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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________________.
COMMISSION FILE NUMBER 000-28345
CHINA BROADBAND CORP.
(formerly Institute for Counseling, Inc.)
(Exact name of small business issuer as specified in its charter)
NEVADA 52-2197688
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
2080, 440-2ND AVENUE S.W.
CALGARY, ALBERTA
CANADA T2P 5E9
(Address of principal place of business or intended principal place of business)
(403) 234-8885
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes |X| No ____
The number of outstanding common shares, with $0.001 par value, of the
registrant at September 30, 2000 was 19,474,517.
Transitional Small Business Disclosure Format (check one): Yes _ No |X|
<PAGE>
CHINA BROADBAND CORP.
(formerly Institute for Counseling, Inc.)
INDEX TO THE FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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PAGE
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS F-1
China Broadband Corp.
Consolidated Balance Sheet (Unaudited) F-2
Consolidated Statement of Operations (Unaudited) F-3
Consolidated Statement of Shareholders' Equity (Unaudited) F-4
Consolidated Statement of Cash Flows (Unaudited) F-5
Notes to the Consolidated Financial Statements (Unaudited)
September 30, 2000 F-6
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................1
PART II - OTHER INFORMATION.......................................................................................8
ITEM 1. LEGAL PROCEEDINGS.....................................................................................8
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................................8
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................8
ITEM 5. OTHER INFORMATION.....................................................................................8
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................................8
SIGNATURES........................................................................................................9
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ii
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
China Broadband Corp.
Consolidated Balance Sheet (Unaudited)
Consolidated Statement of Operations (Unaudited)
Consolidated Statement of Shareholders' Equity (Unaudited)
Consolidated Statement of Cash Flows (Unaudited)
Notes to the Consolidated Financial Statements (Unaudited)
September 30, 2000
F-1
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<CAPTION>
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
-------------------------------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30,
2000 2000
$ $
-------------------- -------------------
ASSETS
CURRENT
<S> <C> <C>
Cash and cash equivalents 7,191,845 9,690,074
Interest and GST receivable 105,443 39,240
Due from officers and employees (Note 4) 109,876 215,056
Prepaid expenses 159,218 64,217
-------------------- -------------------
7,566,382 10,008,587
Due from Shekou Joint Venture 295,015 -
Due from Big Sky Network Canada Ltd. - 1,995,465
Investment in Shekou Joint Venture (Note 1 and 3) 2,684,438 -
Investment in Big Sky Network Canada Ltd. (Note 1) - 189,901
Fixed assets 254,572 56,910
Intangible Assets:
Intellectual Property (Note 5) 849,750 -
Shekou Joint Venture (Note 5) 2,549,250 -
Chengdu Joint Venture (Note 5) 5,098,500 -
Goodwill (Note 5) 2,153,717 -
-------------------- -------------------
21,451,624 12,250,863
==================== ===================
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 228,774 34,889
Promissory Note (Note 5) 1,700,000 -
Unearned revenue - 416,666
-------------------- -------------------
1,928,774 451,555
-------------------- -------------------
STOCKHOLDERS' EQUITY
Common shares 12,086,692 12,112,320
Additional paid-in capital 8,512,735 15,235
Accumulated deficit (1,076,577) (328,247)
-------------------- -------------------
19,522,850 11,799,308
-------------------- -------------------
21,451,624 12,250,863
==================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
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<CAPTION>
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
------------------------------------------------------------------------------------------------------------------------------
Cumulative
Period From
February 1, Date of
2000 Incorporation
to to
SEPTEMBER 30, June 30, September 30,
2000 2000 2000
(3 MONTHS)
$ $ $
------------------ ------------------- -------------------
REVENUE
<S> <C> <C> <C>
Technical consulting 125,000 83,333 208,333
GENERAL AND ADMINISTRATIVE EXPENSES 895,525 441,854 1,337,379
STOCK COMPENSATION - 15,235 15,235
------------------ ------------------- -------------------
(770,525) (373,756) (1,144,281)
EQUITY LOSS IN BIG SKY NETWORK
CANADA LTD. (101,372) (80,099) (181,471)
INTEREST INCOME 123,567 125,608 249,175
------------------ ------------------- -------------------
NET LOSS (748,330) (328,247) (1,076,577)
================== =================== ===================
LOSS PER SHARE
Basic (0.04) (0.03)
================== ===================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 18,366,147 9,679,276
================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
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CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(EXPRESSED IN U.S. 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
Share consolidation (809,150) - - - -
Issue of common shares for the
outstanding shares of
China Broadband (BVI) Corp. 13,500,000 710,029 - - 710,029
Shares issued pursuant to private
placement agreements at $0.20
per share 500,000 100,000 - - 100,000
Shares issued pursuant to private
placement agreements at $1.00
per share 1,530,000 1,530,000 - - 1,530,000
Shares issued pursuant to private
placement agreements at $7.50
per share 1,301,667 9,762,503 - - 9,762,503
Share issue costs - (50,183) - - (50,183)
Stock compensation - - 15,235 - 15,235
Net loss - - - (328,247) (328,247)
--------------- -------------- ----------------- --------------- ------------------
Balance, June 30, 2000 18,341,517 12,112,320 15,235 (328,247) 11,799,308
Share issue costs (25,628) (25,628)
Acquisition of the shares of 1,133,000 - 8,497,500 - 8,497,500
Big Sky Network Canada Ltd.
(Note 5)
Net loss - - - (748,330) (748,330)
--------------- -------------- ----------------- --------------- ------------------
Balance, September 30, 2000 19,474,517 12,086,692 8,512,735 (1,076,577) 19,522,850
=============== ============== ================= =============== ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
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<CAPTION>
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
------------------------------------------------------------------------------------------------------------------------------
Cumulative
Period From
February 1, Date of
2000 Incorporation
to to
SEPTEMBER 30, June 30, September 30,
2000 2000 2000
(3 MONTHS)
$ $ $
------------------ ------------------- -------------------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
<S> <C> <C> <C>
Net loss (748,330) (328,247) (1,076,577)
Adjustments for:
Amortization 3,745 - 3,745
Equity loss in Big Sky Network Canada Ltd. 101,372 80,099 181,471
Stock compensation - 15,235 15,235
------------------ ------------------- -------------------
(643,213) (232,913) (876,126)
Changes in non-cash working capital
Interest and GST receivable (66,203) (39,240) (105,443)
Due from officers and employees 105,180 (215,056) (109,876)
Prepaid expenses 271,666 (64,217) (207,449)
Accounts payable and accrued liabilities 193,885 34,889 228,774
Unearned revenue (416,666) 416,666 -
------------------ ------------------- -------------------
(555,351) (99,871) (655,222)
------------------ ------------------- -------------------
FINANCING
Issue of common shares for cash - 11,892,503 11,892,503
Share issuance costs (25,628) (50,183) (75,811)
------------------ ------------------- -------------------
(25,628) 11,842,320 11,816,692
------------------ ------------------- -------------------
INVESTING
(Increase) decrease in due from Big Sky Network Canada Ltd. 975,000 (1,995,465) (1,020,465)
Increase in due from Shekou Joint Venture (295,015) - (295,015)
Fixed asset additions (201,407) (56,910) (258,317)
Acquisition of Big Sky Network Canada Ltd. (net of cash
acquired) (2,395,828) - (2,395,828)
------------------ ------------------- -------------------
(1,917,250) (2,052,375) (3,969,625)
------------------ ------------------- -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,498,229) 9,690,074 7,191,845
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,690,074 - -
------------------ ------------------- -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 7,191,845 9,690,074 7,191,845
================== =================== ===================
NON-CASH INVESTING AND FINANCING ACTIVITY:
Shares issued to acquire investment in Big Sky
Network Ltd. 8,497,500 270,000 8,767,500
================== =================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN U.S. 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 internet technology 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
Company was incorporated for the purposes of implementing a business
strategy involving joint ventures to provide high speed internet
broadband services in major urban markets throughout the PRC.
On April 14, 2000, the Corporation, a public shell company, acquired
China Broadband (BVI) Corp. ("CBB - BVI") in a transaction 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 tangible net assets of the
Corporation, valued at fair value, which approximates the Corporation's
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-6
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CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN U.S. 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 SoftNet
Systems, Inc. ("SoftNet") 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 SoftNet for cash consideration of $2,000,000. As a
result of the April 25, 2000 transaction, the Corporation no longer
controls BSN and therefore, BSN's accounts have been deconsolidated
from these financial statements. For the period April 26, 2000 to
September 29, 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 SoftNet, see Note 5.
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 in
cash or equipment. BSN is also responsible for providing technical
support to the Shekou JV. Over the Shekou JV's 15 year term, 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 Huayu 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 Huayu 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 earned 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-7
<PAGE>
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
--------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
UNCERTAINTIES AND RISK FACTORS
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 Shekou JV's services were launched on June 30, 2000, and it is
currently expanding its subscriber base in the Shekou Industrial Zone.
The Chengdu JV's services 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.
F-8
<PAGE>
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
--------------------------------------------------------------------------------
1. INCORPORATION AND NATURE OF BUSINESS (CONTINUED)
UNCERTAINTIES AND RISK FACTORS (CONTINUED)
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.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information presented in the accompanying financial statements is
unaudited and includes all adjustments which are, in the opinion of
management, necessary to present fairly the financial position, results
of operations and cash flows for the interim periods presented. It is
suggested that these interim financial statements be read in
conjunction with the audited consolidated financial statements of
CBB-BVI as at March 31, 2000 and for the period from February 1, 2000
(date of incorporation) to March 31, 2000.
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. The Corporation
believes that its revenue recognition practices are in conformity with
SAB 101.
F-9
<PAGE>
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
--------------------------------------------------------------------------------
3. INVESTMENT IN JOINT VENTURES
As discussed in Note 1, BSN participates in both the Shekou JV and the
Chengdu JV. The Chengdu JV commenced operations in October, 2000.
Summarized financial information for the Shekou
JV is as follows:
-----------------
$
-----------------
Current assets 2,198,736
Other assets 715,429
-----------------
Total assets 2,914,165
=================
Current liabilities 7,622
Capital 2,906,543
-----------------
Total liabilities and capital 2,914,165
=================
Net loss (94,037)
The Chengdu JV commenced operations in October, 2000.
4. DUE FROM OFFICERS AND EMPLOYEES
The amounts due from officers and employees are advances for travel
expenses. They are non-interest bearing and payable on demand.
F-10
<PAGE>
CHINA BROADBAND CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
--------------------------------------------------------------------------------
5. 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 Big Sky Network Canada Ltd.
("BSN") increasing its ownership to 100% of BSN. 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. 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
=================
6. COMMITMENTS
a) BSN has entered into an investment commitment for capital
contributions to the joint venture with Chengdu Huayu Information
Industry Co. Ltd. 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.
b) 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.
7. SEGMENTED INFORMATION
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.
F-11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements and information contained in this Report constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. 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 Company to be materially different from any future results
or achievements of the Company expressed or implied by such forward-looking
statements. Such factors include, but are not limited to the following: the
Company's limited operating history and history of losses; the Company'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 Company's ability to enter into joint venture
relationships on acceptable terms; the Company'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 Company's operations; the
ability of the Company'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
Company'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 Company's dependence on key management and
personnel; the Company'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 in the Company's
Securities and Exchange Commission filings.
OVERVIEW
We, China Broadband Corp. (formerly, Institute for Counselling, Inc.),
through our wholly-owned subsidiary, Big Sky Network Canada Ltd., a British
Virgin Islands corporation ("Big Sky Network"), are in the process of entering
into cooperative joint venture relationships with government-approved Chinese
partners to offer high capacity, high speed Internet access and services in
major urban markets throughout the People's Republic of China. Each of Big Sky
Networks government approved joint venture partners has obtained or are expected
to obtain the required licenses, regulatory approvals and access to existing
cable television optical fibre-coaxial cable systems for the joint venture to
offer broadband services. 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 ventures provide
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
areas in which the joint venture services. In the future, the joint ventures are
expected to provide a complete range of broadband services, including 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, subject to regulatory and government approval.
HISTORY OF THE COMPANY
We were incorporated under the laws of Nevada on February 9, 1993 as
"Institute for Counselling, Inc.", and changed our name to "China Broadband
Corp." on April 27, 2000. We were inactive from the date of incorporation
through December 31, 1997, during which time we raised no significant capital
and incurred no significant expenses. As of February 1, 2000, we had 2,319,000
shares of common stock issued and outstanding.
1
<PAGE>
On April 14, 2000, we completed a reverse-split of our common stock on
a .65104 for 1 basis reducing our issued and outstanding share capital to
1,509,850 shares of common stock.
We acquired all of the issued and outstanding shares of China Broadband
(BVI) Corp. in exchange for 13,500,000 shares of our common stock on April 14,
2000. Because we 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 our corporation. In instances like this,
accounting principles require that the transaction be reflected in financial
statements as a recapitalization of the parent, China Broadband Corp., and the
subsidiary, China Broadband (BVI) Corp. is treated as the acquiring or
continuing entity for financial accounting purposes. Consequently, the
statements are created by aggregating the accounts of the subsidiary, as would
have been the case if shareholders of China Broadband (BVI) Corp. had retained
ownership, and then adding the accounts of the parent for the relevant period
when all the companies came under common control. In this case, common control
started immediately after the completion of the acquisition, effectively April
14, 2000. Consequently, our financial statements for periods subsequent to the
acquisition will include the accounts of China Broadband (BVI) Corp. and Big Sky
Network for the full fiscal period, but only the financial information for China
Broadband Corp. for the period following the date of acquisition.
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, a company implementing a business strategy involving
entering into joint ventures that would provide high capacity, high speed
Internet broadband services in the major urban markets throughout the People's
Republic of China. Big Sky Network had several letters of intent to enter into
cooperation joint venture agreements with Chinese joint venture partners to
deliver such services. On February 1, 2000, China Broadband (BVI) Corp. acquired
50,000 shares, representing all of the issued and outstanding capital stock of
Big Sky Networks. On February 22, 2000, Big Sky Network issued an additional
10,000 shares of SoftNet Systems, Inc. ("SoftNet") for cash consideration of
$500,000. On April 25, 2000, Big Sky Network issued a further 40,000 shares to
SoftNet for cash consideration of $2,000,000.
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.
Subsequent to China Broadband Corp.'s acquisition of China Broadband
(BVI) Corp., China Broadband Corp. completed three private placements of
3,331,667 shares of its common stock for proceeds of $11,392,502.
On September 29, 2000, we acquired, indirectly through China Broadband
(BVI) Corp., the 50,000 shares of Big Sky Network owned by SoftNet, under the
terms of a common stock purchase agreement. Under the terms of the agreement, we
paid SoftNet $12,697,500 for its interest in Big Sky Network, with the following
components:
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 debt, if any, owed by SoftNet to us; and
o 1,133,000 shares of our common stock, valued at $7.50 per share.
We acquired SoftNet's interest in Big Sky Network to obtain 100%
ownership. After giving effect to the acquisition, we own 100% of the issued and
outstanding capital stock of Big Sky Network. On October 13, 2000, we filed Form
8-K with the U.S. Securities and Exchange Commission, providing details of the
transaction together with an undertaking to file pro-forma financial statements
within 60 days of the Form 8-K filing.
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BIG SKY NETWORK JOINT VENTURES
As of November 13, 2000, Big Sky Network formed the following joint
ventures:
- Shenzhen China Merchants Big Sky Network Ltd., a joint venture with
Shenzhen, China Merchants Shekou Industrial Zone Ltd. ("China
Merchants Shekou"), to provide high-speed Internet access in Shekou,
Shenzhen, Guangdong Province (the "Shekou Joint Venture");
- Sichuan Huayu Big Sky Networks Ltd., a joint venture with Chengdu
Huayu Information Industry Co. Ltd. ("Chengdu Huayu"), to provide
high-speed Internet access in Chengdu, Sichuan Province (the
"Chengdu Joint Venture").
China Merchants Shekou received regulatory approval and the required
licenses for the Shekou Joint Venture and launched Big Sky Networks' first joint
venture broadband service in Shekou, China on June 30, 2000.
Chengdu Huayu received regulatory approval and the required licenses
for the Chengdu Joint Venture and launched Big Sky Network's second joint
venture broadband service in Chengdu, China on October 26, 2000.
On July 21, 2000, Big Sky Network entered into a Strategic Partnership
Agreement with Chengdu Huayu to build a Greater Chengdu-Area and a
Province-Wide-Area Integrated Information Network to provide high-speed Internet
access, data transmission and value-added services in the Chengdu, Sichuan area.
On September 15, 2000, Big Sky Network entered into a Joint Development
Agreement of City-Wide-Area High Speed Broadband Data Transmission Services
Networks of China with Jitong Network Communications Co. Ltd. dated September
15, 2000, under which the parties agreed to jointly develop digital data
transmission services based on the nation-wide City-Wide-Area integrated
high-speed broadband network.
Big Sky Network has signed letters of intent with the following
potential joint venture partners:
- Zhuhai Cable Television Station dated May 27, 1999;
- Cixi Broadcast and TV Station dated January 12, 2000;
- Dalian Metropolitan Area Network Center dated March 1, 2000;
- Deyang Guangshi Networks Development Ltd.; and
- Guangzhou Cable Television Station dated April 8, 1999.
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 these joint
ventures in the fourth quarter 2000 and during 2001. Big Sky Networks is also
exploring additional joint venture opportunities in other municipalities
throughout China.
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RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000
The Company had no business activity prior to February 1, 2000. The
discussion set forth below describes the result of operations for the
three-month period ended September 30, 2000. The "Company" as used in this
discussion refers to China Broadband Corp. and its subsidiaries.
Revenues. During the fiscal quarter ended September 30, 2000, the
Company generated $125,000 in revenues from management fees by providing
technical consulting services to Big Sky Network for the period. The Company
earned interest income of $123,567 from its cash and short-term deposits.
Expenses. The Company incurred general operating expenses of $895,525.
These expenses included accounting and audit expenses of $64,615 and legal
expenses of $92,735 related to the preparation of the Company's reports under
the Securities Exchange Act of 1934, as amended, preparation of legal documents
related to the joint venture and the SoftNet transaction, and investment banking
expenses of $200,000. Consulting expenses of $241,405 and travel expenses of
$89,065 were incurred during the three month period ended September 30, 2000
primarily related to the negotiation of various joint venture agreements in
China, including the extended 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. The Company anticipates that expenses will
increase during the fourth quarter of 2000 for the following reasons: (i) the
Company anticipates that it will continue to negotiate and finalize letters of
intent and definitive agreements to form joint ventures; (ii) the Company's
joint ventures will begin extensive marketing and promotional campaigns to build
subscription bases in Shekou and Chengdu; (iii) the Company will incur expenses
related to the launch of its joint venture services in Chengdu and other
potential areas; (iv) the Company will incur costs associated with finance
raising activities; (v) the Company will incur costs related to hiring
additional personnel to provide management, technical and support services to
its growing organization; and (vi) the Company will incur other costs related to
implementing its business plan and financing its joint venture obligations.
Loss. The Company had a loss of $770,525 from its operations. The
Company also recorded an equity loss of $101,372 related to Big Sky Network's
ongoing operating expenses incurred by the first joint venture offering services
of Shekou, China, leasing office space and hiring employees to commence signing
up subscribers. The Company's loss for the three-month period ended September
30, 2000, after interest income of $123,567, was of $748,330. The Company
anticipates losses will increase in the fourth quarter of 2000, due to expenses
related to expanding its business operations to facilitate additional joint
venture relationships, as described above. The Company also anticipates that its
equity loss related to Big Sky Network will increase in the third and fourth
quarters of 2000 as additional ongoing operating expenses are incurred as joint
venture agreements are executed and office space is leased and employees are
hired to commence signing up subscribers. Loss per share for the three-month
period ended September 30, 2000 was $0.04 per share.
Since the Company is in its development stage, all losses accumulated
since inception have been considered as part of the Company's development stage
activities.
PERIOD FROM INCEPTION (FEBRUARY 1, 2000) THROUGH SEPTEMBER 30, 2000.
The Company had no business activities prior to February 1, 2000. On
April 25, 2000, Big Sky Network issued 40,000 shares to SoftNet Systems, Inc.
and, as a result, the company 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, the Company's 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, the
Company owns 100% of Big Sky Network's issued and outstanding share capital.
4
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Revenues. During the period from inception (February 1, 2000) through
September 30, 2000, the Company generated revenues of $208,333 from management
fees by providing technical consulting services to Big Sky Network for the
period. The Company earned interest income of $249,175 from its cash and
short-term deposits.
Expenses. The Company 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 the Company's 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. The Company
anticipates that expenses will increase during the fourth quarter of 2000 for
the following reasons: (i) the Company anticipates that it will continue to
negotiate and finalize letters of intent and definitive agreements to form joint
ventures; (ii) the Company's joint ventures will begin extensive marketing and
promotional campaigns to build subscription bases in Shekou and Chengdu; (iii)
the Company will incur expenses related to the launch of its joint venture
services in Chengdu and other potential areas; (iv) the Company will incur costs
associated with finance raising activities; (v) the Company will incur costs
related to hiring additional personnel to provide management, technical and
support services to its growing organization; and (vi) the Company will incur
other costs related to implementing its business plan and financing its joint
venture obligations.
Loss. The Company had a loss of $1,144,281 from its operations during
the period. The Company also recorded an equity loss of $181,471 related to Big
Sky Network's ongoing operating expenses incurred by the Shekou Joint Venture
related 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. The Company's loss for the
period from inception (February 1, 2000) through September 30, 2000, after
interest income of $249,175, was of $1,076,577. The Company anticipates that it
will continue to incur losses in future periods until the Company's 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. The Company also anticipates that its equity loss related to
Big Sky Network will increase in the fourth quarter of 2000 as additional
ongoing operating expenses are incurred as joint venture agreements are executed
and expenses related to launching joint venture broadband services, including
rent expenses, administrative expenses, personnel expenses, consulting expenses
and marketing and sales expenses are incurred.
Since the Company is 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, the Company had cash and cash equivalents of
$7,191,845 and working capital of $5,637,608.
During the period from inception (February 1, 2000) through September
30, 2000, the Company raised $11,392,503 through the issuance of common stock,
less share issuance costs of $75,811. The Company had cash of $9,690,074 at the
beginning of the period. During the period from inception (February 1, 2000)
through September 30, 2000, the Company generated Cash of $7,191,845; and during
the three month period ended September 30, 2000, the Company used Cash of
$2,498,229.
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Operating activities during the fiscal quarter ended September 30, 2000
included net loss of $748,330 for the quarter and a non-cash equity loss in Big
Sky Network of $101,372. The Company had changes in non-cash working capital
accounts of $87,862 resulting from accounts payable and accrued liabilities of
$193,885 related primarily to costs associated with the Shekou Joint Venture,
and travel advances for officers and employees of $105,180, offset by prepaid
expenses of $271,666 related to deposits on furniture and rent, retainers for
legal firm and transfer agent, interest receivable of $66,203, and unearned
revenue of $416,666. Financing activities during the fiscal quarter ended
September 30, 2000 used cash of $25,628. Investing activities during the fiscal
quarter ended September 30, 2000 included $295,015 due from the Shekou Joint
Venture; acquisition of Big Sky Networks of $2,395,828; fixed asset additions of
$201,407 related to fixtures and equipment; and $975,000 decrease in due from
Big Sky Network.
SOFTNET TRANSACTION
On September 29, 2000, the Company, through China Broadband (BVI),
acquired SoftNet's 50% interest in Big Sky Network. Under the terms of the
acquisition agreement, the Company agreed to pay SoftNet $2,500,000 in cash;
issue SoftNet 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 Company and issue
SoftNet 1,133,000 shares of China Broadband Corp. common stock.
The Company's acquisition of SoftNet's interest in Big Sky Network had
the following impact on the Company's financial position:
o $2,500,000 in cash paid to SoftNet;
o China Broadband issued 1,133,000 shares to SoftNet at a deemed
value of $8,497,500;
o The Company recorded a $1,700,000 liability related to its
obligation to pay SoftNet under a promissory note; and
o Forgiveness of debt, if any, owed by SoftNet to us.
In addition to the commitments described above, the Company has the
following commitments:
Big Sky Network has agreed to future maximum capital contributions
under the Chengdu Joint Venture Agreement and the Strategic Partnership
Agreement with Chengdu Huayu Information Industry Co. Ltd. of $5,500,000. The
Company contributed $500,000 to the Chengdu Joint Venture in October. 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 Company 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.
6
In addition to the foregoing, the Company, through Big Sky Network, is
expected to enter into additional joint venture arrangements that are
anticipated to require capital contributions of cash and/or services of
approximately $5,000,000 each. The Company anticipates that it may finance such
capital contributions through vendor financing or by issuing debt or equity
securities. There can be no assurance that such financing will be available on
terms acceptable to the Company, if at all.
PLAN OF OPERATION
As of Septemeber 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 is
estimated to be approximately $1,000,000 million to $1,200,000 (primarily joint
venture contributions, salaries, travel, office and other similar expenses).
These funds are intended to permit us to expand our marketing efforts through
additions to staff and to develop and execute a comprehensive market exposure
program to implement the business strategy of entering into joint ventures that
are anticipated to provide high capacity, high speed Internet, data and voice
services in the major urban markets throughout the People's Republic of China.
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
Subsequent to the period ended September 30, 2000, the following events
occurred:
- Chengdu Huayu received regulatory approval and the required licenses
for the Chengdu Joint Venture and launched Big Sky Network's second
joint venture broadband service in Chengdu, China on October 26,
2000.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) Sales of Unregistered Securities
On September 29, 2000, China Broadband Corp. issued 1,133,000
shares to SoftNet as partial consideration for 50,000 shares
of Big Sky Network. Theses securities were issued pursuant to
an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended.
b) Use of Proceeds from Sales of Registered Securities
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
During the quarter ended September 30, 2000, there were no changes in
or disagreements with accountants on accounting or financial disclosure. On
September 22, 2000, China Broadband Corp. replaced Arthur Andersen LLP as its
independent auditor with Deloitte & Touche LLP. China Broadband Corp. filed a
current report on Form 8-K to report the change in auditors on September 26,
2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Common Stock Purchase Agreement dated September 29, 2000, among
SoftNet Systems, Inc., China Broadband Corp. and Big Sky Network
Canada Ltd. (previously filed as Exhibit 10.1 on Form 8-K on
October 13, 2000).
10.2 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. (previously filed as Exhibit
10.2 on Form 8-K on October 13, 2000).
10.3 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. (previously filed as Exhibit 10.3 on Form 8-K on October
13, 2000)
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(b) Reports on Form 8-K.
Form 8-K/A filed on August 1, 2000, amending Form 8-K filed on
April 28, 2000, containing audited financial statements of
acquired business: China Broadband (BVI) Corp. -- Consolidated
Financial Statements Together With Auditors' Report as at
March 31, 2000 and for the Period from February 1, 2000 (date
of incorporation) to March 31, 2000.
Form 8-K filed on August 24, 2000, reporting change in
auditor.
Form 8-K filed on October 13, 2000, reporting the acquisition
by China Broadband (BVI) Corp. of 50,000 shares of Big Sky
Network Canada Ltd. pursuant to the terms of a Common Stock
Purchase Agreement.
Form 8-K filed on September 26, 2000, reporting change in
auditor.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHINA BROADBAND CORP.
(formerly Institute for Counseling, Inc.)
Date: November 14, 2000 By: /S/ MATTHEW HEYSEL
--------------------------------
Name: Matthew Heysel
Title: Chief Executive Officer
Date: November 14, 2000 By: /S/ THOMAS G. MILNE
--------------------------------
Name: Thomas G. Milne
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
9
