SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
o
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
OR
þ
|
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended
December 31,
2009
.
OR
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
OR
o
|
SHELL COMPANY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
for the
transition period from __________ to ___________
Commission
file number
001-34136
China
Cablecom Holdings, Ltd.
(Exact name of the Registrant as specified in its charter)
British
Virgin Islands
(Jurisdiction of incorporation or organization)
Suite
4612, Tower 1
Plaza
66
No.1266
Nanjing West Road
Shanghai,
200040
People’s
Republic of China
(86) 21
6113-8281
(Address of principal executive offices)
Debra
Chen, debra@chinacablecom.net, 27 Union Square West, Suite 501-502, New York, NY
10003
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company
Contact Person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Title of Each
Class
ORDINARY
SHARES, $.0015 PAR VALUE
Name of each exchange on
which registered
The
NASDAQ Capital Market LLC
Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
On
December 31, 2009, the registrant had 4,688,151 ordinary shares
outstanding.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o
Yes
x
No
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.
o
Yes
x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes
o
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
o
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
o
Large Accelerated filer
|
o
Accelerated filer
|
x
Non-accelerated filer
|
Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
|
o
International Financial Reporting
|
|
x
US GAAP
|
Standards as issued by the International
|
o
Other
|
|
Accounting Standards Board
|
|
If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.
If
this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
x
No
(APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of the securities under a
plan confirmed by a court.
o
Yes
o
No
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Identity
of Directors, Senior Management and Advisers
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5
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Item
2.
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Offer
Statistics and Expected Timetable
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5
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Item
3.
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Key
Information
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5
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A.
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Selected
financial data
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5
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B.
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Capitalization
and indebtedness
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9
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C.
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Reasons
for the offer and use of proceeds
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9
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D.
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Risk
factors
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9
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Item
4.
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Information
on the Company
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19
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A.
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History
and Development of the Company
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19
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B.
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Business
overview
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23
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C.
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Organizational
structure
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31
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D.
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Property,
plants and equipment
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34
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Item
4A.
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Unresolved
Staff Comments
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34
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Item
5.
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Operating
and Financial Review and Prospects
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34
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Item
6.
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Directors,
Senior Management and Employees
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41
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A.
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Directors
and senior management
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41
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B.
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Compensation
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44
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C.
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Board
practices
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46
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D.
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Employees
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49
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E.
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Share
ownership
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49
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|
Item
7.
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Major
Shareholders and Related Party Transactions
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50
|
A.
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Major
shareholders
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|
50
|
B.
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Related
party transactions
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52
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C.
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Interests
of experts and counsel
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53
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Item
8.
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Financial
Information
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|
53
|
A.
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Consolidated
Statements and Other Financial Information
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53
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B.
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Significant
Changes
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53
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Item
9.
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The
Offer and Listing
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53
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A.
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Offer
and listing details
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53
|
B.
|
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Plan
of distribution
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56
|
C.
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Markets
|
|
56
|
D.
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Selling
shareholders
|
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57
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E.
|
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Dilution
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57
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F.
|
|
Expenses
of the issue
|
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57
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Item
10.
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Additional
Information
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|
57
|
A.
|
|
Share
capital
|
|
57
|
B.
|
|
Memorandum
and articles of association
|
|
57
|
C.
|
|
Material
contracts
|
|
57
|
D.
|
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Exchange
controls
|
|
58
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E.
|
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Taxation
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58
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F.
|
|
Dividends
and paying agents
|
|
65
|
G.
|
|
Statement
by experts
|
|
65
|
H.
|
|
Documents
on display
|
|
66
|
I.
|
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Subsidiary
Information
|
|
66
|
|
|
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|
Item
11.
|
|
Quantitative
and Qualitative Disclosure About Market Risk
|
|
66
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|
Item
12.
|
|
Description
of Securities Other Than Equity Securities
|
|
66
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PART
II
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Item
13.
|
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Defaults,
Dividend Arrearages and Delinquencies
|
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67
|
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|
Item
14.
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Material
Modifications to the Rights of Security Holders and Use of
Proceeds
|
|
67
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Item
15.
|
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Controls
and Procedures
|
|
67
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Item
16
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|
[Reserved]
|
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68
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Item
16A
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—
Audit Committee Financial Expert
|
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68
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Item
16B
|
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—
Code of Ethics
|
|
68
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Item
16C
|
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—
Principal Accountant Fees and Services
|
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68
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Item
16D
|
|
—
Exemption from the Listing Standards for Audit Committees
|
|
68
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Item
16E
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|
—
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
|
|
68
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Item
16F
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|
—
Change in Registrant’s Certifying Accountant
|
|
68
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Item
16G
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|
—
Corporate Governance
|
|
68
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PART
III
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Item
17
|
|
Financial
Statements
|
|
69
|
|
|
|
|
|
Item
18.
|
|
Financial
Statements
|
|
69
|
|
|
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|
Item
19
|
|
Exhibits
|
|
69
|
|
|
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Signatures
|
|
|
|
73
|
CERTAIN
INFORMATION
As used
in this Annual Report on Form 20-F (the “Annual Report”), unless otherwise
indicated, “we,” “us,” “our,” the “Company,” the “Corporation,” and “China
Cablecom Holdings” refers to China Cablecom Holdings, Ltd., a company formed in
the British Virgin Islands and its subsidiaries. All references to
“China Cablecom,” and “China Cablecom Ltd.” refer to China Cablecom Ltd., a
wholly owned subsidiary of China Cablecom Holdings, and the entity through which
our operating businesses are held. All references to “China” or the “PRC” refer
to the People’s Republic of China.
See Item
3: “Key Information” for historical information regarding the average rate
between buying and selling as published by the people’s Bank of China with
respect to Chinese Renminbi. You should not construe these translations as
representations that the Chinese Renminbi amounts actually represent such US
dollar amounts or could have been or could be converted into US dollars at the
rates indicated or at any other rates. Such rates are the number Chinese
Renminbi per one United States dollar quoted by the People’s Bank of
China.
FORWARD-LOOKING
STATEMENTS
This
Annual Report contains ‘‘forward-looking statements’’ that represent our
beliefs, projections and predictions about future events. All statements other
than statements of historical fact are ‘‘forward-looking statements,’’ including
any projections of earnings, revenue or other financial items, any statements of
the plans, strategies and objectives of management for future operations, any
statements concerning proposed new projects or other developments, any
statements regarding future economic conditions or performance, any statements
of management’s beliefs, goals, strategies, intentions and objectives, and any
statements of assumptions underlying any of the foregoing. Words such as
‘‘may’’, ‘‘will’’, ‘‘should’’, ‘‘could’’, ‘‘would’’, ‘‘predicts’’,
‘‘potential’’, ‘‘continue’’, ‘‘expects’’, ‘‘anticipates’’, ‘‘future’’,
‘‘intends’’, ‘‘plans’’, ‘‘believes’’, ‘‘estimates’’ and similar expressions, as
well as statements in the future tense, identify forward-looking
statements.
These
statements are necessarily subjective and involve known and unknown risks,
uncertainties and other important factors that could cause our actual results,
performance or achievements, or industry results, to differ materially from any
future results, performance or achievements described in or implied by such
statements. Actual results may differ materially from expected results described
in our forward-looking statements, including with respect to correct measurement
and identification of factors affecting our business or the extent of their
likely impact, the accuracy and completeness of the publicly available
information with respect to the factors upon which our business strategy is
based or the success of our business.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of whether, or the times by
which, our performance or results may be achieved. Forward-looking statements
are based on information available at the time those statements are made and
management’s belief as of that time with respect to future events, and are
subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences
include, but are not limited to, those factors discussed under the headings
‘‘Risk Factors’’, ‘‘Operating and Financial Review and Prospects,’’
‘‘Information on Our Company” and elsewhere in this Annual
Report.
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A.
Directors and Senior
Management
Not
required.
B.
Advisers
Not
required.
C.
Auditors
Not
required.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
required.
ITEM
3. KEY INFORMATION
A.
Selected financial
data
The
following summary consolidated financial data for the years ended December 31,
2008 and 2009 have been derived from the Company’s audited consolidated
financial statements included in this Annual Report beginning on page
F-1. The following selected historical statement of income data for the
period from October 1, 2007 to December 31, 2007 and the selected historical
balance sheet data as of December 31, 2007 have been derived from the audited
financial of the Company not included in this annual report.
The
following selected historical statements of income data for the years ended
December 31, 2005 and 2006 and for the period from January 1, 2007 to September
30, 2007 and the selected historical balance sheet data as of December 31, 2005
and 2006 and September 30, 2007 have been derived from the audited financial
statements of Binzhou Guangdian Network Co., Ltd. (the “Predecessor Company”)
not included in this annual report. This information is only a summary and
should be read together with the consolidated financial statements, the related
notes and other financial information included in this Annual
Report.
Certain
factors that affect the comparability of the information set forth in the
following table are described in the “Operating and Financial Review and
Prospects,” and the Financial Statements and related notes thereto included
elsewhere in this Annual Report.
|
|
Predecessor Company
|
|
|
|
|
|
|
Year
Ended
December
31,2005
|
|
|
Year
Ended
December
31,2006
|
|
|
January 1
through
September 30,
2007
|
|
|
October 1
through
December
30, 2007
|
|
|
Year Ended
December
31, 2008
|
|
|
Year Ended
December
31, 2009
|
|
(in
US$ thousands, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Statement
of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
|
|
|
Revenues,
net
|
|
|
7,804
|
|
|
|
8,288
|
|
|
|
5,020
|
|
|
|
1,995
|
|
|
|
23,439
|
|
|
|
45,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,066
|
|
|
|
5,485
|
|
|
|
2,340
|
|
|
|
978
|
|
|
|
10,002
|
|
|
|
15,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
3,628
|
|
|
|
3,774
|
|
|
|
532
|
|
|
|
(684
|
)
|
|
|
(5,123
|
)
|
|
|
(6,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expenses
|
|
|
(703
|
)
|
|
|
(721
|
)
|
|
|
(743
|
)
|
|
|
(1,474
|
)
|
|
|
(8,742
|
)
|
|
|
(9,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax and non-controlling interest
|
|
|
2,984
|
|
|
|
3,154
|
|
|
|
222
|
|
|
|
(2,095
|
)
|
|
|
(12,844
|
)
|
|
|
(55,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
profit (loss) attributable to China Cablecom Holdings,
Ltd.
|
|
|
2,861
|
|
|
|
2,925
|
|
|
|
24
|
|
|
|
(2,155
|
)
|
|
|
(14,173
|
)
|
|
|
(56,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.61
|
)
|
|
|
(5.73
|
)
|
|
|
(16.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.61
|
)
|
|
|
(5.73
|
)
|
|
|
(16.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number ordinary shares, Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
688,893
|
|
|
|
2,472,504
|
|
|
|
3,391,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
688,893
|
|
|
|
2,472,504
|
|
|
|
3,391,924
|
|
Weighted ordinary share numbers have been restated to reflect the
Company’s March 2, 2010 1-for-3 Reverse Split.
|
|
Predecessor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December
31, 2005
|
|
|
As of
December
31, 2006
|
|
|
As of
September 30,
2007
|
|
|
As of
December
31, 2007
|
|
|
As of
December
31, 2008
|
|
|
As of
December
31, 2009
|
|
(in
US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
355
|
|
|
|
303
|
|
|
|
867
|
|
|
|
12,639
|
|
|
|
29,182
|
|
|
|
23,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and advances
|
|
|
1,791
|
|
|
|
1,165
|
|
|
|
667
|
|
|
|
669
|
|
|
|
9,236
|
|
|
|
9,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,150
|
|
|
|
2,649
|
|
|
|
2,830
|
|
|
|
16,194
|
|
|
|
43,792
|
|
|
|
41,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant & equipment, net
|
|
|
20,197
|
|
|
|
20,946
|
|
|
|
21,324
|
|
|
|
20,722
|
|
|
|
79,877
|
|
|
|
89,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,363
|
|
|
|
37,850
|
|
|
|
35,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,276
|
|
|
|
19,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
23,998
|
|
|
|
23,840
|
|
|
|
24,812
|
|
|
|
69,496
|
|
|
|
183,076
|
|
|
|
190,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long term debt, net of discount
|
|
|
1,859
|
|
|
|
1,921
|
|
|
|
1,998
|
|
|
|
9,618
|
|
|
|
9,482
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
12,129
|
|
|
|
9,624
|
|
|
|
8,736
|
|
|
|
2,461
|
|
|
|
8,872
|
|
|
|
17,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable – non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,218
|
|
|
|
55,420
|
|
|
|
27,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
to be settled by minority interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,461
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
14,943
|
|
|
|
12,543
|
|
|
|
13,895
|
|
|
|
43,247
|
|
|
|
83,067
|
|
|
|
57,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes, net of discounts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,684
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured notes, net of discounts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
secured notes, net of discounts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
notes, net of discounts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable – non-controlling interest, net of current portion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,047
|
|
|
|
51,778
|
|
|
|
64,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, net of discount and current portion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,478
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
14,943
|
|
|
|
12,543
|
|
|
|
13,895
|
|
|
|
67,772
|
|
|
|
151,528
|
|
|
|
152,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders equity
|
|
|
9,055
|
|
|
|
11,297
|
|
|
|
10,917
|
|
|
|
1,724
|
|
|
|
31,547
|
|
|
|
38,677
|
|
Exchange
Rate Information
Our
business is currently conducted in and from China in Renminbi. In this annual
report, all references to “Renminbi” and “RMB” are to the legal currency of
China and all references to U.S. dollars, dollars, $ and US$ are to the legal
currency of the United States. The conversion of Renminbi into U.S. dollars in
this annual report is based on the middle rate between buying and selling as
published by the People’s Bank of China of the PRC. For reader convenience, this
annual report contains translations of some Renminbi or U.S. dollar amounts for
2009 at US$1.00: RMB6.8282, which was the middle rate on December 31, 2009.
The published middle rate on June 29, 2010 was US$1.00: RMB 6.7901. We make
no representation that any Renminbi or U.S. dollar amounts could have been, or
could be, converted into U.S. dollars or Renminbi, as the case may be, at any
particular rate, the rates stated below, or at all. The Chinese government
imposes control over its foreign currency reserves in part through direct
regulation of the conversion of Renminbi into foreign currency and through
restrictions on foreign trade.
The
following table sets forth the average middle rates for Renminbi expressed as
per one U.S. dollar for the years 2005, 2006, 2007, 2008 and
2009:
Year
|
|
Renminbi Average(1)
|
|
2005
|
|
|
8.1826
|
|
2006
|
|
|
7.9579
|
|
2007
|
|
|
7.6040
|
|
2008
|
|
|
6.9451
|
|
2009
|
|
|
6.8314
|
|
|
(1)
|
Determined
by averaging the middle rate between buying and selling rates on the last
business day of each month during the relevant
period.
|
The
following table sets forth the high and low middle rates for Renminbi expressed
as per one U.S. dollar during the past six months.
Month Ended
|
|
High
|
|
|
Low
|
|
December 31,
2009
|
|
|
6.8299
|
|
|
|
6.8260
|
|
January 31,
2010
|
|
|
6.8258
|
|
|
|
6.8295
|
|
February 28,
2010
|
|
|
6.8330
|
|
|
|
6.8258
|
|
March 31,
2010
|
|
|
6.8270
|
|
|
|
6.8254
|
|
April 30,
2010
|
|
|
6.8275
|
|
|
|
6.8229
|
|
May 31,
2010
|
|
|
6.8310
|
|
|
|
6.8245
|
|
June 30,
2010 (through June 29)
|
|
|
6.8284
|
|
|
|
6.7890
|
|
B.
Capitalization and
Indebtedness
Not
required.
C
.
Reasons for the Offer and Use of
Proceeds
Not
required.
D.
Risk factors
Risks
Relating to Our Business
We
have a very limited operating history, which may make it difficult for you to
evaluate our business and prospects.
We
acquired Binzhou Broadcasting and Television Information Network Co., Ltd.
(“Binzhou Broadcasting”) in September 2007 and Hubei Chutian Video Communication
Network Co., Ltd. (“Hubei Chutian”) in June 2008. As a result, our operating
history is very limited and, accordingly, the revenue and income potential of
our business and markets are unproven. Binzhou Broadcasting’s and Hubei
Chutian’s historical operating results may not provide a meaningful basis for
evaluating our business, financial performance and prospects, particularly in
view of the fact that the networks comprising the operations of Binzhou
Broadcasting and Hubei Chutian have historically been operated
independently.
We also
face numerous risks, uncertainties, expenses and difficulties frequently
encountered by companies at an early stage of development. Some of these risks
and uncertainties relate to our ability to:
|
·
|
develop
new customers or new business from existing
customers;
|
|
·
|
expand
the technical sophistication of the products we
offer;
|
|
·
|
respond
effectively to competitive
pressures;
|
|
·
|
attract
and retain qualified management and employees;
and
|
|
·
|
adverse
effect on our business caused by the global financial
crisis.
|
We may
not meet internal or external expectations regarding our future performance. If
we are not successful in addressing these risks and uncertainties, our business,
operating results and financial condition may be materially adversely
affected.
We
must make significant intercompany loans to Binzhou Broadcasting to preserve our
consolidation of the operating results of Binzhou Broadcasting for financial
reporting purposes.
Although
we are currently entitled to consolidate the financial position and operating
results of Binzhou Broadcasting in our financial statements under US GAAP, this
is the result of the ratio of risk and rewards borne by us regarding the
operations of Binzhou Broadcasting, which in turn is dependent on the
significant level of intercompany debt we have extended to Binzhou Broadcasting.
Pursuant to the terms of the Asset Transfer Agreement with the local state-owned
enterprise, Binzhou Guangdian Network Co., Ltd. (“Binzhou SOE”), Binzhou
Broadcasting must complete the payment for all assets to be transferred not
later than August 2008, which was later extended to December 31, 2008, further
extended to January 31, 2009, further extended to December 31, 2009 and further
extended to June 30, 2010.To the extent the financing for such payment is not in
the form of an intercompany loan from us, our ability to preserve the accounting
treatment of Binzhou Broadcasting will be jeopardized. Based on a recent
government decree in an initiative of “forming one consolidated broadcasting
network within one province”, the Shandong party committee and government have
recently announced plans on the development and reform of provincial Radio and
TV broadcasting network, in such that, the municipal, county (county level city
or district) Radio and TV broadcasting network shall freeze headcounts and
assets and maintain the current organization to suspend any pending financing
activities. As a result, our Binzhou JV has temporarily suspended any current
obligations until further notification from the government, delaying and
extending our payment obligations to June 30, 2010.We are required to seek
additional financing and to amend or modify the terms of our existing debts to
meet these obligations. There can be no assurance that any such additional
financing will be available on acceptable terms or at all or that such lenders
will be willing to amend or modify the terms of the outstanding notes. Any such
failure to secure additional financing by us will create a default under the
terms of the joint venture agreement between Jinan Youxiantong Network
Technology Co., Ltd. (“JYNT”) and Binzhou SOE and likely result in us no longer
being entitled to consolidate the financial position and results of operations
of Binzhou Broadcasting.
The
PRC television broadcasting industry may not digitalize as quickly as we expect,
as a result of which our revenues would be materially adversely
affected.
Our
future success depends upon the pace at which PRC television network operators
switch from analog to digital transmission. Various factors may cause PRC
television network operators to convert from analog to digital transmission at a
slow pace. The PRC government, which has strongly encouraged television network
operators to digitalize their networks and has set a target of 2015 for all,
except for up to six, analog channels to be switched off, may relax or cancel
the 2015 target. Also, PRC television viewers may fail to subscribe to digital
television services in sufficient numbers to support wide-scale
digitalization.
Existing
and emerging alternative platforms for delivering television programs, including
terrestrial networks, Internet protocol television and satellite broadcasting
networks present a significant competitive risk to our business.
We
compete with traditional terrestrial television networks for the same pool of
viewers. As technologies develop, other means of delivering information and
entertainment to television viewers are evolving. For example, some
telecommunications companies in the PRC are seeking to compete with terrestrial
broadcasters and cable television network operators by offering Internet
protocol television, or IPTV, which allows telecommunications companies to
stream television programs through telephone lines. While the PRC Ministry of
Information Industry, or the MII, so far has issued only five IPTV licenses, it
may issue significantly more licenses in the future. In addition, the State
Administration of Radio, Film and Television (“SARFT”) issued a broadcast
license last year to the PRC’s first direct satellite broadcast company, which
is expected to begin commercial operation this year. To the extent that the
terrestrial television networks, telecommunications companies and direct
satellite television network operators compete successfully with us for viewers,
our ability to attract and retain subscribers may be adversely
affected.
Changes
in the regulatory environment of, and government policies towards, the PRC
television network industry could materially adversely affect our
revenues.
Strong
PRC government support has been a significant driver of the PRC television
broadcasting industry’s transition from analog to digital transmission. Although
the PRC government has set a target of 2015 for all television networks to
switch to digital transmissions, terminating all analog transmissions except for
up to six channels that will continue in service for the benefit of those unable
to afford digital television, there is no assurance that the government will not
change or adjust its digitalization policies at any time, including canceling or
relaxing the target date for digitalization. If the digitalization process in
the PRC were to be slowed down or otherwise adversely affected by any government
action or inaction, we may not be able to develop new customers or attract new
business from existing customers, and our revenues would be materially adversely
affected.
Furthermore,
the television broadcasting industry in the PRC is a highly regulated industry.
Government regulations with respect to television broadcasting content, the
amount and content of advertising, the pricing of pay-television subscriptions,
the role of private-sector investment and the role of foreign investment
significantly influence the business strategies and operating results of our
customers. Among other things, the SARFT must approve the creation of new
premium content channels and has the power to order television network operators
to stop airing programs or advertising that it considers illegal or
inappropriate. Any of such adverse government actions against television network
operators could in turn cause us to lose existing or potential
subscribers.
In China,
the basic subscription fee for cable television is regulated, municipal cable
television operators have to apply for approval at the local Price Bureau, which
will then arrange public hearings to approve any subscription price changes.
Although Binzhou Broadcasting and Hubei Chutian have applied for and have
acquired approval for a subscription fee raise from the Price Bureau in year
2009 and 2005, respectively, there is no guarantee that any future partnership
networks will succeed in getting approval for subscription fee raises for
digital television services.
Our
officers and directors may allocate their time to other businesses, and may be
affiliated with entities that may cause conflicts of interest. In particular,
our principal shareholder and Executive Chairman is subject to potentially
conflicting duties to another company he established to pursue business
opportunities in the PRC.
Messrs.
Ng and Pu and certain of our other officers and directors have the ability to
allocate their time to other businesses and activities, thereby causing possible
conflicts of interest in their determination as to how much time to devote to
our affairs.
These
individuals are engaged in several other business endeavors and are not
obligated to devote any specific number of hours to our affairs. If other
business affairs require them to devote more substantial amounts of time to such
affairs, it could limit their ability to devote time to our affairs and could
have a negative impact on our ongoing business. Certain of our officers and
directors are now, and all of them may in the future become, affiliated with
entities engaged in business activities similar to those intended to be
conducted by us or otherwise, and accordingly, may have conflicts of interest in
allocating their time and determining to which entity a particular investment or
business opportunity should be presented. Moreover, in light of our officers’
and directors’ existing affiliations with other entities, they may have
fiduciary obligations to present potential investment and business opportunities
to those entities in addition to presenting them to us, which could cause
additional conflicts of interest. While we do not believe that any of our
officers or directors has a conflict of interest in terms of presenting to
entities other than our investment and business opportunities that may be
suitable for us, conflicts of interest may arise in the future in determining to
which entity a particular business opportunity should be presented. We cannot
assure you that any conflicts will be resolved in our favor. These possible
conflicts may inhibit the activities of such officers and directors in seeking
acquisition candidates to expand our geographic reach or broaden our service
offerings. For a complete description of our management’s other affiliations,
see “Directors and Management.” In any event, it cannot be predicted with any
degree of certainty as to whether or not Mr. Ng, Mr. Pu or our other officers or
directors will have a conflict of interest with respect to a particular
transaction as such determination would be dependent upon the specific facts and
circumstances surrounding such transaction at the time.
Mr. Ng,
our Executive Chairman, entered into a settlement agreement with China
Broadband, Inc., another company he organized to pursue broadband cable
opportunities in the PRC, and certain of its shareholders and consultants,
relating to possible claims that China Broadband and such shareholders and
consultants suggested might be brought by China Broadband against Mr. Ng for his
activities in forming China Cablecom. If the parties to the settlement agreement
fail to observe the terms of the agreement, China Cablecom Holdings may be
involved in burdensome and time-consuming litigation in order to establish clear
entitlement to the Binzhou Broadcasting operations.
In
particular, notwithstanding the terms of the settlement and the amendment to Mr.
Ng’s employment agreement with China Broadband, Ltd., Mr. Ng’s continuing
relationship with China Broadband could lead to future claims of violation of
his duties to China Broadband in the event future acquisitions in the PRC are
offered to us rather than China Broadband, notwithstanding the express terms of
the revised employment agreement and provisions of the settlement agreement. Mr.
Ng’s revised employment agreement with China Broadband contains an express
provision permitting Mr. Ng to resign from China Broadband in the event an
acquisition arises that involves the business of China Cablecom, which is how
Mr. Ng currently intends to handle opportunities in the future that could create
a situation similar to that which led to the settlement agreement.
The
settlement agreement contains a provision recognizing that the provision of
integrated cable television services in the People’s Republic of China and
related activities is our business and the provision of stand-alone independent
broadband services is the business of China Broadband. However, notwithstanding
the terms of the settlement agreement and the amendment to Mr. Ng’s employment
agreement with China Broadband, Mr. Ng’s continuing relationship with China
Broadband could lead to future claims of violation of his duties to China
Broadband in the event future acquisitions in the PRC are offered to China
Cablecom Holdings rather than China Broadband, notwithstanding his current
intention to resign in such circumstances.
If
shareholders sought to sue our officers or directors, it may be difficult to
obtain jurisdiction over the parties and access to the assets located in the
PRC.
Because
most of our officers and directors reside outside of the U.S., it may be
difficult, if not impossible, to acquire jurisdiction over these persons in the
event a lawsuit is initiated against such officers and directors by shareholders
in the U.S. It also is unclear if extradition treaties now in effect between the
U.S. and the PRC would permit effective enforcement of criminal penalties of the
federal securities laws. Furthermore, because substantially all of our assets
are located in the PRC, it would also be extremely difficult to access those
assets to satisfy an award entered against us in U.S. court. Moreover, we have
been advised that the PRC does not have treaties with the U.S. providing for the
reciprocal recognition and enforcement of judgments of courts. As a result, it
may not be possible for investors in the U.S. to enforce their legal rights, to
effect service of process upon our directors or officers or to enforce judgments
of U.S. courts predicated upon civil liabilities and criminal penalties of our
directors and officers under federal securities laws.
The
Chinese government could change its policies toward, or even nationalize,
private enterprise, which could reduce or eliminate our interests.
Over the
past several years, the Chinese government has pursued economic reform policies,
including the encouragement of private economic activities and decentralization
of economic regulation. The Chinese government may not continue to pursue these
policies or may significantly alter them to our detriment from time to time
without notice. Changes in policies by the Chinese government that result in a
change of laws, regulations, their interpretation, or the imposition of high
levels of taxation, restrictions on currency conversion or imports and sources
of supply could materially and adversely affect our business and operating
results. The nationalization or other expropriation of private enterprises by
the Chinese government could result in the total loss of our investment in
China.
Foreign
exchange regulations in the PRC may affect our ability to pay dividends in
foreign currency or conduct other foreign exchange business.
Renminbi,
or RMB, is not presently a freely convertible currency, and the restrictions on
currency exchanges may limit our ability to use revenues generated in RMB or to
make dividends or other payments in U.S. dollars. The PRC government, through
the State Administration for Foreign Exchange (“SAFE”), regulates conversion of
RMB into foreign currencies. Currently, Foreign Invested Enterprises (such as
China Cablecom) are required to apply for “Foreign Exchange Registration
Certificates” and to renew those certificates annually. However, even with that
certification, conversion of currency in the “capital account” (e.g. for capital
items such as direct investments or loans) still requires the approval of SAFE.
There is no assurance that SAFE approval will be obtained, and if it is not, it
could impede our business activities.
The Onshore and Offshore Loan
Agreements may be scrutinized by the
SAFE
In June
and July of 2008, China Cablecom entered into 2 loan agreements, whereby, China
Cablecom extended 2 loans in U.S. dollars to Rich Dynamic Limited, a Hong Kong
company, (“RDL”), which amount in aggregate, to U.S. dollars
38,000,000. These loans were utilized as payment to a shareholder
(“Shareholder”) of Chengdu Chuanghong Jinsha Real Estate Co., Ltd. (“Chengdu
Chuanghong”), for the purpose of acquiring 60% of the equity interest in this
company. After payment was made to the Shareholder, 2 RMB loans were
extended by the Shareholder to JYNT, pursuant to the loan agreements entered
into between the Shareholder and JYNT, which amount in aggregate to RMB
244,000,000.
Although
neither of the loan transactions contravenes PRC Law, we cannot ensure that the
SAFE will not regard the transactional arrangement (taken as a whole) as an
attempt to circumvent the SAFE’s scrutiny over foreign exchange. If the SAFE
deems the transactional arrangement to be illegal, it may levy fines and
restrict our ability to transfer funds to our PRC subsidiaries. As a result, the
development of our business may be adversely affected.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC, which could result in misconduct and difficulty in
complying with applicable laws and requirements.
As a
quasi-governmental business in the PRC, our networks have not historically
focused on establishing Western-style management and financial reporting
concepts and practices, as well as modern banking, computer and other internal
control systems. We may have difficulty in hiring and retaining a sufficient
number of qualified internal control employees to work in the PRC. As a result
of these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards, especially on the operation level of our
joint ventures with municipal cable TV network operators.
Being
a foreign private issuer exempts us from certain Securities and Exchange
Commission requirements that provide shareholders the protection of information
that must be made available to shareholders of United States public
companies.
As a
foreign private issuer. we are exempt from certain provisions applicable to
United States public companies including:
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The
rules requiring the filing with the SEC of quarterly reports on Form 10-Q
or current reports on Form 8-K;
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The
sections of the Securities Exchange Act regulating the solicitation of
proxies, consents or authorizations with respect to a security registered
under the Securities Exchange Act;
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Provisions
of Regulation FD aimed at preventing issuers from making selective
disclosures of material information;
and
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The
sections of the Securities Exchange Act requiring insiders to file public
reports of their share ownership and trading activities and establishing
insider liability for profits realized from any “short swing” trading
transactions (i.e., a purchase and sale, or a sale and purchase, of the
issuer’s equity securities within less than six
months).
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Because
of these exemptions, our shareholders may not be afforded the same protections
or information generally available to investors holding shares in public
companies organized in the United States.
Risks
Relating to our Corporate Structure
We
exercise voting and economic control over Jinan Youxiantong Network Technology
Co., Ltd. (“JYNT”) pursuant to contractual agreements with the shareholders of
JYNT that may not be as effective as direct ownership.
As a
result of the contractual agreements entered into between our indirect
subsidiary Heze Cablecom Network Technology Co., Ltd., a PRC company (“HZNT”),
and the shareholders of JYNT, we control and are considered the primary
beneficiary of JYNT, and are entitled to consolidate the financial results of
JYNT, which includes JYNT’s 60% economic interest in the financial results of
Binzhou Broadcasting and JYNT’s 55% economic interest in the financial results
of Hubei Chutian. While the terms of these contractual agreements are designed
to minimize the operational impact of governmental regulation of the media,
cultural and telecommunications industries in the PRC, and provide us with
voting control and the economic interests associated with the shareholders’
equity interest in JYNT, they are not accorded the same status at law as direct
ownership of JYNT and may not be as effective in providing and maintaining
control over JYNT as direct ownership. For example, we may not be able to take
control of JYNT upon the occurrence of certain events, such as the imposition of
statutory liens, judgments, court orders, death or capacity. If the PRC
government proposes new laws or amends current laws that are detrimental to the
contractual agreements with JYNT, such changes may effectively eliminate our
control over the JYNT and our ability to consolidate the financial results of
Binzhou Broadcasing and Hubei Chutian, JYNT’s sole operational assets. In
addition, if the shareholders of JYNT fail to perform as required under those
contractual agreements, we will have to rely on the PRC legal system to enforce
those agreements, and there is no guarantee that we will be successful in an
enforcement action.
Furthermore,
if we, or HZNT, were found to be in violation of any existing PRC laws or
regulations, the relevant regulatory authorities would have broad discretion to
deal with such violation, including, but not limited to the
following:
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confiscating
income; and/or
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requiring
a restructure of ownership or
operations.
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JYNT
has a 49% equity interest in each of Binzhou Broadcasting and Hubei Chutian and
the failure by the Binzhou SOE or the Hubei SOE to perform its obligations under
the respective joint venture agreements and services agreements may
negatively impact our ability to consolidate the financial operations of Binzhou
Broadcasting and Hubei Chutian.
JYNT has
entered into a joint venture agreement and a series of services agreements that,
pursuant to applicable accounting principles, entitles JYNT to consolidate 60%
of the operating results of Binzhou Broadcasting, although JYNT only has a 49%
equity interest and the Binzhou SOE has retained control of the joint
venture. JYNT has also entered into a joint venture agreement and a series
of services agreements that, pursuant to applicable accounting principles,
entitles JYNT to consolidate 55% of the operating results of Hubei Chutian,
although JYNT only has a 49% equity interest and the local state-owned
enterprise, Hubei Chutian Radio and Television Information Network Co., Ltd.
(“Hubei SOE”) has retained control of the joint venture. Because JYNT
lacks actual control over Binzhou Broadcasting and Hubei Chutian, JYNT, and us
through our contractual arrangements with the shareholders of JYNT, are
protected in our dealings with the Binzhou SOE and the Hubei SOE only to the
extent provided for in the joint venture agreement and the services agreements.
If either the Binzhou SOE or the Hubei SOE fails to observe the requirements of
its respective joint venture agreement and other services agreements with JYNT,
we may have to incur substantial costs and resources to enforce such
arrangement, and rely on legal remedies under PRC law, including seeking
specific performance or injunctive relief, and claiming damages, which may not
be effective. If the shareholders of JYNT and us are unable to compel the
Binzhou SOE or Hubei SOE to observe the requirements of its respective joint
venture agreement and the services agreements, we may be forced to account for
the financial results and position of Binzhou Broadcasting and Hubei Chutian
pursuant to different accounting principles, effectively eliminating our sole
operational assets.
The
agreements that establish the structure for operating our business may result in
the relevant PRC government regulators revoking or refusing to renew Binzhou
Broadcasting’s or Hubei Chutian’s operating permit.
Each of
Binzhou Broadcasting and Hubei Chutian obtains exclusive operating rights by
entering into exclusive service agreements with Binzhou SOEs and Hubei SOEs,
respectively, who are 100% owned by different levels of branches of SARFT in
Binzhou Municipality and Hubei Municipality, respectively. Binzhou SOEs and
Hubei SOEs enjoy the right to provide cable access services in their respective
territories. Any foreign-invested enterprise incorporated in the PRC, such as
our subsidiary, HZNT, is prohibited from conducting a business involving the
transmission of broadcast television or the provision of cable access services.
Our contractual arrangements with JYNT and its shareholders provide us with the
economic benefits of Binzhou Broadcasting and Hubei Chutian. If SARFT determines
that our control over JYNT, or our relationship with Binzhou Broadcasting or
Hubei Chutian through those contractual arrangements, is contrary to their
generally restrictive approach towards foreign participation in the PRC cable
television industry, there can be no assurance that SARFT will not reconsider
Binzhou Broadcasting’s or Hubei Chutian’s eligibility to hold exclusive rights
to provide operating services or cable access services to Binzhou SOEs or Hubei
SOEs. If that were to happen, we might have to discontinue all or a substantial
portion of our business pending the approval of exclusive service and operating
rights on the required operating permits held by Binzhou SOEs and Hubei SOEs. In
addition, if we are found to be in violation of any existing or futures PRC laws
or regulations, the relevant regulatory authorities, including the SARFT, would
have broad discretion in dealing with such violation, including levying fines,
confiscating our income, revoking the business licenses or operating licenses of
our PRC affiliates and Binzhou SOE and Hubei SOE, requiring us to restructure
the relevant ownership structure or operations, and requiring us to discontinue
all or any portion of our operations. Any of these actions could cause
significant disruption to our business operations and may materially and
adversely affect our business, financial condition and results of
operations.
Risks
Relating to the People’s Republic of China
Adverse
changes in economic policies of the PRC government could have a material adverse
effect on the overall economic growth of the PRC, which could reduce the demand
for our services and materially adversely affect our business.
All of
our assets are located in and all of our revenue is sourced from the PRC.
Accordingly, our business, financial condition, results of operations and
prospects will be influenced to a significant degree by political, economic and
social conditions in the PRC generally and by continued economic growth in the
PRC as a whole.
The PRC
economy differs from the economies of most developed countries in many respects,
including the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources. Although the PRC
government has implemented measures since the late 1970s emphasizing the
utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of improved corporate
governance in business enterprises, a substantial portion of productive assets
in the PRC is still owned by the PRC government. In addition, the PRC government
continues to play a significant role in regulating industry development by
imposing industrial policies. The PRC government also exercises significant
control over the PRC’s economic growth through the allocation of resources,
controlling payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or
companies.
While the
PRC economy has experienced significant growth over the past decade, growth has
been uneven, both geographically and among various sectors of the economy. The
PRC government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures benefit the overall
PRC economy, but may also have a negative effect on us. For example, our
operating results and financial condition may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us.
Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit
the legal protections available to you and us.
The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which legal decisions have limited value as
precedents. In 1979, the PRC government began to promulgate a comprehensive
system of laws and regulations governing economic matters in general. The
overall effect of legislation over the past three decades has significantly
increased the protections afforded to various forms of foreign or private-sector
investment in the PRC. These laws and regulations change frequently, and their
interpretation and enforcement involve uncertainties. For example, we may have
to resort to administrative and court proceedings to enforce the legal
protections that we enjoy either by law or contract. However, since PRC
administrative and court authorities have significant discretion in interpreting
and implementing statutory and contractual terms, it may be more difficult to
evaluate the outcome of administrative and court proceedings and the level of
legal protection we enjoy than in more developed legal systems. These
uncertainties may also impede our ability to enforce the contracts we have
entered into. As a result, these uncertainties could materially adversely affect
our business and operations.
Under
the EIT Law, we and China Cablecom Company Limited (“HKZ") may be classified as
a “resident enterprise” of the PRC. Such classification could result in
unfavorable tax consequences to us and HKZ and our non-PRC
shareholders.
On
March 16, 2007, the Fifth Session of the Tenth National People’s Congress
passed the Enterprise Income Tax Law of the People’s Republic of China (the “EIT
Law”), which became effective on January 1, 2008. Under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a “resident enterprise,” meaning that it can be treated in a
manner similar to a Chinese enterprise for enterprise income tax purposes,
although the dividends paid to one resident enterprise from another may qualify
as “tax-exempt income.” The implementing rules of the EIT Law define de facto
management as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise.
On April
22, 2009, the State Administration of Taxation issued the
Notice on the
Issues Regarding Recognition of
Overseas Incorporated Domestically Controlled Enterprises as PRC Resident
Enterprises Based on the De Facto Management Body Criteria
, which was
retroactively effective as of January 1, 2008. Under this notice, an overseas
incorporated domestically controlled enterprise will be recognized as a PRC
resident enterprise if it satisfies all of the following conditions: (i) the
senior management responsible for daily production/business operations is
primarily located in the PRC, and the location(s) where such senior management
execute their responsibilities are primarily in the PRC; (ii) strategic
financial and personnel decisions are made or approved by organizations or
personnel located in the PRC; (iii) major properties, accounting ledgers,
company seals and minutes of board meetings and shareholder meetings, etc., are
maintained in the PRC; and (iv) 50% or more of the board members with voting
rights or senior management habitually reside in the PRC. However, it is still
unclear whether PRC tax authorities would require us and/or China Cablecom to be
treated as a PRC resident enterprise.
If the
PRC tax authorities determine that we and HKZ are a “resident enterprise” for
PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we and HKZ may be subject to enterprise income tax at a
rate of 25% on our worldwide taxable income, as the case may be, as well as PRC
enterprise income tax reporting obligations. Second, although under the EIT Law
and its implementing rules, dividends paid to us from our PRC subsidiaries
through HKZ, our Hong Kong sub-holding company, assuming we and HKZ are each
treated as a “resident enterprise” under the EIT Law, may qualify as “tax-exempt
income,” we cannot guarantee that such dividends will not be subject to
withholding tax generally at a rate of 10% (or, if the Double Tax Avoidance
Agreement between Hong Kong and Mainland China is applicable, 5%). Finally, the
new “resident enterprise” classification could result in a situation in which a
10% PRC tax is imposed on dividends we pay to our non-PRC security holders and
gains derived by our non-PRC security holders from transferring our securities,
if such income is considered PRC-sourced income by the relevant PRC tax
authorities.
If any
such PRC tax applies to a non-PRC security holder, such security holder may be
entitled to a reduced rate of PRC taxes under an applicable income tax treaty
and/or a dedution for such PRC tax against such security holder's domestic
taxable income or a foreign tax credit in respect of such PRC
tax against such security holder’s domestic income tax liability (subject
to applicable conditions and limitations). You should consult with your own tax
advisors regarding the applicability of any such taxes, the effects of any
applicable income tax treaties, and any available deductions or foreign tax
credits.
Risks
Relating to Being Incorporated in the British Virgin Islands
We
are a British Virgin Islands company and, because the rights of shareholders
under British Virgin Islands law differ from those under U.S. law, you may have
fewer protections as a shareholder.
Our
corporate affairs are governed by our Amended and Restated Memorandum and
Articles of Association, the BVI Business Companies Act, 2004 (as amended) of
the British Virgin Islands (the “Act”) and the common law of the British Virgin
Islands. The rights of shareholders to take action against the directors,
actions by minority shareholders and the fiduciary responsibility of the
directors under British Virgin Islands law are governed by the Act and the
common law of the British Virgin Islands. The common law of the British Virgin
Islands is derived in part from comparatively limited judicial precedent in the
British Virgin Islands as well as from English common law, which has persuasive,
but not binding, authority on a court in the British Virgin Islands. The rights
of shareholders and the fiduciary responsibilities of directors under British
Virgin Islands law are not as clearly established as they would be under
statutes or judicial precedent in some jurisdictions in the United States. In
particular, the British Virgin Islands has a less developed body of securities
laws as compared to the United States, and some states (such as Delaware) have
more fully developed and judicially interpreted bodies of corporate
law.
British
Virgin Islands companies may not be able to initiate shareholder derivative
actions, thereby depriving shareholders of the ability to protect their
interests.
British
Virgin Islands companies may not have standing to initiate a shareholder
derivative action in a federal court of the United States. The circumstances in
which any such action may be brought, and the procedures and defenses that may
be available in respect to any such action, may result in the rights of
shareholders of a British Virgin Islands company being more limited than those
of shareholders of a company organized in the United States. Accordingly,
shareholders may have fewer alternatives available to them if they believe that
corporate wrongdoing has occurred. The British Virgin Islands courts are also
unlikely to recognize or enforce against us judgments of courts in the United
States based on certain liability provisions of U.S. securities law, and to
impose liabilities against us, in original actions brought in the British Virgin
Islands, based on certain liability provisions of U.S. securities laws that are
penal in nature.
The
laws of the British Virgin Islands provide statutory protection for minority
shareholders.
Under the
laws of the British Virgin Islands, there is some statutory law for the
protection of minority shareholders under the Act. The principal protection
under statutory law is that shareholders may bring an action to enforce our
Amended and Restated Memorandum and Articles of Association. The Act sets forth
the procedure to bring such a claim. Shareholders are entitled to have the
affairs of the company conducted in accordance with the general law and the
Amended and Restated Memorandum and Amended and Restated Articles of
Association. Companies are not obligated to appoint an independent auditor
and shareholders are not entitled to receive the audited financial statements of
the company.
There are
common law rights for the protection of shareholders that may be invoked (such
rights have also now been given statutory footing under the Act), largely
dependent on English company law, since the common law of the British Virgin
Islands for business companies is limited. Under the general rule pursuant to
English company law known as the rule in
Foss v. Harbottle
, a
court will generally refuse to interfere with the management of a company at the
insistence of a minority of its shareholders who express dissatisfaction with
the conduct of the company’s affairs by the majority or the board of directors.
However, every shareholder is entitled to have the affairs of the company
conducted properly according to law and the constituent documents of the
corporation. As such, if those who control the company have persistently
disregarded the requirements of company law or the provisions of the company’s
memorandum or articles of association, then the courts will grant relief.
Generally, the areas in which the courts will intervene are the following: (i)
an act complained of which is outside the scope of the authorized business or is
illegal or not capable of ratification by the majority, (ii) acts that
constitute fraud on the minority where the wrongdoers control the company, (iii)
acts that infringe on the personal rights of the shareholders, such as the right
to vote, and (iv) where the company has not complied with provisions requiring
approval of a special or extraordinary majority of shareholders, which are more
limited than the rights afforded minority shareholders under the laws of many
states in the U.S.
The Act
has introduced a series of remedies available to members. Where a company
incorporated under the Act conducts some activity which breaches the Act or the
company's memorandum and articles of association, the court can issue a
restraining or compliance order. Members can now also bring derivative, personal
and representative actions under certain circumstances. The traditional English
basis for members' remedies have also been incorporated into the Act – where a
member of a company considers that the affairs of the company have been, are
being or are likely to be conducted in a manner likely to be oppressive,
unfairly discriminating or unfairly prejudicial to him, he may now apply to the
BVI court for an order on such conduct.
Any
member of a company may apply to the BVI court for the appointment of a
liquidator for the company and the court may appoint a liquidator for the
company if it is of the opinion that it is just and equitable to do
so.
The Act
provides that any member of a company is entitled to payment of the fair value
of his shares upon dissenting from any of the following: (a) a merger; (b) a
consolidation; (c) any sale, transfer, lease, exchange or other disposition of
more than 50 per cent in value of the assets or business of the company if not
made in the usual or regular course of the business carried on by the company
but not including (i) a disposition pursuant to an order of the court having
jurisdiction in the matter, (ii) a disposition for money on terms requiring all
or substantially all net proceeds to be distributed to the members in accordance
with their respective interest within one year after the date of disposition, or
(iii) a transfer pursuant to the power of the directors to transfer assets for
the protection thereof; (d) a redemption of 10 percent, or fewer of the issued
shares of the company required by the holders of 90 percent, or more of the
shares of the company pursuant to the terms of the Act; and (e) an arrangement,
if permitted by the court.
Generally
any other claims against a company by its shareholders must be based on the
general laws of contract or tort applicable in the British Virgin Islands or
their individual rights as shareholders as established by the company's
memorandum and articles of association.
Because
we do not intend to pay dividends shareholders will benefit from an investment
in our ordinary shares only if they appreciate in value.
We have
never declared or paid any cash dividends on our ordinary shares. We currently
intend to retain all future earnings, if any, for use in the operations and
expansion of the business. As a result, we do not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the
declaration and payment of cash dividends will be at the discretion of our Board
of Directors and will depend on factors our Board of Directors deems relevant,
including among others, our results of operations, financial condition and cash
requirements, business prospects, and the terms of China Cablecom Holdings’
credit facilities, if any, and any other financing arrangements. Accordingly,
realization of a gain on shareholders’ investments will depend on the
appreciation of the price of the ordinary shares. There is no guarantee that our
ordinary shares will appreciate in value.
There
is a risk that we could be treated as a U.S. domestic corporation for U.S.
federal income tax purposes, which could result in significantly greater U.S.
federal income tax liability to us.
Section
7874(b) of the Internal Revenue Code of 1986, as amended (the “Code”) generally
provides that a corporation organized outside the United States which acquires,
directly or indirectly, pursuant to a plan or series of related transactions
substantially all of the assets of a corporation organized in the United States
will be treated as a domestic corporation for U.S. federal income tax purposes
if shareholders of the acquired corporation, by reason of owning shares of the
acquired corporation, own at least 80% (of either the voting power or the value)
of the stock of the acquiring corporation after the acquisition. If Section
7874(b) were to apply to the Redomestication Merger and Business Combination (as
each such term is defined in the section of this Annual Report entitled
“Information on the Company”), then, among other things, we would be subject to
U.S. federal income tax on our worldwide taxable income following the
Redomestication Merger and Business Combination as if we were a domestic
corporation. Although it is not expected that Section 7874(b) will apply to
treat us as a domestic corporation for U.S. federal income tax purposes, this
result is not entirely free from doubt. As a result, shareholders and warrant
holders are urged to consult their tax advisors on this issue. The balance of
this discussion (including the discussion in the section of this Annual Report
entitled “Taxation—United States Federal Income Taxation”) assumes that we will
be treated as a foreign corporation for U.S. federal income tax
purposes.
W
e
may qualify as a passive foreign
investment company, or “PFIC,” which could result in adverse U.S. federal income
tax consequences to U.S. investors.
In
general, we will be classified as a PFIC for any taxable year in which either
(1) at least 75% of our gross income (looking through certain corporate
subsidiaries) is passive income or (2) at least 50% of the average value of our
assets (looking through certain corporate subsidiaries) is attributable to
assets that produce, or are held for the production of, passive income. Passive
income generally includes, without limitation, dividends, interest, rents,
royalties, and gains from the disposition of passive assets. If we are
determined to be a PFIC for any taxable year during which a U.S. Holder (as
defined in the section of this Annual Report captioned ‘‘Taxation – United
States Federal Income Taxation – General’’) held our ordinary shares or
warrants, the U.S. Holder may be subject to increased U.S. federal income tax
liability and may be subject to additional reporting requirements. Based on the
composition (and estimated values) of the assets and the nature of the income of
us and our subsidiaries in 2009, we do not anticipate that we will be treated as
a PFIC in 2009.
Notwithstanding the
foregoing, our view that we will not be treated as a PFIC in 2009 is not free
from doubt because of, among other things, the significant cash position and
uncertainties relating to the actual values of the other assets of us and our
subsidiaries in 2009. Our actual PFIC status for any subsequent taxable year
will not be determinable until after the end of such taxable year. Accordingly,
there can be no assurance with respect to our status as a PFIC for 2009 or any
subsequent taxable year. We urge U.S. Holders to consult their own tax advisors
regarding the possible application of the PFIC rules. For a more detailed
explanation of the tax consequences of PFIC classification to U.S. Holders, see
the section of this Annual Report captioned ‘‘Taxation—United States
Federal Income Taxation—Tax Consequences to U.S. Holders of Our Ordinary Shares
and Warrants—Passive Foreign Investment Company Rules.’’
ITEM
4. INFORMATION ON THE COMPANY
A.
History and Development of the
Company.
China
Cablecom Holdings was formed on October 25, 2007, in the British Virgin Islands,
and operates through a wholly-owned subsidiary China Cablecom Ltd., a British
Virgin Islands company, which (through subsidiaries) is a joint-venture provider
of cable television services in the PRC, operating in partnership with a local
state-owned enterprise (“SOE”) authorized by the PRC government to control the
distribution of cable TV services. China Cablecom acquired the network it
currently operates in Binzhou, Shandong Province in September 2007 and in Hubei
Province in June 2008 by entering into a series of asset purchase and services
agreements with a company organized by SOEs owned directly or indirectly by
local branches of SARFT in five different municipalities to serve as a holding
company of the relevant businesses.
China
Cablecom Ltd.’s operating activity from October 6, 2006 (inception date) to
September 30, 2007, was limited and related to its formation, and professional
fees and expenses associated with its acquisition activities.
On
September 20, 2007, China Cablecom Ltd. entered into a Purchase Agreement with
several accredited investors (the “Purchase Agreement”), and consummated the
private placement of 20,000,000 units, each unit consisting of (i) a promissory
note in the face amount of $499,808, bearing interest at the rate of 10% per
annum (the “Note”), and (ii) 19,167 detachable shares of China Cablecom Ltd.’s
Class A Preferred Stock (the “Units”). As security for the Notes, Mr. Clive Ng
pledged and granted to the investors, on a
pro rata
basis, a first
priority lien on 50.1% of the ordinary shares of China Cablecom Ltd. owned by
him. The proceeds of the sale and issuance of the Units were used in the
following manner: (i) $12.0 million was used to finance the acquisition through
contractual arrangements of Binzhou Broadcasting and (ii) $8 million was used
for working capital, including payment of certain administrative, legal,
investment banking and accounting fees, repayment of loans in the aggregate
amount of $720,000 owed to Mr. Ng and a $475,000 loan made to Jaguar Acquisition
Corporation (“Jaguar”). Jaguar used the proceeds of this loan for working
capital expenses associated with completing its acquisition of China Cablecom
Ltd. After its merger with and into China Cablecom Holdings, Jaguar ceased to
exist and the loan was assumed by China Cablecom Holdings and continues to be in
effect an intercompany obligation.
On April
9, 2008, pursuant to the terms of an Agreement and Plan of Merger, dated October
30, 2007 (“Merger Agreement”), Jaguar merged with and into (the “Redomestication
Merger”) China Cablecom Holdings, its wholly-owned British Virgin Islands
subsidiary, for the purpose of redomesticating Jaguar to the British Virgin
Islands as part of the acquisition of China Cablecom Ltd., and China Cable
Merger Co., Ltd., a wholly-owned British Virgin Islands subsidiary of China
Cablecom Holdings (“China Cable Merger Co.”), merged with and into China
Cablecom Ltd., resulting in China Cablecom Ltd. becoming a wholly-owned
subsidiary of China Cablecom Holdings (the “Business Combination”).
At the
closing of the Business Combination, China Cablecom Holdings issued to China
Cablecom’s shareholders aggregate merger consideration of 2,066,680 of ordinary
shares and China Cablecom Holdings assumed approximately $20 million in
outstanding debt of China Cablecom.
In
connection with the approval of the merger at the April 9, 2008 Special Meeting
of Stockholders of Jaguar, the stockholders of Jaguar also approved (i) the
adoption of China Cablecom Holdings’ 2007 Omnibus Securities and Incentive Plan,
which provides for the grant of up to 10,000,000 ordinary shares of China
Cablecom Holdings or cash equivalents to directors, officers, employees and/or
consultants of China Cablecom Holdings and its subsidiaries; (ii) the grant of
up to 8,120,000 ordinary shares (‘‘Performance Shares’’), pursuant to consulting
and other arrangements to certain of Jaguar’s and China Cablecom’s insiders in
connection with the Business Combination upon the achievement of certain
financial goals of China Cablecom Holdings following the Business Combination;
and (iii) the payment of cash bonuses of up to $5,000,000 to certain officers
and directors of Jaguar and China Cablecom following the exercise of existing
warrants after the Business Combination.
As a
result of the Redomestication Merger and Business Combination, China Cablecom
Holdings succeeded to the registration of Jaguar’s common stock under Section
12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).
The
Company consummated a convertible debt financing in May 2008 with current and
new investors involving the issuance of an aggregate of $43.175 million
principal amount at maturity of secured convertible notes and approximately
1.525 million ordinary shares to assist in securing its acquisition of Hubei
Broadcasting. Interest was prepaid at closing, resulting in net proceeds
(excluding existing investors who reinvested principal and interest repayments
in the new issuance) to the Company of approximately $19 million. Chardan
Capital Markets, LLC, Lazard Frères & Co. LLC and Roth Capital Partners
, LLC acted as co-placement agents.
The
3-year senior secured convertible notes bear an interest rate of 9.99% per annum
and are secured by a pledge of the stock of the Company’s wholly-owned
subsidiary, China Cablecom Ltd., and all other assets owned by the Company
outside of the People’s Republic of China. The notes are convertible into shares
of the Company’s ordinary shares at a conversion price of $9.50 per share and
are guaranteed by China Cablecom Ltd. as to the principal, interest and all
other amounts due thereunder. In addition, the Company issued approximately
1.525 million ordinary shares to the investors and is obligated to issue an
additional approximate 125,000 shares if the notes are not repaid upon the first
anniversary of the closing and an additional approximate 300,000 shares if
the notes are not repaid upon the second anniversary of the closing.
Additionally, the Company has the ability to prepay the notes for a total of $34
million upon the first anniversary of their issuance and any time thereafter at
prepayment amounts equal to such amount plus additional amounts equal to
approximately 10 5/8% of the principal amount of maturity per annum of such
notes, based on the number of days from such first anniversary to such date of
pre payment. To the extent that the Company calls its outstanding warrants and
such warrants are exercised, it is required to repay the notes with the net
proceeds from such warrant exercise.
Debt
Restructure and Private Financings, October 2009
Debt
Restructure
Due to a
default in repayment of principal and interest on certain of its outstanding
promissory notes in April 2009, the Company negotiated a comprehensive
restructuring of its outstanding capital markets debt obligations which closed
in October 2009.
Pursuant
to the Restructuring, the Company entered into a waiver agreement and consent
with all note holders pusuant to which the note holders agreed to exchange
approximately $47 million in aggregate principal amount of current debt
obligations for an aggregate of $5.5 million in unsecured notes, $18 million in
secured notes and 65,799,286 newly issued shares of Series A Convertible
Preferred Shares, each share convertible into one ordinary share and
representing in aggregate approximately 66.2% of the Company's ordinary shares
outstanding after the closing of the Restructuring and the private financing
referred to below.
Until
fourteen months after the issue date, principal on the new notes is subject to
cancellation in the event that (i) the Company's ordinary shares close at a
daily volume weighted average price greater than $0.85 for 30 consecutive days
with daily dollar volume of 500,000 or more and all of the conversion shares
issuable upon conversion of the Series A Preferred Shares could have been sold
by the noteholder during such 30 day period; or (ii) noteholders convert the
Series A Convertible Preferred Shares into ordinary shares within 14 months
after the issue date, such cancellation in proportion to the amount
converted. Since the Restructuring, an aggregate of $1,840,965 in
principal amount of the secured notes and $365,205 in principal amount of the
unsecured notes has been cancelled as a result of such conversions.
The
unsecured and secured notes are due April 2016 and bear non-cash interest at 5%
per annum payable semi-annually in the form of the Company’s Common Stock valued
at 95% of the volume-weighted average price for the 10 trading days prior to the
required payment date. Amortizing principal repayments with respect to
both the unsecured and secured notes commence in 2012.
Private
Financing
In
October 2009, the Company also completed a private placement of $33 million in
aggregate principal amount of 12% Senior Secured Notes (the “New Notes”) due
October 2015. The holders of New Notes have been issued 23,158,080 Series B
Convertible Preferred Shares, representing approximately 23.3% of the Company's
total outstanding ordinary shares after the Restructuring and issuance of the
New Notes. Immediately following the issuance, the Company redeemed
approximately $13.9 million of the New Notes, resulting in approximately $19.1
million of New Notes remaining outstanding.
The New
Notes are due October 2015 and bear cash interest at 12% per annum payable
semi-annually commencing October 2012. Amortizing principal repayments
with respect to the New Notes were commence in 2014 as a result of the
redemption described above.
The net
proceeds from the private financing were used to satisfy the Company's remaining
obligations to the Hubei SOE under its supplementary framework
agreement.
Joint
Venture with Binzhou Guangdian Network Co., Ltd. and China
Cablecom.
In
September 2007, China Cablecom entered into a Framework Agreement through its
affiliated company, JYNT, to purchase a 49% equity interest and 60% economic
benefit in a newly created joint venture, Binzhou Broadcasting and Television
Information Network Co., Ltd. (“Binzhou Broadcasting”). The local state-owned
enterprise, Binzhou Guangdian Network Co., Ltd. (“Binzhou SOE”), agreed to
contribute certain assets and businesses for a 51% equity interest in Binzhou
Broadcasting. Binzhou SOE was organized in 2006 to aggregate various local
state-owned cable assets and businesses within the city of Binzhou, China. Prior
to the formation of Binzhou Broadcasting, Binzhou SOE consolidated the following
five cable operating companies and networks:
|
·
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Binzhou
Guang Shi Network Co., Ltd.;
|
|
·
|
Huiming
Cable Network Co., Ltd.;
|
|
·
|
Boxing
Dian Guang Media Co., Ltd.;
|
|
·
|
Zouping
Cable Network Center; and
|
|
·
|
Binzhou
Guang Dian Cable Network Center.
|
In order
to comply with current PRC laws limiting foreign ownership in the cable
industry, Binzhou Broadcasting operates in a joint venture and China Cablecom
manages its interest in the joint venture through direct ownership of wholly
foreign owned entities and affiliated companies wholly owned by PRC citizens.
China Cablecom entered into contractual arrangements, through its affiliated PRC
company, JYNT, to provide marketing, strategic consulting and technical support
and services to Binzhou Broadcasting for a fee of 11% of the net profits of the
joint venture. In addition, in the Framework Agreement between JYNT and the
Binzhou SOE, JYNT has the ability to control certain aspects of the financing
and management of Binzhou Broadcasting arising from a veto right it holds
regarding the appointment of the general manager of Binzhou Broadcasting, the
right to appoint the chief financial officer of Binzhou Broadcasting and an
obligation to provide continued financial resources for investment and capital
expenditure for the future expansion of the joint venture’s operations. As a
result, China Cablecom has the ability to substantially influence the joint
venture’s daily operations and financial affairs, appoint their senior
executives and approve all matters requiring shareholder vote. In addition,
China Cablecom enjoys 60% of the economic benefits of the joint venture through
its 11% fee of net profit combined with its 49% ownership interest. The other
provisions of the Framework Agreement (including an appraisal of the assets of
Binzhou Broadcasting, the initial capitalization of Binzhou Broadcasting and a
prohibition on the Binzhou SOE establishing a competing network in the
cooperation area) have either been performed in full or are contained in the
formal agreement entered into subsequent thereto.
Joint
Venture with Hubei Chutian Radio and Television Information Network Co., Ltd.
and China Cablecom.
In June
2008, China Cablecom entered into a Framework Agreement through its affiliated
company, JYNT, to purchase a 49% equity interest and 60% economic benefit in a
newly created joint venture, Hubei Chutian Video Communication Network Co., Ltd.
(“Hubei Chutian”). In September 2009, the Framework Agreement was revised by
Supplement Agreement II. China Cablecom reduced it’s economic interest to 55% in
Hubei Chutian. The local state-owned enterprise, Hubei Chutian Radio and
Television Information Network Co., Ltd. (“Hubei SOE”), agreed to contribute
certain assets and businesses for a 51% equity interest in Hubei Chutian. Hubei
SOE was organized under the laws of the PRC to aggregate various local
state-owned cable assets and businesses within the Province of Hubei,
China.
In order
to comply with current PRC laws limiting foreign ownership in the cable
industry, Hubei Chutian operates in a joint venture and China Cablecom manages
its interest in the joint venture through direct ownership of wholly foreign
owned entities and affiliated companies wholly owned by PRC citizens. China
Cablecom entered into contractual arrangements, through its affiliated PRC
company, JYNT, to provide marketing, strategic consulting and technical support
and services to Hubei Chutian for a fee of 6% of the net profits of the joint
venture. In addition, in the Framework Agreement between JYNT and the Hubei SOE,
JYNT has the ability to control certain aspects of the financing and management
of Hubei Chutian arising from a veto right it holds regarding the appointment of
the general manager of Hubei Chutian, the right to appoint the chief financial
officer of Hubei Chutian and an obligation to provide continued financial
resources for investment and capital expenditure for the future expansion of the
joint venture’s operations. As a result, China Cablecom has the ability to
substantially influence the joint venture’s daily operations and financial
affairs, appoint their senior executives and approve all matters requiring
shareholder vote. In addition, China Cablecom enjoys 55% of the economic
benefits of the joint venture through its 6% fee of net profit combined with its
49% ownership interest.
Our
registered office is located at Kingston Chambers, P. O. Box 173, Road Town,
Tortola, British Virgin Islands. Our principal executive office is located
at Suite 4612, Tower 1, Plaza 66, No1266, Nanjing West Road, Shanghai, 200040,
People’s Republic of China. The telephone number of our principal
executive office is (86) 21 6113-8281.
B.
Business Overview
Overview
We are a
joint-venture provider of cable television services in the PRC, operating in
partnership with a local state-owned enterprise authorized by the PRC government
to control the distribution of cable TV services (“SOE”). We acquired the
networks we currently operate in Binzhou, Shandong Province in September 2007
and in Hubei Province in June 2008 by entering into a series of asset purchase
and services agreements with companies organized by SOEs owned directly or
indirectly by local branches of SARFT to serve as holding companies of the
relevant businesses. Due to restrictions on foreign ownership of PRC media and
broadcasting entities, our 49% joint venture interest is held through a series
of contractual arrangements intended to result in the risks and benefits of
Binzhou Broadcasting’s and Hubei Chutian’s operations being primarily borne by
us, rather than through a direct ownership of equity securities. In addition to
seeking to avoid a violation of PRC law, these arrangements provide, under
relevant principles of US GAAP, for the consolidation of 60% and 55% of the
results of operations, financial position and cash flows of Binzhou Broadcasting
and Hubei Chutian respectively by us. These contractual arrangements with
Binzhou SOE have an initial term of 20 years. The parties may mutually seek to
extend these agreements upon the expiry of the current term. The contractual
agreements with Hubei SOE have a fixed term of 30 years and China Cablecom
agreed to transfer the remaining economic interest in the Joint Venture to Hubei
SOE after the 30 years period for free.
We are
not aware of any legal impediments that may affect the renewal of the agreements
with Binzhou SOE and to sign the new agreements with Hubei Chutian after the 30
years periodunder current PRC laws. In order for us to continue to derive the
economic benefits from the operation of Binzhou Broadcasting and Hubei Chutian,
it must renew these agreements with Binzhou SOE and sign new agreements with
Hubei SOE after the first 30 year co-operation period. Binzhou Broadcasting
operates a cable network with 482,016 paying subscribers as of December 31, 2009
and Hubei Chutian operates a cable network with approximately 1,190,000 paying
subscribers as of December 31, 2009 . China Cablecom’s strategy is to replicate
the acquisition by operating partnership model in other municipalities in the
PRC and then introduce operating efficiencies and increase service offerings in
the networks it has acquired.
The
PRC Cable Industry
China is
the world’s largest cable television market in subscriber volume. As of December
31, 2009, China had 174 million cable subscribers, or 41% of cable
television-viewing subscribers, , including 65 million digital TV subscribers.
Howeverdigital cable penetration rates are reported to be very low compared to
all television-viewing households. We expect to benefit from the following
additional trends affecting the PRC and the Chinese cable TV
industry:
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Rising
household incomes in the PRC.
According to a report by the
McKinsey Global Institute, over the next 20 years more people will migrate
to China’s cities for higher-paying jobs. These working consumers will
create a new and significant middle class. McKinsey also notes that the
trend in China is toward a younger middle
class.
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·
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Government
mandates ensure proliferation of digital cable.
According to the
provisions of SARFT, China will carry out digital broadcast and television
roundly in 2010, and will halt analog TV programs in 2015. With the
approaching deadline, the pace of conversion to DTV speeds up in
China.
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New and
dynamic product offerings.
The transition to digital cable
benefits cable operators by expanding their market for premium product and
service offerings to their customers. Examples that are more fully
describe below, include broadband Internet access; premium content
subscription; electronic programming guide, or EPG; video on-demand, VOD;
personal video recorder, or PVR; and
others.
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·
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Higher
ARPU.
Digital cable offers cable network operators an
opportunity to create new revenue streams. In addition, SARFT has
authorized cable operators to apply for rate increases to cover the costs
associated with digitalization. Recently, the government approved rate
increase in excess of 70%. On average, subscribers in the PRC pay $1.50
per month for basic cable service compared to digital cable which averages
$3.50 per month.
|
The
following chart summarizes two recent studies on the impact of selected cable
operators throughout the PRC and the impact on ARPU after the digitalization
conversion. The average increase in ARPU for these 15 locations was
72%.
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Monthly subscription fee before
and after digitalization (USD)
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|
|
|
|
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|
|
|
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|
Chongqing
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1.57
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|
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|
2.88
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|
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|
83
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%
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|
|
|
|
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|
|
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Dalian
|
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1.57
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|
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|
3.14
|
|
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|
100
|
%
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|
|
|
|
|
|
|
|
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|
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|
Foshan
|
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|
1.83
|
|
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|
2.22
|
|
|
|
21
|
%
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|
|
|
|
|
|
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|
|
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|
Fuzhou
|
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1.83
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|
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3.40
|
|
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86
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%
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|
Guangxi
Province
|
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|
1.70
|
|
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|
3.40
|
|
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|
100
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%
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|
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Guangzhou
|
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2.22
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3.46
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56
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%
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Hainan
Province
|
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2.09
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|
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3.40
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|
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63
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%
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|
Hangzhou
|
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1.83
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|
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|
1.83
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0
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%
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|
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|
|
|
|
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Hunan
Province
|
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2.16
|
|
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|
3.27
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|
52
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%
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|
Jinan
|
|
|
1.70
|
|
|
|
3.66
|
|
|
|
115
|
%
|
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|
|
|
|
|
|
|
|
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|
Qingdao
|
|
|
1.57
|
|
|
|
2.88
|
|
|
|
83
|
%
|
|
|
|
|
|
|
|
|
|
|
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|
Shaanxi
Province
|
|
|
1.83
|
|
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|
3.14
|
|
|
|
71
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%
|
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|
|
|
|
|
|
|
|
|
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|
Shenzhen
|
|
|
2.09
|
|
|
|
3.66
|
|
|
|
75
|
%
|
|
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|
|
|
|
|
|
|
|
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|
Taiyuan
|
|
|
1.57
|
|
|
|
3.01
|
|
|
|
92
|
%
|
|
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|
|
|
|
|
|
|
|
|
|
|
Zibo
|
|
|
1.70
|
|
|
|
3.66
|
|
|
|
115
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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|
Average
|
|
|
1.83
|
|
|
|
3.14
|
|
|
|
72
|
%
|
Source:
SYWG Consulting and Research, 2007; Skillnet MI, 2007
Products
and Service Offerings
Currently,
we operate two cable networks, Binzhou Broadcasting and Hubei Chutian, and offer
the following products and services to our customers: (i) basic analog and
digital cable subscription services (including installation), referred to as
video subscription services, (ii) landing service for satellite TV broadcasters,
(iii) network leasing, (iv) broadband Internet, and (v) other services,
including premium content and interactive.
Video subscription
services.
The majority of the revenues are currently generated from
video subscription services and related installation fees. As of
December 31, 2009, the two networks we operate served 1,673,695 paying
subscribers. Subscribers typically pay Binzhou Broadcasting and Hubei Chutian on
an annual basis and generally may discontinue services at any time. Monthly
subscription rates were ranging from RMB12 to RMB15 for analog service and Rmb
24 to Rmb 28 for digital service
.
Landing service for satellite TV
broadcasters.
Satellite broadcasters in China have no network and
must pay a ‘‘landing fee’’ to local cable operators. The landing fee for
satellite TV to reach one household is approximately $0.04 per channel per
year.
Network leasing.
Local
enterprises in the PRC, such as hospitals, schools, financial institutions and
telecommunications companies, do not have complete coverage within the region
for their own local network. Accordingly, they rent network bandwidth from local
cable companies to operate their internal communication networks among their
subsidiaries and branches.
Broadband Internet.
Binzhou Broadcasting and Hubei Chutian offer to residential, commercial
and government broadband internet services. Key customers for cable internet
access include new buildings and the government. As of December 31, 2009, the
two networks we operate had 21,939 broadband households, representing 1% of
service penetration.
We
operate cable network systems through Binzhou Broadcasting and Hubei Chutian as
summarized in the table below:
|
|
Binzhou
Broadcasting
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|
Hubei
Chutian
|
|
|
|
|
|
Location
|
|
Shandong
province, China
|
|
Hubei
province, China
|
|
|
|
|
|
Number
of networks
|
|
5
|
|
23
|
|
|
|
|
|
Subscribers
(2009/2008)
|
|
482,016
/ 477,910
|
|
1,191,679/
1,031,212
|
|
|
|
|
|
Revenues
(2009/2008)
|
|
$10.5
million / $ 9.1 million
|
|
$35.0
million / $ 27.5 million
|
Most of
our revenues are from subscription fees and one time installation
charges.
Competition
and Threats of Substitution
Cable
operators in the PRC are local monopolies, similar to the U.S. in the past where
only one cable network operated in one municipal city or one county. China
Cablecom believes it is possible that current cable network operators may
ultimately lose their single monopoly status. Additionally, there are other
private sector investors seeking to explore the cable industry in the Shandong
and Hubei provinces, including CITIC Group, a publicly traded company listed in
Hong Kong.
There
are, however, emerging threats to traditional cable, such as Internet Protocol
TV, or IPTV, and Direct Broadcast Satellite, or DBS. Since media and media
content are strongly controlled by the PRC government, new entrants to the
market will face significant hurdles that are heavily government policy oriented
and not market-oriented. Foreign IPTV models cannot be copied in the PRC due to
the strict control by the government for censorship purposes. As a consequence,
cable operators will continue to be the dominant market force for the
foreseeable future. For example, industry experts forecast that in five years
cable network operators will still maintain 70% market share in the financially
lucrative pay TV content distribution market.
IPTV
rollout in the PRC has also been hampered by high service fees, which are $8.00
per month, as well as conflict of interest issues between local SARFT and local
telecommunications operators, which has slowed the licensing process for IPTV
operators. China Cablecom believes that these new entrants will not pose
significant threats of substitution to cable network operators in the
foreseeable future.
Similar
to the U.S., DBS poses even less of a threat to cable operators than IPTV. There
are very few DBS households in the PRC. Due to PRC policies, DBS typically
cannot be directly received into households, requiring retransmission through
terrestrial or cable networks. The transition to digital cable greatly
diminishes the competitive threat to cable from DBS.
Other
threats of substitution, such as mobile TV, are in the early stages of
development and customer acceptance of this technology is unknown. We believe
mobile TV does not represent a competitive threat.
Currently,
there are several large cable operators in the PRC. The cable market is highly
fragmented and the large operators are geographically centered. For example,
Beijing GeHau, a cable operator with 3.8 million households, focuses its efforts
in Beijing. Hangzhou Wasu, a cable operator with 1.0 million households, focuses
its efforts in Hangzhou. The largest consolidator in the PRC is CITIC Guoan, or
CITIC, with 8.8 million households. CITIC is a publicly listed company on the
Shenzhen stock exchange and is diversified across several industries, including
cable TV, real estate, energy and others. CITIC has focused its efforts in the
Hunan and Jiangxi provinces; however, they do operate one local cable network,
Weihai, in Shandong and Wuhan, the capital city of Hubei
Province.
China
Cablecom believes that there are many attractive acquisition targets in PRC and
the presence of other cable operators in the PRC does not pose a competitive
threat, especially in the territories that we have already covered, given the
inherent monopolistic nature of the cable business in the PRC.
On
January 13, 2010 the State Council of People’s Republic of China announced a
decision to accelerate the convergence of three networks: telecom, broadcasting
and internet. As a result, cable operators will face competition from the
PRC telecom companies for broadcasting revenue, although the Company management
believes this also provides opportunities for cable operates to tap the
broadband access and VoIP markets. China Cablecom believes the 3-Net convergence
plan will not have immediate impact on its business since the plan sets a 3-year
trial run in limited sites for convergence service to firm up relevant
regulatory policies and framework. Given the fact that content is still under
the control of SARFT, management believes telecom operators are unlikely to
attract a lot of IPTV subscribers with the same content now provided by cable
operators.
Marketing
and Sales
Our sales
and marketing strategy depends heavily on the monopolistic situation of cable in
the PRC. We do not intend to spend significant dollar amounts on marketing and
sales efforts other than for converting the analog signal to a digital signal.
The cost of marketing programs associated with premium content service offerings
will be mostly borne by the content providers and integrators.
Governmental
Regulation
The
media, cultural and telecommunications industries in China are highly regulated
by the PRC government, even though the past several years have seen
liberalization in this regard. Many foreign and domestic industry participants
operate by means of establishing flexible corporate and commercial relationships
that allow them to avoid regulatory restrictions while at the same time
achieving their business goals. As a result, in order to comply with current PRC
laws limiting foreign ownership in the cable industry, Binzhou Broadcasting and
Hubei Chutian operate in a joint venture and we manage our interest in the joint
venture through direct ownership of wholly foreign owned entities and affiliated
companies wholly owned by PRC citizens. This organization structure is designed
to minimize the operational impact of governmental regulation in the PRC,
although the contractual arrangements required in this regard are not accorded
the same status at law as direct ownership, which may affect our ability to
secure future financing and pursue its strategic growth plans. The effectiveness
of the current contractual arrangement is more dependent on there being no
change (or at least no substantial change) in the current PRC regulations,
rather than direct ownership. There is the possibility that the relevant PRC
authorities could, at any time, decide that this contractual arrangement
violates existing or future PRC laws, regulations or policies.
Cable
TV
Overall
responsibility for the administration of the cable TV sector is divided between
the Chinese Communist Party (“CCP”) and the central government. The CCP Central
Committee is responsible for censorship; the State Council, in co-operation with
the National People’s Congress (“NPC”), is the government body responsible for
promulgating new laws and regulations for the cable TV industry. Responsibility
for enforcing policies and laws set out by the CCP and State Council at the
local level lies with the relevant department of the State Administration of
Radio, Film and Television (“SARFT”).
Investments
in cable TV companies are subject to the supervision of the SARFT and other
relevant government agencies. The primary restrictions in this regard are as
follows:
|
·
|
Foreign Investment –
Prohibited
– Foreign investors are prohibited from investing in all
levels of radio and TV transmission
networks.
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|
·
|
Domestic Private Investment –
Limited Access
– Private investors may invest in the construction
and operation of cable TV transmission networks and participate in the
reconstruction of digitalization of the receiving terminals of cable TV,
subject to a 49% shareholding ceiling. However, private investors are
allowed to hold majority shares in companies which only operate the
community access portion (terminal connection) of the cable TV
transmission networks.
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|
·
|
TV Stations and
Channels
|
|
·
|
Foreign Investment/Domestic
Private Investment – Prohibited
– Foreign and domestic private
investors are prohibited from investing in radio stations and TV stations
and channels.
|
Notwithstanding
the recent attempts at liberalization, the cable TV industry is still primarily
State owned. At the central government level, the SARFT is responsible for
approving the establishment of cable, radio and TV stations, the nationwide
administration of cable, radio and TV services, and developing and promulgating
policies, standards and regulations. At the local level, the radio and TV
administrative departments and bureau of provinces, municipalities and counties
are in charge of the administration of radio and TV services and of implementing
policies, standards and regulations within their jurisdiction. In accordance
with the Interim Measures on Administration of Fees for Basic Receipt and
Maintenance of Cable TV (jointly promulgated by the SARFT and the National
Development and Reform Commission on December 2, 2004 and effective as of
January 1, 2005), the standards governing the fees for basic receipt and
maintenance of cable TV shall be set by the authorities in charge of pricing. A
prior hearing is required before the authorities set or adjust the fees. Any
changes to the fee standards must comply with the principles of equality,
fairness, transparency, and efficiency. In addition, the service costs incurred
by providers, as well as the feasibility of the consumer market are considered
in making any changes.
As a
result of the above restrictions on foreign investment, we rely on the
contractual arrangements with these affiliated PRC companies to hold and
maintain the licenses necessary to operate our cable TV business in
China.
The chart
below reflects the division of authority.
Assets of different SARFT
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|
|
|
Province SARFT
(e.g. Shandong)
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|
City SARFT (e.g.
Binzhou, Jining)
|
|
District & county
SARFT (e.g.
Boxing/Binzhou)
|
|
|
|
|
|
|
|
|
|
Character
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|
No
direct access to households but strong power due to central
authorities
|
|
No
direct access to households
|
|
Direct
access to households in its network
|
|
Direct
access to households in its network
|
|
|
|
|
|
|
|
|
|
Networks
|
|
Backbone
connected with province backbone
|
|
Backbone
in the province, from city to city
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|
Backbone
in the city
|
|
Small
networks
|
|
|
|
|
|
|
|
|
|
Channels
– Broadcasters
|
|
CCTV
|
|
Province
channels, satellite channels
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|
Local
channels, network center
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|
Local
channels, network center
|
As a
result of the control arrangements established by us through affiliated PRC
companies wholly owned by PRC citizens, we believe that we are in compliance
with the above prohibitions. As set forth in the chart above, however, there are
different authorities within the PRC that could seek to regulate the operations
of Binzhou Broadcasting, and the fact that one such authority does not impose
restrictions on Binzhou Broadcasting’s operations does not mean that any other
authority is foreclosed from doing so.
The
Measures for the Administration of Radio and Television Program Transmission
Services (promulgated on July 6, 2004 by the SARFT as Decree No. 33 and
effective as of August 10, 2004), require entities that wish to provide TV
program transmission and cable access services to obtain an operating permit for
Radio and Television Program Transmission Services.
Only the
following entities may apply for an Operating Permit: (i) radio and television
broadcasting entities which have been established with the permission of the
SARFT; (ii) radio, film and television groups and their affiliates which have
been established with the permission of the SARFT; and (iii) state-owned
entities that have the right to operate radio and television cable
networks.
The
Operating Permit contains information about the transmission content,
transmission range, transmission technology and transmission methods. The entity
holding the Operating Permit must operate in accordance with the details set
forth on the permit.
Legal
Proceedings
We are
not a party to any material legal proceedings nor are we aware of any
circumstance that may reasonably lead a third party to initiate legal
proceedings against us.
C.
Organizational
Structure
PRC
Corporate Structure
China
Cablecom conducts substantially all of its business in the PRC through Heze
Cablecom Network Technology Co., Ltd. (“HZNT”), and Jinan Youxiantong Network
Technology Co., Ltd. (“JYNT”), a PRC company and a domestic variable interest
entity (“VIE”). JYNT is controlled by the Company through contractual
arrangements. China Cablecom also owns 100% of the equity interest of Hong Kong
Zhongyouxiantong Co., Ltd. (“HKZ”), a Hong Kong holding company that, in turn,
directly owns 100% of the equity interest of HZNT.
In order
to comply with the PRC’s regulations on private investment in the cable
industry, China Cablecom operates its cable business in a joint venture with a
local state-owned enterprise. China Cablecom’s operations are conducted through
direct ownership of HKZ and HZNT and contractual arrangements with JYNT. China
Cablecom does not have an equity interest in JYNT, but instead enjoys the
economic benefits derived from JYNT through a series of contractual
arrangements. JYNT is owned 95% by Pu Yue , China Cablecom’s Chief Executive
Officer and 5% by Liang Yuejing, his spouse.
China
Cablecom operates its cable business in two joint ventures: Binzhou
Broadcasting, which is 49% owned by JYNT and 51% by Binzhou SOE, a PRC
state-owned enterprise and Hubei Chutian, which is 49% owned by JYNT and 51% by
Hubei SOE, a PRC state-owned enterprise.
We do not
directly or indirectly have an equity interest in JYNT, but HZNT and HKZ, our
wholly owned subsidiaries, have entered into a series of contractual
arrangements with JYNT and its shareholders. As a result of the following
contractual arrangements, we control and are considered the primary beneficiary
of JYNT and, accordingly, we consolidate JYNT’s results of operations in our
financial statements.
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·
|
the
shareholders of JYNT have jointly granted HZNT an exclusive and
irrevocable option to purchase all or part of their equity interests in
JYNT at any time; this option may only be terminated by mutual consent or
at the direction of HZNT;
|
|
·
|
without
HKZ’s consent, the shareholders of JYNT may not (i) transfer or pledge
their equity interests in JYNT, (ii) receive any dividends, loan interest
or other benefits from JYNT, or (iv) make any material adjustment or
change to JYNT’s business or
operations;
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|
·
|
the
shareholders of JYNT agreed to (i) accept the policies and guidelines
furnished by HKZ with respect to the hiring and dismissal of employees,
the operational management and the financial system of JYNT, and (ii)
appoint the candidates recommended by HKZ as directors of
JYNT;
|
|
·
|
each
shareholder of JYNT has appointed HKZ’s designee as their
attorneys-in-fact to exercise all its voting rights as shareholders of
JYNT. This power of attorney is effective until 2027;
and
|
|
·
|
each
shareholder of JYNT has pledged all of its respective equity interests in
JYNT to HZNT to secure the payment obligations of JYNT under certain
contractual arrangements between JYNT and HKZ, and HZNT and JYNT. This
pledge is effective until the later of (1) the date on which the last
surviving of the Service Agreements, the Loan Agreement and the Equity
Option Agreement terminates; and (2) the date on which all outstanding
Secured Obligations are paid in full or otherwise
satisfied.
|
JYNT,
Binzhou Broadcasting and Binzhou SOE have entered into the following contractual
arrangements that provide JYNT with the ability to control and consolidate the
results of operations of Binzhou Broadcasting. Also, as a result of these
agreements, Binzhou Broadcasting controls and consolidates Binzhou SOE in its
financial statements.
|
·
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a
technical services agreement, pursuant to which JYNT exclusively performs
the following for Binzhou Broadcasting: (i) management, operation and
maintenance of relevant networks and equipment; (ii) consulting services
for operation, business development, sales and planning, market research,
data collection and analysis; (iii) training for management personnel;
(iv) international developments and advanced technology regarding the
cable business; (v) provide developed systems and financial support
software; and (vi) provide other technology troubleshooting plans, related
software and technical services. JYNT is paid a fee of 11% of the net
profits of Binzhou Broadcasting, which brings its effective economic
interest in Binzhou Broadcasting to 60%. The term of this technical
services agreement is 20 years. JYNT and Binzhou Broadcast may mutually
seek to extend this agreement upon the expiry of the current term, and we
are not aware of any legal impediments that may affect the renewal of this
agreement under current PRC laws. This agreement further provides that any
non-breaching party may early terminate this agreement in the event that a
breaching party has not made rectification 30 days after receipt of the
breaching notice from the non-breaching
party.
|
|
·
|
an
exclusive services agreement, pursuant to which Binzhou Broadcasting
exclusively performs marketing, strategic consulting and technical support
and services for Binzhou SOE.
|
|
·
|
under
PRC law, Binzhou SOE must maintain ownership of the broadcasting licenses
related to the assets that were contributed to Binzhou Broadcasting for a
51% equity interest. As a result and pursuant to an exclusive services
agreement, Binzhou Broadcasting will provide the following services in
operating the Binzhou SOE contributed assets: (i) collecting all cash
related to revenues generated including subscription fees, installation
fees, and channel landing fees; (ii) the marketing, promotion and sales of
digital TV set-top boxes; (iii) the building and maintenance of the cable
TV network; (iv) the marketing, promotion and sales of businesses in
relation to broadcast and television network broadband access; (v) the
operation of businesses in relation to wireless network transmission and
cable TV; (vi) various troubleshooting, software support and other
technology services; (vii) developments, updates and upgrades in relation
to the provider application software and user application software; (viii)
training services for technology staff and technology consulting services
in relation to the business; and (ix) other applicable technology
services. As the license holder, Binzhou SOE will collect all revenues
from customers and, in turn, remit the cash flows, net of business taxes,
to Binzhou Broadcasting. Binzhou Broadcasting will provide the necessary
resources including employees and other costs necessary to operate the
cable business. The term of the agreement is 20 years with an option to
extend for another 10 years. Binzhou SOE and Binzhou Broadcasting may
mutually seek to extend this agreement upon the expiry of the current
term, and we are not aware of any legal impediments that may affect the
renewal of this agreement under current PRC laws. This agreement further
provides that Binzhou SOE and Binzhou Broadcasting may early terminate
this agreement with the mutual written consent of the
parties.
|
In
addition, JYNT, Hubei Chutian and Hubei SOE have entered into the following
contractual arrangements that provide JYNT with the ability to control and
consolidate the results of operations of Hubei Chutian.
|
·
|
a
technical services agreement, pursuant to which JYNT exclusively performs
the following for Hubei Chutian: (i) management, operation and maintenance
of relevant networks and equipment; (ii) consulting services for
operation, business development, sales and planning, market research, data
collection and analysis; (iii) training for management personnel; (iv)
international developments and advanced technology regarding the cable
business; (v) provide developed systems and financial support software;
and (vi) provide other technology troubleshooting plans, related software
and technical services. JYNT is paid a fee of 6% of the net profits of
Hubei Chutian, which brings its effective economic interest in Hubei
Chutian to 55%. The term of this technical services agreement is 30 years.
JYNT and Hubei Chutian may mutually seek to extend this agreement upon the
expiry of the current term, and we are not aware of any legal impediments
that may affect the renewal of this agreement under current PRC laws. This
agreement further provides that any non-breaching party may early
terminate this agreement in the event that a breaching party has not made
rectification 30 days after receipt of the breaching notice from the
non-breaching party.
|
|
·
|
an
exclusive services agreement, pursuant to which Hubei Chutian exclusively
performs marketing, strategic consulting and technical support and
services for Hubei SOE.
|
|
·
|
under
PRC law, Hubei SOE must maintain ownership of the broadcasting licenses
related to the assets that were contributed to Hubei Chutian for a 51%
equity interest. As a result and pursuant to an exclusive services
agreement, Hubei Chutian will provide the following services in operating
the Hubei SOE contributed assets: (i) collecting all cash related to
revenues generated including subscription fees, installation fees, and
channel landing fees; (ii) the marketing, promotion and sales of digital
TV set-top boxes; (iii) the building and maintenance of the cable TV
network; (iv) the marketing, promotion and sales of businesses in relation
to broadcast and television network broadband access; (v) the operation of
businesses in relation to wireless network transmission and cable TV; (vi)
various troubleshooting, software support and other technology services;
(vii) developments, updates and upgrades in relation to the provider
application software and user application software; (viii) training
services for technology staff and technology consulting services in
relation to the business; and (ix) other applicable technology services.
As the license holder, Hubei SOE will collect all revenues from customers
and, in turn, remit the cash flows, net of business taxes, to Hubei
Chutian. Hubei Chutian will provide the necessary resources including
employees and other costs necessary to operate the cable business. The
term of the agreement is 30 years. Hubei SOE and Hubei Chutian
may mutually seek to extend this agreement upon the expiry of the current
term, and we are not aware of any legal impediments that may affect the
renewal of this agreement under current PRC laws. This agreement further
provides that Hubei SOE and Hubei Chutian may early terminate this
agreement with the mutual written consent of the
parties.
|
D.
Property, plant and
equipment
Binzhou
Broadcasting has 310 employees working in one headquarter facility and 5
operating subsidiary facilities located in Boxin, Huiming and Zoupin counties
and in Binzhou city. Hubei Chutian has 3,248 employees working in one
headquarter facility located in Wuhan city and 23 subsidiary facilities in Hubei
Province. Our property, plant and equipment mainly include the
following:
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·
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Fiber
infrastructures: fiber cable laid underground or laid through poles across
urban and suburban areas;
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|
·
|
Electronic
equipment: distribution amplifier, decoders, mixers and fiber substations,
etc., which changes the fiber signal to electric signals that can be
distributed to householders’ TV sets;
and
|
|
·
|
Headend
facilities: distributes Cable TV
signals.
|
We plan
to invest $30 million, through vendor financing and operating cash flows, in
2010 on upgrading the networks and on digital TV set-up-boxes (“STB”) and
related electronic equipment to convert 300,000 existing subscribers to digital
subscribers.
ITEM
4A. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
China
Cablecom Ltd., a British Virgin Islands company, was incorporated on October 6,
2006. On April 9, 2008, China Cablecom Ltd. and Jaguar Acquisition Corporation
("Jaguar"), a special purpose acquisition company, completed both the previously
announced redomestication merger of Jaguar in the British Virgin Islands as
China Cablecom Holdings and the concurrent business combination merger with
China Cablecom Ltd.
In
accordance with the merger agreement, the following occurred with respect to the
outstanding Class A Preference shares and common shares of China Cablecom Ltd.
and the common shares and warrants of Jaguar:
i)
|
all
of the Class A preference shares and common shares of China Cablecom Ltd.
were cancelled and each registered owner of outstanding preference shares
and common shares of China Cablecom Ltd. automatically become the
registered owner of one and 0.6842 shares of our ordinary shares,
respectively.
|
ii)
|
all
of the common shares of Jaguar were cancelled and each registered owner of
outstanding common shares of Jaguar automatically become the registered
owner of one share of our ordinary
shares.
|
iii)
|
all
the outstanding warrants were assumed by the Company and became
exercisable for our ordinary shares at the original exercise price, US$
5.00.
|
China
Cablecom Ltd. is the 100% shareholder of Hong Kong Zhongyouxiantong Co., Ltd.
(“HKZ”), incorporated in Hong Kong on May 22, 2007. HKZ owns 100% of Heze
Cablecom Network Technology Co., Ltd ("HZNT") incorporated under the laws of the
PRC on October 9, 2007. We are also the primary beneficiary of the following
Variable Interest Entities (“VIE”) as defined under FASB ASC
810-10:
l
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Jinan
Youxiantong Network Technology Co., Ltd. ("JYNT") incorporated under the
laws of the PRC on July 16, 2007.
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l
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Binzhou
Broadcasting and Television Information Network Co., Ltd. (“Binzhou
Broadcasting”) incorporated under the laws of the PRC on September 10,
2007.
|
l
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Hubei
Chutian Video Communication Network Co., Ltd. (“Hubei Chutian”)
incorporated under the laws of the PRC on May 15,
2008.
|
On
October 1, 2007, JYNT entered into an operating partnership through a joint
venture with its partner Binzhou SOE, called Binzhou
Broadcasting. Binzhou SOE agreed to contribute all of the inventory
and property, plant and equipment of Binzhou PRC along with all of their cable
business operations in the PRC in exchange for a 51% equity interest in Binzhou
Broadcasting. JYNT agreed to acquire the remaining 49% equity interest in
Binzhou Broadcasting, as well as receive 60% of the economic benefits in Binzhou
Broadcasting, through an exclusive 11% service agreement, for total
consideration of approximately $26.5 million. This exclusive service agreement
provides marketing, strategic consulting and technical support and services for
11% of the net profits of Binzhou Broadcasting. Binzhou SOE receives 40% of the
economic benefits or net profits of Binzhou Broadcasting for its interest in the
joint venture.
In
addition, in accordance with the operating partnership and other agreements
(“Framework Agreement”) between JYNT and Binzhou SOE, JYNT was given the ability
to control certain aspects of the financing and management of Binzhou
Broadcasting. JYNT has a veto right regarding the appointment of the general
manager of Binzhou Broadcasting, the right to appoint the chief financial
officer of Binzhou Broadcasting and an obligation to provide continued financial
resources for investment and capital expenditures for the future expansion of
the Binzhou Broadcasting’s operations. The result of these rights and
obligations given to JYNT is that China Cablecom and JYNT have the ability to
substantially influence the joint venture’s daily operations and financial
affairs, appoint their senior executives and approve all matters requiring
shareholder vote.
The
contractual arrangements between JYNT and Binzhou Broadcasting have an initial
term of 20 years. The parties may mutually seek to extend these agreements upon
the expiry of the current term. China Cablecom is not aware of any legal
impediments that may affect the renewal of these agreements under current PRC
laws. In order for China Cablecom to continue to derive the economic benefits
from its joint venture interest in the operation of Binzhou Broadcasting, it
must renew these contractual agreements.
On June
16, 2008, we announced the phase one acquisition of Hubei Chutian network
through a contractual and joint venture agreement similar to that used in the
acquisition of Bingzhou network.
We,
through JYNT, acquired a 49% equity interest in Hubei Chutian, a joint-venture
company, operating with its partner in the joint venture, Hubei Chutian Radio
and Television Information Network Co., Ltd. (‘‘Hubei SOE’’).
In
accordance with the operating partnership and other agreements (“Framework
Agreement”) between JYNT and Hubei SOE, JYNT was given the ability to control
certain aspects of the financing and management of Hubei Chutian. JYNT has a
veto right regarding the appointment of the general manager of Hubei Chutian,
the right to appoint the chief financial officer of Hubei Chutian and an
obligation to provide continued financial resources for investment and capital
expenditures for the future expansion of the Hubei Chutian’s operations. The
result of these rights and obligations given to JYNT is that China Cablecom and
JYNT have the ability to substantially influence the joint venture’s daily
operations and financial affairs, appoint their senior executives and approve
all matters requiring shareholder vote.
JYNT also
enter into a technical service agreement with Hubei Chutian, JYNT provides
marketing, strategic consulting and technical support and services for 11% of
the net profits. Together with its 49% equity interest, JYNT effectively
received 60% of economic benefits of Hubei Chutian.
On
September 30, 2009 JYNT and Hubei SOE signed a supplement to the Framework which
reduces the service fee from 11% to 6% of the net profits and the effective
economic benefit received by JYNT to 55%.
The
following discussion of our results of operations is based upon our audited
consolidated financial statements beginning on Page F-1 on this Annual
Report.
Fiscal
year ended 2009 compared to fiscal year ended 2008
Revenue
During
the fiscal year ended December 31, 2009, our revenue were $45.6
million, which is an increase of $22.2 million, or 95%, compare to the same
period of 2008. The increase was largely attributable to a full year of
consolidation of Hubei Chutian for 2009; the organic growth of paying
subscribers and the increase of average ARPU resulted from the fast
digitalization . As of December 31, 2009, the Company had more than 1.6 million
paying subscribers, who pay on average $1.50 to $2.20 per month.
Cost
of revenue
Cost of
revenue for the year ended December 31, 2009 were $29.9 million, an increase of
$16.5 million or 123%, from $13.4 million for the year ended December 31, 2008.
The increase was also attributable to the full year consolidation of Hubei
Chutian for 2009.
Cost of
revenue includes maintenance costs; depreciation expense related to network
property, plant and equipment; and costs associated with maintenance and
construction projects including replacing cable TV boxes at subscriber’s homes,
troubleshooting cable TV problems, and occasionally digging up cable lines to
determine network problems. Also included in cost of revenues are salaries and
related employee costs for the maintenance employees, including temporary
staff.
Gross
Profit
As a
percentage of net sales, the gross margin was 34% for the year ended December
31, 2009 compared to 43% for the year ended December 31, 2008.
The
decrease in gross profit percentage is primarily due to the higher cost of
revenue of Hubei Chutian which operates a cable network which covers larger
rural areas than Binzhou Broadcasting.
Selling
expenses.
Selling
and marketing expenses are not significant because of the nature of cable TV in
the PRC.
General
and administrative expenses
General
and administrative expenses for the year ended December 31, 2009 were $22.6
million, an increase of $7.5 million from $15.1 million for the year ended
December 31, 2008. General and administrative expenses consist primarily of
amortization of intangible assets and deferred offering costs, and salary and
welfare expenses in administrative functions such as human resources, finance
and senior management. The increase was mainly due to increased general
administration expenses of $6 million associated with full year of operations
for Hubei Chutian.
Amortization
expenses for the year ended December 31, 2009 were $3.4 million, including
amortization of intangible assets of $2.8 million and amortization of deferred
offering costs of $0.6 million. Intangible assets with a definite useful life
are amortized using the straight line method over the estimated economic life of
the intangible assets. For the subscriber base, the useful life is 10 years
while the cable operating license is 20 years. Amortization of deferred offering
costs for the year ended December 31, 2009 was approximately $0.6 million. The
deferred offering costs are the costs directly attributed to the Company’s
financing of anticipated business acquisition activities. Deferred offering
costs related to the Company’s Bridge Financing and Convertible Notes has been
fully amortized as a result of the Restructuring.
Interest
income
Interest
income for the year ended December 31, 2009 was $152,000, a decrease of $188,000
from $340,000 for the year ended December 31, 2008. The decrease in interest
income is attributable to lower average cash balances and lower interest rate on
savings.
Interest
expenses
Interest
expense for the year ended December 31, 2009 was $10 million, an increase of
$1.3 million from $8.7 million for the year ended December 31,
2008.
The $10
million interest expense primarily comprised (1) interest and amortization of
deferred financing costs on the promissory notes issued in connection with the
bridge financing in the amount of $1.6 million; (2) interest and amortization of
deferred financing costs on the convertible notes issued in May 2008 in the
amount of $7.3 million; (3) interest on the secured notes and unsecured notes
issued in October 2009 in the amount of $0.3 million; (4) interest and
amortization of deferred financing costs on the New Notes issued in October 2009
in the amount of $0.5 million; and (5) $0.3 million interest on short-term
borrowings incurred at Hubei Chutian.
Income
tax expense
Income
tax expense for the year ended December 31, 2009 was $572,000, an increase of
$230,000, from $342,000 for the year ended December 31, 2008. The increase in
income tax expense is primarily attributable to the first full year operation of
Hubei Chutian.
Loss
from operations before non-controlling interest
Loss from
operations before non-controlling interest for the year ended December 31, 2009
was $56.2 million, an increase of $43 million, from $13.2 million for the year
ended December 31, 2008. China Cablecom suffered an one time loss on
the debt extinguishment of $39.7M on the debt restructure completed in October
2009.
Noncontrolling
(‘‘minority’’) interest in income
Noncontrolling
(minority) interest in income for the year ended December 31, 2009 was $392,856,
representing the 40% noncontrolling (minority) interest on Binzhou SOE’s share
of the net income of Binzhou Broadcasting of $ 356,687 and the 45%
noncontrolling (minority) interest on Hubei SOE’s share of the net income of
Hubei Chutian of $36,169.
Liquidity
and Capital Resources
As of
December 31, 2009, the Company had cash and cash equivalents in the amount of
$23.9 million, of which $21.2 million were Binzhou Broadcasting and Hubei
Chutian’s working capital, which are sufficient for their
operation.
As of
December 31, 2009, the Company had cash and cash equivalents approximately $2.7
million available for investment and corporate overhead. As we discussed under
the risk factor -
We must make
significant intercompany loans to Binzhou Broadcasting to preserve our
consolidation of the operating results of Binzhou Broadcasting for financial
reporting purposes,
We are required to seek additional financing and to
amend or modify the terms of our existing debts to meet the obligations of
providing loan financial to Binzhou Broadcasting. The amount of the required
financing is approximately $16 million.
As of
December 31, 2009, we had following obligations:
l
|
$5.1
million unsecured notes with 5% annual interest rate. The repayment was
scheduled in 8 installments to be paid every 6 months starting
from October 15, 2012
|
l
|
$17
million secured notes with 5% annual interest rate. The
repayment was scheduled in 7 installments to be paid every 6 months
starting from October 15, 2012.
|
l
|
$19.1
million ($8.0M after discount) Senior Secured Notes with 12% annual
interest rate. The repayment was scheduled in 6 installments to be paid
every 6 months starting from April 15, 2013.
|
l
|
$25.3
million due to Binzhou SOE of which $6.6 million is repayable on demand
and $18.7 million is to be paid over a 20-year period.
|
l
|
$66.6
million due to Hubei SOE of which $21 million is repayable on demand
and $45.6 million does not have a fixed repayment
date.
|
Capital
expenditures
Capital
expenditures, excluding the assets acquired under the assets transfer agreements
with Binzhou SOE and Hubei SOE, for 2009 and 2008 were approximately $25 million
and $10 million. The vast majority of these expenditures related to digital
set-up boxes, underground fiber cable and related distribution equipment
necessary to decode and send electric signals to household TV sets.
Trend
information
Other
than as disclosed elsewhere in this Annual Report, we are not aware of any
trends, uncertainties, demands, commitments or events that are reasonably likely
to have a material effect on our net sales, profitability, liquidity or capital
resources, or that caused the disclosed financial information to not necessarily
be indicative of future operating results or financial conditions.
Off-balance
sheet arrangements
We do not
have any off-balance sheet arrangements, any outstanding derivative financial
instruments, interest rate swap transactions or foreign currency forward
contracts.
Tabular
disclosure of contractual obligations
The
following table summarizes our contractual commitments as of December 31, 2009
and the effect those commitments are expected to have on our liquidity and cash
flow in future periods:
|
|
|
|
|
|
|
|
Payments due by period
|
|
US$ Million
|
|
Total
|
|
|
Less than one
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Debt Obligations
|
|
|
30.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26.4
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
(Finance) Lease Obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease Obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities Reflected on the Company's Balance Sheet under the
GAAP of the primary financial statements
|
|
|
91.9
|
|
|
|
27.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
121.9
|
|
|
|
27.6
|
|
|
|
-
|
|
|
|
26.4
|
|
|
|
67.9
|
|
Recent
Accounting Pronouncements
ASC 105.
In June
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement
No. 168,
The FASB
Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles
”
,
(“SFAS No. 168”) “—
a replacement of FASB Statement
No. 162.
SFAS No. 168 is the new source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. This
statement was incorporated into ASC 105,
Generally Accepted Accounting
Principles
under the new FASB codification which became effective on
July 1, 2009. The new Codification supersedes all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Company has included the references to the Codification,
as appropriate, in these consolidated financial statements. Adoption of this
statement did not have an impact on the Company’s consolidated results of
operations, cash flows or financial condition.
ASC 805.
FASB
Statement No. 141(R
)
Business
Combinations
was issued in December
2007. This statement was incorporated into ASC 805,
Business Combinations
, under
the new FASB codification. ASC 805 requires that upon initially obtaining
control, an acquirer should recognize 100% of the fair values of acquired
assets, including goodwill and assumed liabilities, with only limited
exceptions, even if the acquirer has not acquired 100% of its target.
Additionally, contingent consideration arrangements will be fair valued at the
acquisition date and included on that basis in the purchase price consideration
and transaction costs will be expensed as incurred. This statement also
modifies the recognition for pre-acquisition contingencies, such as
environmental or legal issues, restructuring plans and acquired research and
development value in purchase accounting. This statement amends ASC 740-10,
Income Taxes
(“ASC
740”) to require the acquirer to recognize changes in the amount of its deferred
tax benefits that are recognizable because of a business combination either in
income from continuing operations in the period of the combination or directly
in contributed capital, depending on the circumstances. ASC 805 is effective for
fiscal years beginning after December 15, 2008. The adoption of these
provisions did not have an effect on the Company’s financial
reporting.
ASC 805 Update.
In
February 2009, the FASB issued SFAS No. 141R-1,
Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies
,
which allows an exception to the recognition and fair value measurement
principles of ASC 805. This exception requires that acquired contingencies be
recognized at fair value on the acquisition date if fair value can be reasonably
estimated during the allocation period. This statement update was effective for
the Company as of January 1, 2009 for all business combinations that close
on or after January 1, 2009 and it did not have an impact on the Company’s
consolidated results of operations, cash flows or financial
condition.
ASC 810.
In
December 2007, the FASB issued FASB Statement No. 160,
Non-controlling
Interests in Consolidated Financial Statements
— an amendment of ARB
No. 51,
which is effective for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. SFAS No. 160 was
incorporated into ASC 810,
Consolidation
(“ASC 810”) and
requires companies to present minority interest separately within the equity
section of the balance sheet. The Company adopted this statement as of
January 1, 2009 and it did not have an impact on the Company’s consolidated
results of operations, cash flows or financial condition.
ASC 810.
In June
2009, the FASB issued FASB Statement No. 167,
Amendments to
FASB Interpretation No. 46 (R)
(“SFAS No. 167”),
which amended the consolidation guidance for variable-interest entities. The
amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should
consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. This
Statement is effective for financial statements issued for fiscal years periods
beginning after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The Company will adopt these provisions on
January 1, 2010 and the adoption will not have an impact on the Company’s
financial statements.
ASC 275 and ASC
350.
In April 2008, the FASB issued FASB Staff Position
(“FSP”) No. 142-3,
Determination of
the Useful Lives of Intangible Assets
,
which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of an intangible asset. Under the new codification
this FSP was incorporated into two different ASC’s, ASC 275,
Risks and Uncertainties
(“ACS
275”) and ASC 350,
Intangibles — Goodwill and
Other
(“ASC 350”). This interpretation was effective for financial
statements issued for fiscal years beginning after December 15, 2008 and
interim periods within those years. The Company adopted this FSP on
January 1, 2009, and it did not have a material impact on the Company’s
consolidated results of operations, cash flows or financial condition, and did
not require additional disclosures related to existing intangible
assets.
ASC 820.
On
February 12, 2008, the FASB issued FSP FAS 157-2,
Effective Date of FASB Statement
No. 157
(“FSP 157-2”), which delayed the effective date of
SFAS No. 157
Fair Value
Measurements
,
for nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years beginning after November 15, 2008. Under
the new codification the FSP was incorporated into ASC 820,
Fair Value Measurements and
Disclosures
(“ASC 820”). The Company adopted this ASC update on
January 1, 2009 and it did not have a material impact on the Company’s
consolidated results of operations, cash flows or financial condition, and did
not require additional disclosures.
ASC 260.
In June
2008, the FASB issued FSP EITF 03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
(“FSP
EITF 03-6-1”).
Under the new FASB codification this FSP
was incorporated into ASC 260,
Earnings Per Share
(“ASC
260”). ASC 260 clarifies that unvested share-based payment awards that entitle
holders to receive non-forfeitable dividends or dividend equivalents (whether
paid or unpaid) are considered participating securities and should be included
in the computation of earnings per share (“EPS”) pursuant to the two-class
method. The Company does not currently have any share-based awards that would
qualify as participating securities. Therefore, application of this FSP will
not have an effect on the Company's financial reporting.
ASU 2009-05.
The
FASB issued Accounting Standards Update (“ASU”) No. 2009-05 which provides
additional guidance on how companies should measure liabilities at fair value
and confirmed practices that have evolved when measuring fair value such as the
use of quoted prices for a liability when traded as an asset. While reaffirming
the existing definition of fair value, the ASU reintroduces the concept of entry
value into the determination of fair value. Entry value is the amount an entity
would receive to enter into an identical liability. Under the new guidance, the
fair value of a liability is not adjusted to reflect the impact of contractual
restrictions that prevent its transfer. The effective date of this ASU is the
first reporting period (including interim periods) after August 26, 2009.
Early application is permitted for financial statements for earlier periods that
have not yet been issued. The adoption of these provisions did not have an
effect on the Company’s financial reporting.
ASU 2010-06.
The
FASB issued ASU No. 2010-06 which provides improvements to disclosure
requirements related to fair value measurements. New disclosures are required
for significant transfers in and out of Level 1 and Level 2 fair value
measurements, disaggregation regarding classes of assets and liabilities,
valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements for Level 2 or Level 3. These
disclosures are effective for the interim and annual reporting periods beginning
after December 15, 2009. Additional new disclosures regarding the
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements are effective for fiscal years beginning
after December 15, 2010 beginning with the first interim period. The
adoption of these provisions did not have an effect on the Company’s financial
reporting.
ASU 2010-09.
The
FASB issued ASU No. 2010-09 which provides amendments to certain
recognition and disclosure requirements. Previous guidance required that an
entity that is an SEC filer be required to disclose the date through which
subsequent events have been evaluated. This update amends the requirement of the
date disclosure to alleviate potential conflicts between ASC 855-10 and the
SEC’s requirements. The adoption of these provisions did not have an effect on
the Company’s financial reporting.
In May
2008, the FASB issued ASC 470-20,
Debt with Conversion and Other
Options
(ASC 470-20). ASC 470-20 will be effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The FSP includes guidance that convertible debt instruments that may be settled
in cash upon conversion should be separated between the liability and equity
components, with each component being accounted for in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest costs are
recognized in subsequent periods.. Adoption of this statement did not have an
impact on the Company’s consolidated results of operations, cash flows or
financial condition.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and senior
management
Our board
of directors and executive officers are as follows:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Clive
Ng
|
|
47
|
|
Executive
Chairman
|
|
|
|
|
|
Pu
Yue
|
|
37
|
|
Chief
Executive Officer
|
|
|
|
|
|
Sikan
Tong
|
|
37
|
|
Chief
Financial Officer
|
|
|
|
|
|
Kerry
Propper
|
|
34
|
|
Director
|
|
|
|
|
|
Su-Mei
Thompson (1)
|
|
44
|
|
Director
|
|
|
|
|
|
Pierre
Suhandinata (2)
|
|
41
|
|
Independent
Director
|
|
|
|
|
|
Richard
Eu
|
|
62
|
|
Independent
Director
|
|
|
|
|
|
Shan
Li
|
|
46
|
|
Independent
Director
|
|
|
|
|
|
Emmanuel
J. Olympitis
|
|
61
|
|
Independent
Director
|
(1) Ms.
Thompson
resigned
from her position as a director of the Company on July 4, 2009.
(2) Mr.
Suhandinata resigned from his position as an independent director of Company
on September 22, 2009.
Clive Ng
has served as Executive Chairman of the board of China Cablecom since its
inception on October 6, 2006 and as a director and Executive Chairman of China
Cablecom Holdings since October 2007. From 2000 to 2003, he was the Chief
Executive Officer of Pacific Media PMC, a home shopping company, Mr. Ng
co-founded TVB Superchannel Europe in 1992, which has grown to become Europe’s
leading Chinese language broadcaster. He also owned a 50% stake in HongKong
SuperNet, the first Hong Kong based ISP which was then sold to Pacific Internet
(NASDAQ:PCNTF). He was Chairman and founder of Asia content (NASDAQ:IASIA), one
of the first Asian internet companies to list in the United States, that has
been a joint venture partner with NBCi, MTVi, C-NET, CBS Sportsline and
DoubleClick in Asia. Mr. Ng was also one of the initial investors and founder of
E*TRADE Asia, a partnership with E*TRADE Financial Corp (NYSE: ET). He is also a
founding shareholder of MTV Japan, with H&Q Asia Pacific and MTV Networks (a
division of Viacom Inc). Currently he serves as a Senior Advisor to Warner Music
Group Inc. (NYSE: WMG) and as Chairman and a director of China Broadband, Inc.,
a company that operates a broadband cable internet company based in the city of
Jinan in the Shandong region of China pursuant to contractual arrangements
similar to those between JZNT and China Cablecom.
Pu Yue
has
served as general manager and Chief Executive Officer of China Cablecom since
its inception in 2006 and Chief Executive Officer of China Cablecom Holdings
since October 2007. Mr. Pu also serves as Chief Executive Officer and a director
of China Broadband, Inc., a company that operates a broadband cable internet
company based in the city of Jinan in the Shandong region of China pursuant to
contractual arrangements similar to those between JZNT and China Cablecom. Mr.
Pu was an intelligence officer with China’s National Security Service from 1993
to 1995. He then worked as a logistics specialist with the joint venture between
Crown Cork & Seal and John Swire & Sons in Beijing. In 1997, he joined
Economic Daily, where he spent a two-year journalism career with China
Entrepreneur Magazine. From 1999 to 2000, he oversaw the inception of Macau
5-Star Satellite TV, a mainland China satellite TV channel venture in which his
family took significant investment. From 2004 to 2006, Mr. Pu was in charge of
business development for a TV advertising consolidation venture under HC
International. Mr. Pu holds MBA from Jesse H. Jones Graduate School of
Management of Rice University, and Bachelor of Law from University of
International Relations in Beijing, China.
Sikan Tong
has served as Chief Financial Officer of China Cablecom since March 31,
2009. From March 2008 to February 2009, Mr. Tong was the Senior Vice
President of the Company where he was responsible for the Company’s internal
control over financial reporting. From September 2006 to February 2008, Mr. Tong
was the Chief Financial Officer of Merrylin International Holding, which manages
Merrylin restaurants and Motel 168 hotel chains in China, where he spearheaded
Merrylin’s IPO and closely managed fundraising activities through private
placements. Mr. Tong served as Head of Accountancy Training at The Financial
Training Company, a leading provider of professional qualifications and business
training in the United Kingdom and Asia, which later became part of Kaplan Inc.
from November 2005 to August 2006. From May 2003 to October 2005, Mr. Tong
served as the learning and education manager of the Shanghai office of
PriceWaterhouseCoopers where he began his career in the audit practice and was
responsible for lecturing and organization of the training courses. Mr. Tong
received his Bachelor degree from Shanghai University in 1995 in Mechanic and
Robotic.
Kerry
Propper
has been a director of China Cablecom Holdings since October 2007
and the chief financial officer, secretary and a member of the board of
directors of Chardan North China Acquisition Corporation and has been the chief
executive officer, secretary and a member of the board of directors of Chardan
South China Acquisition Corp. since their inception in March 2005. Chardan North
China Acquisition Corp. and Chardan South China Acquisition Corp. are blank
check companies seeking to acquire an operating business north and south,
respectively, of the Yangtze River in the People’s Republic of China. Mr.
Propper has been the owner and chief executive officer of Chardan Capital
Markets LLC, a New York based broker/dealer, since July 2003. He has also been a
managing director of SUJG, Inc., an investment company, since April 2005. From
its inception in December 2003 until November 2005, Mr. Propper served as the
executive vice president and a member of the board of directors of Chardan China
Acquisition Corp., an OTC Bulletin Board listed blank check company that was
seeking to acquire an operating business in the People’s Republic of China. In
November 2005, Chardan China Acquisition Corp. completed its business
combination with State Harvest Holdings Ltd. and changed its name to Origin
Agritech Ltd. Mr. Propper has continued to serve as a member of the board of
directors of Origin Agritech since its merger. Mr. Propper also sits on the
board of directors of Source Atlantic Inc., a health care consulting company
based in Massachusetts. Mr. Propper was a founder, and from February 1999 to
July 2003 owner and managing director of Windsor Capital Advisors, a full
service brokerage firm also based in New York. Mr. Propper also founder The
Private Capital Group LLC, a small private investment firm specializing in hard
money loans and convertible preferred debt and equity offerings for small
companies, in May 2000 and was affiliated with it until December 2003. From July
1997 until February 1999, Mr. Propper worked at Aegis Capital Corp., a broker
dealer and member firm of NASD. Mr. Propper received his B.A. (with honors) in
Economics and International Studies from Colby College and studied at the London
School of Economics.
Su-Mei Thompon
was a director of China Cablecom Holdings from December 2008 until July
2009. Ms. Thompson was a Senior Vice President of Strategic Business Development
for Asia at Christie's Asia, Art and Auction Business from April 2007 to July
2008. From April 2003 to April 2007, Ms. Thompson served as the Managing
Director of the Financial Times, Asia Pacific during which she oversaw the
launch of the Financial Times Asian edition, and the Financial Times luxury
title "How To Spend It" in Asia, and its Chinese language website,
FTChinese.com. She was a member of the board of directors of the Financial Times
Global Management and on the board of directors of Business Standard in India.
Previously, she served as General Counsel and Senior Vice-President for Business
Development and Corporate Development at Asiacontent.com, a NASDAQ-listed Asia
joint venture partner for leading websites such as CNET.com and MTVi.com. She
also served as Regional Director, Business and Legal Affairs, at Walt Disney
Television Asia-Pacific from 1996 to 2000 where she was involved in negotiating
and concluding joint venture and licensing arrangements for Disney TV in China
and across the region. Prior to joining Disney, Ms. Thompson was a senior
associate in corporate finance at Linklaters and served in the firm's London,
Paris and Hong Kong offices. Ms. Thompson earned her undergraduate degree in law
at Trinity College, Cambridge in 1987 and her Masters degree in law (BCL) at
Christchurch College, Oxford in 1989. She also received her MBA from IMD,
Switzerland in 2001.
Pierre
Suhandinata
was an Independent Director of the Company from May 2008
until September 2009. He currently serves as Chairman and Chief Executive
Officer and Co-founder of ACCESS China Inc., a global provider of mobile content
delivery and access technologies for information appliances. He has more than 15
years of successful investment and management experience in multinational
companies across several countries. Prior to ACCESS, he worked several years as
an engineer in Japan, and as a Management Consultant with The Boston Consulting
Group in South-East Asia
Richard Eu
has been our Independent Director since May 2008, Ltd. He is Group CEO of Eu
Yang Sang International Ltd, an investment holding company that engages in the
manufacture, distribution, and sale of Chinese herbs, Chinese proprietary
medicines, and health foods. He Serves on the boards of the Hong Kong Singapore
Business Association, Broadway Industrial Group Limited, Harry’s Holdings Ltd
and Governing Council for the Singapore Institute of Management. He has
Leadership and management expertise through his appointments at Haw Par Brothers
International Ltd, Dataprep Group, Metro Holdings Ltd and Intervest Capital
Management Pte Ltd, among many other companies.
Shan Li
has been served as our independent director since October 2007. Mr. Li is a
founding principal of San Shan Capital Partners, a Hong Kong-based private
equity firm focusing on asset-based alternative investments in the Greater China
region where he has been employed since November 2005. From April 2001 until
October 2005, Dr. Li was the Chief Executive Officer of Bank of China
International Holdings (“BOCI”). Prior to joining BOCI and from 1999, Dr. Li was
the managing director and head of China investment banking at Lehman Brothers,
from April 1998 to September 1999 he was the Deputy Head of the Investment Bank
Preparation Committee at the China Development Bank. From November 1993 to April
1998, Dr. Li was the Executive Director of Investment Banking and Economic
Research at Goldman Sachs and from April 1993 until October 1993, he was an
Associate of Global Foreign exchange trading at Credit Suisse First Boston. Dr.
Li is Vice Chairman of China Overseas-Educated Scholars Development Foundation
and a regular commentator and author of various influential local and
international mass media and publications on areas concerning China’s economic
development policy. He is deputy head of the National Center of Economic
Research and a member of the board of alumni at Tsinghua University in Beijing.
Mr. Li holds a B.E. in management information systems from Tsinghua University,
an M.A. in economics from University of California at Davis and a Ph.D. in
economics from Massachusetts Institute of Technology.
Emmanuel J.
Olympitis
has been served as our independent director since October
2009. Mr. Olympitis currently serves as Executive Chairman of
Petrocapital Resources Plc., a UK-listed company with investments in the oil
sector. He is also a non-executive Director of Canoel International Energy Ltd.,
a Toronto-listed exploration oil and gas company. From 1999 to 2004, Mr.
Olympitis was formerly Executive Chairman of Pacific Media Plc., a London Stock
Exchange listed retail, media, and e-commerce company focused on Asia.
Previously, he held numerous executive positions including Group Chief Executive
of Aitken Hume International Plc., a London Stock Exchange listed banking,
insurance and fund management group. Subsequently, Mr. Olympitis was Executive
Chairman and Managing Director of Johnson & Higgins Ltd., during which time
the company won the Queens Award for Exports in 1994. Mr. Olympitis' background
includes investment banking where he was appointed head of all Eurodollar
syndicated loan activities for Bankers Trust International Limited in London.
There he served as Executive Director where he managed international initiatives
of several billion dollars into South America, Greece and Eastern Europe.More
recently, he has held positions as a non-executive Director and member of Audit
Committees on several UK-listed companies including Matica Plc., Secure Fortress
Plc., Bulgarian Land Development Plc., Norman 95 Plc., and served as Chairman
for Bella Media Plc.
There is
no family relationship between any of our executive officers or
directors.
B.
Compensation
Compensation
of Directors and Executive Officers
In 2009,
we granted stock options to purchase an aggregate of 160,000 ordinary shares to
our non-executive directors under the 2007 Omnibus Securities and Incentive
Plan.
All
directors receive reimbursements from us for expenses which are necessary and
reasonably incurred by them for providing services to us or in the performance
of their duties.
Our
directors who are also our employees receive compensation in the form of
salaries, housing allowances, other allowances and benefits in kind in their
capacity as our employees. Our directors do not receive any compensation in
their capacity as directors in addition to their salaries and other
remunerations as members of our management team. We pay their expenses related
to attending board meetings and participating in board functions.
The
aggregate cash compensation and benefits that we paid to our directors and
executive officers, a group of eight persons for the year ended December 31,
2009 was approximately RMB5,000,000. No executive officer is entitled to any
severance benefits upon termination of his or her employment with our
company.
In
addition, we granted options to purchase an aggregate of 2,516,666 ordinary
shares in 2009 under the 2007 Omnibus Securities and Incentive Plan to our
Executive Chairman, our Executive Director, and our Chief Executive Officer and
our Chief Financial Officer, as set forth below:
|
|
Individual Grants
|
Name
|
|
Ordinary
Shares
Underlying
Options
Granted
|
|
|
% of
Options
Granted to
Employees
in Fiscal
Year (1)
|
|
|
Exercise
Price (2)
|
|
Date of
Grant
|
|
Date of
Expiration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clive
Ng
|
|
|
833,334
|
|
|
|
29.7
|
%
|
|
$
|
2.34
|
|
October
9, 2009
|
|
October
9, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clive
Ng
|
|
|
733,333
|
|
|
|
26.1
|
%
|
|
$
|
1.83
|
|
December
20, 2009
|
|
December
20, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kerry
Propper
|
|
|
33,333
|
|
|
|
1.2
|
%
|
|
$
|
2.34
|
|
October
9, 2009
|
|
October
9, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kerry
Propper
|
|
|
33,333
|
|
|
|
1.2
|
%
|
|
$
|
1.83
|
|
December
20, 2009
|
|
December
20, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pu
Yue
|
|
|
333,333
|
|
|
|
11.9
|
%
|
|
$
|
2.34
|
|
October
9, 2009
|
|
October
9, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pu
Yue
|
|
|
333,333
|
|
|
|
11.9
|
%
|
|
$
|
1.83
|
|
December
20, 2009
|
|
December
20, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sikan
Tong
|
|
|
50,000
|
|
|
|
1.8
|
%
|
|
$
|
2.34
|
|
October
9, 2009
|
|
October
9, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sikan
Tong
|
|
|
166,667
|
|
|
|
5.9
|
%
|
|
$
|
1.83
|
|
December
20, 2009
|
|
December
20,
2019
|
|
(1)
|
Based
on a total of 2,810,000 options granted to our employees in 2009,
including options granted to the executive
officers.
|
|
(2)
|
The
exercise price per share of options granted represented the fair market
value of the underlying ordinary shares on the date the options were
granted.
|
Employment
Agreements
The
following discussion summarizes the material terms of current employment
agreements between us and our executive officers:
We have
entered into an agreement with Clive Ng on the following terms:
|
·
|
Annual
Salary – $500,000; minimum bonus of
$250,000.
|
|
·
|
Principal
Benefits will include Health Insurance, Life Insurance, Company Car, Tax
Advisory Services, Annual Leave of Four Weeks and Stock Option Employment
Commencement Package with vesting over ten (10)
years.
|
|
·
|
Benefits
Upon Termination For Cause or Resignation For Other Than Good Reason will
include Earned Compensation, Earned Benefits, Vested Stock
Options.
|
|
·
|
Severance
Pay – The greater of six (6) times monthly compensation or twelve (12)
months base salary less any compensation paid to the employee during the
period between change of control and
termination.
|
We have
entered into an agreement with Pu Yue on the following terms:
|
·
|
Annual
Salary – RMB 900,000.
|
|
·
|
Principal
Benefits will include Health Insurance, Life Insurance, Annual Leave of
Four Weeks.
|
|
·
|
Benefits
Upon Termination For Cause or Resignation For Other Than Good Reason will
include Earned Compensation, Earned
Benefits.
|
|
·
|
Severance
Pay – The greater of six (6) times monthly compensation or twelve (12)
months base salary less any compensation paid to the employee during the
period between change of control and
termination.
|
Other
than as described above for Mr. Ng and Mr. Pu, there have been no employment
agreements negotiated or drafted between us and our executive officers of
although it is anticipated that such agreements may be put in place with our
executive offices.
C.
Board
Practices
All of
our directors serve for an indefinite term until their respective successor
takes office or until his or her earlier death, resignation or removal by the
members at a meeting called for the purpose of removing the directors or for
purposes including the removal of a director; or by a resolution passed by the
majority of the remaining directors. The following table sets forth the number
of years our current directors and executive officers have held their positions
and the expiration of their current term.
Name
|
|
Appointed
on
|
|
|
|
Clive
Ng
|
|
October
2006
|
|
|
|
Kerry
Propper
|
|
October
2007
|
|
|
|
Shan
Li
|
|
October
2007
|
|
|
|
Pierre
Suhandinata (1)
|
|
May
2008
|
|
|
|
Richard
Eu
|
|
May
2008
|
|
|
|
Su-Mei
Thompson (2)
|
|
December
2008
|
|
|
|
Emmanuel
J. Olympitis
|
|
October
2009
|
(1) Mr.
Suhandinata resigned from his position as an independent director of the Company
on September 22, 2009.
(2)
Ms. Thompson resigned from her position as a director of the Company on July 4,
2009.
Director
Independence
The Board
of Directors has determined that Emmanuel J. Olympitis, Richard Eu and Shan Li
are independent under the Nasdaq Marketplace Rules, because they do not
currently own a significant percentage of our ordinary shares, are not currently
employed by us, have not been actively involved in the management of China
Cablecom and do not fall into any of the enumerated categories of people who
cannot be considered independent under the Nasdaq Marketplace Rules. We have an
Audit Committee, Nominating and Corporate Governance Committee and Compensation
Committee. We have appointed independent directors to each of our
committees.
Compensation
Committee Interlocks and Insider Participation
During
the last fiscal year, no officer and employee of China Cablecom Holdings, and no
former officer of China Cablecom Holdings, during the last completed fiscal
year, participated in deliberations of the Board of Directors concerning
executive officer compensation.
Meetings
and Committees of the Board of Directors
To date,
the Board has only taken formal action solely by unanimous consent. Although we
do not have any formal policy regarding director attendance at annual
shareholder meetings, in the future we will attempt to schedule our annual
meetings so that its directors can attend. In addition, we expects our directors
to attend all Board and committee meetings and to spend the time needed and meet
as frequently as necessary to properly discharge their
responsibilities.
Audit
Committee
The Audit
Committee was established on June 2, 2008. Our Audit Committee currently
consists of Emmanuel J. Olympitis, Richard Eu and Shan Li, who are independent
directors and are also “financially literate.” The Nasdaq rule defines
“financially literate” as being able to read and understand fundamental
financial statements, including a company’s balance sheet, income statement and
cash flow statement. On September 22, 2009, Mr. Pierre Suhandinata resigned from
his position as a member of the board of directors and as a result ceased to
serve as a member of the Audit Committee. On October 2009, Mr. Emmanuel J.
Olympitis was appointed as a member of the board of directors and
Audit Committee..
Audit Committee Financial
Expert
. Emmanuel J. Olympitis has been qualified by the board
as an “audit committee financial expert” within the meaning of all applicable
rules. The Audit Committee is responsible for, among other things:
|
·
|
reviewing
and approving all transactions with affiliates, related parties, directors
and executive officers;
|
|
·
|
reviewing
the procedures for the receipt and retention of, and the response to,
complaints received regarding accounting, internal control or auditing
matters; and
|
|
·
|
reviewing
with management and the independent auditors, at least once
annually.
|
Nominating
Committee and Corporate Governance Committee
The
Nominating and Corporate Governance Committee was established on June 2, 2008.
Our Nominating and Corporate Governance Committee currently consists of Emmanuel
J. Olympitis, Richard Eu and Shan Li. On September 22, 2009, Mr. Pierre
Suhandinata resigned from his position as a member of the board of directors and
as a result ceased to serve as a member of the Nominating and Corporate
Governance Committee. On October 2009, Mr. Emmanuel J. Olympitis was
appointed as a member of the board of directors and Nominating and
Corporate Governance Committee. The Nominating and Corporate Governance
Committee is responsible for, among other things:
|
·
|
reviewing
with the board from time to time the appropriate skills and
characteristics required of board
members;
|
|
·
|
establishing
and administering a periodic assessment procedure relating to the
performance of the board as a whole and its individual members;
and
|
|
·
|
making
recommendations to the board regarding corporate governance matters and
practices, including formulating and periodically reviewing corporate
governance guidelines to be adopted by the
board.
|
Compensation
Committee
The
Compensation Committee was established on June 2, 2008. Our Compensation
Committee currently consists of Emmanuel J. Olympitis, Richard Eu and Shan Li.
On September 22, 2009, Mr. Pierre Suhandinata resigned from his position as a
member of the board of directors and as a result ceased to serve as a member of
the Compensation Committee. On October 2009, Mr. Emmanuel J. Olympitis was
appointed as a member of the board of directors and Compensation
Committee. The Committee is responsible for, among other things:
|
·
|
assisting
the board in determining the compensation of the Chief Executive Officer,
Chief Financial Officer and other officers of the
Company;
|
|
·
|
reviewing
and making recommendations to the board with respect to non-CEO and
non-CFO compensation; and
|
|
·
|
making
recommendations to the board regarding approval, disapproval,
modification, or termination of existing or proposed employee benefit
plans.
|
Settlement
with China Broadband
Following
Jaguar’s original filing, on October 31, 2007, of its prospectus/proxy statement
on Form S-4 with the Securities and Exchange Commission relating to the
Redomestication Merger and Business Combination, investors in China Broadband
informed Mr. Ng that they viewed our activities as violative of Mr. Ng’s
employment agreement with China Broadband. China Broadband is another company
organized by Mr. Ng to pursue broadband cable opportunities in the PRC.
Currently, it operates a broadband cable internet company that is pursuing
opportunities in stand-alone, independent broadband services, including
electronic program/television program-type publications, and is based in the
city of Jinan in the Shandong province of the PRC.
Although
Mr. Ng disagreed that our activities violated his employment agreement with
China Broadband, in order to avoid the possibility of time consuming and costly
litigation, Mr. Ng, Mr. Pu, China Broadband, Jaguar, us and certain of China
Broadband’s shareholders and consultants entered into a settlement agreement
dated as of January 11, 2008, pursuant to which the potential claims were
resolved. As a result of this settlement, the parties agreed, among other
things, as follows:
|
·
|
Each
of Mr. Ng and Mr. Pu agreed with a subsidiary of China Broadband to
modifications to his employment agreement to reflect the original intent
of the parties, and allow them to continue as executives and directors of
China Cablecom Holdings. In addition, the amendment to Mr. Ng’s employment
agreement provides that (i) until such time as China Broadband hires a new
Chief Executive Officer, Mr. Ng would remain an executive of China
Broadband and take commercially reasonable efforts to assure that his
activities with us would not materially interfere with his obligations to
China Broadband and (ii) when China Broadband hires a new Chief Executive
Officer, Mr. Ng’s work requirements for China Broadband would be
appropriately reduced and he would no longer be an executive of China
Broadband, although he will remain the non-executive Chairman and a member
of the board of directors of China Broadband until the expiration of the
employment agreement in July 2009, and (iii) requiring that he assist the
Chief Executive Officer, the Board and management of China Broadband in
identifying, negotiating with and entering into agreements with potential
acquisition candidates that are in the stand-alone, independent broadband
business in the People’s Republic of China. A new Chief Executive Officer
was appointed by China Broadband. The amendment to Mr. Pu’s employment
agreement provides that when China Broadband hires a new Chief Financial
Officer and Principal Financial Officer, Mr. Pu’s work requirements for
China Broadband shall be appropriately reduced although he will remain
Vice Chairman and a member of the board of directors of China Broadband.
The settlement agreement contains a provision recognizing that the
provision of integrated cable television services in the People’s Republic
of China and related activities is our business and the provision of
stand-alone independent broadband services is the business of China
Broadband. Mr. Ng’s revised employment agreement contains an express
provision permitting Mr. Ng to resign from China Broadband in the event an
acquisition arises that involves our business, which is how Mr. Ng
currently intends to handle opportunities in the future that could create
a situation similar to that which led to the settlement agreement. (Mr.
Pu’s revised employment agreement does not include a similar provision).
The resignation of Mr. Ng under his revised employment agreement with
China Broadband should not result in a violation of such agreement for
actions occurring prior to his resignation provided he complies with the
terms of such agreement. However, notwithstanding the terms of the
settlement agreement and the amendment to Mr. Ng’s employment agreement
with China Broadband, Mr. Ng’s continuing relationship with China
Broadband could lead to future claims of violation of his duties to China
Broadband in the event future acquisitions in the PRC are offered to us
rather than China Broadband, notwithstanding his current intention to
resign in such circumstances.
|
|
·
|
The
revised China Broadband employment agreements with Messrs. Ng and Pu
expressly allow for them to engage in certain “permitted activities”,
including serving as an officer, director and/or board committee member or
being a securityholder of us pursuant to an employment agreement or
otherwise and all activities undertaken in connection with the business of
acting as a joint venture provider of integrated cable television services
in the PRC and related activities (not including the provision of
stand-alone broadband services).
|
|
·
|
Mr.
Ng agreed, subject to the terms of the settlement agreement, to transfer
130,000 of our ordinary shares and make certain transfers of shares of
China Broadband to or for the benefit of certain securityholders of China
Broadband.
|
|
·
|
China
Broadband, for itself and on behalf of any person or entity claiming by or
through China Broadband, together with the securityholders and consultants
who are parties to the settlement agreement, Mr. Ng, Mr. Pu, Jaguar and us
all agreed to mutual releases of claims against each other (except that no
release was provided by Jaguar or us to Mr. Ng or Mr. Pu and that certain
investors have been asked to provide releases subsequent to the settlement
agreement having been entered
into).
|
D.
Employees
We had
3,566 and 3,568 employees as of December 31, 2008 and 2009, respectively. As of
December 31, 2009, we had 3,568 employees, including 2,182 in customer service,
403 in maintenance and engineering and 983 in administration. None of our
employees are represented under collective bargaining agreements. We consider
our relations with our employees to be good.
E.
Share
Ownership
See Item
7.A below.
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major
shareholders
The
following table sets forth information with respect to the beneficial ownership
of the ordinary shares as of June 25, 2010 by each person who beneficially owns
more than 5% of ordinary shares and each officer, each director and all officers
and directors as a group.
Ordinary
shares which an individual or group has a right to acquire within 60 days
pursuant to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group, but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
Name and Address of Beneficial Owner
(1)
|
|
Amount and
Nature of
Beneficial
Ownership
|
|
|
Approximate
Percentage of
Outstanding
Ordinary
Shares
|
|
Clive
Ng
(2)
|
|
|
370,000
|
(3)
|
|
|
5.5
|
%
|
Pu
Yue
(4)
|
|
|
—
|
|
|
|
-
|
%
|
Sikan
Tong
|
|
|
—
|
|
|
|
-
|
%
|
Kerry
Propper
(5)
|
|
|
83,888
|
6)
|
|
|
1.2
|
%
|
Pierr
Suhandinata
|
|
|
—
|
|
|
|
-
|
%
|
Shan
Li
(7)
|
|
|
—
|
|
|
|
-
|
%
|
Richard
Eu
|
|
|
—
|
|
|
|
-
|
%
|
Emmanuel
J. Olympitis
|
|
|
—
|
|
|
|
-
|
%
|
Craig
Samuels
(8)
|
|
|
1,147,271
|
|
|
|
2.2
|
%
|
JLF
Offshore Fund, Ltd
(9)
|
|
|
—
|
|
|
|
-
|
%
|
JLF
Partners I, L.P.
(9)
|
|
|
—
|
|
|
|
-
|
%
|
Globis
Capital Partners, L.P.
(10)
|
|
|
26,892
|
|
|
|
0.4
|
%
|
Globis
Capital Advisors., L.L.C.
(10)
|
|
|
26,892
|
|
|
|
0.4
|
%
|
Globis
Overseas Fund, Ltd.
(10)
|
|
|
22,937
|
|
|
|
0.3
|
%
|
Globis
Capital Management, L.P.
(10)
|
|
|
49,829
|
|
|
|
0.7
|
%
|
Globis
Capital, L.L.C.
(10)
|
|
|
49,829
|
|
|
|
0.7
|
%
|
Paul
Packer
(10)
|
|
|
49,829
|
|
|
|
0.7
|
%
|
Jack
Silver
(11)
|
|
|
208,793
|
|
|
|
3.1
|
%
|
Sherleigh
Associates Inc. Profit Sharing Plan
(11)
|
|
|
—
|
|
|
|
-
|
%
|
Spinner
Global Technology Fund, Ltd.
(12)
|
|
|
140,991
|
|
|
|
2.1
|
%
|
Spinner
Asset Management, LLC
(12)
|
|
|
140,991
|
|
|
|
2.1
|
%
|
Arthur
C. Spinner
(12)
|
|
|
140,991
|
|
|
|
2.1
|
%
|
China
Broadband, Inc.
(13)
|
|
|
17,151
|
|
|
|
0.2
|
%
|
Jeffrey
Keswin
(14)
|
|
|
46,301
|
|
|
|
0.7
|
%
|
Lyrical
Corp. I, LLC
(14)
|
|
|
46,301
|
|
|
|
0.7
|
%
|
Lyrical
Partners, L.P.
(14)
|
|
|
46,301
|
|
|
|
0.7
|
%
|
All
directors and executive officers as a group (eight
individuals)
|
|
|
—
|
|
|
|
-
|
%
|
Jayhawk
Private Equity Fund, L.P. .(15)
|
|
|
259,824
|
|
|
|
3.8
|
%
|
Jayhawk
Private Equity Co-Invest Fund, L.P. .(15)
|
|
|
16,363
|
|
|
|
0.2
|
%
|
Jayhawk
Private Equity GP, L.P. .(15)
|
|
|
276,188
|
|
|
|
4.1
|
%
|
Jayhawk
Capital Management.(15)
|
|
|
276,188
|
|
|
|
4.1
|
%
|
Jayhawk
Private Equity Fund II, L.P. .(15)
|
|
|
279,150
|
|
|
|
4.1
|
%
|
Jayhawk
Private Equity GP II, L.P. .(15)
|
|
|
279,150
|
|
|
|
4.1
|
%
|
Jayhawk
Private Equity, LLC.(15)
|
|
|
279,150
|
|
|
|
4.1
|
%
|
Kent
C. McCarthy.(15)
|
|
|
555,338
|
|
|
|
8.3
|
%
|
Platinum
Partners Value Arbitrage Fund L.P. (16)
|
|
|
335,981
|
|
|
|
5.0
|
%
|
(1)
|
Unless
otherwise indicated, the business address of each of the individuals is
Suite 4612, Tower 1, Plaza 66, No.1266 Nanjing West Road, 200040, People’s
Republic of China.
|
(2)
|
The
business address for Mr. Ng is 27 Union Square West, Suite 501-502, New
York, NY 10003.
|
(3)
|
After
giving effect to delivery of 130,000 ordinary shares by the shareholder
pursuant to the terms of a settlement agreement. See “Settlement Agreement
with China Broadband”. Excludes 378,889 ordinary shares which are subject
to voting agreements China Cablecom Holdings and Mr. Ng entered into with
certain shareholders who were issued shares of China Cablecom Holdings in
connection with the Business Combination. Pursuant to the voting
agreements, such shareholders agreed, for a period of three years
following the Business Combination, to vote their shares in favor of the
Board nominees presented at a meeting of stockholders. Mr. Ng. disclaims
beneficial ownership of the shares held by such shareholders. Not include
up to 2,506,667 shares that can be earned in connection with the grant of
the Performance Shares.
|
(4)
|
The
business address for Mr. Pu is Suite 4612, Tower 1, Plaza 66, No.1266
Nanjing West Road, 200040, People’s Republic of
China.
|
(5)
|
The
business address of Mr. Propper is Chardan Capital Markets, LLC, 17 State
Street, Suite 2575, New York, New York
10004.
|
(6)
|
Includes
15,833 shares issuable upon exercise of warrants. Not include 66,667
shares that can be earned in connection with the grant of the Performance
Shares.
|
(7)
|
The
business address of Mr. Li is Two IFC, 8 Finance Street, Central, Hong
Kong.
|
(8)
|
The
business address of Mr. Samuels is 13990 Rancho Dorado Bend, San Diego, CA
92130. Include 300,000 shares issuable upon exercise of warrants. The
information was derived from a Schedule 13D filed with the SEC on February
13, 2009.
|
(9)
|
The
business address of JLF Partners I, L.P. is 2775 Via de la Valle, Suite
204, Del Mar, CA 92014. The business address of JLF Offshore Fund, Ltd. is
c/o Goldman Sachs (Cayman) Trust Limited, PO Box 896, Harbour Centre,
2
nd
Floor, North Church Street, Grand Cayman KY1-1103, Cayman
Islands. The information was derived from a Schedule 13G/A
filed with the SEC on July 24,
2008.
|
(10)
|
The
principal office and business address is 60 Broad Street, 38
th
floor, New York, NY 10004. The Schedule 13G, as amended, on March 13,
2009, was jointly filed by each of the following persons pursuant to Rule
13d-1 promulgated by the Securities and Exchange Commission pursuant to
Section 13 of the Securities Exchange Act of 1934, as amended: (i) Globis
Capital Partners, L.P., a Delaware limited partnership (“Globis
Partners”), with respect to shares of Common Stock directly held by it;
(ii) Globis Capital Advisors, L.L.C., a Delaware limited liability company
(“Globis Advisors”), serves as the general partner of Globis Partners,
with respect to shares of Common Stock directly held by Globis Partners;
(iii) Globis Overseas Fund, Ltd., a Cayman Islands exempted company
(“Globis Overseas”), with respect to shares of Common Stock directly held
by it; (iv) Globis Capital Management, L.P., a Delaware limited
partnership (the “Investment Manager”), which serves as investment manager
to, and has investment discretion over the securities held by, Globis
Partners and Globis Overseas, with respect to shares of Common Stock
directly held by Globis Partners and Globis Overseas; (v) Globis Capital,
L.L.C., a Delaware limited liability company (“GC”), which serves as the
general partner of the Investment Manager, with respect to shares of
Common Stock directly held by Globis Partners and Globis Overseas; and
(vi) Mr. Paul Packer (“Mr. Packer”), who is the Managing Member of Globis
Advisors, and GC, with respect to shares of Common Stock directly held by
Globis Partners and Globis Overseas. The information was derived from a
Schedule 13G/A filed on March 13,
2009.
|
(11)
|
The
principal office and business address is c/o SIAR Capital LLC, 660 Madison
Avenue, New York, NY 10021. Represents 422,186 shares issuable upon the
exercise of outstanding warrants held by Sherleigh Associates Inc. Profit
Sharing Plan, a trust of which Mr. Silver is the trustee. This information
was derived from a Schedule 13G filed on February 17,
2009.
|
(12)
|
The
principal office and business address of Spinner Asset Management, LLC and
Arthur C. Spinner is 730 Fifth Avenue, Suite 1601, New York, NY 10019. The
principal office and business address of Spinner Global Technology Fund,
Ltd. is c/o ATC Fund Services (Curacao) N.V., Bon Bini Business Center
Units 2B2K/2B2L, Schottegatweg Oost 10, Willemstad, Curacao. The Schedule
13G was jointly filed by each of the following persons pursuant to Rule
13d-1 promulgated by the Securities and Exchange Commission pursuant to
Section 13 of the Securities Exchange Act of 1934, as amended: (i) Spinner
Global Technology Fund, Ltd. (the “Fund”), Spinner Asset Management, LLC
(the “Manager”) and Arthur C. Spinner. The Manager is the
investment manager of the Fund and Mr. Spinner is the managing member of
the Manager. Each of the Fund and the Manager has the shared
power to vote and to dispose of the shares reported above and Mr. Spinner,
by virtue of his position as the managing member of the Member, has shared
authority to vote and to dispose of such shares. The information was
derived from a Schedule 13G filed with the SEC on January 22,
2009.
|
(13)
|
The
principal office and business address is 1900 Ninth Street, 3rd Floor
Boulder, Colorado 80302. Marc Urbach, President, or such other person as
designated by the board of directors of China Broadband, Inc. has
dispositive and voting power over the
shares.
|
(14)
|
The
principal office and business address of Jeffrey Keswin, Lyrical Corp. I,
LLC (“Lyrical Corp.”) and Lyrical Partners, L.P. (“Lyrical”) is 405 Park
Avenue, 6
th
Floor, New York, NY 10022. Lyrical serves as principal investment manager
to a number of investment funds with respect to which it has voting and
dispositive authority over the shares. Lyrical Corp. serves as
the general partner of Lyrical. As such, Lyrical Corp. may be
deemed to control Lyrical and therefore may be deemed to be the beneficial
owner of the shares. Mr. Jeffrey Keswin is the Managing Partner
of Lyrical Corp. and may be deemed to control Lyrical Corp. and be the
beneficial owner of the shares. The information was derived from a
Schedule 13G filed with the SEC on February 11, 2009.(15)The principal
business address of Mr. McCarthy, JCM, JPEGP, JPEF, JPECF, JPE, JPEGPII,
and JPEFII is 930 Tahoe Blvd., 802-281, Incline Village, NV,
89451.
|
(16)
|
The
principal business address of Platinum Partners Value Arbitrage Fund L.P.,
is 152 West 57
th
Street, 4
th
floor, New York, NY 10019.
|
B.
Related Party
Transactions
We have
not, during the three most recently completed financial years and the subsequent
period up to the date of this Annual Report, entered into transactions or loans
with any (a) enterprises that are directly or indirectly controlled by or under
common control with us; (b) our associates; (c) individuals directly or
indirectly owning voting right which give them significant influence over us or
close members of their respective families, (d) our directors, senior management
or close members of their respective families or (e) enterprises in which a
substantial interest in the voting power is held or significantly influenced by
any of the foregoing individuals, except as indicated below.
On June
26, 2008
,
we issued
106,666 shares of
our ordinary shares to
ClearMedia Limited, a company owned by our executive Chairman, Clive Ng, as
finder’s fee in connection with the acquisition of Hubei Chutian.
We
consummated a convertible debt financing in May 2008 with current and new
investors involving the issuance of an aggregate of $43.175 million principal
amount at maturity of secured convertible notes and approximately 1.525
million ordinary shares to assist in securing our acquisition of Hubei
Broadcasting. Chardan Capital Markets, LLC, acted as lead placement agent in the
convertible debt financing and was paid a broker fee of $1,400,000. Kerry
Propper, a member of our board of directors, is the chief executive officer of
Chardan Capital Markets, LLC.
In
October 2009, we consummated a senior secured debt financing involving the
issuance of an aggregate of $33 million secured notes and approximately 23
million preferred series B shares. Chardan Capital Markets, LLC, acted as lead
placement agent in the convertible debt financing and was paid a broker fee of
$1,494,000 along with 250,000 ordinary shares of the Company. Kerry Propper, a
member of our board of directors, is the chief executive officer of Chardan
Capital Markets, LLC.
C.
|
Interests
of Experts and Counsel
|
Not
Applicable.
ITEM
8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other
Financial Information
The
Company’s consolidated financial statements are stated in U.S dollars and are
prepared in accordance with US GAAP.
Audited
Financial Statements
Our
consolidated financial statements for the years ended December 31, 2009 and 2008
as required under Item 17 are included immediately following the text of this
Annual Report. The audit reports of the Company are included herein immediately
preceding the financial statements.
Legal/Arbitration
Proceedings
The
Directors and the management of the Company do not know of any material, active
or pending, legal proceedings against them; nor is the Company involved as a
plaintiff in any material proceeding or pending litigation.
Policy
on Dividend Distributions
The
Company has not paid any dividends on its outstanding common shares since its
incorporation and does not anticipate that it will do so in the foreseeable
future. The payment of dividends in the future, if any, is within the discretion
of the Board of Directors of Dynasty and will depend upon our earnings, our
capital requirements and financial condition and other relevant factors. We do
not anticipate declaring or paying any dividends in the foreseeable
future.
None.
ITEM
9. THE OFFER AND LISTING
A.
Offer and Listing
Details
Our
ordinary shares, are quoted on the Nasdaq Capital Market under the symbol
CABL. The closing price for the securities on June 29, 2010, the most
recent trading day practicable before the date of this Annual Report,
was $0.79.
Prior to
the Business Combination, Jaguar’s units commenced public trading on April 6,
2006, and common stock and warrants commenced public trading on June 26, 2006.
The Business Combination occurred on April 9, 2008 and we began trading as China
Cablecom Holdings, Ltd. on the OTC Bulletin Board on April 10, 2008. Our
ordinary shares, warrants and units commenced trading on the Nasdaq Capital
Market on July 30, 2008.
The table
below sets forth, for the calendar quarters indicated, the high and low bid
prices for the securities as reported on the OTC Bulletin Board and Nasdaq
Capital Market in U.S. dollars. These quotations reflect inter-dealer prices,
without markup, markdown or commissions, and may not represent actual
transactions.
On
February 19, 2010, we announced that our Board of Directors authorized a
one-for-three reverse share split of our ordinary shares effective March 2,
2010, at the open of trading.
On March
1, 2010, we announced that effective April 4, 2010, our units will be separated
into its component securities, consisting of one share of common stock and two
warrants. As a result, beginning April 4, 2010, the Units and Warrants ceased
trading. The warrants expired on April 4, 2010 and the reverse stock split was
applied to each ordinary share resulting from the expired unit.
|
|
Common
Stock/Ordinary
Shares
|
|
|
|
|
|
|
|
|
|
|
(US$)
|
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
22.20
|
|
|
|
16.05
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
16.71
|
|
|
|
16.05
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
|
17.70
|
|
|
|
16.59
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter
|
|
|
18.00
|
|
|
|
16.89
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
|
22.32
|
|
|
|
18.00
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
22.35
|
|
|
|
19.29
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
|
19.05
|
|
|
|
17.70
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter
|
|
|
21.00
|
|
|
|
6.51
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
|
7.65
|
|
|
|
1.77
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
2.61
|
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
|
5.82
|
|
|
|
0.78
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter
|
|
|
4.14
|
|
|
|
1.14
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
|
3.30
|
|
|
|
1.41
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
2.37
|
|
|
|
1.40
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter (through June 23)
|
|
|
1.68
|
|
|
|
0.77
|
|
*The
share prices from the Second Quarter of 2006 begin on the dates which our
securities first commenced trading.
Holders
of ordinary shares should obtain current market quotations for their securities.
There can be no assurance that a trading market will develop for these
securities.
Status of Outstanding Ordinary
Shares.
As of June 25, 2010, we had a total of 6,688,919
ordinary shares issued and outstanding.
Holders.
As of June
25, 2010 there were, of record, 34 holders of ordinary shares. We believe the
number of beneficial holders of each of these securities is significantly
greater than the number of record holders.
B.
Plan of
Distribution
Not
Applicable.
C.
Markets
Our
ordinary shares, are quoted on the Nasdaq Capital Market under the symbols
CABL.
On March
1, 2010, we announced that effective April 4, 2010, our units (CABLU) will be
separated into its component securities, consisting of one share of common stock
(CABL) and two warrants. As a result, beginning April 4, 2010, the
Units (CABLU) and Warrants (CABLW) ceased trading. The warrants
expired on April 4, 2010 and the reverse stock split was applied to each
ordinary share resulting from the expired unit.
D.
Selling
Shareholders
Not
Applicable.
E.
Dilution
Not
Applicable.
F.
Expenses of the
Issue
Not
Applicable.
ITEM
10. ADDITIONAL INFORMATION
A.
Share Capital
Not
applicable.
B.
Memorandum and Articles of
association
The
description of certain terms and provisions of our Amended and Restated
Memorandum and Articles of Association is incorporated by reference to our
Registration Statement filed on Form S-4 filed with the SEC on March 21,
2008.
C.
Material
Contracts
During
the fiscal years ended December 31, 2009 and 2008, the Company has not entered
into any material agreements which are not described elsewhere in this Annual
Report except that:
In June
and July of 2008, China Cablecom and JYNT entered into a set of loan agreements
which are detailed below.
Offshore Loan
Agreements.
China Cablecom and Rich Dynamic Limited, a Hong
Kong company (“RDL”), entered into two loan agreements respectively on June 10,
2008 and July 29, 2008 (“Offshore Loan Agreements”), whereby China Cablecom
agreed to extend loans to RDL. RDL’s loan repayment obligations under
the Offshore Loan Agreements were secured under share pledge agreements, in
which RDL agreed to pledge its equity interest in Chengdu Chuanghong to China
Cablecom as security for RDL’s performance of its loans repayment
obligations under the Offshore Loan Agreements.
Onshore Loan
Agreements.
Dong Wanling and JYNT entered into two loan
agreements respectively on June 10, 2008 and July 29, 2008 (“Onshore Loan
Agreements“), whereby Dong Wanling agreed to extend two loans to JYNT which
amount in aggregate to RMB 254,600,000. To date, we have received a payment
of RMB244,000,000 in aggregate for both the Onshore Loan Agreement and the
Offshore Loan Agreement. We will settle the Onshore Loan Agreement and the
Offshore Loan Agreement once the payment under the Onshore Loan Agreement has
been made in full.
D.
Exchange controls
China’s
government imposes control over the convertibility of RMB into foreign
currencies. Under the current unified floating exchange rate system, the
People’s Bank of China publishes a daily exchange rate for RMB, or the PBOC
Exchange Rate, based on the previous day’s dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC Exchange Rate according to market
conditions.
Pursuant
to the Foreign Exchange Control Regulations issued by the State Council on
January 29, 1996 and effective as of April 1, 1996 (and amended on January 14,
1997) and the Administration of Settlement, Sale and Payment of Foreign Exchange
Regulations which came into effect on July 1, 1996 regarding foreign exchange
control, or the Regulations, conversion of Renminbi into foreign exchange by
foreign investment enterprises for current account items, including the
distribution of dividends and profits to foreign investors of joint ventures, is
permissible upon the proper production of qualified commercial vouchers or legal
documents as required by the Regulations. Foreign investment enterprises are
permitted to remit foreign exchange from their foreign exchange bank account in
China upon the proper production of, inter alia, the board resolutions declaring
the distribution of the dividend and payment of profits. Conversion of RMB into
foreign currencies and remittance of foreign currencies for capital account
items, including direct investment, loans, security investment, is still subject
to the approval of the State Administration of Foreign Exchange, or SAFE, in
each such transaction. On January 14, 1997, the State Council amended the
Foreign Exchange Control Regulations and added, among other things, an important
provision, as Article 5 provides that the State shall not impose restrictions on
recurring international payments and transfers.
Under the
Regulations, foreign investment enterprises are required to open and maintain
separate foreign exchange accounts for capital account items (but not for other
items). In addition, foreign investment enterprises may only buy, sell and/or
remit foreign currencies at those banks authorized to conduct foreign exchange
business upon the production of valid commercial documents and, in the case of
capital account item transactions, document approval from SAFE.
Currently,
foreign investment enterprises are required to apply to SAFE for “foreign
exchange registration certificates for foreign investment enterprises.” With
such foreign exchange registration certificates (which are granted to foreign
investment enterprises, upon fulfilling specified conditions and which are
subject to review and renewal by SAFE on an annual basis) or with the foreign
exchange sales notices from the SAFE (which are obtained on a
transaction-by-transaction basis), foreign-invested enterprises may enter into
foreign exchange transactions at banks authorized to conduct foreign exchange
business to obtain foreign exchange for their needs.
E.
Taxation
BVI Tax
Considerations
The
Government of the British Virgin Islands, will not, under existing legislation,
impose any income, corporate or capital gains tax, estate duty, inheritance tax,
gift tax or withholding tax upon the Company or its shareholders or warrant
holders. The British Virgin Islands are not party to any double
taxation treaties.
The
Company and all distributions, interest and other amounts paid by the Company to
persons who are not persons resident in the British Virgin Islands are exempt
from the provisions of the Income Tax Act in the British Virgin Islands and any
capital gains realized with respect to any shares, debt obligations or other
securities of the Company by persons who are not resident in the British Virgin
Islands are exempt from all forms of taxation in the British Virgin
Islands. As of January 1, 2007, the Payroll Taxes Act, 2004 came into
force. It will not apply to the Company except to the extent the Company has
employees (and deemed employees) rendering services to the Company wholly or
mainly in the British Virgin Islands. The Company at present has no
employees in the British Virgin Islands and has no intention of having any
employees in the British Virgin Islands.
No
estate, inheritance, succession or gift tax, rate, duty, levy or other charge is
payable by persons who are not persons resident in the British Virgin Islands
with respect to any shares, debt obligations or other securities of the
Company.
All
instruments relating to transactions in respect of the shares, debt obligations
or other securities of the Company and all instruments relating to other
transactions relating to the business of the Company are exempt from the payment
of stamp duty in the British Virgin Islands.
There are
currently no withholding taxes or exchange control regulations in the British
Virgin Islands applicable to the Company or its shareholders or warrant
holders.
United States Federal Income
Taxation
General
The
following is a summary of the material U.S. federal income tax consequences of
owning and disposing of our units, ordinary shares and warrants,
sometimes referred to as our securities, to holders of our securities. As used
in this discussion, references to "we", "us" and "our" refer to China Cablecom
Holdings, Ltd. Because the components of a unit are separable at the option
of the holder, the holder of a unit should be treated, for U.S. federal income
tax purposes, as the owner of the underlying ordinary share and warrant
components of the unit, as the case may be. As a result, the discussion below of
the U.S. federal income tax consequences with respect to actual holders of
ordinary shares and warrants should also apply to the holder of a unit (as the
deemed owner of the underlying ordinary share and warrant components of the
unit). The discussion below of the U.S. federal income tax consequences to “U.S.
Holders” will apply to a beneficial owner of our securities that is for U.S.
federal income tax purposes:
|
·
|
an
individual citizen or resident of the United
States;
|
|
·
|
a
corporation (or other entity treated as a corporation for U.S. federal
income tax purposes) that is created or organized (or treated as created
or organized) in or under the laws of the United States, any state thereof
or the District of Columbia;
|
|
·
|
an
estate whose income is includible in gross income for U.S. federal income
tax purposes regardless of its source;
or
|
|
·
|
a
trust if (i) a U.S. court can exercise primary supervision over the
trust’s administration and one or more U.S. persons are authorized to
control all substantial decisions of the trust, or (ii) it has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
|
If a
beneficial owner of our ordinary shares and warrants is not described as a U.S.
Holder and is not an entity treated as a partnership or other pass-through
entity for U.S. federal income tax purposes, such owner will be considered a
“Non-U.S. Holder.” The U.S. federal income tax consequences applicable
specifically to Non-U.S. Holders is described below under the heading “Non-U.S.
Holders.”
This
summary is based on the Internal Revenue Code of 1986, as amended (the “Code”),
its legislative history, Treasury regulations promulgated thereunder, published
rulings and court decisions, all as currently in effect. These authorities are
subject to change or differing interpretations, possibly on a retroactive
basis.
This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to us or to any particular holder based on such holder’s individual
circumstances. In particular, this discussion considers only holders that own
our ordinary shares and warrants as capital assets within the meaning of Section
1221 of the Code, and does not address the potential application of the Medicare
contribution tax on certain unearned income or the alternative minimum tax.
In addition, this discussion does not address or the U.S. federal income
tax consequences to holders that are subject to special rules,
including:
|
·
|
financial
institutions or financial services
entities;
|
|
·
|
taxpayers subject
to the mark-to-market accounting rules under Section 475 of the
Code;
|
|
·
|
governments
or agencies or instrumentalities
thereof;
|
|
·
|
regulated
investment companies;
|
|
·
|
real
estate investment trusts;
|
|
·
|
certain
expatriates or former long-term residents of the United
States;
|
|
·
|
persons
that actually or constructively own 5% or more of our voting
shares;
|
|
·
|
persons
that acquired our ordinary shares or warrants pursuant to an exercise of
employee share options, in connection with employee share incentive plans
or otherwise as compensation;
|
|
·
|
persons
that hold our ordinary shares or warrants as part of a straddle,
constructive sale, hedging, conversion or other integrated transaction;
or
|
|
·
|
persons
whose functional currency is not the U.S.
dollar.
|
This
discussion does not address any aspect of U.S. federal non-income tax laws, such
as gift or estate tax laws, state, local or non-U.S. tax laws, or except as
discussed herein, any tax reporting obligations of a holder of our securities.
Additionally, the discussion does not consider the tax treatment of partnerships
or other pass-through entities or persons who hold our ordinary shares or
warrants through such entities. If a partnership (or other entity classified as
a partnership for U.S. federal income tax purposes) is the beneficial owner of
our ordinary shares or warrants, the U.S. federal income tax treatment of a
partner in the partnership will generally depend on the status of the partner
and the activities of the partnership.
We have
not sought, and will not seek, a ruling from the Internal Revenue Service
(“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the description herein, and its
determination may be upheld by a court. Moreover, there can be no assurance that
future legislation, regulations, administrative rulings or court decisions will
not adversely affect the accuracy of the statements in this
discussion.
BECAUSE
OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO US OR TO
ANY PARTICULAR HOLDER OF OUR SECURITIES MAY BE AFFECTED BY MATTERS NOT DISCUSSED
HEREIN, EACH HOLDER OF OUR SECURITIES IS URGED TO CONSULT WITH ITS TAX ADVISOR
WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION AND THE
OWNERSHIP AND DISPOSITION OF OUR SECURITIES, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS
AND ANY APPLICABLE TAX TREATIES.
Tax
Consequences to U.S. Holders of Our Ordinary Shares
and Warrants
Taxation
of Distributions Paid on Ordinary Shares
Subject
to the passive foreign investment company, or “PFIC”, rules discussed below, a
U.S. Holder will be required to include in gross income as ordinary income the
amount of any cash dividend paid on our ordinary shares.
A cash distribution on our ordinary shares will be treated as a
dividend for U.S. federal income tax purposes to the extent the distribution is
paid out of our current or accumulated earnings and profits (as determined for
U.S. federal income tax purposes). Such dividend will not be eligible for the
dividends-received deduction generally allowed to U.S. corporations in respect
of dividends received from other U.S. corporations. Such distributions in excess
of such earnings and profits will be applied against and reduce the U.S.
Holder’s basis in its ordinary shares and, to the extent in excess of such
basis, will be treated as gain from the sale or exchange of such ordinary
shares.
With
respect to non-corporate U.S. Holders for taxable years beginning before January
1, 2011, dividends may be taxed at the lower applicable regular long term
capital gains rate (see “— Taxation on the Disposition of Ordinary Shares and
Warrants” below) provided that (1) our ordinary shares are readily tradable on
an established securities market in the United States or in the event we are
treated as a PRC
“
resident
enterprise
”
under the EIT law, we are eligible for benefits of the income tax treaty between
the United States and the PRC, (2) we are not a PFIC, as discussed below, for
either the taxable year in which the dividend was paid or the preceding taxable
year, and (3) certain holding period requirements are met. Under recently
published IRS authority, shares are considered for purposes of clause (1) above
to be readily tradable on an established securities market in the United States
only if they are listed on certain exchanges, which presently include the Nasdaq
Capital Market. While our ordinary shares are currently listed and
traded on the Nasdaq Capital Market, U.S. Holders nevertheless should consult
their own tax advisors regarding the availability of the lower rate for any
dividends paid with respect to our ordinary shares.
If PRC
taxes apply to dividends paid to a U.S. Holder on our ordinary shares, such
taxes may be treated as foreign taxes eligible for a deduction from such
holder's U.S. federal taxable income or a foreign tax credit against
such holder’s U.S. federal income tax liability (subject to applicable
conditions and limitations), and a U.S. Holder may be entitled
to certain benefits under the income tax treaty between the United
States and the PRC. U.S. Holders should consult their own tax advisors regarding
the deduction or credit for any such PRC tax and their eligibility for the
benefits of the income tax treaty between the United States and the
PRC.
Taxation
on the Disposition of Ordinary Shares and Warrants
Upon a
sale or other taxable disposition of our ordinary shares or warrants, and
subject to the PFIC rules discussed below, a U.S. Holder generally will
recognize capital gain or loss in an amount equal to the difference between the
amount realized and the U.S. Holder’s adjusted tax basis in the ordinary shares
or warrants. See “— Exercise or Lapse of a Warrant” below for a discussion
regarding a U.S. Holder’s basis in the ordinary shares acquired pursuant to the
exercise of a warrant.
The
regular U.S. federal income tax rate on capital gains recognized by U.S.
Holders generally is the same as the regular U.S. federal income tax
rate on ordinary income, except that long-term capital gains recognized by
non-corporate U.S. Holders are generally subject to U.S. federal income tax at a
maximum regular rate of 15% for taxable years beginning before January 1,
2011 (and 20% thereafter). Capital gain or loss will constitute long-term
capital gain or loss if the U.S. Holder’s holding period for the ordinary shares
exceeds one year. The deductibility of capital losses is subject to various
limitations.
If PRC
taxes apply to any gain from the disposition of our ordinary shares or warrants
by a U.S. Holder, such taxes may be treated as foreign taxes eligible for a
deduction from such holder's U.S. federal taxable income or a foreign
tax credit against such holder’s U.S. federal income tax liability (subject
to applicable deductions and limitations), and a U.S. Holder may
be entitled to certain benefits under the income tax treaty between the United
States and the PRC. U.S. Holders should consult their own tax advisors regarding
the deduction or credit for any such PRC tax and their eligibility for the
benefits of the income tax treaty between the United States and the
PRC.
Exercise
or Lapse of a Warrant
Subject
to the discussion of the PFIC rules below, a U.S. Holder generally will not
recognize gain or loss upon the acquisition of ordinary shares on
the exercise of a warrant for cash. Ordinary shares acquired pursuant to
the exercise of a warrant for cash generally will have a tax basis equal to the
U.S. Holder’s tax basis in the warrant, increased by the amount paid to exercise
the warrant. The holding period of such ordinary shares generally would begin on
the day after the date of exercise of the warrant. The terms of a warrant
provide for an adjustment to the number of ordinary shares for which the warrant
may be exercised or to the exercise price of the warrant, in certain events.
Such adjustment may, under certain circumstances, result in constructive
distributions that could be taxable to the U.S. Holder of the warrants.
Conversely, the absence of an appropriate adjustment similarly may result in a
constructive distribution that could be taxable to the U.S. Holders of the
ordinary shares. See “—Taxation of Distributions Paid on Ordinary Shares,”
above. If a warrant is allowed to lapse unexercised, a U.S. Holder generally
will recognize a capital loss equal to such holder’s tax basis in the warrant.
If a warrant is exercised other than by the payment of the exercise price in
cash, the tax treatment of such an exercise may vary from that described above.
U.S. Holders should consult their own tax advisors regarding the tax treatment
of such an exercise.
Passive
Foreign Investment Company Rules
A foreign
corporation will be a passive foreign investment company, or PFIC, if at least
75% of its gross income in a taxable year, including its pro rata share of the
gross income of any company in which it is considered to own at least 25% of the
shares by value, is passive income. Alternatively, a foreign corporation will be
a PFIC if at least 50% of its assets in a taxable year, ordinarily determined
based on fair market value and averaged quarterly over the year, including its
pro rata share of the assets of any company in which it is considered to own at
least 25% of the shares by value, are held for the production of, or produce,
passive income. Passive income generally includes dividends, interest, rents and
royalties (other than certain rents or royalties derived from the active conduct
of a trade or business), and gains from the disposition of passive
assets.
Based on
the composition (and estimated values) of the assets and the nature of the
income of us and our subsidiaries in 2009, we do not anticipate that we will be
treated as a PFIC in 2009. Notwithstanding the foregoing, our view that we will
not be treated as a PFIC in 2009 is not free from doubt because of, among other
things, the significant cash position and uncertainties relating to the actual
values of the other assets of us and our subsidiaries in 2009. Our actual PFIC
status for any subsequent taxable year will not be determinable until after the
end of such taxable year. Accordingly, there can be no assurance with respect to
our status as a PFIC for 2009 or any subsequent taxable year.
If
we are determined to be a PFIC for any taxable year (or portion
thereof) that is included in the holding period of a U.S.
Holder of our ordinary shares or warrants and, in the case of our
ordinary shares, the U.S. Holder did not make either a timely qualified
electing fund (“QEF”) election for the first taxable year of its holding period
for our ordinary shares or a mark-to-market election, as described below, such
holder will be subject to special rules with respect to:
|
·
|
any
gain recognized by the U.S. Holder on the sale or other disposition of its
ordinary shares or warrants; and
|
|
·
|
any
“excess distribution” made to the U.S. Holder (generally, any
distributions to such U.S. Holder during a taxable year of the U.S.
Holder that are greater than 125% of the average annual distributions
received by such U.S. Holder in respect of the ordinary shares during the
three preceding taxable years or, if shorter, such U.S. Holder’s holding
period for the ordinary shares).
|
Under
these rules,
|
·
|
the
U.S. Holder’s gain or excess distribution will be allocated ratably over
the U.S. Holder’s holding period for the ordinary shares or
warrants;
|
|
·
|
the
amount allocated to the taxable year in which the U.S. Holder recognized
the gain or received the excess distribution, or to the period in the
U.S. Holder's holding period before the first day of our
first taxable year in which we qualified as a PFIC, will be taxed as
ordinary income;
|
|
·
|
the
amount allocated to other taxable years (or portions thereof) will be
taxed at the highest tax rate in effect for that year and applicable to
the U.S. Holder; and
|
|
·
|
the
interest charge generally applicable to underpayments of tax will be
imposed in respect of the tax attributable to each such other
taxable year of the U.S.
Holder.
|
In
general, a U.S. Holder may avoid the PFIC tax consequences described above in
respect to our ordinary shares by making a timely QEF election to include in
income its pro rata share of our net capital gains (as long-term capital gain)
and other earnings and profits (as ordinary income), on a current basis, in each
case whether or not distributed. A U.S. Holder may make a separate election to
defer the payment of taxes on undistributed income inclusions under the QEF
rules, but if deferred, any such taxes will be subject to an interest
charge.
A U.S.
Holder may not make a QEF election with respect to its warrants. As a result, if
a U.S. Holder sells or otherwise disposes of a warrant (other than upon exercise
of a warrant), any gain recognized generally will be subject to the special tax
and interest charge rules treating the gain as an excess distribution, as
described above, if we were a PFIC at any time during the period the U.S. Holder
held the warrants. If a U.S. Holder that exercises such warrants properly makes
a QEF election with respect to the newly acquired ordinary shares (or has
previously made a QEF election with respect to our ordinary shares), the QEF
election will apply to the newly acquired ordinary shares, but the adverse tax
consequences relating to PFIC shares will continue to apply with respect to such
ordinary shares (which generally will be deemed to have a holding period for the
purposes of the PFIC rules that includes the period the U.S. Holder held the
warrants), unless the U.S. Holder makes a purging election. The purging election
creates a deemed sale of such shares at their fair market value. The gain
recognized by the purging election will be subject to the special tax and
interest charge rules treating the gain as an excess distribution, as described
above. As a result of the purging election, the U.S. Holder will have a new
basis and holding period in the ordinary shares acquired upon the exercise of
the warrants for purposes of the PFIC rules.
The QEF
election is made on a shareholder-by-shareholder basis and, once made, can be
revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF
election by attaching a completed IRS Form 8621 (Return by a Shareholder of a
Passive Foreign Investment Company or Qualified Electing Fund), including the
information provided in a PFIC annual information statement, to a timely filed
U.S. federal income tax return for the tax year to which the election relates.
Retroactive QEF elections generally may be made only by filing a protective
statement with such return and if certain other conditions are met or with the
consent of the IRS.
In order
to comply with the requirements of a QEF election, a U.S. Holder must receive
certain information from us. Upon request from a U.S. Holder, we will endeavor
to provide to the U.S. Holder no later than 90 days after the request such
information as the IRS may require, including a PFIC annual information
statement, in order to enable the U.S. Holder to make and maintain a QEF
election. However, there is no assurance that we will have timely knowledge of
our status as a PFIC in the future or of the required information to be
provided.
If a U.S.
Holder has elected the application of the QEF rules to our ordinary shares, and
the special tax and interest charge rules do not apply to such shares (because
of a timely QEF election for our first tax year as a PFIC in which the U.S.
Holder holds (or is deemed to hold) such shares or a purge of the PFIC
taint pursuant to a purging election, as described above), any gain recognized
on the sale of our ordinary shares generally will be taxable as capital gain and
no interest charge will be imposed. As discussed above, U.S. Holders of a QEF
are currently taxed on their pro rata shares of its earnings and profits,
whether or not distributed. In such case, a subsequent distribution of such
earnings and profits that were previously included in income generally will not
be taxable as a dividend to such U.S. Holders. The tax basis of a U.S. Holder’s
shares in a QEF will be increased by amounts that are included in income, and
decreased by amounts distributed but not taxed as dividends, under the above
rules. Similar basis adjustments apply to property if by reason of holding such
property the U.S. Holder is treated under the applicable attribution rules as
owning shares in a QEF.
Although
a determination as to our PFIC status will be made annually, an initial
determination that our company is a PFIC will generally apply for subsequent
years to a U.S. Holder who held ordinary shares or warrants while we were a
PFIC, whether or not we meet the test for PFIC status in those years. A U.S.
Holder who makes the QEF election discussed above for our first tax year in
which the U.S. Holder holds (or is deemed to hold) our ordinary shares as a
PFIC, however, will not be subject to the PFIC tax and interest charge rules
discussed above in respect to such shares. In addition, such U.S. Holder will
not be subject to the QEF inclusion regime with respect to such shares
for any taxable year of us that ends within or with a taxable year of
the U.S. Holder and in which we are not a PFIC. On the other hand, if the
QEF election is not effective for each of our tax years in which we are a PFIC
and the U.S. Holder holds (or is deemed to hold) our ordinary shares, the PFIC
rules discussed above will continue to apply to such shares unless the holder
makes a purging election, as described above, and pays the tax and interest
charge with respect to the gain inherent in such shares attributable to the
pre-QEF election period.
Alternatively,
if a U.S. Holder, at the close of its taxable year, owns shares
in a PFIC that is treated as marketable stock, the U.S. Holder may make a
mark-to-market election
with
respect to
such shares for such taxable year. If the U.S. Holder makes a valid
mark-to-market election for the first tax year of the U.S. Holder in which
the U.S. Holder holds (or is deemed to hold) ordinary shares in us and for which
we are determined to be a PFIC, such holder generally will not be subject to the
PFIC rules described above in respect to its ordinary shares. Instead, in
general, the U.S. Holder will include as ordinary income each year the excess,
if any, of the fair market value of its ordinary shares at the end of its
taxable year over the adjusted basis in its ordinary shares. The U.S. Holder
also will be allowed to take an ordinary loss in respect of the excess, if any,
of the adjusted basis of its ordinary shares over the fair market value of its
ordinary shares at the end of its taxable year (but only to the extent of the
net amount of previously included income as a result of the mark-to-market
election). The U.S. Holder’s basis in its ordinary shares will be adjusted to
reflect any such income or loss amounts, and any further gain recognized on a
sale or other taxable disposition of the ordinary shares will be treated as
ordinary income. Currently, a mark-to-market election may not be made with
respect to warrants.
The
mark-to-market election is available only for stock that is regularly traded on
a national securities exchange that is registered with the Securities and
Exchange Commission (including the Nasdaq Capital Market), or on a foreign
exchange or market that the IRS determines has rules sufficient to ensure that
the market price represents a legitimate and sound fair market value. While our
ordinary shares are currently listed and traded on the Nasdaq Capital Market,
U.S. Holders nevertheless should consult their own tax advisors regarding the
availability and tax consequences of a mark-to-market election in respect to our
ordinary shares under their particular circumstances.
If we are
a PFIC and, at any time, have a non-U.S. subsidiary that is classified as a
PFIC, U.S. Holders generally would be deemed to own a portion of the shares of
such lower-tier PFIC, and generally could incur liability for the deferred tax
and interest charge described above if we receive a distribution from, or
dispose of all or part of our interest in, the lower-tier PFIC. Upon request, we
will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later
than 90 days after the request the information that may be required to make or
maintain a QEF election with respect to the lower-tier PFIC. However, there is
no assurance that we will have timely knowledge of the status of
such lower-tier PFIC or will be able to cause the lower-tier
PFIC to provide the required information. U.S. Holders are urged to consult
their own tax advisors regarding the tax issues raised by lower-tier
PFICs.
If a U.S.
Holder owns (or is deemed to own) shares during any year in a PFIC, such holder
may have to file an IRS Form 8621 (whether or not a QEF election or
mark-to-market election is made).
The rules
dealing with PFICs and with the QEF and mark-to-market elections are very
complex and are affected by various factors in addition to those described
above. Accordingly, U.S. Holders of our ordinary shares should consult their own
tax advisors concerning the application of the PFIC rules to our ordinary shares
and warrants under their particular circumstances.
Tax
Consequences to Non-U.S. Holders of Our Ordinary Shares and
Warrants
Dividends
paid (or deemed paid) to a Non-U.S. Holder in respect to its ordinary
shares generally will not be subject to U.S. federal income tax, unless the
dividends are effectively connected with the Non-U.S. Holder’s conduct of a
trade or business within the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base
that such holder maintains in the United States).
In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain attributable to a sale or other disposition of our ordinary
shares or warrants unless such gain is effectively connected with its conduct of
a trade or business in the United States (and, if required by an applicable
income tax treaty, is attributable to a permanent establishment or fixed base
that such holder maintains in the United States) or the Non-U.S. Holder is an
individual who is present in the United States for 183 days or more in the
taxable year of sale or other disposition and certain other conditions are met
(in which case, such gain from United States sources generally is subject to tax
at a 30% rate or a lower applicable tax treaty rate).
Dividends
and gains that are effectively connected with the Non-U.S. Holder’s conduct of a
trade or business in the United States (and, if required by an applicable income
tax treaty, are attributable to a permanent establishment or fixed base in the
United States) generally will be subject to tax at the same regular
U.S. federal income tax rates applicable to a comparable U.S.
Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S.
federal income tax purposes, may also be subject to an additional branch profits
tax at a 30% rate or a lower applicable tax treaty rate.
Backup
Withholding and Information Reporting
In
general, information reporting for U.S. federal income tax purposes will apply
to distributions made on our ordinary shares within the United States to a
non-corporate U.S. Holder and to the proceeds from sales and other dispositions
of our ordinary shares or warrants by a non-corporate U.S. Holder to or through
a U.S. office of a broker. Payments made (and sales and other dispositions
effected at an office) outside the United States will be subject to information
reporting in limited circumstances.
In
addition, backup withholding of United States federal income tax, currently at a
rate of 28%, generally will apply to dividends paid on our ordinary shares to a
non-corporate U.S. Holder and the proceeds from sales and other dispositions of
shares or warrants by a non-corporate U.S. Holder, in each case
who:
|
·
|
fails
to provide an accurate taxpayer identification
number;
|
|
·
|
is
notified by the IRS that backup withholding is required;
or
|
|
·
|
in
certain circumstances, fails to comply with applicable certification
requirements.
|
A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status, under penalties of perjury, on a duly executed applicable IRS Form W-8
or by otherwise establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS. Holders are urged to consult their own tax advisors regarding the
application of backup withholding and the availability of and procedure for
obtaining an exemption from backup withholding in their particular
circumstances.
F.
Dividends and paying agents
Not
applicable.
G.
Statement by experts
Not
applicable.
H.
Documents on
display
Documents
concerning us that are referred to in this document may be inspected at our
principal executive offices at Suite 4612, Tower 1 Plaza 66, 1 Nanjing West
Road, Shanghai, 200040, People’s Republic of China.
In
addition, we will file annual reports and other information with the Securities
and Exchange Commission. We will file annual reports on Form 20-F and
submit other information under cover of Form 6-K. As a foreign private
issuer, we are exempt from the proxy requirements of Section 14 of the
Exchange Act and our officers, directors and principal shareholders are exempt
from the insider short-swing disclosure and profit recovery rules of
Section 16 of the Exchange Act. Annual reports and other information
we file with the Commission may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington,
D.C. 20549, and at its regional offices located at 233 Broadway, New York, New
York 10279 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and copies of all or any part thereof may be obtained from such offices
upon payment of the prescribed fees. You may call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms and you can request copies of the documents upon payment of a duplicating
fee, by writing to the Commission. In addition, the Commission maintains a
web site that contains reports and other information regarding registrants
(including us) that file electronically with the Commission which can be
assessed at http://www.sec.gov.
I.
Subsidiary
Information
Not
required.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The
Company anticipates its primary market risk, if any, will be related to
fluctuations in exchange rates. Exchange rate risk may arise if the
Company is required to use different currencies for various aspects of its
operations. Although the principal currency of our primary revenue source
will be the Chinese RMB, the corporate expenses of the Company (e.g., rent,
telephone, payroll, professional fees etc.) are likely to be paid in US Dollars.
The Company intends to monitor its exchange rate risk and take necessary actions
to reduce its exposure, though the Company is not currently exploring hedging
opportunities.
We do not
use derivative financial instruments.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES
Not
applicable.
PART
II
ITEM
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS
OF SECURITY HOLDERS AND USE OF PROCEEDS
Not
applicable
ITEM
15. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
An
evaluation was performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
regarding the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the December 31, 2009. Based on that
evaluation, our management, including our Chief Executive Officer and Chief
Financial Officer, have concluded that our disclosure controls and procedures as
of December 31, 2009 were effective and that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b)
Management’s annual report on internal control over financial
reporting
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Given the size of our Company
in terms of capital and personnel, the controls generally involve direct
observations by the CFO and CEO, and the review of all financial reporting
documents by the CFO. Management has concluded that our internal controls over
financial reporting are effective.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can only
provide reasonable assurances with respect to financial statement preparation
and presentation. In addition, any evaluation of effectiveness for future
periods is subject to the risk that controls may become inadequate because of
changes in conditions in the future.
(c)
Attestation report of the register public accounting firms
Not
applicable.
(d)
Changes in Internal Controls over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act) that occurred during the year ended December
31, 2009 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. It should be noted that
while our management believes that our disclosure controls and procedures
provide a reasonable level of assurance; our management does not expect that our
disclosure controls and procedures or internal financial controls will prevent
all errors or fraud. A control system, no matter how well conceived or operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met.
ITEM
16.
[RESERVED]
ITEM 16A.
AUDIT COMMITTEE FINANCIAL
EXPERT.
Our Board
of Directors has determined that Emmanuel J. Olympitis, is an independent
financial expert serving on our audit committee.
ITEM 16B.
CODE OF ETHICS.
The
Company has adopted a Code of Conduct that applies to its Chief Executive
Officer and all of its directors, officers and employees, or persons performing
similar functions. A copy of our Code of Conduct is available at its corporate
office in the PRC. Any future changes to the Code of Conduct will be posted on
the Company’s website or filed as an exhibit to a report filed with the SEC
within five business days of the change being effective.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND
SERVICES.
The
following table represents aggregate fees billed to the Company for fiscal years
ended December 31, 2009 and 2008 by UHY Vocation HK CPA Limited, the Company’s
principal accounting firm.
Accountant
Fees and Services
|
|
2009
|
|
|
2008
|
|
Audit
Fees
|
|
$
|
324,300
|
|
|
$
|
259,800
|
|
Audit
Related Fees
|
|
|
20,000
|
|
|
|
348,200
|
|
|
|
$
|
344,300
|
|
|
$
|
608,000
|
|
Audit
Fees
The audit
fees for the years ended December 31, 2009 and 2008, respectively, were paid for
professional services rendered for the audits of our consolidated financial
statements, quarterly reviews, consents, and assistance with review of documents
filed with the SEC.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS
FOR AUDIT COMMITTEES.
Not
applicable.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE
ISSUER AND AFFILIATED PURCHASERS.
Not
applicable.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING
ACCOUNTANT.
Not
applicable.
ITEM 16G.
CORPORATE
GOVERNANCE
.
Not applicable
.
PART
III
ITEM
17. FINANCIAL STATEMENTS
Our
audited Financial Statements are included as the “F” pages attached to this
report.
All
financial statements in this Annual Report, unless otherwise stated, are
presented in accordance with US GAAP.
ITEM
18. FINANCIAL STATEMENTS
The
Company has elected to provide financial statements pursuant to ITEM
17.
Exhibit
Number
|
|
Description of Exhibit
|
|
|
|
1.1
|
|
China
Cablecom Holdings Amended and Restated Memorandum of
Association
|
|
|
|
1.2
|
|
China
Cablecom Holdings Amended and Restated Articles of
Association
|
|
|
|
2.1
(1)
|
|
Specimen
Unit Certificate
|
|
|
|
2.2
(1)
|
|
Specimen
Ordinary Share Certificate
|
|
|
|
2.3
(1)
|
|
Form
of Unit Purchase Option
|
|
|
|
2.4
(1)
|
|
Form
of Warrant
|
|
|
|
2.5
(2)
|
|
Form
of Warrant Agreement
|
|
|
|
4.1
(1)
|
|
The
China Cablecom Holdings 2007 Omnibus Securities and Incentive
Plan
|
|
|
|
4.2
(1)
|
|
Warrants
Exercise Proceeds Award Agreement between China Cablecom Holdings and
James S. Cassano
|
|
|
|
4.3
(1)
|
|
Warrants
Exercise Proceeds Award Agreement between China Cablecom Holdings and
Kerry Proper
|
|
|
|
4.4
(1)
|
|
Warrants
Exercise Proceeds Award Agreement between China Cablecom Holdings and
Jonathan Kalman
|
|
|
|
4.5
(1)
|
|
Warrants
Exercise Proceeds Award Agreement between China Cablecom Holdings and
Clive Ng
|
|
|
|
4.6
(1)
|
|
Incentive
Share Agreement between China Cablecom Holdings and James S.
Cassano
|
|
|
|
4.7
(1)
|
|
Incentive
Share Agreement between China Cablecom Holdings and Kerry
Proper
|
|
|
|
4.8
(1)
|
|
Incentive
Share Agreement between China Cablecom Holdings and Jonathan
Kalman
|
|
|
|
4.9
(1)
|
|
Form
of Consulting Agreement between China Cablecom Holdings and China Cablecom
Holdings Limited, a Cayman Islands limited company
|
|
|
|
4.10
(1)
|
|
Form
of Employment Agreement between China Cablecom Holdings and Clive
Ng
|
|
|
|
4.11
(1)
|
|
Promissory
Note from China Cablecom to Jaguar in the initial principal amount of
$475,000
|
|
|
|
4.12
(1)
|
|
Purchase
Agreement, dated as of September 19, 2007, by and among China Cablecom
Ltd. and the entities listed on the Schedule of Investors attached thereto
as Schedule I
|
4.13
(1)
|
|
Form
of First Closing Promissory Note
|
|
|
|
4.14
(1)
|
|
Registration
Rights Agreement, dated September 19, 2007, by and among China Cablecom
Ltd. and the entities listed on the Schedule A attached
thereto
|
|
|
|
4.15
(1)
|
|
Share
Pledge Agreement, dated as of September 19, 2007, by Clive Ng in favor of
the persons and entities listed on the Schedule of Investors attached
thereto as Schedule III
|
|
|
|
4.16
(2)
|
|
Form
of Registration Rights Agreement among the Registrant and the Initial
Stockholders
|
|
|
|
4.17
(
2)
|
|
Form
of Stock Escrow Agreement between the Registrant, Continental Stock
Transfer & Trust Company and the Initial
Stockholders
|
|
|
|
4.18
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and Jonathan
Kalman
|
|
|
|
4.19
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and C. Richard
Corl
|
|
|
|
4.20
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and James S.
Cassano
|
|
|
|
4.21
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and John J.
Hoey
|
|
|
|
4.22
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and William J.
Westervelt, Jr.
|
|
|
|
4.23
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and David W.
Tralka
|
|
|
|
4.24
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and Robert
Moreyra
|
|
|
|
4.25
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and Peter
Collins
|
|
|
|
4.26
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and Sapphire
Canyon Investments LLC
|
|
|
|
4.27
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and Corl
LLC
|
|
|
|
4.28
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and JSC Group
Holdings LLC
|
|
|
|
4.29
(2)
|
|
Letter
Agreement among the Registrant, Early Bird Capital, Inc. and PA Holdings,
LLC
|
|
|
|
4.30
(1)
|
|
Framework
Agreement by and between Binzhou Broadcasting and Television Network Co.,
Ltd. and Jinan Youxiantong Network Technology Co., Ltd., August
2007
|
|
|
|
4.31
(1)
|
|
Asset
Transfer Agreement by and between Binzhou Broadcasting and Television
Network Co., Ltd. and Binzhou Broadcast and Television Information Network
Co., Ltd., September 2007
|
|
|
|
4.32
(1)
|
|
Exclusive
Service Agreement between Binzhou Broadcasting and Television Network Co.,
Ltd. and Binzhou Broadcast and Television Information Network Co., Ltd.,
September 2007
|
|
|
|
4.33
(1)
|
|
Technical
Services Agreement between Binzhou Broadcast and Television Information
and Network Co., Ltd. and Jinan Youxiantong Network Technology Co., Ltd.,
September 2007
|
|
|
|
4.34
(1)
|
|
Equity
Option Agreement by and between Heze Cablecom Network Technology Co., Ltd.
and Liang Yue Jing, July 2007
|
|
|
|
4.35
(1)
|
|
Equity
Option Agreement by and between Heze Cablecom Network Technology Co., Ltd.
and Pu Yue, July 2007
|
|
|
|
4.36
(1)
|
|
Equity
Pledge Agreement by and between Heze Cablecom Network Technology Co., Ltd.
and Lian Yue Jing, July 2007
|
|
|
|
4.37
(1)
|
|
Equity
Pledge Agreement by and between Heze Cablecom Network Technology Co., Ltd.
and Pu Yue, July 2007
|
4.38
(1)
|
|
Loan
Agreement by and between China Cablecom Co. Ltd. (Hong Kong) and Liang
Yue-Jing, June 2007
|
|
|
|
4.39
(1)
|
|
Loan
Agreement by and between China Cablecom Co. Ltd. (Hong Kong) and Pu Yue,
June 2007
|
|
|
|
4.40
(1)
|
|
Power
of Attorney granted by Lian Yue Jing, July 16, 2007
|
|
|
|
4.41
(1)
|
|
Power
of Attorney granted by Pue Yue, July 16, 2007
|
|
|
|
4.42
(1)
|
|
Trustee
Arrangement Letter, by and between China Cablecom Co., Ltd. (Hong Kong)
and Lian Yue Jing, June 30, 2007
|
|
|
|
4.43
(1)
|
|
Trustee
Arrangement Letter, by and between China Cablecom Co., Ltd. (Hong Kong)
and Pu Yue, June 30, 2007
|
|
|
|
4.44
(1)
|
|
Supplementary
Agreement to the Framework Agreement, by and between Binzhou Broadcasting
and Television Network, Co., Ltd. and Jinan Youxiantong Network Technology
Co. Ltd., dated August 6, 2007
|
|
|
|
4.45
(3)
|
|
Settlement
Agreement by and between China Broadband, Inc., China Broadband, Ltd.,
China Broadband, Inc., Stephen P. Cherner, Maxim Financial Corporation,
Mark L. Baum, BCGU, LLC, Mark I. Lev, Wellfleet Partners, Inc., Pu Yue,
Clive Ng, Chardan Capital Markets, LLC, Jaguar Acquisition Corporation and
China Cablecom Holdings, Ltd. dated January 9, 2008
|
|
|
|
4.46
(1)
|
|
Form
of Voting Agreement by and between Jaguar Acquisition Corporation, China
Cablecom Holdings, Ltd., Certain Shareholders of Jaguar Acquisition
Corporation and Clive Ng.
|
|
|
|
4.47
(1)
|
|
Form
of Employment Agreement by and between China Cablecom Holdings, Ltd. and
Pu Yue.
|
|
|
|
4.48
(4)
|
|
Unit
Purchase Option Clarification Agreement dated as of January 30, 2008 by
Jaguar Acquisition Corporation.
|
|
|
|
4.49
(4)
|
|
Warrant
Clarification Agreement dated January 30, 2008 by and between Jaguar
Acquisition Corporation and Continental Stock Transfer & Trust
Company.
|
|
|
|
|
|
Offshore
Loan Agreement between China Cablecom and Rich Dynamic Limited, dated June
10, 2008.
|
|
|
|
|
|
Offshore
Loan Agreement between China Cablecom and Rich Dynamic Limited, dated July
29, 2008.
|
|
|
|
|
|
Onshore
Loan Agreement between Dong Wanling and JYNT, dated June 10,
2008.
|
|
|
|
|
|
Onshore
Loan Agreement between Dong Wanling and JYNT, dated June 10,
2008.
|
|
|
|
4.54
|
|
Supplement
to Framework Agreement dated September 29, 2009
|
|
|
|
4.55
|
|
Form
of Hubei Chutian Loan Agreement dated September 29,
2009
|
|
|
|
4.56
|
|
Subscription
Agreement dated October 9, 2009
|
|
|
|
4.57
|
|
Form
of New Note
|
|
|
|
4.58
|
|
New
Notes Security Agreement
|
|
|
|
4.59
|
|
Senior
Secured Subsidiary
Guaranty
|
4.60
|
|
Collateral
Agent Agreement
|
|
|
|
4.61
|
|
Intercreditor
Agreement dated October 9, 2009
|
|
|
|
4.62
|
|
Warrant
for Chardan Capital Markets LLC
|
|
|
|
4.63
|
|
Secured
Notes Exchange and Waiver Agreement dated October 9,
2009
|
|
|
|
4.64
|
|
Form
of New Junior Secured Notes
|
|
|
|
4.65
|
|
Junior
Secured Security Agreement dated October 9, 2009
|
|
|
|
4.66
|
|
Junior
Secured Subsidiary Guaranty dated October 9, 2009
|
|
|
|
4.67
|
|
Unsecured
Notes Exchange and Waiver Agreement dated October 9,
2009
|
|
|
|
4.68
|
|
Form
of New Unsecured Notes
|
|
|
|
4.69
|
|
Unsecured
Notes Subsidiary Guaranty dated October 9, 2009
|
|
|
|
8.1
(9)
|
|
List
of subsidiaries
|
|
|
|
11.1
(10)
|
|
China
Cablecom Holdings Ltd. Code of Business Conduct and
Ethics
|
|
|
|
12.1
|
|
Certification
of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
12.2
|
|
Certification
of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
13.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer required by Section
906 of the Sarbanes-Oxley Act of
2002.
|
(1)
|
Incorporated by reference to the
Company’s Registration Statement on Form S-4 (Registration No.
333-147038).
|
(2)
|
Incorporated by reference to
Jaguar Acquisition Corp. Registration Statement on Form S-1 (Registration
No. 333-127135).
|
(3)
|
Incorporated by reference to
Exhibit No. 10.1 to the Current Report on Form 8-K filed with the SEC by
China Broadband, Inc. on January 17,
2008.
|
(4)
|
Incorporated by reference to the
Quarterly Report on Form 10-QSB filed with the SEC by Jaguar Acquisition
Corp. on February 14, 2008.
|
(5)
|
Incorporated
by reference to Exhibit No. 4.50 to the Annual Report on Form 20-F filed
on July 15, 2009.
|
(6)
|
Incorporated
by reference to Exhibit No. 4.51 to the Annual Report on Form 20-F filed
on July 15, 2009.
|
(7)
|
Incorporated
by reference to Exhibit No. 4.52 to the Annual Report on Form 20-F filed
on July 15, 2009.
|
(8)
|
Incorporated
by reference to Exhibit No. 4.53 to the Annual Report on Form 20-F filed
on July 15, 2009.
|
(9)
|
Incorporated
by reference to Exhibit No. 8.1 of the Annual Report on Form 20-F filed on
July 15, 2009.
|
(10)
|
Incorporated
by reference to Exhibit No. 11.1 of the Annual Report on Form 20-F filed
on July 15, 2009.
|
SIGNATURES
The
Registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
CHINA
CABLECOM HOLDINGS, LTD.
|
|
|
|
|
|
|
|
By:
|
/s/
Pu Yue
|
|
By:
|
/s/
Sikan
Tong
|
|
|
|
|
|
|
|
Name:
Pu Yue
|
|
Name:
Sikan Tong
|
|
Title:
Chief Executive Officer
|
|
Title:
Chief Financial Officer
|
|
Date:
June 30, 2010
|
|
Date:
June 30, 2010
|
|
CHINA
CABLECOM HOLDINGS, LTD.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-1
|
|
Consolidated
Balance Sheets
|
|
F-2
|
|
Consolidated
Statements of Operations
|
|
F-3
|
|
Consolidated
Statements of Comprehensive Loss
|
|
F-4
|
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficiency)
|
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
|
F-8
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
China
Cablecom Holdings, Ltd.
We have
audited the accompanying consolidated balance sheets of China Cablecom Holdings,
Ltd. (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations and comprehensive loss, changes in
stockholders’ equity (deficiency) and cash flows for the years then
ended. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor are we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has incurred significant losses
during 2009 and 2008, has a working capital deficit at December 31, 2009 and has
relied on debt and equity financings to fund their operations. These conditions
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans regarding these matters are also described in Note
3. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ UHY
Vocation HK CPA Limited
UHY
Vocation HK CPA Limited
Certified
Public Accountants
Hong
Kong, June 30, 2010
(THE
PEOPLE'S REPUBLIC OF CHINA)
CHINA
CABLECOM HOLDINGS, LTD.
CONSOLIDATED
BALANCE SHEETS
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
(restated)
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
23,938,460
|
|
|
$
|
29,182,251
|
|
Accounts
receivable
|
|
|
1,973,333
|
|
|
|
1,628,710
|
|
Prepaid
expenses and advances
|
|
|
9,222,547
|
|
|
|
9,236,025
|
|
Inventories
|
|
|
6,033,914
|
|
|
|
3,744,745
|
|
Total
Current Assets
|
|
|
41,168,254
|
|
|
|
43,791,731
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant & Equipment, net
|
|
|
89,329,880
|
|
|
|
79,877,186
|
|
Construction
In Progress
|
|
|
3,967,552
|
|
|
|
1,036,667
|
|
Intangible
assets, net
|
|
|
35,042,708
|
|
|
|
37,850,441
|
|
Goodwill
|
|
|
19,275,561
|
|
|
|
19,275,561
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Deferred
financing costs, net
|
|
|
1,987,215
|
|
|
|
1,243,923
|
|
Total
Assets
|
|
$
|
190,771,170
|
|
|
$
|
183,075,509
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Promissory
note – net of discount
|
|
$
|
-
|
|
|
$
|
9,481,940
|
|
Accounts
payable
|
|
|
17,504,073
|
|
|
|
8,872,144
|
|
Service
performance obligation – deferred revenue
|
|
|
3,069,899
|
|
|
|
1,661,311
|
|
Other
current liabilities
|
|
|
9,374,749
|
|
|
|
7,630,924
|
|
Note
payable – noncontrolling interest
|
|
|
27,626,772
|
|
|
|
55,420,250
|
|
Total
Current Liabilities
|
|
|
57,575,493
|
|
|
|
83,066,569
|
|
Long
Term Liabilities:
|
|
|
|
|
|
|
|
|
Senior
secured notes, net of discount
|
|
|
7,973,096
|
|
|
|
-
|
|
Secured
notes, net of discount
|
|
|
17,062,563
|
|
|
|
-
|
|
Unsecured
notes, net of discount
|
|
|
5,134,795
|
|
|
|
-
|
|
Convertible
notes, net of discount
|
|
|
-
|
|
|
|
16,684,044
|
|
Note
payable – noncontrolling interest, net of current portion
|
|
|
64,347,852
|
|
|
|
51,777,719
|
|
Total
Liabilities
|
|
|
152,093,
799
|
|
|
|
151,528,332
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Series
A convertible preferred shares, $.0005 par value; 70,000,000 authorized
shares, 62,161,965 shares issued and outstanding (December 31, 2008 none
issued)
|
|
|
31,081
|
|
|
|
-
|
|
Series
B convertible preferred shares, $.0005 par value; 25,000,000 authorized
shares, 23,158,080 shares issued and outstanding (December 31, 2008 none
issued)
|
|
|
11,579
|
|
|
|
-
|
|
Ordinary
shares, $.0015 par value; 51,666,667 authorized shares, 4,688,151 shares
issued and outstanding (December 31, 2008 3,225,711shares
issued)
|
|
|
7,033
|
|
|
|
4,839
|
|
Additional
paid-in capital
|
|
|
109,452,870
|
|
|
|
45,526,562
|
|
Statutory
reserves
|
|
|
141,582
|
|
|
|
131,501
|
|
Accumulated
deficit
|
|
|
(73,111,896
|
)
|
|
|
(16,532,864
|
)
|
Accumulated
other comprehensive income
|
|
|
595,396
|
|
|
|
613,064
|
|
Shareholders’
equity
|
|
|
37,127,645
|
|
|
|
29,743,102
|
|
Non-controlling
interest
|
|
|
1,549,726
|
|
|
|
1,804,075
|
|
|
|
|
|
|
|
|
|
|
Total
equity
|
|
|
38,677,371
|
|
|
|
31,547,177
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
190,771,170
|
|
|
$
|
183,075,509
|
|
CHINA
CABLECOM HOLDINGS, LTD.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For the year ended
|
|
|
For the year ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
45,563,281
|
|
|
$
|
23,439,217
|
|
Cost
of revenue
|
|
|
(29,867,222
|
)
|
|
|
(13,436,959
|
)
|
Gross
profit
|
|
|
15,696,059
|
|
|
|
10,002,258
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
(22,652,668
|
)
|
|
|
(15,125,517
|
)
|
Total
operating expenses
|
|
|
(22,652,668
|
)
|
|
|
(15,125,517
|
)
|
Loss
from operations
|
|
|
(6,956,609
|
)
|
|
|
(5,123,259
|
)
|
|
|
|
|
|
|
|
|
|
Other
income / (expenses)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
151,993
|
|
|
|
340,102
|
|
Interest
expense
|
|
|
(9,982,012
|
)
|
|
|
(8,741,899
|
)
|
Loss
on debt extinguishment
|
|
|
(39,663,466
|
)
|
|
|
-
|
|
Other
income
|
|
|
845,980
|
|
|
|
680,574
|
|
Total
other expenses
|
|
|
(48,647,506
|
)
|
|
|
(7,721,223
|
)
|
Loss
before income taxes and non-controlling interest
|
|
|
(55,604,114
|
)
|
|
|
(12,844,482
|
)
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
(571,981
|
)
|
|
|
(341,748
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss, net of tax
|
|
|
(56,176,095
|
)
|
|
|
(13,186,230
|
)
|
|
|
|
|
|
|
|
|
|
Less: Net
profit attributable to non-controlling interest
|
|
|
392,856
|
|
|
|
986,619
|
|
Net
loss attributable to China Cablecom Holdings, Ltd.
|
|
$
|
(56,568,951
|
)
|
|
$
|
(14,172,849
|
)
|
|
|
|
|
|
|
|
|
|
Loss
per ordinary share:
|
|
|
|
|
|
|
|
|
-
Basic and fully diluted
|
|
$
|
(16.68
|
)
|
|
$
|
(5.73
|
)
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
-
Basic and fully diluted
|
|
|
3,391,924
|
|
|
|
2,472,504
|
|
CHINA
CABLECOM HOLDINGS, LTD.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
|
|
For the year ended
|
|
|
For the year ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(55,176,095
|
)
|
|
$
|
(13,186,230
|
)
|
Other
comprehensive (loss) / income, net of tax:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(29,791
|
)
|
|
|
295,477
|
|
Total
other comprehensive (loss) / income, net of tax
|
|
|
(29,791
|
)
|
|
|
295,477
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
(55,205,886
|
)
|
|
|
(12,890,753
|
)
|
Less: Comprehensive
income attributable to the non-controlling interests
|
|
|
380,733
|
|
|
|
943,450
|
|
Comprehensive
loss attributable to China Cablecom Holdings, Ltd.
|
|
$
|
(55,586,619
|
)
|
|
$
|
(13,834,203
|
)
|
CHINA
CABLECOM HOLDINGS, LTD.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
For
the years ended December 31, 2009 and 2008
|
|
Preferred Shares
|
|
|
Series A Preferred Shares
|
|
|
Series B Preferred
Shares
|
|
|
Ordinary shares
|
|
|
Additional
Paid-in
|
|
|
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Shareholders
|
|
|
Non-
controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Reserves
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as December 31, 2007
|
|
|
766,680
|
|
|
$
|
383
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
633,334
|
|
|
$
|
950
|
|
|
$
|
3,575,737
|
|
|
$
|
46,269
|
|
|
$
|
(2,274,783
|
)
|
|
$
|
274,418
|
|
|
$
|
1,622,974
|
|
|
$
|
101,123
|
|
|
$
|
1,724,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
– reverse merger
|
|
|
(766,680
|
)
|
|
|
(383
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,961,012
|
|
|
|
2,941
|
|
|
|
22,131,052
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,133,610
|
|
|
|
-
|
|
|
|
22,133,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Share of Capital
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
744,871
|
|
|
|
744,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
of Minority Interest – Loan Elimination
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,631
|
|
|
|
14,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of proceeds from issuance of convertible notes – incentive
shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
508,331
|
|
|
|
763
|
|
|
|
9,079,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,080,430
|
|
|
|
-
|
|
|
|
9,080,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,367
|
|
|
|
25
|
|
|
|
245,475
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
245,500
|
|
|
|
-
|
|
|
|
245,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of ordinary shares as finder’s fee
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106,667
|
|
|
|
160
|
|
|
|
1,951,840
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,952,000
|
|
|
|
-
|
|
|
|
1,952,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of proceeds from issuance of convertible notes – beneficial
conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,542,791
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,542,791
|
|
|
|
-
|
|
|
|
8,542,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
338,646
|
|
|
|
338,646
|
|
|
|
(43,169
|
)
|
|
|
295,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
from retained earnings to statutory reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,232
|
|
|
|
(85,232
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,172,849
|
)
|
|
|
-
|
|
|
|
(14,172,849
|
)
|
|
|
986,619
|
|
|
|
(13,186,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as December 31, 2008
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
3,225,711
|
|
|
$
|
4,839
|
|
|
$
|
45,526,562
|
|
|
$
|
131,501
|
|
|
$
|
(16,532,864
|
)
|
|
$
|
613,064
|
|
|
$
|
29,743,102
|
|
|
$
|
1,804,075
|
|
|
$
|
31,547,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Preferred Shares related to debt restructure
|
|
|
-
|
|
|
|
-
|
|
|
|
65,799,285
|
|
|
|
32,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,290,543
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,323,443
|
|
|
|
-
|
|
|
|
51,323,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Preferred Shares related to issue of Senior Secured notes, net of
issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,158,080
|
|
|
|
11,579
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,530,960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,542,539
|
|
|
|
-
|
|
|
|
10,542,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
issued as payment for broker fee
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
375
|
|
|
|
584,625
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
585,000
|
|
|
|
-
|
|
|
|
585,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series A Preferred Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,637,320
|
)
|
|
|
(1,819
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,212,440
|
|
|
|
1,819
|
|
|
|
1,302,642
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,302,642
|
|
|
|
-
|
|
|
|
1,302,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option compensation expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
217,538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
217,538
|
|
|
|
-
|
|
|
|
217,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
from retained earnings to statutory reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,081
|
|
|
|
(10,081
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for 2009
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(56,568,951
|
)
|
|
|
-
|
|
|
|
(56,568,951
|
)
|
|
|
392,856
|
|
|
|
(56,176,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
paid for 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(635,082
|
)
|
|
|
(635,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,668
|
)
|
|
|
(17,668
|
)
|
|
|
(12,123
|
)
|
|
|
(29,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
-
|
|
|
$
|
-
|
|
|
|
62,161,965
|
|
|
$
|
31,081
|
|
|
|
23,158,080
|
|
|
$
|
11,579
|
|
|
|
4,688,151
|
|
|
$
|
7,033
|
|
|
$
|
109,452,870
|
|
|
$
|
141,582
|
|
|
$
|
(73,111,896
|
)
|
|
$
|
595,396
|
|
|
$
|
37,127,645
|
|
|
$
|
1,549,726
|
|
|
$
|
38,677,371
|
|
See
accompanying notes to consolidated financial statements
CHINA
CABLECOM HOLDINGS, LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the year ended
|
|
|
For the year ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
loss, net of tax
|
|
$
|
(56,176,095
|
)
|
|
$
|
(13,186,230
|
)
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
15,417,101
|
|
|
|
8,213,143
|
|
Loss
on disposal of property, plant and equipment
|
|
|
776,618
|
|
|
|
-
|
|
Amortization
of intangible assets
|
|
|
2,807,733
|
|
|
|
2,152,882
|
|
Stock
compensation expenses
|
|
|
217,538
|
|
|
|
-
|
|
Loss
on debt restructuring
|
|
|
39,663,466
|
|
|
|
-
|
|
Amortization
of deferred financing costs
|
|
|
636,299
|
|
|
|
1,209,775
|
|
Interest
expenses - Interest for Senior secured notes, Secured and Unsecured
notes
|
|
|
777,036
|
|
|
|
-
|
|
Interest
expenses - Amortization of note payable discount
|
|
|
1,644,124
|
|
|
|
2,382,632
|
|
Interest
expenses - Amortization of convertible note discount
|
|
|
7,310,878
|
|
|
|
4,910,547
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(344,623
|
)
|
|
|
(1,628,710
|
)
|
Inventories
|
|
|
(2,289,169
|
)
|
|
|
(2,978,625
|
)
|
Prepaid
expenses and advances
|
|
|
13,478
|
|
|
|
(8,567,507
|
)
|
Accounts
payable
|
|
|
8,631,929
|
|
|
|
6,411,301
|
|
Service
performance obligation-deferred revenue
|
|
|
1,408,588
|
|
|
|
1,550,566
|
|
Other
current liabilities
|
|
|
2,199,029
|
|
|
|
6,252,789
|
|
Net
cash provided by operating activities
|
|
|
22,693,930
|
|
|
|
6,722,563
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(13,609,695
|
)
|
|
|
(34,202,234
|
)
|
Additions
of construction in progress
|
|
|
(14,942,390
|
)
|
|
|
-
|
|
Sales
proceeds of property, plant and equipment
|
|
|
91,596
|
|
|
|
-
|
|
Payment
received on note receivable – related party
|
|
|
-
|
|
|
|
475,000
|
|
Net
cash used in investing activities
|
|
|
(28,460,489
|
)
|
|
|
(33,727,234
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance
cost of senior secured notes
|
|
|
(545,990
|
)
|
|
|
-
|
|
Financing
cost incurred
|
|
|
(2,066,215
|
)
|
|
|
-
|
|
Proceeds
from issuance of senior secured notes
|
|
|
33,000,000
|
|
|
|
-
|
|
Early
redemption of senior secured notes
|
|
|
(13,860,000
|
)
|
|
|
-
|
|
Proceeds
from reverse merger with Jaguar, net
|
|
|
-
|
|
|
|
23,105,232
|
|
Proceeds
from issuance of convertible notes
|
|
|
-
|
|
|
|
19,050,610
|
|
Proceeds
from issuance of ordinary shares
|
|
|
-
|
|
|
|
9,325,930
|
|
Repayment
of notes payable
|
|
|
-
|
|
|
|
(9,996,160
|
)
|
Contribution
from noncontrolling interests
|
|
|
-
|
|
|
|
759,502
|
|
Dividend
paid to noncontrolling interests
|
|
|
(635,082
|
)
|
|
|
-
|
|
Note
payable payments to noncontrolling interests
|
|
|
(15,223,345
|
)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
669,368
|
|
|
|
42,245,114
|
|
Effect
of exchange rate changes on cash
|
|
|
(146,600
|
)
|
|
|
1,303,234
|
|
Net
(decrease)/increase in cash
|
|
|
(5,243,791
|
)
|
|
|
16,543,677
|
|
Cash
at the beginning of the period
|
|
|
29,182,251
|
|
|
|
12,638,574
|
|
Cash
at the end of the period
|
|
$
|
23,938,460
|
|
|
$
|
29,182,251
|
|
CHINA
CABLECOM HOLDINGS, LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the year ended
|
|
|
For the year ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
48,070
|
|
|
$
|
1,146,836
|
|
Income
taxes paid
|
|
$
|
60,403
|
|
|
$
|
12,316
|
|
Value
assigned to shares issued as payment for broker fee
|
|
$
|
585,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activities related to restructuring of debt (Note
2):
|
|
|
|
|
|
|
|
|
Cancellation
of promissory note and interest
|
|
$
|
11,851,678
|
|
|
$
|
-
|
|
Cancellation
of convertible note and interest
|
|
$
|
23,308,298
|
|
|
$
|
-
|
|
Issuance
of secured notes
|
|
$
|
18,000,000
|
|
|
$
|
-
|
|
Issuance
of unsecured notes
|
|
$
|
5,500,000
|
|
|
$
|
-
|
|
Issuance
of Series A Convertible Preferred Shares
|
|
$
|
51,323,443
|
|
|
$
|
-
|
|
Non-cash
financing activities related to private financings (Note
2):
|
|
|
|
|
|
|
|
|
Issuance
of Series B Convertible Preferred Shares
|
|
$
|
15,045,953
|
|
|
$
|
-
|
|
Reduction
of Notes as the result of conversion of Preferred Series A to Ordinary
Shares
|
|
$
|
1,302,642
|
|
|
$
|
-
|
|
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Organization
and Basis of Preparation of Financial
Statements
|
China
Cablecom Ltd. was incorporated under the laws of the British Virgin Islands on
October 6, 2006.
On April
9, 2008, China Cablecom Ltd. and Jaguar Acquisition Corporation ("Jaguar"), a
special purpose acquisition company, completed a redomestication merger of
Jaguar in the British Virgin Islands as China Cablecom Holdings, Ltd. (the
“Company” or “China Cablecom”) and the concurrent business combination merger
with China Cablecom Ltd.
Prior to
the merger with the Company, Jaguar issued 4,950,000 units (“Units”), each
representing one ordinary share and two warrants.
In
accordance with the merger agreement, the following occurred with respect to the
outstanding Class A Preferred stock and Ordinary shares of China Cablecom Ltd.
and the ordinary shares and warrants, including those under the Units, of
Jaguar:
i)
|
all
of the Class A preferred stock and ordinary shares of China Cablecom Ltd.
were cancelled and each registered owner of outstanding preferred stock
and ordinary shares of China Cablecom Ltd. automatically become the
registered owner of one and 0.6842 shares of the
Company, respectively
|
ii)
|
all
of the common shares of Jaguar were cancelled and each registered owner of
outstanding common shares of Jaguar automatically become the registered
owner of one ordinary share of the
Company
|
iii)
|
all
of the outstanding warrants were assumed by the Company and became
exercisable for the Company’s current shares at the original exercise
price, US$ 5.00 per share.
|
For
financial reporting purposes, this merger transaction was recorded as a
recapitalization of China Cablecom Ltd. whereby China Cablecom Ltd. is deemed to
be the continuing, surviving entity for accounting purpose, but through
reorganization, has deemed to have adopted the capital structure of the
Company.
The
Company is the 100% shareholder of China Cablecom Company Limited (“HK
Cablecom”) incorporated in Hong Kong on May 22, 2007. HK Cablecom owns 100% of
Heze Cablecom Network Technology Co., Ltd ("HZNT") incorporated under the laws
of the People’s Republic of China (“PRC”) on October 9, 2007.
The
Company is also the primary beneficiary of the following Variable Interest
Entities (“VIE”) as defined under FASB ASC 810-10:
·
|
Jinan
Youxiantong Network Technology Co. Ltd ("JYNT") incorporated under the
laws of the PRC on July 16, 2007.
|
·
|
Binzhou
Broadcasting and Television Information Network Co., Ltd. (“Binzhou
Broadcasting”) incorporated under the laws of the PRC on September 10,
2007.
|
·
|
Hubei
Chutian Video Communication Network Co., Ltd. (“Hubei Chutian”)
incorporated under the laws of the PRC on May 15,
2008.
|
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
and Basis of Preparation of Financial Statements (Continued)
On
October 1, 2007, JYNT entered into an operating partnership through a joint
venture with its partner Binzhou SOE, called Binzhou
Broadcasting. Binzhou SOE agreed to contribute all of the inventory
and property, plant and equipment of Binzhou PRC along with all of their cable
business operations in the PRC in exchange for a 51% equity interest in Binzhou
Broadcasting. JYNT agreed to acquire the remaining 49% equity interest in
Binzhou Broadcasting, as well as receive 60% of the economic benefits in Binzhou
Broadcasting, through an exclusive 11% service agreement, for total
consideration of approximately $26.5 million. This exclusive service agreement
provides marketing, strategic consulting and technical support and services for
11% of the net profits of Binzhou Broadcasting. Binzhou SOE receives 40% of the
economic benefits or net profits of Binzhou Broadcasting for its interest in the
joint venture.
In
addition, in accordance with the operating partnership and other agreements
(“Framework Agreement”) between JYNT and Binzhou SOE, JYNT was given the ability
to control certain aspects of the financing and management of Binzhou
Broadcasting. JYNT has a veto right regarding the appointment of the general
manager of Binzhou Broadcasting, the right to appoint the chief financial
officer of Binzhou Broadcasting and an obligation to provide continued financial
resources for investment and capital expenditures for the future expansion of
the Binzhou Broadcasting’s operations. The result of these rights and
obligations given to JYNT is that China Cablecom and JYNT have the ability to
substantially influence the joint venture’s daily operations and financial
affairs, appoint their senior executives and approve all matters requiring
shareholder vote.
The
contractual arrangements between JYNT and Binzhou Broadcasting have an initial
term of 20 years. The parties may mutually seek to extend these agreements upon
the expiration of the current term. China Cablecom is not aware of any legal
impediments that may affect the renewal of these agreements under current PRC
laws. In order for China Cablecom to continue to derive the economic benefits
from its joint venture interest in the operation of Binzhou Broadcasting, it
must renew these contractual agreements.
On June
16, 2008, the Company announced the phase one acquisition of Hubei Chutian
network through a contractual and joint venture agreement similar to that used
in the acquisition of Binzhou network. The Company, through JYNT, acquired a 49%
equity interest in Hubei Chutian, a joint-venture company, operating with its
partner in the joint venture, Hubei Chutian Radio and Television Information
Network Co., Ltd. (‘‘Hubei SOE’’). JYNT also entered into a technical service
agreement with Hubei Chutian whereby JYNT provides marketing, strategic
consulting and technical support and services for 11% of the net profits.
Together with its 49% equity interest, JYNT effectively receives 60% of economic
benefits of Hubei Chutian.
On
October 1, 2009, the Company, through JYNT, revised the Hubei Framework
Agreement and the terms of technical service agreement with Hubei
SOE. JYNT changed the service charge for providing marketing,
strategic consulting and technical support and service from 11% to 6% of the net
profits of Hubei Chutian. Together with its original 49% equity interest, JYNT,
after the revision, effectively receives 55% of economic benefits (previously
60%) of Hubei Chutian which applies retrospectively from July 1, 2008. The
change in percentage of economic benefits would affect the net profit and net
asset value shared by non-controlling interest (Hubei SOE) in Hubei Chutian,
which were increased by $18,919 respectively. In addition, the increase in share
of Hubei Chutian by Hubei SOE will be reflected by the increase of note payable
to non-controlling interest – long-term portion of $5,047,845 while the decrease
in share of Hubei Chutian by JYNT will be reflected by the decrease of note
payable to non-controlling interest – short-term portion of the same amount. As
the agreement was changed in 2009, all adjustments are recorded for the
year ended December 31, 2009.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
and Basis of Preparation of Financial Statements (Continued)
In
addition, in accordance with the operating partnership and other agreements
(“Framework Agreement”) between JYNT and Hubei SOE, JYNT was given the ability
to control certain aspects of the financing and management of Hubei Chutian.
JYNT has a veto right regarding the appointment of the general manager of Hubei
Chutian, the right to appoint the chief financial officer of Hubei Chutian and
an obligation to provide continued financial resources for investment and
capital expenditures for the future expansion of the Hubei Chutian’s operations.
The result of these rights and obligations given to JYNT is that China Cablecom
and JYNT have the ability to substantially influence the joint venture’s daily
operations and financial affairs, appoint their senior executives and approve
all matters requiring shareholder vote.
The term
of this technical services agreement is 30 years. JYNT and Hubei Chutian may
mutually seek to extend this agreement upon the expiry of the current term,
China Cablecom is not aware of any legal impediments that may affect the renewal
of this agreement under current PRC laws. In order for China Cablecom to
continue to derive the economic benefits from its joint venture interest in the
operation of Binzhou Broadcasting, it must renew these contractual
agreements.
Basis
of Presentation
The
consolidated financial statements, prepared in accordance with U.S. GAAP,
include the financial statements of China Cablecom Holdings, Ltd., and its
wholly owned or controlled subsidiaries and its consolidated variable interest
entities as listed above. A consolidated variable interest entity is a variable
interest entity of which the Company is the primary beneficiary under FASB ASC
810-10. All significant inter-company transactions and balances between the
Company, its subsidiaries and VIEs are eliminated upon consolidation. The
Company has included the results of operations of its subsidiaries and
consolidated variable interest entities from the dates of
acquisition.
The
Company, its subsidiaries and VIEs referenced above are hereinafter collectively
referred to as the “Company”.
The
Financial Accounting Standards Board (FASB) issued FASB Accounting Standards
Codification (ASC) effective for financial statements issued for interim and
annual periods ending after September 15, 2009.
Basis
of Presentation (Continued)
The ASC
is an aggregation of previously issued authoritative U.S. generally accepted
accounting principles (GAAP) in one comprehensive set of guidance organized by
subject area.
In
accordance with the ASC, references to previously issued accounting standards
have been replaced by ASC references. Subsequent revisions to GAAP
will be incorporated into the ASC through Accounting Standards Updates
(ASU).
Reverse
Stock Split
Unless
otherwise noted, all capital values, shares, and per share amounts in the
consolidated financial statements have been retroactively restated for the
effects of the Company’s reverse split of its issued and outstanding ordinary
stock at a rate of 1-for-3 which became effective on March 1, 2010. Par value is
now $0.0015 per share. These changes also reverse split the authorized shares.
This action was approved by stockholders on March 1, 2010.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2. Debt
Restructure and Private Financings, October 2009
Debt
Restructure
Due to
the default in payment of both principal and interest of promissory notes in
April 2009, the Company negotiated with the promissory note holders and
convertible note holders and completed the debt restructure in October
2009.
In
connection with the debt restructure, the Company entered into a waiver
agreement with the consent from all the promissory note holders on October 9,
2009. The Company issued $5.5 million in Unsecured Notes due October 8, 2015
bearing a fixed interest rate of 5% per annum along with 15,397,204 shares of
Series A Convertible Preferred Shares to the note holders in settlement of their
current debt and accrued interest obligations. The debt restructure reduced the
overall principal amount of its long-term debt obligations and eliminated cash
interest obligations on the new debt securities issued. Under the debt
restructure, the difference between carrying amount of the notes payable and the
fair value of the equity instruments issued together with the new Notes issued
are accounted for as debt extinguishments resulting in a loss of $5,658,140,
which was recognized in the Statement of Operations for the year ended December
31, 2009.
In
addition, the Company also entered into a waiver agreement with the consent from
all the convertible note holders on October 9, 2009. The Company issued $18
million in Secured Notes due October 8, 2016 bearing fixed interest rate of 5%
per annum along with 50,402,082 shares of Series A Convertible Preferred Shares
to the note holders in settlement of their current debt and accrued interest
obligations. The debt restructure reduced the overall principal amount of its
long-term debt obligations and eliminated cash interest obligations on the new
debt securities issued. Under the debt restructure, the difference between
carrying amount of convertible notes and the fair value of the equity
instruments issued together with the new Notes issued are accounted for as debt
extinguishments resulting in a loss of $34,005,326, which was recognized in the
Statement of Operations for the year ended December 31, 2009.
Each
Series A Convertible Preferred Share may be converted, at the option of the
share holder, into one ordinary share, which represents approximately 66.2% of
the Company's ordinary shares outstanding after the closing of the debt
restructuring and a concurrent offering of new senior secured notes described
below.
The debt
restructure strengthens the Company's balance sheet by reducing the overall
principal amount of its long-term debt obligations and eliminating cash interest
obligations on the new debt securities issued.
Private
Financings
On
October 2009, the Company also completed a private placement of $33 Million in
aggregate principal amount of 12% Senior Secured Notes (the “New Notes”) due
October 2015. The holders of New Notes have been issued 23,158,080 Series B
Convertible Preferred Shares. Each Series B Convertible Preferred Share may be
converted, at the option of the share holder, into one ordinary share, which
representing approximately 23.3% of the Company's total outstanding shares after
a concurrent debt-for-equity restructuring of its outstanding debt
obligations.
The Net
proceeds from the private financing will be used to satisfy the Company's
remaining obligations to the Hubei SOE under its supplementary framework
agreement.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies
Consolidation
of Variable Interest Entities
VIEs are
entities that lack one or more voting interest entity characteristics. The
Company consolidates VIEs in which it is the primary beneficiary of its economic
gains or losses. The FASB has issued FASB ASC 810-10, Consolidation of Variable
Interest Entities, regarding certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. It separates
entities into two groups: (1) those for which voting interests are used to
determine consolidation and (2) those for which variable interests are used to
determine consolidation. FASB ASC 810-10 clarifies how to identify a variable
interest entity and how to determine when a business enterprise should include
the assets, liabilities, noncontrolling (“minority”) interests and results of
activities of a variable interest entity in its consolidated financial
statements.
In
accordance with FASB ASC 810-10, China Cablecom has evaluated its economic
relationships with Hubei Chutian, Binzhou Broadcasting and has determined that
it is required to consolidate Hubei Chutian and Binzhou Broadcasting. Therefore
Binzhou Broadcasting and Hubei Chutian are considered to be a VIE, as defined by
FASB ASC 810-10, of which China Cablecom is the primary
beneficiary. China Cablecom, as mentioned above, absorbs a majority
of the economic risks and rewards of all of these VIEs that are being
consolidated in the accompanying financial statements.
Going Concern and Management’s
Plans
The
accompanying financial statements are presented on a going concern
basis. At December 31, 2009, the Company had a working capital
deficit of approximately $16.4 million. The Company generated a net
loss of approximately $56.1 million and $13.1 million during the years ended
December 31, 2009 and 2008, respectively. These conditions raise
substantial doubt about the Company’s ability to continue as a going
concern. The Company's continuation as a going concern is dependent
on its ability to meet its obligations, to obtain additional financing as may be
required and ultimately to attain profitability. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The Company's independent registered public accounting firm's report on the
financial statements as of and for the year ended December 31, 2009, contained
an explanatory paragraph regarding the Company's ability to continue as a going
concern.
Management
plans to continue its efforts to raise additional funds through debt or equity
offerings. While the Company continues to evaluate what type of offering
the Company may use for future fund raising, there is no guarantee that the
Company will be able to raise any capital through any type of
offering.
Cash
and Cash Equivalents
Cash and
cash equivalents include all cash and deposits in banks. As of
December 31, 2009, over 95% of total cash and cash equivalents were denominated
in Renminbi (“RMB”) with its deposits placed with banks in the
PRC. This cash is not freely convertible into foreign currencies and
the remittance of these funds out of the PRC is subject to exchange control
restrictions imposed by the PRC government. The remaining balance of
cash and cash equivalents were denominated in US dollars and in deposits with
reputable financial institutions in the United States.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies (Continued)
Deferred
Financing Costs
Deferred
financing costs represent costs directly attributable to the Company’s financing
of anticipated business acquisition activities. Deferred financing costs related
to the Company’s Bridge Financing and Convertible Notes are being fully
amortized due to debt restructure during the year ended December 31, 2009.
Deferred financing costs related to the Company’s Senior Secured Note are being
amortized over the life of the notes payable of 6 years.
Amortization
for the year ended December 31, 2009 and 2008 was $636,299 and $1,209,755,
respectively. Indirect costs of financing activities are expensed as
incurred.
Inventories
Inventories
consist of set-top boxes, cable, parts and accessories. Inventories are stated
at the lower of cost or market value. Cost is determined using the first-in,
first-out (FIFO) method.
Inventories
include maintenance materials, such as spare parts, fiber cable and connection
device. Inventory items are removed when they are consumed in construction
relating to maintaining or repairing the current cable distribution
network.
Fair
value of financial instruments
The fair
value of a financial instrument is defined as the exchange price that would be
received from an asset or paid to transfer a liability (as exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. The
carrying amounts of financial assets and liabilities, such as cash, accounts
receivable, prepaid expenses and other current assets, accounts payable, and
other current liabilities, approximate their fair values because of the short
maturity of these instruments and market rates of interest.
Valuation
of Long-lived Assets
The
Company periodically evaluates the carrying value of long-lived assets to be
held and used, including intangible assets subject to amortization, when events
and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash
flows from such asset is less than its carrying value. In that event, an
impairment loss is recognized based on the amount by which the carrying value
exceeds the fair value of the long-lived asset. Fair value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of
are determined in a similar manner, except that fair values are reduced for the
cost to dispose.
Accounts
Receivable
Accounts
receivable is recorded at the invoiced amount after deduction of trade
discounts, and allowance, if any.
Off-balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements as of December 31, 2009
and 2008.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies (Continued)
Property,
Plant and Equipment
Property,
plant and equipment is stated at cost less accumulated depreciation and
impairment, if any. In accordance with FASB ASC 922, Financial Reporting by
Cable Television Companies, the Company capitalizes costs associated with the
construction of new cable transmission and distribution facilities and the
installation of new cable services. Capitalized construction and installation
costs include materials, labor and applicable overhead costs. Installation
activities that are capitalized include (i) the initial connection (or
drop) from our cable system to a customer location, (ii) the replacement of
a drop, and (iii) the installation of equipment for additional services,
such as digital cable, telephone or broadband Internet service. The costs of
other customer-facing activities such as reconnecting customer locations where a
drop already exists, disconnecting customer locations and repairing or
maintaining drops, are expensed as incurred. Interest capitalized with respect
to construction activities was not material during any of the periods presented
in the accompanying financial statements.
Depreciation
of property, plant and equipment is computed using the straight-line method over
the following estimated useful lives of the assets: -
|
|
Furniture
and office equipments
|
5
|
Headend
facilities
|
3-7
|
Motor
vehicles
|
4-10
|
Fiber
infrastructure and electric appliances
|
8-30
|
Building
and building improvements
|
20-40
|
Headend
facilities are special CATV facilities to receive and distribute cable TV
signals. Through the headend, TV signals transferred by trunk cable between
municipalities or by satellite are received and transmitted to other sub
headends.
Fiber
infrastructure means fiber cable laid underground or laid through poles across
urban and suburban areas. Cable operators also own cable pipelines and cable
poles in some areas and may lease the pipeline and poles in other
areas.
Electronic
equipment refers to distributor amplifiers, decoders, address modems, mixers and
fiber sub stations etc., which changes the fiber signal to electric signals that
can be distributed to households TV sets.
Additions,
replacements and improvements that extend the asset life are capitalized.
Repairs and maintenance are charged to operations when the expense is
incurred.
Pursuant
to FASB ASC 410, Accounting for Asset Retirement Obligations, as
interpreted by FASB ASC 410, the Company recognizes a liability for asset
retirement obligations in the period in which it is incurred if sufficient
information is available to make a reasonable estimate of fair
values.
Asset
retirement obligations may arise from rights of way that the Company obtained
from local municipalities or other relevant authorities. Under certain
circumstances, the authorities may cause the Company to remove our network; such
as if the Company discontinued using the equipment or the authority does not
renew our access rights. The Company expects to maintain our rights of way for
the foreseeable future as these rights are necessary to remain a going concern.
In addition, the authorities have the incentive to indefinitely renew our rights
of way and in our past experience, renewals have always been granted. The
Company also has obligations in lease agreements to restore the property to its
original condition or remove our property at the end of the lease term.
Sufficient information is not available to estimate the fair value of our asset
retirement obligations in certain of our lease arrangements. This is the case in
long-term lease arrangements in which the underlying leased property is integral
to our operations.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies (Continued)
Property,
Plant and Equipment (Continued)
There is
not an acceptable alternative to the leased property and the Company has the
ability to indefinitely renew the lease. Accordingly, for most of the rights of
way and certain lease agreements, the possibility is remote that the Company
will incur significant removal costs in the foreseeable future, and as such, the
Company does not have sufficient information to make a reasonable estimate of
fair value for these asset retirement obligations.
As of
December 31, 2009 and 2008, the Company did not have any asset retirement
obligations.
Intangible
Assets
Intangible
assets consist of goodwill, subscriber base and cable operating
license.
Intangible
assets which are considered to have an indefinite life are not amortized but are
tested for impairment at least annually or more frequently if events or
circumstances indicate that the asset may be impaired.
Intangible
assets which have a finite life are amortized over their estimated useful lives
as follows:
|
|
Subscriber
Base
|
10
|
Cable
Operating License
|
20
|
Comprehensive
Income
The
Company has adopted FASB ASC 220, “Comprehensive Income”. This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the Consolidated Statements of Income and the
Consolidated Statements of Equity.
Use
of Estimates
The
preparation of the Company’s financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The
financial statements include some amounts that are based on management’s best
estimates and judgments. The most significant estimates relate to useful lives
for depreciation and amortization, deferred tax provisions and valuation
allowances, purchase price allocations, contingencies. These estimates may be
adjusted as more current information becomes available to the Company and any
adjustment could be significant to the accompanying financial
statements.
Stock-Based
Compensation
The
Company awards stock options and other equity-based instruments to its employees
and directors (collectively “share-based payments”). Compensation
cost related to such awards is measured based on the fair value of the
instrument on the grant date and is recognized on a straight-line basis over the
requisite service period, which generally equals the vesting
period. All of the Company’s stock-based compensation is based on
grants of equity instruments and no liability awards have been
granted.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies (Continued)
Revenue
Recognition
The
Company recognizes revenue based on the following:
Cable
Network Revenue –The Company recognizes revenue from the basic analog and
digital cable subscription services (including installation), referred to as
subscription services, over our cable network to customers in the period the
related services are provided. Subscription services are offered for basic video
service (over 90% of the total revenue), extended basic video service, digital
video service, and pay TV service. All revenue is collected for the calendar
year in advance, with the amount collected depending on when the sale is made
during the year. The balance sheet caption service performance
obligation-deferred revenue for cable network revenue represents amounts
received in advance of the service period.
Installation
revenue – Installation revenue, including reconnect fees, related to these
services over our cable network is recognized as revenue in the period in which
the installation services are completed. Costs related to connections and
reconnections are recognized in the consolidated statement of operations as
incurred.
Fiber
cable rental income – Fiber cable rental income represents the income received
from customers for use of the Company’s fiber cable network and is recognized as
revenue on a pro-rata basis over the contracted service period.
In
accordance with FASB ASC 605, “Revenue Arrangements with Multiple Deliverables”,
when more than one element such as equipment, installation and other services
are contained in a single arrangement, the Company allocates revenue between the
elements based on acceptable fair value allocation methodologies, provided that
each element meets the criteria for treatment as a separate unit of accounting.
An item is considered a separate unit of accounting if it has value to the
customer on a stand alone basis and there is objective and reliable evidence of
the fair value of the undelivered items. The fair value of the undelivered
elements is determined by the price charged when the element is sold separately,
or in cases when the item is not sold separately, by using other acceptable
objective evidence. Management applies judgment to ensure appropriate
application of FASB ASC 605, including the determination of fair value for
multiple deliverables, determination of whether undelivered elements are
essential to the functionality of delivered elements, and timing of revenue
recognition, among others. For those arrangements where the deliverables do not
qualify as a separate unit of accounting, revenue from all deliverables are
treated as one accounting unit and recognized rateably over the term of the
arrangement.
Employee
Benefits
Full time
employees of subsidiaries of the Company in the PRC participate in a government
mandated multi-employer defined contribution plan pursuant to which certain
pension benefits, medical care, unemployment insurance, employee housing fund
and other welfare benefits are provided to employees. Chinese labour regulations
require that the subsidiaries of the Company make contributions to the
government for these benefits based on certain percentages of the employee’s
salaries. Other than the employee defined contribution plan, neither the Company
nor its subsidiaries provide any other employee benefits.
Basic
Income/Loss Per Ordinary Share
The
computation of income/loss per share is based on the weighted average number of
shares outstanding during the period presented in accordance with FASB ASC 260,
“Earnings Per Share”. At December 31, 2009 and 2008, due to net losses the
Company’s share equivalents were anti-dilutive and excluded in the loss per
share computations.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies (Continued)
Income
Taxes
The
Company accounts for income taxes under FASB ASC 740 “Income
Taxes.” Deferred income tax assets and liabilities are determined
based upon differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. Deferred tax assets
are reduced by a valuation allowance to the extent management concludes it is
more likely than not that the assets will not be realized. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statements of
operations in the period that includes the enactment date.
The
Company follows FASB ASC740 “Income Taxes,” which prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken in the tax return. The standard also
provides guidance on de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods and income tax disclosures.
Foreign
Currency Translation
China
Cablecom Holdings, Ltd.’s functional currency is the US dollar. The Company’s
subsidiaries and VIEs determine their functional currencies based on the
criteria of FASB ASC 830 Foreign Currency Translation and have determined their
functional currency to be their respective local currency. The Company uses the
average exchange rate for the period and the exchange rate at the balance sheet
date to translate its operating results and financial position, respectively.
Any translation gains (losses) are recorded in accumulated other comprehensive
income (loss) as a component of shareholders’ equity. Transactions denominated
in foreign currencies are translated into the functional currency at the
exchange rates prevailing on the transaction dates. Assets and liabilities
denominated in foreign currencies are translated into the functional currency at
the exchange rates prevailing at the balance sheet date. Exchange gains and
losses are included in the consolidated statements of income.
Translation
of amounts from RMB into United States dollars (“US$”) has been made at the
following exchange rates for the respective periods:
December
31, 2009
|
|
Balance
sheet
|
RMB6.8282 to
US$1.00
|
Statement
of operations and comprehensive loss
|
RMB6.8314 to
US$1.00
|
|
|
December
31, 2008
|
|
Balance
sheet
|
RMB6.8346 to
US$1.00
|
Statement
of operations and comprehensive loss
|
RMB7.0744 to
US$1.00
|
Non-controlling
interest in consolidated financial statements
FASB ASC
810 requires us to classify noncontrolling interests in a subsidiary as part of
consolidated net income and to include the accumulated amount of noncontrolling
interests as part of total equity. The calculation of earnings per share
continues to be based on income amounts attributable only to
shareholders. Similarly, in our presentation of total equity, we
distinguish between equity amounts attributable to shareholders and amounts
attributable to the noncontrolling interests (previously classified as minority
interest outside of shareholders’ equity).
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4. Recent
Changes in Accounting Standards
ASC 105.
In June
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement
No. 168,
The FASB
Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles
”
,
(“SFAS No. 168”) “—
a replacement of FASB Statement
No. 162.
SFAS No. 168 is the new source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. This
statement was incorporated into ASC 105,
Generally Accepted Accounting
Principles
under the new FASB codification which became effective on
July 1, 2009. The new Codification supersedes all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Company has included the references to the Codification,
as appropriate, in these consolidated financial statements. Adoption of this
statement did not have an impact on the Company’s consolidated results of
operations, cash flows or financial condition.
ASC 805.
FASB
Statement No. 141(R
)
Business
Combinations
was issued in December
2007. This statement was incorporated into ASC 805,
Business Combinations
, under
the new FASB codification. ASC 805 requires that upon initially obtaining
control, an acquirer should recognize 100% of the fair values of acquired
assets, including goodwill and assumed liabilities, with only limited
exceptions, even if the acquirer has not acquired 100% of its target.
Additionally, contingent consideration arrangements will be fair valued at the
acquisition date and included on that basis in the purchase price consideration
and transaction costs will be expensed as incurred. This statement also
modifies the recognition for pre-acquisition contingencies, such as
environmental or legal issues, restructuring plans and acquired research and
development value in purchase accounting. This statement amends ASC 740-10,
Income Taxes
(“ASC
740”) to require the acquirer to recognize changes in the amount of its deferred
tax benefits that are recognizable because of a business combination either in
income from continuing operations in the period of the combination or directly
in contributed capital, depending on the circumstances. ASC 805 is effective for
fiscal years beginning after December 15, 2008. The adoption of these
provisions did not have an effect on the Company’s financial
reporting.
ASC 805 Update.
In
February 2009, the FASB issued SFAS No. 141R-1,
Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies
,
which allows an exception to the recognition and fair value measurement
principles of ASC 805. This exception requires that acquired contingencies be
recognized at fair value on the acquisition date if fair value can be reasonably
estimated during the allocation period. This statement update was effective for
the Company as of January 1, 2009 for all business combinations that close
on or after January 1, 2009 and it did not have an impact on the Company’s
consolidated results of operations, cash flows or financial
condition.
ASC 810.
In
December 2007, the FASB issued FASB Statement No. 160,
Non-controlling
Interests in Consolidated Financial Statements
— an amendment of ARB
No. 51,
which is effective for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. SFAS No. 160 was
incorporated into ASC 810,
Consolidation
(“ASC 810”) and
requires companies to present minority interest separately within the equity
section of the balance sheet. The Company adopted this statement as of
January 1, 2009 and it did not have an impact on the Company’s consolidated
results of operations, cash flows or financial condition.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4. Recent
Changes in Accounting Standards (Continued)
ASC 810.
In June
2009, the FASB issued FASB Statement No. 167,
Amendments to
FASB Interpretation No. 46 (R)
(“SFAS No. 167”),
which amended the consolidation guidance for variable-interest entities. The
amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should
consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. This
Statement is effective for financial statements issued for fiscal years periods
beginning after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The Company will adopt these provisions on
January 1, 2010 and the adoption will not have an impact on the Company’s
financial statements.
ASC 275 and ASC
350.
In April 2008, the FASB issued FASB Staff Position
(“FSP”) No. 142-3,
Determination of
the Useful Lives of Intangible Assets
,
which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of an intangible asset. Under the new codification
this FSP was incorporated into two different ASC’s, ASC 275,
Risks and Uncertainties
(“ACS
275”) and ASC 350,
Intangibles — Goodwill and
Other
(“ASC 350”). This interpretation was effective for financial
statements issued for fiscal years beginning after December 15, 2008 and
interim periods within those years. The Company adopted this FSP on
January 1, 2009, and it did not have a material impact on the Company’s
consolidated results of operations, cash flows or financial condition, and did
not require additional disclosures related to existing intangible
assets.
ASC 820.
On
February 12, 2008, the FASB issued FSP FAS 157-2,
Effective Date of FASB Statement
No. 157
(“FSP 157-2”), which delayed the effective date of
SFAS No. 157
Fair Value
Measurements
,
for nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years beginning after November 15, 2008. Under
the new codification the FSP was incorporated into ASC 820,
Fair Value Measurements and
Disclosures
(“ASC 820”). The Company adopted this ASC update on
January 1, 2009 and it did not have a material impact on the Company’s
consolidated results of operations, cash flows or financial condition, and did
not require additional disclosures.
ASC 260.
In June
2008, the FASB issued FSP EITF 03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
(“FSP
EITF 03-6-1”).
Under the new FASB codification this FSP
was incorporated into ASC 260,
Earnings Per Share
(“ASC
260”). ASC 260 clarifies that unvested share-based payment awards that entitle
holders to receive non-forfeitable dividends or dividend equivalents (whether
paid or unpaid) are considered participating securities and should be included
in the computation of earnings per share (“EPS”) pursuant to the two-class
method. The Company does not currently have any share-based awards that would
qualify as participating securities. Therefore, application of this FSP will
not have an effect on the Company's financial reporting.
ASU 2009-05.
The
FASB issued Accounting Standards Update (“ASU”) No. 2009-05 which provides
additional guidance on how companies should measure liabilities at fair value
and confirmed practices that have evolved when measuring fair value such as the
use of quoted prices for a liability when traded as an asset. While reaffirming
the existing definition of fair value, the ASU reintroduces the concept of entry
value into the determination of fair value. Entry value is the amount an entity
would receive to enter into an identical liability. Under the new guidance, the
fair value of a liability is not adjusted to reflect the impact of contractual
restrictions that prevent its transfer. The effective date of this ASU is the
first reporting period (including interim periods) after August 26, 2009.
Early application is permitted for financial statements for earlier periods that
have not yet been issued. The adoption of these provisions did not have an
effect on the Company’s financial reporting.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4. Recent
Changes in Accounting Standards (Continued)
ASU 2010-06.
The
FASB issued ASU No. 2010-06 which provides improvements to disclosure
requirements related to fair value measurements. New disclosures are required
for significant transfers in and out of Level 1 and Level 2 fair value
measurements, disaggregation regarding classes of assets and liabilities,
valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements for Level 2 or Level 3. These
disclosures are effective for the interim and annual reporting periods beginning
after December 15, 2009. Additional new disclosures regarding the
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements are effective for fiscal years beginning
after December 15, 2010 beginning with the first interim period. The
adoption of these provisions did not have an effect on the Company’s financial
reporting.
ASU 2010-09.
The
FASB issued ASU No. 2010-09 which provides amendments to certain
recognition and disclosure requirements. Previous guidance required that an
entity that is an SEC filer be required to disclose the date through which
subsequent events have been evaluated. This update amends the requirement of the
date disclosure to alleviate potential conflicts between ASC 855-10 and the
SEC’s requirements. The adoption of these provisions did not have an effect on
the Company’s financial reporting.
In May
2008, the FASB issued ASC 470-20,
Debt with Conversion and Other
Options
(ASC 470-20). ASC 470-20 will be effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The FSP includes guidance that convertible debt instruments that may be settled
in cash upon conversion should be separated between the liability and equity
components, with each component being accounted for in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest costs are
recognized in subsequent periods.. Adoption of this statement did not have an
impact on the Company’s consolidated results of operations, cash flows or
financial condition.
Management
does not believe that any recently issued, but not yet effective, accounting
standards, if currently adopted, would have a material effect on the
accompanying financial statements.
5. Stock
Based Compensation
In April
2008, the Company adopted the China Cablecom Holdings, Ltd. 2007 Omnibus
Securities and Incentive Plan (the “Plan”), which provides for the grant of up
to 3,333,333 shares option for the benefit of its directors, officers and
employees. During the year, the Company granted 1,350,000 share options and
1,460,000 share options on October 9, 2009 and December 20, 2009, respectively,
to its directors, officers and employees under the plan. These shares options
are exercisable at $2.34 and $1.83 per share, respectively, and may be exercised
by the optionee no later than the tenth anniversary of the date of option
agreement. Through December 31, 2009, 2,810,000 options have been issued under
the plan and 523,333 shares remain available to be issued.
The
Company accounts for its stock option awards pursuant to the provisions of FASB
ASC 718, “Stock Compensation”. The fair value of each option award is
estimated on the date of grant using the Black-Scholes option valuation
model. The Company recognizes the fair value of each option as
compensation expense ratably using the straight-line attribution method over the
service period, which is generally the vesting period.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
5. Stock
Based Compensation (Continued)
The
Black-Scholes model incorporates the following assumptions:
|
·
|
Expected
volatility - the Company estimates the volatility of common stock at the
date of grant using historical
volatility.
|
|
·
|
Expected
term - the Company estimates the expected term of options granted based on
a combination of vesting schedules, term of the option and historical
experience.
|
|
·
|
Risk-free
interest rate - the Company estimates the risk-free interest rate using
the U.S. Treasury yield curve for periods equal to the expected term of
the options in effect at the time of
grant.
|
|
·
|
Dividends
- the Company uses an expected dividend yield of zero. The Company intends
to retain any earnings to fund future operations and, therefore, does not
anticipate paying any cash dividends in the foreseeable
future.
|
The fair
value of the total options granted in the year measured as at the date of grant
on October 9, 2009 was $2,727,755 and December 20, 2009 was $2,260,874. The
following table outlines the variables used to derive the fair value using in
the Black-Scholes option-pricing model:
|
|
2009
|
|
|
Risk
free interest rate
|
|
|
1.3177% - 1.4864
|
%
|
Volatility
|
|
|
163.46%
- 170.57
|
%
|
Dividend
yield
|
|
|
-
|
|
Expected
option life
|
|
10
years
|
|
|
Movements
in the number of share options outstanding and their related weighted average
exercise prices are as follows:
Date of grant
|
|
Exercise
Price
|
|
Note
|
|
Options
outstanding
at January 1,
2009
|
|
|
Granted
during the
year
|
|
|
Exercised
during the
year
|
|
|
Cancelled
/Expired
during the
year
|
|
|
Options
outstanding at
December 31,
2009
|
|
|
Options
exercisable at
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
9, 2009
|
|
$
|
2.34
|
|
(i
|
)
|
|
-
|
|
|
|
1,350,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,350,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
20, 2009
|
|
$
|
1.83
|
|
(ii
|
)
|
|
-
|
|
|
|
1,460,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,460,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
2,810,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,810,000
|
|
|
|
-
|
|
Notes:
(i)
|
Once
vested, the share options are exercisable within the period commencing
from October 9, 2009 to October 9,
2019.
|
(ii)
|
Once
vested, the share options are exercisable within the period commencing
from December 20, 2009 to December 20,
2019.
|
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
5. Stock
Based Compensation (Continued)
The
Options shall vest and become exercisable pursuant to the following
schedule:
Anniversary of Grant Date
|
|
Percent Vested and
Exercisable
|
|
|
|
|
|
Less
than 1 year
|
|
|
0
|
%
|
1
year but less than 2 years
|
|
|
33⅓
|
%
|
2
years but less than 3 years
|
|
|
66⅔
|
%
|
3
years or more
|
|
|
100
|
%
|
Notwithstanding
the above schedule, the Optionee shall become one hundred percent (100%) vested
in the Option if the Optionee’s employment with the Company shall terminate on
account of the Optionee’s death or total and permanent disability.
During
the year ended December 31, 2009 and 2008, the Company recorded stock based
compensation of $217,538 and $nil, respectively, in connection with the issuance
of stock options.
As of
December 31, 2009, the Company had total unrecognized compensation expense
related to options granted of $4,771,091 which will be recognized over a
remaining service period of approximately 3 years.
6. Cash
and cash equivalents
Financial instruments that
potentially subject the Company to significant concentrations of credit risk
consist of cash and cash equivalents and pledged deposits. As of December
31, 2009 and 2008, substantially all of the Company’s cash and cash equivalents
were held by major banks located in the PRC and United States, which management
believes are high credit quality financial institutions.
7.
Prepaid Expenses and Advances
Prepaid
expenses and other receivables consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Prepaid
professional fees
|
|
$
|
14,645
|
|
|
$
|
125,020
|
|
Loan
advance
|
|
|
4,413,198
|
|
|
|
6,425,587
|
|
Advanced
payments
|
|
|
4,794,704
|
|
|
|
2,614,381
|
|
Purchase
deposits
|
|
|
-
|
|
|
|
71,037
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,222,547
|
|
|
$
|
9,236,025
|
|
The loan
advance included unsettled offshore loan amounting to approximately $2.3 million
and bridge financing to third parties amounting to approximately $2.1 million
which would be recoverable in 2010.
The
advanced payments include loan advanced to staff, cash advanced to local
branches for daily operation, advances for purchase of materials and
construction payments.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8. Property,
Plant and Equipment, Net
Property,
plant and equipment, net consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
At
cost:
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
$
|
440,929
|
|
|
$
|
275,247
|
|
Headend
facilities
|
|
|
24,588,555
|
|
|
|
8,496,610
|
|
Motor
vehicles
|
|
|
1,955,426
|
|
|
|
1,413,299
|
|
Fiber
infrastructure and electric appliances
|
|
|
77,095,320
|
|
|
|
69,141,379
|
|
Building
and building improvements
|
|
|
11,191,302
|
|
|
|
11,059,980
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
115,271,532
|
|
|
|
90,386,515
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
25,941,652
|
|
|
|
10,509,329
|
|
|
|
|
|
|
|
|
|
|
Net
book value
|
|
$
|
89,329,880
|
|
|
$
|
79,877,186
|
|
There were no impairment provisions
made at December 31, 2009 and 2008. Depreciation expense for the years ended
December 31, 2009 and 2008 was $15,417,101 and $8,213,143,
respectively.
9.
Construction in Progress
Construction
in progress represents costs incurred in connection with construction of fiber
infrastructure. The construction in progress that was completed during the year
was transferred to Property, Plant and Equipment on a monthly basis, with
monthly completion and inspection reports. Total construction in progress was
$3,967,552 and $1,036,667 at December 31, 2009 and 2008, respectively.
Capitalized interest was not significant for the years ended December 31, 2009
and 2008.
10.
Intangible Assets, Net
The
following table summarizes the lives and carrying values of the Company's
intangible assets by category, at December 31, 2009:
|
|
Useful
Life
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber
base - Binzhou Broadcasting
|
|
10
|
|
|
$
|
11,223,334
|
|
|
$
|
2,525,247
|
|
|
$
|
8,698,087
|
|
Cable
operating license- Binzhou Broadcasting
|
|
20
|
|
|
|
7,513,901
|
|
|
|
845,316
|
|
|
|
6,668,585
|
|
Subscriber
base -
Hubei
Chutian
|
|
10
|
|
|
|
4,553,513
|
|
|
|
683,027
|
|
|
|
3,870,486
|
|
Cable
operating license- Hubei Chutian
|
|
20
|
|
|
|
17,087,081
|
|
|
|
1,281,531
|
|
|
|
15,805,550
|
|
Total
amortized intangible assets
|
|
|
$
|
40,377,829
|
|
|
$
|
5,335,121
|
|
|
$
|
35,042,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
$
|
19,275,561
|
|
|
$
|
-
|
|
|
$
|
19,275,561
|
|
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10.
Intangible Assets, Net (Continued)
Amortization
expense for the years ended December 31, 2009 and 2008 was $2,807,733 and
$2,152,882, respectively. Estimated amortization expenses of the existing
intangible assets for the next five years and thereafter are as
follows:
|
|
Amortization
|
|
For
the year ending December 31,
|
|
|
|
2010
|
|
$
|
2,807,733
|
|
2011
|
|
|
2,807,733
|
|
2012
|
|
|
2,807,733
|
|
2013
|
|
|
2,807,733
|
|
2014
|
|
|
2,807,733
|
|
Thereafter
|
|
|
21,009,043
|
|
|
|
$
|
35,042,708
|
|
11. Noncontrolling
Interest
Noncontrolling
interest represents Binzhou SOE and Hubei SOE’s equity contributions made to
Binzhou Broadcasting and Hubei Chutian together with their respective 40% and
45% proportionate share of the total economic benefits in the Joint Ventures
through December 31, 2009.
12. Income
Taxes
British
Virgin Islands
The Company was incorporated in the
British Virgin Islands and is not subject to income taxes under the current laws
of the British Virgin Islands.
Hong
Kong
China Cablecom Company Limited, a
wholly owned subsidiary of the Company, was incorporated in Hong Kong and is
subject to Hong Kong profits tax. The Company is subject to Hong Kong
taxation on its activities conducted in Hong Kong and income arising in or
derived from Hong Kong. No provision for profits tax has been made as
the subsidiary has no assessable income for Hong Kong for the periods
presented. The applicable statutory tax rate for the year ended
December 31, 2009 is 16.5% (2008: 16.5%).
The
PRC
The Company’s income tax in the PRC
is charged at 25% (2008: 25%) of the assessable profits. The subsidiaries and
the VIEs incorporated in the PRC are subject to the PRC enterprises income tax
at the applicable tax rates on the taxable income as reported in their PRC
statutory accounts in accordance with the relevant enterprises income tax laws
applicable to foreign enterprises.
The
amount of taxation charged to the consolidated statement of comprehensive income
represents:
|
|
2009
|
|
|
2008
|
|
Current
tax
|
|
|
|
|
|
|
-
PRC tax
|
|
$
|
571,981
|
|
|
$
|
341,748
|
|
-
Hong Kong tax
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
571,981
|
|
|
$
|
341,748
|
|
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
12. Income
Taxes (Continued)
The
income tax expenses can be reconciled to the profit per the consolidated income
statement as follows:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Loss
before tax and non-controlling interest
|
|
$
|
(55,210,138
|
)
|
|
$
|
(12,844,482
|
)
|
|
|
|
|
|
|
|
|
|
Tax
calculated at the domestic tax rate of 25%
|
|
|
(13,802,535
|
)
|
|
|
(3,211,121
|
)
|
Tax
effect of expenses not deductable for tax purposes
|
|
|
18,876,725
|
|
|
|
4,522,744
|
|
Tax
effect of revenue not taxable for tax purposes
|
|
|
(6,183,774
|
)
|
|
|
(1,246,770
|
)
|
Tax
effect of tax losses not recognised
|
|
|
1,681,565
|
|
|
|
276,895
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
571,981
|
|
|
$
|
341,748
|
|
13. Other
Current Liabilities
Other
current liabilities consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Other
payable
|
|
$
|
3,715,305
|
|
|
$
|
3,099,854
|
|
Accrued
expenses
|
|
|
1,540,491
|
|
|
|
1,596,604
|
|
Accrued
salaries and welfare
|
|
|
2,960,924
|
|
|
|
1,859,125
|
|
Provision
for taxation - PRC
|
|
|
851,005
|
|
|
|
340,990
|
|
Accrued
interest
|
|
|
307,024
|
|
|
|
2,779
|
|
Short-term
loan
|
|
|
-
|
|
|
|
731,572
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,374,749
|
|
|
$
|
7,630,924
|
|
Other
payables are related to loan advance from others, guarantee deposit received
from staff and set-top TV rental deposits received from users.
14.
Note Payable – Noncontrolling interest
Note
payable consists of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Short-term
portion
|
|
|
|
|
|
|
Note
payable - Binzhou SOE
|
|
$
|
6,658,805
|
|
|
$
|
8,603,751
|
|
Note
payable - Hubei SOE
|
|
|
20,967,967
|
|
|
|
46,816,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,626,772
|
|
|
|
55,420,250
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion
|
|
|
|
|
|
|
|
|
Note
payable - Binzhou SOE
|
|
|
18,728,216
|
|
|
|
18,710,678
|
|
Note
payable - Hubei SOE
|
|
|
45,619,636
|
|
|
|
33,067,041
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,347,852
|
|
|
$
|
51,777,719
|
|
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
14.
Note Payable – Noncontrolling interest (Continued)
Note payable to Binzhou
SOE
The
short-term portion of note payable was unsecured, interest-free and payable on
demand.
The due
date of long-term note payable of approximately Rmb128 million (equivalent to
approximately $18.7 million) is to be paid over a 20-year period from the date
of the assets transfer.
Note payable to Hubei
SOE
The
short-term portion of note payable was unsecured, interest-free and payable on
demand.
The due
date of long-term note payable of Rmb311 million (equivalent to approximately
$45.6 million) is not specified in the contract and the Company does not expect
to make any repayment for the long-term notes payable during the next
year.
15.
Note payable – promissory note
In
September 2007, China Cablecom Ltd. issued an aggregate of $19.99 million in
promissory notes along with 766,680 shares of Class A convertible preferred
stock to 10 investors in exchange for proceeds of approximately $20 million (the
“Bridge Financing”). Each share of Class A preferred stock was
converted into one share of the Company’s ordinary shares in April 2008.
The proceeds from the Bridge Financing were used to fund the acquisition price
of Binzhou Broadcasting (Note 4) and for working capital purposes. The
promissory notes bear interest at a stated interest rate of 10% and are
collateralized by a pledge of approximately 216,666 ordinary shares of the
Company, held by the Company’s Chairman. The Company allocated the
proceeds based on the relative fair value of the promissory notes and the Class
A preferred stock, the resulting discount on the promissory notes is being
amortized using the effective interest method to interest expense over the term
of the promissory notes. Upon the merger between China Cablecom Ltd. and Jaguar,
50% of the promissory notes plus accrued interest was repaid in April 2008. The
remaining balance of the promissory notes plus accrued interest was due in April
2009.
Due to
the default in payment of the principal and interest of promissory notes due in
April 2009, the Company negotiated with the note holders and completed the debt
restructure in October 2009. The Company issued $5.5 million Unsecured Notes due
October 8, 2015 bearing a fixed interest rate of 5% per annum along with
15,397,204 shares of Series A Convertible Preferred Shares to the note holders
in settlement of approximately $11 million in current debt and accrued interest
obligations. The debt restructure reduce the overall principal amount of its
long-term debt obligations and eliminate cash interest obligations on the new
debt securities issued.
16.
Unsecured notes, net of discount
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Unsecured
note issued
|
|
$
|
5,500,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Principal
reduction
|
|
|
(365,205
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion - net of original issue discount
|
|
$
|
5,134,795
|
|
|
$
|
-
|
|
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
16.
Unsecured notes, net of discount (Continued)
On
October 9, 2009, under the debt restructure, the Company issued $5.5 million
Unsecured Notes due October 8, 2015 bearing fixed interest rate of 5% per annum
and 15,397,204 Series A Convertible Preferred Shares to promissory note holders.
Each Series A Convertible Preferred Shares can be convertible, at the option of
the holder, into one ordinary share. The repayment was scheduled in 8 stalments
to be paid every 6 months starting from October 15, 2012.
Until
fourteen months after the issue date, principal on the new notes is subject to
the cancellation in the event that the Company's ordinary shares close at a
daily volume weighted average price greater than $0.85 for 30 consecutive days
with daily dollar value of the trading volume of $500,000 or more. All of the
shares issuable upon conversion of the Series A Preferred Shares could have been
sold by the note holder according to the terms of the notes and permitted to
sell during such 30 consecutive trading days, then the principal amount of the
note will be deemed satisfied and paid in full. Interest accrued on this note
shall be payable on the immediately following interest due date. The principal
on the new notes is also subject to the reduction in the event that the note
holders convert the Series A Convertible Preferred Shares into ordinary shares
within 14 months after the issued date.
During
the year, there were 1,022,389 Series A Convertible Preferred Shares converted
into ordinary shares, resulting in the reduction of $365,205 in principal amount
of the Unsecured notes and an increase in ordinary shares and additional paid-in
captial.
17.
Convertible notes
On May 9,
2008, China Cablecom Holdings, Ltd. issued convertible notes with a principal
(“face”) value of $43,175,000, along with 508,331 ordinary shares
(labelled “incentive shares” in the agreement) to several
investors. The gross proceeds of this transaction were $30,000,000
(“purchase price”), consisting of $25,793,283 cash and $4,206,717 from the
cancellation of the principal amount and accrued interest of promissory notes
issued by China Cablecom Ltd. in September 2007.
The
Company negotiated with the note holders and completed the debt restructure in
October 2009. The Company issued $18 million Secured Notes due October 8, 2016
bearing fixed interest rate of 5% per annum along with 50,402,082 shares of
Series A Convertible Preferred Shares to the note holders in settlement of
approximately $23 million in current debt obligations. The debt restructure
reduced the overall principal amount of its long-term debt obligations and
eliminated cash interest obligations on the new debt securities
issued.
18.
Secured notes, net of discount
Secured
notes, net of discount consists of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Secured
note issued
|
|
$
|
18,000,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Principal
reduction
|
|
|
(937,437
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion - net of original issue discount
|
|
$
|
17,062,563
|
|
|
$
|
-
|
|
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
18.
Secured notes, net of discount (Continued)
On
October 9, 2009, under the debt restructure, the Company issued $18 million
Secured Notes due October 8, 2016 bearing fixed interest rate of 5% per annum
and 50,402,082 Series A Convertible Preferred Shares to convertible note
holders. Each Series A Convertible Preferred Shares may be converted, at the
option of the holder, into one ordinary share. The repayment was scheduled in 7
stalments to be paid every 6 months starting from October 15, 2012.
Until
fourteen months after the issue date, principal on the new notes is subject to
the cancellation in the event that the Company's ordinary shares close at a
daily volume weighted average price greater than $0.85 for 30 consecutive days
with daily dollar value of the trading volume of $500,000 or more. All of the
shares issuable upon conversion of the Series A Preferred Shares could have been
sold by the note holder according to the terms of the notes and permitted to
sell during such 30 consecutive trading days, then the principal amount of the
note will be deemed satisfied and paid in full. Interest accrued on this note
shall be payable on the immediately following interest due date. The principal
on the new notes is also subject to the reduction in the event that the note
holders convert the Series A Convertible Preferred Shares into ordinary shares
within 14 months after the issued date.
During
the year, there were 2,624,931 Series A Convertible Preferred Shares converted
into Ordinary Shares, resulting in the reduction of $937,437 in principal amount
of the Secured notes and an increase in ordinary shares and additional paid-in
capital.
19.
Senior secured notes, net of discount
On
October 9, 2009, the Company completed a private placement of $33 million Senior
Secured Notes (“New Notes”) due October 8, 2015 bearing fixed interest rate of
12% per annum combined with 23,158,080 shares of Series B Convertible Preferred
Shares to the holders of New Notes. Each share of Series B
Convertible Preferred Shares is convertible into one share of the Company’s
ordinary shares. The repayment was scheduled in 6 stalments to be paid every 6
months starting from October 15, 2012. The net proceeds from the issuance will
be used to satisfy the Company’s remaining obligations to the Hubei SOE under
its supplementary framework agreement.
On the
same date, the Company immediately redeemed $13,860,000 of the New Notes due
October 2015 reducing the aggregate principal amount of the New Notes
outstanding from $33,000,000 to $19,140,000. The value of $11,673,530 was
allocated to Series B Convertible Preferred Shares using the relative fair value
method and the balance of $7,466,470 was recognized as the value of New
Notes.
According
to the New Notes agreement, the early redemption of principal prior to the third
anniversary of the issue date, the interest otherwise payable on a regularly
scheduled payment date prior to the 36 month anniversary of the issue date will
be deferred (“Deferred Interest”) and accrue and be payable commencing with the
payment date that coincides with the third anniversary of the issue date in
equal instalments over the remaining regularly scheduled payment dates. Payments
of principal amount will resume on the payment date set forth on the
amortization schedule of the New Notes.
Issuance
cost totaled $3,197,205, of which $1,130,990 was allocated to the issuance cost
of preferred shares and recorded as a reduction to additional paid-in capital
and $2,066,215 was recorded as deferred financing costs and is being amortized
over the six-year term of the Senior Secured Note.
For the
year ended December 31, 2009, $506,625 was charged to interest
expense using the effective interest rate and $79,000 was amortized to
finance costs.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
20.
Stockholders’ Equity
Pursuant
to the debt restructure in October 2009, the Company issued 15,397,204 and
50,402,082 Series A Convertible Preferred Shares, par value $.0005, to the
previous Promissory notes holders and Convertible note holders,
respectively.
The
Company also issued 23,158,080 Series B Convertible Preferred Shares, par value
$.0005, as the incentive shares to the New Notes subscribers. As part of the
transaction, 250,000 ordinary shares were issued to the Broker for its
fees.
Each
share of Series A and Series B Convertible Preferred Shares may be converted
into one share of the Company’s ordinary shares. For the year ended December 31,
2009, 3,637,320 Series A Preferred Shares had been converted into Ordinary
Shares.
21.
Operating Lease Commitments
At the
reporting date, the Group had commitments for future lease payments under
non-cancellable operating leases in respect of land and buildings which fall due
as follows:
2010
|
|
$
|
150,845
|
|
2011
|
|
|
150,845
|
|
2012
|
|
|
150,845
|
|
2013
|
|
|
150,845
|
|
2014
|
|
|
150,845
|
|
Thereafter
|
|
|
1,206,760
|
|
|
|
|
|
|
|
|
$
|
1,960,985
|
|
22.
Statutory Reserves
The
Company’s statutory reserves are comprised as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Statutory
reserves
|
|
$
|
135,322
|
|
|
$
|
125,241
|
|
Other
reserve
|
|
|
6,260
|
|
|
|
6,260
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
141,582
|
|
|
$
|
131,501
|
|
Under the
PRC regulations, the Company’s PRC subsidiaries and VIEs may pay dividends only
out of their accumulated profits, if any, determined in accordance with the PRC
GAAP. In addition, these companies are required to set aside at least 10% of
their after-tax net profits each year, if any, to fund the statutory reserves
until the balance of the reserves reaches 50% of their registered
capital. The statutory reserves are not distributable in the form of
cash dividends to the Company and can be used to make up cumulative prior year
losses.
23.
Segment Reporting
Management
considers the Company to have one business segment, consisting of cable network
services and support. The information presented in the consolidated statement of
operations reflects the revenues and costs associated with this business segment
that management uses to make operating decisions and assess
performance.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
24.
Warrants
The
Company issued warrants to investors and service providers to purchase ordinary
share of the Company. The following table outlines the warrants outstanding as
of December 31, 2009 and 2008:
Name
|
|
Number of
Warrants Issued
|
|
|
Exercise Price
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
9,384,234
|
|
|
$
|
5.00
|
|
4/4/2010
|
Warrants
|
|
|
700,000
|
|
|
$
|
9.10
|
|
5/4/2011
|
Warrants
|
|
|
2,115,385
|
|
|
$
|
0.858
|
|
8/10/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,199,619
|
|
|
|
|
|
|
25.
Onshore and offshore loan agreements with Rich Dynamic Limited
The
Company advanced $38,000,000 to Rich Dynamic Limited, a Hong Kong company
(“RDL”) in 2008, according to two loan agreements dated on June 10, 2008 and
July 29, 2008 (“Offshore Loan Agreements”), whereby China Cablecom agreed to
extend loans to RDL. These loans were utilized by RDL as payment to a
shareholder of Chengdu Chuanghong Jinsha Real Estate Co., Ltd. (“Chengdu
Chuanghong”), for the purpose of acquiring 60% of the equity interest in Chengdu
Chuanghong. RDL’s loan repayment obligations under the Offshore Loan Agreements
were secured under share pledge agreements, in which RDL agreed to pledge its
equity interest in Chengdu Chuanghong to China Cablecom as security for RDL’s
performance of its loans repayment obligations under the Offshore Loan
Agreements.
The
shareholder of RDL and JYNT entered into two loan agreements dated on June 10,
2008 and July 29, 2008 (“Onshore Loan Agreements“), whereby the shareholder of
RDL agreed to extend two loans to JYNT which amount in aggregate to
approximately $38 million (Rmb254,600,000). By the end of December 31, 2009, the
Company received repayment of approximately $35.7 million (Rmb244,000,000) from
the shareholder of RDL.
The
unsettled offshore loan balance amounting to approximately $2.3 million is
included in the prepaid expenses and advances as at December 31, 2009 (2008:
approximately $5.2 million).
26.
Employee Benefits
The
Company contributes to a state pension scheme organized by municipal and
provincial governments in respect of its employees in the PRC. The expense
related to this plan, was $2,402,591 and $1,076,430 for the years ended December
31, 2009 and 2008, respectively.
27.
Related Party Transation
In
October 2009, the Company consummated $33 million Senior Secured Notes
financings, Chardan Capital Markets, LLC, acted as the lead placement agent and
was paid a broker fee of $1,494,000 along with 250,000 ordinary shares. Kerry
Propper, a member of our board of directors, is the chief executive officer of
Chardan Capital Markets, LLC.
CHINA
CABLECOM HOLDINGS, LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
28.
Operating Risk
Concentrations of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk primarily consist of cash and cash equivalents, and accounts
receivable. As of December 31, 2009, substantially all of the Company’s cash and
cash equivalents were managed by several financial institutions that management
believes are high credit quality financial institutions. The Company has
approximately $23 million in cash, bank deposits and money market funds in the
PRC, which constitute over 95% of total cash and cash equivalents. Historically,
deposits in Chinese banks are secured due to the state policy on protecting
depositors’ interests. However, the PRC promulgated a new Bankruptcy Law in
August 2006, which went into effect on June 1, 2007, which contains a separate
article expressly stating that the State Council may promulgate implementation
measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under
the new Bankruptcy Law, a Chinese bank may go into bankruptcy. In addition,
since the PRC’s concession to WTO, foreign banks have been gradually permitted
to operate in the PRC and have been severe competitors against Chinese banks in
many aspects, especially since the opening of Renminbi business to foreign banks
in late 2006. Therefore, the risk of bankruptcy of those banks in which the
Company has deposits has increased. In the event of bankruptcy of one of the
banks, which holds the Company’s deposits, it is unlikely to claim its deposits
back in full since it is unlikely to be classified as a secured creditor based
on the PRC laws.
Foreign
exchange risk
Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible into foreign currencies. On January 1, 1994, the PRC government
abolished the dual rate system and introduced a single rate of exchange as
quoted daily by the People’s Bank of China. However, the unification of the
exchange rates does not imply the convertibility of RMB into US$ or other
foreign currencies. All foreign exchange transactions continue to take place
either through the People’s Bank of China or other banks authorized to buy and
sell foreign currencies at the exchange rates quoted by the People’s Bank of
China. Approval of foreign currency payments by the People’s Bank of China or
other institutions requires submitting a payment application form together with
suppliers’ invoices, shipping documents and signed contracts.
Company’s
operations are substantially in foreign countries
All of the Company provided cable
networks businesses are in the PRC. The Company’s operations are subject to
various political, economic, and other risks and uncertainties inherent in the
PRC. Among other risks, the Company’s operations are subject to the risks of
restrictions on transfer of funds; export duties, quotas, and embargoes;
domestic and international customs and tariffs; changing taxation policies;
foreign exchange restrictions; and political conditions and governmental
regulations.
Restrictions
on transfer of assets out of the PRC
Dividend
payments by the Company, are limited by certain statutory regulations in the
PRC. The Company shall not pay any dividend without receiving first prior
approval from the Foreign Currency Exchange Management Bureau. Dividend payments
are restricted to 85% of profits, after tax.
29.
Subsequent Event
On May 4,
2010, the Company had issued 225,000 ordinary shares of $1.45 each to Loeb &
Loeb LLP in payment of the accrued fees and disbursements.
The
Shandong government recently announced its initiative to consolidate its
provincial cable assets resulting in a temporary deferment of the Group’s
obligation to pay outstanding cash payments of approximately $16.5 million to
Binzhou Broadcasting.
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