As filed with the Securities and Exchange Commission on December 6, 2000.
File No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------------------------
CHINA BROADBAND CORP.
(Exact name of registrant as specified in its charter)
NEVADA 4899 72-13812
(STATE OR JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
CODE NUMBER)
2080, 440-2 Avenue SW Michael J. Morrison
Calgary, Alberta, Canada T2P 5E9 1495 Ridgeview Drive
(403) 225-2198 Reno, Nevada 89509
(775) 827-6300
(Address, including zip code, and (Name, address, including zip
telephone number,including area code, code, and telephone number,
of registrant's principal executive including area code, of agent
offices) for service)
----------------
COPIES TO:
Bernard G. Poznanski Randal R. Jones
Koffman Kalef, Business Lawyers Kenneth G. Sam
19th Floor, 885 West Georgia Street Dorsey & Whitney LLP
British Columbia V6C 3H4 1420 Fifth Avenue, Suite 3400
(604) 891-3688 Seattle, Washington 98101
(206) 903-8800
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE AGGREGATE OFFERING FEE
PER SHARE PRICE
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<S> <C> <C> <C> <C>
Common stock, 6,699,867(1) $7.1875(1)(2) $48,155,295(2) $12,713
$0.001 par value (1)
Common stock issuable upon 200,790 $7.1875(3) $1,443,179(3) $381
exercise of Warrants
TOTAL 6,900,657 $49,598,474 $13,094
<FN>
1) Represents 6,699,867 shares of common stock, which may be sold by the
selling shareholders.
2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of
1933, as amended. The aggregate offering price of shares of common
stock of the registrant is estimated solely for purposes of calculating
the registration fees payable, as determined in accordance with Rule
457(c), using the average of the high and low sales price reported by
the National Securities Dealers' Association Over-The-Counter Bulletin
Board for the common stock on December 1, 2000, which was $7.1875 per
share.
3) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(g) under the Securities Act of
1933, as amended. The aggregate offering price of shares of Common
Stock issuable upon exercise of outstanding warrants of the Registrant
is estimated solely for purposes of calculating the registration fees
payable, as determined in accordance with Rule 457(g).
</FN>
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
<PAGE>
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
DECEMBER 5, 2000
6,900,657
[Logo]
China Broadband Corp.
COMMON STOCK
This is a public offering of 6,900,657 shares of the common stock of
China Broadband Corp.
All of the shares being offered, when sold, will be sold by selling
shareholders as listed in this prospectus on pages 25 and 26. The selling
shareholders are offering:
- 6,699,867 shares of common stock
- 200,790 shares of common stock issuable upon exercise of the warrants
We will not receive any of the proceeds from the sale of the shares.
Our common stock is currently quoted on the National Association of
Securities Dealers (NASD) Over-the-Counter Bulletin Board under the symbol
"CBBD." The last price of our common stock on the NASD Over-the-Counter Bulletin
Board on December 1, 2000 was $7.1875 per share.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Investing in the shares involves risks. See "Risk Factors" beginning on
page 8.
--------------
The date of this prospectus is December 5, 2000.
The information contained in this prospectus is not complete and may be changed.
The selling shareholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities, and no solicitation or
offer to buy these securities may be made in any state where the offer or sale
is not permitted.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
NOTE REGARDING FORWARD-LOOKING STATEMENTS.................................................................v
ADDITIONAL INFORMATION....................................................................................v
PROSPECTUS SUMMARY........................................................................................3
RISK FACTORS..............................................................................................8
RISKS RELATING TO CHINA BROADBAND......................................................................8
RISKS RELATING TO OUR MARKETS.........................................................................14
POLITICAL, ECONOMIC AND REGULATORY RISKS..............................................................17
RISKS RELATING TO OUR TECHNOLOGIES....................................................................19
OTHER RISKS...........................................................................................21
USE OF PROCEEDS..........................................................................................22
DIVIDEND POLICY..........................................................................................22
CAPITALIZATION...........................................................................................23
DILUTION.................................................................................................23
SELLING SHAREHOLDERS.....................................................................................24
SELECTED FINANCIAL DATA..................................................................................26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION....................27
OVERVIEW..............................................................................................27
RESULTS OF OPERATIONS.................................................................................28
LIQUIDITY AND CAPITAL RESOURCES.......................................................................29
PLAN OF OPERATION.....................................................................................30
SUBSEQUENT EVENTS.....................................................................................31
RECENT ACCOUNTING PRONOUNCEMENTS......................................................................32
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.............................................32
BUSINESS.................................................................................................33
OVERVIEW OF CORPORATE STRUCTURE.......................................................................33
OVERVIEW OF BUSINESS..................................................................................34
GROWTH OF INTERNET USAGE IN CHINA.....................................................................34
BIG SKY NETWORK'S CABLE TELEVISION INTERNET SERVICE STRATEGY..........................................35
SHEKOU JOINT VENTURE..................................................................................35
CHENGDU JOINT VENTURE.................................................................................36
DEYANG JOINT VENTURE..................................................................................37
MODEL JOINT VENTURE TERMS.............................................................................38
CHINESE GOVERNMENTAL APPROVALS........................................................................39
PROPOSED JOINT VENTURES...............................................................................40
TRANSACTIONS WITH SOFTNET.............................................................................41
SALES AND MARKETING...................................................................................42
RESEARCH AND DEVELOPMENT..............................................................................42
COMPETITION...........................................................................................43
INTELLECTUAL PROPERTY.................................................................................43
EMPLOYEES.............................................................................................43
FACILITIES............................................................................................44
LEGAL PROCEEDINGS.....................................................................................44
MANAGEMENT...............................................................................................45
EXECUTIVE OFFICERS AND DIRECTORS......................................................................45
BOARD COMMITTEES......................................................................................45
DIRECTOR COMPENSATION.................................................................................46
EXECUTIVE COMPENSATION................................................................................46
EMPLOYMENT AND CONSULTING CONTACTS....................................................................47
OPTION GRANTS.........................................................................................47
OPTION EXERCISES......................................................................................48
ADVISORY BOARD........................................................................................48
STOCK OPTION PLAN.....................................................................................49
<PAGE>
<S> <C>
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS.....................................................50
RELATED PARTY TRANSACTIONS...............................................................................50
PRINCIPAL SHAREHOLDERS...................................................................................51
TAXATION.................................................................................................52
DESCRIPTION OF CAPITAL STOCK.............................................................................55
COMMON STOCK..........................................................................................55
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON STOCK AND RELATED STOCKHOLDER MATERIALS...................55
ANTI-TAKEOVER EFFECTS OF CHARTER AND BYLAWS PROVISIONS AND THE NEVADA BUSINESS CORPORATION ACT........55
TRANSFER AGENT AND REGISTRAR..........................................................................56
SHARES ELIGIBLE FOR FUTURE SALE..........................................................................58
PLAN OF DISTRIBUTION.....................................................................................58
LEGAL MATTERS............................................................................................60
EXPERTS..................................................................................................60
WHERE YOU CAN FIND MORE INFORMATION......................................................................60
INDEX TO FINANCIAL STATEMENTS............................................................................60
</TABLE>
Until December 31, 2000 (25 days after the commencement of this
offering), all dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters.
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for statements of historical fact, certain information contained
herein constitutes "forward-looking statements," including without limitation
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, as well as all projections of future results. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results or achievements of the
Registrant to be materially different from any future results or achievements of
the Registrant expressed or implied by such forward-looking statements. Such
factors include, but are not limited to the following: the Registrant's limited
operating history and history of losses; the Registrant's dependence on
relationships with joint venture partners; political and economic risks related
to operating in China, including government regulation of the telecommunications
and broadband services industry, the Internet and the cable television industry
in China; the Registrant's ability to enter into joint venture relationships on
acceptable terms; the Registrant's ability to raise additional capital to
finance its growth and to meet its obligations under its joint venture
arrangements; management of growth of the Registrant's operations; the ability
of the Registrant's joint ventures to procure equipment and technical services
to expand the capacity of the joint venture systems; dependence on development
of the Internet in China and the continued growth in use of the Internet
worldwide; acceptance of broadband service offerings through cable television
systems; capacity and systems disruptions of the systems of the Registrant's
joint ventures; risk related to development of technologies related to
delivering broadband services over existing fibre-optic cable television systems
in China; competition in the broadband services industry in China; risks related
to technological change; the Registrant's dependence on key management and
personnel; the Registrant's ability to protect its intellectual property rights;
uncertainty regarding infringing intellectual property rights of others;
security risks and the other risks and uncertainties described under "Risk
Factors" in this prospectus. Certain of the forward looking statements contained
in this prospectus are identified with cross-references to this section and/or
to specific risks identified under "Risk Factors".
We have included projections and estimates in this prospectus, which
are based primarily on management's assessment of our results of operations,
discussions and negotiations with third parties, management's experience, and a
review of information filed by our competitors with the SEC. Investors are
cautioned against attributing undue certainty to management's projections.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1
covering the shares being sold in this offering. We have not included in this
prospectus some information contained in the registration statement, and you
should refer to the registration statement, including exhibits and schedules
filed with the registration statement, for further information. You may review
without charge a copy of the registration statement at the public reference
section of the SEC in Room 1024, Judiciary Plaza, 450 5th Street, N.W.,
Washington, D.C., 20549; and at the SEC's Regional Offices located at 7 World
Trade Center, Suite 1300, New York, New York, 10048, and 1400 Citicorp Center,
500 West Madison Street, Chicago, Illinois, 60661. You may also obtain copies of
such materials at prescribed rates from the public reference section of the SEC
in Room 1024, Judiciary Plaza, 450 5th Street, N.W., Washington, D.C., 20549. In
addition, the SEC maintains a web site on the Internet at WWW.SEC.GOV, which
contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the SEC. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms and
their copy charges.
We furnish our stockholders with annual reports containing financial
statements audited by our independent auditors. We also file annual, quarterly
and current reports, proxy statements and other information with the SEC. You
can also request copies of these documents, for a copying fee, by writing the
SEC, or you may request free copies of any filing by writing or telephoning us
at our principal offices, which are located at the following address:
CHINA BROADBAND CORP.
2080, 440-2 Avenue SW
Calgary, Alberta, Canada T2P 5E9
(403) 234-8885
ATTN: Thomas G. Milne, Chief Financial Officer
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus.
CHINA BROADBAND
We, China Broadband Corp., through our wholly-owned subsidiary, Big Sky
Network Canada Ltd., a British Virgin Islands corporation, are in the process of
entering into cooperative joint venture relationships with government approved
Chinese partners. These joint ventures offer reliable high capacity, high speed
Internet access and services in major urban markets throughout the People's
Republic of China. Each of Big Sky Network's government approved joint venture
partners obtains the required licenses, regulatory approvals and access to
existing cable television optical fibre-coaxial cable systems for the joint
venture. Big Sky Network is an internet technology service provider and provides
financing and equipment, software, installation, training and technical support
services to each joint venture. The joint venture provides broadband (i.e., high
capacity, high speed) data transport and dedicated Internet access to
businesses, individuals, educational institutions and others through existing
cable television optical fibre-coaxial cable systems. In the future, the joint
ventures are expected to provide high speed data transport and Internet access,
advanced Web hosting, co-location, facilities-based Internet transport services
and other enhanced Internet services on a large scale.
As of November 30, 2000, Big Sky Network has formed the following joint
ventures:
- SHEKOU JOINT VENTURE: Shenzhen China Merchants Big Sky Network Ltd.,
a joint venture with Shenzhen, China Merchants Shekou Industrial Zone
Ltd., to provide high-speed Internet access in Shekou, Shenzhen,
Guangdong Province;
- CHENGDU JOINT VENTURE: Sichuan Huayu Big Sky Networks Ltd., a joint
venture with Chengdu Huayu Information Industry Co. Ltd., to provide
high-speed Internet access in Chengdu, Sichuan Province.
- DEYANG JOINT VENTURE: Deyang Guangshi Big Sky Ltd., a joint venture
with Deyang Guangshi Network Development Ltd., to provide high-speed
Internet access in Deyang, Sichuan Province.
Big Sky Network also signed letters of intent with potential joint venture
partners to provide Internet high-speed Internet access through cable television
networks, including the Zhuhai cable television network in Zhuhai, Guandong
Province, the cable television network in the Dalian Metropolitan Network Centre
in Liaoning Province, the Cixi cable television network in Zhejiang Province,
and the Guangzhou Cable Television Station in the Guangzhou Province. We
anticipate that Big Sky Networks will enter into final joint venture agreements
with these joint venture partners and that the joint venture partners will
receive government regulatory approval and licenses for the joint ventures in
the fourth quarter 2000 or first half of 2001. Big Sky Network is also exploring
additional joint venture opportunities in other municipalities throughout China.
China Merchants Shekou, Big Sky Network's joint venture partner in
Shekou, received regulatory approval and the required licenses for the Shekou
joint venture and launched Big Sky Networks' first broadband service in Shekou,
China on June 30, 2000.
Chengdu Huayu Information Industry, Big Sky Network's joint venture
partner in Chengdu, received regulatory approval and the required licenses for
the Chengdu joint venture and launched Big Sky Network's second broadband
service in Chengdu, China on October 26, 2000.
Big Sky Network also entered into a strategic alliance dated July 21,
2000 with Chengdu Huayu Information Co. Ltd. to provide internet technology
services related to the development of a fiber optic network to connect cities
in Sichuan Province.
-3-
<PAGE>
On November 25, 2000, Big Sky Network entered into a cooperative joint
venture agreement with Deyang Guangshi Network Development Ltd., to form Deyang
joint venture. Deyang Guangshi Network Development is currently in the process
of seeking regulatory approval and the required licenses for the Deyang joint
venture to provide high-speed Internet access in Deyang, Sichuan Province.
CORPORATE HISTORY
We were incorporated in Nevada on February 9, 1993 under the name
Institute for Counseling, Inc. On April 14, 2000, Institute for Counseling, Inc.
acquired all of the issued and outstanding shares in the capital of China
Broadband (BVI) Corp., a company incorporated under the laws of the British
Virgin Islands, in consideration for an aggregate of 13,500,000 of our shares of
common stock. Prior to the acquisition, Institute for Counseling, Inc. had
1,509,850 shares of common stock issued and outstanding. As a result of the
acquisition, the former shareholders of China Broadband (BVI) Corp. became the
controlling shareholders of Institute for Counseling, Inc. On April 27, 2000,
Institute for Counseling, Inc. changed its name to "China Broadband Corp."
China Broadband Corp., through China Broadband (BVI) Corp., owns Big
Sky Network Canada Ltd., a British Virgin Islands corporation. The terms "our
company," "we," "us" and "our" in this prospectus refer to China Broadband Corp.
and its subsidiaries. "China Broadband" refers to China Broadband Corp.
China Broadband's common stock has been quoted on the National
Association of Securities Dealers Over-the-Counter Bulletin Board since
September 25, 2000.
The registration statement this prospectus forms a part is the first
public offering of China Broadband securities filed with the Securities and
Exchange Commission.
Our head office address is 2080, 440 -2 Avenue SW., Calgary, Alberta,
Canada, T2P 5E9, and our telephone number is (403) 234-8885. Our subsidiary, Big
Sky Network, has offices located at Room 808, Zhaoshang Building, Shaoshang
Road, 518067 Shekou, Shenzhen, Guangdong, China, and Zongnan Residential Area,
Tai D4, Shenglong Street, Consulate Road, Chengdu, Sichuan 610041 Chengdu,
Sichuan Province, China.
We maintain a World Wide Web site address at WWW.CHINABROADBAND.COM.
Information on our web site is not part of this prospectus.
We have applied for registration of the trademarks "China Broadband" in
the United States. We have also applied for registration of the "China
Broadband" trademark in Canada. All other trademarks or service marks appearing
in this prospectus are trademarks or service marks of the companies that use
them.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS DECEMBER 5, 2000.
-4-
<PAGE>
THE OFFERING
This prospectus covers up to 6,900,657 shares of China Broadband common
stock to be sold by selling stockholders identified in this prospectus. The
selling shareholders acquired the common stock being offered in the following
transactions.
- On April 14, 2000, China Broadband Corp. issued 3,375,000 shares of
common stock to 11 selling shareholders in connection with the
acquisition of China Broadband (BVI) Corp.
- On April 14, 2000, China Broadband issued 500,000 shares of common
stock to 7 investors at $0.20 per share for gross proceeds of
$100,000.
- On May 12, 2000, China Broadband Corp. issued 1,530,000 shares of
common stock to 15 investors at $1.00 per share for gross proceeds of
$1,530,000.
- On May 12, 2000, China Broadband Corp. issued 1,301,667 shares of
common stock to 12 investors at $7.50 per share for gross proceeds of
$9,762,503.
- On November 1, 2000, China Broadband Corp. issued warrants
exercisable to acquire 50,000 shares at $1.00 per share in return for
investor relations services.
- On November 1, 2000, China Broadband Corp. issued warrants
exercisable to acquire 100,000 shares at $7.50 per share to three
warrant holders in connection with consulting and investor relations
services.
- On November 1, 2000, China Broadband Corp. issued warrants
exercisable to acquire 50,790 shares at $7.50 per share to one
warrant holder as a Financial Advisory Fee in connection with our
acquisition of SoftNet's 50% interest in Big Sky Network.
SHARES OFFERED BY THE SELLING 6,900,657 shares of common stock, $0.001
SECURITYHOLDERS par value per share
OFFERING PRICE Determined at the time of sale by the
selling shareholders
COMMON STOCK OUTSTANDING AS OF 19,474,517 shares
NOVEMBER 30, 2000
COMMON STOCK OUTSTANDING ASSUMING 19, 675,307 shares.
THE MAXIMUM NUMBER OF SHARES ARE
SOLD PURSUANT TO THIS OFFERING Assuming conversion of the warrants into
shares of common stock registered under
this prospectus, the shares of common
stock subject to this prospectus
represent approximately 35.11% of our
issued and outstanding common stock as
of November 30, 2000.
NUMBER OF SHARES OWNED BY THE SELLING 0 shares. (1)
SHAREHOLDERS AFTER THE OFFERING
USE OF PROCEEDS We will not receive any of the proceeds
of the shares offered by the selling
shareholders.
We intend to use the proceeds from the
exercise of the warrants, if exercised,
held by certain selling shareholders for
working capital
-5-
<PAGE>
purposes.
DIVIDEND POLICY We currently intend to retain any future
earnings to fund the development and
growth of our business. Therefore, we do
not currently anticipate paying cash
dividends. See "Dividend Policy."
OTC BULLETIN BOARD SYMBOL CBBD
(1) This number assumes that each shareholder will sell all of its shares
available for sale during the effectiveness of the registration statement
that includes this prospectus. Shareholders are not required to sell their
shares. See "Plan of Distribution."
Unless otherwise specifically stated, information throughout this
prospectus excludes:
- 4,775,000 shares issuable upon the exercise of outstanding options;
- 200,790 shares issuable upon the exercise of outstanding warrants;
and
- 3,225,000 shares reserved for future issuance under our stock option
plan.
-6-
<PAGE>
SUMMARY FINANCIAL DATA
PERIOD FROM INCEPTION
(FEBRUARY 1, 2000) THROUGH
SEPTEMBER 30, 2000
------------------------------
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 208,333
Loss from operations.................. $ (1,144,281)
Net loss.............................. $ (1,076,577)
Basic and diluted loss per common
share.............................. $ (0.06)
Book and diluted weighted average
common shares outstanding.......... 17,023,688
AS OF
SEPTEMBER 30, 2000
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 7,191,845
Working capital....................... $ 5,637,608
Total assets.......................... $ 21,451,624
Long-term obligations................. -
Total stockholders' equity............ $ 19,522,850
China Broadband Corp. acquired all of the issued and outstanding shares of China
Broadband (BVI) Corp. in exchange for 13,500,000 shares of its common stock on
April 14, 2000. Because China Broadband Corp. had only 1,509,850 (post
reverse-split) shares issued and outstanding on the date of our acquisition, the
former shareholders of China Broadband (BVI) acquired 90% control of China
Broadband Corp. In instances like this, accounting principles require that the
transaction be reflected in financial statements as a reverse acquisition of the
parent, China Broadband Corp., by the shareholders of China Broadband (BVI)
Corp. as the shareholders of China Broadband (BVI) Corp. owned a majority of the
combined company at acquisition date. In this case, common control started
immediately after the completion of the acquisition, effectively April 14, 2000.
Consequently, under the principles of reverse acquisition accounting China
Broadband (BVI) Corp. was deemed to be the acquiror of the Company and the
consolidated financial statements of China Broadband Corp., the legal parent,
are presented as a continuation of the financial position and results from
operations of China Broadband (BVI) Corp., the legal subsidiary.
-7-
<PAGE>
RISK FACTORS
RISKS RELATING TO CHINA BROADBAND
WE HAVE NO OPERATING HISTORY AND HAVE INCURRED NET LOSSES SINCE INCEPTION AND
ANTICIPATE THAT LOSSES WILL CONTINUE.
We were incorporated in Nevada in February 1993 and did not engage in our
current business activities until April 2000, when we acquired China Broadband
(BVI). China Broadband (BVI) had acquired an interest in Big Sky Network in
February 2000. We, China Broadband (BVI) and Big Sky Network have no operating
histories upon which you may evaluate our business and prospects. We have
incurred losses since inception and had an accumulated deficit of $1,076,577 as
of September 30, 2000. We anticipate that we will continue to incur net losses
due to a high level of planned operating and capital expenditures, increased
sales and marketing costs, additional personnel hires and our general growth
objectives. Our net losses will increase in the future and we may never achieve
or sustain profitability.
In addition, our senior management and employees have worked together at our
company for only a short period of time. As an early stage company in the new
and rapidly evolving market for broadband Internet access services, we face
numerous risks and uncertainties. Some of these risks relate to our ability to:
o deploy our services in a cost effective manner;
o enter into additional agreements with joint venture partners to
expand our services to new markets; and
o our ability to finance our expansion.
Our financial success will depend on the commercial acceptance and profitability
of our services. If we are unsuccessful in addressing these risks or in
executing our business strategy, our business and financial results will suffer.
If we encounter significant problems with our billing and collection process,
our business, financial condition and results of operations could be materially
and adversely affected.
WE AND OUR SHAREHOLDERS MAY BE ADVERSELY AFFECTED BY PEOPLE'S REPUBLIC OF CHINA
(PRC) GOVERNMENT REGULATION OF INTERNET COMPANIES
Our entire Internet business in China will be conducted by Big Sky Network
through joint ventures that we have established or will establish in China with
Chinese enterprises. Big Sky Network was incorporated in the British Virgin
Islands and is a foreign person under PRC law. The legality of foreign
investment in the PRC Internet sector, the various businesses and activities of
Internet companies in China and the issuance of securities by foreign companies,
such as China Broadband, that invest in PRC Internet businesses are all subject
to various issues, risks and uncertainties. Jun He Law Office, our PRC counsel,
is of the opinion that our business activities in China and the issuance of our
securities do not violate any existing PRC laws or regulations; however, the
interpretation of existing PRC laws and regulations is subject to uncertainty
and new PRC laws and regulations relating to the Internet sector will be adopted
in the future.
The issues, risks and uncertainties relating to PRC government regulation of the
PRC Internet sector include the following:
o Officials of the PRC Ministry of Information Industry (MII), have
recently stated publicly that foreign investment is prohibited in
the PRC Internet sector, including in Internet service providers
and Internet content providers.
-8-
<PAGE>
o MII officials have also stated that the offering of securities to
the public by foreign companies that invest in the PRC Internet
businesses may require the approval of MII.
o MII has also stated recently adopted new laws or regulations
governing foreign investment in the PRC Internet sector, which are
intended to clarify the restrictions on foreign ownership and
involvement in the telecommunications and related industries in
China. We do not believe that these new laws and regulations will
have an adverse affect on our business or joint ventures.
o Under agreements reached in 1999 and 2000 between China and each of
the United States, Canada and the European Union respectively,
concerning their respective support for China's entry into the
World Trade Organization (WTO), foreign investment in PRC Internet
services will be liberalized at the same rate as will apply to
other key telecommunications services. In addition, the agreement
provides that key telecommunication services in China will be
subject to a foreign ownership limit of 49% for the first two years
after China's entry into the WTO and 50% thereafter. We do not know
if these agreements will in fact be implemented or the timing
thereof or the terms of any new laws or regulations resulting from
such implementation.
o In October 2000, the PRC adopted new laws and regulations governing
internet access and the provision of online business, economic and
financial information. Current or proposed laws aimed at limiting
the use of online services could, depending upon interpretation and
application, result in significant uncertainty to the Corporation,
additional costs and technological challenges in order to comply
with any statutory or regulatory requirements imposed by such
legislation. Additional legislation and regulations that may be
enacted by the government of the PRC could have an adverse affect
on the Corporation's business, financial condition and results of
operations.
The interpretation and application of existing PRC laws and regulations, the
stated positions of MII and the implementation of new laws or regulations create
substantial uncertainties regarding the legality of existing and future foreign
investments in, and the businesses and activities of, PRC Internet businesses,
including our business.
Jun He Law Office is of the opinion that the business activities that we plan to
conduct through the Shekou Joint Venture and the Chengdu joint venture, the
ownership structure of the joint venture between Big Sky Network and China
Merchants Shekou Industrial Zone Ltd., the ownership structure of the joint
venture between Big Sky Network and Chengdu Huayu Information Industry Co. Ltd.,
and the issuance of securities by our company does not violate or breach any of
the existing laws, rules and regulations of China, and no consent, approval or
licence other than those already obtained are required under any of the existing
laws, rules and regulations of China for such business activities, ownership
structure or issuances of securities. We plan to expand our business from Shekou
and Chengdu to other parts of China by establishing joint ventures that will
conduct business activities similar to those conducted by the Shekou and Chengdu
joint venture on similar terms and conditions and using similar ownership
structures.
We cannot assure you that the PRC government will not take a contrary view to
the opinions of our PRC counsel. It is possible that the relevant PRC
authorities could, at any time, assert that any portion or all of our existing
or proposed business activities, the ownership structure of our Chinese joint
ventures or the issuance of our securities, violate existing or future PRC laws
and regulations. It is also possible that the new laws or regulations governing
the PRC Internet sector that may be adopted in the future will prohibit or
restrict foreign investment in, or other aspects of, any of our current or
proposed business activities or require governmental approvals relating to the
issuance of our securities. In addition, these new laws and regulations may be
retroactively applied to us. For example, China's potential entry into the WTO
will likely affect the terms of any new laws and regulations, and may result in
the PRC government adopting a 49% or 50% limit on foreign investment in Internet
businesses, as well as affect the interpretation of existing regulations
relating to the PRC Internet sector. Furthermore, MII's positions set forth in
the statements discussed above may become the official PRC government policy,
which may result in new laws or regulations prohibiting any of our existing or
proposed business activities, the ownership structure of our existing or future
joint venture or the issuances of our securities.
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If we are found to be in violation of any existing or future PRC laws or
regulations, the relevant PRC authorities would have broad discretion to deal
with such a violation, including, without limitation, do any of the following:
o levy fines;
o revoke the business licences of our Chinese joint ventures;
o require us to restructure our ownership structure or operations;
and/or
o require us to discontinue any portion or all of our Internet
business or our investment in the Chinese joint ventures.
Any such action would have a material adverse effect on our business, financial
condition and results of operations and on our shareholders. See "Regulation of
the PRC Internet Industry".
WE ARE DEPENDENT UPON JOINT VENTURES WITH GOVERNMENT APPROVED CHINESE JOINT
VENTURE PARTNERS, AND WE MAY NOT BE ABLE TO ESTABLISH OR MAINTAIN GOOD
RELATIONSHIPS WITH THEM
Establishing and maintaining joint ventures with government approved Chinese
joint venture operators with the ability to gain access to cable television
networks is critical to our subsidiary's, Big Sky Network, ability to enter into
additional joint ventures and to generate sufficient revenues to meet its
ongoing joint venture obligations and its working capital needs. Big Sky
Network's Chinese joint venture partners obtain government regulatory approval,
licenses and permits and access to cable television networks that allow the
joint ventures to deliver broadband Internet access services to subscribers
through existing fibre-optic cable television systems. Big Sky Network is an
internet technology service provider and provides financing and equipment,
software, installation, training and technical support services to each joint
venture. Under existing Chinese law and regulations, neither we nor Big Sky
Network are eligible to own cable networks or to obtain the licenses necessary
to deliver broadband services in China. If we and/or Big Sky Network are unable
to maintain good relationships with government approved joint-venture partners,
the ability of such joint ventures to deliver broadband services and to generate
revenues from subscriptions will be materially adversely affected.
We believe we will receive almost all our revenues from service fees earned by
Big Sky Network for internet technology services, and a percentage of the
profits from such joint venture. Given the contractual and business
relationships between Big Sky Network and its various government approved joint
venture partners, the joint venture partners' interests may not always coincide
with our interests, and conflicts of interest concerning the payment of service
fees, division of profits, if any, and other matters may arise, which may
adversely affect these joint venture relationships. Because we do not yet have a
significant number of subscribers, we cannot determine whether the subscription
rates, revenue streams and the other economic aspects of the distribution of
cable-based broadband services will be sufficiently attractive to encourage a
sufficient number of potential joint venture partners to enter into joint
ventures with Big Sky Network.
In addition, our dependence on establishing and maintaining joint ventures
exposes us to other risks such as:
o the difficulty of identifying appropriate joint venture partners
with access to cable television network and the ability to obtain
government approval and licensing;
o the time our senior management must spend negotiating agreements
and monitoring joint venture activities;
o the possibility that we may not be able to reach agreement on
definitive agreements, including with potential joint venture
partners with whom we have signed letters of intent;
o the nature and extent of the required investment of our capital and
the loss of control over the return of this capital;
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o the inability of management to capitalize on the growth
opportunities presented by joint ventures;
o the insolvency of any joint venture partner; and
o our lack of control over our joint venture partner's development
and maintenance of the cable television network in which the joint
venture delivers broadband services.
We cannot assure you that we would be successful in overcoming these risks or
any other problems encountered with these joint ventures.
OUR BUSINESS DEPENDS ON THE ABILITY OF OUR JOINT VENTURE PARTNERS TO OBTAIN AND
MAINTAIN THEIR INTERNET OPERATING PERMITS AND TO LEASE BANDWIDTH
Under our business plan, our joint venture customers will access the Internet
through the cable television networks of our joint venture partners, who, in
turn, must lease bandwidth from China Telecom or other international gateway to
the Internet. If any of our joint venture partners fails to obtain or maintain
its Internet operating permit or fails to lease bandwidth from an international
gateway to the Internet, we would not be able to serve our subscribers through
its cable system. We cannot assure you that our joint venture partners will be
able to maintain Internet operating permits or will be able to lease such
bandwidth on acceptable terms or on a timely basis or at all. In addition, we
will have no means of securing access to alternative networks and services, on a
timely basis or at all, in the event of any disruption or failure of the
network.
WE MAY NOT BE ABLE TO RETAIN EXCLUSIVE AGREEMENTS WITH OUR JOINT VENTURE
PARTNERS
Our joint venture partners may be required by law or choose to grant our
competitors access to their cable systems. In that event:
o Internet and online service providers could potentially provide
services over these joint venture partners' cable systems that
compete with our services;
o our rights as the exclusive broadband Internet access provider over
these joint venture partners' systems could be lost; and
o our business, financial condition and results of operations would
likely be adversely affected.
WE MAY NEED ADDITIONAL CAPITAL AND WE MAY NOT BE ABLE TO OBTAIN IT
Our capital requirements are difficult to plan in light of our current
obligations to the Shekou joint venture and the Chengdu joint venture, and our
intent to enter into new joint ventures through our subsidiary, Big Sky Network.
Currently, the Chengdu joint venture and the Deyang joint venture obligate Big
Sky Network to make additional capital expenditures of $4 million and $4.5
million over the next three years, respectively. We believe that our current
cash and cash equivalents and cash flow from operations will be sufficient to
meet our anticipated needs, including working capital and capital expenditures,
through at least June 30, 2001. However, future market conditions or other
developments may cause us to require additional funds.
In addition, we will require additional capital to fund the establishment of new
joint ventures, the expansion of services that we will provide and our business
development and marketing activities. Big Sky Network also signed letters of
intent with potential joint venture partners to provide Internet high-speed
Internet access through cable television networks, including the Zhuhai cable
television network in Zhuhai, Guandong Province, the cable television network in
the Dalian Metropolitan Network Centre in Liaoning Province, the Cixi cable
television network in Zhejiang Province and the Guangzhou Cable Television
Station in the Guangzhou Province. We anticipate that Big Sky Network will enter
into final joint venture agreements with these joint venture partners and that
each joint venture will require us to make a capital contribution of at least
$500,000. We cannot assure you that
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we will have sufficient working capital to make these capital contributions or
to fund our obligations under our existing joint venture relationships.
Our ability to obtain additional financing in the future is subject to a variety
of uncertainties, including:
o the ability of our existing joint partnership arrangements to
successful market and obtain subscribers for their respective
broadband services;
o the revenues generated from existing joint venture operations and
the profitability, if any, of such joint ventures;
o our future results of operations, financial condition and cash
flows;
o the amount of capital that other PRC entities may seek to raise in
foreign capital markets;
o economic, political and other conditions in China, including the
impact of PRC's admission to the WTO, if applicable, on the
broadband industry in China;
o PRC governmental policies relating to foreign currency borrowings;
and
o PRC governmental regulation of foreign investment in Internet
related companies.
Our inability to raise additional funds on terms favorable to us, or at all, may
have a material adverse effect on our business, financial condition and results
of operations. For more information on our capital and financing requirements,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources".
IF WE FAIL TO MANAGE OUR PLANNED GROWTH, OUR BUSINESS MIGHT BE HARMED
To manage our anticipated growth, we must continue to:
o implement and improve our operational, financial and management
information systems;
o hire, train and retain additional qualified personnel, including
management with experience in developing and managing an
organization consisting of a number of joint venture partnerships
and operating under in a highly regulated industry;
o continue to expand and upgrade core technologies; and
o effectively manage our relationships among joint venture partners,
governmental agencies, suppliers, service providers and other third
parties.
The expansion of our organization could place a significant strain on our
ability to deliver quality support services to our joint venture partnerships
and our operational, marketing, administration and other resources. We
anticipate that each joint venture will establish its own marketing, sales,
subscriber support and administrative systems, and that Big Sky Network will
provide training and support for such systems. Big Sky Network could experience
difficulties providing training and support for such systems as our organization
expands and as each joint venture grows. If Big Sky Network is unable to provide
training and support, the implementation process for establishing these systems
will be longer and customer satisfaction may be lower. There can be no assurance
that the systems established by Big Sky Network or its joint ventures, including
administrative procedures or controls will be adequate to support our operations
or that our management will be capable of exploiting fully the market for
broadband services in China. The failure to manage growth effectively or develop
systems that permit such growth could have a material adverse effect on our
business, financial condition and results of operations.
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OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY DIFFER FROM
MARKET EXPECTATIONS
A high proportion of the expenses related to each joint venture, particularly
bandwidth leasing costs and employee compensation, are fixed and the quarterly
and annual operating results of each joint venture may vary significantly in the
future as a result of factors beyond its control. Consequently, while we do not
believe that quarter-to-quarter comparisons of our operating results are a good
indication of our future performance, our operating results in some future
quarter may be below the expectations of public market analysts and investors
and cause the trading price of our common stock to fall.
Factors which may cause fluctuations in our revenues and earnings include, among
other things:
o amount and timing of capital expenditures and other significant
costs;
o introduction of new products or services;
o pricing and other changes in our industry; and
o technical difficulties we may encounter.
WE DEPEND ON KEY PERSONNEL AND OUR BUSINESS MAY SUFFER IF WE LOSE THE SERVICES
OF OUR KEY EXECUTIVES
Our future success is heavily dependent upon the continued service of our key
executives, particularly the founders of our company, Mr. Matthew Heysel (our
Chairman and Chief Executive Officer) and Mr. Daming Yang (our President). We
rely on their expertise in our business operations and on their personal
relationships with our shareholders, existing and potential joint venture
partners, the relevant regulatory authorities and our suppliers. If one or more
of our key executives were unable or unwilling to continue in their present
positions, we may not be able to easily replace them, and our business,
financial condition and results of operations may be materially and adversely
affected. In addition, if any of these key executives joins a competitor or
forms a competing company, we may lose customers and suppliers and incur
additional expenses to recruit and train personnel. Mr. Matthew Heysel and Mr.
Daming Yang each entered into a confidentiality, non-competition and
non-solicitation agreement with us. We do not maintain key-man life insurance
for any of our key executives.
RAPID GROWTH AND A RAPIDLY CHANGING OPERATING ENVIRONMENT STRAIN OUR LIMITED
RESOURCES
We have limited operational, administrative and financial resources, which may
be inadequate to sustain the growth we want to achieve. As the demands of Big
Sky Network increases with the number of joint ventures and the increased size
of such joint venture operations, our obligations to these joint ventures may
increase substantially and we will need to increase our investments in our
management, administration, marketing and support organizations. If we are
unable to manage our growth and expansion effectively, the quality of our
services and the service levels and offerings of Big Sky Network's joint
ventures could deteriorate and our business and results of operations may
suffer. Our future success will depend on, among other things, our ability and
the ability of Big Sky Network's joint ventures to:
o to develop, maintain and improve the quality of services to the end
users;
o continue training, motivating and retaining existing employees and
attracting and integrating new employees; and
o developing and improving administrative, operational, financial,
accounting and other internal systems and controls.
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WE RELY ON INCOME FROM DIVIDENDS AND OTHER DISTRIBUTIONS PAID BY OUR JOINT
VENTURE TO FUND ANY CASH REQUIREMENTS WE MAY HAVE
We operate our business through Big Sky Network, the company through which we
hold all our joint venture interests in China. We will rely on dividends and
other distributions paid by our Chinese joint ventures to Big Sky Network for
our cash requirements, including the funds necessary to service any debt we may
incur. In addition, under the terms of our standard joint venture agreements,
Big Sky Network will lose the right to appoint a majority of the directors of
its joint ventures in or about the fifth year of the joint venture term and will
not be able to control any joint venture over the entire joint venture term. If
any of our existing or future joint ventures incurs debt on its own behalf in
the future, the instruments governing the debt may restrict its ability to pay
dividends or make other distributions to us. In addition, PRC legal restrictions
permit payment of dividends by a sino-foreign joint venture only out of its net
income, if any, determined in accordance with PRC accounting standards and
regulations. Under PRC law, a sino-foreign joint venture will also be required
to set aside a portion of its net income each year to fund certain reserve
funds. These reserves are not distributable as cash dividends.
RISKS RELATING TO OUR MARKETS
OUR SUCCESS WILL DEPEND ON PUBLIC ACCEPTANCE OF BROADBAND INTERNET SERVICES,
WHICH REMAINS UNPROVEN IN CHINA
The market for Internet services in China has only recently begun to develop.
Our future results of operations from access services will depend substantially
upon the increased use of the Internet in China for information, publication,
advertising, entertainment, distribution and commerce. Despite growing interest
in the commercial possibilities for the Internet, businesses and consumers in
China may be deterred from purchasing Internet access services for the following
reasons:
o inconsistent quality of service;
o lack of availability of cost-effective service;
o a limited number of local access points for corporate users;
o the need to deal with multiple and frequently incompatible vendors;
and
o a lack of tools to simplify Internet access and use.
The adoption of the Internet for commerce and communications, particularly by
those individuals and enterprises that have historically relied upon alternative
means of commerce and communication, generally requires understanding and
acceptance of a new way of conducting business, promoting products and services
and exchanging information. Many of those individuals and enterprises, however,
may have limited experience with the Internet and may be reluctant to adopt the
Internet as a tool for commerce and communication.
Critical issues concerning the commercial use of the Internet in China such as
security, reliability, cost, ease of deployment, administration and quality of
service may affect the adoption of the Internet to solve business needs. For
example, the cost of access may prevent many potential users in China from using
the Internet. In addition, consumers will have to be confident that adequate
security measures will prevent fraud and protect electronic sale transactions
conducted over the Internet.
Various government entities and businesses are working to resolve these
fulfillment and payment problems, but these problems are expected to continue to
hinder the acceptance and growth of the Internet as a commerce platform in
China, which could in turn adversely affect our business, financial condition
and results of operations.
BIG SKY NETWORK'S JOINT VENTURES MAY NOT BE ABLE TO ATTRACT AND RETAIN
SUBSCRIBERS AND, AS A RESULT, OUR REVENUES MAY DECLINE
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The ability of each of Big Sky Network's joint ventures to attract residential
and commercial subscribers to its services, increase the number of residential
and commercial subscribers and to retain subscribers will depend on a number of
factors, many of which are beyond their control. These factors include:
o the speed at which we are able to deploy their services,
particularly if they cannot obtain on a timely basis adequate
supplies of cable modems or necessary telecommunications circuitry;
o the impact of our marketing efforts on new and existing
subscribers; and
o the willingness of joint venture partners with access to cable
television network systems to enter into or to continue joint
venture relationships.
In addition, Big Sky Network's joint ventures' service is currently priced at a
premium to many other Internet access services and in the future, the joint
ventures may charge subscribers higher access fees after joint venture partners
upgrade their cable systems from one-way systems to two-way systems. Many
subscribers may not be willing to pay a premium for such service. Because of
these factors, joint venture actual revenues or the rate at which they will add
new subscribers may differ from period to period. It is difficult to predict
whether:
o the joint venture pricing model will prove to be viable;
o demand for joint venture services will materialize at the prices
they expect to charge; or
o current or future pricing levels will be sustainable.
If such pricing levels are not achieved or sustained or if joint venture
services do not achieve or sustain broad market acceptance, our business,
financial condition and results of operations will be materially and adversely
affected. As of November 30, 2000, we had approximately 1,000 subscribers to our
broadband Internet access business.
WE FACE INTENSE COMPETITION WHICH COULD REDUCE OUR MARKET SHARE AND ADVERSELY
AFFECT OUR FINANCIAL PERFORMANCE
The market for Internet services in China is intensely competitive. In addition,
the Internet industry is relatively new and constantly evolving and subject to
continuing definition. As a result, our competitors may better position
themselves to compete in this market as it matures. There are many companies
that provide or may provide Internet access and related services to users in
China. Some of our major competitors in China are major Chinese Internet service
providers, such as China Telecom, Jitong, and Unicom, as well as large foreign
Internet service providers companies such as AT&T, some of whom or may become
that are affiliated with large Chinese corporations such as PCCW Communications
and Wharf. These competitors may have certain advantages over Big Sky Network's
joint ventures, including:
o substantially greater financial and technical resources;
o more extensive and well developed marketing and sales networks;
o greater brand recognition among consumers;
o larger customer bases;
o longer operating histories; and
o more established relationships with joint venture partners,
equipment specialists and/or other strategic partners
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With these advantages, Big Sky Network's joint ventures' competitors may be
better able to:
o develop, market and sell their products and services;
o adapt more quickly to new and changing technologies; and
o more easily obtain new customers.
We also compete with other broadband technologies, including integrated services
digital network, digital subscriber line, wireless and satellite data services.
We also compete with traditional narrow band Internet service providers, which
provide basic Internet access to residential and commercial users and
businesses, generally using existing telephone networks. While not offering the
advantages of broadband Internet access, these services are widely available and
less expensive. We believe that China Telecom is the major competitor of Big Sky
Network's joint ventures in the traditional Internet service market. Moreover,
competitors with high-speed telecommunications technologies are offering
diversified packages of telecommunications services, including Internet access,
and could bundle these services together, putting Big Sky Network's joint
ventures at a competitive disadvantage. Widespread commercial acceptance of any
of these competing technologies or competitors' products could significantly
reduce the potential customer base for the services of Big Sky Network's joint
ventures, which could have a material adverse effect on our business, financial
condition and results of operations.
THE GROWTH OF BIG SKY NETWORK'S JOINT VENTURES WITHIN THE INTERNET MARKET IN
CHINA DEPENDS ON THE ESTABLISHMENT OF AN ADEQUATE TELECOMMUNICATIONS
INFRASTRUCTURE BY THE PRC GOVERNMENT
The telecommunications infrastructure in China is not well developed. In
addition, access to the Internet is accomplished primarily by means of the
Internet backbones of separate national interconnecting networks that connect
through several international gateways to the Internet outside of China. The
Internet backbones and international gateways are owned and operated by the
Chinese government and are the only channels through which the domestic China
Internet network can connect to the international Internet network. Although
private sector Internet service providers exist in China, almost all access to
the Internet is accomplished through ChinaNet, China's primary commercial
network, which is owned and operated by the Chinese government. Big Sky
Network's joint ventures rely on this backbone, China Telecom, China NetCom or
Jitong to provide communications capacity primarily through local
telecommunications lines. As a result, we will continue to depend on the Chinese
government and state-owned enterprises to establish and maintain a reliable
Internet and telecommunications infrastructure through which Big Sky Network's
joint ventures can access the Internet and connect their customers. We cannot
assure you that the Internet infrastructure in China will support the demands
associated with continued growth. If the necessary infrastructure standards or
protocols or complementary products, services or facilities are not developed by
the Chinese government and state-owned enterprises, our business, financial
condition and results of operations could be materially and adversely affected.
WE ANTICIPATE THAT PRICES FOR INTERNET SERVICES IN CHINA WILL DECLINE
We anticipate that prices for the services of Big Sky Network's joint ventures
will decline over the next several years, due primarily to the following:
o price competition as various Internet service providers complete
construction of networks or alternative Internet access services
that will compete with Big Sky Network's joint ventures;
o technological advances that will increase competition and capacity
for Internet services in China; and
o strategic alliances or similar transactions, such as purchasing
alliances, that increase the purchasing power of customers and
competitors.
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POLITICAL, ECONOMIC AND REGULATORY RISKS
THE BUSINESS OF BIG SKY NETWORK MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT
REGULATIONS AND LEGAL UNCERTAINTIES AFFECTING THE INTERNET THAT COULD ADVERSELY
AFFECT OUR BUSINESS
The legal and regulatory environment in China that pertains to the Internet is
uncertain and may change. Because many Chinese laws, regulations and legal
requirements with regard to the Internet are relatively new and untested, their
interpretation and enforcement may involve significant uncertainty. In addition,
the Chinese legal system is a civil law system in which decided legal cases have
limited binding force as legal precedents. Uncertainty and new regulations could
increase the costs of doing business or prevent Big Sky Network's joint ventures
from delivering broadband services in China. The growth of the Internet in China
may also be slowed significantly. This could delay the increase in demand for
Big Sky Network joint ventures' services and limit the growth of our revenues.
In addition to new laws and regulations being adopted, existing laws may be
applied to the Internet. New and existing laws may address the following issues,
among others:
o foreign investment;
o sales and other taxes; (including import duties)
o pricing controls;
o e-commerce
o characteristics and quality of products and services;
o consumer protection;
o national security and public safety; and
o claims based on the nature and content of Internet materials.
Foreign-investment enterprises, such as Big Sky Network existing and future
Chinese joint ventures, are not currently permitted to hold Internet operating
permits and neither we nor Big Sky Network hold any such permits. Big Sky
Network's business is dependent upon its Chinese partners being able to obtain
and maintain Internet operating permits and licenses. We cannot provide
assurance that Big Sky Network, its existing or future Chinese joint ventures or
Big Sky Network's Chinese joint venture partners will be able to obtain any
necessary permit or licence required in the future, or that future changes in
Chinese government policies affecting the provision of Internet access services,
will not impose additional regulatory requirements on Big Sky Network, its
Chinese joint ventures, its Chinese joint venture partners or its service and
equipment providers. Changes in the regulatory environment may intensify
competition in the Chinese Internet industry or otherwise have a material
adverse effect on our business, financial condition and results of operations.
REGULATION AND CENSORSHIP AFFECT THE BUSINESS OF BIG SKY NETWORK'S JOINT
VENTURES
China has enacted regulations governing Internet access and the distribution of
news and other information. Furthermore, the Propaganda Department of the
Chinese Communist Party has been given the responsibility to censor news
published in China to ensure, supervise and control proper political ideology.
In addition, MII has published implementing regulations that subject online
information providers to potential liability for content included on their
portals and the actions of subscribers and others using their systems, including
liability for violation of Chinese laws prohibiting the distribution of content
deemed to be socially destabilizing. Periodically, the Ministry of Public
Security has stopped the distribution over the Internet of information which it
believes to be socially destabilizing. The Ministry of Public Security has the
authority to cause any local Internet service provider to block any Web site
maintained outside China at its sole discretion. If the PRC government were to
take any
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action to limit or eliminate the distribution of information through the
Internet, such action could impede the expected growth in the use of the
Internet in China and have a material adverse effect on Big Sky Network's
business and financial condition and our results of operations.
POLITICAL AND ECONOMIC POLICIES OF THE PRC GOVERNMENT COULD AFFECT THE BUSINESS
OF BIG SKY NETWORK
All of our business, assets and operations are located in China and all of our
revenues are derived from the operations of Big Sky Network in China.
Accordingly, our business, financial condition and results of operations are
affected to a significant degree by economic, political and legal developments
in China. Changes in political, economic and social conditions in China,
adjustments in PRC government policies or changes in laws and regulations could
adversely affect our business, financial condition and results of operations.
THERE ARE ECONOMIC RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA
The PRC economy has experienced significant growth in the past decade, but such
growth has been uneven across geographic and economic sectors and has recently
been slowing. There can be no assurance that such growth will not continue to
decrease or that any slow down will not have a negative effect on our business.
The PRC economy is also experiencing deflation which may continue in the future.
The current economic situation may adversely affect our profitability over time
as expenditures for advertisements may decrease due to the results of slowing
domestic demand and deflation. In addition, the international financial markets
in which the securities of the PRC government, agencies and private entities are
traded also have experienced significant price fluctuations upon speculation
that the PRC government may devalue the Renminbi which could increase the costs
of Big Sky Network's business relative to its PRC revenues.
The economy of China differs from the economies of most countries belonging to
the Organization for Economic Cooperation and Development in a number of
respects, including:
o structure;
o level of government involvement;
o level of development;
o level of capital reinvestment;
o growth rate;
o control of foreign exchange; and
o methods of allocating resources.
Since 1949, China has primarily been a planned economy subject to a system of
macroeconomic management. Although the Chinese government still owns the
majority of productive assets in China, economic reform policies since the late
1970s have emphasized decentralization, autonomous enterprises and the
utilization of market mechanisms. Although we believe that economic reform and
the macroeconomic measures adopted by the Chinese government have had a positive
effect on economic development in China, we cannot predict what effects these
measures may have on our business or results of operations. We also cannot
predict the effect China's expected membership in the WTO will have on the
regulatory environment for the Internet industry.
THE PRC LEGAL SYSTEM EMBODIES UNCERTAINTIES WHICH COULD LIMIT THE LEGAL
PROTECTIONS AVAILABLE TO US, BIG SKY NETWORK AND YOU
The PRC legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have little
precedential value. In 1979, the PRC government began to promulgate a
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comprehensive system of laws and regulations governing economic matters in
general. The overall effect of legislation over the past 20 years has
significantly enhanced the protections afforded to various forms of foreign
investment in mainland China. Big Sky Network's existing and future Chinese
joint ventures will be subject to laws and regulations applicable to foreign
investment in mainland China in general and laws and regulations applicable to
sino-foreign joint ventures in particular. However, these laws, regulations and
legal requirements are relatively recent, and their interpretation and
enforcement involve uncertainties. These uncertainties could limit the legal
protections available to us and other foreign investors, including you. In
addition, we cannot predict the effect of future developments in the PRC legal
system, particularly with regard to the Internet, including the promulgation of
new laws, changes to existing laws or the interpretation or enforcement thereof,
or the preemption of local regulations by national laws.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT BIG SKY NETWORK ABILITY TO UTILIZE
ITS REVENUES EFFECTIVELY
Substantially all of the revenues and operating expenses of Big Sky Network are
denominated in Renminbi. The Renminbi is currently freely convertible under the
"current account", which includes dividends, trade and service-related foreign
exchange transactions, but not under the "capital account", which includes
foreign direct investment.
Currently, sino-foreign joint ventures, such as the Shekou joint venture and the
Chengdu joint venture, may purchase foreign exchange for settlement of "current
account transactions", including payment of dividends, without the approval of
the State Administration for Foreign Exchange ("SAFE"). Sino-foreign joint
ventures, such as the Shekou Chengdu and Deyang joint ventures, may also retain
foreign exchange in its current account (subject to a ceiling approved by the
SAFE) to satisfy foreign exchange liabilities or to pay dividends. However, we
cannot assure you that the relevant PRC governmental authorities will not limit
or eliminate our or Big Sky Network's ability to purchase and retain foreign
currencies in the future.
Since a significant amount of Big Sky Network's future revenues will be in the
form of Renminbi, the existing and any future restrictions on currency exchange
may limit Big Sky Network's ability to utilize revenue generated in Renminbi to
fund its and our business activities outside China, if any, or expenditures
denominated in foreign currencies.
Foreign exchange transactions under the capital account are still subject to
limitations and require approvals from the SAFE. This could affect the ability
of our existing or future Chinese joint ventures to obtain foreign exchange
through debt or equity financing, including by means of loans or capital
contributions from Big Sky Network.
WE MAY SUFFER CURRENCY EXCHANGE LOSSES IF THE RENMINBI DEPRECIATES RELATIVE TO
THE U.S. DOLLAR
Our reporting currency is the U.S. Dollar. However, through Big Sky Network
substantially all of our, assets and revenues are denominated in Renminbi. Our
assets and revenues as expressed in our U.S. Dollar financial statements will
decline in value if the Renminbi depreciates relative to the U.S. Dollar. Any
such depreciation could adversely affect the market price of our common stock.
Very limited hedging transactions are available in China to reduce our exposure
to exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedges may be limited and we may not be
able to successfully hedge our exposure at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that
restrict our ability to convert Renminbi into U.S. Dollars.
RISKS RELATING TO OUR TECHNOLOGIES
THE INTERNET MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES, AND THE
TECHNOLOGIES USED BY BIG SKY NETWORK'S JOINT VENTURES MAY NOT BE POPULAR AND MAY
BECOME OBSOLETE
The market for our Internet access services is characterized by rapid
technological advances, evolving industry standards, changes in user
requirements and frequent new service introductions and enhancements. For
example, a
-19-
<PAGE>
number of broadband technologies, such as asymmetrical digital subscriber line
services, have demonstrated competing technological advantages against the
broadband Internet access services offered by Big Sky Network joint ventures and
may become more popular products with subscribers in the future. If technologies
or standards applicable to the services offered by Big Sky Network joint
ventures become obsolete or fail to gain widespread consumer acceptance, then
Big Sky Network's business and our financial results will be materially and
adversely affected. We cannot assure you that the introduction of new products
or services or the emergence of new technologies will not enable competitors to
provide Internet access to Big Sky Network's customers at a lower cost, higher
speed or with greater reliability than Big Sky Network joint ventures are able
to provide. We cannot predict the likelihood of these changes and we cannot
assure you that any technological changes will not materially adversely affect
our business and operating results.
IF THE CABLE SYSTEMS USED BY BIG SKY NETWORK'S JOINT VENTURE PARTNERS ARE NOT
UPGRADE TO TWO-WAY SYSTEMS, THE BIG SKY NETWORK JOINT VENTURES MAY NOT BE ABLE
TO EFFECTIVELY DECREASE THEIR OPERATING COSTS OR PROVIDE THE QUALITY OF SERVICES
NECESSARY TO ATTRACT CUSTOMERS
Many of Big Sky Network's potential joint venture partners have one-way cable
systems. In a one-way cable system, although data can be transmitted at high
speeds from the cable headend to subscribers, the subscribers can only transmit
data back to the cable headend via a standard telephone line. Big Sky Network
joint ventures will be required to support the telephone return component of the
system, Big Sky Network may incur higher cost to deliver broadband services.
Over time, however, we expect all of Big Sky Network's joint venture partners to
upgrade and/or rebuild their facilities to provide increased bandwidth and
two-way capabilities. We believe faster uploads and the elimination of telephone
line return costs will make Big Sky Network's joint ventures' service more
valuable and may lead to higher customer penetration rates, which in turn will
benefit the joint venture partners through higher revenue. Consequently, if Big
Sky Network's joint venture partners do not upgrade to two-way capability at the
rate we anticipate, Big Sky Network and our results of operations may be
negatively affected.
OUR SUCCESS IN ATTRACTING AND RETAINING SUBSCRIBERS WILL DEPEND ON BIG SKY
NETWORK'S ABILITY TO INCREASE THE CAPACITY AND MAINTAIN THE SPEED OF OUR
NETWORK, WHICH IS UNPROVEN
We face risks related to our ability to increase the transmission capacity of
network of Big Sky Network's joint ventures to meet expected subscriber levels
while maintaining superior performance. While peak downstream data transmission
speeds across the cable infrastructure approach 10 Mbps in each 6 MHz channel,
actual downstream data transmission speeds are likely to be significantly
slower, depending on a variety of factors, including the type and location of
content, Internet traffic, the number of active subscribers on a given cable
network node, the number of 6 MHz channels allocated to Big Sky Network by its
joint venture partners, the capabilities of the cable modems used and the
service quality of the joint venture partners' facilities. The actual data
transmission speed that a subscriber realizes also will depend on the
subscriber's hardware, operating system and software configurations. There can
be no assurance that Big Sky Network joint venture systems will be able to
achieve or maintain a speed of data transmission sufficiently high to enable the
joint ventures to attract and retain the projected number of subscribers for
such joint venture system, especially as the number of subscribers grows.
Because subscribers will share the available capacities on cable network node
modems and nodes, Big Sky Network may underestimate the capacity it needs to
provide in order to maintain peak transmission speeds. A perceived or actual
failure to achieve or maintain sufficiently high speed data transmission could
significantly reduce subscriber demand for Big Sky Network joint venture
services and have a material adverse effect on our business and financial
condition.
BIG SKY NETWORK DEPENDS ON A DATA TRANSMISSION INFRASTRUCTURE LARGELY MAINTAINED
BY THIRD PARTIES OR SUBJECT TO DISRUPTION BY EVENTS OUTSIDE OUR CONTROL
Big Sky Network joint ventures' success will depend upon the capacity,
reliability and security of the infrastructure used to carry data between their
subscribers and the Internet. A significant portion of that infrastructure is
owned by third parties. Accordingly, Big Sky Network and its joint venture
partners have no direct control over quality and maintenance of the entire
system. For example, Big Sky Network relies on its joint venture partners to
maintain access to cable infrastructures and the maintenance of such
infrastructures. Big Sky Network's joint venture
-20-
<PAGE>
partners, in turn, rely on other third parties to provide a connection from the
cable infrastructure to the Internet.
WE ARE DEPENDENT ON SUPPLIES OF HARDWARE AND SOFTWARE
We are dependent on such manufacturing as Cisco Systems and Nortel Networks for
hardware, software and technical support. Although we believe that there are
alternative suppliers for each of these equipment and technologies, it could
take a significant period of time to substitute their equipment and
technologies. The loss of any of our relationships with these suppliers could
have a material adverse effect on our business, financial condition and results
of operations.
WE RELY ON SOFTWARE AND HARDWARE SYSTEMS THAT ARE SUSCEPTIBLE TO FAILURE
Any system failure or inadequacy that causes interruptions in the availability
of our services, or increases the response time of our services, as a result of
increased traffic or otherwise, could reduce user satisfaction, future traffic
and our attractiveness to existing and potential consumers. We are also
dependent upon the cable television networks and other systems of our joint
venture partners and on the Internet backbones in China and elsewhere, which
have experienced significant system failures and electrical outages in the past.
Consequently, our customers may experience difficulties due to system failures
unrelated to our systems and services.
OTHER RISKS
THERE IS UNCERTAINTY AS TO OUR SHAREHOLDERS' ABILITY TO ENFORCE CIVIL
LIABILITIES IN THE BRITISH VIRGIN ISLANDS AND CHINA
Our assets are located outside the United States and are held through companies
incorporated under the laws of the British Virgin Islands and joint ventures
established in China. Our current operations are conducted in China. In
addition, a majority of our directors and officers are nationals and/or
residents of countries other than the United States. All or a substantial
portion of the assets of these persons are located outside the United States. As
a result, it may be difficult for you to effect service of process within the
United States upon these persons. In addition, there is uncertainty as to
whether the courts of the British Virgin Islands or China, respectively, would
recognize or enforce judgments of United States courts obtained against us or
such persons predicated upon the civil liability provisions of the securities
laws of the United States or any state thereof, or be competent to hear original
actions brought in the British Virgin Islands or China, respectively, against us
or such persons predicated upon the securities laws of the United States or any
state thereof. See "Business--Enforcement of Civil Liabilities".
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS MAY NOT BE ACCURATE
Included in this Registration Statement are various forward-looking statements
which can be identified by the use of forward looking terminology such as "may,"
"will," "expect," "anticipate," "estimate," "continue," "believe" or other
similar words. We have made forward-looking statements with respect to the
following, among others:
o our goals and strategies;
o the importance and expected growth of Internet technology;
o the pace of change in Internet marketplace;
o the demand for Internet services; and
o our revenues.
These statements are forward-looking and reflect our current expectations. They
are subject to a number of risks and uncertainties, including but not limited
to, changes in the economic and political environments in China,
-21-
<PAGE>
changes in technology and changes in the Internet marketplace. In light of the
many risks and uncertainties surrounding China Broadband, China and the Internet
marketplace, prospective purchasers of our shares should keep in mind that we
cannot guarantee that the forward-looking statements described in this
prospectus will transpire.
BROKER-DEALERS MAY BE DISCOURAGED FROM EFFECTING TRANSACTIONS IN OUR SHARES
BECAUSE THEY ARE CONSIDERED PENNY STOCKS AND ARE SUBJECT TO THE PENNY STOCK
RULES
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act
of 1934, as amended, impose sales practice and disclosure requirements on NASD
brokers-dealers who make a market in "a penny stock." A penny stock generally
includes any non-NASDAQ equity security that has a market price of less than
$5.00 per share. Our shares are quoted on the OTCBB, and the price of our shares
ranged from $4.19 (low) to $10.00 (high) during the period from September 25,
2000 to December 1, 2000. The closing price of our shares on December 1, 2000
was $7.1875. Purchases and sales of our shares are generally facilitated by NASD
broker-dealers who act as market makers for our shares. The additional sales
practice and disclosure requirements imposed upon brokers-dealers may discourage
broker-dealers from effecting transactions in our shares, which could severely
limit the market liquidity of the shares and impede the sale of our shares in
the secondary market.
Under the penny stock regulations, a broker-dealer selling penny stock
to anyone other than an established customer or "accredited investor"
(generally, an individual with net worth in excess of $1,000,000 or an annual
income exceeding $200,000, or $300,000 together with his or her spouse) must
make a special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the
broker-dealer or the transaction is otherwise exempt.
In addition, the penny stock regulations require the broker-dealer to
deliver, prior to any transaction involving a penny stock, a disclosure schedule
prepared by the Commission relating to the penny stock market, unless the
broker-dealer or the transaction is otherwise exempt. A broker-dealer is also
required to disclose commissions payable to the broker-dealer and the registered
representative and current quotations for the securities. Finally, a
broker-dealer is required to send monthly statements disclosing recent price
information with respect to the penny stock held in a customer's account and
information with respect to the limited market in penny stocks.
USE OF PROCEEDS
This prospectus is part of a registration statement that permits
selling shareholders to sell their shares. Because this prospectus is solely for
the purpose of selling shareholders, we will not receive any proceeds from the
sale of stock being offered. If Warrant holders exercise their right to acquire
common shares, we could receive proceeds of $1,180,925.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain any future earnings to fund the development and
growth of our business and we do not anticipate paying any cash dividends in the
foreseeable future.
-22-
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2000:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------------------
<S> <C>
Stockholders' equity:
Common stock, $0.001 par value, 50,000,000 shares $ 77,936
authorized; 19,474,517 issued and outstanding
Additional paid-in capital.............................. 20,521,491
Accumulated deficit..................................... (1,076,577)
-----------------------------
Total stockholders' equity............................. $ 19,522,850
-----------------------------
Total capitalization................................... $ 19,522,850
=============================
</TABLE>
DILUTION
This offering is for sales of stock by existing China Broadband
shareholders on a continuous or delayed basis in the future. Sales of common
stock by shareholders will not result in any substantial change to the net
tangible book value per share before and after the distribution of shares by the
selling shareholders. There will be no change in net tangible book value per
share attributable to cash payments made by purchasers of the shares being
offered. Prospectus investors should be aware, however, that the price of China
Broadband's shares may not bear any rational relationship to net tangible book
value per share.
-23-
<PAGE>
SELLING SHAREHOLDERS
The following are the shareholders for whose accounts the shares are
being offered; the amount of securities owned by each selling shareholder prior
to this offering; the amount to be offered for each selling shareholder's
account; and the amount to be owned by each selling shareholder following
completion of the offering:
<TABLE>
<CAPTION>
PERCENT OF COMMON
SHARES OWNED
-----------------------------
NUMBER OF NUMBER OF NUMBER OF
NAME SHARES OWNED SHARES OFFERED SHARES AFTER BEFORE THE AFTER THE
SALE (1) OFFERING (3) OFFERING
------------------------------------------- --------------- --------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Wallace Nesbitt 562,500 562,500 - 2.89% -
Western Capital 562,500 562,500 - 2.89% -
Pamela Hallisey 45,000 45,000 - 0.23% -
R. Scott Hutcheson 65,000 65,000 - 0.33% -
David Beatty 360,000 360,000 - 1.85% -
Fevzi Ogelman 900,000 900,000 - 4.62% -
Malcolm Albery 90,000 90,000 - 0.46% -
850015 Alberta Ltd. 180,000 180,000 - 0.92% -
728871 Alberta Ltd. 90,000 90,000 - 0.46% -
588063 Alberta Ltd. 90,000 90,000 - 0.46% -
Lombard Odier & Cie 450,000 450,000 - 2.31% -
Precise Details, Inc. 10,000 10,000 - 0.05% -
Thomas Milne (4) 10,000 10,000 - 0.05% -
Susan A Milne (5) 5,000 5,000 - 0.03% -
Sarah Anderson (6) 2,500 2,500 - 0.01% -
Christopher M. Milne (7) 2,500 2,500 - 0.01% -
Greg Anderson (8) 2,500 2,500 - 0.01% -
Christopher H Hopkins 2,000 2,000 - 0.01% -
Shelley Gatto 2,000 2,000 - 0.01% -
Terry Kent 2,500 2,500 - 0.01% -
Janys M Milne & Benjamin J Thomas (9) 2,500 2,500 - 0.01% -
Don Cooper 1,000 1,000 - 0.01% -
Kathleen J Gathercole 500 500 - 0.01% -
FTCG Enterprises 1,000 1,000 - 0.01% -
GCI Investments 1,000 1,000 - 0.01% -
John Harvey 2,000 2,000 - 0.01% -
Stuart Crombie 2,000 2,000 - 0.01% -
Lynn Dufort 2,000 2,000 - 0.01% -
Richard M. Hurwitz 100,000 100,000 - 0.51% -
Patrimer Investments Inc. 125,000 125,000 - 0.64% -
Lobsinger Management Inc. 250,000 250,000 - 1.28% -
Julie Poznanski 25,000 25,000 - 0.13% -
Carmen Kwan 25,000 25,000 - 0.13% -
Lombard, Odier & Cie 100,000 100,000 - 0.51% -
Michael B. Beatty 10,000 10,000 - 0.05% -
Richard Hallisey 100,000 100,000 - 0.51% -
Quarry Bay Investments Inc. 125,000 125,000 - 0.64% -
David Doritty 15,000 15,000 - 0.08% -
Signet Management Limited 10,000 10,000 - 0.05% -
Value Investors International 20,000 20,000 - 0.10% -
Michael Lauer 400,000 400,000 - 2.05% -
Martin Garvey 50,000 50,000 - 0.26% -
Eric Hauser 50,000 50,000 - 0.26% -
Lombard,Odier & Cie 208,000 208,000 - 1.07% -
James C. Kennedy 20,000 20,000 - 0.10% -
BBL (Ref. Aureus Capital) 112,000 112,000 - 0.58% -
Transatlantic Securities Ltd. 20,000 20,000 - 0.10% -
James Pasieka 50,000 50,000 - 0.26% -
-24-
<PAGE>
<CAPTION>
PERCENT OF COMMON
SHARES OWNED
-----------------------------
NUMBER OF NUMBER OF NUMBER OF
NAME SHARES OWNED SHARES OFFERED SHARES AFTER BEFORE THE AFTER THE
SALE (1) OFFERING (3) OFFERING
------------------------------------------- --------------- --------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Allen Wu 10,000 10,000 - 0.05% -
Martin Maurel Gestion 30,000 30,000 - 0.15% -
Transatlantic Securities Limited 100,000 100,000 - 0.51% -
Michael Binnion 5,000 5,000 - 0.03% -
David Doritty 15,000 15,000 - 0.08% -
Banque Privee Edmond de Rothschild 25,000 25,000 - 0.13% -
Luxembourg
Gutzwiller SA 20,000 20,000 - 0.10% -
Pictet & Cie,Banquiers 10,000 10,000 - 0.05% -
Lombard, Odier & Cie 110,000 110,000 - 0.56% -
CCF Capital Mangement 50,000 50,000 - 0.26% -
The Orbiter Fund, Ltd. 80,000 80,000 - 0.41% -
The Viator Fund, Ltd. 40,000 40,000 - 0.21% -
Lancer Offshore Inc. 496,667 496,667 - 2.55% -
Lancer Partners Limited Partnership 250,000 250,000 - 1.28% -
Elizabeth C. Kennedy 20,000 20,000 - 0.10% -
Clariden Bank 70,000 70,000 - 0.36% -
Pictet & Cie 10,000 10,000 - 0.05% -
Gestor Finance 24,000 24,000 - 0.12% -
Somangest Vesigest 10,000 10,000 - 0.05% -
BBL Ref.: Somangest 1,000 1,000 - 0.01% -
Banque Cantonale Vaudevoise 7,000 7,000 - 0.04% -
BBL, ref. Aureus Capital 18,000 18,000 - 0.09% -
Transatlantic Securities Limited 10,000 10,000 - 0.05% -
Pinnaton Ref. Innoven FCPI 1997 no. 1 4,000 4,000 - 0.02% -
Pinnaton Ref. Innoven FCPI 1998 no.2 18,200 18,200 - 0.09% -
Kenneth Barnes nil 50,000(2) - 0.26%(2) -
Canaccord Capital International, Ltd. nil 50,790(2) - 0.26%(2) -
Tibor Gajdics nil 47,500 - 0.26%(2) -
AL Charuk nil 47,500 - 0.26%(2) -
Bo Wan International Ltd. 5,000 5,000 0.003%
--------------- --------------- -------------- --------------- ------------
TOTAL 6,699,867 6,900,657 - 34.40% (3)
<FN>
(1) This table assumes that each shareholder will sell all of its shares
available for sale during the effectiveness of the registration
statement that includes this prospectus. Shareholders are not required
to sell their shares. See "Plan of Distribution." Other than described
in footnotes below, no other selling shareholder has held any position
or office or had any material relationship with China Broadband during
the past three years.
(2) Consists of warrants exercisable to acquire shares of common stock.
(3) Based on 19, 474,517 shares issued and outstanding on December 5, 2000.
(4) Thomas Milne is the Chief Financial Officer and a Director of China Broadband Corp.
(5) Susan Milne is the spouse of Thomas Milne.
(6) Sarah Anderson is the daughter of Thomas Milne
(7) Christopher Milne is the son of Thomas Milne.
(8) Greg Anderson is the son-in-law of Thomas Milne
(9) Janys M Milne is the sister of Thomas Milne.
</FN>
</TABLE>
-25-
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are qualified in their entirety
by reference to, and you should read them in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements and notes to such financial statements included
in this prospectus. We have derived the statements of operations data from our
audited financial statements that appear in this prospectus, and these data are
qualified by reference to the financial statements.
China Broadband Corp. acquired all of the issued and outstanding shares
of China Broadband (BVI) Corp. in exchange for 13,500,000 shares of its common
stock on April 14, 2000. Because China Broadband Corp. had only 1,509,850 (post
reverse-split) shares issued and outstanding on the date of our acquisition, the
former shareholders of China Broadband (BVI) acquired 90% control of China
Broadband Corp. In instances like this, accounting principles require that the
transaction be reflected in financial statements as a reverse acquisition of the
parent, China Broadband Corp., by the shareholders of China Broadband (BVI)
Corp. as the shareholders of China Broadband (BVI) Corp. owned a majority of the
combined company at acquisition date. In this case, common control started
immediately after the completion of the acquisition, effectively April 14, 2000.
Consequently, under the principles of reverse acquisition accounting China
Broadband (BVI) Corp. was deemed to be the acquiror of the Company and the
consolidated financial statements fo the Company, the legal parent, are
presented as a continuation of the financial position and results from
operations of China Broadband (BVI) Corp., the legal subsidiary.
SUMMARY FINANCIAL DATA
PERIOD FROM INCEPTION
(FEBRUARY 1, 2000) THROUGH
SEPTEMBER 30, 2000
------------------------------
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 208,333
Loss from operations.................. $ (1,144,281)
Net loss.............................. $ (1,076,577)
Basic and diluted loss per common share $ (0.06)
Book and diluted weighted average
common shares outstanding.......... 17,023,688
AS OF
SEPTEMBER 30, 2000
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 7,191,845
Working capital....................... $ 5,637,608
Total assets.......................... $ 21,451,624
Long-term obligations................. -
Total stockholders' equity............ $ 19,522,850
-26-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION
The information contained in this Management's Discussion and Analysis
contains "forward looking statements." Actual results may materially differ from
those projected in the forward looking statements as a result of certain risks
and uncertainties set out in this prospectus. See "Note Regarding Forward
Looking Statements." Factors which could cause our actual results to differ from
expectations include variations in the level of orders, which can be affected by
general economic conditions and in the markets served by our customers, and
international economic and political climates. Additional factors would be the
timing of future product releases, difficulties or delays in product
functionality or performance, our failure to respond adequately to either
changes in technology or customer preferences, or to changes in our pricing or
that of our competitors, our inability to manage growth, from non-payment of
accounts receivable and changes in budgeted costs. All of the above factors
constitute significant risks to our company. There can be no assurance that our
results of operations will not be adversely affected by one or more of these
factors.
You should read the following discussion and analysis in conjunction with the
audited financial statements and notes thereto appearing elsewhere in this
prospectus.
OVERVIEW
We were inactive from the date of our incorporation on February 9, 1993
through December 31, 1997. Through December 31, 1997, we raised no significant
capital and incurred no significant expenses. Our share capital at December 31,
1997 consisted of 100 common shares with paid in share capital of $100. During
our fiscal year ended December 31, 1998, we raised $56,001 in capital by selling
common shares, and incurred start up expenses of $25,095.
On April 14, 2000, China Broadband Corp. completed a reverse-split of
its common stock on a .65104 for 1 basis reducing its issued and outstanding
share capital to 1,509,850 shares of common stock.
On April 14, 2000, China Broadband Corp. acquired all of the issued and
outstanding shares in the capital of China Broadband (BVI) Corp., a company
incorporated under the laws of the British Virgin Islands. China Broadband (BVI)
Corp. was formed on February 1, 2000, and had no business activities prior to
that time. China Broadband (BVI) Corp. was incorporated for the purposes of
acquiring all of the issued and outstanding shares of Big Sky Network Canada
Ltd., a British Virgin Island corporation, a company developing a business to
become a facilities-based provider of high capacity, high speed Internet, data
and voice services in the major urban markets throughout the People's Republic
of China. Big Sky Network had an executed cooperation joint venture agreement
related to the Shekou joint venture and letters of intent with potential joint
venture partners to provide Internet high-speed Internet access through cable
television networks in other municipalities in China. China Broadband (BVI)
Corp. acquired 50,000 shares, representing all of the issued and outstanding
capital stock of Big Sky Network Canada Ltd. on February 1, 2000. Big Sky
Network Canada Ltd. then issued to SoftNet Systems, Inc. 10,000 shares on
February 22, 2000 for $500,000 and 40,000 shares for $2,000,000 on April 25,
2000. China Broadband subsequently purchased the shares held by SoftNet on
September 29, 2000. See "Business - Transactions with SoftNet."
.China Broadband Corp. acquired all of the issued and outstanding
shares of China Broadband (BVI) Corp. in exchange for 13,500,000 shares of its
common stock on April 14, 2000. Because China Broadband Corp. had only 1,509,850
(post reverse-split) shares issued and outstanding on the date of our
acquisition, the former shareholders of China Broadband (BVI) acquired 90%
control of China Broadband Corp. In instances like this, accounting principles
require that the transaction be reflected in financial statements as a reverse
acquisition of the parent, China Broadband Corp., by the shareholders of China
Broadband (BVI) Corp. as the shareholders of China Broadband (BVI) Corp. owned a
majority of the combined company at acquisition date. In this case, common
control started immediately after the completion of the acquisition, effectively
April 14, 2000. Consequently, under the principles of reverse acquisition
accounting China Broadband (BVI) Corp. was deemed to be the acquiror of the
Company and the consolidated financial statements of the Company, the legal
parent, are presented as a
-27-
<PAGE>
continuation of the financial position and results from operations of China
Broadband (BVI) Corp., the legal subsidiary.
After giving effect to the acquisitions, China Broadband Corp. owned
all of the issued and outstanding capital of China Broadband (BVI) Corp. and
China Broadband (BVI) Corp. owned 50% of the issued and outstanding capital of
Big Sky Network Canada Ltd.
Subsequent to China Broadband Corp.'s acquisition of China Broadband
(BVI) Corp. on April 14, 2000, China Broadband Corp. completed three private
placements of 3,331,667 shares of its common stock for proceeds of $11,392,503.
On April 27, 2000, the company filed Articles of Amendment to the
Articles of Incorporation in the State of Nevada, to change its name to "China
Broadband Corp."
RESULTS OF OPERATIONS
PERIOD FROM INCEPTION (FEBRUARY 1, 2000) THROUGH SEPTEMBER 30, 2000.
We had no business activities prior to February 1, 2000. On April 25, 2000, Big
Sky Network issued 40,000 shares to SoftNet Systems, Inc., a third party, and,
as a result, we no longer controlled Big Sky Network and deconsolidated the
accounts of Big Sky Network from April 25, 2000 onward. For the period from
April 26, 2000 to September 28, 2000, our investment in Big Sky Network is
accounted for using the equity method, resulting in an equity loss of $181,471
for the period. On September 29, 2000, China Broadband (BVI) acquired SoftNet's
interest in Big Sky Network, and as a result, we own 100% of Big Sky Network's
issued and outstanding share capital.
Revenues. During the period from inception (February 1, 2000) through September
30, 2000, we generated revenues of $208,333 from management fees by providing
technical consulting services to Big Sky Network for the period. We earned
interest income of $249,175 from its cash and short-term deposits.
Expenses. We incurred general operating expenses of $1,337,379. These expenses
included accounting and audit expenses of $92,960 and legal expenses of $188,475
related to the preparation of our reports under the Securities Exchange Act of
1934, as amended, and preparation of joint venture related legal documents and
documents related to the acquisition of SoftNet's interest in Big Sky Network.
Consulting expenses of $294,295 and travel expenses of $218,014 were incurred
during the period from inception (February 1, 2000) to September 30, 2000
primarily related to the negotiation of various joint venture agreements in
China, including the executed July 8, 2000 agreement with Chengdu Huayu
Information Co. Ltd. and the July 21, 2000 strategic alliance agreement with
Chengdu Huaya Information Co. Ltd. to develop a fiber optic network to connect
cities in the Sichuan Province. We anticipate that expenses will increase during
the fourth quarter of 2000 for the following reasons:
- we anticipate that we will continue to negotiate and finalize
letters of intent and definitive agreements to form joint ventures;
- our joint ventures will begin extensive marketing and promotional
campaigns to build subscription bases in Shekou and Chengdu;
- we will incur expenses related to the launch of our joint venture
services in Chengdu and other potential areas;
- we will incur costs associated with finance raising activities;
- we will incur costs related to hiring additional personnel to
provide management, technical and support services to its growing
organization; and
- we will incur other costs related to implementing its business plan
and financing its joint venture obligations.
Loss. We had a loss of $1,144,281 from its operations during the period. We also
recorded an equity loss of $181,471 related to Big Sky Network's ongoing
operating expenses incurred by the Shekou Joint Venture related
-28-
<PAGE>
to leasing office space, hiring employees to commence signing up subscribers and
technical support staff in Shekou, China; and the expenses related to
establishing the Chengdu Joint Venture. Our loss for the period from inception
(February 1, 2000) through September 30, 2000, after interest income of
$249,175, was of $1,076,577. We anticipate that we will continue to incur losses
in future periods until our joint venture partners successfully launch broadband
subscription services and revenues generated from subscriptions are sufficient
to cover the costs associated with business development and general
administrative expense, as described above. Since we in its development stage,
all losses accumulated since inception have been considered as part of the
Company's development stage activities.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash and cash equivalents of
$7,191,845 and working capital of $5,637,608. Since inception, we have financed
operations primarily through sales of equity securities and have raised a total
of $11,316,692, net of share issuance costs of $75,811.
Our principal source of capital has been equity financing from our shareholders
and founders. We are exploring opportunities for vendor financing, bank credit
facilities and export credit agencies. Revenue from subscribers has begun in
recent months but will not constitute a significant source of capital for some
time. Meeting our future financing requirements may be dependent on access to
equity capital markets. We may not be able to raise additional common equity
when required or on favorable terms that are not dilutive to existing
shareholders.
Subsequent to September 30, 2000, we have invested $ 500,000 cash and purchased
and installed primary operating equipment, at a cost of approximately $400,000,
in the Chengdu joint venture.
On a consolidated basis, our operating cash expenditures are approximately
$125,000 per month. Our future cash requirements will depend on:
o Rate of expansion of existing joint ventures
o Rate of signing new joint ventures
o Capital equipment requirements for new joint ventures.
o The level of marketing required to expand our service offerings
o Our ability to lease additional bandwidth as customer base expands
o Price competition in our markets
During the quarter ended June 30, 2000, China Broadband Corp. completed
the following transactions related to its common stock:
- On April 14, 2000, China Broadband Corp. completed a reverse-split
of its common stock on a .65104 for 1 basis reducing its issued and
outstanding share capital from 2,319,000 to 1,509,850 shares of
common stock.
- On April 14, 2000, China Broadband Corp. issued 13,500,000 shares
of common stock for all of the issued and outstanding stock of
China Broadband (BVI) Corp.
- On April 14, 2000, China Broadband Corp. granted options to
officers, directors and consultants to China Broadband Corp.
exercisable to acquire a total of 4,175,000 at $1.00 per share.
These options were fully vested and expire on April 14, 2005.
- In May 2000, China Broadband issued 500,000 shares at $0.20 per
share; 1,530,000 shares at $1.00 per share and 1,301,667 shares at
$7.50 per share for gross proceeds of $11,392,503.
During the quarter ended September 30, 2000, China Broadband Corp.
completed the following transactions:
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<PAGE>
- Big Sky Network Canada Ltd. executed a joint venture agreement
dated July 8, 2000 with Chengdu Huayu Information Co. Ltd., the
municipal network company, to provide high-speed Internet access
via the cable television architecture in Chengdu, the provincial
capital of Sichuan Province.
- Big Sky Network Canada Ltd. entered into a strategic alliance on
July 21, 2000 with Chengdu Huayu Information Co. Ltd. to build a
fiber optic network to connect cities in Sichuan Province.
- China Broadband replaced Amisano Hanson, Chartered Accountants as
its independent auditor with Arthur Andersen LLP on August 24,
2000. There were no disagreements with Amisano Hanson, Chartered
Accountants on any matter of accounting principles, or practices,
financial statement disclosure or auditing scope or procedure. In
addition, Amisano Hanson, Chartered Accountants did not advise the
Company with respect to any of the matters described in paragraphs
(a)(i)(vi), (B)(1) through (3) of item 304 of Regulation S-B.
- China Broadband replaced Arthur Andersen LLP as its independent
auditor with Deloitte & Touche LLP on September 22, 2000. There
were no disagreements with Arthur Anderson LLP on any matter of
accounting principles, or practices, financial statement disclosure
or auditing scope or procedure. In addition, Arthur Anderson LLP
did not advise the Company with respect to any of the matters
described in paragraphs (a)(i)(vi), (B)(1) through (3) of item 304
of Regulation S-B.
- On September 29, 2000, China Broadband acquired, indirectly through
China Broadband (BVI) Corp. ("China Broadband (BVI)"), its
wholly-owned subsidiary, 50,000 shares of common stock, par value
$1.00 per share, of Big Sky Network, under the terms of a common
stock purchase agreement dated September 29, 2000, among SoftNet
Systems, Inc., a Delaware Corporation, the Registrant and Big Sky
Network. Under the terms of the Common Stock Purchase Agreement,
China Broadband paid SoftNet the following consideration for
SoftNet's interest in Big Sky Network:
o $2,500,000 in cash;
o a promissory note in the principal amount of $1,700,000, due
September 29, 2001, with interest payable at maturity at the
rate of 8% per annum;
o forgiveness of a debt, if any, owed by SoftNet to the
Registrant; and
o 1,133,000 shares of the Registrant's common stock.
PLAN OF OPERATION
As of September 30, 2000, the Company's management anticipates that the
Company currently has sufficient working capital to fund the Company's plan of
operation through the year ended December 31, 2000. The Company's costs to fund
its plan of operation for the fiscal year ending December 31, 2000 and the next
two fiscal quarters ending June 30, 2001, is estimated to be approximately $8
million to $10 million. These funds are intended to fund the business operations
of Big Sky Network, including funding the capital requirements of new and
existing Big Sky Network joint ventures, funding additional technical,
management and marketing/sales personnel and funding comprehensive joint venture
marketing and promotional programs to increase market awareness and subscription
sales. Management believes that additional funding will be required to fund the
implementation of Big Sky Network's business of entering into joint ventures
that will become leading providers of high capacity, high speed Internet, data
and voice services in their respective markets.
-30-
<PAGE>
The Company anticipates that its operating expenses and capital
expenditure may increase significantly during the year ending December 31, 2001,
the next phase of the Company's development. The amount and timing of
expenditures during the year ending December 31, 2001 will depend on the success
of any contracts it secures, and there is no assurance the Company will receive
significant revenues or operate profitably. Current cash resources are not
anticipated to be sufficient to fund the next phase of the Company's development
and management intends to seek additional private equity or debt financing.
There can be no assurances that any such funds will be available, and if funds
are raised, that they will be sufficient to achieve the Company's objective, or
result in commercial success.
SUBSEQUENT EVENTS
On November 1, 2000, the Corporation granted options to certain officers,
directors and employees to acquire 650,000 common shares at $7.50 per share.
On November 1, 2000, the Corporation issued warrants exercisable to acquire
50,790 shares at $7.50 per share as a financial advisory fee in connection with
the acquisition of BSN. The warrants are exercisable for two years from
September 30, 2000. In addition, the fee includes cash consideration of $253,950
of which $219,950 was paid on November 24, 2000 and the remainder is due on
September 30, 2001.
On November 1, 2000, the Corporation cancelled 50,000 stock options that were
issued to a consultant on April 14, 2000. The options were replaced with 50,000
Warrants with the same terms and conditions.
On November 1, 2000, the Corporation issued Warrants to purchase 100,000 common
shares of the Corporation at an exercise price of $7.50 per common share, for a
term of 18 months from the date of issue, in return for investor relations
services.
On November 25, 2000, BSN signed a joint venture agreement with Deyan Guangshi
Network Development Ltd. ("Deyang Guangshi") to establish Deyang Guangshi BigSky
Ltd. ("Deyang JV"), the purpose of which is to develop advanced broadband
software and hardware platform for data transmission and internet related
business in the Deyang area. Under the terms of the joint venture agreement,
Deyang Guangshi agreed to provide the entire software and hardware data
transmission platform of its Deyang HFC network and the rights to use all of its
facilities and equipment. BSN is required to contribute $4,500,000 to the Deyang
JV in cash or equipment. Over the Deyang JV's 20 year term, BSN will be entitled
to receive 80% of the profits earned between 2001 and 2005, 60% of the profits
between 2006 and 2010, 50% of the profits earned between 2011 and 2015, and 40%
of the profits earned between 2016 and 2020. BSN is entitled to appoint four of
the seven Board of Directors of the Deyang JV for the first ten years of its
operations and is thereafter entitled to appoint three of the seven directors.
-31-
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which as subsequently amended by SFAS No.
137 and 138, established accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value for fiscal quarters of fiscal years
beginning after June 15, 2000. Management believes that these statements will
not have a significant impact on the Corporation's consolidated financial
position, results of operations or cash flows.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition" to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. Management believes that its revenue recognition practices
are in conformity with SAB 101.
In March 2000, the FASB issued FASB Interpretation (FIN) No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." FIN 44
clarifies the application of Accounting Principles Board Opinion No. 25 for
certain issues relating to stock compensation. FIN 44 is effective July 1, 2000,
but certain conclusions in it cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that FIN 44 covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying FIN 44 are
recognized on a prospective basis from July 1, 2000. The Corporation adopted the
recommendations under FIN 44.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY
The Company maintains its cash with two major Canadian banks, on
short-term deposits of less than two months duration. While the interest rates
vary on these deposits with each maturity, the Company does not consider the
principal of these deposits at risk.
The Company has one fixed interest rate obligation as a result of the
SoftNet transaction. A fluctuation in interest rates will not have a material
impact on the value of this obligation.
The Company does not hedge any of its interest rate risk.
FOREIGN EXCHANGE RATE RISK
Revenue from current and future operations in PRC is denominated in
Renminbi (RNB). Many of the Companies expenses and capital costs are denominated
in US dollars. The official exchange rate for the conversion of RMB to US
dollars has been stable, with the RMB increasing slightly, in recent years. The
Company does not expect to use any foreign exchange hedges or derivative
instruments in the near future.
-32-
<PAGE>
BUSINESS
OVERVIEW OF CORPORATE STRUCTURE
China Broadband Corp. was incorporated in February 1993 under the name
"Institute for Counseling, Inc." under laws of the State of Nevada. On April 14,
2000, we acquired China Broadband (BVI) Corp., a British Virgin Islands company
incorporated in February 2000, by issuing 13,500,000 shares of our common stock
in exchange for all of the issued and outstanding common stock of China
Broadband (BVI). The former shareholders of China Broadband (BVI) became our
controlling shareholders. On April 27, 2000, Institute for Counseling, Inc.
changed its name to "China Broadband Corp."
As a result of our acquisition of China Broadband (BVI), we owned 50% of the
issued and outstanding shares of Big Sky Network Canada Ltd., a British Virgin
Islands company, which was incorporated in May 1999. SoftNet Systems, Inc., a
Delaware company, owned the remaining 50% interest. See "Transactions with
SoftNet". SoftNet Systems acquired its 50% interest in Big Sky Network by
committing $2 million to fund Big Sky Network's Shekou joint venture and by
providing $500,000 to Big Sky Network for working capital. On September 29,
2000, we purchased SoftNet's 50% interest in Big Sky Network for the following
consideration:
- $2,500,000 in cash;
- a promissory note in the principal amount of $1,700,000, due
September 29, 2001, with interest payable at maturity at the rate
of 8% per annum;
- forgiveness of a debt, if any, owed by SoftNet to the Registrant;
and
- 1,133,000 shares of the Registrant's common stock, at a deemed
value of approximately $8,000,000.
Big Sky Network holds the following joint venture interests:
- a 50% interest in Shenzhen China Merchants Big Sky Network Ltd.,
known as the Shekou Joint Venture, a cooperative joint venture for
a term of 15 years established under the laws of the People's
Republic of China; and
- a 50% interest in Sichuan Huayu Big Sky Network Ltd., known as the
Chengdu Joint Venture, a cooperative joint venture for a term of 20
years established under the laws of the People's Republic of China
Big Sky Network has entered into and negotiating letters of intent to establish
similar joint ventures in other parts of China.
China Broadband (BVI) provides marketing, technical and administrative services
to Big Sky under a one-year renewable agreement for an annual service fee of
US$500,000.
The following figure sets forth our corporate structure.
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<PAGE>
<TABLE>
<S> <C> <C> <C>
----------------------------------------------------
China Broadband Corp.
a Nevada corporation
----------------------------------------------------
| 100%
|
----------------------------------------------------
China Broadband (BVI) Corp.
a British Virgin Islands corporation
----------------------------------------------------
| 100%
|
------------------ ---------------------------------------------------- --------------------
Big Sky Network Canada Ltd.
a British Virgin Islands corporation
----------------------------------------------------
|
------------------------------------------------------
| (1) | (2) | (2)
| | |
------------------ | | --------------- | --------------------
China Merchants | | Chengdu Huayu | Deyang Guangshi
Shekou | | Information | Network
Industrial Zone | | Industry Co. | Development Ltd.
Ltd. | | (PRC) | (PRC)
(PRC) | | |
------------------ | | --------------- | --------------------
| 50%(1) | | | 50%(2) | | 50%(3)
------------------------- | -------------- | -----------------
| | | | |
--------------- -------------------- -----------------------
Shenzhen
China Sichuan Huayu Big Deyang Guangshi Big
Merchants Big Sky Network Ltd. Sky Ltd.
Sky Network (PRC) (PRC)
Ltd.
(PRC)
--------------- -------------------- -----------------------
<FN>
(1) Big Sky Network has a profit interest of 60% from 2000 through 2004; 50%
from 2005 through 2009; and 40% from 2010 through 2014.
(2) Big Sky Network has a profit interest of 65% from 2001 through 2007; 50%
from 2008 through 2014; and 50% from 2015 through 2020.
(3) Big Sky Network has a profit interest of 80% from 2001 through 2005; 60%
from 2006 through 2010; 50% from 2011 to 2015 and 40% from 2015 through 2020.
</FN>
</TABLE>
OVERVIEW OF BUSINESS
Big Sky Network plans to enter into joint ventures with government approved
joint venture partners with access to the fibre-optic networks of Chinese cable
television stations to provide internet access to residential and business
customers in China. Under these joint ventures, the Chinese joint venture
partners will obtain government approvals, licenses and access to cable
television station fibre optic networks to use non-broadcast bandwidth on their
cable systems to deliver broadband services to residential and business
subscribers. Big Sky Network will contribute capital, management, technology and
internet technology services. Through these cable television networks, Big Sky
Network joint ventures intend to provide internet access that is more reliable,
cheaper and faster than Chinese customers can obtain by dial-up access over
currently existing telephone lines. Initially, Big Sky Network joint ventures
will focus on providing internet access to residential and business customers.
Ultimately, as development evolves and Chinese regulations permit, China
Broadband anticipates that Big Sky Network joint ventures may provide its
residential and business customers with a full array of quality services
including web hosting, internet/intranet business solutions, e-mail, on-line
internet content services (such as shopping, games, medicine, education),
e-commerce, interactive video on demand (VOD), music on demand (MOD) and IP
telephony.
GROWTH OF INTERNET USAGE IN CHINA
In 1998, China's population was approximately 1.2 billion and the Internet
penetration rate in China was approximately 0.2%. Given China's large population
and the commitment of the Chinese government to the rapid development of the
internet in China, we believe that China represents enormous potential for
internet use in the long-term. In recent years, internet use in China has grown
rapidly. According to International Data Corporation ("IDC"), the number of
Chinese internet users grew from approximately 2.4 million in 1998 to
approximately 3.8 million in 1999, representing an annual growth rate of 58%.
IDC projects that the number of internet users in China will grow to
approximately 25.2 million in 2003.
China Internet Network Information Centre conducted a survey entitled "Semi
Annual Survey Report on Internet Development in China (2000.1)", and collected
200,000 responses, primarily from internet users. Based on this survey, we
believe that slow speed and the high cost of obtaining internet access via
conventional dial-up over
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<PAGE>
telephone lines are the two major impediments hindering the growth of internet
usage in China. We also believe that China's interest in the internet will grow
during the next five years. We believe that our strategy of providing Internet
access through fibre optic cables will allow us to addresses both of these
impediments and will attract existing and new internet users to our service.
BIG SKY NETWORK'S CABLE TELEVISION INTERNET SERVICE STRATEGY
Over the last three years, China has installed approximately 12 million
kilometres of fibre optic cable that provide cable television to approximately
80 million paying subscribers in 22 Chinese provinces. China's broadcast and
television network is owned by regional cable television stations, which are in
turn controlled by local governments. Foreign companies are not permitted to
operate telecommunication businesses, own broadcast rights or hold internet
operating permits in China. However, our operational subsidiary, Big Sky
Network, has entered into joint ventures with Chinese government approved joint
venture partners with access to cable television station to provide Internet
access through these cable television fibre optic networks. Big Sky Network's
business strategy is to enter into similar joint venture relationships with
joint venture partners with access to television fibre optic networks throughout
China. Big Sky Network joint ventures obtain "non-broadcast rights" through
structured joint venture agreements in a manner that is designed to comply with
Chinese laws and regulations. We anticipate that Big Sky Network joint ventures
will provide Chinese customers internet access via the existing optical
fibre-coaxial television cable network of Chinese joint venture partners. In
addition to providing higher reliability than the current dial-up alternative,
we believe that over time Big Sky Network joint ventures will be able to
deliver internet access at substantially higher speed and at a lower cost
than traditional dial-up Internet services.
SHEKOU JOINT VENTURE
Big Sky Network established the Shekou Joint Venture, its first Chinese joint
venture, in the Shekou Industrial Area within the Special Economic Zone of
Shenzhen, a city in Guangdong Province separated from Hong Kong by a 2-mile
strip of water. The Shenzhen Special Economic Zone is the first special economic
zone established by China and the place where China's first cellular telephone
and first internet dial-up access trials were conducted. The Shekou Industrial
Area was established in 1979 and is administered by China Merchants Group of
Hong Kong, one of China's oldest banking groups. Our Chinese partner in the
Shekou Joint Venture is Shenzhen China Merchants Shekou Industrial Zone Ltd., a
member of the China Merchants Group that controls the Shekou Cable Television
(CATV) Station. According to Shekou CATV, it has one of the most advanced
high-frequency cable networks in China with a bandwidth of 860MHz and two-way
transmission capability. It has more than 35,000 residential subscribers and
approximately 2,000 business subscribers. Based on a survey conducted by Shekou
CATV, approximately 78% of these cable television subscribers have computers,
and 68% of these computer owners (53% of the total number of cable television
subscribers) currently have access to the internet via dial-up.
TERMS OF THE COOPERATIVE JOINT VENTURE CONTRACT
Under the terms of the cooperative joint venture contract dated September 29,
1999, Big Sky Network and China Merchants Shekou Industrial Zone Ltd. agreed to
form a joint venture company, Shenzhen China Merchants Big Sky Network Ltd.,
under the Law of the People's Republic of China on Cooperative Joint Ventures
using Chinese Foreign Investments. Shenzhen China Merchants Big Sky Network Ltd.
was formed under Articles of Association dated September 29, 1999, for a term of
fifteen years , extendable upon an application to and approval by the State
Administration of Industry and Commerce, Taxation Bureau and Customs. The
capitalization of Shenzhen China Merchants Big Sky Network Ltd. is $3,000,000.
China Merchants Shekou Industrial Zone Ltd. agreed to:
- contribute the exclusive operating right of current cable
television for certain frequencies during the duration of the joint
venture in the Shekou Industrial Zone; and
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<PAGE>
- obtain all regulatory approvals and licenses required to conduct
the business of developing a world-class software and hardware
platform to provide Internet-related business via the cable
television network in the Shekou Industrial Zone.
Big Sky Network agreed to provide up to $3,000,000 in financing in the form of
cash and equipment. Big Sky Network made an initial investment in the amount of
$500,000 after China Merchants Shekou Industrial Zone Ltd. received governmental
approval for the joint venture and a license was issued to Shenzhen China
Merchants Big Sky Network Ltd. to conduct its business.
Under the terms of the cooperative joint venture contract, Shenzhen China
Merchants Big Sky Network Ltd. is managed by a board of seven directors, of
which Big Sky Network is entitled to appoint four during the first five years of
the term of the joint venture and three for the remainder of the term. China
Merchants Shekou Industrial Zone Ltd. is entitled to appoint three directors
during the first five years of the term of the joint venture and four for the
remainder of the term. China Merchants Shekou Industrial Zone Ltd. is entitled
to appoint the chairman of the board and Big Sky Network is entitled to appoint
the vice chairman. The day to day operations of the joint venture is managed by
a general manager who is appointed by the board of directors.
Under the terms of the cooperative joint venture contract, profits from the
joint venture are shared as follows:
------------------ ------------------------- -----------------------
Period China Merchants Shekou Big Sky Network Profit
Industrial Zone Ltd. - Interest
Profit Interest
------------------ ------------------------- -----------------------
Years 1 -5 40% 60%
------------------ ------------------------- -----------------------
Years 6-10 50% 50%
------------------ ------------------------- -----------------------
Years 11-15 60% 40%
------------------ ------------------------- -----------------------
China Merchants Shekou Industrial Zone Ltd. received approval for the joint
venture arrangement and the joint venture launched its Internet service on June
30, 2000.
CHENGDU JOINT VENTURE
Big Sky Network established the Chengdu Joint Venture on July 8, 2000 with
Chengdu Huayu Information Co. Ltd., the municipal network company, to provide
high-speed Internet access via the cable television architecture in Chengdu, the
provincial capital of Sichuan Province. The Chengdu Cable Television Station has
developed an integrated broadband information network servicing more than
600,000 users.
TERMS OF THE COOPERATIVE JOINT VENTURE CONTRACT
Under the terms of the cooperative joint venture contract dated July 8, 2000,
Big Sky Network and Chengdu Huayu Information Co. Ltd. agreed to form a joint
venture company, Sichuan Huaya Big Sky Network Ltd., under the Law of the
People's Republic of China on Cooperative Joint Ventures using Chinese Foreign
Investments. Sichuan Huaya Big Sky Network Ltd. was formed under Articles of
Association dated July 8, 2000, for a term of twenty years , extendable upon an
application to and approval by the State Administration of Industry and
Commerce, Taxation Bureau and Customs. The capitalization of Sichuan Huaya Big
Sky Network Ltd. is $4,500,000. Chengdu Huayu Information Co. Ltd. agreed to:
- contribute the exclusive operating right of current cable
television for certain frequencies during the duration of the joint
venture in the Chengdu and
- obtain all regulatory approvals and licenses required to conduct
the business of developing a world-class software and hardware
platform to provide Internet-related business via the cable
television network in Chengdu.
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<PAGE>
Big Sky Network agreed to provide up to $4,500,000 in financing in the form of
cash and equipment. Big Sky Network made an initial investment in the amount of
$500,000 after Chengdu Huayu Information Co. Ltd. received governmental approval
for the joint venture and a license was issued to Sichuan Huaya Big Sky Network
Ltd. to conduct its business.
Under the terms of the cooperative joint venture contract, Sichuan Huaya Big Sky
Network Ltd. is managed by a board of seven directors, of which Big Sky Network
is entitled to appoint four during the first thirteen years of the term of the
joint venture and three for the remainder of the term. Chengdu Huayu Information
Co. Ltd. is entitled to appoint three directors during the first thriteen years
of the term of the joint venture and four for the remainder of the term. Chengdu
Huayu Information Co. Ltd. is entitled to appoint the chairman of the board and
Big Sky Network is entitled to appoint the vice chairman. The day to day
operations of the joint venture is managed by a general manager who is appointed
by the board of directors.
Under the terms of the cooperative joint venture contract, profits from the
joint venture are shared as follows:
------------------- ---------------------------- ---------------------
Period Chengdu Huayu Information Big Sky Network
Co. Ltd. Profit Interest
Profit Interest
------------------- ---------------------------- ---------------------
Years 1 -6 35% 65%
------------------- ---------------------------- ---------------------
Years 7-14 50% 50%
------------------- ---------------------------- ---------------------
Years 15-20 65% 35%
------------------- ---------------------------- ---------------------
Chengdu Huayu Information Co. Ltd. received approval for the joint venture
arrangement and the joint venture launched its Internet service on October 26,
2000.
Big Sky Network also entered into a strategic alliance on July 21,2000 with
Chengdu Huayu Information Co. Ltd. to build a fiber optic network to connect
cities in Sichuan Province.
DEYANG JOINT VENTURE
Big Sky Network established the Deyang Joint Venture on November 25, 2000 with
Deyang Guangshi Network Development Ltd., the municipal network company, to
provide high-speed Internet access via the cable television architecture in
Deyang, in the Sichuan Province.
TERMS OF THE COOPERATIVE JOINT VENTURE CONTRACT
Under the terms of the cooperative joint venture contract dated November 25,
2000, Big Sky Network and Deyang Guangshi Network Development Ltd. agreed to
form a joint venture company, Deyang Guangshi Big Sky Ltd., under the Law of the
People's Republic of China on Cooperative Joint Ventures using Chinese Foreign
Investments. Deyang Guangshi Big Sky Ltd. is to be formed under Articles of
Association for a term of twenty years , extendable upon an application to and
approval by the State Administration of Industry and Commerce, Taxation Bureau
and Customs. The capitalization of Sichuan Deyang Guangshi Big Sky Ltd. is
$2,250,000. Deyang Guangshi Network Development Ltd. agreed to:
- contribute the exclusive operating right of current cable
television for certain frequencies during the duration of the joint
venture in the Deyang and
- obtain all regulatory approvals and licenses required to conduct
the business of developing a world-class software and hardware
platform to provide Internet-related business via the cable
television network in Deyang.
Big Sky Network agreed to provide up to $4,500,000 in financing in the form of
cash and equipment. Big Sky Network made an initial investment in the amount of
$500,000 after. Deyang Guangshi Network Development Ltd.
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<PAGE>
receives governmental approval for the joint venture and a license was issued to
Deyang Guangshi Big Sky Ltd. to conduct its business.
Under the terms of the cooperative joint venture contract, Deyang Guangshi Big
Sky Ltd. is managed by a board of seven directors, of which Big Sky Network is
entitled to appoint four during the first ten years of the term of the joint
venture and three for the remainder of the term. Deyang Guangshi Network
Development Ltd. is entitled to appoint three directors during the first ten
years of the term of the joint venture and four for the remainder of the term.
Deyang Guangshi Network Development Ltd. is entitled to appoint the chairman of
the board and Big Sky Network is entitled to appoint the vice chairman. The day
to day operations of the joint venture is managed by a general manager who is
appointed by the board of directors.
Under the terms of the cooperative joint venture contract, profits from the
joint venture are shared as follows:
----------------- ---------------------------- ------------------------
Period Deyang Guangshi Network Big Sky Network Profit
Development Ltd. Interest
Profit Interest
----------------- ---------------------------- ------------------------
Years 1 -5 20% 80%
----------------- ---------------------------- ------------------------
Years 5-10 40% 60%
----------------- ---------------------------- ------------------------
Years 10-15 50% 50%
----------------- ---------------------------- ------------------------
Years 15-20 60% 40%
----------------- ---------------------------- ------------------------
Deyang Guangshi Network Development Ltd. is in the process of seeking approval
for the joint venture arrangement.
MODEL JOINT VENTURE TERMS
The following summarizes the model upon which Big Sky Network intends to
structure additional joint ventures throughout China:
o Big Sky Network's Chinese joint venture partners will obtain all
necessary Chinese governmental approvals, licences and permits. Big
Sky Network's obligation to invest capital will be made conditional
upon all such approvals, licences and permits being obtained and
confirmed by our PRC legal counsel.
o Big Sky Network's Chinese joint venture partners will hold the
internet operating permits and conduct the Internet and
telecommunication related operations.
o Big Sky Network will contribute the requisite management,
technology and capital to upgrade and connect the joint venture
customers to the cable television network infrastructure accessed
by the Chinese joint venture partner.
o Big Sky Network's joint ventures will install multi-user modems
that will connect the personal computers of our customers to the
cable television networks accessed by the Chinese joint venture
partners who will, in turn, provide the joint venture customers
with internet access via bandwidth leased from licensed Chinese
backbone internet service providers.
o Big Sky Network joint venture customers will pay a combined fee for
internet access comprising an initial installation fee and a
monthly maintenance fee that will be paid to Big Sky Network's
joint venture, and a separate monthly subscription fee that will be
paid to Big Sky Network's Chinese joint venture partners. Fees are
anticipated to be collected by our joint venture partners by direct
debit from customers bank accounts
o Big Sky Network joint ventures will have a term of 15 to 20 years.
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<PAGE>
o Big Sky Network will provide Internet technology services to the
joint venture and receive a profit interest. Equal to 60% of the
distributable joint venture profits and maintain control of the
boards of directors of the joint ventures for the first 5 years of
the joint venture term. Big Sky Network's share of the distribut-
able joint venture profits will drop to 50% in the sixth year and
to 40% in the tenth year of the joint venture terms.
CHINESE GOVERNMENTAL APPROVALS
SHEKOU JOINT VENTURE
China Broadband selected Shenzhen as the location of its first joint venture
because the Shenzhen Special Economic Zone was established as China's first
special economic zone in 1979 and the Shenzhen Government has foreign joint
venture experience. Shenzhen China Merchants Big Sky Network Ltd. was formed as
a joint venture between Big Sky Network and Shenzhen, China Merchants Shekou
Industrial Zone Ltd., to provide high-speed Internet access in Shekou, Shenzhen,
Guangdong Province. The Shekou Joint Venture was formed and the issuance of
governmental approvals took place as follows:
o Big Sky Network and its Chinese joint venture partner, Shenzhen,
China Merchants Shekou Industrial Zone Ltd., signed a Joint Venture
Contract and Articles of Association in September, 1999.
o The Shenzhen Foreign Investment Bureau approved the Shekou Joint
Venture in November, 1999.
o The State Administration of Industry and Commerce issued a business
licence to the Shekou Joint Venture in November, 1999.
o The Guangdong Bureau of Administration of Telecommunications issued
an internet operating permit to Big Sky Network's Chinese joint
venture partner in February, 2000.
o Jun He Law Office rendered an opinion in February, 2000 stating
amongst other things that:
o the Shekou Joint Venture Contract and Articles of Association
are legal, valid, and binding obligations enforceable against
each of Big Sky and its Chinese joint venture partner and are
entitled to the protection of the laws of China;
o the Shekou Joint Venture is a Chinese-foreign co-operative
joint venture and has been duly organized and validly exists
as a limited liability company; and
o the Shekou Joint Venture has the corporate capacity and power
and has received all governmental approvals and licenses
necessary for conducting its internet business activities.
o Based upon the receipt of such approvals, licences, permits and
legal opinion, Big Sky Network contributed US$500,000 in capital to
the Shekou Joint Venture in February, 2000 and an
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<PAGE>
additional US$2,000,000 of capital in May, 2000, fulfilling all of
its capital contribution obligations.
o Using these funds, the Shekou Joint Venture completed
installation work and began offering broadband services in
Shekou on June 30, 2000.
CHENGDU JOINT VENTURE
Big Sky Network formed a second joint venture Sichuan Huayu Big Sky Network Ltd.
with Chengdu Huayu Information Industry Co. Ltd., to provide high-speed Internet
access in Chengdu, Sichuan Province. The Chengdu joint venture was formed and
the issuance of governmental approvals took place as follows:
o Big Sky Network and Chengdu Huayu Information Industry Co. Ltd.
signed a Joint Venture Contract and Articles of Association in
September, 2000.
o The Chengdu Foreign Investment Bureau approved the Chengdu Joint
Venture in October, 2000.
o The State Administration of Industry and Commerce issued a business
licence to the Chengdu Joint Venture in October, 2000.
o An internet operating permit was issued to Chengdu Huayu
Information Industry Co. Ltd. in October, 2000.
o Jun He Law Office rendered an opinion in October, 2000 stating
amongst other things that:
o the Chengdu Joint Venture Contract and Articles of Association
are legal, valid, and binding obligations enforceable against
each of Big Sky Network and Chengdu Huayu Information Industry
Co. Ltd. and are entitled to the protection of the laws of
China;
o the Chengdu Joint Venture is a Chinese-foreign co-operative
joint venture and has been duly organized and validly exists
as a limited liability company; and
o the Chengdu Joint Venture has the corporate capacity and power
and has received all governmental approvals and licenses
necessary for conducting its internet business activities.
o Based upon the receipt of such approvals, licences, permits and
legal opinion, Big Sky Network contributed US$500,000 in capital to
the Chengdu Joint Venture in October, 2000 and we anticipate Big
Sky Network will make an additional US$4,000,000 of capital in 2001
to fulfill its capital contribution obligations under the Chengdu
joint venture contract.
o Using these funds, the Chengdu joint venture completed installation
work and began offering broadband services in Chengdu on October
25, 2000.
PROPOSED JOINT VENTURES
Big Sky signed letters of intent with four cable television stations in other
parts of China to establish additional joint ventures that will be modeled upon
the Shekou Joint Venture.
ZHUHAI JOINT VENTURE
In May, 1999, Big Sky Network signed a letter of intent with a company that
operates the Zhuhai Cable Television Station located in the Zhuhai Special
Economic Zone approximately 20 minutes north of Macau. Zhuhai Cable Television
Station has 100,000 cable television subscribers of which 10,000 have two-way
transmission capability.
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In addition, Zhuhai has approximately 2,000 business subscribers. Zhuhai Cable
Television Station recently successfully tested the internet on its system with
50 users. A trial 3-day marketing of this service resulted in several hundred
inquiries for internet access. Big Sky Network agreed to invest between $4.5
million and $5 million to fund the joint venture.
GUANGZHOU JOINT VENTURE
In April, 1999, Big Sky Network signed a letter of intent with a company that
operates the Guangzhou Cable Television Station.
CIXI JOINT VENTURE
In January, 2000, Big Sky Network signed a letter of intent with a company that
operates the Cixi Cable Television Station located in Cixi. The Cixi Cable
Television Station has developed an integrated broadband information network
servicing more than 220,000 users.
DALIAN JOINT VENTURE
In March, 2000, Big Sky Network signed a letter of intent with a company that
operates the Dalian Cable Television Station located in Dalian. The Dalian Cable
Television Station has developed an integrated broadband information network.
TRANSACTIONS WITH SOFTNET
Big Sky Network was formed for the purposes of deploying cable-based
broadband services in the People's Republic of China. SoftNet acquired its
interest in Big Sky Network under a common stock purchase agreement among
SoftNet and Big Sky Network dated December 23, 1999, under which SoftNet
purchased 10,000 shares of common stock of Big Sky Network for an aggregate
purchase price of $500,000 and Big Sky Network granted SoftNet an option to
acquire an additional 40,000 shares of common stock of Big Sky Network for
$2,000,000. SoftNet subsequently exercised its option, which resulted in SoftNet
holding an aggregate 50% interest (50,000 shares) in Big Sky Network.
The proceeds of the sale were used for working capital to fund the
Shekou joint venture, a joint venture to deploy Internet broadband services in
the Shekou Industrial Area within the Special Economic Zone of Shenzhen, a city
in Guangdong Province.
In connection with the stock purchase agreement, the parties entered
into an Investor's Rights Agreement dated December 23, 1999, granting certain
rights to SoftNet related to the Big Sky Network shares and a Provision of
Services Agreement dated December 23, 1999, under which SoftNet agreed to
provide certain services to Big Sky Network in connection with the Shenzhen
Joint Venture . SoftNet, Big Sky Network and certain founding shareholders of
Big Sky Network had previously entered into a Right of First Refusal, Co-Sale
and Voting Agreement dated December 23, 1999, under which SoftNet was granted
certain first right of refusal to purchase such shareholders' shares in Big Sky
Network, Co-sale Rights and Voting Rights related to the election of directors
of Big Sky Network.
On September 29, 2000, China Broadband acquired, indirectly through
China Broadband (BVI), its wholly-owned subsidiary, 50,000 shares of common
stock of Big Sky Network from SoftNet under the terms of a common stock purchase
agreement dated September 29, 2000. Big Sky Network has 100,000 shares of common
stock issued and outstanding, of which 50% (50,000 shares) were held by SoftNet
and 50% (50,000 shares) were held by China Broadband (BVI). After the
acquisition, China Broadband beneficially owns all of the issued and outstanding
capital stock of Big Sky Network.
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<PAGE>
Under the terms of the Common Stock Purchase Agreement, the Registrant
paid SoftNet the following consideration for SoftNet's interest in Big Sky
Network:
- $2,500,000 in cash;
- a promissory note in the principal amount of $1,700,000, due
September 29, 2001, with interest payable at maturity at the rate
of 8% per annum;
- forgiveness of a debt, if any, owed by SoftNet to the Registrant;
and
- 1,133,000 shares of the Registrant's common stock.
Each of the Investor's Rights Agreement, the Provision of Services
Agreement and the Right of First Refusal, Co-Sale and Voting Agreement were
terminated in connection with the Registrant's purchase of SoftNet's interest in
Big Sky Network. These agreements were terminated pursuant to the terms of a
termination agreements dated September 29, 2000 among SoftNet, the Registrant,
Big Sky Network and the founding shareholders of Big Sky Network. The directors
of Big Sky Network appointed by SoftNet resigned on September 29, 2000.
SALES AND MARKETING
Exclusive Franchise - we seek to enter into exclusive franchises with
municipally owned and operated cable television facilities in cities where
competing Internet companies have not deployed. Provincial capital cities are
our initial target but we do not restrict our marketing solely to such cities.
We establish relationships with the municipal governments and the management of
the local cable television stations. By offering the municipalities a
competitive Internet service, we enhance their ability to attract foreign
investment in local industry.
Residential - After installing equipment and tuning it for local conditions, our
sales force concentrates on the multiple unit residential buildings in the area.
Installation is readily available, as many buildings have cable lines already in
place. We also provide free Internet access to schools in a target area.
Students recognize the value of high speed, reliable service, which we expect
will be used to persuade parents to subscribe. We have also partnered with
securities dealers to market on-line trading capabilities to their clients.
Business - Our marketing programs target large businesses with import and export
focus. It is our expectation that such businesses will welcome the competitive
advantage of meeting customers and suppliers on-line.
RESEARCH AND DEVELOPMENT
We do not invest in proprietary technology or research and development. Instead,
we intend to use technologies that are available from third-party vendors and
the technologies developed by Big Sky Network's joint venture partners and
affiliated entities.
Big Sky Network's joint ventures are expected to rely on the technologies and
systems of major cable television stations in which such ventures intend to
offer broadband services through. These cable television stations generally use
technologies that are use modern standards comparable to most western cities.
Big Sky Network's contribution to the joint ventures includes the acquisition
and installation of routers, switches head-end equipment and modems that Big Sky
Network plans to acquire from third-party providers. We do not anticipate that
we will be required to conduct any material research and development to provide
equipment or technologies required to convert cable television stations to
Internet capable facilities are available.
Big Sky Network's implementation strategy for each joint venture includes
providing an assessment of each facility, using contractors, employees and
third-party providers to design required upgrades, supply technicians, install
equipment and activate the Internet high-speed access service.
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<PAGE>
Big Sky Network does not depend on any one equipment supplier, although
negotiations with suppliers may lead to exclusivity agreements if significant
benefits accrue to the Company from entering into such agreements.
COMPETITION
The size of the China market for Internet services attracts considerable
attention from foreign companies seeking to expand the market for their goods
and services. We believe our primary competitors are Chinese telecommunications
companies, which currently provide dial-in Internet access.
A number of companies have announced their intention to provide Internet access
through cable television stations. We believe the demand for broadband Internet
service will increasingly attract foreign attention. As China gains acceptance
into the World Trade Organization ("WTO"), it will liberalize its rules on
foreign investment, ownership of telecommunications facilities and Internet
access. China Broadband Corp. believes Big Sky Network can enter into joint
ventures to capture a reasonable number of exclusive franchises before WTO takes
effect. We are constrained by limited financial and human resources and cannot
expect to dominate the Internet industry. However, we do expect that by
capturing selected provincial capitals and other key cities, we will be well
positioned to partner with other companies on competitive terms to grow the
Chinese broadband Internet market profitably
Currently, the resident Chinese telecommunications companies have exclusive
right to offer Internet service. New entrants such as Big Sky Network's joint
ventures must secure license agreements with one or more of the authorized
Internet access providers. Chinese telecommunications companies have a
competitive advantage in terms of size, acceptance, customer base, marketing and
sales force and license.
Relative to the Chinese telecommunications companies, China Broadband Corp.
believes Big Sky Network's joint ventures can differentiate its services from
typical dial-in Internet services because of its services offer advantages in
speed of service and price.
China Broadband Corp. also believes that Big Sky Network's joint ventures are
structured in a manner that has been approved by government regulators and is
legal in China, which may create a competitive advantage over other companies
seeking to provide broadband Internet service using other business structures.
INTELLECTUAL PROPERTY
Our success is dependent upon our ability to protect our intellectual
property rights. We rely principally on a combination of copyright, trademarks,
trade secret and patent laws, non-disclosure agreements and other contractual
provisions to establish and maintain our proprietary rights. We have submitted a
trademark application to register the name "China Broadband" with the United
States Patent and Trademark Office.
As part of our confidentiality and operating procedures, we generally
enter into nondisclosure and confidentiality agreements with each of our key
employees and consultants and limit access to and distribution of our core
technology, documentation and other proprietary information. To protect
ourselves against any loss of essential information held by key personnel, we
have entered into provisions with our research and development employees with
regard to ownership of technological developments.
Policing the unauthorized use of our technology is difficult. We will
use all viable and cost-permissive methods for defending and prosecuting any
suspected violators of our technology.
EMPLOYEES
Most of our employees are employees of the joint ventures in China.
Each joint venture engages local staff as required to manage its business,
market the product, and install the Internet service. We maintain a small group
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of technical specialists contracted to the joint ventures to install, integrate
and service major components, such as routers and head-end equipment. We plan to
hire additional employees in sales, marketing, and administration over the next
fiscal year and plan to hire additional management and service employees on an
as-needed basis. If the need arises for additional technical employees and we
are unable to hire qualified employees in a timely manner, we may outsource
projects to third-parties such as Cisco Systems or Nortel Network.
Our subsidiary, Big Sky Network, employs a total of 11 employees in
general, administrative and marketing functions on a full-time basis. We
anticipate that Big Sky Network will hire additional employees in sales,
marketing, and administration and additional research and development employees
on an as-needed basis over the next fiscal year.
FACILITIES
Our principal Corporate administrative and marketing facilities are
located in Calgary, Alberta, and consist of approximately 4000 square feet of
office space held under a lease that expires in five years subject to certain
early termination provisions after one year. Our head office address is 2080,
440 -2 Avenue SW., Calgary, Alberta, Canada, T2P 5E9.
Our subsidiary, Big Sky Network, has offices located at Room 808,
Zhaoshang Building, Shaoshang Road, 518067 Shekou, Shenzhen, Guangdong, China,
and Zongnan Residential Area, Tai D4, Shenglong Street, Consulate Road, Chengdu,
Sichuan 610041 Chengdu, Sichuan Province, China.
LEGAL PROCEEDINGS
We are not currently party to any pending legal proceedings.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information, as of November 30, 2000,
regarding the executive officers and directors of the Corporation:
NAME AGE POSITION
------------------ ----------- -------------------------------------------------
Matthew Heysel 44 Chairman of the Board, Chief Executive Officer
since April 14, 2000
------------------ ----------- -------------------------------------------------
Daming Yang 43 Director and President since April 14, 2000
------------------ ----------- -------------------------------------------------
Tom Milne 54 Director and Chief Financial Officer since April
14, 2000
------------------ ----------- -------------------------------------------------
MATTHEW HEYSEL - CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER:
Mr. Matthew Heysel is forty-four years old and serves as Chairman of the Board
of Directors and Chief Executive Officer of China Broadband Corp. from April 14,
2000 to the present. He also serves as the chairman of Big Sky Network Canada
Ltd, (a subsidiary of China Broadband Corp.) and has held that position since
May of 1999. Previously, he served as Vice President of Corporate Finance of
Yorkton Securities, a Canadian independent securities firm, where he was
responsible for corporate finance in the oil and gas sector from April 1997
through April 1999. From October 1999 to the present, Mr. Heysel has also served
President and a director of New Energy West Corp., a junior oil and gas
exploration company.
DAMING YANG - DIRECTOR AND PRESIDENT:
Mr. Daming Yang is forty-three years old and has served on our Board of
Directors and as our President since April 14, 2000. He has also served as the
President and a member of the board of directors of Big Sky Network Canada Ltd.,
our subsidiary, since May of 1999. From 1993 through 1999, Mr. Yang served as
Vice President and then President of Tongli Energy Technical Service Co. Ltd.,
an importer of high-technology equipment to China.
TOM MILNE - DIRECTOR AND CHIEF FINANCIAL OFFICER:
Mr. Tom Milne is fifty-four years old and has served on our Board of Directors,
and as Vice President of Finance, and as Chief Financial Officer since April 14,
2000. He also has served as the Chief Financial Officer of Big Sky Network
Canada Ltd, our subsidiary, since May of 1999. From 1985 through 1997, Mr. Milne
was Vice President and Treasurer of NOVA Corporation, and director of Nova
Finance International. He was the Vice President, Finance and Chief Financial
Officer of Arakis Energy (now Talisman Energy Corp.) from September, 1997 to
October, 1998, an oil and gas company traded on the NASDAQ. Since March 1998,
Mr. Milne has served as Chief Executive Officer of Precise Details, Inc., a
consulting, investment management real estate and automotive services company.
Mr. Milne currently serves on the board of directors of Caspian Oil Tools
Limited, Longview Petroleum Limited and Synenco Energy Limited. Mr. Milne is
also a director of The Alberta Performing Arts Stabilization Fund and the
Pension and Investment Committee of the University of Calgary Pension and
Endowment Funds.
BOARD COMMITTEES
On November 1, 2000, our board of directors established an audit
committee and a compensation committee. As additional directors are added to the
Board, non-executive directors will assume responsibility for audit and
compensation committees.
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<PAGE>
AUDIT COMMITTEE. The audit committee of the board of directors reviews
our internal accounting procedures and consults with and reviews the services
provided by our independent auditors. Messrs. Heysel, Yang and Milne are members
of this committee.
COMPENSATION COMMITTEE. The compensation committee of the board of
directors reviews and recommends to the board of directors the compensation and
benefits of all our executive officers and establishes and reviews general
policies relating to compensation and benefits of our employees. Messrs. Heysel
and Milne are members of this committee. Except as described in "Related Party
Transactions," no interlocking relationships exist between our board of
directors or compensation committee and the board of directors or compensation
committee of any other company, nor has any interlocking relationship existed in
the past.
In the past, our board of directors has negotiated all executive
salaries on behalf of China Broadband. Our Board of Directors believes that the
use of direct stock awards is at times appropriate for employees, and in the
future intends to use direct stock awards to reward outstanding service or to
attract and retain individuals with exceptional talent and credentials. The use
of stock options and other awards is intended to strengthen the alignment of
interests of executive officers and other key employees with those of our
stockholders. See "Stock Option Plan."
DIRECTOR COMPENSATION
We do not currently pay any cash compensation to directors for serving
on our board, but we do reimburse directors for out-of-pocket expenses for
attending board and committee meetings. We do not provide additional
compensation for committee participation or special assignments of the board of
directors.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our chief
executive officer and two other most highly compensated executive officer for
the years indicated. No other executive officer of China Broadband earned a
salary and bonus for such fiscal year in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------------------------------------------------
AWARDS PAYOUTS
---------------------------------------
RESTRICTED
SECURITIES SHARES OR
FISCAL OTHER UNDER RESTRICTED LTIP
NAME AND PRINCIPAL YEAR SALARY BONUS ANNUAL OPTIONS/SARS SHARE UNITS PAYOUTS ALL OTHER
POSITION ENDED(1) (US$) (US$) COMPEN- GRANTED(#) (US$) (US$) COMPENSATION
SATION
(US$)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Matthew Heysel 2000 90,000(2) 0 0 550,000 0- 0 0
1999(3) nil
Daming Yang 2000 45,000(2) 0 0 550,000 0 0 0
1999(3) nil
Tom Milne 2000 60,000(2) 0 0 250,000 0 0 0
1999(3) nil
James Charuk 2000(4) nil(4) - -
1999 nil(5)
<FN>
(1) December 31
(2) Estimated salary for the year ending December 31, 2000.
(3) Mr. Heysel, Mr. Yang and Mr. Milne were not employed by the Registrant
in 1999. No compensation was paid to officers and directors during the
year ended December 31, 1999.
(4) Mr. Charuk served as the President and a director of ICI from June 22,
1998 through March 1, 2000. No compensation was paid to any officer or
director of China Broadband during this period.
(5) No compensation was paid to any officer or director of China Broadband
during this period.
</FN>
</TABLE>
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EMPLOYMENT AND CONSULTING CONTACTS
We, through our subsidiaries, have entered into consulting agreements
with key individuals, who perform services for the Company as specified in the
agreements. We use a standard form of consulting agreement, which define term of
the agreement, services to be performed, compensation and benefits,
confidentiality and individual specific benefits based on the requirements of
the position. We have entered into consulting agreements with MH Financial
Management, for the services of Matthew Heysel, Daming Yang and Precise Details
Inc., for the services of Thomas Milne.
We, through our subsidiaries, have also entered into employment and/or
consulting agreements with the following officers and directors of our
subsidiaries.
OPTION GRANTS
We did not grant any stock options to our chief executive officer or
other most highly compensated executive officers during the fiscal year ended
December 31, 1999.
On April 14, 2000, China Broadband Corp. granted options to certain
officers, directors and consultants exercisable to acquire a total of 4,175,000
shares at $1.00 per share. The Corporation cancelled 50,000 options and issued
50,000 warrants with identical terms and conditions. On November 1, 2000, China
Broadband Corp. granted options to certain officers, directors and employees
exercisable to acquire a total of 650,000 common shares at $7.50 per share.
The following table sets forth information regarding stock option
grants. The potential realizable value is calculated based on the assumption
that the common stock appreciates at the annual rate shown, compounded annually,
from the date of grant until the expiry of the term of the option. These numbers
are calculated based on SEC requirements and do not reflect our projection or
estimate of future stock price growth. Potential realizable values are computed
by:
o multiplying the number of shares of common stock subject to a given
option by the exercise price;
o assuming that the aggregate stock value derived from that
calculation compounds at the annual 5% or 10% rate shown in the
table for the entire term of the option; and
o subtracting from that result the aggregate option exercise price.
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<TABLE>
<CAPTION>
OPTION GRANTS
INDIVIDUAL GRANTS POTENTIAL REALIZED
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
TERM
---------------------------------------------------------------------------------- -------------------------
(A) (B) (C) (D) (E) (F) (G)
NAME NUMBER OF % OF TOTAL EXERCISE EXPIRATION 5% ($) 10% ($)
SECURITIES OPTIONS OR BASE DATE
UNDERLYING GRANTED TO PRICE
OPTIONS EMPLOYEES ($/SH)(2)
GRANTED (#) IN FISCAL
YEAR(1)
------------------------ -------------- ------------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Matthew Heysel 500,000 10.47% $1.00 4/14/2005 107,753 305,255
50,000 1.05% $7.50 10/17/2003 103,605 228,941
Daming Yang 500,000 10.47% $1.00 4/14/2005 107,753 305,255
50,000 1.05% $7.50 10/17/2003 103,605 228,941
Tom Milne 100,000 2.09% $1.00 4/14/2005 21,550 61,051
150,000 3.14% $7.50 10/17/2003 310,817 686,823
<FN>
(1) Based on options exercisable to acquire a total 4,775,000 shares to officers, directors, employees and consultants.
(2) The exercise price per shares was equal to the fair market value of the common stock on the date of grant as determined by
the Board of Directors.
</FN>
</TABLE>
OPTION EXERCISES
None of the Named Executive Officers have exercised options to purchase
shares of our common stock as of November 30, 2000.
ADVISORY BOARD
On April 14, 2000, we created an advisory board to advise our Board of Directors
on matters related to our business and operations. Set forth below are the
members of our Advisory Board.
---------------------- -------------------------------------------
ADVISORY BOARD MEMBER DATE OF APPOINTMENT
---------------------- -------------------------------------------
Ian Aaron Advisory Board Member since April 14, 2000
---------------------- -------------------------------------------
Danai Suksira Advisory Board Member since April 14, 2000
---------------------- -------------------------------------------
Bernard Poznanski Advisory Board Member since April 14, 2000
---------------------- -------------------------------------------
Richard Hurwitz Advisory Board Member since June 30,2000
---------------------- -------------------------------------------
James Pasieka Advisory Board Member since October 26,2000
---------------------- -------------------------------------------
IAN AARON - ADVISORY BOARD MEMBER:
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Ian Aaron has served on the Advisory Committee to the Chairman from May 2000 to
the present. Mr. Aaron served as a President, after serving as Vice President
and Chief Information Officer, and director of SoftNet Systems, Inc. Mr. Aaron
served as President of Communications Direct, Inc., and Director of Marketing at
Fujitsu/GTE Business Communications. Mr. Aaron is Chief Executive Officer and a
director of Big Sky Network Canada Ltd.
BERNARD POZNANSKI - ADVISORY BOARD MEMBER:
Bernard Poznanski has served on the Advisory Committee to the Chairman from May
2000 to the present. Mr. Poznanski is a founding partner and head of the
securities group of the business law firm Koffman Kalef.
RICHARD HURWITZ - ADVISORY BOARD MEMBER:
Richard Hurwitz currently is a partner at Bancorp Services, LLC in St. Louis Mo.
Is past Chief Executive Officer of Benefit Finance Securities and former
Managing Director, Europe and Senior Vice President of Bridge Information
Systems (UK)
JAMES PASIEKA - ADVISORY BOARD MEMBER:
Jim Pasieka currently serves as Vice President, Corporate Development of
Cavendish Investing Ltd. A private investment company. He has 20 years
experience practicing and teaching corporate and commercial law.
DANAI SUKSIRA - ADVISORY BOARD MEMBER:
Danai Suksiri has served on the Advisory Committee to the Chairman from May 2000
to the present. Mr. Suksira is currently the Market Development Manager,
Broadband Networks, Cisco Systems. He was formerly a Development Engineer at
Unisys Corp. and Manufacturing Engineer with Rolm-IBM.
STOCK OPTION PLAN
Our board of directors approved the creation of the 2000 Stock Option
Plan. Under the plan, the board of directors may grant incentive and
non-qualified options to acquire up to a total of 8,000,000 common shares to our
directors, officers, employees and consultants. To date, our board has granted
options exercisable to acquire 4,775,000 common shares.
The plan is intended to retain the services of our valued key employees
and consultants and others that the plan administrator may select to:
o encourage our employees and consultants to acquire a greater
proprietary interest in China Broadband;
o serve as an aid and inducement in the hiring of new employees; and
o provide an equity incentive to consultants and others selected by
the Board of Directors and the plan administrator.
The primary difference between "incentive stock options" and
non-qualified options is the tax treatment of the option holder. If a holder
complies with Internal Revenue Service rules regarding incentive stock options,
a holder of an incentive stock can defer recognition of income for tax purposes
until the shares underlying the options are sold. A holder of a non-qualified
option generally recognizes income on the date of exercise. Incentive stock
options may be granted to any individual who, at the time the option is granted,
is an employee of China Broadband or any related corporation. Non-qualified
stock options may be granted to employees and to others at the discretion of the
plan administrator. The plan administrator fixes the exercise price for options
in the exercise of its sole
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discretion, except that the exercise price for an incentive stock option must be
at least the fair market value per share of the common stock at the date of
grant (as determined by the plan administrator in good faith), or in the case of
greater-than ten percent shareholders, at least one hundred ten percent of the
fair market value per share. The exercise price may be paid in cash or, with the
approval of the plan administrator, by other means, including withholding of
option shares or delivery of previously held shares. Options granted under the
plan vest over a three-year period, with one-third becoming exercisable at the
end of each of the three years following the date of grant. The plan
administrator may accelerate the vesting of options in its sole discretion.
Options are non-transferable except by will or the laws of descent and
distribution or subject to a qualified domestic relations order. With some
exceptions, vested but unexercised options terminate upon the earlier of:
o the expiration of the option term specified by the plan
administrator at the date of grant (generally 10 years; or, with
respect to incentive stock options granted to greater-than ten
percent shareholders, a maximum of five years);
o the expiration of 30 days from the date of an employee optionee's
termination of employment with us or any related corporation "for
cause" as defined in the plan;
o the expiration of 90 days from the date of an employee optionee's
termination of employment with us or any related corporation for
any reason whatsoever other than for cause, death or disability
(unless, in the case of non-qualified stock options, extended by
the plan administrator); or
o the expiration of one year from the date of death or disability (as
defined in the plan) of the optionee.
If an employee optionee's employment is terminated by death, any option
held by the optionee is exercisable only by the person or persons to whom such
optionee's rights under the option pass by the optionee's will or by the laws of
descent and distribution of the state or county of the employee optionee's
domicile at the time of death. Unless accelerated in accordance with the plan,
unvested options terminate immediately upon termination of employment of the
optionee by us for any reason, including death or disability, and upon a change
of relationship between the optionee and us, such as from employee to
consultant. The plan administrator may amend or modify the plan, except that no
amendment with respect to an outstanding option may be made over the objection
of the holder of the option (other than those provisions triggering acceleration
of vesting of outstanding options).
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
Our articles of incorporation provide that we shall have the right to
indemnify any person for any liability or expenses incurred by that person by
reason of the fact that he was a director, officer, employee or agent and has
the right to advance or pay the expenses of directors and officers in defending
civil or criminal suit or proceeding to the full extent provided by the General
Corporation Law of Nevada.
Our bylaws provide that to the fullest extent permitted by law we may
indemnify our directors, officers and others who were or are a party or are
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding.
We maintain director and officer liability insurance in the amount of
$10,000,000.
RELATED PARTY TRANSACTIONS
On April 14, 2000, we entered into an exchange agreement with the
shareholders of China Broadband (BVI), including certain officers and members of
our board of directors. In exchange, we issued 13,500,000 shares of common stock
to the shareholders of China Broadband (BVI). Under the terms of the exchange
agreement, Brent Shaw, Michael Kang and James Charuk resigned as members of our
Board of Directors and Matthew Heysel, Daming Yang and Tom Milne were appointed
as the members of our Board of Directors.
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On April 14, 2000, China Broadband Corp. granted options to officers,
directors and consultants to China Broadband Corp. exercisable to acquire a
total of 4,175,000 shares at $1.00 per share. These options were fully vested
and expire on April 14, 2005.
In May 2000, China Broadband issued 500,000 shares at $0.20 per share;
1,530,000 shares at $1.00 per share and 1,301,667 shares at $7.50 per share for
gross proceeds of $11,392,503. We are registering for resale the shares of our
common stock acquired by the following selling shareholders pursuant to the
purchase agreement.
On November 1,2000, China Broadband Corp. granted options to officers,
directors and employees exerciseable to acquire 650,000 common shares at $7.50
per common share. These options are fully vested and expire on November 1, 2003.
We have entered into consulting agreements with Matthew Heysel, Daming
Yang and Tom Milne. See "Employment and Consulting Agreements."
PRINCIPAL SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of our outstanding common stock as of November 30, 2000 for:
o each of our directors and executive officers individually;
o each person or group that we know owns beneficially more than 5% of
our common stock; and
o all directors and executive officers as a group.
Rule 13d-3 under the Securities Exchange Act defines the term,
"beneficial ownership." Under this rule, the term includes shares over which the
indicated beneficial owner exercises voting and/or investment power. The rules
also deem common stock subject to options currently exercisable, or exercisable
within 60 days, to be outstanding for purposes of computing the percentage
ownership of the person holding the options but do not deem such stock to be
outstanding for purposes of computing the percentage ownership of any other
person. The applicable percentage of ownership for each shareholder is based on
19,474,517 shares of common stock outstanding as of September 30, 2000, together
with applicable options for that shareholder. Except as otherwise indicated, we
believe the beneficial owners of the common stock listed below, based on
information furnished by them, have sole voting and investment power over the
number of shares listed opposite their names.
<TABLE>
<CAPTION>
PERCENT OF
SHARES OUTSTANDING(1)
------------------
NAME AND ADDRESS NUMBER OF SHARES BEFORE AFTER
OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
-------------------- ------------------ -------- --------
OFFICERS AND DIRECTORS
<S> <C> <C> <C>
Matthew Heysel, Director, CEO
2080, 440-2 Avenue SW 2,473,750(2) 12.45% 12.45%
Calgary, Alberta T2P 5E9
Daming Yang, Director and President
2080, 440-2 Avenue SW 2,473,750(3) 12.45% 12.45%
Calgary, Alberta T2P 5E9
Tom Milne
2080, 440-2 Avenue SW 260,200 1.34% 1.34%
Calgary, Alberta T2P 5E9
Officers and Directors as a Group 5,207,700(7) 26.74% 26.74%
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<PAGE>
<CAPTION>
PERCENT OF
SHARES OUTSTANDING(1)
------------------
NAME AND ADDRESS NUMBER OF SHARES BEFORE AFTER
OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
-------------------- ------------------ -------- --------
5% SHAREHOLDERS
<S> <C> <C> <C>
Wei Yang
Room 837, China Merchant Building 2,423,750(5) 12.13% 12.13%
Shenzhen, Guong Dong
China 518067
Kai Yang
1404 Building A Huriyan Apart. 2,023,750(6) 10.34% 10.34%
Asia Game Village
Beijing
China 100101
<FN>
(1) Based on 19,474,517 issued and outstanding shares of common stock at
November 30, 2000.
(2) Includes 1,923,750 shares of common stock and options exercisable within 60
days of November 30, 2000 to acquire 550,000 shares of common stock.
(3) Includes 1,923,750 shares of common stock and options exercisable within 60
days of November 30, 2000 to acquire 550,000 shares of common stock.
(4) Includes 10,200 shares of common stock and options exercisable within 60
days of November 30, 2000 to acquire 250,000 shares of common stock.
(5) Includes 1,923,750 shares of common stock and options exercisable within 60
days of November 30, 2000 to acquire 500,000 shares of common stock.
(6) Includes 1,923,750 shares of common stock and options exercisable within 60
days of November 30, 2000 to acquire 100,000 shares of common stock.
(7) Includes 1,350,000 shares of common stock acquirable upon exercise of
options within 60 days of November 30, 2000.
</FN>
</TABLE>
TAXATION
The following discussion describes the material United States federal income tax
consequences of the ownership of common shares of China Broadband Corp. by an
investor that purchases and holds them as capital assets.
The discussion does not address any aspects of United States taxation other than
federal income taxation. Prospective investors are urged to consult their tax
advisors regarding the United States federal, state and local tax consequences
of the purchase, holding or disposal of common shares.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
The discussion below is based on the Internal Revenue Code of 1986, as
amended, its legislative history, Treasury Regulations and published judicial
and administrative interpretations, all as in effect on the date hereof and
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all of which are subject to change, possibly retroactively. The tax treatment of
a holder of common shares may vary depending upon the holder's particular
situation. This discussion does not address all of the tax consequences relating
to the ownership of the common shares, and does not take into account holders
subject to special rules including, but not limited to, dealers in securities or
currencies, financial institutions, tax-exempt entities, banks, life insurance
companies, traders in securities that elect to mark-to-market their securities,
persons that hold common shares as a part of a straddle or a hedging, or
conversion transaction, persons liable for the alternative minimum tax, persons
that actually or constructively own 10% or more of our voting stock, or persons
whose "functional currency" is not the U.S. dollar. In addition, the following
discussion is limited to United States holders who will hold the common shares
as capital assets within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended.
A United States holder is a holder of common shares that is an
individual who is a citizen or resident of the United States, a partnership,
corporation or other entity organized in or under the laws of the United States
or any political subdivision thereof (unless, in the case of a partnership,
Treasury Regulations otherwise provide), an estate that is subject to United
States federal income taxation without regard to the source of its income or a
trust subject to the primary supervision of a United States court and the
control of one or more United States persons.
The discussion below does not address the effect of any state or local
tax law on a holder of the common shares.
DISTRIBUTIONS
The gross amount of a distribution (including a deemed or constructive
distribution) with respect to the common shares will be treated as a dividend
taxable as ordinary income on the date of receipt, to the extent of our current
or accumulated earnings and profits as determined for United States federal
income tax purposes. Distributions, if any, in excess of these current and
accumulated earnings and profits will first constitute a non-taxable return of
capital to the extent thereof, and then a capital gain realized on the
disposition of the common shares. The portion of any distribution treated as a
non-taxable return of capital will reduce a holder's tax basis in the common
shares. Corporate United States holders will be eligible for the dividends
received deduction allowed for distributions to domestic corporations,
multiplied by the relevant percentage based on their percentage shareholding.
If a distribution is paid with respect to the common shares in any
currency other than U.S. dollars, the amount of the distribution will be
translated into U.S. dollars at the spot rate on the date the distributions are
paid or deemed paid to a United States holder, regardless of whether the
distributions are in fact converted on that date. Any subsequent gain or loss in
respect of that non-US currency arising from exchange rate fluctuations will be
ordinary income or loss.
CAPITAL GAINS AND LOSSES
A United States holder will generally recognize gain or loss on the
sale or other disposition of common shares in an amount equal to the difference
between the amount realized on the sale or other disposition and the holder's
adjusted tax basis in the common shares. This will result in a long-term or
short-term capital gain or loss, depending on whether the common shares have
been held for more than one year. The deductibility of capital losses may be
subject to limitation.
CHINESE TAXATION
The following is a summary of income taxes, including withholding
provisions, to which the China Broadband companies are subject under existing
Chinese laws and regulations. The summary is subject to changes in Chinese law,
including changes that could have retroactive effect, and does not purport to be
a complete technical analysis or an examination of all potential tax effects
under Chinese laws and regulations. The China Broadband group is currently
looking at ways to restructure the tax affairs so as to minimise the foreign
taxes payable.
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Income attributable to a permanent establishment of a foreign
corporation from sources in China is subject to tax at a general rate of 33%.
Certain operations may qualify for a reduction in Chinese taxes under certain
regional tax incentives. No branch profits tax is levied. According to the State
Tax Bureau notice, a foreign enterprise without a permanent establishment in
China receiving a profit allocation from a Chinese-foreign cooperative joint
venture will temporarily not be subject to withholding tax of 20% on the
payment. In terms of the Chinese-foreign joint venture agreements, the joint
ventures have a limited period of existence. On the termination of the joint
ventures, China Broadband will receive proceeds on liquidation. These will be
treated as dividend distributions for Chinese tax purposes. Dividends received
by a U.S. resident company or a passive foreign holding company controlled by
U.S. shareholders will be subject to U.S. taxation, upon receipt of the
dividend. Subject to certain limitations, a tax credit for the underlying
Chinese taxes paid is available for set-off against the U.S taxes.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 50,000,000 shares of common stock, $0.001
par value per share. The following is only a summary of provisions of the common
stock. It is not complete and may not contain all the information you should
consider before investing in the common stock. You should carefully read our
articles of incorporation and bylaws, which are included as an exhibit to the
registration statement containing this prospectus.
COMMON STOCK
As of November 1, 2000, we were authorized to issue 50,000,000 shares
of common stock, of which 19,474,517 shares were issued and outstanding held of
record by 177 shareholders. This public offering consists solely of shares of
common stock being resold by selling shareholders. Therefore, this offering will
not affect the total number of shares of common stock issued and outstanding.
Holders of shares of common stock are entitled to one vote per share on
all matters to be voted on by the shareholders. The holders of shares of common
stock are entitled to receive any dividends the board of directors declares out
of funds legally available for the payment of dividends. Upon the liquidation,
dissolution or winding up of China Broadband, the holders of shares of common
stock are entitled to share all of our assets remaining after payment of
liabilities. All outstanding shares of common stock are fully paid and
nonassessable.
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON STOCK AND RELATED
STOCKHOLDER MATERIALS
HIGH BID LOW BID
-------- -------
September 25 through $10.00 $7.50
September 30, 2000
October 1, 2000 through $7.50 $4.19
November 30, 2000
Source of trading information: Bloomberg.
Quotations commenced on the NASD Over-the-Counter Bulletin Board on
September 25, 2000. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
The price of our common stock on the NASD OTCBB on December 1, 2000 was
$7.1875.
We have never paid dividends on our common shares. We do not anticipate
paying any dividends in the foreseeable future.
ANTI-TAKEOVER EFFECTS OF CHARTER AND BYLAWS PROVISIONS AND THE NEVADA
BUSINESS CORPORATION ACT
Nevada law provides that any agreement providing for the merger,
consolidation or sale of all or substantially all of the assets of a corporation
be approved by the owners of at least the majority of the outstanding shares of
that corporation, unless a different vote is provided for in our articles of
incorporation. Our articles of incorporation do not provide for a super-majority
voting requirement in order to approve any such transactions. Nevada law also
gives appraisal rights for some mergers, plans of reorganization, or exchanges
or sales of all or substantially all of the assets of a corporation. Under
Nevada law, a shareholder does not have the right to dissent with respect to:
o a sale of assets or reorganization, or
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o any plan of merger or any plan of exchange, if the shares held by
the shareholder are part of a class of shares which are listed on a
national securities exchange or the Nasdaq National Market Systems,
or are held of record by note less than 2,000 shareholders, and the
shareholder is not required to accept for his shares any
consideration other than shares of a corporation that, immediately
after the effective time of the merger or exchange, will be part of
a class of shares which are listed on a national securities
exchange or the Nasdaq National Market System, or are held of
record by not less than 2,000 holders.
The Nevada Private Corporation Law also has three provisions designed
to deter take-over attempts:
Control Share Acquisition Program. Under Nevada law, when a person has
acquired or offers to acquire one-fifth, one-third or a majority of the stock of
a corporation, a shareholders meeting must be held after delivery of an
"offerors" statement, at the offerors expense, so that the shareholders of the
corporation can vote on whether the shares proposed to be acquired can exercise
voting rights. Except as otherwise provided in a corporation's article of
incorporation, the approval of the majority of the outstanding stock not held by
the offerors is required so that the stock held by the offerors will have voting
rights. The control share acquisition provisions are applicable to any
acquisition of a controlling interest, unless the articles of incorporation or
by-laws of a corporation in effect on the tenth day following the acquisition of
a controlling interest by an acquiring person provides that the control share
acquisition provisions do not apply. We have not elected out of the control
share acquisition provisions of Nevada law.
Combination Moratorium Provision. Nevada law provides that a
corporation may not engage in any "combinations," which is broadly defined to
include mergers, sales and leases of assets, issuances of securities and similar
transactions with an "interested stockholder," which is defined as the
beneficial owner of 10% or more of the voting power of the corporation, and
affiliates of their associates for three years after an interested shareholder's
date of acquiring the shares, unless the combination or the purchase of the
shares by the interested shareholder is first approved by the board of
directors. After the initial three-year period, any combination must still be
approved by a majority of the voting power not beneficially owned by the
interested shareholder or the interested shareholders affiliates or associates,
unless the aggregate amount of cash and the market value of the consideration
other than cash that could be received by shareholders as a result of the
combination is at least equal to the highest of the highest bid per share of
each class or series of shares, including the common shares, on the date of the
announcement of the combination or on the date the interested shareholder
acquired the shares, or for holders of preferred stock, the highest liquidation
value of the preferred stock.
Other Provisions. Under Nevada law, the selection of a period for
achieving corporate goals is the responsibility of the directors. In addition,
the directors and officers, in exercising their respective powers with a view to
the interest of the corporation may consider the interest of the corporation's
employees, suppliers, credits and customers, the economy of the state and the
nation, the interest of the economy and of society and the long-term, as well as
short-term, interests of the corporation and its shareholders, including the
possibility that those interest may be best served by the continued independence
of the corporation. The directors may also resist any change or potential change
of control of the corporation if the directors, by majority vote of a quorum,
determine that a change or potential change is opposed to or not in the best
interest of the corporation "upon consideration of the interest of the
corporation's shareholders," or for one of the other reasons described above.
The directors may also take action to protect the interests of the corporation's
shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent for our shares of common stock is:
Interwest Transfer Co., Inc.
1981 East 4800 So., Suite 100
Salt Lake City, UT. 84117
Phone (801) 272-9294
Fax (801) 277-3147
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<PAGE>
Our registered agent is:
Michael J. Morrison
1495 Ridgeview Drive
Reno, Nevada 89509
Phone (775) 827-6300
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SHARES ELIGIBLE FOR FUTURE SALE
There are 19,474,517 shares of our common stock outstanding as of
November 30, 2000, of which 1,509,850 are freely tradable. Subject to the
registration statement being declared and remaining effective, 6,706,667 issued
and outstanding shares and 200,790 shares acquirable upon the exercise of
warrants, all of which are offered for resale under this prospectus will be
immediately tradable without restriction or further registration under the
Securities Act.
We cannot predict as to the effect, if any, that sales of shares of
common stock by the selling shareholders, or even the availability of such
shares for sale, will have on the market prices of our common stock from time to
time. The possibility that substantial amounts of common stock may be sold in
the public market may adversely affect prevailing market prices for our common
stock and could impair our ability to raise capital through the sale of our
equity securities.
Subject to the provisions of Rule 144, 10,125,000 additional shares of
our common stock will be available for sale in the public markets on April 14,
2001; an additional 1,133,000 shares of our common stock will be available for
sale in the public markets on September 29, 2001
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
o 1% of the number of shares of common stock then outstanding, which
equals approximately 19,474 shares as of November 30, 2000; or
o the average weekly trading volume of the common stock on the OTC
Bulletin Board during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately.
As of November 30, 2000, options to purchase 4,775,000 shares of common
stock were issued and outstanding under our 2000 Stock Option Plan. We intend to
file a registration statement on Form S-8 to register all of the shares of
common stock reserved for issuance under our 2000 Stock Option Plan (including
shares subject to outstanding options). Accordingly, shares registered under
such registration statement are, subject to vesting provisions and Rule 144
volume limitations applicable to our affiliates, available for sale in the open
market.
PLAN OF DISTRIBUTION
We are registering the shares on behalf of the selling shareholders.
When we refer to selling shareholders, we intend to include donees and pledgees
selling shares received from a named selling shareholder after the date of this
prospectus. All costs, expenses and fees in connection with the registration of
the shares offered under this registration statement will be borne by us.
Brokerage commissions and similar selling expenses, if any, attributable to the
sale of shares will be borne by the selling shareholders. Sales of shares may be
effected by selling shareholders from time to time in one or more types of
transactions (which may include block transactions) in the over-the-counter
market, in negotiated transactions, through put or call options transactions
relating to the shares, through short sales of shares, or a combination of such
methods of sale, at market prices prevailing at the time of
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sale, or at negotiated prices. Such transactions may or may not involve brokers
or dealers. The selling shareholders have advised us that they have not entered
into any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares by the selling shareholders.
The selling shareholders may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling shareholders and/or
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The selling shareholders and any broker-dealers that act in connection
with the sale of shares might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of shares sold by them while acting
as principals might be deemed to be underwriting discounts or commissions under
the Securities Act. We have agreed to indemnify each selling shareholder against
some liabilities arising under the Securities Act. The selling shareholders may
agree to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the shares against some liabilities arising
under the Securities Act.
Because selling shareholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the selling shareholders
will be subject to the prospectus delivery requirements of the Securities Act.
We have informed the selling shareholders that the anti-manipulative provisions
of Regulation M promulgated under the Exchange Act may apply to their sales in
the market.
Selling shareholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.
Upon being notified by a selling shareholder that any material
arrangement has been entered into with a broker-dealer for the sale of Shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, we will file a supplement to
this prospectus, if required, under Rule 424(b) of the Act, disclosing
o the name of each selling shareholder and of the participating
broker-dealer(s),
o the number of shares involved,
o the price at which the shares were sold,
o the commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable,
o that the broker-dealer(s) did not conduct any investigation to
verify information set out or incorporated by reference in this
prospectus; and
o other facts material to the transaction.
In addition, upon being notified by a selling shareholder that a donee
or pledgee intends to sell more than 500 shares, we will file a supplement to
this prospectus.
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LEGAL MATTERS
Michael J. Morrison, Chartered, has acted as special counsel on matters
of Nevada law with respect to the legality of the shares offered by this
prospectus.
EXPERTS
The consolidated financial statements of China Broadband Corp. and the
financial statements of Big Sky Network Canada Ltd. included in this prospectus
and in the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports (which contain an explanatory
paragraph regarding our ability to continue as a going concern), herein and
elsewhere in the registration statement, and is included in reliance upon such
reports of such firm given upon the authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 covering the shares being sold in this
offering. We have not included in this prospectus some information contained in
the registration statement, and you should refer to the registration statement,
including exhibits and schedules filed with the registration statement, for
further information. You may review a copy of the registration statement from
the public reference section of the Securities and Exchange Commission in Room
1024, Judiciary Plaza, 450 5th Street, N.W., Washington, D.C. 20549; and at the
SEC's Regional Office located at: 7 World Trade Center, Suite 1300, New York,
New York 10048 and 1400 Citicorp Center, 500 West Madison Street, Chicago, IL
60661. You may also obtain copies of such materials at prescribed rates from the
public reference section at the Commission, Room 1024, Judiciary Plaza, 450 5th
Street, N.W., Washington, D.C. 20549. In addition, the Securities and Exchange
Commission maintains a Web site on the Internet at the address
http://www.sec.gov that contains reports, proxy information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission.
INDEX TO FINANCIAL STATEMENTS
PAGE
Consolidated Financial Statements of China Broadband Corp. for F-1
the period from February 1, 2000 (inception) to September 30,
2000...........................................................
Report of Independent Auditors'........................... F-2
Consolidated Balance Sheet as of September 30, 2000...... F-3
Consolidated Statement of Operations for the period F-4
ended September 30, 2000..............................
Consolidated Statement of Stockholders' Equity for F-5
period ended September 30, 2000.......................
Consolidated Statement of Cash Flows for the period F-6
ended September 30, 2000..............................
Notes to Consolidated Financial Statements................ F-7
Financial Statements of Big Sky Network Canada Ltd. for the F-2
period from May 20, 1999 (inception) to December 31, 1999, and
for the period January 1, 2000 to March 31, 2000...............
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Report of Independent Auditors'........................... F-23
Balance Sheets as of December 31, 1999 and March 31, 2000 F-24
Statements of Operations for the periods ended December F-25
31, 1999 and March 31, 2000...........................
Statements of Shareholders' Equity for periods ended F-26
December 31, 1999 and March 31, 2000..................
Statements of Cash Flows for the periods ended December F-27
31, 1999 and March 31, 2000...........................
Notes to Financial Statements............................. F-28
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Consolidated Financial Statements of
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
September 30, 2000
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
China Broadband Corp.:
We have audited the consolidated balance sheet of China Broadband Corp. (a
Development Stage Enterprise) as of September 30, 2000 and the related
consolidated statement of operations, stockholders' equity and cash flows for
the period from February 1, 2000 (date of incorporation) to September 30, 2000.
This consolidated financial statement is the responsibility of the Corporation's
management. Our responsibility is to express an opinion on this consolidated
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit, such consolidated financial statement
presents fairly, in all material respects, the financial position of the
Corporation as of September 30, 2000 and the results of its operations and its
cash flows for the period from February 1, 2000 (date of incorporation) to
September 30, 2000 in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statement has been prepared assuming that the
Corporation will continue as a going concern. The Corporation is a development
stage enterprise engaged in providing high speed internet, data and voice
services in The People's Republic of China. As discussed in Note 1 to the
financial statement, the Corporation's operating losses since inception raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The financial
statement does not include any adjustments that might result from the outcome of
these uncertainties.
/s/ DELOITTE & TOUCHE LLP
-------------------------
Deloitte & Touche LLP
Calgary, Alberta, Canada
December 5, 2000
F-2
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Consolidated Balance Sheet
September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
$
------------------
ASSETS
CURRENT
Cash and cash equivalents 7,191,845
Interest and Goods and Services Tax receivable 105,443
Due from officers and employees (Note 9) 109,876
Prepaid expenses 159,218
------------------
7,566,382
Due from Shekou joint venture 295,015
Investment in Shekou joint venture (Notes 1 and 5) 2,684,438
Property and equipment, net (Note 4) 254,572
Intangible assets:
Intellectual property (Note 3) 849,750
Shekou joint venture (Note 3) 2,549,250
Chengdu joint venture (Note 3) 5,098,500
Goodwill (Note 3) 2,153,717
------------------
21,451,624
==================
LIABILITIES
CURRENT
Accounts payable 155,274
Accrued liabilities 73,500
Promissory note (Note 3) 1,700,000
------------------
1,928,774
------------------
CONTINUING OPERATIONS (Note 1)
COMMITMENTS (Note 11)
STOCKHOLDERS' EQUITY
Common stock
$0.001 par value, shares authorized: 50,000,000;
shares issued and outstanding: 19,474,517 77,936
Additional paid-in capital 20,521,491
Accumulated deficit (1,076,577)
------------------
19,522,850
------------------
21,451,624
==================
The accompanying notes are an integral part of this consolidated financial
statement.
F-3
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Consolidated Statement of Operations
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
$
----------
REVENUE
Technical consulting (Note 10) 208,333
GENERAL AND ADMINISTRATIVE EXPENSES
(including non-cash stock compensation of $15,235) 1,352,614
----------
(1,144,281)
EQUITY LOSS IN BIG SKY NETWORK CANADA LTD. (181,471)
INTEREST INCOME 249,175
----------
NET LOSS AND DEFICIT, END OF PERIOD (1,076,577)
==========
LOSS PER SHARE
Basic and diluted (0.06)
==========
SHARES USED IN COMPUTATION, BASIC AND DILUTED 17,023,688
==========
The accompanying notes are an integral part of this consolidated financial
statement.
F-4
<PAGE>
<TABLE>
<CAPTION>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Consolidated Statement of Stockholders' Equity
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
-----------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
$ $ $ $
---------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, February 1, 2000 2,319,000 59,971 - - 59,971
Reverse stock split (809,150) - - - -
Issue of common stock for the
outstanding shares of
China Broadband (BVI) Corp. 13,500,000 13,500 696,529 - 710,029
Stock issued pursuant to private
placement agreements at $0.20
per share 500,000 500 98,835 - 99,335
Stock issued pursuant to private
placement agreements at $1.00
per share 1,530,000 1,530 1,518,289 - 1,519,819
Stock issued pursuant to private
placement agreements at $7.50
per share 1,301,667 1,302 9,696,236 - 9,697,538
Non-cash stock compensation - - 15,235 - 15,235
Acquisition of the shares of
Big Sky Network Canada Ltd. 1,133,000 1,133 8,496,367 - 8,497,500
Net loss - - - (1,076,577) (1,076,577)
--------------- ------------- ------------------ --------------- -----------------
Balance, September 30, 2000 19,474,517 77,936 20,521,491 (1,076,577) 19,522,850
=============== ============= ================== =============== =================
The accompanying notes are an integral part of this consolidated financial statement.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Consolidated Statement of Cash Flows
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------------------------
$
------------------
<S> <C>
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net loss (1,076,577)
Adjustments for:
Amortization 3,745
Equity loss in Big Sky Network Canada Ltd. 181,471
Non-cash stock compensation 15,235
------------------
(876,126)
Changes in operating assets and liabilities
Interest and Goods and Services Tax receivable (105,443)
Due from officers and employees (109,876)
Prepaid expenses 207,449
Accounts payable 155,274
Accrued liabilities 73,500
------------------
(655,222)
------------------
FINANCING
Issue of common stock for cash (net of issuance costs) 11,816,692
------------------
11,816,692
------------------
INVESTING
Increase in due from Big Sky Network Canada Ltd. (1,020,465)
Increase in due from Shekou joint venture (295,015)
Purchases of property and equipment (258,317)
Acquisition of Big Sky Network Canada Ltd. (net of cash acquired) (2,395,828)
------------------
(3,969,625)
------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS, END OF PERIOD 7,191,845
==================
NON-CASH INVESTING AND FINANCING ACTIVITY:
Stock issued to acquire investment in Big Sky Network Ltd. 8,767,500
==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes -
==================
Cash paid for interest -
==================
The accompanying notes are an integral part of this consolidated financial statement.
</TABLE>
F-6
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS
Incorporation and background
China Broadband Corp. (the "Corporation") was incorporated in Nevada in
February 1993 under the name "Institute for Counselling, Inc." On April
27, 2000, Institute for Counselling, Inc. changed its name to China
Broadband Corp. The Corporation is a development stage enterprise and
is seeking to become a leading facilities based provider of high
capacity, high speed internet, data and voice services in major urban
markets throughout The People's Republic of China (the "PRC"). The
Corporation was incorporated for the purposes of implementing a
business strategy involving joint ventures to provide high speed
internet broadband services in major urban markets through the PRC.
On April 14, 2000, the Corporation, a public shell company, acquired
China Broadband (BVI) Corp. ("CBB - BVI") through a reverse acquisition
which was accounted for as a recapitalization. This recapitalization
was effected through the issuance of 13,500,000 common shares of the
Corporation, constituting approximately 90% of its shares outstanding
after the acquisition, in exchange for all of the outstanding shares of
CBB - BVI.
As a result of the application of the accounting principles governing
recapitalization, CBB - BVI (incorporated on February 1, 2000) is
treated as the acquiring or continuing entity for financial accounting
purposes.
The recapitalization of CBB - BVI was affected through the issuance of
stock by CBB - BVI in exchange for the acquisition of the tangible net
assets of the Corporation at fair value, which approximates the
Corporation's net assets historical costs. As a result, the
consolidated financial statements will be deemed to be a continuation
of CBB - BVI's historical financial statements.
Investment in Big Sky Network Canada Ltd.
CBB - BVI acquired 50,000 shares representing all of the outstanding
shares of Big Sky Network Ltd. ("BSN"), a company incorporated under
the laws of the territory of the British Virgin Islands from officers,
directors and persons related to the officers and directors for
12,500,000 common shares of CBB - BVI. CBB - BVI was incorporated for
the purpose of acquiring the shares of BSN. BSN did not have any
substantial operations prior to February 1, 2000. This transaction was
accounted for as a recapitalization of BSN. This recapitalization was
effected through the issuance of 12,500,000 common shares of CBB - BVI
constituting all of its issued and outstanding shares.
F-7
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
Investment in Big Sky Network Canada Ltd. (Continued)
On February 22, 2000, BSN issued an additional 10,000 shares to a third
party for cash consideration of $500,000. As the Corporation controlled
BSN, the financial statements of the Corporation included the accounts
of BSN. On April 25, 2000, BSN issued a further 40,000 shares to the
third party for cash consideration of $2,000,000. As a result of the
April 25, 2000 transaction, the Corporation no longer controlled BSN
and therefore, BSN's accounts have been deconsolidated from these
financial statements. For the period April 26, 2000 to September 28,
2000, the Corporation's investment in BSN is accounted for using the
equity method. On September 29, 2000, the Corporation purchased the
shares of BSN held by the third party (see Note 3).
BSN signed a joint venture agreement on September 21, 1999 with China
Merchants Shekou Industrial Zone, Ltd. ("China Merchants") to establish
Shenzhen China Merchants Big Sky Network Ltd. ("Shekou JV"), the
purpose of which is to provide internet access to Chinese residential
and business customers through the existing cable television
infrastructure. Under the terms of the joint venture agreement, China
Merchants agreed to provide all the non-broadcast rights on the cable
network of a cable television station controlled by China Merchants.
BSN is required to contribute a total of $3,000,000 to the Shekou JV as
cash or equipment. BSN is also responsible for providing technical
support to the Shekou JV. Over the Shenzhen JV's 15 year duration, BSN
will be entitled to receive 60% of the profits earned between 2000 and
2004, 50% of the profits earned between 2005 and 2009 and 40% of the
profits earned between 2010 and 2014. BSN is entitled to appoint four
of the seven directors on the Board of Directors of the Shekou JV for
the first five years of its operations and is thereafter, entitled to
appoint three of the seven directors.
On July 8, 2000, BSN signed a joint venture agreement with Chengdu
Huayu Information Industry Co., Ltd. ("Chengdu Huayu") to establish
Sichuan Huaya Big Sky Network Ltd. ("Chengdu JV"), the purpose of which
is to develop an advanced broadband software and hardware platform for
data transmission and internet related business in the Chengdu area.
Under the terms of the joint venture agreement, Chengdu Huayu agreed to
provide the entire software and hardware data transmission platform of
its Huaya HFC network and the rights to use all of its facilities and
equipment. BSN is required to contribute a maximum of $5,500,000 to the
Chengdu JV in cash or equipment. Over the Chengdu JV's 20 year term,
BSN will be entitled to receive 65% of the profits earned between 2001
and 2007, 50% of the profits between 2008 and 2013 and 35% of the
profits earned between 2014 and 2020. BSN is entitled to appoint four
of the seven Board of Directors of the Chengdu JV for the first seven
years of its operations and is thereafter entitled to appoint three of
the seven directors.
F-8
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (Continued)
Continuing operations
The Corporation's operations may be adversely affected by significant
political, economic and social uncertainties in the PRC. Although the
government of the PRC has been pursuing economic reform policies, no
assurance can be given that it will continue to pursue such policies or
that such policies may not be significantly altered, especially in the
event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRC's political, economic and
social conditions. There is also no guarantee that the pursuit of
economic reforms by the government of the PRC will be consistent or
effective.
The PRC has recently enacted new laws and regulations governing
internet access and the provision of online business, economic and
financial information. Current or proposed laws aimed at limiting the
use of online services could, depending upon interpretation and
application, result in significant uncertainty to the Corporation,
additional costs and technological challenges in order to comply with
any statutory or regulatory requirements imposed by such legislation.
Additional legislation and regulations that may be enacted by the
government of the PRC could have an adverse effect on the Corporation's
business, financial condition and results of operations.
The success of the Corporation will depend on the acceptance of
broadband internet services, which remains unproven in the PRC. The
Corporation may not be able to attract and retain subscribers, or it
may face intense competition which could have an adverse effect on the
Corporation's business, financial condition and results of operations.
The Corporation's services were launched on June 30, 2000 and is
currently expanding its subscriber base in the Shekou Industrial Zone.
The services in Chengdu were launched on October 26, 2000.
Substantially all of the Corporation's revenues and operating expenses
will be denominated in the Chinese Renminbi, which is currently freely
convertible, however, there can be no assurance that this will continue
or that the ability to purchase or retain foreign currencies will
continue in the future.
These consolidated financial statements have been prepared on a going
concern basis. The Corporation's ability to continue as a going concern
is dependent upon its ability to generate profitable operations in the
future and to obtain the necessary financing to meet its obligations
and repay its liabilities arising from normal business operations when
they come due. The outcome of these matters cannot be predicted with
any certainty at this time. These consolidated financial statements do
not include any adjustments to the amounts and classification of assets
and liabilities that may be necessary should the Corporation be unable
to continue as a going concern.
F-9
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
Management anticipates that the Corporation currently has sufficient
working capital to fund the Corporation's plan of operation through the
year ended December 31, 2000. The Corporation's costs to fund its plan
of operation for the fiscal year ending December 31, 2000 and the next
two fiscal quarters ending June 30, 2001 is expected to increase.
The working capital is intended to fund the business operations of BSN,
including funding the capital requirements of new and existing joint
ventures, funding additional technical, management and marketing/sales
personnel and funding comprehensive joint venture marketing and
promotional programs to increase market awareness and subscription
sales. Management believes that additional funding will be required to
fund the implementation of BSN's business of entering into joint
ventures.
2. SIGNIFICANT ACCOUNTING POLICIES
Financial statements estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Such estimates include the
allowance for potentially uncollectible accounts receivable and a
valuation allowance for deferred tax assets. Actual results could
differ from those estimates.
Basis of presentation
These consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, CBB - BVI. The equity
method of accounting is used for companies in which the Corporation has
significant influence, generally this represents common stock ownership
of at least 20% and not more than 50% (see Note 1). All material
inter-company accounts and transactions have been eliminated.
F-10
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash equivalents
The Corporation considers all highly liquid debt instruments with
maturities at the date of purchase of three months or less to be cash
equivalents.
Investment in joint ventures
The joint ventures in Shekou and Chengdu are accounted for under the
equity method of accounting.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed
using the declining balance method as follows:
Furniture and fixtures 20%
Computer hardware 30%
Amortization of leasehold improvements and assets recorded under
capital lease agreements are computed using the straight-line method
over the shorter of the lease term or the estimated useful lives of the
related assets.
Goodwill and other intangible assets
Amortization of goodwill will be provided using the straight line
method over the estimated useful life of five years. Acquired
intangible assets consist of intellectual property, Shekou joint
venture and the Chengdu joint venture, and are amortized using the
straight line method over estimated useful lives ranging from five to
seven years.
Long-lived assets
The carrying value of long-lived assets, include goodwill, is evaluated
whenever events or changes in circumstances indicate that the carrying
value of the asset may be impaired. An impairment loss is recognized
when estimated undiscounted future cash flows expected to result from
the use of the asset including disposition, is less than the carrying
value of the asset.
F-11
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes
The Corporation accounts for income taxes under an asset and liability
approach. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, and operating loss and tax credit carryforwards
measured by applying currently enacted tax laws. Valuation allowances
are provided when necessary to reduce net deferred tax assets to an
amount that is more likely than not to be realized.
Revenue recognition
The Corporation recognizes revenue from consulting services rendered to
BSN on a ratable basis over the term of the services agreement.
The joint ventures derive revenue from monthly subscription fees and
are recorded when earned.
Stock-based compensation
The Corporation accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees". The
Corporation accounts for stock-based awards to non-employees in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation".
Net loss per share
Basic loss per share ("EPS") excludes dilution and is computed by
dividing net loss attributable to common stockholders by the weighted
average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants
to purchase convertible preferred stock and common stock options and
warrants using the treasury stock method) were exercised or converted
into common stock. Potential common shares in the diluted EPS
computation are excluded in net loss periods as their effect would be
antidilutive.
F-12
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
New accounting standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which as subsequently amended by
SFAS No. 137 and 138, established accounting and reporting standards
requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair
value for fiscal quarters of fiscal years beginning after June 15,
2000. Management believes that these statements will not have a
significant impact on the Corporation's consolidated financial
position, results of operations or cash flows.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin 101 ("SAB 101"), "Revenue
Recognition" to provide guidance on the recognition, presentation and
disclosure of revenues in financial statements. Management believes
that its revenue recognition practices are in conformity with SAB 101.
In March 2000, the FASB issued FASB Interpretation (FIN) No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." FIN
44 clarifies the application of Accounting Principles Board Opinion No.
25 for certain issues relating to stock compensation. FIN 44 is
effective July 1, 2000, but certain conclusions in it cover specific
events that occur after either December 15, 1998, or January 12, 2000.
To the extent that FIN 44 covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective
date of July 1, 2000, the effects of applying FIN 44 are recognized on
a prospective basis from July 1, 2000. The Corporation adopted the
recommendations under FIN 44.
F-13
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
3. ACQUISITION OF BIG SKY NETWORK CANADA LTD.
On September 29, 2000, the Corporation closed a common stock purchase
agreement to buy 50,000 common shares of BSN, increasing its ownership
to 100% of BSN. The acquisition was accounted for as a purchase. The
purchase price was U.S. $12.7 million, consisting of $2.5 million cash,
$1.7 million promissory note and 1,133,000 common shares of the
Corporation valued at the fair market value of the common shares (see
Note 14(b)). The purchase price has been allocated as follows:
-----------------
$
-----------------
Assets acquired, excluding cash
Net working capital deficiency (742,327)
Investment in Shekou joint venture 2,684,438
Intellectual property 849,750
Chengdu joint venture 5,098,500
Shekou joint venture 2,549,250
Goodwill 2,153,717
-----------------
12,593,328
Cash acquired 104,172
-----------------
Net assets acquired 12,697,500
=================
The Corporation is reviewing the valuation of the assets acquired and
adjustments may be made to the values ascribed above.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of:
-----------------
$
-----------------
Furniture and fixtures 126,036
Computer hardware 79,579
Leasehold improvements 52,702
-----------------
258,317
Accumulated amortization (3,745)
-----------------
254,572
=================
F-14
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
5. INVESTMENT IN JOINT VENTURES
As discussed in Note 1, BSN participates in both the Shekou JV and the
Chengdu JV.
Summarized financial information for the Shekou JV is as follows:
-----------------
$
-----------------
Current assets 2,198,736
Other assets 381,978
-----------------
Total assets 2,580,714
=================
Current liabilities 7,622
Capital 2,573,092
-----------------
Total liabilities and capital 2,580,714
=================
Net loss (278,364)
=================
The Chengdu JV commenced operations in October 2000.
6. COMMON SHARES
On April 14, 2000, the Corporation completed a reverse split of its
common stock on a 0.65104-for-1 basis reducing its issued and
outstanding common stock to 1,509,850.
The Corporation has issued the following shares in a series of private
placement agreements:
i) On April 14, 2000 the Corporation issued 500,000 common shares at
$0.20 per share for total proceeds of $100,000;
ii) On May 12, 2000 the Corporation issued 1,530,000 common shares at
$1.00 per share for total proceeds of $1,530,000; and
iii) On May 12, 2000 the Corporation issued 1,301,667 common shares at
$7.50 per share for total proceeds of $9,762,503.
F-15
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
7. STOCK OPTION PLAN
The Board of Directors of the Corporation adopted the 2000 Stock Option
Plan (the "Plan") during April 2000. Under the Plan, the Corporation
has reserved 8,000,000 common shares for issuance under options granted
to eligible persons.
Under the Plan, options to purchase common shares may be granted to
employees, directors and certain consultants at prices not less than
the fair market value at date of grant for incentive stock options and
not less than 110% of fair market value for incentive stock options
where the employee who, at the time of grant, owns stock representing
more than 10% of the total combined voting power of all classes of
stock of the Corporation. These options expire five years from the date
of grant and may be fully exercisable immediately, or may be
exercisable according to a schedule or conditions specified by the
Board of Directors.
Option activity under the Plan is as follows:
---------
Number of
Shares
---------
Outstanding, February 1, 2000 -
Granted 4,175,000
---------
Outstanding, September 30, 2000
(4,175,000 exercisable at a weighted price of $1.00) 4,175,000
=========
F-16
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
7. STOCK OPTION PLAN (Continued)
Additional information regarding options outstanding as of September
30, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
----------------------------- ----------------------------------------------------------------------------------
Weighted Average Weighted
Remaining Average
Range of Number Contractual Life Exercise
Exercise Prices Outstanding (Years) Price
----------------------------- -------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
$1.00 4,175,000 4.3 $1.00
==========================
</TABLE>
As discussed in Note 2, the Corporation accounts for its employee
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees and its Related Interpretations". Accordingly, compensation
expense has been recognized in the consolidated financial statements
for non-employee stock arrangements. Had compensation expense been
recognized based on the fair value of the options on the date they were
granted for employees, the Company's net income (loss) and net income
(loss) per common share would have been $(1,090,587) and $(0.06) per
share.
The Company estimated the fair value of each option grant using the
Black-Scholes option pricing method while using the following weighted
average assumptions:
-------------
$
-------------
-------------
Risk-free interest rate 6.53%
Expected life (in years) 3
Expected volatility 50%
Dividend yield -
F-17
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
8. INCOME TAXES
The Corporation did not provide any current or deferred U.S. federal or
foreign income tax provision or benefit because it has experienced an
operating loss since inception. The Corporation is not liable for any
state taxes. The Corporation has provided a full valuation allowance on
the deferred tax asset, consisting primarily of a net operating loss,
because of uncertainty regarding its realizability.
At September 30, 2000, the Corporation had a net operating loss of
approximately $948,236 for U.S. federal purposes. Utilization of the
net operating loss, which begins to expire at various times starting in
2007, may be subject to certain limitations under Section 382 of the
Internal Revenue Code of 1986, as amended.
9. DUE FROM OFFICERS AND EMPLOYEES
The amounts due from officers and employees are advances for travel
expenses. They are unsecured, non-interest bearing and payable on
demand.
F-18
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
10. UNEARNED REVENUE
The Corporation received a $500,000 advance payment from BSN for
technical consulting services to be provided by the Corporation to BSN
over a 12 month period, commencing in May 2000 (See Note 1).
11. COMMITMENTS
BSN has entered into an investment commitment for capital contributions
to the joint venture with Chengdu Huaya, located in the PRC. Future
maximum capital contributions are $5,500,000. In October, $500,000 was
contributed to this joint venture. The remaining $5,000,000 is required
to be spent over the life of the joint venture, funded from the cash
flow of the joint venture.
On July 25, 2000, the Corporation entered into an agency agreement for
financial advisory services. The Corporation paid a commencement fee of
$200,000. As compensation for the services, the Corporation will pay
monthly advances of $5,000 for the next 12 months and a success fee,
payable at the conclusion of any transaction.
Net rent expense incurred under operating leases was $14,730 for the
period ended September 30, 2000.
12. FINANCIAL INSTRUMENTS
Revenue from current and future operations in the PRC are denominated
in Chinese Renminbi ("RMB") and many of the Corporation's expenses are
denominated in U.S. dollars. The official exchange rate for the
conversion of RMB to U.S. dollars has been stable, with the RMB
increasing slightly in recent years. The Corporation does not expect to
use any foreign exchange hedges or derivative instruments in the near
future. The Corporation is exploring credit financing opportunities but
does not currently require any interest rate risk management, hedging
or derivative instruments.
Financial instruments which potentially subject the Corporation to
concentrations of credit risk consist primarily of cash and cash
equivalents. Cash and cash equivalents are held primarily with two
financial institutions and consist primarily of commercial paper and
cash in bank accounts.
The carrying amounts for cash and cash equivalents, accounts payable,
accrued liabilities, and the promissory note are a reasonable estimate
of their fair values.
F-19
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
13. SEGMENTED INFORMATION
The Corporation operates in one reportable segment: provider of high
capacity, high speed internet, data and voice services in major urban
markets throughout the PRC. The Corporation's operating activities are
entirely in the PRC. It is not expected that commercial operations will
be carried on in any other country. The Corporation's administrative
and corporate activities are carried on in the United States and
Canada.
14. SUBSEQUENT EVENTS
a) On November 1, 2000, the Corporation granted options to certain
officers, directors and employees to acquire 650,000 common shares
at $7.50 per share.
b) On November 1, 2000, the Corporation issued warrants exercisable
to acquire 50,790 shares at $7.50 per share as a financial
advisory fee in connection with the acquisition of BSN (see Note
3). The warrants are exercisable for two years from September 30,
2000. In addition, the fee includes cash consideration of $253,950
of which $219,950 was paid on November 24, 2000 and the remainder
is due on September 30, 2001.
c) On November 1, 2000, the Corporation cancelled 50,000 stock
options that were issued to a consultant on April 14, 2000. The
options were replaced with 50,000 warrants with the same terms and
conditions.
d) On November 1, 2000, the Corporation issued warrants exercisable
to acquire 100,000 common shares of the Corporation at an exercise
price of $7.50 per common share for investor relation services.
The warrants are exercisable for a term of 18 months from the date
of issue.
e) On November 25, 2000, BSN signed a joint venture agreement with
Deyang Guangshi Network Development Ltd. ("Deyang Guangshi") to
establish Deyang Guangshi Big Sky Ltd. ("Deyang JV"), the purpose
of which is to develop an advanced broadband software and hardware
platform for data transmission and internet related business in
the Deyang area. Under the terms of the joint venture agreement,
Deyang Guangshi agreed to provide the entire software and hardware
data transmission platform of its Deyang HFC network and the
rights to use all of its facilities and equipment. BSN is required
to contribute $4,500,000 to the Deyang JV in cash or equipment.
Over the Deyang JV's 20 year term, BSN will be entitled to receive
80% of the profits earned between 2001 and 2005, 60% of the
profits between 2006 and 2010, 50% of the profits earned between
2011 and 2015, and 40% of the profits earned between 2016 and
2020. BSN is entitled to appoint four of the seven Board of
Directors of the Deyang JV for the first ten years of its
operations and is thereafter entitled to appoint three of the
seven directors.
F-20
<PAGE>
CHINA BROADBAND CORP.
(a Development Stage Enterprise)
Notes to the Consolidated Financial Statements
Period From Date of Incorporation,
February 1, 2000 to September 30, 2000
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
14. SUBSEQUENT EVENTS
f) On December 5, 2000, the Corporation filed a registration
statement under the Securities Act of 1933 with the U.S.
Securities and Exchange Commission. The purpose of the
registration statement is to qualify 6,699,867 common shares and
200,790 warrants exchangeable for common shares for unrestricted
trading on the NASDAQ. The registration statement is subject to
review prior to becoming effective. Management cannot say when the
registration statement will become effective or when NASDAQ will
list the shares for trading. The Corporation is not seeking to
raise additional share capital with this registration statement.
F-21
<PAGE>
FINANCIAL STATEMENTS OF
BIG SKY NETWORK CANADA LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
MARCH 31, 2000 AND DECEMBER 31, 1999
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
BIG SKY NETWORK CANADA LTD.:
We have audited the balance sheets of BIG SKY NETWORK CANADA LTD. (A DEVELOPMENT
STAGE ENTERPRISE) as of March 31, 2000 and December 31, 1999, and the related
statements of operations, shareholders' equity and cash flows for the three
months ended March 31, 2000 and the period from May 20, 1999 (date of
incorporation) to December 31, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, based on our audits, such financial statements present fairly,
in all material respects, the financial position of the Corporation as of March
31, 2000 and December 31, 1999, and the results of its operations and its cash
flows for the three months ended March 31, 2000 and the period from May 20, 1999
(date of incorporation) to December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. The Corporation is a development
stage enterprise engaged in providing high speed internet, data and voice
services in The People's Republic of China. As discussed in Note 1 to the
financial statements, the Corporation's operating losses since inception raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
/s/ DELOITTE & TOUCHE LLP
-------------------------
Deloitte & Touche LLP
Calgary, Alberta, Canada
December 5, 2000
F-23
<PAGE>
<TABLE>
<CAPTION>
BIG SKY NETWORK CANADA LTD.
(a Development Stage Enterprise)
Balance Sheets
March 31, 2000 and December 31, 1999
(Expressed in United States Dollars)
----------------------------------------------------------------------------------------------------
2000 1999
$ $
----------------- ------------------
<S> <C> <C>
ASSET
Investment in Shekou joint venture (Note 1) 500,000 -
================= ==================
LIABILITY
CURRENT
Due to officers and directors (Note 5) 19,604 19,604
----------------- ------------------
CONTINUING OPERATIONS (Note 1)
COMMITMENTS (Notes 1 and 8)
SHAREHOLDERS' EQUITY
Common shares
$1.00 par value, shares authorized: 100,000;
shares issued and outstanding: 60,000 10,000 -
Additional paid-in capital 490,000 -
Accumulated deficit (19,604) (19,604)
----------------- ------------------
480,396 (19,604)
----------------- ------------------
500,000 -
================= ==================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
BIG SKY NETWORK CANADA LTD.
(a Development Stage Enterprise)
Statements of Operations
Three-Month Period Ended March 31, 2000 and the Period From
Date of Incorporation, May 20, 1999 to December 31, 1999
(Expressed in United States Dollars)
---------------------------------------------------------------------------------------------------
Cumulative
Period From Period From
Date of Date of
Incorporation Incorporation,
May 20 May 20,
Three Month 1999 1999
Period Ended to to
March 31, December 31, March 31,
2000 1999 2000
$ $ $
-------------------- ------------------- --------------------
<S> <C> <C> <C>
GENERAL AND ADMINISTRATIVE
EXPENSES - 19,604 19,604
-------------------- ------------------- --------------------
NET LOSS - (19,604) (19,604)
==================== =================== ====================
LOSS PER SHARE
Basic and diluted - (0.39)
==================== ===================
SHARES USED IN COMPUTATION,
BASIC AND DILUTED 55,889 50,000
==================== ===================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
BIG SKY NETWORK CANADA LTD.
(a Development Stage Enterprise)
Statements of Shareholders' Equity
Three-Month Period Ended March 31, 2000 and the Period From
Date of Incorporation, May 20, 1999 to December 31, 1999
(Expressed in United States Dollars)
-----------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Shares Paid-in Accumulated Shareholders'
Number of Amount Capital Deficit Equity
Shares $ $ $ $
--------------- ------------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, May 20, 1999 - - - - -
Issue of common shares to founding
shareholders 50,000 - - - -
Net loss - - - (19,604) (19,604)
--------------- ------------- ------------------ --------------- -----------------
Balance, December 31, 1999 50,000 - - (19,604) (19,604)
Issue of common shares for cash 10,000 10,000 490,000 - 500,000
--------------- ------------- ------------------ --------------- -----------------
Balance, March 31, 2000 60,000 10,000 490,000 (19,604) 480,396
=============== ============= ================== =============== =================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
BIG SKY NETWORK CANADA LTD.
(a Development Stage Enterprise)
Statement of Cash Flows
Three-Month Period Ended March 31, 2000 and the Period From
Date of Incorporation, May 20, 1999 to December 31, 1999
(Expressed in United States Dollars)
-------------------------------------------------------------------------------------------------------------------------
Cumulative
Period From Period From
Date of Date of
Incorporation Incorporation,
May 20 May 20,
Three Month 1999 1999
Period Ended to to
March 31, December 31, March 31,
2000 1999 2000
$ $ $
-------------------- ------------------- --------------------
<S> <C> <C> <C>
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net loss - (19,604) (19,604)
Changes in operating assets and liabilities
Due to officers and directors - 19,604 19,604
-------------------- ------------------- --------------------
- - -
-------------------- ------------------- --------------------
FINANCING
Issue of common shares for cash 500,000 - 500,000
-------------------- ------------------- --------------------
INVESTING
Investment in Shekou joint venture (500,000) - (500,000)
-------------------- ------------------- --------------------
NET CASH FLOW - - -
==================== =================== ====================
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes - - -
==================== =================== ====================
Cash paid for interest - - -
==================== =================== ====================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-27
<PAGE>
BIG SKY NETWORK CANADA LTD.
(a Development Stage Enterprise)
Notes to the Financial Statements
Three-Month Period Ended March 31, 2000 and the Period From
Date of Incorporation, May 20, 1999 to December 31, 1999
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS
INCORPORATION AND BACKGROUND
Big Sky Network Canada Ltd. (the "Corporation" or "BSN") was
incorporated under the laws of the territory of the British Virgin
Islands on May 20, 1999. The Corporation is a development stage
enterprise and is seeking to become a leading facilities based provider
of high capacity, high speed internet, data and voice services in major
urban markets throughout The People's Republic of China (the "PRC").
The Corporation was incorporated for the purposes of implementing a
business strategy involving joint ventures to provide high speed
internet broadband services in major urban markets through the PRC.
BSN signed a joint venture agreement on September 21, 1999 with China
Merchants Shekou Industrial Zone, Ltd. ("China Merchants") to establish
Shenzhen China Merchants Big Sky Network Ltd. ("Shekou JV"), the
purpose of which is to provide internet access to Chinese residential
and business customers through the existing cable television
infrastructure. Under the terms of the joint venture agreement, China
Merchants agreed to provide all the non-broadcast rights on the cable
network of a cable television station controlled by China Merchants.
BSN is required to contribute a total of $3,000,000 to the Shekou JV as
cash or equipment. BSN is also responsible for providing technical
support to the Shekou JV. Over the Shenzhen JV's 15 year duration, BSN
will be entitled to receive 60% of the profits earned between 2000 and
2004, 50% of the profits earned between 2005 and 2009 and 40% of the
profits earned between 2010 and 2014. BSN is entitled to appoint four
of the seven directors on the Board of Directors of the Shekou JV for
the first five years of its operations and is thereafter, entitled to
appoint three of the seven directors.
CONTINUING OPERATIONS
The Corporation's operations may be adversely affected by significant
political, economic and social uncertainties in the PRC. Although the
government of the PRC has been pursuing economic reform policies, no
assurance can be given that it will continue to pursue such policies or
that such policies may not be significantly altered, especially in the
event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRC's political, economic and
social conditions. There is also no guarantee that the pursuit of
economic reforms by the government of the PRC will be consistent or
effective.
F-28
<PAGE>
BIG SKY NETWORK CANADA LTD.
(a Development Stage Enterprise)
Notes to the Financial Statements
Three-Month Period Ended March 31, 2000 and the Period From
Date of Incorporation, May 20, 1999 to December 31, 1999
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (Continued)
CONTINUING OPERATIONS (Continued)
The PRC has recently enacted new laws and regulations governing
internet access and the provision of online business, economic and
financial information. Current or proposed laws aimed at limiting the
use of online services could, depending upon interpretation and
application, result in significant uncertainty to the Corporation,
additional costs and technological challenges in order to comply with
any statutory or regulatory requirements imposed by such legislation.
Additional legislation and regulations that may be enacted by the
government of the PRC could have an adverse effect on the Corporation's
business, financial condition and results of operations.
The success of the Corporation will depend on the acceptance of
broadband internet services, which remains unproven in the PRC. The
Corporation may not be able to attract and retain subscribers, or it
may face intense competition which could have an adverse effect on the
Corporation's business, financial condition and results of operations.
The Corporation's services were launched on June 30, 2000 and is
currently expanding its subscriber base in the Shekou Industrial Zone.
The services in Chengdu were launched on October 26, 2000.
Substantially all of the Corporation's revenues and operating expenses
will be denominated in the Chinese renminbi, which is currently freely
convertible, however, there can be no assurance that this will continue
or that the ability to purchase or retain foreign currencies will
continue in the future.
These financial statements have been prepared on a going concern basis.
The Corporation's ability to continue as a going concern is dependent
upon its ability to generate profitable operations in the future and
to obtain the necessary financing to meet its obligations and repay
its liabilities arising from normal business operations when they come
due. The outcome of these matters cannot be predicted with any cer-
tainty at this time. These financial statements do not include any
adjustments to the amounts and classification of assets and liabilities
that may be necessary should the Corporation be unable to continue as a
going concern.
F-29
<PAGE>
BIG SKY NETWORK CANADA LTD.
(a Development Stage Enterprise)
Notes to the Financial Statements
Three-Month Period Ended March 31, 2000 and the Period From
Date of Incorporation, May 20, 1999 to December 31, 1999
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (Continued)
CONTINUING OPERATIONS (CONTINUED)
Management anticipates that the Corporation currently has sufficient
working capital to fund the Corporation's plan of operation through the
year ended December 31, 2000. The Corporation's costs to fund its plan
of operation for the fiscal year ending December 31, 2000 and the next
two fiscal quarters ending June 30, 2001 is expected to increase.
The working capital is intended to fund the business operations of BSN,
including funding the capital requirements of new and existing joint
ventures, funding additional technical, management and marketing/sales
personnel and funding comprehensive joint venture marketing and
promotional programs to increase market awareness and subscription
sales. Management believes that additional funding will be required to
fund the implementation of BSN's business of entering into joint
ventures.
2. SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENTS ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Such estimates include the
valuation allowance for deferred tax assets. Actual results could
differ from those estimates.
INVESTMENT IN JOINT VENTURE
The joint venture in Shekou is accounted for under the equity method of
accounting.
INCOME TAXES
The Corporation accounts for income taxes under an asset and liability
approach. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, and operating loss and tax credit carryforwards
measured by applying currently enacted tax laws. Valuation allowances
are provided when necessary to reduce net deferred tax assets to an
amount that is more likely than not to be realized.
F-30
<PAGE>
BIG SKY NETWORK CANADA LTD.
(a Development Stage Enterprise)
Notes to the Financial Statements
Three-Month Period Ended March 31, 2000 and the Period From
Date of Incorporation, May 20, 1999 to December 31, 1999
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
NET LOSS PER SHARE
Basic loss per share ("EPS") excludes dilution and is computed by
dividing net loss attributable to common shareholders by the weighted
average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants
to purchase convertible preferred stock and common stock options and
warrants using the treasury stock method) were exercised or converted
into common stock. Potential common shares in the diluted EPS
computation are excluded in net loss periods as their effect would be
antidilutive.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which as subsequently amended by
SFAS No. 137 and 138, established accounting and reporting standards
requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair
value for fiscal quarters of fiscal years beginning after June 15,
2000. Management believes that these statements will not have a
significant impact on the Corporation's consolidated financial
position, results of operations or cash flows.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin 101 ("SAB 101"), "Revenue
Recognition" to provide guidance on the recognition, presentation and
disclosure of revenues in financial statements. Management believes
that its revenue recognition practices are in conformity with SAB 101.
3. COMMON SHARES
The Corporation has issued the following shares:
i) On May 20, 1999 the Corporation issued 50,000 founder (bearer)
shares for no consideration;
ii) On February 22, 2000, the Corporation issued an additional
10,000 shares to a third party for cash consideration of
$500,000.
F-31
<PAGE>
BIG SKY NETWORK CANADA LTD.
(a Development Stage Enterprise)
Notes to the Financial Statements
Three-Month Period Ended March 31, 2000 and the Period From
Date of Incorporation, May 20, 1999 to December 31, 1999
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
3. COMMON SHARES (Continued)
China Broadband (BVI) Corp. ("CBB - BVI") acquired 50,000 founder
shares representing all of the outstanding shares of BSN, from
officers, directors and persons related to the officers and directors
for 12,500,000 common shares of CBB - BVI. CBB - BVI was incorporated
for the purpose of acquiring the shares of BSN. BSN did not have any
substantial operations prior to February 1, 2000. This transaction was
accounted for as a recapitalization of BSN. This recapitalization was
effected through the issuance of 12,500,000 common shares of CBB - BVI
constituting all of its issued and outstanding shares.
4. INCOME TAXES
The Corporation did not provide any current or deferred U.S. federal or
foreign income tax provision or benefit because it has experienced an
operating loss since inception. The Corporation is not liable for any
state taxes. The Corporation has provided a full valuation allowance on
the deferred tax asset, consisting primarily of a net operating loss,
because of uncertainty regarding its realizability.
The Corporation had net operating losses of approximately $19,604 for
U.S. federal purposes. Utilization of the net operating loss, which
begins to expire at various times starting in 2007, may be subject to
certain limitations under Section 382 of the Internal Revenue Code of
1986, as amended.
5. DUE TO OFFICERS AND DIRECTORS
The amounts due to officers and directors are advances to the
Corporation to fund expenses. They are non-interest bearing and payable
on demand.
6. FINANCIAL INSTRUMENTS
Revenue from future operations in the PRC are denominated in Chinese
Renminbi ("RMB") and many of the Corporation's expenses are denominated
in U.S. dollars. The official exchange rate for the conversion of RMB
to U.S. dollars has been stable, with the RMB increasing slightly in
recent years. The Corporation does not expect to use any foreign
exchange hedges or derivative instruments in the near future. The
Corporation is exploring credit financing opportunities but does not
currently require any interest rate risk management, hedging or
derivative instruments.
The carrying amounts for due to officers and directors are a reasonable
estimate of their fair values.
F-32
<PAGE>
BIG SKY NETWORK CANADA LTD.
(a Development Stage Enterprise)
Notes to the Financial Statements
Three-Month Period Ended March 31, 2000 and the Period From
Date of Incorporation, May 20, 1999 to December 31, 1999
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
7. SEGMENTED INFORMATION
The Corporation operates in one reportable segment: provider of high
capacity, high speed internet, data and voice services in major urban
markets throughout the PRC. The Corporation's operating activities are
entirely in the PRC. It is not expected that commercial operations will
be carried on in any other country. The Corporation's administrative
and corporate activities are carried on in the United States and
Canada.
8. SUBSEQUENT EVENTS
a) On April 25, 2000, BSN issued a further 40,000 shares to the third
party for cash consideration of $2,000,000. As a result
of this transaction, CBB - BVI no longer controlled BSN.
b) On July 8, 2000, BSN signed a joint venture agreement with Chengdu
Huayu Information Industry Co., Ltd. ("Chengdu Huayu") to
establish Sichuan Huaya Big Sky Network Ltd. ("Chengdu JV"), the
purpose of which is to develop an advanced broadband software and
hardware platform for data transmission and internet related
business in the Chengdu area. Under the terms of the joint venture
agreement, Chengdu Huayu agreed to provide the entire software and
hardware data transmission platform of its Huaya HFC network and
the rights to use all of its facilities and equipment. BSN is
required to contribute a maximum of $5,500,000 to the Chengdu JV
in cash or equipment. Over the Chengdu JV's 20 year term, BSN will
be entitled to receive 65% of the profits earned between 2001 and
2007, 50% of the profits between 2008 and 2013 and 35% of the
profits earned between 2014 and 2020. BSN is entitled to appoint
four of the seven Board of Directors of the Chengdu JV for the
first seven years of its operations and is thereafter entitled to
appoint three of the seven directors.
c) On September 29, 2000, CBB - BVI purchased the shares held by the
third party (see Note 8(a)). As a result of this transaction, CBB
- BVI owns 100% of BSN.
d) On November 25, 2000, BSN signed a joint venture agreement with
Deyang Guangshi Network Development Ltd. ("Deyang Guangshi") to
establish Deyang Guangshi Big Sky Ltd. ("Deyang JV"), the purpose
of which is to develop an advanced broadband software and hardware
platform for data transmission and internet related business in
the Deyang area. Under the terms of the joint venture agreement,
Deyang Guangshi agreed to provide the entire software and hardware
data transmission platform of its Deyang HFC network and the
rights to use all of its facilities and equipment. BSN is required
to contribute $4,500,000 to the Deyang JV in cash or equipment.
Over the Deyang JV's 20 year term, BSN will be entitled to receive
80% of the profits earned between 2001 and 2005, 60% of the
profits between 2006 and 2010, 50% of the profits earned between
2011 and 2015, and 40% of the profits earned between 2016 and
2020. BSN is entitled to appoint four of the seven Board of
Directors of the Deyang JV for the first ten years of its
operations and is thereafter entitled to appoint three of the
seven directors.
F-33
<PAGE>
================================================================================
6,900,657 SHARES TO BE SOLD
BY CURRENT SHAREHOLDERS
[LOGO]
COMMON STOCK
PROSPECTUS
DECEMBER 5, 2000
DEALER PROSPECTUS DELIVERY OBLIGATION:
UNTIL DECEMBER 31, 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
AMOUNT TO BE PAID
SEC registration fee $13,094
Printing and engraving expenses $10,000
Legal fees and expenses $75,000
Accounting fees and expenses $75,000
Blue Sky qualification fees and expenses $5,000
Miscellaneous fees $10,000
TOTAL: $188,094
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Nevada Revised Statutes Section 78.7502 and 78.751, our articles
of incorporation and bylaws provide for the indemnification of our officers and
directors. Mandatory indemnification is required for present and former
directors. However, the director must have conducted himself in good faith and
reasonably believes that his conduct was in, or not opposed to, our best
interests. In a criminal action he must not have had a reasonable cause to
believe his conduct was unlawful. Advances for expenses may be made if the
director affirms in writing that he believes he has met the standards and that
he will personally repay the expense if it is determined he did not meet the
standards. We provide permissive indemnification for officers, employees or
agents. Our Board must approve such indemnification and the standards and
limitations are the same as for a director.
We will not indemnify a director or officer adjudged liable due to his
negligence or willful misconduct toward us, adjudged liable to us, or if he
improperly received personal benefit. Indemnification in a derivative action is
limited to reasonable expenses incurred in connection with the proceeding. Also,
we are authorized to purchase insurance on behalf of an individual for
liabilities incurred whether or not we would have the power or obligation to
indemnify him under our bylaws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On March 1, 1993, Institute for Counseling, Inc. (now China Broadband
Corp.) issued 2,000,000 shares of our common stock on a private placement basis
pursuant to Section 4(2) of the Securities Act of 1933, to our founder, Phillip
Herr, for an aggregate offering price of $100 in cash.
On February 15, 1999, Institute for Counseling, Inc. (now China
Broadband Corp.) issued a total of 200,000 shares of our common stock to two
investors, MDI Small Cap Fund (100,000) and Murdoch & Company (100,000), at
$0.15 per share for proceeds of $30,000. The offer and sale was made pursuant to
an exemption from registration available under Rule 504 of Regulation D of the
Securities Act.
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On September 30, 1998, Institute for Counseling, Inc. (now China
Broadband Corp.) issued a total of 200,000 shares of our common stock to two
investors, MDI Small Cap Fund (100,000) and Murdoch & Company (100,000), at
$0.15 per share for proceeds of $30,000. The offer and sale was made pursuant to
an exemption from registration available under Rule 504 of Regulation D of the
Securities Act.
On February 15, 1999, Institute for Counseling, Inc. (now China
Broadband Corp.) issued a total of 119,000 shares of our common stock to 100
investors at $0.25 per share for proceeds of $29,750. The offer and sale was
made pursuant to an exemption from
registration available under Rule 504 of Regulation D of the Securities Act.
On April 14, 2000, China Broadband Corp. issued 13,500,000 shares of
common stock for all of the issued and outstanding stock of China Broadband
(BVI) Corp. These shares were issued pursuant to an exemption from registration
under Rule 506 of Regulation D promulgated under the Securities Act of 1933.
On April 14, 2000, China Broadband Corp. granted options to officers,
directors and consultants to China Broadband Corp. exercisable to acquire a
total of 4,175,000 at $1.00 per share. These securities were issued pursuant to
an exemption from registration under Section 4(2) the Securities Act of 1933.
On April 14 2000, China Broadband Corp. issued 500,000 shares to
accredited investors at $0.20 per share for gross proceeds of $100,000. These
securities were issued pursuant to an exemption from registration under Rule 506
of Regulation D promulgated under the Securities Act of 1933.
On May12, 2000, China Broadband Corp. issued 1,530,000 shares to
accredited investors at $1.00 per share for gross proceeds of $1,530,000. These
securities were issued pursuant to an exemption from registration under Rule 506
of Regulation D promulgated under the Securities Act of 1933.
On May 12, 2000, China Broadband Corp. issued 1,301,667 shares to
accredited investors at $7.50 per share for gross proceeds of $9,762,503. These
securities were issued pursuant to an exemption from registration under Rule 506
of Regulation D promulgated under the Securities Act of 1933.
On September 29, 2000, China Broadband Corp. issued 1,133,000 shares to
SoftNet at a deemed value of $7.50 per share as partial consideration for 50,000
shares of Big Sky Network. These securities were issued pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933.
On November 1, 2000, China Broadband Corp. granted options to officers,
directors and employees to China Broadband Corp. exercisable to acquire a
total of 650,000 at $7.50 per share. These securities were issued pursuant to an
exemption from registration under Section 4(2) the Securities Act of 1933.
On November 1, 2000, China Broadband Corp. issued warrants
exercisable to acquire 100,000 shares at $7.50 per share to three warrant
holders in connection with consulting and investor relations services. These
securities were issued pursuant to an exemption from registration under
Regulation S promulgated under the Securities Act of 1933.
On November 1, 2000, China Broadband Corp. issued warrants exercisable
to acquire 50,790 shares at $7.50 per share to Canaccord International Ltd. as a
Financial Advisory Fee in connection with our acquisition of SoftNet's 50%
interest in Big Sky Network. These securities were issued pursuant to an
exemption from registration under Regulation S promulgated under the Securities
Act of 1933.
On November 1, 2000, China Broadband Corp. granted Warrants to Kenneth
Barnes exercisable to acquire a total of 50,000 at $1.00 per share. These
securities were issued pursuant to an exemption from registration under
Regulation S promulgated under the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
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(a) Subject to the rules regarding incorporation by reference, furnish the
exhibits as required by Item 601 of Regulation S-K.
Except for contracts made in the ordinary course of business, the
following are the material contracts that have been entered into by
China Broadband within the two years preceding the date of this
registration statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 (1) Certificate of Incorporation of the Company consisting of the Articles of Incorporation
filed with the Secretary of the State of Nevada on February 9, 1993
3.2 Certificate of Amendment to Articles of Incorporation of Institute For Counseling, Inc.
filed with the Secretary of the State of Nevada on March 22, 2000
3.3 (3) Certificate of Amendment to Articles of Incorporation of Institute For Counseling, Inc.
filed with the Secretary of the State of Nevada on April 14, 2000
3.4 (1) By-Laws of the Company, dated November 9, 1993
5.1 Opinion Letter of Michael Morrison, Chartered
10.1 (2) Purchase Agreement for the Acquisition of China Broadband (BVI) Corp. among Institute
For Counseling, Inc. and China Broadband (BVI) Corp.
10.2 (2) Cooperative Joint Venture Contract For Shenzhen China Merchants Big Sky Network Ltd.
10.3 (4) Common Stock Purchase Agreement dated September 29, 2000, among SoftNet Systems, Inc.,
China Broadband Corp. and Big Sky Network Canada Ltd.
10.4 (4) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd. and Matthew Heysel, for himself and as
attorney-in-fact for Daming Yang, Kai Yang, Wei Yang, Jeff Xue, Lu Wang, Wallace
Nesbitt and Western Capital Corp.
10.5 (4) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd., China Broadband (BVI) Corp., Matthew
Heysel and Daming Yang.
10.6 Cooperative Joint Venture Contract For Sichuan Huayu Big Sky Network Ltd. dated July 8,
2000
10.7 Strategic Partnership Agreement Between Chengdu Huayu Information Industry Co., Ltd.
and Big Sky Network Canada Ltd.
10.8 Cooperative Joint Venture Contract For Deyang Guangshi Big Sky Ltd. dated November 25,
2000
10.9 Consulting Agreement MH Financial Management, for the services of Matthew Heysel
10.10 China Broadband Stock Option Plan
10.11 Form of Stock Option Agreement
10.12 Form of Restricted Stock Purchase Agreement
10.13 Letter Agreement dated July 25, 2000 by and between China Broadband Corp. and Canaccord
International Ltd.
10.14 Joint Development Agreement of City-Wide-Area High Speed Broadband and Data Transmission
Services Networks of China Between Big Sky Network Canada Ltd. and Jitong Network
Communications Co. Ltd.
10.15 Consulting Agreement Daming Yang
10.16 Consulting Agreement and Precise Details Inc. for the services of Thomas Milne
21.1 List of subsidiaries of registrant
23.1 Consent of Deloitte & Touche LLP
23.2 (5) Consent of Jun He Law Office
23.3 Consent of Michael Morrison (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
(1) Previously filed on Form 10-SB on December 2, 1999.
(2) Previously filed on Form 8-K filed on April 28, 2000.
(3) Previously filed on Form 10-KSB on July 11, 2000
(4) Previously filed on Form 8-K filed on September 29, 2000.
(5) To be filed by amendment.
</TABLE>
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<PAGE>
FINANCIAL STATEMENT SCHEDULES.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or not material, or the information
called for thereby is otherwise included in the financial statements and
therefore has been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names by the
underwriter to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(6) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(7) For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Shekou,
Shenzhen, province of Guangdong, on November 30, 2000.
CHINA BROADBAND CORP.
By: /s/ MATTHEW HEYSEL
----------------------------------------
Matthew Heysel, Chief Executive
Officer and Director
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mathew Heysel and Thomas Milne, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this registration
statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intends and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents or each of them or their substitute or substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities indicated on November 30 2000.
SIGNATURE TITLE DATE
/s/ MATTHEW HEYSEL Chief Executive Officer and Director November 30, 2000
--------------------
Matthew Heysel
/s/ DAMING YANG President and Director November 30, 2000
--------------------
Daming Yang
/s/ THOMAS MILNE Chief Financial Officer and Director November 30, 2000
--------------------
Thomas Milne
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 (1) Certificate of Incorporation of the Company consisting of the Articles of Incorporation
filed with the Secretary of the State of Nevada on February 9, 1993
3.2 Certificate of Amendment to Articles of Incorporation of Institute For Counseling, Inc.
filed with the Secretary of the State of Nevada on March 22, 2000
3.3 (3) Certificate of Amendment to Articles of Incorporation of Institute For Counseling, Inc.
filed with the Secretary of the State of Nevada on April 14, 2000
3.4 (1) By-Laws of the Company, dated November 9, 1993
5.1 Opinion Letter of Michael Morrison, Chartered
10.1 (2) Purchase Agreement for the Acquisition of China Broadband (BVI) Corp. among Institute
For Counseling, Inc. and China Broadband (BVI) Corp.
10.2 (2) Cooperative Joint Venture Contract For Shenzhen China Merchants Big Sky Network Ltd.
10.3 (4) Common Stock Purchase Agreement dated September 29, 2000, among SoftNet Systems, Inc.,
China Broadband Corp. and Big Sky Network Canada Ltd.
10.4 (4) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd. and Matthew Heysel, for himself and as
attorney-in-fact for Daming Yang, Kai Yang, Wei Yang, Jeff Xue, Lu Wang, Wallace
Nesbitt and Western Capital Corp.
10.5 (4) Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China
Broadband Corp., Big Sky Network Canada Ltd., China Broadband (BVI) Corp., Matthew
Heysel and Daming Yang.
10.6 Cooperative Joint Venture Contract For Sichuan Huayu Big Sky Network Ltd. dated July 8,
2000
10.7 Strategic Partnership Agreement Between Chengdu Huayu Information Industry Co., Ltd.
and Big Sky Network Canada Ltd.
10.8 Cooperative Joint Venture Contract For Deyang Guangshi Big Sky Ltd. dated November 25,
2000
10.9 Consulting Agreement MH Financial Management, for the services of Matthew Heysel
10.10 China Broadband Stock Option Plan
10.11 Form of Stock Option Agreement
10.12 Form of Restricted Stock Purchase Agreement
10.13 Letter Agreement dated July 25, 2000 by and between China Broadband Corp. and Canaccord
International Ltd.
10.14 Joint Development Agreement of City-Wide-Area High Speed Broadband and Data Transmission
Services Networks of China Between Big Sky Network Canada Ltd. and Jitong Network
Communications Co. Ltd.
10.15 Consulting Agreement Daming Yang
10.16 Consulting Agreement and Precise Details Inc. for the services of Thomas Milne
21.1 List of subsidiaries of registrant
23.1 Consent of Deloitte & Touche LLP
23.2 (5) Consent of Jun He Law Office
23.3 Consent of Michael Morrison (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
(1) Previously filed on Form 10-SB on December 2, 1999.
(2) Previously filed on Form 8-K filed on April 28, 2000.
(3) Previously filed on Form 10-KSB on July 11, 2000
(4) Previously filed on Form 8-K filed on September 29, 2000.
(5) To be filed by amendment.
</TABLE>
