U.S.
Securities and Exchange Commission
Washington,
D.C. 20549
FORM
10-KSB/A
AMENDMENT
NO. 3
|
x
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
for the period ended December 31,
2004
|
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
for the transition period from _______ to
_______
|
COMMISSION
FILE NUMBER: 333-101167
CHINA
EDUCATION ALLIANCE, INC.
f/k/a
ABC REALTY CO.
(Exact
name of small business issuer as specified in its charter)
|
North
Carolina
|
56-2012361
|
|
(State
or other jurisdiction of
|
(IRS
Employer identification No.)
|
|
incorporation
or organization)
|
|
80
Heng Shan Rd. Kun Lun Shopping Mall
Harbin,
P.R. China 150090
(Address
of principal executive offices)
(86451)
8233-5794
(Issuer's
telephone number)
Securities
registered pursuant to Section 12(b) of the Exchange Act:
None
Securities
registered pursuant to Section 12(g) of the Exchange Act:
$0.001
Par Value Common Voting Stock
(Title
of
Class)
Check
whether the issuer (1) filed all reports required to be filed by Section13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
x
No
o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or an
amendment to this Form 10-KSB. x
State
issuer's net revenues for its most recent fiscal year: $51,700
As
of
March 31, 2005, there were 57,915,000 common shares outstanding and the
aggregate market value of the common shares (based upon the close price of
$.33
reported by brokers) held by non-affiliates was approximately
$3,255,450.
Transitional
Small Business Disclosure Format (check one): Yes o
Nox
Number
of
shares of common stock outstanding as of March 31, 2005: 57,915,000
Number
of
shares of preferred stock outstanding as of March 31, 2005: -0-
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
The
discussion contained in this 10-KSB under the Securities Exchange Act of 1934,
as amended, (the "Exchange Act") contains forward-looking statements that
involve risks and uncertainties. The issuer's actual results could differ
significantly from those discussed herein. These include statements about our
expectations, beliefs, intentions or strategies for the future, which the
Company indicates by words or phrases such as "anticipate," "expect," "intend,"
"plan," "will," "we believe," "the Company believes," "management believes"
and
similar language, including those set forth in the discussion under "Description
of Business," including the "Risk Factors" described in that section, and
"Management's Discussion and Analysis or Plan of Operation" as well as those
discussed elsewhere in this Form 10-KSB. The Company bases their forward-looking
statements on information currently available to them, and the Company assumes
no obligation to update them. Statements contained in this Form 10-KSB that
are
not historical facts are forward-looking statements that are subject to the
"safe harbor" created by the Private Securities Litigation Reform Act of
1995.
PART
I
Item
1.
Business
GENERAL
DESCRIPTION OF BUSINESS
China
Education Alliance, Inc. ("CEDA" or the "Company") was incorporated in the
State
of North Carolina on December 2, 1996 under the name of ABC Realty Co. to engage
in residential real estate transactions as a broker or agent. In performing
these residential real estate services, the Company represented either the
seller, as the listing broker, or the buyer, as the buyer's agent, in the sale.
The revenue was primarily attributable to the commissions upon the closing
of
the real estate transaction.
2
On
September
15, 2004, the Company executed a Plan of Exchange (the "Agreement"), between
and
among the Company, Harbin Zhong He Li Da Jiao Yu Ke Ji You Xian Gong Si, a
corporation organized and existing under the laws of the People's Republic
of
China ("ZHLD"), the shareholders of ZHLD (the "ZHLD Shareholders"), and Duane
Bennett, Chairman of the Board and indirect controlling shareholder of the
Company.
Pursuant
to and at the closing of the Plan of Exchange, dated September 15, 2004, which
occurred on December 13, 2004, the Company issued the ZHLD Shareholders
55,000,000 shares of common stock of the Company, or 95% of the Company's then
outstanding common stock, in exchange for all of the shares of capital stock
of
ZHLD owned by the ZHLD shareholders. Immediately upon the closing, the Company
cancelled 11,000,000 shares of common stock controlled by Duane Bennett, and,
as
a result, the Company had 2,915,000 shares issued and outstanding before the
issuance of the 55,000,000 new shares. Payment for the cancelled shares was
made
by ZHLD and/or the ZHLD Shareholders in the amount of $400,000 in the aggregate
(composed of $300,000 in cash and $100,000 in a promissory note).
On
November 17, 2004, the Company changed its name to China Education Alliance,
Inc.
Since
the
reverse merger was consummated, the Company has continued the operations of
ZHLD, which is a development stage company that has had little or no revenue
since inception and very limited operations due to a lack of
capital.
ZHLD
is a
technology company engaged in the online education industry in China. There
is a
significant market in China for education and education related products. It
has
been reported that the education budget established by the Chinese government
is
over US$60 billion every year, which accounts for 3.41% of the GDP. It is
expected to increase year by year. In addition, educational expenses are in
the
top three expenditure categories in every Chinese family. Currently, ZHLD owns
www.edu-chn.com,
which
is the only website in China having copyrights of examination materials of
Chinese primary schools and middle schools, so that ZHLD legally provides target
users in the age group of 7 to 18 years with downloadable examination materials.
ZHLD plans to provides other services such as text book downloading and SMS.
When the visits to its web site increase, and its membership base expands,
ZHLD
plans to expand its products into the advanced education market and adult
education market.
ZHLD
has
developed some successful educational software independently and owns a database
covering all levels of the basic education. Through cooperation with the local
education committees and schools, ZHLD started its business in Heilongjiang
and
now has 270,000 users who visit its web site. ZHLD projects over 50 million
users over the next five years, based on demographic trends and an increase
product offering on its web site. ZHLD’s plans for expansion of its business
operations include the following:
|
v
|
Buildup
the infrastructure to ensure fast access and to satisfy the volume
that
would develop with increasing demand ;
|
|
v
|
Boost
market shares via nation-wide advertising campaigns;
|
|
v
|
Invest
in human resources to improve the quality of
services;
|
|
v
|
Open
branch offices in key cities.
|
ZHLD
has
a professional team experienced in the Chinese education market, which increases
its chances of successfully implementing these plans.
3
COMPETITION
The
Company is currently taking steps to address the competition in the Chinese
online educational industry. In order to increase market share and revenue
as
quickly as possible, the Company has determined to set up subsidiaries in
Beijing, Shanghai, Xian, Hubei and Guangzhou where the educational industry
is
comparatively well-established. It will continue to make use of its strategy
of
growth through the use of computer web sites. The Company will take the
following steps to increase sales and implement its marketing
strategy;
|
1.
|
Market
penetration
|
|
2.
|
Establishing
resale networks
|
|
3.
|
Seeking
strategic partners
|
It
is
expected that there will be more competitors from both domestic and overseas
markets in the following years because the Chinese educational market is huge
and growing. In order to avoid the potential low-price competition in the
future, the Company has determined to create barriers to entry through the
following actions:
|
1.
|
Applying
for copyrights for the examination materials and educational course
data
that the Company has collected.
|
|
2.
|
Entering
into exclusive agreements with local educational authorities and
schools.
In return, the Company will agree to pay such authorities and schools
approximately 30% of the earnings as a commission. It is planned
that this
will prevent potential competitors from contacting these school partners
directly to solicit business. Currently, the Company has entered
into
these types of exclusive agreements with approximately 150
schools.
|
UNCERTAINTY
OF COMPETITIVE ENVIRONMENT
In
the
event that the Company succeeds in its business strategy, in all likelihood,
competition will develop. The degree of competition cannot presently be
ascertained. However, there can be no assurances that the Company will have
the
resources to compete effectively, especially to the extent that the market
experiences rapid growth.
EMPLOYEES
The
Company currently employs 15 staff members, all of whom are located in Northern
China. The need for employees and their availability will be addressed in
connection with the business development. The Company plans to increase its
staff by 55 individuals in 2005.
REGULATION
No
government
approvals are required to conduct the Company’s principal operations, and the
Company is not aware of any probable governmental regulation of our business
sectors in the near future.
ADDITIONAL
FINANCIAL
The
Company
may need to raise additional funds to meet operating requirements in the future.
If the Company raises additional funds through issuance of equity related or
debt securities, such securities may have rights to the Company's common stock,
such as warrants or options. Shareholders may experience additional dilution
from exercise of these equity instruments. The Company cannot be certain that
additional financing will be available when required or at all.
4
Item
2.
Properties
The
Company's main office is located at 80 Heng Shan Road Kun Lun Shopping Mall
Harbin, P.R. China 150090, which is self-owned property with total area of
11,373 square feet. This space is adequate for the Company's present and their
planned future operations. The property was contributed to ZHLD in
connection with its Plan of Exchange. The Company pays no rent for use of this
space. In addition the Company has no written agreement or formal arrangement
with ZHLD pertaining to the use of this space. No other businesses operate
from
this office. The Company has no current plans to occupy other or additional
office space.
Item
3.
Legal Proceedings
The
Company is not aware of any pending or threatened legal proceedings, in which
the Company is involved. In addition, the Company not aware of any pending
or
threatened legal proceedings in which entities affiliated with our officers,
directors or beneficial owners are involved.
Item
4.
Submission of Matters to a Vote of Security Holders
No
matter
was submitted to a vote during the fourth quarter.
PART
II
Item
5.
Market for the Registrant’s Common Stock and Related Security Holder
Matters
|
(a)
|
The
principal market in which the common stock is traded is the
Over-the-Counter Bulletin Board. The table below presents the low
and high
bid price for the Company's common stock each quarter since its initial
quotation in 2004 and reflects inter-dealer prices, without retail
markup,
markdown, or commission, and may not represent actual transactions.
The
Company obtained the following information from brokers who make
a market
in their securities.
|
Bid
Quarter
Ended
Low
High
06/30/04* .25
.25
09/30/04 .51
.51
12/31/04
.30 .30
|
(b)
|
Holders.
The approximate number of holders of record of the Company's Common
Stock
as of March 31, 2005 was 538.
|
|
(c)
|
The
Company has not paid dividends from inception to date and does not
currently intend to do so.
|
*
No
trading prior to this date.
The
Company has no outstanding options and no outstanding warrants.
5
Item
6.
Management’s Discussion and Analysis
The
discussion contained in this prospectus contains “forward-looking statements”
that involve risk and uncertainties. These statements may be identified by
the
use of terminology such as “believes”, “expects”, “may”, or “should”, or
“anticipates”, or expressing this terminology negatively or similar expressions
or by discussions of strategy. The cautionary statements made in this prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this prospectus. The Company's actual results could
differ materially from those discussed in this prospectus. Important factors
that could cause or contribute to such differences include those discussed
under
the caption entitled “risk factors,” as well as those discussed elsewhere in
this prospectus.
INTRODUCTION
The
Company was incorporated in the State of North Carolina on December 2, 1996
under the name of ABC Realty Co. to engage in residential real estate
transactions as a broker or agent. Meanwhile, the Company is also interested
in
business opportunities in People's Republic of China. The Company will attempt
to grow through further business acquisitions in this market. Currently, the
Company's revenue streams come from ZHLD, their wholly-owned subsidiary which
was acquired on December 13, 2004. ZHLD is a technology company principally
engaged in the online education business serving, amongst other customers,
the
local middle schools in Harbin, China. ZHLD's revenue is primarily from the
sale
of debit cards for use to obtain educational materials posted on the ZHLD's
website at the time of delivery, when title to the products transfers and the
customer bears the risk of loss.
|
|
Year
ended
|
|||
|
Selected
financial data
|
December
31, 2004
|
|||
|
|
|
|||
|
Net
Sales
|
$
|
51,700
|
||
|
|
||||
|
Net
Loss
|
(109,721
|
)
|
||
|
Net
Loss per Common Share
|
-
|
|||
|
Weighted
Average
|
||||
|
Common
Shares Outstanding
|
55,364,375
|
|||
|
|
||||
|
As
of
December
31, 2004
|
||||
|
|
||||
|
Total
Assets
|
$
|
2,475,986
|
||
|
Working
Capital Deficiency
|
(13,917
|
)
|
||
|
Shareholders’
Equity
|
2,361,163
|
|||
No
dividends have been declared or paid for any of the periods
presented.
Results
of Operations
For
the
period of inception (August 9, 2004) through December 31, 2004.
6
Sales.
The
Company
currently carries its business in the on-line education business serving the
local middle schools in Harbin, China. The sales of $51,700 for the period
ending December 31, 2004 were primarily from the sales of debit cards for use
to
obtain educational materials posted on the Company's website at the time of
the
delivery, when title to the products transfers and the customer bears the risk
of loss. The educational materials purchased include downloadable examination
materials, educational result appraisals and occupational license
authorizations, all for certain age groups. Our revenue is derived solely from
the sale of debit cards, as mentioned elsewhere herein. In the future, we plan
to make self-developed educational software and educational books media
available from our website, as well as such other services such as text book
downloading and electronic storage, although this is only in the planning stage.
At that point in time, we plan to use our website as a platform for several
lines of revenue.
Cost
of
Goods Sold.
The
cost of
goods sold includes the purchase price and printing expenses for the Company's
debit cards and the cost of copy rights of the exam materials plus other direct
costs associated with making the products available for resale. It is customary
to experience variations in the cost of sales as a percentage of net sales
based
on the types of products sold.
The
cost of
goods sold for the period ending December 31, 2004 was $17,073. Cost of sales
as
a percentage of sales was 33% for 2004.
The
Company
expects cost of sales as a percentage of sales to decrease to around 25% of
total sales for fiscal year 2005 as new services the Company provides on their
website are more popular. For example, the Company is seeking for the
co-operation with the named schools which have quality guarantee on the exam
materials due to their experiences and restricted systems. If the Company can
successfully grow their revenues through providing download services for the
exam materials of named schools, their cost of sales as a percentage of sales
should be lower in future periods due to higher margin of these services. In
addition, volume discounts will be available to them if the Company is
successful in achieving sales growth in the future, which will further reduce
their cost of sales as a percentage of sales.
Expenses.
Selling,
general and administrative expenses for the period ending December 31, 2004
were
$11,346. The expenses were primarily attributable to the initial set up costs
and website creation.
The
Company's
other selling, general and administrative expenses remained either fixed or
relatively constant during 2004.
The
Company
expects increases in expenses through the year 2005 as the Company moves towards
developing their business plan in the following aspects:
|
v
|
Buildup
the infrastructure to ensure fast access and to satisfy the volume
coming
with increasing demand ;
|
|
v
|
Boost
market shares via nation-wide advertising
campaigns;
|
|
v
|
Invest
in human resources to improve the quality of services;
|
|
v
|
Open
branch offices in key cities.
|
Income
/
Losses.
Net
loss for
the year ended December 31, 2004 was $109,721. The net loss was primarily
attributable to professional fee for the period. The Company expects to continue
to incur losses at least through 2005 as the Company expects to implement their
business plan which will cause the increase in operating expenses. In addition,
there can be no assurance that ZHLD will achieve or maintain profitability
or
that their revenue growth can be sustained in the future.
7
Impact
of
Inflation.
The
Company
believes that inflation has had a negligible effect on operations since
inception. The Company believes that they can offset inflationary increases
in
the cost of labor by increasing sales and improving operating
efficiencies.
Liquidity
and Capital Resources.
Cash
flows
used in operating activities were $62,726 for the period ending December 31,
2004. Cash flows used in 2004 were primarily for net loss and inventory of
$109,721 and $11,165, respectively, partially offset by the depreciation of
operating expenses.
Cash
flows
used in investing activities were $2,101 for the period ending December 31,
2004. Cash flows for the 2004 were for the purchase of property and
equipment.
Cash
flows
provided by financing activities were $154,568 for the period ending December
31, 2004. Cash flows for the 2004 included $60,386 in proceeds from issuance
of
common stock for reverse merger, and $89,182 in proceeds from notes payable,
and
$5,000 of due to stockholders.
The
Company
estimates they will need approximately $50,000 in additional capital during
2005. If revenues increase during 2005, the Company may have sufficient cash
flow from operations. At December 31 2004, the Company had cash on hand of
$89,741.
Overall,
the
Company has funded their cash needs from inception through December 31, 2004
with notes payable and a series of equity transactions related reverse merger.
If the Company is unable to receive additional cash from their related parties,
the Company may need to rely on financing from outside sources through debt
or
equity transactions. The Company's related parties are under no legal obligation
to provide them with capital infusions. Failure to obtain such financing could
have a material adverse effect on operations and financial
condition.
The
Company
had cash on hand of $89,741 and a working capital deficit of $13,917 as of
December 31, 2004. The working capital deficit is primarily due to $89,182
of
notes payable and accrued taxes payable. The Company will substantially rely
on
the existence of revenue from their business to sustain their business for
the
next 12 months. Currently, the Company has enough cash to fund their operations
for the next 12 months. This is based on current cash flows from financing
activities and projected revenues. Also, if the projected revenues fall short
of
needed capital the Company may not be able to sustain their capital needs.
The
Company will then need to obtain additional capital through equity or debt
financing to sustain operations for an additional year. A lack of significant
revenues in 2005 will significantly affect the Company's cash position and
move
them towards a position where the raising of additional funds through equity
or
debt financing will be necessary. The Company's current level of operations
would require capital of approximately $50,000 to sustain operations through
year 2005 and approximately $50,000 per year thereafter. Modifications to the
Company's business plans or diversify their business in different industries
may
require additional capital for them to operate. For example, if the Company
is
unable to raise additional capital in the future they may need to curtail their
number of new services offers or limit their marketing efforts to the most
profitable geographical areas. This may result in lower revenues and market
share for the Company. In addition, there can be no assurance that additional
capital will be available to us when needed or available on terms favorable
to
the Company.
8
On
a
long-term basis, liquidity is dependent on continuation and expansion of
operations, receipt of revenues, and additional infusions of capital and debt
financing. The Company's current capital and revenues are insufficient to fund
such expansion. If the Company chooses to launch such an expansion campaign,
the
Company will require substantially more capital. The funds raised from this
offering will also be used to market their products and services as well as
expand operations and contribute to working capital. However, there can be
no
assurance that the Company will be able to obtain additional equity or debt
financing in the future, if at all. If the Company is unable to raise additional
capital, their growth potential will be adversely affected and the Company
will
have to significantly modify their plans. For example, if the Company unable
to
raise sufficient capital to develop their business plan, the Company may need
to:
|
§
|
Curtail
new product launches
|
|
§
|
Forego
or postpone opening new traveling showrooms,
or
|
|
§
|
Limit
our future marketing efforts to areas that the Company believes would
be
the most profitable.
|
Demand
for
the products and services will be dependent on, among other things, market
acceptance of the Company's on-line services and other related products.
Inasmuch as a major portion of the Company's activities is the receipt of
revenues from the sales of the Company's downloadable services, the Company's
business operations may be adversely affected by their competitors and prolonged
recession periods.
The
Company's
success will be dependent upon implementing their plan of operations and the
risks associated with their business plans. The Company plans to strengthen
their position in educational markets in China. The Company also plans to expand
their operations through aggressively marketing their on-line business and
Company concept.
9
Item
7.
Financial Statements
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF
DECEMBER 31, 2004
10
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
|
CONTENTS
|
|
|
|
|
|
|
Pages
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
1
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet as of December 31, 2004
|
2
|
|
|
|
|
|
|
|
Consolidated
Statement of Operations for the period from August 9, 2004 (Inception)
to
December 31, 2004
|
3
|
|
|
|
|
|
|
|
Consolidated
Statement of Stockholders’ Equity for the period from August 9, 2004
(Inception) to December 31, 2004
|
4
|
|
|
|
|
|
|
|
Consolidated
Statement of Cash Flows for the period from August 9, 2004 (Inception)
to
December 31, 2004
|
5
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
6
-
9
|
11
 |
JIMMY
C.H. CHEUNG & CO
Certified
Public Accountants
(A
member of Kreston
International)
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors of:
China
Education Alliance, Inc. (Previously ABC Realty Co.) and Subsidiary
We
have
audited the accompanying consolidated balance sheet of China Education Alliance,
Inc. (Previously ABC Realty Co.) and subsidiary as of December 31, 2004, and
the
related statements of operations, changes in shareholders’ equity and cash flows
for the period from August 9, 2004 (Inception) to December 31, 2004. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit of the financial statements provides a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Education Alliance, Inc.
(Previously ABC Realty Co.) as of December 31, 2004, and the results of its
operations and its cash flows for the period from August 9, 2004 (Inception)
to
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 8 to the
consolidated financial statements, the Company had a net loss of $109,721,
an
accumulated deficit of $109,721 and a working capital deficiency of $13,917
and
used cash in operations of $62,726. These factors raise substantial doubt about
its ability to continue as a going concern. Management’s plans concerning this
matter are also described in Note 8. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
|
|
|
|
|
|
JIMMY
C.H. CHEUNG & CO
Certified
Public Accountants
|
|
|
|
|
|
|
Date: April
12, 2005
|
By:
|
/s/
JIMMY
C.H. CHEUNG
|
|
|
JIMMY
C.H. CHEUNG
|
|
|
|
Hong
Kong,
|
|
12
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
CONSOLIDATED
BALANCE SHEET
AS
OF
DECEMBER 31, 2004
The
accompanying notes are an integral part of these financial
statements
13
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
CONSOLIDATED
STATEMENT OF OPERATIONS
FOR
THE
PERIOD FROM AUGUST 9, 2004 (INCEPTION) TO DECEMBER 31, 2004
The
accompanying notes are an integral part of these financial
statements
14
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY
FOR
THE
PERIOD FROM AUGUST 9, 2004 (INCEPTION) TO DECEMBER 31, 2004
The
accompanying notes are an integral part of these financial
statements
15
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
CONFOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
PERIOD FROM AUGUST 9, 2004 (INCEPTION) TO DECEMBER 31, 2004
The
accompanying notes are an integral part of these financial
statements
16
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
DECEMBER 31, 2004
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND
ORGANIZATION
|
(A)
Organization
ABC
Realty Co. was organized under the laws of the State of North Carolina on
December 2, 1996. Harbin Zhong He Li Da Jiao Yu Ke Ji You Xian Gong Si (“ZHLD”)
was registered in the People’s Republic of China (“PRC”) on August 9, 2004 with
its principal place of business in Harbin, PRC.
ZHLD
is
principally engaged in the on-line education business serving, among other
customers, the local middle schools in Harbin, China.
On
September 15, 2004, ABC Realty Co. executed a Plan of Exchange with ZHLD and
Duane C. Bennett, Chairman of ABC Realty Co. pursuant to which ZHLD exchanged
all of its registered capital of $60,386 for 55,000,000 shares or approximately
95% of the common stock of China Education Alliance, Inc. (“China Education”).
On December 13, 2004, China Education consummated the Plan of Exchange with
ZHLD. As a result of the Plan of Exchange, the transaction was treated for
accounting purposes as a capital transaction and recapitalization by the
accounting acquirer (ZHLD) and as a reorganization by the accounting acquiree
(China Education).
On
November 17, 2004, ABC Realty changed its name to China Education Alliance,
Inc.
Accordingly,
the financial statements include the following:
|
|
(1)
|
The
balance sheet consists of the net assets of the acquirer at historical
cost and the net assets of the acquiree at historical
cost.
|
|
|
(2)
|
The
statement of operations includes the operations of the acquirer for
the
periods presented and the operations of the acquiree from the date
of the
merger.
|
China
Education and its wholly owned subsidiary ZHLD are hereafter referred to as
(the
“Company”).
|
(B)
|
Principal
of consolidation
|
The
accompanying consolidated financial statements for 2004 include the accounts
of
China Education from the date of merger and its wholly owned subsidiary of
ZHLD
from August 9, 2004 (Inception) to December 31, 2004.
All
significant intercompany transactions and balances have been eliminated on
consolidation.
17
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
DECEMBER 31, 2004
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(CONTINUED)
|
|
(C)
|
Use
of estimates
|
The
preparation of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
|
(D)
|
Cash
and cash equivalents
|
For
purpose of the statement of cash flows, cash includes demand deposits with
a
bank with a maturity of less than three months.
|
(E)
|
Inventories
|
Inventories
are stated at lower of cost or market value, cost being determined on a first
in
first out method. The Company provided inventory allowances based on excess
and
obsolete inventories determined principally by customer demand. The Company’s
inventory consists of purchased debit cards held for sale to
distributors.
|
(F)
|
Property
and equipment
|
Property
and equipment are stated at cost, less accumulated depreciation. Expenditures
for additions, major renewals and betterments are capitalized and expenditures
for maintenance and repairs are charged to expense as incurred.
Depreciation
is provided on a straight-line basis, less estimated residual value over the
assets’ estimated useful lives. The estimated useful lives are as
follows:
Buildings
20 Years
Communication
equipment
10 Years
Motor
vehicles
5 Years
Furniture,
fixtures and
equipment
5 Years
18
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
DECEMBER 31, 2004
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(CONTINUED)
|
|
(G)
|
Long-lived
assets
|
In
accordance with Statement of Financial Accounting Standards No. 121 and 142,
“Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets
to
be Disposed of", long-lived assets and certain identifiable intangible assets
held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. For purposes of evaluating the recoverability of long-lived
assets, the recoverability test is performed using undiscounted net cash flows
related to the long- lived assets. The Company reviews long-lived assets to
determine that carrying values are not impaired.
|
(H)
|
Revenue
recognition
|
The
Company recognizes revenue from the sale of debit cards for use to obtain
educational materials posted on the Company’s website at the time of delivery,
when title to the products transfers and the customer bears the risk of
loss.
The
debit
cards are sold to the customers by distributors who sell the predetermined
debit
cards to individuals. The Company recognizes revenue on the debit cards
at the
time of sale by the distributors as the Company has no record of when and
the
extent the debit cards purchased were used by the customers. Unused debit
cards
have no cash value after their purchase and the Company does not refund
purchases by distributors.
|
(I)
|
Income
taxes
|
The
Company accounts for income taxes under the Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes” (“Statement 109”). Under
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
PRC
income tax is computed according to the relevant laws and regulations in the
PRC. The Company’s applicable tax rate has been 33% and income tax expense for
the period was $2,197.
19
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
DECEMBER 31, 2004
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(CONTINUED)
|
|
(J)
|
Fair
value of financial instruments
|
The
respective carrying value of certain on-balance sheet financial instruments
approximates their fair values. These financial instruments include cash,
accounts payable and accrued liabilities, indebtedness to related parties and
notes payable. Fair values were assumed to approximate cost or carrying values
as most of the debt was incurred recently and the assets were acquired within
one year. Management is of the opinion that the Company is not exposed to
significant interest, credit or currency risks arising from these financial
instruments.
|
(K)
|
Foreign
currency translation
|
The
functional currency of the Company is the Chinese Renminbi (“RMB”). Translations
denominated in currencies other than the RMB are translated into United States
dollars using period end exchange rates as to assets and liabilities and average
exchange rates as to revenues and expenses. Capital accounts are translated
at
their historical exchange rates when the capital translation occurred. Net
gains
and losses resulting from foreign exchange translations are included in the
statement of operations and stockholders’ equity as other comprehensive income
(loss). Cumulative translation adjustment amounts were insignificant at and
for
the period ended December 31, 2004.
|
(L)
|
Segments
|
The
Company operates in only one segment, thereafter segment disclosure is not
presented.
|
(M)
|
Recent
Accounting Pronouncements
|
Statement
of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs - an
amendment of ARB No. 43, Chapter 4”” SFAS No. 152, “Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67,” SFAS
No. 153, “Exchanges of Non-monetary Assets - an amendment of APB Opinion No.
29,” and SFAS No. 123 (revised 2004), “Share-Based Payment,” were recently
issued. SFAS No. 151, 152, 153 and 123 (revised 2004) have no current
applicability to the Company and have no effect on the financial
statements.
20
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
DECEMBER 31, 2004
2.
INVENTORIES
Inventories
at December 31, 2004 consisted of the following:
For
the
period ended December 31, 2004, no provision for obsolete inventories was
recorded by the Company.
3.
PROPERTY AND EQUIPMENT
The
following is a summary of property and equipment at December 31, 2004:
Depreciation
expenses for the period ended December 31, 2004 were $32,519.
|
4.
|
NOTE
PAYABLE
|
Note
payable of $89,182 as of December 31, 2004 is due to a third party, is unsecured
and bears interest at a rate of approximately 9% per annum. The Company
scheduled monthly payments included in interest, each in the amount of $2,500
starting on October 15, 2004 and ending on September 15, 2005, with the balance
of $70,000 due and payable on September 15, 2005, at the option of the Company,
in cash or in an equivalent amount of free trading common stock of the Company.
21
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
DECEMBER 31, 2004
|
5.
|
SHAREHOLDERS’
EQUITY
|
|
(A)
|
Stock
Issued in Reverse Merger
|
On
December 13, 2004, China Education issued 2,915,000 shares of common stock
for
the recapitalization with ZHLD (See Note 1).
|
(B)
|
In
kind contribution
|
During
2004, property and equipment of $2,405,498 was contributed by a stockholder
as
additional paid in capital. The property and equipment was recorded at the
stockholder’s historical cost.
|
6.
|
RELATED
PARTY TRANSACTIONS
|
During
2004, property and equipment of $2,405,498 was contributed by a stockholder
as
additional paid in capital. The property and equipment was recorded at the
stockholders’ historical cost.
|
7.
|
CONCENTRATIONS
AND RISKS
|
During
2004, 100% of the Company’s assets were located in China and 100% of the
Company’s revenues were derived from customers located in China.
During
2004, the Company purchased 100% of its inventory from only one
supplier.
|
8.
|
GOING
CONCERN
|
As
reflected in the accompanying consolidated financial statements, the Company
has
an accumulated deficit of $109,721 at December 31, 2004 that includes a net
loss
of $109,721 for the period ended December 31, 2004. The Company’s total current
liabilities exceed its total current assets by $13,917 and the Company used
cash
in operations of $62,726. These factors raise substantial doubt about its
ability to continue as a going concern. In view of the matters described above,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying consolidated balance sheet is dependent upon continued operations
of the company, which in turn is dependent upon the Company’s ability to raise
additional capital, obtain financing and succeed in its future operations.
The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
22
CHINA
EDUCATION ALLIANCE, INC.
(PREVIOUSLY
ABC REALTY CO.)
AND
SUBSIDIARY
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
DECEMBER 31, 2004
|
8.
|
GOING
CONCERN (CONTINUED)
|
Management
has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with
the
ability to continue as a going concern. The Company is actively pursuing
additional funding and potential merger or acquisition candidates and strategic
partners, which would enhance stockholders’ investment. Management believes that
the above actions will allow the Company to continue operations through the
next
fiscal year.
Item
8.
Changes with and Disagreements With Accountants on Accounting and
Financial Disclosure
On
or about
December 10, 2004, Perrella & Associates, P.A. resigned as the auditor of
the Company.
Perrella
& Associates, P.A.'s reports on the Company's financial statements the years
ended December 31, 2003 and 2002, contained no adverse opinion or disclaimer
of
opinion nor were they qualified or modified as to the uncertainty, audit scope
or accounting principles, except that their audit report for years end December
31, 2003 contained a going concern qualification because of Perrella &
Associates doubt about the ability to continue as a going concern. In connection
with the audits for the fiscal years ended December 31, 2003 and 2002, and
the
review for the interim periods up to and including December 10, 2004, there
have
been no disagreements with Perrella & Associates, P.A. on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which if not resolved to the satisfaction of Perrella &
Associates, P.A. would have caused it to make reference to the subject matter
of
the disagreement in connection with its report on these financial statements
for
those periods.
The
Company's
Board of Directors has made the decision to engage another auditor. The Company
does not have an audit committee. On December 29, 2004, the Company engaged
Jimmy C.H. Cheung & Co., CPA as its independent auditors.
Prior
to
making the decision to retain Jimmy C.H. Cheung & Co., CPA, the Company has
had no prior relationship with Jimmy C.H. Cheung & Co., CPA's or any of its
members.
Item
8A.
Controls and Procedures
Quarterly
Evaluation of Controls
As
of the end
of the period covered by this annual report on Form 10-KSB, the Company
evaluated the effectiveness of the design and operation of (i) their disclosure
controls and procedures (“Disclosure Controls”), and (ii) their internal control
over financial reporting (“Internal Controls”). This evaluation (“Evaluation”)
was performed by the Company's President and Chief Executive Officer, Yu, Xiqun
(“CEO”) and by Wang, Chunqing, the Company's Chief Financial Officer (“CFO”). In
this section, the Company presents the conclusions of their CEO and CFO based
on
and as of the date of the Evaluation (i) with respect to the effectiveness
of
their Disclosure Controls and (ii) with respect to any change in their Internal
Controls that occurred during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect their Internal
Controls.
23
CEO
and CFO Certifications
Attached
to
this annual report, as Exhibits 31.1 and 31.2, are certain certifications of
the
CEO and CFO, which are required in accordance with the Exchange Act and the
Commission’s rules implementing such section (the “Rule 13a-14(a)/15d-14(a)
Certifications”). This section of the annual report contains the information
concerning the Evaluation referred to in the Rule 13a-14(a)/15d-14(a)
Certifications. This information should be read in conjunction with the Rule
13a-14(a)/15d-14(a) Certifications for a more complete understanding of the
topic presented.
Disclosure
Controls and Internal Controls
Disclosure
Controls are procedures designed with the objective of ensuring that information
required to be disclosed in the Company's reports filed with the Securities
and
Exchange Commission under the Securities Exchange Act, such as this annual
report, is recorded, processed, summarized and reported within the time period
specified in the Commission’s rules and forms. Disclosure Controls are also
designed with the objective of ensuring that material information relating
to
the Company is made known to the CEO and the CFO by others, particularly during
the period in which the applicable report is being prepared. Internal Controls,
on the other hand, are procedures which are designed with the objective of
providing reasonable assurance that (i) the Company's transactions are properly
authorized, (ii) the Company’s assets are safeguarded against unauthorized or
improper use, and (iii) the Company's transactions are properly recorded and
reported, all to permit the preparation of complete and accurate financial
statements in conformity with accounting principals generally accepted in the
United States.
Limitations
on the Effectiveness of Controls
The
Company's
management does not expect that their Disclosure Controls or their Internal
Controls will prevent all error and all fraud. A control system, no matter
how
well developed and operated, can provide only reasonable, but not absolute
assurance that the objectives of the control system are met. Further, the design
of the control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances so of
fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and
that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of
two
or more people, or by management override of the control. The design of a system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed
in
achieving its stated objectives under all potential future conditions. Over
time, control may become inadequate because of changes in conditions, or because
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Scope
of the Evaluation
The
CEO and
CFO’s evaluation of the Company's Disclosure Controls and Internal Controls
included a review of the controls’ (i) objectives, (ii) design, (iii)
implementation, and (iv) the effect of the controls on the information generated
for use in this annual report. In the course of the Evaluation, the CEO and
CFO
sought to identify data errors, control problems, acts of fraud, and they sought
to confirm that appropriate corrective action, including process improvements,
was being undertaken. This type of evaluation is done on a quarterly basis
so
that the conclusions concerning the effectiveness of the Company's controls
can
be reported in their quarterly reports on Form 10-QSB and annual reports on
Form
10-KSB. The overall goals of these various evaluation activities are to monitor
the Company's Disclosure Controls and the Company's Internal Controls, and
to
make modifications if and as necessary. The Company's external auditors also
review Internal Controls in connection with their audit and review activities.
The Company's intent in this regard is that the Disclosure Controls and the
Internal Controls will be maintained as dynamic systems that change (including
improvements and corrections) as conditions warrant.
24
Among
other
matters, the Company sought in their Evaluation to determine whether there
were
any significant deficiencies or material weaknesses in our Internal Controls,
which are reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information, or whether the Company
had
identified any acts of fraud, whether or not material, involving management
or
other employees who have a significant role in their Internal Controls. This
information was important for both the Evaluation, generally, and because the
Rule 13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and CFO
disclose that information to our Board (audit committee), and to the Company's
independent auditors, and to report on related matters in this section of the
annual report. In the professional auditing literature, “significant
deficiencies” are referred to as “reportable conditions”. These are control
issues that could have significant adverse affect on the ability to record,
process, summarize and report financial data in the financial statements. A
“material weakness” is defined in the auditing literature as a particularly
serious reportable condition where the internal control does not reduce, to
a
relatively low level, the risk that misstatement cause by error or fraud may
occur in amounts that would be material in relation to the financial statements
and not be detected within a timely period by employee in the normal course
of
performing their assigned functions. The Company also sought to deal with other
controls matters in the Evaluation, and in each case, if a problem was
identified, the Company considered what revisions, improvements and/or
corrections to make in accordance with the Compan's ongoing
procedures.
Conclusions
Based
upon
the Evaluation, our disclosure controls and procedures are designed to provide
reasonable assurance of achieving our objectives. Our CEO and CFO have concluded
that our disclosure controls and procedures are effective at that reasonable
assurance level to ensure that material information relating to the Company
is
made known to management, including the CEO and CFO, particularly during the
period when our periodic reports are being prepared, and that our Internal
Controls are effective at that assurance level to provide reasonable assurance
that our financial statements are fairly presented inconformity with accounting
principals generally accepted in the United States. Additionally, there has
been
no change in our Internal Controls that occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to affect, our
Internal Controls.
Item
9.
Directors and Executive Officers of the Registrant
Directors
and Executive Officers.
The
Company's
Bylaws provide that the Company must have at least 1 director, but not more
than
7 directors. Each director will serve until the Company's next annual
shareholder meeting, to be held sixty days after the close of the fiscal year,
or until a successor is elected who accepts the position. Directors are elected
for one-year terms. The Company's officers may be elected by their Board of
Directors at any regular or special meeting of the Board of
Directors.
On
November
13, 2004, Duane Bennett, the former President, filled five vacancies on the
Board of Directors with designees of ZHLD and then he resigned. The names and
positions of these individuals are as follows:
25
|
Name
|
Age
|
Position
|
|
Yu,
Xinqun
|
38
|
Chairman
of the Board of Directors,
President,
Chief Executive Officer and Director
|
|
Wang,
Chunqing
|
46
|
Vice
Chairman and Chief Financial Officer
|
|
Yang,
Yuhong
|
40
|
Vice
President and Director
|
|
Liu,
Yanzhi
|
37
|
Director
|
|
Wu,
Yuzhong
|
35
|
Director
|
The
following
is a summary of the business experience and other biographical information
with
respect to each of the Company’s officers and directors listed in the
above-referenced table.
Mr.
Yu, Xiqun
- Chairman of the Board, President and Chief Executive Officer. Mr. Yu has
over
16 years of experience in senior management with several Northern China based
enterprises. He was responsible for marketing, strategic planning and designing
for many of these corporations. In addition to his posts in Zelda, he is also
the CEO of RETONG.COM., as well as the Chairman of Harbin Zhonghelida Technology
Corporation, Heilongjiang Retong Advertising Co., Ltd. And Heilongjiang Wantong
Telecommunication Project Co., Ltd. Mr. Yu is a member of the Council of China
Harbin Advertising Association and a Director of the China Internet Network
Association. Mr. Yu holds a degree in Business Administration from the Harbin
University of Science and Technology. He is the owner of 38,050,000 shares
of
the Registrant, representing 66% of the outstanding shares of common
stock.
Mr.
Chunqing
Wang - Vice Chairman of the Board and Chief Financial Officer. Mr. Wang holds
a
Certificate of Senior Accountant. Mr. Wang has extensive experience in financial
management. Prior to joining the Registrant, from 1986 to 1989, he served as
a
Financial Director for Harbin Battery Manufacturing Company. From 1989 to 1992,
he was a Financial Director with Harbin Tianrun Chemical Joint-Stock Company.
From 1992 to 2001, he assumed the CFO position for Tianrun Group. Since 2001,
he
has been the CFO with Zelda. Mr. Wang is a graduate in industrial accounting
from the Harbin College of Economic Carde Management. He doesn't own any shares
of the Registrant.
Mr.
Yuhong
Yang - Director and Vice President. Before joining the Registrant, Mr. Yang
was
the Managing Director and Chief Editor of the Qitaihe Evening Paper, a Vice
President with the Orient Realty Development Co., Ltd. and the President of
Harbin Runtong Group. He is also a member of the Council of Heilongjiang Young
Enterpriser Association. Mr. Yang is a specialist in capital deployment and
asset management, and is excellent in human resource cultivation. He earned
his
Master of Business Administration from Hong Kong Public University. He doesn't
own any shares of the registrant.
Mr.
Yanzhi
Liu - Director. Mr. Liu is 37 years old. He is a graduate in computer science,
and holds a Certificate of Senior Engineer. Mr. Liu served as a Technical
Manager for the Thermodynamic Company of the Harbin Power Station Group, and
as
the Technical Manager for the Heilongjiang Wantong Telecom Project Company.
He
is a specialist in telecommunications and trouble shooting. He doesn't own
any
shares of the registrant.
Mr.
Yuzhong
Wu - Director. Mr. Wu is 35 years old. He is a graduate in enterprise management
and a Certificate holder of Economist. Mr. Wu was a Marketing Manager for Harbin
Kaida Wood Products Company, and later was an Administration Officer and
Strategic Planning Manager for Heilongjiang Retong Advertising Co., Ltd. Mr.
Wu
has planned many provincial and municipal activities. He doesn't own any shares
of the registrant
26
Significant
Employees.
The
Company
has no significant employees in the United States.
Legal
Proceedings.
No
officer,
director, or persons nominated for such positions and no promoter or significant
employee of the Company has been involved in legal proceedings that would be
material to an evaluation of the management.
There
are
no arrangements or understandings pursuant to which any were elected as
officers.
Audit
Committee Financial Expert
The
Company
does not have a separately designated standing audit committee. Pursuant to
Section 3(a)(58)(B) of the Exchange Act, the entire Board of Directors acts
as
an audit committee for the purpose of overseeing the accounting and financial
reporting processes, and audits of the financial statements of the Company.
The
Commission recently adopted new regulations relating to audit committee
composition and functions, including disclosure requirements relating to the
presence of an "audit committee financial expert" serving on its audit
committee. In connection with these new requirements, the Company's Board of
Directors examined the Commission's definition of "audit committee financial
expert" and concluded that the Company does not currently have a person that
qualifies as such an expert. The Company has had minimal operations for the
past
two (2) years. Presently, there are only two (2) directors serving on the
Company's Board, and the Company is not in a position at this time to attract,
retain and compensate additional directors in order to acquire a director who
qualifies as an "audit committee financial expert", but the Company intends
to
retain an additional director who will qualify as such an expert, as soon as
reasonably practicable. While neither of our current directors meets the
qualifications of an "audit committee financial expert", each of the Company's
directors, by virtue of his past employment experience, has considerable
knowledge of financial statements, finance, and accounting, and has significant
employment experience involving financial oversight responsibilities.
Accordingly, the Company believes that its current directors capably fulfill
the
duties and responsibilities of an audit committee in the absence of such an
expert.
Code
of
Ethics
The
Company
is presently working with its legal counsel to prepare and adopt a code of
ethics that applies to the Company’s principal chief executive officer,
principal financial officer, and principal accounting officer or controller,
or
persons performing similar functions (the Code of Ethics"). A draft of the
Code
of Ethics is attached hereto as Exhibit
14.1.
The
Code of Ethics is being designed with the intent to deter wrongdoing, and to
promote the following:
|
·
|
Honest
and ethical conduct, including the ethical handling of actual or
apparent
conflicts of interest between personal and professional
relationships
|
|
·
|
Full,
fair, accurate, timely and understandable disclosure in reports and
documents that a small business issuer files with, or submits to,
the
Commission and in other public communications made by the small business
issuer
|
|
·
|
Compliance
with applicable governmental laws, rules and
regulations
|
|
·
|
The
prompt internal reporting of violations of the code to an appropriate
person or persons identified in the
code
|
|
·
|
Accountability
for adherence to the code
|
27
Section
16(a) Beneficial Ownership Reporting Compliance
Under
Section
16(a) of the Exchange Act, all executive officers, directors, and each person
who is the beneficial owner of more than 10% of the common stock of a company
that files reports pursuant to Section 12 of the Exchange Act, are required
to
report the ownership of such common stock, options, and stock appreciation
rights (other than certain cash-only rights) and any changes in that ownership
with the Commission. Specific due dates for these reports have been established,
and the Company is required to report, in this Form 10-KSB, any failure to
comply therewith during the fiscal year ended December 2003. The Company
believes that all of these filing requirements were satisfied by its executive
officers, directors and by the beneficial owners of more than 10% of the
Company’s common stock. In making this statement, the Company has relied solely
on copies of any reporting forms received by it, and upon any written
representations received from reporting persons that no Form 5 (Annual Statement
of Changes in Beneficial Ownership) was required to be filed under applicable
rules of the Commission.
Item
10.
Executive Compensation
|
Summary
Compensation Table
|
||||||||
|
|
Annual
Compensation
|
Long
Term Compensation
|
||||||
|
Name
and Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Other
Annual Compensation ($)
|
Restricted
Stock
Award(s) ($)
|
Securities
Underlying
Options
(#)
|
LTIP
Payouts ($)
|
Other
($)
|
|
Yu,
Xiqun
Chairman
of the Board of Directors,
President,
Chief Executive Officer and Director
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
2003
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
2002
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
The
Company has not entered into any other employment agreements with their
employees, Officers or Directors. The Company has no standard arrangements
under
which the Company will compensate their directors for their services provided
to
them.
Item
11.
Security Ownership of Certain Beneficial Owners and Management
The
following
tables set forth the ownership, as of March 31, 2005, of our common stock (a)
by
each person known by us to be the beneficial owner of more than 5% of our
outstanding common stock, and (b) by each of our directors, by all executive
officers and our directors as a group. To the best of our knowledge, all persons
named have sole voting and investment power with respect to such shares, except
as otherwise noted.
Security
Ownership of Certain Beneficial Owners ( 1)( 2).
(1)
Pursuant to Rule 13-d-3 under the Securities Exchange Act of 1934, as amended,
beneficial ownership of a security consists of sole or shared voting power
(including the power to vote or direct the voting) and/or sole or shared
investment power (including the power to dispose or direct the disposition)
with
respect to a security whether through a contract, arrangement, understanding,
relationship or otherwise. Unless otherwise indicated, each person indicated
above has sole power to vote, or dispose or direct the disposition of all shares
beneficially owned. The Company is unaware of any shareholders whose voting
rights would be affected by community property laws.
28
(2) This
table is based upon information obtained from the Company's stock records.
Unless otherwise indicated in the footnotes to the above tables and subject
to
community property laws where applicable, the Company believes that each
shareholder named in the above table has sole or shared voting and investment
power with respect to the shares indicated as beneficially owned.
|
Title
of Class
|
Name
and Address
|
#
of Shares
|
Current
% Owned
|
|
Common
|
Yu,
Xiqun
80
Heng Shan Rd.
Kun
Lun Shopping Mall
Harbin,
P.R. China 150090
|
38,050,000
|
66%
|
|
Common
|
Feng,
Guilan
80
Heng Shan Rd.
Kun
Lun Shopping Mall
Harbin,
P.R. China 150090
|
10,000,000
|
17%
|
Security
Ownership of Officers and Directors (2).
|
Title
of Class
|
Name
and Address
|
#
of Shares
|
Current
% Owned
|
|
Common
|
Yu,
Xiqun
80
Heng Shan Rd.
Kun
Lun Shopping Mall
Harbin,
P.R. China 150090
|
38,050,000
|
66%
|
|
Common
|
All
Officers and Directors as a Group (2)
|
38,050,000
|
66%
|
Changes
in Control.
There
has
been a change in the majority of the directors of the Company resulting from
the
share exchange transition between the Company and ZHLD and, as a result, there
has been a change of control of the Company within the meaning of the Securities
Exchange Act of 1934, as amended (the "Securities Exchange Act"). However,
since
the Company is not registered under Section 12 of the Securities Exchange Act
of
1934, as amended, there was no obligation on the Registrant to prepare and
file
with the Commission and mail to shareholders an Information Statement on
Schedule 14F-1 with respect to such change of control. However, such change
in
control was described in a Current Report on Form 8-K, filed with the Commission
on December 15, 2004, which is incorporated herein by reference. Such report
contains information on, among other things, the age, background and stock
ownership of the recently appointed directors of the Company.
As
a result
of the completion of the acquisition of ZHLD, a Form 8-K/A with audited
financial statements of ZHLD and pro forma combined financial statements as
required by Item 9.01 of Form 8-K was filed with the Commission on April 18,
2005.
Item
12.
Certain Relationships and Related Transactions
Pursuant
to and at the closing of the Plan of Exchange, dated September 15, 2004, which
occurred on December 13, 2004, the Company issued the ZHLD Shareholders
55,000,000 shares of common stock of the Company, or 95% of the Company's then
outstanding common stock, in exchange for all of the shares of capital stock
of
ZHLD owned by the ZHLD Shareholders.
29
Immediately
upon the closing, the Company accepted the cancellation of 11,000,000 shares
of
common stock from Duane Bennett, and, as a result, the Company had 2,915,000
shares of common stock issued and outstanding before the issuance of the
55,000,000 new shares of common stock.
Item
13.
Exhibits and Reports on Form 8-K
|
(a)
Financial Statements
|
|
|
1.
The following financial statements of China Education Alliance, Inc.
are
included in Part II, Item 7:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheet - December 31, 2004
|
F-2
|
|
Consolidated
Statements of Operations - August 9, 2004 (Inception) To December
31,
2004
|
F-3
|
|
Consolidated
Statements of Stockholders’ Equity - August 9, 2004 (Inception) To
December 31, 2004
|
F-4
|
|
Consolidated
Statements of Cash Flows - August 9, 2004 (Inception) To December
31,
2004
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-6-10
|
|
|
|
|
2.
Exhibits
|
|
|
3.
Articles of Incorporation as amended and bylaws are incorporated
by
reference to Exhibit No. 1 of Form SB-2 as amended filed July
2001.
|
|
|
14.1.
Code of Ethics*
|
|
|
31.1.
Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
*
|
|
|
31.2.
Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer
*
|
|
|
32.1.
Section 1350 Certifications of Chief Executive Officer *
|
|
|
32.2.
Section 1350 Certifications of Chief Financial Officer *
|
|
|
*
Filed previously
|
|
|
|
|
|
(b)
Reports on Form 8-K
|
|
|
|
|
|
(1)
On December 15, 2004, we filed a current report on Form 8-K in order
to
report the completion of acquisition of Harbin Zhong He Li Da Jiao
Yu Ke
Ji You Xian Gong Si, a corporation organized and existing under the
laws
of the People's Republic of China.
|
|
|
|
|
|
(2)
On January 25, 2005, we filed a current report on Form 8-K in order
to
report the changes in our certifying accountant.
|
|
|
|
|
|
(3)
On April 18, 2005, we filed an amendment of current report on Form
8-K/A
in order to publish our audited financial statements and unaudited
pro
forma financial statements reflecting a transaction closing on December
13, 2004.
|
|
Item
14.
Principle Accounting Fees
Fees
Billed For Audit and Non-Audit Services
The
following table represents the aggregate fees billed for professional audit
services rendered to Jimmy C.H. Cheung & Co., CPA, the Company's current
independent auditor for the audit of the Company's annual financial statements
for the period from August 9, 2004 (Inception) to December 31,
2004.
30
|
Year
Ended December 31
|
2004
|
|||
|
|
|
|||
|
Audit
Fees (1)
|
$
|
20,000(2
|
)
|
|
|
Audit-Related
Fees (3)
|
-
|
|||
|
Tax
Fees (4)
|
-
|
|||
|
All
Other Fees (5)
|
-
|
|||
|
Total
Accounting Fees and Services
|
$
|
20,000
|
||
___________
|
|
(1)
|
Audit
Fees.
These are fees for professional services for the audit of the Company's
annual financial statements, and for the review of the financial
statements included in the Company's filings on Form 10-QSB, and
for
services that are normally provided in connection with statutory
and
regulatory filings or engagements.
|
|
|
(2)
|
The
amounts shown for Jimmy C.H. Cheung & Co., CPA in 2004 relate to the
audit of the Company's annual financial statements for the fiscal
year
ended December 31, 2004.
|
|
|
(3)
|
Audit-Related
Fees.
These are fees for the assurance and related services reasonably
related
to the performance of the audit or the review of the Company's financial
statements.
|
|
|
(4)
|
Tax
Fees.
These are fees for professional services with respect to tax compliance,
tax advice, and tax planning.
|
|
|
(5)
|
All
Other Fees.
These are fees for permissible work that does not fall within any
of the
other fee categories, i.e., Audit Fees, Audit-Related Fees, or Tax
Fees.
|
Pre-Approval
Policy For Audit and Non-Audit Services
The
Company does not have a standing audit committee, and the full Board performs
all functions of an audit committee, including the pre-approval of all audit
and
non-audit services before the Company engages an accountant. All of the services
rendered to the Company by Jimmy C.H. Cheung & Co., CPA after December 2004
were pre-approved by the Board of Directors of the Company.
The
Company is presently working with its legal counsel to establish formal
pre-approval policies and procedures for future engagements of the Company's
accountants. The new policies and procedures will be detailed as to the
particular service, will require that the Board or an audit committee thereof
be
informed of each service, and will prohibit the delegation of pre-approval
responsibilities to management. It is currently anticipated that the Company's
new policy will provide (i) for an annual pre-approval, by the Board or audit
committee, of all audit, audit-related and non-audit services proposed to be
rendered by the independent auditor for the fiscal year, as specifically
described in the auditor's engagement letter, and (ii) that additional
engagements of the auditor, which were not approved in the annual pre-approval
process, and engagements that are anticipated to exceed previously approved
thresholds, will be presented on a case-by-case basis, by the President or
Controller, for pre-approval by the Board or audit committee, before management
engages the auditors for any such purposes. The new policy and procedures may
authorize the Board or audit committee to delegate, to one or more of its
members, the authority to pre-approve certain permitted services, provided
that
the
estimated fee for any such service does not exceed a specified dollar amount
(to
be determined). All pre-approvals shall be contingent on a finding, by the
Board, audit committee, or delegate, as the case may be, that the provision
of
the proposed services is compatible with the maintenance of the auditor's
independence in the conduct of its auditing functions. In no event shall any
non-audit related service be approved that would result in the independent
auditor no longer being considered independent under the applicable rules and
regulations of the Securities and Exchange Commission.
31
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
caused this report to be signed on its behalf by the undersigned, hereunto
duly
authorized.
|
|
|
|
|
|
CHINA
EDUCATION ALLIANCE, INC.
(Registrant)
|
|
|
|
|
|
|
Date: December
9, 2005
|
By:
|
/s/ Yu,
Xi Qun
|
|
|
Yu,
Xi Qun
President
and Chief Executive Officer
|
|
32