-----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, GkNTDof2vYJXUZjovR52qdegZkE8D9er6kg8Dhgq1w+J9jkXN0oYHRf6pmSdYNDh PGoh3DpJVM7gfd7DOLMmdA== 0001144204-05-026154.txt : 20050817 0001144204-05-026154.hdr.sgml : 20050817 20050817172509 ACCESSION NUMBER: 0001144204-05-026154 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050817 DATE AS OF CHANGE: 20050817 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 SEC ACT: 1934 Act SEC FILE NUMBER: 002-98997-NY FILM NUMBER: 051034155 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 1 v023834_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2005 (_) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 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 Identification Number) incorporation or organization) 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 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 June 30, 2005 was 76,928,260. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] CHINA CABLE AND COMMUNICATION, INC. FORM 10-QSB INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements..............................................2 Item 2. Management's Discussion and Analysis or Plan of Operations.......17 Item 3. Controls and Procedures..........................................25 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......26 Item 3. Defaults Upon Senior Securities..................................26 Item 4. Submission of Matters to a Vote of Security Holders..............26 Item 5. Other Information................................................26 Item 6. Exhibits ........................................................26 SIGNATURES .................................................................28 Exhibit 31.1......Certification Exhibit 31.2......Certification Exhibit 32.1......Certification Exhibit 32.2......Certification 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2005 2004 ------------ ------------ ASSETS (Unaudited) (Audited) CURRENT ASSETS Cash and cash equivalents $ 199,994 $ 117,197 Accounts receivable, net of allowance for doubtful accounts of $393,913 and $219,786 respectively 240,121 114,644 Prepayments and deposits 297,582 434,837 Inventories 508,924 341,446 Other current assets 59,300 111,450 ------------ ------------ Total current assets 1,305,921 1,119,574 ------------ ------------ NON-CURRENT ASSETS Property and equipment, net 15,944,103 15,933,744 Intangible asset 1,770,032 1,830,374 Amount due from the holding company of the joint venture partner 498,587 498,587 ------------ ------------ Total non-current assets 18,212,722 18,262,705 ------------ ------------ Total assets $ 19,518,643 $ 19,382,279 ============ ============ LIABILITIES, MINORITY INTERESTS, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 4,056,233 $ 4,143,583 Deferred revenue 642,102 476,814 Amount due to the preferred stockholders 5,208,611 4,784,497 Income tax payable 31,046 63,479 Amounts due to stockholders and directors 560,618 366,300 Amount due to a director of the joint venture -- 45,094 ------------ ------------ Total current liabilities 10,498,610 9,879,767 ------------ ------------ MINORITY INTERESTS, net 6,625,333 6,549,012 ------------ ------------
(To be continued) 2 CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December 31, 2005 2004 ------------ ------------ (Unaudited) (Audited) STOCKHOLDERS' EQUITY Preferred Stock, $0.0001 par value, 20,000,000 shares authorized, nil shares issued -- -- Common Stock, $0.00001 par value; 100,000,000 shares authorized, 76,928,260 shares issued and outstanding at June 30, 2005 and December 31, 2004 769 769 Additional paid-in capital 22,973,536 22,973,536 Comprehensive Income - Foreign exchange reserve 27,723 27,723 Deferred consulting fees (697,294) (1,245,538) Accumulated deficit (19,910,034) (18,802,990) ------------ ------------ Total stockholders' equity 2,394,700 2,953,500 ------------ ------------ Total liabilities and stockholders' equity $ 19,518,643 $ 19,382,279 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
Three months ended June 30, Six months ended June 30, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ NET SALES $ 1,256,581 $ 1,109,160 2,772,510 2,042,911 ------------ ------------ ------------ ------------ COST AND EXPENSES Consulting fees (194,643) (830,212) (548,244) (2,137,050) Directors' compensation (32,692) (111,769) (104,739) (336,695) Professional fees (63,521) (130,239) (199,229) (265,724) Operating expenses (600,029) (310,180) (1,151,969) (559,479) Administrative expenses (112,278) (116,084) (212,544) (246,682) Depreciation (397,109) (362,612) (791,713) (725,201) Amortization (30,171) (30,172) (60,342) (60,343) ------------ ------------ ------------ ------------ Total cost and expenses (1,430,443) (1,891,268) (3,068,780) (4,331,174) ------------ ------------ ------------ ------------ (LOSS) FROM OPERATIONS (173,862) (782,108) (296,270) (2,288,263) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSES) Provision for bad debts -- -- (174,127) -- Interest income (expenses), net (228,867) 124 (308,419) 332 Other income (expenses), net (28,978) 69,103 (50,414) 77,513 ------------ ------------ ------------ ------------ Total other income (expenses) (257,845) 69,227 (532,960) 77,845 ------------ ------------ ------------ ------------ LOSS ON EXTINGUISHMENT OF DEBT -- (1,174,183) -- (1,174,183) ------------ ------------ ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES (431,707) (1,887,064) (829,230) (3,384,601) PROVISION FOR INCOME TAXES (57,351) (22,339) (57,351) (51,248) ------------ ------------ ------------ ------------ LOSS BEFORE MINORITY INTEREST (489,058) (1,909,403) (886,581) (3,435,849) MINORITY INTEREST (91,019) (200,861) (220,463) (322,769) ------------ ------------ ------------ ------------ NET LOSS (580,077) (2,110,264) (1,107,044) (3,758,618) DEEMED DIVIDENDS -- (27,221) -- (60,249) ------------ ------------ ------------ ------------ NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS $ (580,077) $ (2,137,485) $ (1,107,044) $ (3,818,867) ============ ============ ============ ============ Net loss per share - basic and diluted $ (0.01) $ (0.03) $ (0.01) $ (0.05) Weighted average number of shares outstanding - basic and diluted 76,928,260 73,467,837 76,928,260 72,940,386
The accompanying notes are an integral part of these consolidated financial statements. 4 CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Comprehensive Common Stock at Additional Income-Foreign Deferred Retained Total 0.00001 par value Paid - Exchange Consulting Earnings Stockholders' No. of Shares Amount In Capital Reserve Fees (Deficit) Equity ------------- --------- ------------ ---------- ------------ ------------ ------------ Balances, January 1, 2004 72,312,760 $ 723 $ 21,356,799 $ 0 $ (1,934,192) $(11,947,932) $ 7,475,398 Shares issued to directors as directors' compensation 600,500 6 347,974 0 0 0 347,980 Shares issued to consultant for financial advisory services 4,015,000 40 1,875,660 0 0 0 1,875,700 Foreign exchange difference arising from consolidation 0 0 0 27,723 0 0 27,723 Adjustment to reflect preferred stocks becoming mandatorily redeemable at fair value 0 0 (606,897) 0 0 0 (606,897) Deemed dividend arising from beneficial conversion feature of redeemable convertible preferred stock 0 0 0 0 0 (60,249) (60,249) Deferred consulting fees - stock compensation 0 0 0 0 688,654 0 688,654 Net loss for the year ended December 31, 2004 0 0 0 0 0 (6,794,809) (6,794,809) ------------ --------- ------------ --------- ------------ ------------ ------------ Balances, December 31, 2004 76,928,260 $ 769 $ 22,973,536 $ 27,723 $ (1,245,538) $(18,802,990) $ 2,953,500 Deferred consulting fees - stock compensation 0 0 0 0 548,244 0 548,244 Net loss for the period ended June 30, 2005 0 0 0 0 0 (1,107,044) (1,107,044) ------------ --------- ------------ --------- ------------ ------------ ------------ Balances, June 31, 2005 76,928,260 $ 769 $ 22,973,536 $ 27,723 $ (697,294) $(19,910,034) $ 2,394,700 ============ ========= ============ ========= ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
2005 2004 ------------ ------------ Cash flows from operating activities: Net loss $ (1,107,044) $ (3,758,618) Adjustments to reconcile net loss to net cash generated from (used in) operating activities: Loss on extinguishment of debt -- 1,174,183 Common stocks and warrants issued for consulting fees -- 700,000 Deferred consulting fees expensed, net 548,244 1,401,050 Common stocks issued for directors' compensation -- 249,900 Directors' compensation payable by common stocks 30,380 -- Depreciation and amortization 852,055 785,544 Minority interest 220,463 322,769 Bad debts 174,127 -- Interest due to preferred stockholder 424,114 -- Changes in operating assets and liabilities: Decrease (Increase) in: Cash held in trust account -- 149,628 Accounts receivable (299,604) (107,369) Prepayments and deposits 137,255 -- Inventories (167,478) (111,929) Other current assets 52,150 18,891 Increase (Decrease) in: Accounts payable and accrued liabilities (87,350) 625,815 Deferred revenue 165,288 -- Income tax payable (32,433) (82,714) Amounts due to stockholders and directors 163,938 11 Amount due to a director of the joint venture (45,094) -- ------------ ------------ Net cash generated from operating activities 1,029,011 1,367,161 ------------ ------------ Cash flows from investing activities: Increase in cash in connection with the consolidation of joint venture -- 45,859 Increase in amount due from the joint venture partner (144,142) (514,529) Purchase of property and equipment (808,123) (963,407) Proceeds from disposal of property 6,051 -- ------------ ------------ Net cash used in investing activities (946,214) (1,432,077) ------------ ------------ Cash flows from financing activities: -- -- ------------ ------------ Net increase (decrease) in cash and cash equivalents 82,797 (64,916) Cash and cash equivalents at beginning of year 117,197 173,967 ------------ ------------ Cash and cash equivalents at end of year $ 199,994 $ 109,051 ============ ============ Supplementary disclosures of cash flow information Income and value added taxes paid $ 154,706 $ 100,586 ============ ============ Supplemental Schedule of non-cash financing activities: Common stock and warrants issued for consulting and directors' fees $ -- $ 876,400 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 6 CHINA CABLE AND COMMUNICATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 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 six months ended June 30, 2005. 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, 2004 have been condensed or omitted for the interim financial statements; accordingly, the interim financial statements should be read in conjunction with the December 31, 2004 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. GOING CONCERN The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not purport to represent the realizable or settlement values. We incurred a net loss of $1,107,044 and $3,818,867 for the six months ended June 30, 2005 and 2004, respectively, and our current liabilities exceeded our current assets by $9,192,689 at June 30, 2005. These factors create substantial doubt about our ability to continue as a going concern. Company management continues to evaluate the Company's cash needs and the availability of debt and equity financing to fund the Company's operations. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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, 2004. Basis of Consolidation The interim consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary, Broadway Offshore Limited ("Broadway") and its 49% equity interest in Baoding Pascali Broadcasting Cable Television Integrated Information Networking Co., Ltd. (the "Joint Venture"), collectively its subsidiaries. All significant inter-company balances and transactions, including inter-company profits and unrealized profits and losses, are eliminated on consolidation. The Joint Venture is a Sino-foreign joint venture established in the People's Republic of China (the "PRC"), between Broadway 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. Prior to December 31, 2003, Baoding's joint venture partners consisted of the Company and Baoding Multimedia with ownership interests of 49% and 51%, respectively. In addition, Baoding Multimedia had the majority of the Joint Venture's board seats of the Board of Directors. Accordingly, the Company accounted for its investment in the Joint Venture using the equity method of accounting for the year ended December 31, 2003. 7 On December 29, 2003, the Joint Venture agreement was amended whereby Baoding Multimedia 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 Multimedia was further amended whereby the Company assumed effective control of the board of directors of the Joint Venture by appointing five out of nine of its directors under the PRC Sino-foreign Joint Venture Law. The other four directors consist of three directors for Baoding Multimedia 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. As a result, control of the Board of Directors of the Joint Venture enables the Company to significantly influence the operations of the Joint Venture. Accordingly, since January 1, 2004, the Company has accounted for the Joint Venture as a subsidiary and its accounts are consolidated. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated 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. Cash and cash equivalents Cash and cash equivalents include cash on hand, demand and time deposits with banks and liquid investments with an original maturity of three months or less. 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, amortization 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 The useful lives of assets and depreciation and amortization methods are reviewed periodically. Construction in progress includes direct costs of constructing equipment and new cable and fiber optic 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. 8 Intangible assets The intangible asset is an exclusive right to operate a cable TV network and is amortized on a straight-line basis over a period of twenty years. Impairment The Company applies the provisions of Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), issued by the Financial Accounting Standards Board ("FASB"). SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. The Company tests its long-lived assets, including property and equipment and intangible assets subject to periodic amortization, for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company has identified this lowest level to be principally the cable TV network in a specific region of Baoding city. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows as the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary. There was no impairment of long-lived assets in the periods ended June 30, 2005 and 2004. Redeemable convertible preferred stock In connection with the issuance of the redeemable convertible preferred stock in 2003, the Company recorded deemed dividends of $4,000,000 arising from the beneficial conversion feature embedded within the preferred stock in accordance with the provisions of Emerging Issues Task Force Consensus Nos. 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", and 00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments" and $60,249 of accretion for the year ended December 31, 2004. The deemed dividends arise from the allocation of proceeds raised to the detachable warrants issued to the preferred stockholders, as well as due to the effective conversion price based on the proceeds allocated to the preferred stock being below the fair market value of the Company's common stock on the date of issuance. The beneficial conversion feature is limited to the total proceeds raised of $4,000,000. During the period ended June 30, 2005, the redeemable convertible preferred stock was redeemed by the preferred stockholders. Income taxes The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. No provision for deferred taxation has been made, as there are no temporary differences at the balance sheet date. Stock based compensation The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 123, which defines a fair-value-based method of accounting for stock based employee compensation and transactions in which an entity issues its equity instruments to acquire goods and services from non-employees. Stock compensation for stock granted to non-employees has been determined in accordance with SFAS No.123 and the Emerging Issues Task Force consensus in 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"), as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured. 9 Earnings per share The Company has presented a dual presentation of basic and diluted earnings per share ("EPS") with a reconciliation of the numerator and denominator of the EPS computations. Basic EPS amounts are based on the weighted average 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 potential dilutive financial instruments as of June 30, 2005 had the effect of reducing the reported net loss per share, and therefore, were excluded from the calculation. Foreign Currency Translations and Transactions The Renminbi ("RMB"), the national currency of the PRC, is the primary currency of the economic environment in which the operations of the Joint Venture are conducted. The Company uses the United States dollar ("U.S. dollars") for financial reporting purposes. The Company translates the Joint Venture's assets and liabilities into U.S. dollars using the applicable unified exchange rates quoted by the People's Bank of China prevailing at the balance sheet date, and the statement of income is translated at average unified exchange rates during the reporting period. Adjustments resulting from the translation of the Joint Venture's financial statements from RMB into U.S. dollars are recorded in shareholders' equity as part of accumulated comprehensive income. Transactions denominated in currencies other than RMB are translated into RMB at the unified exchange rates prevailing at the transaction dates. Gains or losses resulting from transactions in currencies other than RMB are reflected in the statement of income of the Joint Venture for the reporting periods. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 2.0% appreciation of the RMB against the U.S. dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant revaluation of the RMB against the U.S. dollar. Any significant revaluation of RMB may be attributable to adjustments resulting from the translation of the Joint Venture's financial statements which will be recorded as part of accumulated comprehensive income in shareholders' equity. Revenue recognition Revenue from the provision of subscription television services is recognized at the time when the services are provided. Customers are billed on a quarterly basis for the analog television services and on an annual basis for the digital television services. High-speed internet service customers are billed on a monthly basis. Prepayment from all of the customers is deferred to the appropriate period of service. Installation fee income is recognized upon completion of the related installation work. 4. RECENT ACCOUNTING PRONOUNCEMENTS In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1") which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1. The Company will evaluate the effect, if any, of EITF 03-1 when final guidance is released. In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our consolidated financial statements. 10 In December 2004, the FASB issued SFAS No. 123-R, Share Based Payments, which requires that the compensation cost relating to share-based payment transactions (including the cost of all employee stock options) be recognized in the financial statements. The cost will be measured based on the estimate fair value of the equity or liability instruments issued. SFAS 123-R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Management believes the adoption of this pronouncement will not have a material effect on our consolidated financial statements. Also, in December 2004, the FASB issued SFAS 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions." The amendments made by SFAS No. 153 are based on the principle that the exchange of non-monetary assets should be measured using the estimated fair market value of the assets exchanged. SFAS No. 153 eliminates the narrow exception for non-monetary exchanges of similar productive assets, and replaces it with a broader exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has "commercial substance" if the future cash flows of the entity are expected to change significantly as a result of the transaction. This pronouncement is effective for monetary exchanges in fiscal periods beginning after June 15, 2005. Management believes the adoption of this pronouncement will not have a material effect on our consolidated financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement replaces APB Opinion No. 20, "Accounting Changes", and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements", and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Management believes the adoption of this pronouncement will not have a material effect on our consolidated financial statements. In June 2005, the FASB ratified the EITF consensus to amend EITF No. 96-16, "Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholders Have Certain Approval or Veto Rights." The EITF agreed to amend the Protective Rights section of this consensus, as well as Example of Exhibit 96-16A, to be consistent with the consensus reached in Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similarly Entity When the Limited Partners Have Certain Rights." The provisions of this amendment should be applied prospectively to new investments and to investment agreements that are modified after June 29, 2005. Management believes the adoption of this pronouncement will not have a material effect on our consolidated financial statements. Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements. 5. INVENTORIES As of June 30, 2005 and December 31, 2004, inventories consisted of the following:- June 30, December 31, 2005 2004 Raw materials $327,894 $141,152 Finished product 181,030 200,294 -------- -------- Total $508,924 $341,446 ======== ======== 11 6. PROPERTY AND EQUIPMENT June 30, December 31, 2005 2004 Leasehold improvements $ 78,105 $ 84,156 Machinery and equipment 17,811,563 17,718,296 Furniture, fixtures and equipment 131,963 127,073 Motor vehicles 358,456 295,659 ------------ ------------ 18,380,087 18,225,184 Less: Accumulated depreciation (6,161,447) (5,369,734) ------------ ------------ 12,218,640 12,855,450 Construction in progress 3,725,463 3,078,294 ------------ ------------ $15,944,103 $ 15,933,744 ============ ============ 7. INTANGIBLE ASSETS June 30, December 31, 2005 2004 Exclusive right to operate cable TV network $ 2,413,687 $ 2,413,687 Less: Accumulated amortization (643,655) (583,313) ----------- ----------- $ 1,770,032 $ 1,830,374 =========== =========== The amortization expense for the period ended June 30, 2005 amounted to $60,342. 8. AMOUNTS DUE TO STOCKHOLDERS AND DIRECTORS The amounts due to stockholders and directors are unsecured, non-interest bearing and repayable on demand. June 30, December 31, Name 2005 2004 ----------- ------------ Stockholder: Faithful Union Limited $143,400 $263,882 Stockholder and Director: Raymond Ying-Wai Kwan, CEO 38,592 15,767 Yau-Sing Tang, CFO 373,004 86,651 George Raney, Director 4,340 - Paul Zee-Ho Tsang, Director 1,282 - -------- -------- Total $560,618 $366,300 ======== ======== 12 For the period ended June 30, 2005, the Company repaid $120,482 to Faithful Union Limited, a company wholly owned by Mr. Hong Tao Li, a Director, Chief Operating Officer and Vice-President of Project Development and as a result, the Company still owed this shareholder $143,400 as of June 30, 2005. For the period ended June 30, 2005, Mr. Yau Sing Tang, CFO and Director of the Company paid various expenses of $58,411 on behalf of the Company. The Company also owed him total salaries of $44,872 and director's shares valued at $18,600 for the period ended June 30, 2005. Mr. Tang also advanced $206,758 to the Company during the period ended June 30, 2005. The Company paid him the salaries of $42,288 for the period ended June 30, 2005. In total, the Company owed him the amount of $373,004 as of June 30, 2005. For the period ended June 30, 2005, the Company owed Mr. Raymond Ying Wai Kwan, CEO and Director of the Company total salaries of $26,923 and director's shares valued at $7,440. The Company paid him the salaries of $11,538 for the period ended June 30, 2005. In total, the Company owed him the amount of $38,592 as of June 30, 2005. For the period ended June 30, 2005, the Company owed Mr. George Raney, Director of the Company, director's shares valued at $4,340. For the period ended June 30, 2005, the Company owed Mr. Zee-Ho Tsang, Director of the Company, director's fee of $2,564. The Company paid him the director fee of $1,282 for the period ended June 30, 2005. In total, the Company owed him the amount of $1,282 as of June 30, 2005. 9. AMOUNT DUE TO A DIRECTOR OF THE JOINT VENTURE As of December 31, 2004, the Company's Joint Venture owed an amount of $45,094 to one of the directors of the Company's Joint Venture. The amount owed represents the personal bank loan taken up by such director for office premises acquired by the Company's Joint Venture in 2004. The amount was wholly repaid before June 30, 2005. 10. 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 per share of 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 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 with 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 Preferred Stock is senior to the common stock with respect to the payment of dividends, redemption payments and rights upon liquidation, dissolution or winding up of the affairs of the Company. Upon liquidation, the Preferred Stock is entitled to receive a liquidation preference equal to the Purchase Price plus the amount of accrued and unpaid dividends. The Company was 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. 13 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 was recorded at the minimum redemption amount of $4,000,000, less related transactions costs of $660,563 to be adjusted in subsequent periods for accretion adjustments and accrued and unpaid dividends. On September 24, 2003, the Company also 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 grants 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 June 14, 2004 the Purchaser requested that the Company redeem the Preferred Stock, as the market price of the Company's common stock was equal to or less than $0.70 per share for more than ten consecutive trading days. 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; plus unpaid dividends equal to $220,226 and interest accruing at $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. On June 20, 2005, the Company and the Purchaser represented to the Court that they had agreed to an entry of judgment on the Purchaser's claim against the Company. Therefore, the Purchaser was granted a judgment against the Company in the amount of $5,165,119.99. The Purchaser was also granted recovery of post-judgment interest on the judgment at a rate of 6% per annum from June 20, 2005 until the judgment is paid by the Company. In a separate agreement, the Company agreed to pay the Purchaser a sum of $35,000 to cover legal costs incurred by the Purchaser in two installments: $20,000 on or before June 30, 2005 and $15,000 on or before July 31, 2005. In exchange for the $35,000 payment, the Purchaser agreed not to execute on the agreed judgment on or before September 30, 2005. Subsequent to June 30, 2005, the Company completed payment of the $35,000 to the Purchaser. In accordance with Financial Accounting Standards Board SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", the Company has accounted for the judgment debt of $5,165,120, together with post-judgment interest of $8,491 for the period from June 21, 2005 to June 30, 2005 and the compensation amount of $35,000 as a current liability on its consolidated balance sheet. The Company has accounted for the difference between the minimum Preferred Stock redemption amount of $4,000,000 and the cash redemption price of $ 4,606,897 as a reduction in Additional Paid-in Capital for the year ended December 31, 2004. In addition, for the year ended December 31, 2004, the Company has expensed unamortized transaction costs amounting to $567,286 relating to the original Preferred Stock issuance. For the period ended June 30, 2005, the Company expensed the difference between the judgment debt and the recorded amount due to the Purchaser as of December 31, 2004 of $309,194 as other interest expenses and the compensation amount of $35,000 as other expenses on the Company's consolidated statement of operations and comprehensive income. 11. INCOME TAXES Broadway Offshore is a British Virgin Islands investment holding company that does not carry on any business and does 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. 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 the PRC for the periods ended June 30, 2005 and 2004 resulted in a profitable operation, while loss was incurred on the Company level. 14 12. 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. Since the expiry of the Agreements on February 28, 2005, the Company has not yet renewed the stock compensation agreements with the directors. As of June 30, 2005, the Company did not issue the 98,000 director's shares of common stock valued at $30,380 to the directors. 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 accrued for the directors' compensation in shares and warrants based on the fair market value of the Company's common stock at the period end. During the six months ended June 30, 2004, 294,000 shares of the Company's common stock under the Company's 2003 Stock Compensation Plan were issued to the directors. No shares of the Company's common stock were issued for the six months ended June 30, 2005. 13. CONSULTING AGREEMENTS AND DEFERRED CONSULTING FEES For the year ended December 31, 2004, the Company issued a total of 4,015,000 shares of the Company's common stock to several consultants as consideration for consultation and advisory services rendered and to be rendered over a period ranging from one month to eighteen months. For the period ended June 30, 2005, no shares were issued. 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 six months ended June 30, 2005 and 2004, the Company charged to expense a total of $548,244 and $2,137,050, respectively associated with consulting agreements and recorded deferred consulting fees of $697,294 and $1,245,538 respectively at June 30, 2005 and December 31, 2004. The deferred consulting fees will be charged to expenses as follows: Year ending December 31 Amount 2005 $ 393,565 2006 303,729 ----------- Total $ 697,294 =========== For the periods ended June 30, 2005 and 2004, no warrants were granted or exercised. As of June 30, 2005, the following warrants were still outstanding:
- --------------------------------------------------------------------------------------------------------------- Warrant-holder No. of warrants Exercise Price Exercise Period - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Patrick Ko 250,000 $0.45 Five years starting from May 3, 2003 - --------------------------------------------------------------------------------------------------------------- Ni Rong-song 1,000,000 $0.45 Five years starting from May 30, 2003 - --------------------------------------------------------------------------------------------------------------- Friedland Capital Inc. 100,000 $1.50 Three years starting from August 22, 2003 - ---------------------------------------------------------------------------------------------------------------
15 14. MINORITY INTEREST The minority interest comprises the following:-
As of June 30, 2005 December 31, 2004 ------------- ----------------- Share in the net assets of the joint venture $ 8,829,299 $ 8,608,836 Less: Amount due from the PRC joint venture partner (2,203,966) (2,059,824) ---------- ---------- Net amount $ 6,625,333 $ 6,549,012 ========== ==========
For the six months ended June 30, 2005 and 2004, the Company recorded a reduction to income of $220,463 and $332,769 respectively, representing the other partners' share in the income of the joint venture. The Company also recorded a minority interest of $8,829,299 and $8,608,836 as of June 30, 2005 and December 31, 2004 respectively, representing the other partners' share in the net assets of the joint venture. The balance of the minority interest as of June 30, 2005 and December 31, 2004 was reduced by receivables due from Baoding's 48% joint venture partner in anticipation of the proposed dividend on the Baoding joint venture as described below. The amount due from the PRC joint venture partner was not trade in nature. The amount was unsecured, interest free and is due for repayment by December 31, 2005. The Board of directors of Baoding joint venture has proposed the distribution of a cash dividend to its joint venture partners in the amount of RMB36 million (equivalent to approximately US$4,337,300). The payment of such dividend is contingent upon the approval of SAFE (State Administration of Foreign Exchange) and of the local PRC tax bureau. Baoding joint venture is in the process of obtaining a tax clearance certificate from the local PRC tax bureau in order to get the approval for the declaration of dividend. The local PRC tax bureau needs to review Baoding joint venture's up-to-date tax filings to ensure all of the enterprise and value-added taxes have been properly paid up to December 31, 2004. Under the current PRC foreign joint venture law, Baoding joint venture cannot formerly declare the dividend until formal approvals from SAFE and local PRC tax bureau have been obtained. The Baoding joint venture intends to offset the amount of dividend to be declared to its PRC joint venture partner with the amount due from the PRC joint venture partner. Such offset of dividend declared is permitted under the current PRC laws. In the books of the Baoding joint venture, the dividend to be declared has not yet been accrued. 15. EARNINGS (LOSS) PER COMMON SHARE Basic EPS amounts are based on the weighted average 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 potential dilutive financial instruments as of June 30, 2005 had the effect of reducing the reported net loss per share, and, therefore, were excluded from the calculation. 16. SEGMENT REPORTING The Company operates in three principal business segments. Management believes that the following table presents useful information to the chief operation decision makers for measuring business performance and financing needs and preparing the corporate budget, etc. As all the Company's customers are located in Baoding City, China and the Company's revenues are generated in Baoding, no geographical segment information is presented. 16
Analog Digital High speed For the six months ended Television Television Internet June 30, 2005 Services Services Services Corporate Total - -------------- -------- -------- -------- --------- ----- Net Sales $ 1,983,287 $ 686,605 $ 102,618 $ -- $ 2,772,510 Consulting fees -- -- -- (548,244) (548,244) Directors' compensation -- -- -- (104,739) (104,739) Professional fees -- -- -- (199,229) (199,229) Operating expenses (467,437) (562,075) -- (122,457) (1,151,969) Administrative expenses (212,544) -- -- -- (212,544) Depreciation (791,713) -- -- -- (791,713) Amortization (60,342) -- -- -- (60,342) Profit (Loss) from operation 451,251 124,530 102,618 (974,669) (296,270) Analog Digital High speed For the six months ended Television Television Internet June 30 , 2004 Services Services Services Corporate Total - -------------- -------- -------- -------- --------- ----- Net Sales $ 1,948,092 $ -- $ 94,819 $ -- $ 2,042,911 Consulting fees -- -- -- (2,137,050) (2,137,050) Directors' compensation -- -- -- (336,695) (336,695) Professional fees -- -- -- (265,724) (265,724) Operating expenses (404,446) -- -- (155,033) (559,479) Administrative expenses (246,682) -- -- -- (246,682) Depreciation (725,201) -- -- -- (725,201) Amortization (60,343) -- -- -- (60,343) Profit (Loss) from operation 511,420 -- 94,819 (2,894,502) (2,288,263)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS This quarterly report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company's future financial performance. The Company has attempted to identify forward-looking statements by terminology including "anticipates," "believes," "expects," "can," "continue," "could," estimates," "intends," "may," "plans," "potential," "predict," "should" or "will" or the negative of these terms or other comparable terminology. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, level of activity, performance or achievements. The Company expectations are as of the date this Form 10-QSB is filed, and the Company does not intend to update any of the forward-looking statements after the date this quarterly report on Form 10-QSB is filed to confirm these statements to actual results, unless required by law. Overview The Company was incorporated in the State of Delaware on November 27, 1984. Prior to February 2003, the Company had no business operations. From February 2003, as a result of a reverse merger, the Company, through its wholly-owned subsidiary, Broadway Offshore Limited ("Broadway Offshore"), which was incorporated under the laws of the British Virgin Islands, has owned 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 Broadway Offshore 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. 17 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 and 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 operations of the Joint Venture was issued. 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. 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"). In February 2004, the Company sold its intermediate holding company, Solar Touch, to an independent third party and as a result, the Company directly owns a 100% interest in Broadway Offshore. 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 dated December 29, 2003, 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 become the single largest interest holder of the Joint Venture and has actively participated in the management of the Joint Venture. 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. 18 Critical Accounting Policies and Estimates The preparation of the Company's financial statements requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, and which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The Company considers the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment: Investment in Joint Venture: On and before December 31, 2003, the Company accounted for its 49% ownership interest in the Joint Venture using the equity method of accounting. However, effective on January 1, 2004, the Company assumed control of the board of directors of the Joint Venture 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 the Joint Venture as a subsidiary and its accounts are consolidated. Revenue recognition: Revenue from the provision of subscription television services is recognized at the time when the services are provided. Customers are billed on a quarterly basis for the analog television services and on an annual basis for the digital television services. High speed internet service customers are billed on a monthly basis. Prepayment from all of the customers is deferred to the appropriate period of services. Installation fee income is recognized upon completion of the related installation work. Results of operations Three months ended June 30, 2005 and 2004 Revenue Our revenue of $1,256,581 for the three months ended June 30, 2005 represents the installation and subscription fees, premium digital service fees and added value services fees of the Joint Venture received and to be received, net of service tax whereas our revenue of $1,109,160 for the three months ended June 30, 2004 only included the installation and subscription fees and added value services fees of the Joint Venture received and to be received, net of service tax. The increase in our revenue of $147,421, representing a 13% increase, was attributable to the combined effect of the sales of set-top boxes and cable modems and the provision of premium digital services to customers for the three months ended June 30, 2005 which amounted to $220,940 and the decrease in installation fees received for the three months ended June 30, 2005. No such sales and services were provided for the three months ended June 30, 2004. Consulting Fees Total consulting fees decreased by $635,569, representing a 77% decrease to $194,643 for the three months ended June 30, 2005 from $830,212 for the three months ended June 30, 2004. The decrease was primarily attributable to the decrease in deferred consulting fees that resulted from the decrease in issuance shares of the Company's common stock to consultants for their services rendered and the decrease in the Company's stock price used in determining the fair market value of those shares of common stock in accordance with the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation". Directors' compensation Total directors' compensation decreased by $79,077, representing a 71% decrease to $32,692 for the three months ended June 30, 2005 from $111,769 for the three months ended June 30, 2004. The decrease was primarily attributable to the decrease in issuance of shares as directors' compensation for the three months ended June 30, 2004. No shares were issued to the directors for the three months ended June 30, 2005. Professional fees Total professional fees decreased by $66,718, representing a 51% decrease from $130,239 for the three months ended June 30, 2004 to $63,521 for the three months ended June 30, 2005. The decrease was primarily due to our decreased use of professional services during the three months ended June 30, 2005. 19 Operating Expenses Total operating expenses increased by $289,849 from $310,180 for the three months ended June 30, 2004 to $600,029 for the three months ended June 30, 2005. Total operating expenses represent the operating expenses incurred by both the Company and the Joint Venture. The increase was mainly because of the combined effect of an increase in operating expenses of $15,795 for analog television services, the inclusion of operating expenses of $218,169 for digital television services and an increase in operating expenses of the Company itself of $55,885. The increase in operating expenses for analog television services is in line with the increase in subscription fees received for analog television services. There was no digital television service offered by our Baoding Joint Venture for the three months ended June 30, 2004. The increase in operating expenses of the Company itself resulted from an increase in business travel and entertainment expenses for the three months ended June 30, 2005. Interest income (expenses), net Interest expenses, net for the three months ended June 30, 2005 was $228,867, as compared to interest income, net of $124 for the three months ended June 30, 2004. The significant change primarily resulted from the inclusion of interest on debt due to the preferred stockholders. Minority interest The minority interest represents the profit of the Joint Venture attributable to the 51% equity interest not owned by the Company. The decrease in minority interest of $109,842, representing a 55% decrease, from $200,861 for the three months ended June 30, 2004 to $91,019 for the three months ended June 30, 2005 was in line with the decrease in the profit generated by the Joint Venture. Deemed dividends For the three months ended June 30, 2004, the Company recorded deemed dividends of $27,221 on its redeemable convertible preferred stock whereas the Company recorded nil deemed dividends for the three months ended June 30, 2005. The substantial decrease in deemed dividends was caused by the fall in share price below the fixed redemption price of the Preferred Stock of $0.70 per share. It resulted in the mandatory redemption of the Preferred Stock after which no deemed dividends were charged to retained earnings of the Company. Net loss available for common stockholders Net loss decreased to $580,077 for the three months ended June 30, 2005 from $2,137,485 for the corresponding period of 2004, representing a decrease of $1,557,408 or 73%. This decrease is primarily due to the combined effects of the increases in net sales of $147,421, operating expenses of $289,849, and interest expenses of $228,991, along with the decreases in consulting fees of $635,569, directors' compensation of $79,077, administrative expenses of $3,806 and other income (expenses), net of $98,081. Six months ended June 30, 2005 and 2004 Revenue Our revenue of $2,772,510 for the six months ended June 30, 2005 represents the installation and subscription fees, premium digital service fees and added value services fees of the Joint Venture received and to be received, net of service tax whereas our revenue of $2,042,911 for the six months ended June 30, 2004 only included the installation and subscription fees and added value services fees of the Joint Venture received and to be received, net of service tax. The increase in our revenue of $729,599, representing a 36% increase, was mainly attributable to the sales of set-top boxes and cable modems and the provision of premium digital services to customers for the six months ended June 30, 2005, which amounted to $686,605. No such sales and services were provided for the six months ended June 30, 2004. 20 Consulting Fees Total consulting fees decreased by $1,588,806, representing a 74% decrease to $548,244 for the six months ended June 30, 2005 from $2,137,050 for the six months ended June 30, 2004. The decrease was primarily attributable to the decrease in issuance shares of the Company's common stock to consultants for their services rendered and the decrease in the Company's stock price used in determining the fair market value of those shares of common stock in accordance with the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation". Directors' compensation Total directors' compensation decreased by $231,956, representing a 69% decrease to $104,739 for the six months ended June 30, 2005 from $336,695 for the six months ended June 30, 2004. The decrease was primarily attributable to the combined effect of the reduction in directors' compensation in shares and the decrease in the Company's stock price as most of the directors' compensation was in shares. Operating Expenses Total operating expenses increased by $592,490 from $559,479 for the six months ended June 30, 2004 to $1,151,969 for the six months ended June 31, 2005. Total operating expenses represent the operating expenses incurred by both the Company and the Joint Venture. The increase was mainly because of the combined effect of an increase in operating expenses of $62,991 for analog television services, the inclusion of operating expenses of $562,075 for digital television services and a decrease in operating expenses of the Company itself of $32,576. The increase in operating expenses for analog television services is in line with the increase in subscription fees received for analog television services. There was no digital television service offered by our Baoding Joint Venture for the six months ended June 30, 2004. The decrease in operating expenses of the Company itself resulted from a decrease in business travel and entertainment expenses and discontinued employment of one part-time assistant to the Chief Financial Officer. Administrative Expenses Total administrative expenses decreased by $34,138 from $246,682 for the six months ended June 30, 2004 to $212,544 for the six months ended June 30, 2005. Total administrative expenses represent the administrative expenses incurred by the Joint Venture only. The decrease was mainly attributable to the decrease in salaries and staff benefits of approximately $21,424 and inclusion of an advisory fee of approximately $12,145 for the six months ended June 30, 2004. There was no such advisory fee for the six months ended June 30, 2005. Bad debts Bad debts represent an increase in the doubtful debt provision made for accounts receivables of our Baoding Joint Venture by $174,127 for the six months ended June 30, 2005, whereas there was no such provision made for accounts receivables for the corresponding period in 2004. Interest income (expenses), net Interest expenses, net for the six months ended June 30, 2005 was $308,419, as compared to interest income, net of $332 for the six months ended June 30, 2004. The significant change primarily resulted from the inclusion of interest on debt owing to the preferred stockholders. Losses on extinguishment of debt For the six months ended June 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. There was no such loss for the six months ended June 30, 2005. Minority interest The minority interest represents the profit of the Joint Venture attributable to the 51% equity interest not owned by the Company. The decrease in minority interest of $102,306, representing a 32% decrease, from $322,769, for the six months ended June 30, 2004 to $220,463 for the six months ended June 30, 2005 was in line with the decrease in the profit generated by the Joint Venture. 21 Deemed dividends For the six months ended June 30, 2004, the Company recorded deemed dividends of $60,249 on its redeemable convertible preferred stock whereas the Company did not have deemed dividends for the six months ended June 30, 2005. The substantial decrease in deemed dividends was caused by the fall in share price below the fixed redemption price of the Preferred Stock of $0.70 per share. It resulted in the mandatory redemption of the Preferred Stock after which no deemed dividends were charged to retained earnings of the Company. Net loss available for common stockholders Net loss decreased to $1,107,044 for the six months ended June 30, 2005 from $3,818,867 for the corresponding period of 2004, representing a decrease of $2,711,823 or 71%. This decrease is primarily due to the combined effects of the increases in net sales of $729,599, operating expenses of $592,490, bad debts of $174,127 and interest expenses, net of $308,751, along with the decreases in consulting fees of $1,588,806, directors' compensation of $231,956, professional fees of $66,495, administrative expenses of $34,138 and other income (expenses), net of $127,927 and because there is no loss on extinguishment of debt for the six months ended June 30, 2005. Financial condition, liquidity, capital resources For the six months ended June 30, 2005, we generated cash from operating activities of $1,029,011 and we used $808,123 to purchase property and equipment and further advanced $144,142 to the PRC joint venture partner. Although the Company incurred an operating loss of $1,107,044 for the six months ended June 30, 2005, the Company generated positive cash flows of $1,029,011 from operating activities. The operating loss for the six months ended June 30, 2005 included items which are of either non-cash or non-recurrent nature: (i) expensed common stocks for consulting fees of $548,244; (ii) expensed common stock for directors' compensation of $30,380, (ii) allowance for doubtful debts of $174,127 (iii) interest due to preferred stockholders of $424,114 and (iv) depreciation and amortization of $852,055. As of June 30, 2005, the Company had cash and cash equivalents of $199,994. Our current assets were $1,305,921 and our current liabilities were $10,498,610, which resulted in a current ratio of 0.12. We had no capital expenditure commitment outstanding as of June 30, 2005. The cash requirements of the Company and its subsidiaries during the next twelve months include the normal operating expenditures of the Baoding joint venture, payments for professional fees, and compensation of the Company's directors. While the Baoding joint venture has been generating positive cash flow and does not have material commitments for capital expenditures, we anticipate, based on the scale of the Baoding joint venture's existing operations, that the Baoding joint venture's projected cash flows from operations would be sufficient to support its planned operations for the next twelve months. To make the required payments for professional fees and directors' compensation, the Company expects to receive a cash dividend from the Baoding joint venture. The board of directors of the Baoding joint venture has proposed to distribute a cash dividend in the amount of RMB36 million (approximately $4,337,300) to its equity holders, although the payment of such dividend is contingent upon the approval by the State Administration of Foreign Exchange (SAFE) and by the local PRC tax bureau. In order to fulfill the cash dividend obligation, the Baoding joint venture plans to borrow money from the local Chinese bank by using its assets and its right to receive subscription fees as collateral. The Company's working capital deficit at June 30, 2005 was primarily attributable to the amount due to the preferred stockholders, Gryphon Master Fund, L.P. ("Gryphon"), of $5,208,611 as a result of an agreed judgment entered against the Company in Gryphon Master Fund, L.P. v. China Cable and Communication Inc. (U.S District Court, Northern District of Texas, Dallas Division - Cause No. 3:04cv1617B). As explained more fully in Part II, Item 1 of this quarterly report, on June 20, 2005, the Company and Gryphon represented to the Court that they had agreed to an entry of judgment on the Gryphon's claim against the Company. Therefore, Gryphon was granted a judgment against the Company in the amount of $5,165,119.99. Gryphon was also granted recovery of post-judgment interest on the judgment at a rate of 6% per annum from June 20, 2005 until the judgment is paid by the Company. In a separate agreement, the Company agreed to pay Gryphon a sum of $35,000 to cover legal costs incurred by Gryphon in two installments: $20,000 on or before June 30, 2005 and $15,000 on or before July 31, 2005. In exchange for the $35,000 payment, Gryphon agreed not to execute on the agreed judgment on or before September 30, 2005. Subsequent to June 30, 2005, the Company completed payment of the $35,000 to Gryphon. 22 To settle the agreed judgment debt, together with the post-judgment interest on the agreed judgment, the Company is actively seeking strategic investors in the PRC and intends to raise additional capital through the issuance of debts or equity securities, although there can be no assurance that we will be successful in obtaining this financing. Meanwhile, the Company is negotiating with Gryphon to extend the repayment period to allow more time for the Company to seek strategic investors to settle the debt by issuing the shares of the Company's stock. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not purport to represent the realizable or settlement values. We incurred a net loss of $1,107,044 for the six months ended June 30, 2005 and our current liabilities exceeded our current assets by $9,192,689 at June 30, 2005. These factors create substantial doubt about our ability to continue as a going concern. The Company's management continues to evaluate the Company's cash requirements and the availability of debt and equity financing to meet the Company's financial obligations as they fall due. Plan of Operation We do not anticipate generating sufficient positive internal operating cash flow to meet our financial obligations as mentioned above. As mentioned above, the cash requirements of the Company and its subsidiaries during the next twelve months include the normal operating expenditures of the Baoding joint venture, and the payments for professional fees, and compensation for the Company's directors. While the Baoding joint venture has been generating positive cash flow and does not have material commitments for capital expenditures, we anticipate, based on the scale of the Baoding joint venture's existing operations, that the Baoding joint venture's projected cash flows from operations would be sufficient to support its planned operations for the next twelve months. To make the required payments for professional fees and directors' compensation, the Company expects to receive a cash dividend from the Baoding joint venture. The board of directors of the Baoding joint venture has proposed to distribute a cash dividend in the amount of RMB36 million (approximately $4,337,300), although the payment of such dividend is contingent upon the approval by SAFE and by the local PRC tax bureau. In order to fulfill the cash dividend obligation, the Baoding joint venture plans to borrow money from the local Chinese bank by using its assets and its right to receive subscription fees as collateral. Although the Company expects to receive the cash dividend from the Baoding joint venture, we cannot meet the exceptional cash requirements for payment of the agreed judgment debt, as described above, without seeking strategic investors and raising additional capital through the issuance of debt or equity securities. Meanwhile, the Company, through its appointed attorney, is now negotiating with Gryphon to extend the repayment period to allow more time for the Company to seek strategic investors and raise additional capital for use in settling the debt or for Gryphon to accept shares of the Company's stock as settlement for the agreed judgment. However, there can be no assurance that we will be successful in finding the strategic investor and/or obtaining this financing or that Gryphon will accept our share settlement proposal. To the extent that we are unable to successfully raise the capital necessary to meet our financial obligations on a timely basis and under acceptable terms and conditions, we will not have sufficient cash resources to settle the agreed judgment debt and maintain the Company's normal operations, and may have to dispose of our interest in the Baoding joint venture and consider a formal restructuring or reorganization. Termination of Efforts to Acquire of Macau Media Holdings Ltd. In November 2003, the Company paid a $3,000,000 refundable deposit to the owner of Macau Media Holdings Limited ("Macau Media") under a letter of intent for the Company's proposed acquisition of Macau Media and its subsidiaries. The completion of the proposed acquisition was subject to due diligence and Chinese government approval for the renewal of Macau Media's satellite broadcasting license. The purchase price for Macau Media was originally to consist of $3,000,000 in cash and 8,500,000 shares of Company common stock. If the proposed acquisition was not completed, the deposit of $3,000,000 would be refunded. In early 2005, the Company received notice from Macau Media that the Chinese government did not approve the renewal of Macau Media's satellite broadcasting licenses. Management of the Company has determined that the owner of Macau Media is not financially capable of repaying the $3,000,000 deposit. Accordingly, the deposit was fully reserved in the statements of operations and comprehensive income for the year ended December 31, 2004. 23 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 the United States dollar. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 2.0% appreciation of the RMB against the U.S. dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant revaluation of the RMB against the U.S. dollar. Any significant revaluation of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable in U.S. dollars. Recent accounting pronouncements In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1") which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1. The Company will evaluate the effect, if any, of EITF 03-1 when final guidance is released. In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our consolidated financial statements. In December 2004, the FASB issued SFAS No. 123-R, Share Based Payments, which requires that the compensation cost relating to share-based payment transactions (including the cost of all employee stock options) be recognized in the financial statements. The cost will be measured based on the estimated fair value of the equity or liability instruments issued. SFAS 123-R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Management believes the adoption of this pronouncement will not have a material effect on our consolidated financial statements. Also, in December 2004, the FASB issued SFAS 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions." The amendments made by SFAS No. 153 are based on the principle that the exchange of non-monetary assets should be measured using the estimated fair market value of the assets exchanged. SFAS No. 153 eliminates the narrow exception for non-monetary exchanges of similar productive assets, and replaces it with a broader exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has "commercial substance" if the future cash flows of the entity are expected to change significantly as a result of the transaction. This pronouncement is effective for monetary exchanges in fiscal periods beginning after June 15, 2005. Management believes the adoption of this pronouncement will not have a material effect on our consolidated financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement replaces APB Opinion No. 20, "Accounting Changes", and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements", and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Management believes the adoption of this pronouncement will not have a material effect on our consolidated financial statements. 24 In June 2005, the FASB ratified the EITF consensus to amend EITF No. 96-16, "Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholders Have Certain Approval or Veto Rights". The EITF agreed to amend the Protective Rights section of this consensus, as well as Example of Exhibit 96-16A, to be consistent with the consensus reached in Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similarly Entity When the Limited Partners Have Certain Rights." The provisions of this amendment should be applied prospectively to new investments and to investment agreements that are modified after June 29, 2005. Management believes the adoption of this pronouncement will not have a material effect on our consolidated financial statements. Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future 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 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 include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act of 1934 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. Within the 90 days prior to the filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its principal executive and financial officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon and as of the date of that evaluation, the Company's principal executive and financial officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that Company files and submits under the Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. 2) Changes in Internal Control There were no changes in the Company's internal controls or in other factors that could have significantly affected those controls subsequent to the date of the Company's most recent evaluation. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Except for the pending litigation described below with Gryphon Master Fund, L.P., the Company is not a party to any pending or, to the best of our knowledge, any threatened legal proceedings, and no director, officer or affiliate of the Company, or owner of record or of more than five percent (5%) of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company. On June 20, 2005, an agreed judgment was entered against the Company in Gryphon Master Fund, L.P. v. China Cable and Communication Inc. (U.S. District Court, Northern District of Texas, Dallas Division - Cause No. 3:04cv1617B) As previously reported in the Company's quarterly report on Form 10-QSB for the period ended March 31, 2005, 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 ("Gryphon"), for $1.45 per share (the "Purchase Price"), or an aggregate purchase price of $4,000,000. The Company was 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, 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. 25 On June 14, 2004, Gryphon requested that the Company redeem the Preferred Stock as the market price of the Company's common stock was equal to or less the $0.70 per share for more than ten consecutive trading days. On July 26, 2004, Gryphon 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. Gryphon sought 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. On June 20, 2005, the Company and Gryphon represented to the Court that they had agreed to an entry of judgment on Gryphon's claim against the Company. Therefore, Gryphon was granted a judgment against the Company in the amount of $5,165,119.99. Gryphon was also granted recovery of post-judgment interest on the judgment at a rate of 6% per annum from June 20, 2005 until the judgment is paid by the Company. In a separate agreement, the Company agreed to pay Gryphon a sum of $35,000 to cover legal costs incurred by Gryphon in two installments: $20,000 on or before June 30, 2005 and $15,000 on or before July 31, 2005. In exchange for the $35,000 payment, Gryphon agreed not to execute on the agreed judgment on or before September 30, 2005. Subsequent to June 30, 2005, the Company completed payment of the $35,000 to Gryphon. To settle the agreed judgment debt, together with the post-judgment interest on the agreed judgment, the Company is actively seeking strategic investors in the PRC and intends to raise additional capital through the issuance of debts or equity securities, although there can be no assurance that we will be successful in obtaining this financing. The Company is currently negotiating with Gryphon to extend the repayment period for the agreed judgment to allow more time for the Company to seek strategic investors to settle the debt by issuing the shares of the Company's stock. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION (a) None. (b) There were no changes to the procedures by which security holders may recommend nominees to our board of directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 26 EXHIBIT INDEX 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). Filed herewith. (3) 3(ii) Bylaws of CCCI. (1) 31.1 Rule 13a-14(a) Certifications of Chief Executive Officer Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Rule 13a-14(a) Certifications of Chief Financial Officer Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350as 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 1350as 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 Form 8-K filed on September 29, 2003. (b) REPORTS ON FORM 8-K: During the six months ended June 30, 2005, the Company filed the following Current Report/s on Form 8-K: 1. Form 8-K filed on April 19, 2005 - Termination of efforts to acquire Macau Media Holdings Ltd. and write-off of deposit in connection thereto. 27 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: August 17, 2005 /s/ Raymond Ying-Wai Kwan ---------------------------------------- Name: Raymond Ying-Wai Kwan Title: Chief Executive Officer Date: August 17, 2005 /s/ Yau-Sing Tang ---------------------------------------- Name: Yau-Sing Tang Title: Chief Financial Officer 28 EX-31.1 2 v023834_ex31-1.txt Exhibit 31.1 CERTIFICATION I, Raymond Ying-Wai Kwan, certify that: 1. I have reviewed this 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(s) 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: August 17, 2005 /s/ Raymond Ying-Wai Kwan -------------------------- Raymond Ying-Wai Kwan Chief Executive Officer EX-31.2 3 v023834_ex31-2.txt Exhibit 31.2 CERTIFICATION I, Yau Sing Tang certify that: 1. I have reviewed this 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(s) 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: August 17, 2005 /s/ Yau-Sing Tang ---------------------------- Yau-Sing Tang Chief Financial Officer EX-32.1 4 v023834_ex32-1.txt 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 Quarterly Report on Form 10-QSB (the "Report") of China Cable and Communication, Inc. (the "Company") for the quarter ended June 30, 2005, I, Raymond Ying-Wai Kwan, the Chief Executive 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: August 17, 2005 /s/ Raymond Ying-Wai Kwan -------------------------- Raymond Ying-Wai Kwan Chief Executive Officer EX-32.2 5 v023834_ex32-2.txt 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 Quarterly Report on Form 10-QSB (the "Report") of China Cable and Communication, Inc. (the "Company") for the quarter ended June 30, 2005, I, 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: August 17, 2005 /s/ Yau-Sing Tang ---------------------------- Yau-Sing Tang Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----