum of the expected future cash flows (undiscounted and without interest charges) resulting from the use of the assets and its eventual disposition is less than the carrying amount of the asset. Otherwise, an impairment loss is not recognized. Measurement of the impairment loss for long-lived assets is based on the fair value of the asset. Revenue recognition - ------------------- Installation fee income is recognized upon completion of the related installation work. Revenue from the provision of subscription television services is recognized at the time when the services are provided. Customers are billed on a monthly basis through an automated billing system. F-8 3. PROPERTY AND EQUIPMENT September 30, December 31, 2004 2003 (Unaudited) (Audited) Leasehold improvements $ 98,609 $ -- Machinery and equipment 16,392,306 -- Furniture, fixtures and equipment 125,265 -- Motor vehicles 295,659 -- ------------ ------------ 16,911,839 -- Less: Accumulated depreciation (5,007,094) -- ------------ ------------ 11,904,745 -- Construction in progress 3,916,987 -- ------------ ------------ $ 15,821,732 $ -- ============ ============ Depreciation expense was $365,878 and $1,091,079 for the three and nine months ended September 30, 2004, respectively. Depreciation for the next five years and remainder of life of the property and equipment is as follows: 2005.......................$ 1,450,402 2006....................... 1,450,402 2007....................... 1,450,402 2008....................... 1,450,402 2009....................... 1,449,201 Thereafter................. 8,570,923 ------------ $ 15,821,732 ============ 4. INTANGIBLE ASSET September 30, December 31, 2004 2003 (Unaudited) (Audited) Exclusive right to operate cable TV network $ 2,413,687 $ -- Less: Accumulated amortization (553,141) -- ----------- ----------- $ 1,860,546 $ -- =========== =========== Amortization expense was $30,171 and $90,514 for the three and nine months ended September 30, 2004, respectively, and annual amortization for each of the next five years is expected to be $120,686. F-9 5. INVESTMENT IN JOINT VENTURE On and before December 31, 2003, the Company accounted for its 49% ownership interest in Baoding using the equity method of accounting. However, effective on January 1, 2004, the Company assumed control of the board of directors of Baoding by appointing five out of nine of its directors and filled key management positions at the Joint Venture, including the position of Chief Financial Officer and General Manager, with persons affiliated with the Company. Accordingly, effective on January 1, 2004, the Company has accounted for Baoding as a subsidiary and its accounts are consolidated. The condensed balance sheets and statements of operations of Baoding were as follows: Condensed Balance Sheets as of September 30, December 31, ------------------------------ ----------- ----------- 2004 2003 ---- ---- ----------- ----------- (Unaudited) (Audited) Current assets $ 1,061,658 $ 2,170,280 Non-current assets 20,076,183 17,115,642 ----------- ----------- Total assets $21,137,841 $19,285,922 =========== =========== Current liabilities $ 4,417,186 $ 3,579,390 Non-current liabilities -- -- Capital 16,720,655 15,706,532 ----------- ----------- Total liabilities and equity $21,137,841 $19,285,922 ---------------------------- =========== =========== Condensed Statement of Operations For the nine months ended September 30 2004 2003 -------------------------------------- ---- ---- (Unaudited) (Unaudited) Net sales $ 3,215,260 $ 2,691,755 =========== =========== Profit from operations $ 1,056,567 $ 481,440 Other income (expenses), net 8,804 5,956 ----------- ----------- Profit before provision for income taxes 1,065,371 487,396 Provision for income taxes (51,248) (128,927) ----------- ----------- Net income $ 1,014,123 $ 358,469 =========== =========== The Company's equity in earnings (49%) $ 496,920 $ 175,650 =========== =========== The Board of Directors of Baoding has agreed to distribute a cash dividend to its joint venture partners in an amount equivalent to Baoding's accumulated earnings as of December 31, 2004. However, the payment of this dividend is contingent upon the approval of MOFTEC and local PRC tax bureau. Accordingly, Baoding has not reorganized a liability for declaring the dividend until the approvals from MOFTEC and the local PRC tax bureau have been obtained or it is probable that such approvals will be obtained. F-10 6. AMOUNTS DUE FROM THE PRC JOINT VENTURE PARTNER AND ITS HOLDING COMPANY As of September 30, 2004, the PRC joint venture partner of Baoding, Baoding Pascali Multimedia Transmission Networking Co., Ltd., and its holding company owed $1,948,788 and $498,587, respectively to Baoding. These amounts were not trade in nature, and were unsecured, interest free and are due for repayment on December 31, 2005. 7. AMOUNTS DUE TO STOCKHOLDERS AND A DIRECTOR The amounts due to stockholders and a director are unsecured, non-interest bearing and repayable on demand. 8. 8% REDEEMABLE CONVERTIBLE PREFERRED STOCK On September 24, 2003, the Company completed the sale of 2,758,621 shares of the Company's restricted 8% Redeemable Convertible Preferred Stock, par value $0.0001 per share (the "Preferred Stock"), to Gryphon Master Fund, L.P., a Bermuda limited partnership (the "Purchaser"), for $1.45 per share (the "Purchase Price"), or an aggregate purchase price of $4,000,000. The Purchase Price for the Preferred Stock was calculated based upon 90% of the moving average closing price of the Company's common stock for the 60 trading days immediately prior to entering into the agreement. The fair market value of the Company's common stock as of September 24, 2003 was $2.85 per share. In connection with this transaction, the Company also issued warrants to the Purchaser to purchase up to 827,586 shares of the Company's restricted common stock for at an exercise price $2.18 per share until September 24, 2008 (the "Warrants"). The sale of the Preferred Stock and the Warrants to the Purchaser was made in a private placement transaction in reliance upon an exemption from registration under Section 4(2) of the Securities Act of 1933. The Preferred Stock accrues dividends at the rate of 8% of the Purchase Price per share per annum, payable when, as and if declared by the Board of Directors on September 30 and March 31 of each year commencing on March 31, 2004. The Company is required to redeem all then outstanding shares of Preferred Stock on September 24, 2008, the fifth anniversary of the date on which the preferred stock was issued, at a redemption price equal to the Purchase Price, plus accrued but unpaid dividends. However, if the "Current Market Price" (defined as the volume weighted average price of the Company's common stock on the 10 consecutive trading days immediately preceding such date as reported on the Over-the-Counter Bulletin Board of the Company's Common Stock is equal to or less than $0.70 for a period of 10 consecutive trading days), the holders of the Preferred Stock have the right to require the Company to redeem all or any portion of the Preferred Stock at a redemption price, in cash, equal to $1.67 per share, plus all accrued but unpaid dividends. The fair value of the Preferred Stock with the conversion feature and the warrants, calculated based on available market data using appropriate valuation models, was determined to be in excess of the net proceeds of $3,642,150 received by the Company from the Purchaser, and the minimum Preferred Stock redemption amount of $4,000,000. Therefore, the Preferred Stock has been recorded at the minimum redemption amount of $4,000,000, less related transactions costs of $660,563 to be adjusted for in subsequent periods for accretion adjustments and accrued and unpaid dividends. F-11 8. 8% REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED) On September 24, 2003, the Company issued 18,391 shares of restricted common stock to Trenchant Operating LLC ("Trenchant"), in consideration for services performed by Trenchant in finding the Purchaser. In addition, the Company issued warrants to Trenchant to purchase 91,954 shares of common stock, with an exercise price equal to $2.18 per share until September 25, 2008. The fair market value of the Company's commons stock as of September 24, 2003 was $2.85. The fair value of the warrants was determined to be $250,299 as of the date of grant using the Black-Scholes pricing option valuation model, which assumed a risk free interest rate of approximately 3.07%, an expected life of 5 years, and a volatility rate of 171%. On July 26, 2004, the Purchaser filed a complaint in the United States District Court for the Northern District of Texas, Dallas Division alleging that the Company breached its contract by failing to redeem the Preferred Stock. The Purchaser is seeking the redemption price of $4,606,897; accrued unpaid dividends equal to $220,226; interest of $888 per day from June 14, 2004 until the date of redemption; pre-judgment and post-judgment interest; attorneys' fees; court costs; and other such relief. The Company retained counsel to represent it in this matter and filed its answer to the complaint. Although the Company cannot yet assess the probable outcome of the litigation, it has accounted for the redemption price of the Preferred Stock of $4,606,897 and interest of $95,904 for the period from June 14, 2004 to September 30, 2004 as a current liability on its consolidated balance sheet. The Company currently believes that this accounting accrual is conservative and reflects the probable maximum amount that the Company would be required to pay to the Purchaser should the Purchaser be successful in its lawsuit. The Company does not believe that it would be required to pay unpaid dividends to the Purchaser because the terms of the Preferred Stock provide that the holders of Preferred Stock receive dividends only when and if declared by the Board of Directors of the Company. The Company's Board of Directors has not declared dividends on the Preferred Stock to date. The Company does not believe that the existence of the lawsuit will hamper its ability to conduct its business because Mr. Hong-Tao Li, a director, officer and a beneficial owner of the Company, has personally agreed to pay any obligation that may arise out of the Company's litigation with Gryphon. Mr. Li will receive shares of common stock in the Company if he is required to make payment to the Company under this agreement. The price per share of the stock to be issued to Mr. Li will be a reasonable price mutually acceptable to both parties. If Mr. Li receives a large number of shares pursuant to his agreement with the Company, existing shareholders' interests in the Company will be proportionally diluted. 9. INCOME TAXES Solar Touch and Broadway Offshore are both British Virgin Islands investment holding companies that do not carry on any business and do not maintain any offices in the United States of America. Therefore, no provision for United States income taxes or tax benefits for the Company has been made. F-12 9. INCOME TAXES (CONTINUED) Baoding is a Sino-foreign joint venture established in the PRC. Baoding was subject to a 3% local income tax for the year ended December 31, 2002 and 18% (15% federal income tax plus 3% local income tax) for the year ended December 31, 2003 and 13% (10% federal income tax plus 3% local income tax) for future years, on the results of its operations after adjusting for items which are non-assessable or disallowed. Certain items of income and expense are recognized for PRC income tax purposes in a different accounting period from that in which they are recognized for financial accounting purposes. Baoding's operation in PRC for the nine months ended September 30, 2004 results in a profitable operation, while loss was incurred on the Company level. 10. DIRECTORS' COMPENSATION IN SHARES AND WARRANTS The Company signed two-year directors' stock compensation agreements (the "Agreements") with three of its directors, Mr. George Raney, Mr. Raymond Ying-Wai Kwan, and Mr. Yau-Sing Tang on February 28, 2003. Pursuant to the Agreements, the Company will issue an aggregate of 49,000 shares of common stock each month in consideration for their services rendered through February 2005. In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Issues Task Force Consensus Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18"), the Company accounted for the directors' compensation in shares and warrants based on the fair market value of the Company's common stock at the date of the individual issue of the stock to the directors. During the three and nine months ended September 30, 2004, 147,000 and 441,000 shares of the Company's common stock under the Company's 2003 Stock Compensation Plan were issued to the directors, respectively. 11. CONSULTING AGREEMENTS AND DEFERRED CONSULTING FEES In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Issues Task Force Consensus Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18"), the Company has accounted for the consulting agreements based on the fair market value of the Company's common stock at the commencement date of the individual consulting agreements. For the three and nine months ended September 30, 2004, the Company charged to expense a total of $195,608 and $2,296,658, respectively associated with consulting agreements and recorded deferred consulting fees of $337,534 at September 30, 2004. No warrants granted to consultants were exercised during the three and nine months ended September 30, 2004. 12. MINORITY INTEREST For the three and nine months ended September 30, 2004, the Company charged to expense $194,434 and $517,203, respectively representing the other partners' share in the income of the joint venture. The Company recorded a minority interest of $8,527,535 as of September 30, 2004, representing the other partners' share in the net assets of the joint venture. F-13 13. EARNINGS (LOSS) PER COMMON SHARE Basic EPS amounts are determined based on the weighted average number of shares of common stock outstanding. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. All potentially dilutive financial instruments as of September 30, 2004 had the effect of reducing the reported net loss per share, and, therefore, were excluded from the calculation. For presentation and comparative purposes of computing EPS only, the Company has assumed that 49,567,002 common shares were outstanding during throughout the period until February 2003, due to the reverse merger of the Company and Solar Touch Limited. 14. LITIGATION On July 26, 2004, the Purchaser filed a complaint in the United States District Court for the Northern District of Texas, Dallas Division alleging that the Company breached its contract by failing to redeem the Preferred Stock. The Purchaser is seeking the redemption price of $4,606,987; accrued unpaid dividends equal to $220,226; interest of $888 per day from June 14, 2004 until the date of redemption; pre-judgment and post-judgment interest; attorneys' fees; court costs; and other such relief. The Company has retained counsel to represent it in this matter and the Company has not yet filed its answer to the complaint. Although the Company cannot yet assess the probable outcome of the litigation, it has accounted for the redemption price of the Preferred Stock of $4,606,897 and interest of $95,904 for the period from June 14, 2004 to September 30, 2004 as a current liability on its consolidated balance sheet. The Company currently believes that this accounting accrual is conservative and reflects the probable maximum amount that the Company would be required to pay to the Purchaser should the Purchaser be successful in its lawsuit. The Company does not believe that it would be required to pay unpaid dividends to the Purchaser because the terms of the Preferred Stock provide that the holders of Preferred Stock receive dividends only when and if declared by the Board of Directors of the Company. The Company's Board of Directors has not declared dividends on the Preferred Stock to date. The Company does not believe that the existence of the lawsuit will hamper its ability to conduct its business because Mr. Hong-Tao Li, a director, officer and a beneficial owner of the Company, has personally agreed to pay any obligation that may or may not arise out of the Company's litigation with Gryphon. Mr. Li will receive shares of common stock in the Company if he is required to make payment to the Company under this agreement. The price per share of the stock to be issued to Mr. Li will be a reasonable price mutually acceptable to both parties. If Mr. Li receives a large number of shares pursuant to his agreement with the Company, existing shareholders' interests in the Company will be proportionally diluted. F-14 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS This discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and related notes. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis, we review our estimates and assumptions. Our estimates were based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Our critical accounting policies, the policies we believe are most important to the presentation of our consolidated financial statements and require the most difficult, subjective and complex judgments, are outlined in the notes to our Consolidated Financial Statements. In addition, certain statements made in this report may constitute "forward-looking statements". These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. You can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Overview - -------- The Company was incorporated in the State of Delaware on November 27, 1984. Prior to May 1993, the Company was principally engaged in the business of developing, financing and producing motion pictures for distribution. From May 1993 to February 28, 2003, however, the Company had no business operations and sought other business opportunities. Pursuant to a Share Exchange Agreement dated as of November 1, 2002, as amended on February 21, 2003, between the Company and Martin Rifkin and William Rifkin on the one hand; and Kingston Global Co., Ltd. ("Kingston") and Sino Concept Enterprises Limited (collectively the "Sellers"); and Solar Touch Limited ("Solar Touch"), on the other hand, on February 28, 2003 (the "Closing Date"), the Company acquired (the "Acquisition") from Kingston all of the issued and outstanding equity interests of Solar Touch (the "Solar Touch Shares"). As consideration for the Solar Touch Shares, the Company issued 49,567,002 shares of its Common Stock to the Sellers. In addition to the Common Stock issued to the Sellers, the Company issued 4,760,931 shares to the Sellers' financial consultants. The consideration for the Acquisition was determined through arms-length negotiations between the management of the Company and the Sellers. As a result of the Acquisition, the Company continued the operations of Solar Touch. Solar Touch was incorporated in the British Virgin Islands on April 26, 1999. Solar Touch owns 49% of the issued and outstanding shares of capital stock on a fully diluted basis of Baoding Pascali Broadcasting Cable Television Integrated Information Networking Co., Ltd. (the "Joint Venture"). The Joint Venture is a Sino-foreign joint venture established in the People's Republic of China (the "PRC"), between Solar Touch and Baoding Pascali Multimedia Transmission Networking Co., Ltd. ("Baoding Multimedia"), which is a subsidiary of Baoding Pascali Group Co., Ltd., a Chinese state-owned enterprise. 15 The Joint Venture was formed on July 23, 1999, when Baoding Multimedia and Solar Touch signed a joint venture contract (the "JV Agreement") and the articles of association of the Joint Venture (the "JV Articles"). The JV Agreement and JV Articles provide that the total amount of investment of the Joint Venture was RMB122.425 million (or approximately US$14.8 million); and that the registered capital stock of the Joint Venture was RMB70 million (or approximately US$8.46 million). The JV Agreement and JV Articles also provide that Baoding Multimedia's contribution to the Joint Venture was Baoding Multimedia's network and related facilities with a value of RMB21.7 million, plus intangible assets (including licenses, business goodwill) valued at RMB14 million which was equal to 51% of the registered capital of the Joint Venture and that Solar Touch's contribution was an investment of US$4.14 million (or RMB34.3 million) in cash which was equal to 49% of the registered capital. On July 28, 1999, the Management Commission of the Baoding Hi-Tech Industrial Development Area approved the JV Agreement and JV Articles as well as the members of the board of directors of the Joint Venture. On August 5, 1999, a Certificate of Approval for Establishment of Enterprises with Foreign Investment in the PRC for the Joint Venture was issued and on August 16, 1999, the Business License for the Joint Venture was issued for the operation of the Joint Venture. On February 23, 2000, Baoding Multimedia and Solar Touch signed another agreement to increase the Joint Venture's registered capital from RMB70 million to RMB100 million, provided, however, that the parties' respective percentage of equity interests in the Joint Venture shall remain the same. On February 24, 2000, the Management Commission of the Development Area approved the increase in the Joint Venture's registered capital from RMB70 million to RMB100 million. On September 6, 2000, a revised Business License was issued to reflect the increase in the Joint Venture's registered capital. On May 6, 2003, Solar Touch transferred its 49% interest in the Joint Venture to its wholly-owned subsidiary, Broadway Offshore Limited ("Broadway Offshore"), a company incorporated in the British Virgin Islands. On December 29, 2003, Baoding Multimedia transferred a 3% interest in the Joint Venture to the Baoding Pascali Cable Television Network Workers Stockholding Association. On the same date, the JV Agreement and JV Articles were amended to reflect the correct shareholdings of Broadway Offshore, Baoding Multimedia and Baoding Pascali Cable Television Network Workers Stockholding Association. Also, the total number of board of directors of the Joint Venture increased to nine pursuant to the Amended Joint Venture Agreement dated December 29, 2003 (the "Amended JV Agreement"). The Joint Venture operates a cable television network in the municipality of Baoding, near Beijing in the PRC. The Joint Venture has over 200,000 subscribers in a market with a population of over 10 million. The Company believes that the Joint Venture is at present the only Sino-foreign joint venture approved by the State Administration of Radio, Film and Television to be licensed as a cable television network operator in the PRC. The Company believes that it is the first and only joint venture allowed to have a foreign investor invest in and to operate the cable television network in the PRC. The board of directors of the Joint Venture currently has nine members, five of whom were appointed by the Company. Pursuant to the Amended JV Agreement, Broadway Offshore has the right to appoint five of the nine members of the Board of the Joint Venture. Through those five appointed directors, the Company has obtained control of the board of directors of the Joint Venture and the Company's Board of Directors has filled key management positions at the Joint Venture, including Chief Financial Officer and General Manager, with persons affiliated with the Company. As a foreign investor, the Company, through its predecessor, has been the single largest interest holder of the Joint Venture since formation of the Joint Venture in 1999 and HAS actively participated in the management of the Joint Venture. 16 In view of China's accession to the World Trade Organization, it is expected that further opening of the cable television market in China will take place in the near future. Being the first foreign investor to be allowed to own an interest in a Chinese cable operator and with the experience gained through the years, the Company believes it is at an advantageous position to increase its ownership interest in the Joint Venture beyond the current 49% level, should it be allowed to do so in the future. According to its business license and the current relevant rules and regulations, the Joint Venture is allowed to acquire and own networks in areas other than Baoding. Therefore, when opportunities arise, the Joint Venture may try to expand its business beyond Baoding, in which case, the Company may assist the Joint Venture in raising capital for such expansion, although there cannot be any assurance of such expansion. On July 1, 2003, the Company changed its name from Nova International Film, Inc. to China Cable and Communication, Inc. Results of operations - --------------------- Three months ended September 30, 2004 and 2003 - ---------------------------------------------- Revenue - ------- Our revenue of $1,172,349 for the three months ended September 30, 2004 represents the installation and subscription fees, premium digital service fees and added value services fees of our Baoding joint venture received and to be received, net of service tax. The Company reported no revenue for the three months ended September 30, 2003 because Baoding was accounted for using the equity method of the accounting in 2003. Cost and Expenses Total cost and expenses decreased by 55.2% to $1,066,221 for the three months ended September 30, 2004 from $2,378,723 for the corresponding period in 2003 and represent expenses incurred by the Company and our Baoding joint venture. The decrease was primarily due to net effect of the decrease in consulting fees of $1,347,769, directors' compensation of $672,627 and professional fees of $13,276, and the increase in operating expenses of $220,039, administrative expenses of $105,082 and depreciation and amortization of $365,878 and $30,171, respectively. The decrease in consulting fees and directors' compensation was primarily because the Company did not issue any common stock as compensation for consultants for the three months ended September 30, 2004. The decrease in directors' compensation was purely because of the significant decrease in the market price of common stock over the year, so that the value of monthly shares issued as compensation to directors dropped. Total cost and expenses for the three months ended September 30, 2003 represent expenses incurred by the Company only. Interest income (expenses), net Interest expenses, net for the three months ended September 30, 2004 was $95,633, as compared to other income, net of $542 for the same corresponding period in 2003. The significant change was primarily resulted from the inclusion of an interest on debt of $95,904 owing to the preferred stockholders. The interest was accrued at $888 per day for the period from June 14, 2004, the date of redemption, to September 30, 2004. 17 Other income (expenses), net Other expenses, net for the three months ended September 30, 2004 was $69,358, as compared to the zero balance for the same corresponding period in 2003. The significant change was primarily because of the reverse of the recovery of the amount due from a related company of $69,507, which was previously recorded in the six months ended June 30, 2004. Equity in earnings of investment For the three months ended September 30, 2003, Baoding was accounted for by us as an investment in a joint venture using the equity method of accounting. The equity in earnings of investment in 2003 represented the Company's 49% share of undistributed earnings of its investment in Baoding. As discussed above, starting as of January 1, 2004, the Baoding accounts have been consolidated with ours and, therefore, no equity in earnings of investment has been recorded. Minority interest For the three months ended September 30, 2004, minority interest represented the profit of Baoding attributable to the 51% equity interest not owned by the Company. No minority interest was recorded for 2003 as the Baoding accounts had not yet been consolidated with ours. Net loss available for common stockholders Net loss decreased to $253,297 for the three months ended September 30, 2004 from $2,443,092 for the corresponding period in 2003, representing a decrease of $2,189,795 or 89.6%. This decrease is due to the combined effect of the increase in profit attributable to our Baoding joint venture of $251,718 and the decreases in operating expenses attributable to the Company of $851, consulting fees of $1,347,769, directors' compensation of $672,627; professional fees of $13,276 and the increase in interest expenses, net of $96,175 and other expenses, net of $69,358. The profit attributable to the Baoding joint venture for the three months ended September 30, 2004 was $186,807 (net profit of the Baoding joint venture less minority interest), as compared to the equity in loss of the Baoding joint venture of $64,911 for the corresponding period in 2003. Nine months ended September 30, 2004 and 2003 - --------------------------------------------- Revenue Our revenue of $3,215,260 for the nine months ended September 30, 2004 represents the installation and subscription fees, premium digital service fees and added value services fees of our Baoding joint venture received and to be received, net of service tax. The Company reported no revenue for the nine months ended September 30, 2003 because Baoding was accounted for using the equity method in 2003. Cost and Expenses Total cost and expenses increased by 39.5% to $5,397,395 for the nine months ended September 30, 2004 from $3,869,695 for the corresponding period in 2003 and represent expenses incurred by the Company and our Baoding joint venture. The increase was primarily due to the combined effect of the decrease of consulting fees of $402,184 and directors' compensation of $576,465, and the 18 increase of professional fees of $193,474, operating expenses of $779,518, administrative expenses of $351,764 and depreciation and amortization of $1,091,079 and $90,514, respectively. Total cost and expenses for the nine months ended September 30, 2003 represent expenses incurred by the Company only. Merger costs For the nine months ended September 30, 2004, the Company reported no merger costs whereas for the corresponding period in 2003, the Company incurred merger costs of $3,770,416 as a result of the reverse merger that took place in 2003. Interest income (expenses), net Interest expenses, net for the nine months ended September 30, 2004 was $95,301, as compared to other income, net of $867 for the same corresponding period in 2003. The significant change was primarily resulted from the inclusion of an interest on debt of $95,904 owing to the preferred stockholders. The interest was accrued at $888 per day for the period from June 14, 2004, the date of redemption, to September 30, 2004. Other income, net Other income, net for the nine months ended September 30, 2004 was $8,155, as compared to the negative balance of $121 for the same corresponding period in 2003. The significant change was primarily caused by the inclusion of a service income of $8,374 charged to other Baoding network operator in 2004. There was no such income in the corresponding period of 2003. Equity in earnings of investment For the nine months ended September 30, 2003, Baoding was accounted for by us as an investment in a joint venture using the equity method of accounting. The equity in earnings of investment in 2003 represented the Company's 49% share of undistributed earnings of its investment in Baoding. As discussed above, starting as of January 1, 2004, the Baoding accounts have been consolidated with ours and, therefore, no equity in earnings of investment has been recorded. Loss on extinguishment of debt. For the nine months ended September 30, 2004, the Company recorded a loss on extinguishment of debt of $1,174,183. This represented the premium recognized on the Preferred Stock requested by its holders to be redeemed by the Company. Provision for income taxes As Baoding recorded income whereas the Company on its own level incurred a loss, provision for income taxes for the nine months ended September 30, 2004, represented the PRC income taxes incurred by Baoding only. Baoding is subject to total taxes at 13% (10% federal income tax plus 3% local income tax). No provision for income taxes was recorded for 2003 because the Company was not subject to any tax and the Baoding accounts had not yet been consolidated with ours. 19 Minority interest For the nine months ended September 30, 2004, minority interest represented the profit of Baoding attributable to the 51% equity interest not owned by the Company. No minority interest was recorded for 2003 as the Baoding accounts had not yet been consolidated with ours. Deemed dividends For the nine months ended September 30, 2004, the Company recorded deemed dividends of $60,249 on its redeemable convertible preferred stock. Because the preferred stock was issued by the Company on September 24, 2003, there were no deemed dividends for the corresponding period in 2003. Net loss available for common stockholders Net loss decreased to $4,011,915 for the nine months ended September 30, 2004 from $7,463,715 for the corresponding period in 2003, representing a decrease of $3,451,800 or 46.2%. This decrease is primarily due to the combined effect of the increases in profit attributable to our Baoding joint venture of $321,270, professional fees of $193,474, operating expenses of $154,182, interest expenses, net of $96,168 and other income, net of $8,276, and the decreases in merger costs of $3,770,416, consulting fees of $402,184, and directors' compensation of $576,465, and the loss on extinguishment of debt of $1,174,183, and deemed dividends on preferred stock of $60,249. The profit attributable to the Baoding joint venture for the nine months ended September 30, 2004 was $517,203, as compared to the equity in earnings of joint venture of $194,434 for the corresponding period in 2003, that represents an increase of $321,270, or 182.9%. The significant improvement in the results of our Baoding joint venture has been caused by the launch of digital premium services to subscribers since October 2003 and successful marketing of our set-top boxes. Since the beginning of the year, the Company has sold approximately 30,000 set-top boxes to the digital premium services subscribers. Subscribers for these new services have paid extra subscription fees, that has resulted in the increase in revenue of our Baoding joint venture in 2004. However, the operating and administrative expenses of our Baoding did not increase in line with the increase in revenue and, therefore, it resulted in increase in net profit of our Baoding. Financial condition, liquidity, capital resources - ------------------------------------------------- For the nine months ended September 30, 2004, we generated $2,040,175 from operating activities and we used $1,855,229 to purchase property, plant and equipment. As of September 30, 2004, the Company has cash and cash equivalents of $109,188. Our current assets were $4,346,145 and our current liabilities were $9,586,174, which resulted in a current ratio of 0.46. We had no capital expenditure commitments outstanding as of September 30, 2004. Although the Company has a negative working capital, management believes that there is currently not a going concern issue because management believes that Mr. Hong-Tao Li, a director, officer and a beneficial owner of the Company will continue to provide financial support to the Company to meet its liabilities as they are incurred. However, there can be no assurance that Mr. Li will continue to provide financial support to the Company. As described in the "Legal Proceedings" section in this Form 10-QSB, the Company is currently involved in litigation with Gryphon Master Fund, L.P. ("Gryphon") regarding Gryphon's investment in the Company's 8% Redeemable Convertible Preferred Stock (the "Preferred Stock"). Gryphon has filed a complaint alleging that the mandatory redemption feature of the Preferred Stock has been triggered and that the Company is required to redeem the Preferred 20 Stock at the redemption price of $4,606,987 plus accrued unpaid dividends, interest and costs. The Company has retained counsel to represent it in this matter. Although the Company cannot yet assess the probable outcome of the litigation, it has accounted for the redemption price of the Preferred Stock of $4,606,897 and its interest of $95,904 for the period from June 14, 2004 to September 30, 2004 as a current liability on its consolidated balance sheet. The Company currently believes that this accounting accrual is conservative and reflects the probable maximum amount that the Company would be required to pay to the Purchaser should the Purchaser be successful in its lawsuit. The Company does not believe that it would be required to pay unpaid dividends to the Purchaser because the terms of the Preferred Stock provide that the holders of Preferred Stock receive dividends only when and if declared by the Board of Directors of the Company. The Company's Board of Directors has not declared dividends on the Preferred Stock to date. The Company does not believe that the existence of the lawsuit will hamper its ability to conduct its business because Mr. Hong-Tao Li, a director, officer and a beneficial owner of the Company, has personally agreed to pay any obligation that may or may not arise out of the Company's litigation with Gryphon. Mr. Li will receive shares of common stock in the Company if he is required to make payment to the Company under this agreement. The price per share of the stock to be issued to Mr. Li will be a reasonable price mutually acceptable to both parties. If Mr. Li receives a large number of shares pursuant to his agreement with the Company, existing shareholders' interests in the Company will be proportionally diluted. Plan of Operation - ----------------- While our projection of future cash requirements is affected by numerous factors, including but not limited to changes in customer receipts, cable TV industry trends, operating cost fluctuations, and unplanned capital spending, we anticipate, based on the scale of our existing operations, that our projected cash flows from operations will be sufficient to support our planned operations for the next twelve months. Exchange rate - ------------- Fluctuations of currency exchange rates between Renminbi and the United States dollar could adversely affect our business since our sole investment conducts its business primarily in China, and its revenue from operations is settled in Renminbi. The Chinese government controls its foreign reserves through restrictions on imports and conversion of Renminbi into foreign currency. Although the Renminbi to United States dollar exchange rate has been stable since January 1, 1994 and the Chinese government has stated its intention to maintain the stability of the value of the Renminbi, there can be no assurance that exchange rates will remain stable. The Renminbi could devalue against the United States dollar. Exchange rate fluctuations may adversely affect our revenue arising from the sales of products in China and denominated in Renminbi and our financial performance when measured in United States dollar. Recent accounting pronouncements - -------------------------------- In April 2002, The Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 22 and 64. Amendment of FASB Statement No. 13, and Technical Corrections." The Statement addresses the accounting for extinguishment of debt, sale-leaseback transactions and certain 21 lease modifications. The Statement is effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not have material impact on the Company's financial statement presentation or disclosure. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company's financial statement presentation or disclosure. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions. The Company does not expect this standard will have any effect on its financial statement presentation or disclosure. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 is not expected to have a material effect on the Company's financial position, results of operations, or cash flows. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation. Transition and Disclosure" SFAS No. 148 amends SFAS No. 123 "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company does not expect the adoption of SFAS No. 148 to have a material effect on our financial position, results of operations, or cash flows. In January 2003, the FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities (an interpretation of ARB No. 51) ("FIN-46")." FIN46 addresses consolidation by business enterprises of certain variable interest entities, commonly referred to as special purpose entities. The Company will be required to implement the other provisions of FIN46 in 2003. The adoption of FIN46 is not expected to have a material impact on the Company's consolidated financial statements. In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." It is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designed after June 30, 2003. All provisions of SFAS No. 149 should be applied prospectively. The adoption of SFAS 149 is not expected to have a material impact on the Company's consolidated financial statements. 22 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or as an asset in some circumstances). It is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is permitted. The adoption of SFAS No. 150 is not expected to have a material impact on the Company's consolidated financial statements. ITEM 3. CONTROLS AND PROCEDURES 1) Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company conducted an evaluation under the supervision and with the participation of the principal executive officer and principal financial officer of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d- 15(e) under the Exchange Act. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. 2) Changes in Internal Control There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is currently in litigation with the purchaser of its 8% Redeemable Convertible Preferred Stock. See Note 9 to the Company's Consolidated Financial Statements in this Quarterly Report and also the Company's Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on August 24, 2004 for detailed information regarding the litigation. 23 ITEM 2. CHANGES IN SECURITIES During the three months ended September 30, 2004, compensation to three of our directors, Mr. George Raney, Mr. Yau-Sing Tang and Mr. Raymond Ying-Wai Kwan, were paid by the issuance of 147,000 shares in lieu of cash. All issuances described above were made pursuant to Section 4(2) of the Securities Act of 1933, as amended, and pursuant to Regulation D promulgated there-under. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS Exhibit Number Description - ------ ----------- 3(i)(a) Certificate of Incorporation of CCCI. (1) 3(i)(b) Certificate of Amendment of Certificate of Incorporation (filed November 17, 1989). (2) 3(i)(c) Certificate of Amendment of Certificate of Incorporation (filed July 1, 2003). (3) 3(ii) Bylaws of CCCI. (1) 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - -------------------------- (1) Incorporated by reference from CCCI's Registration Statement on Form S-18, effective November 12, 1985. (2) Incorporated by reference from CCCI's Annual Report on Form 10-K for the fiscal year ended October 31, 1989. (3) Incorporated by reference from CCCI's Current Report on Form 8-K filed on September 29, 2003. 24 SIGNATURES In accordance with the requirements of the Exchange Act, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHINA CABLE AND COMMUNICATION, INC. Date: November 23, 2004 /s/ Raymond Ying-Wai Kwan ----------------------------------- Name: Raymond Ying-Wai Kwan Title: Chief Executive Officer Date: November 23, 2004 /s/ Yau-Sing Tang ----------------------------------- Name: Yau-Sing Tang Title: Chief Financial Officer 25 EX-31.1 2 chinaexhib311-112304.txt CERTIFICATION OF CEO PER SECTION 302 Exhibit 31.1 CERTIFICATION I, Raymond Ying-Wai Kwan, certify that: 1. I have reviewed this Amendment No. 1 to the quarterly report on Form 10-QSB of China Cable and Communication, Inc.: 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 23, 2004 /s/ Raymond Ying-Wai Kwan ----------------------------------- Raymond Ying-Wai Kwan Chief Executive Officer EX-31.2 3 chinaexhib312-112304.txt CERTIFICATION OF CFO PER SECTION 302 Exhibit 31.2 CERTIFICATION I, Yau-Sing Tang certify that: 1. I have reviewed this Amendment No. 1 to the quarterly report on Form 10-QSB of China Cable and Communication, Inc.: 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 23, 2004 /s/ Yau-Sing Tang ----------------------------------- Yau-Sing Tang Chief Financial Officer EX-32.1 4 chinaexhib321-112304.txt CERTIFICATION OF CEO PER SECTION 906 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this Amended Quarterly Report on Form 10-QSB (the "Report") of China Cable and Communication, Inc. (the "Company") for the quarter ended September 30, 2004, Raymond Ying-Wai Kwan, the Chief Executive Officer, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of the undersigned knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 23, 2004 /s/ Raymond Ying-Wai Kwan ----------------------------------- Raymond Ying-Wai Kwan Chief Executive Officer EX-32.2 5 chinaexhib322-112304.txt CERTIFICATION OF CFO PER SECTION 906 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this Amended Quarterly Report on Form 10-QSB (the "Report") of China Cable and Communication, Inc. (the "Company") for the quarter ended September 30, 2004, Yau-Sing Tang, the Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of the undersigned knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 23, 2004 /s/ Yau-Sing Tang ----------------------------------- Yau-Sing Tang Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----