Unassociated Document
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-KSB
[x]
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
for the period ended December 31,
2006
|
[
]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
for the transition period from _______ to
_______
|
Commission
File Number: 000-52092
CHINA
EDUCATION ALLIANCE, INC.
(Exact
name of small business issuer as specified in its charter)
North
Carolina
|
56-2012361
|
(State
or other jurisdiction of
|
(IRS
Employer identification No.)
|
incorporation
or organization)
|
|
80
Heng Shan Road, Kun Lun Shopping Mall
Harbin,
The People’s Republic of China 150090
(Address
of principal executive offices)
011-86-451-8233-5794
(Issuer's
telephone number)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $.001 par value
(Title
of
Class)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act 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 [ ]
Indicate
by checkmark whether the registrant is a shell company (as defined by Rule
12(b)
of the Exchange Act).
Yes
[ ]
No [x]
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or an
amendment to this Form 10-KSB. ྈ
State
issuer's net revenues for its most recent fiscal year: $8,324,473
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked sale price of such common equity, as of
a
specified date within the past 60 days: $13,074,848 as of March 26,
2007.
(ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)
Check
whether the issuer has filed all documents and reports required to be filed
by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes ྑ No ྑ
(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 57,965,000 shares as of March 26,
2007.
DOCUMENTS
INCORPORATED BY REFERENCE
None
Transitional
Small Business Disclosure Format (check one): Yes [ ] No [x]
Cautionary
Statement Regarding Forward Looking Information
The
discussion contained in this 10-KSB filed under the Securities Exchange Act
of
1934, as amended, (the "Exchange Act") contains forward-looking statements
that
involve risks and uncertainties. The issuer's actual results could differ
significantly from those discussed herein. These include statements about our
expectations, beliefs, intentions or strategies for the future, which the
Company indicates by words or phrases such as "anticipate," "expect," "intend,"
"plan," "will," "we believe," "the Company believes," "management believes"
and
similar language, including those set forth in the discussion under "Description
of Business," including the "Risk Factors" described in that section, and
"Management's Discussion and Analysis or Plan of Operation" as well as those
discussed elsewhere in this Form 10-KSB. The Company bases its forward-looking
statements on information currently available to it, and the Company assumes
no
obligation to update them. Statements contained in this Form 10-KSB that are
not
historical facts are forward-looking statements.
PART
I
ITEM
1.
Description of Business
General
China
Education Alliance, Inc. (the "Company") is an education service company in
China. The Company is a holding company which conducts its business through
its
wholly owned subsidiaries, Harbin Zhong He Li Da Education Technology, Inc.
(“ZHLD”) and the Zhonghe Education Training Center. The Company conducts
educational services through three main channels: a large educational on-line
portal, education and vocational training centers, and educational software
and
media. The Company’s educational services and material focus primarily on
supplemental education and test preparation material for grades kindergarten
through high school.
The
Company’s products include on-line test preparation materials, teachers’
materials, study guides, and audio recordings of popular classes. The products’
scope includes pre-school education, elementary and middle school education,
vocational education, continuing education, enterprise training education,
intelligence authentication, agricultural labor education, education for the
disabled, first-time employment education, re-employment education, study
abroad, and education for seniors. The Company provides its services and
materials primarily through distance learning technology, education resource
development, education project planning and promotion, teaching platforms,
class
development and scheduling, education information and technical services.
The
Company works in conjunction with several independent and state owned entities
allowing the Company to enhance the services and products of the Company and
to
promote its products and services. The Company has historical relationships
with
the Chinese vocational educational society, the government education information
center, the authentication training center, and other government departments
and
education entities. The Company further promotes its materials and services
through cooperation with more than one thousand professors, over two thousand
membership schools, over three thousand school principals, more than fifty
thousand school teachers, one hundred news media outlets, and twenty scholarly
research organizations.
Corporate
History
CEDA
was
incorporated in the State of North Carolina on December 2, 1996 under the name
of ABC Realty Co. to engage in residential real estate transactions as a broker
or agent. In performing these residential real estate services. The Company
changed its name several times and engaged in several types of business before
it became inactive.
On
September 15, 2004, the Company executed a Plan of Exchange (the "Agreement"),
between and among the Company, Zhong He Li Da Education Technology, Inc., a
corporation organized and existing under the laws of the People's Republic
of
China ("ZHLD"), the shareholders of ZHLD (the "ZHLD Shareholders"), and Duane
Bennett, Chairman of the Board and controlling shareholder of the Company.
At
the
closing of the Plan of Exchange which occurred on December 13, 2004, the Company
issued the ZHLD Shareholders 55,000,000 shares of common stock of the Company,
or 95% of the Company's then outstanding common stock, in exchange for all of
the shares of capital stock of ZHLD owned by the ZHLD shareholders. Immediately
upon the closing, the Company cancelled 11,000,000 shares of common stock
controlled by Duane Bennett, and, as a result, the Company had 2,915,000 shares
issued and outstanding before the issuance of the 55,000,000 new shares. Payment
for the cancelled shares was made by ZHLD and/or the ZHLD Shareholders in the
amount of $400,000 in the aggregate (composed of $300,000 in cash and $100,000
in a promissory note).
On
November 17, 2004, the Company changed its name to China Education Alliance,
Inc.
Educational
Operations
Since
the
reverse merger was consummated, the Company has continued the operations of
ZHLD.
ZHLD
is a
company engaged in the on-line education industry in The People’s Republic of
China (“China”). There is a significant market in China for education and
education related products and services. It has been reported that the education
budget established by the Chinese government is over $60 billion (U.S.) every
year, which accounts for 3.41% of the GDP in China. It is expected to increase.
Currently, ZHLD owns www.edu-chn.com, which is the only website in China having
copyrights of examination materials of Chinese primary schools and middle
schools, and ZHLD legally provides target users in the age group of 7 to 18
years with downloadable examination materials. ZHLD plans to provide other
services such as text book downloading and SMS. When the visits to its web
site
increase, and its membership base expands, ZHLD plans to expand its products
into the advanced education market and adult education market.
ZHLD
has
developed some successful educational software independently and owns a database
covering all levels of basic education. Through cooperation with local education
committees and schools, ZHLD started its business in the City of Harbin in
Heilongjiang Province in northern China. ZHLD’s plans for expansion of its
business operations include the following:
-
|
Buildup
the infrastructure to ensure fast access and to satisfy the volume
that
would develop with increasing demand
|
-
|
Boost
market shares via nation-wide advertising
campaigns;
|
-
|
Invest
in human resources to improve the quality of its services;
and
|
-
|
Open
branch offices in key cities.
|
The
Company’s principal purpose is to engage in the education industry and offer
network solutions for education courses in China. As an education resources
provider and operator, the Company has a leading interactive business platform.
It makes full use of its internet network resources beyond the traditional
teaching methods and face-to-face constraints. Through the physical integration
and successful education case spreading, it serves to change the uneven
distribution of education resources and creates a better sharing of education
resources across China. Meanwhile, it is promoting the Chinese education system
by assisting in opening schools and training agencies. It has shaped
www.edu-chn.com to become a leading functional portal website through the
enforcement of the “on-site” training business. It has become an internet
network and physical training agency.
As
a
provider and operator of high-quality education resources, the Company, based
on
its know-how of the educational market in China, currently takes the
exam-oriented education in junior, middle, and high school as its core business.
The Company combined its network operating experience with its education
resources integrating its experience, and using takes the Company’s website as a
platform to carry out services like “Famed Instructors Test Paper Store” through
its service charging system by way of rechargeable learning debit cards. The
learners can study via on-line classrooms or materials downloaded for off-line
education. The Company also provides on-site teaching services under the “Big
Classroom of the Famed Instructors” program through its state-of-the-art
training center.
www.edu-chn.com
is a functional education resources portal website in China. It provides
numerous resources and strong brand promotion for business development. Under
the website, there are four modules, eight alliances, nine platforms and eight
columns of interactive entertainment columns. It has provided informative
educational products through the updated communication tools under
www.edu-chn.com. It provides multi-media resources such as college, middle
school and elementary school test papers, courseware, and video data since
the
1980’s, owning intellectual property rights for more than 300,000 sets of
courseware and test papers. www.edu-chn.com is an enterprise-class comprehensive
education network platform which is based on network video technology and the
large data sources of elementary education resources. It provides on-line
education and material to download for customers by integrating “the big
classroom of the famed instructors”.
Heilongjiang
Zhonghe Education Center engages in on-site training services and face-to-face
tutorship under “The Big Classroom of the Famed Instructors” program and its VOD
courseware resources. The useable area for the training center is about 3,400
square meters, with 17 modern classrooms that has a capacity for 1,200 students.
The courses cover each phase of compulsory education, of which junior, middle
and high school as the key part.
The
Company also provides new services to fulfill the market needs of on-line
vocational training services. The core business for its vocation education
is in
three main areas: vocation education enrollment, vocational certification,
and
career development for college graduates. The Company has collaborated with
the
China Vocation Education Society in setting up www.360ve.com. This website
is a
substantial site for vocational education enrollment providing customers with
reliable information regarding vocational training schools and vocation
trainings both on-line and on-site. Pilot version of the www.360ve.com, a
“high-quality vocational teaching resource supermarket”, has been launched. The
Company leverages the existing resources of China Vocational Education Society
which has numerous members, including provincial education bureaus and more
than
one thousand vocational training schools across China. The Company intends
to
expand its strategic cooperation with training agencies, especially in the
aspects of joint enrollment, the exchange of resources and on-site training
agencies facilities. The Company has carried out various levels of cooperation
with over one thousand professors in their respective expertise fields, more
than two thousand membership schools, over three thousand school principals,
over fifty thousand school teachers, as well as over one hundred news media
and
twenty scholarly research organizations.
Through
the authorization of the China Vocation Education Society, the vocational
certificating center contacts and coordinate with the education ministry, labor
ministry and other authorized government agencies to draw up benchmarks for
different education training sectors and organize performance evaluation. The
Company has been become not only the provider of on-line vocational education
but also the administrator for various vocational certifications.
The
Company’s “Millions of College Students Employment Crossroad” program has been
developed in response to the high jobless rate for China’s current college
graduates. More than 35% of college graduates can not find a job in the year
of
graduation. Many of the college graduates pursue vocational training after
college education. The Company’s “Millions of College Students Employment
Crossroad” program is designed to establish a long term training program for
college students to build connections with corporations and complete education
programs prescribed by the hiring corporations.
Recent
Acquisition and Expansion
During
December 2006, the Company acquired all of the fixed assets and franchise rights
of Harbin Nangang Compass Computer Training School (“HNCC”) for $1,010,230.
HNCC has been engaged in the business of providing on-line education resources
to computer vocational training school students. The expansion of its on-line
education programs into the vocational training market is expected to complement
its on-line education programs in elementary schools, middle schools, high
schools, and colleges.
As
a
result of this acquisition, the Company has become the exclusive partner of
Beida Qingniao APTEC Software Engineering within Heilongjiang Province in China
for vocational training. The acquisition includes six classrooms for on-site
education classes, six computer rooms and patented course materials. HNCC
currently has two principal education programs focused on network engineering
and ACCP software engineering.
Employees
The
Company had 225 employees as of December 31, 2006. The employees were comprised
of five executives, six administrative and finance employees, 47 marketing
and
sales personnel, seven research and development staff, eight information
employees, six design staff, 132 teaching and education administrative staff,
and 14 other employees engaged in security, planning, human resources and
other
activities.
We
have
no collective bargaining agreements, and we believe that we have good relations
with our employees.
Competition
The
Company has been taking steps to address the competition in the Chinese on-line
educational industry. In order to increase market share and revenue, the Company
has determined to establish offices in Liaoning, Jilin and Inner Mongolia.
It
will continue to make use of its strategy of growth through the use of computer
web sites. The Company will also take the following steps to increase sales
and
implement its marketing strategy:
1.
Market
penetration,
2.
Establish resale networks, and
3.
Seek
strategic partners
It
is
expected that there will be more competitors from both domestic and overseas
companies because the educational market in China is large and growing. In
order
to avoid or minimize the potential of low-priced competition in the future,
the
Company has determined to increase its competitiveness in various
educational markets.
Education
Systems in China
Since
1949 when the People's Republic of China was founded, the government in China
has considered education an important component of its economic and social
development. Recently, with the emergence of its market economy, education
has become a priority in China.
According
to the National Bureau of Statistics of China for 2003, the gross domestic
product (“GDP”) of the country was calculated at $1.41 trillion (~ RMB11.67
trillion), with an annual real rate of GDP growth at 9.1%; 1.1 percentage points
more than 2002. The average Chinese family sets aside 10% of its savings
for education according to the United Nations Educational, Scientific, and
Cultural Organization. We believe that many parents are willing to invest
in their children for better and higher education because it is critical for
their future opportunities and advancement. The educational system in
China is under pressure to reform and develop. China understands the
country's international competitiveness will depend greatly on the quality
of
its human resources. On March 14, 2004, the second session of the 10th
National’s People’s Congress concluded that China advocates “putting people
first” as its development model. The Chinese government sets education as a
strategic priority in the China Agenda for Education.
The
central government in China, through the Ministry of Education, manages
education in China at a macro level, responsible for carrying out related laws,
regulations, guidelines and policies of the central government; planning
development of the education sector; integrating and coordinating educational
initiatives and programs nationwide; maneuvering and guiding education reform
countrywide. To a large degree, the provincial governments are left to
implement basic education through development of teaching plans to supplement
the required coursework from the central Ministry of Education and the funding
of basic education in poorer areas. Provincial level governments have the
main responsibilities for implementing basic education on a day to day basis.
China has set up an education system with government as the major investor
and social partners as co-investors.
Since
1978, the government in China has promulgated such codes as Degree Statute
of
the People's Republic of China, Law of Compulsory Education of the People's
Republic of China, Law of Teachers of the People's Republic of China, Law of
Protection over Juveniles of the People's Republic of China, Education Law
of
the People's Republic of China, Statute for Teacher's Eligibility and Law of
Higher education of the People's Republic of China, and released more than
ten
sets of education administration regulations. The Ministry of Education, within
its jurisdiction, has issued more than 200 sets of administrative rules and
regulations, significantly facilitating development of education of different
natures.
Education
is funded by a variety of sources: schools directly controlled by the central
government are generally funded from the central financial pool; schools
controlled by local governments are supported by local governments, the Central
Government and fund raising projects initiated by these schools themselves;
schools sponsored by township and village governments and by public institutions
are mainly financed by the sponsor institutions and subsidized by local
governments; private schools are funded by sponsors (including collecting
tuition from students and soliciting contributions).
In
China,
primary and secondary education takes 12 years to complete. Primary
education generally is six years, and junior middle school and senior middle
school is three years each. Children generally begin primary school at the
age
of six. In 1986, China passed the Compulsory Education Law of the People's
Republic of China (the "Compulsory Education Law"), which dictates that nine
years of compulsory education (grades 1 through 9) is to become mandatory and
requires that Provincial and local governments take the necessary steps to
ensure that all students receive at least the required nine years of education.
The goal of the Compulsory Education Law, as well as the subsequent Guidelines
for the Reform and Development of Education in China, put forth by the Chinese
State Education Commission in 1993, was to universalize compulsory education
and
to eliminate illiteracy among the Chinese people. According to the Bulletin
of
Statistics on National Educational Development in 1999 issued by the Ministry
of
Education, the nine-year compulsory education has covered 80% of China's
population since its inception. In 2002, China began to aggressively
incorporate English into its elementary school curriculum.
On
March
3, 2004, the State Council approved and disseminated the 2003-2007 Action Plan
for Invigorating Education in the 21st Century, which was formulated by the
Ministry of Education. The plan recognizes the need to make China
competitive in the world economy and provides a blue print to speed up
educational reform and development in China. The plan is based on two
fundamental concepts to “Rejuvenating China Through Science and Education” and
“Reinvigorating China through Human Resource Development.” The objectives
of the plan are to establish a well-to-do society and perfect the socialistic
market economy in China. The plan has the following
guidelines:
Consolidate
Achievements.
Consolidate and universalize the Nine-Year Compulsory Education plan in
the areas inhabited by 92% of the population and eradicate illiteracy among
young and middle-aged groups. Maintain the achievements in senior
secondary education, especially secondary vocational education and the
achievements in mass higher education with a goal of a gross enrollment rate
of
17%.
Deepen
Reform.
Deepen educational reform gradually from macro level to micro level with
overall planning and clear priorities. Promote reform and innovation in training
modes, management system, curriculum, teaching methodologies and teaching
content effectively.
Quality
Improvement.
Further change governmental functions to carry out administration by laws,
govern the practices in education strictly and strengthen management. While
accelerating the development, regard quality improvement as the most important
task to have a rational understanding of quality, improve the quality assessment
system and guide the educational institutions into justified
competition.
Continue
Development.
Devotion to the educational development so that the public will have
access to high-quality education. Consider the sustainable development of
education as well as the cohesive development between education and economy
and
society.
Although
China has had remarkable achievements in educational development and educational
reform, it recognizes that it faces challenges for future educational
development with an increasing demand for education and limitations on resources
and capacity. China recognizes that the infrastructure, teacher training,
management system and operations of the educational system must be improved
to
meet the needs of modernization. China has highlighted two strategic
priorities to focus on major issues and define key solutions:
Rural
Area Educational Development:
The comprehensive educational reform in rural areas will be deepened and
the new management system with the county-level government as the main
management body will be implemented. In addition, the system for
facilitating students with poor economic background will be improved and the
efforts in building up a teaching cohort in primary and secondary schools will
be further intensified. Moreover, the “Program for Modern Distance
Education in Primary and Secondary Schools in Rural Areas” will be implemented
as well.
Major
Projects Initiative:
Six major projects are included into the 2003-2007 Action Plan to cover
all the educational undertakings that must be completed before
2007:
|
1.
|
The
‘Project for Quality-Oriented Education in the New Century’ aims at
promoting quality-oriented education, strengthening moral education
in
schools, deepening curriculum reform and the reform of evaluation
system
in basic education, actively developing senior secondary education,
pre-school education and special education, thoroughly improving
the
physical well-being, moral integrity, and artistic attainment of
the
students, promoting the studies of Chinese language and Chinese
characters.
|
|
2.
|
The
‘Program on Innovation in Vocational Education and Training’ to change the
mode of vocational education into an employment-oriented one and
to adopt
an ‘order-form style’ or ‘module style’ characterized by a close link
between employers and vocational schools. We will speed up the cultivation
of a large pool of urgently needed technical human resource, especially
the senior technicians of all types to actively contribute the transfer
of
labor force from rural areas and agriculture to urban areas and
non-agricultural industries. The ‘Programme on Teaching Quality and
Teaching Reform in Higher Education Institutions’ places emphasis and
efforts on the teaching reform and the establishment of an evaluation
and
quality assurance system.
|
|
3.
|
The
‘Program on Employment Promotion for University Graduates’ to strengthen
the construction of leadership system, operation mechanism, policy
framework and service system for university graduates employment,
and to
deepen reforms both in and outside the domain of education orientated
by
the labor market.
|
|
4.
|
The
‘Educational Informationization Construction Program’ to intensify efforts
in infrastructure construction, resource building, talents training,
and
the application of IT inside the educational
circle.
|
|
5.
|
The
‘Program on Building Up A Competent Teaching and Administrating Cohort’
to prioritize personnel system reform for teaching staff to
reinforce the management of school scale so that all the teaching
positions and different units inside schools can be planned
scientifically. A teacher certificate system will be implemented
with the policy of ‘accessing with qualifications, competing for
vacancies, and working with employment contracts’. Additionally, this new
Action Plan will further promote this practice and improve the teacher
training system and the further education system for in-service
teachers.
|
The
plan
emphasizes the use of information technology in education and training.
The plan also calls for an increase in financing for education and
contains a commitment by the Ministry of Education to raise educational
appropriations in the budgets of the Provinces.
Our
Authors
Our
teaching materials are written by various authors in China. These authors
are usually teachers, university professors or experts in field in which they
publish. We contract with the authors to create the content for our web
sites. Under the terms of our contracts, we own the copyright on all
materials produced for us by these authors.
We
generally pay each author a fixed fee and a royalty based on sales.
We
also
enter into agreements to use and publish educational materials developed by
others.
Marketing
We
employ
sales persons that make sales calls to the Ministry of Education and Provincial
Education Commissions. These education commissions are customers for our
products, which approve the purchase of certain products for the various schools
under their jurisdiction. Information and requests obtained by our sales
persons from the education commissions are also used to assist us in developing
educational products and identifying new products and opportunities. Our
sales force is also actively involved with educators in developing curriculums
based on the products we produce. Our sales persons regularly visit
provincial education officials, administrators, schools and teachers to market
and sell our products.
We
intend
to use our web-based educational portal to assist us in marketing our
educational products.
Since
2000, the Chinese government has been implementing policy reform to change
the
education system from one of memory learning to a more individualized creative
approach. This reform has created demand for new curriculum, updated
educational materials, and educational resources. Our portal enables our
customers to access the new curriculum created by various levels of government
and leading academic experts and fully endorsed by the Ministry of
Education.
This
curriculum reform is being mandated by the Ministry of Education and executed
through its Curriculum Development Center (CDC), the leading authority for
curriculum development for the kindergarten to grade 12 segment.
Competition
Financial
Resources:
We compete with many larger, more established competitors. Many of
these competitors have diverse businesses and are better capitalized. In
some cases, these are new competitors that are entering the educational market
in China and may offer products and services at lower costs to build market
share.
Government-Owned
Entities:
We compete directly with government-owned enterprises that receive
subsidies, funding and other support from local governments.
Government-owned enterprises are not normally run as profit-enterprises
and may sell educational materials at lower cost. Government-owned
enterprises may receive approval for their educational materials more promptly
than private enterprises, and government-owned enterprises are generally able
to
distribute all of the materials they publish. Currently there are
restrictions on a private company’s ability to publish textbooks so we are
required to use government-owned publishers to publish certain educational
materials. Government-owned publishers may publish and print their
educational materials at lower costs.
Product
Offerings:
Many of our competitors offer complete lines of educational products,
textbooks and services. Our competitors may be able to offer their
products at lower costs based on their ability to offer a comprehensive line
of
educational products to customers. These competitors may also offer
educational products that are integrated and sold in packages. Our
strategy is to focus on underserved niche segments in the market and to develop
and sell products to serve unique demands.
Sales
Channels:
Many
of our competitors have existing sales and distribution channels for their
products. Government-owned enterprises have existing long-term
relationships with the Xinhua Bookstore system, the largest bookstore chain
in
China that is government owned
We
believe that we can successfully differentiate our educational products and
services from those of our competitors by developing quality products and
services for underserved niche segments in the market. Our strategy also
allows us to avoid direct competition with larger competitors by developing
educational materials for subjects and areas that may not be practicable or
economical for larger competitors to compete. We also are able to develop
educational materials more quickly than larger competitors or government-owned
entities, which may be subject to more burdensome internal procedures and
requirements. We do not employ salaried authors to prepare our educational
materials; instead, we use third-party authors that are experts and recognized
in their respective academic fields, which may allow us to develop higher
quality educational products than our competitors. Finally, we employ
professional sales persons, many who have regularly visited provincial education
officials, administrators, schools and teachers to market and sell our products
for many years.
We
could
face competition from competitors that offer similar products and services
on
the Internet to the educational community or other websites specializing in
educational products. In addition, we could face competition from existing
websites that expand to offer information and permit sharing of information
related to education. At this time we are unable to fully predict which
entities will introduce portals that will compete directly or the nature and
scope of services our competitors will offer.
While
the
potential exists for competition to provide some services and products of a
similar nature, we believe that it would be very difficult for a competitor
to
provide a portal offering all the products and services that we currently offer
because of agreements we have entered into which give us certain exclusive
rights to provide certain products and services.
Chinese
practices and policies have limited contracting with non-Chinese entities in
the
education industry. In addition, our business is subject to numerous
Chinese rules and regulations, including restrictions on foreign ownership
of
Internet and education companies and regulation of Internet content. Many
of the rules and regulations that we face are not explicitly communicated,
but
arise from the fact that education and the Internet are politically sensitive
areas of the economy. We believe that the Ministry of Education and the
various Provincial Education Commissions prefer to contract with Chinese
companies in the industry of education. As a result, all of our Chinese
subsidiaries are staffed with Chinese nationals. Where practicable, we
retain Chinese legal counsel to review our agreements and to assist us in
structuring our corporate organization. All of our revenue is derived from
our Chinese subsidiaries, and our success is dependent on the skill and
experience of our subsidiaries.
Risk
Factors
We
depend upon our subsidiaries in China and their affiliates to conduct our
business in China.
In
the
education industry in China, contracts are not often made with non-Chinese
entities. As a result, the Company is not a party to many of the contracts
of our subsidiaries. We believe that the Ministry of Education and the
various Provincial Education Commissions prefer to contract with China companies
in the industry of education. As a result, our material agreements in
China are entered into by our subsidiaries and all of our China operations
are
conducted by our China subsidiaries. All of our revenue is derived from
our China subsidiaries, and our success is dependent on the skill and experience
of our subsidiaries.
We
and our affiliates and agents may not be able to enforce our agreements in
China.
China
law
governs most of our material agreements, many of which are with China government
entities. Although we use local lawyers in China to assist us in preparing
our agreements, there can be no assurance that we can enforce any of our
material agreements or that remedies will be available outside of China.
China's system of laws and the enforcement of existing laws may not be as
certain in implementation and interpretation as U.S. or other laws. The
judiciary in China is comparatively inexperienced in enforcing corporate and
commercial law, leading to a higher than usual degree of uncertainty as to
the
outcome of any litigation. Even where adequate law exists in China, it may
be impossible to obtain swift and equitable enforcement of such law, or to
obtain enforcement of the judgment by a court of another jurisdiction. The
inability to enforce or obtain a remedy under the foregoing agreements would
have a material adverse impact on us.
We
are subject to numerous Chinese rules and regulations which restrict the scope
of our business and could have a material adverse impact on
us.
We
are
subject to numerous rules and regulations in China, including, without
limitation, restrictions on foreign ownership of Internet and education
companies and regulation of Internet content. Many of the rules and
regulations that we face are not explicitly communicated, but arise from the
fact that education and the Internet are politically sensitive areas of the
economy. We are not aware that any of our agreements or our current
organizational structure is in violation of any governmental requirements or
restrictions, explicit or implicit. However, there can be no assurance
that we are in compliance now, or will be in the future. Moreover,
operating in China involves a high risk that restrictive rules and regulations
could change. Indeed, even changes of personnel at certain ministries of
the government could have a negative impact on us. The determination that
our structure or agreements are in violation of governmental rules or
regulations in China would have a material adverse impact on us, our business
and on our financial results.
Our
business is subject to seasonal and cyclical fluctuations in sales.
We
may
experience seasonal fluctuations in our sales. The operations of our
business are seasonal, with a substantial part of operating income in China
recognized in the second half of the fiscal year. The seasonality of the
education market is significantly influenced by national, provincial and local
school schedules and because certain purchases by students are generally made
just prior to the start or at the beginning of the school year in the autumn.
We are required to produce inventory prior to those periods in order to
meet customer delivery requirements. This seasonality causes significant
pressure on us to monitor production and distribution accurately to satisfy
these delivery requirements. Lower than expected sales during the adoption
period of a new or updated educational material or a general economic downturn
in our market or industry could have a material adverse effect on the timing
of
our cash flows and, therefore, on our ability to service our obligations.
We
depend on certain key personnel to manage our business
effectively.
Our
success depends on the management skills of Mr. Xiqun Yu, our Chief Executive
Officer and President, and Mr. Chunqing Wang, our Vice Chairman and Chief
Financial Officer, and the relationships they have with educators,
administrators and other business contacts they have in China. We also
depend on successfully recruiting and retaining highly skilled and experienced
authors, teachers, managers, sales persons and other personnel who can function
effectively in China. In some cases, the market for these skilled
employees is highly competitive. We may not be able to retain or recruit
such personnel, which could materially and adversely affect our business,
prospects and financial condition.
We
do not
maintain key person insurance on these individuals. The loss of either Mr.
Yu or Mr. Wang would delay our ability to implement our business plan and would
adversely affect our business.
We
may not be successful in protecting our intellectual property and proprietary
rights.
We
rely
on authors and educators to develop our materials and educational curriculum
products. Our proprietary software products are primarily protected by
trade secret laws. We execute agreements with our authors and
confidentiality and non-disclosure agreements with our software development
employees and contractors. We limit access to and distribution of our
proprietary information and source code. On October 27, 2001, China's
National People's Congress passed new copyright laws that specifically cover
software and significantly expanded the rights of copyright owners. We do
not know what impact, if any, these new laws will have on our relationships
with
our authors.
Our
success depends upon the knowledge and experience of our management and
technical personnel and our ability to market our existing products and to
develop new products. We have adequately protected our proprietary technology,
and we will take all appropriate and reasonable legal measures to protect it,
a
competitor's use of our processes could have a material adverse effect on our
business, financial condition and results of operations.
Others
may bring defamation and infringement actions against us, which could be
time-consuming, difficult and expensive to defend.
As
a
distributor of educational materials, we face potential liability for
negligence, copyright, patent or trademark infringement and other claims based
on the nature and content of the materials that we publish or distribute.
Any claims could result in us incurring significant costs to investigate
and defend. We do not carry general liability insurance that would cover
any potential or actual claims.
The
launch of any suit against us or any of our affiliates, successful or
unsuccessful, could require us to suspend or discontinue the distribution of
educational material or require us to allocate resources to investigating or
defending claims.
We
depend upon the acquisition and maintenance of licenses to conduct our business
in China.
We
are
dependent upon licenses in China, including, without limitation, general
business licenses, and an education service provider license to conduct
our business. While we believe that all steps necessary to maintain these
licenses have been taken and will be taken, the loss or failure to obtain
renewals of these licenses will have a material adverse impact on our business
and financial condition.
Our
growth may be inhibited by the inability of potential customers to fund
purchases of our products and services.
Many
schools in China, especially those in rural areas, do not have sufficient funds
to purchase textbooks, educational materials or computers to use our web-based
educational portal. In addition, provincial and local governments may not
have the funds to support the implementation of a curriculum using our
educational products. Accordingly, we may not be able to sell our products
and services to schools in certain areas of China until they are able to procure
the necessary funding, which may inhibit our growth.
The
lack of teachers trained in the use of our products may inhibit schools from
using them.
In
order
to use our materials, products and services, appropriate teacher training is
necessary. Accordingly, we are and will continue to offer training in seminars
through our branch offices. However, we may not have the necessary
resources to provide training for all teachers and their needs. Schools
that do not receive training may not be able to effectively use our curriculum,
materials, products and services and are unlikely to purchase them. The
failure to increase teacher training could have a material adverse impact on
the
growth prospects of our business.
We
face competition in each of our businesses.
Many
of
our competitors are better capitalized, more experienced, and have deeper ties
in the educational market place in China. We may be unsuccessful in our
attempts to compete, which would have a material adverse impact on our business
and financial conditions.
We
face the risk that changes in the policies of the government in China could
have
significant impacts upon the business we may be able to conduct in China and
the
profitability of such business.
The
economy of China is a planned economy subject to five-year and annual plans
adopted by the government that set down national economic development goals.
Policies of the government can have significant effects on the economic
conditions of China. The government in China has confirmed that economic
development will follow a model of market economy under socialism. Under
this direction, we believe that the government will continue to strengthen
its
economic and trading relationships with foreign countries and business
development in China will follow market forces. A change in the trend
towards economic liberalization may materially affect our business, prospects
and financial condition.
Inflation
in China could negatively affect our profitability and
growth.
While
the
economy in China has experienced rapid growth, such growth has been uneven
among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. If prices for our products rise at a rate that is insufficient to
compensate for the rise in our costs, it may have an adverse effect on
profitability. In order to control inflation in the past, the government has
imposed controls in bank credits, limits on loans for fixed assets, and
restrictions on state bank lending. Such an austerity policy can lead to a
slowing of economic growth.
An
outbreak of Severe Acute Respiratory Syndrome (“SARS”) may adversely affect our
results of operations.
In
March 2003, Guangdong Province of China, Hong Kong, Singapore, Taiwan and
several other Asian countries encountered an outbreak of SARS, a highly
contagious form of atypical pneumonia. In the future, if any of our
employees or students is suspected to have contracted SARS, under certain
circumstances such employees, students and affected areas of our premises may
have to be quarantined. As a result, we may have to temporarily suspend
all or part of our operations. Furthermore, a future outbreak of SARS may
negatively impact our ability to effectively market our products and services.
We cannot rule out the possibility of a future outbreak or predict the
effect any such future outbreak could have on our business.
Regulation
of the Internet by the government of China could affect our ability to operate
in China as well as our profitability.
China
regulates its Internet sector by making pronouncements or enacting regulations
regarding the legality of foreign investment in the Chinese Internet sector
and
the existence and enforcement of content restrictions on the Internet. Our
web-based educational portal must comply with Chinese laws and regulation.
There are, however, substantial uncertainties regarding the proper
interpretation of current Chinese Internet laws and regulations.
Issues,
risks and uncertainties relating to government regulation of the Internet sector
in China include, without limitation, the following:
|
*
|
a
prohibition of foreign investment in businesses providing value added
telecommunication services including computer information services
or
electronic mailbox services, may be applied to Internet related businesses
which would adversely affect our web-based educational portal. Some
officials of the Ministry of Information have taken the position
that
foreign investment in the Internet sector is
prohibited.
|
|
*
|
The
Ministry of Information has stated recently that it intends to adopt
new
laws or regulations governing foreign investment in the Chinese Internet
sector in the near future. If these new laws or regulations forbid
foreign
investment in the Internet sector, they could severely impair our
business.
|
|
*
|
The
Ministry of Information has stated recently that the activities of
Internet content providers are also subject to regulations by various
government authorities, depending on the specific activities conducted
by
the Internet content provider. Areas of regulation may include on-line
advertising and on-line news reporting. In addition, the new laws
and
regulations may require various government approvals in China for
securities offering by companies engaged in the Internet sector in
China.
|
|
*
|
The
interpretation and application of existing laws and regulations,
the
stated position of the Ministry of Information in China and the possible
new laws or regulations have created substantial uncertainties regarding
the legality of existing and future foreign investment in the Internet
sector, and the business activities of Internet businesses, including
our
business.
|
Accordingly,
it is possible that the relevant authorities in China could, at any time, assert
that any portion or all of our existing or future ownership structure and
businesses violate existing or future Chinese laws and regulations. It is also
possible that new laws and regulations governing the Chinese Internet sector
will prohibit or restrict foreign investment in our proposed businesses and
operations, affect other aspects of our proposed businesses and operations
or
require governmental approvals. In addition, these new laws and regulations
may
be retroactively applied to us. If the relevant authorities in China find
us to be in violation of any existing or future Chinese laws or regulations,
they would have broad discretion in dealing with such a violation, including,
without limitation, the following:
* levying
fines;
* revoking
our business and other licenses;
* requiring
that we restructure our ownership or operations; and
* requiring
that we discontinue any portion or all of our Internet related
business.
Any
of
these actions could have a material adverse impact on our business and financial
condition.
We
are subject to currency exchange rate risks and limitations on our ability
to
convert Chinese currency.
China's
national currency, the “Yuan” or “Renminbi” (Rmb), is not a freely convertible
currency. Effective January 1, 1994, the Chinese foreign exchange system
underwent fundamental changes. This reform was stated to be in line with China's
commitment to establish a socialist market economy and to lay the foundation
for
making the Rmb convertible in the future. The currency reform is designed to
turn the dual exchange rate system into a unified and managed floating exchange
rate system.
A
China
Foreign Exchange Trading Centre was formed in April, 1994 to provide an
interbank foreign exchange trading market whose main function is to facilitate
the matching of long and short term foreign exchange positions of the
state-designated banks, and to provide clearing and settlement services. The
People's Bank of China publishes the state managed exchange rate daily based
on
the daily average rate from the previous day's interbank trading market, after
considering fluctuations in the international foreign exchange markets. Based
on
these floating exchange rates, the state-designated banks list their own
exchange rates within permitted margins, and purchase or sell foreign exchange
with their customers.
The
State
Administration of Foreign Exchange ("SAFE") administers foreign exchange
dealings and requires that they are transacted through designated financial
institutions. All Foreign Investment Enterprises ("FIEs") may buy and sell
foreign currency from designated financial institutions in connection with
current account transactions, including, but not limited to, profit
repatriation. With respect to foreign exchange needed for capital account
transactions, such as equity investments, all enterprises in China (including
FIEs) are required to seek approval of the SAFE to exchange Rmb into foreign
currency. When applying for approval, such enterprises will be subject to review
by the SAFE as to the source and nature of the Rmb funds. According to the
1999 Circular on Relevant Questions Concerning the Remittance of Profits,
Dividends and Bonuses out of China through Designated Foreign Exchange Banks,
effective from 1 October 1999, an FIE is permitted to remit profits, dividends
and bonuses out of China in proportion to the amount of registered capital
that
has been paid up, notwithstanding that its registered capital has not been
paid
up pursuant to its constitutional documents.
There
can
be no assurance that the Rmb relative to other currencies will not be volatile
or that there will be no devaluation of the Rmb against other foreign
currencies, including the U.S. dollar. We do not currently engage in
currency hedging transactions.
In
order
for our China subsidiaries to pay dividends to the Company, a conversion of
Renminbi into US dollars is required which, if we were not allowed to do by
the
Chinese government, would cause an interruption in our operating cash flow.
Under current Chinese law, the conversion of Renminbi into foreign currency
generally required government consent. Government authorities may impose
restrictions that could have a negative impact in the future on the conversion
process and upon the ability of the Company to meet its cash needs and to pay
dividends to its shareholders. Although out subsidiaries’ classification as
wholly-owned foreign enterprises (“WOFE”) under Chinese law permits them to
declare dividends and repatriate their funds to the Company in the United
States, any change in this status or the regulations permitting such
repatriation could prevent them from doing so. Any inability to repatriate
funds
to the Company would in turn prevent payments of dividends to our
shareholders.
Dividends
paid to the Company, as the U.S. parent company would be subject to U.S.
corporate income tax.
The
Company has not accrued any tax liability associated with the possible payment
of dividends to the U.S. parent company. Such a tax would be an added expense
appearing on our balance sheet would reduce our net income.
Lack
of bank deposit insurance puts our funds at risk of loss from bank foreclosures
or insolvencies.
The
Company maintains certain bank accounts in China that are not insured and are
not protected by FDIC insurance or other insurance. As of December 31, 2006,
the
Company held $1,713,424 in bank accounts in China. If a Chinese bank holding
funds experienced insolvency, it may not permit us to withdraw our funds which
would result in a loss of such funds and a reduction of our net
assets.
We
are subject to uncertainty related to the tax systems in China.
Through
our subsidiaries, we conduct all our business in China. China currently
has a number of laws related to various taxes imposed by both federal and
regional governmental authorities. Applicable taxes include value added tax,
corporate income tax (profits tax), and payroll (social) taxes, together with
others. Laws related to these taxes have not been in force for a
significant period, in contrast to more developed market economies; therefore,
implementing regulations are often unclear or nonexistent. Often,
differing opinions regarding legal interpretation exist both among and within
government ministries and organizations; thus, creating uncertainties and areas
of conflict. Tax declarations, together with other legal compliance areas
(as examples, customs and currency control matters) are subject to review and
investigation by a number of authorities, which are enabled by law to impose
extremely severe fines, penalties and interest charges.
We
do not carry fire, theft or liability insurance.
Due
to
the nature of our business and assets, our management has determined not to
maintain fire, theft or general liability insurance at this time. There can
be
no assurance that any insurance coverage will be available to us in the future
to cover losses or liability should we determine to obtain such insurance.
Should any of these events occur (fire or theft), we may suffer
substantial losses in the absence of insurance.
Broker-dealers
may be discouraged from effecting transactions in our shares because they are
considered a penny stock and are subject to the penny stock
rules.
Rules
15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934 impose
sales practice and disclosure requirements on certain brokers-dealers who engage
in certain transactions involving “a penny stock.” Subject to certain
exceptions, a penny stock generally includes any non-NASDAQ equity security
that
has a market price of less than $5.00 per share. The market price of our
shares over the year ended December 31, 2006 was generally less than $1.00
per
share and our shares are deemed penny stock for the purposes of the Exchange
Act. 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 U. S. Securities and Exchange 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.
ITEM
2.
Description of Property
The
Company's main office building is located at 80 Heng Shan Road, Kun Lun Shopping
Mall Harbin, The People’s Republic of China 150090, which is owned by the
Company and has a total area of 4,177 square feet. This space is adequate for
the Company's present and their planned future operations. No other businesses
operate from this office. The Company has no current plans to occupy other
or
additional office space.
The
Company also has a building in the City of Harbin, China, for its educational
training center and a building for its vocational training center.
There
is
no private ownership of land in China; all land ownership is held by the
government of China, its agencies and collectives. Land use rights are obtained
from government for periods ranging from 50 to 70 years, and are typically
renewable. Land use rights can be transferred upon approval by the land
administrative authorities of China (State Land Administration Bureau) upon
payment of the required transfer fee.
ITEM
3.
Legal Proceedings
The
Company may become subject to legal proceedings and claims which arise in the
ordinary course of business. The Company’s management does not expect that the
results in any of these legal proceedings will have a material adverse effect
on
the Company’s financial condition or results of operations.
ITEM
4.
Submission of Matters to a Vote of Security Holders
None
PART
II
ITEM
5.
Market for Common Equity and Related Security Holder Matters
General
The
Company is authorized to issue 150,000,000 shares of Common Stock, $.001
par
value per share. At December 31, 2006, there were 57,935,000 shares of Common
Stock issued and outstanding that were held by 531 stockholders of
record.
Common
Stock
Holders
of Common Stock are entitled to one vote for each share held on all matters
voted upon by stockholders, including the election of directors. The holders
of
Common Stock have no preemptive rights to purchase or subscribe for any stock
of
the Company now or hereafter authorized or for securities convertible into
such
stock. All of the outstanding shares of Common Stock are fully paid and
nonassessable. Upon any liquidation of the Company, the holders of Common
Stock
are entitled to share ratably in assets available for distribution to such
stockholders. Holders of Common Stock are entitled to receive dividends out
of
assets legally available therefore at such times and in such amounts as the
Board of Directors may from time to time determine.
Shareholders
are not entitled to cumulative voting rights, and accordingly, the holders
of a
majority of the voting power of the shares voting for the election of directors
can elect the entire class of directors to be elected each year if they choose
to do so and, in that event, the holders of the remaining shares will not
be
able to elect any person as a director of such class.
Dividends
The
Company has not declared or paid any dividends on its Common Stock and presently
does not expect to declare or pay any such dividends in the foreseeable future.
The Company has not yet formulated a future dividend policy in the event
restrictions on its ability to pay dividends are created. Payment of dividends
to our shareholders would require payment of dividends by our China subsidiaries
to the Company. This, in turn, would require a conversion of Renminbi into
US
dollars and repatriation of funds to the United States. Under current Chinese
law, the conversion of Renminbi into foreign currency generally requires
government consent. Government authorities may impose restrictions that could
have a negative impact in the future on the conversion process and upon the
ability of the Company to meet its cash needs, and to pay dividends to its
shareholders. Although, our subsidiaries’ classification as wholly-owned foreign
enterprises (“WOFEs”) under Chinese law permits them to declare dividends and
repatriate their funds to the Company in the United States, any change in
this
status or the regulations permitting such repatriation could prevent them
from
doing so. Any inability to repatriate funds to the Company would in turn
prevent
payments of dividends to our shareholders.
Market
for Common Stock
The
principal market in which the common stock is traded is the NASD Electronic
Bulletin Board over-the-counter market (OTC-BB) with the trading symbol CEDA.
The table below presents the closing bid price for the Company's Common Stock
each quarter since its initial quotation in 2004 and reflects inter-dealer
prices, without retail markup, markdown, or commission, and may not represent
actual transactions. The Company obtained the following information from the
National Quotations Bureau, L.L.C.
Market
Price
When
the
trading price of the Company’s Common Stock is below $5.00 per share, the Common
Stock is considered to be “penny stock” that are subject to rules promulgated by
the Securities and Exchange Commission (Rule 15g-1 through 15g-9) under the
Securities Exchange Act of 1934. These rules impose significant requirements
on
brokers under these circumstances, including: (a) delivering to customers the
Commission’s standardized risk disclosure document; (b) providing to customers
current bid and offers; (c) disclosing to customers the brokers-dealer and
sales
representatives compensation; and (d) providing to customers monthly account
statements.
The
following table sets forth the range of high and low closing bid prices per
share of the Common Stock of the Company as reported by National Quotations
Bureau, L.L.C. for the periods indicated.
The
closing price of the Common Stock of the Company on March 26, 2007, was $.575
per share.
Year
ended December 31, 2004
|
|
High
Closing
Bid Price
|
|
Low
Closing
Bid Price
|
|
1st
Quarter
|
|
$
|
---
|
|
$
|
---
|
|
2nd
Quarter
|
|
$
|
0.10
|
|
$
|
0.05
|
|
3rd
Quarter
|
|
$
|
1.25
|
|
$
|
0.10
|
|
4th
Quarter
|
|
$
|
0.40
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
0.55
|
|
$
|
0.25
|
|
2nd
Quarter
|
|
$
|
0.30
|
|
$
|
0.17
|
|
3rd
Quarter
|
|
$
|
0.36
|
|
$
|
0.20
|
|
4th
Quarter
|
|
$
|
0.30
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
0.86
|
|
$
|
0.10
|
|
2nd
Quarter
|
|
$
|
1.00
|
|
$
|
0.31
|
|
3rd
Quarter
|
|
$
|
0.44
|
|
$
|
0.22
|
|
4th
Quarter
|
|
$
|
0.81
|
|
$
|
0.28
|
|
Sales
of
Unregistered Securities
On
September 6, 2006, the Company issued 20,000 shares of restricted common stock
to Stephen A. Zrenda, Jr. for legal services in reliance upon Section 4(2)
under
the Securities Act of 1933, as amended.
On
March
7, 2007, the Company issued 30,000 shares of restricted common stock to Taylor
Raferty Associates Inc. for public relations services in reliance upon Section
4(2) under the Securities Act of 1933, as amended.
Registrar
and Stock Transfer Agent
The
registrar and stock transfer agent of the Company is Florida Atlantic Stock
Transfer, Inc., 7130 Nob Hill Road, Tamarac, FL 33321.
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto included elsewhere
herein.
The
statements contained in this report include forward-looking statements about
information of possible or assumed results of operations, business strategies,
financing plans, competitive position and potential growth opportunities.
Forward-looking statements include all statements that are not historical facts
and are generally accompanied by words such as “may,” “will,” “intend,”
“anticipate,” “believe,” “estimate,” “expect,” “should,” or similar expressions
or the negative of such words or expressions. These statements also relate
to
the Company’s contingent payment obligations relating to acquisitions, future
capital requirements, potential acquisitions and the Company’s future
development plans and are based on current expectations. Forward-looking
statements involve various risks, uncertainties and assumptions. The Company’s
actual results may differ materially from those expressed in these
forward-looking statements.
Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses. On an on-going basis, we evaluate these estimates, including those
related to useful lives of real estate assets, cost reimbursement income, bad
debts, impairment, net lease intangibles, contingencies and litigation. We
base
our estimates on historical experience and on various other assumptions that
are
believed to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. There can be no assurance
that
actual results will not differ from those estimates.
The
discussion that follows is based on our consolidated results of operations
for
the years ended December 31, 2006 and December 31, 2005.
Overview
China
Education Alliance, Inc. (“CEDA”), formerly known as ABC Realty, Inc., is a
corporation organized in the State of North Carolina. The Company’s primary
business activity is online education and on-site training services. It offers
high-quality educational resources, and focuses on network education, and also
provides on-site training. It is operated in China through its wholly owned
subsidiaries, Harbin Zhonghelida Education Technology Company Limited with
the
registered website domain www.edu-chn.com for its online education, and
Heilongjiang Zhonghe Education Center for its on-site education and vocational
training services.
The
Company is dedicated to becoming the leading provider of education services
in
China. As an education resources provider and operator, the Company has a
leading interactive business platform. It makes full use of network resources.
Through the integration of the Internet and of classes, it serves to change
the
uneven distribution of education resources creates a better sharing of education
resources across China. Meanwhile, it is promoting Chinese education by opening
schools and training agencies. It has shaped its website www.edu-chn.com to
become a leading functional portal website, through the enhancement of its
“on-site” training business. It has become a network and physical training
agency.
As
a
provider and operator of high-quality educational resources, the Company, based
on its know-how of the educational market in China, currently provides the
exam-oriented education in junior, middle, and high school as its core business.
The Company has combined its network operating experience with its education
resources and its integrating experience, and takes the Company’s website as a
platform to carry out services like “Famed Instructors Test Paper Store” through
its service charging system by way of rechargeable debit learning cards. The
learners can study via online classrooms or through materials downloading for
offline education. The Company also provides on-site teaching services under
the
“Big Classroom of the Famed Instructors” program through its state-of-the-art
training center.
www.edu-chn.com
is a major functional education resources portal website in China. It provides
a
diverse variety of resources and provides strong brand promotion for its
business development. Under the website, there are four modules, eight
alliances, nine platforms and eight columns of interactive entertainment
columns. It provides informative education products through its updated
communication tools under www.edu-chn.com. It provides multi-media resources
such as college school, middle school and elementary school test papers,
courseware, and video data since the 1980s, owning intellectual property rights
for more than 300,000 sets of courseware and test papers. www.edu-chn.com is
an
enterprise-class comprehensive education network platform which is based on
network video technology and large data sources of elementary education
resources. It provides online education and material for download customers
by
integrating “the big classroom of the famed instructors”.
Heilongjiang
Zhonghe Education Center engages in the on-site training services and
face-to-face tutorship under “The Big Classroom of the Famed Instructors”
program and its VOD courseware resources. The useable area for the training
center is about 3,400 square meters, with 17 modern classrooms that has capacity
of 1,200 students. The courses cover each phase of compulsory education, and
its
junior middle and high school as its key parts.
The
Company is also providing new services to fulfill the market needs of online
vocational training services. The core business for the Company’s vocation
education will be in three main areas: vocation education enrollment, vocational
certification, and career development for college graduates. The Company has
collaborated with the China Vocation Education Society in setting up
www.360ve.com. This website is a credible site for vocational education
enrollment providing customers with reliable information regarding vocation
training schools and vocation training both on-line and on-site. The Pilot
version of the www.360ve.com, a “high-quality vocational teaching resource
supermarket”, has been recently launched. The Company leverages the existing
resources of the China Vocational Education Society which has members including
provincial education bureaus and more than one thousand vocational training
schools across the country to carry out its fast expansion strategic cooperation
with the outstanding training agencies in local area, especially in the aspects
of joint enrollment, resource exchanges and on-site training agencies
establishments. The Company has carried out various levels of cooperation with
over one thousand professors in their respective expertise fields, more than
two
thousand membership schools, over three thousand school principals, over fifty
thousand school teachers, as well as over one hundred news media and twenty
scholarly research organizations.
The
Company’s “Millions of College Students Employment Crossroad” program was
developed in response to the high jobless rate for China’s current college
graduates. More than 35% of the college graduates can not find a job in the
year
of graduation. Many of the college graduates pursue vocational training after
college education. The Company’s “Millions of College Students Employment
Crossroad” program is to establish a long term training program for college
students to build connections with corporations and obtain educational programs
prescribed by the hiring corporations.
Results
of Operation
Comparison
of Years Ended December 31, 2006 and December 31, 2005
Revenues
increased by $5,211,741 or 167% in 2006 to $8,324,473 as compared to $3,112,732
in 2005, resulting in gross profit of $5,760,583 for 2006 as compared to
gross
profit of $2,095,358 in 2005. This was mainly attributable to the income
generated from the training center, new programs, and advertising income.
The
training center was established during the third quarter of 2005,
initially providing little income, and which expanded afterwards.
During 2006, the Company has added several new programs for vocational studies
and certification programs, which provides new sources of income. Advertising
income was increased as the results of the increased awareness of the Company’s
website, which resulted in more viewers coming to the Company’s website, which
enables the Company to increase its advertising income.
Cost
of sales
increased by $1,546,516 to $2,563,890 in 2006 as compared to $1,017,374 in
2005.
Cost of sales as a percentage of sales decreased by 2% to 31% for 2006 as
compared to 33% for 2005. This was primarily due to the increase in sales,
which
results in the cost of booklets and simulation tests to increase.
Gross
profit margin
increased by 2% for 2006 as compared to 2005. Gross profit margins vary from
product to product depending on a number of factors including: (a) cost of
materials; (b) overall market demand and individual customer demand; (c)
the
cost of intellectual property rights; and (d) competitor pricing
policies.
Selling
expenses
increased by $1,234,518 or 727% to $1,404,319 from $169,801 in 2005 due to
the
increase in agency fees associated with increased sales and
advertising.
Administrative
expenses
increased by $1,403,916 or 1,243% to $1,516,865 in 2006 as compared to $112,949
in 2005. The increase is due primarily to an increase in salaries due to
bonuses
paid at year end and the overall growth of the business of the
Company.
Interest
expense increased by
$147,355 due to the issuance of notes payable and associated
warrants.
Liquidity
and Capital Resources
The
Company’s assets primarily consist of its operating subsidiaries, marketable
properties for sales, cash and cash equivalents.
Cash
and Cash Equivalents
increased by 208% or $1,240,895 to $1,838,339 at December 31, 2006 as compared
to $597,444 at December 31, 2005. The increase in cash and cash equivalents
was
mainly due to bank deposits generated from bridge loans of $1,530,000 and
sales
receipts during the period.
The
Company’s current ratio at December 31, 2006 was 1.53. Its primary sources of
funds include cash balances, revenues, the proceeds of prepayments made
by
customers, or the sale of common stock. Management endeavors to ensure
that the
funds are always available to take advantage of new investment opportunities
and
that they are sufficient to meet future liquidity and capital needs. Management
considers current working capital and borrowing capabilities adequate to
cover
the Company’s planned operating and capital requirements. For future operations,
management plans to raise capital through equity financing in the international
capital markets.
.
Any
additional funding most likely through debt financing. In general, the
commitment of funds to the acquisition of plant and equipment tends to impair
liquidity. However, we believe that because of the upward trend in our revenues
in recent years, even if this upward trend levels off, our income from
operations coupled with such additional financing should provide sufficient
liquidity to meet our needs.
There
are
no restrictive bank deposits pledged as of December 31, 2006 and December 31,
2005. Therefore, the Company did not have to maintain any minimum balance in
the
relevant deposit accounts as security.
Industry
and Market Outlook
The
distribution of educational resources is uneven in different areas across China,
most of the excellent teachers are in the developed areas and key middle
schools. Among the 15,998 high schools in China, 847 of them are considered
key
schools, which account for 5.29% of the total schools. Most of the excellent
teachers’ resources are in the key high schools, the ratio of college entrance
of key high schools is higher than 90%, but the national average of college
entrance is about 55%.
Most
of
the high-quality resources of China’s elementary education often centralize in a
few of key schools, and its scale is quite limited. Because the college entrance
rate of key high schools is higher than that of the ordinary high schools,
each
student expects to enter the key high school where they can obtain the best
teaching resources. The students who have poor performance but want to enter
into the key high school must pay additional “school selecting fees”. According
to the Chinese Nanfang Daily in China, the school selecting fees was more than
RMB 27 billion in 2005, which is over $3 billion. There are even about 20%
students entering into high school through sponsorship and school selecting
fee
in China. Thus it can be noted that the China elementary and secondary education
is in urgent need for high-quality education resources.
On
the
whole, the China’s online education market is still at the preliminary stage. In
2004, the China online education market turnover reached RMB 14.4 billion,
about
$1.8 billion. As China becomes more information-oriented, while people become
increasingly aware of the network’s function, the size of the online education
market is expected to increase dramatically. iResearch, a well-known market
consulting firm, forecasts the China online market turnover in 2007 will reach
RMB 29.6 in billings.
According
to the China Network Information Center’s statistics as of December 31, 205, the
total number of internet users in China was 111 million, ranked second over
the
world, a increase of 17 million compared with the same period a year earlier
or
18.1 higher. The students account for 35.7%, about 39.627 million (objects
of
exam-oriented education); company staff accounted for 29.70%, about 32,967
million (objects of profession education); the jobless accounted for 6.9%,
about
7.657 million (objects of vocational educational); the China online education
market has of great potential.
Quantitative
and Qualitative Disclosures About Market Risks
As
of
December 31, 2006 and December 31, 2005, the Company had no material derivative
instruments. The Company may enter into derivative financial instrument
transactions in order to mitigate its interest rate risk on a related financial
instrument in the future.
The
Company’s balance sheet includes assets and liabilities whose fair values are
subject to market risk. Market risk is the risk of loss arising from adverse
changes in market prices or interest rates. Generally, the Company’s borrowing
is short to medium term in nature and therefore approximate fair value.
The
Company currently has interest rate risk and it related to its fixed maturity
mortgage participation interest. The Company seeks to limit the impact
of
interest rate changes on earnings and cash flows and to lower its overall
borrowing costs by closing monitoring its interest rate
debt.
The
Company’s equity risk as it related to its marketable equity securities, and
foreign currency risk as it relates to investments denominated in foreign
currencies. The Company and its subsidiaries are all located in China. There
were no significant changes in exchange rates, however, unforeseen developments
may cause a significant change in exchange rates. The Company is subject to
commodity price risks arising from the price of construction
materials.
The
Company’s expansion risk is in connection with the rapid development of the
Internet and growth of its users. Online learning will become one of the
dominant and efficient ways of learning for students. This is the main risk
for
business development, considering the habits of customers and the popularization
of broadband business. The management team worked out a solution by direct
communicating with students in forefront, promoting the idea that training
is
far beyond face-to-face teaching, various ways should be occupied, such as
downloading learning, online learning and other ways to attract students to
use,
become familiar with and rely on the internet and services, including but not
limited to individual service and interactive entertainment service of
www.edu-chn.com.
The
Company’s competition risk lies with its education resources. As the provider of
education resource, high-quality education resource are the core competitive
power for education enterprises. Currently, Chinese high-quality elementary
education resource is not balanced on a provincial-basis and locally focused
featuring key schools. The schools that have the local education resource an
open the local learning website, and have strong competitive power. The Company
will duplicate the regional model in national market, with the strong internet
operational capability; it will build the national leading educational service
system and top brand of education service; integrate the advanced resource
of
local education organizations by untitled means and provide partial educational
resource for the public schools. Under the principle of providing operating
platform, CEDA plans to build the regional educational organizations, and reach
a win-win situation with public schools, and to realize the Company’s ambition
of sharing high-grade resources.
Significant
Accounting Estimates and Policies
The
discussion and analysis of our financial condition and results of operations
is
based upon consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenues,
and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which from our basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We
must
make estimates of the collectability of accounts receivable. We analyze
historical write-offs, changes in our internal credit policies and customer
concentrations when evaluating the adequacy of our allowance for doubtful
accounts. Differences may result in the amount and timing of expenses for any
period if we make different judgments or use different estimates.
Property
and equipment are evaluated for impairment whenever indicators of impairment
exist. Accounting standards require that if an impairment indicator is present,
the Company must assess whether the carrying amount of the asset is
unrecoverable by estimating the sum of the future cash flows expected to result
from the asset, undiscounted and without interest charges. If the carrying
amount is less than the recoverable amount, an impairment charge must be
recognized, based on the fair value of the asset.
As
part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes. This process involves estimating our
current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. We must then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income, and, to the extent we believe that recovery is not likely,
we
must establish a valuation allowance. To the extent that we establish a
valuation allowance or increase this allowance in a period, we must include
a
tax provision or reduce our tax benefit in the statements of operations.
We use
our judgment to determine our provision or benefit for income taxes, deferred
tax assets and liabilities and any valuation allowance recorded against our
net
deferred tax assets. We believe, based on a number of factors including
historical operating losses, which we will not realize the future benefits
of a
significant portion of our net deferred tax assets and we have accordingly
provided a full valuation allowance against our deferred tax assets. However,
various factors may cause those assumptions to change in the near
term.
We
cannot
predict what future laws and regulations might be passed that could have
a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update
the
assumptions and estimates used to prepare our financial statements when we
deem
it necessary.
We
have
determined the significant principles by considering accounting policies
that
involve the most complex or subjective decisions or assessments. Our most
significant accounting policies are those related to revenue recognition
and
accounting for stock-based compensation.
New
Accounting Pronouncements
In
February 2006, the FASB issued Statement No. 155, "Accounting for Certain
Hybrid
Financial Instruments" ("SFAS No. 155"), which amends FASB Statements No.
133
and 140. This Statement permits fair value remeasurement for any hybrid
financial instrument containing an embedded derivative that would otherwise
require bifurcation, and broadens a Qualified Special Purpose Entity's ("QSPE")
permitted holdings to include passive derivative financial instruments that
pertain to other derivative financial instruments. This Statement is effective
for all financial instruments acquired, issued or subject to a remeasurement
event occurring after the beginning of an entity's first fiscal year beginning
after September 15, 2006. This Statement has no current applicability to
the
Company's financial statements. Management plans to adopt this Statement
on
January 1, 2007 and it is anticipated that the initial adoption of this
Statement will not have a material impact on the Company's financial position,
results of operations, or cash flows.
In
March
2006, the FASB issued Statement No. 156, "Accounting for Servicing of Financial
Assets - an amendment of FASB Statement No. 140" ("SFAS No. 156"). This
Statement is effective for fiscal years beginning after September 15, 2006.
This
Statement requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. This Statement
has no current applicability to the Company's financial statements. Management
plans to adopt this Statement on January 1, 2007 and it is anticipated that
the
initial adoption of this Statement will not have a material impact on the
Company's financial position, results of operations, or cash flows.
In
June
2006, the FASB issued Interpretation 48, "Accounting for Uncertainty in Income
Taxes" ("FIN 48"), an interpretation of FASB Statement No. 109, "Accounting
for
Income Taxes." FIN 48 clarifies the accounting and reporting for income taxes
where interpretation of the law is uncertain. FIN 48 prescribes a comprehensive
model for the financial statement recognition, measurement, presentation
and
disclosure of income tax uncertainties with respect to positions taken or
expected to be taken in income tax returns. FIN 48 is effective for fiscal
years
beginning after December 15, 2006. This Statement has no current applicability
to the Company's financial statements. Management plans to adopt this Statement
on January 1, 2007 and it is anticipated that the initial adoption of FIN
48
will not have a material impact on the Company's financial position, results
of
operations, or cash flows.
In
September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 addresses how companies should measure fair
value
when they are required to use a fair value measure for recognition or disclosure
purposes under GAAP. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
with earlier adoption permitted. Management is assessing the impact of the
adoption of this Statement.
In
September 2006, the FASB issued Statement No. 158, "Employers' Accounting
for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158"),
an
amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires
(a) recognition of the funded status (measured as the difference between
the
fair value of the plan assets and the benefit obligation) of a benefit plan
as
an asset or liability in the employer's statement of financial position,
(b)
measurement of the funded status as of the employer's fiscal year-end with
limited exceptions, and (c) recognition of changes in the funded status in
the
year in which the changes occur through comprehensive income. The requirement
to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the fiscal year ending after December 15,
2006.
The requirement to measure the plan assets and benefit obligations as of
the
date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. This Statement
has no
current applicability to the Company's financial statements. Management plans
to
adopt this Statement on December 31, 2006 and it is anticipated the adoption
of
SFAS No. 158 will not have a material impact to the Company's financial
position, results of operations, or cash flows.
In
September 2006, the Securities Exchange Commission issued Staff Accounting
Bulletin No. 108 ("SAB No. 108"). SAB No. 108 addresses how the effects of
prior
year uncorrected misstatements should be considered when quantifying
misstatements in current year financial statements. SAB No. 108 requires
companies to quantify misstatements using a balance sheet and income statement
approach and to evaluate whether either approach results in quantifying an
error
that is material in light of relevant quantitative and qualitative factors.
When
the effect of initial adoption is material, companies will record the effect
as
a cumulative effect adjustment to beginning of year retained earnings and
disclose the nature and amount of each individual error being corrected in
the
cumulative adjustment. SAB No. 108 will be effective beginning January 1,
2007
and it is anticipated that the initial adoption of SAB No. 108 will not have
a
material impact on the Company's financial position, results of operations,
or
cash flows.
In
February 2007, the FASB issued Statement No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159). This statement permits
companies to choose to measure many financial assets and liabilities at fair
value. Unrealized gains and losses on items for which the fair value option
has
been elected are reported in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the
impact
of SFAS 159 on its consolidated financial statements.
Item
7.
Financial Statements
Refer
to
pages F-1 through F-20
Item
8.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
For
fiscal 2005, the Company changed its independent auditors from Jimmy C.H.Cheng
& Co., CPA to E-Fang Accountancy Corp., & CPA.
For
fiscal 2006, the Company changed its independent auditors from E-Fang
Accountancy Corp., & CPA to Murrell, Hall, Mcintosh & Co.,
PLLP.
The
Company has not had any disagreements with its independent registered
accountants regarding accounting or financial disclosure matters.
Item
8.A.
Controls and Procedures
The
Company’s Chief Executive Officer/President and its Chief Financial
Officer/principal accounting officer (collectively, the “Certifying Officers”)
are responsible for establishing and maintaining disclosure controls and
procedures for the Company. Such officers have concluded (based upon their
evaluation of these controls and procedures as of a date within 90 days of
the
filing of this report) that the Company’s disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company
in
this report is accumulated and communicated to the Company’s management,
including its principal executive officers as appropriate, to allow timely
decisions regarding required disclosure. The Certifying Officers also have
indicated that there were no significant changes in the Company’s internal
controls or other factors that could significantly affect such controls
subsequent to the date of their evaluation, and that there were no corrective
actions necessary with regard to any significant deficiencies and material
weaknesses.
Item
8.B.
Other Information
None
PART
III
Item
9.
Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with
Section
16(a) of the Exchange Act
Directors
and Executive Officers.
The
following persons are the directors and executive officers of the Company.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Xiqun
Yu
|
|
39
|
|
Chairman
of the Board of Directors, Chief Executive Officer, President and
Director
|
Chunqing
Wang
|
|
47
|
|
Vice
Chairman of the Board of Directors and Chief Financial
Officer
|
Yuhong
Yang
|
|
41
|
|
Vice
President and Director
|
Yanzhi
Liu
|
|
38
|
|
Director
|
Yuzhong
Wu
|
|
36
|
|
Director
|
The
following is a summary of the business experience and other biographical
information with respect to each of the Company’s officers and directors listed
in the above-referenced table.
Mr.
Yu
has over 16 years of experience in senior management with several Northern
China
based enterprises. He was responsible for marketing, strategic planning and
designing for many of these corporations. In addition to his posts with
subsidiaries of the Company in China, he is also the CEO of RETONG.COM., as
well
as the Chairman of Harbin Zhonghelida Technology Corporation, Heilongjiang
Retong Advertising Co., Ltd. and Heilongjiang Wantong Telecommunication Project
Co., Ltd. Mr. Yu is a member of the Council of China Harbin Advertising
Association and is a Director of the China Internet Network Association. Mr.
Yu
received a degree in English from the Harbin University of Science and
Technology in 1989.
Mr.
Wang
holds a Certificate of Senior Accountant in China. Mr. Wang has extensive
experience in financial management. Prior to joining the Company, from 1986
to
1989, he served as a Financial Director for Harbin Battery Manufacturing
Company. From 1989 to 1992, he was a Financial Director with Harbin Tianrun
Chemical Joint-Stock Company. From 1992 to 2001, he assumed the in CFO position
for Tianrun Group. Since 2001, he has been the Chief Financial Officer of the
subsidiaries of the Company. Mr. Wang is a graduate in industrial accounting
from the Harbin College of Economic Carde Management.
Mr.
Yang
was the Managing Director and Chief Editor of the Qitaihe Evening Paper
September 1992 to October 1995, a Vice President with the Orient Realty
Development Co., Ltd. From October 1995 to March 2000, and was the President
of
Harbin Runtong Group before joining the Company. He is also a member of the
Council of Heilongjiang Young Enterpriser Association. Mr. Yang is a specialist
in capital deployment and asset management, and is excellent in human resource
cultivation. He received a Business Administration degree from the Open
University of Hong Kong in 2001.
Mr.
Liu
is a graduate in computer science, and holds a Certificate of Senior Engineer.
Mr. Liu served as a Technical Manager for the Thermodynamic Company of the
Harbin Power Station Group, and as the Technical Manager for the Heilongjiang
Wantong Telecom Project Company. He is a specialist in telecommunications.
Mr.
Wu is
a graduate in enterprise management and is a certified economist. Mr. Wu was
a
Marketing Manager for Harbin Kaida Wood Products Company, and later was an
Administration Officer and Strategic Planning Manager for Heilongjiang Retong
Advertising Co., Ltd. Mr. Wu has planned many provincial and municipal
activities. Mr. Wu is a graduate of Harbin University in 1993.
Audit
Committee
The
Company does not have a separately designated standing audit committee. The
entire Board of Directors acts as an audit committee for the purpose of
overseeing the accounting and financial reporting processes, and audits of
the
financial statements of the Company. The U.S. Securities and Exchange Commission
has adopted new regulations relating to audit committee composition and
functions, including disclosure requirements relating to the presence of an
"audit committee financial expert" serving on its audit committee. In connection
with these requirements, the Company's Board of Directors examined the
Commission's definition of "audit committee financial expert" and concluded
that
the Company does not currently have a person that qualifies as such an expert.
The Company intends to retain an additional director who will qualify as such
an
expert, as soon as reasonably practicable. While the members and current
directors do not meet the qualifications of an "audit committee financial
expert", each of the Company's directors, by virtue of his past employment
experience, has considerable knowledge of financial statements, finance, and
accounting, and has significant employment experience involving financial
oversight responsibilities. Accordingly, the Company believes that its current
directors capably fulfill the duties and responsibilities of an audit committee
in the absence of such an expert.
Section
16(a) Beneficial Ownership Reporting Compliance
Under
Section 16(a) of the Exchange Act, all executive officers, directors, and each
person who is the beneficial owner of more than 10% of the common stock of
a
company that files reports pursuant to Section 12 of the Exchange Act, are
required to report the ownership of such common stock, options, and stock
appreciation rights (other than certain cash-only rights) and any changes in
that ownership with the Commission. Specific due dates for these reports have
been established, and the Company is required to report, in this Form 10-KSB,
any failure to comply therewith during the fiscal year ended December 31, 2006.
The Company does not believe that all of these filing requirements were
satisfied by its executive officers, directors and by the beneficial owners
of
more than 10% of the Company’s common stock. It is expected that such reports
will be filed within 30 days.
Item
10.
Executive Compensation
All
executive officers, for services in all capacities to the Company, received
the
following compensation during the fiscal years ended December 31, 2006 and
2005.
Summary
Compensation Table
Name
and Principal Position
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Other
Annual Compensation
|
|
|
Restricted
Stock Awards(s)
|
|
|
Securities
Underlying Options
|
|
|
LTIP
Payouts
|
|
|
Other
|
|
Xiqun
Yu, current Chairman of the Board
|
2006
|
|
$
|
65,500
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
of
Directors, Chief Executive Officer and President |
2005
|
|
$
|
1,250
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Duanne
C. Bennett, former
|
2006
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
President and director
|
2005
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Personal
benefits received by the Company’s executive officers are valued below the
levels which would otherwise require disclosures under the rules of the U.S.
Securities and Exchange Commission.
The
Company does not currently provide any contingent or deferred forms of
compensation arrangements, annuities, or retirement benefits.
The
Company has not entered into any employment agreements with their employees,
officers or directors. The Company has no standard arrangements under which
the
Company will compensate their directors for their services provided to
them.
Committees
of the Board of Directors
The
Company does not have an audit committee, compensation committee, nominating
committee, or an executive committee of the Board of Directors. The Board of
Directors plans to establish various committees in the future.
Benefit
Plans
The
Company does not have any stock option plan, stock bonus plan, profit sharing
plan, or similar plans for the benefit of its officers, directors or employees.
However, the Company may establish such plans in the future.
Board
Compensation
Directors
of the Company have not received any compensation in their capacity as directors
during the fiscal year ended December 31, 2006.
Director
and Officer Indemnification and Limitations on Liability
Article
VIII of our Bylaws limits the liability of directors, officers and employees
of
the Company to the fullest extent permitted by North Carolina law.
Consequently, our directors and officers may not be personally liable for
monetary damages regarding their duties as directors.
Section
16:21, et seq. of the North Carolina Business Corporation Act (the “Act”), as
amended, provides for broad indemnification of directors, officers and employees
subject to certain exceptions. A North Carolina corporation may indemnify an
individual who is made a party to a proceeding if he conducted himself in good
faith, and he reasonably believed that his conduct was in its best interests
and
that his conduct was at least not opposed to its best interests. However, a
corporation can not indemnify in connection with a proceeding by or in the
right
of the corporation in which a director was adjudged liable to the corporation
or
any other proceeding charging improper personal benefit to him. Section 17:12
of
the Act provides for mandatory indemnification of officers to be the same extent
as a director, unless on account of his activities which were, at the time
taken, known or believed by him to be clearly in conflict with the best interest
of the corporation.
ITEM
11.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
following tables set forth the ownership, as of December 31, 2006, of our common
stock (a) by each person known by us to be the beneficial owner of more than
5%
of our outstanding common stock, and (b) by each of our directors, executive
officers and our officers and directors as a group. To the best of our
knowledge, all persons named have sole voting and investment power with respect
to such shares, except as otherwise noted.
Title
of Class
|
Name
and Address
|
Number
of Shares
|
Percent
of Total
Outstanding
Shares
|
Common
|
Xiqun
Yu (1)
80
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
30,190,411
(1)
|
52.1%
|
Common
|
Guilan
Feng
80
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
4,000,000
|
6.9%
|
Common
|
Chunqing
Wang
80
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
3,000
|
.001%
|
Common
|
Yuhong
Yang
80
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
0
|
0%
|
Common
|
Yanzhi
Liu
80
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
15,000
|
.001%
|
Common
|
Yuzhong
Wu
80
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
1,017,723
|
1.8%
|
Common
|
Officers
and Directors as a group as a group
|
35,226,134
|
60.8%
|
----------------------------------
(1) |
Mr.
Yu has pledged 7,859,598 shares of his Common Stock of the Company
as
collateral for loans to the Company in the aggregate amount of $1,530,000
and accrued interest in connection with his personal guaranty of
such
loans.
|
Item
12.
Certain Relationships and Related Transactions, and Director
Independence
Pursuant
to and at the closing of the Plan of Exchange dated September 15, 2004, which
occurred on December 31, 2004, the Company issued the former ZHLD Shareholders
55,000,000 shares of common stock of the Company (including present directors
and officers of the Company), or 95% of the Company’s then outstanding common
stock, in exchange for all of the shares of capital stock of ZHLD. Immediately
upon the closing, the Company accepted the cancellation of 11,000,000 shares
of
common stock from Duane Bennett, and, as a result, the Company had 2,915,000
shares of common stock issued and outstanding before the issuance of the
55,000,000 new shares of common stock.
During
December 2004 in connection with the reverse merge between the Company and
ZHLD,
Mr. Xi Qun Yu, a director and the Chief Executive Officer and President of
the
Company, made a loan of $100,000 to the Company with interest at 9%. Mr. Yu
has
the right to convert the principal amount of the loan and accrued interest
into
the common stock of the Company the market price of its common stock on the
date
of the loan. As of December 31, 2006, the outstanding balance of the loan with
accrued interest was $135,944.
ITEM13.
Exhibits
3.1 |
Articles
of Incorporation filed December 2, 1996 in the State of North Carolina
is
incorporated herein by reference to Exhibit 3.1 to the Form SB-2
Registration Statement of the Company (File No. 333-101167) filed
on
November 13, 2002
|
3.2 |
Articles
of Amendment Business Corporation dated May 23, 2002 is incorporated
herein by reference to Exhibit 3.2 to the Form SB-2 Registration
Statement
of the Company (File No. 333-101167) filed on November 13,
2002
|
3.3 |
Articles
of Amendment Business Corporation filed November 17, 2004, changing
the
name of the Company from ABC Realty Co. to China Education Alliance,
Inc.
is incorporated herein by reference to Exhibit 3.3 filed with the
Company’s Form 10-KSB annual report for its fiscal year ended December 31,
2005
|
3.4 |
ByLaws
of the Company are incorporated herein by reference to Exhibit 3.3
to the
Form SB-2/A Registration Statement of the Company filed on February
7,
2003 (File No. 333-101167)
|
10.1 |
Stock
Transaction Agreement between and among the Company and the former
owners
of Harbin Zhonghelida Educational Technology Co., Ltd., a wholly
owned
subsidiary of the Company is incorporated herein by reference to
Exhibit
10.3 filed with the Company’s Form 10-KSB filed on April 17, 2006 is
hereby incorporated herein by reference to Exhibit 10-1 to the Form
10-SB
Registration Statement of the Company filed on June 30,
2006.
|
10.2 |
Organization
Constitution of Heilongjiang Zhonge Education Training Center dated
June
15, 205, a wholly owned subsidiary of the Company is incorporated
herein
by reference to Exhibit 10.4 filed with the Company’s Form 10-KSB filed on
April 17, 2006 is incorporated herein by reference to Exhibit 10.2
to the
Form 10-SB Registration Statement of the Company filed on June 30,
2006.
|
10.3 |
Business
licenses of Harbin Zhonghelinda Educational Technology Company Limited,
a
wholly owned subsidiary of the Company is incorporated herein by
reference
to Exhibit 10.5 filed with the Company’s Form 10-KSB filed on April 17,
206 is hereby incorporated herein by reference to Exhibit 10.3 to
the Form
10-SB Registration Statement of the Company filed on June 30,
2006.
|
10.4 |
Product
Commission Process Contract dated March 2, 2006, with Tianjin Huishi
Printing Products Co., Ltd. is incorporated herein by reference to
Exhibit
10.4 to the Form 10-SB Registration Statement of the Company filed
on June
30, 2006.
|
10.5 |
Employment
contract with Liansheng Zhang effective February 21, 2006 is incorporated
herein by reference to Exhibit 10.7 filed with the Company’s Form 10-KSB
filed on April 17, 2006 is hereby incorporated herein by reference
to
Exhibit 10.5 to the Form 10-SB Registration Statement of the Company
filed
on June 30, 2006.
|
10.6 |
Consulting
Agreement with Conceptual Management Limited dated March 20, 2006
is
incorporated herein by reference to Exhibit 10.8 filed with the Company’s
Form 10-KSB filed on April 17, 2006 is hereby incorporated herein
by
reference to Exhibit 10.6 to the Form 10-SB Registration Statement
of the
Company filed on June 30, 2006.
|
10.7 |
Form
of Promissory Note dated September 29, 2006, by the Registrant
is hereby
incorporated herein by reference to Exhibit 10.1 to the Form
8-K current
report of the Registrant on November 2,
2006.
|
10.8 |
Stock
Pledge Agreement dated September 29, 2006, between Xinqun Yu
and the Agent
is hereby incorporated herein by reference to Exhibit 10.2
to the Form 8-K
current report of the Registrant filed on November 2,
2006.
|
10.9 |
Guarantee
Agreement dated as of September 29, 2006, among Harbin Zhong
He Li Da Jiao
Yu Ke Ji You Xian Gong Si, Heilongjiang Zhonghe Education
Training Center,
Harbin Zhonghelida Educational Technology Company Limited,
Xinqun Yu, and
the Agent is hereby incorporated herein by reference to Exhibit
10.3 to
the Form 8-K current report of the Registrant filed on November
2,
2006.
|
10.10
|
Investor
Relations Agreement dated November 1, 2006, with Taylor Rafferty
Associates, Inc. is incorporated herein by reference to Exhibit 10.3
to
the Form 10-QSB quarterly report of the Company for the period ended
June
30, 2006
|
10.11 |
Purchase
Contract dated December 28, 2006, to purchase assets of Harbin
Nangang Compass Computer Training School. |
16.
|
Letter
on change in certifying accountant is incorporated hereby by reference
to
the Form 8-K current report of the Company dated January 4,
2007.
|
23.1
|
Consent
of registered certifying accounting firm - Murrell,
Hall, McIntosh & Co., PLLP
|
23.2 |
Consent
of registered accounting firm - eFang Accountancy & Co.,
CPA
|
31.1
|
Certification
of Xiqun Yu
|
31.2
|
Certification
of Chunqing Wang
|
32
|
Certification
of Xiqun Yu and Chunqing Wang
|
ITEM
14.
Principal Accountant Fees and Services
Name
|
Audit
Fees
|
Audit
Related Fees
|
Tax
Fees
|
All
Other Fees
|
|
|
|
|
|
E-Fang
Accountancy Corp., & CPA
|
|
|
|
|
December
31, 2005
|
$30,000
|
-0-
|
-0-
|
-0-
|
December
31, 2006
|
-0-
|
-0-
|
-0-
|
-0-
|
|
|
|
|
|
Murrell,
Hall, McIntosh & Co., PLLP
|
|
|
|
|
December
31, 2005
|
-0-
|
-0-
|
-0-
|
-0-
|
December
31, 2006
|
$20,000
|
-0-
|
-0-
|
-0-
|
The
Company does not have a standing audit committee, and the full Board performs
all functions of an audit committee, including the pre-approval of the scope
and
cost of all audit and non-audit services before the Company engages an
accountant. All of the services rendered to the Company by its independent
registered public accountants were pre-approved by the Board of Directors of
the
Company.
Report
of Independent Registered Public Accounting Firm
We
have
audited the accompanying consolidated balance sheet of China Education Alliance,
Inc. as of December 31, 2006 and the related consolidated statement of
operations, stockholders’ equity, and cash flows for the year ended
December 31, 2006. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of China Education Alliance, Inc. as of December 31, 2005, were audited by
other
auditors whose report dated March 28, 2006, expressed an unqualified opinion
on
those statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audit provides a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of China Education
Alliance, Inc. as of December 31, 2006 and the results of its consolidated
operations and its consolidated cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States
of
America.
March
16,
2007
Oklahoma
City, Oklahoma
China
Education Alliance, Inc. and Subsidiaries
|
Consolidated
Balance Sheet
|
December
31, 2006
|
|
|
|
|
ASSETS
|
|
|
|
|
Current
Assets
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,838,339
|
|
Other
receivables
|
|
|
54,723
|
|
Prepaid
expenses
|
|
|
1,321,448
|
|
Total
current assets
|
|
|
3,214,510
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
5,329,798
|
|
|
|
|
|
|
Franchise
rights
|
|
|
689,642
|
|
Goodwill
|
|
|
43,696
|
|
|
|
|
|
|
|
|
$
|
9,277,646
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
211,149
|
|
Deferred
revenues
|
|
|
309,366
|
|
Loan
from shareholder
|
|
|
135,944
|
|
Notes
payable, net of loan discount of $81,563
|
|
|
1,448,437
|
|
Total
current liabilities
|
|
|
2,104,896
|
|
|
|
|
|
|
Minority
interest
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
Preferred
stock ($0.001 par value, 5,000,000 shares authorized,
|
|
|
|
|
none
issued and outstanding)
|
|
|
-
|
|
Common
stock ($0.001 par value, 150,000,000 shares authorized,
|
|
|
|
|
57,935,000
issued and outstanding)
|
|
|
57,935
|
|
Additional
paid-in capital
|
|
|
2,618,857
|
|
Accumulated
other comprehensive income
|
|
|
277,833
|
|
Retained
earnings
|
|
|
4,218,125
|
|
Total
stockholders' equity
|
|
|
7,172,750
|
|
|
|
|
|
|
|
|
$
|
9,277,646
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
China
Education Alliance, Inc. and Subsidiaries
|
Consolidated
Statements of Operations
|
For
the Years Ended December 31, 2006 and
2005
|
|
|
2006
|
|
2005
|
|
Revenues
|
|
|
|
|
|
Online
education revenues
|
|
$
|
6,620,519
|
|
$
|
2,424,173
|
|
Training
center revenues
|
|
|
1,703,954
|
|
|
688,559
|
|
Total
revenue
|
|
|
8,324,473
|
|
|
3,112,732
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
|
|
|
|
|
Online
education costs
|
|
|
1,766,442
|
|
|
727,344
|
|
Training
center costs
|
|
|
797,448
|
|
|
290,030
|
|
Total
cost of goods sold
|
|
|
2,563,890
|
|
|
1,017,374
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
5,760,583
|
|
|
2,095,358
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
1,404,319
|
|
|
169,801
|
|
Administrative
|
|
|
1,516,865
|
|
|
112,949
|
|
Depreciation
and amortization
|
|
|
123,610
|
|
|
134,293
|
|
Total
operating expenses
|
|
|
3,044,794
|
|
|
417,043
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
Other
income
|
|
|
-
|
|
|
26,869
|
|
Interest
income
|
|
|
12,530
|
|
|
1,559
|
|
Other
expense
|
|
|
-
|
|
|
(1,229
|
)
|
Interest
expense
|
|
|
(147,355
|
)
|
|
-
|
|
Total
other income (expense)
|
|
|
(134,825
|
)
|
|
27,199
|
|
|
|
|
|
|
|
|
|
Net
Income Before Provision for Income Tax
|
|
|
2,580,964
|
|
|
1,705,514
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
2,328
|
|
Deferred
|
|
|
-
|
|
|
-
|
|
|
|
|
- |
|
|
2,328
|
|
|
|
|
|
|
|
|
|
Net
Income Before Minority Interest
|
|
|
2,580,964
|
|
|
1,703,186
|
|
|
|
|
|
|
|
|
|
Minority
Interest in loss of subsidary
|
|
|
43,696
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
2,624,660
|
|
$
|
1,703,186
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Earnings Per Share
|
|
$
|
0.05
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Weighted Average Shares Outstanding
|
|
|
57,921,356
|
|
|
57,915,000
|
|
|
|
|
|
|
|
|
|
The
Components of Other Comprehensive Income
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
2,624,660
|
|
$
|
1,703,186
|
|
Foreign
currency translation adjustment
|
|
|
258,766
|
|
|
19,067
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
2,883,426
|
|
$
|
1,722,253
|
|
The
accompanying notes are an integral part of these financial
statements.
China
Education Alliance, Inc. and Subsidiaries
|
Consolidated
Statements of Stockholders' Equity
|
For
the Years Ended December 31, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Number
|
|
|
|
Additional
|
|
Retained
|
|
Other
|
|
Total
|
|
|
|
of
|
|
Par
|
|
Paid-In
|
|
Earnings
|
|
Comprehensive
|
|
Stockholders'
|
|
|
|
Shares
|
|
Value
|
|
Capital
|
|
(Deficit)
|
|
Income
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
57,915,000
|
|
$
|
57,915
|
|
$
|
2,407,969
|
|
$
|
(109,721
|
)
|
$
|
-
|
|
$
|
2,356,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
19,067
|
|
|
19,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,703,186
|
|
|
-
|
|
|
1,703,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
57,915,000
|
|
|
57,915
|
|
|
2,407,969
|
|
|
1,593,465
|
|
|
19,067
|
|
|
4,078,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
20,000
|
|
|
20
|
|
|
6,980
|
|
|
-
|
|
|
-
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued for loan discount
|
|
|
|
|
|
|
|
|
203,908
|
|
|
|
|
|
|
|
|
203,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
258,766
|
|
|
258,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,624,660
|
|
|
-
|
|
|
2,624,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
57,935,000
|
|
$
|
57,935
|
|
$
|
2,618,857
|
|
$
|
4,218,125
|
|
$
|
277,833
|
|
$
|
7,172,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
China
Education Alliance, Inc. and Subsidiaries
|
Consolidated
Statements of Cash Flows
|
For
the Years Ended December 31, 2006 and
2005
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
Income
|
|
$
|
2,624,660
|
|
$
|
1,703,186
|
|
Adjustments
to reconcile net cash provided by
|
|
|
|
|
|
|
|
operating
activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
334,974
|
|
|
214,449
|
|
Amortization
of loan discount
|
|
|
122,345
|
|
|
-
|
|
Minority
interest in loss of subsidary
|
|
|
(43,696
|
)
|
|
-
|
|
Stock
issued for services
|
|
|
7,000
|
|
|
-
|
|
Net
change in assets and liabilities
|
|
|
|
|
|
|
|
Other
receivables
|
|
|
(46,460
|
)
|
|
(8,263
|
)
|
Prepaid
expenses and other
|
|
|
(1,252,749
|
)
|
|
(57,535
|
)
|
Accounts
payable and accrued liabilities
|
|
|
103,616
|
|
|
81,893
|
|
Advances
by customers
|
|
|
12,241
|
|
|
297,125
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
1,861,931
|
|
|
2,230,855
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(1,738,159
|
)
|
|
(1,765,982
|
)
|
Acquisition
of franchise rights
|
|
|
(689,642
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) investing activities
|
|
|
(2,427,801
|
)
|
|
(1,765,982
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
from loan from shareholder
|
|
|
17,999
|
|
|
23,763
|
|
Proceeds
from notes payable
|
|
|
1,530,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,547,999
|
|
|
23,763
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate
|
|
|
258,766
|
|
|
19,067
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
1,240,895
|
|
|
507,703
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
597,444
|
|
|
89,741
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
1,838,339
|
|
$
|
597,444
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
25,010
|
|
$
|
-
|
|
Taxes
paid
|
|
$
|
-
|
|
$
|
-
|
|
Value
of warrants issued in connection with
|
|
|
|
|
|
|
|
debt
issuance
|
|
$
|
203,908
|
|
|
-
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
1. |
Description
of Business
|
Nature
of Organization - China
Education Alliance, Inc. (the “Company”), formerly known as ABC Realty Co., was
originally organized under the laws of the State of North Carolina on December
2, 1996. The main function for ABC Realty was to engage in residential real
estate transactions as a broker or agent. On September 15, 2004, ABC Realty
was
reorganized pursuant to the Plan of Exchange to acquire Harbin Zhong He Li
Da
Education Technology, Inc. (“ZHLD”), a corporation formed on August 9, 2004 in
the City of Harbin of Heilongjiang Province, The People’s Republic of China,
with an authorized capital of $60,386 (RMB500,000).
On
September 15, 2004, ABC Realty Co. executed a Plan of Exchange with ZHLD,
and
Duane C. Bennett, Chairman of ABC Realty Co., pursuant to which ZHLD exchanged
all of its registered capital of $60,386 for 55,000,000 shares, or approximately
95% of the common stock. On November 17, 2004, ABC Realty Co. changed its
name
to China Education Alliance, Inc. On December 13, 2004, China Education
Alliance, Inc. consummated the Plan of Exchange with ZHLD. As a result of
the
Plan of Exchange, the transaction was treated for accounting purposes as
a
recapitalization of ZHLD.
ZHLD
is a
technology company engaged in the online education industry in China. Its
mission is to promote the distance learning development in China, to improve
the
efficiency and effectiveness of elementary education, higher education,
vocational education, skill education, continuing education, and professional
training programs, and to integrate with the international education
system.
Heilongjiang
Zhonghe Education Training Center (“ZHTC”) was registered in The People’s
Republic of China on July 8, 2005 with a registered capital of $60,386 and
is
the wholly owned subsidiary of ZHLD. ZHLD owns 99% of ZHTC with 1% held in
trust
by Xi Qun Yu for the benefit of China Education Alliance, Inc..
ZHLD
also
owns 70% of Beijing Hua Yu Hui Zhong Technology Development Co., Ltd (“BHYHZ”).
BHYHZ was formed on September 30, 2006.
The
remaining 30% interest was given to The Vocational Education Guidance Center
of
China for no consideration. In consolidation, the 30% of BHYHZ’s gave to The
Vocational Education Guidance Center of China was treated as goodwill in
consolidation.
The
Company’s online education business has established positions in several
segments, including supplemental education and test preparation for grades
kindergarten through high school.
The
Company’s products include on-line test preparation materials, teachers’
materials, study guides and audio recordings of popular classes. It is a
full
range professional education resource service provider. The business scope
includes distance learning technology, education resource development, education
project planning and promoting, teaching platform, and class development
and
schedules, education information, and technical service. The products cover
all
education ranges, including pre-school education, elementary and middle school
education, vocational education, continuing education, enterprise training
program, intelligence authentication, agricultural labor education, education
for the disabled, first time employment education, re-employment education,
study abroad, and education for seniors.
2. |
Basis
of Preparation of Financial
Statements
|
ZHLD,
Zhonghe Education Training Center and Beijing Hua Yu Hui Zhong Technology
Developments Co., Ltd. maintains its books and accounting records in Renminbi
(“RMB”).
The
financial statements have been prepared in order to present the consolidated
financial position and consolidated results of operations in accordance with
accounting principles generally accepted in the United States of America
(“US
GAAP”) and are expressed in terms of US dollars (see paragraph “Foreign
Currency” below).
The
accompanying financial statements differ from the financial statements used
for
statutory purposes in PRC in that they reflect certain adjustments, recorded
on
the entities’ books, which are appropriate to present the financial position,
results of operations and cash flows in accordance with US GAAP. The principal
adjustments are related to revenue recognition, foreign currency translation,
deferred taxation, consolidation, and depreciation and valuation of property
and
equipment and intangible assets.
3. |
Summary
of Significant Accounting
Policies
|
Principles
of Consolidation
- The
consolidated financial statements include the accounts of the Company and
its
wholly and majority owned subsidiaries, ZHLD, Zhonghe Education Training
Center
and Beijing Hua Yu Hui Zhong Technology Developments Co., Ltd. All inter-company
transactions and balances were eliminated. Minority interest in the net assets
and earnings or losses of BHYHZ are reflected in the caption “Minority interest”
in the Company’s Consolidated Balance Sheet and Statements of Operations.
Cumulative losses applicable to minority interest that exceed the minority’s
interest in the subsidiary’s capital, the losses in excess of the minority’s
interest in the subsidiaries capital are charged against the majority interest.
Subsequent profits earned by a subsidiary under such circumstances that are
applicable to the minority interests should be allocated to the majority
interest to the extent minority losses have been previously absorbed. For
the
year ended December 31, 2006, the Company was allocated $285,626 of minority
interest losses in BHYHZ.
Use
of estimates
- The
preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affected the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at
the dates of the financial statements and the reported amounts of net sales
and
expenses during the reported periods.
Significant
estimates included values and lives assigned to acquired intangible assets,
reserves for customer returns and allowances, uncollectible accounts receivable,
slow moving, obsolete and/or damaged inventory and stock warrant valuation.
Actual results may differ from these estimates.
Cash
and cash equivalents
- The Company
considers all highly liquid debt instruments purchased with maturity period
of
three months or less to be cash equivalents. The carrying amounts reported
in
the accompanying consolidated balance sheet for cash and cash equivalents
approximate their fair value. Substantially all of the Company’s cash is held in
bank accounts in The Peoples Republic of China and is not protected by FDIC
insurance or any other similar insurance.
Property
and equipment
-
Property and equipment is stated at the historical cost, less accumulated
depreciation. Depreciation on property, plant and equipment is provided using
the straight-line method over the estimated useful lives of the assets after
taking into account a 5% residual value for both financial and income tax
reporting purposes as follows:
Buildings
|
|
|
20
years
|
|
Communication
Equipment
|
|
|
10
years
|
|
Motor
vehicles
|
|
|
5
years
|
|
Furniture,
Fixtures, and Equipment
|
|
|
5
years
|
|
Expenditures
for renewals and betterments were capitalized while repairs and maintenance
costs are normally charged to the statement of operations in the year in
which
they are incurred. In situations where it can be clearly demonstrated that
the
expenditure has resulted in an increase in the future economic benefits expected
to be obtained from the use of the asset, the expenditure is capitalized
as an
additional cost of the asset.
Upon
sale
or disposal of an asset, the historical cost and related accumulated
depreciation or amortization of such asset were removed from their respective
accounts and any gain or loss is recorded in the Statements of
Operations.
The
Company reviews the carrying value of property, plant, and equipment for
impairment whenever events and circumstances indicate that the carrying value
of
an asset may not be recoverable from the estimated future cash flows expected
to
result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment
loss
is recognized equal to an amount by which the carrying value exceeds the
fair
value of assets. The factors considered by management in performing this
assessment include current operating results, trends and prospects, the manner
in which the property is used, and the effects of obsolescence, demand,
competition, and other economic factors. Based on this assessment there was
no
impairment at December 31, 2006
Intangible
Assets
-
Intangible assets consist of franchise rights acquired by the Company and
are
amortized over the lives of the rights agreements, which is five years. The
Company evaluates the carrying value of intangible assets during the fourth
quarter of each year and between annual evaluations if events occur or
circumstances change that would more likely than not reduce the fair value
of
the intangible asset below its carrying amount. There were no impairments
recorded during the year ended December 31, 2006.
Foreign
Currency -
The
Company’s principal country of operations is in The People’s Republic of China.
The financial position and results of operations of the Company are determined
using the local currency (“Renminbi” or “Yuan”) as the functional currency. The
results of operations denominated in foreign currency are translated at the
average rate of exchange during the reporting period.
Assets
and liabilities denominated in foreign currencies at the balance sheet date
are
translated at the market rate of exchange ruling at that date. The registered
equity capital denominated in the functional currency is translated at the
historical rate of exchange at the time of capital contribution. All translation
adjustments resulting from the translation of the financial statements into
the
reporting currency (“US Dollars”) are dealt with as a separate component within
shareholders’ equity.
Income
recognition
-
Revenue is recognized in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition, which states that revenue should be recognized when
the
following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) the service has been rendered; (3) the selling price is
fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. The Company believes that these criteria are satisfied
upon
customers download prepaid study materials.
Prepaid
debit cards allow our subscribers to purchase a predetermined monetary amount
of
download materials posted on our website. The Company’s new system is able to
track usage of the debit card once the end user uses the debit cards for
its
service.
Prepaid
service contracts are amortized to income on a straight line basis over the
length of the service contract. These service contracts allow the user to
have
unlimited access to study materials for a designed period of time.
At
the
time that the prepaid debit card is purchased, the receipt of cash is recorded
as deferred revenue. Revenues are recognized in the month when services are
actually rendered. Unused value relating to debit cards is recognized as
revenues when the prepaid debit card has expired.
Interest
income is recognized when earned, taking into account the average principal
amounts outstanding and the interest rates applicable
Prepayments
Account - Prepaid
expenses are primarily comprised of advance payments made for services to
teachers for online materials and video and prepaid advertising. At December
31,
2006, prepayments to teachers to provide online materials totaled $872,941,
prepayment of rent expense totaled $299,057, and prepaid advertising totaled
$149,450.
Goodwill
- In
connection with the organization of BHYHZ the Company gave an unrelated
governmental entity a 30% ownership in interest in the contributed capital
of
BHYHZ. In consolidation, this transfer of ownership reflected as goodwill
on the
consolidated financial statements. At December 31, 2006, goodwill incurred
in
connection with this transaction was $43,696.
The
Company evaluates the carrying value of goodwill during the fourth quarter
of
each year and between annual evaluations if events occur or circumstances
change
that would more likely than not reduce the fair value of the reporting unit
below its carrying amount. Such circumstances could include, but are not
limited
to: (1) a significant adverse change in legal factors or in business climate,
(2) unanticipated competition, or (3) an adverse action or assessment by
a
regulator. When evaluating whether goodwill is impaired, the Company compares
the fair value of the reporting unit to which the goodwill is assigned to
the
reporting unit’s carrying amount, including goodwill. The fair value of the
reporting unit is estimated using a combination of the income, or discounted
cash flows, approach and the market approach, which utilizes comparable
companies’ data. If the carrying amount of a reporting unit exceeds its fair
value, then the amount of the impairment loss must be measured. The impairment
loss would be calculated by comparing the implied fair value of reporting
unit
goodwill to its carrying amount. In calculating the implied fair value of
reporting unit goodwill, the fair value of the reporting unit is allocated
to
all of the other assets and liabilities of that unit based on their fair
values.
The excess of the fair value of a reporting unit over the amount assigned
to its
other assets and liabilities is the implied fair value of goodwill. An
impairment loss would be recognized when the carrying amount of goodwill
exceeds
its implied fair value. The Company’s evaluation of goodwill completed during
the year resulted in no impairment losses.
Deferred
Revenue
-
Deferred revenue reflects the unearned portion of debit cards sold and prepaid
service contract payments received.
Advertising
-
The
Company expensed advertising costs the first time the respective advertising
took place. These costs were included in selling, general and administrative
expenses. The total advertising expenses incurred for years ended December
31,
2006 and 2005 were $468,825 and $140,445, respectively.
Taxation
- Taxation
on profits earned in the PRC has been calculated on the estimated assessable
profits for the year at the rates of taxation prevailing in the PRC in the
Company operates after taking into effect the benefits from any special tax
credits or “tax holidays” allowed in the country of operations.
The
Company does not accrue United States income tax on unremitted earnings from
foreign operations as it is the Company’s intention to invest these earnings in
the foreign operations indefinitely.
Enterprise
income tax
Under
the
Provisional Regulations of The People’s Republic of China Concerning Income Tax
on Enterprises promulgated by the State Council which came into effect on
January 1, 1994, , income tax is payable by a Wholly Foreign Owned Enterprises
at a rate of 15% of their taxable income. Preferential tax treatment may,
however, be granted pursuant to any law or regulations from time to time
promulgated by the State Council. ZHLD enjoyed a 100% exemption from enterprise
income taxes during 2006 due to its classification as a “Wholly Foreign Owned
Enterprise”. This exemption will end on April 8, 2007, at which time ZHLD will
qualify under the current tax structure for a 50% reductions in the statutory
enterprise income tax rates for an additional three years.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax basis. Deferred
tax
assets, including tax loss and credit carry forwards, and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect of deferred tax assets and liabilities of a change in
tax
rates is recognized in income in the period that includes the enactment date.
Deferred income tax expense represents the change during the period in the
deferred tax assets and deferred tax liabilities. The components of the deferred
tax assets and liabilities are individually classified as current and
non-current based on their characteristics. Deferred tax assets are reduced
by a
valuation allowance when, in the opinion of management, it is more likely
than
not that some portion or all of the deferred tax assets will not be
realized.
Value
added tax
The
Provisional Regulations of The People’s Republic of China Concerning Value Added
Tax promulgated by the State Council came into effect on January 1, 1994.
Under
these regulations and the Implementing Rules of the Provisional Regulations
of
the PRC Concerning Value Added Tax, value added tax is imposed on goods sold
in
or imported into the PRC and on processing, repair and replacement services
provided within the PRC.
Value
added tax payable in The People’s Republic of China is charged on an aggregated
basis at a rate of 13% or 17% (depending on the type of goods involved) on
the
full price collected for the goods sold or, in the case of taxable services
provided, at a rate of 17% on the charges for the taxable services provided,
but
excluding, in respect of both goods and services, any amount paid in respect
of
value added tax included in the price or charges, and less any deductible
value
added tax already paid by the taxpayer on purchases of goods and services
in the
same financial year.
Contingent
liabilities and contingent assets -
A
contingent liability is a possible obligation that arises from past events
and
whose existence will only be confirmed by the occurrence or non-occurrence
of
one or more uncertain future events not wholly within the control of the
Company. It can also be a present obligation arising from past events that
is
not recognized because it is not probable that outflow of economic resources
will be required or the amount of obligation cannot be measured
reliably.
A
contingent liability is not recognized but is disclosed in the notes to the
financial statements. When a change in the probability of an outflow occurs
so
that outflow is probable, they will then be recognized as a
provision.
A
contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one
or
more uncertain events not wholly within the control of the Company.
Contingent
assets are not recognized but are disclosed in the notes to the financial
statements when an inflow of economic benefits is probable. When inflow is
virtually certain, an asset is recognized.
Related
companies -
A
related company is a company in which a director or an officer has beneficial
interests in and in which the Company has significant influence.
Retirement
benefit costs
-
According to The People’s Republic of China regulations on pensions, the Company
contributes to a defined contribution retirement program organized by the
municipal government in the province in which the Company was registered
and all
qualified employees are eligible to participate in the program. Contributions
to
the program are calculated at 23.5% of the employees’ salaries above a fixed
threshold amount and the employees contribute 2% to 8% while the Company
contributes the balance contribution of 21.5% to 15.5%. The Company has no
other
material obligation for the payment of retirement benefits beyond the annual
contributions under this program.
Fair
value of financial instruments - The
carrying amounts of certain financial instruments, including cash, accounts
receivable, commercial notes receivable, other receivables, accounts payable,
commercial notes payable, accrued expenses, and other payables approximate
their
fair values as of December 31, 2006 because of the relatively short-term
maturity of these instruments.
Reclassifications
-
Certain
reclassifications have been made to the prior years’ financial statements to
conform to the current year presentation. These reclassifications had no
effect
on previously reported results of operations or retained earnings.
Recent
accounting pronouncements
- In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 123(R), Share-Based
Payment.
SFAS
123(R) replaces SFAS No. 123, Accounting
for Stock-Based Compensation,
and
supersedes Accounting
Principles Board
(APB)
Opinion No. 25, Accounting
for Stock Issued to Employees
.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standard No. 123(R), Share-Based Payment, (“SFAS No. 123(R)”), using the
modified prospective transition method. SFAS No. 123(R) requires
equity-classified share-based payments to employees, including grants of
employee stock options, to be valued at fair value on the date of grant and
to
be expensed over the applicable vesting period. Under the modified prospective
transition method, share-based awards granted or modified on or after January
1,
2006, are recognized in compensation expense over the applicable vesting
period.
Also, any previously granted awards that are not fully vested as of January
1,
2006 are recognized as compensation expense over the remaining vesting period.
No retroactive or cumulative effect adjustments were required upon The Company’s
adoption of SFAS No. 123(R) as the Company had not outstanding share awards
as
of the date of adoption and has not issued any share based awards during
2006.
Prior
to
adopting SFAS No. 123(R), The Company accounted for its fixed-plan employee
stock options using the intrinsic-value based method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
(“APB
No. 25”) and related interpretations. This method required compensation expense
to be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. Had the Company elected the
fair
value provisions of SFAS No. 123(R), The Company’s 2005 net earnings and net
earnings per share would not have differed from the amounts actually reported
as
no share-based payments were made during this period.
In
July
2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes-an Interpretation of FASB Statement 109, Accounting for Income
Taxes (“FIN 48”). FIN 48 prescribes a comprehensive model for how a company
should recognize, measure, present, and disclose in its financial statements
uncertain tax positions that a company has taken or expects to take on a
tax
return. FIN 48 is effective as of the beginning of fiscal years that start
after
December 15, 2006. The Company does not expect its implementation to be material
to our financial statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108 (“SAB 108”). Due to diversity in practice among
registrants, SAB 108 expresses SEC staff views regarding the process by which
misstatements in financial statements are evaluated for purposes of determining
whether financial statement restatement is necessary. SAB 108 is effective
for
fiscal years ending after November 15, 2006, and early application is
encouraged. The Company does not believe SAB 108 will have a material impact
on
our results from operations or financial position.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. This
statement does not require any new fair value measurements; rather, it applies
under other accounting pronouncements that require or permit fair value
measurements. The provisions of this statement are to be applied prospectively
as of the beginning of the fiscal year in which this statement is initially
applied, with any transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. The provisions of
SFAS
157 are effective for the fiscal years beginning after November 15, 2007.
Therefore, we anticipate adopting this standard as of January 1, 2008.
Management has not determined the effect, if any, the adoption of this statement
will have on our financial condition or results of operations.
In
September 2006, the FASB issued Statement No. 158,“Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans”
(“SFAS No. 158”), an amendment of FASB Statements No. 87, 88, 106
and 132(R). SFAS No. 158 requires (a) recognition of the funded
status (measured as the difference between the fair value of the plan assets
and
the benefit obligation) of a benefit plan as an asset or liability in the
employer’s statement of financial position, (b) measurement of the funded
status as of the employer’s fiscal year-end with limited exceptions, and
(c) recognition of changes in the funded status in the year in which the
changes occur through comprehensive income. The requirement to recognize
the
funded status of a benefit plan and the disclosure requirements are effective
as
of the end of the fiscal year ending after December 15, 2006. The
requirement to measure the plan assets and benefit obligations as of the
date of
the employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. This Statement has no current
applicability to the Company’s financial statements. Management plans to adopt
this Statement on December 31, 2006 and it is anticipated the adoption of
SFAS No. 158 will not have a material impact to the Company’s
financial position, results of operations, or cash flows.
In
February 2007, the FASB issued Statement No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159). This statement permits
companies to choose to measure many financial assets and liabilities at fair
value. Unrealized gains and losses on items for which the fair value option
has
been elected are reported in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the
impact
of SFAS 159 on its consolidated financial statements.
4. |
Concentrations
of Business and Credit Risk
|
Substantially
all of the Company’s bank accounts are in banks located in the PRC and are not
covered by any type of protection similar to that provided by the FDIC on
funds
held in U.S banks.
The
Company is operating in China, which may give rise to significant foreign
currency risks from fluctuations and the degree of volatility of foreign
exchange rates between U.S. dollars and the Chinese currency RMB.
Financial
instruments that potentially subject the Company to concentration of credit
risk
consist principally of cash and trade receivables, the balances of which
are
stated on the balance sheet. The Company places its cash in high credit quality
financial institutions. Concentration of credit risk with respect to trade
receivables is limited due to the Company's large number of diverse customers
in
different locations in China. The Company does not require collateral or
other
security to support financial instruments subject to credit risk.
For
the
years ended December 31, 2006 and 2005, no single customer accounted for
10% or
more of sales revenues.
As
of
December 31, 2006 the Company had no insurance coverage of any kind. Accrual
for
losses is not recognized until such time as an uninsured loss has
occurred.
Payments
of dividends may be subject to some restrictions and the following are condensed
parent company only financial statements for period ended December 31,
2006.
CHINA
EDUCATION ALLICANCE, INC.
CONDENSED
PARENT COMPANY ONLY BALANCE SHEETS
AS
OF
DECEMBER 31, 2006
Current
assets:
|
|
|
|
Cash
|
|
$
|
124,915
|
|
|
|
|
|
|
Total
current assets
|
|
|
124,915
|
|
|
|
|
|
|
Investment
in subsidiaries, reported on equity method
|
|
|
8,755,908
|
|
|
|
|
|
|
Total
assets
|
|
$
|
8,880,823
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
28,649
|
|
Loans
from shareholder
|
|
|
230,987
|
|
Notes
payable, net of discount of $81,563
|
|
|
1,448,437
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,708,073
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock $.001 par value; 5,000,000 shares
|
|
|
|
|
authorized,
none issued and outstanding
|
|
|
|
|
Common
stock, $.001 par value; 150,000,000 shares
|
|
|
|
|
authorized;
57,935,000 shares issued and outstanding
|
|
|
|
|
December
31, 2006
|
|
|
57,935
|
|
Additional
paid-in capital
|
|
|
2,618,857
|
|
Retained
earnings
|
|
|
4,218,125
|
|
Accumulated
other comprehensive income
|
|
|
277,833
|
|
Total
stockholders' equity
|
|
|
7,172,750
|
|
Total
liabilities and stockholders' equity
|
|
$
|
8,880,823
|
|
CHINA
EDUCATION ALLICANCE, INC.
CONDENSED
PARENT COMPANY ONLY INCOME STATEMENTS
FOR
THE
YEAR ENDED DECEMBER 31, 2006
SALES
|
|
$
|
--
|
|
OPERATING
AND ADMINISTRATIVE
|
|
|
|
|
EXPENSES:
|
|
|
|
|
General
and administrative expenses
|
|
|
173,970
|
|
|
|
|
|
|
Income
from operations
|
|
|
(173,970
|
)
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
Equity
in earnings of unconsolidated
|
|
|
|
|
subsidiaries
|
|
|
2,623,556
|
|
Interest
and finance costs
|
|
|
(147,355
|
)
|
|
|
|
|
|
|
|
|
2,476,201
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
2,302,231
|
|
|
|
|
|
|
(PROVISION
FOR) BENEFIT FROM
|
|
|
|
|
INCOME
TAXES
|
|
|
--
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,302,231
|
|
CHINA
EDUCATION ALLICANCE, INC.
CONDENSED
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
FOR
THE
YEAR ENDED DECEMBER 31, 2006
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
income
|
|
$
|
2,302,231
|
|
Adjustments
to reconcile net income to operating
activities -
|
|
|
|
|
|
|
|
--
|
|
Less:
Equity in earnings of unconsolidated subsidiaries
|
|
|
|
)
|
Compensation
expense for stock issued
|
|
|
7,000
|
|
Changes
in assets and liabilites:
|
|
|
|
|
Increase
(decrease) in -
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
28,649
|
|
Net
cash (used in) operating activities
|
|
|
(285,676
|
)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
Advances
from subsidiary
|
|
|
222,978
|
|
Investment
in subsidiary
|
|
|
(1,360,386
|
)
|
|
|
|
|
|
Net
cash (used in) investing activities
|
|
|
(1,137,408
|
)
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
Loans
from shareholders
|
|
|
17,999
|
|
Loan
proceeds
|
|
|
1,530,000
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,547,999
|
|
|
|
|
|
|
Effect
of exchange rate change on cash and cash
equivalents
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
|
|
|
124,915
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
--
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
124,915
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
Interest
paid
|
|
$
|
25,010
|
|
Income
taxes paid
|
|
$
|
--
|
|
Value
of warrants issued in connection with
|
|
|
|
|
Debt
issuance
|
|
$
|
203,908
|
|
China
Education Alliance, Inc.
Notes
to
Condensed Parent Company Only Financial Statements
Note
1 -
These condensed parent company only financial statements should be read in
connection with the consolidated financial statements and notes
thereto.
Note
2 -
Notes Payable
On
September 29, 2006 the Company consummated a bridge financing pursuant to
which
the Company issued $1,530,000 aggregate principal amount of secured promissory
notes and warrants to acquire 3,060,000 shares of the Company’s common
stock for an exercise price per share of $0.50.
Each
Note
accrues interest at the rate of 6% per annum from September 29, 2006 to March
29, 2007, with interest payable each month commencing from November 1, 2006
and
terminating on March 1, 2007, as well as March 29, 2007, which is the maturity
date for each Note.
The
warrants issued were valued at $203,908 and was treated as a loan discount.
The
discount is being amortized to interest expense over the life of the notes
payable. Loan discount amortized to interest expense for the year ended December
31, 2006 was $122,345.
The
Notes
constitute senior indebtedness of the Company. The Notes are guaranteed by
ZHLD,
ZHTC and Harbin Zhonghelida Educational Technology Company Limited, and Xinqun
Yu, the chief executive officer and principal stockholder of the Company.
The
guarantee of Xinqun Yu is secured by his pledge of a number of shares of
common
stock of the Company to be determined from time to time as provided therein,
with a value of $3,060,000. The number of shares initially pledged is
7,859,598.
5. |
Cash
and Cash Equivalents
|
As
of
December 31, 2006, Cash and cash equivalents consist of the
following:
Cash
and Cash Equivalents
|
|
|
|
Cash
on Hand
|
|
$
|
1,027
|
|
Bank
Deposits
|
|
|
1,837,312
|
|
Total
Cash and Cash Equivalents
|
|
$
|
1,838,339
|
|
6. |
Property
and Equipment
|
As
of
December 31, 2006, Property and Equipment consist of the following:
Property
and Equipment
|
|
|
|
Buildings
|
|
$
|
2,855,133
|
|
Transportation
vehicles
|
|
|
131,722
|
|
Communication
equipment and software
|
|
|
1,289,176
|
|
Furniture
and fixtures
|
|
|
1,651,944
|
|
Total
Property and Equipment
|
|
|
5,927,975
|
|
Less:
Accumulated Depreciation
|
|
|
(598,177
|
)
|
Property
and Equipment, Net
|
|
$
|
5,329,798
|
|
For
the
years ended December 31, 2006 and 2005 depreciation expense totaled $334,974
and
$214,449 respectively. For the years ended December 31, 2006 and 2005,
depreciation expense totaling $211,364 and $80,156 were included in cost
of
goods sold, respectively.
As
of
December 31, 2006 the Company does not have any land use rights agreements
with
the PRC for the office buildings owned by the Company.
The
Company through its subsidiary ZHLD owns 70% of Beijing Hua Yu Hui Zhong
Technology Development Co., Ltd (“BHYHZ”). At the time of the formation of BHYHZ
the Company made a 30% minority interest contribution of the initial capital
of
BHYHZ on behalf of the minority interest. This contribution has been reflected
as $43,696 of goodwill at December 31, 2006
Deferred
revenue includes subscriber prepayments and education fee prepayments.
Subscriber prepayments represents deferred revenue for the purchase of debit
cards used to pay for the online downloading of education materials, including
testing booklets, supplemental materials, and teaching video clips. The Company
values the sales based on the actual occurrence of customer download. Therefore,
from the time between the purchase of debit cards and actual download is
recorded under advances on accounts as deferred or unearned revenues to the
Company. Once the download takes place, the amount is then transferred from
advances on accounts to sales. Education fee prepayments represent customer
prepayments for the service provided by the Company of teaching and educating
the customers for their specific need at their desired education level. There
are various levels available for the customers to choose the best one that
fits
their individual needs. During the period, a great portion of advances were
consumed and recognized as income, due to occurrences of several state-wide
entrance exams for junior middle schools, high schools, and universities.
During
the period, more advances were paid by customers for the summer classes at
the
time of registration. As of December 31, 2006, the Company has $309,366 on
subscriber prepayments and prepaid instruction fees.
On
September 29, 2006 the Company consummated a bridge financing pursuant to
which
the Company issued $1,530,000 aggregate principal amount of secured promissory
notes and warrants to acquire 3,060,000 shares of common stock of the
Company for an exercise price per share of $ 0.50.
Each
Note
accrues interest at the rate of 6% per annum from September 29, 2006 to March
29, 2007, with interest payable each month commencing from November 1, 2006
and
terminating on March 1, 2007, as well as March 29, 2007, which is the maturity
date for each Note.
The
warrants issued were valued at $203,908 and was treated as a loan discount.
The
discount is being amortized to interest expense over the life of the notes
payable. Loan discount amortized to interest expense in for the year ended
December 31, 2006 was $122,345.
The
Notes
constitute senior indebtedness of the Company. The Notes are guaranteed by
ZHLD,
ZHTC and Harbin Zhonghelida Educational Technology Company Limited, and Xinqun
Yu, the chief executive officer and principal stockholder of the Company.
The
guarantee of Xinqun Yu is secured by his pledge of a number of shares of
common
stock of the Company to be determined from time to time as provided therein,
with a value of $3,060,000. The number of shares initially pledged is
7,859,598.
On
September 15, 2004, China Education Alliance executed a Plan of Exchange
with
Zhong He Li Da Education Technology, Inc. (“ZHLD”), a corporation organized and
existing under the laws of People’s Republic of China. ZHLD applied to be as a
foreign invested company right after the merger, which business license has
been
approved as a foreign invested company on April 8, 2005. According to Chinese
taxation policy, there is income tax exemption for 2 years and half for 3
years
suitable to foreign invested company, advanced Technology Company or software
Development Company. ZHLD is a Company under the category of all three.
Therefore the Company receives this income tax exemption policy from April
8,
2005 the date approval as a foreign invested company was received. The
Company received a 100% tax holiday as of December 31, 2006. On April 8,
2007
the Company’s tax exemption will be reduced to 50% of the prevailing tax rate
and will continue at this reduced rate for three additional years.
A
reconciliation of the provision for income taxes with amounts determined
by the
U.S. federal income tax rate to income before income taxes is as
follows.
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Computed
tax at the federal statutory rate of 34%
|
|
$
|
892,384
|
|
$
|
579,875
|
|
Less
adjustment to EIT statutory rate of 15%
|
|
|
(498,685
|
)
|
|
(324,048
|
)
|
|
|
|
|
|
|
|
|
Benefit
of tax holiday
|
|
|
(393,699
|
)
|
|
(253,499
|
)
|
|
|
|
|
|
|
|
|
Income
tax expense per books
|
|
$
|
-
|
|
$
|
2,328
|
|
The
tax
holiday resulted in tax savings as follows:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Tax
savings
|
|
$
|
393,699
|
|
$
|
253,499
|
|
|
|
|
|
|
|
|
|
Benefit
per share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Significant
components of the Company’s deferred tax assets and liabilities as of December
31, 2006 is as follows:
Deferred
tax assets |
|
|
|
Benefit
from U.S net operating loss carryforward
|
|
$
|
197,000
|
|
Less
valuation allowance |
|
$
|
(197,000
|
)
|
Net
deferred tax asset |
|
$
|
(0
|
)
|
The
Company has a U.S net operating loss carryforward of approximately $495,000
as
of December 31, 2006 which will begin expiring in 2025. Certain of these
loss
carryforward amounts may be limited due to the more than 50% change in ownership
which took place during 2005.
11. |
Employee
Retirement Benefits and Post Retirement
Benefits
|
According
to the Heilongjiang Provincial regulations on state pension program, both
employees and employers have to contribute toward pensions. The pension
contributions range from 8% that was contributed by individuals (employees)
and
the Company is required to make contributions to the state retirement plan
based
on 20% of the employees’ monthly basic salaries. Employees in the PRC are
entitled to retirement benefits calculated with reference to their basic
salaries on retirement and their length of service in accordance with a
government managed benefits plan. The PRC government is responsible for the
benefit liability to these retired employees. During the fiscal year ended
December 31, 2006, the Company contributed $28,344 in pension
contributions.
12. |
Loans
from Shareholder
|
In
connection with ABC Realty Merger (see Note 1), the shareholder, Xiqun Yu
loaned
the Company $100,000 at a 9% interest rate originally signed in December
2004.
Annual amount of interest is payable together with principal. The shareholder
paid all necessary overseas consulting and advising fees, lawyer fees, and
accounting fees from period to period out of his own personal bank accounts
in
the United States due to the strict laws and regulations imposed by the Chinese
government on out-going foreign currency wire transfers. The amount outstanding
as of December 31, 2006 is $135,944. The loan from shareholder has the option
to
convert in two years into common stock of the Company at the market price
on the
date the Company incurred the loan.
SFAS
128
requires a reconciliation of the numerator and denominator of the basic and
diluted earnings per share (EPS) computations. The following securities were
not
included in the calculation of diluted earnings per share because their effect
was antidilutive.
For
the
year ended December 31, 2006, dilutive shares do not include outstanding
warrants to purchase 3,060,000 shares of common stock at an exercise price
of
$0.50 because the warrant’s exercise price was greater than the average market
price for the common stock and their effect would have been antidilutive.
The
following reconciles the components of the EPS computation:
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
(Denominator)
|
|
Amount
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31, 2006:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,624,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS income available to common shareholders
|
|
$
|
2,624,660
|
|
|
57,921,356
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS income available to common shareholders
|
|
$
|
2,624,660
|
|
|
57,921,356
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,703,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS income available to common shareholders
|
|
$
|
1,703,186
|
|
|
57,915,000
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS income available to common shareholders
|
|
$
|
1,703,186
|
|
|
57,915,000
|
|
$
|
0.03
|
|
14. |
Commitments
and Contingencies
|
No
government approvals are required to conduct the Company’s principal operations,
and the Company is not aware of any probable governmental regulation of our
business sectors in the near future. Although management believes that the
Company is in material compliance with the statutes, laws, rules and
regulations of every jurisdiction in which it operates, no assurance can
be
given that the Company’s compliance with the applicable statutes, laws,
rules and regulations will not be challenged by governing authorities or
private parties, or that such challenges will not lead to a material adverse
effect on the Company’s financial position, results of operations or cash
flows.
The
Company and its subsidiaries are self-insured, and they do not carry any
property insurance, general liability insurance, or any other insurance that
covers the risks of their business operations. As a result any material loss
or
damage to its properties or other assets, or personal injuries arising from
its
business operations would have a material adverse affect on the Company’s
financial condition and operations.
The
Company is not involved in any legal matters arising in the normal course
of
business. While incapable of estimation, in the opinion of the management,
the
individual regulatory and legal matters in which it might involve in the
future
are not expected to have a material adverse effect on the Company’s financial
position, results of operations or cash flows.
Total
scheduled future minimum lease payments, under these operating leases are
as
follows:
|
|
Payment
Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Operating
leases
|
|
$
|
322,251
|
|
$
|
117,647
|
|
$
|
102,302
|
|
$
|
102,302
|
|
$
|
-
|
|
$
|
-
|
|
On
September 9, 2006 the Company issued 20,000 shares of the Company’s common stock
valued at $7,000 for services.
Pursuant
to an asset acquisition agreement dated December 28, 2006, the Company acquired
certain fixed assets and franchise rights for a total cash consideration
of
$1,010,230, (7,900,000 RMB). The franchise rights had a value of $689,642,
which
will be amortized over the five year term of these rights.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
CHINA
EDUCATION ALLIANCE, INC.
(Registrant)
|
|
|
|
Date: March
28, 2007
|
By:
|
/s/ Yu
Xiqun
|
|
Yu
Xiqun
President
and Chief Executive Officer
|