UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-3
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF
1933
CHINA
EDUCATION ALLIANCE, INC.
(Exact
name of registrant as specified in its charter)
North
Carolina
(State or
other jurisdiction of incorporation or organization)
56-2012361
(I.R.S.
Employer Identification Number)
58
Heng Shan Road, Kun Lun Shopping Mall, Harbin, The People’s Republic
of China 150090
011-86-
451-8233-5794
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Mr.
Xiqun Yu
58
Heng Shan Road, Kun Lun Shopping Mall, Harbin, The People’s Republic
of China 150090
011-86-
451-8233-5794
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Benjamin
Tan, Esq.
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32nd
Floor,
New
York, NY 10006
Telephone:
(212) 930-9700
Facsimile:
(212) 930-9725
From time
to time after the effective date of this Registration Statement
(Approximate
date of commencement of proposed sale to the public)
If the only securities being registered
on this Form are being offered pursuant to dividend or interest reinvestment
plans, please check the following box: o
If any of the securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, other than securities
offered only in connection with dividend or interest reinvestment plans, check
the following box: x
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this Form is a registration
statement pursuant to General Instruction I.D. or a post-effective amendment
thereto that shall become effective upon filing with the Commission pursuant to
Rule 462(e) under the Securities Act, check the following box. o
If this Form is a post-effective
amendment to a registration statement filed pursuant to General Instruction I.D.
filed to register additional securities or additional classes of securities
pursuant to Rule 413(b) under the Securities Act, check the following box.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer o
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Non-accelerated
filer o (Do not
check if a smaller reporting company)
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Smaller reporting company x
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CALCULATION
OF REGISTRATION FEE
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Title
of each class of securities to be registered
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Amount
to be registered
(1)(2)
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Proposed
maximum offering price per
unit(3)
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Proposed
maximum aggregate offering price
(3)
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Amount
of registration fee
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Common
Stock, par value $0.001 per share underlying warrants
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3,354,390 | 5.19 | 17,409,284.10 | 971.44 | ||||||||||||
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(1)
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Reflects
2,587,190 shares of common stock underlying warrants that are being
registered for resale by the Selling Stockholders named herein and 767,200
shares of common stock underlying warrants that were previously
registered on a post-effective amendment to the Form S-1 filed with the
SEC on October 21, 2008 and effective on October 24,
2008.
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(2)
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Pursuant
to Rule 416 promulgated under the Securities Act of 1933, as amended, and
in order to prevent dilution, the shares being registered hereunder
include such indeterminate number of shares of common stock as may be
issuable with respect to the shares being registered hereunder as a result
of a stock split, stock dividend, recapitalization or similar transaction
involving the registrant’s common
stock.
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(3)
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Estimated
solely for the purpose of calculating the registration fee in accordance
with Rule 457(c) under the Securities Act of 1933, as amended, based on
the average of the high ($5.38) and low ($4.99) prices of the Registrant’s
common stock reported on the NYSE Amex on August 5, 2009, which was within
five business (5) days of the date of the filing
hereof.
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The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933,
as amended, or until the Registration Statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
The information in
this prospectus is not complete and may be changed. We may not sell
these securities until the registration statement relating to these securities
that has been filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
(Subject
to Completion, Dated August __, 2009)
PRELIMINARY
PROSPECTUS
3,354,390
Shares
(underlying
warrants)
Offered
by Selling Stockholders of
CHINA
EDUCATION ALLIANCE, INC.
Common
Stock
This
prospectus relates to the resale by the selling stockholders identified in this
prospectus of up to 3,354,390
shares of our common stock that they may acquire from us upon exercise of
warrants. Of the 3,354,390 shares of common stock offered under this
prospectus herein, 767,200 were previously registered and offered under a
prospectus dated October 27, 2008.
These
shares comprise (i) 382,503 shares underlying warrants with an exercise price of
$1.50 and an expiration date of September 29, 2010 that were issued to certain
selling stockholders in September 2006, and (ii) 2,971,887 shares underlying
warrants that were issued to three selling stockholders in a private placement
on May 8 and May 31, 2007. These warrants have exercise prices of
$1,50, $2.07, $2.40 and $3.00 and a term of 5 years.
Information
regarding the selling stockholders and the manner in which they acquired their
shares, and the times and manner in which they may offer and sell shares of our
common stock under this prospectus, is provided under “Selling Stockholders” and
“Plan of Distribution” in this prospectus.
All of
the securities offered by this prospectus may be sold from time to time by or on
behalf of the selling stockholders. The prices at which the selling stockholders
may sell their shares of our common stock will be determined by the prevailing
market price for the shares or in negotiated transactions.
We will
not receive any proceeds from the sale by the selling stockholders of their
shares of common stock other than the exercise price of the outstanding warrants
if and when the warrants are exercised. Under the terms of the warrants cashless
exercise is permitted. We intend to use any cash proceeds received
from the exercise of warrants for working capital and other general corporate
purposes. We cannot assure you that any of the warrants will ever be exercised
for cash or at all. We will pay the cost of the preparation of this prospectus,
which is estimated at $971, but the selling stockholders will pay all of the
selling commissions, brokerage fees and related expenses.
Our common stock is listed on NYSE
Amex Equities (“NYSE Amex”, formerly, the American Stock Exchange) under the
symbol “CEU.” On August 5, 2009, the last reported sale price of our common
stock on NYSE Amex was $5.35 per share.
Investing
in our securities involves a high degree of risk. We urge you to carefully
consider the risks that we have described on page 6 of this prospectus under the
caption “Risk Factors.” We may also include specific risk factors in supplements
to this prospectus under the caption “Risk Factors.” This prospectus may not be
used to offer or sell our securities unless accompanied by a prospectus
supplement.
The
selling stockholders have not engaged any underwriter in connection with the
sale of their shares of common stock. The selling stockholders may sell their
shares of common stock in the public market based on the market price at the
time of sale or at negotiated prices. The selling stockholders may also sell
their shares in transaction that are not in the public market in the manner set
forth under “Plan of Distribution.”
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date
of this prospectus is [ ], 2009
Table
of Contents
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Page
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About
this Prospectus
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1
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Cautionary
Statement Regarding Forwarding Looking
Statements
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1
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Summary
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2
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Risk
Factors
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6
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Use
of Proceeds
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15
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Description
of Capital Stock
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15
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North
Carolina Anti-Takeover Law
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18
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Dilution
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18
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Selling
Stockholders
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18
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Plan
of Distribution
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28
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Legal
Matters
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29
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Experts
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29
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Where
You Can Find More Information
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29
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Incorporation
of Certain Information By Reference
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30
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You
should rely only on the information contained or incorporated by reference in
this prospectus or any prospectus supplement. We have not authorized
anyone to provide you with information different from that contained or
incorporated by reference into this prospectus. If any person does
provide you with information that differs from what is contained or incorporated
by reference in this prospectus, you should not rely on it. No dealer,
salesperson or other person is authorized to give any information or to
represent anything not contained in this prospectus. You should assume that the
information contained in this prospectus or any prospectus supplement is
accurate only as of the date on the front of the document and that any
information contained in any document we have incorporated by reference is
accurate only as of the date of the document incorporated by reference,
regardless of the time of delivery of this prospectus or any prospectus
supplement or any sale of a security. These documents are not an
offer to sell or a solicitation of an offer to buy these securities in any
circumstances under which the offer or solicitation is unlawful.
ABOUT
THIS PROSPECTUS
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including “Risk Factors” and our
consolidated financial statements, including the notes to the financial
statements appearing elsewhere in this prospectus. As used throughout this
prospectus, the terms “we,” “us,” and “our” and words of like import refer to
China Education Alliance, Inc. and its subsidiaries, unless the context suggests
otherwise. Additionally, unless we indicate otherwise, references in
this prospectus to:
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“China”
and the “PRC” are to the People’s Republic of China, excluding, for the
purposes of this prospectus only, Taiwan and the special administrative
regions of Hong Kong and Macau;
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“RMB”
and “Renminbi” are to the legal currency of China;
and
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“$,”
“US$” and “U.S. dollars” are to the legal currency of the United
States.
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The
information contained in this prospectus and the documents and information
incorporated by reference in this prospectus include some statements that are
not purely historical and that are “forward-looking statements.” Such
forward-looking statements include, but are not limited to, statements regarding
our expectations, hopes, beliefs, intentions or strategies regarding the future,
including our financial condition, and results of operations. In addition, any
statements that refer to projections, forecasts or other characterizations of
future events or circumstances, including any underlying assumptions, are
forward-looking statements. The words “anticipates,” “believes,” “continue,”
“could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,”
“potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and
similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that a
statement is not forward-looking.
The
forward-looking statements contained in this prospectus are based on current
expectations and beliefs concerning future developments and their potential
effects on us. There can be no assurance that future developments actually
affecting us will be those anticipated. These forward-looking statements involve
a number of risks, uncertainties (some of which are beyond our control) or other
assumptions that may cause actual results or performance to be materially
different from those expressed or implied by these forward-looking statements,
including the following:
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Changes
in the laws of the PRC that affect the Company’s
operations;
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Any
significant occurrence of severe acute respiratory syndrome (SARS), Avian
Flu, or Swine Flu (H1N1);
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The
Company’s ability to obtain and maintain all necessary government
certifications and/or licenses to conduct the Company’s
business;
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Development
of a public trading market for the Company’s
securities;
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The
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on the Company’s
operations;
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Changes
in the political and economic policies of the government in China, where
all of the Company’s assets are located and all from where its revenues
are derived;
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Adverse
capital and credit market conditions, and the Company’s ability to meet
liquidity needs;
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Fluctuation
of the foreign currency exchange rate between U.S. Dollars and
Renminbi;
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Our
ability to obtain additional funding for our continuing operations and to
fund our expansion;
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Our
ability to meet our financial projections for any financial
year;
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Our
ability to retain our key executives and to hire additional senior
management;
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1
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Continued
growth of the Chinese economy and demand for our
services;
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Our
ability to anticipate trends and provide programs that are relevant and
useful to our students;
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other
factors, including those described in this prospectus under the heading
“Risk Factors,” as well as factors set forth in other filings we make with
the Securities and Exchange
Commission.
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Should
one or more of these risks or uncertainties materialize, or should any of our
assumptions prove incorrect, actual results may vary in material respects from
those projected in these forward-looking statements. We undertake no obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.
SUMMARY
The
following is only a summary, and does not contain all of the information that
you need to consider in making your investment decision. We urge you to read
this entire prospectus, including the more detailed consolidated financial
statements, notes to the consolidated financial statements and other
information incorporated by reference into this prospectus under “Where You Can
Find More Information” and “Incorporation of Certain Information by Reference”
from our other filings with the SEC, as well as any prospectus supplement
applicable to an offering of the securities registered pursuant to the
registration statement of which this prospectus forms a part. Investing in our
securities involves risks. Therefore, please carefully consider the information
provided under the heading "Risk Factors" beginning on page 6.
ABOUT
CHINA EDUCATION ALLIANCE, INC.
We are an
education service company that provides on-line education and on-site
training in the PRC.
Our
principal business is the distribution of educational resources through the
internet. Our website, www.edu-chn.com, is a
comprehensive education network platform which is based on network video
technology and large data sources of elementary education resources. We have a
database comprised of such resources as test papers that were used for secondary
education and university level courses as well as video on demand. Our data base
includes more than 300,000 exams and test papers and courseware for college,
secondary and elementary schools. While some of these exams were given in
previous years, we engage instructors to develop new exams and a methodology for
taking the exams. We market this data base under the name “Famous Instructor
Test Paper Store.” We also offer, though our website, video on demand, which
includes tutoring of exam papers and exam techniques. We complement the past
exams and test papers with an interactive platform for students to
understand the key points from the papers and exams. Although a number of
resources are available through our website without charge, we charge our
subscribers for such services as the Famous Instructor Test Paper Store and
video on demand. Subscribers can purchase debit cards which can be used to
download material from our website.
We also
provide on-site teaching services in Harbin, which we market under the name
“Classroom of Famed Instructors.” We have a 36,600 square foot training facility
in Harbin, Heilongjiang Province, PRC, which has 17 classrooms and can
accommodate 1,200 students. These classes, which complement our on-line
education services, provide classroom and tutoring to our students. The courses
cover primarily the compulsory education curriculum of junior, middle and high
school. We charge tuition for these classes.
We are
also in the business of providing on-line vocational training services. We
collaborated with the China Vocation Education Society to set up a website,
www.360ve.com ,
which is an internet platform for training agencies and schools to offer their
services. We launched www.360ve.com in
September 2007. We called this program our “Millions of College Students
Employment Crossroad” program. We offer job search capability and career
planning courses for university students. We developed this program in response
to the high jobless rate for PRC college graduates. Many college graduates
pursue vocational training after college education in order to find employment.
Our program is designed to establish a long-term training program for college
students to build connections with corporations and obtain educational programs
prescribed by the hiring corporations. We anticipate that we will constantly
revise our materials to meet changes in the market as well as the demands of
university students and graduates who enroll in our courses in order to meet
their changing needs.
2
On April
18, 2008, our wholly owned subsidiary, Harbin Zhong He Li Da, Education
Technology, Inc. (“ZHLD”) entered into an agreement and supplementary agreement
with Harbin Daily Newspaper Group to invest in a joint venture company, Harbin
New Discovery Media Co., ZHLD contributed RMB 3,000 000 (approximately,
$430,000) and Harbin Daily Newspaper Group contributed RMB 3,120,000
(approximately, $445,000) towards the registered capital of Harbin New Discovery
Media Co. In return for their respective contributions, ZHLD will own 49.02%
equity interest and Harbin Daily Newspaper Group will own 50.98% equity interest
in Harbin New Discovery Media Co., Ltd. This joint venture will create new
educational material distribution channels in readable newspaper format in the
future. Pursuant to the terms of the supplementary agreement, Harbin Daily
Newspaper Group assigned all its rights in the “Scientific Discovery” newspaper
exclusively to the joint venture company. The transaction closed on July 7, 2008
and as a result, Harbin New Discovery Media Co. Ltd. is now a 49.02% owned
subsidiary of ZHLD and we are now in the publication and distribution of a
scientific newspaper business.
On April
27, 2008, we entered into a Share Transfer Agreement with Mr. Yuli Guo (“Guo”)
and World Exchanges, Inc. (“WEI”) to purchase from Guo seventy (70) issued and
outstanding common shares in WEI, representing 70% of the entire
issued share capital of WEI. In consideration for the said shares, we issued to
Guo 400,000 shares of our common stock. Guo will retain the remaining 30% of the
issued share capital of WEI. The sale transaction closed on April 29, 2008. As a
result of the transaction, WEI is now a 70% owned subsidiary of China Education
Alliance. We, through WEI, now provide English training programs, English test
preparation courses and overseas study and consulting services in the PRC
through five entities, namely, Beijing Weishi Success Education Technology Co.,
Ltd., Beijing World Exchanges English College, Yantai WECL English College,
Xiamen Siming District Weishi English Training School and the Private Qingdao
Weishi Education Training School in Beijing, Yantai, Xiamen and Qingdao. We
are currently in the process of completing the required Chinese business
documentation to complete the acquisition of the three schools.
On
December 23, 2008, our subsidiary, WEI incorporated a wholly-owned company,
Beijing Wei Shi Yi Tong Education Technology Co., Inc. (“BJWSYT”) in the PRC.
WEI contributed US$ 100,000 towards the registered capital of BJWSYT, amounting
to a total registered capital of US$100,000. In return WEI now owns
100% equity interest in BJWSYT. BJWSYT was incorporated on December 23, 2008
with a business term of 30 years. The members of the board of
directors of BJWSYT comprise Mr. Xiqun Yu as the chairman, Mr. Yuli Guo and Ms.
Xuxin Dong. Mr. Xiqun Yu is the legal representative of
BJWSYT. BJWSYT is involved in the English language training business,
in particular, in running the World Exchanges Colleges of Language in the
PRC.
On
January 4, 2009, our subsidiary ZHLD entered into an agreement with Mr. Guang Li
to jointly incorporate and invest in a joint venture company, Zhong He Li Da
(Beijing) Management Consultant Co., Ltd. (“ZHLDBJ”). ZHLD
contributed RMB 425,000 (approximately, $62,107), and Mr. Guang Li contributed
RMB 75,000 (approximately, $10,960) towards the registered capital of ZHLDBJ,
amounting to a total registered capital interest, and Mr. Guang Li will own 15%
equity interest in ZHLDBJ. ZHLD has authorized Mr. Xiqun Yu to hold 20% of its
equity interest of ZHLDBJ on its behalf.
ZHLDBJ
was incorporated on January 4, 2009 with a business term of 20
years. The registered capital of ZHLDBJ has been paid by the parties
concerned. Mr. Xiqun Yu is the legal representative and the managing
director of ZHLDBJ. ZHLDBJ will be involved in the vocational
training business, in particular, in running the “Million Managers Training
Program”. The “Million Managers Training Program” is the PRC’s first
management training program targeted to upgrade management skills.
More recently, we entered into a
co-operative agreement signed with the Foreign Language College of Peking
University to jointly collaborate on the research and development, promotion and
running of a "Practical Oral English Training Project." Under this agreement,
both parties will participate in recruiting qualified teachers to teach English
at classes held at Peking University. The classes will last one year, and
student admissions across the country are scheduled to begin in September
2009.
3
For fiscal year 2008, our net income
was $9,918,536, or $0.46 per share basic and $0.40 diluted, as compared with net
income of $3,104,907 or $0.16 per share basic and $0.14 diluted, for fiscal year
2007. During the three months ended March 31, 2009 and 2008, we
earned net income of $3,229,481 and $1,913,923, respectively.
As of March 31, 2009, we had total
assets of $31,322,599.
We were
incorporated in 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.
Following a September 2004 reverse acquisition in which we acquired all the
equity interest in ZHLD, our corporate name was changed to China Education
Alliance, Inc. and we ceased being a blank-check shell.
Our
principal executive offices are located at 58 Heng Shan Road, Kun Lun Shopping
Mall, Harbin, The People’s Republic of China 150090. Our
telephone number is 011-86- 451-8233-5794. Our website is www.chinaeducationalliance.com. Information
contained on, or that can be accessed through our website is not part of this
prospectus. For additional information about us and our business, see
“Where You Can Find More Information.”
Reverse
Stock Split
On
October 12, 2007, we effected a one-for-three reverse split of our common stock.
All share and per share information in this prospectus retroactively reflects
this reverse split.
Issuance
of Securities to the Selling Stockholders
In May
2007, we issued to certain selling stockholders, for $3,400,000, convertible
notes in the principal amount of $3,400,000. Upon filing of articles of
amendment to our articles of incorporation and a certificate of designation
setting forth the rights, preferences, privileges and limitation on the holders
of the series A convertible preferred stock (“series A preferred stock”), the
notes were automatically converted into 9,189,189 shares of series A preferred
stock and warrants to purchase a total of 735,632 shares of common stock at
$1.50 per share, 2,833,333 shares of common stock at $2.07 per share, 681,034
shares of common stock at $2.40 per share and 264,367 shares of common stock at
$3.00 per share. The 9,189,189 shares of series A preferred stock are
convertible into 3,063,063 shares of common stock. Each share of series A
preferred stock is convertible into one-third of a share of common stock, and
the conversion price of the series A preferred stock, which is determined by
dividing the purchase price of $3,400,000 by the number of shares of common
stock issuable upon conversion, is $1.11 per share.
On May 8,
2007, the date of the initial closing on the securities purchase agreement, the
closing price of our common stock was $1.11 per share. Out of the
total 4,514,366 shares underlying the warrants converted from the notes, we
originally registered 2,250,000 of the shares pursuant to a Form SB-2 (File No.
333-146023) declared effective on December 28, 2007, and by a post-effective
amendment declared effective on October 24, 2008.
In
September 2006, we issued to certain selling stockholders, for $1,530,000,
secured promissory notes and warrants to acquire an aggregate of 510,003 shares
of common stock at $1.50 per share.
Based on
the $5.35 per share closing price of our common stock on August 5, 2009, the
3,354,390 shares we are registering hereby had a value of
$17,945,987.
Plan
of Distribution
The
selling stockholders and any of their pledgees, donees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions or by gift. These sales may be made
at fixed or negotiated prices. The selling stockholders may use any one or more
of the following methods when selling or otherwise transferring
shares:
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
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block
trades in which a broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
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sales
to a broker-dealer as principal and the resale by the broker-dealer of the
shares for its account;
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an
exchange distribution in accordance with the rules of the applicable
exchange;
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privately
negotiated transactions, including
gifts;
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covering
short sales made after the date of this
prospectus.
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pursuant
to an arrangement or agreement with a broker-dealer to sell a specified
number of such shares at a stipulated price per
share;
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a
combination of any such methods of sale;
and
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any
other method of sale permitted pursuant to applicable
law.
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The
selling stockholders may also sell shares under Rule 144 of the Securities Act
of 1933, as amended (the “Securities Act”), if available, rather than pursuant
to this prospectus. The selling stockholders shall have the sole and absolute
discretion not to accept any purchase offer or make any sale of shares if it
deems the purchase price to be unsatisfactory at any particular
time.
The
selling stockholders and their pledgees, donees, transferees or other successors
in interest, may also sell the shares directly to market makers acting as
principals and/or broker-dealers acting as agents for themselves or their
customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholder and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that the selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then existing market
price. We cannot assure that all or any of the shares offered in this prospectus
will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be an “underwriters”
as that term is defined under the Securities Act in connection with such sales.
In such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We are
required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholder,
but excluding brokerage commissions or underwriter discounts.
The
selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. The selling stockholders have
not entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into. If the selling
stockholders propose to sell shares to an underwriter, we will be required to
amend this prospectus to reflect the terms of the underwritten
offering.
5
The
selling stockholders may pledge shares to brokers under the margin provisions of
customer agreements. If the selling stockholders defaults on a margin loan, the
broker may, from time to time, offer and sell the pledged shares. The selling
stockholders and any other persons participating in the sale or distribution of
the shares will be subject to applicable provisions of the Securities Exchange
Act of 1934, as amended, and the rules and regulations under such Act,
including, without limitation, Regulation M. These provisions may restrict
certain activities of, and limit the timing of purchases and sales of any of the
shares by, the selling stockholder or any other such person. In the event the
selling stockholders is deemed an affiliated purchaser or distribution
participant within the meaning of Regulation M, then the selling stockholder
will not be permitted to engage in short sales of common stock. Furthermore,
under Regulation M, persons engaged in a distribution of securities are
prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In addition, if a short sale is deemed to be a stabilizing activity,
then the selling stockholder will not be permitted to engage in a short sale of
our common stock. All of these limitations may affect the marketability of the
shares.
If a
selling stockholder notifies us that it has a material arrangement with a
broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreement between the selling stockholder
and the broker-dealer.
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Common
Stock being offered by Selling Stockholder:
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3,354,390
shares which are issuable upon exercise of warrants. The 3,354,390 shares
of common stock being registered represents 14.53% of our outstanding
common stock and 32.58% of the number of shares of common stock held by
persons other than our officers, directors and
affiliates.
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Limitation
on Issuance of Common Stock:
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The
holders of the warrants cannot exercise their warrants to the extent that
such exercise would result in the holders and their affiliates owning more
than 4.9% of our outstanding common stock.
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Outstanding
Shares of Common Stock:
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23,083,796
shares
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Common
Stock to be Outstanding after Exercise of Investor Warrants covered
hereby:
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26,438,186
shares 1
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Use
of Proceeds:
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In
the event that any selling stockholders exercise all of the warrants for
which the underlying shares are registered, we would receive the exercise
price which would total approximately $7,178,693 if and when the warrants
are exercised. The proceeds from the exercise of the warrants are subject
to adjustment in the event of a change in the exercise price of the
warrants. We cannot assure you that any of the warrants will be exercised.
See “Use of Proceeds.”
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Risk
Factors:
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See
“Risk Factors” beginning on page 6 and other information included in this
prospectus for a discussion of factors you should consider before deciding
to invest in shares of our common
stock.
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_______________
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1
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Includes
shares of common stock issuable upon the exercise of warrants held by the
selling stockholders for which the underlying shares are registered, and
does not include 1,615,883 shares of common stock which are issuable upon
conversion of series A preferred
stock.
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RISK
FACTORS
An
investment in our common stock involves a high degree of risk. Before making an
investment decision, you should carefully consider the risks described under
“Risk Factors” below and in the applicable prospectus supplement, together with
all of the other information appearing in this prospectus or incorporated by
reference into this prospectus and any applicable prospectus supplement, in
light of your particular investment objectives and financial circumstances. Our
business, financial condition or results of operations could be materially
adversely affected by any of these risks. The trading price of our securities
could decline due to any of these risk factors, and you may lose all or any part
of your investment.
6
Risks
Associated with our Business
Our
business is dependent upon the PRC government’s educational policies and
programs.
As a
provider of educational services, we are dependent upon governmental educational
policies. Almost all of our revenue to date has been generated from the sale of
test papers and materials relating to courses at different educational levels.
To the extent that the government adopts policies or curriculum changes that
significantly alter the testing and course materials used in the PRC educational
system, our products could become obsolete, which would affect our ability to
generate revenue and operate profitably. We cannot assure you that the PRC
government agencies would not adopt such changes.
We
are subject to numerous PRC 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 the PRC, 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 the PRC
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 the PRC
would have a material adverse impact on us, our business and on our financial
results.
Our
business may be subject to seasonal and cyclical fluctuations in
sales.
We may
experience seasonal fluctuations in our revenue in some regions in the PRC,
based on the academic year and the tendency of parents and students to make
purchases relating to their education just prior to or at the beginning of the
school year in the autumn. Any seasonality may cause significant pressure
on us to monitor the development of materials accurately and to anticipate and
satisfy these requirements.
Our
business is subject to the health of the PRC economy.
The
purchase of educational materials not provided by the state educational system
is discretionary and dependent upon the ability and willingness of families or
students to spend available funds on extra educational products to prepare for
national examinations. A general economic downturn either in our market or a
general economic downturn in the PRC could have a material adverse effect on our
revenue, earnings, cash flow and working capital.
We
depend on our senior officers to manage and develop our business.
Our
success depends on the management skills of Mr. Xiqun Yu, our chief executive
officer and president and his relationships with educators, administrators and
other business contacts. 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 the PRC. 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. We do
not have employment contracts with Mr. Yu or any other officers or employees.
The loss of Mr. Yu would delay our ability to implement our business plan and
would adversely affect our business.
7
We
may not be successful in protecting our intellectual property and proprietary
rights.
Our
intellectual property consists of old test papers, which are contained in our
library, and courseware which we developed by engaging authors and educators to
develop these materials. Our proprietary software products are primarily
protected by trade secret laws. Although we require our authors and
software development employees to sign confidentiality and non-disclosure
agreements, we cannot assure you that we will be able to enforce those
agreements or that our authors and software development employees will not be
able to develop competitive products that do not infringe upon our proprietary
rights. We do not know the extent that PRC courts will enforce our proprietary
rights.
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 regardless of the final outcome. We do not carry general
liability insurance that would cover any potential or actual claims. The
commencement of any legal action against us or any of our affiliates, whether or
not we are successful in defending the action, could both require us to suspend
or discontinue the distribution of some or a significant portion of our
educational materials and require us to allocate resources to investigating or
defending claims.
We
depend upon the acquisition and maintenance of licenses to conduct our business
in the PRC.
In order
to conduct business in the PRC, we need licenses from the appropriate government
authorities, including general business licenses and an education service
provider license. The loss or failure to obtain or maintain these licenses
in full force and effect will have a material adverse impact on our ability to
conduct our business and on our financial condition.
Our
growth may be inhibited by the inability of potential customers to fund
purchases of our products and services.
Many
schools in the PRC, 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 or may allocate funds to programs which are
different from our products. Our failure to be able to sell our products and
services to students in certain areas of the PRC may inhibit our growth and our
ability to operate profitably.
Changes
in the policies of the government in the PRC could significant impact our
ability to operate profitably.
The
economy of the PRC is a planned economy subject to five-year and annual plans
adopted by the government that set down national economic development goals.
Government policies can have significant effect on the economic conditions
of the PRC generally and the educational system in particular. Although
the government in the PRC has confirmed that economic development will follow a
model of market economy under socialism, a change in the direction of government
planning may materially affect our business, prospects and financial
condition.
Inflation
in the PRC could negatively affect our profitability and growth.
While the
economy in the PRC 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 purchase, and
restrictions on state bank lending. Such an austerity policy can lead to a
slowing economic growth which could impair our ability to operate
profitably.
8
If
we make any acquisitions, they may disrupt or have a negative impact on our
business.
If we
make acquisitions, we could have difficulty integrating personnel and operations
of the acquired companies with our own. In addition, the key personnel of the
acquired business may not be willing to work for us. We cannot predict the
affect expansion which may have on our core business. Regardless of whether we
are successful in making an acquisition, the negotiations could disrupt our
ongoing business, distract our management and employees and increase our
expenses. In addition to the risks described above, acquisitions are accompanied
by a number of inherent risks, including, without limitation, the
following:
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the
difficulty of integrating acquired products, services or
operations;
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the
potential disruption of the ongoing businesses and distraction of our
management and the management of acquired
companies;
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the
difficulty of incorporating acquired rights or products into our existing
business;
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difficulties
in disposing of the excess or idle facilities of an acquired company or
business and expenses in maintaining such
facilities;
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difficulties
in maintaining uniform standards, controls, procedures and
policies;
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the
potential impairment of relationships with employees and customers as a
result of any integration of new management
personnel;
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the
potential inability or failure to achieve additional sales and enhance our
customer base through cross-marketing of the products to new and existing
customers;
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the
effect of any government regulations which relate to the business
acquired;
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potential
unknown liabilities associated with acquired businesses or product lines,
or the need to spend significant amounts to retool, reposition or modify
the marketing and sales of acquired products or the defense of any
litigation, whether or not successful, resulting from actions of the
acquired company prior to our
acquisition.
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Our
business could be severely impaired to the extent that we are unable to succeed
in addressing any of these risks or other problems encountered in connection
with these acquisitions, many of which cannot be presently identified, these
risks and problems could disrupt our ongoing business, distract our management
and employees, increase our expenses and adversely affect our results of
operations.
Our
operations and assets in the PRC are subject to significant political and
economic uncertainties.
Government
policies are subject to rapid change, and the government of the PRC may adopt
policies which have the effect of hindering private economic activity and
greater economic decentralization. There is no assurance that the government of
the PRC will not significantly alter its policies from time to time without
notice in a manner which reduces or eliminates any benefits from its present
policies of economic reform. In addition, a substantial portion of productive
assets in the PRC remains government-owned. For instance, all lands are state
owned and leased to business entities or individuals through governmental
granting of state-owned land use rights. The granting process is typically based
on government policies at the time of granting, which could be lengthy and
complex. The government of the PRC also exercises significant control over its
economic growth through the allocation of resources, controlling payment of
foreign currency and providing preferential treatment to particular industries
or companies. Uncertainties may arise with changing of governmental policies and
measures. In addition, changes in laws and regulations, or their interpretation,
or the imposition of confiscatory taxation, restrictions on currency conversion,
imports and sources of supply, devaluations of currency, the nationalization or
other expropriation of private enterprises, as well as adverse changes in the
political, economic or social conditions in the PRC, could have a material
adverse effect on our business, results of operations and financial
condition.
9
Price
controls may affect both our revenues and net income.
The laws
of the PRC provide the government broad power to fix and adjust prices. We need
to obtain government approval in setting our prices for classroom coursework and
tutorials. Although the sale of educational materials over the Internet is not
presently subject to price controls, we cannot give you any assurance that they
will not be subject to controls in the future. To the extent that we are subject
to price control, our revenue, gross profit, gross margin and net income will be
affected since the revenue we derive from our services will be limited and we
may face no limitation on our costs. As a result, we may not be able to pass on
to our students any increases in costs we incur, or any increases in the costs
of our faculty. Further, if price controls affect both our revenue and our
costs, our ability to be profitable and the extent of our profitability will be
effectively subject to determination by the applicable PRC regulatory
authorities.
Our
operations may not develop in the same way or at the same rate as might be
expected if the PRC economy were similar to the market-oriented economies of
most developed countries.
The
economy of the PRC has historically been a nationalistic, “planned economy,”
meaning it functions and produces according to governmental plans and pre-set
targets or quotas. In certain aspects, the PRC’s economy has been making a
transition to a more market-oriented economy, although the government imposes
price controls on certain products and in certain industries. However, we cannot
predict the future direction of these economic reforms or the effects these
measures may have. The economy of the PRC also differs from the economies of
most developed countries including with respect to the amount of government
involvement, level of development, growth rate, control of foreign exchange and
allocation of resources. As a result of these differences, our business may not
develop in the same way or at the same rate as might be expected if the economy
of the PRC were similar to those of other developed countries.
Because
our officers and directors reside outside of the United States, it may be
difficult for you to enforce your rights against them or enforce United States
court judgments against them in the PRC.
Our
directors and our executive officers reside in the PRC and all of our assets are
located in the PRC. It may therefore be difficult for United States investors to
enforce their legal rights, to effect service of process upon our directors or
officers or to enforce judgments of United States courts predicated upon civil
liabilities and criminal penalties of our directors and officers under federal
securities laws. Further, it is unclear if extradition treaties now in effect
between the United States and the PRC would permit effective enforcement of
criminal penalties of the federal securities laws.
We
may have limited legal recourse under PRC law if disputes arise under contracts
with third parties.
All of
our agreements, which are made by our PRC subsidiaries, are governed by the laws
of the PRC. The PRC legal system is a civil law system based on written
statutes. Accordingly decided legal cases have little precedential value. The
government of the PRC has enacted some laws and regulations dealing with matters
such as corporate organization and governance, foreign investment, commerce,
taxation and trade. However, these laws are relatively new and their experience
in implementing, interpreting and enforcing these laws and regulations is
limited. Therefore, our ability to enforce commercial claims or to resolve
commercial disputes may be uncertain. The resolution of these matters may be
subject to the exercise of considerable discretion by the parties charged with
enforcement of the applicable laws. Any rights we may have to specific
performance or to seek an injunction under PRC law may be limited, and without a
means of recourse, we may be unable to prevent these situations from occurring.
The occurrence of any such events could have a material adverse effect on our
business, financial condition and results of operations.
10
Because
we may not be able to obtain business insurance in the PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in the PRC. To the extent that we suffer a
loss of a type which would normally be covered by insurance in the United
States, such as product liability and general liability insurance, we would
incur significant expenses in both defending any action and in paying any claims
that result from a settlement or judgment.
Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.
Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. As a result, in the event of a bank failure, we may not have access
to funds on deposit. Depending upon the amount of money we maintain in a bank
that fails, our inability to have access to our cash could impair our
operations, and, if we are not able to access funds to pay our suppliers,
employees and other creditors, we may be unable to continue in
business.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC. We can make
no assurance, however, that our employees or other agents will not engage in
such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our
business, financial condition and results of operations.
Fluctuations
in the exchange rate could have a material adverse effect upon our
business.
We
conduct our business in the Renminbi. The value of the Renminbi against the U.S.
dollar and other currencies may fluctuate and is affected by, among other
things, changes in political and economic conditions. On July 21, 2005, the PRC
government changed its decade old policy of pegging its currency to the U.S.
currency. Under the current policy, the Renminbi is permitted to fluctuate
within a narrow and managed band against a basket of certain foreign currencies.
This change in policy has resulted in an approximately 17% appreciation of the
Renminbi against the U.S. dollar between July 21, 2005 and March 23, 2009.
However, there remains significant international pressure on the PRC government
to adopt an even more flexible currency policy, which could result
in a further and more significant appreciation of the RMB against the U.S.
dollar. To the extent our future revenues are denominated in currencies other
the United States dollars, we would be subject to increased risks relating to
foreign currency exchange rate fluctuations which could have a material adverse
affect on our financial condition and operating results since our operating
results are reported in United States dollars and significant changes in the
exchange rate could materially impact our reported earnings.
Recent
recalls of PRC products may affect the market for our stock.
Although
we do not sell consumer products in the international market, the recent recalls
of PRC products in the United States and elsewhere could affect the market for
our stock by causing investors to invest in companies that are not based on the
PRC.
11
Certain
of our stockholders control a significant amount of our common
stock.
Approximately
57.9% of our outstanding common stock is owned by our chief executive officer,
Mr. Xiqun Yu. Mr. Yu presently has the voting power to elect all of the
directors and approve any transaction requiring stockholder
approval.
The
terms on which we may raise additional capital may result in significant
dilution and may impair our stock price.
The terms
of our recent private placement and the number of outstanding warrants and the
exercise price and other terms on which we may issued common stock upon exercise
of the warrants, may make it difficult for us to raise additional capital if
required for our present business and for any planned expansion. We are
prohibited from (i) issuing convertible debt or preferred stock until the
earlier of May 2012 or until the investors have converted or exercised and sold
the securities issued in the private placement or (ii) having debt in an amount
greater than twice our EBITDA until May 2010 or until 90% of the securities have
been converted or exercised and sold. The investors in the private placement
also have a right of first refusal on future financings. We cannot assure you
that we will be able to get additional financing on any terms, and, if we are
able to raise funds, it may be necessary for us to sell our securities at a
price which is at a significant discount from the market price and on other
terms which may be disadvantageous to us. In connection with any such financing,
we may be required to provide registration rights to the investors and pay
damages to the investor in the event that the registration statement is not
filed or declared effective by specified dates. The price and terms of any
financing which would be available to us could result in both the issuance of a
significant number of shares and significant downward pressure on our stock
price and could result in a reduction of the conversion price of the series A
preferred stock and exercise price of the warrants held by the investors in our
May 2007 private placement.
We
have paid liquidated damages and we may be required to pay additional liquidated
damages if our board does not consist of a majority of independent directors and
our audit committee does not consist of at least three independent
directors.
The
purchase agreement relating to the May 2007 private placement requires us to
appoint and maintain such number of independent directors that would result in a
majority of our directors being independent directors, that the audit committee
would be composed solely of at least three independent directors and the
compensation committee would have a majority of independent directors by August
6, 2007. Liquidated damages are payable at the rate of 12% per annum, with a
maximum of 12% of the purchase price, payable in cash or shares of series A
preferred stock, as the investors may request. The maximum amount of liquidated
damages which may be paid under this provision is $408,000. Our failure to
comply with these requirements resulted in our payment of liquidated damages
through the payment of $77,128 or the issuance of 208,456 shares of series A
preferred stock as of October 15, 2007. The shares of series A preferred stock
are convertible into 69,484 shares of common stock. The number of shares of
series A preferred stock issued was based on the liquidation value of one share
of series A preferred stock, which is $.37 per share. Although further
liquidated damages for failure to comply with these provisions have been waived
through December 31, 2007, if we are not in compliance with these provisions
subsequent to December 31, 2007, we may be obligated to pay additional
liquidated damages. Pursuant to the securities purchase agreement, as amended,
the shares of series A preferred stock are valued at the liquidation value,
which is $0.37 per share of series A preferred stock. Since the market price for
our common stock on October 15, 2007 was $4.00 per share, the market value of
the shares issued to the investors was approximately $277,944. If we are
required to issue any additional shares of series A preferred stock pursuant to
the securities purchase agreement, we are to issue the shares at the $0.37 per
share liquidation value. If we are required to issue additional shares pursuant
to the liquidated damages provisions of the securities purchase agreement and
the market price of our common stock at the time the determination is made is
greater than $1.11, which is the common stock equivalent of the liquidation
value of the series A preferred stock, the investors will receive more shares of
series A preferred stock than they would receive if the number of shares were
based on the market value at the time of issuance. Since January 1, 2008, we
were not in compliance but have since been, with effect from June 17, 2009 with
the appointment of Yizhao Zhang as our independent director and audit chair. As
of December 31, 2008, unless otherwise waived by the investors, we are obligated
to pay liquidated damages to the investors in an amount equal to approximately
$130,056 or, issue approximately 351,503 shares of series A preferred stock
(which are convertible into 117,168 shares of our common stock) to the
investors, at the option of the investors. Such liquidated damages have been
accrued as of December 31, 2008 and is included in accrued
expenses. Assuming the investors elect to take the liquidated damages
in stock and do not waive their right to receive such damages, and based on the
market price for one share of our common stock on December 31, 2008, which was
$1.20 per share, the market value of the shares which may be issued to the
investors is approximately $140,602. Thereafter, if we are required to issue any
additional shares of series A preferred stock pursuant to the securities
purchase agreement, we are also to issue such additional shares at the $0.37 per
share liquidation value. If we are required to issue additional shares pursuant
to the liquidated damages provisions of the securities purchase agreement and
the market price of our common stock at the time the determination is made is
greater than $1.11, which is the common stock equivalent of the liquidation
value of the series A preferred stock, the investors will receive more shares of
series A preferred stock than they would receive if the number of shares were
based on the market value at the time of issuance.
12
If
we do not maintain the effectiveness of the registration of the shares of common
stock being sold pursuant to this prospectus in a timely manner, we will be
required to issue additional shares of series A preferred stock as liquidated
damages.
The
registration rights agreement which we executed in connection with the sale of
the convertible notes initially required us to issue additional shares of series
A preferred stock if we failed to file a registration statement by July 7, 2007,
and have the registration statement declared effective by November 5, 2007, and
keep the registration statement current and effective thereafter. The
registration rights agreement was amended to eliminate liquidated damages for
failure to file this registration statement when required and to waive any
liquidated damages due as a result of our failure to have the registration
statement declared effective through December 31, 2007. The agreement provides
that the liquidated damages are a maximum of 2,130 of series A preferred stock
per day, up to a maximum of 900,000 shares of series A preferred stock. However,
since, pursuant to the SEC’s rules relating to secondary offerings, we were not
able to register all of the shares of common stock issuable upon conversion of
the series A preferred stock or exercise of the warrants, the number of shares
was reduced to a fraction of 2,130 shares, of which the numerator was the number
of shares being registered on the registration statement (2,250,000) and the
denominator was the number of shares issuable upon conversion of all of the
series A preferred stock (3,063,063), which was 1,565 shares per day. Since our
registration statement was declared effective on December 28, 2007 and our
post-effective amendment was declared effective on October 24, 2008, we were not
obligated to pay any liquidated damages pursuant to the registration rights
agreement. The registration rights agreement also provides for
additional demand registration right in the event that the investors are not
able to register all of the shares in the initial registration
statement. The investors have a right of first refusal on future
financings.
Risks
Associated with Investing in our Common Stock
The
rights of the holders of common stock may be impaired by the potential issuance
of preferred stock.
Our board
of directors has the right, without stockholder approval, to issue preferred
stock with voting, dividend, conversion, liquidation or other rights which could
adversely affect the voting power and equity interest of the holders of common
stock., which could be issued with the right to more than one vote per share,
could be utilized as a method of discouraging, delaying or preventing a change
of control. The possible impact on takeover attempts could adversely affect the
price of our common stock. Although we have no present intention to issue any
additional shares of preferred stock or to create any new series of preferred
stock other than issuances required pursuant to liquidated damages provisions
arising for the agreements we signed in connection with the May 2007 private
placement, we may issue such shares in the future.
Failure
to achieve and maintain effective internal controls in accordance with Section
404 of the Sarbanes-Oxley Act could have a material adverse effect on our
business and operating results and stockholders could lose confidence in our
financial reporting.
Internal
controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or
prevent fraud, our operating results could be harmed. Under the current SEC
regulations, we will be required to include a management report on internal
controls over financial reporting in our Form 10-K annual report for the year
ended December 31, 2008, and we will be required to include an auditor’s report
on internal controls over financial reporting for the year ended December 31,
2009. Failure to achieve and maintain an effective internal control environment,
regardless of whether we are required to maintain such controls, could also
cause investors to lose confidence in our reported financial information, which
could have a material adverse effect on our stock price. Although we are not
aware of anything that would impact our ability to maintain effective internal
controls, we have not obtained an independent audit of our internal controls,
and, as a result, we are not aware of any deficiencies which would result from
such an audit. Further, at such time as we are required to comply with the
internal controls requirements of Sarbanes Oxley, we may incur significant
expenses in having our internal controls audited and in implementing any changes
which are required.
13
Because
of our cash requirements and restrictions in our preferred stock purchase
agreement as well as potential government restrictions, we may be unable to pay
dividends.
We are
prohibited from paying dividends on our common stock while our series A
preferred stock is outstanding. In addition, payment of dividends to our
shareholders would require payment of dividends by our PRC subsidiaries to us.
This, in turn, would require a conversion of Renminbi into US dollars and
repatriation of funds to the United States. Although our subsidiaries’
classification as wholly-owned foreign enterprises under PRC law permits them to
declare dividends and repatriate their funds to us 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 us would in
turn prevent payments of dividends to our shareholders.
Because
we may be subject to the “penny stock” rules, you may have difficulty in selling
our common stock.
Because
our stock price is less than $5.00 per share, our stock may be subject to the
SEC’s penny stock rules, which impose additional sales practice requirements and
restrictions on broker-dealers that sell our stock to persons other than
established customers and institutional accredited investors. The application of
these rules may affect the ability of broker-dealers to sell our common stock
and may affect your ability to sell any common stock you may own.
According
to the SEC, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include:
|
|
·
|
Control
of the market for the security by one or a few broker-dealers that are
often related to the promoter or
issuer;
|
|
|
·
|
Manipulation
of prices through prearranged matching of purchases and sales and false
and misleading press releases;
|
|
|
·
|
“Boiler
room” practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
|
|
|
·
|
Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
|
|
|
·
|
The
wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with the
inevitable collapse of those prices with consequent investor
losses.
|
As
an issuer of “penny stock” the protection provided by the federal securities
laws relating to forward looking statements does not apply to us.
Although
the federal securities law provide a safe harbor for forward-looking statements
made by a public company that files reports under the federal securities laws,
this safe harbor is not available to issuers of penny stocks. As a result, if we
are a penny stock we will not have the benefit of this safe harbor protection in
the event of any based upon an claim that the material provided by us contained
a material misstatement of fact or was misleading in any material respect
because of our failure to include any statements necessary to make the
statements not misleading.
14
Our
stock price may be affected by our failure to meet projections and estimates of
earnings developed either by us or by independent securities
analysts.
Although
we do not make projections relating to our future operating results, our
operating results may fall below the expectations of securities analysts and
investors. In this event, the market price of our common stock would likely be
materially adversely affected.
The
volatility of and limited trading market in our common stock may make it
difficult for you to sell our common stock for a positive return on your
investment.
The
public market for our common stock has historically been very volatile. Over the
recent years, the market price for our common stock has ranged from $0.26 to
$6.40. Any future market price for our shares is likely to continue to be very
volatile. Further, our common stock is not actively traded, which may amplify
the volatility of our stock. These factors may make it more difficult for you to
sell shares of common stock.
The
registration and potential sale, either pursuant to a prospectus or pursuant to
Rule 144, by certain of our selling stockholders of a significant number of
shares could encourage short sales by third parties.
There may
be significant downward pressure on our stock price caused by the sale or
potential sale of a significant number of shares by certain of our selling
stockholders pursuant to a current registration statement and prospectus or
under Rule 144, which could allow short sellers of our stock an opportunity to
take advantage of any decrease in the value of our stock. The presence of short
sellers in our common stock may further depress the price of our common
stock.
If the
selling stockholders sell a significant number of shares of common stock, the
market price of our common stock may decline. Furthermore, the sale or potential
sale of the offered shares pursuant to a prospectus and the depressive effect of
such sales or potential sales could make it difficult for us to raise funds from
other sources.
USE
OF PROCEEDS
DESCRIPTION
OF CAPITAL STOCK
General
Our
authorized share capital consists of 150,000,000 shares of common
stock, par value $0.001 per share, and 20,000,000 shares of “blank
check” preferred stock, par value $0.001 per share.
15
As of
August 5, 2009, there were 23,083,796 common shares outstanding and
4,847,645 preferred
shares issued and outstanding. All outstanding shares of common stock are fully
paid and non-assessable.
The
following description of our common stock and preferred stock, together with any
additional information we include in any applicable prospectus supplement,
summarizes the material terms and provisions of our common stock and the
preferred stock that we may offer under this prospectus. While the terms we have
summarized below will apply generally to any future common stock or preferred
stock that we may offer, we will describe the particular terms of any class or
series of these securities in more detail in the applicable prospectus
supplement. For the complete terms of our common stock and preferred stock,
please refer to our Articles of Incorporation and our bylaws that are
incorporated by reference into the registration statement of which this
prospectus is a part or may be incorporated by reference in this prospectus or
any applicable prospectus supplement.
The terms
of these securities may also be affected by Chapter 55 of the North Carolina
Business Corporation Act. The summary below and that contained in any applicable
prospectus supplement are qualified in their entirety by reference to our
Articles of Incorporation and bylaws.
Common
Stock
Holders
of common stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of common stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of common stock are entitled to receive proportionately any
dividends as may be declared by our board of directors, subject to any
preferential dividend rights of outstanding preferred stock. Pursuant to the
certificate of designation relating to the series A preferred stock, we are
prohibited from paying dividends on our common stock while the preferred stock
is outstanding. Upon our liquidation, dissolution or winding up, the holders of
common stock are entitled to receive proportionately our net assets available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The rights,
preferences and privileges of holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock that we may designate and issue in the future.
Preferred
Stock
Our
articles of incorporation give our board of directors the power to issue shares
of preferred stock in one or more series without stockholder approval. Our board
of directors has the discretion to determine the rights, preferences, privileges
and restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, of each series of preferred
stock. The purpose of authorizing our board of directors to issue preferred
stock and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or could discourage a third party from acquiring,
a majority of our outstanding voting stock. Except for the series A preferred
stock, we have no present plans to issue any shares of preferred stock. Our
articles of incorporation include a provision which states that any rights,
options and warrants may provide that any or all of such terms and conditions
may not be waived or amended or may be waived or amended only with the consent
of the holders of a designated percentage of a designated class or classes of
our capital stock (or a designated group or groups of holders within such class
or classes, including but not limited to disinterested holders), and the
applicable terms and conditions of any such rights, options or warrants so
conditioned may not be waived or amended or may not be waived or amended absent
such consent. This relates to the terms of the warrants that provide that the
4.9% limitation on the number of shares of common stock that a warrant holder
may beneficially own may not be amended.
16
Series
A Preferred Stock
The
certificate of designation for the series A preferred stock provides
that:
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|
·
|
Each
share of series A preferred stock is initially convertible into one third
of a share of common stock, subject to
adjustment.
|
|
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·
|
If
we issue common stock at a price, or options, warrants or other
convertible securities with a conversion or exercise price less than the
conversion price (presently $1.11 per share), with certain specified
exceptions, the number of shares issuable upon conversion of one share of
series A preferred stock is adjusted to reflect a conversion price equal
to the lower price.
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|
|
·
|
No
dividends are payable with respect to the series A preferred stock, and
while the series A preferred stock is outstanding, we may not pay
dividends on or redeem shares of common
stock.
|
|
|
·
|
Upon
any voluntary or involuntary liquidation, dissolution or winding-up, the
holders of the series A preferred stock are entitled to a preference of
$.37 per share before any distributions or payments may be made with
respect to the common stock or any other class or series of capital stock
which is junior to the series A preferred stock upon voluntary or
involuntary liquidation, dissolution or
winding-up.
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|
|
·
|
The
holders of the series A preferred stock have no voting rights. However, so
long as any shares of series A preferred stock are outstanding, we shall
not, without the affirmative approval of the holders of 75% of the
outstanding shares of series A preferred stock then outstanding, (a) alter
or change adversely the powers, preferences or rights given to the series
A preferred stock or alter or amend the certificate of designation, (b)
authorize or create any class of stock ranking as to dividends or
distribution of assets upon liquidation senior to or otherwise pari passu
with the series A preferred stock, or any of preferred stock possessing
greater voting rights or the right to convert at a more favorable price
than the series A preferred stock, (c) amend our articles of incorporation
or other charter documents in breach of any of the provisions thereof, (d)
increase the authorized number of shares of series A preferred stock, or
(e) enter into any agreement with respect to the
foregoing.
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|
|
·
|
The
holders of the series A preferred stock may not convert the series A
preferred stock to the extent that such conversion would result in the
holders owning more than 4.9% of our outstanding common stock. This
limitation may not be amended or waived; provided, that the limitation
does not supply with respect to a change of control. The shares of series
A preferred stock are automatically converted upon a change of control, as
defined in the certificate of
designation.
|
Warrants
and Options
The
following table summarizes information about stock warrants outstanding and
exercisable as of June 30, 2009.
|
Exercise
Price
|
Outstanding
June 30,
2009
|
Weighted
Average
Remaining
Life in
Years
|
Number
exercisable
|
|||||||||||
| $ | 1.29 | 50,000 | 0.40 | 50,000 | ||||||||||
| $ | 1.50 | 413,156 | 2.66 | 413,156 | ||||||||||
| $ | 2.07 | 2,055,516 | 2.85 | 2,055,516 | ||||||||||
| $ | 2.25 | 83,333 | 0.84 | 83,333 | ||||||||||
| $ | 2.40 | 681,035 | 2.85 | 681,035 | ||||||||||
| $ | 3.00 | 264,369 | 2.85 | 264,369 | ||||||||||
| 3,547,409 | 2.74 | 3,547,409 | ||||||||||||
17
In connection with the May
2007 private placement, we issued five-year common stock purchase warrants to
purchase 735,632 shares of common stock at $1.50 per share, 2,833,333 shares of
common stock at $2.07 per share, 681,035 shares of common stock at $2.40 per
share and 264,369 shares of common stock at $3.00 per share.
Also in connection with
the May 2007 private placement, we issued Brean Murray a three-year warrant to
purchase 83,333 shares of common stock at $2.25 per share.
On
September 29, 2006, we raised gross proceeds of $1,530,000 from the issuance and
sale of $1,530,000 aggregate principal amount of secured promissory notes and
warrants to purchase 510,003 shares of our common stock for an as adjusted
exercise price per share of $1.50.
On
June 30, 2009, there were outstanding warrants to purchase 50,000 shares of our
common stock for an exercise price per share of $1.29, 413,156 shares at $1.50,
2,055,516 shares at $2.07, 83,333 shares at $2.25, 681,035 shares at $2.40,
264,369 shares at $3.00.
Transfer Agent and Registrant for our
Common Stock
The
transfer agent and registrar for our common stock is StockTrans, Inc. and its
address is 44 W. Lancaster Avenue, Ardmore, PA 19003 and its telephone number is
(610) 649 7300.
Listing
on NYSE Amex
Our
common stock is listed on NYSE Amex under the symbol “CEU.”
NORTH
CAROLINA ANTI-TAKEOVER LAW
We are a
North Carolina corporation, and may become subject to the anti-takeover
provisions of the North Carolina Control Share Act (Section 55-9A-01). In
general, North Carolina Law prevents take-over offers to acquire equity
securities of a North Carolina corporation. The North Carolina Shareholder
Protection Act, for example, requires an affirmative vote of the holders of
ninety-five percent (95%) of the voting shares of a North Carolina corporation
to adopt or authorize a business combination with any other entity if the other
entity is the beneficial owner, directly or indirectly, of more than twenty
percent (20%) of the voting shares of the corporation, subject to certain
exceptions. The existence of this and other provisions would be expected to have
an anti-takeover effect, including attempts that might result in a premium over
the market price for the shares of common stock held by
stockholders.
The
common stock to be sold by the selling stockholders is common stock that will be
issued to our stockholders upon conversion or exercise of certain warrants.
Accordingly, there will be no dilution to our existing
shareholders.
SELLING
STOCKHOLDERS
The
following table sets forth the names of the selling stockholders, the number of
shares of common stock owned beneficially by the selling stockholders as of
August 5, 2009, and the number of shares of our common stock that may be offered
by the selling stockholders pursuant to this prospectus. The table and the other
information contained under the captions “Selling Stockholders” and “Plan of
Distribution” has been prepared based upon information furnished to us by or on
behalf of the selling stockholders. Upon completion of the offering, the
number of shares of common stock beneficially owned by the
selling stockholders will include shares issuable upon conversion of series
A preferred stock or exercise of warrants that have not been sold pursuant to
this offering. The following table sets forth, as to each of the selling
stockholders, the number of shares beneficially owned, the number of share being
sold, the number of shares beneficially owned upon completion of the offering
and the percentage beneficial ownership upon completion of the
offering.
18
|
After Sale of Shares in Offering
|
||||||||||||||||
|
Name
|
Shares Beneficially
Owned 4
|
Shares Being Sold
|
Shares Beneficially
Owned 4
|
Percent of
Outstanding 4,5
|
||||||||||||
|
Barron Partners, LP 1
|
5,221,650 | 2,808,333 | 2,478,317 | 4.9 | % | |||||||||||
|
Eos Holdings 2
|
202,387 | 27,538 | 174,849 | * | ||||||||||||
|
Hua-Mei
21st
Century Partners, LP 3
|
228,149 | 136,014 | 92,135 | * | ||||||||||||
|
R.
Ralph Parks
|
30,743 | 25,001 | 5,742 | * | ||||||||||||
|
The
Angeloff Family, LP
|
25,001 | 25,001 | 0 | 0 | ||||||||||||
|
Sean
Robert Wallace
|
30,743 | 25,001 | 5,742 | * | ||||||||||||
|
SBI
Advisors, LLC
|
250,000 | 250,000 | 0 | 0 | ||||||||||||
|
Cambria
Investment Fund LP
|
50,000 | 50,000 | 0 | 0 | ||||||||||||
|
The
Angeloff Family, LLC
|
7,500 | 7,500 | 0 | 0 | ||||||||||||
* Less
than 1%.
|
1
|
Andrew
B. Worden, president of the general partner of Barron Partners, has sole
voting and dispositive power over the shares beneficially owned by Barron
Partners. The shares being offered by Barron Partners represent 1,912,500
shares issuable upon exercise of $2.07 warrants, 656,250 shares issuable
upon exercise of $2.40 warrants, and 239,583 shares issuable upon exercise
of $3.00 warrants. As a result of the 4.9% limitation on the number of
shares issuable upon conversion of the series A preferred stock and the
exercise of the warrants, the number of shares of common stock shown as
beneficially owned by Barron Partners after the offering represents the
number that, upon such exercise or conversion, would result in Barron
Partners owning 4.9% of the then outstanding common stock. The total
number of shares which would be owned beneficially by Barron Partners
prior to the sale of shares in this offering if the 4.9% limitation were
not applicable is 5,221,650 shares, including shares of common stock
issuable upon conversion of the series A preferred stock and the warrants,
which would represent beneficial ownership of 19.13% of our common
stock.
|
|
2
|
Jon
Carnes has sole voting and dispositive power over the shares beneficially
owned by Eos Holdings. The shares being offered by Eos Holdings represent
13,769 shares issuable upon exercise of $2.40 warrants and 13,769 shares
issuable upon exercise of $3.00
warrants.
|
|
3
|
Peter
Sirus and Leigh Curry have sole voting and dispositive power over the
shares beneficially owned by Hua-Mei 21st
Century Partners, LP. The shares being offered by Hua-Mei 21st
Century Partners, LP represent 30,651 shares issuable upon exercise of
$1.50 warrants, 35,499 shares issuable upon exercise of $2.07 warrants,
11,015 shares issuable upon exercise of $2.40 warrants, and 11,015 shares
issuable upon exercise of $3.00
warrants.
|
|
4
|
Under
applicable SEC rules, a person is deemed to beneficially own securities
which the person as the right to acquire within 60 days through the
exercise of any option or warrant or through the conversion of a
convertible security. Also under applicable SEC rules, a person is deemed
to be the “beneficial owner” of a security with regard to which the person
directly or indirectly, has or shares (a) voting power, which includes the
power to vote or direct the voting of the security, or (b) investment
power, which includes the power to dispose, or direct the disposition, of
the security, in each case, irrespective of the person’s economic interest
in the security. As of August 5, 2009 there were 23,083,796
shares of our common stock issued and outstanding. In determining the
percent of common stock beneficially owned by a selling stockholder on
August 5, 2009, (a) the numerator is the number of shares of common stock
beneficially owned by such selling stockholder (including shares that he
has the right to acquire within 60 days of August 5, 2009), and (b) the
denominator is the sum of (i) the 23,083,796 shares outstanding on August
5, 2009 and (ii) the number of shares of common stock which such selling
stockholders has the right to acquire within 60 days of August 5,
2009.
|
|
5
|
The
total number of shares which would be owned beneficially by Barron
Partners after the offering if the 4.9% limitation were not applicable is
2,478,317, including shares of common stock issuable upon conversion
of the series A preferred stock and the warrants, which would represent
beneficial ownership of 9.08% of our common
stock.
|
19
Since
neither EOS Holdings nor Hua-Mei 21st Century
Partners, LP owns a significant percentage of the stock, the 4.9% limitation
only applies to Barron Partners. The 4.9% limitation relates to the percentage
beneficial ownership that Barron Partners may own at any one time. The 4.9%
limitation does not preclude serial exercises and sales. If Barron Partners
exercises warrants to the extent of the 4.9% limitation, Barron Partners may
sell those shares and exercise the warrants or convert shares of series A
preferred stock to bring its beneficial ownership to 4.9%.
Pursuant
to the securities purchase agreement, 2,833,333 shares of series A preferred
stock, which are convertible into 944,445 shares of common stock, and 944,445
shares of common stock which are owned by our chief executive officer, Xiqun Yu,
are held in escrow. If our pre-tax income for 2007 was less than $0.19941 per
share, on a fully-diluted basis, all or a portion of the shares of series A
preferred stock were to be delivered to the investors and all or a portion of
the shares placed in escrow with Mr. Yu will be returned to us and cancelled.
None of the escrow shares are treated as being beneficially owned by any of the
selling stockholders either prior to or upon completion of the offering. The
following table sets forth the maximum number of the shares of series A
preferred stock which may be transferred to each of the selling
stockholders.
|
Name
|
Maximum Number of Shares
|
|||
|
Barron
Partners, LP
|
2,645,833
|
|||
|
Eos
Holdings
|
104,167
|
|||
|
Hua-Mei
21st
Century Partners, LP
|
83,333
|
|||
|
Total
|
2,833,333
|
|||
Since we
have achieved the pre-tax income per share milestone set forth in the securities
purchase agreement, Mr. Yu’s shares were promptly released from escrow and
returned to him.
Except as
expressly provided in the certificate of designation relating to the series A
preferred stock or the warrants, no person may convert shares of series A
preferred stock or exercise warrants to the extent that such conversion or
exercise would result in beneficial ownership by that person and its affiliates
of more than 4.9% of the then outstanding number of shares of common stock on
such date. Beneficial ownership is determined in accordance with Section 13(d)
of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3
thereunder. This provision, which cannot be modified, limits the ability of the
holders of the series A preferred stock to convert their shares of series A
preferred stock and exercise their warrants. This limitation applies separately
to each of these selling stockholders and applies to shares owned by the selling
stockholders at any one time. Upon disposition of the shares issuable upon
conversion of the series A preferred stock and exercise of the warrants, the
selling stockholders would be able to exercise or convert additional securities.
As the number of outstanding shares of common stock increases, whether upon
conversion of the series A preferred stock or exercise or warrants or for any
other reason, the number of shares which could be issued under this limitation
will increase. In the event that any holder of notes or the warrants issued in
the May 2007 private placement transfers its or his notes or warrants, the
transferee, if it is not an affiliate of the transferor, would be subject to a
separate 4.9% limitation.
20
Although
this prospectus does not cover shares of common stock issuable upon conversion
of the series A preferred stock, the selling stockholders, who hold shares of
series A preferred stock which are convertible into an aggregate of 3,063,063
shares of common stock, will be able to sell such shares of common stock
pursuant to Rule 144 based on an amendment to the rule which permits
stockholders who are not affiliates of an issuer to sell such stock without
restriction after the shares have been held for six months. Since the holding
period for these shares of common stock commenced in May 2007, the selling
stockholders, as holders of the series A preferred stock, will be able to
convert the series A preferred stock, subject to the 4.9% limitation, and sell
the underlying common stock as soon as the amended Rule 144 becomes effective.
The amendment to Rule 144 was announced in November 2007 and became effective 60
days after the amended rule was published in the Federal Register.
None of
the selling stockholders is a member, affiliate or associate of any
broker-dealer. None of the selling stockholders has, or within the past three
years has had, any position, office or material relationship with us or any of
our predecessors or affiliates.
May
2007 Private Placement
On May 8,
and May 31, 2007, we sold, pursuant to a securities purchase agreement, as
amended, 3% convertible subordinated notes in the aggregate principal amount of
$3,400,000 to three investors. In October 2007, the notes were automatically
converted into an aggregate of (i) 9,189,189 shares of our series A preferred
stock, which are convertible into an aggregate of 3,063,063 shares of our common
stock, subject to adjustment, (ii) five-year common stock purchase warrants to
purchase 735,632 shares of common stock at $1.50 per share, 2,833,333 shares of
common stock at $2.07 per share, 681,034 shares of common stock at $2.40 per
share and 264,367 shares of common stock at $3.00 per share.
The
following table sets forth the investment made by each investor, which is the
same as the principal amount of the note issued to each investor, the number of
shares of preferred stock issued to the investor upon conversion of the notes,
the number of shares of common stock are issuable upon conversion of the series
A preferred stock, and the number of shares of common stock issuable upon
exercise of each set of warrants:
|
Name
|
Investment
|
Preferred
Stock
|
Common
Stock
|
$1.50
Warrants
|
$2.07
Warrants
|
$2.40
Warrants
|
~$3.00
Warrants
|
|||||||||||||||||||||
|
Barron
Partners, LP
|
$ | 3,175,000 | 8,581,081 | 2,860,360 | 666,667 | 2,645,833 | 656,250 | 239,583 | ||||||||||||||||||||
|
Eos
Holdings
|
125,000 | 337,838 | 112,613 | 38,314 | 104,167 | 13,769 | 13,769 | |||||||||||||||||||||
|
Hua-Mei
21st
Century Partners, LP
|
100,000 | 270,270 | 90,090 | 30,651 | 83,333 | 11,015 | 11,015 | |||||||||||||||||||||
|
Total
|
$ | 3,400,000 | 9,189,189 | 3,063,063 | 735,632 | 2,833,333 | 681,034 | 264,367 | ||||||||||||||||||||
The notes
provided for interest at 3% per annum. However, upon the conversion of the
notes, we issued the stock and warrants based on the principal amount of the
notes, and we did not make any adjustment for the interest.
The
warrants have a term of five years, and expire in May 2012. The warrants provide
a cashless exercise feature; however, the holders of the warrants may not make a
cashless exercise during the twelve months following the date of the initial
issuance and thereafter only if the underlying shares are covered by an
effective registration statement.
21
The
warrants provide that the exercise price of the warrants may be reduced by up to
50% if our pre-tax income per share of common stock, on a fully-diluted basis,
is less than $0.19941 for the year ended December 31, 2007. Pre tax-income is
defined as income before income taxes determined in accordance with generally
United States generally accepted accounting principles (“GAAP”) plus (a) any
charges relating to the transaction contemplated by the purchase agreement and
the registration rights agreement, minus (b) the amount, if any, by which all
non-recurring losses or expenses exceed all non-recurring items or income or
gain. Pre-tax income shall not be adjusted if all non-recurring items of income
or gain exceed all non-recurring losses or expenses. Items shall be deemed to be
non-recurring only if they qualify as non-recurring pursuant to GAAP. For
determining pre-tax income per share, all shares which are outstanding or which
may be issuable upon exercise or conversion of options, warrants and other
convertible securities are deemed to be outstanding, regardless of whether the
shares would be counted for purposes of computing diluted earnings per shares
under GAAP. An adjustment in the warrant exercise price does not affect the
number of shares issuable upon exercise of the warrants. The following table
sets forth the exercise price of the warrants if our pre-tax income is 20% below
the threshold (a “20% shortfall”) and 50% or more below the threshold (a “50%
shortfall”):
|
|
$1.50
Warrant
|
$2.07
Warrant
|
$2.40
Warrant
|
$3.00
Warrant
|
||||||||||||
|
|
Exercise
Price
|
Exercise
Price
|
Exercise
Price
|
Exercise
Price
|
||||||||||||
|
Unadjusted
|
$ | 1.50 | $ | 2.07 | $ | 2.40 | $ | 3.00 | ||||||||
|
20%
shortfall
|
$ | 1.20 | $ | 1.656 | $ | 1.92 | $ | 2.40 | ||||||||
|
50%
shortfall
|
$ | 0.75 | $ | 1.035 | $ | 1.20 | $ | 1.50 | ||||||||
No
warrant exercise price needed to be adjusted since the pre-tax income for the
year ended December 31, 2007 after adjustment of the warrant transaction charges
is higher than $0.19941 per share of common stock.
The
warrants also give us the right to call the warrants for $.01 per share of
common stock issuable upon exercise of the warrants if the trading price per
share of the common stock is not less than the greater of (a) $4.14 or 200% of
the exercise price for the $2.07 warrants, (b) $4.14 or 276% of the exercise
price for the $1.50 warrants; (c) $4.14 or 172.5% of the exercise price for the
$2.40 warrants, and (d) $5.25 or 175% of the exercise price for the $3.00
warrants on each trading day in the 20 trading days ending on the date prior to
the date on which the warrants are called for redemption provided that the
trading volume on each day in the computation period is at least 1,000
shares.
In order
for us to exercise the right of redemption, a registration statement covering
the sale of the underlying shares must be current and effective. In the event
that, at any time subsequent to the date on which the warrants are called for
redemption, the shares of common stock underlying the warrants are not subject
to a current and effective registration statement, our right to call the
warrants for redemption shall terminate with respect to all warrants that have
not then been exercised or converted prior to that date.
The
securities purchase agreement, the certificate of designation for the series A
preferred stock and the warrants provide that those securities may not be
exercised or converted if such conversion or exercise would result in the holder
and its affiliates having beneficial ownership of more than 4.9% of our
outstanding common stock. Beneficial ownership is determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and Rule 13d-3
thereunder. This limitation may not be waived.
Pursuant
to the purchase agreement, in addition to the foregoing:
|
|
·
|
We
amended our articles of incorporation to provide for a class of preferred
stock and we created the series A preferred
stock.
|
|
|
·
|
We
placed 944,445 shares of common stock into escrow. Mr. Xiqun Yu, our chief
executive officer and principal stockholder, placed in escrow 944,445
shares of common stock personally owned by Mr. Yu. We are to deliver to
the escrow agent a certificate for 2,833,333 shares of series A preferred
stock, upon receipt of which the escrow agent is to return to us for
cancellation the 944,445 shares of common stock that we placed in
escrow.
|
22
|
|
·
|
If
our pre-tax income for 2007 is less than $0.19941 per share, on a
fully-diluted basis, the percentage shortfall shall be determined by
dividing the amount of the shortfall by the target number. If the
percentage shortfall is equal to or greater than 33 1/3%, then the 944,445
shares of common stock (or the 2,833,333 shares of series A preferred
stock after the exchange of the common stock for the series A preferred
stock as described above) shall be delivered to the investors and the
944,445 shares of common stock placed in escrow by Mr. Yu shall be
delivered to us for cancellation.
|
|
|
·
|
If
the percentage shortfall is less than 33 1/3%, the escrow agent
shall:
|
|
|
·
|
with
respect to the shares placed in escrow by us, (i) deliver to the investors
such number of shares of common stock as is determined by multiplying the
percentage shortfall by 944,445 (or 2,833,333 shares of series A preferred
stock after the exchange of the common stock for the preferred stock as
described above), and (ii) deliver to the balance of such shares to us for
cancellation, and
|
|
|
·
|
with
respect to the shares placed in escrow by Mr. Yu, (i) deliver to us such
number of shares of common stock as is determined by multiplying the
percentage shortfall by 944,445 shares, and we shall cancel such shares,
and (ii) deliver to Mr. Yu the balance of the 944,445 shares that were not
transferred to us.
|
|
|
·
|
We
agreed that, within 90 days after the closing, which was August 6, 2007,
we would have appointed such number of independent directors that would
result in a majority of our directors being independent directors and we
would have an audit committee composed solely of at least three
independent directors and a compensation committee would have a majority
of independent directors. Thereafter, our failure to meet these
requirements for a period of 60 days for an excused reason, as defined in
the purchase agreement, or 75 days for a reason which is not an excused
reason, would result in the imposition of liquidated damages which are
payable in cash or additional shares of series A preferred stock. The
liquidated damages are computed in an amount equal to 12% per annum of the
principal amount of notes outstanding, up to a maximum of $408,000, which
is payable in cash or stock, at the election of the investors. Our failure
to comply with these requirements resulted in our payment of liquidated
damages through the payment of $77,128 or the issuance of 208,456 shares
of series A preferred stock as of October 15, 2007. The shares of series A
preferred stock are convertible into 69,484 shares of common stock. The
investors elected to take payment in stock, and we issued the shares in
October 2007. The number of shares of series A preferred stock was based
on the liquidation value of one share of series A preferred stock, which
is $.37 per share. The investors have waived their right to receive any
additional liquidated damages through December 31, 2007 with respect to
our failure to comply with these provisions. Pursuant to the securities
purchase agreement, as amended, the shares of series A preferred stock are
valued at the liquidation value, which is $0.37 per share of series A
preferred stock. Since the market price for our common stock on October
15, 2007 was $4.00 per share, the market value of the shares issued to the
investors was approximately $277,944. If we are required to issue any
additional shares of series A preferred stock pursuant to the securities
purchase agreement, we are to issue the shares at the $0.37 per share
liquidation value.
|
|
|
·
|
We
and the investors entered into a registration rights agreement pursuant to
which we were required to have this registration statement filed with the
SEC by July 7, 2007 and declared effective by the SEC not later than
November 5, 2007. We filed the registration statement on September 13,
2007. In November 2007, we entered into an agreement with the investors
pursuant to which the registration rights agreement was amended to
eliminate the liquidated damages for failure to file this registration
statement when required and waived any additional liquidated damages that
would be due as a result of our failure to have the registration statement
declared effective by December 31,
2007.
|
23
Although
further liquidated damages for failure to comply with these provisions have been
waived through December 31, 2007, if we are not in compliance with these
provisions subsequent to December 31, 2007, we may be obligated to pay
additional liquidated damages. Pursuant to the securities purchase agreement, as
amended, the shares of series A preferred stock are valued at the liquidation
value, which is $0.37 per share of series A preferred stock. Since the market
price for our common stock on October 15, 2007 was $4.00 per share, the market
value of the shares issued to the investors was approximately $277,944. If we
are required to issue any additional shares of series A preferred stock pursuant
to the securities purchase agreement, we are to issue the shares at the $0.37
per share liquidation value. If we are required to issue additional shares
pursuant to the liquidated damages provisions of the securities purchase
agreement and the market price of our common stock at the time the determination
is made is greater than $1.11, which is the common stock equivalent of the
liquidation value of the series A preferred stock, the investors will receive
more shares of series A preferred stock than they would receive if the number of
shares were based on the market value at the time of issuance. Since January 1,
2008, we were not in compliance but have since been, with effect from June 17,
2009 with the appointment of Yizhao Zhang as our independent director and audit
chair. As of December 31, 2008, unless otherwise waived by the investors, we are
obligated to pay liquidated damages to the investors in an amount equal to
approximately $130,056 or, issue approximately 351,503 shares of series A
preferred stock (which are convertible into 117,168 shares of our common stock)
to the investors, at the option of the investors. Such liquidated damages have
been accrued as of December 31, 2008 and is included in accrued
expenses. Assuming the investors elect to take the liquidated damages
in stock and do not waive their right to receive such damages, and based on the
market price for one share of our common stock on December 31, 2008, which was
$1.20 per share, the market value of the shares which may be issued to the
investors is approximately $140,602. Thereafter, if we are required to issue any
additional shares of series A preferred stock pursuant to the securities
purchase agreement, we are also to issue such additional shares at the $0.37 per
share liquidation value. If we are required to issue additional shares pursuant
to the liquidated damages provisions of the securities purchase agreement and
the market price of our common stock at the time the determination is made is
greater than $1.11, which is the common stock equivalent of the liquidation
value of the series A preferred stock, the investors will receive more shares of
series A preferred stock than they would receive if the number of shares were
based on the market value at the time of issuance.
|
|
·
|
The
investors have a right of first refusal on future
financings.
|
|
|
·
|
With
certain limited exceptions, if we issue stock at a purchase price or
warrants or convertible securities at an exercise or conversion price
which is less than the conversion price of the series A preferred stock or
the exercise price of the warrants, (a) the conversion price of the note
and the series A preferred stock is reduced to the lower price and (b)
exercise price will be reduced pursuant to a weighted average
formula.
|
|
|
·
|
We
are restricted from issuing convertible debt or preferred stock or from
having debt in an amount greater than twice our earnings before interest,
taxes, depreciation and
amortization.
|
|
|
·
|
Our
officers and directors agreed, with certain limited exceptions, not to
publicly sell shares of common stock for 27 months or such earlier date as
all of the convertible securities and warrants have been converted or
exercised and the underlying shares of common stock have been
sold.
|
|
|
·
|
We
paid Barron Partners $50,000 for its due diligence
expenses.
|
In
connection with the placement, we paid Brean Murray Carret & Co. a fee of
$60,000 and issued to Brean Murray a warrant to purchase 83,333 shares of common
stock at $2.25 per share, and paid cash fees of $48,000 to Huang Jun and $24,000
to Liu Zongbo.
The
proceeds from the sale of the notes, after brokerage fees and closing costs was
used to pay the principal and interest on bridge notes issued in September 2006
in the amount of $1,364,578 and for working capital. The warrants to purchase
shares of common stock which were issued in connection with the bridge notes (of
which there are currently 382,503 outstanding), were modified so that the
warrants will terminate on September 29, 2010 and have an exercise price of
$1.50 per share. The warrants give us the right to call the warrants for $.01
per share after September 29, 2008 if the average closing sales price of our
common stock exceeds $4.14 per share during any period of 30 consecutive trading
days. It was also agreed that there will be no piggy-back rights regarding the
warrants in connection with the registration statement to be filed by us in
connection with the notes issued pursuant to the purchase agreement and that the
warrant holders will not exercise any demand registration rights until September
29, 2008; provided, however, the holders of the warrants shall not exercise any
demand registration rights if (a) all of the underlying shares issuable upon
exercise of such warrants may be sold pursuant to Rule 144(k) or any subsequent
successor rule or (b) such warrants have not been called for
redemption.
24
Table 1
sets forth the dollar value of any payment made by us, including the value of
any payments made in stock, in connection with May 2007 private placement, to
any selling stockholder or any affiliate of any selling stockholder or any
person which we know to have a contractual relationship with any selling
stockholder.
Table
1
|
Payee
|
Payment
|
Value of
Payment
|
Purpose of Payment
|
||||
|
Barron
Partners
|
$50,000
|
$
|
50,000
|
Due
diligence payment made at closing
|
|||
|
Brean
Murray Carret & Co.
|
$60,000
plus warrants to purchase 83,333 shares of common stock at $2.25 per
share
|
$
|
64,495
|
Investment
banking fee
|
|||
|
Huang
Jun
|
$48,000
|
$
|
48,000
|
Finders
fee
|
|||
|
Liu
Zongbo
|
$24,000
|
$
|
24,000
|
Finders
fee
|
|||
|
Barron
Partners, Eos Holdings and Hua-Mei 21st
Century Partners
|
208,456
shares of series A preferred stock
|
$
|
77,128
|
(1)
|
Liquidated
damages for failing to have a majority of independent directors as of
October 15, 2007
|
||
|
Barron
Partners, Eos Holdings and Hua-Mei 21st
Century Partners
|
A
maximum of 2,833,333 shares of series A preferred stock
(potential)
or
944,445 shares of common stock if the series A preferred stock is not
exchanged for the common stock
|
$
|
5,052,777
|
(2)
|
Maximum
value of the 944,445 shares of common stock (or 2,833,333 shares of series
A preferred stock upon the exchange) held in escrow if such shares are
delivered to the investors as a result a shortfall of 33 1/3% or more from
our targeted pre-tax income.
|
||
______________
|
(1)
|
The
value of the series A preferred stock is based on the liquidation value of
one share of series A preferred stock, which is $.37 per share. The value
of such shares, based on the closing price of one share of common stock on
August 5, 2009, would have been $371,747.
|
|
|
|
(2)
|
The
series A preferred stock is based on a price of $1.78 per share since each
shares of series A preferred stock is convertible into one-third share of
common stock and the price of the common stock on August 5,
2009 was $5.35.
|
We
received total proceeds of $3,400,000 from the sale of the notes. After
deducting the due diligence payment of $50,000 to Barron Partners and the
investment banking and finders fees in the amount of $132,000, the net cash
proceeds were $3,218,000.
The
closing price of our common stock on August 5, 2009 was $5.35 per share. If all
of the 3,354,390 shares of common stock that the selling stockholders propose to
sell pursuant to this prospectus were sold at that price, the selling
stockholders would realize gross proceeds of approximately $17.94 million. Table
2 shows the potential profit from the sale of those shares if the shares could
be sold at that price:
25
|
Table
2
|
||||
|
Gross
proceeds
|
$ | 17,945,987 | ||
|
Exercise
price of the warrants
|
4,238,190 | |||
|
Potential
profit
|
$ | 13,707,797 | ||
In Table
2, no portion of the purchase price of the notes was allocated to the shares of
common stock issuable upon exercise of the warrants.
Table 3
sets forth information relating to the total profit which the selling
stockholders may realize from their sale of the shares of common stock issuable
upon conversion of the series A preferred stock and exercise of the warrants,
based on the market price of our common stock on August 5, 2009 was $5.35 per
share.
Table
3
|
Shares
of common stock issuable upon exercise or conversion of
|
||||||||||||||||||||||||||||||||
|
Series
A Preferred
|
1.29
warrants
|
$1.50
warrants
|
$2.07
warrants
|
$2.25
warants
|
$2.40
warrants
|
$3.00
warrants
|
Total
|
|||||||||||||||||||||||||
|
Issued
at closing
|
2,417,381 | 50,000 | 413,156 | 2,055,516 | 83,333 | 681,035 | 264,369 | 5,964,790 | ||||||||||||||||||||||||
|
Liquidated
damages
|
69,484 | - | - | - | - | - | - | 69,484 | ||||||||||||||||||||||||
|
Total
|
2,486,865 | 50,000 | 413,156 | 2,055,516 | 83,333 | 681,035 | 264,369 | 6,034,274 | ||||||||||||||||||||||||
|
Cost
|
$ | 3,400,000 | $ | 64,500 | $ | 619,734 | $ | 4,254,918 | $ | 187,499 | $ | 1,634,484 | $ | 793,107 | $ | 10,954,242 | ||||||||||||||||
|
Sales
price at $5.35
|
$ | 13,304,728 | $ | 267,500 | $ | 2,210,385 | $ | 10,997,011 | $ | 445,832 | $ | 3,643,537 | $ | 1,414,374 | $ | 32,283,366 | ||||||||||||||||
|
Discount
based on $5.35 price
|
$ | 10,258,173 | $ | 267,500 | $ | 1,510,896 | $ | 6,194,519 | $ | 445,832 | $ | 1,337,502 | $ | 915,059 | $ | 20,929,480 | ||||||||||||||||
|
Maximum
adjustment if earnings target is not met
|
$ | 4,476,666 | $ | - | $ | 551,724 | $ | 2,932,500 | $ | - | $ | 817,241 | $ | 396,551 | $ | 9,174,682 | ||||||||||||||||
|
Discount
resulting from the
|
||||||||||||||||||||||||||||||||
|
foregoing
adjustments
|
$ | 14,734,839 | $ | 267,500 | $ | 2,062,620 | $ | 9,127,019 | $ | 445,832 | $ | 2,154,743 | $ | 1,311,610 | $ | 30,104,162 | ||||||||||||||||
In Table
3:
|
|
·
|
The
purchase price of the notes is being allocated to the shares issuable upon
conversion of the series A preferred stock. The effective price per share
for the shares issuable upon conversion of the shares of series A
preferred stock is $1.11 per share. There is no cost associated with the
shares issued for liquidated
damages.
|
|
|
·
|
The
number of shares issued as liquidated damages reflect those shares that
were paid to the selling stockholders as of October 15, 2007, and is based
on the assumption that the registration statement would be declared
effective by December 31, 2007.
|
|
|
·
|
The
maximum adjustment if earnings target is not met reflects (a) the value of
the common stock issuable upon conversion of the maximum number of shares
of series A preferred stock which may be delivered to the selling
stockholders from escrow and (b) the increase in the discount resulting
from the maximum reduction in the exercise price of the
warrants.
|
|
|
·
|
The
discount referred to in the table represents the potential profit to the
selling stockholder based on the assumptions reflected in the
table.
|
26
Table 4
sets forth information concerning the gross proceeds paid or payable to us, the
net proceeds and the potential profit to the selling stockholders based on the
closing price of our common stock on August 5, 2009 was $5.35 per share, and the
ratio of the potential profit to the net proceeds to us.
Table
4
| 1 |
Gross
proceeds payable at closing
|
$
|
3,400,000
|
|||
| 2 |
Gross
proceeds from exercise of all warrants at current exercise
price
|
7,554,242
|
||||
| 3 |
Total
gross proceeds
|
10,954,242
|
||||
| 4 |
Cash
payments to selling stockholders, brokers’ commissions, value of equity
issued to brokers and potential
|
|
||||
|
issuance
of series A preferred stock ifearnings targets are not met, as shown in
Table 1
|
4,735,794
|
|||||
| 5 |
Net
proceeds to us (line 3 minus line 4)
|
6,218,448
|
||||
| 6 |
Potential
profit to selling stockholders based on issuance of the maximum number of
shares of series A
|
|
||||
|
preferred
stock and the maximum reduction in the exercise price of the warrants, as
shown in Table 3
|
30.104,162
|
|||||
| 7 |
Ratio
of potential profit to selling stockholders (line 6 to net proceeds to us
(line 5)
|
484
|
%
|
Table 5
sets forth information as to our outstanding shares and shares issued to the
selling stockholders.
|
Table
5
|
||||
|
Shares
outstanding prior to conversion of any shares of series A preferred stock
or warrants,
|
||||
|
exclusive
of shares held by officers, directors and affiliates
|
8,076,584 | |||
|
Shares
registered for resale by selling stockholders and their affiliates prior
to the registration
|
||||
|
statement
of which this prospectus is part
|
0 | |||
|
Shares
sold by selling stockholders and their affiliates pursuant to a
registration statement
|
1,482,800 | |||
|
Shares
issued to selling stockholders and their affiliates upon conversion of
series a preferred stock
|
||||
|
or
warrants and held by them
|
3,059,148 | |||
|
Shares
registered for selling stockholders for sale pursuant to this prospectus
which have not been
|
||||
|
sold
as of the date of this prospectus
|
3,354,390 | |||
The
number of shares included in this registration statement represents 32.58% of
the shares of common stock held by stockholders other than our officers,
directors and affiliates.
The
selling stockholders do not hold any option, warrants, notes or other
convertible securities other than the securities described in this prospectus.
Neither we nor our predecessor engaged in any securities transactions with any
of the selling stockholders, their affiliates or any person which whom any
selling stockholder has a contractual relationship regarding the sale by us of
our securities to the selling stockholders. We have been advised by the selling
stockholders that they do not have a short position in our common stock. Except
as described in this prospectus, we do not have any agreements or understandings
with any of the stockholders or any of their affiliates or any person known to
us to have a contractual relationship with any of the selling
stockholders.
27
PLAN
OF DISTRIBUTION
The
selling stockholders and any of their pledgees, donees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions or by gift. These sales may be made
at fixed or negotiated prices. The selling stockholders may use any one or more
of the following methods when selling or otherwise transferring
shares:
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
|
·
|
block
trades in which a broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
|
·
|
sales
to a broker-dealer as principal and the resale by the broker-dealer of the
shares for its account;
|
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
|
·
|
privately
negotiated transactions, including
gifts;
|
|
|
·
|
covering
short sales made after the date of this
prospectus.
|
|
|
·
|
pursuant
to an arrangement or agreement with a broker-dealer to sell a specified
number of such shares at a stipulated price per
share;
|
|
|
·
|
a
combination of any such methods of sale;
and
|
|
|
·
|
any
other method of sale permitted pursuant to applicable :
law.
|
The
selling stockholders may also sell shares under Rule 144 of the Securities Act
of 1933, as amended (the “Securities Act”), if available, rather than pursuant
to this prospectus. The selling stockholders shall have the sole and absolute
discretion not to accept any purchase offer or make any sale of shares if it
deems the purchase price to be unsatisfactory at any particular
time.
The
selling stockholders and their pledgees, donees, transferees or other successors
in interest, may also sell the shares directly to market makers acting as
principals and/or broker-dealers acting as agents for themselves or their
customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholder and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that the selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then existing market
price. We cannot assure that all or any of the shares offered in this prospectus
will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be an “underwriters”
as that term is defined under the Securities Act in connection with such sales.
In such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We are
required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholder,
but excluding brokerage commissions or underwriter discounts.
28
The
selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. The selling stockholders have
not entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into. If the selling
stockholders propose to sell shares to an underwriter, we will be required to
amend this prospectus to reflect the terms of the underwritten
offering.
The
selling stockholders may pledge shares to brokers under the margin provisions of
customer agreements. If the selling stockholders defaults on a margin loan, the
broker may, from time to time, offer and sell the pledged shares. The selling
stockholders and any other persons participating in the sale or distribution of
the shares will be subject to applicable provisions of the Securities Exchange
Act of 1934, as amended, and the rules and regulations under such Act,
including, without limitation, Regulation M. These provisions may restrict
certain activities of, and limit the timing of purchases and sales of any of the
shares by, the selling stockholder or any other such person. In the event the
selling stockholders is deemed an affiliated purchaser or distribution
participant within the meaning of Regulation M, then the selling stockholder
will not be permitted to engage in short sales of common stock. Furthermore,
under Regulation M, persons engaged in a distribution of securities are
prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In addition, if a short sale is deemed to be a stabilizing activity,
then the selling stockholder will not be permitted to engage in a short sale of
our common stock. All of these limitations may affect the marketability of the
shares.
If a
selling stockholder notifies us that it has a material arrangement with a
broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreement between the selling stockholder
and the broker-dealer.
LEGAL
MATTERS
The
validity of the securities being offered by this prospectus will be passed upon
for us by Sichenzia Ross Friedman Ference LLP, New York, New York. If the
validity of any securities is also passed upon by counsel any underwriters,
dealers or agents, that counsel will be named in the prospectus supplement
relating to that specific offering.
EXPERTS
The
consolidated financial statements of China Education Alliance, Inc. as
of December 31, 2008 and 2007 and for the fiscal years then ended
have been audited by Sherb & Co. LLP, independent auditors, as set forth in
their report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We are
subject to the reporting requirements of the Exchange Act and file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy these reports, proxy statements and other information
at the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549.
You can request copies of these documents by writing to the SEC and paying a fee
for the copying cost. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. The SEC also maintains an Internet
site that contains reports, proxy statements and other information about
issuers, like us, who file electronically with the SEC. The address of the SEC's
web site is http://www.sec.gov
.. Our common stock is listed for trading on the NYSE Amex under the symbol
“CEU.”
We have
filed a registration statement on Form S-3 with the SEC to register the
securities that may be offered pursuant to this prospectus. This prospectus is
part of that registration statement and, as permitted by the SEC’s rules, does
not contain all of the information included in the registration statement. For
further information about us, this offering and our common stock, you may refer
to the registration statement and its exhibits and schedules as well as the
documents described herein or incorporated herein by reference. You can review
and copy these documents, without charge, at the public reference facilities
maintained by the SEC or on the SEC’s website as described above, or you may
obtain a copy from the SEC upon payment of the fees prescribed by the
SEC.
29
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
The SEC
allows us to “incorporate by reference” the information we file with them, which
means that we can disclose important information to you by referring you to
those documents. The information we incorporate by reference is considered to be
an important part of this prospectus, and information that we file with the SEC
at a later date will automatically add to, update or supersede this
information.
We
incorporate by reference into this prospectus the documents listed
below:
|
|
·
|
our
annual report on Form 10-K for the year ended December 31, 2008
filed with the SEC on March 30, 2009 (File No.
000-52092-09714327);
|
|
|
·
|
our
Quarterly Report on Form 10-Q for our fiscal quarter ended March 31, 2009,
filed with the SEC on May 15, 2009 (File No.
000-52092-09832553);
|
|
|
·
|
our
Current Report on Form 8-K filed with the SEC, on April 1,
2009. (File No.
000-52092-09723292);
|
|
|
·
|
our
Current Report on Form 8-K filed with the SEC, on May 19, 2009. (File No.
000-52092-09839145);
|
|
|
·
|
our
Current Report on Form 8-K filed with the SEC, on June 17, 2009. (File No.
000-52092-09895737);
|
|
|
·
|
our
Current Report on Form 8-K filed with the SEC, on July 15, 2009. (File No.
001-34386-09945459);
|
|
|
·
|
our
Current Report on Form 8-K filed with the SEC, on June 16, 2009. (File No.
001-34386-09947972);
|
|
|
·
|
our
Current Report on Form 8-K filed with the SEC, on June 21, 2009. (File No.
001-34386-09954542);
|
|
|
·
|
the
description of our common stock contained in our registration statement on
Form 8-A12B/A filed with the SEC on June 19, 2009, (File No.
001-34386-09900286); and
|
|
|
·
|
all
future filings that we make with the SEC under Section 13(a), 13(c), 14,
or 15(d) of the Exchange Act after the date of filing of the registration
statement on Form S-3 of which this prospectus is a part and prior to the
termination or completion of any offering of securities under this
prospectus and all applicable prospectus supplements (except, in each
case, for information contained in any such filing that is furnished and
not “filed” under the Exchange Act), which filings will be deemed to be
incorporated by reference in this prospectus, as supplemented by the
applicable prospectus supplement, and to be a part hereof from the
respective dates of such
filings.
|
We will
provide without charge to each person, including any beneficial owner, to whom
this prospectus is delivered, upon written or oral request of such person, a
copy of any or all of the information that is incorporated by reference in this
prospectus. Requests for such documents should be directed to: China Education
Alliance, Inc., 58 Heng Shan Road, Kun Lun Shopping Mall, Harbin, The
People’s Republic of China 150090, Attention: Investor
Relations, Tel:011-86- 451-8233-5794.
This
prospectus is part of a registration statement on Form S-3 that we filed with
the SEC. That registration statement contains more information than this
prospectus regarding us and our common stock, including certain exhibits and
schedules. You can obtain a copy of the registration statement from the SEC at
the address listed above or from the SEC’s Internet website.
You should rely only on the
information provided in and incorporated by reference into this prospectus or
any prospectus supplement. We have not authorized anyone else to provide you
with different information. You should not assume that the information in this
prospectus or any prospectus supplement is accurate as of any date other than
the date on the front cover of these documents.
30
3,354,390
Shares
CHINA
EDUCATION ALLIANCE, INC.
Common
Stock
PROSPECTUS
August
[ ], 2009
31
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
14. Other Expenses of Issuance and Distribution.
The
following table sets forth the costs and expenses to be paid by us in connection
with the sale of the shares of common stock being registered hereby. All amounts
are estimates, except for the SEC registration fee.
|
SEC
registration fee
|
$
|
971
|
||
|
Printing
and engraving expenses
|
10,000
|
|||
|
Accounting
fees and expenses
|
$
|
5,000
|
||
|
Legal
fees and expenses
|
$
|
20,000
|
||
|
Miscellaneous
expenses
|
|
$
|
4,700
|
|
|
Total
|
|
$
|
40,671
|
Item
15. Indemnification of Directors and Officers.
Section 16:21, et seq. of the North
Carolina Business Corporation 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 cannot 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.
Indemnification
Against Public Policy
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
32
Item
16. Exhibits.
The
following exhibits are filed herewith and as a part of this registration
statement:
|
Exhibit
No.
|
Description
|
|
|
3.1
|
Articles
of Incorporation filed December 2, 1996 in the State of North Carolina are
incorporated herein by reference to Exhibit 3.1 to the Form SB-2
Registration Statement of China Education Alliance, Inc. (File No.
333-101167) filed on November 13, 2002.
|
|
|
3.2
|
Articles
of Amendment Business Corporation dated May 23, 2002 are incorporated
herein by reference to Exhibit 3.2 to the Form SB-2 Registration Statement
of China Education Alliance, Inc. (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
|
Articles
of Share Exchange of China Education Alliance, Inc. filed with
the Department of The Secretary of State of the State of North Carolina on
December 30, 2004 are incorporated herein by reference to Exhibit 3.1
filed with China Education Alliance, Inc.’s Form 10-QSB
quarterly report for its quarter ended September 30, 2007 filed with the
SEC on November 14, 2007.
|
|
|
3.5
|
Articles
of Amendment to Articles of Incorporation filed with the Department of The
Secretary of State of the State of North Carolina on October 4, 2007
are incorporated herein by reference to Exhibit 3.2 filed
with China Education Alliance, Inc.’s Form 10-QSB quarterly
report for its quarter ended September 30, 2007 filed with the SEC on
November 14, 2007.
|
|
|
3.6
|
ByLaws
of China Education Alliance, Inc. are incorporated herein by
reference to Exhibit 3.3 to the Form SB-2/A Registration Statement
of China Education Alliance, Inc. 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 our 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.
(1)
|
|
|
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 our 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.(2)
|
|
|
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.(1)
|
|
|
10.5
|
Employment
contract with Liansheng Zhang effective February 21, 2006 is incorporated
herein by reference to Exhibit 10.7 filed with our 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.(1)
|
|
|
10.6
|
Consulting
Agreement with Conceptual Management Limited dated March 20, 2006 is
incorporated herein by reference to Exhibit 10.8 filed with our 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.(1)
|
|
|
10.11
|
Purchase
Contract dated December 28, 2006, to purchase assets of Harbin Nangang
Compass Computer Training School.(1)
|
|
|
10.12
|
Securities
purchase agreement dated May 8, 2007, among the Company, Barron Partners,
LP and the other investors named therein is hereby incorporated herein by
reference to Exhibit 99.1 to the Form 8-K of the Company filed on May 15,
2007. (1)
|
|
|
10.13
|
3%
Convertible Note issued to Barron Partners, LP is hereby incorporated
herein by reference to Exhibit 99.2 to the Form 8-K of the Company filed
on May 15, 2007. (1)
|
|
|
10.14
|
3%
Convertible Note issued to Eos Holdings is hereby incorporated herein by
reference to Exhibit 99.3 to the Form 8-K of the Company filed on May 15,
2007.(1)
|
|
|
10.15
|
3%
Convertible Note issued to Hua-Mei 21st Century Partners, LP is hereby
incorporated herein by reference to Exhibit 99.4 to the Form 8-K of the
Company filed on May 15, 2007. (1)
|
|
|
10.16
|
Registration
rights agreement, dated May 8, 2007, among the Company, Barron Partners,
LP and the other investors named therein is hereby incorporated herein by
reference to Exhibit 99.5 to the Form 8-K of the Company filed on May 15,
2007. (1)
|
33
|
10.17
|
Closing
escrow agreement, dated May 8, 2007, among the Company, Barron Partners,
LP and the other investors named therein and the escrow agent named
therein is hereby incorporated herein by reference to Exhibit 99.6 to the
Form 8-K of the Company filed on May 15, 2007. (1)
|
|
|
10.18
|
Letter
agreement dated May 8, 2007 between the Company and SBI Advisors LLC, and
related payment letter is hereby incorporated herein by reference to
Exhibit 99.7 to the Form 8-K of the Company filed on May 15, 2007.
(1)
|
|
|
10.19
|
Amendment
dated as of May 23, 2007 to the securities purchase agreement dated May 8,
2007, among the Company, Barron Partners, LP and the other investors named
therein is hereby incorporated herein by reference to Exhibit 99.1 to the
Form 8-K of the Company filed on June 7, 2007. (1)
|
|
|
10.20
|
3%
Convertible Note issued to Barron Partners, LP is hereby incorporated
herein by reference to Exhibit 99.2 to the Form 8-K of the Company filed
on June 7, 2007.(1)
|
|
10.21
|
Closing
escrow agreement, dated May 8, 2007, among the Company, Barron Partners,
LP and the other investors named therein and the escrow agent named
therein is hereby incorporated herein by reference to Exhibit 99.3 to the
Form 8-K of the Company filed on June 7, 2007. (1)
|
|
|
10.22
|
Letter
agreement dated November 30, 2007, among the Company, Barron Partners, LP
and the other investors named therein is hereby incorporated herein by
reference to Exhibit 10.22 to the Form SB-2/A Registration Statement (File
No. 333-146023) of the Company filed on September 28,
2007.
|
|
|
10.23
|
Agreement
and Supplementary Agreement between Harbin Zhong He Li Da Education
Technology, Inc. and Harbin Daily Newspaper Group dated April 18, 2008.
(2)
|
|
|
10.24
|
Share
Transfer Agreement dated April 27, 2008, by and between China Education
Alliance, Yuli Guo and Word Exchanges, Inc.
(3)
|
|
21.1
|
List
of Subsidiaries (4)
|
|
|
23.1
|
Consent
of Sichenzia Ross Friedman Ference LLP (included in Exhibit
5.1).
|
|
|
23.2
|
Consent
of Sherb & Co. LLP, Independent Registered Public Accounting
Firm
|
(1) Incorporated by reference to the
Company’s Registration Statement on Form SB-2 filed on September 13,
2007.
(2) Incorporated by reference to the
Company’s Current Report on Form 8-K filed with the Securities and Exchage
Commission on July 8, 2008.
(3) Incorporated
by reference to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 30, 2008.
(4)
Incorporated by reference to the Company’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 30, 2009.
Item
17. Undertakings.
(a)
The undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum aggregate offering price
set forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
34
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in this registration statement or any material change to
such information in this registration statement.
provided, however, that the
undertakings set forth in paragraphs (1)(i), (1)(ii) and (1)(iii) above do not
apply if the registration statement is on Form S-3 or Form F-3 and the
information required to be included in a post-effective amendment by those
paragraphs is contained in reports filed with or furnished to the SEC by the
registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration statements or
is contained in a form of prospectus filed pursuant to Rule 424(b) that is a
part of the registration statement.
(2)
That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3)
To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4)
That, for the purpose of determining liability under the Securities Act of 1933
to any purchaser:
(i) Each
prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to
be part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(ii) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
(5)
That, for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser: (i) any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be filed pursuant to
Rule 424; (ii) any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned registrant or used or referred to by the
undersigned registrant; (iii) the portion of any other free writing prospectus
relating to the offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the undersigned
registrant; and (iv) any other communication that is an offer in the offering
made by the undersigned registrant to the purchaser.
35
(6)
That: (i) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of the
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective; and (ii) for the purpose of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona fide offering
thereof.
(7)
That, for purposes of determining any liability under the Securities Act of
1933, each filing of the registrant’s annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan’s annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
36
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-3 and has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Beijing, People’s Republic of China, on this 7th day of
August, 2009.
|
CHINA
EDUCATION ALLIANCE, INC.
|
||
|
|
|
|
|
By:
|
/s/ Xiqun Yu
|
|
|
Xiqun
Yu, Chief Executive Officer
|
||
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Xiqun Yu
|
President,
Chief Executive Officer
|
August
7, 2009
|
||
|
Xiqun
Yu
|
Chairman
of the Board of Directors and Director
(Principal
Executive Officer)
|
|||
|
/s/
Susan Liu
|
Chief
Financial Officer
|
August
7, 2009
|
||
|
Susan
Liu
|
(Principal
Financial and Accounting Officer)
|
|||
|
/s/
Liansheng Zhang
|
Director
|
August
7, 2009
|
||
|
Liansheng
Zhang
|
||||
|
/s/
James Hsu
|
Director
|
August
7, 2009
|
||
|
James
Hsu
|
||||
|
/s/
Ansheng Huang
|
Director
|
August
7, 2009
|
||
|
Ansheng
Huang
|
|
/s/
Yizhao Zhang
|
Director
|
August
7, 2009
|
||
|
Yizhao
Zhang
|
37